Rating Agency Attestations to Wema Bank’s Profitability, Assets Quality

Kayode Tokede

The recent rating by Agusto & Co has further attested to Wema Bank Plc’s impressive 2023 financial year performance that showed increasing intrinsic value in profit generation and assets quality as the management moves to become top Tier-1 bank in Nigeria. The credit rating agency upgraded Wema Bank from a “Bbb” rating issued in June 2023 to a “Bbb+” rating. The upgrade from “Bbb” to “Bbb+” indicates an improvement in Wema Bank’s creditworthiness.

While both ratings are considered investment grade, a “Bbb+” rating is one notch higher, suggesting the bank has shown positive developments in its financial health and risk profile over the past year. One of the oldest financial institutions in Nigeria, Wema Bank recorded all-time high profit before tax and profit after tax in the full year ended December 31 2023, driven by 71 per cent increase in gross earnings, and 64.4 per cent growth in operating income.

The financial institution in 2023FY performance declared Profit Before Tax (PBT) of N43.59billion, an increase of 195.61per cent from N14.75 billion in 2022 FY.

Wema Bank’s PBT was at N12.38 billion in 2021 and in 2020, it declared N5.93billion PBT from N6.76billion in 2019FY and N4.8billion PBT in 2018FY.

Profit after tax also increased significantly in 2023 to N35.99 billion, an increase of 217 per cent from N11.35billion in 2022FY. The reported N35.99 billion profit was a milestone achievement for the current management of Wema Bank.

Before now, the lender announced N8.93billion profit in 2021, N4.57billion in 2020 and N5.2billion profit in 2019. 

The significant profit before tax and gross earnings growth, driven by interest income, highlight Wema Bank’s strong core operations, as evidenced by surpassing its five-year CAGR. 

Amid growth in profit, the management paid a dividend of N0.50 kobo per share in 2023 from N0.30 kobo per share in 2023, which is about N3.86 billion from N3.09 billion in 2022FY.

According to Agusto & Co, the growth in profit translated to higher pre-tax return on average assets (ROA) and pre-tax return on average equity (ROE) to 2.1 per cent (FY 2022: one per cent) and 43.9 per cent (FY 2022: 21.5%), respectively.

“Excluding the volatile foreign exchange income, the Bank’s pre-tax profit would have increased by 99 per cent year-on-year. In addition, the ROA and ROE would have been 1.4 per cent and 29.4 per cent, respectively.

“In the near term, we do not expect the Bank to replicate this level of performance given the expected slower depreciation of the naira as well as the capital raise which would not have been deployed and therefore impede ROE.

“However, we believe Wema Bank will leverage its retail base and good relationship with significant shareholders and investors to maintain performance at acceptable levels. In Q1 2024, the annualised ROE was 34.5per cent, in line with our expectation. Excluding the foreign exchange income, the annualised ROE would have been 34per cent, reflecting the sustainable nature of the profit recorded in Q1 2024.”

Performance Backed by Fundamentals

The impressive performance in the period under review was backed Gross Earnings of N225.75billion, an increase of 72.22 per cent from N131.08 billion in 2022, driven by an increase of 73.92 per cent and 64.95 per cent in Interest Income and Non-Interest Income respectively.

In the period under review, Wema Bank announced N185.64billion interest income, an increase of 72per cent from N108.04 billion in the same period prior year. The growth in interest income was largely due to the 53.1per cent surge in the loan book and upward loan repricing in line with the hikes in Monetary Policy Rate (MPR).

The impact of the naira depreciation on the income from foreign currency loans, which grew by 173per cent during the year, also bloated the interest income. However, the rising yield environment elicited a 78.7per cent rise in interest expense to N92.9 billion in 2023 from N53.81 billion in 2022.

 The interplay between interest expenses and interest income placed Wema Bank’s net income net interest income at N91.72billion in 2023, an increase of 69 per cent from N54.72 billion in 2022.

In 2023FY, Wema Bank’s impairment charge spiked by a substantial 119.7 per cent to N10.6 billion from N4.76 billion in 2022FY, largely due to the deteriorating macroeconomic environment and an enlarged loan portfolio. Thus, the loan loss expense represented a higher 5.7 per cent from 4.5 per cent of interest income.

Non-Interest Income stood at N41.27 billion in 2023, a growth of 65per cent from N27.25 billion in the same period of the prior year. The growth in non-interest income was driven by N24.96billion net Fees and Commission in 2023 from N16.59billion in 2022 and N15.5 billion other income in 2023 from N2.9 billion in 2022

In addition, operating Income rise to N122.33 billion in 2023, an increase of 65 per cent from N74.33 billion declared in 2022.

With the significant increase in profit, Wema Bank’s earnings per share stood at 279.9 kobo in 2023 from 88.3 in 2022.

In the period under review, Wema Bank reported N78.74 billion operating expense in 2023, an increase of 32 per cent from N59.58billion in 2022, as its substantial portion of the increase is due to the increase in statutory expenses based on increase in the book size.

Personnel expenses moved to N26.8billion in 2023 from N21.33billion in 2022, while Depreciation and amortization closed 2023 at N6.1billion in 2023 from N4.55billion in 2022.

In addition to operating expenses is N45.89billlion other operating expenses in 2023 from N33.72billion declared in 2022.

Driving topline growth

The increase brings it Cost to income ratio (CIR) dropped to 64.34per cent in 2023 from 80.02 per cent in 2022. The management disclosed that its focus remains driving topline growth expansion while mitigating excessive cost growth and it is expected to result in a sustainable downtrend in the cost-to-income ratio.

Improved asset utilization

As of December 31, 2023, Wema bank declared N2.24trillion in total assets from N1.44trillion in 2022, driven by increased deposit liabilities and additional capital.

Loans and advances to customers closed 2023 at N801.10 billion, representing an increase of 54 per cent from N521.43billion in 2022, while deposits from customers stood at N1.86trillion as of 2023, representing an increase of 60 per cent from N1.17trillion in 2022.

During the year under review, low-cost (demand and savings) deposits spiked by 121.9per cent to N1.2 trillion, supported by intensified marketing efforts and various low-cost deposit mobilisation initiatives.

Nonetheless, the discretionary cash reserve debits and rising monetary policy rate intensified funding pressures. The Bank recorded a 21.3 per cent year-on-year decline in relatively expensive term deposits, which accounted for a lower 26.5per cent (FYE 2022: 50.4per cent) of local currency (LCY) deposit liabilities.

Wema Bank’s capital raising exercise recorded some traction in the year under review with a N21 billion perpetual bond issued in March 2023 and a N40 billion rights issue exercise in December 2023.

Similarly, the Capital Adequacy Ratio (CAR) improved to 16 per cent in 2023 from 12.7 per cent in 2022, surpassing the 10per cent regulatory minimum for national banks operating in Nigeria.

“However, when we stressed the capital, the CAR declined to 8.2 per cent, reflecting the need for additional capital given the significant loan growth in the period.

“Given the planned business growth and the CBN’s recapitalisation directive, a N150 billion capital raising exercise through rights issue, private placements and public offer is scheduled for June 2024.

“We expect the Bank to be able to meet the CBN deadline of June 2025 for recapitalisation on the back of the strong shareholders’ support and growing brand franchise,” Agusto & Co said.

Showcasing revitalized Wema Bank

Commenting on the results, the MD/CEO, Mr. Moruf Oseni in a statement said, ‘2023 showcased a revitalized Wema Bank as evidenced by the considerable improvements in our numbers. The performance is headlined by impressive improvements in Profit before Tax which grew strongly by 196per cent.

Oseni said, “We are satisfied with the bank’s performance in the first year of the new leadership team, as we move in a strong growth trajectory.

“Our target remains clear, we want to become a Top-Tier Bank in the industry powered by Digital excellence, we have carved a niche for ourselves with ALAT as a Retail platform, but we are now positioning the enterprise as the Intelligent platform for all financial services – We have partnered with the Federal Government on upskilling Two (2) million MSMEs, provided engagement platforms for all NYSC members and now implementing partnerships in Health, Education, Women empowerment and in the green economy.

“In the months ahead, we would be developing platforms and supporting initiatives that prioritize the needs of our customers, leveraging technology in solving problems across all sectors.”

Meanwhile, the bank successfully concluded the first tranche of its recapitalisation exercise having secured all relevant regulatory approvals for the allotment of its N40 billion Rights Issue which was initiated in December 2023.

In view of macroeconomic conditions, the Central Bank of Nigeria (CBN) in March 2024, launched a recapitalisation programme requiring commercial banks to raise fresh capital in alignment with the minimum requirement for their respective banking licenses, within a 24-month timeline spanning April 1, 2024, to March 31, 2026.

The goal of this recapitalisation programme is to simultaneously boost the Nigerian economy and strengthen the Nigerian financial services industry.

 As a forward-thinking and pioneering bank, Wema Bank in December 2023 launched a N40 billion Rights issue which has now been approved by the CBN and the Securities and Exchange Commission (SEC).

With this remarkable development, Wema Bank has now successfully raised the 1st tranche of its plan in the minimum requirement laid down by the CBN.

In a statement, Oseni iterated the Bank’s resolve in retaining its Commercial Banking license with National Authorisation, adding that the N40billion Rights Issue is a step in that direction.

“We are delighted to announce the conclusion of the 1st tranche of our Capital Raise Programme, after obtaining the relevant approvals of all regulatory authorities. Our move to commence our Capital Raise Programme very early demonstrates our push for excellence and with a strong emphasis on our digital play, we are set to amass more successes in the coming months.”

“We were impressed by the vote of confidence given by our shareholders during the 1st Rights Issue exercise as our shares were fully subscribed. In addition, we obtained the approval of shareholders at our 2023 Annual General Meeting (AGM) to raise an additional N150billion to meet the capitalisation threshold set by the CBN.

“The process is expected to be completed within 12-18 months. We are committed to providing optimum returns for every stakeholder and the successful conclusion of this N40biillion Rights Issue is a bold step in the right direction,” he said.

Wema Bank’s market share

Over the medium to long term, Wema Bank is positioned to not only dominate the digital Banking space but also the Nigerian financial services industry at large as it translates its industry leadership to significant market share.

Agusto & Co stated that, “With a strong focus on retail customers, particularly in the Southern region of Nigeria, the Bank has targeted the growing youth demographic through its innovative digital banking platform, ALAT, which doubles as a customer well-being app.

“During the year under review, Wema Bank’s share of the banking industry’s resources declined due to an intense competitive environment and a challenging economy. As at 2023 FY, the Bank had expanded its agency banking network to 48,873 agents (FYE 2022: 26,806 agents) across the country. In our view, Wema Bank’s market share is low.

“Going forward, we expect Wema Bank to maintain its positive growth trajectory, driven by its persistent focus on retail expansion through the ALAT digital platform and other alternative channels.

“In addition, we note that the Bank is actively expanding its presence in the South-Eastern and Northern regions, which is expected to further solidify its market footprint and enhance market share over the medium term. We also expect the ongoing recapitalisation to translate to more investments by the Bank in its digital channels.”