Fitch Affirms Wema Bank Ratings with Stable Outlook
Fitch Ratings has confirmed Wema Bank PLC’s Long-Term Issuer Default Rating (IDR) of ‘B-‘ and its Viability Rating (VR) of ‘b-‘. Fitch has also confirmed Wema’s National Long-Term Rating as ‘BBB’ (nga) with a stable outlook.
In a rating note, Fitch said Wema Bank’s IDRs are driven by its standalone creditworthiness, as expressed by its viability rating. The bank viability rating considers the concentration of Wema’s operations in Nigeria’s challenging operating environment.
This is also determined by the bank’s small franchise, strong loan and balance-sheet growth, high credit concentrations, moderate profitability and capitalisation metrics, as well as an improved deposit structure.
The rating note stated that Wema’s national ratings are at the lower end of those assigned to Nigerian banks due to the bank’s smaller franchise and weaker profitability and local-currency liquidity than their higher-rated peers.
In the banking sector, Wema has a small market share, representing 2% of banking system assets in 2023, which constrains its revenue generation. However, the local lender is noted to have a leading position in digital banking, which has delivered a significant reduction in reliance on term deposits.
Fitch rating note stated that the bank’s single-obligor credit concentration is high, with the 20-largest loans representing 32% of gross loans and 1.9x Fitch Core Capital (FCC) at the end of the first quarter of 2024.
“This should decline to around 1.4x FCC post its rights issue in 1H24, and is below that of small and medium-size rated peers in Nigeria.”.
Wema Bank oil and gas exposure was 20% of net loans in 2023, which Fitch considered to be low by domestic standards.
It added that its strong loan and balance-sheet growth in recent years may weigh on Wema’s financial profile. Nigeria’s sovereign exposure through securities and Central Bank of Nigeria cash reserves is very high, according to the rating note.
On asset quality, Fitch said Wema’s impaired loans (Stage 3 loans under IFRS 9) ratio was stable at 5.1% at the end of first quarter of 2024 as loan growth offset the impact of successive devaluations on the stock of impaired loans.
While the devaluation lifted the Stage 2 loans ratio to 8.8% in the period, from 5% in 2022, it remains low by domestic standards owing to its lower exposure to the oil and gas sector.
However, Fitch noted that the bank’s specific loan loss allowance coverage of impaired loans which printed at 47% in Q1-2024 is low, reflecting reliance on collateral. Operating returns strengthened to 5.8% of risk-weighted assets (RWAs) in 2023 from 3.2% in 2022, driven by higher margins and large FX revaluation gains.
Its operating returns on average total assets have averaged less than 1.5% over the past four years; according to Fitch, saying this is below domestic-rated peers’ as its higher cost of funding and a small franchise affect revenue generation.
The bank’s long-awaited N40 billion rights issue has been completed and should be reflected in its first half of 2024 accounts. Fitch said this should inflate the bank’s capital adequacy ratio (CAR) of 13.2% at the end of Q1 (excluding unaudited profits) by over 400 basis points.
“We forecast the bank’s Fitch core capital ratio at around 18% at end-2024, up from 14.5% at the end of 2023”.
Fitch said Wema Bank’s reliance on expensive term deposits declined sharply to 23% of total deposits at end-1Q24 from 46% at end-2022. Deposit concentration has also declined, with the 20-largest deposits representing around 15% of total customer deposits at end-1Q24, compared with 52% at end-2022, according to the rating note. #Fitch Affirms Wema Bank Ratings with Stable Outlook Fitch Revises Nigeria’s Outlook to Positive
