How Wema Bank Plc rises above challenges against struggle to rise
Wema Bank Plc fundamentals strong gained traction in 2018. Across key metrics, there was significant improvement compare with base years.
For example, the bank earnings per share rose by 48.28% from N5.80 in 2017 to N8.60 in 2018. Also, both pretax and post-tax margin were strengthened just as net assets per share grew by 2.57% from N1.29 to N1.32 kobo in 2018.
Year on year, the bank return on equity, return on equity, ROE, increased by 43.79% while return on assets, return on assets, ROA, went up by 16.93% in 2018.
Wema Bank recorded improvement in its operation. There seems to be efficient allocation of resources and quality strategy from the top.
In 2018, Wema Bank converted 6.7% of its gross earnings to pretax profit. The conversion rate in the financial year 2017 was just 4.61%.
Though, with cost to income ratio guideline for 2019 at 75%-80%, it means the bank’s operation is expected to burn more cash.
From the result, more than 93% of the bank earnings was split between some fixed and variable overheard expenses. But it was worst in 2017.
The outlook for 2019 is expected to be if only the management consolidate on the feat achieved in 2018.
Cost of obtaining funds declined in 2018. It cost Wema bank N53.17 on every N100 earned on interest income in 2018.
This was against N62.76 kobo expended on every N100 the bank earned from interest earnings assets in 2017.
Standing on three evils of high cost, heavy rivalry in the industry and weak asset quality, it has been a struggle to rise for Wema Bank Plc.
The Central Bank of Nigeria, CBN, is not also making things easy for small size banks as they are being regulated just as their Tier 1 capital counterparts.
The same market, different resources, smaller size banks are finding it difficult to wielding influence in the market space.
Thanks to technologies that has levered up competitive strength of innovative banks and Wema is enjoying this advantage with ALAT, a fully digitalized bank under its watch.
Analysts told MarketForces Africa that the CBN cash reserve ratio is putting pressure on banks as their funds are locked down.
All small size banks including Wema Bank Plc is affected with the 22.5% cash reserve ratio, the resultant effect on funds has always been declined loanable amount available to banks.
Many Tier1 banks have been complaining that the apex bank approach on CRR sterilize significant chunk of their funds, thereby curtailed their ability to lend.
As a result of that, the alternative has always been to sourcing for funds. In the tier 11 class where Wema Bank plays, maintaining strong capital buffer has been an issue.
Further threat that the sector would witness in 2019 is the implementation of the international Financial Reporting Standard 9.
The impact of that would mean that there is need to raise fresh capital. It would be recalled that the bank raised N17.675 billion in Tier II capital during the year 2018.
Vetiva Research noted in the banking sector update that average banking sector capital adequacy ratio (CAR) for financial year 2018 was 17.05%, supported by a Tier I Banks’ average of 20.6% as against 16.6% for Tier II.
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The firm said it foresees scope for additional capital injections in 2019 and 2020 to help absorb effects from the implementation of IFRS 9.
That said, the need to raise additional Tier I capital is becoming increasingly crucial given the limitations of Tier II capital in CBN’s ratio of total qualifying capital.
The management of Wema Bank Plc already know that, and an insider has said that the bank is planning to raise fresh capital but analysts review also noted that subordinated capital won’t do the magic.
Now, Wema Bank stands between tense rivalry in the industry and its struggle to rise.
In its 2018 result;
Wema Bank Plc numbers rested in green in 2018, though some hit the red lines. But the power of the red ink in its business performance came on the back of weak asset quality.
In the period, while all other banks booked lower impairment charges on credit losses, Wema Bank Plc recorded an increase.
Its audited stamen showed that NPL printed at 4.98% in 2018 as against 5% benchmark set by the apex bank. Meanwhile, industry ratio clicked at 11.7% having moved down from 14.8% in 2017.
As Wema Bank Plc plans to book more loans in 2019, therefore it makes sense that the bank hike its NPL guideline to 5% for 2019.
A review of the bank income statement shows that net impairment loss on financial assets that closed the period at N3.51 billion as against N2.179 billion in the comparable period in 2017.
This represents more than 61% upsurge year on year. For it size, analysts say that this weaken the overall performance of the bank.
Wema bank paid its shareholders 3kobo per share as dividend for the first time in 14 years. At the earnings level, financial year 2018 operating performance improved generally.
Its scorecard showed that Wema Bank Plc’s gross earnings expanded by about 10%, the same period when some Tier 1 class market share nosedived.
It has been long that Wema Bank has this kind of beautiful performance, a buy side analyst told BusinessHallmark.
“The bank has strong fundamentals but encumbered by competition.
It is hard to believe that Wema bank came up with ALAT, finance it and the rest is the story today. I think they have what it takes to compete only if they can carve out a niche”
The increase in earnings power came on the back of 8.6% uptick reported in interest income, supported by 15.34% upswing in net fees and commission income.
Net trading income rose by 15.28% while other income sources elevated by 16.10%.
By the figure, it means that the bank’s interest earnings assets generated about 9% more than the previous year.
In 2018, the bank made N57.634 billion on its interest earnings assets as its income, compare with N53.073 billion it generated in 2017.
Yet, the amount expended on funding source or interest expenses declined by 8%. By interpretation, it means that the bank became more efficient in sourcing for funds and perhaps attracted low cost deposits.
In figure, interest expenses paid on funds declined 8% year on year, from N33.306 billion to N30.642 billion in 2018.
But amount booked as impairment surged. In 2018, net impairment loss on financial assets increased by more than 61% to N3.51 billion from N2.179 billion.
To worsen the case, net gain on fair value through profit and loss investment securities went down by 82.07%.
The bank had recorded N185.146 million gain in 2017, but by the end of 2018 only N33.188 million was added to income statement.
Net fee and commission income, net trading income and other income came to the bank rescue with positive performance across the three lines.
Net fees and commission rose to N6.507 billion in 2018 from N5.642 billion in the corresponding year in 2017, representing 15.34% uptick.
Net trading activities also supported the income statement with N5.532 billion, from N4.799 billion in 2017.
This translate to 15.28% increase between the periods. Other income did 16.1%, from N1.569 billion to N1.821 billion.
Though the bank operating expenses jerked up, far above average rate of inflation in the period, its pretax profit strengthened year on year.
In 2018, personnel expenses expanded by 23.25% from N10 billion to N12.336 billion. Its depreciation and amortization expenses rose 13.14% to N2.622 billion while other operating expenses rose by 21.97% from N14.446 billion to N17.619 billion.
Wema Bank increase its balance sheet size in 2018 on the back of 29.59% upsurge in total liabilities from N33.7.929 billion in 2017 to N437.915 billion in 2018.
This was balanced with a 26.13% increase in total assets from N387545 billion to N488.804 billion in 2018.
The bank’s balance sheet reflected growth in loans and advances and customer deposits respectively.
In the first quarter 2019
Wema Bank Plc post tax profit closed the period N1.144 billion as against N764.701 million that was recorded in 2018.
However, the review of the numbers show that Wema Bank Plc has paid more to obtain funds invested in interest earnings assets, albeit marginal.
On every N100 the bank made from interest earnings assets, N65.20 was paid to fund provider in the first quarter.
In the comparable period in 2018, N65.70 was used on every N100 generated as interest income.
Between the periods, interest expenses rose by 26.21% on the back of increase in business activities in relations to earnings assets.
Interest income spiraled up to N16.078 billion compare with N12.644 billion made in similar period in 2018.
It is noted that net fees and commission remained flat in the first quarter 2019, and net trading income rose to N1.852 billion from N1.405 billion.
Earnings per share was about double the amount made in 2018. The first quarter results shows that EPS closed at 12.4 kobo as against 6.8 kobo in 2018.
Meanwhile, Wema Bank added about N100 billion to the total assets from the beginning of the financial year till the end of first quarter 2019.
Total assets increased to N583.867 billion from N488.804 billion at the beginning of the year. Shareholders’ funds went up to N52.064 billion from N50.889 billion at the beginning of the year.
How Wema Bank Plc rises above challenges against struggle to rise