Wema bank Plc: How Would Adebise Deliver Value to Investors?

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Wema bank Plc: How Would Adebise Deliver Value to Investors?

With the first dividend in 14 years, it is clear that Ademola Adebise, the Managing Director Wema bank Plc (formerly Agbonmagbe Bank limited) comes to field with an ambition.

The MD has taken the first move to restore confidence in the market, investors but it doesn’t look like the coast has yet cleared.

Wema bank share price increased by 3 kobo in 6-months or year to date.

Historically, the  bank has been able to weather storms and developments in the economy since it was converted to a public limited liability company in April 1987 and was subsequently listed on the floor of the Nigerian Stock Exchange in January 1990.

Total float of 45.6% is available to investors but contrary to popular opinion that Odu`a investment company limited holds largest shares in Wema bank, Kesington Adebutu appears to be the key investor in the bank with 27.7% holdings according to available data.

Odu`a holds 10%, followed by Petrotrabs Limited 8.54% and SW8 investment 8.02%.

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Should investors buy?

Second quarter earnings season is here and some geeks at the Broadstreet are as expectant that, this time performance would be generally uptick all things being equal.

Wema bank Plc: How Would Adebise Deliver Value to Investors?
Ademola Adebise MD -Wema Bank Plc

In terms of stock performance, the market have been significantly bearish in the first quarter, and down the line in the second quarter, there seems to be a repeat of early trend.

But hope is not lost as investors continue to position as stock are priced cheaper.

Then, the coming on board of MTNN and Airtel would make significant different, if earnings season is juicy enough to reflate market performance in the second quarter.

Market capitalization could hit N15 trillion market should bulls return. Yeah, it is first half already. In the Tier 11 capital class, our focus is on Wema Bank Plc.

At the last trading day in June, Wema Bank market capitalization pitched at N25.46 billion on 38.57 billion outstanding shares, thus settled the stock price at 66 kobo.

The stock opened at 63 kobo at the first trading in the year, then closed at 66 kobo in the first half.

Therefore, investors have gained 4.7619% in the last 6 months of trading.

What that means is that, if you had invested N1 million, your returns would have been N47, 619; demonstrating low return on investment compare with fixed interest income investment.

In the first quarter 2019

Wema Bank Plc post tax profit closed at N1.144 billion in the first quarter as against N764.701 million that was recorded in 2018.

However, the review of the numbers show that Wema Bank Plc is still paying more to obtain funds invested in interest earnings assets.  

On every N100 the bank made from interest earnings assets, N65.20 was paid to fund providers in the first quarter.

In the comparable period in 2018, N65.70 was used on every N100 generated as interest income.

Thus, between the periods, interest expenses rose by 26.21% on the back of increased demand for funds in relations to interest related 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, EPS, 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.

Its total assets increased to N583.867 billion from N488.804 billion at the beginning of the year, just as shareholders’ funds went up to N52.064 billion from N50.889 billion at the beginning of the year.

Some investment bankers, equity research analysts that attended MarketForces Africa analysts’ forum at the weekend said that Wema Bank Plc has what it takes to take the industry by surprise but its cost structure would always stand on its way.

In a less than emotion related, they split the banks numbers into shred and, they feel there is more to do than the management is currently doing.

Improved fundamentals

Wema Bank Plc fundamentals gained traction in 2018. Across key metrics, there were 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.

There were improvements in its operations, line by line items in the financial statement has shown.

I notice strong efficient allocation of resources and quality strategy from the top. Though, it hit bottom with its overall costs behaviour.

But that seems like a pattern among Tier II capital deposits money banks in the sector.

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%.

The management sets cost to income ratio guideline for 2019 at 75%-80%, it means the bank’s operation is expected to burn more cash, again.

That means there is need to adjust financing mix, but that is not feasible in the short time.

Some analysts have said that Wema Bank would raise qualifying capital but we are yet to see that but it is more likely to see capital raising in the second half.

This is at management discretion but then IFRS 9 would demand lot.

Drive for cheap deposits in tough operating environment is like pursuing fish in an ocean with bare hands. It would take a greater effort to achieve.

Cost is the lender’s big issue.

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.

Though, 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.

Innovation, results and the future

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 said 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.

GTB Plc said more than 30% of its deposits was sterilized by the apex bank and one could wonder what this would do to smaller size banks.

As a result of this, 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 as earlier pointed out.

Wema bank had raised N17.675 billion in Tier II capital during the year 2018. Some equity analysts re-adjusted estimates in line with fundamentals and technical readings.

Vetiva Capital 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.

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;

Performance was significantly impressive. Wema Bank Plc numbers rested in green in 2018, though some hit the red lines.

The red signal 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.

The bank audited statement showed that non-performing loan ratio, 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.

With Diamond Bank out from the picture, the industry non-performing closed went down, resultant effects of the merger that formed new Access Bank in the first quarter 2019.

At the end of first quarter, the ratio of the non-performing loans to total loans was 10.83%, while non-performing loans to total loans after specific provisions was 12.2%.

Wema: How profitable is the bank?

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 said.

“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.

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Earnings from non-interest income

The bank seems to have served its customers well.

Its net fee and commission income, net trading income and other income came to the bank rescue with positive performance across the three lines.

The numbers show that 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.

Also, 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, reinforcing it steep cost trend, far above average rate of inflation in the period.

Nonetheless, 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 jerked up by 21.97% from N14.446 billion to N17.619 billion.

Wema Bank increased 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.

Building an investing case for the bank is beyond looking at the number within short term horizon.

There must be pattern, management attitude and bucket of innovations. The ball has dropped on Adebise`s laps.

Wema bank Plc: How Would Adebise Deliver Value to Investors?

VIAJulius Alagbe
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