Wema Bank: Analysts estimate 17.24% upside as investors’ value lender at ₦22 billion

Wema Bank: Analysts estimate 17.24% upside as investors’ value lender at ₦22 billion

  • Market cap: ₦21.987 billion
  • Analysts price target ₦0.68
  • History of elevated interest expenses
  • Steep cost to income ratio: 88.74%
  • Weak capital adequacy ratio: 11.6%
  • PBT fell by 15.13%
  • LDR 52.61%, CBN debit ₦49.37 billion

In general, the recent devaluation of Naira has a rub off effects on lender’s capital, at least by 18%. Wema Bank stock market worth in dollar term pitched at USD$61.111 billion.

The Central Bank of Nigeria in what it termed technical adjustment raised official foreign exchange rate from ₦305 to ₦360.

To be on a safe side, banks are expected to close this gap, having booked a revaluation gain through their income statement.

Coming from a low base, Wema Bank Plc achieved a double digit growth in its audited financial performance in 2019.

Specifically, lender’s topline expanded by about 33%. Trading at ₦0.57, the lender is currently valued at ₦21.987 billion on 38,574,466,082 shares outstanding.

Though, analysts think the stock will be at around ₦0.68 in December, 2020.

In the first quarter (Q1) of 2020, the low base effects seems to be dropping followed a moderate growth reported.

Meanwhile, going forward, analysts are projecting that economic lockdown would hurt Wema bank result for 2020.

Wema Bank Plc reported double-digit topline growth of 32.66% year on year.

Meristem Securities had attributed this to, inter alia, the relatively low base in the corresponding period in the previous year.

In Q1 2020 results however reveal a significantly lower growth rate of +4.64% to ₦20.78 billion which suggests the diminished impact of a low base on growth.

Be that as it may, the growth in topline was supported by sustained expansion in interest earning assets, surged 5.09% year to date to ₦559.35 billion.

Consequently, interest income grew by 5.07% to ₦16.86 billion.

However, non-interest income on the other hand, recorded much slower growth of +2.85% to ₦3.88 billion on the back of the regulatory reduction in fees and commission.

Meristem maintained expectation of a moderated growth in 2020 on account of downside risks stemming from the COVID-19 pandemic, and the regulatory environment.

In particular, the implementation of loan forbearance to vulnerable sectors including Oil & Gas, Manufacturing and Agriculture, is expected to bear on interest income.

Cost inefficiencies, as observed by analysts further constrained lender’s profitability in the period.

The bank interest expense declined marginally by 2.92% to ₦16.89 billion in Q1:2020, despite sustained growth in deposits of +11.59% to ₦648.25 billion.

Analysts think this is a positive development given the bank’s history of elevated interest expense.

Meristem noted that the bank’s increasingly costly funding mix, reflected by a further decline in current and savings account (CASA) mix to 39.00% as against 48.96% in 2019.

Analysis of the book shows that lender’s net interest margin declined to 5.41%, coming from 7.29% in Q1:2019 following a depression in asset yield to 13.63% as against 17.82%.

Analysts reckoned that loan book expansion continued to drive impairment charges which increased markedly by 59.81% to ₦0.57 billion.

“We expect a significant rise in impairment charges in 2020 in view the anticipated economic contraction and the impact of a depreciating Naira on impaired dollar-denominated assets.

Meristem explained that branch expansion activities further pressured bottom line through a 15.85% growth in operating expenses to ₦8.90 billion.

Consequently, lender’s cost-to-income Ratio (CIR) increased to 88.74%, coming from 85.23% in Q1:2019.

Hence, profit before tax (PBT) fell by 15.13% to ₦1.13 billion while profit after tax (PAT) settled at ₦0.98 billion, representing a 14.58% drop.

Going forward, Meristem expect a slow-down (if not a complete halt) in physical branch expansion activities due to the realities of COVID-19.

Analysts stated that this may reduce pressure on operating expenses and hence profit after tax.

However, the firm projects a slower top line growth and high impairment charges as a result of prevailing macroeconomic uncertainties are expected to bear on PAT growth.

It was observed the lender’s loans-to-deposits ratio (LDR) was below regulatory minimum.

Although LDR increased to 52.61% in Q1:2020 from 49.79% in 2019, it is remains below regulatory benchmark.

Analysts stated that the shortfall in LDR, coupled with the official CRR hike resulted in a ₦49.37 billion CRR debit against the bank.

This may put a strain the bank’s liquidity position, analysts explained.

Wema Bank launches new website to mark 75th anniversary

The bank’s total assets however remain relatively robust at ₦794.50, up 11.06% from the beginning of the year to date.

Meristem stated that a sustained faster-paced loan growth is required to meet benchmark.

However, analysts held that the persistent decline in capital adequacy to 11.60%, from 13.60% in 2019 reflects growth in risk assets which is expected to moderate in 2020.

Meristem remarked that Wema Bank’s continued asset expansion and digital banking focus is expected to bode positively for earnings in the medium to long term.

However, short term outlook is fraught with cost inefficiencies, regulatory headwinds, and the economic consequences of the COVID-19 pandemic.

Applying our target P/E of 5.21x with an expected EPS of 0.13, yields a December 2020 target price of ₦0.68.

This indicates an upside potential of +17.24%. Hence, analysts at Meristem rate the ticker a BUY.

Wema Bank: Analysts estimate 17.24% upside as investors’ value lender at ₦22 billion

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