Wema Bank Rises to N70bn Investors Bet Large on Shares
With about 40% year-to-date gain, Wema Bank Plc inched to about N70 billion in market valuation following an unusual volume bet on the tier-2 lender’s shares in the local bourse.
On Friday, investors traded shares worth more than N658 million, driving the market price higher. The Nigerian small lender has 12,858,155,360 shares outstanding worth N69. 948 billion.
Market data shows that more than 121 million shares of the Nigerian lender exchanged hands during the trading sessions. Last month, Fitch Affirmed Wema Bank Plc at ‘B-‘ with a stable outlook.
The bank’s viability rating was also affirmed at ‘b-‘, reflecting Wema’s small franchise, high credit concentrations, aggressive loan and balance-sheet growth, and funding weaknesses.
It also reflects good asset quality and healthy liquidity. Wema has a small franchise with 2% of banking system assets at the end of 2022, affecting its funding cost, revenue generation, and risk diversification.
According to the rating note, the tier 2 lender’s leading position in digital banking is reflected in its increasing customer base and transaction volumes, which supports profitability.
However, reliance on expensive term deposits remains high; these accounted for 46% of total customer deposits in 2022, representing an improvement when compared with 50% recorded in 2021.
Fitch Ratings noted that the local lender’s asset-quality risks could stem from rapid loan growth in recent years and large credit concentrations.
Wema’s 20-largest loans formed 26% of gross loans, and its exposure to the Nigerian sovereign was highly significant in the same period, though its asset quality remains stable, according to the rating note.
Wema’s impaired loan ratio edged up to 5.7% in 2022 from 4.8% in 2021 as high inflation and foreign-currency shortages hit credit performance.
The bank’s stage 2 loans were only 5% of gross loans in 2022, according to Fitch Rating, which it considered to be well below domestic-rated peers’. This reflects lower exposure to the oil and gas and power sectors, which accounted for 15% of gross loans in the financial year 2022.
Naira depreciation has a limited impact on the bank’s impaired loan ratio as only 5% of stage 3 loans were denominated in foreign currency at the end of the financial year 2022, the rating note stated.
“Our core profitability metric, operating return on risk-weighted assets (RWAs), declined to 3.2% in 2022 from 3.5% in 2021 following strong growth in RWAs (up 34%).
“Operating return on average total assets averaged less than 1% over the last four years; this is below domestic-rated peers’ as higher cost of funding and a small franchise has affected revenue generation”.
The bank estimates a 50% devaluation of the naira will lead to around N7 billion in revaluation gains supported by the bank’s long foreign currency position; the rating note said.
“We now expect Wema’s N40 billion rights issue to be completed before the end of 2024, two years later than scheduled, after it was delayed by political uncertainties ahead of the February 2023 presidential elections.
“The expected rights issue will have a material positive impact on the bank’s regulatory capital ratios. The recent devaluation of the naira is expected to have a limited impact on the bank’s regulatory capital ratios given its moderate balance-sheet dollarisation, reasonable internal capital generation, and its long foreign currency position”, Fitch stated.
Wema’s funding base is weakened by a high reliance on expensive term deposits and higher deposit concentration than domestic-rated peers’. The gross loans/customer deposits ratio is very low at 46%, according to the rating note. #Wema Bank Rises to N70bn Investors Bet Large on Shares FBNH Rises to N682bn on ‘Special Stock Bet’