Wema Bank: Weak Earnings, Bleak Outlook Validate Concerns on Vulnerability - Meristem

Wema Bank: Weak Earnings, Bleak Outlook Validate Concerns on Vulnerability – Meristem

  • Lender’s Suffered Regulatory-Induced Risk Straining Earnings
  • ₦89.14 billion CRR Debit Against Lender, Earned Zero Interest
  • Equity Analysts Downgrade Stock to SELL
  • Topline Outlook Revised from Modest to Bearish Due to Low Asset Yield
  • 3% of Deposits Sterilised by CBN in H1:2020
  • Profit Dropped by 33.5% Year on Year
  • You Can Buy Wema Bank Low Now

For Wema Bank Plc, the outbreak of coronavirus remains a disaster to its earnings capability as the lender struggle to compete effectively.

Traded at 51 Kobo on Thursday, investors valued Wema Bank Plc at ₦19.672 billion on 38,574,466,082 shares outstanding.

In its unaudited financial result, lender’s earnings dropped significantly, net interest margin was pressed, recorded moderate growth in operating expenses.

Specifically, analysts at Meristem Securities expressed worry over lender’s low asset yield, weak competitive position and regulatory Induced Shock.

Explaining the trend, Meristem Securities stated that lender’s topline growth contracts, bucks five-year trend.

Meristem stated that the lender’s Q2:2020 performance validates its earlier concerns over the bank’s increasing vulnerability.Wema Bank: Weak Earnings, Bleak Outlook Validate Concerns on Vulnerability - Meristem

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“The strong topline growth seen in prior years from 2015 to 2019, at an average annual growth rate of 19.98% has now given way to a sharp decline.

Topline dropped 17.19% year on year from ₦20.98 billion in Q2:2019 to ₦17.37 billion in Q2:2020.

“While we acknowledge the role of the pandemic on the bank’s performance, we note with concern, regulatory headwinds which continue to constrain earning ability.

“We are particularly mindful of the bank’s restricted deposits which have risen by 64.88% year to date to ₦226.53 billion”, analysts stated.

Also, analysts said it appears the bank has sought refuge in the short-term funds market, due to the current low investment yield environment, as cash and cash equivalents grew 81.31% year to date.

This drove interest on cash and cash equivalents up by 53.59% to ₦1.30 billion in H1:2020.

Meanwhile, interest incomes on loans and investment securities on the other hand declined by 9.58% and 21.00% respectively, dragging interest income by 9.23% to ₦29.86 billion.

The 4.45% growth in non-interest income came off the back of gains from treasury bills trading.

Analysts said they see further scope for loan book expansion for the bank in H2:2020 as economic activities pick up in Q3:2020.

Read more: Analysts Maintain Buy Rating on Sterling Bank, Set Price Target to ₦1.43

Increased volume of transactions should also support non-interest income, analysts projected.

Nevertheless, Meristem Securities revised topline outlook for the bank from modest to bearish on account of persistent low assets yield, unfavourable competitive position and regulatory-induced shocks.

Bottom line Fails to Reflect Improved Cost Conditions:

Meristem Securities stated that the decline in interest income was partly salvaged by a significant drop in interest expense such that net interest income fell slightly to ₦11.81 billion in H1:2020 from  ₦11.90 billion in H1:2020.

Analysts said apart from the low interest rate environment, an improved current and savings accounts (CASA) mix from 39.67% as at H1:2019 to 41.12% as at H1:2020 also supported the decline in interest expense.

“While the increasing contribution of deposits to interest-bearing liabilities of 93.73% as at H1:2020 is considered a plus, it is worrisome that a significant part (33.30% as at H1:2020) of it is restricted with the apex bank”, Meristem Securities stated.

This is expected to pressure bottom line as it implies that the bank pays for deposits which generate no income.

Meanwhile, impairment charges took a surprising turn with a 57.38% year on year decline in Q2:2020.

Analysts said they attribute this to improved credit conditions due to monetary and fiscal stimuli.

Also, operating expenses growth moderated to 7.27%, much in line with analysts’ expectation.

Nonetheless, profit before tax (PBT) fell by 33.57% to ₦1.73 billion while profit after tax (PAT) declined by 33.53% to at ₦1.49 billion.

Meristem Securities said it maintains a bearish outlook for bottom line in 2020. Risks to our outlook may however emanate from a faster economic recovery and sustained moderation in operating expenses.

Loans-to-Deposits Ratio (LDR) Remains below Regulatory Minimum

Deposit expanded +17.85% year to date to ₦680.32 billion, outpaced loan book growth of +16.70% from the beginning of the year to 337.55 billion.

Thereby, this pressured LDR to 49.62% in H1:2020 from 50.10% in 2019, which was well below regulatory benchmark.

The shortfall in LDR is partly responsible for the ₦89.14 billion CRR debit against the bank.

Meristem Securities stated that although the firm expects some improvement in the general macroeconomic environment over the short term, the bank’s outlook is dampened by regulatory risks, and intense competition for market share.

Thus, analysts revised target price earnings to 4.15x from 5.28X and expected earnings per share (EPS) to ₦0.11 from ₦0.13.

“This yields a December 2020 target price of ₦0.46 and indicates a downside potential of -11.54%. Hence, we rate the ticker a SELL”, Meristem explained.

Wema Bank: Weak Earnings, Bleak Outlook Validate Concerns on Vulnerability – Meristem