Fitch Affirms Wema Bank at ‘B-‘

By Dipo Olowookere

Fitch Ratings has affirmed Wema Bank Plc’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook, while the bank’s National Long-Term Rating was also affirmed at ‘BBB-(nga)’.

Fitch said the stable outlook reflects the base case expectation that Wema Bank’s credit profile is unlikely to change significantly over a one-to-two year period.

The financial institution operates exclusively in Nigeria, where it has a small franchise, accounting for just 1% banking system assets at end-2017.

According to a statement, the IDRs of Wema Bank are driven by its standalone creditworthiness, as defined by its Viability Rating (VR). Wema’s VR, as with that of other Nigerian banks, is highly conditioned by Nigeria’s operating environment, with the fragile economic recovery restraining banks’ growth prospects and asset quality.

It was said that the lender’s VR further reflects a small franchise, weak profitability, low capitalisation relative to peers’, a weak funding profile and potential deterioration of asset quality metrics.

The company’s impaired loans (stage 3 loans under IFRS 9) ratio (3.4% at end-1H18) is considerably lower than peers’. However, its stock of stage 2 loans is the highest among rated Nigerian banks at 40% of gross loans at end-1H18, which may put pressure on future earnings and loss absorption capacity if they migrate into stage 3. Reserve coverage of impaired loans (78% at end-1H18) declined in 1H18, but remains adequate.

As with other Nigerian banks, Wema Bank is exposed to large credit concentrations. The 20 largest loans measured at 49% of gross loans and 220% of Fitch Core Capital (FCC) at end-1H18.

The bank is also exposed, albeit less than peers, to the oil sector, which accounted for 20% of gross loans at end-1H18 and has a considerably lower proportion of lending in foreign currency (11% at end-1H18) than peers, which we view positively.

Profitability is weak, but broadly in line with most similarly-sized peers’. Weak profitability metrics reflect a low net interest margin, given a high cost of funding that is reflective of its more expensive deposit base. Wema Bank is investing heavily in digital offerings and its cost structure is not commensurate with its earnings generation capacity, as reflected by a very high cost-income ratio (86% in 2017).

Wema Bank operates with just a national banking license, meaning that it must comply with a minimum total regulatory capital requirement of just 10% and its total capital ratio was 13.3% at end-1H18, providing a moderate buffer against this requirement. The bank’s funding profile is structurally weaker than peers’, given a greater reliance on more expensive and less stable term deposits and the lender is almost entirely funded in local currency, meaning that it is less exposed to foreign currency liquidity risks that have prevailed in Nigeria in recent years, which is viewed positively. Single-depositor concentration is in line with peers’, with the 20-largest customer deposits accounting for 18% of the total at end-1H18.