GCR Affirms Wema Bank BBB-(NG) Rating

By Dipo Olowookere

Global Credit Ratings has affirmed the national scale ratings assigned to Wema Bank Plc of BBB-(NG) and A3(NG) in the long-term and short-term respectively; with the outlook accorded as Stable.

A statement issued by the local rating agency explained that it affirmed the rating because the mid-sized bank has recorded some improvements lately.

It said Wema Bank was presently focusing on deepening its market share particularly within the retail banking segment through increased presence and digitisation.

The lender’s risk-weighted capital adequacy ratio (CAR) improved to 14.3 percent at FY17 (FY16:11.1 percent), supported by a reduction in risk weighted assets (particularly contraction in loans and advances book). Cognisance is taken of the capital reorganisation scheme carried out by the bank during the year, which involved writing off negative retained earnings as well as a portion of impaired assets against the share premium account.

Consequently, the bank expects a more efficient balance sheet. Going forward, the bank plans to raise additional Tier 2 capital before the end of 2Q FY18. This is expected to further strengthen capitalisation and enhance operation.

The bank’s gross non-performing loan (NPL) ratio improved slightly to 4.9 percent at FY17 (FY16: 5.1 percent) and further strengthened to 4 percent at end-1Q FY18, following the declassification of a major component of the reported NPL at FY17. Consequently, specific provision coverage of gross NPLs improved to 21 percent at FY17 (FY16:18.3 percent), albeit remained low.

Wema Bank witnessed liquidity pressure during the year, with the regulatory liquidity ratio falling below the regulatory minimum requirement at some points during FY17 (recording lowest ratio of 17.8 percent in September 2017 and later improved to 26.3 percent at end-FY17).

Management ascribed this to the crowding out effect created by the high yields on government securities during the period.

However, the bank issued commercial paper in 4Q FY17 (raising a total of N17 billion) to cushion its liquidity challenges.

Subsequently, the bank’s liquidity position has since normalised with the liquidity ratio maintained at above 30% throughout 1Q FY18.

Despite an improvement in total operating income during the year, Wema Bank recorded a decline in pre-tax profit to N3 billion in FY17 (FY16: N3.2 billion), impacted by higher funding cost, rise in impairment charges and operating expenses.

Accordingly, return on average equity (ROaE) declined to 4.6 percent (FY16: 5.4 percent), while return on average assets (ROaA) remained flat at 0.6 percent.

Note is taken of management’s operating efficiency strategy aimed at curtailing the relatively high cost-to-income ratio which stood at 83.8 percent, well above the peer average at FY17.

GCR noted that upward rating movement could result from a significant enhancement of market position, and an improved funding mix that could strengthen the bank’s liquidity profile as well as profitability metrics.

However, a rating downgrade could follow from a weakening in competitive positioning, and sustained pressure on earnings, asset quality, and liquidity metrics.