**Affirms Bank at ‘B-‘ With Outlook Stable
By Modupe Gbadeyanka
Renowned global rating company, Fitch Ratings, has disclosed that the financial metrics of Nigeria-based Wema Bank has remained weak despite meeting its strategic goals over the last three years.
Fitch made this disclosure in a statement last week when it announced affirming the lender’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ and National Long-Term Rating at ‘BBB-(nga)’ with the outlook stable.
The rating agency noted that Wema Bank’s core earnings remain low but are improving gradually, adding that its net interest income has benefited from Nigeria’s high-interest-rate environment (the policy rate is 14%) despite continuing pressure on the cost of funding.
The latter, it said, reflects the limited franchise and weak customer deposit mix.
Fitch said one of the main constraints on Wema Bank’s profitability continues to be its very high cost base (the cost/income ratio was 90% in 2016). Loan impairment charges are increasing but remain manageable.
On Wema Bank’s IDRs, the rating firm noted that they are driven by its standalone creditworthiness as defined by its Viability Rating (VR). The VR is constrained by challenging operating conditions in Nigeria, the bank’s modest franchise (1% market share), as well as weak earnings and profitability and tight capitalisation.
It said these factors are counterbalanced by Wema Bank’s coherent strategy, strong management team, good impaired loan ratio and low levels of foreign currency (FC) loans.
The business model, underpinned by the roll-out of sophisticated delivery channels, is improving and the bank is in an early stage of growth focussing on mid-market corporates and retail segments, it said.
However, Fitch said Wema Bank’s low impaired loan ratio (end-9M17: 1.4%) partly reflects its below-average exposure to the oil sector and a smaller proportion of FC loans. The bank’s non-performing loan ratio (based on prudential requirements/90 days overdue) is higher (end-9M17: 3.5%) but still compares favourably with peers.
“Our assessment of asset quality also considers Wema’s very high credit concentrations by industry and single borrower,” the statement released in London on Wednesday, February 7, 2018, disclosed.
It added that Wema Bank’s capital ratios are tight in the context of the operating environment and regulatory requirements.
The bank reported a total capital adequacy ratio (CAR) of 12.4% at end-9M17, which is a modest buffer over its regulatory minimum of 10% and is sensitive to even modest shocks. Pressure on the CAR partly comes from low internal capital generation.
Funding is primarily reliant on costly savings and term deposits given Wema Bank’s limited retail franchise. The bank is diversifying its funding sources by tapping market funding. Positively, Wema Bank has a lower proportion of FC assets and liabilities than peers and is less affected by FC liquidity pressures in the system, it said.
“Wema Bank’s National Ratings reflect Fitch’s opinion of its standalone creditworthiness relative to the best credits in the country. The National Long- and Short-Term Ratings of ‘BBB-(nga)’ and ‘F3(nga)’ take into account Wema Bank’s overall risk profile relative to other Nigerian banks, including its limited franchise and weak financial metrics,” the statement said.
“Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s (B+/Negative) weak ability to provide support, particularly in foreign currency.
“In addition, there are no clear messages from the authorities regarding their willingness to support the banking system.
“Therefore, the Support Rating Floor of all Nigerian banks is ‘No Floor’ and all Support Ratings are ‘5’. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable,” the statement said.
Concluding, it said Wema Bank’s IDRs are sensitive to rating action on its VR. This would most likely be triggered by a further decline in its capital ratios. A material deterioration in asset quality and/or a pronounced instability in Wema Bank’s funding profile could also put negative pressure on the bank’s VR.
Dipo Olowookere 
Aduragbemi Omiyale