Nigeria Bank Analysis | Public Credit Rating Wema Bank Plc Nigeria Bank Analysis June 2019 Financial data: (USDm comparative) ⱡ 31/12/17 31/12/18 NGN/USD (avg.) 305.3 305.6 NGN/USD (close) 305.5 306.5 Total assets 1,252.6 1,579.8 Primary capital 162.4 166.0 Secondary capital 20.7 80.5 Net advances 706.5 822.8 Liquid assets 206.2 353.0 Operating income 104.7 133.8 Profit after tax 7.4 10.9 Market cap.* N24.7bn/USD80.5m Market share** 1.0% ⱡCentral Bank of Nigeria (“CBN”) exchange rates. *As at 03 June 2019 **Based on industry assets at 31 December 2018. Rating history: Initial rating (March 2016) Long-term rating: BBB-(NG) Short-term rating: A3(NG) Rating outlook: Stable Last rating (May 2018) Long-term rating: BBB-(NG) Short-term rating: A3(NG) Rating outlook: Stable Related methodologies/research: Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017 Nigerian Banking Sector Bulletin, 2017 Wema Rating Reports (up to 2018) Glossary of Terms/Ratios, February 2017 GCR contacts: Primary Analyst Adeyinka Olowofela Credit Analyst [email protected]Committee Chairperson Dave King [email protected]Analyst location: Lagos, Nigeria Tel: +23 41 904-9462 Website: www.globalratings.com.ng Summary rating rationale Wema Bank Plc (“Wema”, “the bank”) ranks among the mid-sized commercial banks in Nigeria in terms of balance sheet size, and geographical spread across the country. Wema’s total assets amounted to N484.2bn (representing a market share of 1.0%) at FY18. Total shareholders’ funds improved by 2.6% to N50.9bn at FY18, while an additional N17.7bn raised in Tier 2 capital during the year accelerated total capital by 35.1% to N75.6bn at FY18 and translated to an increase in risk weighted capital adequacy ratio (“CAR”) to 18.0% (FY17:14.3%). Wema’s asset quality remained fairly strong, with the gross non- performing loan (“NPL”) ratio ending at 5.0% in FY18 (FY17: 4.9%), well within the peer average of 6.5%, and tolerable limit of 5% set by the regulator. Given that fully provisioned NPL of N898m was written off during the year, impaired loans’ coverage by specific provisions improved to 60% in FY18 (FY17: 20.6%). A mismatch of asset and liability maturities was evident in FY18, with the bank recording a liquidity gap of N206.4bn in the ‘less than three months’ maturity band, equating to 2.7x capital. Cumulative negative liquidity gaps were also recorded across the ‘up to one year’ maturity bands. Cognisance has been taken of the behavioural liability pattern, with a significant portion of deposits normally rolled over at maturity. In terms of statutory compliance, Wema’s liquidity ratio remained above the required minimum, albeit with a thin buffer throughout FY18, ranging between 30.9% and 38.1% to close the year at 34.6%. Wema reported a pre-tax profit of N4.8bn in FY18, an improvement of 59.5% over FY17. Performance was supported by both interest and non-interest income which saw total operating income grow 27.9% to N40.9bn. Although there was an increase in operating expenses during the year, underpinned by increases in technology cost and personnel cost, the bank was able to achieve a level of efficiency given the decline in cost ratio to 79.7% in FY18 (FY17: 83.8%). Accordingly, return on average equity and assets (“ROaE” and “ROaA”) improved to 6.6% and 0.8% in FY18 from 4.6% and 0.6% in prior year respectively. Factors that could trigger a rating action may include Positive change: Upward movement in the rating could result from an enhancement of market position, and an improved funding mix that could strengthen the bank’s liquidity profile as well as profitability metrics. Negative change: A rating downgrade could follow from a weakening in competitive positioning, and sustained pressure on earnings, asset quality, and liquidity metrics. Rating class Rating scale Rating Rating outlook Expiry date Long-term National BBB-(NG) Stable April 2020 Short-term National A3(NG)
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Nigeria Bank Analysis | Public Credit Rating
Wema Bank Plc Nigeria Bank Analysis
June 2019
Financial data:
(USDm comparative) ⱡ
31/12/17 31/12/18
NGN/USD (avg.) 305.3 305.6
NGN/USD (close) 305.5 306.5
Total assets 1,252.6 1,579.8
Primary capital 162.4 166.0
Secondary capital 20.7 80.5
Net advances 706.5 822.8
Liquid assets 206.2 353.0
Operating income 104.7 133.8
Profit after tax 7.4 10.9
Market cap.* N24.7bn/USD80.5m
Market share** 1.0% ⱡCentral Bank of Nigeria (“CBN”) exchange
*Ranked by total assets. †Excludes balances held in respect of letters of credit. Source: Audited Financial Statements.
Nigeria Bank Analysis | Public Credit Rating Page 5
CBN) under its agriculture, small and medium scale
sector, for on-lending to qualified customers.
Table 5: Borrowings FY17 FY18
N'm N'm
Qualifying Tier 2 capital 6,328.2 24,676.3
Wema SPV 6,328.2 24,676.3
Other borrowings* 33,131.3 20,772.3
Commercial Paper 15,557.9 -
National Housing Fund 104.0 93.6
CBN MSMEDF 108.0 1,000.1
Due to BOI 3,672.6 2,776.5
CBN Agricultural loan 992.9 825.2
Osun Bailout Fund 9,549.6 -
Shelter Afrique 3,146.3 2,938.3
AFDB - 5,639.4
ICD - 7,493.8
AGSMEIS - 5.4
Total 39,459.5 45,448.6
*Excluding Qualifying Tier 2 capital Source: Wema AFS.
Liquidity positioning
Comparison of Wema’s asset and liability maturities
at balance sheet date shows a negative contractual
liquidity gap of N206.4bn (2.7 times capital) in the
‘less than three months’ maturity bucket. Nonetheless,
the behavioural trend in the Nigerian banking space
indicates that a significant portion of deposits are
usually rolled over at maturity.
The bank’s liquidity ratio remained above the
statutory minimum (30%), albeit with a thin buffer
throughout FY18, ranging between 30.9% and 38.1%
to close the year at 34.6%.
Table 6: Net liquidity gap profile (N'bn)
<3 months
3-6 months
6-12 months
>1 year
Assets 168.0 31.2 66.1 123.1
Liabilities (374.4) (6.5) (2.2) (53.5)
Net liquidity gap (206.4) 24.7 63.9 69.6
Cumulative liquidity gap
(206.4) (181.7) (117.8) (48.2)
Source: Wema AFS.
Operational profile
Risk management
Wema continues to update its Enterprise risk
management framework in line with the economic and
industry conditions. The board is responsible for the
overall risk management of the bank. These functions
are performed through its board committees, which
are assisted by management committees. The bank has
in place a full compliance risk unit, aimed at
governing the credit approval process, as well as
credit monitoring and supervision.
Asset composition
Total assets grew 26.5% to N484.2bn at FY18,
underpinned by increased funding base (particularly
the subordinated debts issued during the year).
Consequently, reflecting utilisation of the available
funds, a notable rise was recorded in net loans and
advances, as well as mandatory reserve with CBN
during the period. As such, cash and liquid assets
grew 71.7% to N108.2bn, and accounted for an
increased 22.3% of the enlarged asset base.
Table 7: Asset Mix FY17 FY18
N'bn % N'bn %
Cash and liquid assets 63.0 16.5 108.2 22.3
Cash 13.3 3.5 17.1 3.5
Liquidity reserve deposits 26.5 6.9 58.1 12.0
Treasury bills and bonds 19.6 5.1 12.6 2.6
Balances with other banks 3.7 1.0 20.4 4.2
Customer advances 215.8 56.4 252.2 52.1
Other investment securities 24.9 6.5 59.0 12.2
Investment in property 0.0 0.0 0.0 0.0
Property, plant and equipment 17.1 4.5 18.6 3.8
Other assets 61.8 16.1 46.2 9.5
Total 382.7 100.0 484.2 100.0
Source: Wema AFS.
Furthermore, the bank’s investment securities, which
comprised treasury bills and bonds grew significantly
by 136.9% YoY and accounted for a higher 12.2% of
total assets at FY18.
Loan portfolio
Fuelled by customer demand and Tier 2 capital raised
during the year, the bank’s gross loans and advances
grew 18.9% to N261.6bn at FY18. The loan book is
considered to be well diversified by economic sector,
as no sector accounted for more than 20% of the loan
book.
Table 8: Loan book characteristics (%)
By Sector:
Agriculture 3.5 Manufacturing 4.1
Oil & gas 20.1 IT & Telecomms 0.1
Construction 14.7 Transport 5.0
Whole sale and retail 16.1 Individuals 2.9
Public sector 4.6 Others 29.0
Concentration: Maturity: Single largest 4.4 <1 month 2.7 Five largest 16.9 1-3 months 11.3 Ten largest 29.6 3-12 months 24.7 Twenty largest 47.2 >12 months 61.4
Product type:
Term loans 88.4 Others 0.7
Overdrafts 10.9
Source: Wema AFS.
Concentration risk by obligor is considered moderate,
with the single obligor of 4.4% of gross loan,
translating to 15.3% of shareholders’ funds, while the
twenty largest exposures accounted for 47.2% of the
portfolio. The maturity profile of the book was
relatively long, with about 61.4% maturing after one
year. About 86.2% of the gross loan was contracted in
local currency while 13.8% was foreign currency
denominated.
Contingencies Off-balance sheet assets grew 30.3% to N62.9bn at
FY18, constituted 83.3% of the total capital base and
27.2% were cash covered. These comprised;
guarantee and indemnities (70.6%), bonds (7.9%), and
clean-line facilities and irrevocable letter of credit
(21.5%).
Nigeria Bank Analysis | Public Credit Rating Page 6
Asset quality
Wema’s asset quality remained fairly strong with gross
NPL ratio ending at 5.0% in FY18 (FY17: 4.9%),
which compares well with the peer average of 6.5%,
and tolerable limit of 5% set by the regulator. As fully
provisioned NPL of N898m was written off during the
year, impaired loans’ coverage by specific provisions
improved to 60% in FY18 (FY17: 20.6%).
Management is optimistic about maintaining a quality
loan book over the medium term as the bank
continues with its strict loan selection process.
Table 9: Asset Quality FY17 FY18
N'bn N'bn
Gross Advances 220.1 261.6
Performing 209.4 248.6
Impaired 10.7 13.0
Provision for impairment (4.2) (9.4)
Individually impaired (2.2) (7.8)
Collectively impaired (2.0) (1.6)
Net NPLs 6.5 3.6
Selected asset quality ratios:
Gross NPLs ratio (%) 4.9 5.0
Net NPLs ratio (%) 2.9 1.4
Net NPLs/Capital (%) 11.6 4.8
Source: Wema AFS.
Financial performance
A five year financial synopsis is presented on page 7
of this report, and supplemented by the commentary
below.
The bank’s performance recorded an improvement
year-on-year across most metrics during FY18. While
interest income reported a growth of 8.6% to N57.6bn
during the year, a decline of 8% was recorded in
interest expense, which saw the net interest income
report a notable 36.6% growth in FY18. Non-interest
income grew 13.9% to N13.9bn during the year,
supported by growth in securities trading.
Accordingly, total operating income increased 27.9%
to N40.9bn during FY18, surpassing the budgeted
N35.6bn for the period.
Operating expenses reported a 21.7% rise toN32.6bn
in FY18, underpinned by increases in technology
costs (given the digital focus of the bank) and
personnel expenses driven by branch and business
expansion. That said, the outpaced growth of the
bank’s income saw a decline in the cost to income
ratio to 79.7% in FY18 (FY17: 83.8%). Accordingly,
Wema reported pre-tax profit of N4.8bn in FY18,
which represented a 59.5% growth over FY17
position, which led to an improved ROaE and ROaA
of 6.6% and 0.8% in FY18 from 4.6% and 0.6% in
prior year respectively.
Table 10: Budget vs. interim results
Actual FY18
Budget FY19
Actual 1Q FY19
N'bn
% of budget*
FY19 N'bn N'bn
Income statement Net interest income 27.0 27.8 5.6 80.6
Other income 13.9 12.0 3.8 126.7
Total income 40.9 39.8 9.4 94.5
Impairment charge (3.5) - (0.4) -
OPEX (32.6) (33.8) (7.7) 91.1
NPBT 4.8 6.0 1.3 86.7
Balance sheet
Customers deposits 369.2 500.1 383.3 76.7
Net advances 252.2 301.3 266.3 88.4
Total assets 484.2 632.7 573.3 90.6
Tier 1 capital 50.9 54.9 52.1 94.9
*Annualised Source: Wema.
Management has forecast 25% growth at the pre-tax
profit level, which will be highly driven by reduction
in impairment charges. Operating income is expected
to remain stable as the bank pursues loan recovery
with slight growth in risk assets. However, for the
three months period ending 30 March 2019, the bank
delivered a pre-tax profit of N1.3bn, translating to
86.7% of the budget on annualised basis, and
management remain optimistic about achieving the
full year budget given the various initiatives put in
place coupled with gradual economic recoveries.
Nigeria Bank Analysis | Public Credit Rating Page 7
Year end: 31 December
Statement of Comprehensive Income Analysis 2014 2015 2016 2017 2018 Q1 2019
Interest income 35,453 37,128 44,560 53,073 57,635 16,078 Interest expense (16,901) (19,408) (25,910) (33,306) (30,643) (10,484) Net interest income 18,552 17,720 18,650 19,767 26,992 5,594 Other income 6,734 8,664 9,801 12,196 13,895 3,776 Total operating income 25,286 26,383 28,451 31,963 40,887 9,370 Impairment charge (88) 78 (412) (2,180) (3,511) (354) Operating expenditure (22,103) (23,470) (24,793) (26,774) (32,579) (7,684) Share of profit in associate - - - - - - Net profit before tax 3,094 2,991 3,245 3,009 4,798 1,331 Tax (721) (718) (685) (754) (1,471) (187) Net profit after tax 2,372 2,273 2,561 2,255 3,326 1,144 Other comprehensive income 1 22 (154) 140 0 32
Total comprehensive income 2,373 2,295 2,407 2,396 3,327 1,176
Statement of Financial Position Analysis
Subscribed capital 68,157 68,157 68,157 27,985 27,985 27,985 Reserves (incl. net income for the year) (24,389) (22,093) (19,687) 21,630 22,904 24,079 Hybrid capital (incl. eligible portion of subordinated term debt) 50,062 25,000 12,732 6,328 24,676 24,096 Total capital and reserves 93,830 71,064 61,202 55,943 75,565 76,161
† Excludes balances held in respect of letter of credit.
‡ Please note that for these ratios, liquid assets exclude the statutory reserve balance.
Wema Bank Plc(Naira in mill ions except as noted)
Nigeria Bank Analysis | Public Credit Rating Page 8
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and (d) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The ratings were solicited by, or on behalf of, Wema Bank Plc, and therefore, GCR has been compensated for the provision of the ratings.
Wema Bank Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings above were disclosed to Wema Bank Plc with no contestation of/changes to the ratings.
The information received from Wema Bank Plc and other reliable third parties to accord the credit rating included the latest audited annual financial statements as at 31 December 2018 (plus four years of audited comparative numbers), latest internal and/or external audit report to management, full year detailed budgeted financial statements for 2019, most recent year-to-date management accounts to 31 March 2019 reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.