Wema Bank plc has defied the regulatory and macro-economic pressures by recording earnings growth in the first quarter of the year.
For the first three months through March 2015, Wema Bank’s net income increased by 4.13 percent to N523.0 million from N502.13 million the same period of the corresponding year 2014.
“The sustainability of our earnings and the resilience of the Bank’s income growth, in spite of the harsh economic environment since the middle of last year are particularly encouraging,” said Segun Oloketuyi, Managing Director/CEO of the bank in an emailed note to bussinessDay.
“The year started slowly as a result of the uncertain political environment as well as the economic constraints brought about by the impact of declining oil prices. In spite of this, we were still able to record sustainable growth in all our critical performance indices,” said Oloketuyi.
The Nigerian lender has been grappling with tough regulatory conditions as the Abuja based Central Bank increased the Cash Reserve Requirements (CRR) on private sector funds from 15 percent to 20 percent while the monetary policy rate (MPR) was moved from 12 percent to 13 percent. CRR for public sector funds remained at 75 percent.
The Central Bank devalued the naira twice in the last quarter of 2014 in a bid to stabilize the naira and reduce volatility as oil, which is the nation’s major foreign exchange earner fell by more than 50 percent in 2014.
The Nigerian lender was able to curb expenses amid regulatory induced costs as total operating expenses reduced by 2.91 percent to N4.67 billion in 2015 from N4.81 billion in 2014.
The bank’s cost to income ratio, measure of efficiency reduced to 79.70 percent in 2015 from 81 percent in 2014. This improved cost to income ratio means the lender is cutting costs while increasing profits – the higher the ratio the less efficient a bank and the higher the ratio the more efficient.
Wema Bank’s gross earnings increased by 5 percent to N10.63 billion driven by an increase of 8 percent in interest income to N8.9 billion in 2014 as against N8.3 billion the year over.
While the Nigerian lender may have reduced costs, it capitulated to the CBN’s tightening stance as interest expense were up by 17.50 percent culminating in a single digit growth in net interest income by 2.70 percent to N4.17 billion in 2015 from N4.06 billion in 2014.
The Bank is also using the resources of the owner in generating higher profit as return on average equity increased to 6.4 percent in 2015 as against 6.1 percent in 2014.
Earnings per share EPS increased by 100 percent to 10k in 2015 compared with 5k in 2014.
Wema Bank has developed its Risk Management Strategy (RMS) and improved on the quality of its loan portfolio as the lender’s Overall NPL ratio reduced to 2.3 percent in 2015 compared with 3.4 percent in 2014 – a milestone in the banking industry.
“By optimising our cost of funds through the accelerated phase-out of public sector and other expensive deposits, we have been able to streamline our balance sheet, making it leaner and positioning us to take advantage of opportunities within the Retail and Commercial Banking space,” said Oloketuyi.
Loans to deposits ratio increased to 62.10 percent in 2015 from 57.65 percent in 2014. It means the Nigerian lender is aggressive about lending while creating risk assets.
Loans and advances to customers increased by 9.52 percent to N135.08 billion in 2015 as against N149.30 billion in 2013.
Deposits to customers reduced by 16.0 percent to N217.50 billion in 2015 from N258.95 billion in 2014.
Total assets were down by 10.22 percent to N343.40 billion in the review period from N382.50 billion in 2014.
Wema Bank Plc operates as a commercial bank in Nigeria. It is a financial services provider with a network of 110 branches located across the six geo-political regions in the country, including Abuja. The Company’s services include commercial banking, corporate finance, institutional banking, retail banking and trade finance.
“Our Total Assets shrank by 10.21 percent due to our deliberate strategy of squeesing out inefficiencies. As the economy opens up in the 2nd to 3rd quarter of the year, we expect more measured growth driven by better yields and lower cost of funds,” said Oloketuyi.
Analysts say the Nigerian banking sector may not replicate the earnings growth of the 2014 financial year as capital adequacy requirements following the implementation of Base II/III may subdue the dividend paying abilities of Nigeria lenders thus reducing the minimum required return on share holders.
“Going into 2015, we are likely to see more muted loan growth as the pressured macro clime creates a paucity of high quality borrowers,” said Wale Okunrinboye, equity research analyst with ARM research Limited, in an emailed statement to BusinessDay.
“Generally more cautious approach to risk asset creation suggests softer interest income growth. On the NIR side, the closure of the RDAS and the implementation of the order based 2-way quote system which has significantly reduced naira volatility robs banks of a key pillar of 2014’s earnings performance which should result in more subdued earnings growth,” said Okunrinboye.
WEMA Bank aims to complete a $100 million Tier II capital raising exercise by the second quarter of this year to fund its growing foreign currency loan portfolio.
The bank has upgraded its Corporate Internet Banking Solution, designed to be the best in the industry with respect to the user experience, security and functionality.
“In general, our outlook for the next few months is that of cautious optimism; we will continue to grow our business in our area of comparative advantage – Retail & SME while at the same time pushing for further gains in operating efficiency,” said Oloketuyi.
Share performance and outlook
The stock closed trading at N1 a share on Wednesday April 21 2015 and currently has a market capitalisation of N37.51 billion the same day.
Nigeria’s Gross Domestic Product grew at the rate of 5.94 percent y/y in Q4 2014, down by 83bps from 6.77 percent recorded in the corresponding quarter of previous fiscal year.
The non-oil sector was the major driver of the growth recorded in Q4 2014, with activities in crop production, trade, textile and real estate contributing the most.
With the conduct of a fair and peaceful election, investors’ confidence in the country’s economy has increased which means the economy may pick in last quarter of 2015.
Headline Inflation increased to 8.4 percent y/y in February 2015 from 8.2 percent y/y recorded in January 2015. The marginal rise in the rate was mainly as a result of the increase in the prices of seven of the non-food commodities classification, especially alcoholic beverages and transportation costs.
Nigerian foreign reserves decreased by $5bn (12.7 percent) from $39.5bn at end of Q3 2014 to $34.5billion at end of Q4 2014.
BALA AUGIE
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