Behind Wema Bank’s best half-year performance in 5 years

Amid a declining interest environment which has seen banks interest income slump, Wema Bank’s digital drive and strong retail footprint of tier-two lender helped the lender record one of the biggest profit growths so far in H1 among lenders.

Corporate history

Wema Bank Plc is one of Nigeria’s longest surviving indigenous banks and was established on May 2, 1945, under the old name of Agbonmagbe Bank Limited. The mid-tier lender obtained a commercial banking license and started banking activities in the same year.

The bank became a publicly quoted company in 1987 and was listed on the Nigerian Stock Exchange (NSE) in 1990. 11 years later Wema was granted a universal banking license.

In 2009, the bank underwent a strategic repositioning exercise led by a new management team that saw its finances and profile rise considerably which eventually made it took a sound strategic decision to operate as a deposit money bank with a regional scope in South-south, South-west and Federal Capital Territory (FCT) in 2011.

It was the first in Sub-saharan Africa to fully deploy Finance 10.2 Core Banking Application which enhanced its branch and electronic banking services offered to customers while reducing system downtime and fostering access to banking services.

The bank became a national bank in December 2015, with a capital base of over N44 billion, satisfying the regulatory requirements stipulated for a National Banking License by the Central Bank of Nigeria.

Wema Bank introduced Alat, the first fully digital bank in Nigeria, in 2017, which has earned it various local and international awards including World Finance Award 2017 for the Best Mobile App and Best Digital App in Nigeria.

Information from the bank’s analyst presentation for the first half of 2019 showed that the lender has 1, 173 professional staffs, 155 branches nationwide, 2.25 million customer accounts, 359 Automated Teller Machines, 5, 682 point of sale (POS) stations and 2, 067 agency banking partners.

The bank has a Bbb stable rating from Agusto & Co and Global Credit Rating & Co.

The administrative and financial affairs of the bank are overseen by Ademola Adebise, the Chief Executive Officer/managing Director. Prior to his appointment as helmsman which took effect October 1, 2018, he held the position of a Deputy Managing Director.

The Board of Wema Bank Plc is chaired by Babatunde Kasali, with Adeboye Adefioye, Samuel Durojaiye, Moruf Oseni and Folake Sanu to mention few as non-executive directors.

The bank’s major shareholders include Neemtree Limited, Odua Investment Company, Petrotrab Limited and SWB Investment Limited, with a combined 54 percent equity stake.

Wema Bank’s half-year net profit grows most in 5 years

Wema Bank Plc. recorded an impressive performance in the first half of this year after it grew its profit for the period the most in 5 years, sustaining its profit growth momentum which it resumed in 2016 after a dip in 2015 half-year net profit.

The lender grew profit after tax by 43 percent to N2.25 billion in the first half of 2019, the biggest leap since 2014, as against N1.57 billion achieved in the corresponding period of 2018.

This was supported by the bank’s interest income generated from investments in securities as well as income on loans and advances which continued to account for a greater proportion of its total interest income. Wema Bank’s interest income on loans and advances to banks and customers grew by almost a quarter to N28.37 billion from N22.82 billion.

Similarly, the bank’s investment income on investment securities grew by 66 percent to N3.67 billion in the half-year 2019 compared with N2.21 billion achieved in the same period of last year.

A trend analysis of the bank’s half-year non-interest income in the last five years shows the bank recorded significant improvement in 2018 and 2019 driven by increased net trading income for the periods.

Net trading income rose from N0.66 billion in half-year 2015 to N0.69 billion in 2016 and fell to N0.52 billion in 2017. However, in 2018, the figure rose significantly by 534 percent to N3.30 billion and the bank sustained the trend with an 8 percent growth in the first six months of this year to hit N3.65 billion.

As a result, Wema Bank’s non-interest income as a percentage of total income rose to 21 percent in half-year 2019 from 19 percent in the previous year, while interest income waned to 79 percent from 81 percent recorded in the comparative period of last year.

Net interest margin of the lender dropped from the 2018 high of 7.08 percent to 6.69 percent due to a decline in the average yield on earnings asset, according to the bank, while the yield on assets maintained its downward spiral to 16.73 percent as against 17.75 percent recorded in end-year 2018 and 17.76 percent in 2017.

Wema Bank’s deposits from customers rose from N369 billion in 2018 financial year to N446 billion as of June 2019, indicating an increase of N77 billion within six months which represents 67 percent of the increase of N115 billion recorded in 2018.

The bank deepened its retail customer base in H1 2019 by 18 percent. However, the relative size of retail, the bank’s largest segment, dropped to 36 percent from 37 percent recorded in the first half of 2018.

The bank’s gross loans and advances to customers rose steadily by 11.07 percent to N290.55 billion since the start of the year.

The growth in the loan books was driven mainly by loans to the construction, general commerce and manufacturing sectors of the economy which jointly account for about 70.6 percent of the increase in the loan books since the start of the year. Oil and gas sector got the highest portion of N54.26 billion, while the education sector took the least chunk of N2.22 billion from the bank.

Also, the bank showed efficiency in its loan recovery strategies during the first half of this year as its non-performing loan ratio (NPL) fell to 3.55 percent from 4.98 percent recorded at end-year 2018. In the review period, 51 percent of Wema Bank’s loans went to corporate organizations; 35 percent, commercial; 10 percent, retail; and the remaining 4 percent, public sector.

Loan to deposit ratio (LDR) fell to 63 percent in the period from 68 percent recorded in the 2018 financial year. However, this is still above the 60 percent LDR threshold mandated for commercial lenders across the country by the Central Bank of Nigeria (CBN) and due for implementation after end-september 2019.

Net impairment loss on financial assets rose more than double to N823 billion from N344 billion while operating income continued its growth 23.6 percent to N19 billion from N15 billion.

Wema Bank paid N359 million as income tax expense for the review period from N244 million in the same period in 2018, while its earnings per share increased from N8.2 to N11.6.

How Wema bank hopes to sustain earnings momentum

Wema bank will continue to drive its growth through digital capabilities as its strategic thrust till 2020. The bank revealed six strategic pillars to help achieve its goal to become “the most innovative bank”.

The pillars include enhancing capital and funding, driving aggressive growth in the core - corporate and commercial – banking, and growing market share in Retail and SME.

Others include transforming the customer experience, digitizing business and operations, and building a high performing team which would be at the fore of the bank’s operations.

Key enablers would be innovation, agile execution and partnership and alliances, the bank noted in a note to investors and analysts. In the short run, the mid-tier lender would remain focused on growth, doubling performance and leveraging on technology.

“We are committed to ensuring we deepen our retail footprint with continued innovation,” said Funmilayo Falola, Head of Brand and Marketing Communications, Wema Bank Plc.

With ALAT, Wema Bank was able to open over 380, 000 new accounts and issued 142,343 cards as at June 30, 2019. The bank has also executed 6.7 million transactions worth N175 billion and created 122, 894 saving goals.

Management Guidance

Management guidance for customer deposits growth is at 30 percent in the second half of the year. The guidance was improved after the first half where customer deposits rose 20.8 percent.

The management also expects a 25 percent growth at the end of 2019, while growth for 2018 was at 45.13 percent. Guidance for Loan growth was also raised to 12.5 percent for H2 2019 on the back of expanded loan books. The full year is expected at 10 percent. Non-interest income growth is expected to grow at 25 percent in H2 and 2019 full year. The bank grew its non-interest income by 19.6 percent in H1 and 13.95 percent in the full-year 2018.

Net interest margin is expected to grow to 8 percent in H2 and full-year 2019. This compares to 7.08 percent in full-year 2018.

Wema’s Cost to Income Ratio is expected to be at 75-80 percent at year’s end while its non-performing loan, one of the lowest in the banking sector, is expected to be at 5 percent in H1 and full year 2019. The bank had 3.55 percent NPL in H1.

Return on Average Equity according to management is expected to improve to 12 percent in H2 and full year 2019. Last year Wema had 9.43 percent ROAE.

As at the close of business on Friday, August 2, 2019, shares of the tier- two lender fell by 4.76 percent on the Nigerian Stock Exchange (NSE) to close at 60 kobo per share, the negative performance further worsened its year-to-date return to 4.76 percent even though it outperformed the NSE broad index which plunged 12.09 percent since the beginning of the year.