Announcements Financial Institutions Rating Alerts

GCR Affirms Wema Bank Plc’s Issuer National Scale Long Term Rating of BBB-(NG); Outlook changed to Evolving from Negative

Lagos, 18 June 2021 – GCR Ratings (“GCR”) has affirmed Wema Bank Plc’s national scale long and short-term issuer ratings of BBB-(NG) and A3(NG) respectively; with the Outlook changed to Evolving from Negative.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

Wema Bank Plc

Long Term issuer

National

BBB-(NG)

Evolving Outlook

Short Term issuer

National

A3(NG)

An “Evolving” outlook means that the rating symbol may be raised, lowered or unchanged over the outlook horizon.

Rating Rationale

The ratings on Wema Bank Plc (“Wema”, “the bank”) reflect its stable funding structure, intermediate capitalisation, adequate liquidity, a sustained moderate risk position and the growing competitive position within the Nigerian banking/financial institutions sector.

Wema is a mid-sized commercial bank with track record of over seven decades and remains the longest surviving indigenous bank within the country. The bank controls an estimated market share of 3% and 2.1% based on industry’s total deposits and assets respectively at FY20. The bank’s asset base has grown significantly over the last three years to date, with an average yearly growth of 30%. In particular, customer deposits peaked at N795.5bn at Q1 FY21 from N369.2bn in FY18, attesting to increased brand acceptance within the local market.

Capitalisation is currently a moderate ratings constraint. The GCR capital ratio was relatively stable at about 14% at FY20 despite the reported growth in risk weighted assets, underpinned by the bank’s strong internal capital generation capacity. The anticipated increase in tier one capital through a rights Issue before the end of 2021 is expected to see the capital ratio improve to around 25-30% in the next 18 months. Without the additional capital, we expect the capital ratio to be around 15%, reflecting a sustained strong internal capital generation that outpaces risk weighted asset growth. In addition, the bank intends to dispose some of its non-core assets in the immediate future, which is expected to reduce its risk weighted assets and ultimately improve the capital adequacy ratio. Loan loss reserving is adequate with Stage 3 loans coverage of 76.7% at FY20 (FY19: 54.5%).

Wema’s risk position is viewed to be contained, with gross non-performing loans (‘NPL”) ratio registering an improvement somewhat to 4.7% at FY20, from 7.4% previously, albeit underpinned by restructured loans during the year. Credit losses of 1.7% at FY20 is considered moderate and in line with industry average. Furthermore, concentration by obligor is perceived high, with the twenty largest exposures accounting 37.6% of the loan book at FY20, while the single largest constituted 25.7% of the capital base, breaching the 20% regulatory obligor limit. We expect a more diversified loan book over the short to medium term as the bank continues to strategically expand its lending activities. In addition, foreign currency loans constituted 10.8% of the loan portfolio at FY20, which is favourably viewed and remained below the industry average 35%.

Wema’s funding and liquidity position is assessed at an intermediate level. Wema is largely funded through customer deposits, which has constituted around 90% of the funding base over the review period. While the deposit book mix indicated that higher cost of funding (term deposits) constituted the bulk at FY20, it reflects a decreasing rate, reflective of the bank’s focus on growing the low-cost deposits. This notwithstanding, the relatively low interest environment saw average cost of funds moderate to 4.3% at FY20 relative from 6.9% at FY19. Liquidity is good, evidenced by the liquid nature of the balance sheet over the review period. As at FY20, the GCR adjusted liquid assets covered total wholesale funding moderately by 3.8x, while the ratio of GCR liquid asset to total customer deposits stood at 35% (FY19: 37.2%). Though the contractual matching of assets and liabilities reflects a liquidity gap of N555bn in the critical ‘less than three-month’ maturity band, the behavioural trend reflects that a sizeable portion are usually rolled over at maturity.

Outlook Statement

The Evolving Outlook means that the rating symbol may be raised, lowered or unchanged over the outlook horizon. This reflects the assumption of Wema’s ability to raise its planned equity capital within the next 12 months. Should it materialise, we anticipate an improvement in capitalisation. We also expect NPL ratio and credit losses to remain within a sound range over the next 12 – 18 months.

Rating Triggers

The ratings could be upgraded should Wema successfully raise its capital and the GCR core capital maintained around the 20% level, assuming no change in asset quality and liquidity metrics. Conversely, if capital fails to improve and / or asset quality deteriorates, it could trigger a downward rating movement.

Analytical Contacts

Primary analyst

Adeyinka Olowofela

Senior Analyst, Financial Institutions Analyst

Lagos, NG

Yinka@GCRratings.com

+234 1 904 9462

     

Committee chair

Matthew Pirnie

Group Head of Ratings

Johannesburg, ZA

MatthewP@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019

Criteria for Rating Financial Institutions, May 2019

GCR Ratings Scale, Symbols & Definitions, May 2019

GCR Country Risk Scores, February 2021

GCR Financial Institutions Sector Risk Score, February 2021

Ratings History

Wema Bank Plc

Rating class

Review

Rating scale

Rating class

Outlook

Date

Long Term Issuer

Initial

National

BBB-(NG)

Stable

March 2016

Short Term Issuer

A3-(NG)

Long Term Issuer

Last

National

BBB-(NG)

Negative

July 2020

Short Term Issuer

A3(NG)

Risk Score Summary

Rating Components & Factors

Risk scores

   

Operating environment

7.25

Country risk score

3.75

Sector risk score

3.50

   

Business profile

0.00

Competitive position

0.00

Management and governance

0.00

   

Financial profile

-1.00

Capital and leverage

-1.00

Earnings vs. Risk

0.00

Liquidity

0.00

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total Score

6.25

Glossary

Balance Sheet

Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.

Capital

The sum of money that is invested to generate proceeds.

Cash

Funds that can be readily spent or used to meet current obligations.

Credit Rating

An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.

Debt

An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.

Diversification

Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.

Exposure

Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks

Income

Money received, especially on a regular basis, for work or through investments.

Interest

Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.

Issuer

The party indebted or the person making repayments for its borrowings.

Leverage

With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.

Liquidity

The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 

Long Term Rating

See GCR Rating Scales, Symbols and Definitions.

Margin

A term whose meaning depends on the context. In the widest sense, it means the difference between two values.

Market

An assessment of the property value, with the value being compared to similar properties in the area.

Maturity

The length of time between the issue of a bond or other security and the date on which it becomes payable in full.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

Short Term Rating

See GCR Rating Scales, Symbols and Definitions.

Short Term

Current; ordinarily less than one year.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to Wema Bank Plc. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Wema Bank Plc participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Wema Bank Plc and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 31 December 2020
  • Four years of comparative audited numbers
  • Management account as at 31 March 2021
  • Other related documents.

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