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.

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) 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.