WEMA BANK PLC
|Ticker: WEMABANK||Nature of Business: Banking||Location : Nigeria|
|Recent Price: NGN0.72||52-Week High/Low: NGN0.90/0.54||Estimated Fair Value: NGN1.20-NGN2.00|
|Expected Return: 61.1%||Consider Buy: Below NGN1.60||Business Risk: Average|
|Financial Risk: Average||Economic Moat: Weak||Corporate Governance: Strong|
The existence of WEMABANK dates back to 2nd May 1945 when it began banking business as a private limited company, Agbomagbe Bank Limited. It was changed to a public company in April 1987. Thereafter, its shares were listed on the Nigerian Stock Exchange for various investors to have access to its shares. In 2005, WEMABANK acquired the National Bank of Nigeria Plc. The company was authorised to carry out commercial banking nationwide in November 2015, having divested from its non-banking businesses. It used to be a regional bank serving South-South, South-West and FCT. Neemtree Limited is the major shareholder with a 28.1% equity stake in the company while SW8 Investment Limited controls 14.9% of the outstanding shares of WEMABANK.
Mr. Babatunde Kasali chairs the 12-man board of directors of the company while Mr. Ademola Adebise is the managing director of WEMABANK. Mrs. Ibiye Ekong replaced Ms. Tina Vukor-Quarshie who retired as an independent director in August 2020. Mr. Oluwole Ajimisinmi and Mr. Emeka Obiagwu were appointed executive directors in the year 2020.
Since the bank’s toxic assets were purchased by the Asset Management Corporation of Nigeria (AMCON), there has been remarkable progress by the management to shore up its capital and improve profitability. Profit After Tax (PAT) has been improving since the 2012 fiscal year when the bank made a Loss After Tax of NGN5 billion. In year 2020, WEMABANK made a PAT of NGN4.6 billion (2019: NGN5.2 billion, 2018: NGN3.3 billion). Over the past three years, total assets have grown at a compound rate of 36.2% while gross loans have expanded by 19.5%. Total assets peak at NGN979.5 billion in 2020 and shareholders’ fund gained 6% on a 3-Year Compound Annual Growth Rate basis. Besides, the company has started compensating shareholders by paying dividends.
The bank has been attracting more deposits that can be loaned out to borrowers. It is hoped that this will reduce its indebtedness and debt service obligations. Also, it will improve liquidity. Loans and advances are on the increase and credit loss provision by the bank has been reduced to 4.7%. We opined that this may rise as the bank seeks to raise its earnings by growing its loan portfolio.
WEMABANK is investing in technology aimed at boosting its earnings. It invested in a digital banking platform, ALAT, to offer digital financial services to customers. We expect costs of operation in relation to gross earnings to continue to drop in order to sustain profitability. Management should not, however, sit on its laurels. The company may become liable to liquidity problems if management relents.
WEMABANK ‘s resuscitation appears to have continued unabated. The recently released results showed that gross earnings for the first nine months of the year 2021 improved by 9.1% to NGN63.1 billion compared to the corresponding period of last year. Net interest income was NGN28.4 billion as at 30th September 2021, up from NGN20.1 billion announced a year earlier. PAT more than doubled the figure for the first nine months of last year. The total assets of the company were NGN1.1 trillion at the end of the third quarter of 2021.
A share of WEMABANK is estimated at a value between N1.20 and NGN2.00. Therefore, the company seems to be undervalued at the current market price of NGN0.72. A return of 61.1% is expected on the stock of the company.
Gross earnings decreased by 14.2% year-over-year to NGN81.4 billion from NGN94.9 billion announced in the preceding year. The dip in gross earnings was caused by a drop in net trading income on treasury bills and interest income on loans and advances. The bank lost NGN10.9 billion or 75.2% net trading income on treasury bills in 2020. Interest income on loans and advances shrank 13.2% to NGN53.7 billion even though the bank granted more loans. Gross loans increased by 24.5% year-over-year to NGN 375 billion in 2020. However, fee and commission income, which produced 10.4% of gross earnings, rose 5.3% to NGN8.4 billion.
Profit Before Tax (PBT) declined by 12.3% from NGN6.8 billion to NGN5.9 billion. PAT lessened by 12% or NGN622.5 million. Cost of operations formed 44.4% of gross income compared to 39.3% of last year. Net interest margin moved up to 37.9% from the preceding year’s 27.4%. Both PBT and PAT margins witnessed marginal improvement in the year under consideration. Return on Average Equity (RoAE) and Return on Average Assets (RoAA) were 9.2% and 0.6% respectively.
Gross loans grew by 24.5% compared to the previous year in which it gained 15.2%; deposits jumped by 39.4% as against 56.4% in the prior fiscal year. WEMABANK has cautiously grown its loan portfolio. The gross loan to deposit ratio stood at 46.6% (2019: 52.2%). Loan expansion has trailed deposit growth. The quality of its loan portfolio improved with non-performing loans dropping to 4.7% from 7.4%.
WEMABANK is adequately capitalised. The capital adequacy ratio of 15% is higher than the regulatory requirement of 10% for a national bank. It had a total debt of NGN73.5 billion at the 2020 year-end which translated into over 100% of shareholders’ fund but only 7.5% of total assets.
WEMABANK provides traditional and digital banking services. But competition is heating up from both the financial technology firms and the traditional financial institutions. The commoditisation of financial products makes it difficult for WEMABANK to have an edge on the competition. Therefore, it cannot ward off competitors from eating into its earnings.