Agusto & Co. upgrades Wema Bank Plc to “Bbb+”

In its June 2024 report, Agusto & Co., a credit rating agency, upgraded Wema Bank Plc from a “Bbb” rating issued in June 2023 to a “Bbb+” rating.  

The upgrade from “Bbb” to “Bbb+” indicates an improvement in Wema Bank’s creditworthiness.  

While both ratings are considered investment grade, a “Bbb+” rating is one notch higher, suggesting the bank has shown positive developments in its financial health and risk profile over the past year. 

 

This upgrade is likely to continue enhancing investor confidence and fueling the share price rally.  

In 2023, Wema Bank’s share price gained 44% year-to-date, increasing its market capitalization to N72.006 billion. 

This upward trend persisted into Q1 2024, with market capitalization further rising to N109.294 billion, reflecting a 52% growth in Q1 alone.

As of June 4, 2024, Wema Bank’s stock remains the best-performing banking stock YtD and ranks 30th on the NGX, with a YtD gain of 20.54%. 

The substantial increase in market capitalization and strong YtD performance suggests an appealing investment option. The upgraded rating further highlights that. 

Key Factors Behind the Rating Upgrade

Some reasons for the upgraded rating, as cited by Agusto & Co., include improved profitability, lower impaired loans, a better deposit mix, etc. These are reflected in the bank’s financial statements. 

The bank’s financial statements reveal a profit before tax of N43.64 billion for the year ended December 31, 2023, driven by gross earnings of N226.915 billion. Notably, about 82% of this revenue came from interest income. 

• The reliance on interest income suggests that if the bank maintains or grows its lending operations, it will continue to generate substantial revenues.

• The significant profit growth in 2023 surpasses the bank’s 5-year compound annual growth rate (CAGR) of 35%.

• By Q1 2024, Wema Bank had already achieved 26% of its 2023 full-year profit before tax, indicating continued strong financial performance.

• The significant profit before tax and revenue growth, driven by interest income, highlight Wema Bank’s strong core operations, as evidenced by surpassing its 5-year CAGR.

On loans and impaired loans, the rating agency observed growth and diversification in the loan book.  

Impaired loans, which increased by 8.7% during the review period, constituted 4.3% of total loans as of December 31, 2023, down from 6.1% in FYE 2022, and remained below the 5% maximum threshold. 

The agency noted that the bank’s focus on the midstream segment for risk asset creation, combined with the 50.1% devaluation of the Naira, resulted in a rise in the proportion of foreign currency loans to 22.9% of the loan book, up from 12.8% in 2022. 

Therefore, it highlighted the necessity for increased monitoring of exposure to the oil and gas sector due to the susceptibility of midstream oil and gas obligors to contract variations amid challenges faced by the sector. 

• The loan portfolio stability indicates stability and effective risk management and suggests a lower likelihood of significant losses from non-performing loans. This aspect provides reassurance to investors concerned about asset quality.

• However, it is important to note that while foreign currency loans can diversify the loan portfolio and potentially offer higher returns, they also expose the bank to exchange rate fluctuations, which can impact profitability and asset quality. Investors should carefully consider the implications of this increased exposure.

The agency anticipates that Wema Bank will meet the new CBN capital requirement by June 2025 due to strong shareholder support and brand growth, evidenced by a 68.6% increase in shareholders’ funds to N139.3 billion from a successful N40 billion rights issue in December 2023.   

Additionally, it stated that its capital adequacy ratio improved to 16%, exceeding the 10% regulatory requirement, but declined to 8.2% under stress testing.  

To comply with the CBN’s directive and facilitate planned business expansion, a N150 billion capital exercise is planned for June 2024 through rights issues, private placements, and public offers. 

• The significant increase in shareholders’ funds following a successful rights issue suggests strong support from existing investors. This indicates confidence in the bank’s management and prospects, which may attract new investors.

• The decline in the capital adequacy ratio under stress testing indicates that the bank’s capital position becomes weaker when subjected to adverse scenarios or stress events.  This emphasizes the significance of implementing robust risk management practices to ensure the bank can withstand potential financial shocks and maintain adequate capital levels to support its operations and absorb losses during challenging times.

Overall, the rating assessment suggests that Wema Bank has demonstrated resilience and proactive measures to enhance its financial stability and compliance with regulatory requirements.  

The significant increase in shareholders’ funds, coupled with plans for a capital exercise, highlights investor confidence and the bank’s commitment to growth and regulatory compliance.   

However, challenges remain, particularly regarding exposure to the oil and gas sector and the need for effective risk management practices.  

For investors, these developments present opportunities for growth and potential returns, but also highlight the importance of thorough due diligence and risk assessment before making investment decisions.