Wema Bank 2023 Results :IMPRESSIVE BUT TRAILED BY RESERVATIONS

  Excitement over its 2023 results damping by fear of sustainability

 In the last few years ,the financial results of Wema Bank Plc, no doubt , have continued to register big improvements that are commendable when measured on year on year basis . But the fact that the same success story has always been trailed by one deep-seated reservation or the other has continued to put on hold the expected excitements .

For its 2023 results ,the fear is over the performance sustainability while the concerns over the bank’s inability to change its treadmill status persist . In other words, why should a child born decades ago remain a toddler ?

Though the results for the 2023 financial year showed the bank’s ability to prevail on its past disastrous cost to income and non performing loan ratios , yet the possibility of sustaining the latest results in the current financial year by the bank, indeed, is hanging in the bance .

 Truly , its 2023 results surely look impressive on the basis of historical comparison or when benchmarked with the previousyearfigures .At the end of of 2023 financial , Wema Bank saw its gross earnings and profitability (PBT) soar by +70.63% and +193.34% to N225.75bn and N43.66bn, respectively, the highest growth rate in 5 years. Its total assets have climbed to N2.25trn, with commensurate growth in shareholder’s fund to N139.30bn in FY 2023.

The positive gross earnings and profitability performance fed into the bank’s key financial ratios in FY 2023. The return on equity and assets rose to 25.83% and 1.60% in FY 2023 from 19.25% and 0.79% in FY 2022, implying a better utilization of shareholder funds and assets. The cost-to-income ratio moderated to 64.34% in FY 2023 from 80.15% in FY 2022, showing better cost optimization. Despite the high default risk environment, Wema Bank’s non-performing loan ratio declined to 4.31% in FY 2023 from 6.80% in FY 2022, driven by N96.32bn recovered loans and N624.77m written off as bad debt. Wema Bank’s share price had a fairly bullish run, with a gain of +43.59% as of December 30, 2023.

But is the performance sustainable? This is a question around its 2023 performance that no one could emphatically affirm . However ,stakeholders are gripped by more by the fear of its unsustainabilty than ever when certain circumstances behind the achievement of the aboveresults are considered. .

Most importantly, when the new highs in earnings and profitability attained by it could be traced to the revaluation gains and increased interest income induced by the naira devaluation and monetary policy rate (MPR) hike . The high-interest rate environment and FX devaluation drove a +71.83% growth in interest income to N185.64bn and a +75.73% growth in non-interest income in FY 2023.

The point is that with the current reversal of the foreign exchange rate in 2024 , the re- occurrence of the revaluation gains might be threatened, reducing gross earnings source to interest income. Moreover , since the naira has seen persistent appreciation since March, settling at N1,230/US$1 as of April 08, 2024, compared to N1,615.94k/US$ on February 27, 2024, and if this appreciation should persist, the so called revaluation gains are sure to vanish in the current year and the pipe of the earnings windfall may dry up .

Also , though the bank’s non performing loan ratio moving to 4.31% in FY 2023 from 6.80% in FY 2022, nothing as such has signified the bank’s risk management had witnessed a turnaround . What exposed this fear is it its impairment charge on financial instruments that increased by +121.81% from N4.76bn in FY 2022 to N24.96bn in FY 2023, driven by higher impairment on loans and advances, off-balance sheet, and investment securities. Moreover , though the bank’s lower NPL suggests less risk on asset quality, the increased loan loss provision to N10.56bn in FY 2023 from N4.76bn in FY 2022, driven by higher provision on bonds/treasury bills and off-balance sheet is not that encouraging . In addition , the improved asset quality was driven by N96.32bn recovered loans and N624.77m written off as bad debt that might not be sustainable .

Excessive cost over revenue is usually the drawback on Wema Bank good performance. Though in 2023 ,the bank demonstrated to be on top of this situation, its current cost to income might not be sustainable too . The reason for this fear may not be far to seek . First, it was the strong earnings performance that prevented the bank from using nearly all its income to service operating costs as done in the past , making its cost-to-income ratio to decline to 64.34% in FY 2023; in the past five years its cost-to-income ratio hovered at an average of 82.78%. In this current year , the earning windfall may not repeat itself with the current revaluation of naira

The fear of the bank’s possible inability to sustain its current cost to income could be further pinned down to the speculations over the likely rising banking sector’s operational costs in 2024 due to various triggers, such as the recent removal of subsidies for current Band A customers. This might negatively impact further on the banking sector’s asset quality as a higher operating cost environment could hurt manufacturers, putting pressure on their profitability and ability to service debt. Moreover, despite the so called improvements recorded in its 2023 results on its impact on the share price appreciation, investors are yet to throw their weight on the management as the bank shares are seemed to be priced below its earnings with the price-to-earnings (P/E) at 3.04x in FY 2023, lower than the peer average of 4.20x and the price-to-book value at 0.78x, confirming the investors’ position and fear over its stock .