Wema Bank Half Year 2023 : Still In Its Under- performing Mode
A look into Wema Bank’s half year reports or figures for 2023 conveys a supersonic performance of bank recovering from a damaged past . Its Gross Earnings hit N89.09billion, an increase of 49.50% from N59.59billion in Q2’22, due to an increase of 53% and 32% in Interest Income and Non-Interest Income respectively .Even its profit for the year moved swiftly by 99 % to N105b in the first half of 2023 from N5.3b in the corresponding period of 2022 ; its total Assets inched up by 41.6% to N1.88 trillion from N1.33 trillion between June 2022 to June 2023 , and its shareholders funds by 23.4% within the same period to N89.3b from N72.3b
But the above feat could only excite a naive observer or investor ; it merely a dummy. When a leader of less competitive corporate entity wants to be disingenuous he or she ventures more into historical data or absolute figures to measure his or her performance . That is exactly what the management of Wema Bank and few others have been doing most;y to measure their performance over years .
But the suspicion is that the above standard could be a ruse . Though looking at the performance of an organization in relation to previous years or quarters in order to identify any significant changes may be imperative ,however ,the danger in it is that it can lead to complacency since it is the rate of improvement compared with that of competitors that is important. Not only that .It may be difficult for an investor to detect whether such an entity is delivering better value for money .
To some observers , that is the suspicion surrounding Wema’ s means of measuring its its success. Ironically , however , even on the basis of its absolute figures a comparative analysis of Wema Bank’s performance shows it is the worst bank , at least based on the fact that its profit figure ,is the least in the industry when Unity Bank with its negative equity is exempted
Beyond that , when certain critical success factors are used to measure its performance , the bank does not convey a different picture from a laggard it has been ,particularly among the tier 2 banks even with the data from its first half 2023 results stated above .
In banking, there are five critical segments or audiences every player is expected to satisfy , each with its critical success factors .In other words .in the business of financial intermediation ,the bank has to satisfy five main constituencies. One is the surplus units from which it borrows .These units demand the best possible term in rates of interest and maturity structures and the maximum liquidity to enable them to have the funds back when they want them , or as agreed . the second constituency is the deficit units which borrow from the banks . They want to borrow when they need the funds and as cheaply as possible .Like the lenders ,the borrowers also impose the obligation of maximum on the banks to enable them to obtain funds when they need them . In addition to satisfying the surplus and the deficit sectors ,the shareholders must also be satisfied .These require maximum or adequate returns on their investments in order to remain invested in the bank and to be willing to continue to provide additional resources and when needed .To this is added the fourth constituency , the regulatory authorities ,whose interest is to ensure that the bank does not undertake excessive risks and that it operates prudently and within stipulated regulatory requirements .There is , finally the community at large. As the provider of the environment within which it operates . the bank owes an obligation to the community to be a good corporate citizen, capable of maximizing the exploitation of the opportunities available and minimizing the threats in the environment .
In all the above areas , Wema Bank could only be adjudged a threshold player dispensing threshold values
One critical performance indicator that exposes Wema Bank is its profit margin. Looking at Wema Bank from its latest results in the first half of the ongoing financial year confirms its laggard status , contrasting sharply its historical performance year on year that gives it a deceptive picture of competitiveness . Its pre tax margin increased to13.5% in the first half of this year compared to 10.1% in the similar period last year ; it decreased to 11.2 % in the full year 2022 from 13.2% in the 2021 full financial year . Its net profit margins follow the same trend rising to 11.7% in 2023 half year period from 8.8% last year June . At the end of 2022 it was 8.5% compared to 9.5 % in 2021 . The implication of the above uninspiring trend is that for every N100 revenue generated at the top line less than N10 is converted to profit after the tax man has been settled . .
The above picture is uninspiring as it is uncompetitive , very far below the inflation rates . Profit margins , whether operating ,pre tax or net profit margin are indicators pointing to how well a company manages its financial resources ; when a net profit margin, for instance , is below inflation rate , it represents a negative real earning in an economy while a positive profit margin figure over inflation rates represents a gain to investors ; a declining net profit margin takes a toll on reserves .
Deeper and critical interpretations of these metrics ,particularly its profitability metric, give also uninspiring pictures. Looking at this bank profit from its earnings to the investors or earnings per share [EPS] confirms an observation that the bank needs a better top management to fulfill its destiny or to exploit its full potentials. A good way to determine earnings to the investor is the Earning Per Share (EPS), which is the monetary share value, i.e., what every share issued by the bank will receive from declared earnings. The higher the EPS, the more profitable the bank is. Full Year EPS for Wema Bank in the last five years comes to about 88.3k , 23.1k , 11.9k , .13.5k and 8.6 k per share between 2022 and 2018; in the first half of 2023 it is 163k compared to 82k in the corresponding period of 2022 .
When the prevailing high of inflation is factored into the values given to its investors by EPS, this is nothing but miserable return to investors. Is Wema Bank Plc under any jinx to remain on treadmill perpetually ? For decades now ,the bank has remained a weakling it was when it was saved from extinction by the regulatory authorities ..
Its stock price has remained diminutive below N5 per share, a product of the investors’ poor perception of its value The stock’s unbounded volatility is another dent on the image of the bank . Compared to industry and market , its Average weekly movement or votality is 11.6%, the rate at which it is adjudged to be the most volatile in the industry and the market Average Movement 8.3%
The diminutive price of Sterling Bank could strictly pinned down its uninspiring performance over the years and unstable dividend track record .This is the reason for its miserable value delivery to its shareholders . . Its current dividend yield is 4% and dividend payout ratio is 20
The stakeholders worst hit by the above position are the shareholders that require maximum or adequate returns on their investments in order to remain invested in the bank and to be willing to continue to provide additional resources and when needed .
One can now see why the investors’ perception towards its stock has been unimpressive ; it has remained diminutive as the values created by it for its shareholders
Its leadership undoing remains its inability to control its costs ,grow the bank’s resources as well as its revenue competitively . Management of costs is a key strategic capability . Shareholders can benefit from cost efficiencies in terms of better value for money or more service features for the same cost Beyond that ,shareholders do not value profit at any cost . If the profit is achieved at a higher cost relative to the competitors , they could opt for a company with lower cost with better value for money . So the challenge is to ensure that an appropriate level of value is offered at an acceptable cost . This means that every player in an industry is forced to keep costs as low as possible, consistent with the value to be provided. Not to do so invites shareholders to switch to ther companies for a value at a lower cost .
The management of the cost base of an organisation could also be a basis for achieving competitive advantage . Competitive rivalry will continually require the driving down of costs because competitors will be trying to reduce their cost so as to outperform their rivals while offering similar value.
For Wema Bank, the above feat has become a tall ambition. The bank’s cost yo income has become one of the worst in the industry hovering between 80% and 70% .This means making converting about N20 to to profit from every N100 generated at the top line . In the first half of 2023 ,its operating expenses increased by 23% to N32.40 billion in H1 2023 from N26.33 billion in H1 2022, largely driven by regulatory costs, inflationary pressures, and exchange rate deterioration. ▪ Cost to income ratio of 72.7% for H1 2023 (H1’22:81.1%) shows improved proficiency and higher profitability
Not only in cost management , even its revenue generation has been sluggish , all which could be pinned down to the quality of its leadership and resources at its disposal .
Banking business is primarily about risk management ,it is the core business and lending is the heart of it .All the technical training a banker receives is heavily geared towards lending .When it is said that one is a good or an astute banker ,what ,in fact , is meant is that one is a shrewd lender . –one who lends money safely and profitably . But this bank has found it difficult to break hard nut of banking and generate better income because of the challenges of interest rate and credit rates risks involved . This manifests in its net interest margin and non performing loan ratio.
Its Net interest margin decreased to 6.12% in H1 2023 from 6.13% in H1 2022 as a result of a higher increase in Cost of fund by 20% in H1 2023 (5.5%) from H1 2022 (4.2%) compared to Yields on Assets which
h increased to 16.4% in H1 2023 from 15.7% in H1 2022 In our example of Local Bank, the NIM was 8.7 percent. This means that for every $100 of invested assets (loans to bank customers) the bank made $9 of income after all interest expenses had been paid. The bank made good investment decisions this year and used its resources effectively to general a 9 percent return. While the yield was driven by significant improvements in asset quality and strong loan growth,the increase in the cost of fund was due to the increase in MPR in March 2023 to 18.5% Its non performing loan ratio hit 5.12% staying slightly above the minimum 5% expected by the regulatory authorities .
