Wema Bank: Profit slows down, heads for a drop at full year

Wema Bank lost its earnings growth rate in the third quarter and heads for a possible drop in profit at full year. Its ability to defend profit seen in the second quarter could not be sustained in the third. The ability to covert revenue into profit remains a problem with one major cost line still running out of control.

The bank’s one major challenge on the side of cost is interest cost, even as it is losing customer deposits. The challenge intensified in the third quarter, as interest expenses rose more than twice as fast as interest income and caused a decline in net interest income.

Interest expenses claimed 60% of interest income in the third quarter, rising from 50.8% in the third quarter of last year. The increased cost of funds against a flat growth in non-interest income led to a slight decline in after tax profit during the review period. There was a major slowdown in profit growth from N1.10 billion in the second quarter to N1.27 billion at the end of the third.

Revenue growth remained relatively strong with gross earnings improving by 16.4% to N37.89 billion at the end of the third quarter. The growth was accounted for exclusively by interest income, which rose by 20% to N31.93 billion at the end of September. Non-interest income, which was the driving force of revenue growth last year, has lost the steam in the current year.

Full year projection indicates gross earnings in the region of N52 billion for Wema Bank at the end of 2016. This is a slight upward revision from the N50 billion earlier projected based on the second quarter growth rate. With that, the bank looks good to step up revenue growth from 8.5% in 2015 to 13.6% this year. Last year saw the lowest growth rate in revenue for the bank in four years, as growth slowed down for the third year running.

Interest expenses grew by 41.6% to N19.14 billion at the end of the third quarter and claimed more than the increase in interest income. That caused a decline of 3.6% in net interest income. The bank’s record of rising interest expenses remains against the general trend in the banking industry this year. Banks are generally experiencing declining interest expenses, which is helping them moderate the impact of rising loan losses on the bottom line.

On the other hand, the bank is equally moving against the general banking industry trend of rising loan loss expenses. Compared to the rapidly growing credit losses in the banking industry, Wema Bank shows a marginal impairment charge at the end of the third quarter, moving even from a net write back position in the second quarter. This has helped to dilute the impact of rising interest expenses on the income statement during the period.

The bank appears to have overcome its credit quality problem since 2013. Its loan recovery effort is still yielding fruit with a net write back of N61.5 million at the end of the second quarter, moving to a net charge of N80 million at the end of September.

Non-interest income was marginally down at N5.96 billion at the end of the third quarter. Growth in fee income needs to speed up in the final quarter, otherwise a wider decline from the closing figure of N8.66 billion last year looks likely.

Operating expenses declined marginally by 1.8% to N17.18 billion at the end of September. This has lowered operating cost margin from 51.2% at the end of last year to below 47% in the second quarter and further to 45.3% at the end of September. The cost margin has also declined from 53.7% in the third quarter of last year. This has helped to moderate further the impact of the high growth in interest expenses.

After tax profit still declined by 2.2% to N1.27 billion at the end of September. This is a sharp slowdown compared to the net profit figure of N1.10 billion the bank posted at the end of the second quarter. The full year profit outlook has weakened from the second quarter view. We mark down the full year after tax profit projection for Wema Bank from N2.3 billion to N1.78 billion in 2016. This will be a drop of 23.6% from the full year profit figure of N2.33 billion in 2015.

There was an accelerated growth in profit in the final quarter of last year. More than 44% of the full year profit in 2015 was earned in the final quarter. Should the pattern be repeated in the current year, the bank may close the year with a bigger profit than projected.

There was a sharp drop of 20.3% in customer deposits at the end of the third quarter, which has registered negatively on the asset side of the balance sheet. Loans and advances declined by 4.6% to a little over N177 billion and total assets went down by 3% to N384.5 billion from the closing figures last year.

Net profit margin declined from 4% in the same period last year to 3.3% at the end the third quarter – one of the lowest in the banking sector. The bank earned less than 4 kobo per share at the end of the third quarter and the full year expectation is less than 5 kobo. It earned 6 kobo per share at the end of last year. Cash dividend isn’t expected until profit is big enough to clean up a retained deficit of over N34 billion.