Things seem to have gone sour immediately for Wema Bank despite recording the biggest profit advances in the banking industry at close to 50 percent in 2014 as the recovery fire which was a hard work of several years went off suddenly in 2015.
The lender failed to sustain the top growth record in profit of the prior year and closed the 2015 operations with revenue slowing down for the third year running and profit ending flat.
This is seen not to be an interesting story for a bank that needs all the operating speed possible in rebuilding profit in order to fill up a hole of over N35 billion of accumulated losses. The bank’s capital stock is punctured by retained deficit, which grew further in 2015 instead of declining.
The bank, according to experts, needs to keep revenue accelerating and cost moderating to enable it escape from its backward profit margin. The opposites are what happened in 2015, placing a question mark over the bank’s ability to sustain the recovery trend going forward.
Inability to achieve a reasonable growth in revenue was the major drawback for the bank in 2015. Revenue growth has been slowing down since it reported an impressive growth of 35 percent in 2012. Growth slowed down for the third year running in 2015, marking the lowest growth rate in earnings in four years.
At 8.5 percent, gross income grew at about half the growth rate of the preceding year. Non-interest income however provided the strength for revenue growth in the year at 28.7 percent but interest income remained the dominant source of revenue. The expansion of 25 percent in net credit volume in the year to N185.60 billion is not reflected in the less than 5 percent increase in interest income. Earnings per naira of outstanding loans and investments declined during the year.
Management succeeded in putting two of the three major expenditure lines under control. Wema Bank appears to have overcome its credit quality problem, as a net write back in 2015 follows a moderate provision in 2014 and a huge net write back in 2013. This is an indication that loan recovery effort is yielding some positive results for the bank.
Operating expenses were also under check with a decline in personnel expenses while total operating cost increased by 6 percent to N23.41 billion in the year. Total operating expenses grew a little below gross earnings, lowering the cost margin slightly from 52.4 percent at the end of 2014 to 51.2 percent in 2015. This remains well above the average industry number, indicating that the bank is still devoting one of the highest ratios of its revenue to operating expenses in the banking sector.
The one expenditure line that management could not control is interest cost, which rose by close to 15 percent to N19.41 billion in 2015. That is almost twice as fast as the 8.5 percent growth in gross earnings and three times as fast as the 5 percent increase in interest income. That caused a decline of 4.5 percent in net interest income in the year.
The strength to improve operating income slightly to N26.46 billion came from the stronger growth in non-interest income. Further strength came from the moderated growth in operating cost, which enabled the bank to defend profit. Net profit however slipped by 2 percent to stand at about N2.33 billion at the end of 2015.
The profit figure represents a comparatively weak ability to convert revenue into profit. The bank’s net profit margin, already one of the lowest in the banking sector, declined further from 5.6 percent in 2014 to 5.1 percent in 2015.
Inability to grow revenue and inability to convert a good proportion of it into profit are the key issues that should be in the bank’s strategy paper going forward into 2016. How to gear up the bank’s growth functions to raise asset turnover is the second heart of the matter.
How to add new momentum to the two sides of the operational flow – assets to revenue and revenue to profit is the task facing Wema Bank’s management in 2016. Without a new strength on either side, the decelerating trend in revenue will lead to a sharp profit drop in the current year.
The bank earned 6 kobo per share in 2015, which is unchanged from the preceding year’s figure. Its long dividend holiday is still running and dividend isn’t to be expected until the N35 billion impairment of the capital stock is made good with sustained strong profit growth and aggressive profit retentions.
The sign of a weak performance was evident in the bank’s half year 2015 result when it announced that its profit before tax also dipped to N1.17 billion from N1.70 billion recorded in the previous year. It added that its other operating expenses fell to N4.98 billion compared to N5.04 billion achieved in 2014.
However, its gross earnings appreciated to N20.87 billion in its first half of 2015. The growth represented an increase of 2.4 percent from N20.82 billion recorded in the same period of 2014, while its net interest income in the period dropped to N9.06 billion; from N9.71billion in the first half of 2014.
According to the bank, loans and advances dropped to N134.57 billion; from N149.29 billion as at December 2014 while deposits went down to N234.1 billion, from N258.96 billion in 2014.
Segun Oloketuyi, Managing Director of the bank attributed the poor result to a tough operating environment occasioned by economic headwinds, regulatory restrictions and political uncertainty.
“The first quarter of the year was characterized by election-related activities and political maneuverings with limited emphasis on economic matters. “While the second quarter was largely characterized by the continued pressure on the currency, the tight monetary policy conditions and the low level supply of petroleum products.
“All these issues affected consumer discretionary spending and indeed the growth in our retail volumes,” he said.
Oloketuyi said that lack of economic policy clarity so far in 2015, investment decisions had been tentative. He added that the Cash Reserves Ratio (CRR) harmonisation by the Central Bank of Nigeria (CBN) had reduced liquidity with significant impact on margins from money market investments.
“We are confident that as the new administration settles into office; its policy thrust will become clearer. “Hence, it will enable us to continue to make well informed lending decisions mitigate risk exposures and further expand our customer base,” he said.
Experts believe that the bank needs to redouble its effort at ensuring that the legacies of its founding fathers and its resurgence as a national bank should not be taken for granted as more still need to be done.