05, 2021 / 4:35 PM / by Fitch Ratings / Header Image Credit: Wema Bank
Fitch Ratings has affirmed Wema Bank PLC's Long-Term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook. The National Long-Term Rating has been upgraded to 'BBB(nga)' from 'BBB-(nga)', reflecting the bank's increased creditworthiness relative to that of other issuers in Nigeria.
Key Rating Drivers
IDR and Viability Rating
The IDRs of Wema are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR) of 'b-'. The VR reflects the concentration of the bank's activities within Nigeria's challenging operating environment, a small franchise, high credit concentrations, aggressive loan and balance-sheet growth - which we expect to continue over the medium term - and weaknesses in the bank's funding profile. It also reflects our expectation of a significant improvement in capitalisation and leverage, due to a material rights issue due to be concluded by end-2021.
The Stable Outlook reflects Fitch's view that risks to Wema's credit profile are captured by the current rating, with sufficient headroom under our base case to absorb the fallout from operating-environment pressures.
Operating conditions in Nigeria are gradually stabilising. Fitch forecasts 1.9% GDP growth in 2021, following a 1.8% contraction in 2020. Our baseline scenario is that business volumes and earnings should continue to rebound in 2021, while the rally in oil prices is also a positive factor. Nevertheless, downside risks linger, given inherently volatile market conditions, with banks still exposed to foreign currency (FC) shortages, potential further currency devaluation, rising inflation and regulatory intervention by the Central Bank of Nigeria (CBN).
Wema has a small franchise, representing 2% of domestic banking-system assets at end-2020. Its market shares have improved slightly in recent years, reflecting aggressive growth, which has resulted in a significant increase in leverage.
Wema's impaired loans (Stage 3 loans under IFRS 9) ratio increased to 5.2% at end-2020 from 3% at end-2019, as a result of the pandemic, but declined to 3.5% at end-1H21 on higher customer cash flows amid an economic recovery. Stage 2 loans were a fairly low 5%. However, restructured loans represented a high 35% of gross loans, mainly relating to loans to small companies that were restructured during the pandemic. The majority of restructured loans are classified as Stage 1. Low specific loan loss allowance (LLA) coverage of impaired loans (41% at end-1H21) is mitigated by reasonable collateral coverage.
Aggressive loan growth in recent years has flattered asset-quality metrics and creates seasoning risks. Single-borrower concentration is high, with the 20-largest loans representing 35% of gross loans or 329% of Fitch Core Capital (FCC) at end-1H21. The oil and gas sector represented 17% of gross loans (165% of FCC) but exposure to the higher-risk upstream segment is limited. Our asset-quality assessment also considers substantial non-loan assets (64% of total assets at end-1H21) that largely comprise Nigeria sovereign (B/Stable) securities and cash reserves at the CBN.
Wema delivers adequate profitability, despite a high cost base reflecting its limited economies of scale. Margins are reasonable but in line with peers', underpinned by naira lending to higher-margin segments and, in 1H21, deposit-cost optimisation. Loan impairment charges (LICs) have weighed on performance in recent years but absorbed a more moderate 17% of pre-impairment profit in 1H21.
Wema's FCC ratio (13.9% at end-1H21) should be considered in view of the bank's very low risk-weighted asset density (29%). Rapid balance-sheet growth has also resulted in a sharp reduction in the tangible leverage ratio to below-sector-average levels (a low 4.1% at end-1H21). However, Fitch expects growth to slow in the short term while the expected rights issue in 4Q21 - which has yet to receive full regulatory approval - would have a material positive impact on the tangible leverage ratio, if it goes ahead as planned, bringing it more in line with peers'. Wema's capital adequacy ratio (CAR; 13.2% at end-1H21) is comfortably above its 10% minimum regulatory requirement.
Funding is mainly in the form of customer deposits. The funding structure is weakened by a high reliance on expensive but less stable term deposits (49% of customer deposits at end-1H21). Single-depositor concentration is moderate, with the 20-largest depositors accounting for 25% of customer deposits at end-1H21. The loans/deposits ratio is a low 48%. Liquidity coverage in both local and foreign currencies is adequate.
Support Rating and Support Rating Floor
Sovereign support to commercial banks cannot be relied on given Nigeria's weak ability to provide support, particularly in foreign currency. The Support Rating Floor of all Nigerian banks is 'No Floor' and all Support Ratings are '5'. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.
Wema's National Ratings are driven by the bank's standalone strength. The upgrade of the National Long-Term Rating reflects Wema's increased creditworthiness relative to that of other Nigerian issuers. Its National Short-Term Rating is the lower of two possible options for a 'BBB(nga)' National Long-Term Rating under Fitch's criteria, reflecting weaknesses in the bank's funding and liquidity profile, which increases the vulnerability of default on its short-term local-currency obligations within Nigeria.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Factors that could, individually or collectively, lead to a positive rating action/upgrade:
The National Ratings are sensitive to Fitch's view of the entity's creditworthiness relative to other Nigerian issuers'.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.