February 9, 2018 /14:05 PM /Fitch Ratings
Fitch Ratings has affirmed Nigeria-based Wema Bank Plc's Long-Term Issuer Default Rating (IDR) at 'B-' and National Long-Term Rating at 'BBB-(nga)'. The Outlook is Stable.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
IDRS, Viability Rating and National Ratings
Wema's IDRs are driven by its standalone creditworthiness as defined by its Viability Rating (VR). The VR is constrained by challenging operating conditions in Nigeria, the bank's modest franchise (1% market share), as well as weak earnings and profitability and tight capitalisation. These factors are counterbalanced by Wema's coherent strategy, strong management team, good impaired loan ratio and low levels of foreign currency (FC) loans.
The business model, underpinned by the roll-out of sophisticated delivery channels, is improving and the bank is in an early stage of growth focussing on mid-market corporates and retail segments. Over the last three years, the bank has met strategic goals but its financial metrics remain weak.
Wema's core earnings remain low but are gradually improving. Net interest income has benefited from Nigeria's high-interest-rate environment (the policy rate is 14%) despite continuing pressure on the cost of funding. The latter reflects the limited franchise and weak customer deposit mix. One of the main constraints on Wema's profitability continues to be its very high cost base (the cost/income ratio was 90% in 2016). Loan impairment charges are increasing but remain manageable.
Wema's low impaired loan ratio (end-9M17: 1.4%) partly reflects its below-average exposure to the oil sector and a smaller proportion of FC loans. The bank's non-performing loan ratio (based on prudential requirements/90 days overdue) is higher (end-9M17: 3.5%) but still compares favourably with peers. Our assessment of asset quality also considers Wema's very high credit concentrations by industry and single borrower.
Wema's capital ratios are tight in the context of the operating environment and regulatory requirements. The bank reported a total capital adequacy ratio (CAR) of 12.4% at end-9M17, which is a modest buffer over its regulatory minimum of 10% and is sensitive to even modest shocks. Pressure on the CAR partly comes from low internal capital generation.
Funding is primarily reliant on costly savings and term deposits given Wema's limited retail franchise. The bank is diversifying its funding sources by tapping market funding. Positively, Wema has a lower proportion of FC assets and liabilities than peers and is less affected by FC liquidity pressures in the system.
Wema's National Ratings reflect Fitch's opinion of its standalone creditworthiness relative to the best credits in the country. The National Long- and Short-Term Ratings of 'BBB-(nga)' and 'F3(nga)' take into account Wema's overall risk profile relative to other Nigerian banks, including its limited franchise and weak financial metrics.
Support Rating And Support Rating Floor
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria's (B+/Negative) weak ability to provide support, particularly in foreign currency. In addition, there are no clear messages from the authorities regarding their willingness to support the banking system. Therefore, 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.
IDRS, Viability Rating and National Ratings
The bank's IDRs are sensitive to rating action on its VR. This would most likely be triggered by a further decline in Wema's capital ratios. A material deterioration in asset quality and/or a pronounced instability in Wema's funding profile could also put negative pressure on the bank's VR.
The bank's National Ratings are sensitive to changes in its standalone creditworthiness relative to other Nigerian entities.
Support Rating and Support Rating Floor
The Support Rating is potentially sensitive to any change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank.
The rating actions are as follows:
Long-Term Foreign-Currency IDR affirmed at 'B-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Viability Rating affirmed at 'b-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
National Long-Term Rating affirmed at 'BBB-(nga)'
National Short-Term Rating affirmed at 'F3(nga)'
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