Wema Bank Earning Capacity is Limited – Fitch

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Segun Oloketuyi, MD, Wema Bank

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FITCH Ratings has assigned Wema Bank Plc’s long term Issuer Default Rating, IDR ‘B-‘ with a stable outlook, short-term IDR of ‘B’ and Viability Rating, VR of ‘b-‘. Fitch has also published Wema’s long-term and short-term National Ratings of ‘BBB-(nga)’ and ‘F3(nga)’, respectively.

The global rating agency also explained that Wema’s IDRs and VR reflected the bank’s intrinsic characteristics, including its improving performance. It, however, noted that the bank’s earnings capacity was still limited. The bank is still recovering from large historical losses, resulting in its recapitalisation in 2013. The bank has since returned to profitability, but internal capital generation remains weak, providing limited capital buffers with which to absorb losses.

The ratings also considered Wema’s modest Fitch Core Capital, FCC ratio relative to peers, which provided limited buffers against moderate internal or external shocks, particularly given the increasingly challenging economic conditions and market volatility in Nigeria. “The FCC ratio improved significantly under Basel II due to the use of credit risk mitigation to reduce risk-weighted assets,” it added.

According to Fitch, “Wema’s IDRs also reflect the highly challenging and volatile operating environment in Nigeria. The recent oil price shock and subsequent currency pressure has weakened the Nigerian operating environment and is likely to result in lower GDP growth in 2015. In turn, the banking sector is likely to report weaker profitability, asset quality and capital ratios.

“These pressures are to an extent captured in the ratings, and partly explain the stable outlook. Nevertheless, should the operating environment deteriorate faster than expected, particularly if it had a significant impact on the bank’s capital and asset quality, the VR could be downgraded. Wema’s National Ratings are driven by its long-term IDR and Fitch’s opinion of the bank’s creditworthiness relative to the best credits in Nigeria.”

Wema Bank was recapitalised by N40 billion in 2013 in order to meet regulatory requirements. The bank plans to raise tier 2 qualifying junior debt to fund growth and strengthen regulatory capital ratios. However, this will not benefit its FCC ratio and lending growth is likely to put pressure on core capital ratios.

— Aug 3, 2015 @ 01:00 GMT

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