Wema Bank recently held its first half of 2024 investor and analyst conference call, where it unveiled plans to raise N150 billion in new capital through a mix of rights issuance, a public offer, and private placement.
During the call, Executive Director Tunde Mabawonku outlined the bank’s strategy, stating: “We have secured shareholder approval to raise N150 billion in qualifying capital through a combination of a rights issuance and a special private placement. We plan to initiate this process towards the end of the year, with completion expected in Q1 2025, all within the remaining 18 months of the regulatory timeline.
Currently, shareholders’ funds are around N200 billion, while our qualifying capital stands at N67 billion. To maintain our commercial bank status with national authorization, we need to raise this capital soon to meet our licensing requirements.”
When asked about potential merger discussions, Mabawonku noted that such talks are premature at this stage. He remarked, “M&A conversations might seem a bit premature at this level. Our focus is on meeting regulatory requirements and continuing our business operations.”
Attention now shifts to whether Wema Bank’s current performance, as reflected in various financial ratios, will convince investors to participate in this capital-raising effort.
Current Performance: The Case for Optimism
Wema Bank’s results for the first half of 2024 highlight significant growth. The bank reported a remarkable 100.5% increase in gross earnings, reaching N178.63 billion, up from N89.09 billion in the same period last year. This growth is attributed to a 91% rise in interest income and a 155% increase in non-interest income.
Profit before tax (PBT) also saw a notable 153.5% increase, climbing to N30.56 billion from N12.05 billion in the first half of 2023. This represents more than double the previous year’s figures and exceeds the bank’s five-year compound annual growth rate of 45%.
These positive results are supported by improvements in key financial ratios. For instance, Wema Bank’s Net Interest Margin (NIM) improved to 7.43% in the first half of 2024, up from 6.12% in the same period of 2023. This increase indicates efficient management of interest-earning assets, which is crucial for maintaining profitability in a high-interest-rate environment.
The Return on Average Equity (ROAE) also remains strong. Although slightly down from 39.28% in 2023, Wema Bank’s ROAE of 36.16% in the first half of 2024 is significantly higher than the 19.25% recorded in 2022. This suggests that the bank continues to generate substantial returns on shareholders’ equity, which is appealing to potential investors.
Moreover, the Non-Performing Loan (NPL) ratio has declined to 3.69%, indicating an improvement in the quality of Wema Bank’s loan portfolio. The NPL coverage ratio has increased from 76% to 100%, showing that the bank has adequate provisions to cover its non-performing loans.
Concerns and Caution
Despite the positive aspects, there are areas of concern. One notable issue is Wema Bank’s Cost-to-Income Ratio, which stood at 66.65% in the first half of 2024. While this represents a slight improvement from 64.37% in 2023, it indicates a rise compared to earlier years. A higher Cost-to-Income Ratio suggests that operational costs are increasing faster than income, potentially impacting long-term profitability.
Additionally, the rising cost of funds is a concern. In the first half of 2024, Wema Bank’s cost of funds increased by 27%, reaching 7.0% compared to 5.5% in the same period of 2023. A higher cost of funds could pressure the bank’s profitability, especially if interest rates remain high.
Loan impairment has also surged by 474% in the first half of 2024, reaching N5.2 billion—nearly 70% of the total for 2023. This rising trend may affect net interest income and overall profitability.
Valuation and Market Sentiment
Wema Bank’s share price has been relatively strong. Despite a broader sector decline averaging 1.31%, Wema Bank’s share price has risen by 12.50% Year-to-Date (YtD). This strong performance, coupled with a low valuation multiple, could offer an attractive entry point for investors, potentially benefiting the capital raise.
The bank’s current earnings multiple of 0.8x, lower than the sector average of 2.28x, suggests the market may be undervaluing the bank. The strong profitability, improved NIM, and impressive ROAE are positive indicators of the bank’s management and growth potential.
However, the rising Cost-to-Income Ratio, cost of funds, and loan impairment charges could temper enthusiasm if not addressed effectively.
For potential investors, deciding whether to participate in Wema Bank’s capital raise will require careful consideration of these factors. While the bank’s performance offers several reasons for optimism, the associated risks must be weighed against the potential rewards.
