A herd of finance and economic analysts has commended the decision of Wema Bank Plc with respect to an ongoing Rights Offer to strengthen its capital base.
The analysts also observed that currently, the bank has over 90 fintech partners, suggesting a deliberate path towards digital advantage.
This development according to them, could unlock further investment in technology that would ease the transition to the future of banking (customer-specific products).
The analysts believe that the timely offering of Rights could improve local banks’ Common Equity Tier 1 (CET1) capital to ward off the possible shocks to the local payment and settlement system in 2024
In a note to clients titled: “Wema Bank: Capital Raise, Market Repositioning, and the Next Business Wave, “ seen by Nigerian Tribune, Proshare research observed that
The banking business has changed dramatically with the emergence of digitalisation as a commercial enabler, and Wema Bank’s technological investment has put the bank in a strong commercial position.
“Wema Bank, shows the promise of girding its loins to address the next phase of its evolution. With an ongoing Rights Offer to strengthen its capital base, the lender shows courage amid economic uncertainty. Increasing the bank’s equity is a bold step as it pressures its management to sweat the additional cash available.
“Raising equity could be sensible but precarious, considering the expected difficulties with loan default in a slow-growth economy in 2024,” the analysts note read in part.
The lender has stepped up to raise capital through a Rights Issue amidst an ongoing banking system recapitalisation conversation.
The prevailing FX volatility and naira devaluation are believed to have eroded the underlying value of banks’ capital buffers, leading some analysts and Central Bank officials to argue for the recapitalisation of Nigeria’s deposit money banks (DMBs), feeding into the administration’s aspiration of a US$1trillion Gross Domestic Product (GDP) in the next 7 years.
Wema Bank is offering 8,572,103,573 ordinary shares of N0.50k each at N4.66 per share based on two (2) new ordinary shares for every three (3) existing shares held as of September 28, 2023. The bank intends to raise N39.95 billion through the issue, with subscriptions starting on December 11, 2023, and extending till December 29, 2023.
The group’s share price stood at N5.35k on 8 December 2023, before the Right Issue, suggesting an N0.69k per share subscriber discount.
According to Proshare, the discounted price and the bank’s strategic digital propositions may stir existing shareholders to buy into the fresh Issue.
“Adding 8,572,103,573 to the existing ordinary shares of N12,858,155,360 will result in a new equity base of 21,430,258,933, thereby increasing shareholder’s funds, which stood at N118.56billion as of 9Months 2023 while diluting prospective return on equity (RoE) temporarily (29.32% as of 9M 2023).
“The capital raise would allow the bank to increase its loan book, which stood below N1trillion (N661.30 billion as of 9M 2023), “ the analysts observed.
Although the bank’s capital adequacy Ratio (CAR) is above the 10percent regulatory minimum at 13.31percent as of September 2023, the additional capital will further increase CAR.
In 2023, Wema Bank’s share price has demonstrated a volatile upward trend, riding on investors’ bullish stance regarding banking stocks given the hefty revaluation gains, evidenced by the +100.49percent year-to-date return of the NGX banking index.
The share price started the year at N3.90k and immediately commenced a jerky ride, exiting the upward race from August 2022. The bank’s price fluctuated several times, leading to a new resistance price of N5.81k on June 27, 2023, and falling off to a floor of N4.23k on September 30, 2023.
The share price switched back to bullish by mid-October after announcing the Rights Issue to raise N39.95billion.
The report noted that the bullishness persisted till December 15, 2023, when it closed at N5.25k. The new bullish run meant the group’s year-to-date (YTD) return was +35percent as of December 15, 2023. However, analysts expect the share price to tilt downwards at the end of the Rights Offer.
However, Wema Bank’s ALAT app has recorded a total volume of 114million transactions and a total value of N4.7trillion as of 9M 2023, showing strong customer adoption of the product.
The shareholder’s fund improved by +128percent to N118.56billion by 9M 2023 from N51.98billion in 9M 2018, showing a fair investor accretion and strong retained earnings to sustain the growth.
To most outsiders, Nigerian banks have done well in 2023. Their net Interest Margins were up, their gross earnings growth was sustained, and their bottom lines widened.
Happily, local banks’ non-performing loans ratio (NPLRs) has been within the 5percent prudential limit for 2023. However, analysts believe this could take a turn for the worse if the country’s economic headwinds threaten revenues and profits.
Analysts have observed that the excellent performance of some banks in 2023 was related to FX revaluation gains that saw a jump in earnings.
Proshare’s banking sector analysts noted that Nigeria’s Tier 1 banks had stronger geographic diversity and benefitted immensely from their larger capital bases.
Nevertheless, Tier 2 banks were not excluded from the FX revaluation bonanza. Amongst Proshare’s Bank Strength Index (PBSI) Tier 2 lenders, Fidelity Bank had the highest revaluation gains at N24.99billion, followed by Sterling Holding at N5.80billion, FCMB came third at N4.96billion, Wema Bank at N3.95billion.
At the same time, Unity Bank saw a revaluation loss of N38.16billion. The unexpected gains improved Tier 2 banks’ performance, with gross earnings and profitability rising strongly according to Proshare.
The higher earnings came in handy to absorb rising operating costs caused by inflationary pressure. Most Tier 2 banks had cost-to-income (CIR) hovering below or slightly above 50percent, except for Sterling Bank and Wema Bank, which stood at 76.38percent and 71.11percent, respectively.
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