Company: Wema BankPlc
Rating: Buy
Current Market Price: N0.71
LOAN to DEPOSIT RATIO: 59.96%
Year High: N1.04
Year Low: N0.54
Fair Value: N1.02
Equity Analyst: Tunde Segun Jeariogbe
Key Financial Ratios
• This report scanned through the financial numbers of Wema Bank for the nine-month ended September 30, 2019, compared same with numbers released in the similar quarter of 2018 to establish growth. We also utilised a few ratios from the full-year financial numbers for projection and valuation of each unit of Wema Bank shares.
• Although we have valued each unit of Wema Bank for N1.02, we are of the opinion that the valuation will adjust if the management declares cash dividend at the end of the ongoing financial year.
• We also believe that should this happen, the bank will enjoy more favourable patronage from the investing public, thereby improving some of its valuation metrics.
• It is worth noting that the bank met the regulatory standard for Loan to Deposit Ratio of 60% at the end of the quarter
• Estimates from the nine-month earnings confirmed that the company already earned 11 kobo/share. Should it meet up with our projection of 15 kobo/share at the end of the current financial year, we expect improvements in its dividend payment.
• Note, that last year, the payout ratio was roughly 35% of the earnings.
Company Figures
• Gross Earnings improved over the comparable year by 32.34%, after shifting to N64.82 billion, as against the reported N48.98 billion in the corresponding period of 2018.
• Similarly, Interest Income grew by 26.10% to N49.03 billion, compared to N38.88 billion posted in a similar period of 2018.
• Interest Expenses equally grew by 38.08% to stand at N31.84 billion against N23.06 billion in 2018.
• Operating Expenses through the first nine months of 2019 is currently estimated at N24.42 billion, same as 19.50% above the N20.44 billion reported in 2018.
• Profit before Tax (PBT) improved by 54.78% to N4.73 billion, as against the N3.05 billion of a similar period in 2018.
• Thus, after considering tax expense, net profit for the period (PAT) stood at N4.08 billion, this is 54.64% above the N2.64 billion earned in the corresponding period.
• Total Assets appreciated to N611.57 billion, growing by 27.71% above the N480.77 billion in the same period of 2019.
• Total Liabilities through the nine months of 2019 is estimated at N557.81 billion the same as 30.10% above the N428.78 billion stated in its 2018 nine months result.
• Net Assets improved by marginal 3.32% to N53.70 billion as against the N51.98 billion posted in 2018 nine months financials.
• Retained Earnings built up to N8.07 billion, this is 7.05% above N7.54 billion achieved in 2018 third-quarter earnings.
• Total Deposit for the period is valued at N478.50 billion against N374.77 billion last year.
• Total Loans and Advances stood at N286.93 billion the same as 17.22% above the N244.79 billion reported at the end of the 2018 nine-month period.
Volatility Ratios
• Going by the estimated Beta value of Wema Bank Plc, the shares are currently enjoying heightened patronage, running a beta value higher than unity and above the industry average.
• Please understand that the Debt to Equity Ratio is estimated using the entire liability value (which, of course, includes the deposit). Thus we have estimated that total liability is the same as 10.39 times the Equity value. This is 25.93% above the corresponding quarter’s estimate.
• Equity Ratio is estimated at 0.09x, as against the previous 0.11x, implying that the Net Assets Value is about 9% of the Total Assets Value.
Profitability Ratios
• EBITDA Margin dropped by 16.67% to 30.91%, compared to the 37.13% estimated in the corresponding quarter of last year.
• Pre-Tax Margin, on the other hand, grew by 16.96% having improved from the 6.24% estimate of 2018 to 7.30%.
• Effective Tax Rate was stable through the two periods compared, as shown in the table below.
• Return on Average Equity is estimated at 7.61%, versus 5.09% in the corresponding quarter.
• See the table below for more details.
Efficiency Ratio
• Operating Expense is the same as 37.68% of the Gross Earnings reported for the first nine months of 2019, which is a 9.70% improvement in efficiency when compared with the 41.73% used in the similar period.
• Meanwhile, the management of Wema Bank achieved a marginal 4.03% improvement in efficiency when we tested Gross Earnings to Total Assets Ratio.
• Loan to Debt Ratio was in line with the 59.96% regulatory standard, although this was fairly below the 65.32% achieved in the same period of 2018.
Investment Ratios
• The amount earned per share of Wema Bank is currently estimated at N0.11, the same as 54.64% above the N0.07 earned in the same period of 2018.
• Our nine-month adjusted P/E ratio for Wema Bank stood at 1.73x, a reasonable reduction from the previously estimated 2.92x.
• The said earnings yielded 19.27% of the share price of Wema Bank on the floor of the exchange (N0.55) as at the time this result was made available to the investing public.
• Nevertheless, each unit of Wema Bank is worth N1.39 in its books, confirming the fact that the stock is technically under-priced on the NSE.
• Further confirming this is the estimated Price to Book Value, which stood below unity.
Valuation
Through our blend of valuation models, and fully considering the non-dividend state of the financial institution before the three kobo cash paid at the end of the 2018 financial year, we have valued each unit of Wema Bank Plc at N1.02. Considering the current market price of N0.71 (as at the time this report was concluded), we Rate Wema Bank shares a Buy.
