The high-cost Wema Bank incurs to generate its revenue is taking a serious toll on its profitability as it has one of the highest cost-to-income ratios in the Nigerian banking industry.
For every N1000 Wema Bank earns, it spent N816 to raise it as its cost-to-income ratios stood at 81.6% as of September 2021, even though it was an improvement from 89.7% in the same period in the prior year.
The average cost-to-income ratio of the Nigerian banking industry stood at 70.54% at the end of 2020.
Expenditures still gulped 81.6% of Wema Bank revenue despite its operating income, which grew 32% to N39.2 billion, outpaced its operation cost, which was up 20.1% to N31.9 billion in Q3 2020.
The bank attributed the increase in operating expenses to regulatory costs, adding that also it reflected the high inflation operating environment.
The levy the bank paid to the Asset Management Company of Nigeria (AMCON) went up 37.2% year-on-year to ₦3.9 billion due to the the10.7% growth in its total assets.
AMCON is a special vehicle created by the government in 2010 to buy bad loans from the books of commercial lenders.
AMCON which was designed to last for 10 years charges 0.5per cent of banks’ total assets on and off-balance sheet items.
There has been an outcry from banks’ shareholders calling for the winding down of AMCON, which they claimed through its levy robs them of their dividends.
The bank’s NDIC premium also rose 67.7% to ₦2.8 billion, driven by growth in deposits.
The expenses on diesel which grew +39.2%, repairs and maintenance +25.7% and others +4.1%, also contributed to the bank’s rising cost.
Other contributors to Wema Bank’s operating expenses were wages and salaries which rose 5.2%. This the bank attributed to growth in personnel and promotion.
Teslim Shitabey, Managing Editor, Proshare, an online finance and economic platform and a former banker, told Businessline.ng that the migration of Wema Bank from a regional bank to a national lender has caused its capital expenses to shoot up, hurting its cost-to-income ratio.
Businesslive.ng inquired from Funmilayo Falola, Head, Marketing Communications & Investor Relations at Wema Bank, what the bank was doing to tame its high cost-to-income ratio challenge, she promised to respond but failed to do so before the publication of this story, despite being calls twice and messages sent to her on two different occasions.
Wema Bank revenue went up by 9.1% to N63.1 billion in Q3 2021 on the back of operating income and interest income which grew by 32% and 11.1% respectively.
Meanwhile, non-interest income recorded a 0.9% marginal growth, though net fee and commission income went up by 68.9% during this period, weakened by fees on electronic products which dipped by 68.9%.
The lender’s profit-before-tax and profit-after-tax both rose by a whopping 135.8% to N6.2 billion and N7.2 billion respectively compared to N2.6 billion and N6.2 billion correspondingly in Q3 2020.
While total assets grew by 10.7% to N1.08 trillion, bolstered by loans and advances which went up by 10.3 to N397.3 billion, total liabilities increased by 10.94% to N1.02 trillion underpinned on total customer deposits which rose by 9.3% to N879.8 billion during this period.
Impairment charges for bad loans were reduced by 56.5% to N0.81 billion from N1.87 billion at the same time in the previous year because impairment charges on loans were cut by 99.4%. Expectedly, the non-performing loan (NPL) ratio reduced to 4.3% in Q3 2021 from 4.6% at the end of 2021.
However, Wema Bank liquidity ratio dipped to 26.3% in Q3 2021, going below the 30% required by the Central Bank of Nigeria (CBN).
Likewise, its capital adequacy ratio (CaR) fell to 12% during this period, below the 10% regulatory threshold for national banks, the category which Wema Bank is.
Wema Bank has disclosed that it will be raising N40 billion via the Nigerian bond market within the first three months of this year, to address its liquidity and capital challenges.