Fitch Maintains Wema Bank's Long-Term IDR of 'B-' on Rating Watch Negative

(The following statement was released by the rating agency)
Fitch Ratings-London-05 October 2020:
Fitch Ratings has maintained Wema Bank PLC's Long- and Short-Term Issuer
Default Ratings (IDRs), Viability Rating (VR) and National Ratings on Rating
Watch Negative (RWN). A full list of rating actions is below.

The RWN on Wema's ratings reflects continued near-term risks resulting from
the bank's weak core capitalisation and leverage, pressured by growth and by
the impacts of the economic downturn that have also started feeding through
into deteriorating asset quality and profitability. The bank intends to have a
significant capital raising over the next 12-18 months but Fitch recognises a
degree of uncertainty as to whether the capital increase will materialise.

As for peers, it will take several quarters before the full extent of the
crisis on corporates and households is seen in its financial metrics. Since
the previous rating action in March, regulatory forbearance on asset
classification and banks' own debt relief measures have significantly eased
sector asset quality pressures. Debt relief measures are, nevertheless,
temporary and with the eventual easing of fiscal and monetary support from the
Central Bank of Nigeria (CBN), there remains a material risk that bank asset
quality could deteriorate faster, unless economic recovery gathers pace.

Fitch expects to resolve the RWN in the next six months once it gets more
clarity on the recapitalisation plan and after it has assessed the bank's
capital and leverage position in the context of the weaker operating
environment and the impact this will have on the bank's financial profile.
Key Rating Drivers
ISSUER DEFAULT RATINGS AND VIABILITY RATING

Wema's IDRs are driven by its standalone creditworthiness, as expressed by its
'b-' Viability Rating (VR). The VR primarily reflects Wema's weak core capital
ratios that are lower than peers' and the increased vulnerability of its
capital in the context of weakened earnings generation, continued credit
growth and asset quality pressures as the bank's loans season in the weaker
domestic operating environment. Capitalisation and leverage is a key rating
weakness and is a factor of high importance to the VR. The ratings also
incorporate Wema's small franchise, high credit concentrations and a weak
funding structure.

Wema's Fitch Core Capital (FCC) ratio of 12.1% at end-1H20 is markedly below
the peer average and has been declining in recent years due to strong loan
growth. The bank's tangible common equity/tangible assets ratio of 4.4% at
end-1H20 is also considerably below peers'. Wema's total capital adequacy
ratio (11% at end-1H20) had only 100bp headroom over the bank's 10% regulatory
minimum requirement; however, we recognise that 1H20 unaudited earnings are
excluded from this calculation.

A weak pre-impairment operating profit provides limited room to cushion the
impact on capital from a potential spike in loan impairment charges. Wema
plans to increase core capital through a significant rights issue within the
next 12-18 months but uncertainty remains about these plans. High risk
concentrations and growth remain the main risks to capital.

Wema's profitability metrics are considerably lower than those of rated peers
due to a relatively weak net interest margin (NIM) and high cost-to-income
ratio. Operating returns over risk-weighted assets declined to 1.2% in 1H20
(on an annualised basis, from 2.6% in 2019) despite relatively small loan
impairment charges incurred in response to the pandemic, driven by a decline
in the bank's NIM and net fees and commissions. Similar to peers, we expect
the bank's profitability to remain under pressure over 2H20 and 1H21 as
operating conditions remain challenging.

Wema's impaired loans (Stage 3 loans under IFRS 9) ratio increased moderately
to 5.6% at end-1H20 (from 3.0% at end-2019) due to the classification of
several large exposures. It is broadly in line with the sector average. Strong
loan growth in recent years has flattered the bank's impaired loans ratio and
may lead to a lag effect on loan quality. Specific coverage of impaired loans
(49% at end-1H20) is considered adequate when regarding collateral coverage
and recovery expectations. Stage 2 loans (10.7% of gross loans at end-1H20)
are lower than peers' but are highly concentrated by single-borrower,
including one large upstream oil and gas exposure. Fitch considers that these
loans, in addition to a material proportion of loans that are benefitting from
debt relief measures (around 30% of gross loans at end-1H20, primarily
repayment moratoria), may lead to pressure on asset quality.

As for peers, credit concentration is a key risk. Single-borrower
concentration is exceptionally high, with the largest 20 customer exposures at
4.5x FCC at end-1H20. Exposure to the oil and gas sector is material,
representing 20% of gross loans or 196% of FCC, but exposure to the riskier
upstream segment is more limited than for peers. Foreign currency lending (10%
of net loans at end-1H20) is lower than peers and Wema's balance sheet is less
dollarised and, therefore, we have less concerns around foreign exchange
devaluation risks than we have for other banks.

Funding is mainly in the form of a customer deposits. Wema's deposit base is
less stable than peers' due to a very high reliance on term deposits (59% of
customer deposits at end-1H20) and only a moderate volume of retail deposits
(33% of customer deposits). Single-depositor concentration is high, with the
largest 20 depositors accounting for 24% of customer deposits. Liquidity
coverage in both local and foreign currency is considered adequate.

Wema is a small Nigerian bank, accounting for 2% of domestic banking system
assets and customer deposits, respectively, at end-2019. Wema operates
exclusively in Nigeria under a national banking license.

SUPPORT RATING AND SUPPORT RATING FLOOR

Sovereign support to banks cannot be relied on given Nigeria's weak ability to
provide support, particularly in foreign currency. The Support Rating Floor of
all Nigerian banks is 'No Floor' and all Support Ratings are '5'. This
reflects our view that senior creditors cannot rely on receiving full and
timely extraordinary support from the Nigerian sovereign if any of the banks
become non-viable.

NATIONAL RATINGS

Wema's National Ratings reflect its creditworthiness relative to other issuers
in Nigeria and are driven by its standalone strength. They are at the lower
end of the scale, primarily reflecting Wema's small franchise, weak
capitalisation and weak funding profile.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating
action/upgrade:

Wema's ratings could be affirmed and removed from RWN if the bank's core
capitalisation and leverage improves to more acceptable levels in line with
peers, including through successful completion of capital raising as guided by
the bank.

Factors that could, individually or collectively, lead to negative rating
action/downgrade:

Wema's ratings will likely be downgraded if the bank is unable to address
current pressure on capital ratios, arising from continued strong balance
sheet growth and weak internal capital generation, and to improve its
resilience by recovering core capitalisation. The lack of a credible plan to
improve capitalisation and leverage will be negative for the ratings.

A severe tightening in the bank's foreign currency liquidity could lead to a
negative rating action.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond
issuers have a best-case rating upgrade scenario (defined as the 99th
percentile of rating transitions, measured in a positive direction) of three
notches over a three-year rating horizon; and a worst-case rating downgrade
scenario (defined as the 99th percentile of rating transitions, measured in a
negative direction) of four notches over three years. The complete span of
best- and worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on
historical performance. For more information about the methodology used to
determine sector-specific best- and worst-case scenario credit ratings, visit
[https://www.fitchratings.com/site/re/10111579]
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The
principal sources of information used in the analysis are described in the
Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit
relevance is a score of '3'. This means ESG issues are credit-neutral or have
only a minimal credit impact on the entity, either due to their nature or the
way in which they are being managed by the entity. For more information on
Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Wema Bank PLC; Long Term Issuer Default Rating; Rating Watch Maintained; B-;
Rating Watch Negative
; Short Term Issuer Default Rating; Rating Watch Maintained; B; Rating Watch
Negative
; National Long Term Rating; Rating Watch Maintained; BBB-(nga); Rating Watch
Negative
; National Short Term Rating; Rating Watch Maintained; F3(nga); Rating Watch
Negative
; Viability Rating; Rating Watch Maintained; b-; Rating Watch Negative
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF

Contacts:
Primary Rating Analyst
Vincent Martin,
Director
+44 20 3530 1828
Fitch Ratings Ltd
30 North Colonnade, Canary Wharf
London E14 5GN

Secondary Rating Analyst
Tim Slater,
Senior Analyst
+44 20 3530 1791

Committee Chairperson
Olga Ignatieva,
Senior Director
+7 495 956 6906

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email:
louisa.williams@thefitchgroup.com

Additional information is available on www.fitchratings.com

Applicable Criteria
Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption
sensitivity) (https://www.fitchratings.com/site/re/10110041)
National Scale Rating Criteria (pub. 08 Jun 2020)
(https://www.fitchratings.com/site/re/10121358)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
(https://www.fitchratings.com/site/dodd-frank-disclosure/10138522)
Solicitation Status
(https://www.fitchratings.com/site/pr/10138522#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10138522#endorsement_status)
Endorsement Policy
(https://www.fitchratings.com/site/pr/10138522#endorsement-policy)

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