By Ayobami Adedinni
The Chief Finance Officer of Wema Bank Plc, Tunde Mabawonku, has said the financial institution was targeting 80 per cent cost-to-income (CIR) ratio by the end of 2017.
Mabawonku in response to questions on plans by the management at reducing its CIR explained that the lender had put in place a series of activities to get down its cost-to-income ratio below the industry average within the shortest possible time-frame.
Wema Bank in 2016 had one of the highest CIRs in the banking industry of about 88.32 per cent from 88.49 per cent in 2015.
He noted that the bank despite high CIR rate was able to improve market share and ensure profitability remains adequate.
According to him, “Wema Bank has put in place a series of activities to get down its CIR to below the industry average within the shortest possible time-frame.
“While we acknowledge there was some marginal drop in 2016, there is still a lot of work to be done. However in reviewing the CIR ratio, there are two components that have to be examined closely.
“First, cost- If you check the trend of operating expense of Wema Bank in the last five years, you will see that the Compound Annual Growth Rate (CAGR) of expense is less than five per cent per annum. “This means that despite inflation averaging 17-19 per cent, the Bank has been able to keep its growth of cost within control and significantly below inflation.
“One element of cost that has gone up is Interest rates – and that is a function of both the market, inflation rate, liquidity and the monetary policy.
“Unfortunately, interest on customer deposits has gone up at a faster rate than interest we can charge on customers. Hence we have seen some impact on our Net Interest margins.
“Secondly, income – On the income front, we have been able to grow income at an annual rate of 21 per cent. This is largely driven by interest income on the loan book but increasingly from fee based income lines especially on our electronic products.
“As stated earlier, however the margins on incremental income have reduced slightly.
“The bank’s balance sheet still relatively small and as such the impact of tighter margins can easily be seen. While CIR is close to 88 per cent, we have still been able to improve market share and ensure PBT levels remain adequate.
“The bank will require scale in terms of additional capital or significant incremental funding and we will start seeing better impact on CIR.
”A significant part of the initiatives in the 2017 financial year are around operating efficiency; migrating more customers to digital platforms, automating significant part of processes, using technology tools to improve productivity and invariably reduce cost to serve.
“We have also launched additional cost control initiatives that will further push down cost of doing business. However a large component of cost is interest expense and that is still largely driven by market forces.
“We believe CIR will slowly start coming down further and we have a guidance of approximately. 80 per cent in 2017 and down to 65-70per cent in 2018,” he added.