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Investors confidence soar as Wema Bank’s rights issue exceeds expectations



Wema Bank experienced a significant boost in investor confidence following its substantial rights issue in December 2023.

The bank offered 8,572,103,573 ordinary shares at N4.66 per share, with a two-for-three ratio for existing shareholders as of September 28, 2023.

The surge in Wema Bank’s share prices after the rights issue suggests that investors have high expectations for the bank’s promised utilization of proceeds, its past performance, and its optimistic outlook.On September 28, 2023, the closing share price was N4.85.

The rights issue, priced at N4.66 per share, offered a discount of N0.19 per share or 3.92 percent. By December 29, 2023, the share price had increased to N5.60, representing a rise of N0.94 per share or 20.17 percent.

The upward trend continued, and on January 19, 2024, the share price reached N12, marking the highest level since 2018.

This outstanding performance resulted in a year-to-date gain of 114%, surpassing the 2023 full-year year-to-date gain of 43.59%.

Generally, while short-term gains are promising, which may be attributed in part to a shift towards specific asset classes with relatively better returns, such as investors flocking to equity assets to counter negative real return, a critical analysis of the bank’s sustainability and its ability to uphold and extend this positive momentum becomes imperative.

The sustainability of this momentum can be tied to how effectively the bank deploys the proceeds from the rights issue.

The bank had explicitly stated in the rights issue circular its intention to allocate 89.82 percent of the proceeds from the rights issue towards expanding its loan portfolio, specifically targeting the retail, commercial, and SME sectors.

The bank should adhere to this commitment and execute the planned deployment to realise the anticipated benefits and uphold investor confidence.

One anticipated key impact of the rights issue deployment is the enhancement of Wema Bank’s relatively small franchise within the banking sector.

Currently, the bank’s total assets constitute only 2 percent of both the banking system assets and loans and advances to customers as at the end of Q3 2023.

More so, the bank’s profitability is observed to be below that of its peers. This is evident in its 9M 2023 reported pre-tax profit of N22.117 billion, accounting for approximately 1 percent of the listed banks’ pre-tax profit for the first nine months of 2023.

The anticipated expansion in the bank’s loan portfolio is expected to have a positive impact on its financial metrics, particularly on net interest income and net interest margin.

The decline in net interest margin by 8.82 percent year-on-year to 6.2 percent in the 9M of 2023 highlights the current challenge.

Furthermore, a sincere deployment of the rights issue proceeds is expected to strengthen the bank’s balance sheet, enhance shareholders’ funds and have a positive effect on the bank’s regulatory capital ratios.

In alignment with this perspective, Fitch Ratings, in its June 2023 report, explicitly affirmed that the rights issue, when completed, would exert a significant positive impact on the bank’s regulatory capital ratios.

Since the landmark 2005 bank recapitalisation in Nigeria, which raised the minimum paid-up capital from N2 billion to N25 billion, the landscape of Nigerian banks has evolved significantly.

As of the end of the third quarter in 2023, none of the banks listed on the Nigeria Exchange Limited (NGX) had attained the N25 billion share capital threshold, despite boasting substantial shareholders’ funds.

Among them, FBNH led with a share capital of N17.948 billion, followed closely by Access Holding Company at N17.773 billion.

In this context, Wema Bank’s current share capital of N6.429 billion and shareholders’ fund of N118.558 billion would potentially increase to about N46 billion and N159 billion, respectively, with fully realized proceeds.

This improvement in Tier-1 capital would boost the capital adequacy ratio, currently at 13.31 percent.

However, there are notable downside risks that demand the bank’s close attention.

The persistent volatility in the exchange rate poses a significant challenge, as it has the potential to erode both the real and dollar values of the capital requirements.

The expansion in the loan portfolio resulting from the rights issue, particularly in an elevated risk environment characterised by Naira devaluation, high inflation, and interest rates, may lead to increased loan impairment losses and a rise in the cost of funds.

The bank’s cost of funds has already increased by 17 percent YoY to 5.4 percent, primarily attributed to a hike in the Monetary Policy Rate (MPR).

Albeit the overarching goal remains investor returns and increased shareholders’ value. While an initial dip in return on average equity is possible due to increased share outstanding without commensurate growth in earnings, it is expected that the bank will improve its earnings, starting with a critical examination of its cost structure.

The bank’s cost-to-income ratio, although showing a 13 percent reduction to 71.11 percent in 9M 2023, remains relatively high compared to industry standards, standing as one of the highest in the banking sector.

The bank’s share price presents an attractive investment opportunity, offering a favorable return with an impressive industry-wise dividend yield of 5.36 percent and an inflation-protected earning yield of 31.50 percent.

Money market

DMO to raise N450bn in April bond auction



The Debt Management Office (DMO) is seeking to raise N450 billion in its April bond auction billed to take place on April 15.

This is in line with the agency’s plan to raise up to N1.8 trillion through FGN bonds in the second quarter (Q2) of 2024.

The DMO is offering N150 billion for the new FGN APR 2029 five-year bond. It is offering N150 billion for the reopened FFBN FEB 2031 17-year bond and N150 billion for the FGN FEB 2034 10-year bond.

The auction will take place on April 15 and the settlement date is April 17, 2024.

FGN bonds are auctioned every month through the DMO, with the interest paid semi-annually. They are subject to a minimum subscription of N50,000,001 and in multiples of N1,000 thereafter.

FGN bonds are recognised as investment instruments for trustees under the Trustee Investment Act. They receive tax exemption benefits for pension funds because they’re considered government securities, as per the guidelines in the Company Income Tax Act (CITA) and the Personal Income Tax Act (PITA).

In Q1 2024, the DMO raised about N2.39 trillion through FGN bonds, with the largest issuance occurring in February.

In Q1 2024, the DMO raised about N2.39 trillion through FGN bonds, with the largest issuance occurring in February.

The DMO issued N418.2 billion of FGN bond in January, N1.49 trillion worth of FGN bonds in February 2024, with interest rates hitting 19 percent for the 10-year bonds. Then in March 2024, the DMO issued N475.7 billion at bumper interest rates, with rate hitting 20.45 percent on the 10-year bond.

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Money market

ABCON backs CBN’s prohibition of non export domiciliary account collateral for naira loans



The Central Bank of Nigeria (CBN’s) directive stopping the use of Non Export Domiciliary Account Collateral for naira loans will boost dollar liquidity, support reserves accretion and strengthen the financial services sector, President, Association of Bureaux De Change Operators of Nigeria (ABCON), Alhaji (Dr.) Aminu Gwadabe has said.

According to the CBN directive to banks, the use of foreign currency-denominated collaterals for Naira loans is now prohibited, except in cases where the collateral is in the form of Eurobonds issued by the Federal Government of Nigeria or guarantees provided by foreign banks, including Standby Letters of Credit.

In a statement on the apex bank policy and impact on the forex market, Gwadabe described the move as a welcome development, expected to put the excesses of big businesses and manufacturers putting unnecessary pressure on the forex market  in check.

He said, “ABCON members are bewildered that some companies and manufacturers with billions of dollar balances in their non-oil export domiciliary accounts  use it as collateral for naira loans and still source forex in the official window thereby depleting what is available for other operators.

“The stoppage of this unprofitable practice will not only add to the dollar liquidity in the market but also help in the accretion of foreign reserves buffers,” he added.

Gwadabe advised the apex bank to review foreign currency holding guidelines for non-oil export domiciliary accounts proceeds and entrench maximum of 48 hours with a minimum balance of $5k for individuals and $50 k for companies in holding positions as practiced in South Africa.

ABCON chief further advised the CBN not to approve forex requests by manufacturers and other business applicants with billions of dollars holdings in Non export oil proceeds domiciliary accounts at both the NAFEM and NAFEX window.

ABCON boss explained that unfortunately, the BDCs are most times seen as crude but remain an effective market control mechanism with the potent transmission mechanism tool in achieving the CBN’s mandate of price stability and liquidity in the markets.

“We therefore urge the CBN to continue to drive and expand its operations to ensure that the best results now achieved in the last 15 years is maintained and  also ensure exchange rate convergence, market calmness and confidence of the public and foreign investors,” he said.

ABCON leadership, he added, has also called for and advocated for the separation of ownership and operational structures of FMDQ Exchange. The move, he said would ensure more transparency and effectiveness in market operations and price control mechanisms.

Furthermore, ABCON boss urged the CBN to allow legislative decisions on the planned reforms in the BDCs sub-sector to boost foreign investors’ confidence and guarantees in the sectoral transformation.

“We also want to pledge our continuing support to CBN’s proactive and effective policies and meant to address volatility and headwinds in the forex market. As a self regulatory body, ABCON is currently engaging all stakeholders and players in the retail  end market to deepen, liberalise, democratise and centralise the retail end segments of the market for price discovery, market efficiency, transparency, accretion of buffers and healthy balance of payments,” Gwadabe said.

“We applaud the CBN management for the reconsideration and reinstatement of the BDC sub-sector as third leg of the forex market to put hoarding and speculation under check and we have seen faster results than expected,” he stated.

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Money market

CBN slashes exchange rate for Customs duties, provides relief to importers



Importers in Nigeria have received a welcome reprieve as the Central Bank of Nigeria (CBN) announced a further reduction in the exchange rate used for calculating Customs duties at the nation’s seaports.

According to information obtained from the official trade portal of the Nigeria Customs Service, the apex bank has slashed the Customs FX duty rate from N1,260.49 per dollar to N1,246.665 per dollar, effective as of Monday, April 8.

This adjustment signifies a 1.1 percent reduction in the exchange rate compared to the previous rate of N1,260.49 per dollar, which was in place as of Friday, April 5. Importers will now benefit from a decrease of N13.825 on each dollar required to clear goods at the port, providing them with much-needed relief amid challenging economic conditions.

The slash in exchange rate for paying import duty is coming on the back of continuous appreciation of the naira in the foreign exchange market with the naira trading at N1,251.05/$ at the Nigerian Autonomous Foreign Exchange Market (NAFEM) on April 5.

What this means is that importers opening Form M today Monday, April 8 for importation will have some measures of relief in terms of the money required to pay import duties compared to the importer who opened Form M on Friday, April 5.

Using the Form M exchange rate to calculate import duties is in line with the apex bank’s new directive that Customs should be using the rate on the date of submitting Form M for calculating import duties.

Meanwhile, there are expectations that the FX rate will witness further decline as the naira grows stronger even as the apex bank plans to sell $15.88 million to 1,588 eligible Bureau De Charge (BDC).

CBN also reviewed the exchange rate for BDC operators to N1,101 per dollar from N1,251/$1.

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