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Wema Bank Annual Reports & Analysis of Banking Stocks – See My FInancial Result Analysis of Wema Bank and Fair Value Estimates Using Q3 2018.
NSE banking index has been worst hit by market sell-offs and we already know why: the effect of fallen yield on fixed income securities and cautious lending to the private sector, hence lower loan and advances.
Amidst these risks, Wema bank seems to be the only short-term penny stock in the banking stock I’d love to buy and resell in 2-3 months. Here is why:
The bank had just released its Q3 earnings report with key metrics showing double-digit growth.
The stock is selling for 63k with its YTD performance of 30.77%.
In January, Wema bank had an explosive run from 46k to ₦1.48, 221% growth but had since fallen to a year low.
Month to Date, the stock is up 15% which is the second month the bank stock closed higher, a sign that investors may have started accumulating the stock again.
Recent Result
Results for the 9-month ended September 2018 show that interest income from loan disbursements grew from ₦37.4 billion in 2017 to ₦38 billion in 2018 while interest expenses declined to ₦23billion (from ₦25.2billion).
Net impairment loss on financial increased to ₦477.04 (from ₦255.6), a development the bank needs to watch and manage closely.
Profit before tax jumped from ₦1.7billion in 2017 to ₦3 billion in 2018. Profit after tax followed suit; from ₦1.5billion in 2017 to ₦2.6 billion in 2018. Thanks to the well-managed operating expenses.
Wema bank generated ₦362.2b deposit compared to ₦250.9b, an increase that is tied to the bank’s growing subscribers on ALAT mobile banking app.
While tier 1 banks like GTB, UBA, and Zenith reported a lower loan and advances to customers on cautious lending, Wema bank is strategically increasing her loans to private sectors. This is evident in its recent partnership with the development bank of Nigeria.
Loan to deposit fell from 84% to 67% as the bank looks to explore the fixed income space; asset held for trading increased from ₦4.3b to ₦12.2billion.
Cash generated from the operation on the Q3 report is ₦53.3b against a negative figure reported in a similar period.
Technical Analysis
Technically, Wema bank stock’s price is below its 20-day price of 66k and 50-day moving average price of 75k which suggest bearish sentiments. As price approaches its 20-day average price, the bank’s stock may be set for some rally on the recent impressive result.
The long-term sentiment is clearly bearish, except the price surge past its 200-day moving average of 76k.
Valuation
Wema bank reported a 9-month EPS of 9.2k, which is 73.5% more than the EPS of 5.3k in the comparable period (2017).
Using an adjusted discount rate of 15%, and a projected year-end EPS of 13.2k we assign a fair value of 88k to the stock, which is 33% above the current share price.
Market update
The bank announced its partnership with development bank of Nigeria (DBN) to help small businesses access to cheaper loans of up to ₦600 million.
Recommendation
We assign a BUY rating on Wema Bank’s stock on the back of increased interest income from loan and advances and expected rise in yield on fixed income securities.
About Wema Bank
Wema Bank Plc provides commercial banking services. The Bank offers retail and corporate banking services, trade finance, treasury as well as foreign exchange operations.
