Title: Wema Bank H1 2016 Investor and Analyst Conference Call

Date: 27.07.2016

Speakers: Ademola Adebise, Tunde Mabawonku and Segun Oloketuyi

Duration: 35:10

Introduction and Presentation

OperatorLadies and gentlemen, thank you for standing by. Welcome to the Wema Bank H1 2016 Investor and Analyst Conference Call. Throughout the call, all participants will be in listen-only mode and afterwards, there will be a question and answer session. Just to remind you, this conference call is being recorded. Today, I am pleased to present the CEO, Segun Oloketuyi, please begin your meeting.

Ademola AdebiseGood afternoon ladies and gentlemen. Welcome to the Wema Bank H1 2016 Investor Conference Call. I would now like to – I mean, I’m representing the MD who is unavoidably absent, is on a business call right now and he sends his apology. Before I go on, I’d like to introduce my colleagues who are around the table who will be taking this conference call with me. I have Mrs Folake Sanu, the Executive Director Lagos Directorate. Also, Wole Akinleye who is the Executive Director for South-West Bank. Mr Moruf Oseni is the Executive Director North Bank. I also have with me the CRO of the Bank, the Credit Risk Officer, Mr Sylvanus Emeche and of course, Tunde Mabawonku who is the Chief Finance Officer. And myself of course, Ademola Adebise, I’m the Executive Director of Corporate Banking and the South-South Directorate.

The presentation is going to be in three parts. If you turn to slide two, the business and operation highlights, I will be handling that. Tunde Mabawonku, our CFO will be handling the financial performance while I’ll come back to wrap up on the outlook and strategy. During the question and answer session, either my colleagues on the table will join me or assist me in answering the questions.

I will now ask – can we now move to slide three? Wema Bank is a commercial bank founded in 1945. We’re proud to be the oldest indigenous bank in Nigeria. In the last six months, we’ve been working aggressively on our retail strategy. And what you have on this slide, basically speaks to the outcome of all the efforts. In terms of earnings – gross earnings of 24.3 billion. Our credit ratings remain stable by the two local rating agencies, and the international rating agency, Fitch. We have a stable BBB minus rating. In term of the alternate channels, we continued to push aggressively. As we go on in the slides, you will see the performance in terms of how we have been able to increase our market share in this space. In terms of branch growth, after obtaining the national license, we have continued to increase our branch footprint. And during the presentation, you will see the details. In terms of service delivery, we’ve also improved. An independent survey ranked Wema Bank as number 13, moving from 19 the last year. Also in terms of innovation, we are proud to say we have a very innovative bank, in the alternate channel space, we have the special feature, the card control which allows you to control the use of your card anywhere in the world under any platform.

Now we move on to slide four. The operating environment has been quite challenging both on the global and of course on the domestic front. On the domestic front, just yesterday, the MPC moved the MPR by 200 basis points in line with the move in the inflation rates. Now, the impact of this is quite impactful on the performance of banks for H2, cost of funds will definitely rise, and of course the net interest margins will also take a hit. Despite the relatively stable oil prices in the international market, Nigeria has continued to have challenges with the disruptions by the Nigeria Delta militants, and of course production has reduced which again, has impact on the revenues of government and on the FX liquidity available in the market.

Shall we move to slide five? At the beginning of the year, we set out clearly, our objectives along the pipelines, to grow the franchise, to enhance asset quality and capital, to improve on efficiency, organisational capacity, and of course to commit to deploying alternate channels. I’m happy to say – to inform you that, customer deposits grew by about 17% year-on-year. Based on the back of the retail strategy, we actively carried out the number of campus storms during the period, we grew accounts, we partnered with telcos, and all these things beginning to come to fruition and that is clearly evident in the result that we are having. In terms of branch footprint, again, we continue to add more branches to our network. We opened four branches in Lagos, four new branches in Lagos. Two in Port Harcourt, two in Abuja, and recently we opened the Lokoja branch. As we speak, we have a branch development happening in Enugu and Aba as we speak. We are expecting the Securities and Exchange Commission’s clearance on the Tier 2 capital and we’ve constantly also continued to repay our Tier 2 capital existing on the books. In terms of operational efficiency, we have kept a lid on our expenses moving by just 2.7% in H1, relative to an average inflation rate of 9.2%. We all know that inflation today is 16.5%. Cost to income ratio at 89.8, we believe also that this is quite impressive considering the challenges of inflation and the fact that our top line revenues have not really grown, but we’ve kept the lid on the OPEX.

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In terms of service delivery, an independent survey that was done, has ranked us number 13, moving from number 19 the previous year. We expect that by next year, we’ll move to top ten. In terms of alternate channels, this has a direct correlation with the performance on our deposit in the sense that we’ll continue to improve our footprint in terms of ATM deployment, POS and the number of cards in the hands of customers.

I ask now to move onto the next slide, slide six. All these shows that we’ve improved our PBT, by about 8.3% from period 2015 to 2016, and this basically is based on the fact that we’re able to contain our costs, just by the inflationary trends of the economy, and also non-interest income. The pressures on net interest margin, we’re able to do a lot better on the non-interest income which compensated for the hit on the net interest margin.

I will now hand over to Tunde Mabawonku, the CFO who will take a deep dive into the numbers, and will explain the facts behind the figures. Tunde.

Tunde MabawonkuOkay, thank you very much. Good afternoon, audience. My name is Tunde Mabawonku, the Chief Finance Officer of Wema Bank. We’ll be starting from slide eight and well, for the next couple of slides, I’ll walk you through some more details on the financials of the bank.

On slide eight, I think it’s important to note that, in the last couple of months have been a very relatively challenging operating environment, driven by high interest rates, increased cost of funding, increased cost of operations. Wema Bank has been able to squeeze out some efficiency in a number of ways. If we look at the first section of the chart, you see that this is evidenced by the increase in gross earnings, we’ve been able to achieve a 16% growth in gross earnings year-on-year. And that has flown to an improvement in PBT moving from 1.2 billion to 1.3 billion. The second half revolves around funding and the loan book. Funding is relatively flat on the previous financial year, closing at an average of 2.7 billion in H1. I will give more colour on the breakdown of this funding in subsequent slides. Two more important things to point out on slide eight, is we grew the non-interest income. You can see it moved from 3.4 billion, the previous half year, to 4.1 billion this half year. We’ve taken some hit on the cost of funds, obviously due to the high interest rates regime, we moved up from 6.28% to 6.56%, and that has been evidenced by the slightly lower margin, dropping from 7.72% to 6.71%. But despite this operating environment, NPLs remain quite low, we have one of the lowest NPLs in industry closing out 2.83% and a coverage ratio of 100%. So the story here is that, despite the harsh operating environment, we’ve been able to keep earnings up, been able to ensure profitability at the same levels, have opportunity to work on our operating expenses.

If you move to slide nine, slide nine is more like on the earnings trend of the bank and it shows what we’ve done year-on-year. The first half shows the breakdown of growth earnings into interest income, and non-interest income. And obviously a large chunk of interest income remains driven by the loan book. But the interesting part is, if you look at the second half of the chart, you can see an improvement in fees and income, and fees and commission, and that is driven by fees from retail, fees from banking transactions and fees from alternative platforms. Our retail sector acquisition drives more traction in this. On the upper half which is largely tied to loan volume, I think the message here is that with the increase in the MPR, there’s opportunity for higher yields in money market instruments, and there’s also opportunity to get better efficiency in our loan book. So going forward, we do see some positive improvements on the fees base, and given the high rates of the market, we think earning both from the loan book and from other assets will continue to rise.

If we move to slide ten, what we’re doing here is to shed some more light on the operating expenses of the bank. And the message from Wema really is that in the last two to three years, we’ve been able to mitigate headwinds by getting a lot more efficient in terms of our cost management. The upper half shows the movement in operating expenses, the lower half focuses on net interest margin, and cost of funds. The cost to income of 89% is obviously still not where we want it to be, but coming from a high of 90 and from the high of 150%, a couple of years ago, shown that there was some improvement, but the message here is also that operating expenses only grew by 2.61%, so 11.39bn, that was largely on the back of higher energy prices and inflation. Well, inflation now is about 16.5% and the bank has been able to keep its OPEX growth at 2.61%. It shows that we continue to find some way to manage cost. Cost of funds have gone up, but the impact of that has been mitigated by the Bank’s ability to manage this operating cost. And one other point we you to know is that, if we have gone up in terms of branches by 7% like Demola mentioned, we’ve kept costs flat, so branch network continues to expand, but cost of doing business remains flat, so we show some insight into how we’ve been able to manage that cost.

Slide 11 largely talks on the PBT, and like I said early on, you could see the 10% improvement in PBT from 1.2 billion to 1.3 billion. Largely, as a result of improvement in fee income, and the continuous cost management of the Bank. And in terms of cost efficiency, we do have a room to better manage the effective tax rates given that we have some deferred tax assets in our books

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that will reduce the tax rate the Bank has paid –is paying. Our outlook for net earnings is that we expected it to be subdued, but there are opportunities for higher yield within the money market segment at least in the immediate term.

If you move to slide 12, what we’ve done here is to provide some colour on the deposit liabilities of the Bank, and it shows both the changing mix and changing structure of deposit. If we look at the lower half, we tried to do a snapshot between H1 2015 and H1 2016. And you see in 2015, we do have some huge chunks on the public sector, but that hasn’t been fully replaced by the retail end of the business. Unfortunately, what has happened is also the mix had not been as ideal as possible. Fixed deposits are accounting for up to 57% of total deposits. If you recall, for those that were on the call last year end, the public sector deposits accounted for 6% of total funding, but what we’ve seen is that there has been some vital improvement to current accounts. And as we opened a lot more branches which is our alternative platform, most new customers open deposit accounts with the bank and then charge it to current accounts and savings accounts. But one more important point here is that on the average, Wema Bank, we open 20,000 retail accounts per month. This time last year, we used to open 10,000 accounts so that has shown that, yes, the retail strategy will continue to make an impact on cost of funds going forward.

If you move to slide 13, this shows the breakdown of loans and advances and if you were to look at this chart, you see a well diversified loan portfolio, with oil and gas, most are 18.6% downstream, we’ll provide more insight into the majority of these downstream facilities. 8.81% to retail, construction at 10.75% so we don’t really have any sectoral breaches within the books of the Bank and also just to point out that the foreign currency loan as a percentage of total loan book is at 6%. So when it comes to all the foreign currency loans, we also have foreign currency receivables, so exposure is minimised for the Bank within that space.

What slide 14 does is to shed more light on the NPL of the Bank. Largely, the NPL number has remained constant. There was some increase of 500 million in non-performing loans between full-year 2015, and half-year 2016, and likely due to some customers within the retail and commercial sectors. But a large chunk of – the NPLs have some legacy transactions that we are dealing with, are working out for the customers. But the message is the NPL ratio of the Bank at 2.83%, we think remains quite efficient and that is evident in slide 14 where you see the NPL ratio of 2.83% and coverage ratio here, coverage ratio here also includes the regulatory risk reserve. The coverage of 139% will then give us enough leverage over the NPLs of the Bank.

If you move to slide 16, what we did here was just shed more light on the capital structure and liquidity of the Bank. The Bank throughout the period had average liquidity ratio of 33%. What we’ve done is to try to ensure some efficiency. You will recall that liquidity is at 33%, cash reserve at by 22.5%. So locking in 52.5%, we’re relatively low yielding asset. Yes, there are regulatory issues, but the Bank also has to ensure some efficiency. But as rates improve in money market, we think there might be some guidance so some money market items. But capital liquidity ratio up 13.36% is above the minimum threshold of 10%. And what has happened here is the consistent stringent application of the credit risk mitigant. We had a number of loans that were cash collaterised, are paid down during the year, but that affected our ability to use credit risk mitigants in the CAR. As we go on, I want to shed more light to you on our plans to further improve on Tier 2 capital in the next half, this half of the financial year.

Moving on to slide 17, I think it’s important to mention that in the context of high interest rates, what we can call the dynamic FX regime, high inflation, managing this part to remain at the core of every business. Of course, Wema Bank that has remained at the core. What we’ve done is to continue to strengthen and ultimate the loan review on collateral process and ensure some early warning signals are available. The number of risks that we are worried about challenges in all sectors, exchange rate risks and trade finance, but what we’re doing at the Bank is to be ahead of the curve, and that is evident in the low NPL ratio. Wema Bank is also proud to say we are one of the first banks to identify and appoint a Chief Information Security Officer as a designated role in the financial institution and that has helped us in managing technology-related risks within the Bank.

In conclusion, we can go to slide 19, what this does is to show the five year trend of a number of critical indices for the Bank. And I think I’ll just highlight three brief things here. What we’ve done in the last couple of years is, show moderate improvement in earnings and that has been evident by the improvement in PBT in H1 2016. We’ve kept a lid on – secondly, we kept a lid on operating expenses and we continue to manage our loan exposures and I think that is evident by the 2.83% NPL and the 2% growth in operating expenses set by inflation at 16%. For us, the opportunities for higher yields, given what is happening within the market and that will ensure that we minimise the impact of increased cost of funds. So largely for the Bank, continue to drive innovation, and continue to keep a lid on our cost and risk assets. I will now hand over to Mr. Ademola Adebise for the concluding part of the presentation.

Thank you.

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Ademola AdebiseThank you very much, Tunde. Can we go to slide 20? We’ll look at the outlook. For me, I will just speak on two critical things: inflation and the interest and exchange rates. As you’re all aware, MPC increased the NPL by 200 basis points yesterday. Of course, these has implications. However, we believe – in terms of outlook, we believe that considering the fact that the shocks of H1 is the removal of subsidy, increase in the electricity tariff and liberalisation of the FX market, we believe that the impact on inflation should moderate going forward as we do not expect any other shocks that will continue to increase this. On exchange rates, we expect that we will move towards the full liberalisation as currently we still do not – we still have some current inadequacies in the market. And as we move towards full liberalisation, we believe that the gap between the parallel market and the interbank market, will begin to close up.

Let’s move on to slide 21. Wema Bank will continue to grow, focus on and grow on our retail strategy. Specifically, we’re going to aggressively work on our digital strategies to improve the retail markets. In terms of branch expansion, we would continue to optimise this, and this will include growing more branches, improving on the footprint by getting more branches, and also shutting down branches that are loss-making consistently. Cost optimisation will continue too – we already have a lid on this, we will continue to have a lid on costs by improving our processes and also ensuring that we watch – we will manage things effectively and this we have control over. Service delivery, again, as I said, we’ll continue to ensure that the superior customer experience is always delivered from time to time.

Now, we move on to slide 22, on slide 22, we’re talking about the guidance. Now, for Wema Bank, we have adjusted our guidance for deposits, for loan growth, for cost to income ratio and net interest margin when compared with the guidance that we gave at the last conference call. And this is based on the situation in the market, the challenges in the market. Loan growth for example, we tend to keep it very low. We need to be very cautious on loan growth, watching our capital adequacy ratios. We will need to continue to improve on our deposits, however we may not be able to achieve the 10% to 12% increase that we gave the last time. We expect anything between 7% and 10% and this is going to be largely based on driving our retail strategy. Two key things that we are going to continue to maintain our guidance on and – which we continue to hone on, is the retail penetration and the non-interest income. We’ll maintain the margins at 15% to 20% on both factors. And we believe that we will continue to do this, maintaining, keeping a lid on our costs, and of course trying to improve on margin top line.

On this note, we’ve come to the end of this presentation. I would now go into the question and answer session. Thank you very much.

Q&A

OperatorThank you. Ladies and gentlemen, if you do wish to ask an audio question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Once again, please press 01 to register for a question. And there will be a brief pause whilst questions are being registered. Once again, if you would like to ask a question, please press 01 on your telephone keypad now. And there will be further pause whilst questions are being registered.

Our first question comes from the line of Alieza Jo-Madugu. Please go ahead, your line is open.

Alieza Jo-MaduguGood afternoon, thanks for the call. I just wanted to get an idea of your liquidity ratio. You say it dropped to about 31% as of H1 16 and we know that the environment is getting tighter. I want to understand where you guys see your liquidity ratio going – as in, trending, given the environment? It’s very close to reaching the regulatory requirement of 30% as of H1 16? Thank you.

Tunde MabawonkuOkay. Thank you very much, Adigun. This is Tunde, speaking. Because the liquidity ratio of half year, at 31%, I think we will remain between the 33% to 35% LR ratio in the short-term. What the MPC has said is that the minimum ratio remains 30%. But you know, liquidity and profitability is a delicate balancing act; where we see opportunity for higher yields within the money market, we’ll obviously take advantage of that. We think in the short to medium term, will 500 or so, basis points above the regulatory threshold.

Alieza Jo-MaduguThank you.

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OperatorOur next question comes from line of Ade Ayokunle from Agusto & Co, please go ahead, your line is open.

Ade AyokunleHey, good afternoon. Thank you for the call. My question is regards to the capital. I want to find out when are we likely to conclude on the Tier 2 capital that we want to raise? And also, from the year end 2015, we said that we are trying to convert our retained earnings which is at a loss that we want to net it off with our share premium. I want to find out how far we have gone, and when are we likely to conclude it? Thank you.

Ademola AdebiseThank you very much. In terms of our tier two capital, we’ll go ahead with tier two capital. We sent in a portfolio to the Securities and Exchange Commission. We expect that we shall have an approval in the next four to six weeks. And then after that, we’ll then come in to the market.

Now, in terms of the capital reduction, basically we are still on course as well. This also is with the Securities and Exchange Commission and we’ve been able to cross all the hurdles with the Central Bank and the FRC. Basically, it's going to be structured as a capital reduction scheme where we would be able to trick create a capital reduction account and again, this was net of premium, and some of the assets and all the items on the balance sheet that are no longer required. That is the way it's going to be structured. We are still very much on course with that and we believe that this will be adjusted in the audited accounts at the end of the year.

OperatorOur next question comes from the line of Laolu Alabi from Silk Invest, please go ahead. Your line is open.

Laolu AlabiThank you. I have two-part question. The first is inward and the second is just your view on the FX market. In previous calls you’ve talked about looking to the use of technology to improve cost and efficiency. Are you able to quantify specifically what kind of savings you're going to be able to attribute to the alternative channels that you've spoken about?

And then the second question is around the FX market, it seems to be the general market perspective that the parallel market is the true reflection of where the currency should be, I wanted to get your opinion on that; only in relation to what kind of speculative impact we still have in the currency in determining the true value of the naira.

Ademola AdebiseOn technology, I’ll take the first question on technology. We pride ourselves as a forward-looking bank in terms of the use of technology. And basically our retail strategy will be – is going to be largely based on our technology. As we’re speaking, we are working with a first-class international consulting firm to work on our retail strategy which is basically on the digital space. And there are a lot of things, innovative things are going to be coming out for Wema Bank from January 2017. Specifically, if you’ve observed, we have a product with a feature, a product feature called card control. We are the only bank in Nigeria today that provides that service. Normally what you see is, you want to use your card abroad, you have to call your bank to set you up properly so that you can use your card outside our shores. Today, we have a product on behalf of our customers, where they can determine where to use their card, whether it's on ATM, whether it's on the POS, or whether it's on the internet. It also allows you to control where, anywhere in the world, if I live in Nigeria or France, I will disable myself from Nigeria and then enable for France. Which means, if anybody cloned my card, or is in possession of my card, any other, in any other country, they will be unable to use the card. And that’s the kind of the innovation we are talking about. Going forward, we are coming up with – we have a digital lab, and we are coming up with a number of products that will enable us to reduce our cost to serve. That will impact on the cost of serving our customers.

On the FX market, quite frankly, I'm not an economist, but our view is that, as it is today, which is a guided FX liberalisation, we believe, yes, the true value may not - we are probably not at the true exchange rate. But I believe personally that we – it is not as bad as the parallel market is. Somewhere in between, as what we have been talking about. The objective really is that once the foreign direct investors and the FPIs are comfortable with the policies, funds will begin to move in freely and move out freely. There will be liquidity in the market and the things will flow very, very well.

Also, one of the things that we think we have also done very well, you know, is the introduction of the futures market. This will also deepen – we believe it will deepen the FX market, and further improve.

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I would like to announce that the Managing Director has just joined the conference, Mr Segun Oloketuyi and he will probably want to say one or two things at this session. Next question please. Can we take the next question?

OperatorAs a last reminder, if you would like to ask a question, please press 01 on your telephone keypad now. And there will be a further pause whilst the questions are being registered.

Our next question comes line of Mr Adewale from FSDH Merchant Bank, please go ahead your line is open.

AdewaleHello good afternoon. I would like to ask a question regarding the MPC’s decision to increase the MPR by 200 basis points. I would like to know how the increase in the MPR will affect Wema Bank’s cost of funds going forward?

Ademola AdebiseThank you Mr Adewale. I mean clearly, the increase of 200 basis points has a direct impact on the cost of funds generally. And with that we believe that the cost of funds will – but I think one of the things that we are working on, is basically to continue to push hard on the retail strategy so that the impact will not – well, you agree with me that the retail journey is a long journey, it’s not something that you can close your eyes and then you know, you're there, you know. It’s something that we will continue to work on, so that over time, we will begin to dilute the high cost funds that is in the books. Of course, the impact also would affect net interest margin. As cost of funds go up, the propensity to increase on the asset side, of course you also know is not as easy as the hit on the cost of funds side.

OperatorOur next question comes from the line of Chinedu from PAL Pensions please go ahead, your line is open. Mr Chinedu if you are muted, please unmute yourself, your line is open for your question.

ChineduOkay. So, good afternoon. Okay I just want to find out – because we’re aware that Wema Bank wants to raise a Tier 2 capital, so I just want to find out what – it is they want to deploy the impact?

And also, is it also profitable at this point in time considering the rise in yield in the FGN bond. We predict that the bond will be priced at ATM plus some basis points, so I just want to find out if it is profitable for the Bank to go ahead with the issue. Thank you.

Segun OloketuyiOkay. My name is Segun Oloketuyi, the CEO, thanks again for bringing up the germane issue around the cost of capital, Tier 2 capital. We said a couple of months back, rates in the market were softer than what it is today. Suddenly[?] rates have gone up, even on the risk-free investment instruments and generally we know inflation has pushed up a lot of things. However, the need to raise capital for us is very, very solid. But we are raising capital, because we need to grow the Bank. The level we’re at today is not the optimal size that we're looking for. And in growing the business you need some level of capital adequacy ratio to do that, so from my last point, we are raising this money and not just to deploy the business and make a huge income as well. For us, we it will just suffice, it would breakeven. [Inaudible] raise the money because we need to have the right size of capital to achieve a growth plan that we have set in the short to the medium term. So we will raise the money and we are sure the rates have gone up on the liability side, on the capital side, these have equally gone up on the asset side. Yes, my colleagues said, we may not be able to increase rate on the asset side as much as the rate increase on the liability side. The target for us is actually a breakeven position. If we achieve that, largely, we’ll have achieved our objectives. And we think we should be able to achieve that.

OperatorAs there are no further questions registered, I will return the conference back to you guys.

Segun OloketuyiOkay. Ladies and gentlemen, thank you once again for calling in to join us at this conference call. It is an eventful year as we say. We are looking forward with a lot of optimism that things are going to turn around. The plan of the government actually is to bring some spending power into into the economy. That happens and things will look better than we saw in the first half of the

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year. Certainly margins will get squeezed, no doubt about that, but for us in Wema Bank certainly we’ll keep our head above water. Thank you very much, we appreciate you joining us. I look forward to the next call in another three months. Bye.

OperatorThis now concludes our conference call. Thank you all for attending, you may now disconnect your lines.

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