Wema Bank Plc is moving out of the bottom hierarchy on profit margin in the Nigerian banking industry to the medium rangers with a profit margin of 13.6 percent at the end of the first quarter.
This is the first double-digit profit margin for the bank in years, which powered a top record profit growth of 88.4 percent quarter-on-quarter to N5.4 billion at the end of the first quarter.
The first quarter unaudited accounts of the bank for the period ended March 2023 show a significantly enhanced ability to convert revenue into profit. The high growth in profit stands three times an increase of 29 percent in gross earnings over the same period.
Since the bank’s sustained return into profitable operations in 2013, it had stayed at the bottom of a wide-ranging profit margin record in the banking industry. Its net profit margin ranged between 3.5 percent and 5.6 percent between 2013 and 2020.
A major advance happened in 2021 when the bank closed with a net profit margin of 9.5 percent, which slipped to 8.6 percent in 2022.
The leap in profit margin to 13.6 percent in the first quarter of the current year has taken the bank to a new pedestal when it comes to how banks stand on their ability to convert revenue into profit – a signal of how much returns a bank can give to shareholders.
At N39.3 billion, gross earnings rose by 29 percent quarter-on-quarter at the end of the first quarter. At the current growth rate, gross income is headed to the region of N160 billion for the bank for the full year.
In terms of growth, the projected revenue figure isn’t going to deliver anywhere close to the major advance of over 41 percent achieved in 2022.
Management is however more than compensating for the slowing growth in revenue with the significant gain in profit margin. The strength for profit is coming from an all-around hold on costs that are yielding cost savings and swelling the bottom line.
There is a change in the cost-income balance that overturned last year’s pattern when interest expenses grew well ahead of interest income.
The first quarter saw interest income grow by 35.3 percent to almost N34 billion while interest expenses rose less rapidly at less than 30 percent quarter-on-quarter.
With the saving from the cost of funds, net interest income advanced by 43.4 percent quarter-on-quarter to close at N14.5 billion at the end of the first quarter.
A second level of cost saving was added from a drop in net impairment loss on financial assets from N278 million in the same quarter last year to less than N108 million at the end of March 2023.
This boosted net interest income after credit loss charges by an elevated margin of 46.3 percent to close at N14.3 billion.
Yet a third level of cost savings was extracted from total operating expenses that grew at half the rate of increase in gross earnings.
At N13.9 billion, total operating cost grew by 14.5 percent compared to the 29 percent growth in gross income. With that, the operating cost margin went down from 48.3 percent in the same period last year to 35 percent in the first quarter.
This is the lowest operating cost margin that Wema Bank has seen in more than a decade – down from 45 percent at the end of the 2022 operations.
The three-level cost savings achieved by the bank in the first quarter provided the profit-building capacity that saw pre-tax profit jump by 87.4 per cent to over N6 billion at the end of the first quarter.
The bank closed the first quarter operations with earnings per share of N1.67, up from about 89 kobo per share in the same quarter in 2022.
Whether the bank will keep costs slowing down and margins improving will be the test for the new leadership of the bank in the course of the current financial year.
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