OREANDA-NEWS. June 30, 2015. Fitch Ratings has published Wema Bank Plc's (Wema) Long-Term Issuer Default Rating (IDR) of 'B-' with a Stable Outlook, Short-Term IDR of 'B' and Viability Rating (VR) of 'b-'. Fitch has also published Wema's Long-term and Short-term National Ratings of 'BBB-(nga)' and 'F3(nga)', respectively. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS, VR AND NATIONAL RATINGS
Wema's IDRs and VR reflect the bank's intrinsic characteristics, including the bank's improving performance, although earnings capacity is still limited. The bank is still recovering from large historical losses, resulting in its recapitalisation in 2013. The bank has since returned to profitability, but internal capital generation remains weak, providing limited capital buffers with which to absorb losses.

The ratings also consider Wema's modest Fitch Core Capital (FCC) ratio relative to peers, which provides limited buffers against moderate internal or external shocks, particularly given the increasingly challenging economic conditions and market volatility in Nigeria. The FCC ratio improved significantly under Basel II due to the use of credit risk mitigation to reduce risk-weighted assets.

Wema was recapitalised by NGN40bn in 2013 in order to meet regulatory requirements. The bank plans to raise tier 2 qualifying junior debt to fund growth and strengthen regulatory capital ratios. However, this will not benefit its FCC ratio and lending growth is likely to put pressure on core capital ratios.

Wema's IDRs also reflect the highly challenging and volatile operating environment in Nigeria. The recent oil price shock and subsequent currency pressure has weakened the Nigerian operating environment and is likely to result in lower GDP growth in 2015. In turn, the banking sector is likely to report weaker profitability, asset quality and capital ratios. These pressures are to an extent captured in the ratings, and partly explain the Stable Outlook. Nevertheless, should the operating environment deteriorate faster than expected, particularly if it had a significant impact on the bank's capital and asset quality, the VR could be downgraded.

Wema's National Ratings are driven by its Long-term IDR and Fitch's opinion of the bank's creditworthiness relative to the best credits in Nigeria.

SUPPORT RATING AND SUPPORT RATING FLOOR
Wema's Support Rating (SR) and Support Rating Floor (SRF) reflect a possibility of support from the Nigerian authorities, but Fitch believes that this cannot be relied upon. In assessing the probability of support, Fitch considers the authorities' recent track record of support across the sector, including in Wema. The authorities' ability to support the bank is constrained by Nigeria's 'BB-' sovereign rating. Fitch assigns SRFs based on each bank's systemic importance. Fitch views Wema as having limited systemic importance, given its market share, regional banking licence and subsequent limited area of operations.

RATING SENSITIVITIES
IDRS, VIABILITY RATING AND NATIONAL RATINGS
There is limited upward potential for the bank's IDR to be upgraded at present. Wema's IDR would be upgraded following an upgrade of its VR or an upward revision of its SRF. However, an upgrade of the VR is unlikely given the bank's recent recapitalisation and its limited performance track record. An upward revision of the SRF would require a national banking licence and a significant expansion of the bank's franchise and business model, which would signify greater systemic importance.

Wema's IDRs would only be downgraded if its VR was downgraded and its SRF simultaneously revised downwards, as its VR and SRF are currently at the same level. A prolonged economic downturn is a threat to the bank's VR. The VR is also sensitive to declining capital ratios, mostly likely the result of fast loan growth and/or declining asset quality. A return to losses could also be a trigger for a downgrade of the VR.

Wema's National Ratings are sensitive to a change in its Long-term IDR and relative creditworthiness.

SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF are sensitive to a prolonged and severe recession that would affect the ability or willingness of the Nigerian authorities to provide support. However, a one-notch downgrade of the sovereign would not necessarily lead to a downwards revision of the SRF.

The rating actions are as follows:

Long-term IDR published at 'B-'; Outlook Stable
Short-term IDR published at 'B'
Viability Rating published at 'b-'
Support Rating published at '5'
Support Rating Floor published at 'B-'
National Long-term Rating published at 'BBB-(nga)'
National Short-term Rating published at 'F3(nga)'