Thursday, July 25, 2024
BusinessWegagen faces worst financial meltdown in banking industry

Wegagen faces worst financial meltdown in banking industry

Reports 1.2 billion birr in loan loss, 2.9 billion birr in non-performing loans

Wegagen Bank, one of the industry leaders for the last 25 years, faces the worst financial tragedy in the banking industry, after reporting a drastic fall in profit and a soar in Non-Performing Loans (NPL), an underperformance linked with the conflict in Tigray.

The Bank reported a fall in gross profit from one billion to 193 million birr, the lowest in the industry. It is a financial underperformance that forced the 25-year old financial institution to lose its top spot in the industry, next to Awash, Dashen and Bank of Abyssinia.

No financial institution has reported such a level of a downturn in the last decade, with the last to report similar slides being the Cooperative Bank of Oromia in 2015/16 when it faced an eightfold fall in its profit from 312 million to below 40 million birr. Lion Bank, the majority of whose customers are based in Tigray like Wegagen, also reported a fall in net profit from 643.1 million to 334.2 million birr this year.

Similar with their counterparts at Lion, the Board of Directors of Wegagen, chaired by Abdishu Hussien, attributed the underperformance of the Bank with the conflict in the northern part of the country. Abdishu called the impacts of the war on Wegagen “Immense.”

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“The conflict affected the operation of the banking industry, particularly its effect on our Bank was immense mainly due to the closure of many branches and damage of properties in conflict areas,” said Abdishu.

Coupled with the adverse effects of the COVID-19 pandemic, the armed conflict, which has resulted in the closure of almost one-third of the Bank’s branches and deterioration of quite a large portfolio of assets, has challenged the income generation of the Bank, said Abdishu, in his message to shareholders.

A fall in profit was also reflected in shareholders’ return. Wegagen’s earnings per share plummeted from 31.3 percent to 4.2 percent, one of the lowest in the banking industry in the last fiscal year. Such an underperformance is an outcome of a fall in operating activities. Net operating income of Wegagen fell by almost 300 million birr to 2.6 billion birr, a performance attributed with a surge in loans at a risk of default.

Wegagen’s loan impairment charge, a provision held in the anticipation of possible unforeseen loan defaults, surged from 154 million to 789.5 million birr, while the Bank’s NPL increased from 1.2 billion to almost three billion birr. It has also reported a 1.2 billion birr in loss allowance, an estimate of the loan that a company is unlikely to recover, during the last fiscal year.

The Bank has also operated under a tight liquidity condition in the last fiscal year. Its cash and bank balance dropped by 31.2 percent to 4.8 billion birr. Its deposit also saw the lowest growth since its emergence as one of the leading financial institutions in Ethiopia. Wegagen’s deposit grew by only one percent to 29.5 billion birr, a rare occurrence in the banking industry.

Despite a disappointing reporting period, however, Wegagen remained strong in terms of capital. Its share capital stood at 3.2 billion birr, only two billion Birr shy from the threshold set for commercial banks in the coming five years.

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