London – 29 October 2019: Fitch Ratings has affirmed the United Bank for Africa PLC’s (UBA) Long-Term Issuer Default Rating (IDR) at ‘B+’. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRs, VIABILITY RATING AND NATIONAL RATINGS
The IDRs of UBA are driven by its standalone creditworthiness, as expressed by its ‘b+’ Viability Rating (VR). UBA’s VR is highly influenced by Nigeria’s operating environment, with weak macroeconomic conditions, policy uncertainty and regulatory intervention constraining the bank’s standalone creditworthiness.
UBA’s VR also reflects a strong franchise in Nigeria, as highlighted by market shares and a sizeable retail and current and savings accounts (CASA) deposit base, which translates into pricing power over smaller peers. UBA’s overall franchise is strengthened by a network of 19 subsidiaries across Sub-Saharan African (SSA) countries outside of Nigeria, which positions the bank to serve corporate customers operating across the continent and capitalise on trade flows. Operations across the rest of Africa (28% of assets at end-1H19; 41% of net income in 2018) provide a valuable source of diversification, particularly given the small contribution of each country.
Execution on strategy has been particularly strong, as highlighted by exceptional retail deposit growth, increasing earnings contributions from the rest of Africa business and generally strong financial performance during challenging economic conditions.
Loan quality remains weak. UBA’s impaired (Stage 3 under IFRS 9) loans ratio (5.6% at end-1H19) is low relative to the sector average, but a large stock of Stage 2 loans (24% of gross loans at end-1H19) that are concentrated by single-borrower and derive from troubled sectors such as power and oil and gas, present a risk to UBA’s financial profile. Specific loan loss coverage of impaired loans is low (30% at end-1H19) and compares poorly with other large banks’. This is influenced by particularly weak provisioning against impaired loans to bulk oil distribution companies in Ghana (48% of impaired loans at end-1H19), which are expected to be repaid as part of a government framework. Single-borrower concentration is high, with UBA’s 20-largest loans representing 136% of Fitch Core Capital (FCC) at end-1H19.
UBA consistently produces strong profitability metrics. Strong profitability is supported by a wide net interest margin that benefits from a low cost of funding but is flattered by weak provisioning of impaired and Stage 2 loans. However, the impact of currency translation of foreign operations on other comprehensive income can be large, as highlighted in recent years.
Capitalisation is a rating strength. Regulatory capital metrics display significant buffers over the regulatory minima. UBA’s FCC ratio (31% at end-1H19) is exceptionally high, influenced by a small loan book and financial collateral on lending, which both serve to reduce the bank’s risk-weight density, but leverage is higher than at certain other large banks. Net impaired loans measured at just 5% of FCC at end-1H19, but this should be considered in view of weak specific coverage of Stage 3 loans and a large stock of lowly-provisioned Stage 2 loans, which have the potential to compromise solvency.
Naira liquidity is a rating strength. UBA’s low loans/customer deposits ratio (50% at end-1H19) is reflective of a particular liquid balance sheet, withholdings of liquid assets being large enough to comfortably cover short-term liquidity gaps. Funding stability is supported by a sizeable CASA (73% of customer deposits at end-1H19) deposit and retail deposit base (52% of customer deposits at end-1H19) and only moderate single-depositor concentration. Growth in retail deposits has been particularly strong in recent periods, serving to strengthen the stability of UBA’s funding profile. US dollar liquidity appears only adequate in view of high single-depositor concentration in US dollar.
UBA’s National Ratings reflect Fitch’s view of the bank’s relative creditworthiness within Nigeria.
SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s weak ability to provide support, particularly in foreign currency. In addition, there are no clear messages of support from the authorities regarding their willingness to support the banking system. Therefore, the Support Rating Floor of all Nigerian banks is ‘No Floor’ and all Support Ratings are ‘5’. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.
UBA’s senior unsecured debt is rated in line with the bank’s Long-Term IDR, given that the likelihood of default on these notes reflects the likelihood of default of the bank. Fitch assigns a Recovery Rating (RR) of ‘RR4’ to this issue, reflecting average recovery prospects.
IDRs, VIABILITY RATINGS AND NATIONAL RATINGS
UBA’s Long-Term IDR, VR and National Ratings are sensitive to deterioration in asset quality, including migration of Stage 2 loans into the Stage 3 category, which would lead to a knock-on effect on profitability and solvency. UBA’s ratings are also sensitive to a downgrade of Nigeria’s sovereign rating.
UBA’s senior unsecured debt is sensitive to a change in UBA’s Long-Term IDR.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF are sensitive to a change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank.
The highest level of environmental, social and governance (ESG) credit relevance for UBA is a score of 3. This means ESG issues are credit-neutral or have only a minimal impact on the entity, either due to their nature or to the way in which they are being managed by the entity.
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