Fitch Ratings has affirmed Union Bank Of Nigeria PLC’s (Union) Long-Term Issuer Default Rating

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The IDRs of Union is driven by its standalone creditworthiness, as expressed by its Viability Rating (VR). Union’s VR is conditioned by Nigeria’s operating environment, with weak macroeconomic conditions, policy uncertainty and regulatory intervention influencing the bank’s standalone creditworthiness. Union’s VR further reflects a nominal franchise concentrated in Nigeria, weak profitability, a large stock of Stage 2 and 3 loans (under IFRS 9), low capital buffers and only adequate funding and liquidity.

Union’s impaired loans (Stage 3 loans under IFRS 9) ratio (22.1% at end-1H19) is very high, driven primarily by four large exposures in the power sector and oil and gas sector. Union’s reported non-performing loans ratio (7.1% at end-1H19) reflects management’s view of cash flow and collateral characteristics on Stage 3 loans. However, according to our global bank rating criteria, we consider all Stage 3 loans to be impaired, and this explains our higher ratio. Stage 2 loans measured at a further 16% of gross loans at end-1H19. Reserve coverage of Stage 3 loans is low (29.7% at end-1H19).

Union Bank is exposed to high concentrations by sector and single obligor. The 20-largest loans represented 68% of gross loans and 2.8x Fitch Core Capital (FCC) at end-1H19. The union is also highly exposed to the volatile oil and gas sector, which represented 34% of gross loans at end-1H19.

Union Bank’s net interest margins, at 6%, are in line with the average reported by the bank’s direct peers. However, the Union’s ability to generate sufficient revenues from operations to cover the bank’s operating expenses is challenged, as demonstrated by a high cost-to-income ratio of 84.1%.

The bank’s capital levels were materially reduced on the adoption of IFRS 9 in 2018. Union’s FCC/risk-weighted assets (RWA) ratio declined to 15.9% at end-1H19 from 31.1% at end-2017, following significant write-offs. Capital is highly vulnerable to unreserved Stage 2 and 3 loans. Unreserved Stage 3 loans were equivalent to 63.8% of FCC at end-1H19.

Union benefits from a strong retail deposit base, which accounted for 47% of customer deposits at end-1H19, providing a low-cost source of stable funding. Single depositor concentration is in line with peers’, with Union’s 20-largest deposits accounting for 19% of total customer deposits at end-1H19. Union complied with the regulatory loans-to-deposits ratio at end-September 2019.

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The Stable Outlook reflects Fitch’s base case expectation that upside and downside risks to Union’s credit profile are equally balanced in the near-term.

Union’s National Ratings reflect the bank’s creditworthiness relative to other Nigerian issuers.

Key Assumptions

Support Rating And Support Rating Floor

Fitch believes that sovereign support to Nigerian banks cannot be relied upon given Nigeria’s weak ability to provide support, particularly in foreign currency. Therefore, the Support Rating (SR) and Support Rating Floor (SRF) are ‘5’ and ‘No Floor’, respectively. 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 becomes non-viable.

Rating Sensitivities

IDRs, Viability Rating And National Ratings

Union’s Long-Term IDR is sensitive to a change in the bank’s VR. Downside pressure is most likely to result from a significant increase in loan impairment charges or write-offs, which could erode capital. A positive rating action is unlikely in the short-term given the bank’s asset-quality risks.

Union’s National Ratings are sensitive to a change in the bank’s creditworthiness relative to other Nigerian issuers.

Support Rating And Support Rating Floor

The Support Rating and Support Rating Floor are sensitive to a change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank. Given Nigeria’s weak sovereign ratings, this is not our base case.

ESG Considerations

The highest level of environmental, social and governance (ESG) credit relevance for Union 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.