BY KENNETH EZE
Global rating agency, Fitch Ratings has affirmed United Bank for Africa Plc’s long-term issuer default rating at ‘B’.
In its latest report, the agency rated UBA’s national short-term IDR has also been upgraded to ‘F1+(nga)’ from ‘F1(nga)’, which reflects the bank’s continuing solid funding and liquidity profile, which is a rating strength.
“The outlook on the bank is stable,” Fitch stated.
Key Rating Drivers
The IDRs and senior debt ratings of UBA are driven by its standalone creditworthiness, as reflected in its ‘b’ viability rating.
“The VR,” Fitch stated, considered UBA’s exposure to the Nigerian volatile operating environment, but also the bank’s healthy profitability and adequate capitalisation, which provided reasonable capacity to absorb losses from an economic downturn.”
The VR also reflects sizeable non-loan assets, dominated by cash and balances, restricted deposits (mainly cash reserve requirements held at the Central Bank of Nigeria) and Nigerian government securities (B/Stable), which together comprised about 29 per cent of total assets at end-1H21 (3.3x Fitch Core Capital (FCC)).
“The stable outlook reflects Fitch’s view that risks to UBA’s credit profile are captured at the current rating level, with sufficient headroom, under our base case, to absorb the fallout from operating-environment pressures, the report added.
The ratings also reflect UBA’s pan-African franchise with subsidiaries in 20 countries outside of Nigeria (with 50 per cent of net income and 35 per cent of assets at end-1H21 coming from the rest of Africa).
“We believe UBA’s ability to capitalise on business and trade flows and attract deposits across the continent is a competitive advantage relative to the bank’s peer group,” the agency added.
The Point reports that UBA is the fourth-largest banking group in Nigeria, representing 15 per cent of domestic banking-system assets at end-2020.
In the report, Fitch noted that, asset-quality losses have been limited to date and net loans remained low at 32 per cent of total assets at end-1H21.
Furthermore, asset-quality metrics improved in 1H21, with the impaired (Stage 3 under IFRS 9) loans ratio falling to 3.5 per cent at end-1H21 (2019: 4.8 per cent).
Total reserves coverage of impaired loans also rose, to 95 per cent, the highest among the peer group.
“Our asset-quality assessment also considers UBA’s lower oil and gas exposure – at 13 per cent of net loans compared with the sector average of 30 per cent – and high exposure to Nigerian government securities,” Fitch pointed out.
However, UBA holds a moderate stock of Stage 2 loans (9.6 per cent of gross loans at end-1H21) compared with peers, which are mostly restructured and concentrated to a few borrowers, exposing the bank to event risk.
At end-1H21, around 18 per cent of the bank’s gross loans were also subject to debt relief (end-1H20: 15 per cent), broadly in line with the peer groups.
UBA’s profitability metrics have been consistently strong through the cycle. The bank reported an increase in its operating profit-to-risk weighted assets (RWA) ratio to 6.5 per cent at end-1H21 from 5.4 per cent at end-2020, despite falling asset yields and regulatory limits on transaction fees, and lower transaction volumes, which continue to weigh on non-interest income. Pressure on net interest income was, to some extent, offset by lower funding costs, due to lower interest rates, while loan impairment charges were lower relative to pre-impairment operating income (6 per cent) as asset quality improved. UBA’s geographical diversification provides some cushion to the pressures in Nigeria through the cycle.
The bank has adequate capitalisation and is expected to be under moderate pressure as RWAs are inflated by currency devaluation. UBA’s FCC ratio was a solid 30.1 per cent, at end-1H21, reflecting its low risk weight density (end-2020: 32 per cent). The latter results from the highly liquid nature of the bank’s balance sheet – including large holdings of government securities and financial collateral – which provides capital relief.
However, leverage is fairly high, as reflected in a tangible equity/asset ratio of 8.7 per cent at end-1H21.
The bank’s sovereign exposure is high compared with capital, which constrains the bank’s rating.
Funding and liquidity are considered a rating strength. UBA’s loan-to-deposit ratio of 47 per cent at end-1H21 reflects a liquid balance sheet, which covers short-term maturity gaps in naira. Local-currency liquidity is ample (regulatory liquidity ratio of 35 per cent at end-1H21), with excess liquidity placed in government securities.
Deposits account for 84 per cent of funding and largely comprise stable current and saving accounts.
While, UBA is not immune to the current foreign-currency shortages in Nigeria and has liquidity gaps at shorter maturities on a contractual basis, resulting in reliance on the stability of domiciliary deposits and loan repayments in foreign currency to meet its own debt obligations, it noted that domiciliary deposits have shown stability over the last crisis in 2016 and have remained inelastic in behaviour in 2020.
