UNION BANK OF NIGERIA PLC
Fitch Ratings has affirmed
The Outlook on IDR is Stable. A full list of rating actions is below.
The affirmation reflects Fitch's view that UBN will remain compliant with its regulatory minimum capital adequacy ratio (CAR) requirement in the near term despite the sharp devaluation, with sufficient buffer and pre-impairment profit to accommodate the second-order economic effects on loan quality and to restore compliance, if necessary.
Key Rating Drivers
UBN's IDRs and National Ratings are driven by its standalone creditworthiness, as expressed by its VR of 'b-'.
The official exchange rate - the Investors and Exporters (I&E) window - depreciated sharply on 14 June following the
The move away from a longstanding managed exchange rate regime is intended to restore capital inflows and reduce foreign-currency (FC) shortages that have plagued the Nigerian economy in recent years.
A large proportion of economic activity was already influenced by the parallel market exchange rate, which had traded over
Fitch expects the banking sector's impaired loans ratios to increase in the near term at a faster pace following the devaluation and fuel subsidy removal as borrowers contend with higher inflation and interest rates. FC lending standards have tightened in recent years, influenced by a CBN directive prohibiting FC loans to borrowers without FC revenues and some banks restructuring FC loans to naira. Some legacy FC loans to borrowers without FC revenues remain and such loans are expected to weaken in the near term.
Our assessment of UBN's asset quality considers its small loan book relative to its assets, as it holds large cash reserves at the CBN and sovereign fixed-income securities. Large Stage 2 loans (25% of gross loans at end-2022) are a vulnerability for UBN, as they are predominantly FC-denominated and will inflate after naira depreciation.
However, Stage 2 loans are viewed by Fitch as only a moderate downside risk for regulatory CAR, as the bank has a forbearance from the CBN until end-2024, which allows only a modest provisioning of these exposures for the calculation of regulatory capital ratios.
The devaluation will inflate UBN's FC-denominated risk-weighted assets (RWAs) in naira terms and exert downward pressure on its capital ratios. Fitch believes the direct impact of the recent devaluation on capital ratios will be manageable due to its small FC-denominated RWAs and long net FC position, which will lead to revaluation gains and help to cushion the impact of inflated RWAs on capital ratios.
We expect UBN will maintain sufficient capital buffers and pre-impairment operating profit to accommodate the second-order economic effects of the devaluation on loan quality and increased risks to capital from inflated FC-denominated problem loans.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A sovereign downgrade could result in a downgrade of the Long-Term IDR and VR if Fitch believes that the direct and indirect effects of a sovereign default would likely erode capitalisation and FC liquidity insofar as to undermine the bank's viability.
Absent a sovereign downgrade, a downgrade could result from the combination of the naira devaluation and a marked increase in the impaired loans ratio, resulting in a breach of minimum capital requirements without near-term prospects for recovery. It could also result from a severe tightening of FC liquidity.
A National Rating downgrade would result from a weakening in creditworthiness relative to other Nigerian issuers'.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of the Long-Term IDR and VR would require a sovereign upgrade and an improvement in operating conditions in conjunction with a strong financial profile.
A National Rating upgrade would result from a strengthening in creditworthiness relative to other Nigerian issuers'.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The government's ability to provide full and timely support to commercial banks is weak due to its constrained FC resources and high debt servicing metrics. The Government Support Rating (GSR) is therefore 'no support', reflecting our view of no reasonable assumption of support for senior creditors being forthcoming should UBN become non-viable.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
An upgrade of the GSR would require an improvement in the government's ability to provide support, which would most likely be indicated by an increase in international reserves and an improvement in debt servicing metrics. This will also depend on our assessment of the bank's systemic importance.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
External Appeal Committee Outcomes
In accordance with Fitch's policies the Issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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