Fitch has affirmed United Bank for Africa (UBA) Plc.’s long-term issuer default rating at ‘B’ with a stable outlook, the international rating agency said in a new report.
It also added that UBA’s national short-term issuer default rating has also been upgraded to ‘F1+(nga)’ from ‘F1(nga)’, reflecting the bank’s continuing solid funding and liquidity profile, which Fitch considers as a rating strength.
According to the report, the issuer default rating and senior debt ratings of UBA are driven by its standalone creditworthiness, as reflected in its ‘b’ viability rating (VR).
Fitch explained that UBA viability ratings consider the bank’s exposure to the Nigerian volatile operating environment, but also the bank’s healthy profitability and adequate capitalization, which provide reasonable capacity to absorb losses from an economic downturn.
This 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% of total assets at end of the first half of 2021.
Subsequently, the lender’s 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.
It said the ratings also reflect UBA’s pan-African franchise with subsidiaries in 20 countries outside of Nigeria – with 50% of net income and 35% of assets at end of the first half of the year coming from the rest of Africa.
Fitch analysts said they believe UBA’s ability to capitalize on business and trade flows and attract deposits across the continent is a competitive advantage relative to the bank’s peer group.
Asset Quality Assessment also considers UBA’s lower oil and gas exposure – at 13% of net loans compared with the sector average of 30% – and high exposure to Nigerian government securities”, Fitch stated.
However, UBA holds a moderate stock of Stage 2 loans (9.6% of gross loans at the end of the first half of 2021) compared with peers, which are mostly restructured and concentrated to a few borrowers, exposing the bank to event risk.
Pressure at end of the period, around 18% of the bank’s gross loans were also subject to debt relief as against 15% at the comparable period in 2020, broadly in line with the peer group, adding that UBA’s profitability metrics have been consistently strong through the cycle.
The bank reported an increase in its operating profit-to-risk weighted assets ratio to 6.5% in the first half from 5.4% in 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%) as asset quality improved”.
Fitch noted that UBA’s geographical diversification provides some cushion to the pressures in Nigeria through the cycle, adding that the lender’s capitalization is adequate and expected to be under moderate pressure as risk-weighted assets are inflated by currency devaluation.
UBA’s Fitch Capital ratio was a solid 30.1% at end-1H21, reflecting its low-risk weight density, from 32% at the end of 2020. 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.
“Leverage is fairly high, as reflected in a tangible equity/asset ratio of 8.7% as of the first half of 2021. The bank’s sovereign exposure is high compared with capital, which constrains the bank’s rating”.
UBA’s loan-to-deposit ratio of 47% in the first half reflects a liquid balance sheet, which covers short-term maturity gaps in naira.
Local Currency Liquidity is ample with excess liquidity placed in government securities. Deposits account for 84% of funding and largely comprise stable current and saving accounts.
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, Fitch said.
It added that domiciliary deposits have shown stability over the last crisis in 2016 and have remained inelastic in behavior in 2020. culled