Fitch publishes corrected version of UBA Rating, affirms group at ‘B-’, outlook stable

FITCH Ratings has affirmed United Bank for Africa (UBA) Plc’s Long-Term Issuer Default Rating (IDR) at ‘B-’ with a Stable Outlook. Fitch has also affirmed the bank’s National Long-Term Rating at ‘A+(nga)’ and assigned a Stable Outlook.

According to Fitch, UBA Issuer Default Ratings (IDRs) are driven by its standalone creditworthiness, as expressed by its ‘b-‘ Viability Rating (VR). The VR is constrained by Nigeria’s Long-Term IDRs of ‘B-’, due to the bank’s high sovereign exposure relative to capital and the concentration of its operations in Nigeria

The ‘b-’ VR is one notch below the ‘b’ implied VR due to the operating environment/sovereign rating constraint.

It said UBA’s National Long-Term Rating balances a strong franchise against higher leverage than higher-rated peers’.

UBA’s profitability metrics have been consistently strong through the cycle. The bank reported a strong increase in its operating profit to 7.2 percent of risk-weighted assets (RWA) in 2022 (2021: 5.7 percent) as a result of wider net interest margins and improved non-interest income (35 percent of gross revenue in 2022).

Fitch stated that UBA’s FCC ratio (31.7 percent at end-2022) is the highest among Nigerian banks but flattered by a low risk-weight density (end-2022: 26 percent), as indicated by a lower tangible leverage ratio (8.2 percent at end-2022).

Pre-impairment operating profit is strong, providing a large buffer to absorb loan impairment charges without affecting capital. UBA’s regulatory capital ratios have large buffers above impending Basel III requirements.

UBA’’s loan-to-deposit ratio of 41 percent at end-2022 reflected a liquid balance sheet. Local-currency liquidity is ample (regulatory liquidity ratio of 40.6 percent at end-2022), with excess liquidity placed in government securities and liquidity more than sufficiently covering short-term naira funding.

Deposits account for 82 percent of funding and largely comprise stable current and savings accounts.

Banks continue to contend with US dollar shortages and the Central Bank of Nigeria’s (CBN) highly burdensome cash reserve requirement.

Fitch expects reform progress under the new administration, including elimination of fuel subsidies and gradual liberalisation of the naira. However, we see a risk of a sharp naira depreciation due to large disparities between the official and parallel exchange rates. The CBN has increased its policy rate by 700bp since April 2022 (currently 18.5 percent) due to rising inflation (22 percent in four months 2023).

Fitch recognises that UBA has a pan-African franchise with subsidiaries in 20 countries outside of Nigeria. These contributed 46 percent of net income and 39 percent of assets at end-2022.

“We believe UBA’s ability to capitalise on business and trade flows and attract deposits across the continent is a competitive advantage relative to peers,” it said.

Fitch says single-obligor credit concentration is moderate, with the 20-largest loans representing 113 percent of UBA’s Fitch Core Capital (FCC) at end-2022. Oil and gas exposure (16 percent of gross loans at end-2022) is lower than peers’. Nigerian sovereign exposure through securities and CBN cash reserves is high relative to FCC (over 350 percent at end-2022).

The agency said 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 forthcoming support for senior creditors should UBA become non-viable.”

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