December 12, 2018 05:18 PM / Fitch Ratings
Fitch Ratings has affirmed Union Bank of Nigeria PLC's (Union) Long-Term Issuer Default Rating (IDR) at 'B-'. The Outlook is Stable. Fitch has also downgraded Union's National Long-Term Rating to 'BBB-(nga)' from 'BBB(nga)'. A full list of rating actions is at the end of this rating action commentary.
The downgrade of Union's National Long-Term Rating mainly reflects Fitch's view of weaker asset quality relative to Nigerian peers', as highlighted by the bank's disclosure under IFRS 9.
Key Rating Drivers
IDRS, Viability Rating And National Ratings
The IDRs of Union are driven by its standalone creditworthiness, as defined by its Viability Rating (VR). Union's VR, as with that of other Nigerian banks, is highly conditioned by Nigeria's operating environment, with the fragile economic recovery restraining banks' growth prospects and asset quality. Union's VR further reflects a moderate franchise, weak profitability, severe loan-quality problems and adequate capitalisation, funding and liquidity.
The Stable Outlook reflects Fitch's base case expectation that Union's credit profile is unlikely to change significantly over the next one-to-two years.
Union's operations are concentrated in Nigeria. Union accounted for 4% of banking system assets at end-2017.
Union's stock of impaired loans is declining, as is its exposure to the troubled oil sector. However, the bank's impaired loans (stage 3 loans under IFRS 9) ratio (24% at end-1H18) is very high compared with the 9.4% average for rated Nigerian banks, driven primarily by its oil sector exposure. Stage 2 loans measured at a further 30% of gross loans at end-1H18. Reserve coverage of impaired loans (32% at end-1H18) is low, reflecting management's view of collateral on impaired loans.
Union is exposed to large credit concentrations. The 20-largest loans measured at 71% of gross loans and 128% of Fitch Core Capital (FCC) at end-1H18. The volatile oil sector represented 45% of Union's gross loans at end-1H18.
Union's operating profit/risk-weighted assets ratio was 1.8% in 2017 (compared with rated-banks average of 4%), which is weak by emerging market standards. Union has a high net interest margin, but this is offset by a high cost-income ratio and large loan impairment charges that have eroded around 55%-65% of pre-impairment operating profit in recent years.
Capital metrics are somewhat better than similarly-sized peers', having improved following a rights issue in 2017. However, as a result of IFRS 9 implementation from this year, Union's FCC ratio declined to 24% at end-1H18 (end-2017: 31%). Union's high FCC ratio must be considered in the context of the bank's large unreserved impaired loans, which measured at 45% of FCC at end-1H18.
Union benefits from a strong retail deposit base, which accounted for 52% of customer deposits at end-1H18, providing an inexpensive source of stable funding. Single-depositor concentration is in line with peers', with Union's 20-largest deposits accounting for 21% of the total at end-1H18. Union's loans/customer deposits ratio (62% at end-1H18) sits at the lower end of the peer group. Foreign-currency liquidity has been tight in recent years, with Union restructuring some trade finance obligations with international correspondent banks in 2015 and 2016. Foreign-currency liquidity pressures have eased and are no longer a significant rating weakness.
Union's National Ratings reflect the bank's creditworthiness relative to Nigerian peers'.
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. In addition, there are no clear messages of support from the authorities regarding their willingness to support the banking system. 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 become non-viable.
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 material worsening of impaired loans, including the migration of stage 2 loans into the stage 3 category, putting pressure on capital adequacy. A positive rating action is unlikely in the foreseeable future.
Union's National Ratings are sensitive to a change in the bank's creditworthiness relative to Nigerian peers'.
Support Rating And Support Rating Floor
The SR and SRF are sensitive to a change in assumptions around the propensity or ability of the sovereign to provide timely support.
The rating actions are as follows:
Long-Term IDR affirmed at 'B-'; Outlook Stable
Short-Term IDR affirmed at 'B'
Viability Rating affirmed at 'b-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
National Long-Term Rating downgraded to 'BBB-(nga)' from 'BBB(nga)'
National Short-Term Rating affirmed at: 'F3(nga)'