Nigeria-Based United Bank For Africa PLC Assigned 'B and B' Ratings; Outlook Stable


Monday, May 22, 2017 11:46 AM / S&P Global Ratings

·         United Bank for Africa's (UBA) market position is supported by its good franchise in the corporate and retail segments in Nigeria and its geographic diversification. 

·         We expect that UBA's earnings will be resilient despite the economic slowdown in Nigeria and the high economic risk in the other parts of Africa where the group operates. 

·         We believe the bank's capital and earnings under our risk-adjusted capital frameork will remain moderate over the next 12-18 months, with its capital adequacy ratio remaining well above minimum regulatory requirements. 

·         We are assigning our 'B/B' global-scale and 'ngBBB/ngA-2' Nigeria national-scale counterparty credit ratings to UBA. 

·         The stable outlook parallels our stable outlook on Nigeria but also reflects our expectation that the bank's financial profile will remain broadly stable in the next 12 months. 

S&P Global Ratings said today that it assigned its 'B' long-term and 'B' short-term global-scale counterparty credit ratings to Nigeria-based United Bank for Africa PLC (UBA). The outlook is stable. 

We also assigned the bank our 'ngBBB' long-term and 'ngA-2' short-term Nigeria national-scale ratings. 

UBA operates in the top tier of the competitive Nigerian banking sector, benefitting from a good franchise in the corporate and retail segments in Nigeria and from some geographic diversification. The group operates in 19 African countries and has offices in the U.S., France, and the U.K. As of Dec. 31, 2016, it had total assets of 3.5 trillion Nigerian naira (NGN), which is equivalent to US$11.5 billion using an NGN305/$US1 exchange rate. 

We assess the bank's capital and earnings as moderate under our risk-adjusted capital framework. We estimate UBA's risk-adjusted capital (RAC) ratio before adjustments for diversification at 5.2% for year-end 2016. We project that before adjustments, the ratio will remain broadly stable over the next 12-18 months because of the bank's good earning capacity and expected stable cost of risk.  

Our forecast assumptions include a further weakening of the naira and  very muted loan growth, excluding devaluation impact. UBA's capital adequacy ratio was 19.7% at year-end 2016, which is well above the regulatory minimum of 15%, and we believe it will remain stable over the next 12-18 months. 

We assess UBA's risk position as adequate, which reflects our expectation that the group will exhibit broadly stable asset quality in the next 12 months on the back of relatively muted loan growth.  

The group's cost of risk increased to 2.1% in 2016 compared with 0.5% in 2015. This ratio compares well with the sector average. The group's exposure to oil and gas--at about 20% of total loans and concentrated in the upstream segment--has been shielded from lower oil prices (because of clients' hedges).  

However, nonperforming loans (NPLs; loans overdue by 90 days or more) increased to 3.9% as of Dec. 31, 2016, from 1.7% at year-end 2015. For 2016, the Central Bank of Nigeria allowed banks to write-off fully provisioned NPLs the same year, without prejudice to the prudential guideline that requires banks to retain fully provisioned NPLs for one year before write-off.  

This forbearance was to avoid accumulation of NPLs, as banks were expected to record additional provisions in the context of the Naira devalution that year. As a result, NPLs coverage by provisions dropped to 83.3% at year-end 2016 after reaching about 100% on Sept. 30, 2016.  

NPLs outside Nigeria accounted for 50% of the group's total. We anticipate that credit losses will decline to about 1.0% in 2017-2018, while the NPL ratio will be 4%-4.5% over the same period. Similar to other Nigerian banking groups, the UBA group extends loans in U.S. dollars (about 35% of total loans at year-end 2016), but this risk appears to be mitigated by receivables in the same foreign currency. 

We consider the bank's funding to be above average and its liquidity as adequate, owing to its stable and relatively low-cost, retail-deposit-based funding profile. Like its Nigerian peers, UBA exhibits contractual asset-liability mismatch, including in foreign currency.  

Despite tightening monetary policy in Nigeria in 2015-2016, the bank has been able to maintain a stable cost of funding at about 3.7% as of Dec. 31, 2016. The group reported a net stable funding ratio of 143% as of the same date and exhibits one of the lowest levels of loan leverage among Nigerian peers.  

Broad liquid assets covered short-term wholesale funding about 4x as of the same date. We understand that the group has sufficient U.S. dollar liquidity to meet its financial obligations in 2017 and relies on various sources of funding to finance its U.S. dollar balance sheet. Domiciliary accounts constituted about 20% of total customer deposits, and the group obtained funding from multilateral institutions. 

The ratings on UBA reflect the bank's stand-alone credit profile (SACP).  Despite its high systemic importance, we do not factor any extraordinary external support into the ratings, as we see the Nigerian government's support toward the country's banking sector as uncertain. 

The stable outlook parallels our stable outlook on Nigeria but also reflects our expectation that the bank's financial profile will remain broadly stable in the next 12 months. 

We could lower the ratings on UBA if we observed a higher-than-expected deterioration in the group's asset-quality indicators compared with top-rated peers in the next 12 months.  

This could be triggered by, for example, a deterioration of the macroeconomic environment in countries where the group operates. We would also lower the ratings on UBA in the unlikely scenario of a significant drop in capitalization, leading to a RAC ratio (before adjustments for diversification) below 3%. 

An upgrade appears remote in the next 12 months, as it would require a simultaneous upgrade of the sovereign and a decline in the economic risks faced by the Nigerian banking sector or a significant strengthening of capitalization, as reflected by an RAC ratio (before adjustments for diversification) sustainably exceeding 7%.  

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