We are affirming our 'B/B'
and 'ngBBB/ngA-2' ratings on UBA.
The stable outlook reflects
that on Nigeria and our expectation that the group's financial profile will
remain broadly stable in the next 12 months.
S&P Global Ratings
today affirmed its long- and short-term global scale issuer credit ratings on
Nigeria-based United Bank For Africa PLC (UBA) at 'B/B'. The outlook is stable.
At the same time, we affirmed our long- and short-term Nigeria national scale
ratings on the group at 'ngBBB/ngA-2'.
The affirmation reflects
our view that the group will maintain its top-tier competitive position in the
Nigerian banking sector. UBA benefits from a good franchise in the corporate
and retail segments in Nigeria and increasing geographic diversification. Overall,
we think the group has an adequate business position. Furthermore, we believe
that the group will display relatively stable asset quality and good earnings
generation over the next 12 months.
We assess the group's
capital and earnings as moderate under our risk-adjusted capital (RAC)
framework. We estimate UBA's RAC ratio (before adjustments for diversification)
at 5.2% for year-end 2016. We project that the RAC ratio will remain broadly
stable over the next 12 months on the back of the group's good earning capacity
and expected stable cost of risk.
Our forecast assumptions
include loan growth of around 20% (factoring in the expected depreciation of
the Nigerian naira), stable interest margins, cost control, and moderate
dividend distribution. On June 30, 2017, UBA's capital adequacy ratio was
19.7%, which is well above the regulatory minimum of 15%, and we believe it
will remain stable over the next 12 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. The group's cost of
risk increased to 2.1% in 2016 compared with 0.5% in 2015, before declining to
1.2% at end-June 2017.
This ratio compares well
with the sector average. However, nonperforming loans (NPLs; loans overdue by
90 days or more) ratio increased to 4.2% at end-June from 3.9% at end-2016
(1.7% at year-end 2015) and was hit hard by the foreign currency shortages,
which mainly affected the general commerce and oil and gas trading companies.
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 was aimed at avoiding
accumulation of NPLs, since banks were expected to record additional provisions
in the context of the naira devaluation in 2016. As a result, UBA's NPL
coverage by provisions dropped to 60.1% at end-June 2017 from 83.3% at
end-2016, after reaching about 100% on Sept. 30, 2016.
NPLs outside Nigeria
accounted for 60% of the group's total NPLs. We anticipate that credit losses
will decline to about 1% in 2017-2018, while the NPL ratio will stabilize at
around 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
end-2016), but this risk appears to be mitigated by receivables in the same
foreign currency.
We consider the group's
funding to be above average and its liquidity to be adequate, owing to its
steady and relatively low-cost, retail-deposit-based funding profile. Similar
to its Nigerian peers, UBA exhibits contractual asset-liability mismatches,
including in foreign currency.
Despite tightening monetary
policy in Nigeria in 2016, the group maintained a stable cost of funding at
about 3.6% as of end-June 2017. The group reported a net stable funding ratio
of 143% as of the same date. Broad liquid assets covered short-term wholesale
funding at about 4.5x as of the same date. UBA issued a $500 million Eurobond
in May 2017. We understand that the group has sufficient U.S. dollar liquidity
to meet its financial obligations in 2017.
The stable outlook on UBA
reflects that on Nigeria and our expectation that the group's financial profile
will remain broadly stable in the next 12 months.
We would lower the ratings
on UBA if we lowered the rating on Nigeria or observed a higher-than-expected
deterioration in the group's assets quality indicators over the next 12 months.
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 is unlikely in
the next 12 months because it would hinge on an 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 a RAC ratio
(before adjustments for diversification) sustainably exceeding 7%.
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