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Friday,
February 9, 2018 /11:45 AM /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 affirmed the bank's Viability Rating (VR) at 'b-' and
Support Rating at '5'.
A full list of rating actions is at the end of
this rating action commentary.
Key Rating Drivers
IDRS, National Ratings and VR
The IDRs of Union are driven by its standalone
creditworthiness, as defined by the VR. They are constrained by Nigeria's
operating environment and factor in a high impaired loans ratio, some weakness
in loan loss reserve cover, which puts pressure on capital adequacy and
performance metrics which, although improving, are still impacted by high loan
impairment charges. Risk appetite is now lower and management is focusing on
loan restructuring and recoveries. Union is a second-tier bank, with a market
share of about 4%, operating primarily in Nigeria.
The bank is 100 years old and its brand is
well-established, which helps to attract cheap retail deposits that make up 60%
of deposit funding. Corporate lending represents around 70% of loans but
Union's strategy is to establish itself as a leading mid-tier bank in Nigeria,
developing deeper customer relationships particularly in the corporate and SME
segments, and ultimately expand its retail lending capabilities. This expansion
is likely to be supported by shareholders, particularly Atlas Mara Limited,
which owns around 21% of the bank, a financial company whose primary goal is to
support retail banking across the African continent.
During the initial years under new ownership
(2011- 2015), risk appetite at Union was high, resulting in a loan portfolio
that is highly concentrated on the oil sector (38% of loans). Our assessment
shows significant weakness in asset quality measures. Impaired loans represent
around 9% -10% of gross loans. In addition, the bank has a high level of
non-performing and restructured loans not captured in the impaired loan ratio.
Loan loss reserve cover, at around 80% of impaired loans, exposes the bank to
unexpected losses even after factoring in the availability of collateral for
some large impaired loans.
Management's focus on recoveries and loan
restructuring is showing positive initial signs but the sustainability of these
trends will be assessed over time. Union's margins compare favourably with
peers' and overall operating profit metrics are broadly in line with peers'.
Operating profit reflects some pressure on efficiency ratios impacted by the
cost of maintaining a large branch network and the impact of inflation.
Union's funding profile is improving. Customer
deposits are growing steadily, reliance on interbank deposits is declining and
all public sector deposits have been repaid, in line with local requirements.
Union's foreign currency (FC) liquidity position was tight in 2016 and, along
with several Nigerian peers, Union restructured some trade finance obligations
with international correspondent banks. These are being repaid in line with
restructured terms, but our assessment is that the bank's FC liquidity position
remains tight. The bank's history of accessing term FC funding under new
management is limited to a small number of counterparts.
Given asset quality challenges, capital ratios
have become strained. Union raised NGN49.7 billion of Tier 1 capital in 4Q17
and we believe that prudential capital shortfalls have been addressed. However,
capital levels may still not be commensurate with risk despite the capital
injection, largely because unreserved impaired and non-performing loans still
represent a high proportion of equity.
Union's National Ratings reflect the bank's
creditworthiness relative to the country's best credit and to peers operating
in that country.
Support Rating and Support Rating Floor
Fitch believes that sovereign support to Nigerian
banks cannot be relied on given Nigeria's (B+/Negative) weak ability to provide
support, particularly in FC. In addition, there are no clear messages from the
authorities regarding their willingness to support the banking system.
Therefore, the Support Rating Floor of all Nigerian banks is at 'No Floor' and
all Support Ratings are at '5'. 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.
Rating Sensitivities
IDRS, National Ratings and VR
The bank's IDRs, National Ratings and VR are
primarily sensitive to either improvements or deterioration in asset quality
and capital adequacy. Given the extent of Union's asset quality pressures,
upside is limited at present.
Support Rating and Support Rating Floor
The Support Rating is potentially sensitive to a
change in assumptions around the propensity or ability of the sovereign to
provide timely support to the bank.
The rating actions are as follows:
Union Bank of Nigeria PLC
Long-Term IDR affirmed at 'B-'; Outlook Stable
Short-Term IDR affirmed at 'B'
Viability Rating affirmed at 'b-'
National Long-Term Rating: affirmed at BBB(nga)'
Short-Term National Rating affirmed at 'F3(nga)'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
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