| Reviews & Outlooks |    800 VIEWS  |
| Reviews & Outlooks | |
| 800 VIEWS | |
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Fitch Ratings has downgraded United Bank for Africa (Ghana) Limited's Long-Term Issuer Default Rating (IDR) to 'B-' from 'B' and Viability Rating (VR) to 'b-' from 'b'. The Outlook on the Long-Term IDR is Stable.
The rating actions follow Fitch's downgrade of Ghana's Long-Term IDRs to 'B-' from 'B' on 14 January 2022 (see Fitch Downgrades Ghana to 'B-'; Outlook Negative).
Fitch has withdrawn UBA Ghana's Support Rating as it is no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned a Shareholder Support Rating (SSR) of 'b-'.
IDRs and SSR
UBA Ghana's Long-Term IDR
is now driven by our assessment of the likelihood of extraordinary support from
its Nigeria-based parent, United Bank for
Africa Plc (UBA Plc; B/Stable), as expressed by its SSR of 'b-'. The
Long-Term IDR and SSR are at the same level as Ghana's Country Ceiling of 'B-'.
The Stable Outlook on UBA Ghana's Long-Term IDR reflects that on UBA Plc's
Long-Term IDR.
Fitch's view of support
considers UBA Plc's high propensity to provide support given UBA Ghana's
importance to the group's pan-African strategy and its substantial contribution
to group net income (10% in 1H21). It also considers the 91% ownership, common
branding and high level of management and operational integration between UBA
Ghana and the wider group.
However, UBA Plc's ability
to provide support is conditioned by its standalone creditworthiness, as
captured by its Long-Term IDR. We also consider there to be a risk of
regulatory restrictions in Nigeria, particularly concerning foreign-currency
flows out of the country, which may constrain UBA Plc's ability to provide
timely and sufficient support.
VR
The downgrade of UBA
Ghana's VR follows the downgrade of Ghana's Long-Term IDRs as the bank does not
meet Fitch's criteria to be rated above the sovereign on a standalone basis.
Fitch considers that UBA Ghana is unlikely to remain solvent in a sovereign default
scenario, due to the concentration of its operations within Ghana, reliance on
sovereign-derived income and high exposure to the sovereign relative to
capital, primarily through local-currency government securities (over 300% of
common equity Tier 1 (CET1) capital at end-9M21).
UBA Ghana has a small
market share of Ghanaian banking sector assets (3% at end-9M21), but its
franchise benefits from being a subsidiary of UBA Plc. We expect market shares
to increase moderately over the next two years as UBA Ghana pursues an
aggressive growth strategy.
Single-borrower credit
concentration is high, with the bank's 20 largest loans representing 86% of
gross loans at end-9M21 (although equivalent to just 87% of equity, due to UBA
Ghana's large capital base and a low share of loans in total assets). Our risk
profile assessment also considers aggressive loan growth that may lead to
seasoning risks in the event of a relaxation of underwriting standards.
UBA Ghana's impaired loans
(Stage 3 loans under IFRS 9) ratio (40% at end-9M21) is extremely high,
reflecting exposure to several downstream oil companies that have struggled to
service their debt due to delayed government payments. However, the loan book
represents a small proportion of total assets (22% at end-9M21), with Ghanaian
local-currency government securities representing over 50% of total assets.
Fitch also expects the impaired loans ratio to decline in the short term as a
result of write-offs, the resolution of some sizeable impaired loans and strong
loan growth.
UBA Ghana has strong
profitability, as indicated by operating returns on risk-weighted assets (RWA)
that have averaged 10% over the past four full years. Profitability is
underpinned by Ghana's high interest rate environment but earnings are highly reliant
on interest income from government securities, which represented 66% of total
interest income in 2020. Operating returns on RWAs declined in 2020 (to 6.8%)
and 9M21 (to 5.6%) as a result of elevated loan impairment charges (LICs)
following the Bank of Ghana's directive to UBA Ghana to gradually write-off its
largest impaired loan. LICs are expected to remain elevated in 2022 and 2023 as
a result of continued LICs against this impaired loan.
UBA Ghana's CET1 capital
ratio (21.4% at end-9M21) is comfortably above the minimum regulatory
requirement. Net impaired loans were equal to 31% of total equity, but the
largest impaired exposure is considered fully-provisioned from a regulatory
capital calculation perspective, and therefore it written off will not affect
the CET1 capital ratio. Fitch expects UBA Ghana's regulatory capital ratios to
remain comfortably above minimum requirements in the medium term but to decline
moderately as a result of aggressive budgeted growth.
Reliance on non-deposit
funding is limited (2% of total funding at end-9M21). Term deposit funding is
moderate (18% of customer deposits) but depositor concentration is particularly
high, with the 20 largest depositors representing 49% of customer deposits.
However, large holdings of government securities and bank placements
(equivalent to over 90% of total funding) ensure strong liquidity coverage that
compensates for high depositor concentration.
The Earnings and
Profitability Score of 'b-' has been assigned below the 'bb' category implied
score due to the following adjustment reason: Revenue diversification
(negative).
International scale credit
ratings of Financial Institutions and Covered Bond issuers have a best-case
rating upgrade scenario (defined as the 99th percentile of rating transitions,
measured in a positive direction) of three notches over a three-year rating
horizon; and a worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction) of four
notches over three years. The complete span of best- and worst-case scenario
credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case
scenario credit ratings are based on historical performance.
UBA Ghana's Long-Term IDR
is driven by UBA Plc's Long-Term IDR.
Unless otherwise disclosed
in this section, the highest level of ESG credit relevance is a score of '3'.
This means ESG issues are credit-neutral or have only a minimal credit impact
on the entity, either due to their nature or the way in which they are being
managed by the entity.
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