GCR Affirms Union Bank's National Scale Issuer Ratings; Outlook Revised to Stable from Negative

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Thursday, September 23, 2021 / 07:16 PM / By GCR Ratings / Header Image Credit: Union Bank


GCR Ratings ("GCR") has affirmed Union Bank of Nigeria Plc's national scale long-term and short-term issuer ratings of BBB+(NG) and A2(NG) respectively, with the Outlook revised to Stable from Negative.


Rated Entity

Rating class

Rating scale

Rating

Outlook/Watch

Union Bank of Nigeria Plc

Long Term issuer

National

BBB+(NG)

Stable Outlook

Short Term issuer

National

A2(NG)

 Rating Rationale

The ratings assigned to Union Bank of Nigeria PLC ("UBN" or "the bank") balances the bank's good franchise strength, strong funding structure and adequate liquidity position against the modest levels of capitalisation, high loan book concentrations, and moderate asset quality.


UBN's competitive position is anchored on its proven track record in the Nigerian banking industry, with a strong foothold especially in the retail segment. The bank has a market share of 4.4%, 4.0%, and 4.1% measured by total assets, customer deposits and gross loans respectively as at FY20. Over the review period (FY17-FY20), the bank has demonstrated earnings stability, evidenced by the sustained upward trajectory in bottom-line earnings and the high contribution of more stable revenue sources (net interest income and fees and commissions) to total operating income. Management and governance standards of the bank are assessed to be in line with the industry best practice, albeit we noted the ongoing legal cases against the bank contributing to very high contingent liabilities.


Capitalisation is negative to the rating. Outpaced growth in risk-weighted assets vis-a-vis total regulatory capital resulted in a 200-basis points dip in UBN's capital adequacy ratio ("CAR") from 19.7% at FY19 to 17.5% at FY20. While the metric stood above the 15% regulatory minimum requirement for the bank's license category, GCR computed capital ratio registered within the low band at 14.6% at FY20 (FY19: 14.8%). Earnings are also viewed to be moderate, largely due to a weak cost to income ratio, which restrains internal capital generation. At the expected levels of retained internal capital generation and risk asset growth, UBN's GCR core capital is forecast to remain at the low band (<15%) over the rating horizon barring any injection of additional tier 1 capital.


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The risk position of the bank is a moderate rating negative. Although we note the sustained improvement in impaired loans following the loan book clean-up in FY17, with the bank's NPL ratio registering at 4.0% as at FY20 (FY19: 5.8%) against the industry average of 6%. However, we remain cautious of the sizable portion of the loan book classified under watchlist in both stage 2 and stage 3 as any adverse credit migration of the watchlist exposures is likely to have a material impact on the bank's risk profile moving forward. Positively, strong write-backs recorded by the bank resulted in negative credit losses (FY20: -1.5%; FY19: -1.7%) after significant credit losses were posted through capital and income in previous years.


While GCR noted management's commitment to diversifying lending, the loan book has remained skewed, with the oil and gas, and manufacturing sectors representing 30.7% and 22.5% of gross loans respectively as at FY20. Also, obligor concentration is relatively high, as the top twenty largest exposures accounted for 69% of the loan book as at FY20. We also take into account the bank's foreign currency exposures, constituting 48.3% of gross loans at FY20 (FY19: 45.5%), which is markedly higher than the industry average of 35%.


Funding and liquidity is a positive rating factor, underscoring the bank's stable funding structure and sufficiently liquid balance sheet. Stable core customer deposits constituted the bulk of the bank's funding base at 68.8% at FY20 (FY19: 69.7%). Equally, the relatively low-cost current and savings account (CASA) contributed 67.8% to customer deposits at FY20, helping moderation in cost of funds to 3.2% in 1Q FY21 (FY20: 4.2%; FY19: 5.6%). 


Also, the deposit book is well-diversified, with the single and top twenty depositors constituting less than 1% and 14% of core customer deposits respectively at FY20. This highly stable funding structure is expected to be maintained in light of the bank's strong deposit mobilization drive and retail penetration. Liquidity position of the bank has been satisfactory. Regulatory liquidity ratio stood at 41% at FY20 (FY19: 51%), while GCR liquid assets coverage of total wholesale funding and customer deposits registered at 2.6x and 49.1% respectively at FY20.

Outlook Statement

The stable outlook reflects GCR's opinion that UBN's financial profile will remain stable over the rating horizon. We expect to see the bank's credit losses and impaired loans ratio maintained below the industry averages of 3% and 6% respectively over the next 12-18 months, with no adverse credit migration, especially from the watchlist exposures. Also, retained internal capital generation is expected to be maintained at such levels that GCR core capital is not weighed significantly lower notwithstanding the high loan book growth and above industry average foreign currency exposures.


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Rating Triggers

The ratings could be upgraded if GCR core capital registers within the intermediate range of 15%-25% on a sustainable basis, alongside a material improvement in earnings. Also, we would expect to see continued improvement in asset quality, with significant reduction of the bank's watchlist exposures and loan book concentrations, as well as a containment of NPLs within the industry average. GCR could lower the ratings if asset quality deteriorates or growth in risk weighted assets continues to surpass internal capital generation, sustaining the downward pressure on the bank's capitalisation.


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