Lagos Nigeria, 30 July 2020–Global Credit Ratings has today affirmed the national scale ratings assigned to Union Bank of Nigeria Plc of BBB+(NG) and A2(NG) in the long and short term respectively, with the outlook accorded as Negative. The ratings are valid until June 2021.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Union Bank of Nigeria Plc (“UBN” or “the bank”) based on the following key criteria:
The ratings of UBN takes in consideration, the improved capitalisation and sustained market share (in terms of total industry asset) of 4.5% as at December 2019. Though asset quality appears to have improved in FY19, the sustained weighting of the bank’s exposure in the challenged oil and gas sector remains a rating negative. Furthermore, while management has discussed some of its strategic responses to the macro-economic challenges arising from COVID-19 with Global Credit Rating Company (“GCR”), the effectiveness of the initiatives can only be accurately evaluated over time, specifically, when the full impact of the pandemic on the local banking operating environment is determinable, thus the Negative rating outlook.
UBN’s capitalisation metrics improved significantly in FY19 and is considered satisfactory vis-à-vis the bank’s risk level. Shareholders’ funds increased by 11.8% to N252.3bn, underpinned by strong internal capital generation. In addition, the bank issued subordinated debt of N30bn during the year, boosting the capital adequacy ratio to 19.7% (FY18: 16.4%), against the required minimum of 15% for an international bank. The bank’s capitalisation is expected to improve further upon the conclusion of the ongoing divestment from a subsidiary, Union Bank UK.
On the back of the loan book clean-up exercise undertaken by UBN in FY18, gross impaired loans moderated to N34.8bn at FY19, translating to an improved gross non-performing loan ratio of 5.8% (FY18: 8.4%). However, concerning is the fact that UBN’s exposures remained significantly weighted towards the challenged oil and gas sector, with a single obligor in this sector accounting for 47% of impaired credits at FY19. Also, loan loss provision coverage of impaired loans and the entire stage 3 loans is considered low at 46.6% (FY18: 67.8%) and 27.6% respectively. In GCR’s opinion, pressure on asset quality is likely to further intensify in the short to medium term, given the current challenged and uncertain operating environment. As at 1Q FY20, gross NPL ratio stood at 5.9%.
UBN’s liquidity position appears strong, based on the highly liquid balance sheet position at FY19, with the liquid assets to short-term funding ratio improving to 52% at the balance sheet date (FY18: 39%). To augment liquidity, the bank issued series 3 and 4 commercial papers totalling N25.6bn in 1Q FY20.
Overall profitability improved in FY19, largely supported by the non-interest income (particularly recoveries). Interest income grew by 11.2% during the year, but a higher 20.2% increase in interest expense constrained margin and saw net interest income increased marginally by 1.8% to N52.5bn. Non-interest income increased by 24.8% to N42.8bn (of which N12bn relates to recoveries). Profitability was further enhanced by the absence of impairment and a relatively flat operating expense. Though cost ratio moderated to 74.5% (FY18: 83.1%), it measured above the industry average of 67%. Accordingly, pre-tax profits rose by 37.5% to N24.8bn, and was well ahead of budget. As a result, ROaE and ROaA rose to 10.5% and 1.5% respectively from 6.4% and 1.2% in FY18. Performance as at 1Q FY20 reflects a significant improvement relative to the corresponding period in FY19, albeit measures below budget on annualised basis.
An upward movement in the rating may follow sustained profitability and capitalisation metrics at high levels, in addition to strong asset quality and liquidity indicators. However, rating will be sensitive to deterioration in asset quality, as well as material decline in profitability and liquidity metrics.
NATIONAL SCALE RATINGS HISTORY
Initial rating (June 2015)
Long term: BBB+(NG)
Short term: A2(NG)
Last rating (June 2019)
Long term: BBB+(NG)
Short term: A2(NG)
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for rating Banks and Other Financial Institutions, updated March 2017
Glossary of Terms/Ratios, February 2016
UBN rating reports (2015-19)
RATING LIMITATIONS AND DISCLAIMERS
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The ratings were solicited by, or on behalf of, Union Bank of Nigeria Plc, and therefore, GCR has been compensated for the provision of the ratings.
Union Bank of Nigeria Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings above were disclosed to Union Bank of Nigeria Plc with no contestation of/changes to the ratings.
The information received from Union Bank of Nigeria Plc and other reliable third parties to accord the credit ratings included the latest audited annual financial statements as at 31 December 2019 (plus four years of comparative numbers), latest internal and/or external report to management, full year 2020 budgeted financial statements, year-to-date unaudited accounts to 31 March 2020, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.