Announcements Financial Institutions Rating Alerts

GCR Affirms Union Bank of Nigeria Plc’s National Scale Long-term and Short-term Issuer Ratings of BBB+(NG) and A2(NG) Respectively, Outlook Revised to Stable from Negative.

Lagos, 22 September 2021 – 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-à-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.

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.

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.

Analytical contacts

Primary analyst Abdul Mukhtar Financial Institutions Analyst
Lagos, NG Abdullahim@GCRratings.com +2341 904 9462
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Financial Institutions, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, February 2021
GCR Financial Institutions Sector Risk Score, February 2021

Ratings history

Union Bank of Nigeria Plc

Rating class Review Rating scale Rating Outlook/Watch Date
Long Term issuer Initial National BBB+(NG) Stable Outlook June 2015
Short Term issuer Initial National A2(NG) June 2015
Long Term issuer Last National BBB+(NG) Negative Outlook July 2020
Short Term issuer Last National A2(NG) July 2020

Risk score summary

Rating Components & Factors Risk Scores
Operating environment 7.25
Country risk score 3.75
Sector risk score 3.50
Business profile 1.00
Competitive position 1.00
Management and governance 0.00
Financial profile (1.25)
Capital and Leverage (2.00)
Risk (0.25)
Funding and Liquidity 1.00
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 7.00

Glossary

Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Income Money received, especially on a regular basis, for work or through investments.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATING

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

Subsequent to an appeal by the rated entity, the national scale financial strength rating was revised as reflected in the announcement.

The credit ratings have been disclosed to Union Bank of Nigeria Plc. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Union Bank of Nigeria Plc participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from Union Bank of Nigeria Plc and other reliable third parties to accord the credit ratings included:

  • The audited financial results to 31 December 2020
  • Four years of comparative audited numbers
  • Other related documents.
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