Lagos Nigeria, 10 July 2019–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 Stable. The ratings are valid until June 2020
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:
UBN ratings take into consideration its competitive position as a mid-sized player in the Nigerian banking industry, the decline in market share (in terms of industry’s total assets) to 3.8% at FY18 (FY17: 4.2%), as well as the ongoing effort by management to reposition the Bank among the top-tier players.
Shareholders’ funds declined 34.3% to N225.6bn at FY18, following a significant write-off totalling N132.6bn during the year (partly arising from the reassessment of the loans and advances book under IFRS 9 and management’s decision to write-off some of the previously fully provisioned non-performing loans (“NPLs”)). Accordingly, the risk weighted capital adequacy ratio (“CAR”) declined to 16.4% at FY18 (FY17: 17.8%), albeit this was supported by CBN’s IFRS 9 transition arrangement (which allows banks to gradually release additional provision from the process into CAR computation over a four-year period). Going forward, management remain confident of being able to sustain CAR above the required minimum. The CAR ended up at 16.5% at 1Q FY19.
On the back of the loan book clean-up, gross NPL ratio declined to 8.7% at FY18 (FY17: 19.8%) and further reduced to 7.6% at 1Q FY19. While management plans to maintain the ratio below the FY18 position in FY19, GCR does not expect a significant reduction in the NPL ratio in the short term, considering the impact of the tough operating environment.
Liquidity risk is considered low as the liquid and trading assets to short term funding ratio ranked high (relative to peers) at 33.1% at FY18. Also, statutory liquidity ratio closed FY18 firmer at 38% (FY17: 35%). GCR does not envisage a major change in liquidity position in FY19.
The Bank successfully raised a total of N13.5bn through debt issuance in FY18 (comprising fixed rate Series1 and Series 2 bonds of five and seven years, at 15.5% and 15.75% respectively). In addition, UBN raised a sum of N23.1bn through Series 1 and Series 2 commercial paper Issue in 1Q FY19 to further augment its working capital.
UBN’s key performance metrics were under pressure in FY18, underpinned by the slow-down in loan growth. Total operating income was down 14.6% year-on year and operating expenses rose by 12.5%, translating to a higher cost ratio of 82.9% in FY18 (FY17: 63.0%). Notwithstanding this, a pre-tax profit of N18.5bn was achieved, representing 32.6% increase from the previous year, as major write-off for the period was charged directly to reserves. Performance at 1Q FY19 reflects that performance at the pre-tax level was in line with budget on annualised basis, largely supported by growth in non-interest income.
An upward movement in the ratings may follow a markedly improved competitive positioning, a rebound to strong asset quality and profitability metrics. However, the ratings may be revised downward following a significant weakening in profitability, particularly from credit losses, or a further decline in asset quality.
NATIONAL SCALE RATINGS HISTORY
Initial rating (June 2015)
Long term: BBB+(NG)
Short term: A2(NG)
Last rating (June 2018)
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 (2015-18)
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 2018 (plus four years of comparative numbers), latest internal and/or external report to management, full year 2019 budgeted financial statements, year-to-date unaudited accounts to 31 March 2019, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.