Lagos Nigeria, 15 August 2019–Global Credit Ratings has today affirmed the national scale long term rating of BBB+(NG) accorded to the Series 1 and Series 2 Bonds issued under the N100bn Debt Issuance Programme(“DIP”); with a Stable outlook. The ratings are valid until June 2020.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings based on the following key criteria:
Union Bank of Nigeria Plc (“UBN” or “the Bank”) was enabled by the resolution of its Board of Directors (“the Board”) to issue Bonds in Series or Tranches from time to time, with varying maturities and variable rates of interests, registered the DIP with the Securities and Exchange Commission in September 2018. The Bank through its Series 1 and Series 2 Bonds (“the Bonds”) raised an aggregate sum of N13.5bn in September 2018. The Bonds (which were the first to be issued under the DIP) were of very similar terms except for the rates and tenor, and constitute direct, unconditional, unsecured and senior obligations of the Bank.
UBN is s a mid-sized player in the Nigerian banking industry in terms of balance sheet size, capitalisation and geographical presence. GCR affirmed the Bank’s long-term national scale rating at ‘BBB+(NG)’ with a Stable outlook in June 2019.
The Bank’s 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.
Capitalisation metrics weakened during the year with the capital to total assets ending down at 15.8% (FY17: 23.7%). This followed a significant 34.3% decline in total shareholders’ fund to N225.6bn, underpinned by write-off of N132.6bn. According to management, the additional write-off was necessitated by the reassessment of the loans and advances book under IFRS 9, as well as the Bank’s decision to fully write-off some of its non-performing loans. Accordingly, statutory 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.
As the Bonds are senior unsecured obligation of the Issuer, the Bonds bear the same rating as the Issuer, and any change in the rating assigned to the Issuer will directly affect the Bonds rating.
Performance report from the Trustees as at 31 May 2019 reflects the first coupon has been paid and there were no breach of negative pledge or covenants by the Issuer as at the date of the report.
Timely payment under the obligation directly on the performance of the Issuer. Hence, the ratings would be sensitive to a positive rating action on the Issuer. However, non-compliance with the set covenants, as well as a negative rating action on the Issuer could trigger a negative rating action on the Bonds.
NATIONAL SCALE RATINGS HISTORY
Initial rating* (July 2018) Last rating (December 2018)
Long term: BBB+(NG) Long term: BBB+(NG)
Short term: A2(NG) Short term: A2(NG)
Outlook: Stable Outlook: Stable
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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 2018
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.