Lagos Nigeria, 9 November 2018–Global Credit Ratings has affirmed the national scale ratings assigned to United Bank for Africa Plc of AA-(NG) and A1+(NG) in the long and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the long term international scale rating assigned to United Bank for Africa Plc of B+; with the outlook accorded as Stable. The ratings are valid until September 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to United Bank for Africa Plc (“UBA” or “the bank”) based on the following key criteria:
UBA’s ratings reflect its established franchise, significant domestic market share (being one of the top-tier banks in Nigeria) and status as a systemically important bank. Further rating support is derived from the bank’s risk appropriate capitalisation, comfortable liquidity, as well as geographic and earnings diversification, with operations in twenty African countries and offices in three global financial centres (London, Paris and New York).
UBA’s capitalisation is considered satisfactory for the current risk level, with a risk weighted capital adequacy ratio of 20% and 18.4% at FY17 and 3Q FY18 respectively, above the regulatory minimum of 15%. Supported by strong internal capital generation, shareholders’ funds grew consistently over the years and stood at N529.4bn at FY17, representing a compounded annual growth rate of 22.5% over a five-year review period.
The gross non-performing loans (“NPL”) almost doubled (rising by 89.8%) to N114.8bn at FY17, largely impacted by the downgrade of a single large exposure, underpinning the gross NPL ratio rise to 6.7% at FY17, from 3.9% at FY16. According to management, remedial action on the loan has commenced and recovery prospects are considered high. Specific provision coverage of impaired loans stood at 22.0% at FY17 (FY16: 36.0%). Consequently, capital value at risk (NPLs net of provisions to capital) was a higher 9.7% at FY17 (FY16: 1.9%). At 3Q FY18, the NPL ratio stood at 7.2%.
Although the contractual and behavioural mismatch of assets and liabilities in FY17 reflected a liquidity gap of N1,631.7bn and N712.7bn respectively within the critical ‘less than one-month’ maturity bucket (equivalent to 3.1x and 1.3x of shareholders’ funds respectively), liquidity risk is mitigated through maintaining a sizeable portion of liquid assets. The bank’s liquidity profile is further supported by USD500m Eurobond facility raised during the year, as well as available credit lines from other financial institutions. UBA’s statutory liquidity ratio ranged between 33.8% and 55.5% in FY17, against the regulatory minimum of 30%.
The bank reported a pre-tax profit of N105.3bn in FY17, representing a 16.1% year-on-year growth. While net interest income was largely supported by improved investment yields and funding costs, non-interest income was driven by increase in transaction related income and foreign exchange gains. Operating expenses rose by 23.7% on the back of increase in staff costs, IT and other administrative expenses, resulting in a cost to income ratio of 57.8% at FY17 (FY16: 56.3%). Overall, the return on average equity and assets stood at 16.6% (FY16: 19.0%) and 2.1% (FY16: 2.3%) respectively in FY17. In 3Q FY18, the bank delivered a pre-tax profit of N79.1bn, comparing favourably with the corresponding period in FY17 and in line with budget on annualised basis.
Substantially improved asset quality, positive earnings profitability, and capitalisation metrics, as well as further enhancement of geographic and earnings diversification benefits, would be positively considered. However, downward ratings movement may emanate from a significant deterioration in asset quality, liquidity, capital and profitability metrics. Furthermore, the international scale rating will be sensitive to changes in the sovereign rating of Nigeria.
NATIONAL SCALE RATINGS HISTORY
Initial rating (August 2000) Last rating (October 2017)
Long term: AA(NG) Long term: AA-(NG)
Short term: A1+(NG) Short term: A1+(NG)
Rating outlook: Stable Rating outlook: Stable
INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (August 2013) Last rating (October 2017)
Long term international scale: BB- Long term international scale: B+
Rating outlook: Stable Rating outlook: Stable
Yinka Adeoti/Julius Adekeye
+234 1 904-9462
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for rating Banks and Other Financial Institutions, updated March 2017
Glossary of Terms/Ratios, February 2016
UBA rating reports (2000-17)
RATING LIMITATIONS AND DISCLAIMERS
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings 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, United Bank for Africa Plc, and therefore, GCR has been compensated for the provision of the ratings.
United Bank for Africa 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 United Bank for Africa Plc with no contestation of/changes to the ratings.
The information received from United Bank for Africa Plc and other reliable third parties to accord the credit ratings included the latest audited annual financial statements as at 31 December 2017 (plus four years of comparative numbers), unaudited financial statements for the period ended 30 September 2018, latest internal and/or external audit report to management, full year detailed budgeted financial statements for 2018, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.