Fitch Affirms Union Bank of Nigeria PLC at 'B-'; off RWN; Outlook Negative

(The following statement was released by the rating agency)
Fitch Ratings-London-06 October 2020:
Fitch Ratings has affirmed Union Bank of Nigeria PLC's (Union) ratings,
including the bank's Long-Term Issuer Default Rating (IDR) at 'B-', and
removed them from Rating Watch Negative (RWN). The Outlook is Negative.

The removal of the RWN on Union's Long-Term IDR, Viability Rating (VR) and
National Ratings reflects Fitch's view of receding near-term risks to the
bank's credit fundamentals from the economic fallout arising from the oil
price slump and coronavirus pandemic.

In our opinion the impact of the economic downturn on Union's credit profile
is largely contained at the bank's current rating level and it will take
several quarters before the full extent of the crisis on corporates and
households is seen in its financial metrics. Since our previous rating action
in March, regulatory forbearance on asset classification and banks' own debt
relief measures have significantly eased the sector's asset-quality pressures.
Debt relief measures are, nevertheless, temporary and with the eventual easing
of fiscal and monetary support from the Central Bank of Nigeria (CBN), we see
a material risk that bank asset quality could deteriorate faster, unless
economic recovery gathers pace.

The Negative Outlook on the Long-Term IDR reflects our view that Union's
capitalisation and leverage are highly vulnerable to unreserved Stage 3 loans,
which were equivalent to 19.1% of Fitch Core Capital (FCC) at end-1H20.
Key Rating Drivers
IDR AND VR

The Long-Term IDR of Union is driven by its intrinsic creditworthiness, as
defined by its 'b-' VR. Sensitivities to capitalisation and leverage from
persistent weakness in asset quality highly influence the VR. Union's
asset-quality metrics have been volatile since 2016, reflecting weak
historical underwriting standards that have resulted in high borrower
concentration and culminated in a large stock of Stage 2 and 3 loans. Our
expectation is that Union's asset quality will remain weak over the medium
term given sustained downside risks to Nigeria's operating environment.

Union's impaired (Stage 3) loans ratio increased to 12.4% at end-1H20 from
9.9% at end-2019, due mainly to the reclassification of a large oil-related
exposure (equivalent to 26.1% of Stage 3 loans and 2.8% of gross loans).
Union's Stage 3 loans ratio was the highest of Fitch-rated Nigerian banks at
end-1H20, while its loan loss allowances-to-Stage 3 loans of 62.6% at end-1H20
(end-2019: 76%) was among the lowest.

Additionally, Union's level of Stage 2 loans, equivalent to 21% of gross loans
at end-1H20, and very high loan concentrations by sector and single obligor
are credit-negative. Union's exposure to the volatile oil and gas sector was
32% of gross loans at end-1H20, above the sector average of 28%. Union's
20-largest loans represented 65% of gross loans and 2.7x FCC at end-1H20.

Union's FCC ratio of 16.2% at end-1H20 was in line with other tier-two
Nigerian banks'. Union's total capital adequacy ratio of 19.2% at end-1H20 was
comfortably above the current minimum regulatory capital requirement of 15%,
supported by Tier 2 qualifying debt of NGN30 billion. However, Union's capital
buffers are sensitive to high loan concentrations and the performance of
lowly-reserved Stage 2 and 3 loans.

The VR also reflects Union's position as a tier-two bank with operations
concentrated mainly in Nigeria. Union has an established brand and a
nationwide presence and operates across all business segments but lacks clear
competitive advantages compared with large Nigerian banks due to its small
franchise and market share (around 5%). Union's decision to divest the UK
operations (subject to regulatory approvals) will not fundamentally alter the
bank's franchise.

Union's operating profit/risk-weighted assets (RWAs) ratio of 2.4% in 1H20
compares well against small and medium-sized bank peers', but remains
sensitive to loan impairment charges (LICs) given weak coverage levels.
Trading income, up 2.4x year-on-year in 1H20, boosted earnings but Union's
still high cost structure (cost/income ratio of 69.4% in 1H20) is a constraint
on profitability, which has gradually improved over recent periods as
business-reorganisation initiatives are being completed. Profitability in 2H20
will be under pressure from net interest margin compression, lower trading
gains, and our expectation for higher LICs given the weak economic
environment.

Union benefits from a stable retail deposit base, which accounted for 51% of
customer deposits at end-1H20, providing a low-cost source of funding. Union
complied with the regulatory minimums for the loans-to-deposits ratio, the
cash reserve requirement and the liquidity ratio at end-1H20. Union's
loans/customer deposits ratio (63% at end-1H20) is low and liquidity coverage
is adequate in local and foreign currencies.

SUPPORT RATING AND SUPPORT RATING FLOOR

Sovereign support to banks cannot be relied on given Nigeria's weak ability to
provide support, particularly in foreign currency. The Support Rating Floor
(SRF) of all Nigerian banks is 'No Floor' and all Support Ratings (SR) are
'5'. This reflects our view that senior creditors cannot rely on receiving
full and timely extraordinary support from the Nigerian sovereign if any of
the banks become non-viable.

NATIONAL RATINGS

Union's National Ratings reflect the bank's creditworthiness relative to that
of other issuers in Nigeria and are driven by the bank's standalone strength.
Union's National Ratings are among the lowest of Fitch-rated Nigerian banks,
given the bank's weak asset quality and capitalisation and leverage relative
to peers'.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating
action/upgrade:

Rating upside is limited. The Outlook could be revised to Stable if the bank's
level of unreserved Stage 3 loans relative to FCC, which has been highly
volatile, reduces to below 10% for a sustained period, and the bank's FCC
ratio remains above 15%.

Factors that could, individually or collectively, lead to negative rating
action/downgrade:

A sharp increase in the bank's unreserved Stage 3 loans/FCC ratio to near its
recent peak of 51% at end-2018 and/or a drop in the bank's FCC ratio below 15%
could trigger a rating downgrade.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond
issuers have a best-case rating upgrade scenario (defined as the 99th
percentile of rating transitions, measured in a positive direction) of three
notches over a three-year rating horizon; and a worst-case rating downgrade
scenario (defined as the 99th percentile of rating transitions, measured in a
negative direction) of four notches over three years. The complete span of
best- and worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on
historical performance. For more information about the methodology used to
determine sector-specific best- and worst-case scenario credit ratings, visit
[https://www.fitchratings.com/site/re/10111579]
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The
principal sources of information used in the analysis are described in the
Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit
relevance is a score of '3'. This means ESG issues are credit-neutral or have
only a minimal credit impact on the entity, either due to their nature or the
way in which they are being managed by the entity. For more information on
Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Union Bank of Nigeria PLC; Long Term Issuer Default Rating; Affirmed; B-;
Rating Outlook Negative
; Short Term Issuer Default Rating; Affirmed; B; Rating Watch Off
; National Long Term Rating; Affirmed; BBB-(nga); Rating Watch Off
; National Short Term Rating; Affirmed; F3(nga); Rating Watch Off
; Viability Rating; Affirmed; b-; Rating Watch Off
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF

Contacts:
Primary Rating Analyst
Mahin Dissanayake,
Senior Director
+44 20 3530 1618
Fitch Ratings Ltd
30 North Colonnade, Canary Wharf
London E14 5GN

Secondary Rating Analyst
Kurt Boere,
Senior Analyst
+44 20 3530 2707

Committee Chairperson
Olga Ignatieva,
Senior Director
+7 495 956 6906

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email:
louisa.williams@thefitchgroup.com

Additional information is available on www.fitchratings.com

Applicable Criteria
Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption
sensitivity) (https://www.fitchratings.com/site/re/10110041)
National Scale Rating Criteria (pub. 08 Jun 2020)
(https://www.fitchratings.com/site/re/10121358)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
(https://www.fitchratings.com/site/dodd-frank-disclosure/10138520)
Solicitation Status
(https://www.fitchratings.com/site/pr/10138520#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10138520#endorsement_status)
Endorsement Policy
(https://www.fitchratings.com/site/pr/10138520#endorsement-policy)

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