(The following statement was released by the rating agency)
Fitch Ratings-London-November 04:
Fitch Ratings has affirmed Union Bank of Nigeria PLC's (Union) Long-Term Issuer
Default Rating (IDR) at 'B-'. The Outlook is Stable. A full list of rating
actions is at the end of this rating action commentary.
Key Rating Drivers
IDRs, VIABILITY RATING AND NATIONAL RATINGS
The IDRs of Union are driven by its standalone creditworthiness, as expressed by
its Viability Rating (VR). Union's VR is conditioned by Nigeria's operating
environment, with weak macroeconomic conditions, policy uncertainty and
regulatory intervention influencing the bank's standalone creditworthiness.
Union's VR further reflects a nominal franchise concentrated in Nigeria, weak
profitability, a large stock of Stage 2 and 3 loans (under IFRS 9), low capital
buffers and only adequate funding and liquidity.
Union's impaired loans (Stage 3 loans under IFRS 9) ratio (22.1% at end-1H19) is
very high, driven primarily by four large exposures in the power sector and oil
and gas sector. Union's reported non-performing loans ratio (7.1% at end-1H19)
reflects management's view of cash flow and collateral characteristics on Stage
3 loans. However, according to our global bank rating criteria, we consider all
Stage 3 loans to be impaired, and this explains our higher ratio. Stage 2 loans
measured at a further 16% of gross loans at end-1H19. Reserve coverage of Stage
3 loans is low (29.7% at end-1H19).
Union is exposed to high concentrations by sector and single obligor. The
20-largest loans represented 68% of gross loans and 2.8x Fitch Core Capital
(FCC) at end-1H19. Union is also highly exposed to the volatile oil and gas
sector, which represented 34% of gross loans at end-1H19.
Union's net interest margins, at 6%, are in line with the average reported by
the bank's direct peers. However, Union's ability to generate sufficient
revenues from operations to cover the bank's operating expenses is challenged,
as demonstrated by a high cost-to-income ratio of 84.1%.
The bank's capital levels were materially reduced on adoption of IFRS 9 in 2018.
Union's FCC/risk-weighted assets (RWA) ratio declined to 15.9% at end-1H19 from
31.1% at end-2017, following significant write-offs. Capital is highly
vulnerable to unreserved Stage 2 and 3 loans. Unreserved Stage 3 loans were
equivalent to 63.8% of FCC at end-1H19.
Union benefits from a strong retail deposit base, which accounted for 47% of
customer deposits at end-1H19, providing a low-cost source of stable funding.
Single depositor concentration is in line with peers', with Union's 20-largest
deposits accounting for 19% of total customer deposits at end-1H19. Union
complied with the regulatory loans-to-deposits ratio at end-September 2019.
The Stable Outlook reflects Fitch's base case expectation that upside and
downside risks to Union's credit profile are equally balanced in the near-term.
Union's National Ratings reflect the bank's creditworthiness relative to other
Nigerian issuers.
Key Assumptions
SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch believes that sovereign support to Nigerian banks cannot be relied upon
given Nigeria's weak ability to provide support, particularly in foreign
currency. Therefore, the Support Rating (SR) and Support Rating Floor (SRF) are
'5' and 'No Floor', respectively. This reflects our view that senior creditors
cannot rely on receiving full and timely extraordinary support from the Nigerian
sovereign if any of the bank become non-viable.
RATING SENSITIVITIES
IDRs, VIABILITY RATING AND NATIONAL RATINGS
Union's Long-Term IDR is sensitive to a change in the bank's VR. Downside
pressure is most likely to result from a significant increase in loan impairment
charges or write-offs, which could erode capital. A positive rating action is
unlikely in the short-term given the bank's asset-quality risks.
Union's National Ratings are sensitive to a change in the bank's
creditworthiness relative to other Nigerian issuers.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating and Support Rating Floor are sensitive to a change in
assumptions around the propensity or ability of the sovereign to provide timely
support to the bank. Given Nigeria's weak sovereign ratings, this is not our
base case.
ESG Considerations
The highest level of environmental, social and governance (ESG) credit relevance
for Union is a score of 3. This means ESG issues are credit-neutral or have only
a minimal impact on the entity, either due to their nature or to the way in
which they are being managed by the entity.
Union Bank of Nigeria PLC; Long Term Issuer Default Rating; Affirmed; B-; RO:Sta
; Short Term Issuer Default Rating; Affirmed; B
; National Long Term Rating; Affirmed; BBB-(nga)
; National Short Term Rating; Affirmed; F3(nga)
; Viability Rating; Affirmed; b-
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF
Contacts:
Primary Rating Analyst
Janine Dow,
Senior Director
+44 20 3530 1464
Fitch Ratings Ltd
30 North Colonnade, Canary Wharf
London E14 5GN
Secondary Rating Analyst
Kurt Boere,
Senior Analyst
+44 20 3530 2707
Committee Chairperson
Christian Scarafia,
Senior Director
+44 20 3530 1012
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. 12 Oct 2018)
https://www.fitchratings.com/site/re/10044408
National Scale Ratings Criteria (pub. 18 Jul 2018)
https://www.fitchratings.com/site/re/10038626
Short-Term Ratings Criteria (pub. 02 May 2019)
https://www.fitchratings.com/site/re/10073011
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/site/dodd-frank-disclosure/10100303
Solicitation Status
https://www.fitchratings.com/site/pr/10100303#solicitation
Endorsement Policy
https://www.fitchratings.com/regulatory
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