London-17 February 2017: Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of United Bank for Africa Cameroon (UBA CAM), United Bank for Africa Senegal (UBA SEN) and United Bank for Africa Ghana (UBA Ghana) at ‘B-‘. The Outlooks are Stable. A full list of rating actions is listed at the end of this commentary.
The three banks are subsidiaries of Nigeria’s United Bank for Africa Plc (UBA; B/Stable/b). UBA controls 100% of UBA CAM, 86% of UBA SEN and 91% of UBA Ghana.
The KEY RATING DRIVERS are as follows IDRS, VIABILITY RATINGS, SUPPORT RATINGS
The Long-Term IDRs of UBA CAM, UBA SEN and UBA Ghana are driven by their standalone financial strength, as defined by their ‘b-‘ Viability Ratings (VR), and are also underpinned by Fitch’s view of potential support from UBA..
The VRs of the three subsidiaries are constrained by the weak environments in which they operate. The economies of the three countries are fairly underdeveloped, banking sectors operate with large single-name concentrations and limited capital buffers, in our view, and the prudential regulations for banks, though improving, fall short of international best practice guidelines. Fitch rates Cameroon ‘B’/Stable and Ghana ‘B’/Negative.
The VRs also consider the banks’ limited franchises. None of the banks are systemically important in their domestic markets. Single-name concentrations in both loans and deposits are very high across the three banks, exposing them to considerable event risks. Currently, the banks’ top 20 exposures represent 70% or higher of total exposures and sector concentrations can also be high. Oil-related loans represent 30% of UBA CAM’s loan portfolio, for example.
Performance indicators are strong at the banks, particularly in UBA Ghana, and their balance sheets are liquid. This is credit-positive because it provides some protection against the considerable liquidity risks arising from notable asset and liability maturity gaps. The banks’ ability to build up capital internally is positive because this will support the parent’s ambitious growth plans for its subsidiaries.
Reported impaired loans represent below 4% of gross loans across the banks, and impaired loan ratios are far better than the averages reported by their domestic peers (14% in Cameroon, 16% in Senegal and 19% Ghana). This is explained by the relatively unseasoned loan portfolios (UBA Ghana, UBA CAM and UBA SEN were respectively established in 2004, 2007 and 2009) and by the relatively higher-quality customers they target.
The three subsidiaries lend to leading domestic corporate and public sector entities and these loans dominate the portfolios, representing around 70% – 90% of total loans. Reported losses in these portfolios are small but, in our view, published impairment figures may not reflect the full extent of the risks.
Our view is that the banks’ capital buffers are limited, considering the risks to which they are exposed. Reported regulatory capital ratios comfortably meet local Basel 1 requirements (UBA CAM: 11.4% at end-June 2016; UBA Sen: 25% at end-September 2016; UBA Ghana 25.7% at end-September 2016) but these measures must be viewed in the context of a balance sheet where between one-third and a half of assets comprise government bonds and other 0% risk-weighted assets, which flatter capital ratios. In our opinion, the banks’ loss absorption capacity is weaker than prudential ratios suggest. This varies across the banks, with UBA SEN reporting a higher tangible common equity to tangible assets ratio (14.4% at end-September 2016), compared with UBA CAM (8% at end-June 2016) and UBA Ghana (8.9%).
The banks’ funding structures are weak, dominated by short-term and highly concentrated customer deposits. The maturity profile of corporate loans is also short-term (averaging three months, but frequently rolled over), while retail loans can be extended for up to three to five years. Contractual asset and liability maturity gaps are considerable. No hedging instruments are in place, but the banks stockpile large amounts of government bonds that can readily be repo’ed at local central banks to provide immediate liquidity if required.
UBA’s ‘b’ VR is used as the anchor from which to derive the ‘5’ Support Ratings (SR) assigned to the three banks. The three banks are an integral part of the group’s central and western African franchise. However, the subsidiaries are all small relative to the parent. UBA Ghana is the largest of the three subsidiaries, representing 8% of consolidated group assets. This suggests that the potential cost to the group of providing support to the subsidiaries, if required, would not be too onerous. In our view, UBA’s propensity to support its subsidiaries is high but its ability to provide external support, if required, cannot be relied on.]
IDRS, VR, SR
An improvement in the VRs of UBA CAM, UBA SEN and UBA Ghana could trigger upgrades of their Long-Term IDRs. However, significant improvements in concentration risk and funding profiles would be required before we would consider upgrading their VRs. The banks’ Long-Term IDRs could also be upgraded if UBA’s VR is upgraded. Considering the tough current operating conditions for Nigeria’s banks, this is unlikely in the foreseeable future.
A downgrade of the three banks’ Long-Term IDRs would require a simultaneous downgrade of their VRs and a reduced probability of support from UBA. We consider this to be unlikely in the foreseeable future.