Nigeria’s United Bank for Africa Ratings Affirmed; Outlook Stable

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We believe United Bank for Africa PLC (UBA) will continue to maintain sound earnings and asset quality over the next 12 months, despite the sluggish economy in Nigeria and the high economic risk in other parts of Africa where the group operates.

We are affirming our ‘B/B’ and ‘ngBBB/ngA-2’ ratings on UBA.

The stable outlook reflects that on Nigeria and our expectation that the group’s financial profile will remain broadly stable in the next 12 months.

S&P Global Ratings today affirmed its long- and short-term global scale issuer credit ratings on Nigeria-based United Bank For Africa PLC (UBA) at ‘B/B’. The outlook is stable. At the same time, we affirmed our long- and short-term Nigeria national scale ratings on the group at ‘ngBBB/ngA-2’.

The affirmation reflects our view that the group will maintain its top-tier competitive position in the Nigerian banking sector. UBA benefits from a good franchise in the corporate and retail segments in Nigeria and increasing geographic diversification. Overall, we think the group has an adequate business position. Furthermore, we believe that the group will display relatively stable asset quality and good earnings generation over the next 12 months.

We assess the group’s capital and earnings as moderate under our risk-adjusted capital (RAC) framework. We estimate UBA’s RAC ratio (before adjustments for diversification) at 5.2% for year-end 2016. We project that the RAC ratio will remain broadly stable over the next 12 months on the back of the group’s good earning capacity and expected stable cost of risk.

Our forecast assumptions include loan growth of around 20% (factoring in the expected depreciation of the Nigerian naira), stable interest margins, cost control, and moderate dividend distribution. On June 30, 2017, UBA’s capital adequacy ratio was 19.7%, which is well above the regulatory minimum of 15%, and we believe it will remain stable over the next 12 months.

We assess UBA’s risk position as adequate, which reflects our expectation that the group will exhibit broadly stable asset quality in the next 12 months. The group’s cost of risk increased to 2.1% in 2016 compared with 0.5% in 2015, before declining to 1.2% at end-June 2017.

This ratio compares well with the sector average. However, nonperforming loans (NPLs; loans overdue by 90 days or more) ratio increased to 4.2% at end-June from 3.9% at end-2016 (1.7% at year-end 2015) and was hit hard by the foreign currency shortages, which mainly affected the general commerce and oil and gas trading companies.

The Central Bank of Nigeria allowed banks to write-off fully provisioned NPLs the same year, without prejudice to the prudential guideline that requires banks to retain fully provisioned NPLs for one year before write-off. This was aimed at avoiding accumulation of NPLs, since banks were expected to record additional provisions in the context of the naira devaluation in 2016. As a result, UBA’s NPL coverage by provisions dropped to 60.1% at end-June 2017 from 83.3% at end-2016, after reaching about 100% on Sept. 30, 2016.

NPLs outside Nigeria accounted for 60% of the group’s total NPLs. We anticipate that credit losses will decline to about 1% in 2017-2018, while the NPL ratio will stabilize at around 4%-5% over the same period. Similar to other Nigerian banking groups, the UBA group extends loans in U.S. dollars (about 35% of total loans at end-2016), but this risk appears to be mitigated by receivables in the same foreign currency.

We consider the group’s funding to be above average and its liquidity to be adequate, owing to its steady and relatively low-cost, retail-deposit-based funding profile. Similar to its Nigerian peers, UBA exhibits contractual asset-liability mismatches, including in foreign currency.

Despite tightening monetary policy in Nigeria in 2016, the group maintained a stable cost of funding at about 3.6% as of end-June 2017. The group reported a net stable funding ratio of 143% as of the same date. Broad liquid assets covered short-term wholesale funding at about 4.5x as of the same date. UBA issued a $500 million Eurobond in May 2017. We understand that the group has sufficient U.S. dollar liquidity to meet its financial obligations in 2017.

The stable outlook on UBA reflects that on Nigeria and our expectation that the group’s financial profile will remain broadly stable in the next 12 months.

We would lower the ratings on UBA if we lowered the rating on Nigeria or observed a higher-than-expected deterioration in the group’s assets quality indicators over the next 12 months. We would also lower the ratings on UBA in the unlikely scenario of a significant drop in capitalization, leading to a RAC ratio (before adjustments for diversification) below 3%.

An upgrade is unlikely in the next 12 months because it would hinge on an upgrade of the sovereign and a decline in the economic risks faced by the Nigerian banking sector or a significant strengthening of capitalization, as reflected by a RAC ratio (before adjustments for diversification) sustainably exceeding 7%.

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