“Fitch Ratings Affirms UBA’s Ratings with Stable Outlook, Removes Rating Watch Negative”

Date:

Fitch Ratings has affirmed United Bank for Africa (UBA) Plc’s ratings, including the Long-Term Issuer Default Rating (IDR) at ‘B’, and removed them from Rating Watch Negative (RWN). The Outlook is Stable.

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The removal of the RWN on UBA’s Long-Term IDRs, 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 crash and coronavirus pandemic.

Fitch believes that the economic downturn’s impact on UBA’s credit profile is tolerable at the current rating level, and it will take several quarters to see the full extent of the crisis on corporates and households in its financial metrics. Regulatory forbearance on asset classification and banks’ own debt relief measures have significantly eased pressures on the sector’s asset quality. However, these relief measures are temporary, and with the eventual easing of fiscal and monetary support from the Central Bank of Nigeria (CBN), there is a material risk that bank asset quality could deteriorate unless economic recovery gathers pace.

The Stable Outlook on UBA’s Long-Term IDR reflects Fitch’s view that the bank’s rating has sufficient headroom to absorb moderate shocks from sustained downside risks to the operating environment, the heightened level of risk in doing banking business, and resulting risks to its financial performance over the next 12-18 months.

**Key Rating Drivers:**

**IDRs, VR, and Senior Debt Ratings**

The IDRs and senior debt ratings are driven by UBA’s intrinsic creditworthiness, as defined by the bank’s ‘b’ VR. The VR considers UBA’s exposure to Nigeria’s volatile operating environment, but also the bank’s healthy profitability and adequate capitalization, providing reasonable capacity to absorb losses from the downturn. Asset-quality erosion has been limited to date. The bank’s sizeable non-loan assets, dominated by cash and balances, restricted deposits, and government securities, are also considered.

UBA’s pan-African franchise with subsidiaries in 19 countries outside of Nigeria accounts for 60% of net income and 29% of assets at the end of 1H20. Fitch views UBA’s ability to capitalize on business and trade flows and to attract deposits across the continent as a competitive advantage.

Asset-quality metrics compare well against peers, with UBA’s impaired (Stage 3 under IFRS 9) loans-to-gross loans ratio at 4.1% at the end of 1H20, supported by high reserve coverage at 104%. UBA’s lower oil and gas exposure at 21% of net loans is favorable compared to the sector average of 30%. The bank holds a significant stock of Stage 2 loans (19% of gross loans at end-1H20), exposing it to event risk.

**Profitability and Capitalization**

UBA’s profitability metrics have been consistently strong, with an operating profit-to-risk weighted assets (RWA) ratio of 5.4% at the end of 1H20. Despite higher loan impairment charges and falling asset yields, pressure on net interest income was offset by lower funding costs. UBA’s geographical footprint could lead to earnings volatility due to currency translation impacts.

Capitalization remains strong, with Fitch Core Capital/RWAs at 28.6% at end-1H20, driven by UBA’s low-risk weight density and highly liquid balance sheet.

UBA’s loan-to-deposit ratio of 48% at end-1H20 reflects a liquid balance sheet. The stability of its funding base comes from current and saving accounts, making up 78% of UBA’s customer deposit base.

**Senior Debt**

UBA’s senior unsecured debt is rated in line with the bank’s Long-Term IDR, reflecting the likelihood of default on these notes. Fitch assigns a Recovery Rating (RR) of ‘RR4’, indicating average recovery prospects.

**Support Rating and National Ratings**

Sovereign support to banks is unreliable given Nigeria’s weak ability to provide support. UBA’s National Ratings reflect its creditworthiness relative to other issuers in Nigeria, driven by the bank’s standalone strength.

**Rating Sensitivities**

**Positive:**
– A material improvement in operating conditions and sovereign upgrade.
– Sustained improvement in financial metrics, especially capitalization.

**Negative:**
– Negative rating action on the sovereign or a downward revision of the operating environment assessment.
– Substantial rise in UBA’s impaired loan ratio, or severe tightening in foreign-currency liquidity.

UBA’s senior unsecured debt is sensitive to changes in UBA’s Long-Term IDR. Fitch’s best-case rating upgrade scenario for financial institutions is three notches over three years, while the worst-case scenario is a four-notch downgrade over the same period.

OyinyeChukwu Paula
OyinyeChukwu Paulahttp://Vetiva%20Research
OyinyeChukwu Paula Position: Business Journalist, Naija247news OyinyeChukwu Paula is an accomplished business journalist contributing her expertise to Naija247news, one of Nigeria's leading news platforms. With a keen interest in economic affairs, financial markets, and corporate developments, Paula brings a wealth of knowledge to her reporting, delivering insightful analyses on the dynamic business landscape in Nigeria and beyond. Education: Paula holds a degree in Journalism from [Abia State University], where she honed her skills in investigative reporting and business journalism. Her academic background laid the foundation for her commitment to delivering accurate and timely news with a business-focused perspective. Professional Experience: Having amassed experience in the field, Paula's journalistic journey has been marked by a dedication to uncovering stories that impact the business community. Her work spans interviews with key industry figures, coverage of market trends, and in-depth analyses of economic policies. Areas of Expertise: Financial Markets: Paula provides comprehensive coverage of financial markets, offering insights into stock movements, currency fluctuations, and economic indicators. Corporate Affairs: With a focus on corporate activities, Paula delves into mergers and acquisitions, financial reports, and the strategies employed by leading companies. Economic Policy: Keeping a watchful eye on government policies, Paula explores their implications on businesses and the broader economy, providing readers with a nuanced understanding of economic developments. Contributions to Naija247news: Paula's bylines at Naija247news reflect her commitment to delivering quality journalism. Whether unraveling complex financial narratives or simplifying intricate economic concepts, she ensures that her audience is well-informed and empowered. Passion for Business Journalism: Beyond the newsroom, Paula is known for her passion for business journalism's role in fostering transparency and accountability. She believes in the power of information to drive positive change and economic growth. In a media landscape marked by rapid changes, OyinyeChukwu Paula stands out as a dedicated business journalist who continues to shape the discourse on economic matters, contributing significantly to Naija247news's mission of delivering credible and impactful news.

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