GCR Puts Union Bank of Nigeria on Rating Watch Evolving
GCR Rating affirmed Union Bank of Nigeria Plc’s national scale long-term and short-term issuer ratings of BBB+ (NG) and A2 (NG) respectively, according to its latest rating note on the financial service.
The emerging market rating agency also affirmed the bank’s N6.3 billion Series 2 Senior Unsecured Bonds national scale long-term issue rating of BBB+ (NG). It said the rating affirmation of Union Bank of Nigeria Plc balances a long-standing domestic franchise, stable funding structure and good liquidity against moderate capitalisation.
This was also matched by the bank’s high obligor concentration in the loan book and a dominance of foreign currency (FCY) loans. It accorded the bank outlook rating watch evolving.
“The evolving outlook reflects ongoing changes within the Bank’s ownership structure following the acquisition by Titan Trust Bank which is now a majority shareholder with a 94.1% equity stake as of 31 December 20222, GCR said in its update.
The ratings watch evolving outlook will be resolved when the acquisition process is concluded, and a full picture of the consolidated entity is formed, the note added.
Before then, GCR said UBN’s asset quality metrics are expected to remain within industry averages to support the Rating agency’s core capital ratio.
It said following the sale of the foreign subsidiary, Union Bank United Kingdom, UBN now operates a national commercial banking license.
According to the rating note, Union Bank’s revenues have been stable and driven by the core lending business although we note a considerable 27% (versus 20.5% in 2021) of operating income from market-sensitive income in 2022.
Over the next 12-18 months, GCR Rating said the firm does not foresee a material change in the Bank’s competitive position although initiatives across various business segments particularly the retail segment and digital innovation will drive growth.
The rating note reads that management and governance standards are assessed to be in line with regulatory requirements, although major litigation against the Bank is pending.
The Rating firm explained that UBN’s capitalisation is negative to the rating.
“Although the Bank’s regulatory capital adequacy ratio (CAR) of 14.4% was above the 10% minimum requirement for banks with national authorisation, GCR core capital ratio registered within the low band at 13.6% as of 31 December 2022.
“Over the next 12-18 months, the GCR core capital ratio is expected to inch up to about 17% buoyed by shareholders’ support and revaluation gains; nonetheless, the low reserve coverage of classified loans at 10% in 2022 may pressure capitalisation ratios if additional impairment charges are taken”, the rating note stated.
Also, GCR saw the bank’s risk as slightly negative to the rating. It said UBN’s asset quality metrics remained largely stable year on year, with a non-performing loans (NPL) ratio of 4%, a decline from 4.3% reported in 2021 and a low credit loss ratio of 0.5%.
However, the rating agency noted that the bank’s stage 3 loans – watchlist and impaired – as a percentage of gross loans rose to 7.4% from 6.9% in 2022 while stage 2 loans continue to account for a high 24.8% of gross loans.
GCR said UBN is also highly exposed to foreign currency risks as almost half of the loan book was FCY denominated in 2022, well above the industry’s average.
Obligor concentration is also above the regulatory threshold, exacerbated by the naira devaluation in June 2023, the rating note added. Over the next 12-18 months, while we expect the Bank to moderate FCY exposures and diversify lending, the lingering weak operating environment remains a threat to asset quality, GCR Rating said.
“Our assessment of UBN’s funding and liquidity is positive, underpinned by a stable and diversified funding base and a sufficiently liquid balance sheet.
“The Bank’s activities are largely funded by stable core customer deposits, with low-cost current and savings account (CASA) contributing 68.3% to customer deposits as of 31 December 2022, like the prior year.
“The funding base is well diversified with top 20 depositors accounting for a low 10.9% of total core customer deposits. UBN’s cost of funds of 4.5% in 2022 compares well with peers and the industry’s average”, the rating note explained.
UBN’s liquidity position is satisfactory; according to GCR which added that its liquid assets coverage of total wholesale funding and customer deposits registered at 4.2x and 60.2% respectively in 2022.
It said Union Bank FCY liquidity is also adequate with FCY deposits funding 69.2% of FCY loans as of 31 December 2022 and is supported by funding from foreign financial institutions.
“The Series 2 bonds (the bonds) were issued under Union Bank of Nigeria Plc’s NGN100bn Debt Issuance Programme on September 7, 2018.
“The issuer raised an aggregate sum of N6.3 billion in Series 2 bonds issuance, at a fixed annual interest rate of 15.75%. The Series 2 Bonds have a tenor of seven years, with a legal maturity date of 03 September 20252, GCR said.
The rating note said the Bonds constitute senior, direct, irrevocable, and unsubordinated obligations of the Issuer, and rank pari passu without any preference among themselves and all unsecured and unsubordinated indebtedness and monetary obligations of the Issuer, present and future, but in the event of insolvency, only to the extent permitted by applicable laws relating to creditors’ rights.
“Being a senior unsecured debt, the bond bears the same probability of default as the Issuer and reflects similar recovery prospects to senior unsecured creditors in the event of a default”.
GCR said UBN has met all obligations on the bonds issued on a timely basis thus far, with no breach of negative pledges/covenants by the Issuer. Naira Devaluation Deepens Economic Crisis in Nigeria