UBA Sees Mixed Ratings, Outlook Remains Stable
Indicating very high credit quality relative to other issuers, the United Bank for Africa (UBA) Plc long term national rating has been upgraded to AA+ from AA-, emerging market rating firm, GCR, said in a note today.
However, GCR said the pan African lender international rating scale dropped to B, indicating low levels of obligor/obligation creditworthiness from B+. At the same time, the national scale short-term rating was affirmed at A1+ (NG), with the outlook maintained as stable, according to GCR ratings note.
It said the ratings of the United Bank for Africa Plc reflect its sound competitive position, well-diversified operations, robust capitalisation, sound risk profile, and adequate funding and liquidity position.
These are, however, balanced against the relatively weak operating environment risk scores of its markets in the rest of Africa, GCR noted, adding that competitive position is a positive rating factor.
The rating report sees UBA as a top tier bank in Nigeria with a strong Pan-African banking franchise, complemented by good earnings and geographic diversification across 20 African countries and three international financial markets (London, Paris, and New York).
In the financial year 2020, UBA controlled a sizeable market share of 14.7%, 16.5% and 13.9% of the Nigerian banking industry’s total assets, loan portfolio and customer deposits respectively, according to the rating note.
The emerging market focused rating firm said the group has consistently demonstrated good revenue stability and growth, with its core earnings maintaining an upward trajectory over the review period.
“UBA is adequately capitalised relative to its risk level, with capital adequacy ratio consistently maintained well above the regulatory minimum of 15% over the review period”.
Similarly, the note hinted that the GCR computed core capital ratio stood at a robust 24.2% in the Q3 of the financial year 2021 from 21.8% in 2020 largely underpinned by the group’s good internal capital generation capacity.
“We believe the current capitalisation level provides adequate headroom for loss absorption, with the GCR core capital ratio expected to remain within similar strong range over the next 12-18 months”.
Also, loan loss provision is viewed to be adequate, with reserve coverage of impaired loans at 83.7% in the Q3 of the financial year 2021 from 86.4% in 2020. The positive risk assessment reflects the contained credit losses and below average non-performing loans, the rating note reads.
It added that in the third quarter of the financial year 2021, the group’s NPL ratio stood at 3.5%, from 4.8% in 2020, relative to the Central Bank of Nigeria tolerable limit of 5% and the industry average of about 6%.
Similarly, credit losses averaged 0.9% over the last five years and stood at 0.3% at the end of the third quarter of 2021 from 1.1% last year, comparing well with the estimated industry average of 3%.
“We expect the NPL ratio and credit losses to remain at sound range over the next 12-18 months, as the gradual macroeconomic environment recovery is anticipated to forestall any significant credit migration”, GCR said.
Analysis of the loan book indicated some degree of concentration risk by an obligor, with the 20 largest obligors accounting for 30.2% of the loan portfolio as of the third quarter of 2021, an improvement when compared with 34.2% seen in 2020.
Meanwhile, GCR ratings considered UBA’s robust funding and liquidity a rating strength. It explained that the group is predominantly funded by customer deposits, which constituted a sizeable 85.5% of the funding base in the third quarter of 2021 from 83.6% last year.
Customer deposits evidenced an upward trajectory over the review period, recording an average annual growth rate (CAGR) of 22.9% over a five-year period.
GCR analysts hinted that the sustained expansion in the group’s deposit book was largely underpinned by its extensive branch networks, digital platforms, and strong retail franchise to mobilise the low-cost deposits.
As a result, the relatively cheap current and savings account (CASA) deposits constituted a higher 82.3% of deposit pool in the third quarter of 2021, compared with 81.8% recorded in 2020.
This healthy deposit position underpinning the moderate cost of funds of 2.3% at the end of the third quarter earnings season in 2021, an improvement from 2.9% seen last year.
An analysis of the Pan-Africa lender deposit book reflects a well-diversified mix, with the top 20 depositors accounting for 7.4% of customer deposits in Q3 2021 from 9.6% in 2020.
Further augmenting UBA’s funding base is the Issuance of USD300m Eurobond in November 2021, which was oversubscribed, GCR Ratings said, adding that liquidity is positive, with liquid assets covering 11.4x and 53.5% of wholesale funding and customer deposits respectively at 2020.
“We also view the liquidity management of the foreign currency book to be sound, with foreign currency liquid assets covering 57.6% of total foreign currency liabilities in the financial year 2020”.
UBA group stable outlook reflects GCR’s expectation that the lender’s credit profile will be sustained at a sound level over the rating horizon.
“We believe the asset quality pressures have subsided, with no significant credit migration envisaged over the next 12-18 months, as such, credit losses and NPLs should stabilise at strong levels”, it said.
GCR analysts think the group’s healthy internal capital generation capacity should continue to support the capital base at a sufficient buffer for losses absorption.
Also, the funding and liquidity position is expected to remain adequate on the back of the group’s good deposit mobilisation capacity, particularly the low-cost CASA deposits.
“While the international scale rating has been revised downward on the back of criteria change, GCR believes that there is sufficient headroom to maintain a stable outlook on the international scale rating over the rating horizon”, ratings note reads.
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