By Dipo Olowookere
The national scale ratings of BBB+(NG) and A2(NG) in the long and short term respectively assigned to Union Bank of Nigeria Plc by Global Credit Ratings (GCR) have been affirmed.
The ratings, placed on Rating Watch, are valid until January 2018, GCR said in a statement issued last week.
Explaining why the ratings were affirmed, GCR said Union Bank maintained a relatively stable market share of 3.6 percent (in terms of total assets), ranking UBN among Nigeria’s mid-tier banks.
After its recapitalisation in 2012, the bank embarked on a transformation journey to become one of the country’s leading mid-sized banks by 2018, a strategy management actively pursued in FY16.
Total shareholders’ funds grew 10.1 percent to N271.7 billion at FY16.
However, the bank’s capital adequacy ratio (CAR) declined to 13.3 percent (FY15: 15.3 percent), falling below the regulatory minimum of 15 percent.
CAR was impacted by an increase in risk weighted assets, caused by naira devaluation during the period.
To strengthen capitalisation, management is in the process of raising additional capital of about N50 billion by way of a Rights Issue. This is expected to be concluded before the end of FY17.
The bank’s gross non-performing loan (NPL) ratio remained relatively stable at FY16 (6.9 percent vs. 6.7 percent at FY15), but above Central Bank of Nigeria’s (CBN) tolerable limit of 5 percent.
Specific provision coverage of impaired loans reduced to 40 percent from 44.6 percent at FY15, while total coverage stood at 182 percent at FY16.
Management continue to focus on NPL recoveries, amidst a tightening credit risk granting criteria. Total recoveries as at 1H FY17 stood at N1.7 billion.
UBN’s regulatory liquidity ratio ranged between 33 percent and 44 percent throughout FY16, and averaged 40 percent (FY15: 45 percent) for the period, against a regulatory minimum of 30 percent.
The bank’s liquid asset to short term funding ratio declined to 21.5 percent (FY15: 23.9 percent), albeit comparing favourably with peers. Liquidity across the industry was impacted by increase in banks’ cash reserve ratio during the period.
Profit before tax for the bank, which grew 6.7 percent to N15.7 billion (in line with budget), was underpinned by 7.8 percent and 9.3 percent growth in interest and non-interest income respectively.
However, profitability was constrained by an increase in operating expenses and impairments. Operating expenses grew on the back of higher staff and IT costs, while impairments were largely impacted by foreign currency movement.
As a result, return on average equity and assets stood at 6.1 percent and 1.4 percent in FY16, from 6.2 percent and 1.4 percent in FY15 respectively.
Annualised pre-tax profit as at 1H FY17 is reflected ahead of budget and that of same period in FY16, largely supported by growth in non-interest income.
GCR explained that the Rating Watch reflects UBN’s current CAR position and the planned capital raising for FY17. Global Credit Rating will reassess the ratings immediately after year-end.
The rating may be reviewed upward following a sustained improvement in profitability, liquidity and market share. Also, an improvement in asset quality metrics such that it falls within the tolerable limit may be favourably considered.
A downward review of the rating may result from the bank’s continued inability to meet the regulatory required CAR, and/or further decline in liquidity and/or asset quality metrics.
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