GCR Affirms Ratings on Union Bank of Nigeria

By Dipo Olowookere

Nigeria-based rating agency, Global Credit Ratings, has affirmed the national scale issuer ratings assigned to Union Bank of Nigeria Plc of BBB+(NG) and A2(NG) in the long term and short term respectively, with the outlook accorded as stable.

In a statement issued by the firm, the ratings affirmed on Union Bank reflect the bank’s improved capitalisation, strong shareholders’ support, sustained profitability, and mid-sized status (by total assets) within the Nigerian banking landscape.

Its non-performing loan (NPL) ratio escalated to 19.8 percent at FY17 from less than 7 percent range in the last four years.

This was driven largely by a marked growth in delinquent assets, particularly within the real estate sector, oil and gas and power sector.

Union Bank is intensifying focus on loan recovery, collections, and portfolio realignment towards perceived lower risk non-oil sectors.

While management is targeting a significant reduction in the NPL ratio by FY18, GCR said it expects the position to remain above 10 percent, given the current risk level. As at March 31, 2018 (1Q FY18), the bank’s NPL ratio stood at 14.9 percent.

Following a successful Rights Issue during FY17, with over 120 percent subscription, Union Bank’s capital adequacy ratio rose to 17.8 percent at FY17 (FY16: 13.3 percent), standing above the regulatory minimum of 15 percent for international commercial banks.

The position is not expected to change imminently given management’s focus on building internal capital generative capacity, GCR noted in the statement.

It said although the lender displayed a largely short-dated funding structure (a common industry feature), liquidity risk is considered to be moderate.

Union Bank’s regulatory liquidity ratio stood at 37 percent at FY17 (1Q FY18: 39.4 percent), against a regulatory threshold of 30 percent.

The financial institution covers liquidity shortfalls via its short term marketable securities and available credit lines from other financial institutions.

The bank also continued to explore potential financing opportunities, including the issuance of debt instruments based on prevailing market conditions.

GCR said in the statement that profitability growth was constrained by higher funding cost and credit losses in FY17, with the bank ending the year with a relatively flat pre-tax profit of N15.5 billion. The high funding cost reflects the high inflationary environment. As of 1Q FY18, the bank reported a pre-tax profit of N5.4 billion, relative to N4.7 billion reported in 1Q FY17.

Although management expects a pre-tax profit of N20 billion-N24 billion by FY18, GCR said it envisages full year performance could be impacted by additional impairments.

While asset quality challenges remain a key issue for Union Bank, the accorded ratings are supported by the bank’s strong capitalisation and continuous shareholders’ support.

The uncertainties within the Nigerian operating environment limit the likelihood of ratings rising in the medium term.

However, markedly improved competitive positioning, a rebound to strong asset quality and profitability may trigger a positive rating action.

Conversely, additional asset quality pressure, resulting in NPL ratio rising above anticipated level; further weakening in profitability, particularly arising from credit losses; and further deterioration in operating conditions would result in a rating downgrade.