GCR Affirms Union Bank’s National Scale Rating of BBB+(NG)
By Dipo Olowookere
The national scale ratings assigned to Union Bank of Nigeria Plc of BBB+(NG) and A2(NG) in the long and short term respectively have been affirmed by Global Credit Ratings.
Also, the firm announced last Thursday that the ratings are with stable outlook and that they remain valid until June 2018.
Commenting on the ratings, Global Credit Ratings disclosed that the rating took into consideration the lender’s successful capital raising exercise of N49.7 billion through a Rights Issue, which was concluded in December 2017, with 120 percent subscription.
While the bank’s capital adequacy ratio had declined to 13.3 percent at FY16 against the required minimum of 15 percent for international commercial banks, the newly raised capital is to be largely utilised to regularise the shortfall and support working capital.
Furthermore, the 20 percent over-subscription is considered a reflection of shareholders’ continuous support for the bank.
Union Bank’s gross non-performing loan (NPL) ratio rose from 6.9 percent at FY16 to 9.1 percent at 3Q FY17, becoming a major concern for the ratings.
In addition, per management, the increase in NPL was largely due to macro-economic pressures on businesses across the country, and its resultant effect on the loan book.
Nonetheless, cognisance is taken of the effort towards NPL recovery, as the bank reported N2 billion in recoveries at 3Q FY17, compared to N923 million recorded for the same period in FY16.
Union Bank’s regulatory liquidity ratio stood at 40.6 percent at 3Q FY17, against the regulatory minimum of 30 percent, while the liquid assets to short term funding ratio rose to 30.4 percent from 21.5 percent at FY16.
Performance based on unaudited 3Q FY17 results, reflect a pre-tax profit of N13.0 billion, representing 2.1 percent decline from the corresponding period in FY16.
Primarily driving the performance was an annualised 20.4 percent growth in interest income to N88.5 billion, but a similar rise in interest expense (up by an annualised 68.1 percent) constrained net interest income to N46.9 billion.
However, profitability was further enhanced by a decline in net impairment charge to N5.9 billion from N12.7 billion at 3Q FY16.
Operating expenses increased by 10.1 percent (which management attributed to inflationary pressure) from the 3Q FY16 position and as such the cost ratio rose to 72.2 percent from 66.2 percent at FY16.
Return on average equity and assets (ROaE and ROaA) stood relatively stable at 6.1 percent and 1.3 percent respectively.
GCR says it considers the capital raising exercise as rating positive. The appropriate deployment of capital and regularisation of capital adequacy metrics, sustained improvement in profitability, asset quality and liquidity measures, and a further strengthening of the bank’s competitive position in the domestic market, could lead to upward ratings migration.
However, a downward review of the rating may result from a further decline in asset quality and earnings metrics, high capital encumbrance by unreserved NPLs and tight liquidity.