Union Bank Asset Quality Significantly Weak—Fitch

By Dipo Olowookere

Foremost rating agency, Fitch Ratings, has disclosed that its assessment has shown significant weakness in Union Bank’s asset quality measures.

Fitch made this known in a statement issued last week, where it announced affirming Union Bank of Nigeria Plc’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with stable outlook.

In the statement, the rating firm said it also affirmed the bank’s Viability Rating (VR) at ‘b-‘ and Support Rating at ‘5’.

It said the Nigerian lender, which has a market share of about 4 percent, has IDRs, driven by its standalone creditworthiness, as defined by the VR, that are constrained by Nigeria’s operating environment and factor in a high impaired loans ratio, some weakness in loan loss reserve cover, which puts pressure on capital adequacy and performance metrics which, although improving, are still impacted by high loan impairment charges.

However, it noted that risk appetite is now lower and management was focusing on loan restructuring and recoveries.

Fitch said in Union Bank’s well-established brand helps to attract cheap retail deposits that make up 60 percent of its deposit funding.

It added that corporate lending represents around 70 percent of loans but Union Bank’s strategy is to establish itself as a leading mid-tier bank in Nigeria, developing deeper customer relationships particularly in the corporate and SME segments, and ultimately expand its retail lending capabilities.

This expansion is likely to be supported by shareholders, particularly Atlas Mara Limited, which owns around 21 percent of the bank, a financial company whose primary goal is to support retail banking across the African continent, the rating agency said.

During the initial years under new ownership (2011- 2015), risk appetite at Union Bank was high, Fitch pointed out, stressing that this resulted into a loan portfolio that is highly concentrated on the oil sector (38 percent of loans).

“Our assessment shows significant weakness in asset quality measures. Impaired loans represent around 9% -10% of gross loans.

In addition, the bank has a high level of non-performing and restructured loans not captured in the impaired loan ratio.

Loan loss reserve cover, at around 80% of impaired loans, exposes the bank to unexpected losses even after factoring in the availability of collateral for some large impaired loans,” Fitch said in the statement obtained by Business Post.

It said the lender’s management’s focus on recoveries and loan restructuring is showing positive initial signs but the sustainability of these trends will be assessed over time.

Union Bank’s margins compare favourably with peers’ and overall operating profit metrics are broadly in line with peers’. Operating profit reflects some pressure on efficiency ratios impacted by the cost of maintaining a large branch network and the impact of inflation, it said further.

Fitch noted that Union Bank’s funding profile is improving, pointing out that customer deposits are growing steadily, reliance on interbank deposits is declining and all public sector deposits have been repaid, in line with local requirements.

It further said Union Bank’s foreign currency (FC) liquidity position was tight in 2016 and, along with several Nigerian peers, and the bank restructured some trade finance obligations with international correspondent banks.

“These are being repaid in line with restructured terms, but our assessment is that the bank’s FC liquidity position remains tight. The bank’s history of accessing term FC funding under new management is limited to a small number of counterparts,” it said.

Fitch said in the statement that given asset quality challenges, capital ratios have become strained.

It pointed out that Union Bank raised N49.7 billion of Tier 1 capital in 4Q17 and it believes that prudential capital shortfalls have been addressed.

“However, capital levels may still not be commensurate with risk despite the capital injection, largely because unreserved impaired and non-performing loans still represent a high proportion of equity,” it stressed.

The statement said Union Bank’s National Ratings reflect the bank’s creditworthiness relative to the country’s best credit and to peers operating in that country.

“Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s (B+/Negative) weak ability to provide support, particularly in FC. In addition, there are no clear messages from the authorities regarding their willingness to support the banking system.

“Therefore, the Support Rating Floor of all Nigerian banks is at ‘No Floor’ and all Support Ratings are at ‘5’.

“This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.

“The bank’s IDRs, National Ratings and VR are primarily sensitive to either improvements or deterioration in asset quality and capital adequacy. Given the extent of Union’s asset quality pressures, upside is limited at present,” the rating company disclosed.