Fitch Ratings has upgraded United Bank for Africa Plc (UBA)'s Viability Rating (VR) to 'b' from 'b-'. Its Long-term Issuer Default Rating (IDR) of 'B+', Support Rating (SR) of '4' and Support Rating Floor (SRF) of 'B+' have been affirmed. The Outlook is Stable.
The upgrade reflects the bank's sustained reduction in leverage in conjunction with capital ratios being in line with peers. We expect capital ratios to remain adequate, on the back of manageable growth in lending. Leverage is adequate and should be seen in the context of solid liquidity compared to peers. The upgrade also reflects UBA's solid company profile, including a broader international footprint than peers, although 2016 will still be challenging.
A full list of rating actions is available at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS, SR AND SRF
UBA's IDRs are driven by a limited probability of sovereign support. In assessing the probability of sovereign support, Fitch considers the authorities' willingness to support the Nigerian banks to be high as demonstrated in the past, but its ability to do so is constrained by Nigeria's sovereign rating (BB-/Negative Outlook). UBA's SRF of 'B+' reflects its systemic importance in Nigeria.
The Stable Outlook reflects that the pressures resulting from Nigeria's challenging and volatile operating environment are - to an extent - already factored into UBA's ratings.
The bank's VR is constrained by Nigeria's highly challenging and volatile operating environment. The recent oil price shock and subsequent currency pressure have weakened the operating environment and are likely to continue to affect GDP growth in 2016. This is likely to put pressure on UBA's profitability and asset quality.
Asset quality is in line with peers. UBA's impaired loans ratio of 1.9% at end-1H15 was below the sector average but during the last Nigerian banking crisis the loan book did not perform as well as those of the highest-rated Nigerian banks (on a VR basis). It is likely that asset quality metrics will be under pressure in 2016 due to the economic slowdown. Similar to peers, UBA has substantial loan exposures to oil and gas. Some facilities are likely to be restructured if oil prices remain low.
Profitability is resilient. The net interest margin (NIM) is below peers' largely due to excess liquidity in the African subsidiaries. We expected this to gradually improve as UBA intends to expand lending in these markets. Following significant investment in establishing a regional network in recent years, efficiency improvements are expected in the medium term.
Capital ratios are acceptable with a Fitch core capital ratio of 19.2% at end-1H15 (15% at end-2014). UBA's capital ratios are expected to remain adequate on the back of manageable growth in lending. Management has been gradually strengthening risk-weighted capital ratios and leverage has also improved with a ratio of tangible common equity-to-tangible assets of 9.3% at end-1H15 (8.5% at end-2014). Leverage should also be seen in the context of the bank's solid liquidity.
UBA has a solid funding and liquidity profile. The bank's strong domestic franchise and its pan-African network allow UBA to collect low-cost deposits, and the loans/deposits ratio is low, at 53.4% at end-1H15. Liquidity is strong, especially in many of the African subsidiaries. Liquidity is managed centrally and we believe it is at least partly fungible within the group. We view foreign-currency liquidity as weaker than local currency liquidity and expect it to remain under pressure in 2016.
UBA's National Ratings are driven by its Long-term IDR and Fitch's opinion of the bank's creditworthiness relative to the best credits in Nigeria.
IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
UBA's ratings and Outlook are sensitive to a prolonged and severe deterioration in fiscal and external buffers or recession that would affect the ability of the Nigerian authorities to provide support, or to changes in the state's willingness to provide support.
However, a one-notch downgrade of the sovereign would most likely not result in a downward revision of UBA's SRF and or a downgrade of its Long-term IDR. This is because Fitch considers that it will not result in a material weakening in the ability of the sovereign to support the banking sector.
There is limited upward potential for UBA's VR given the current economic pressures on the Nigerian operating environment.
The bank's National Ratings are sensitive to changes in its Long-term IDR and relative creditworthiness to other rated Nigerian institutions.
The rating actions are as follows:
Long-term foreign currency IDR: affirmed at 'B+'; Stable Outlook
Short-term foreign currency IDR: affirmed at 'B'
National Long-term rating: affirmed at 'A+(nga)'
National Short-term rating: affirmed at 'F1(nga)'
Viability Rating: upgraded to 'b' from 'b-'
Support Rating: affirmed at '4'
Support Rating Floor: affirmed at 'B+'