Fitch Ratings has affirmed Stanbic Bank Uganda Limited's (SBU) Long-Term Issuer Default Rating (IDR) at 'B+'. The Outlook is Negative. A full list of ratings actions is detailed below.
KEY RATING DRIVERS
IDR, SUPPORT RATING AND NATIONAL RATINGS
SBU's IDRs and National Ratings are driven by a limited probability of support from South Africa-based Standard Bank Group Limited (SBG; BB-/Negative), if required.
SBG's ability to provide support is underpinned by SBU's small size, representing just 1% of consolidated group assets at end-2020. SBU's 'B+' Long-Term IDR is one notch below that of SBG, reflecting the cross-border nature of the parent-subsidiary relationship. The Negative Outlook on SBU's Long-Term IDR mirrors that on SBG.
Fitch's view of support also considers the high propensity of SBG to provide support to SBU given its indirect majority ownership (80%), common branding, reputational risks, a high level of integration and SBU's healthy performance record. Despite operating outside of the parent's core market of South Africa, Fitch regards SBU as a strategically important subsidiary due to its role in SBG's pan-African strategy.
SBU's National Ratings reflect Fitch's view of SBU's creditworthiness relative to that of other issuers within Uganda. The Stable Outlook on the National Long-Term Rating reflects our view that SBU's creditworthiness compared with that of other domestic issuers is unlikely to change over a one- to two-year period.
VIABILITY RATING
SBU's Viability Rating (VR) of 'b' is constrained by Uganda's weak operating environment, which has a high influence on the VR. This reflects Fitch's view that, despite healthy performance and capitalisation and a strong company profile, the concentration of SBU's operations in Uganda's small and undiversified economy constrains the bank's standalone credit profile. The pandemic has had a significant impact on Uganda's economy, with real GDP contracting 1.1% in 2020 as a result of lockdown measures, border closures and the global shock to trade and financial flows. Fitch expects real GDP growth to recover to 5% in 2021 and 6% in 2022.
SBU is the largest bank in Uganda, accounting for around 20% of banking-sector loans, customer deposits and assets. SBU's franchise is also underpinned by close links with the parent.
Impaired loans (Stage 3 loans under IFRS 9) ratio increased only moderately to 4.7% at end-2020 from 4.3% at end-2019, as a 27% loan growth cushioned a significant increase in impaired loans. Impaired loans were 66% covered by specific reserves. Loans under active repayment moratoria (recently extended till end-9M21) at end-2020 equalled 4% of gross loans. Fitch expects some of these loans to become impaired when the moratoria period ends.
Profitability is a rating strength, supported by a wide net interest margin (NIM) and strong non-interest income in the form of trading income and net fees and commissions. NIM decreased in 2020 due to interest-rates cuts, which in combination with lower economic activity and higher loan impairment charges, resulted in the operating profit to risk-weighted assets ratio declining to 5.5% in 2020 from 7.1% in 2019. Return on equity remained solid at 21% in 2020.
SBU's Fitch Core Capital (FCC) ratio was a high 18% at end-2020 and the bank has reasonable cushions over regulatory capital ratios. Strong pre-impairment operating profit, which equalled 12% of average of gross loans in 2020, provides a strong buffer to absorb asset-quality pressures without deterioration of capital.
SBU's funding profile benefits from a strong local franchise. Customer deposits (81% of total funding) are mainly represented by current and savings accounts (CASA) deposits, translating into a low cost of funding. Single-depositor concentration is a key risk, with the 20-largest depositors representing 39% of total customer deposits at end-2020. Liquidity coverage in both local- and foreign-currency is healthy.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- SBU's Long-Term IDR is sensitive to a weakening in SBG's ability or propensity to provide support. Reduced ability to support would most likely result from a downgrade of SBG's Long-Term IDR.
- The rating is also sensitive to a downward revision of Uganda's Country Ceiling of 'B+', which captures Fitch's view of transfer and convertibility risk, most likely to be triggered by a downgrade of Uganda's ratings.
- SBU's VR may be downgraded in case of marked asset-quality deterioration in combination with a significant weakening of profitability and capitalisation.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- An upgrade of SBU's Long-Term IDR would require both an upgrade of SBG's Long-Term IDR and an upward revision of Uganda's Country Ceiling.
- An upgrade of SBU's VR is unlikely given that SBU's operations are concentrated on Uganda's weak operating environment.
