GCR Affirms Union Bank of Nigeria Plc’s rating of BBB+(NG); outlook Stable

01 Jul 2016 In Rating Notifications

GCR Affirms Union Bank of Nigeria Plc’s rating of BBB+(NG); outlook Stable

Lagos Nigeria, 1 July 2016 - Global Credit Ratings has affirmed the national scale credit 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. The ratings are valid until June 2017.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Union Bank of Nigeria Plc based on the following key criteria:

The ratings take into consideration Union Bank of Nigeria Plc’s (“UBN” or “the bank”) improved market position in Nigeria’s highly competitive banking industry, since its successful recapitalisation in 2012. This was followed by the appointment of a new management team, and implementation of a development programme to reposition the bank as a leading mid-tier player, on a trajectory to be a top-tier player. Total shareholders’ funds grew by 10.1% to N243.9bn at FYE15, largely supported by the bank’s internal capital generating capacity. However, the risk weighted capital adequacy ratio (“CAR”) reduced by 100bps to 15.3% at FYE15, on the back of amendments resulting from Basel II implementation by the bank during the year. Nevertheless, management expects CAR to improve over time, given ongoing divesture of its non-banking subsidiaries, and plans to retain most of its earnings in the short to medium term.

Following a loan book clean-up which saw the gross non-performing loan (“NPL”) ratio improve to 5.9% (F13) and 5.0% (F14), the bank’s gross NPL ratio rose to 6.7% in F15, above the 5% tolerance limit of the Central Bank of Nigeria (“CBN”). Per management, the increase in the NPL ratio was as a result of the bank’s conservative approach which required accelerated impairment classification on some loans. Consequently, specific provision coverage of impaired loans reduced to 44.6% at FYE15 (from 58.6% at FYE14). Furthermore, note is taken of the increase in the regulatory risk reserve in line with CBN regulations, which provides additional total provision coverage.

Although liquidity ratios declined in F15, reflecting the tight liquidity stance of CBN (particularly in the first three quarters of the year), UBN’s regulatory liquidity ratio ranged between 54% and 38% during F15, and averaged 45% (F14: 61%), against the 30% required minimum.

Key profitability metrics have improved over the years, as the bank recorded a profit after tax of N13.9bn in F15 on continuing operations (though relatively lower compared to N26.7bn reported in F14), despite the challenging operating environment. Also, performance in F14 was largely supported by a one-off gain on disposal of subsidiaries amounting to N15.7bn, compared to a N0.3bn loss recorded in F15. Although operating expenses declined by 2.1% in F15, the cost ratio increased to 71.1% (F14: 61.8%), but remained within the peer average range. Resultantly, return on average equity and assets (“ROaE” and “ROaA”) stood at 6.1% and 1.4% in F15, from 13.1% and 2.7% in F14 respectively.

An upward review of the ratings and/or outlook may result from a sustained and consistent improvement in profitability, asset quality and market share. Conversely, the ratings may be impacted by declining asset quality, operating efficiency and liquidity trends. Also, a reduction in the capital adequacy ratio such that it leads to the bank’s inability to meet the regulatory minimum, may result in negative rating action.


NATIONAL SCALE RATINGS HISTORY

Initial/last rating (June 2015)
Long term rating: BBB+(NG)
Short term rating: A2(NG)
Rating outlook: Stable


ANALYTICAL CONTACTS

Primary Analyst
Funmilayo Ojatunwase
Credit Analyst
.(JavaScript must be enabled to view this email address)


Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Glossary of Terms/Ratios (February 2016)
UBN rating report (2015)


RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLI WEB SITE AT:  HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE ON THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT www.globalratings.com.ng.


SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The ratings were solicited by, or on behalf of Union Bank of Nigeria Plc, and therefore, GCR has been compensated for the provision of the ratings.

Union Bank of Nigeria Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to Union Bank of Nigeria Plc with no contestation of the rating.

The information received from Union Bank of Nigeria Plc and other reliable third parties to accord the credit ratings included the latest audited annual financial statements as at 31 December 2015 (plus four years of comparative numbers), latest internal and/or external report to management, full year 2016 detailed budgeted financial statements, year-to-date unaudited accounts to 31 March 2016, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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