Fitch Ratings has downgraded Union Bank of Nigeria Plc (UBN) Long-Term Issuer Default Ratings (IDR) to ‘CCC’ from ‘B-‘ and its National Long-Term Rating to ‘B+(nga)’ from ‘BBB(nga).
Union Bank of Nigeria’s viability rating (VR) has also been downgraded to ‘ccc’ from ‘b-‘, according to Fitch.
The downgrades reflect the Fitch-estimated prolonged breach of the bank’s total capital adequacy ratio (CAR) requirement of 10% and uncertainties regarding the timeline for restoring compliance.
Fitch said the bank’s near-term prospects will depend on continued sound internal capital generation and a timely execution of the recapitalisation plan agreed by new management with the Central Bank of Nigeria (CBN).
It said Union Bank of Nigeria ‘CCC’ IDRs are driven by its standalone creditworthiness, as expressed by its viability rating of ‘ccc’.
The rating note explained that the viability rating reflects Fitch’s estimate that the bank has been in breach of its minimum regulatory capital and uncertainties regarding the timeline for restoring compliance.
Fitch said Union Bank of Nigeria’s National Ratings are the lowest across rated banks in Nigeria, primarily reflecting the estimated breach of regulatory capital requirements.
The CBN removed the board and management of three banks, including UBN, on 10 January 2024, citing a range of infractions including regulatory non-compliance and corporate governance failings, while appointing a new chief executive officer.
The rating note stated that the progress is being made in reconstituting the board and the bank continues to operate as a going-concern.
The bank’s single-borrower and industry concentrations are very high, with the top 20 loans accounting for 63% of gross loans in 2023.
Union Bank of Nigeria foreign-currency (FC) lending which settled at 50% of gross loans is noted to be above peers’ and has inflated following the naira devaluation.
Fitch said the bank’s exposure to the weak Nigerian sovereign through securities and cash reserves at the CBN is also high.
Asset quality vulnerabilities stem from the bank’s high concentration risk, be it by sector or single obligor.
The bank’s stage 3 loans ratio of 3.5% at the end of the first quarter of 2024 was a marked improvement from recent years.
“We expect it to remain below the 5% CBN limit in the medium term”, Fitch ratings stated.
The report added that Union Bank of Nigeria has high stage 2 loans, which was 40% of gross loans at the end of first quarter of 2024.
The global ratings agency said this remain a key risk, having inflated significantly since 2023 due to the naira devaluation.
In Q1, the bank’s profit increased 93% year on year as revenues were boosted by large foreign-exchange (FX) and derivatives gains following the naira devaluation and higher net interest income.
Fitch said its profit surge led to noticeable improvements in performance metrics with a return on equity 35% in 1Q24 from 20% in financial year 2023.
Fitch estimates that Union Bank of Nigeria has breached its CAR requirement of 10% due to a significant increase in its regulatory risk reserve, which is deducted from capital for the purpose of capital adequacy computations.
The rating noted stated that the bank plans to restore compliance through capital raisings but the timeframe remains uncertain, particularly in view of the pending merger with Titan Trust Bank (TTB), UBN’s shareholder.
According to the rating note, Union Bank is mainly funded by customer deposits. In 2023, customers deposit accounted for the bank’s 82% of total funding. #Fitch Downgrades Union Bank of Nigeria to Junk Grade.