Fitch Scores has downgraded Union Financial institution of Nigeria Plc’s Lengthy-Time period Issuer Default Scores (IDR) to ‘CCC’ from ‘B-’ and its Nationwide Lengthy-Time period Ranking to ‘B+(nga)’ from ‘BBB(nga). The financial institution additionally had its Viability Ranking (VR) downgraded to ‘ccc’ from ‘b-’ over considerations of breaching capital necessities.
In its score launched on Friday, Fitch additionally affirmed UBN’s Authorities Help Ranking (GSR) of ‘no assist’. “The downgrades replicate the Fitch-estimated extended breach of the financial institution’s whole capital adequacy ratio (CAR) requirement of 10 per cent and uncertainties relating to the timeline for restoring compliance.
“Close to-term prospects will rely upon continued sound inner capital era and a well timed execution of the recapitalisation plan agreed by new administration with the Central Financial institution of Nigeria (CBN).”
The score company famous that Union Financial institution’s ‘CCC’ IDRs are pushed by its standalone creditworthiness, as expressed by its Viability Ranking (VR) of ‘ccc’. “The VR displays Fitch’s estimate that the financial institution has been in breach of its minimal regulatory capital and uncertainties relating to the timeline for restoring compliance. The VR is one notch under the implied VR of ‘ccc+’ as a consequence of capitalisation and leverage.”
UBN’s Nationwide Scores are the bottom throughout Fitch-rated banks in Nigeria, primarily reflecting the estimated breach of regulatory capital necessities. The CBN eliminated the board and administration of three banks, together with UBN, on 10 January 2024, citing a variety of infractions together with regulatory non-compliance and company governance failings, whereas appointing a brand new chief government officer. Progress is being made in reconstituting the board and the financial institution continues to function as a going-concern.
Fitch famous that Union Financial institution’s single-borrower and business concentrations are very excessive, “with the highest 20 loans accounting for 63 per cent of gross loans at end-2023; or 2.9x Fitch Core Capital (FCC). Overseas-currency (FC) lending (50 per cent of gross loans) is above friends’ and has inflated following the naira devaluation. Publicity to the weak Nigerian sovereign via securities and money reserves on the CBN can be excessive at round 6x FCC at end-2023.
“Asset high quality vulnerabilities stem from the financial institution’s excessive focus threat, be it by sector or single obligor. The financial institution’s Stage 3 loans ratio of three.5 per cent at end-1Q24 was a marked enchancment from current years and we count on it to stay under the 5 per cent CBN restrict within the medium time period. Excessive Stage 2 loans (end-1Q24: 40 per cent of gross loans) stay a key threat, having inflated considerably since 2023 as a result of naira devaluation.
“UBN’s internet revenue elevated 93 per cent yr on yr in 1Q24 as revenues have been boosted by giant foreign-exchange (FX) and derivatives features following the naira devaluation and better internet curiosity earnings. This led to noticeable enhancements in UBN’s efficiency metrics with a return on fairness 35 per cent in 1Q24 (2023: 20 per cent ).
Fitch estimates that UBN has breached its CAR (end-3Q23: 16.1 per cent ) requirement of 10 per cent as a consequence of a major improve in its regulatory threat reserve, which is deducted from capital for the aim of capital adequacy computations. UBN plans to revive compliance via capital raisings however the timeframe stays unsure, notably in view of the pending merger with Titan Belief Financial institution (TTB), UBN’s shareholder.
“UBN is especially funded by buyer deposits (end-2023: 82 per cent of whole funding). Liquidity is sweet with a liquidity protection ratio and a internet secure funding ratio of 299 per cent and 214 per cent , respectively at end-1Q24. Money and money equivalents in FC lined an inexpensive 19 per cent of FC deposits at end-2023. Nonetheless, funding and liquidity stay extremely delicate to investor sentiment and due to this fact topic to elevated volatility.
