November 30, 2021/GCR Ratings

GCR Ratings (“GCR”) has revised United Bank for Africa Plc’s long term national and international scale ratings to AA+_(NG) and B from AA-_(NG) and B+ respectively on criteria change. At the same time, the national scale short-term rating was affirmed at A1+_(NG), with the outlook maintained on Stable.

Rating Rationale

The ratings of United Bank for Africa Plc (“UBA” or “the group”) reflect its sound competitive position, well diversified operations, robust capitalisation, sound risk profile, and adequate funding and liquidity position. These are, however, balanced against the relatively weak operating environment risk scores of its markets in the rest of Africa.

Competitive position is a positive rating factor. UBA is a top tier bank in Nigeria with a strong Pan-African banking franchise, which is complemented by good earnings and geographic diversification across 20 African countries and three international financial markets (London, Paris, and New York). At FY20, UBA controlled a sizeable market share of 14.7%, 16.5% and 13.9% of the Nigerian banking industry’s total assets, loan portfolio and customer deposits respectively. Furthermore, the group has consistently demonstrated good revenue stability and growth, with its core earnings maintaining upward trajectory over the review period.

UBA is adequately capitalised relative to its risk level, with capital adequacy ratio consistently maintained well above the regulatory minimum of 15% over the review period. Similarly, the GCR computed core capital ratio stood at a robust 24.2% at 3Q FY21 (FY20: 21.8%) largely underpinned by the group’s good internal capital generation capacity. We believe the current capitalisation level provides adequate headroom for loss absorption, with the GCR core capital ratio expected to remain within similar strong range over the next 12-18 months. Also, loan loss provision is viewed to be adequate, with reserve coverage of impaired loans at 83.7% at 3Q FY21 (FY20: 86.4%).

The positive risk assessment reflects the contained credit losses and below average non-performing loans (“NPL”). At 3Q FY21, the group’s NPL ratio stood at 3.5% (FY20: 4.8%), relative to the Central Bank of Nigeria tolerable limit of 5% and the industry average of about 6%. Similarly, credit losses averaged 0.9% over the last five years and stood at 0.3% at 3Q FY21 (FY20: 1.1%), comparing well with the estimated industry average of 3%. We expect the NPL ratio and credit losses to remain at sound range over the next 12-18 months, as the gradual macroeconomic environment recovery is anticipated to forestall any significant credit migration. Analysis of the loan book indicated some degree of concentration risk by obligor, with the 20 largest obligors accounting for 30.2% of the loan portfolio at 3Q FY21 (FY20: 34.2%).

UBA’s Funding and Liquidity is robust and considered a rating strength. The group is predominantly funded by customer deposits, which constituted a sizeable 85.5% of the funding base at 3Q FY21 (FY20: 83.6%). Customer deposits evidenced an upward trajectory over the review period, recording a CAGR of 22.9% over a five-year period. The sustained expansion in the group’s deposit book was largely underpinned by its extensive branch networks, digital platforms, and strong retail franchise to mobilise the low-cost deposits. As a result, the relatively cheap CASA deposits constituted a higher 82.3% of deposit pool at 3Q FY21 (FY20: 81.8%), thereby underpinning the moderate cost of funds of 2.3% at 3Q FY21 (FY20: 2.9%). An analysis of the deposit book reflects a well-diversified mix, with the top 20 depositors accounting for 7.4% of customer deposits at 3Q FY21 (FY20: 9.6%). Further augmenting UBA’s funding base is the Issuance of USD300m Eurobond in November 2021, which was oversubscribed. Liquidity is positive, with liquid assets covering 11.4x and 53.5% of wholesale funding and customer deposits respectively at FY20. We also view the liquidity management of the FCY book to be sound, with FCY liquid assets covering 57.6% of total FCY liabilities at FY20.

Outlook Statement

The stable outlook reflects GCR’s expectation that UBA’s credit profile will be sustained at sound level over the rating horizon. We believe the asset quality pressures have subsided, with no significant credit migration envisaged over the next 12-18 months, as such, credit losses and NPLs should stabilise at strong levels. We think the group’s healthy internal capital generation capacity should continue to support the capital base at sufficient buffer for losses absorption. Also, the funding and liquidity position is expected to remain adequate on the back of the group’s good deposit mobilisation capacity, particularly the low-cost CASA deposits. While the international scale rating has been revised downward on the back of criteria change, GCR believes that there is sufficient headroom to maintain a stable outlook on the international scale rating over the rating horizon.

Rating Triggers

At the current rating levels, we believe the potential for upward ratings action is limited over the rating horizon. However, the ratings could be upgraded if UBA achieves a core capital ratio above 25% on a sustainable basis, while also maintaining its risk profile and funding and liquidity position at sound levels. Conversely, should asset quality and capitalisation metrics deteriorate materially, a negative rating action could ensue.

Ratings History

United Bank for Africa Plc

Risk score summary

Salient Points of Accorded Rating

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to United Bank for Africa Plc. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

United Bank for Africa Plc participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from United Bank for Africa Plc and other reliable third parties to accord the credit ratings included:

• The audited financial results to 31 December 2020
• Four years of comparative audited numbers
• Management account as at 30 September 2021
• Other related documents.