Fitch Ratings has affirmed United Bank for Africa (UBA) Plc's Long-Term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook. Fitch has also affirmed the bank's National Long-Term Rating at 'A+(nga)' and assigned a Stable Outlook.

Key Rating Drivers

UBA Issuer Default Ratings (IDRs) are driven by its standalone creditworthiness, as expressed by its 'b-' Viability Rating (VR). The VR is constrained by Nigeria's Long-Term IDRs of 'B-', due to the bank's high sovereign exposure relative to capital and the concentration of its operations in Nigeria.

The 'b-' VR is one notch below the 'b' implied VR due to the operating environment/sovereign rating constraint.

UBA's National Long-Term Rating balances a strong franchise against higher leverage than higher-rated peers'.

Challenging Operating Environment: Banks continue to contend with US dollar shortages and the Central Bank of Nigeria's (CBN) highly burdensome cash reserve requirement. Fitch expects reform progress under the new administration, including elimination of fuel subsidies and gradual liberalisation of the naira. However, we see a risk of a sharp naira depreciation due to large disparities between the official and parallel exchange rates. The CBN has increased its policy rate by 700bp since April 2022 (currently 18.5%) due to rising inflation (22% in 4M23).

Strong Local and Pan-African Franchise: UBA has a pan-African franchise with subsidiaries in 20 countries outside of Nigeria; these contributed 46% of net income and 39% of assets at end-2022. We believe UBA's ability to capitalise on business and trade flows and attract deposits across the continent is a competitive advantage relative to peers'.

High Sovereign Exposure: Single-obligor credit concentration is moderate, with the 20-largest loans representing 113% of UBA's Fitch Core Capital (FCC) at end-2022. Oil and gas exposure (16% of gross loans at end-2022) is lower than peers'. Nigerian sovereign exposure through securities and CBN cash reserves is high relative to FCC (over 350% at end-2022).

High Stage 2 Loans: UBA's impaired loans (Stage 3 loans under IFRS 9) ratio declined to 3.4% at end-2022 from 4.8% at end-2020. Specific loan loss allowance coverage of impaired loans (46% at end-2022) is low due to a significant proportion of cash collateral. Stage 2 loans (14% of gross loans at end-2022; concentrated within the oil and gas and power sectors and largely US dollar-denominated) remain high and represent a key risk to asset quality. Fitch forecasts the impaired loans ratio to increase moderately in the near term.

Healthy and Improving Profitability: UBA's profitability metrics have been consistently strong through the cycle. The bank reported a strong increase in its operating profit to 7.2% of risk-weighted assets (RWA) in 2022 (2021: 5.7%) as a result of wider net interest margins and improved non-interest income (35% of gross revenue in 2022).

Sound Capitalisation: UBA's FCC ratio (31.7% at end-2022) is the highest among Nigerian banks but flattered by a low risk-weight density (end-2022: 26%), as indicated by a lower tangible leverage ratio (8.2% at end-2022). Pre-impairment operating profit is strong, providing a large buffer to absorb loan impairment charges without affecting capital. UBA's regulatory capital ratios have large buffers above impending Basel III requirements.

Comfortable Liquidity Coverage: Funding and liquidity are rating strengths. UBA's loan-to-deposit ratio of 41% at end-2022 reflected a liquid balance sheet. Local-currency liquidity is ample (regulatory liquidity ratio of 40.6% at end-2022), with excess liquidity placed in government securities and liquidity more than sufficiently covering short-term naira funding. Deposits account for 82% of funding and largely comprise stable current and savings accounts.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A sovereign downgrade could result in a downgrade of the Long-Term IDR and VR if Fitch believes that the direct and indirect effects of a sovereign default would erode capitalisation and FC liquidity to the extent of undermining the bank's viability.

Absent a sovereign downgrade, a downgrade could result from the combination of a sharp naira depreciation and a marked increase in the impaired loans ratio, resulting in a breach of minimum capital requirements without near-term prospects for recovery. It could also result from a severe tightening of FC liquidity.

A downgrade of the bank's National Ratings would result from a weakening of its creditworthiness relative to other Nigerian issuers'.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade of the Long-Term IDR would require a sovereign upgrade and for the bank to maintain a strong financial profile.

An upgrade of the bank's National Ratings would result from a strengthening of its creditworthiness relative to other Nigerian issuers'.

Other Debt and Issuer Ratings: Key Rating Drivers

Senior debt issued by UBA under its programme constitutes direct, unconditional and unsecured and unsubordinated obligations of the bank and rank at least pari-passu with all other outstanding unsecured and unsubordinated obligations of the bank. Therefore, we rate senior unsecured debt in line with the bank's IDRs. The Recovery Rating of these notes is 'RR4', reflecting average recovery prospects in the event of default.

The government's ability to provide full and timely support to commercial banks is weak due to its constrained FC resources and high debt servicing metrics. The Government Support Rating (GSR) is therefore 'no support', reflecting our view of no forthcoming support for senior creditors should UBA become non-viable.

Other Debt and Issuer Ratings: Rating Sensitivities

UBA's senior unsecured debt ratings would move in tandem with the bank's IDRs

An upgrade of the GSR would require an improvement in the government's ability to provide support, which would most likely be indicated by an increase in international reserves and an improvement in debt servicing metrics.

VR Adjustments

The earnings and profitability score of 'b+' is below the 'bb' category implied score, due to the following adjustment reason: earnings stability (negative).

The capitalisation and leverage score of 'b' is below the 'bb' category implied score, due to the following adjustment reason: risk profile and business model (negative).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. 

References for Substantially Material Source Cited as Key Driver Of Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity.