THUR 21 JAN, 2021-theGBJournal- Fitch Ratings has upgraded United Bank for Africa (Ghana) Limited’s Long-Term Issuer Default Rating (IDR) to ‘B’ from ‘B-‘ and Viability Rating (VR) to ‘b’ from ‘b-‘. The Outlook on the Long-Term IDR is Stable.
The upgrade, Fitch said, ‘’reflects the strengthening of the bank’s capitalisation and leverage, as reflected in the increase in its tangible common equity/tangible assets ratio to 26% at end-9M20, from 18% at end-2019, notwithstanding heightened operating environment risks from the global pandemic.’’
Fitch noted that UBA Ghana’s IDRs are driven by its standalone creditworthiness, as expressed by its VR.
‘’The ratings reflect the concentration of the bank’s operations in the volatile Ghanaian operating environment, extremely high levels of impaired loans and company profile weaknesses. In addition, the ratings consider the bank’s comfortable, and strengthened, capital position, underpinned by its strong profitability, and solid liquidity position.’’
According to Fitch, ‘’UBA Ghana delivers strong profitability, as highlighted by operating returns on risk-weighted assets that have averaged 12% over the past four full years. Profitability has been underpinned by Ghana’s high interest rate environment, which drives a wide net interest margin.’’
Fitch reflecting on the Banks key rating drivers writes: Capitalisation and leverage have a high influence on the bank’s VR, having improved significantly owing to strong internal capital generation. UBA Ghana’s common equity Tier 1 (CET1) ratio (20.0% at end-9M20) is comfortably above minimum regulatory requirements. Reported net impaired loans were equal to 28% of total equity at end-9M20, but the largest impaired exposure is considered fully-impaired from a regulatory capital calculation perspective and therefore failure to resolve this exposure would not impact the CET1 ratio. UBA Ghana’s leverage is also very strong, as highlighted by a tangible common equity/total assets ratio of 26% at end-9M20, up from 18% at end-2019.
We forecast the CET1 ratio to remain broadly stable at end-2021 despite strong loan growth envisaged by management, supported by UBA Ghana’s intention to conserve capital and current regulatory guidance against dividend distributions in respect of 2020 earnings.
Reliance on non-deposit funding tends to be low and accounted for just 3% of total funding at end-9M20. Nonetheless, the deposit base has weaknesses, as reflected in only a limited share of retail deposits, material reliance on less stable and more expensive term deposits and, most importantly, very high single-depositor concentration.
UBA Ghana’s low loans/customer deposits ratio (54% at end-9M20) is reflective of a highly liquid balance sheet. Ghanaian government securities, bank placements and central bank reserves dominate the balance sheet, resulting in strong liquidity coverage that mitigates funding weaknesses.
Fitch’s view of support considers UBA Plc’s high propensity to provide support given its 91% ownership, common branding and the high level of management and operational integration between UBA Ghana and the wider group. Our support assessment also considers UBA Ghana’s strategic importance to the group’s regional network and ambitions as a pan-African banking group, despite the bank accounting for a small proportion of group assets (3% at end-1H20).
However, we consider that support from UBA Plc or from within the group, although possible, cannot be relied on, notably due to the cross-border nature of the parent-subsidiary relationship. We also believe that there is a risk of regulatory restrictions in Nigeria, particularly concerning foreign-currency flows out of the country, that could constrain UBA plc’s ability to provide timely and sufficient support to its foreign subsidiaries.