The upgrade 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.
IDRs AND VR
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. The Ghanaian economy has fared comparatively well in the face of the pandemic and Fitch expects real GDP growth of 2% in 2020, recovering to 5% in 2021.
UBA Ghana's company profile is weakened by limited business model stability, as reflected in high earnings volatility and sizeable shifts in balance sheet composition. UBA Ghana has small market shares of assets and customers deposits (2% and 3%, respectively, at end-9M20) but its franchise benefits from being a subsidiary of United Bank for Africa Plc (UBA Plc; B/Stable), a pan-African banking group. We expect the bank's market shares to increase moderately over the next two years as management pursues an ambitious growth strategy.
UBA Ghana's impaired loans (Stage 3 loans under IFRS 9) ratio (42% at end-9M20) is exceptionally high, reflecting exposure to several bulk oil distribution companies (downstream oil companies) that have struggled to service their debt due to delayed payments from the government. However, the loan book represents a small proportion of total assets (29% at end-9M20), with much of the balance being Ghanaian government securities (B/Stable). The bank's small loan book and limited exposure to vulnerable sectors outside its already-impaired loans has helped to insulate asset quality from the economic implications of the pandemic.
Nonetheless, single-borrower credit concentration at the bank is high, with the 20 largest exposures (funded and unfunded) equivalent to a high percentage of total equity at end-9M20, exposing asset quality to the default of large borrowers.
Specific coverage of impaired loans (53% at end-9M20) is only modest, reflecting expectations of recoveries on the bank's largest impaired loan (equal to 32% of gross loans, or 78% of impaired loans, at end-9M20). However, realisation of these recoveries has experienced significant delays and resolution of the exposure is uncertain, leaving the possibility that further loan impairment charges (LICs) will be required.
DEVTRACO THE PELICAN
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.
However, earnings are highly reliant on net interest income, in
particular interest income on government securities, and exhibit limited
stability, reflecting changes in balance sheet composition and interest
rates in recent years. Nonetheless, profitability has been resilient to
the economic implications of coronavirus, with low LICs attributable to
the limited impact on asset quality. LICs were equal to just 6% of UBA
Ghana's pre-impairment profit in 9M20 (2019: 2%).
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.
SUPPORT RATING
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.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Stronger
than expected loan or balance sheet growth or material asset quality
weakness that exerts significant downward pressure on capitalisation and
leverage. This may be indicated by a decline in the bank's tangible
common equity/tangible assets ratio to around 12%.
A sovereign
downgrade would result in a downgrade of the Long-term IDR and VR, given
that the bank does not meet Fitch's criteria to be rated above the
sovereign. However, this is not our base case given the Stable Outlook
on Ghana's Long-Term IDR of 'B'.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An
upgrade would require a sovereign upgrade and an improvement in the
operating environment, including increased macroeconomic stability.
A significant reduction in credit and single-depositor concentrations.
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