Union Bank’s Ratings Plummet Amidst Capital Adequacy Woes and Uncertain Recovery

Union Bank of Nigeria PLC (UBN) has seen a sharp decline in its credit ratings, according to a recent downgrade by Fitch Ratings.

The international credit rating agency has lowered UBN’s Long-Term Issuer Default Ratings (IDR) from ‘B-’ to ‘CCC’ and its National Long-Term Rating from ‘BBB(nga)’ to ‘B+(nga)’.

The downgrade also includes a reduction in the bank’s viability rating (VR) from ‘b-’ to ‘ccc’.

The move reflects ongoing concerns about the bank’s financial stability, primarily stemming from a prolonged breach of its capital adequacy ratio (CAR).

Fitch estimates that UBN has consistently failed to meet the regulatory CAR requirement of 10%, raising significant uncertainties about the bank’s ability to restore compliance in a timely manner.

Fitch’s report underscores that the bank’s near-term prospects hinge on effective internal capital generation and a successful execution of its recapitalization plan, which has been agreed upon with the Central Bank of Nigeria (CBN).

Despite recent changes in management and efforts to stabilize operations, the bank’s ability to resolve its capital issues remains in question.

The CBN’s intervention, including the removal of UBN’s previous board and management earlier this year, was aimed at addressing regulatory non-compliance and governance issues.

However, Fitch’s report highlights ongoing challenges such as high single-borrower and industry concentrations, with the top 20 loans comprising 63% of gross loans.

Also, the bank’s exposure to foreign-currency lending has increased significantly following the naira’s devaluation, further exacerbating its financial strain.

UBN’s asset quality remains vulnerable, with high stage 2 loans accounting for 40% of gross loans as of the first quarter of 2024.

Although there has been an improvement in the bank’s stage 3 loans ratio, which now stands at 3.5%, the overall risk profile remains high.

The bank’s profitability has shown marked improvement, with a 93% year-on-year increase in profit due to substantial gains from foreign-exchange and derivatives activities.

However, Fitch warns that this profit surge has not sufficiently addressed the underlying capital adequacy issues.

The upcoming merger with Titan Trust Bank (TTB) could play a pivotal role in UBN’s recovery strategy.

However, the timeline and success of this merger remain uncertain, adding another layer of complexity to the bank’s path to financial stability.

Fitch’s downgrade reflects not only the immediate challenges facing Union Bank but also the broader implications for the Nigerian banking sector.

The ratings agency’s assessment underscores the need for robust measures to address capital adequacy and regulatory compliance issues, as well as the importance of effective management in navigating the ongoing financial turbulence.