Fitch affirms UBA Cameroon at ‘B-‘ with a stable outlook
Fitch Ratings has affirmed UBA Cameroon S.A.’s (UBA CAM) Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook.
According to Fitch, UBA CAM’s IDR is driven by its intrinsic strength as captured by the bank’s Viability Rating (VR) of ‘b-‘ and also underpinned by potential support from its parent bank, United Bank for Africa Plc.
Following the bank’s publication of its updated Bank Rating Criteria on 12 November 2021, Fitch Ratings withdrew its Support Rating for the bank as it is of the view that the Support Rating is no longer relevant to the agency’s coverage.
“In line with the updated criteria, we have assigned UBA CAM a Shareholder Support Rating (SSR) of ‘b-‘,” said Fitch in its rating assessment of UBA Cameroon.
Read below Fitch’s rating action commentary on UBA Cameroon:
KEY RATING DRIVERS
IDRs and VR
UBA CAM’s IDRs are driven by driven by its intrinsic strength as captured by the bank’s Viability Rating (VR) of ‘b-‘. They are also underpinned by potential support from its parent bank, United Bank For Africa Plc (UBA; B/Stable), as reflected by the ‘b-‘ SSR.
The VR reflects the bank’s weak asset quality and capitalisation, moderate franchise and concentrated business model. The VR also considers UBA CAM’s reasonable profitability, stable funding profile and reasonable liquidity.
Historically, UBA CAM has had weak and volatile asset quality metrics, although the headline impaired (local GAAP) loans ratio decreased to 8.5% at end-1H21 from a very high 35% at end-2020. This reflected the reclassification of a few large public sector exposures back to performing as they returned to payment schedules. Loan concentration is high, with the 20 largest loans representing 71% of total loans. Fitch believes the impaired loans ratio does not fully capture true asset quality picture, as public sector exposures often become overdue, as has been the case in recent years. Our assessment of the bank’s asset quality also considers its securities portfolio (52% of end-1H21 total assets), which comprises sizeable exposures to weakly-rated Economic and Monetary Community of Central Africa (CEMAC) governments that we consider high-risk.
UBA CAM’s reported capital metrics appear strong by international standards, with a Fitch Core Capital (FCC) ratio of 29% at end-1H21 and regulatory capital ratio of 24%, well above the regulatory requirement of 8%. However, capital ratios are underpinned by a very low risk-weighted assets density of 41%, so the equity to asset ratio was lower 11.7%. Fitch views this as weakf, considering material weaknesses in asset quality, high single-obligor concentrations and high-country risk.
UBA CAM’s profitability metrics are generally good, with some degree of flexibility allowed by the regulator with regard to provisioning policy on ‘high-standing’ companies including those operating in the public sector. Nonetheless, performance metrics have been volatile in recent years, reflecting a sharp expansion and contraction of loan portfolios and large movements in loan impairment charges. The bank’s revenue streams are reasonably diversified, with non-interest income accounting for 42% of operating income in 1H21. Thanks to provision recovery on exposures that were reclassified back to performing, the bank reported a strong annualised return on average equity of 24% in 1H21.
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We view UBA CAM’s funding and liquidity profile as reasonable. The overall balance sheet is relatively liquid, with a loan/deposits ratio of 41% at end-1H21, but the bank’s deposit base is highly concentrated and a large proportion of customer deposits is short-term. At end-1H21, the 20 largest depositors accounted for 54% of total customer deposits. Concentrations are reasonably mitigated by a large stock of liquid assets, which covered a high 84% of total customer deposits at end-1H21.
SSR
The ‘b-‘ SSR reflects Fitch’s view that support from UBA is possible, given that UBA CAM represents less than 5% of group assets, but cannot be relied upon because of UBA’s low financial ability to do so, as reflected in its Long-Term IDR. There is also a moderate risk that potential regulatory restrictions on UBA’s access to foreign currency in Nigeria (B/Stable) could make it difficult for UBA to provide timely and sufficient support to its foreign subsidiaries. The Stable Outlook on UBA CAM mirrors the Outlook on its parent.
UBA has a high propensity to support UBA CAM, given its pan-African strategy and platform. UBA CAM’s SSR is one notch below the parent’s IDR, reflecting the subsidiary’s limited contribution on an individual basis to this strategy, given its small size. Therefore, UBA CAM’s role in the group has a high influence on the rating. Other factors considered in our assessment of UBA’s propensity to provide support include its majority ownership of UBA CAM, various aspects of management integration, including the rotation of senior executives across key sub-Saharan subsidiaries, and common branding.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The bank’s IDR would be downgraded if the VR and SSR were downgraded. A downgrade of the VR is likely to follow a deterioration in key financial metrics, with worsening asset quality, and higher impairment charges ensuing pressure on the bank’s core capitalisation.
A downgrade of UBA CAM’s SSR could stem from either a downgrade of the parent’s Long-Term IDR or a reduced willingness of the parent to provide support.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The bank’s IDR would be upgraded if the VR or SSR were upgraded. A VR upgrade would require significant strengthening of the bank’s franchise and key financial metrics, including moderation of asset quality risks and core capitalisation improvement.
An upgrade of UBA CAM’s SSR would require an upgrade of UBA’s Long-Term IDR, which we do not expect in the near term given the Stable Outlook on UBA’s rating.
