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 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.
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 the 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.
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.