Fitch Ratings agency yesterday published United Bank for Africa (Ghana) Limited’s (UBA Ghana) Long-term Issuer Default Rating (IDR) of ‘B-’ with Stable Outlook.
UBA Ghana is a banking subsidiary of the United Bank for Africa Plc (UBA, B+/Negative/b).
According to Fitch, key rating drivers, IDRS, support rating and viability rating UBA Ghana’s Long-term IDR is driven by its standalone strength as defined by its Viability Rating (VR) and also underpinned by Fitch’s view of potential support from its Nigerian parent, UBA.
It explains that “UBA Ghana’s VR is constrained by a highly challenging operating environment (Ghana rated B/Negative).”
It also takes into account the bank’s limited franchise (less than 5% market share at end-1H15), vulnerable asset quality and limited foreign currency liquidity.
The VR also factors in the bank’s strong profitability, adequate capital ratios and acceptable funding profile and local currency liquidity.
Weak commodity prices have affected Ghana’s public finances and foreign currency liquidity, making the operating environment for UBA Ghana highly challenging.
Furthermore, high interest rates are likely to weigh on the bank’s credit quality. Asset quality is vulnerable to UBA Ghana’s rapid credit growth, significant exposure to the state (almost 7x equity at end-2014), including a high level of overdue petroleum subsidies owed to the bank, and to high single obligor concentrations.
In Fitch’s view, the level of overdue petroleum subsidies (158% of equity at end-1H15) materially understates the bank’s impaired assets (2.5% of total loans at end-1H15).
“UBA Ghana’s loan portfolio is highly concentrated with the top 20 borrowers representing 82% of the total loan portfolio at end-1H15; this significantly exposes the bank to event risk, despite some of them being 0% risk-weighted.
“Profitability metrics are in excess of domestic and regional peers’, with a return on equity in excess of 50% in 2014.
“However, profitability should be seen in the context of a narrow revenue base, which could be subject to volatility.
“Significant earnings are generated from high -yielding domestic government securities, but deterioration in the sovereign creditworthiness would generate significant losses in the bank’s securities portfolio.
“UBA Ghana is mostly funded by customer deposits but has some reliance on interbank funding (32% of total funding at end-1H15). Liquidity is enhanced by the bank’s low loans/deposits ratio (42% at end-1H15).
“However, foreign-currency liquidity is limited given US dollar scarcity in Ghana. UBA Ghana’s Basel I tier 1 capital ratio (21.4% at end-1H15) is only adequate, given that UBA Ghana’s regulatory capital ratios are reported by applying a 0% risk weight on government exposures (through lending, securities and oil subsidies and which represented around 54% of total assets at end-1H15), which positively impacts its capital ratios. Fitch views UBA Ghana’s tangible common equity to tangible assets (17% at end-1H15) as only acceptable compared with international peers, given its sizeable exposure to government securities and high loan concentration,” said Fitch.
The Support Rating (SR) of ‘5’ (indicating that external support is possible, but cannot be relied upon) is consistent with an implicit support level of ‘b-’, which is notched down once from UBA’s VR, indicating that support is likely to come from the parent’s resources rather than ultimately from the Nigerian sovereign. Nigerian sovereign support, which drives UBA’s IDR of ‘B+’, is unlikely, in Fitch’s view, to extend to overseas subsidiaries.
In Fitch’s view, UBA Ghana is not considered core to the group given its limited role and overall contribution to UBA (5% of assets at end-2015). However, UBA Ghana is UBA’s largest subsidiary and UBA’s pan-African business remains a key part of the group strategy.
UBA Ghana is also viewed as strategically important in serving the local operations of UBA’s core regional clients. In addition, given UBA Ghana’s small size, the potential cost of support should not be onerous for the parent, while failing to support it could cause reputational damage for the group.
An upgrade of UBA Ghana’s Long-term IDR would be driven by a sustained improvement in asset quality metrics and reduced exposure to the sovereign. Its IDR could also be upgraded if UBA Ghana assumes a greater role in or increases synergies with the UBA group, or if UBA’s VR is upgraded.
A downgrade of the Long-term IDR would require a simultaneous downgrade of the bank’s VR and a reduced probability of support from UBA, which Fitch views as very unlikely. UBA Ghana’s SR is sensitive to a change in assumptions around the propensity or ability of UBA to provide timely support to the bank.
The SR could be upgraded following an upgrade of UBA’s VR to ‘b+’ or following increased synergies and a greater role of the subsidiary within the UBA group. The rating actions are as follows: United Bank for Africa (Ghana) Limited Long-term IDR published at ‘B-’; Outlook Stable Short-term IDR published at ‘B’ Viability Rating published at ‘b-’ Support Rating published at ‘5’.

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