Fitch Ratings – London – 19 Jan 2021: Fitch Ratings has affirmed UBA Cameroon S.A’s (UBA CAM) Long-Term Issuer Default Rating (IDR) at ‘B-‘. The Outlook is Stable. The Viability Rating (VR) has been affirmed at ‘b-‘. A full list of rating actions is below.
KEY RATING DRIVERS
IDRs AND SUPPORT RATING
UBA CAM’s IDRs are driven by potential support from its parent bank, Nigeria’s United Bank for Africa Plc (UBA; B/Stable), in case of need. The Support Rating (SR) of ‘5’ indicates Fitch views that parental support is possible given the size of UBA CAM (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 of ‘B’. 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 that on its parent.
We consider UBA has a high propensity to support UBA CAM, given its pan-African strategy and platform. We rate UBA CAM one notch below the parent to reflect 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 to UBA CAM include its majority ownership, various aspects of management integration, including the rotation of senior executives across key sub-Saharan subsidiaries, and common branding.
The VR considers UBA CAM’s exposure to the weak and challenging Cameroon operating environment, which is a high influence factor for the bank’s rating. It also considers the bank’s very weak asset quality and capitalisation, volatile profitability metrics, moderate franchise and volatile business model. However, the VR also considers UBA CAM’s stable, but concentrated funding profile and reasonable liquidity.
Fitch affirmed Cameroon at ‘B’/Negative on 29 October 2020. We expect the country’s GDP to contract by 3.2% in 2020 before recovering by 3% in 2021. However, we see downside risks to this scenario, given the continuously evolving nature of the pandemic and a possible renewal of domestic containment measures.
The central bank for countries in the Central African Economic and Monetary Community (CEMAC) region, which includes Cameroon, adopted measures in March 2020 to support banking sector liquidity and continues to allow banks to adopt flexible loan classification policies that defer recognition of impairments and further cloud transparency of reported asset quality metrics. Uncertainty remains about the timing and pace of the economic recovery, which makes it challenging to assess borrowers’ future repayment capacity.
UBA CAM entered the crisis with weak asset quality metrics, including a headline impaired (local GAAP) loans ratio of 11.3% at end-1H20. The loans/assets ratio is low (28% at end-1H20) but concentration risk is material. The 20 largest loans represented 65% of total loans, or 1.5x equity, at end-1H20, which exposes the bank to single-name risk.
Public sector names, including the troubled national oil refinery Sonara, figure prominently among the bank’s largest exposures, the servicing of which is often delayed. However, the regulator allows banks to adopt a flexible approach towards the classification of ‘high-standing’ companies such as Sonara. As a result, we believe UBA CAM’s true impaired loans/gross loans ratio is likely to be materially higher than reported.
Our asset quality assessment also considers UBA CAM’s securities portfolio (equal to a material 58% of end-1H20 total assets (4.3x equity)), which largely comprises sizeable exposures to weakly-rated CEMAC governments (including Gabon and Republic of Congo, both rated ‘CCC’), which we consider high risk.
UBA CAM’s capital ratios appear high in an international context, with a total regulatory capital ratio of 32% at end-1H20, but should be viewed in light of the bank’s high risk profile and low risk-weighted assets density. Furthermore, international standards are loosely applied in Cameroon, which we factor into our operating environment assessment, undermining the value of this ratio, in our view. We consider capitalisation to be weak, given material weaknesses in asset quality, high single-obligor concentrations and high country risk. Positively, retention of net income in respect of 2019 will underpin capital ratios in the short term.
UBA CAM’s profitability metrics are reasonable, albeit boosted by some flexibility allowed by the regulator with regard to provisioning. However, performance metrics have proved volatile in recent years, reflecting sharp expansion and contraction of the loan portfolio – a consequence of the lumpy nature of the loan book – and volatility in loan impairment charges. The bank’s revenue streams are fairly diversified, with non-interest income accounting for 62% of operating income in 1H20. The bank’s digital services, trade finance business and brokerage activity are a strong source of revenues.
We view UBA CAM’s funding and liquidity profile as reasonable. UBA CAM’s overall balance sheet is relatively liquid, with a loan/deposits ratio of a low 41% at end-1H20. However, the deposit base is highly concentrated and a large proportion of customer deposits is short term. At end-1H20, the largest 20 depositors accounted for 42% of total customer deposits. Concentration risk is somewhat mitigated by a large stock of liquid assets, which covered a high 81% of total customer deposits at end-1H20.
IDRS, SR, AND VR
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of UBA CAM’s Long-Term IDR would require a downward revision of our assessment of the probability of parental support combined with a downgrade of the VR.
A change in our view of institutional support would most likely follow a downgrade of UBA plc or regulatory restrictions in Nigeria that constrain the parent’s ability to support its foreign subsidiaries.
A downgrade of the VR would likely occur if Cameroon’s operating environment experiences a prolonged period of economic disruption and slowdown and this results in further significant pressures on asset quality, earnings and capitalisation at UBA CAM. Large losses on the securities book could also result in a downgrade of the bank’s VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of UBA CAM’s Long-Term IDR would result from an upward revision of our assessment of the probability of parental support, which we do not expect in the near term given the Stable Outlook on UBA’s rating, or an upgrade of the VR.
A VR upgrade would require a strengthening of the operating environment and in the bank’s franchise and key financial metrics, which we consider unlikely until Cameroon’s business and economic environment develops in a more sustainable manner.