Fitch Ratings – London – 19 Jan 2021: Fitch Ratings has affirmed United Bank for Africa Senegal SA’s (UBA SEN) Long-Term Issuer Default Rating (IDR) at ‘B-‘. The Outlook remains Stable. The Viability Rating (VR) has also been affirmed at ‘b-‘. A full list of rating actions is provided below.
KEY RATING DRIVERS
IDRs and Support Rating
UBA SEN’s IDRs are driven by potential support from the parent bank, United Bank For Africa Plc (UBA; B/Stable), in case of need. The Support Rating (SR) of ‘5’ indicates Fitch’s view that parental support is possible, notably given that UBA SEN only represents 3% 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 SEN mirrors the Outlook on its parent.
UBA has a high propensity to support UBA SEN given its pan-African strategy and platform. We rate UBA SEN one notch below the parent to reflect the subsidiary’s limited contribution on an individual basis to this strategy, given its small size. UBA SEN’s role in the group therefore has a high influence on the rating. Other factors considered in our assessment of UBA’s propensity to provide support to UBA SEN include its majority ownership, various aspects of management integration, including rotation of senior executives across key sub-Saharan subsidiaries, and common branding.
The VR factors in the negative implications of the coronavirus pandemic for UBA SEN’s operating environment and heightened risks to its Standalone Credit Profile given asset-quality weakness, high single-name borrower and depositor concentrations, and limited capital buffers. Profitability metrics are moderate but have been volatile, reflecting the sharp expansion and contraction of lending – due to the lumpy nature of the bank’s loan book – and one-off costs. The bank’s funding structure is also weak, given the concentrated nature of deposit funding, although liquidity is sufficient.
UBA SEN operates exclusively in member countries of the West African Economic and Monetary Union (WAEMU) and its VR is affected by the region’s weak development. We expect Senegal’s GDP to grow by a tepid 0.5% in 2020 before recovering to 4.5% in 2021. However, we see downside risks to this scenario given the rapidly evolving nature of the pandemic and possible extensions in regional containment measures.
UBA SEN is a second-tier bank and has a limited, concentrated franchise in the highly competitive Senegalese market. Loans accounted for just 3% of total assets at end-June 2020 and the top 20 loans represented about 90% of gross loans, equivalent to a very high 4.4x Fitch Core Capital (FCC).
Public-sector lending represents about 30% of UBA SEN’s loans and debt servicing delays are frequent. The bank’s reported non-performing loans (NPLs)/gross loans ratio improved to a still high 13% at end-1H20 from 27% at end-2019 due to the repayment of several such public exposures. However, we believe reported NPLs understate the true extent of asset-quality problems. Overdue public-sector loans in Senegal are generally repaid, but with long delays, and write-offs at UBA SEN have been low. Even considering this, reserves coverage of impaired loans is weak (13% at end-1H20).
The securities portfolio represented a high 44% of total assets at end-1H20 (equal to 3.6x equity), exclusively composed of WAEMU sovereign securities, and held-to-maturity, as custom in the sub-region, rated in the ‘b’ range.
UBA SEN’s capital buffers are weak considering high single-name credit concentrations and sizeable unreserved impaired loans relative to equity (40% at end-1H20). UBA SEN’s FCC/risk-weighted assets ratio of 22.5% at end-1H20 was high in an international context, but should be viewed in light of the bank’s high risk profile and low risk-weighted asset density. The bank’s tangible common equity/tangible assets ratio was lower at 12.2%, highlighting weaker loss-absorption buffers.
In our view, UBA SEN’s reported profitability metrics are generally healthy but volatile, reflecting varying loan growth and flattered by low provisioning for impaired loans. UBA SEN’s weak asset quality and capitalisation exert high influence in our assessment of the bank’s VR.
UBA SEN’s funding structure demonstrates important weaknesses. Customer deposits provide the bulk of funding and high concentration reflects a limited franchise. The 20 largest deposits represented 51% of customers deposits at end-1H20, which exposes the bank to withdrawal risks. The largest depositors are public-sector companies and corporate deposits are often linked to extension of loans and can be reduced or withdrawn once a loan is repaid. However, access to inexpensive customer deposits is one of the bank’s strengths with 73% of deposits being current and savings accounts at end-1H20.
A large share of liquid assets, the bulk being government securities, held on the balance sheet help mitigate liquidity risk, representing half of total deposits at end-1H20. However, there are limits on the amount of government securities, which can be repurchased with the central bank. UBA SEN comfortably complies with prudential liquidity requirements.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of UBA SEN’s Long-Term IDR and SR 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, or an upgrade of UBA SEN’s VR.
A VR upgrade would require significant strengthening of the bank’s franchise and key financial metrics, which we view as unlikely given pressures arising from Senegal’s challenging operating environment and pressures on capitalisation and asset quality.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of UBA SEN’s Long-Term IDR would follow a weakening of our view of support available from UBA, shown by either a downgrade of the parent’s Long-Term IDR or a reduced willingness of the parent to provide support. However, the IDR would only be downgraded if the bank’s VR was simultaneously also downgraded.
A downgrade of the VR is likely to follow further deterioration in asset quality, for example, resulting from a rise in problematic public loan exposures, and ensuing pressure on the bank’s capitalisation.