By Niyi Jacobs
Fitch Ratings has downgraded Union Bank of Nigeria PLC’s Long-Term Issuer Default Ratings (IDR) to ‘CCC’ from ‘B-‘, citing a prolonged breach of the bank’s total capital adequacy ratio (CAR) requirement of 10% and uncertainties regarding the timeline for restoring compliance.
The downgrade reflects concerns about the bank’s viability and ability to meet its regulatory capital requirements. Fitch estimates that Union Bank of Nigeria has breached its CAR requirement due to a significant increase in its regulatory risk reserve, which is deducted from capital for the purpose of capital adequacy computations.
The bank’s near-term prospects will depend on continued sound internal capital generation and a timely execution of the recapitalization plan agreed upon by new management with the Central Bank of Nigeria (CBN). Fitch noted that progress is being made in reconstituting the board and the bank continues to operate as a going-concern.
However, the bank’s asset quality vulnerabilities stem from its high concentration risk, and its exposure to the weak Nigerian sovereign through securities and cash reserves at the CBN is also high. Additionally, the bank’s foreign-currency lending is above peers and has inflated following the naira devaluation.
Despite these challenges, Union Bank of Nigeria reported a 93% increase in profit in the first quarter of 2024, driven by large foreign-exchange and derivatives gains following the naira devaluation and higher net interest income. Fitch estimates that the bank’s return on equity improved to 35% in the first quarter of 2024 from 20% in the financial year 2023.
