Onome Amuge
Fitch Ratings has downgraded Union Bank of Nigeria PLC’s (UBN) Viability Rating (VR) to ‘f’ from ‘ccc’, a move that the ratings agency says “constitutes a bank failure” under its rating criteria. While the bank’s Long-Term Issuer Default Rating (IDR) was affirmed at ‘CCC’, the ‘f’ rating is the lowest possible VR and indicates that the bank cannot operate independently without external support.
The downgrade reflects a material capital shortfall at UBN, with its total capital adequacy ratio (CAR) in breach of the 10 per cent regulatory requirement since the fourth quarter of 2023. This shortfall, exacerbated by an increase in regulatory risk reserves and the impact of naira depreciation on U.S. dollar risk-weighted assets, has persisted despite extensive regulatory forbearance.
Fitch believes that for UBN to restore capital adequacy and exit forbearance, it will require a material capital injection, along with a substantial reduction in its credit concentrations and problem loans. The agency noted that UBN’s national ratings are the lowest among Fitch-rated Nigerian banks, primarily due to the ongoing regulatory capital breach.
Despite the VR downgrade, the affirmation of the bank’s Long-Term IDR indicates that default risk has not yet materially increased. Fitch’s view is that the bank has sufficient liquidity, including in foreign currency, to meet its current obligations. The ratings agency also anticipates that Nigerian authorities will continue to support the bank and allow it to operate under forbearance in the near term.
However, the ‘CCC’ IDR rating pointed out that default remains a real possibility. This is attributed to the substantial capital shortfall, which could erode depositor confidence and increase the risk of large-scale withdrawals.
Fitch’s analysis also highlights UBN’s high concentration risks. The top 20 loans account for a very high portion of its gross loans and capital. Furthermore, foreign-currency lending has grown following the naira’s depreciation, and the bank holds considerable exposure to the Nigerian sovereign through securities and cash reserves.
The report also points to asset quality vulnerabilities, with a “very high” Stage 2 loans ratio. Some of these loans are currently under forbearance, which prevents their reclassification as more severe Stage 3 loans. This situation, combined with the high concentration risks, is feared to lead to large fluctuations in the bank’s Stage 3 loan ratio. UBN’s management, meanwhile, is actively engaging with regulators on a recapitalisation plan.
