In the face of a significant devaluation of the Nigerian naira, Fitch Ratings has maintained its positive outlook on Union Bank of Nigeria PLC. The agency has affirmed the bank’s Long-Term Issuer Default Rating (IDR) at ‘B-‘, its Viability Rating at ‘b-‘, and its National Long-Term Rating at ‘BBB(nga)’.

Despite the sharp devaluation, Fitch believes that Union Bank of Nigeria (UBN) will continue to meet its regulatory minimum capital adequacy ratio (CAR) requirement in the near future. The bank has an adequate buffer and pre-impairment profit, which should help mitigate the second-order economic effects on loan quality and ensure compliance, if needed.

The devaluation of the naira occurred on June 14 following the Central Bank of Nigeria’s decision to unify the exchange-rate windows and allow the currency to trade at a market-determined rate.

As of June 21, the Investors’ and Exporters’ (I&E) window closed at 776 naira to 1 US dollar, marking a depreciation of 62% since June 13, 2023, and 70% since the end of 2022. This move away from a managed exchange rate regime aims to attract capital inflows and alleviate foreign currency (FC) shortages that have plagued Nigeria’s economy in recent years.

President Tinubu has implemented crucial reforms, including the removal of fuel subsidies, at a faster pace than expected after taking office. While these reforms are beneficial for the country’s credit profile, they also present short-term macroeconomic challenges.

The parallel market exchange rate, which had been hovering above 700 naira to the US dollar for most of the past year, had already influenced a significant portion of economic activity. This has dampened the inflationary impact of the recent devaluation of the official exchange rate.

However, the devaluation and fuel subsidy removal are expected to contribute to existing inflationary pressures, particularly affecting fuel prices, and increase the risk of social unrest. Fitch anticipates that the banking sector will experience a faster rise in impaired loan ratios in the near term as borrowers grapple with higher inflation and interest rates.

In response to a directive from the Central Bank of Nigeria, foreign currency lending standards have tightened, preventing borrowers without similar revenues from obtaining foreign currency loans. Additionally, some banks have restructured foreign currency-denominated loans into naira.

Despite these measures, legacy foreign currency loans to borrowers without foreign currency revenues still exist and are expected to weaken in the near term. When assessing Union Bank of Nigeria’s asset quality, analysts take into account its relatively small loan book compared to its assets, as the bank holds substantial cash reserves at the Central Bank of Nigeria and sovereign fixed-income securities.

The bank’s Stage 2 loans, which accounted for 25% of gross loans in 2022, are considered a vulnerability for Union Bank of Nigeria, primarily because they are predominantly denominated in foreign currency and will increase following the naira’s depreciation.

Nevertheless, Fitch views Stage 2 loans as a moderate downside risk for regulatory capital adequacy ratios since the bank has received forbearance from the Central Bank of Nigeria until the end of 2024. This forbearance allows only modest provisioning for these exposures when calculating regulatory capital ratios.

The devaluation will result in an increase in Union Bank of Nigeria’s risk-weighted assets denominated in foreign currency, exerting downward pressure on its capital ratios. However, Fitch believes that the direct impact of the recent devaluation on the bank’s capital ratios will be manageable due to its relatively small foreign currency-denominated risk-weighted assets and favorable net foreign currency position. Revaluation gains should help cushion the impact of inflated risk-weighted assets on capital ratios.

Fitch expressed confidence that Union Bank of Nigeria will maintain sufficient capital buffers and pre-impairment operating profit to navigate the economic effects of the devaluation on loan quality and the increased risks to capital from inflated foreign currency-denominated problem loans.


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