December 21, 2022/Fitch Ratings
Fitch Ratings has affirmed UBA Cameroon S.A.’s (UBA CAM) Long-Term Issuer Default Rating (IDR) at ‘B-‘. The Outlook is Stable.
Key Rating Drivers
UBA CAM’s IDRs are driven by its intrinsic strength, as captured by the bank’s Viability Rating (VR) of ‘b-‘, and underpinned by potential support from UBA CAM’s parent bank, United Bank For Africa Plc (UBA; B-/Stable), as expressed by a Shareholder Support Rating of ‘b-‘.
The VR reflects the bank’s weak risk profile and asset quality, moderate capitalisation, modest franchise and concentrated business model. The VR also considers UBA CAM’s acceptable profitability, stable funding profile and reasonable liquidity.
Weak Operating Environment: Large corporates – which we view as the best credits in the country – face difficult operating conditions as a result of the weak rule of law and cumbersome tax procedures. The constrained liquidity position of the government and state-owned enterprises (SOEs) has been a growing source of vulnerability for banks.
Modest Local Franchise: UBA CAM is the largest rated subsidiary of the UBA group by total assets and was the second largest by loans at end-3Q22, representing about 5% of the group’s total loans. However, it has a nominal franchise in Cameroon with less pricing power than larger established banks.
Sovereign Exposure Adds Concentration Risk: UBA CAM’s loan book is fairly small at 32% of total assets but highly concentrated, with the 20 largest loans representing 75% of the total at end-3Q22. These include large exposures to the often-troubled public sector. Furthermore, the bank has large exposures to government securities issued by weak Economic and Monetary Community of Central Africa sovereigns that we consider high-risk.
Weak Loan Quality: UBA CAM has historically reported poor asset-quality metrics, although the headline impaired (local GAAP) loans ratio decreased to 10% at end-1H22 from a very high 35% at end-2020. This reflected a few large public-sector exposures being reclassified back to performing after restructuring.
Acceptable Profitability Metrics: UBA CAM’s profitability metrics are acceptable, with some flexibility allowed by the regulator with regard to provisioning policy on ‘high standing’ companies, including those in the public sector. Volatility in performance metrics is caused by large swings in the loan book and loan-impairment charges.
Moderate Capitalisation: UBA CAM’s reported capital metrics appear strong by international standards. However, capital ratios are underpinned by a very low risk-weighted assets (RWA) density that reflects high sovereign exposures carrying low or moderate weights, and equity/total assets was only 12.5% at end-1H22. Net impaired loans are high relative to equity, given low coverage.
Concentrated Funding; Reasonable Liquidity: Funding and liquidity are rating strengths. However, the deposit base is highly concentrated, and a large proportion of customer deposits are short-term. At end-3Q22, the 20 largest depositors accounted for 45% of total deposits. Concentration risk is mitigated by a large stock of liquid assets that covered a high 78% of total customer deposits at end-1H22.
Shareholder Support Rating of ‘b-‘: UBA CAM’s SSR considers the strong reputational risk for UBA of a UBA CAM default as well as UBA’s limited ability to provide support, as highlighted by its IDR of ‘B-‘.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The bank’s IDR would be downgraded if both the VR and SSR are downgraded. A downgrade of the SSR would follow a downgrade of the parent. A downgrade of the VR could follow losses on sovereign exposures or the loan portfolio that cause the bank to have limited headroom above the regulatory minimum capital requirements.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The bank’s IDRs would be upgraded if the VR or the SSR is upgraded. An upgrade of the SSR would require a two-notch upgrade of the parent. A VR upgrade is unlikely as it would require an upgrade of the operating environment, lower exposure to high-risk sovereigns, and an upgrade of the parent.
VR Adjustments
The earnings & profitability score of ‘b-‘ is below the ‘bb’ category implied score, due to the following adjustment reason: risk-weight calculation (negative).
The capitalisation & leverage score of ‘b-‘ is below the ‘bb’ category implied score, due to the following adjustment reason: leverage and risk-weight calculation (negative).
The funding and liquidity score of ‘b’ is below the ‘bb’ category implied score, due to the following adjustment reason: deposit structure (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
