Fitch Cautions Against Regulatory Actions on Union Bank Not to Trigger Downgrade Rating

Rating agency, Fitch Ratings, has said that increased regulatory actions or funding instability may lead to a downgrade rating for Union Bank of Nigeria.

In its latest rating of the bank, it placed Union Bank’s ratings on a ‘Rating Watch Negative’, a significant move that highlights the bank’s current challenges following an intervention by the Central Bank of Nigeria (CBN).

Specifically, the bank’s Issuer Default Ratings (IDRs), Viability Rating (VR), and National Ratings are under the microscope for a possible downgrade. However, UBN’s Government Support Rating of ‘no support’ is not affected by this latest rating action.

Hinting at a possible downgrade in the coming months, it said: “A downgrade (and potential resolution of the RWN) could result from further regulatory intervention, e.g. imposition of restrictive measures on UBN’s activities, fines or other regulatory findings (such as weaker asset quality than initially reported by UBN), that would lead to large losses and erosion of the bank’s capital.

“The downgrade could also result from UBN’s funding instability, i.e. due to a deposit run or where additional liquidity sources become unavailable to the bank.”

It, however, noted that a downgrade can be avoided if there are no further regulatory interventions or financial profile implications under the new management of the bank.

A negative watch signifies that the agency has observed one or more conditions that could lead to a downgrade of the bank’s credit rating soon.

Justifying the negative watch rating, the agency said: “The RWN follows the Central Bank of Nigeria’s (CBN) announcement on 10 January that it had dissolved the board and management of three Nigerian banks, including UBN, as a result of regulatory non-compliance, corporate governance failure, disregarding the conditions under which banking licenses were granted and involvement in activities that pose a threat to financial stability, among other infractions.

“The CBN has since appointed new executives, including chief executive officers, to oversee the affairs of the banks.

“The RWN reflects the uncertainty surrounding the background to the CBN’s intervention, the potential for further regulatory actions and the negative implications for UBN’s standalone credit profile, particularly relating to corporate governance risks and liquidity pressures arising from potential funding instability.

“Fitch expects to resolve the RWN within six months once there is more certainty regarding the CBN’s intervention and the implications for UBN’s standalone credit profile.”