Fitch Ratings has downgraded the long-term issuer default ratings (IDR) of Union Bank of Nigeria, citing concerns over the bank’s capital adequacy ratio (CAR). The downgrade, which saw the bank’s IDR drop from ‘B-‘ to ‘CCC,’ reflects growing apprehension about the bank’s ability to meet regulatory capital requirements and absorb potential losses.
The capital adequacy ratio is a critical metric used by regulators, including the Central Bank of Nigeria (CBN), to ensure that financial institutions like Union Bank have sufficient capital buffers. These buffers are vital for absorbing unexpected losses and protecting depositors. For national banks in Nigeria, the CBN mandates a minimum CAR of 10%. Although Union Bank reported a CAR of 16% in the third quarter of 2023, comfortably above the threshold, Fitch’s concerns suggest that ongoing challenges could jeopardize this buffer.
Fitch’s decision to downgrade Union Bank’s rating also included lowering its national long-term rating, though the bank was removed from negative watch. The credit rating agency warned that continued breaches of the CAR requirements could lead to further downgrades in the bank’s viability ratings. These ratings assess the bank’s capacity to meet its financial commitments relative to its peers.
The downgrade comes at a critical time for Union Bank, which is already under pressure to strengthen its capital base. The bank’s new leadership, appointed by the CBN in January 2024 following regulatory and governance issues, now faces the daunting task of stabilizing the bank’s finances. The bank’s future recovery will likely depend on its ability to generate internal capital and effectively implement a recapitalization plan, particularly as it moves toward a merger with Titan Trust Bank.
Union Bank’s financial challenges are compounded by its lending practices. According to Fitch, the bank’s lending is highly concentrated, with single-borrower and industry-specific loans accounting for 63% of its total loans in 2023. Furthermore, the devaluation of the naira has inflated the bank’s foreign loans, exacerbating its risk exposure. Union Bank’s gross loans increased by 38.1% to ₦1.4 trillion in 2023, compared to ₦1.0 trillion the previous year.
Despite these challenges, Union Bank reported significant financial gains in the first nine months of 2023. The bank’s gross earnings surged by 120% to ₦309.1 billion, driven by increased lending and gains from currency devaluation. Profit before tax saw an even more remarkable increase of 461%, reaching ₦102.3 billion.
Union Bank’s recent struggles have been further highlighted by the controversy surrounding its acquisition by Titan Trust Bank. A probe into the activities of the former CBN Governor Godwin Emefiele alleged that the acquisition was financed through illicit means. The report accused Emefiele of using Dubai-based companies to facilitate the acquisition, allegations that Titan Bank has denied.
As Union Bank navigates these turbulent waters, the coming months will be crucial in determining its ability to restore investor confidence and stabilize its financial position.
