Fitch Ratings has affirmed United Bank for Africa (Ghana) Limited's Long-Term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook.

The bank's Viability Rating (VR) has also been affirmed at 'ccc'.

According to the UK-based firm, UBA Ghana's Long-Term IDR is driven by potential support from its Nigeria-based parent, United Bank for Africa Plc (UBA; B-/Stable), as expressed by its Shareholder Support Rating (SSR) of 'b-'.

The Stable Outlook also reflects that on UBA's Long-Term IDR. UBA Ghana's Long-Term IDR is at the same level as Ghana's Country Ceiling of 'B-', which captures Fitch's view of transfer and convertibility (T&C) risk in the country.

“UBA Ghana's VR of 'ccc' reflects our view that failure remains a real possibility due to high exposure to the Ghanaian sovereign ('RD') through securities. This is despite losses incurred in the sovereign domestic debt restructuring, forthcoming external debt restructuring and impending loan quality issues being tolerable due to large capital buffers”, it pointed out.

Shareholder Support Rating of 'b-'

Fitch believes UBA has a high propensity to provide support, if required, despite the sovereign default to preserve its Ghanaian operations due to the attractiveness and contribution of the Ghanaian market to its pan-African strategy, and the reputational implications of a subsidiary default.

However, UBA's ability to provide support its limited by its own creditworthiness. Fitch does not believe the authorities will impose controls that impede banks in servicing their external debt.

Sovereign Default

Fitch said Ghana's domestic debt-exchange programme (DDEP), which involved exchanging cedi government bonds for new bonds with significantly lower coupons and longer tenors, concluded in February 2023, inflicting large net present value losses on participating bondholders. Ghana recently restructured other domestic debt instruments and is restructuring its external debt.

High Sovereign Exposure

Fitch said sovereign exposure through fixed-income securities is high (June 30, 2023: 50% of total assets; 245% of total equity). This includes new bonds (rated 'CCC' by Fitch) received in the DDEP and treasury bills that are not subject to restructuring. It also includes large holdings of recently restructured cocoa bills and US dollar local bonds, and Eurobonds yet to be restructured.

Rising Impaired Loans

Again, UBA Ghana's impaired loans ratio increased to 26.3% at June 30, 2023 from 9.7% at end-2022 as borrowers' resilience weakens on the back of high interest rates and inflation.

However, loan-quality risks are diminished by UBA Ghana's small loan book (end-1H23: 18% of total assets), with broader asset quality being more closely aligned with the sovereign's creditworthiness.

DDEP Pressures Profitability

It said operating returns on risk-weighted assets decreased to 2.2% in 2022 (2021: 5.2%) as a result of large impairment charges stemming from the DDEP.

Fitch therefore considers profitability to have been supported by use of a low discount rate to determine the fair value of the new bonds.