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

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

The 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.

“UBA Ghana's VR of 'ccc' reflects our view that failure remains a real possibility due to high exposure to the Ghanaian sovereign (Restricted Default; RD) through securities. The bank incurred losses in the sovereign domestic debt exchange programme (DDEP) and some risks remain from the ongoing external debt restructuring and impending loan quality issues. Nevertheless, the losses are tolerable due to adequate capital buffers”, it said.

The VR is one notch below the implied VR of 'ccc+' due to the operating environment/sovereign rating constraint.

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 Ghana's ability to use support is conditioned by T&C risk. Fitch does not believe the authorities will impose controls that impede banks servicing their external debt.

Challenging Operating Environment

The report added that the DDEP imposed large losses on the banking sector, whose metrics continue to benefit from regulatory capital forbearance.

Macroeconomic conditions remain challenging due to high inflation (July 2024: 20.9%) and interest rates, and cedi depreciation, which had driven the sector's non-performing loans ratio to 24.1% in the first half of 2024.

Moderate Franchise

UBA Ghana represented just 2.9% of domestic banking sector assets at end-2023, but its franchise benefits from being a subsidiary of UBA.

High Sovereign Exposure

Fitch saidsovereign exposure through fixed-income securities is high (end-2023: 271% of total equity). This includes new bonds (rated 'CCC') received in the DDEP and Treasury bills not subject to the restructuring. It also includes large holdings of recently restructured cocoa bills and Eurobonds, for which the restructuring is yet to conclude.

High Impaired Loans

UBA Ghana's impaired loans was due to the challenging operating environment and a contracting loan book.

It however eased to 14.3% at end-June 2024 due to write-offs and recoveries. The importance of loan-quality risks for asset quality assessment is diminished by a small loan book, with broader asset quality more closely aligned with the sovereign's creditworthiness.

Sovereign-Derived Income Reliant

Operating returns on risk-weighted assets averaged 5.0% between 2020 and 2023, despite the effects of the pandemic and sovereign default, primarily driven by high yields on government fixed-income securities.

Adequate Capital Buffers

Capital buffers as of June 30, 2024, were adequate to tolerate the restructuring of Eurobonds and higher problem loans.

Fitch estimates UBA Ghana would comply with capital requirements in the absence of regulatory forbearance and even if it used a higher discount rate to value new bonds received in the DDEP.