Union Bank Of Nigeria Plc. - FMDQ Group

The BankUnion Bank of NigeriaPlc of Industry2020 Credit RatingFigure 1: Union Bank of Nigeria Plc's Operating Model as at 31 December 2019Union Bank of NigeriaPlcBusiness SegmentsDivested subsidiaries inprogressRetail, SME, Commercial,Corporate and TreasuryUnion Property CompanyPlc and Union Bank, UKSource: UBNUnion Bank operates through its head office located at Stallion Plaza, 36 Marina Lagos and 239 other branchesspread across Nigeria. The Bank has a customer base of 5.8 million and its digital footprint comprise 977automated teller machines (ATMs) and 5,900 Points of Sale (Pos). UBN also has an agency-banking network of3,500 agents across the country.Information, Communication & Technology (ICT)Union Bank uses the Flexcube Universal Banking System as its core banking application (CBA). Othercentralised software deployed by the Bank are the Calypso Treasury Management System, Misys TradeInnovation Plus and Omni flow Business Process Management. Hardware solutions comprise Oraclesupercluster infrastructure and DELL EMC converged infrastructure. For email correspondences, UBN usesMicrosoft Office 365 while Cisco’s voice and video conferencing platforms assist for workforce collaborationand productivity as well as for extending internal telephony extension out of the physical office.For offsite backups, Union Bank deploys the tape backup infrastructure and has a similar set of infrastructureat one of the three CBN approved tier III datacenter sites in the country.Correspondent BanksUnion Bank of Nigeria Plc had correspondent banking relationships with the following banks in 2019:ABSA/Barclays BankAccess Bank UKBank of Beirut, UKOddo BHF BankByblos Bank LebanonUBA New YorkCitibankCommerzbankCrown Agents BankDeutsche BankStandard Chartered BankRand Merchant BankZenith Bank UKFBN UKFCMB UKMauritius Commercial BankStandard Bank SABritish Arab Commercial Bank (BACB)5Union Bank UKByblos Bank EuropeUBA, UKAFREXIM BankBMCE Bank International

The BankUnion Bank of NigeriaPlc of Industry2020 Credit RatingTrack Record of PerformanceUnion Bank’s performance has steadily improved following the 2016 recession in Nigeria, reflecting itsresilience and experience harnessed over a hundred years of operations in the Nigerian banking industry. Asat 31 December 2019, UBN’s total assets and contingents stood at 1.9 trillion, representing a 27.6% growthover the prior year. As at the same date, tier 1 (core) capital stood at 211.2 billion and funded 11.1% of theBank’s asset base while customer deposits of 886.3 billion funded 46.7%. UBN’s capital adequacy ratio (CAR)computed using the Basel II standards stood at 19.73%. During the year, UBN grew its loan portfolio by amarked 20% to 595.3 billion and recorded a non-performing loan to gross loans ratio of 5.8% as at FYE2019.Net earnings in the period ended 31 December 2019 increased by 6% to 95.5 billion. Furthermore, the Bank’scost-to-income ratio (CIR) improved to 74.1% from 79.3% in the prior year. Pre-tax return on average assets(ROA) and pre-tax return on average equity (ROE) stood at 1.5% and 12.4% respectively in 2019.Table 2: Directors at Union Bank of Nigeria PlcDirectorsPosition/DesignationMr. Cyril Odu*Mrs. Beatrice Hamza BasseyMr. Emeka EmuwaMr. Kandolo KasongoMr. Emeka OkonkwoMr. Adekunle SonolaMr. Nath UdeMrs. Obafunke Alade-AdeyefaMr. John Botts**Mr. Mark Patterson*****ChairmanActing ChairpersonGroup Managing Director/CEOExecutive Director/Chief Risk Officer/Compliance ExecutiveExecutive Director, Corporate BankingExecutive Director, Commercial BankingExecutive Director, Service & TechnologyIndependent Non-Executive DirectorNon-Executive DirectorNon-Executive DirectorNon-Executive DirectorMr. Richard BurrettMr. Ian ClyneDr. Kenroy Dowers***Mr Richard Kramer****Mrs. Furera Isma JumareMr. Taimoor LabibNon-Executive DirectorNon-Executive DirectorNon-Executive DirectorIndependent Non-Executive DirectorNon-Executive Director*Demised- 17 September 2019**Retired 19 March, 2019***Appointed 21 October 2019****Retired 16 September 2019*****Appointed 17 April 7%0.01853%0.000003%NilNilNilNilNilNilNilNilNil

The BankUnion Bank of NigeriaPlc of Industry2020 Credit RatingMANAGEMENT TEAMMr. Emeka Emuwa is the Group Managing Director/Chief Executive Officer (CEO) of Union Bank of Nigeria Plc.Prior to his appointment, he worked at Citibank Nigeria Limited for 25 years where he rose from managementassociate in 1986 to Managing Director, Citibank Nigeria Limited and Citi Country Officer, Nigeria. During histenure at Citibank, he served in various capacities including Country Officer in Cameroon, Tanzania, Gabon,Congo, Ghana and Niger Republic.Mr. Emuwa has garnered extensive experience in credit risk management, strategy, negotiation, leadership andpeople management, treasury, corporate finance and cash management. He holds a Bachelor of Science (B.Sc.)degree in Finance from the University of Lagos and a Master’s Degree from the Krannert School ofManagement, Purdue University, U.S.A.Other members of the senior management team are:Mr. Emeka OkonkwoMr. Adekunle SonolaHead Corporate BankingHead, Commercial BankingMrs. Omolola CardosoHead, Retail and Digital BankingMr. Joseph MbuluMr. Chuka EmeroleChief Financial Officer (CFO)TreasurerMr. Kandolo KasongoMrs. Jumoke OdulajaChief Risk Officer*Chief Credit Officer*Mrs. Rosemary David-EtimMr. Tetem Feyi-WabosoMrs. Ogochukwu Ekezie-EkaidemMr. Miyen SwomenRegional Executive- SouthHead, Service and TechnologyHead, Corporate Communication and MarketingHead, Human Resources*Kandolo Kasongo retired end of April 2020 after which Jumoke Odulaja took on the role of Chief Risk Officer7

The BankUnion Bank of NigeriaPlc of Industry2020 Credit RatingANALYSTS’ COMMENTSASSET QUALITYUBN’s asset base (including contingents) grew by 27.6% year-on-year to 1.9 trillion as at 31 December 2019,driven by a larger customer deposits base and additional borrowings during the review period. The Bank’sassets were predominantly in loans and advances, which rose by 20% to account for 31.4% of total assets andliquid assets, which increased by 58.1% to account for 29.8% of total assets and contingents as at FYE2019. Aconsiderable 42.9% of the Bank’s liquid assets was invested in government securities, which offered favourableyields in the period under review.UBN has a moderate risk appetite and targets large corporates in key economic sectors to create risk assets.The Bank also leverages opportunities in the ecosystem and value chain created by these corporate clients togrow the loan book. Over the last few years, UBN’s goal to be a leader in retail and transaction banking hasled to increased activities in its retail-banking segment, supported by digitisation. As a result, SME and retailloans grew by 33% and 48% respectively to collectively account for 8% of gross loans and advances as atFYE2019 (FYE2018: 6.9%). Loans to the commercial segment accounted for 15%, (FYE2018: 13%) while thecorporate segment remained the largest contributor to the Bank’s loan portfolio at 77% (FYE2018: 81%).Figure 2: Loans by Business Segment orporates2019CommercialRetailAs at 31 December 2019, Union Bank’s loan portfolio stood at 595.3 billion and reflected a 20% growth yearon year2. This was in contrast to a 6.6% decline in the prior year when the Bank wrote off some impairedexposures as it sterilised the loan book of legacy credits. In terms of currency allocation, approximately 49%(FYE2018: 45.4%) of UBN’s gross loans and advances were foreign currency denominated while 51% (FYE2018:54.6%) were in the domestic currency as at FYE2019. The recent 5.3% naira devaluation to 380/ wouldtranslate to a 2% growth in the Bank’s loan book based on its 2019 financial statements.2In 2018, UBN wrote off an impaired loan of 23.2 billion. In 2019, the loan and its corresponding impairment were reinstated,resulting in a restatement of the financial statements (gross loans and impairments)8

The BankUnion Bank of NigeriaPlc of Industry2020 Credit RatingUnion Bank allocated approximately 28% of its loan portfolio to obligors in the oil and gas sector as atFYE2019, down from 38% in the prior year. The marked decline in the sector’s contribution was due torepayments in the downstream subsector and significant growth in exposures to some sectors. UBN’s oil andgas loan book comprised loans to the upstream subsector (52%), downstream subsector (19%) and services(29%) as at FYE2019. Given the vulnerability of the oil and gas sector due to the drop in crude oil prices anddrop in demand due to lockdown in most countries on account of the COVID-19 pandemic, we expect UBN’sasset quality to come under pressure in the short term. However, CBN’s forbearance, which allows banks torestructure loans to businesses that are adversely impacted by the COVID-19 pandemic such as the oil and gasupstream and services, will moderate our anticipated level of deterioration in the short term.Figure 3: UBN's Loan Book by Sector thers3%Power8%Oil & gas28%Finance &Insurance6%General commerce14%Real estate &construction6%Consumer Credit8%Manufacturing15%UBN’s second-largest sectorial exposure was to the manufacturing sector which accounted for 15% (FYE2018:16%) of the loan book and comprised credits to various industries such as food & beverages, breweries andfast-moving consumer goods (FMCG). We expect the performance of obligors in the manufacturing sector todampen in the short term on the back of disruptions in the global supply chain particularly as most inputs areimported. Rising inflation rates will also increase production costs, while revenues will be subdued by a lowpurchasing power. As at 31 December 2019, UBN was also exposed to other troubled sectors such as thegeneral commerce (14%), power and energy (8%) and real estate and construction (6%).During the year under review, UBN granted additional loans to obligors in the finance and insurance,communication, general commerce, power, retail, manufacturing, real estate, and construction sectors whileexposures to other sectors contracted largely because of repayments and write-offs3 to a lesser extent. The202% year on year growth in credits to the communication sector was driven by an additional facility to thecountry’s largest telecommunications operator during the period. Power sector credits also rose by 73% to 453UBN wrote off a total of 15 billion in 20199

The BankUnion Bank of NigeriaPlc of Industry2020 Credit Ratingbillion due to the declassification of a previously written off impaired exposure, which was brought back onthe Bank’s loan book. The power sector is plagued with cash flow issues, which has impaired performance overthe years. As a result, the Bank has maintained a cautious stance towards growing power credits.Figure 4: Loan Book Growth by Sector (FYE2019)Finance & Insurance746%Communication202%Others143%General commerce74%Power73%Consumer Credit51%Manufacturing11%Real estate & construction4%Oil & tion-28%-35%-63%There was an improvement in UBN’s non-performing loans ratio year on year. According to the IFRS 9accounting standards, approximately 67% of the Bank’s gross loans were in the stage 1 category as at 31December 2019, up from 52% in the prior year while stage 2 loans accounted for 24% (FYE2018: 23%). Stage3 loans, which made up 10% of the loan book was unevenly split between watch list (4%) and impaired (6%)loans. The improvement in UBN’s loan book was largely caused by the re-classification of about 58 billion ofstage 3 loans to stage 2 and stage 1 categories based on the syndicate-wide industry classifications of theaffected loans and improvements in the performance of some obligors. The Bank also wrote off impaired loansworth 15 billion in 2019. Thus, there was a 52.3% decline in the volume of stage 3 loans year on year.Figure 5: UBN Credit Quality Analysis (FYE2018 and FYE2019)67%52%23% 24%17%4%Stage 1Stage 2FYE2018Stage 3 (Watchlist)FYE2019108%6%Stage 3 (Impaired)

The BankUnion Bank of NigeriaPlc of Industry2020 Credit RatingAlthough the Bank declared a non-performing loans (NPL) ratio of 6% in 2019 (higher than its peers: FidelityBank Plc, 3.3% and StanbicIBTC Bank Plc, 3.9%), stage 3 loans as a percentage of gross loans stood higher at10%, above the regulatory guidance of 5%. Stage 2 and stage 3 (watch list) loans collectively accounted for28% (FYE2018: 40%) of gross loans, which is a rating concern given that these exposures are most vulnerableto current macroeconomic headwinds. Agusto & Co is of the opinion that the Bank’s loan portfolio requirescareful monitoring, particularly in a period of heightened risks, to forestall an adverse impact on future earningsand capitalisation.The power and energy sector accounted for the largest portion of impaired loans at 47% and had the highestNPL ratio of 36.3% as at FYE2019, though better than 44.3% recorded in the prior year because of thedeclassification of a major exposure. The general commerce and retail sectors contributed 20% and 13% tototal delinquent loans respectively and recorded NPL ratios of 9.2% and 10% respectively. UBN’s coverageratio4 on its impaired loans strengthened to 128.6% (FYE2018: 117.8%), excluding regulatory risk reserves.However, the Bank’s coverage ratio for Stage 3 loans stood lower at 76% (FYE2018: 36.8%). When we factoredin risk reserves of 3.3 billion, the stage 3 coverage ratio increased to 81.7%.Figure 6: NPL Ratio (Peer Comparison)20.8%8.1%5.8%Union 2017Union 2018Union 20193.3%3.9%Fidelity 2019Stanbic IBTC 2019In our opinion, Union Bank’s asset quality requires further improvement. We also believe that the riskmanagement framework of the Bank requires fortification to forestall deterioration of new credits particularlyin a period of global economic turmoil caused by the COVID-19 pandemic. Management projects an NPL ratioof less than 6% by the end of the 2020 financial year, which may be difficult given adverse changes in theglobal and domestic economies. The Bank’s aggressive stance on recovery which yielded a total of 8.8 billionin 2019 (FY2018: 4 billion) may also be tapered by weaknesses in the domestic economy. In 2020, UBNprojects a 15-20% growth in its loan book, targeted at resilient economic sectors such as education, SME andagriculture on the back of the CBN’s intervention funds to economic sectors affected by the pandemic. Weconsider UBN’s loan growth projection to be somewhat ambitious; however, we acknowledge that a furtherdevaluation of the domestic currency will bloat the Bank’s FCY loan book.4CBN Prudential guidelines11

The BankUnion Bank of NigeriaPlc of Industry2020 Credit RatingRISK MANAGEMENTUnion Bank of Nigeria Plc adopts a moderate risk appetite to ensure sustainable growth in shareholder value.The Bank operates a centralised risk management function headed by the Chief Risk Officer (CRO), who reportsto the Managing Director/CEO with a dotted reporting line to the Board of Directors. In 2020, the Bank’s CROretired effective April and was replaced internally. UBN’s risk management team is divided into six departmentsfor efficiency: credit risk management, operational risk management, market and liquidity risk management,business support and recovery, compliance and legal.In assessing credit risk, UBN adopts an obligor risk rating (ORR) model for corporate and commercial clientsand scorecards for retail risk management. As at FYE2019, approximately 67% of the loan book was in thestage 1 category, up from 52% in the preceding year. Furthermore, 62% of gross loans and advances wasgranted to investment grade obligors as at the same date. As part of its credit risk management practice, UBN’sexposures are secured by fixed & floating assets as well as real estates, leased assets, cash, quoted shares andother acceptable securities by the Bank, with a loan to collateral ratio of 35% as at 31 December 2019(FYE2018: 72%). Approximately 90% of these collaterals were in fixed and floating assets.Figure 7: Loan Book Credit Rating (FYE2019)CC C2% 3%CCC1%B20%AAA2%AA7%A20%BB12%BBB33%Union Bank uses the Basel II standardised approach for market risk capital estimation. Internal models such asValue at Risk (VAR), Economic Value of Equity (EVE), Sensitivity Analysis and Price Value per basis point areused to compute market risks. The Bank’s portfolio is also sensitised monthly for significant adversemovements in market risk factors.Union Bank stressed its loan book as at FYE2019 based on a worst case scenario of crude oil prices averaging 15 per barrel and the naira weakening to 500/ . The impact on the Bank’s statement of comprehensiveincome showed a 6.6 billion loss, factoring in the restructurings of exposures to affected sectors in line with12

The BankUnion Bank of NigeriaPlc of Industry2020 Credit RatingCBN’s forbearance and expected revaluation gains. This estimated loss represents approximately 4% ofshareholders’ funds, which we consider moderate.UBN uses the Basic Indicator Approach (BIA) to measure operational risk while tools such as risk and controlself-assessment, key risk indicators, loss data collection and business continuity & disaster recoverymanagement, amongst others are used to manage these risks. During FY 2019, penalties of 124.3 millionwere paid by the Bank (FY2018: 27.95 million) for regulatory infractions related to AML/CFT, foreignexchange transactions and the rendition of suspicious transaction report on several split deposits.We consider UBN’s risk management framework to be adequate for its current business risks. However, currentmacroeconomic and operating uncertainties necessitate a fortification and closer monitoring of its credit riskparticularly to forestall losses in the future.EARNINGSDuring the financial year ended 31 December 2019, UBN’s net earnings improved by 6% to 95.5 billion,underpinned by a larger loan portfolio, loan recoveries and a higher non-interest income. The Bank’s interestincome amounted to 116.5 billion and reflected an 11.2% increase year on year, with growth largely frommoney market placements. Despite the 20% expansion of UBN’s loan portfolio, interest income from loans andadvances inched up by a marginal 1.5% due to a lower interest rate environment elicited by the CBN’sheterodox monetary policies aimed at driving down interest rates. Thus, the yield on UBN’s loan portfoliodeclined by 70 basis points to 14% in 2019. We believe that the average yield on the Bank’s book could improvewith an increased focus on commercial and retail loans. Credits extended to large corporate entities are usuallycharacterised by relatively lower returns.In 2019, UBN’s interest expense also increased, but by a higher 20.4% year on year due to additional borrowingsand a larger customer deposits base. The Bank’s effective cash reserve requirements (CRR) which stood above40% also pressured funding costs. As a result, Union Bank’s Net Interest Spread5 (NIS) moderated to 44.4%(FY2018: 48.6%) and was its lowest in the last decade. UBN’s NIS compared less favourably with Fidelity BankPlc’s 45.5% and Stanbic IBTC Bank Plc’s 61.8%. Due to major reclassifications in the loan book (from the stage3 category to stage 2 and stage 1), Union Bank’s loan loss expense in 2019 was low at 184 million given thatcharges on previously classified stage 3 loans were reversed.5Net Interest Spread is net interest income expressed as a percentage of interest income13

The BankUnion Bank of NigeriaPlc of Industry2020 Credit RatingFigure 8: Net Interest Spread (NIS)63.8%61.8%48.6%45.3%44.4%Union BankStanbic IBT

Byblos Bank Lebanon Standard Chartered Bank Standard Bank SA BMCE Bank International UBA New York Rand Merchant Bank British Arab Commercial Bank (BACB) Union Bank of Nigeria Plc Business Segments. Union Bank of Nigeria PlcThe Bank