Global Courant 2023-04-11 19:08:54
Fitch, the international rating agency, has maintained Stanbic Bank Uganda’s National Rating at ‘AAA (uga)/Stable’, the highest possible on a national scale in its latest report released last week.
The rating agency has also upgraded Stanbic Bank Uganda’s Viability Rating (VR) from ‘b’ to ‘b+’ due to improved capital buffers in relation to the risk profile. VR is the assessment of the bank’s stand-alone creditworthiness.
The VR reflects the concentration of the bank’s activities in Uganda’s relatively weak operating environment, as well as SBUL’s leading market position, large capital buffers supported by internal capital generation, diversified and healthy income streams and good asset quality.
SBUL is the principal subsidiary of Stanbic Holdings Uganda Limited, which is part of the Standard Bank Group (SBG). The latest rating released on April 6 comes as the lender has just reported an impressive financial performance for the year ending 2022 as the economy continues to recover from the aftermath of the COVID-19 pandemic.
Fitch forecasts Uganda’s real GDP to grow by 5.5% in 2023 (2022: estimate 4.9%). The economy has proven resilient to adverse global conditions and domestic climate risk events, as well as an Ebola outbreak in the fourth quarter of 2022. Inflation stood at 9.2% in February 2023, prompting the Bank of Uganda to set its policy rate at 10% (increased by a total of 350 basis points in 2022).
According to Fitch, SBUL’s Long-Term Issuer Default Rating (IDR) is driven by potential, as expressed by the Shareholder Support Rating (SSR) and supported by the bank’s Viability Rating (VR). IDR is an assessment of the bank’s relative vulnerability to default on financial obligations.
However, Fitch adjusted Stanbic’s long-term IDR from stable to negative and confirmed the IDR at ‘B+’. This revision of the outlook follows the similar rating action on the Ugandan state on March 24, 2023.
SBUL’s ‘b+’ SSR is a notch below SBG’s long-term IDR, reflecting SBUL’s strategically important role in the group’s regional operations outside South Africa. The small size of SBU (end of 2022: only 1% of SBG’s assets) supports SBG’s ability to provide support. SBG has an indirect interest of 80% in SBU.
SBUL is the largest bank in Uganda, with almost 30% of the banking sector’s total assets. The leading domestic franchise is backed by a strong corporate and investment banking business, relationships with the leading companies operating in Uganda, and significant benefits that come from being part of a major pan-African banking group.
The ratio of SBUL’s impairments (Stage 3 loans under IFRS 9) decreased to 2.9% at the end of 2022 (end of 2021: 4.6%), supported by significant write-offs and large recoveries. Total bad debt/impaired loan provisions increased significantly to 127% at the end of 2022. Most loans under pandemic-related payment moratoria, which expired in October 2022, have been recovered. Fitch does not expect further pressure on asset quality.
Operating profit/risk-weighted assets (RWA) was 7.7% in 2022, driven by a broad net interest margin (8.3%), high non-interest income and lower loan impairment charges.
According to the Fitch statement, “We expect profitability to remain high in 2023 as we expect high rates to continue. SBUL’s Fitch Core Capital ratio improved to a high 25.3% at the end of 2022 (end 2021: 21.2%) thanks to strong internal capital generation and moderate RWA growth.
A strong pre-impairment operating result (13.9% of average loans in 2022) provides a large buffer to absorb potential asset quality pressures. SBUL’s regulatory capital ratios have healthy buffers above the new minimum requirements.
The bureau continues that SBUL’s balance sheet is structurally liquid, which helps reduce the high concentration of one depositor. However, as a warning, Fitch says that a downgrade of SBUL’s Long-Term IDR requires a downgrade of both the SSR and VR. SBU’s SSR is sensitive to a weakening of SBG’s power or tendency to provide support. Reduced support power would most likely result from a downgrade of SBG’s long-term IDR.
“The rating is also sensitive to a downward revision of Uganda’s country ceiling of ‘B+’, reflecting Fitch’s view of transfer and convertibility risk, most likely triggered by a downgrade in Uganda’s ratings,” Fitch said.
An upgrade of SBUs Long-Term IDR requires an upgrade of the SSR or VR. An upgrade of SBU’s SSR would require both an upgrade of SBG’s Long-Term IDR and an upward revision of Uganda’s Country Ceiling. An upgrade to SBU’s VR would likely require a sovereign upgrade accompanied by an improvement in operating environment and stable profitability, while maintaining healthy capital buffers.
