Fitch Rating has downgraded Union Bank of Nigeria’s credit rating citing a breach in capital adequacy ratio (CAR) requirement. Regulators use CAR to ensure banks have sufficient capital to absorb potential losses without losing depositor funds or becoming insolvent. It is calculated by dividing capital by risk-weighted assets. 

According to the Central Bank, national banks like Union Bank are required to maintain a minimum CAR of 10%. According to Fitch estimates, Union Bank reported 16% CAR in Q3 2023, above its threshold. 

Fitch lowered Union Bank’s long-term issuer default ratings (IDR) from ‘B-‘ to to ‘CCC’. It also downgraded the bank’s national long-term rating. However, it removed Union Bank from negative watch.

The credit rating agency warned that an extension of the breach in CAR requirements could lead to a further downgrade in the bank’s viability ratings, which measure an entity’s relative ability to meet financial commitments.

The new credit ratings will pressure Union Bank’s new leadership to strengthen the focus on buffering its capital base to tolerate naira depreciation and credit losses. The bank’s recovery will depend on internal capital generation and execution of an agreed-upon recapitalisation plan pending its merger with Titan Trust Bank. 

In January 2024, the CBN dissolved Union Bank’s leadership and appointed a new CEO due to regulatory infringements, corporate governance breaches, and involvement in activities that threatened its financial stability. 

Union Bank did not respond to a request for comments.

Nigeria’s second-oldest lender faces significant risks due to its lending practices. Single-borrower and industry concentrations accounted for 63% of its gross loans in 2023, Fitch said. The foreign loans–half of the gross loans–have also inflated due to naira devaluation. The bank’s gross loans grew 38.1% to ₦1.4 trillion compared to ₦.1.0 trillion in 2022, according to its latest unaudited financial report.

In the nine months of 2023, Union Bank’s gross earnings grew 120% to ₦ 309.1 billion due to lending and currency devaluation gains. Its profit before tax saw a significant 461% jump to ₦102.3 billion compared to the previous year.

Union Bank came under pressure in December 2023 after a probe into the activities of the CBN under former Governor Godwin Emefiele alleged that the bank’s 2022 acquisition by Titan Trust Bank was funded by “ill-gotten wealth.”

The report claimed Emefiele acquired Union Bank of Nigeria for Titan Trust Bank Limited through proxies. Titan Bank denied the allegations.

The report alleged that the ex-central banker used two Dubai-based companies, Luxis International DMCC and Magna International DMCC, to set up Titan Bank. In 2021, Titan Bank sought the CBN’s no objection to its proposed consolidation with Union Bank. It first acquired 91.5% of Union Bank’s shares and completed the takeover by 2022.