Fitch Ratings has affirmed United Bank for Africa Senegal SA's (UBA SEN) Long-Term Issuer Default Rating (IDR) at 'B-'.

The Outlook is Stable. A full list of rating actions is below.

Key Rating Drivers

UBA SEN's IDRs are driven by its intrinsic strength as captured by the bank's Viability Rating (VR) of 'b-' and underpinned by potential support from its parent bank, United Bank For Africa Plc (UBA; B-/Stable), as reflected by its Shareholder Support Rating (SSR) of 'b-'.

The VR factors in the bank's weak asset quality, although the headline asset-quality ratios have improved, high single-name borrower and depositor concentrations, and limited core capitalisation. Profitability metrics are moderate and liquidity is sufficient. The VR of 'b-' is below the 'b' implied VR because of its business profile.

Uncertain Operating Environment: Despite Fitch's expectations of strong GDP growth given structural reforms and gas projects coming onstream, banks face an uncertain operating environment outlook as global contagion risks intensify.

Modest Local Franchise: UBA SEN is a second-tier bank in the country and has a limited and concentrated franchise in the highly competitive Senegalese market. Gross loans accounted for only 34% of total assets at end-1H22. The business model is highly reliant on government securities-related earnings.

Risk Controls from Group: UBA SEN applies group-wide risk controls and follows UBA guidelines with regard to strategy and risk appetite. The bank's underwriting is conservative by Senegalese standards but the loan book is concentrated by sector and single-name borrower.

Weak Asset Quality: UBA SEN's reported non-performing loans (NPLs)/gross loans ratio is volatile (end-1H22: 7.5%, end-2021: 28.4%, end-2020: 12.5%) due to inconsistent performance of several public-sector loans and high loan growth at times. We believe reported NPLs understate the true extent of asset-quality problems given the bank's somewhat loose classification.

Healthy Performance Metrics: Reported profitability metrics are generally healthy but volatile through the cycle, reflecting varying loan growth and loan-impairment charges. The bank displays a high cost base, which it is trying to reduce through digitalisation and an efficient branch network. Net interest margins are supported by high lending interest rates, high yields on government securities and an inexpensive funding base.

Weak Capitalisation: UBA SEN's capital buffers are weak for its high single-name credit concentrations and high leverage. UBA SEN's Fitch core capital (FCC)/risk-weighted assets (RWAs) (32.5% at end-1H22) is very high but should be viewed in light of the risk profile and low RWA density (RWAs/assets of only 28%).

Concentrated Funding; Reasonable Liquidity: UBA SEN's 20-largest deposits formed 61% of customers deposits at end-3Q22, exposing the bank to withdrawal risks. A large share of liquid assets, mostly government bonds of Western African Economic and Monetary Union (WAEMU) countries, cover total customer deposits by about 60%, which reasonably mitigates liquidity risk.

Shareholder Support Rating of 'b-': UBA SEN's SSR considers the strong reputational risk for UBA of a UBA SEN default as well as UBA's limited ability to provide support, as highlighted by its IDR of 'B-'.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The bank's IDR would be downgraded if both the VR and SSR are downgraded. A downgrade of the SSR would follow a downgrade of the parent. A downgrade of the VR would likely follow deterioration in asset quality such that impairment charges cause the bank to have limited headroom above the regulatory minimum capital requirements.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The bank's IDRs would be upgraded if the VR or the SSR is upgraded. An upgrade of the SSR would require a two-notch upgrade of the parent. A VR upgrade would require a stronger business profile and a consistently low impaired loans ratio combined with an upgrade of the parent.

VR ADJUSTMENTS

The earnings & profitability score of 'b' is below the 'bb' category implied score, due to the following adjustment reason: risk-weight calculation (negative).

The capitalisation & leverage score of 'b-' is below the 'bb' category implied score, due to the following adjustment reason: leverage and risk-weight calculation (negative).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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