UB Finance receives ‘BB(lka)’ rating by Fitch; Outlook Stable

Fitch Ratings last week affirmed UB Finance PLC’s (UBF) National Long-Term Rating at ‘BB(lka)’. The 
Outlook is Stable.
UBF’s National Long-Term Rating is driven by the expectation of extraordinary support from Union Bank of Colombo PLC (UB, BBB-(lka)/Stable) to UBF, if required. The view is based on UB’s 89.9 percent ownership of UBF, its record of ordinary support, board representation and common branding between the 
bank and UBF.

“UBF’s rating is constrained by our view that any support required may be more of a burden relative to UB’s modest balance sheet size, compared with other Fitch-rated financial leasing companies owned by larger banks,” the rating agency said. 

UBF’s assets accounted for 7 percent of UB’s consolidated assets and 14 percent of equity as of end-2023. UB’s smaller capital base also limits the amount of funding it can provide to UBF in times of need due to the regulatory limit on the bank’s single-borrower lending. At end-3QFY24, UBF held no debt from UB, with only modest historical borrowings on record.

Fitch rated UBF two notches below its parent’s rating, given its limited importance to the UB group. UBF’s main products, including leasing and gold lending, account for 5.3 percent of the group’s gross loans and are not core products of the group due to limited scale, in 
Fitch’s view. 

Furthermore, synergies are limited between the bank and UBF, given minimal overlap between UB’s and UBF’s target customer profiles. UBF’s low contribution to group profitability due to a weak performance record, despite the 13 percent contribution in 2023, also limits its importance 
to the group.

Fitch said it believe UBF’s intrinsic credit profile is weaker than its support-driven rating. UBF has a small franchise, with market share of below one percent as of end-2023. Fitch views UBF’s risk appetite as high while its poor asset quality, weak earnings, thin capital buffers and significant deposit concentration underpin its weak financial profile.
“We expect the proposed rights issue to bridge UBF’s regulatory capital shortfall. However, the capital buffer could be thin against the regulatory minimum capital of Rs.2.5 billion and may fall below the regulatory requirement should there be any unforeseen losses,” Fitch said. 
UBF’s debt/tangible equity stood at 2.9x at end-3QFY24 and Fitch expects this to increase in the medium term as UBF pursues aggressive growth.