Fitch revises UB Finance’s Outlook to Negative; affirms rating at ‘BB’

Wednesday, 11 September 2024 00:06 - - {{hitsCtrl.values.hits}}

Fitch Ratings has revised the Outlook on Sri Lanka-based UB Finance PLC (UBF) to Negative from Stable, and affirmed its National Long-Term Rating at ‘BB(lka)’.

The Fitch issued the following statement.

The revision in UBF’s Outlook stems from similar action on its parent, Union Bank of Colombo PLC (UB; BBB-(lka)/Negative), on 29 August.

The rating continues to factor in our expectation of shareholder support for UBF, as UB remains the largest shareholder (89.9%), UB’s record of support, including a capital infusion in June 2024, UB’s involvement in UBF’s strategic decisions through board representation, as well as common branding.

We rate UBF two notches below its parent’s rating given its limited importance to the UB Group. UBF’s main products, leasing and gold lending, accounted for 5.4% of the Group’s gross loans, while UBF’s entire loan portfolio was just 10% of Group gross loans at end-June 2024. Furthermore, synergies are limited between the bank and UBF, given minimal overlap between UB’s and UBF’s target customer profiles. UBF’s weak and inconsistent profitability record also limits its importance to the Group.

We believe UBF’s intrinsic financial strength is weaker than its support-driven rating. UBF has a small franchise, with market share of less than 1% by assets as of end-2023. Fitch views UBF’s risk appetite as high, while its financial profile is weak, characterised by poor asset quality, weak earnings, thin capital buffers, and significant deposit concentration.