United Bank of Africa Plc (UBA) will likely grow gross earnings by 116.5% to c.N1.7 trillion by FY'23 end (vs a five-year average of N587.4 billion), aided by a projected surge in non-interest revenue to N698.4 billion (FY'22: N213.1 billion) and a 74.0% accretion in interest income. The expected surge in non-interest revenue should be inspired by the rise in net fair value gains on derivatives recorded in the second quarter of the year - a positive offshoot of the material naira devaluation and associated derivative revaluation, with the bank mainly net long in dollar assets. The further deterioration in the I&E window in the ongoing quarter (c.815.32/$ as of the close of 31st October 2023) suggests that there could be scope for more currency-inspired accretion. Similarly, interest income should be supported by the upward movements in fixed-income yields inspired by material re-ratings at the NTB and OMO markets, the removal of the cap on the SDF, and the overall hawkish disposition of the CBN. The impact of the above drivers will likely remain evident in FY'24.
Elsewhere, the bank's huge stock of cheap funding (low-cost funding mix of 93.8% as at 9M'23) and aggressive expansion of retail presence should lead to a relatively subdued increase in interest expense (67.6% YoY vs our projected 74.0% increase in interest income) over the ongoing financial year. Hence, we see legroom for a 1.1ppts increase in NIM to 6.5% in FY'23. This NIM should support a total operating income growth of 126.1% over the full-year period (vs 145.6% YoY in 9M'23). Given this, passthrough from currency-induced gains, and our expectation for a more measured increase in operating expense (+37.8% YoY vs the employee wages and regulatory charges induced 41.2% increase in 9M'23), we see latitude for an improvement in the cost-to-income ratio to c.36.0% in FY'23 (vs 59.1% in FY'22).
