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Diamond Bank Earnings: Succumbing to Cost & Regulatory Pressures?

Diamond Bank Plc recently published its audited FY: 2014 and Q1:2015 results on March 30, 2015 and April 13, 2015 respectively
on the floor of the Nigerian Stock Exchange (NSE).

The results show mixed performances at the top and bottom lines. We present the highlights of the FY: 2014 result, Q1:2015 and our 2015 estimates below:
Profitability Wanes on Hike in Cost to Income Diamond’s gross earnings expanded 15.7% Y-o-Y to N208.4bn in FY:
2014 from N181.2bn in FY: 2013, in line with our FY: 2014 gross earnings forecast of N215.2bn (3.8% variance).

We believe this top-line growth is impressive despite the Apex Bank’s unsympathetic monetary policies that constrained banks’ income.
However, in Q1:2015, gross earnings eased 5.2%Y-o-Y to N50.7bn from N48.2bn in Q1:2014. Compared to peers, the Bank’s performance is fairly above those of its Tier-2 Banks (+12.9%) for FY: 2014.

We note that growth in FY: 2014 gross earnings was broadly driven by expansion in non-interest income which rose 27.8% (N47.3bn in FY: 2014 vs. N37.0bn in FY: 2013) as against interest income. Further review revealed that net trading and foreign exchange income also surged significantly by 43.7% in line with the trends noticed across the sector.

As against top-line growth, FY: 2014 PBT and PAT declined 12.4% and 10.7% respectively, even as Q1:2015 PBT (-9.5%) and PAT (-15.1%) followed suit.

Further scrutiny of the numbers indicated net interest income grew 4.7% Y-o-Y as a result of 33.9% Y-o-Y hike in interest expense (vs. 12.6% in interest income) thereby weighing down the bottom line. Further pressure points on Diamond’s PAT include the 13.2% and 17.9% increase in impairment charges and operating expenses respectively.

Consequently, ROAA and ROAE eased to 1.5% and 14.5% in FY: 2014 from 2.2% and 23.7% in FY: 2013 respectively, relative to Tier-2 Banks average ROAA: 2.1%and ROAE: 16.9%. CIR and CoF Expands, NIM Reduces Cost to Income Ratio (CIR) rose to 63.3%for FY: 2014 from 59.4%in FY: 2013 (but firmed at 62.0% in Q1:2015).

Nonetheless, this is below 67.8% average for Tier-2 banks. A further analysis of the operating expenses shows that substantial increase in AMCON Resolution Fund (+149.5%), professional fees (+37.4%) and personnel expenses (+13.3%) accounted for the rise in CIR in FY: 2014.

We are of the opinion that Diamond may need to seek out means of increasing the efficiency of its Assets to improve its Net margin which eased to 12.2% in FY: 2014 (vs. 15.8% in FY: 2013) and 14.1% in Q1:2015 from 17.5% in Q1:2014.

Also, Cost of Funds (CoF) rose to 3.7% in FY: 2014 and 3.5% in Q1:2015 from 3.1% in FY: 2013. However, this is not surprising given intense rivalry for deposits which was occasioned by Central Bank’s policy that increased CRR on private (from 12.0% to 20.0%) and public sector (from 50.0% to 75.0%) funds. Net Interest Margin (NIM) slackened to 6.7% in FY: 014 and 6.6% in Q1:2015 relative to 7.3% in FY: 2013, well below the 7.2% average for Tier-2 banks in the same period.

Gross Loans and Advances Crossed the N1.0tn Mark The Bank expanded its loan book by 32.8% for FY: 2014 (N1.1tn relative to N818.0bn in FY: 2013). This remained broadly in line with trend across the banking space given the Central Bank’s contractionary stance in the face of weakening macro-economic indicators.

We note that the Bank’s loan book has also crossed the N1.0tn mark compared to its Tier-2 peers. Expectedly, FY: 2014 Credit impairment charges increased 13.2% Y-o-Y (N26.4bn vs. N23.3bn in FY: 2013). Cost of Risk however eased slightly to 2.4% from 2.8% in the previous year given larger size of risk assets, yet this is high relative to Tier-2 average of 1.8%.

In the same vein, Total Assets also increased 27.3% Y-o-Y (N1.9tn in FY: 2014 vs. N1.5tn in FY: 2013), this remained broadly driven by growth in gross loan book whose FY: 2014 contribution increased to 56.2% relative to 53.4% in FY: 2013.

Although Diamond’s Loan to Deposit ratio of 69.6% is low relative to the Tier-2 average of 75.3%and against the regulatory benchmark of 80.0%, we do not expect a significant growth in risk asset in 2015 based on management guidance.

Total Deposits Maintained Double Digit Growth Diamond’s Total deposits advanced 23.9% to maintain its custom of huge deposit mobilisation. Total deposits rose to N1.6tn in FY: 2014 relative to N1.3tn in FY: 2013. This represents 90.6% of Total Liabilities which also grew 24.9% in the same period.

The Bank’s Capital Adequacy Ratio (CAR) slid to 17.5% in FY: 2014 from 18.5% in previous financial year, mainly due to aggressive growth in loan book with less than proportionate increase in qualifying capital. Nonetheless, this is reasonably above the 16.0% regulatory benchmark for Systemically Important Banks (SIBs).

DIAMOND is Still Attractive We forecast Diamond’s Gross loan and advances to strengthen to N1.2tn (up 10% Y-o-Y) in FY: 2015. This is likely to drive gross earnings to N243. 1billion (representing 16.7% growth) on the back of stronger growth in non-interest income.

Also, we anticipate moderation in CIR from 63.3% as at FY: 2014 to an average of 62.5% in the next five years. Consequently, we estimate PAT to strengthen by 23.1% Y-o-Y. Nevertheless, we forecast EPS to settle at N1.53 per share from N1.65 per share due to increase in shares outstanding resulting from rights offering issued last year.

On basis of the foregoing, together with weaker economic outlook, we increase our risk free rate to 15.0% from 11.0% and country’s risk premium from 9.0% to 11.0%. Therefore, we reviewed our target price downward from previous N10.63 to N6.36 per share. The counter currently trades at N4.60 per share, this implies that the stock portends an upside potential of 38.1%.

Therefore, we retain our BUY rating on the counter.

Source: Afrinvest Research

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