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Diamond Bank Plc - Earnings Sink on Higher Loan Loss Expense

Proshare

Tuesday, November 1, 2016 8:13 AM / Vetiva Research

         PAT down 78% y/y – behind Vetiva and Consensus estimates
         Loss posted in Q3’16 standalone
         Worrisome signs ahead, Earnings revised lower
         TP revised to N3.17 (Previous: N4.29)


PAT sinks amidst weak top line growth

DIAMONDBNK released 9M’16 results showing weaker quarterly earnings amidst subdued earlier performance. On a y/y basis, Gross Earnings declined 3% to N151 billion, albeit 2% ahead of our estimate. With Interest Expense coming just in line with our estimate, we applaud the consistent cost moderation recorded year till date despite the higher interest rate environment and a larger customer deposit.

However, Net Interest Income bowed to the weak top line performance, down 8% y/y to N78.4 billion – behind our N79.5 billion estimate. Asset quality remains DIAMONDBNK’s dilemma as loan loss provision continues to race north – doubling y/y to N40 billion and ahead of our N35 billion forecast.

With Operating Expense moderating a mild 3% y/y and much in line with our estimate (1% deviation), PBT sunk to N3.9 billion (Vetiva: N13.2 billion). Overall, PAT came in at N3.5 billion vs. Vetiva and Consensus estimates of N10.6 billion and N9.7 billion respectively.  

Loss posted in Q3 standalone
Although we observed notable improvement in Q3 top line as a 24% q/q rise in Interest Income spurred a 16% uptick in Gross Earnings, elevated expenses and provisioning however ensured that cost increases overshadowed the top line improvement to put Q3 PAT at a loss.

Particularly, aside the marked quarter on quarter increases in Interest and Operating Expense, DIAMONDBNK recorded an additional N21.3 billion loan loss provision in Q3 standalone.

Whilst we had anticipated significant increase in provision in Q3 and Q4, the quantum of the loss recorded in Q3 is worrisome and we anticipate even much more in Q4’16. With these, bottom-line came in at a N5.5 billion loss for Q3’16 vs. Vetiva’s Q3’16 profit forecast of N1.5 billion.

Worrying signs ahead, Earnings revised lower
We are not optimistic about DIAMONDBNK’s earnings in the near term as huge loan loss expense continues to wipe out the bank’s decent margins. Whilst the size of the provision remains surprising, we note that the inability of the bank to grow top line is even more worrisome.

We highlight that whilst most banks within our coverage have recorded marked loan loss expenses, significantly higher top line growth (largely driven by FX revaluation and E-business Income) has cushioned the impact of provisioning on bottom line – making the impact less obvious.

Furthermore, although it appears DIAMONDBNK’s cost remains contained y/y, quarterly trend shows that the inflationary pressure and relatively tighter liquidity environment might be taking its toll on the bank’s performance as cost run rate quickened in Q3.

To reflect the aforementioned, we have revised our forecast across key line items – particularly as regards asset quality. We raise our FY’16 loan loss provision forecast to N58 billion (Previous: N48 billion) – translating to CoR of 6.6%. Overall, we revise our FY’16 PAT forecast to N2.1 billion (Previous: N14 billion).

We place DIAMONDBNK on HOLD
Whilst we highlight DIAMONDBNK’s short term challenges, we note that the fundamental valuation of the bank remains strong with our Target Price at N3.17 (Previous: N4.29). Given current market pricing of N1.04, the bank trades at a 67% discount to our Target Price.

Having said that, we are cautious about the current liquidity and capital adequacy challenges within the banking sector (particularly for tier II names) and expect the need for capital buffers to persist amidst weak capital market sentiment.

With DIAMONDBNK’s CAR ratio hovering around the regulatory benchmark of 15%, we place a HOLD rating on the bank pending a capital adequacy boost. DIAMONDBNK trades at FY’16 P/B and P/E of 0.1x and 11.6x vs. our coverage bank’s averages of 0.4x and 3.6x respectively.



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