Wednesday, August 08, 2018 12:10PM / FBNQuest Research
Earnings guidance revised downwards:
Apart from a solid showing in non-interest income, Diamond’s results were weaker than we expected. And while we have reflected the strength of the former in the changes we have made to our forecasts, management’s outlook going forward is worse than previous guidance: the 2018 PBT guidance has been cut to N6bn from N8bn, driven by a halving of the loan growth guidance from 10% to 5%.
While we welcome the bank’s impending sale of its UK subsidiary as we believe it will help it focus on the Nigerian market better, we do not expect this sale to change the market’s view of the stock materially. It is still not clear how management can improve the operations meaningfully to lift the ROAE to 10%, talk less of 15%+.
The bank continues to lose market share, constrained by its CAR, while its weak asset quality metrics remain a drag on the P&L. In the medium term, we expect Diamond to remain a sub-5% ROAE bank. On the back of the Q2 results and management’s updated guidance, we have cut our 2018E PBT forecast by 28% and our 2019E forecast by 21%. Our new price target of N1.00 represents a 24% cut, despite rolling over our valuation to 2019. The shares have shed -18% this year, compared with the ASI’s -6%. Our new price target implies the shares are likely to lose additional ground; as such, we reiterate our Underperform rating.
Weaker-than-expected Q2 2018 results:
Diamond reported a loss of –N442m in Q2 2018 because of a significant (-N1.5bn) negative result on the other comprehensive income line which completely offset the bank’s PBT result of N1.7bn. That said, the PBT was also weak, declining -63% y/y.
This was as a result of opex and loan loss provisions growth of 3.6% y/y and 14% y/y, respectively, weighing on the P&L, even more: profit before provisions fell -2.2% y/y.
Although the latter was roughly in line with our expectations, the results on the opex and provisions lines surprised negatively, leading to PBT coming in 35% below our forecast. The only positive in the results was the non-interest income line which came in at c.N11bn, +25% y/y. This offset a decline of -12% y/y in funding income. Although the bank managed to limit the decline in interest income to just -3% y/y despite yield contraction, it could not repeat that for interest expense (+16% y/y).
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