DIAMOND's Earnings Track Ahead of Expectations on Low Tax Rate; Chapel Hill BUY rating under Review


Thursday, April 10, 2014 6:12 PM/ Chapel Hill Denham Research

Diamond Bank Plc (Diamond) released its Q1-14 results today 10 April, 2014

Q1-14 Results: Earnings track ahead of expectations on low tax rate

Our views on the results: Diamond’s results show a strong start to FY-14E. Annualised EPS is N2.33, ahead of our FY-14E target of N2.08, primarily due to the relatively low effective tax rate of 8.6%.  We however think the increase in impairment was driven by the bank’s increased focus on retail banking.

Gross earnings grew by 21.3% yoy to N48.9bn in Q1-14 from N40.3bn in Q1-13, ahead of our FY-14E growth expectation of 15.5% yoy. Both interest income and non-interest income made solid contributions to top line growth. Interest income grew by 13.0% yoy to N38.2bn in Q1-14 from N33.8bn in Q1-13 alongside a 20.2% yoy growth in loans to N712.2bn in Q1-14. This suggests a moderation in the bank’s yield on assets (YoA). Non-interest income grew by 64.4% yoy to N10.7bn in Q1-14 from N6.5bn in Q1-13.  We are encouraged by the bank’s relatively modest growth of 15.3% yoy in interest expense to N10.8bn, given that deposits grew by 24.7% to N1.23tn in the period. On a qoq basis, gross earnings were marginally up by 2.1% qoq to N48.9bn, driven by a 5.7% qoq growth in interest income.     

Computed net interest margin (NIM) moderates on lower YoA. We compute Diamond’s annualised NIM as 9.2% in Q1-14, down from 9.4% in Q1-13, but ahead of our 9.0% target for FY-14E. Our estimates show that the bank’s annualised YoA moderated by 40bps yoy to 12.4% in Q1-14. This offset the 20bps yoy improvement in annualised cost of funds (CoF) to 3.2%. The qoq analysis, however, shows that a decline in YoA and an increase in CoF resulted in an 80bps qoq decline in annualised NIM to 9.2% from 10.0% in FY-13.

Cost-to-income ratio (CIR) rises to 62.0% in Q1-14 from 60.7% in Q1-13 on higher staff costs. This is also ahead of our FY-14E CIR expectation of 60.5%. The bank’s operating income grew by 22.6% to N37.4bn in Q1-14. Operating expenses, however, grew by 25.1% yoy to N23.2bn in Q1-14, driven by an increase of 35.6% yoy in the bank’s staff costs to N8.0bn in Q1-14 from N5.9bn in Q1-13.

Annualised cost of risk (CoR) rises on worsening asset quality. We compute Diamond’s annualised CoR as 2.7% in Q1-14, up from 2.1% in Q1-13, and ahead of our FY-14E forecast of 2.3%.  Impairment charges rose by 53.5% yoy to N5.0bn in Q1-14 from N3.3bn in Q1-13. We attribute the rise in impairment charges to the bank’s robust loan growth averaging 29.7% p.a between FY-11 and FY-13.  

Annualised ROAE trending ahead of our FY-14E expectations. Diamond’s annualised ROAE rose by 120bps to 25.8% in Q1-14, ahead of our forecast of 21.8%. The ROAE also compares favourably with our coverage average ROAE of 19.2% for FY-14E.

Our earnings forecasts, target price (N9.07), and BUY rating on Diamond are currently under review. Initial market reaction to the result was negative, with the stock closing down 4.9% at N6.03. Diamond is trading on a FY-14 P/E of 2.9x and a P/B multiple of 0.6x, compared to our coverage FY-14E averages of 4.7x and 0.9x respectively.

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