DIAMONDBNK Reports N11.5bn Pre-tax Loss Driven by Increase in Impairment Charges

Proshare

Thursday, April 28, 2016 9:08AM/ FBNQuest Research

Event: Diamond Bank reports Q4 2015 results

Implications: Concerns on asset quality likely to linger

Positives: Other income grew by 37% y/y

Negatives: Diamond Bank reported a pre-tax loss of N11.5bn, driven by a 3.0x increase in impairment charges

This afternoon, the NSE published Diamond Bank’s (Diamond) Q4 2015 results which showed an after-tax loss of N9.9bn. The primary driver of the after-tax loss was a 206% y/y spike in loan loss provision to N35.7bn. Although pre-provision profit grew by 8% y/y, while opex declined by 17% y/y, the  negative on the provisions line proved more significant and led to a pre-tax loss of N11.5bn.

Thanks to a tax credit of N1.2bn, and to a lesser extent, a positive result of N309m on the other comprehensive income (OCI) line, the after-tax loss narrowed to N9.9bn. Moving back to pre-provision profits, of the two revenue items that contributed to the line, the other income line which grew by 37% y/y was the standout performer. Given the extent of the strength on this line, we would be looking to comments from management to clarify this number.

In contrast, funding income, fell by 10% y/y. Sequentially, pre-provision profits grew by 39% q/q, driven by the strong growth (+212% q/q) in other income. Again, funding income which was down by 9% q/q was the laggard. The pre-tax and after-tax losses reported by Diamond Bank compare with PBT and PAT of N4.4bn and N3.4bn delivered by the company in Q3 2015.

Compared with our forecasts, profit before provisions outperformed by 37%, because of a positive surprise in other income. While the other income line beat our forecast by 186%, funding income missed by 9%. Further down the P&L, impairment charges, which came in around 4.9x higher than our N7.2bn forecast, were the major factor behind the negative surprises in PBT and PAT relative to our N2.3bn and N2.1bn forecasts for both lines respectively.

On a full year basis, PBT fell by -75% y/y, largely driven by a 109% y/y rise in loan loss provisions to N55.2bn. However, the decline on the PAT line narrowed to -69% y/y due to a positive result of N2.2bn in OCI.

The management of the bank has not declared a dividend. Sometime in March, Diamond Bank’s management issued a statement that the bank’s 2015 earnings would be lower than 2015 numbers due to “higher than expected impairment charges on loans made to the energy and commercial business sectors”.

Consequently, the market had expected softer numbers for the Q4 quarter. Diamond Bank’s impairment charges of N55.2bn for 2015 implies a cost of risk of 7.1%.

Diamond Bank’s results imply an ROAE of 3.7%. This ranks among the lowest within our universe of bank stocks. Given the weak set of results and the y/y decline on the funding income line, we would expect the line to be one of the focal points of discussions on the bank’s conference call. We also expect the impairments and cost of risk to come under some scrutiny.  

At current levels, on our published estimates, Diamond Bank is trading on a 2016E P/B multiple of 0.2x for 3.4% ROAE in 2017E. The shares have shed -35.2% ytd, worse than the -13.4% return on the All Share Index.

We rate the shares Underperform. Our estimates are under review.

Diamond Bank Q4 2015 results vs. FBNQuest estimates



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