DIAMONDBNK is Moving from Neutral to Underperform in Q3'15

Proshare

Friday, October 30, 2015 12:47PM / FBNQuest Research

Marked cuts to 2015 earnings guidance:
As we had expected, Diamond Bank management has cut its 2015 PBT target to c. N22bn from “over N30bn”. We have cut our PBT forecast by 19%, from N26bn to N21.6bn.

The main driver behind this weaker outlook is loan growth which management now expects to be flat in 2015 (c. 5% previously). In addition to funding income, we have also made significant cuts (over -20% for 2015 and 2016) to our non-interest income forecasts on the back of the consistent disappointments witnessed throughout 2015.

These cuts are only slightly offset by our decision to reflect some positive surprises on the loan loss provisions line. Although the changes explain the 19% cut to our 2015E PBT forecast, their impact (particularly risk asset growth) is greater for 2016E.

This explains why we have reduced our 2016E PBT/PAT forecasts by over 45%, and our price target by 47% to N2.3. We expect Diamond’s EPS to fall -40% y/y in 2016E.

Although the shares are down -54% ytd (ASI: -15%), we see a further -10% decline by end-2016E. As such, we have downgraded our recommendation to Underperform from Neutral.

Weaker-than-expected Q3 2015 results:
Diamond Bank’s Q3 2015 PBT declined -43% y/y to N4.4bn. Both funding income and non-interest income declined, by -2% y/y and -20% y/y respectively, leading to profit before provisions falling -7% y/y to N34bn; in addition provisions increased 14% y/y to N6.4bn.

Although Diamond managed to keep opex flat y/y, the impact was almost negligible. Returning to the funding income line, although interest expense was down -8% y/y, interest income fell -4% and proved significant, leading to the -2% y/y decline in funding income.

On a q/q basis, both PBT and PAT declined by double-digits too – 24% and 32% respectively. Again, both revenue lines were down, funding income by -11% q/q and non-interest income by -23% q/q. A -14% q/q decline in opex was not sufficient to offset the q/q decline in revenue. Relative to our estimates, PBT and PAT missed by 28% and 34% respectively.

The weakness was driven mainly by revenues. Both lines came in well below our forecasts. As such, even though provisions and opex surprised positively, these were not strong enough to offset the negative surprises.

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