Monday, November 17, 2014 5:21 PM / Chapel Hill Denham Research
Diamond Bank Plc (Diamond) recently held a Q&A session with analysts on its 9M-14 results and outlook for the group. We revise our 12-month target price (TP) for the group down to N6.72 from N6.96, and maintain our HOLD recommendation on the stock.
Net interest margin remains under pressure
• Review of earnings forecasts: We forecast EPS decline of 44.7% yoy in FY-14E to N1.09, further down from our previous forecast of -41.8% yoy, due to weaker net interest income (NII), rising operating expenses, and the dilutive effect of the bank’s rights issue. The new EPS represents 5.1% decrease from our previous FY-14E EPS forecast. This implies FY-14E ROAE of 14.5% vs. our previous forecast of 15.3%.
• Risk asset growth to slow down in FY-14E. We cut our FY-14E gross loan growth forecast to 7.6% yoy from 15.2% previously. We believe this will be attained via increased lending to the real estate, general commerce, power and communications sectors. We lower our growth forecast for lending to the manufacturing and oil & gas sectors and now expect 4.5% yoy decline in lending to the government vs. 15.0% yoy growth forecast previously. We expect 4.3% yoy growth in deposits in line with the modest performance seen in 9M-14. This implies a gross loan-to-deposit ratio of 61.5%, up from 59.6% in FY-13. We raise our CoR forecast to 2.0% in FY-14E from 1.5% previously, to incorporate the rising impairment charges seen in Q2-14 and Q3-14. Diamond’s 9M-14 CoR came to 1.9% from 1.1% in H1-14.
• Higher funding cost, lower yield on assets to depress NIM in FY-14E. We forecast FY-14E NIM of 7.0% for Diamond, down from 8.3% in FY-13. We see net interest income (NII) declining by 0.6% yoy to N104.0bn in FY-14E from N104.6bn in FY-13, while the average interest earning assets will likely rise by 17.1% yoy. Diamond’s yield on assets still appears to be taking a hit from lower yields on loans, as its 9M-14 results showed that it pulled back on retail loans and corporate loans by 1.1% qoq and 5.8% qoq respectively in Q3-14. Interest expense looks set to rise by 30.9% yoy to N50.4bn in FY-14E as its deposit growth leans towards costly term deposits while its cost of borrowings also rose by 30bps ytd in 9M-14. We forecast Diamond’s FY-14E cost of funds at 3.6%, up from 3.3% in FY-13.
• Cost to income ratio (CIR) to worsen by 810bps in FY-14E on constrained income growth and huge operating expenses (OPEX) growth. We expect Diamond’s CIR to rise to 68.4% in FY-14E and average 66.4% between FY-14E and FY-16E from 60.3% in FY-13. We see operating income growing by 2.4% yoy in FY-14E given the decline in net interest income and 14.0% yoy growth in net fee & commission income. The Q3-14 results still reflect pressure on the bank’s OPEX, driven by staff costs, regulatory and general expenses. Consequently, we expect operating expenses to rise by 16.1% yoy in FY-14E.
• We cut our 12-month TP on Diamond to N6.72 from N6.96, implying a potential upside of 12.0%, thus we maintain our HOLD recommendation. Diamond has underperformed the market with YTD depreciation of 17.01% vs. the NSE ASI return of -14.39%. Diamond currently trades on an FY-15E P/E and P/B of 3.70x and 0.6x a discount to our banking coverage average FY-15E P/E and P/B of 4.2x and 0.8x respectively.
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