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Diamond Bank Plc: Not as Bad; Bottom-Fishing Will Pay-Off




Wednesday, April 06, 2011; Vetiva Research
While we await clarity from the Bank’s Management with regards the relative underperformance of their FY’10 scorecard (PAT of N1.3 billion; a 73% decline relative to its Q3’10 record of N4.9 billion), we would like to take a cursory review of the near term fundamentals of the Bank vis-à-vis market valuation of its share price.  
Based on earlier guidance by the management, we look forward to the Q1’11 results on Thursday, April 7. Given the directive of the Nigerian Accounting Standard Boards that all Deposit Money Banks are to reinstate the 1% general provisions that was waived for FY’10, we think the Q1’11 numbers of banks will be relatively weak (Diamond Bank inclusive).  
Hence, we remain focused on the H1’11 results and beyond, which we believe will better reflect the recovery of Diamond’s profit momentum especially as the management continually improves its hold on key cost heads.  
Overall, we believe the market has overreacted to the FY’10 results and posit that bottom-fishing on Diamond Bank’s shares will pay-off. Besides the general political risk which has dominated asset pricing in the run-up to elections, the massive sell-off of the counter following the earnings release has deepened bargain opportunities. In addition to the fundamental attractions on Diamond at the current price, the technicals point toward opportunity.  
The Relative Strength Index (RSI) shows that Diamond’s shares is deep in-the-money and we believe the stock will gain support at the current level. At its current oversold position (an RSI of 25.9), it trades at 23% discount to its book value (P/BV of 0.77x Vs. peer average of 1.18x).  
Hence, early buyers will be the biggest beneficiaries of the oversold opportunities. At the current price of N5.65, the counter trades at deep discounts of 39% and 43% to Year-High and 52-week High of N9.27 and N9.97 respectively. From a YTD perspective, the shares has lost 25%, an indication of market overreaction when benchmarked against the respective losses of 0.14% and 1.83% of the NSE ASI and Banking Sector Index.
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