Diamond Bank Plc Records 55% Increase in Loan Loss Provisions in Q2 2016


Thursday, July 28, 2016 6:07pm/ FBNQuest Research

Event: Diamond Bank reports Q2 2016 results

Implications: Mixed/muted reaction likely from the market   

Positives: Significant y/y growth in trading income and other comprehensive income due to naira devaluation

Negatives: 55% y/y increase in loan loss provisions

Diamond Bank’s Q2 2016 results which were released this afternoon shows a doubling of the PAT to N10.3bn. This contrasts with a -35% y/y decline in PBT to N3.8bn. The boost to PAT came from a significant other comprehensive income result of N7.2bn (the Q2 2015 equivalent was just N177m).

The marked decline in PBT was driven by a combination of poor results further up the P&L: net interest income declined -17% y/y to N24.7bn and more than offset non-interest income which grew 28% y/y to N12.3bn. We should state that the latter was helped by a significant performance in net trading income (N7.8bn for the H1 period vs N1.3bn in the prior year).

Due to the weak funding income performance, profit before provisions fell -6.1% y/y. Compounding the picture, loan loss provisions grew by 55% y/y to N10.2bn. Although operating expenses were down –15% y/y to N23.1bn, this was insufficient to offset the weakness further up the P&L, leading to the poor PBT result.

Sequentially, the picture was similar: PBT fell -43% q/q while PAT grew 78% q/q. Compared with our estimates, while PAT beat our forecast by 181%, PBT missed by 13%. Although net interest income missed by 3%, the strong trading income result offset that, leading to profit before provisions coming in as we had expected.

However, a negative surprise in provisions (19% higher than we had modelled) proved significant, even relative to a positive surprise on the opex line (-4%), leading to the weaker-than-expected PBT result.

The most significant movements of note on the balance sheet were the loans and advances balance as well as the deposits line. The ytd movements for each stood at 29% and 8% respectively as of end-June. These growth rates were clearly driven by fx devaluation, given that at least 25% of both balances are denominated in foreign currency.

The naira devaluation from 199/US$ to around 280/US$ (end-June) was also what led to the surge in net trading income and the other comprehensive income result. Excluding the fx devaluation impact/gains, Diamond Bank’s results would lead to a modest profit at best for the quarter.

As such, while we expect the market to breathe a sign of relief at the results, we expect any gains to be given up soon after the reality of the likely implications of the devaluation on the actual operations of the bank begin to take centre stage. Although Diamond should benefit margin-wise from the tightening by the MPC, we expect its asset quality to deteriorate further, putting strain on its profits in H2 and beyond. Diamond already had some of the highest cost of risk and NPL ratios coming into 2016; we expect the gap between its asset quality ratios and those of tier 1 banks which we consider to be more resilient to widen further.

Year to date, Diamond Bank shares have lost -30% compared with the ASI’s -2%. We rate the shares Underperform. Our estimates are under review.

Diamond Bank Q2 2016  results vs. FBNQuest estimates

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