Tuesday, July 28, 2015 9:50 AM / FBN Capital Research
Slight cuts to EPS and price target; Neutral rating maintained: Following its Q2 2015 results which showed that PAT declined by 13% y/y, Diamond Bank (Diamond) cut its 2015 ROE by 400bps to 11%. A more conservative loan growth outlook of 5% y/y (vs 10% y/y previously) and a spike in opex are among the major drivers behind the subdued ROE expectation.
Regardless, our cost of risk and NPL ratio forecasts of 3.4% and 7.0% are slightly worse than management’s guidance of 3.0% and 5.0% respectively and imply a slightly lower ROE of 10.8%.
Given our more modest expectations, we have reduced our 2015-16E EPS forecast by around 9% on average and our price target by 7% to N5.1. Having shed 29% ytd (vs. -11% NSE ASI), our new price target implies a potential upside of 28% from current levels. On a relative basis, Diamond Bank shares are trading on a 2015E P/B multiple of 0.4x for 9.4% ROAE in 2016E, or a discount to the 0.7x multiple that our universe of banks is trading on. We rate the shares Neutral.
Teens y/y decline in profits: Diamond Bank’s Q2 2015 PBT and PAT declined by -15% y/y and –13% y/y to N5.8bn and N5.1bn respectively on the back of a 62% y/y spike in loan loss provisions and, to a lesser extent, a 9% y/y rise in opex. These more than offset a 9% y/y increase in profit before provisions. Further up the P&L, although both income lines contributed to the growth in pre-provision profits, non-interest income (+19% y/y) was the stronger of the two lines.
Given that Diamond’s loan book shrunk by 2% q/q, we believe that funding income most likely benefitted from a combination of higher yields on earning assets and a 3% q/q decline in customer deposits. Sequentially, PBT and PAT declined by -30% q/q and -44% q/q mainly because non-interest income declined by -5% q/q while opex grew by 12% q/q.
Compared with our forecasts, PBT and PAT missed by between 23% and 25%. Non-interest income, which came in 18% behind our forecast, was the major driver behind the weaker-than-expected result.
Recommendations and movements in price target