Monday, July 31, 2017 3:55PM/ Vetiva Research
· Top line recovery sustained, Gross Earnings up 14% y/y
· Loans, deposits moderate – weaker than estimates
· Modest Q1 run rate maintained as PAT beats estimates
· TP revised to N3.55 (Previous: N3.28)
Performance in line as conservative tax ensures earnings beat
DIAMONDBNK released its H1’17 results, showing sustained earnings run rate in Q2’17 and posting a 3% y/y growth in PAT.
Although bottom line growth is mild, we see the y/y growth as modestly impressive given that H1 had been a stronger half for the bank in 2016 and we had expected the y/y performance to be impacted by the prior year’s high base.
Particularly, despite a 19% moderation in Non-Interest Income, Gross Earnings rose 14% y/y to ₦112 billion (Vetiva: ₦110 billion) – supported by an impressive 31% y/y growth in Interest Income to ₦89 billion (Vetiva: ₦86 billion).
In line with the trend observed in Q1’17 and across the banks that have released so far in H1’17, the strong interest rate environment continues to support earnings. Coupled with the stronger yield on government securities, we believe DIAMONDBNK must have repriced it loans to reflect the higher rate environment with income from loans and advances growing 27% despite the moderation in loan portfolio observed.
Similarly, higher interest cost pressure continues to mount with Interest Expense up 10% q/q – putting y/y comparison at a notable 54% rise amidst the moderation in customer deposits. Furthermore, despite rising 11% y/y, Operating Expense was in line with our estimate at ₦52 billion – coming in relatively flat q/q.
Notably, loan loss provision (₦10.8 billion) came in 8% better than our expectation – albeit up 7% y/y. Overall, whilst PBT was largely in line with our estimate at ₦10.8 billion, PAT came in at came in at ₦9.3 billion – ahead of our expected ₦7.5 billion driven by a more conservative effective tax rate than expected.
TP revised to N3.55 (Previous: N3.28)
Weak top line growth and loan loss pressure have been the biggest concerns for us in the last year. With both line items coming in better than expected, we are more optimistic about FY’17 performance.
Whilst we take a conservative approach and maintain our loan loss provision estimate for FY’17 at ₦44.1 billion (FY’16: ₦59.0 billion), we raise our top line estimate to ₦224.3 billion (Previous: ₦220.5 billion).
Also, we cut our loan growth expectation for FY’17 from our previous 5% to flat. However, we maintain our deposit growth expectation at a modest 2%. Furthermore, we maintain our Operating Expense forecast at ₦104 billion, this translates to a Cost to Income Ratio (CIR) of 62% vs. FY’16: 60%.
With a more optimistic macroeconomic outlook going forward and in line with the trend observed in H1’17, our cost of risk forecast of 4.2% is a significant improvement from prior year’s 6.7%.
Hence, despite the mild bottom line rise recorded at the end of H1’17, our full year expectation of ₦16.6 billion is a huge improvement from the dismal ₦3.5 billion reported in FY’16. Despite the asset quality challenges around DIAMONDBNK, we are positive on the bank and believe the stock is significantly undervalued.
We gathered that the bank is in talks to divest its international subsidiaries in Benin, Cote D’Ivoire, Senegal, and Togo in a bid to shore up its capital and qualify for a more conservative 10% regulatory capital adequacy requirement as a national bank.
DIAMONDBNK trades at FY’17 P/B and P/E of 0.1x and 2.0x vs. our coverage bank’s averages of 0.8x and 4.7x respectively.
FY’17 EPS, TP revised slightly higher on improved cost outlook
With revenue largely in line with our estimate, we have retained our FY’17 estimate at ₦241 billion – implying a 33% y/y growth. Whilst we revise our net interest expense estimate higher to reflect the negative surprise in Q2’17, we reduce our OPEX to sales ratio from 19.6% to 18.4% on an improved cost outlook.
As such, FY’17 EPS estimate is reviewed slightly higher to ₦42.15 (Previous: ₦41.62) and our 12-month target price to ₦819.95 (Previous: ₦818.65).
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