Friday, October 28, 2016/ 6.25pm /FBNQuest Research
Event: Diamond Bank reports Q3 2016 results
Implications: Shares likely to see a marked sell-off
Positives: Limited; net interest income up 7% y/y
Negatives: Marked losses, both pre and post tax, despite N2.4bn in OCI gains
Diamond Bank’s Q3 2016 results which were published this afternoon were dire. PBT came in at –N6.6bn compared with a profit of N4.4bn a year earlier and our forecast of a positive result of N4.6bn (PBT was N3.8bn in Q2 2016). Although the bank booked a positive result of N2.4bn on the other comprehensive income (OCI) line on the back of fx translation gains, this was not enough, leading to a loss after tax of –N3.2bn.
The main reason for this poor set of results appears to be asset quality deterioration: loan loss provisions grew by 230% y/y and by over 100% q/q to N21bn. This single result overshadowed a 17% y/y growth in profit before provisions of N40bn. Of the two revenue lines, net interest income grew 7% to N28bn while non-interest income grew much faster, by 51% y/y to N11bn.
We should add that the non-interest income result was weaker than we were expecting, despite the strong growth delivered (Q2 had come in strong; the q/q change in Q3 was a -10% decline). In contrast, net interest income was slightly (3%) better than our forecast and improved 15% q/q.
We suspect this was largely fx-driven (devaluation impact on FCY loans). Although opex grew 8% y/y and surprised negatively (by 4%), the impact was significantly muted compared with that of loan loss provisions.
The provisions line will be the sole focus of the market as far as these results are concerned. Diamond had guided to a cost of risk estimate of around 5% for the year. It is likely to breach that figure now since the 9M figure equates to a what a full year 5% cost of risk figure will imply, unless the bank is able to find recoveries in Q4. We do not expect the market to give the bank the benefit of the doubt on this point, given the challenging operating environment.
We continue to believe that in these challenging times, it is better to avoid tier 2 banks, and focus purely on the tier 1 banks, many of which are still undervalued, despite marked fx-related gains. Although the shares are trading at a year’s low, we would expect them to sell-off more on the back of these results, further compounding the -53% ytd loss (ASI: -5%). Our estimates are under view. We rate the shares Neutral.
Conference call details: yet to be circulated
Diamond Bank Q3 2016 results vs. FBNQuest Research estimates
1. DIAMONDBNK Declares N3.51 billion PAT in Q3 2016 Result,(SP:N1.14k)
2. Diamond Bank Plc Reports Half Year Profit Before Tax Of N10.5 Billion
3. Diamond Bank Earnings Beat Consensus Despite Weak Q2 Performance
4. Diamond Bank Plc Records 55% Increase in Loan Loss Provisions in Q2 2016
5. DIAMONDBNK Declares N9.05 billion PAT in Q2 2016 Result,(SP:N1.60k)
6. Diamond Bank Lowered To 'B-/C' On Reduced Earnings And Rising Foreign Exchange Liquidity Risk
7. Diamond Bank downgraded to a SELL following Investor Conference Call Today
8. DIAMONDBNK Q4 15 Q1 16 Earnings Presentation The key takeaways
9. DIAMONDBNK Q1 16 Results - Loan Loss Provisions Still Running High
DIAMONDBNK Declares N5.76 billion PAT in Q1 2016 Result SP N1.42k
11. DIAMONDBNK Reports N11.5bn Pre-tax Loss Driven by Increase in Impairment Charges