November 07, 2017 3:26PM /FBNQuest Research
2% cuts to our 2018E EPS forecast and price target
Diamond Bank’s Q3 2017 results diverged markedly from our forecasts, mainly because of a negative surprise in pre-provision profits. To a lesser extent, slightly elevated opex and loan loss provisions relative to our forecasts also contributed to the weaker-than-expected PBT.
Despite the negative surprise, we have increased our 2017E PBT forecast by around 7%, having included c. N16bn in gains (our estimate) from the bank’s planned divestment of Diamond S.A, its west-African subsidiary. Excluding this gain, our underlying PBT forecast is only N1.3bn. Proceeds from the divestment is expected to have a positive impact of around 200bps on the bank’s CAR by end-2017E.
Management disclosed that the proceeds will be deployed towards the expansion of its retail banking franchise in Nigeria and further divestments from non-core businesses are likely. Given that Diamond S.A.’s contribution to PBT in the last two years was around N1bn, we have made modest changes to our earnings forecast for 2018-19E and our price target (-2%) to N1.48.
The announcement of the divestment has propelled Diamond Bank shares (+19% vs. ASI 0.4%). At current levels, Diamond Bank shares provide a potential upside of around 28%. Nevertheless, we retain our Neutral rating on the shares because we believe that downside risks from loan impairments remain high, especially in Q4.
Pre-tax loss of –N4.1bn driven by y/y decline in pre-provision profit
Diamond’s Q3 2017 results showed a pre-tax loss of -N4.1bn, slightly lower than the –N6.6bn that it reported in Q3 2016. The pre-tax loss was mainly driven by a -7% y/y decline in pre-provision profits. Although both revenue lines contributed to the y/y decline in pre-provision profits, non-interest income which fell by -18% y/y was the major driver.
The y/y decline in noninterest income was primarily underpinned by a -72% y/y decline in fx trading income in 9M 2017. Funding income was also down slightly by -2% y/y. The negatives on these lines completely offset a -30% y/y reduction in loan loss provisions. Further down the P&L, the after-tax loss narrowed to -N2.3bn, thanks to a tax credit of N693m and a positive result of N1.2bn in other comprehensive income.
Sequentially, the pre-tax and after-tax losses
of – N4.1bn and -2.3bn showed wide variance from the PBT and PAT of N5.2bn and
N5.8bn that the company reported in Q2 2017.
2. Diamond Bank Plc Announces Planned Divestment from Diamond Bank S.A
3. Diamond Bank Reported Pre-tax and After-tax Losses of -N4.1bn and -N2.3bn Respectively in Q3 2017
4. DIAMONDBNK Declares N5.91 billion PAT in Q3 2017 Result,(SP:N1.02k)