Diamond Bank downgraded to a SELL following Investor Conference Call Today



Wednesday, May 18, 2016 2:52 PM / CardinalStone Research 

Following Diamond Bank Plc (DIAMONDBNK) FY 2015 and Q1 2016 analyst/investor conference call held last week, we have reviewed our projections for the group and cut our TP to N1.76 (Previous: N2.68). Therefore, we downgrade our rating on the stock to a 'SELL' from 'BUY'. Please see below the key points from the conference call.

Still focusing on driving retail banking through e-platforms

Given the significant decline in return on equity (ROE), management hopes to restore value to its shareholders by focusing and reinforcing its retail segment which is known to be its strength. Management plans to soft pedal on asset creation especially for its business banking segment as transactions in this space is heavily reliant on foreign exchange and the level of default or restructuring of asset in this segment has increased.  

However, the group intends to continue to milk opportunities in  non- interest income as the bank was one of the few that enjoyed a significant growth in non interest income in 2015. The bank's popular mobile application recently signed up its 1 millionth customer and management wants to increase its leverage on this technology by migrating more of its retail customers to further drive fees and commission in 2016.  

Management hopes the planned infrastructure and government spending after the passage of the appropriation bill will create opportunities for its corporate and business banking segment. 

Management to strengthen enterprise risk management framework

Considering the lackluster economic conditions and the huge impairments recorded in FY'15, management has resolved to strengthen its risk management framework. It has no intention to grow risk asset in 2016 and has advised that if there would be any growth in 2016, it will be strictly due to Naira devaluation as it expects a currency devaluation of about 10% to 15% in 2016.  

The group expects its cost of risk (CoR) and non-performing loans (NPL) to both decline to 5% from 6.7% and 6.9% respectively. Given the group's low capital adequacy ratio (16.2%) management may raise capital within the next twelve months.  

On liability generation, management is determined to leverage on its retail market to generate cheaper funds to further reduce interest expense and enhance net interest margins (NIM) in 2016. However, it expects a marginal growth of 5% in total deposit in 2016. 

In line with recent sector trend, management to prioritise cost cutting

As revenue and growth opportunities seem bleak, Diamond Bank's management will keep a lid on its cost of operations. It hopes to streamline and improve processes associated with its service delivery and automate more of its processes to gain operating efficiency. To reduce its branch operating cost, it plans to migrate more of its existing customers to alternative channels and platform. Management's guidance for cost to income ratio in 2016 is approximately 60% (which is already in line with Q1'16 performance).  


Following a review for our expectation for the group, we revise our target price to N1.76 from N2.68 which implies a 3.3% downside potential from current price of N1.82. We therefore downgrade our recommendation to a 'SELL' on DIAMONDBNK. DIAMONDBNK is trading at 0.2x forward P/B compared to NGSE B10 index forward P/B of 0.5x. 

Please click here for Diamond Bank Plc  Company Update - Resilient performance in tough times.


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