Sometime in early 2011 I found myself in the middle of an argument between two friends. The argument was about local Nigerian banks preferring to issue debit cards rather than credit cards. To my surprise, I learnt that Diamond Bank indeed issued credit cards provided you can prove to having a steady source of income. That in my view was evident of large scale retail banking on the back of aggressive lending that should increase risk and off course rewards. Diamond Bank released its 2012 Audited Accounts with Gross Earnings rising 34% year on year to N144.1billion. Net Operating Income at the end of the period was N96billion better than the N38billion posted same period last year. The bank will go on to post a profit after tax of N22.1billion coming back to profitability after declaring a loss last year of about N14billion.
How did the turnaround happen?
Diamond Bank’s success had more to do with lesser loan losses than it had with revenue. Yes Gross Earnings increased and customer deposits soared but the key factor here was the loan loss suffered in 2011. In fact if you deduct loan losses from both side then last year they may have made a profit of N41billion and this year N39billion. This simply shows how vulnerable bank incomes are are when loans go bad. Diamond bank has lent aggressively over the last twelve months increasing their loans to borrowers by almost 51%. This is at a time when the likes of Zenith and GTB are doing 10%. This trend in aggrieve lending seem to be prevalent with medium sized banks. As at end of 2012, Sterling Bank had loans that was 5 times its Net Assets just like Diamond Bank.
Any need to be worried?
Much of its loan losses last year arouse from overdrafts or loans which have fallen due but unpaid. It lost about N25billion in impaired overdraft loans compared to N8billion this year. N361billion (67%) of the banks loans are secured by real estate whilst the rest are either unsecured or “otherwise secured”. Is there a risk of write offs in the coming years? Surely, as defaults are part of banking anyway. It will not be unwise to look deeper into the quality of their loans in the coming months. Their seemingly low net asset to loans ratio is an obvious sign that things don’t look good
Do I buy the shares
Diamond Bank currently trades at N6.30 and the shares has rise 148% in the last year. The share price dropped today (9/4/2013) by 10% its biggest one day drop in 8 years. Analyst attribute that to expansion plans that the bank announced will cost $750million to finance expansion and meet CBN capital adequacy ratio. The latter may perhaps have triggered the sell off. It currently trades at less than book value (0.97) making it a candidate for a take over or acquisition. If you wish to buy this stock I suggest you hold on for now as a sell off is currently the order of the day.
Diamond Bank 2012 Audited Accounts was posted on the website of the NSE