Diamond Bank Plc. (9 months ended September 2014)
- Diamond Bank Plc (Diamond) reported 14% YoY rise in gross earnings to N149 billion for the 9 months ended September 2014. PBT declined 7% YoY to N23.7 billion while PAT rose 1% YoY to N20.2 billion.
NIR rebound underpins revenue momentum
- Q3 14 gross earnings rose 8% QoQ to N52.5 billion (Q2 14: +6% QoQ) driven by 37% QoQ recovery in NIR to N11.2 billion and a 2% QoQ rise in interest income to N41.3 billion. In line with management guidance, hinged on prospects of higher revenues from heightened FX volatility, NIR recovered from Q2’s slump (-18% QoQ) underpinned by gains in fee income (+41% QoQ) and trading (+31% QoQ). After rising 6% QoQ in prior two quarters, deceleration in interest income growth emerged as cutback in total earnings assets (-4% QoQ) tempered the impact of 50bps QoQ expansion in asset yields. The reduction in earnings assets stemmed from lower interbank placements (-37% QoQ) and decline in loans (-5% QoQ) which at 4% YTD trails management guidance of 20% growth by FY 14.
Flat trend in opex mutes impairments and funding cost pressures
- On the heels of a 17% QoQ rise in Q2, interest expense rose 12% QoQ to N14 billion leading to a 60bps QoQ rise in annualized WACF to 3.9%. Funding base declined 4% QoQ to N1.4 trillion underpinned by contraction of a similar magnitude in deposits to N1.3 trillion whilst interbank takings (-15% QoQ) and borrowings (-6% QoQ) also shrank. The foregoing suggests funding pressures emanated from greater use of more expensive tenured deposits over the quarter.
- After climbing 7% QoQ in Q2, opex came in flat QoQ at N25 billion as declines in both other opex and depreciation and amortization offset a slight increase (+1%) in personnel expenses. Consequently, CIR declined 5pps QoQ to 65% reflecting impact of higher revenues.
- Reversing the three-quarter declining trend, provisions jumped 38% QoQ to N5.6 billion which translates to a 90bps QoQ jump in annualized cost of risk to 2.5%. Given subdued loan growth over 2014, we will be seeking clarity from management over the nature of the upswing in provisions. Nevertheless, current run rate still tracks slightly behind Diamond’s FY 14 guidance of N20 billion.
- Nevertheless, the flat trend in opex muted the interest expense and impairment pressures which allowed revenue gains percolate to bottom-line with PBT rising 12% QoQ to N7.7 billion whilst a 5pps contraction in effective taxes to 17% allowed PAT expand a wider 20% QoQ to N6.4 billion. Correspondingly, PBT and PAT margins are both 100bps higher QoQ at 15% (-300bps YoY) and 12% (-400bps YoY) respectively.
Robust credit growth outlook post capitalization of rights proceeds to sustain BUY rating
- In line with management guidance, we expect recent currency volatility to continue to create opportunities for sustained NIR momentum into Q4 14. We remain cautious on interest income over Q4 14 in the light of subdued risk asset creation thus far and recent management comments about pending capitalization of rights issues proceeds. Aided by funding pressures and renewed momentum in provisions, it appears less likely that Diamond’s FY 14 PBT guidance of N35 billion will be attainable. Notwithstanding near term earnings weakness, the N50 billion rights issue bolsters loan growth prospects over the medium term. Diamond currently trades at P/E of 2.8x and P/B of 0.5x which are both at a discount with peer averages at 6x and 1x respectively with last trading price at a 41% discount to our FVE of N9.7 (pre dilution), leaving our STRONG BUY rating intact.
Source: ARM Research