Diamond Bank Plc. (12 months ended December 2014)
- Diamond Bank Plc (Diamond) reported a 15% YoY rise in gross earnings to N205 billion for the 12 months ended December 2014 whilst PBT and PAT declined 12% and 11% YoY to N23.9 billion and to N22.1 billion respectively.
- Diamond declared a 10 kobo dividend per share which implies a 9% payout ratio (FY 13: 15%) and a yield of 3% using its last trading price.
FX boost to non-funded income offsets weakness in interest income
- In line with pattern of strong FX trading income reported by banks thus far, Diamond recorded 34% QoQ jump in non-funded income to N14.9 billon underpinned by an eighteen-fold surge in other income to N2.8billion. The upswing in NIR offset impact of stagnant QoQ movement (-0.5%) in interest income resulting in 7% QoQ increase in gross earnings to N56 billion. Parsing through breakdown on interest income reveals offsetting impact of 3% QoQ moderation in interest income from loans and advances on higher bank placements (+15% QoQ) and Securities (+2% QoQ). The cutback in income from risk assets emanated despite 10% QoQ rise in loans and suggests weaker pricing with overall asset yields contracting 140bps QoQ to 8.8% on an annualized basis.
- Similarly, interest expense was also flat (-0.3% QoQ) with breakdowns indicating a reclassification in interbank takings (with a negative figure in Q4) offsetting the effect of 8% QoQ rise in charges on customer deposits which rose 19% over the quarter.
Spike in impairments drive earnings lower
- Despite sustained tight lid on personnel costs which contracted 3.5% QoQ to N8.3 billion, Q4 14 opex rose 3.6% to N25.9 billion. As with banking coverage to have released thus far, regulatory induced pressures via other expenses (+6.4% QoQ) offset the gains from improving cost control. Nonetheless, reflecting NIR boost to operating income, CIR declined 300bps QoQ to 62%.
- From here, the results headed south as impairments rose more than double over the quarter to N11.7 billion (highest in nine quarters) resulting in annualized cost of risk climbing 160bps QoQ to 3.2%. Whilst we are yet unclear as to the drivers, we believe weakness in USDNGN and oil price weighed on asset quality in general commerce, manufacturing and oil & gas loan book which cumulatively account for 56% of Diamond’s risk assets as at FY 14.
- Thus, largely reflecting the jump in impairments, Q4 14 PBT declined 43% QoQ toN4.4 billion whilst a tax credit of N945 million pared declines in PAT (-17% QoQ to N5.3 billion). The weaker Q4 performance largely contributed to the 430bps and 360bps YoY moderation in FY 14 PBT and PAT margins to 14% and 12% respectively.
Muted loan growth outlook and weaker CAR poses downside to ratings
- Going forward, as with the industry, the lower oil price and weaker naira raises concerns over quality of risk assets, with Diamond’s high NPL ratios drawing more attention. More importantly, limited buffer to regulatory CAR threshold of 16% for SIFI as Diamond reported 19bps YoY rise in CAR to 17.48% (in contrast to 20% guidance mentioned at 9M 14 conference call on the back of N50 billion rights issue) should constrain loan growth over FY 15. The low CAR ratio also raises the possibility of additional dilution, which together with the weaker macroeconomic environment and loan growth outlook underpins scope for compression in our last FVE for Diamond at N6.06 (adjusted for rights issue) to trigger change in our BUY rating. Diamond currently trades at P/E of 2.4x and P/B of 0.4x which are both at discounts to peer averages. Our estimates are under review.