Diamond Bank Plc (Diamond) released Q1 15 unaudited results showing gross earnings rose 5% YoY to N50.7 billion while PBT and PAT contracted 9% and 15% YoY to N8.4 billion and N7.2 billion respectively. The results did not particularly worry the market yesterday as the share price closed higher at 2.9% yesterday. However, the share priceed closed 1.3% lower at the end of trading Tuesday perhaps in reaction to a review of the results or in anticipation of its earnings call on Thursday.
Despite this, ARM has taken some positives from the result in their latest review (full review below). The Pension Fund. Here are some of the positives they outlined with this result;
- Reduction in interest expense as they cut back on expensive deposits
- Operating expenses dropped by 12% this quarter compared to same period the quarter before (QoQ).
- Loan impairments which have cost the banks billions shrank 4% quarter on quarter (QoQ)
- Diamond currently trades at P/E of 2.9x and P/B of 0.5x which are both at discounts to peer average. Whilst the stock has risen 14% since our last update, last trading price is at a 32% discount to our FVE (N6.06) for Diamond.
The review also envisages negative headwinds for the bank and we suggest skeptics take time to read it too.
Cutback in NIR leads gross earnings lower
- QoQ, gross earnings weakened 10%, underpinned by 32% moderation in NIR to N10.2 billion and 1% contraction in interest income to N40.5 billion. Despite sizable FX volatility in the first six weeks of 2015 which resulted in subsequent USDNGN devaluation, Diamond was unable to reprise Q4 14’s strong growth in other income, reporting an 85% QoQ contraction in the item to N417 million. Assisted by cutback in fees (-12% QoQ) likely on the moderation in COT charges and trading income (-41% QoQ) the decline in other income exacerbated NIR weakness.
- Elsewhere, the tight domestic liquidity environment brought about by hawkish CBN monetary policies during the quarter (in particular fortnightly CRR computation) reflected on interest income. The contractionary policies induced Diamond to moderate interbank activity resulting in a 70% QoQ contraction in income from bank placements to N873 million which offset impact of gains in interest income from loans (+2% QoQ) and in income from securities (+10% QoQ).
Nevertheless cost containment provide earnings uplift
- Despite the pressured landscape, interest expense contracted 17% QoQ to N11.6 billion largely driven by 19% QoQ contraction in interest expense on customer deposits to N10.7 billion. Reduction in the item is on the back of shrinkage in customer deposits (-6% QoQ to N1.4 trillion) which Diamond notes was a deliberate strategy to shave off high priced deposits in a rising yield environment.
- On the heels of 4% QoQ rise in Q4 14, operating expenses declined 6.7% QoQ to N24 billion. Staff costs were up 4% QoQ, while Depreciation and amortization at N1.6 billion maintained the quarterly run rate of 2014 leaving moderation in other opex (-12% QoQ to N13.9 billion) as the primary driver of lower opex. Nonetheless, opex gains were largely muted by NIR weakness leaving CIR flat QoQ at 62%.
- Furthermore, impairments shrank 45% QoQ to N6.5 billion resulting in annualized cost of risk softening to 3.1% (FY 14: 3.4%). The downtrend across cost items overrode impact of NIR weakness on bottom-line resulting in PBT and PAT rising 92% and 45% QoQ to N8.4 billion and N7.2 billion. Correspondingly, PBT and PAT margins are 9pps and 5pps higher QoQ (each down 300bps YoY) at 17% and 14% respectively.
Challenging economic landscape to induce moderation in FVE
Over the rest of the year, reduced USDNGN volatility under the new order based quote system and cutback in COT charges should amplify NIR weakness. In addition, slowdown in loan growth should weigh on interest income, driving scope for softer top-line growth over 2015. On impairments, the shocks to the domestic landscape and in particular, Diamond’s loan book (with Oil and Gas, manufacturing and general commerce collectively accounting for 56% of loan book) call for caution in interpreting the unaudited Q1 15 reading. Pending clarity from management on drivers behind FY 14 impairments, we see enough in the challenged macro picture for uptrend in charges and net downward revision to our FVE. Diamond currently trades at P/E of 2.9x and P/B of 0.5x which are both at discounts to peer average. Whilst the stock has risen 14% since our last update, last trading price is at a 32% discount to our FVE (N6.06) for Diamond.
