Diamond Bank Plc. (Diamond) released unaudited 9M 2016 results wherein PBT and PAT plunged 79% and 78% YoY to N3.9 billion and N3.5 billion respectively. The results reflect sizable deterioration over Q3 16 with Diamond posting a N5.5 billion loss during the period due to an elevated loan loss charge of N21 billion. The high impairment charge in Q3 16 underpins underperformance of Diamond’s results relative to estimates.
Deterioration in O&G book drives upswing in impairment charge: Extending the pattern in H1 16, impairment charges climbed for the third consecutive quarter, rising three-fold YoY (doubled QoQ) with annualized cost of risk surging 400bps QoQ to 7.5% (9M 16: 5.2%). The Q3 16 reading, tracked well ahead of our forecasts of N18.5 billion, and emanated from higher specific impairments (+87% QoQ) which Diamond links to issues in oil and gas (37% of loan book).
Higher asset yields buoy net interest income: In line with the pattern across coverage in Q3 16, tighter monetary policy provided scope for higher asset yields (+190bps QoQ). Though net loans expanded 6% QoQ, we believe this reflects translation impact of NGN weakness during the period (-12% QoQ) on Diamond’s FCY loan book (49% of loans). On the funding side, Diamond experienced pressures with annualized WACF rising 90bps QoQ to 2.5%. Given improvement in deposit mix with CASA share of funding rising 40bps QoQ to 83%, interest expense pressures stemmed from more expensive borrowings which rose 31% QoQ to N246 billion. Nonetheless, the gains on interest income helped drive improvement in net interest income (+15% QoQ).
Asset quality pain to swing earnings negative: Given the fresh NPL pressures from O&G and Diamond’s historically higher cost of risk relative to peers, we see sizable scope for the bank to report higher loan loss charges in a weak macro environment in the last quarter. Thus, we forecast N23 billion impairment charges over Q4 16, which brings 2016E to N64 billion (+16% YoY) with annualized cost of risk at 6%.
Largely reflecting elevated impairment reading for Q4 16E, we estimate that Diamond should report pre-tax and post-tax losses of N6.4 billion and N5.8 billion respectively which should swing FY 16 earnings into the red. Consequently, our FVE for the stock declines to N1.00 (previously N1.20). Diamond currently trades at P/B of 0.11x which is at discount to peer average of 0.4x. In view of the depressed earnings outlook, we reiterate our SELL rating on Diamond.
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