Upgrading to Neutral post sell-off
- Earnings estimates raised, but not as much as guidance implies: Following Diamond Bank’s Q4 2016 & Q1 2017 results, we have increased our 2017E PBT forecast by 39% to N12.2bn. This estimate is considerably below management’s guidance of c.N20bn because of our conservative cost of risk assumption (4.9% vs. guidance of 4.0%). The bank’s NPL ratio (10.3% in Q1, 9.5% in Q4) remains among the highest within our coverage universe. Although management expects the ratio to improve by end-year to 8%, the bank’s track record on guidance explains our conservatism. Notwithstanding, our earnings upgrade is significant and is behind the 35% increase to our price target to N1.21. The shares have lost –17.6% in the last six months (ASI: -2.3%), coinciding roughly with our downgrade to Underperform at the time. With our new price target implying upside potential of 44%, we have upgraded our recommendation to Neutral (not Outperform as we believe the market will want to see evidence that downside risk from asset quality deterioration is reduced). In addition, Diamond continues to carry some dilution risk with a CAR of just 15.1%.
- Mixed Q4; positive surprise in Q1 on funding income: Diamond Bank’s Q4 2016 pre-provision profits of N45.1bn were down by -5% y/y. Non-interest income fell -30% y/y to N16.3bn, offsetting a 19% y/y growth in funding income. Q4 PBT came in at N1.1bn compared with a loss before tax of –N11.5bn in Q4 2015. PBT was supported by a -47% y/y decline in provisions which offset a 9% y/y rise in opex. The bank reported a loss after tax of –N988m on the back of a high tax charge and a loss on the other comprehensive income (OCI) line of –N1.1bn. On a full year basis, profit before provisions came in flattish y/y at N161.1bn as a -2% y/y decline in funding income offset a 7% y/y rise in non-interest income. PBT declined by -29% y/y to N5.0bn as provisions rose 7% y/y to N59.0bn. PAT, however, was up 52% y/y following a significant rise in other comprehensive income to N8.6bn. For Q1 2017, PBT fell -17%, while PAT was down only -3% y/y because of a positive OCI of N827m. The decline in PBT was driven by a 23% y/y decline in non-interest income, a 20% y/y increase in loan loss provisions and, to a lesser extent, a 9% y/y increase in opex. The changes on these lines more than offset a 25% y/y increase in funding income to N31.5bn. Relative to our forecasts, Q4 came in mixed while Q1 positively surprised, largely because of funding income.