Diamond Bank Q3 2017 Results: Impact of Divestment on Underlying Earnings Limited

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November 7, 2017/FBNQuest Research 

2% cuts to our 2018E EPS forecast and price target

Diamond Bank’s Q3 2017 results diverged markedly from our forecasts, mainly because of a negative surprise in pre-provision profits. To a lesser extent, slightly elevated opex and loan loss provisions relative to our forecasts also contributed to the weaker-than-expected PBT.

Despite the negative surprise, we have increased our 2017E PBT forecast by around 7%, having included c. N16bn in gains (our estimate) from the bank’s planned divestment of Diamond S.A, its west-African subsidiary. Excluding this gain, our underlying PBT forecast is only N1.3bn. Proceeds from the divestment is expected to have a positive impact of around 200bps on the bank’s CAR by end-2017E.

Management disclosed that the proceeds will be deployed towards the expansion of its retail banking franchise in Nigeria and further divestments from non-core businesses are likely. Given that Diamond S.A.’s contribution to PBT in the last two years was around N1bn, we have made modest changes to our earnings forecast for 2018-19E and our price target (-2%) to N1.48.

The announcement of the divestment has propelled Diamond Bank shares (+19% vs. ASI 0.4%). At current levels, Diamond Bank shares provide a potential upside of around 28%. Nevertheless, we retain our Neutral rating on the shares because we believe that downside risks from loan impairments remain high, especially in Q4.

Pre-tax loss of –N4.1bn driven by y/y decline in pre-provision profit

Diamond’s Q3 2017 results showed a pre-tax loss of -N4.1bn, slightly lower than the –N6.6bn that it reported in Q3 2016. The pre-tax loss was mainly driven by a -7% y/y decline in pre-provision profits. Although both revenue lines contributed to the y/y decline in pre-provision profits, non-interest income which fell by -18% y/y was the major driver.

The y/y decline in noninterest income was primarily underpinned by a -72% y/y decline in fx trading income in 9M 2017. Funding income was also down slightly by -2% y/y. The negatives on these lines completely offset a -30% y/y reduction in loan loss provisions. Further down the P&L, the after-tax loss narrowed to -N2.3bn, thanks to a tax credit of N693m and a positive result of N1.2bn in other comprehensive income.

Sequentially, the pre-tax and after-tax losses of – N4.1bn and -2.3bn showed wide variance from the PBT and PAT of N5.2bn and N5.8bn that the company reported in Q2 2017.   

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