Impairments, OPEX pressure earnings in Q1’17: Diamond Bank reported a modest 8.5% YoY growth in gross earnings (N57.0 billion) in Q1’17. The top-line growth was supported by the 24.7% growth in interest income (N44.5 billion), despite the significant 25.6% decline in non-interest income to N12.5 billion.
The impressive growth in interest income was driven by higher yield on government securities assets, while the decline in non-interest income was as result of the marked contraction in trading income (-83.1% YoY).
Impairment charges remain elevated, rising by 20.1% YoY to N10.6 billion while it moderated by 43.3% QoQ from the N18.7 billion recorded in Q4’16. Operating expenses rose by 9.4% YoY and 3.6% QoQ to N26.1 billion. Consequently, PBT and PAT came in weaker, declining by 16.6% YoY and 16.5% YoY to N5.6 billion and N4.8 billion respectively in Q1’17.
Impairment growth to slow down in H1’17: In H1’17, we expect top-line to rise by 19.1% to N111.5 billion, supported by a 10.3% rise in interest income. The expected growth in interest income stems from our belief that banks will continue to benefit from high yields in fixed income securities – at least for this year.
We see a slight moderation of 5.3% in non-interest income (N25.1 billion), owing to the weak performance reported in trading income (-83.1% YoY) as at Q1’17. Following from the trend observed in Q4’16 and Q1’17, we expect interest expense to remain elevated, and envisage a 56.2% YoY in H1’17.
We anticipate a further rise in impairment provisions (+7.3% YoY) in H1’17. For the second half of the year, we believe impairment provisions will remain relatively high given the magnitude of loans that have missed interest payments but are yet to be classified as NPLs as at FY’16.
Diamond’s however does not have any exposure to the Etisalat loan syndication thus; we don’t expect the break down in ongoing negotiations to affect asset quality. In all, we project a 14% decline in after-tax earnings and EPS to N7.8 billion and N0.34 respectively in H1’17.
We downgrade to HOLD: We have retained our previous target price of N1.34 for the counter. Our target price translates to a 7.2% upside at current price of N1.25 thus, we downgrade DIAMONDBNK to a HOLD. We remain cautious on Diamond in the interim given the possibility that many credit assets may still be classified as NPLs due to prolonged defaults on repayment.
We however intend to re-evaluate the counter in H2’17 as the better economic fundamentals may improve the quality of these loans. DIAMONDBNK is trading at a P/B of 0.1x which is at a significant discount to peer average of 0.4x.