csl diamond bank q1 15 result review

Equities

Diamond Bank

Nigeria | Banks | Diamond Bank

14 April 2015

CSL Stockbrokers is a division of FCMB (UK) Limited which is authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the PRA in the United Kingdom.

Q1 earnings in line with consensus, Impairment Charge up 30% y/y

Net Interest Income was up 5% y/y. Fee and Commission Income grew

17%, however Non–Interest Income only grew 2% due to a 29% decline

in Net Trading Income.

Impairment Charge was up 30% y/y resulting in a 9% decline in PBT.

Earnings in line with consensus estimates.

We have a Buy rating and a price target of N5.27 (current price N4.47).

Interest Income was up 6% y/y, in line with our run rate for FY 2015. We

attribute the growth in Interest Income to an increase in yields on risk assets.

Net Loans and Advances were up just 3% in Q1 2014.

Interest Expense on the other hand, grew faster relative to Interest Income,

up 8% y/y despite a contraction in the bank’s deposit book (6% decline in

Q1). We believe this is attributable to an increase in funding costs following

the increase in the cash reserve requirement (CRR) on private sector

deposits to 20% from 15%.

The bank’s Non-Interest Income was up 2% y/y. Net Fee and Commission

Income was up 17% despite the reduction in permissible commission on

turnover (COT) to 2 per mille in 2014 from 3 per mille in 2013, while net

trading income declined 29% y/y.

Operating Expenses (Opex) were up 4% y/y. The increase in Opex came

mainly from a 7% increase in personnel expenses. Cost to income ratio (CIR

ex-provisions) remained stable at 62.0% in Q1 2015 when compared to Q1

2014.

Diamond Bank, Nm

Q1 2014 Q1 2015 y/y

Net Int Income 27,491 28,846 5%

Net fee & commision Inc 7,169 8,362 17%

Other Income 2,774 1,822 -34%

Total Op Inc 37,434 39,029 4%

Opex (23,201) (24,195) 4%

Loan losses (4,992) (6,468) 30%

PBT 9,241 8,367 -9%

Tax (794) (1,200) 51%

Net Profits from contd opns 8,447 7,168 -15% Source: Company data, CSL estimates

The bank’s Impairment Charge of N6.5bn was up 30% y/y. We expect

Diamond Bank’s COR to rise to a full 5.9% in 2015e, reflecting pressure on

Recommendation: Buy Target: N5.27 Price: N4.60

*price as at 13 Apr

Year to December, Nbn

2013 2014 2015e 2016e

Net Interest Income 104.6 109.6 116.5 138.3

Net Profits 28.5 25.5 6.9 33.9

EPS, N 1.5 2.0 0.3 1.5

P/BV (x) 0.5 0.5 0.5 0.4

PE (x) 2.3 3.0 15.5 3.1

Div Yield (%) 6.5 6.5 1.5 7.6

Mkt. cap. N106.5bn (US$532.7m)

Free float 77%

Bloomberg DIAMONDB NL

Reuters DIAMONB. LG

Three-year graph

0

2

4

6

8

10

Apr-12 Apr-13 Apr-14

Diamond Bank share price

Diamond Bank rel. to Nigeria All-Share

Contact information

Lagos: +234 (0)1 448 5436

Analyst: Sade Obilomo

+234 (0)1 448 5436

Head of Research: Guy Czartoryski

+234 (0)1 448 5436

Sales: Temi Popoola, CFA

+234 (0) 1 738 4176

London: +44 (0) 20 7220 1041

Diamond Bank

Equities


its substantial US dollar loan book. (See CSL’s Nigerian Banks, A disaster

priced in. Buy, 30 Jan 2015).

The bank’s PBT was down 9% y/y. Net Profits declined 15% y/y due to a

higher tax charge of 14%, relative to 9% in Q1 2014.

The bank’s annualised RoAE of 15.8% compares with 14.7% for FY 2014.

Management will hold a conference call on Wednesday 15 April 2015 to

discuss the results. Details will be communicated later.

We have a Buy rating on Diamond Bank with a price target of N5.27/s using

two scenarios. We arrive at our price target by applying an implied 0.60x

P/BV multiple to 2015e BVPS estimates of N9.49/s assuming no rights issue

in 2015, and N7.99/s assuming a hypothetical rights issue in 2015.

Diamond Bank

Equities


Diamond Bank financials and ratios, Nm

Income statement 2010 2011 2012 2013 2014 2015e 2016e

Net Interest Income 49,883 69,203 89,322 104,628 109,576 116,548 138,343

Net Fee and Commission Income 17,248 17,926 25,185 27,755 33,495 28,724 28,620

Other Income 7,069 (8,754) (1,446) 7,183 10,683 9,226 9,964

Loan loss & other provision (22,862) (52,949) (17,028) (23,297) (26,371) (46,689) (23,503)

Operating expenses (46,565) (52,559) (68,548) (84,184) (99,282) (99,429) (112,030)

Pretax profits 4,773 (27,132) 27,482 32,080 28,101 8,380 41,393

Effective tax rate 72% 16% 20% 11% -9% 18% 18%

Net Profits 1,329 (22,868) 22,108 28,544 25,485 6,872 33,942

EPS (reported) 0.09 (1.58) 1.53 1.97 1.66 0.30 1.47

DPS 0.15 n/a n/a 0.30 0.10 0.07 0.35

Payout ratio 163% n/a n/a 15% 6% 24% 24%

Dividend sum (2,171) 0 0 (4,343) (2,316) (1,621) (8,106)

Weighted Ave. Share Count 14,475 14,475 14,475 14,475 15,308 23,160 23,160

Statement of financial position

Cash, balances with central banks 27,606 55,784 132,196 228,322 301,393 370,000 380,000

Loans and advances to Bank 66,815 90,648 139,803 129,362 296,099 219,362 239,362

Loans and advances to Customers 294,228 388,136 585,200 689,168 791,095 791,905 951,329

Investment securities 51,303 190,685 245,778 383,210 342,835 507,542 576,037

Fixed assets (PP&E) 36,751 40,484 45,815 52,670 55,062 56,315 56,937

Other assets 118,092 30,495 29,311 36,123 146,640 69,286 81,120

Total assets 594,795 796,232 1,178,104 1,518,856 1,933,123 2,014,410 2,284,785

Customer deposits 412,032 603,003 910,234 1,206,044 1,493,081 1,432,780 1,647,697

Other liabilities 44,822 51,023 87,707 102,902 121,878 171,277 184,587

Taxation 1,995 1,347 1,973 2,467 2,449 2,670 2,770

Deferred taxation 580 0 0 195 195 295 325

Long term liabilities/borrowings 28,281 54,878 69,334 68,395 106,496 187,544 207,766

Total liabilities 487,710 710,251 1,069,248 1,380,003 1,724,099 1,794,566 2,043,145

Shareholders' Funds 106,629 85,756 108,602 138,700 208,807 219,631 241,406

Minority Interest 456 225 253 154 218 214 234

BVPS 7.4x 5.9x 7.5x 9.6x 9.0x 9.5x 10.4x

Ratios

Net interest margin 15.2% 15.1% 13.6% 11.5% 10.4% 10.4% 10.8%

Cost/income ratio 62.8% 67.1% 60.6% 60.3% 64.6% 64.4% 63.3%

Pre-tax margin 5.2% -30.2% 19.8% 17.7% 14.4% 4.0% 17.3%

RoAA 0.2% -3.3% 2.2% 2.1% 1.5% 0.4% 1.6%

RoAE 1.2% -23.7% 22.7% 23.0% 14.7% 3.2% 14.7%

NPLratio 15.6% 9.3% 4.7% 3.6% 5.4% 3.8% 3.8%

Cost of risk 6.8% 14.1% 3.3% 3.5% 3.6% 5.9% 2.6%

Leverage 1.2x 1.1x 1.1x 1.1x 1.1x 1.1x 1.1x

Loan to deposit 79% 70% 67% 59% 53% 57% 60%

Capital adequacy ratio (CAR) 17% 13% 17% 17% n/a 21% 19% Source: Company data, CSL estimates

Diamond Bank

Equities


Analyst Certification

Each research analyst(s) principally responsible for the preparation and content of all or any identified portion of this research report hereby certifies that all of the views expressed in this research report accurately reflect their personal views about those issuer(s) or securities that the research analyst covers in this research report. Each research analyst(s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst in this research report.

Important disclosures

Ratings and Target Price History

Diamond Bank

Date Price (N) Old Target

(N) New Price Target

(N) Old

recommendation New

recommendation

24-Jan-14 7.8 9.1 9.1 Buy Buy

31-Mar-14 6.3 9.1 9.1 Buy Buy

19-Jun-14 6.3 9.1 7.5 Buy Buy

19-Sep-14 6.2 7.5 9.2 Buy Buy

24-Oct-14 6.3 9.2 8.1 Buy Buy

12-Dec-14 4.8 8.1 8.1 Buy Buy

28-Jan-15 4.0 8.1 5.3 Buy Buy

13-Apr-15 4.6 5.3 5.3 Buy Buy

Analysts' compensation is based upon activities and services intended to benefit the investor clients of FCMB (UK) Limited and the subsidiaries of First City Group, Lagos, Nigeria (“the Group”). Analysts receive compensation that is impacted by overall profitability of the Group, which includes revenues from, among other business units, Institutional Sales and Trading and Capital Markets/Investment Banking.

CSL Research Ratings Distribution

BUY HOLD SELL Not Rated Total

Coverage universe 20 6 4 5 35

% distribution 57% 17% 11% 14%

Investment banking clients 1 0 1 0 2


Explanation of CSL Research's equity research rating system

Buy: The analyst expects the stock to outperform the Benchmark over the next 12 months or the stated investment

horizon.

Hold: The analyst expects the stock to perform in line with the Benchmark over the next 12 months or the stated

investment horizon.

Sell: The analyst expects the stock to underperform the Benchmark over the next 12 months or the stated

investment horizon.

Not Rated: The rating and price target have been suspended temporarily to comply with applicable regulations and/or

firm policies in certain circumstances including when FCMB UK or the Group is acting in an advisory capacity in a merger or strategic transaction involving the company or due to factors which limits the analysts ability to provide forecasts for the company in question.

Benchmark: The benchmark is the trailing three year average yield of the 12 month T-Bill plus one standard deviation

rounded to the nearest percent.

Diamond Bank

Equities


Price targets: Price targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The

achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings fall short of estimates.

Asset allocation: Asset allocation is the responsibility of the strategy team. The recommended weight (Buy, Hold and Sell) for

equities, cash and fixed income instruments is based on a number of metrics and does not relate to a particular size change in one variable.

Other disclosures

A. The analyst(s) responsible for the preparation and content of this report (as shown on the front page of this report) holds personal positions in a class of common equity securities of the company.

B. The company beneficially owns more than 5% in FCMB UK or First City Group (“the Group”).

C. FCMB UK or the Group is a market maker in the publicly traded equity securities of the company.

D. FCMB UK or the Group beneficially owns 1% or more of the equity securities of the company.

E. FCMB UK or the Group beneficially holds a significant interest of the debt of the company.

F. FCMB UK or the Group has been lead manager or co-lead manager over the previous 12 months of any publicly disclosed offer of securities of the company.

G. The company is a client of the investment banking division of the Group.

H. FCMB UK or the Group has lead managed or co-lead managed a public offering of the securities of the company within the last 12 months.

I. FCMB UK or the Group has received compensation for investment banking services from the company within the last 12 months.

J. FCMB UK or the Group expects to receive, or intends to seek, compensation for investment banking services from the company during the next 3 months.

Companies from which FCMB UK or the Group’s investment banking division has received compensation in

the last 12 months

Buy Hold Sell Not Rated Total

1 0 0 0 1


Diamond Bank

Equities


Important Risk Warnings and Disclaimers CSL STOCKBROKERS LIMITED (“CSL Stockbrokers”) is regulated by the Securities and Exchange Commission, Nigeria. FCMB (UK) LIMITED (“FCMB UK”), trading in the name of ‘CSL Stockbrokers’, is authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the PRA in the United Kingdom. The details of the authorisation can be viewed at the Financial Services Register at http://www.fsa.gov.uk/register/home.do by entering the Firm Reference Number 502704. FCMB UK is registered in England and Wales No. 6621225. Both CSL Stockbrokers and FCMB UK are members of the FCMB Group (“the Group”) of Nigeria, a group of companies which also includes First City Monument Bank Ltd. RELIANCE ON THIS PUBLICATION FOR THE PURPOSE OF ENGAGING IN ANY INVESTMENT ACTIVITY MAY EXPOSE YOU TO A SIGNIFICANT RISK OF LOSS. By receiving this document, you will not be deemed a client or provided with the protections afforded to clients of CSL Stockbrokers and FCMB UK. When distributing this document, CSL Stockbrokers, FCMB UK or any member of the Group is not acting for any recipient of this document and will not be responsible for providing advice to any recipient in relation to this document. Accordingly, CSL Stockbrokers, FCMB UK or any member of the Group will not be responsible to any recipient for providing the protections afforded to its clients. If you are in the UK, you are a person to whom either Articles 19 or 49 of the Financial Services and Markets 2000 (Financial Promotion) Order 2005 apply or a person to whom this communication may otherwise be lawfully made. In the United Kingdom, this document is available only to such persons described above and persons of any other description should not rely on this document. Transmission of this document to any other person in the United Kingdom is unauthorized and may contravene the Financial Services and Markets Act 2000 (FSMA). If you are not such a person or if the distribution of this document is otherwise unlawful where you are, you are required to return the document immediately to CSL Stockbrokers. In the UK, the content of this document has been approved by an authorised person within the meaning of FSMA. This document is not intended for Retail Clients in the UK. This document is not an offer to buy or sell or to solicit an offer to buy or sell any securities. This document does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The appropriateness of a particular investment will depend on an investor’s individual circumstances and objectives. The investments and shares referred to in this document may not be suitable for all investors. CSL Stockbrokers, FCMB UK or any other member of the Group may effect transactions in shares mentioned herein and may take proprietary trading positions in those shares, and may receive remuneration for the publication of its research and for other services. Accordingly, this document may not be considered as objective or impartial. Additionally, information may be available to CSL Stockbrokers, FCMB UK or the Group, which is not reflected in this material. Further information on CSL Stockbrokers’ and FCMB UK’s policy regarding potential conflicts of interest in the context of investment research and CSL Stockbrokers and FCMB UK’s policy on disclosure and conflicts in general are available on request. This document is based on publicly available information obtained from sources which CSL Stockbrokers believes are reliable, but which it has not independently verified. Neither CSL Stockbrokers, FCMB UK nor their advisors, directors or employees make any guarantee, representation or warranty as to the accuracy, reasonableness or completeness of this information and neither CSL Stockbrokers and FCMB UK nor their advisors, directors or employees accepts any responsibility or liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. The opinions contained in this document are subject to change without notice and are not to be relied upon and should not be used in substitution for the exercise of independent judgment.

http://www.fsa.gov.uk/register/home.do

Diamond Bank

Equities


Nothing herein excludes or restricts any duty or liability to a customer which FCMB UK has under the FSMA or under the Rules of the FCA. A recipient who chooses to deal with any person who is not an authorised representative of FCMB UK in the UK may not enjoy the protections afforded under the UK regulatory regime. Past performance is not a guarantee of future performance. Investments may go down in value as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of an investment for which there is no recognised market it may be difficult for investors to sell their investment or to obtain reliable information about their value or the extent of the risk to which they are exposed. The information contained in this document is confidential and is solely for use of those persons to whom it is addressed and may not be reproduced, further distributed to any other person or published, in whole or in part, for any purpose. @Copyright CSL STOCKBROKERS LIMITED, 2015. All rights reserved. CSL STOCKBROKERS LIMITED FCMB (UK) LIMITED Member of the Nigerian Stock Exchange (Trading as CSL Stockbrokers) First City Plaza, 44 Marina 81 Gracechurch Street PO Box 9117 London EC3V 0AU Lagos State United Kingdom NIGERIA

csl diamond bank q1 15 result review

Business