Culled—Proshare

August 4, 2016/FBNQuest Research

Moving to Neutral post marked sell-off; still wary of n-term outlook
Despite a material boost from fx trading income, Diamond Bank’s Q2 2016 PBT fell -35% y/y and missed our forecast by 13%. Excluding this fx trading income, Diamond likely recorded a pre-tax loss in the quarter. Given this backdrop, we struggle to reconcile management’s guidance of H2 PBT being similar to H1 at around N10bn.

Our full year 2016E PBT forecast of N13.2bn is 34% below guidance of N20bn. With its CAR of 16.5% – once H1 PAT has been capitalised (vs a 15% regulatory limit), we expect the bank to remain in defensive mode going forward. No surprises then that management commented broadly on capital raising plans.

We have made limited changes to our P&L forecasts except for the PAT, given the significant result on the other comprehensive income (OCI) line in Q2 2016. Although we have increased our risk free rate by 200bps to 14.5%, our decision to roll over our valuation to 2017 and the strong OCI result in Q2 explain the increase to our price target by c.9% to N1.64.

Following the sell-off ytd (-31%, ASI: -3.3%), we feel our Underperform recommendation has run its course. As such, we are upgrading to Neutral.

Weak underlying figures; bottom line boosted by fx gains via OCI

Diamond Bank’s Q2 2016 PAT doubled to N10.3bn, compared with a -35% y/y decline in PBT to N3.8bn. The PAT was boosted by a significant other comprehensive income result of N7.2bn (Q2 2015 equivalent was just N177m).

The marked decline in PBT was driven by a combination of poor results further up the P&L: net interest income declined -17% y/y to N24.7bn and more than offset non-interest income which grew 28% y/y to N12.3bn. Note that the latter was helped by strong fx-related net trading income (N7.8bn for the H1 period vs N1.3bn in the prior year).

Due to the weak funding income performance, profit before provisions fell -6.1% y/y. Compounding the picture, loan loss provisions grew by 55% y/y to N10.2bn. Although operating expenses were down –15% y/y to N23.1bn, this was insufficient to offset the weakness further up the P&L. Sequentially, the picture was similar: PBT fell -43% q/q while PAT grew 78% q/q.

Compared with our estimates, PBT missed by 13% while PAT beat by 181%. Although profit before provisions was in line, a negative surprise in loan loss provisions (19%) proved significant, even relative to a positive surprise on the opex line (-4%), leading to the weaker-than-expected PBT result.