NIGERIA | EQUITIES | BANKING | DIAMOND BANK PLC

Q2 2018 results highlight:

·         Net interest income of N23.08billion, down 1.4% q/q; 11.5% y/y

·         Non-interest Income of N10.96billion, up 34.8% q/q; 25.4% y/y

·         Profit before tax of N1.67billion, up 33.1% q/q; down 62.7% y/y

·         Mixed profit after tax of N1.40billion, up 33.0% q/q; down 63.0% y/y 

Yesterday, Diamond Bank released its Q2 2018 results which showed a rather lackluster performance both q/q and y/y.

Net interest income came in relatively flat at N23billion in Q2 2018, representing a 1.4% decline q/q, as net interest margins were unchanged q/q at 6.1%. The inability of the bank to enhance its NIM may be due to the lower interest rate environment with yields on 1-year T-bills down about 80basis points y/y and 120basis points q/q to 14% levels as at Q2 2018.

Further down, non-interest income (NII) was up 6.7% majorly as a result of higher trading income and higher fees from retail transactions as the bank’s digital strategy has been paying off in recent times. This boost helped support profit before provisioning, which increased 8.0% q/q to N34billion. This also helped cushion the effect of a 24% q/q rise in impairment charges.

Overall, PBT and PAT both came in stronger at N1.67billion and N1.40billion (up 33% respectively q/q). 

Year-on-Year Performance weaker on lower yield environment and contraction in net loans 

Compared to Q2 2017, the bank’s bottom line performance was weighed down the decline in yields in the fixed income space. This as well as funding cost pressures pushed NIM down 30bps y/y to 6.7% as at Q2 2018 as well as the 14% y/y decrease in net interest income. The slide in net interest income, 14% y/y increase in loan impairment charges and 3.6% y/y rise in opex more than offset the 25.4% y/y jump in non-interest income as PBT declined by 63% y/y in Q2 2018.  

Focus on asset quality and FX loan repayments sees loan book contract 

The bank’s focus on asset quality has seen its net loan book decline by 3.6% in the year to date (YTD). While part of this was due to the impact of IFRS 9, we point out that the bank has written off N500million worth of bad loans with non-performing loans ratio down 340basis points YTD to 12.3% as at Q2 2018. However, there was an 8% increase in fixed income securities during the period. 

Also, the bank’s capital adequacy (CAR) came in flatish at 16.6% in H1 2018 vs 16.7% in Q4 2017, but the bank is currently in talks with the CBN to review its international banking license to a national license, which means the bank’s regulatory CAR benchmark would fall to 10% from the current 15%. The lower capital requirements may help to reduce pressures on the bank to raise fresh capital in the near term.  

The write-off also led to a decrease in provisioning, as the bank’s coverage ratio declined 580bps q/q to 48.8%. Overall, the bank took provisioning of c.N1.8billion from its equity position in H1 2018, in line with the IFRS 9 regulations.  

Going forward, we are of the opinion that bank’s aggressive approach in pushing its digital retail strategy will continue to yield positive results for the bank as they stand to gather cheaper funding sources which should improve net interest margin in the medium term. The bank also plans to increase its retail loan size by 15%-20% which should further support profitability. 

The bank has also highlighted increased efforts to continue to reduce its fx-denominated loans and reduce exposure of its balance sheet to exchange rate risk with view of potentially redeeming its Eurobond maturity in May 2019. 

Source: Company Financials, Investment One Research