November 7, 2018
By Yakubu LAAH InvestAdvocate
Lagos (INVESTADVOCATE)-Diamond Bank Plc Eurobond price dropped by c.500 basis points following the downgrade by international ratings agency, S&P Global Ratings.
S & P said it lowered its long- and short-term issuer credit ratings on Diamond Bank to ‘CCC+/C’ from ‘B-/B’ and the outlook is negative.
The global ratings agency also lowered its long- and short-term Nigeria national scale ratings on the bank to ‘ngBB-/ngB’ from ‘ngBBB-/ngA-3’.
In the same vein, S & P lowered its issue rating on the bank’s seniour unsecured debt to ‘CCC+’ from ‘B-‘.
“We believe Diamond Bank’s provisioning needs will be higher than we initially expected, which will put pressure on the bank’s capitalisation.
Additionally, its foreign-currency liquidity position also remains vulnerable, due to a large upcoming Eurobond maturity in May 2019,” the rating agency said.
According to the rating agency, the negative outlook reflects pressure on the bank’s capitalisation and foreign-currency liquidity.
S & P says the rating action reflects that they consider Diamond Bank to be currently dependent on favourable business, financial, and economic conditions to meet its financial obligations.
S & P also affirmed that they believe Diamond Bank will have to set aside higher provisions than the rating agency initially expected, following the adoption of International Financial Reporting Standard No. 9 (IFRS 9), which implies weaker asset quality than expected and exerts significant pressure on the bank’s capitalisation.
“Following Diamond Bank’s successful disposal of its West African subsidiaries, and imminent disposal of its U.K. subsidiary, we expect it will convert its license into a national banking license. The license conversion would mean a lower minimum capital adequacy ratio (10 percent versus 15 percent currently) and lower risk of breach. However, the timing is uncertain, and we consider that there is significant pressure on its capital position. Moreover, four of the bank’s 13 board members have resigned recently, which could create instability if left unresolved in the near term,” the agency added.
S & P said as of December 31, 2017, the bank’s regulatory capital adequacy ratio reached 16.7 percent and dropped to 16.3 percent in September 30, 2018, on the back of IFRS 9 implementation and amortisation of tier-2 capital instruments. “The initial implementation of IFRS 9 resulted in the bank taking a Nigerian naira (NGN) 2.5 billion (approximately $7 million) deduction from retained earnings at June 30, 2018,” the report said.
S & P says it believe that the bank will have to take higher provisions for IFRS 9, using the N31 billion of regulatory risk reserves that it holds under the local prudential guidelines. “Based on peers’ experience and the bank’s weak asset-quality indicators, we estimate the impact will significantly exceed the regulatory risk reserves and estimate that our risk-adjusted capital (RAC) ratio will reach 3.4 percent-3.9 percent in the next 12-24 months compared with 5.3 percent at year-end 2017,” it affirmed.
According to S & P, the impact will be somewhat tempered by the capital gain when the sale of the bank’s U.K. subsidiary is finalised.
They expect the bank’s credit losses to average 5 percent over the same period, while nonperforming loans (NPLs; including impaired loans and loans more than 90 days overdue but not impaired) will remain above 35 percent in the next 12-24 months after reaching 40 percent at September 30, 2018.
S & P is projecting Diamond Bank will display losses in the next 12-24 months and will have to repay its maturing Eurobond principal of $200 million in May 2019, and plans to use its foreign-currency liquidity and the proceeds from the sale of its U.K. subsidiary for the repayment, among other sources. “Any delays or unexpected developments could exert downward pressure on the ratings,” S & P said.
Zedcrest Capital reports that the main highlight of Tuesday’s trading session centered on the lenders 19s, with yields rising by a whopping c.600 basis points from Monday’s close in reaction to the short- and long-term issuer credit rating downgrade of the bank. “The bond traded around 25.00 percent-27.00 percent levels with more local buyers taking advantage of the high yield despite the recent downgrade,” the Zedcrest report said.
S & P noted that following the recent resignation of board members, Diamond Bank could face some outflows of deposits, but the granularity of its deposit base and its historically good retail franchise are mitigating factors.
On October 25, 2018, the lender announced the exit of four non-executive directors from its board.
“The negative outlook reflects the pressure on the bank’s capitalisation from weaker-than-expected asset-quality indicators, and on its foreign-currency liquidity due to a large upcoming maturity in May 2019. We could lower the ratings if provisioning needs proves higher than what we currently expect, leading to a decline in capitalization as measured by our RAC ratio (below 3 percemt) or a breach in the local regulatory requirements.
We could also lower the rating if the bank is unable to secure sufficient foreign-currency funding for the repayment of its Eurobond. When the latter is repaid, we may revise the outlook to stable if the banks’ asset quality and capitalization improves, and the make-up of its board stabilises,” the S & P ratings affirmed.
This is coming on the heels of the banks third quarter report for the period ended September 30, 2018, its post-tax profit plunged 57.6 percent to N1.65 billion from N3.90 billion recorded a year ago.
Similarly, pretax profit of the bank declined 35.4 percent to N3.08 billion from N4.78 billion posted the same period of 2017.
Gross earnings for the group dropped to N142 in the review period of 2018 from N143 billion in 2017, indicating a depreciation of 0.77 percent.
Still on the declining streak of the bank is the interest income which plunged 4.0 percent to N107.99 billion from N112.53 declared the same period of 2017, Diamond Bank said in a filing with the Nigerian Stock Exchange (NSE).
Shares of Diamond Bank at the close of Wednesday’s trading on the domestic bourse appreciated 2.54 percent to N1.21 from N1.18, gaining 0.03 kobo per share.
