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DIAMOND BANK PLC - Mixed outlook, tough near-term but positive long-term

DIAMONDBNK earlier released its FY’17 and Q1’18 results, with earnings from both periods coming in largely underwhelming. The full year performance was particularly disappointing with earnings before discontinued operations coming in at a loss of ₦12.9 billion – first full year loss recorded by any of our coverage names in recent years. Although earlier run rates had indicated weak performance for FY’17, Q4’17 earnings came in more dismal than we had anticipated with bottom line for the period coming in at a loss of ₦18.8 billion vs. our ₦2.9 billion profit expectation. Although unconvincing top line as well as persistent weak asset quality (FY’17 NPL: 14.7%) remained the major pressure points for FY’17 numbers, high Interest Expense further compounded the earnings burden. Notably, following a significant 62% q/q moderation in Gross Earnings in Q4’17, the FY’17 top line came in 15% weaker than we had anticipated at ₦190 billion.

DIAMONDBNK’s performance is yet to find any respite as earnings free fall persists. Although we had expected the improving macroeconomic environment to support earnings in 2018, DIAMONDBNK appears to remain snared by the tough operating environment with the bank starting the year on the back foot. Constrained top line, rising funding cost, and elevated loan loss expense remained the key pressure points in Q1’18. Particularly, Gross Earnings moderated 2% y/y to ₦48.4 billion (16% weaker than we had expected). The top line performance was dragged by both weaker than expected Interest and Non-Interest Income as loan book moderated and the impact of the divested subsidiaries kicked in. Also, following the implementation of IFRS 9, DIAMONDBNK took a one-time charge of ₦2.5 billion at the start of the year. This one-time charge comes significantly lower than the average ₦63 billion charge taken by our coverage banks (our tier II coverage average: ₦12.7 billion).