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DIAMOND BANK PLC 9M'16 - Earnings sink on higher loan loss expense

• DIAMONDBNK released 9M’16 results showing weaker quarterly earnings amidst subdued earlier performance. On a y/y basis, Gross Earnings declined 3% to ₦151 billion, albeit 2% ahead of our estimate. With Interest Expense coming just in line with our estimate, we applaud the consistent cost moderation recorded year till date despite the higher interest rate environment and a larger customer deposit. However, Net Interest Income bowed to the weak top line performance, down 8% y/y to ₦78.4 billion – behind our ₦79.5 billion estimate. Asset quality remains DIAMONDBNK’s dilemma as loan loss provision continues to race north – doubling y/y to ₦40 billion and ahead of our N35 billion forecast. With Operating Expense moderating a mild 3% y/y and much in line with our estimate (1% deviation), PBT sunk to ₦3.9 billion (Vetiva: ₦13.2 billion). Overall, PAT came in at ₦3.5 billion vs. Vetiva and Consensus estimates of ₦10.6 billion and ₦9.7 billion respectively.
• Whilst we highlight DIAMONDBNK’s short term challenges, we note that the fundamental valuation of the bank remains strong with our Target Price at ₦3.17 (Previous: ₦4.29). Given current market pricing of N1.04, the bank trades at a 67% discount to our Target Price. Having said that, we are cautious about the current liquidity and capital adequacy challenges within the banking sector (particularly for tier II names) and expect the need for capital buffers to persist amidst weak capital market sentiment. With DIAMONDBNK’s CAR ratio hovering around the regulatory benchmark of 15%, we place a HOLD rating on the bank pending a capital adequacy boost. DIAMONDBNK trades at FY’16 P/B and P/E of 0.1x and 11.6x vs. our coverage bank’s averages of 0.4x and 3.6x respectively.