Material cuts to our 2018-19E EPS forecasts and price target:
Diamond Bank’s Q4 2017 and Q1 2018 results surprised negatively mainly due to significant weakness on both revenue lines. Q1 2018 PBT missed our forecast by c.78%; this followed a pre-tax loss in Q4 2017 of -N18.2bn vs. our N10.4bn profit forecast. Proceeds from the sale of the Benin unit were significantly below expectations. As such, we have cut our EPS forecasts by c.-49% on average over the 2018-19E period and our price target by 41% to N1.30. Our 2018E PBT forecast of N7.9bn is in line with management’s guidance of N8.0bn. The key drivers behind our forecasts include loan and deposit growth forecast of 10% and 5% respectively. Although improvements in the macro environment should help alleviate some asset quality issues (mainly in midstream oil & gas and power), our cost-of-risk assumption of 5.1% remains elevated. Going forward, management expects interest expense to moderate as higher priced liabilities are re-priced through the year. However, we expect this to be offset by lower yields on earnings assets. Although the shares have shed -27.3% over the last one month (ASI: -2.6%), our new price target implies a potential downside of -10% from current levels. As such, we maintain our Underperform rating on the shares.
Weak Q4 ‘17 & Q1 ‘18 results driven by y/y reduction in revenues:
Diamond’s Q4 2017 results showed a pre-tax loss of –N18.2bn. The loss was driven by a combination of factors including y/y declines of -52% and 48% in funding and non-funding income and a 29% y/y spike in loan loss provisions to N21.5bn. These negatives completely offset a -9% y/y reduction in opex. Further down the P&L, the pre-tax loss narrowed to -N12.0bn on the PAT line, thanks to a N3.9bn profit from discontinued operations - related to divestments of its UK (pending) and Benin subsidiaries, and a positive result of N2.9bn from other comprehensive income. A lower effective tax rate of 3.2% compared with 188.5% in Q4 2016 also helped. Although Diamond’s Q1 2018 results showed that earnings improved on a q/q basis, PBT of N1.3bn declined by -75% y/y. The y/y decline in earnings in Q1 2018 was driven by marked reductions across all key headline items. Pre-provision profits fell by -15% y/y, driven by y/y declines of 16% and 11% in funding and non-interest income. Although loan loss provisions declined by 18% y/y, the y/y reduction in both revenue lines proved significant and completely offset any positives from the lower impairment charges y/y. Further down the P&L, PAT declined by 76% y/y to N1.0bn.
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