Diamond Bank: Can management head off another loss?

Diamond Bank closed the three months of its third quarter operations at a marginal loss, deflating the growth momentum with which it ended half year trading. That isn’t providing promising prospects for a turnaround hoped for this year. The loss position looks very likely to grow further in the final quarter when a likely increase in loan loss expenses could drag the bottom line down into the red again.

That was the operating story of the bank last year. While it closed the third quarter with a net profit of close to N4 billion, it ended the year with a loss of over N9 billion. A sharp growth in loan impairment expenses from N33 billion in the third quarter to N57 billion at full year explained the shift.

A big challenge facing the bank’s management is how to head off a loss position for the second year in 2018. Making that happen will require lifting revenue growth at high speed, quenching the raging fire of interest expenses and dressing the kinks of huge credit losses – all in just three months.

Rising interest expenses is hurting the bank badly, as management raises inter-bank borrowings to dress up the impact of declining customer deposits. Inability to grow revenue increases the strain of rising interest expenses on the bottom line.

Gross earnings amounted to N142.54 billion for Diamond Bank at the end of the third quarter, a slight decline from N143.65 billion year-on-year. Interest income – the main revenue line of the bank declined by 4% to N108 billion during the period.

This reflects a continuing decline for the second year in loans and advances to customers – the principal earning assets of the bank. The loan portfolio is down from a peak of close to N1 trillion at the end of 2016 to N755 billion at the end of 2017 and further to N730 billion at the end of the third quarter.

Fee and commission income was flat at N28.85 billion during the period but a near doubling of net trading income to over N5 billion enabled the bank to keep gross earnings from a significant decline. Strengthening revenue growth sufficiently to absorb rising costs is imperative to have the bottom line out of the red at full year.

Interest expenses seem to be out of control and that is the position for the entire financial services sector. Most operators are experiencing rapidly growing interest expenses against slowing or declining interest income, which calls for appropriate regulatory intervention.

For Diamond Bank, interest expenses grew by 17.4% to nearly N41 billion at the end of the third quarter against a slight decline in interest income. Interest expenses consumed 38% of interest income at the end of the third quarter, up from 31% in the same period last year. The result is a drop of close to 14% in net interest income at N67 billion.

Rising cost of funds seems to reflect resort to expensive inter bank borrowings in the face of declining customer deposits. Due to other banks grew by 39% to N15.52 billion over the nine months of the year and yet could not counter a decline of over N93 billion in customer deposits over the period.

Another major cost line hurting the bottom line is impairment charge for credit losses. Despite a drop of 24% year-on-year, credit loss expenses remain quite huge relative to earnings – claiming 38% of net interest income. A rising trend in credit losses has been on since 2013 and has remained one of the biggest impediments to profit performance.

The full year outlook suggests that the charges for loan losses could grow considerably in the final quarter. Last year up to 42% of loan loss expenses happened in the final quarter. If the pattern is repeated this year, the moderate profit figure seen at the end of the third quarter will expectedly vanish and a loss could appear in its place.

After tax profit amounted to N1.65 billion for Diamond Bank at the end of third quarter operations, a drop of 58% year-on-year. The drop in profit follows rising costs against flat revenue. The prospects for defending even the marginal profit to full year are considered quite slim. Diamond Bank has experienced declining profits since 2014 and ended in a loss in 2017.

Earnings per share dropped from 17 kobo to 7 kobo over the review period. With declining profits and a loss last year, the ability to strengthen the equity cushion has declined. Retained earnings are down to a fraction of the 2015 peak. The bank has been on dividend holiday since its 10 kobo per share dividend for 2014 operations.