Diamond Bank: Rising credit losses hurt profit capacity

Diamond Bank may report a drop in profit for the second year in 2015, as rising credit losses are claiming a significantly increasing share of gross earnings. With slowly growing revenue and rising impairment charges, the bank’s profit capacity has continued to weaken. At the end of the third quarter, net profit dropped by close to 21% against a moderate improvement in gross earnings. The bank devoted 16% of interest income to provisions for loan losses, rising from 12.2% in the same period last year.

Rising credit losses is a general trend in the banking sector this year. Diamond Bank has been experiencing it however since 2013. From N23.30 billion in 2013, loan loss charges rose to N26.37 billion in 2014. At the end of the third quarter of the current year, impairment for credit losses grew further by about 32.6% year-on-year to N19.49 billion.

The earnings outlook for the bank this year is worsened by inability to grow revenue against the rising costs. The bank reported a gross income of N156.54 billion at the end of the third quarter, a moderate improvement of 3.3% in year-on-year. Based on the growth rate in the third quarter, no reasonable improvement in gross income is expected for Diamond Bank at full year.

The bank posted gross earnings of N208.40 billion in 2014, which was an improvement of 15% though a slowdown from 31% in the preceding year. A more drastic slowdown is very likely for the bank at the end of 2015. Interest income is weak as the bank is not growing loans and advances and other key main earning assets.

After tax profit dropped by 20.9% to N15.97 billion year-on-year at the end of the third quarter, which is a more rapid drop than the 10.7% decline recorded in the 2014 full year. Based on the growth rate in the third quarter, Diamond Bank is likely to close the current year with another profit drop. The bank closed last year’s trading with a net profit figure of N25.48 billion. In the event that credit losses grow further relative to revenue in the final quarter, a wider margin of profit drop than anticipated can be expected.

Impairment charge for credit losses is the major headache for the bank this year, as it is for the banking industry. It is the main factor in the decline in net profit margin from 13.3% in the third quarter of last year to 10.2% at the end of September this year. The bank closed last year with a net profit margin of 12.2%, which is a continuing decline from net profit margin of 16.1% in 2012 and 15.8% in 2013.

The bank carried a net credit portfolio of over N771 billion at the end of the third quarter, slightly down from the closing figure of N791 billion for last year. The portfolio quality problem appears to warrant a discontinuation of further expansion in credit volume and a step up of asset recovery effort. Despite huge loan loss provisions in the past three years, there are no substantial write backs, indicating that loan recovery isn’t happening either.

Inability to grow revenue is rooted in weakness in earning assets, which has affected the bank’s key income lines. Apart from the decline in loans and advances – the principal earning assets, the second largest earnings assets – investments held to maturity also dropped by 30% at the end of the third quarter. This explains the slacken performance in interest income, the bank’s major income line.

The bank earned 68 kobo per share at the end of the third quarter compared with 87 kobo in the corresponding period last year. Based on the full year profit projection, earnings per share is expected to come to 99 kobo for Diamond Bank at the end of 2015. The bank earned N1.10 per share in 2014 and dividend per share dropped from 30k in the prior year to 10 kobo.