Diamond Bank: Turning around or running down?

Diamond Bank’s bottom line position at the end of the first quarter presents mixed signals of recovery as well as a possible further downward run. Its profit for the three months is already above the full year figure in 2015 and yet is a drop of about 20% year-on-year. Can the bank build on the first quarter profit figure onto recovery or sustain the year-on-year fall to full year is the question mark on Diamond Bank in 2016.

The bank had lost 78% of its preceding year’s profit in 2015, sustaining a falling trend for the second year from its peak profit figure of N28.50 billion in 2013. The problem was an upsurge of 109% in credit losses, which gulped 35% of interest income. That problem is still persisting in the current year with another rise of over 36% in impairment charges for loan losses at the end of the first quarter. That again accounted for the profit drop reported during the period.

Apart from the problem of credit losses, the bank’s management appears to be putting up good effort balancing costs with revenue amid the constraints in growing income. For instance, a decline of 11.8% in interest income in the first quarter virtually cancels out with a decline of 10.3% in interest expenses, thus defending net interest income. Also, a strong growth in non-interest income compensated for the decline in interest income and permitted a moderate growth in gross earnings.

At N52.47 billion, the bank improved gross earnings by 1.8% year-on-year at the end of the first quarter. The earnings growth driver was net trading income, which advanced from a negative figure of N17 million in the same period last year to a little below N6.0 billion at the end of the first quarter.

Based on the growth rate in the first quarter, gross income is projected at N213 billion for Diamond Bank at the end of 2016. That would be a slight decline from the 2015 figure of N217 billion. The bank improved gross earnings by 4.2% in 2015.

The earnings weakness this year is coming from interest income, which is explained by the risk asset quality challenges facing the bank. Whether revenue growth will pick up in subsequent quarters is a critical factor to watch out for on Diamond Bank.

The bank posted an after tax profit of N5.76 billion at the end of the first quarter. This is a drop of 19.6% over the corresponding figure last year and yet already above the full year net profit figure of N5.66 billion the bank reported at the end of 2015.

A sustained growth from the first quarter position will mean a big turnaround for the bank in 2016. Yet a year-on-year drop in profit may be sustained in the light of persisting high growth in impairment charges on loans. The profit outlook for the bank for the current year is subject to uncertain developments that would define the cost-income pattern in the course of the year.

Impairment charges for loan losses rose by 36.3% to N8.81 billion in the first quarter, claiming about 25% of interest income during the period. Rising credit losses is the critical factor undermining profit performance, meaning that profit capacity cannot improve until the credit quality problem is fixed. How soon impairment charges stop rising and begin to decline is another critical factor to watch out for on Diamond Bank in 2016.

Operating expenses are under control at N23.90 billion at the end of the first quarter, a marginal decline on year-on-year basis. With that, the bank has reduced its operating cost margin from 47% to 45.5% over the review period. Also with a drop of 10.3% in interest expenses, the bank’s management has only the impairment charges to contend with in order to rebuild its profit capacity.

The bank converted 11% of revenue into net profit in the first quarter, down from 14% in the same period last year but well above the 2.6% recorded at the end of last year. Earnings per share amounted to 25 kobo in the first quarter against 31 kobo in the same period last year. Subsequent earnings reports of the bank will be needed to determine whether it is headed for a turnaround this year or a further downward run.