Diamond Bank: Will loss grow or profit return?

Diamond Bank’s three years of falling profit degenerated into a loss in 2017 and a clear direction is lacking so far this year on its earnings prospects. Whether the bad trend will continue with a possibly bigger loss or whether a return to profit will be attained remains clouded as the bank finished first quarter trading with just one step away from a loss.

There were no significant changes in the operational functions of the bank underlying the downward trend in performance in the first quarter. Inability to grow revenue has been the problem of the bank since 2015 and a restated figure for 2016 shows a drop of 15% in gross earnings in the year. A marginal improvement was then recorded in 2017. Gross earnings went down by 2% to N48.45 billion at the end of the first quarter.

Interest income provided the strength for the marginal improvement in gross earnings last year. This year, it has joined fees and commissions income on the declining side. Net fee and commission income dropped by 17% year-on-year to N6.88 billion at the end of the first quarter.

Against the decline in interest income, interest expenses rose by 38% year-on-year to N14.73 billion at the end of the first quarter. That caused a drop of over 16% in net interest income, which came to N23.4 billion at the end of March. This reflects a decline in low cost customer deposits and increased use of due to banks – which grew by 52% to N16.67 billion in three months to March 2018.

Impairment charge for loan loss expenses declined by 18% to N8.2 billion over the review period but remains large relative to earnings. A rising trend in credit losses has been on since 2013 and has continued to hurt profit capacity. Loan impairment charges had consumed over 58% of the bank’s net interest income at the end of 2017. Despite a decline in the first quarter, the ratio remains high at 35%.

A tight hold on operating cost helped the bank to avoid a loss position at the end of the period. Total operating expenses were flat at a little over N22 billion at the end of the first quarter. A drop of 8% in personnel expenses countered increases in other expenditure lines. The bank has been laying off workers over the past three years. Between 2014 and 2017, management has cut down its workforce by over 37%.

Loan loss expenses still pose a big risk of standing on the way of profit performance this year. Full year figures usually show much bigger credit losses than the interim accounts and that was the pattern for the bank last year. It closed third quarter last year with a loan impairment charge of N35 billion and an after tax profit of nearly N6 billion. At full year, the loan loss expense rose to N57 billion and in place of profit a loss of N9 billion occurred.

The prospects for further growth in loan impairment charges against a continuing weakness in revenue give little hopes for ending the downward trend in profitability and making a rebound this year. In five years to 2017, the bank has charged a total of N221 billion in credit losses to the income statement.

Diamond Bank closed the first quarter operations virtually at breakeven. After tax profit dropped by 82% year-on-year to N785 million at the end of the period. It earned 3 kobo per share at the end of the first quarter, down from 18 kobo per share in the same period last year.

Profit and earnings per share outlook for the bank at full year is uncertain in the light of its unstable earnings pattern. Earnings per share has been declining since 2014 before turning into a loss in 2017 and no dividend has been paid for the third straight year.