Diamond Bank Plc.: A tough year

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Introduction

Our analysis of Diamond Bank Plc’s newly released 2017 results shows that it did not enjoy any level of profitability during the course of the year as it did in the preceding year. While it was able to step up the level of its core banking operations, it was not able to do the same for its non-core operations and it recorded a loss rather than a profit, as well as negative profitability ratios rather than positive ones.

Investors are also not really benefiting from the bank’s efforts. They have not received any dividend for the past three years, and this is understandable in the light of the fact that the bank has no profit from which to produce dividend.

 

Core operations

The 2017 FY was not too great a year for Diamond Bank. While it was able to expand its core banking operations during the course of the year, it did not quite succeed in stepping up its non-core banking businesses. It however a collectively higher gross earnings of N189.6 billion in 2017, three per cent better than the N184.1 billion recorded in 2016.

Because other operating income and net gain from other financial instruments (at fair value through profit or loss) were not as robust as those of the preceding year, coupled with higher operating expenses, the bank recorded a pretax loss rather than a pre tax profit. Pre tax loss was a whopping and crippling N11.5 billion, as compared to a pre tax profit of N3.4 billion in the prior year. There was also an after tax loss of N12.9 billion during the course of the review year, as compared with an after tax profit of N2 billion in the preceding year.

Diamond Bank also had a lower interest margin of 67.7 per cent, lower than 73.5 per cent in the prior year, and this was not indicative of efficiency in the core business of lending and borrowing. This lower net interest margin was perpetuated despite a wider gap between average lending rate and average interest rate. Average lending rate increased over the preceding year’s (to 13.6 per cent from 18.4 per cent) while average deposit interest rate also increased to 2.8 per cent from 4.0 per cent. This means that the bank charged its lenders a higher interest rate, and paid its depositors a higher interest as well.

It is worth noting that during the course of the year, the bank gave out a lower level of loans and advances, and also received less deposits from customers.

The bank then recorded a loss per share of 39, as compared to 15 kobo before. There was no dividend payout as expected.

 

Profitability ratios

The bank recorded mostly negative results in respect to profitability in 2017. With a lower revenue and a loss rather profit, the bank was definitely not able to record a profit margin that was better than that of 2016. At negative 6.1 per cent, the bank’s loss margin was worse than the profit margin of 1.8 per cent recorded in the prior year. What this means is that for every N100 earned by the bank in the course of the year, there was an equivalent loss of N6.10, as compared to a profit of N1.80 for the year preceding 2017.

The bank was also unable to squeeze any profit at all from assets, as assets deployed earned the bank a loss rather than a profit in 2017. Loss on assets for the year stood at 0.7 per cent in 2017, as compared to a return on assets of 0.2 per cent in 2016.

For the 2016 financial year, Diamond Bank deployed equity valued at N223.3 billion and for every N100 equity deployed, the bank made an after-tax loss of N5.80, a regression over the profit of 90 kobo made in 2016.

Earnings per employee increased to N53.33 million on the average, up from N48.59 million in 2016.

 

Other ratios

The bank had a slightly better capital adequacy standing in 2017 than it did in 2016, meaning that the bank is doing better in its primary business of giving out loans. Diamond Bank’s capital adequacy improved in 2017 to 16.7 per cent, higher than 15 per cent in the prior year, but below the 16 per cent rate mandated for Systemically Important Banks.

The bank had a debt to equity ratio of 6.7, meaning that it is using N6.70 of liabilities in addition to each N1.00 of stockholders equity. In other words, the bank is using N7.70 of total capital for every N1.00 of equity capital, lower than the N9.10 it did in the erstwhile year.

 

Sustainable growth

Diamond Bank did not pay shareholders any dividend in 2017, just like it did not in 2016. Retention ratio in 2017 was therefore 1, same as it was in the prior year. As previously said, there was a loss margin of 6.1 per cent rather than a profit margin. Asset turnover was 0.11 times, higher than the 0.09 times recorded in the prior year while asset to equity ratio was 7.68 times, lower than 9.1 times before.

Analysis shows that sustainable growth for 2017 was negative 5.18 times, meaning that the bank had no inherent capacity for growth during the course of the year. Meanwhile, actual growth was 3.0 per cent, a departure from the negative growth rate of the preceding year.

 

Stock value

As at May 18 2018, Diamond Bank’s stock traded at N1.55, and our analysis shows that the stock was undervalued at this price.

As at analysis date, the company had a net assets per share (NAPS) value of N9.46, much higher than the N1.55 at which it traded on the floor of the stock exchange. Also, the company had a book value of N223.3 billion and a market capitalisation of N35.9 billion, putting its book value/market cap ratio at more than six. Traditionally, a book to market value ratio greater than one indicates an undervalued stock.

The stock is at the moment low priced enough that it is easily accessible by all kinds of investors.

 

Unique strategies

Diamond Bank prides itself as a bank that never stands still. It is one Nigerian bank that is dedicated to continually developing and delivering new ways of doing banking and redefining banking relationships. It is one of the leaders of the digital transformation of the Nigerian banking industry through the utilization of electronic delivery channels.

 

Conclusion

This was not a very good year for Diamond Bank. It remains to be seen if the 2018 financial year will end on the same note, or better.

*Source: Diamond Bank’s 2017 financial report

*The Nigerian Stock Exchange

Nbillion 2017 Percentage change 2016 Percentage change 2015
Turnover 189.6 3.0 184.1 -15.2 217.1
Profit pre tax -11.5 -438.2 3.4 -52.1 7.1
After tax profit -12.9 -745.0 2 -64.9 5.7
Total assets 1714.8 -16.3 2049.8 16.9 1753.2
Equity 223.3 -1.3 226.3 5.5 214.6
Liabilities 1491.5 -18.2 1823.1 18.5 1538.6
Deposits 1172.5 -23.3 1528.2 13.3 1349.3
Loans and advances 790.7 -27.8 1095.6 33.0 823.7
Kobo
Earnings per share -39 -360 15 -37.5 24
Dividend per share 0 0 0 0.0 0
Core operations 2017 2016 2015
Turnover growth rate 3.0 -15.2 4.4
Profit growth rate -438.2 -52.1 -74.8
Average lending rate (%) 18.4 13.6 19.2
Average interest rate 4.0 2.8 3.6
Net interest margin (%) 67.7 73.5 69.3
Profitability ratios
Profit margin (%) -6.1 1.8 3.3
Return on assets (%) -0.7 0.2 0.4
Return on equity (%) -5.8 0.9 2.7
Earnings per employee (Nm) N53.33m N48.59m N43.82m
Other important ratios
% of classified loans 9.5 6.9
Capital adequacy 16.7 15 16.4
Debt to equity ratio 6.7 8.1 7.2
Actual Vs sustainable growth
Profit margin (%) -6.1 1.8 3.3
Retention ratio 1.0 1.00            1.00
Asset turnover (times) 0.11 0.09 0.12
Assets/Equity (times) 7.68 9.1 8.2
Sustainable growth -5.18 1.5 3.3
Actual growth 3 -15.2               4.4

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