Diamond Bank: Credit losses persist, undermine profit growth
Diamond Bank continues to experience huge credit losses in the current financial year and this is undermining profit performance. Net profit dropped by over 15% in the first quarter against a moderate improvement in gross earnings. Rising provisions for risk asset losses accounted mainly for the profit drop, claiming 16% of interest income compared to 13% in the same period last year.
The bank has been making huge provisions for loan losses in recent years, about N23.30 billion in 2013 to N26.37 billion in 2014. At the end of the first quarter of the current year, impairment for credit losses grew further by about 30% to N6.49 billion.
The bank carries a net lending portfolio of over N1.08 trillion, slightly down from the closing figure for last year. The portfolio quality problem facing the bank clearly warrants discontinuation of further growth in credit volume and a step up of asset recovery effort. The absence of substantial write backs to previous provisions indicates that loan recovery isn’t happening as fast as desired.
The lid on risk asset expansion has implications for revenue performance this year, interest income, being the dominant source of income. Further constraint on earning capacity is coming from a drop in the investment portfolio, the second major source of revenue. The ability to grow revenue this year appears to have weakened due to constraints in the bank’s key income lines.
At the end of the first quarter, the bank reported gross income of N51.54 billion, an improvement of 5.3% year-on-year. The only reasonable growth in the bank’s main revenue lines is fees and commissions income, which grew by 16.7%. Interest income improved by 5.9% while trading and other income dropped significantly during the period.
If the first quarter growth rate is maintained to full year, gross income is expected to be flat for Diamond Bank at the end of 2015. The bank generated N208.40 billion in gross earnings in 2014 and may close the current financial year with a slightly lower figure.
After tax profit dropped by 15.1% to N7.17 billion year-on-year at the end of the first quarter, sustaining a drop of 10.7% recorded in the 2014 full year. Based on the growth rate in the first quarter, after tax profit is projected at N28.8 billion for Diamond Bank in 2015. This will be an improvement of 13% from the 2014 profit figure of N25.49 billion.
The improvement in profit expected is subject to possible further growth in loan loss provisioning in the course of the year. The growth rate in credit losses in the first quarter of last year increased significantly at the end of the year. If the pattern is repeated this year, the indicated improvement in profit isn’t likely to be achieved.
Impairment charge for credit losses is the critical cost element to watch this year. By claiming an increased proportion of revenue, it accounts mostly for a decline in net profit margin from 17.3% in the first quarter of last year to 13.9% this year. This is however better than the net profit margin of 12.2% at the end of last year.
Interest cost is another expenditure line to watch this year, which grew ahead of interest income at 8.3% at the end of the first quarter. Other key expenditure lines appear to be under firm control. The bank earned 31 kobo per share at the end of the first quarter, down from 61 kobo in the corresponding period last year.
Based on the full year profit projection, earnings per share is expected to come to N1.22 for Diamond Bank at the end of 2015. The bank earned N1.10 per share in 2014 and has announced a dividend of 10 kobo per share. Its register is scheduled to close on 16-17 April and payment is expected on 4 May 2015.
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