*Impairment charges still a threat to returns

By Emeka Anaeto, Economy Editor

It is no longer news that more than half of banks in Nigeria are carrying huge burden in their balance sheet due, largely, to severe macroeconomic headwinds and, in some cases, coupled with weak corporate capacities to navigate troubled waters.

The fact that about six out of 22 operators in the sector have managed to stay their heads above the trouble waters indicate that others could have done better than give excuses of the harsh operating environment.

Taking the argument further would mean that amongst the 16 that have reported bad 2015 results many of them should be able to get out of trouble in 2016 even though the environment has not yet improved.

Conversely, they are expected to re-strategise, then swim to safe shore or sink.

Already many of them are turning out first quarter 2016 results which gives little glimpse of what has been happening since the red results sheet of 2015.

Diamond Bank, one of the systemically important banks, and one of the 16 that turned out bruised scorecard in the 2015, announced its Q1, 2016 results recently and it looks like it requires a two-quarter result to convincingly show they are fully back on growth track. But there are some good scores to cheer.

OPEX and management costs

Profitability remained pressured by loan impairment provisions in 2016, with Q1, 2016 Profit Before Tax (PBT) and Profit After Tax (PAT)   further declining 23.9% and 24.1% to N6.04 billion and N5.12 billion respectively.

However, the bank seems to have stepped up cost work-down across both OPEX and management costs. Total expenses have further gone down by 3.6% y-o-y to N21.22 billion. Though on lower volume of transaction, interest and similar expense went down 16.5% to N8.44 billion.

On the other hand there was reversal of loss position in Net Trading Income as the heading recorded a huge inflow of N5.8 billion while Fee and Commission Income improved 15.1% to N9.6 billion.
All these positive developments moderated the huge adverse impact of the impairment charges on operating income in Q1, 2016.

Managing Director of the bank, Uzoma Dozie, said Diamond Bank has continued to focus on curtailing cost, and the projections of the macroeconomic   conditions and other external factors for the rest of the year are that these will remain challenging, indicating that this may lead to higher impairment charges. “This very conservative approach to managing our loan book assures of its quality in the long run and in general should deliver the numbers that are consistent with our long term plans.” he said. 
Coming from the cold 2015

Diamond Bank had published its audited full year, FY, 2015 and first quarter, Q1, 2016 results at same time. In the 2015 results, while gross earnings growth slowed to record low of N55.2 billion, credit impairment charges led to a 77.8% decline in net income on account of huge exposure of loan portfolio to oil & gas (29%) and general commerce (20%).

Diamond Bank reported a N217.1 billion gross earnings FY 2015, modest 4.2% y-o-y growth compared to N208.4 billion in 2014. Gross earnings growth was broadly driven by non-interest income (27.3% of gross income) which improved 25% y-o-y to N59.2 billion relative to N47.3 billion in 2014. Non-interest income was boosted by 466.3% jump in Net Gains from Other Financial Instruments to N11.5 billion from N2 billion in 2014.

On the other hand interest and related income (72.7% of gross income) declined 2% as gross loans and advances tumbled 24.2% y-o-y to N823.7 billion on the back of tougher operating environment.

Asset quality deterioration took a huge toll on profitability in 2015 as the bank booked a total of N55.2 billion in impairment charges (up 109.2% y-o-y from N26.4 billion). As a result PBT and PAT crashed 74.8% and 77.8% respectively y-o-y to N7.1 billion and N5.7 billion as against N28.1 billion and N25.5 billion in 2014 respectively.

Operating Margin waned despite restraints in OPEX

In 2015 the bank’s cost to income ratio (CIR) improved to 61 per cent from 64.6 per cent in 2014, indicating that serious cost cutting measures have been instituted since 2015 when the books started looking uncomfortable.

Improvement in CIR didn’t, however, impact significantly on the profit margin as PAT margin contracted to 2.6% from 12.2% in 2014 due to loan impairment charges. Consequently, Return on Equity (ROE)   and Return on Asset (ROA)   settled at 2.7% and 0.3% in 2015 in contrast to 14.5% and 1.5% in 2014 respectively. 

Risk Assets shrank 24.2% y-o-y on macroeconomic dictates
2015 was weakened particularly, by asset quality deterioration which translated into higher cost of risk (CoR) ratio which increased to 6.7% from 2.4% in 2014 as impairment charges jump by 109.2%. Significant weakness in the asset quality is reflected in outrageous loan portfolio exposure to oil and gas (29%) and general commerce (20%), sectors which accounted for 13% and 42% of non-performing loans respectively as at 9-month results.  

Short-Medium term forecast
Some financial analysts believe the bank’s gross earnings growth in full year 2016 would be likely subdued by weaker interest income due to asset quality concerns, while loan loss provision is expected to stay ahead of FY 2012- 14 average of N22.2 billion.

However, they also indicated that in addition to a lower base effect the likelihood of resurgence in a double digit growth in PAT by FY 2016 cannot be over-ruled

Against the backdrop of relentless challenge in the economy as witnessed up to April 2016 risk asset growth is expected to stay modest. Though some of the analysts have projected a loan growth around 1.5% for the bank, first quarter result show a 2.1% growth. In response to the worsened impairment charges, Diamond Bank had soft-pedaled on loan expansion, as gross loans and advances fell 24.2% to N823.7 billion in 2015 from N1.1 trillion in 2014. The bank is expected to leverage its growing customer acquisition which had resulted in over five million new retail customers in 2015.