RECOMMENDATION ON DIAMOND BANK PLC RIGHTS ISSUE JUNE 214
Background Information Diamond Bank is among the large financial services providers in West Africa with total assets in excess of NGN1.7trn, which represents the 7th largest of the banks on the Nigerian Stock Exchange (NSE) with only the 6 tier-1 banks ranking above it. Diamond Bank Plc submitted an application to the NSE to raise approximately N5.37bn (USD39mn) via a Rights Issue as part of the bank s capital raising exercise to shore up its capital adequacy ahead of Basel 3 implementation. This capital raising exercise has also included a Eurobond (newly issued in May, 214) from which the bank raised USD2mn at a rate of 8.75% over 5 years. This Rights Issue (if 1% subscribed) will add 8,685,145,863 ordinary shares of 5 kobo each to the bank s current shareholding structure to bring the total shares outstanding to 23,16,388,968 ordinary shares (8th largest of the 15 banks on the Exchange). Peer Comparison It is our opinion that Diamond Bank, with its re-branding, growth ambitions and planned extensive branch establishment over is on the vanguard of crossing over to join the top players in the Tier 1 league. These banks are usually the favourite of institutional investors, both foreign and local, and their stronger market visibility, higher trading float and liquidity are some of the factors driving this patronage. Chart 1: DIAMONDBK Total assets vs. sector s constituent banks Chart 2: DIAMONDBK Market cap vs. sector s constituent banks Millions 4,5 Billions 1, 4, 9 3,5 3, 2,5 2, 1,5 1, 5 DIAMONDBK ranks 7th, with only Tier-1 banks above 8 7 6 5 4 3 2 1 DIAMONDBNK will rank 9th before and after the Rights Issue at its current price Source: NSE, Company Financials, Meristem Research 1 P a g e
There is empirical data that lends credence to the assertion that there has been a benchmarking of the performance of banks in each tier structure against one another, and then against industry averages. This has instigated a high level of competition in the sector to maintain and then bridge the gap in their key metrics such as balance sheet size, margins, price multiples and even share price. When Diamond bank s metrics are compared with other tier 2 banks, the disparity begins to lend credence to our position that the bank trades well below its fair value. The bank s current P/E of 2.96x is the lowest in the sector, which means that this stock represents the best value for money based on current price and earnings of NGN8.45bn (214Q1 numbers). Chart 3: Metrics comparisons with tier structures and industry Banks Price EPS P/E P/BV BVPS Asset Turnover Net Margin Leverage ROE CIR LTD ACCESS 9.79 1.69 5.8x.89x 11.17.12 18.24% 5.54x 12.13% 64.6% 65.5% DIAMONDBNK 6.11 2.12 2.88x.7x 9.59.12 16.17% 1.85x 21.5% 6.3% 57.8% ETI 15.29 1.6 9.53x.71x 23.46.13 5.99% 9.34x 7.27% 66.% 72.2% FBNH 15.46 2.26 6.85x 1.8x 14.46.1 17.26% 8.3x 13.86% 66.% 62.9% FCMB 4.2.8 5.28x.53x 7.68.13 12.46% 6.84x 11.8% 69.4% 71.8% FIDELITYBK 2.3.23 8.7x.36x 5.78.13 5.35% 5.96x 4.15% 77.% 56.7% GUARANTY 3. 3.8 9.75x 2.47x 12.54.11 36.76% 6.1x 24.3% 46.% 68.4% SKYEBANK 3.4 1.14 2.98x.38x 9.7.12 11.88% 8.98x 12.8% 83.5% 77.3% STANBIC 25. 2.41 1.37x 2.43x 1.43.15 2.98% 7.79x 24.52% 75.% 67.8% STERLNBANK 2.33.41 5.75x.76x 3.8.14 9.12% 11.64x 14.86% 71.7% 62.4% UBA 8. 1.32 6.5x 1.8x 7.47.1 16.17% 1.92x 17.66% 69.1% 48.6% UBN 1..23 44.15x.85x 11.77.12 2.75% 4.88x 1.61% 73.7% 51.8% UNITYBNK.5 -.57 -.87x.62x.8.15-34.53% 1.26x -53.14% 66.3% 65.5% WEMABANK.99.5 2.7x.94x 1.6.13 7.8% 13.58x 13.77% 83.5% 46.2% ZENITHBANK 24.8 3.22 7.71x 1.5x 16.83.12 26.64% 5.92x 18.93% 55.% 57.3% Tier 1 7.46x 1.18x 13.47.11 17.61% 7.38x 14.66% 6.5% 62.% Tier 2 8.22x.72x 5.94.13 1.81% 8.55x 12.98% 73.9% 6.7% All banks 7.88x.89x 7.21.12 12.17% 8.6x 11.78% 67.7% 62.% 18 June, 214 Prices are used in the computations. Also tier-2 for P/E, Net margin and ROE avg. discounts UNITYBANK. Key EPS P/E P/BV BVPS ROE CIR LTD Earnings per Share Price-to-Earnings ratio Price-to-Book Value Book Value per Share Return on Equity Cost Income Ratio Loan-To-Deposit Source: Company Financials, Meristem Research 2 P a g e
The bank s high financial leverage of 1.85x relative to the tier- 1(7.38x), tier-2 (8.55x) and industry average (8.6x) and is the attendant effect of the bank financing its exponential growth with debt, and other liabilities. We do not envisage this being an issue in the near term as long as the bank can grow risk assets sufficiently to offset declining yields on assets. This we believe is achievable given their current LTD ratio of only 58% (which is well below the statutory limit of 8%). Also, the bank s relatively high ROE of 22%, which is well above that of most tier-1 banks save for GUARANTY is not unconnected with this huge balance sheet leverage which is the second highest in the sector. Share price performance DIAMONDBK currently trades at NGN6.5, which represents an 18% discount to its 52-week high of NGN7.95, and an 18% premium to its 52-week low of NGN5.5. The stock is fairly liquid and trades at a beta of 1.635. The counter has declined by approximately 9% to date, compared to the NSEASI s return of -.47%. We surmise that the headwinds at the start of the year were largely responsible for this stock s underperformance so far in 214. The first 4 months of the year saw the ticker pare by -19%. However, after the release of impressive FY213 results the ticker garnered investor attention and the share price rallied, gaining 11% in May alone. Chart 4: 52 week price volume chart Chart 5: Price movement vs. NSEASI (rebased) 25 2 15 Volume (RHS) Price 1.4 1.2 1.8 1.6 1.4 1.2 1.8 DIAMONDBNK NSEASI 1.6.6 5.4.2.4.2 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: NSE, Bloomberg, Meristem Research 3 P a g e
The latest data from the CBN shows that the level of foreign participation in the equities has steadily risen to 32% from lows of 22% recorded in March. We opine that as the level of participation increases, the sound fundamentals of the stock will gain it the recognition that will drive the share price towards our estimated fair value. Valuation We valued DIAMONDBK using a blend of absolute (5%) and relative (5%) valuation techniques. Our adoption of Price Multiples methodology in the valuation metrics is to better reflect the impact of market trend on the stock s movements over time. For the DCF valuation, we used a 5-year forecast model, 6.33% market risk premium through till 216 and 6.18% for 217 and 218. We obtained our terminal values using a cost of equity of 22% and 7% sustainable growth rate. Return on Equity (RoE) is estimated at 15.9% for 214FY which is below our 22% derived Cost of Equity. The issue will imply a lower full year 214 estimate EPS of N1.52 (based on the weighted average shares for the year) versus of our previous forecast of N2.5 which will imply a forward P/E of 5.69x by FY214. Our valuation methodologies put DIAMONDBK at a target price of NGN7.79, a premium of 24% to the current market price of NGN6.27 and a 34% premium to the Rights Issue list price of NGN5.8. And so thus, we recommend that investors take up this Rights Issue. Financial Performance Interest Income & Non-Interest Income Diamond bank grew interest income by 13% Y-o-Y by 214Q1 (27% as at FY213) which supported strong gross earnings growth of 22% (27%; FY213). The bank s strong performance is largely due to the increase in risk assets majorly composed of loans largely skewed towards MSME s which has significant risk, but also significant risk pricing match (as is apparent), 4 P a g e
The bank will continue to drive its retail segment competence to attract low cost deposits, and make high margin loans. This leads us to forecast that their FY214 performance might closely mirror that of FY212 (though slightly tempered), and so we forecast interest income growth of 18%. This we expect will be supported by robust risk asset creation by the bank on the precipice of prominence. Chart 6: Trend in gross earnings, interest and non-interest income Billions 25 2 Gross Earnings Interest Income Non-Interest income 2 per. Mov. Avg. (Gross Earnings) 15 1 5 28 29 21 211 212 213 214F 215F Source: Company Financials, Meristem Research The bank s growth in non-interest income of 65% (24% Y-o-Y; FY213) was equally impressive, supported by an 8% contribution from fees and commission income in 214Q1 (78%; FY213)). This impressive growth in the first quarter of 214 was supported by a gargantuan 68% growth in trading income which we do not expect will reoccur in such magnitude. We forecast a much slower growth in non-interest income growth of 14% to NGN42bn by FY214, primarily due to the impact of reduced COT. OPEX The bank managed a cost to income ratio of 6.3% as at FY213, and 62% as at 214Q1. The cost trended upwards as at 214Q1 primarily due to the new banker s tariff (which includes the AMCON levy and depositor (NDIC) premium). It is likely that the bank s costs might further trend upwards this year due to expansion plans and staff costs. 5 P a g e
This bank unlike the most of the rest of the industry plans to undergo major expansion plans (with a target of 3 branches set or 214) for which they have already raised debt of USD2mn. Due to this massive undertaking we expect that the bank s cost to income might trend upwards by FY214, and so we expect a FY214 cost to income ratio of around 7% (8% over 214Q1, and 1% over FY213). Chart 7: Operating Expenses and Cost-to-income ratio from 28 to date 9 Billions Operating Expenses CIR 84 72% 8 7 69 7% 68% 6 56 66% 5 4 3 27 41 47 64% 62% 6% 2 58% 1 56% 28 29 21 211 212 213 Source: Company Financials, Meristem Research 54% Earnings The bank generated earnings of NGN29bn from gross earnings of NGN181bn by FY213 (representing a net margin of 16%), and NGN8bn from NGN49bn as at 214Q1 (representing an improved net margin of 17%). This performance translates to ROE of 22% which is well above the tier-2 bank average, and would not be illassumed as a tier-1 bank performance. Our expectations for the bank s FY214 performance are tempered by rising OPEX associated with the massive branch expansion being undertaken. We forecast earnings growth of approximately 2% to NGN34bn. 6 P a g e
Financial Highlights (NGN billion) DIAMOND BANK PLC Q1:214 Result Profit & Loss Account Q1:214 Q1:213 y/y Growth Gross Earnings 49. 4.3 21.59% Interest Income 38.24 33.84 13.2% Interest Expense 1.75 9.33 15.29% Impairment Charge 4.99 3.25 53.49% Net Interest income after impairment charge 22.5 21.26 5.83% Non Interest Income 9.94 6.3 64.97% Net operating income 32.44 27.29 18.89% OPEX 23.2 18.55 25.6% PBT 9.24 8.74 5.79% PAT 8.45 6.29 34.3% Balance Sheet Cash and bank 245.13 228.32 7.36% Loans to banks 14.93 129.36 8.94% Loans to customers 712.21 689.17 3.34% Investment Securities 285.79 283.25.9% Fixed Assets 5.62 49.83 1.6% Other Assets 149.42 138.93 7.55% Total Assets 1,584.1 1,518.86 4.3% Deposit from Banks 51.34 54.58-5.93% Deposit from Customers 1,233.18 1,26.4 2.25% Borrowings 68.9 68.4 -.45% Total Liablilites 1,437.4 1,38. 4.13% Other Liabilities 135.77 15.56 28.62% Shareholders' fund 147.6 138.85 5.91% Per share data DIAMONDBNK Current Price 6.27 EPS 2.12 BVPS 1.16 Price multiples/ratios P/E 2.96x P/BV.62x RoAE 21.48% RoAA 1.98% Cost of Funds 3.1% Net Margin 17.24% 7 P a g e
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Date Asset allocation: The recommended weighting for equities, cash and fixed income instrument is based on a number of metrics and does not relate to a particular size change in one variable. Movements in Price Target Company Name: Diamond Bank Plc Price (N) Previous Target Price(N) New Target Price (N) Previous Recommendation 17/6/214 6.27 9.68 7.79 BUY BUY New Recommendation Company disclosures Meristem or the analyst(s) responsible for the coverage may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally, affect the objectivity of this report. Material interests, which Meristem or the analyst(s) have with companies or in securities discussed in this report, are disclosed below: Company Diamond Bank Plc Disclosure a. The analyst(s) hold(s) personal positions (directly or indirectly) in a class of the common equity securities of the company. b. The analyst responsible for this report, as indicated on the front page, is a board member, officer or director of the company c. Meristem beneficially owns 1% or more of the equity securities of the company d. Meristem has been the lead manager or co-lead manager of any publicly disclosed offer of securities of the company over the past 12 months. e. Meristem beneficially holds a major interest in the debt of the company f. Meristem has received compensation for investment banking activities from the company within the last 12 months g. Meristem intends to seek, or anticipates receipt of compensation for investment banking services from the company in the next 3 months h. The content of this research report has been communicated with the company, following which this research has been materially amended before its distribution i. The company is a client of the stock broking division of the Meristem group. j. The company is a client of the investment banking division of the Meristem group. k. The company owns more than 5% of the issued share capital of Meristem l. Meristem has other financial or other material interest in the company. 9 P a g e
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Contact Information Brokerage Services gbadunolasokunbi@meristemng.com (+234 83 361 6176) www.meristemng.com Investment Banking/Corporate Finance jumokeawolumate@meristemng.com (+234 86 273 256) michaelogun@meristemng.com (+234 85 521 165) Wealth Management sulaimanadedokun@meristemwealth.com (+234 83 31 3331) damilolahassan@meristemng.com (+234 83 613 9123) www.meristemwealth.com Tel:+234 1 738 9948 Registrars muboolasoko@meristemregistrars.com (+234 83 324 7996) www.meristemregistrars.com Tel: +234 1-28 925 Trustees yinkaadegbola@meristemng.com (+234 83 717 9556) Tel: +234 1 448 599 Client Services tounomonaiye@meristemng.com (+234 85 846 48) Investment Research Saheedbashir@mersitemng.com (+234 82 454 6575) kemiakinde@meristemng.com (+234 89 183 9487) E-mail: research@meristemng.com Tel: +234 1 295 3135 Corporate websites: www.meristemng.com www.meristemwealth.com www.meristemregistrars.com Meristem Research can also be accessed on the following platforms: Meristem Research portal: meristem.com.ng/rhub Bloomberg: MERI <GO> Capital IQ: www.capitaliq.com ISI Emerging Markets: www.securities.com/ch.html?pc=ng Reuters: www.thomsonreuters.com FactSet: www.factset.com 11 P a g e
12 P a g e Diamond Bank Plc