Equity Analysis /

Diamond Trust Bank: Weak margins depress Q1 earnings, but reiterate Buy on valuation

    Faith Mwangi
    Faith Mwangi

    Equity Research Analyst, Financials (East Africa)

    Tellimer Research
    4 June 2019
    Published by

    Q1 19 EPS grew by 9% yoy to KES6.55, 7% below our expectations. Pre-provision income fell by 6% yoy because of weaker margins. DTB also recorded a fall in loan yields with cost of funds decreasing marginally. Operating expenses grew by 3% yoy. In the recent past, the bank has slowed down its physical expansion plans, preferring instead to buy additional stakes in its regional units. Still, earnings were enhanced by a 62% yoy fall in loan loss provisions from gross NPLs declining by 7% yoy. The ROE was 13.4% versus our estimate of 14.5%.

    Reiterate Buy on share price weakness. Our target price remains unchanged at KES154.00 (ETR of 32%). The bank is trading at 2019f PB of 0.6x and PE of 3.9x and has the highest regional contribution to PBT (c20% in Q1 19). The bank has been progressively increasing its stake in regional units having acquired additional shares in its Burundi business in 2018. DTB has also consistently recorded lower cost/income ratio than local peers, despite its expansion efforts over the last decade. However, its price performance is likely to remain subdued as investors remain concerned about weakening asset quality and continued negative margin pressure from preferential rates to clients with links to its key shareholder, Agha Khan Fund for Economic Development, which directly owns 17.32% of the bank.

    Net interest margin continues to fall behind peers. It fell to 5.6% in Q1 19 from 6% in Q1 18 – one of the lowest among Kenyan banks. This is due to the preferential pricing for its clients. In Q1 19, the bank recorded a significant fall in loan yields, but deposit costs failed to match the decline. So far, DTB is falling behind our 6.0% net interest margin target for FY 19.

    Asset quality improves, but additional coverage still needed. Gross NPLs fell by 7% yoy. However, NPL coverage fell to 37% from 54% – the bank experienced some write-offs in H2 18. We expect the cost of risk for the bank to rise in 2019 to shore up coverage. Historically, DTB has always maintained coverage levels above 60% when asset quality was much higher. Given the minimal chances of improvement in asset quality in 2019, we expect management to increase cost of risk to cushion NPLs.