Earnings Report /

Diamond Trust Bank: Higher loan loss provision dampen earnings; reiterate Hold

  • NPLs up 16% yoy with further weakening expected in 2020. Investors likely to continue punishing the stock

  • Operating expenses grew 1% yoy, which is expected to be maintained on the withdrawal from the expansion strategy

  • Despite cheap multiples, we reiterate our Hold rating given the negative outlook

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
27 May 2020
Published byTellimer Research

DTB (Hold, TP KES154.00) released poor Q1 20 results, with EPS rising 4% yoy to KES6.83. Earnings were weak – pre-provision profit grew just 5% yoy on a marginal decline in the net interest margin and modest cost growth (+1% yoy). DTB has effectively slowed its expansion programme, with management now targeting alternative channels through which to grow market share, which should keen cost growth down. The key disappointment was a 52% yoy rise in loan loss provisions, following a 16% yoy rise in gross non-performing loans.

DTB is trading at a current PB of 0.3x against a Q1 20 ROE of 12.8%. The multiples offer attractive entry levels, but we retain our Hold recommendation due to the: 

  1. Negative impact of lower loan yields, which will likely be greater for DTB compared with the industry average, based on preferential lending to affiliate clients;
  2. Significant downside risk for balance sheet growth forecasts as DTB management tends to be far more conservative on lending compared with other banks; and 
  3. Expected weaker asset quality (higher than the industry cost of risk) in light of the bank’s high coverage policy. 


  1. Weaker net interest margin following recent cuts to the central bank rate (on which the loan yields of old loans are based). Due to the preferential rates to clients, we expect the negative impact on DTB to be much worse than for peers.
  2. Anaemic balance sheet growth. DTB tends to be more conservative (in times of higher country risk) than peers and we would not be surprised to see a decline in loans in 2020.
  3. Asset quality to weaken further. Management has not disclosed how much of the loan book they have so far restructured. However, we consider DTB to be high risk, with the bank’s loan book heavily concentrated in real estate, trade and tourism – the sectors facing restructuring at the moment. DTB has legacy of high-quality loan books, but this has been eroded in the past three years as the bank’s asset quality weakened and caught up with the rest of the industry. With the impact of Covid-19, we do not anticipate the bank recovering its former glory over the next three years. We expect investors to continue to punish the stock for this. 

Key positives

  1. The net interest margin declined by just 10bps yoy, which was lower than expected. There was notably a decline in the cost of funds, which we believe was related to the retirement of some expensive term deposits, as deposits declined by 1% yoy. However, we expect a further decline in the net interest margin following the recent cut to the central bank rate, on which old loans are priced. Overall, net interest income rose 3%yoy while loans grew 7%yoy.
  2. Operating expenses rose 1% yoy, with the cost/income ratio declining to 46.4% from 47.4% in Q1 19. DTB has slowed its expansion programme, preferring instead to acquire higher shareholding in its regional units. Salaries increased 10% yoy, which we see as very high. We expect the bank's salary costs to match inflation, with no notable hires. 

Key negatives

  1. Increase in gross NPLs by 16% yoy, with loan loss provision charges increasing 52% yoy. Given the Covid-19 pandemic and the exposure of the bank to weak economic segments, we expect this to deteriorate further in the coming quarters.
  2. Non-interest revenue grew just 3% yoy. Exchange income declined 13% yoy and we believe this was related to the regional business. Fee and commission income grew 10% yoy. Unlike its local peers, we don’t expect strong growth from the bank’s fee and commission income, with it having just recently embarked on an alternative channel strategy and now having a lower number of clients. 


  • Continued cuts to the central bank rate would impact margins negatively.
  • Protracted Covid-19 period would adversely affect business operations.
  • Locusts infestation will increase the risk of food shortages.
  • Continued floods from heavy rainfall will impact harvests.