Earnings Report /

Diamond Trust Bank: Weak results on low balance sheet growth and asset quality; downgrade to Hold

  • We downgrade the bank to a Hold, with the poor performance evidence of downside risk for our estimates

  • EPS grew by just 1% yoy to KES24.27, with total operating income down by 3% yoy on weaker net interest margin

  • Gross NPLs unexpectedly increased by 12% yoy, which we find concerning

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
20 March 2020
Published byTellimer Research

DTB Group (downgrade to Hold; target price KES154) has released its FY 19 results, with EPS up by just 1% yoy to KES24.27. Overall performance was weak in light of dismal performance on loan growth (+3% yoy), deposit growth (-1% yoy) and net interest margin (5.6% versus 6.2% in FY 18). Gross NPLs increased by 12% yoy to KES13.6bn, with the write-offs we had anticipated failing to materialise. Non-interest revenue was the positive outlier growing 12%yoy to KES 5.8bn on the back of increased fee income and FX income. 

The bank declared a KES2.70 dividend. At 11% dividend pay-out, DTB Group has one of the lowest dividend pay-out ratios in our universe of banks.

DTB Group is trading at a 2020f PB of 0.4x and a PE of 2.8x. FY 19 ROE stood at 14.2%. Given the dismal performance, there are downside risks for our net interest margin and balance sheet growth forecasts. DTB also has taken longer than expected to resolve its weak asset quality and provision levels, which is evidence of further potential downside. 

We downgrade the bank from a Buy to a Hold. 


  • Asset quality weakness likely to continue weakening, with Covid-19 continuing to slow the economy. DTB Group will also need to increase its cost of risk further to increase coverage, which has fallen behind in the past three years.
  • Balance sheet growth likely to remain anaemic in 2020. DTB is traditionally conservative on balance sheet growth at times of increased country level risk. We expect this pattern of management to result in minimal balance sheet growth in 2020. Deposit growth may gain some traction from shareholder-affiliated firms.
  • Net interest margin increase to fall behind rest of industry. We don’t expect much improvement in net interest margin as preferential pricing will hit both loan yields and cost of funds. 


  • Non-funded income grew 12% yoy, driven by fee and commission income (+9% yoy) and FX income (+17% yoy). Unlike that of Tier 1 banks, fee and commission income for DTB is driven mainly by loan fees, rather than alternative channel income. The bank is yet to launch a mobile lending product or gain significant traction on its alternative channels. Although technology adaptation remains a key strategic focus for the bank, its low retail penetration will see it fail to achieve the income growth levels of local Tier 1 banks. FX income is mainly driven by its strong footing in the trade business and regional network, which we believe is sustainable.  


  • Anaemic balance sheet growth, with loans growing 3% yoy and deposits falling 1% yoy. This is the second year that DTB has experienced low balance sheet growth. We expect this challenge to persist in 2020 as the economic environment remains sluggish. Additionally, with gross NPLs increasing 12% yoy, the bank is unlikely to pursue lending aggressively in 2020. 
  • Net interest margin fell to 5.6% from 6.2%. In the post-loan rate cap environment, we believe DTB will struggle to revise net interest margin upward on account of preferential rates to shareholder-associated clients, who are the bulk of its client base. In Q4 19, loan yield remained unchanged at 10.3%, unlike for Equity Group, whose large retail loan book saw an uplift in loan yields. 
  • Cost/income rose to 48.6%. This was on account of the 3% yoy decline in total operating income. Operating expenses grew just 3% yoy. We expect the bank’s cost base to remain low as it is no longer carrying out a physical expansion. We believe costs will mainly arise from investment in technology going forward. 


  • Downside: Asset quality weakening further.
  • Upside: Better-than-expected performance on balance sheet growth.