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Diamond Bank: why it paid no dividend - THE CITIZEN

By The Citizen

Diamond Bank made one of the greatest advancements in profit performance in the banking industry in 2012. It made a big turnaround from a loss of N11.22 billion in 2011 to a net profit high of about N22 billion. As part of the efforts to reinforce its recovery process however, the bank is paying no dividends to shareholders for the second year.

The profit figure has been applied to clean up past losses, which arose from the global financial crisis. Losses and major drops in profit were experienced generally by both the banking industry as a whole and the rest of business sectors. The bank has now taken full provisioning for its exposures to oil and gas, the capital market and other real sector operators that were at the centre of the financial crisis.

In the short-term, the prudential provisioning has undermined its dividend pay-out capacity. In the past four years of operations, Diamond Bank recorded losses in two years - N8.14 billion in December 2009 and N16.93 billion in 2011. The long-term, beneficial effect of the profit the banks has declared from 2012 operations is to clean up the losses in the books.

Despite the big profit figure in 2012, the bank needs to counter the effect of past losses on the capital account. The general reserve account has been in negative figures since 2009. From -N4.95 billion in 2009, retained earnings declined further to about -N8.40 billion in 2010 and dropped to a peak of -24.11 billion at the end of 2011.

The entire profit of 2012 has therefore been applied to wipe off a greater part of negative retained earnings. This has positioned the bank to fully rebuild the its reserve account in 2013. After transferring the N22 billion net profit in 2012 to the capital account, the bank still carries negative retained earnings to the tune of N6.63 billion in its books. This can easily be cleaned up from the 2013 profit and retained earnings rebuilt to a positive figure at the end of the year.

Four years of sustained negative retained earnings had undermined the bank's equity base, which declined from over N114 billion in April 2009 to a five-year low of N85.98 billion at the end of 2011. Rebuilding the reserve account and the equity resources of the bank has been given a higher priority than paying dividend to shareholders.  With the full profit retention in 2012, the bank has ended the downslide in equity stock and raised it to N108.86 billion at the end of 2012.

The bank's earnings growth in 2012 slowed down in the final quarter. Gross earnings closed at N138.85 billion at full year from N110.11 billion recorded at the end of the third quarter. Based on the third quarter growth rate, the bank missed almost N8.0 billion in revenue in the last quarter.

The full year revenue figure still represents an increase of 35.7% over the 2011 earnings. This is a major acceleration from the improvement of 5.8% growth in revenue in the preceding year.

Profit growth equally slowed down in the fourth quarter against the N18.17 billion after tax profit posted at the end of the third quarter. Based on the third quarter growth rate, the bank was expected to earn a little over N24 billion in net profit at full year. The last quarter slow down follows a decline in net profit margin from 16.5% in the third quarter to 15.8% at the end of the year.

Diamond Bank's profit margin measures below most of other banks that have released their 2012 full year results so far. GTB is ahead of them all with net profit margin of 38.8% at the end of 2012 and Zenith Bank follows with a net profit margin of 32.6% for the same period. Access Bank is also well ahead with its net profit margin of 20.6% at full year. Diamond Bank however beats Sterling Bank with net profit margin of 10.6%.

The comparatively low profit margin of the bank is an indication that some key cost elements remain comparatively high despite some moderation achieved in 2012. Operating cost, for instance, moderated during the year as it grew at a lower pace than gross earnings. This led to a mild decline in the operating cost margin from 57.7% in 2011 to 55% in 2012, one of the highest among the released results of banks so far.

GTB's operating cost margin is 34.6% and Zenith Bank's cost margin stands at 39.9% for the same period. The comparatively high operating cost margin of Diamond Bank largely explains its low profit margin.

One major source of cost saving in 2012 is loan loss provisioning, which declined by 69.3% to N17.0 billion after rising by 93.1% in the preceding year. The proportion of gross earnings claimed by provisions for loan losses fell from as high as 53.9% in 2011 to 12.3% in 2012. This provided the major stepping stone back into profit for the bank in 2012.

The strength for the profit growth in 2012 came mainly from rapid expansion of the credit portfolio. The bank's net credit volume expanded by 50.8% in the year to N585.2 billion. The bank needs to guard its overall credit quality strictly in view of the rapid growth in the risk asset portfolio.

While the new assets remain good in quality, they are contributing handsomely to revenue growth. In 2012, interest income rose by 34.8% to N112.4 billion compared to a marginal improvement of 2.7% in the preceding year. The high growth in loans and advances and in investments accounted for the increase in interest income.

Investment assets of the bank expanded from only N8.0 billion in 2011 to N90.1 billion at the end of 2012. Such assets had dropped by 65.3% in 2011.

Interest expenses however grew far ahead of total interest income at 84.2% during the year under review. It claimed an increased share of gross earnings and also depressed net interest margin during the period. The increase in interest expenses is partly explained by the rise of about 51% in deposit liabilities to N910.2 billion during the year. This fired off a new engine of growth that lifted the bank's asset base by 48% to about N1.18 trillion at the end of 2012.

Nevertheless the bank, on the average, paid more in interest cost per naira of deposit liabilities in 2012 than in the preceding year. Increased cost of funds is an industry wide development for the banking sector as well as the rest of the economy in 2012.

The current year seems to be the year of full recovery and the beginning of a new growth phase for Diamond Bank. Asset turnover remains good by industry standard at about 0.12, indicating good ability to convert assets into revenue. The challenge remains in the area of converting the revenue into profit. With some improvement in this area in the current year, the bank can be expected to rebuild its dividend pay-out capacity in 2013.