Lagos Nigeria, 18 December 2018 – Global Credit Ratings has downgraded the national scale rating assigned to Diamond Bank Plc to BBB-(NG) and A3(NG) in the long term and short term respectively; with the outlook accorded as Rating Watch with the outlook accorded as stable. The ratings have been placed on ‘Rating Watch’, which GCR expects to resolve by May 2019.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Diamond Bank Plc’s (“Diamond” or “the bank”) based on the following key criteria:
Diamond’s key performance metrics (asset quality, profitability and market share) reflected sustained pressure in recent years, with the market share (based on the industry’s total assets) contracting to 5.0% at FY17 (FY16: 6.4%). Recently, the bank divested from its foreign subsidiaries with a renewed focus on growing local footprint, particularly within its retail banking franchise. As a result, its operating license was converted to a national banking license.
Capitalisation is somewhat adequate, although earnings remain volatile. Shareholders’ funds declined by 1.3% to N223.3bn at FY17, on account of operational loss during the year. The bank reported a net loss of N11.5bn in FY17, partly due to its reliance on expensive funds, high impairment charge as well as escalation in operating expenses. Performance at 3Q FY18 returned to profitability with a pre-tax profit of N3.1bn, albeit lags budget by annualised 69.3%. The risk-weighted capital adequacy ratio (“CAR”) was up 170bps to 16.7% at FY17 and stood at 16.3% at 3Q FY18, as the bank tried to de-risk its balance sheet through the divestment and contraction of the loan book.
Asset quality remains under pressure, with the gross non-performing loans (“NPL”) ratio rising to 14.7% (FY16: 9.5%). While NPL ratio stood lower at 12.6% at 3Q FY18, management expects its remedial actions, intensified recovery efforts and portfolio diversification to the less susceptible sectors to impact positively on asset quality going forward. Loan loss reserve coverage is low, with specific provision coverage of impaired loans of 44.9% at FY17 (FY16: 49.1%). Consequently, capital value at risk (NPLs net of provisions to capital) was a higher 22.5% at FY17 (FY16: 17.8%). In addition, concentration risk by obligor is considered high with the twenty largest obligor exposures constituting 51.9% of the total loans and advances.
Liquidity support is derived from just adequate levels of liquid assets maintained, although relatively short of peers. This is evidence by the bank’s statutory liquidity ratio which was in line with the regulatory requirement throughout the review period up to 30 September 2018, while the ratio of liquid and trading assets to total short-term funding of 10.2% at FY17 (FY16: 12.1%) ranks low relative to peers.
An improvement in assets quality, liquidity, earnings and capitalisation metrics, as well as enhanced market position would be favourably considered. However, further downward rating movement may emanate from continued pressure on asset quality, profitability and market share.
NATIONAL SCALE RATINGS HISTORY
Last Rating (October 2017)
Long term rating: BBB(NG)
Short term rating: A2(NG)
Rating outlook: Stable
Yinka Adeoti/Julius Adekeye
Credit Analyst/Senior Credit Analyst
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Diamond rating reports (2006-17)
Glossary of Terms/Ratios (February 2016)
RATING LIMITATIONS AND DISCLAIMERS
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The ratings were solicited by, or on behalf of, Diamond Bank Plc, and therefore, GCR has been compensated for the provision of the ratings.
Diamond Bank Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings above were disclosed to Diamond Bank Plc with no contestation of/changes to the ratings.
The information received from Diamond Bank Plc and other reliable third parties to accord the credit ratings included the latest audited annual financial statements as at 31 December 2017 (plus three years of comparative numbers), latest internal and/or external audit report to management, full year detailed budgeted financial statements for 2018, most recent year-to-date management accounts to 30 September 2018, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.