Stock Watch: Diamond Trust Bank

Diamond Trust Bank Ltd (NSE: DTK) announced their audited results for the period ended 31st December 2014 on 12th March 2015.

Recommendation: HOLD – KES 270.90 (Upside 11.0%)

17.8% Rise in Pre-Tax; 16.2% Growth in Net Interest Income
Diamond Trust Bank Ltd announced 17.8% rise in pretax profits to KES 8.52 Billion throttled by 16.2% growth in net interest income to KES 12.79 Billion from KES 11.00 Billion. Interest income spanned 21.1% to KES 20.81 Billion on the back of 24.1% jump in its loan book whereas 29.9% growth in interest expense to KES 8.02 Billion was driven by 30.7% rise in cost of customer deposits to KES 7.54 Billion. As at 31st December 2014, non-funded income contribution to total income stood at 22.9% vis-à-vis 23.5% (FY13).

Cost-to-Income Ratio Unchanged at 43.4%; Final DPS Up 14.3% to KES 2.40
Operating expenses rose by 12.8% to KES 8.07 Billion as cost-to-income ratio stood unchanged at 43.4% from one year earlier. The lender announced a first and final DPS of KES 2.40, 14.3% markup from last year’s DPS of KES 2.10. Thursday 14th May 2015 was provided as the book closure date for qualification in payment of the final DPS with payment set to occur on or about 12th June 2015.

Marginal Rise in NPL Ratio to 1.29% as Loan Loss Provisions Retreat by 6.0%
DTK’s loan book expanded by 24.1% to KES 137.6 Billion as customer deposits followed in tandem with a surge of 25.0% to KES 160.96 Billion. Borrowed funds stood at KES 12.3 Billion; a 113.3% rise, owing to a blend in USD 85 Million in loan facilities raised in 2014 that ranged from: USD 20 Million – IFC, USD 25 Million – DEG and USD 30 Million – PROPARCO. These monies were able to placate the lender’s loan-to-deposit ratio of 85.5% (FY14) and propel DTK’s efforts of scaling up its Small and Medium Enterprises (SME) loan portfolio. Gross NPL ratio widened from 1.1% in 2013 to 1.3% as loan loss provisions tapered by 6.0% to KES 0.87 Billion. NPLs appear suitably provisioned for despite coverage ratio declining marginally to 90.5% (FY14) from 98.5% in FY13.

Outlook: Discounted Multiples, Robust Capital Buffers.
Following their highly successful KES 3.63 Billion cash call in June in addition to the USD 85 Million loan facilities, DTK appears averse to near-term liquidity crunch with core capital ratio and total capital ratios at 16.8% and 18.9% vis-à-vis Basel II requirement of 10.5% and 14.5% respectively.
The share has reported a gain of 3.83% YTD currently trading at P/E and P/B of 11.13x and 2.04x in comparison to industry’s average of 11.80x and 2.46x – indicative of upside in returns.