Is Nigeria’s Diamond Bank a Gem in the Rough?

After some rocky years in the wake of Nigeria’s banking crisis, Diamond Bank looks like it’s regained its footing. Now it wants to grow.

Toward that end, the bank has launched a rights issue which offers existing shareholders the right to purchase three additional shares for every five shares they own.

Is it a good deal? Or should investors dig for value elsewhere? Let’s take a closer look and make an assessment.

Diamond Bank's Rights Issue a Gem in the Rough?

After some rocky years in the wake of Nigeria’s banking crisis, Diamond Bank (DIAMONDB:NL) looks like it’s regained its footing.

Now it wants to grow.

Toward that end, the bank has launched a rights issue which offers existing shareholders the right to purchase three additional shares for every five shares they own at a price of N5.80 per stub.

If the issue is fully subscribed, the bank will raise just over N49 billion (roughly $300 million). It plans to use the capital injection to open 30 new bank branches, refurbish 73 others, upgrade its software platform, and make additional loans.

Is the Diamond Bank rights issue a bargain, or should investors dig for value elsewhere? Let’s take a look at the rights circular and make an assessment.

Take a Look at Book

One method of valuing a financial firm like Diamond Bank is to consider its book value and forecast its growth over time. Assuming the company’s accountants and auditors are doing their jobs right, a company’s book value is the amount that would be paid out to shareholders if the company was liquidated. This is why it’s also commonly known as shareholders’ equity.

We calculate it by subtracting a company’s total liabilities from its total assets.

book value = total assets – total liabilities

In theory, a bank’s share price shouldn’t stray very far from its book value per share. In practice, however, it fluctuates wildly. Banks that are perceived to be growing very quickly often see their market prices soar far above their book values. Meanwhile, banks that have fallen out of favor with investors often trade at deep discounts to book value.

Where does Diamond Bank stand on this value spectrum?

To find out, we’ll first take a look at the bank’s most recent financial statement. The balance sheet on page two shows that, as of June 30, 2014, shareholders’ equity was N148.6 billion.

If we assume that the rights issue will be fully subscribed, all of the money raised will be added to this amount.

book value = shareholders’ equity + rights proceeds

Page 12 of the rights circular tells us that the net proceeds of the offer will be N49.3 billion. Therefore, in a few weeks, Diamond Bank’s book value will equal N197.9 billion (N148.6 + N49.3 = N197.9).

Diamond Bank's Rights Issue a Gem in the Rough?
Photo by Jeff-o-matic

Now, we must figure out how much book value is represented by each share of the company. To do that we simply divide the book value by the total share count at the conclusion of the rights issue.

book value per share = book value / share count post rights issue

At the top of page 55 of the rights circular, we see that (assuming a full subscription) there will be a total of 23,160,388,968 Diamond Bank shares. So, the stock’s projected book value per share at the conclusion of the rights issue is N8.54 (N8.54 = N197.9 billion / 23.16 billion shares).

Good. We’re making some progress.

Make Conservative Assumptions

Now it’s time to do some forecasting. This is always the tricky part.

If you’re like me, you invest with the intention of holding for the long term. So, we want to make our best guess as to what Diamond Bank’s book value per share will be five years from now. This will allow us to determine whether it’s worth buying some shares.

The rights circular tells us on page 52 that shareholders’ equity was N106.1 billion on December 31, 2009. On June 30, 2014 (four and a half years later) it was N148.6 billion. That’s an annualized growth rate of 7.8%.

(N148.6 / N106.1) ^ (1 / 4.5) – 1 = 7.8%

Can Diamond Bank easily replicate this growth rate over the next five years?

I believe it can. Here are a few reasons why.

  • The IMF projects that the Nigerian economy will grow at an average rate of 6.8% over the next five years. To keep net assets growing at 7.8%, Diamond Bank’s management need not do much more than ride this wave.
  • The bank has grown shareholders’ equity at a rate of 24.5% over the past two and a half years or since the end of Nigeria’s banking crisis.
  • The rights offering’s injection of capital looks likely to accelerate growth.

So, let’s conservatively assume that shareholders’ equity continues to grow at a 7.8% rate. At the end of the fifth year, book value per share will then be N12.43.

N8.54 x (1 + 0.078) ^ 5 = N12.43

Guessing Mr. Market’s Mood

Now, our next question is how much the stock market will value N12.43 of Diamond Bank’s book value in August 2019. In other words, what will the stock’s price/book ratio be?

While we can’t know for sure, we can make a fair guess by looking at the bank’s price/book ratio over the past five years. In that time, the ratio has fluctuated within a range from 0.38 to 1.25.

If the bank grows book value at a steady 7.8% pace over five years, I believe it should command a book value multiple of 0.9 – right about the middle of its historic range. That results in a share price of N11.18 five years from now.

N12.43 x 0.9 = N11.18

Don’t Forget Dividends

Last year, Diamond Bank paid a dividend of N0.30 per share. This is equivalent to N0.19 per share if we factor in the additional shares that will result from the rights issue.

If we conservatively assume that the bank will continue to pay that dividend for the next five years, we will receive a total of N0.95 worth of dividends during our holding period (N0.19 x 5 = N0.95).

Now, add those total dividends to our projected share price.

N11.18 + N0.95 = N12.13

So, N12.13 is our conservative estimate of total investment value in August 2019.

The Bottom Line

Therefore, if you hold rights to purchase additional shares of the bank at a price of N5.80. You can reasonably expect them to more than double in value over the next five years. If they should achieve the price of N12.13, your annualized return would be 15.9%.

(N12.13 / N5.80) ^ (1/5) -1 = 15.9%

In my view, this is a decent return considering that our assumptions are conservative and that a 10-Yr Nigerian government bond currently yields 12%.

What Do You Think?

Is this an appropriate method of valuing Diamond Bank? Would you change any of the forecast assumptions? Let us hear your thoughts in the comments!

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10 thoughts on “Is Nigeria’s Diamond Bank a Gem in the Rough?”

  1. Hi Ryan, good technical analysis.

    I actually am a Diamond Bank shareholder and can’t wait to take my rights up. Generally speaking, the Nigerian economy is in a critical stage of infrastructure development in areas of Power, Housing, Oil and gas, Telecoms etc. Many of these activities will be bank-driven. Also, Diamond Bank had always been reinvesting profits into the bank and made the first dividend payout recently after a while. We cannot also downplay the role the CBN policies on CRR and bank charges will play in negatively affecting bank revenues going forward, compared with the last 5 years. In terms of management, the Bank has been stable and hardly involved in any crisis or mis-management, which is critical for the long term. In all, these are a few fundamentals I can add to your analysis.

    1. Excellent. Thanks for the additional background, Ademayowa. Do you personally bank at Diamond Bank? I’m curious to know how people feel about their services. Are they known for good customer service?

      1. Diamond Bank delivers perhaps the best customer service among Nigerian banks and that certainly says quite a lot about them, given the likes of GTBank and Access in that same regard. The guys at Diamond are also definitely the kings of retail banking among Nigeria’s commercial banks (while not doing any wordse in core corporate and commercial banking) and the superiority of their IT infrastructure relative to the entire industry is also another huge plus. In addition to all this is the professional quality of their people both at top and middle levels. I am both a shareholder and a customer of the bank and it just seems to have almost everything going for it right now.

  2. No, I am not a direct customer but I’ve been opportuned to visit it’s bank branches to conduct third-party transactions. The customer service is very good, I hear the staff is well catered for, compared with most other banks. Their technology seems top-notch. The only concern I have is the spread of the bank as I feel they are a little bit regional in operations.

    1. Very interesting. Many thanks, Ademayowa. Between your comments and Chima’s, I’m getting a very positive impression of DB. Perhaps the 30 additional branches they intend to open will broaden their geographic footprint?

  3. I am not sure Diamond Bank can correctly be perceived as a regional regardless of the fact that its main promoters hail from mainly one region of the country. Its HQ has always been Lagos it also has the single largest concentration of its branches. The bank has always followed the money and that accounts its branch spread. It is also heavily present in PH, Benin City and Delta and these are all Niger-Delta oil and gas cities. Diamond is also heavy in Anambra on account of Onitsha and Nnewi, two commercial and industrial hubs in the country’s South East region. Then, there are foreign subsidiaries in the UK, Benin Republic, Ivory Coast and Togo. It’s a growing bank for sure and the proposed new branches can only extend its spread further.

  4. Just want to add that DB is also heavily present in the North of the country from Abuja further up to Kaduna and then Kano, the three most important political and commercial cities in that region. Indeed, Nigeria’s so-called second generation banks, among which DB is counted, all suffer from an unfair perception of their spread on account of where their promoters hail from in Nigeria. There are those who see Zenith or GTBank as mainly regional banks despite their presence all over the country and beyond. The only banks that are somewhat excused from that unfair perception are the so-called first generation banks.

  5. Chima, I’m not sure I’ll say the criticisms are unfair as the stats speak for themselves. For example, I am quite sure there is more money to be made in Kano, where DB has only three branches, compared with a state like Imo with 8, with all due respect. Kano has a population close to Lagos and definitely more industries located within it. Another issue is the composition of its board, which like most ‘new-generation’ banks, tilt towards one region. Well, this shouldn’t be an issue in a normal society where meritocracy is the order of the day, but then, this it hasn’t always been like that in Nigeria. I have always been a proponent of the fact that businesses cannot exist in isolation of the societies they find themselves in, so, this trend is perfectly normal for these banks. I think Northern Nigeria should be made more attractive to investors by dealing with insecurity and creating an enabling economic environment. Likewise, DB should seek deeper market penetration by exploring Northern opportunities where it has just one branch in most states there, that is a key weakness in my SWOT analysis of the bank.

  6. Ademayowa, you have very valid arguments. DB could do with more branches in Kano although like I said every bank seems to decide who constitutes its priority target customers. No bank can obviously serve every one especially given the nature of the industry in Nigeria. But have you wondered for instance why most banks have more branches in Edo State relative to Kano State despite the huge gap in the population of both states. Remittances from abroad sometimes play a part in the decision to site branches and you know some parts of Nigera tend to have more of their people migrate to other parts of the world than others.

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