First Bank & Diamond Bank H1 2015: This is why Nigerian banks will keep telling less...

Dear Africa Interested Individuals:

                                                        I have come across more complaints about the performance and happenings at First Bank and Diamond Bank in recent days.  A cursory look at their income statement (the "optics" sheet) shows that both banks made large (double digit in billions of naira) provisions for deteriorating loans on their books over the first six months of 2015.  In addition, First Bank's MD is on his way out and the CFO of Diamond Bank is out.  It is hard for people on the outside (understandably so) not to link these changes with their deteriorating loan book.  The comments around these banks shows why Nigerian banks (and some other companies) will continue to lean towards telling too little of a BAD situation and telling too much of a GOOD situation.  Earnings will continue to be opaque in nature just as lying will continue to be the norm and acceptable. 

I agree that the banking industry in Nigeria is going through tough times and all banks are impacted to varying degrees.  I do not agree that the banks whose performances are below expectations are actually doing worse than other banks whose performances are at or above expectations based on published figures as at June 30th, 2015.  Unfortunately journalists, sell-side analysts and stock market forums will praise the banks that decide to reveal less of their bad situation and chastise the banks that reveal the actual state of their bad situation.  With scenarios like this, why should you expect Nigerian banks not to lie and/or withhold vital information about their financial performance?  Let us get right to it.  I will make this snappy while leaving you more than enough to ponder about.  I have picked 5 Nigerian banks to buttress my point. 

1. Skye Bank: Interest income boost (y-o-y) of $80m. Net loans grew by $29.5m over the first six months of 2015 and provisions for bad loans increased by $1.3m.  Pre-tax income margin for H1 2015 was 12.57%.  
2. FCMB: Interest income boost of $41.3m.  Net loans decreased by $197m and provisions for bad loans increased by $6.1m.  Pre-tax income margin for H1 2015 was 12.37%.  FCMB is a holding company like Equity Group Kenya and FBN Holdings Nigeria.  
3. Stanbic IBTC: Interest income boost of $38.6m.  Net loans increased by $56.5m and provisions for bad loans increased by $32.3m.  Pre-tax income margin for H1 2015 was 13.96%.  Stanbic IBTC is also a holding company which implies that the bank incorporates earnings from sources beyond core banking e.g., brokerage, asset management, insurance etc.
4. Diamond Bank: Interest income boost of $22.2m year-on-year.  Net loans increased by $12.9m and provisions for bad loans increased year-on-year by $19.9m.  Pre-tax income margin for H1 2015 was 13.78%.  
5. First Bank: Interest income boost of $204.7m.  Net loans decreased by $464.9m and provisions for bad loans increased by $79.6m year-on-year.  Pre-tax income margin for H1 2015 was 19.2%.  First Bank is also a holding company.  

Skye Bank is in the news for good reasons.  Pre-tax income increased by 47%, provisions for bad loans only increased by $1.3m and the bank had a net loan increase of $29.5m.  Good business right?  Pre-tax income margin came out to be 12.57%; this is the second lowest among all five banks selected.  Who cares right?  Pre-tax income grew 47% and the bank had a net loan increase.  This is why some banks in Nigeria will continue to play "musical chairs" with their income statement credit impairment and overall assessment of loan quality. 

Despite First Bank making a provision for loan loss expense on its income statement of $112.9m for the first six months of 2015 and reducing its net loans by $464.9m, it still generated pre-tax income margin of 19.2%.  Diamond Bank (not a holding company) provisioned $65.2m as loan loss expense for the first six months of 2015.  Interest income year-on-year increase was 1.7X more than the net loans increase which is not a good sign.  Despite all of this, pre-tax income margin for Diamond Bank came out at 13.78%.  This is better than the Skye Bank (12.57%) most people are raving about, really close to Stanbic IBTC (13.96%) that is a holding company and an asset management behemoth and also better than FCMB (12.37%) that is also a holding company and a brokerage behemoth.  Many fund managers reading this blog likely trade through CSL Stockbrokers.   

Meanwhile, First Bank and Diamond Bank are getting a lot of flack as if they "cooked their books" or their management do not know what they are doing.  If management of both banks did cook their books, I assure you the steak is "rare" compared to Skye Bank that I will consider "well done" in comparison.  Stop punishing banks for being truthful while celebrating others that may very well be in a worse situation, but decided to pitch their tent with falsehood to suck up all the rave reviews possible.  Short term gain for longer pain...    

The lesson here is, do not get carried away by negative revelations; the negative revelations may still generate a return in excess of the "positive" revelations by another bank.  First Bank and Diamond Bank have taken their fall and will likely rise.  Both banks are doing the right thing.  Unfortunately in Nigeria, the right thing is often labelled bad and the wrong thing labelled good.  The other banks still on a pedestal may very well fall with a loud bang when you least expect it.  2008/2009 may very well repeat itself in the Nigerian banking industry.  It is the institutional investors I pity.  Management meetings will likely not save them.  Retail investors in Nigeria are long gone from the party.    

First Bank and Diamond Bank also passed my Africa Banks credit impairment test based on their 2014 audited financials.  Details are available in a different article on this blog.

I simplified my analyses as much as feasibly possible to carry everybody along and to have more control over the length of this article.  My assertions are built on more than is contained herein.   

Fellow Africans I return to Africa matters from next week.  Let us say some unforeseen Nigerian matters took my attention away for most of this week.

Tell others to tell others about this Africa Research blog; a new dawn is here, ensure you seize the daylight with both hands.  

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