LIKE most banks that went through the con-solidation of the banking industry in a peculiar way, 2006 represented for Diamond Bank an opportunity to settle down fully to business. But the bank also happened to be among those that immediately began to reap the benefits of synergy arising from the exercise.
For completeness of information, it should be noted that Diamond Bank effectively acquired Lion Bank through the Exchange of its seven new shares for 25 shares of Lion Bank on 31st October, 2005. The share exchange which gave rise to additional 840 million units created a goodwill of N4.64 billion in the books of the bank.
According to the Managing Director’s testimony on the acquisition, “Lion Bank came as a strategic fit into our focus on retail banking.” Hence the acquisition was not necessarily only justified by the need to meet regulatory requirements but made a lot of commercial sense. Firstly, the target company was particularly active in the retail market of the Middle Belt region where Diamond Bank needed to penetrate. With this acquisition, the bank’s total personal accounts was reported to have grown 228 per cent in 2006 alone from 106,265 to 346,505. Interestingly, Lion Bank acquisition accounted for 136,426 of the total accounts or 56 per cent of the growth.
Certainly, the bank began immediately to reap the benefits inherent in the N4.64 billion goodwill booked in this acquisition.
This success in the retail market emboldened the bank to expand the scope of its retail business through the establishment of customer service outlets known as Diamond Minis as a channel of support to the major branches. The Diamond Minis are more like self-service outlets with complements of ATMs and interest points fashioned out for he convenience of customers. Other innovative products introduced during the period include DiamondXpress Account, Diamond Advance, Diamond Lease, Diamond Online, Any Time Money and Diamond Mobile.
With these array of innovative produces and services, Diamond Bank is in no doubt all about the need for a robust IT platform for efficient delivery of these services.
Recently,, it launched a Universal Banking Application – the latest version of flexcube software. Apart from the capacity of this software to reduce cost and improve quality, it is particularly effective in data backup and recovery. The Bank went live with the application in January 2007 with strong promise of quality service delivery, integrity in financial reporting and quick decision-making cycle.
The launch of the latest version of this application is not surprising to industry watchers. It should be noted that in the 90’s, the bank did score first in Technology with its popular Diamond Integrated Banking System (DIBS).
This is all in the company’s desire to assure customers’ satisfaction at all times. It is also because of this that it instituted a unique “Mystery Shopper” within an elaborate feedback mechanism. This has improved responsiveness to customer requirements.
But the bank does not only respond to the needs of customers, it also regularly attends to the needs of other stakeholders.
Accordingly, staff issues are taken seriously with questions of motivation and training always on top of the agenda. While a remuneration package that compares favourably with the best in the industry has since been adopted, management also implements a training policy of a minimum of 40-man hours per staff per year. This has naturally translated to high staff productivity.
To the wider community, Diamond Bank takes its corporate social responsibility issues serious with strategic focus to the areas of eye care, university sports and reduction in road accidents. Collectively, the bank spent about N75 million in such projects in 2006, up from about N10 million in 2005. Apart from this, the Bank has consistently played key roles in organisation of National Economic Summit, Commonwealth Business Council meetings and West African Investment Forum, etc.
Definitely, Diamond Bank is not left out of the new pre-occupation of banks in the emerging universal banking environment whereby subsidiaries are set-up to render related financial services to customers.
In fact, as part of its medium-term strategy, it is committed to the establishment of “respectable presence in the emerging non-banking financial services sectors.”
During the 2006 review year, it indeed established the Diamond Pension Fund Custodian Ltd., acquired Dominion Building Society Ltd. (now re-named Diamond Mortgage Ltd.) and acquired an insurance firm (now renamed Diamond Insurance Ltd.). it already had a bank subsidiary in Republic of Benin under the name Diamond Bank du Benin SA, and a stock-broking subsidiary under the name Diamond Securities Ltd. (which equally has two other subsidiaries). It is the intention of the bank to achieve substantial synergy through business relationship among the group members. Interestingly, all the operational subsidiaries added significant figures to the performance reported for 2006.
Beyond these local and sub-regional subsidiaries, Diamond Bank has a vision of being an effective player with presence in key financial centres of the world. In fact, it sees its foray to Republic of Benin as the initial first step to an inevitable expansion of its global franchise.
One outstanding event in the life of Diamond Bank in 2006 is the resignation of Pascal Dozie as the Managing Director/CEO. In a move interpreted in industry circles as aimed at complying with best practice in corporate governance, the highly regarded banker who nurtured the Bank to its current enviable standard dropped the CEO position but retained the group chairmanship position.
The first one year of the new management and governance structure proved rewarding as virtually all the key performance variables moved in the desired direction.
Earnings and profitability performance
In 2006, management re-focused efforts towards growing the top-liner as a very important step towards reporting enhanced bottom line and by extension, maximising shareholders’ value.
Riding on the synergy brought about by recent acquisition of Lion Bank and incursion into non-banking financial businesses, the Bank succeeded in growing gross earning by 42 per cent from N15.3 billion in 2005 to N21.7 billion. The scenario was not significantly different from that of other banks as interest income accounted for as much as 67 per cent of the totals and was also responsible for a greater percentage of the increase. This is not surprising especially with almost 100 per cent increase in loans and advances. Within the creation of additional lease and credit products later in the year, expectations are high that the dominance of fun-based income will further intensify in the coming year. However, by setting up viable fee-earning subsidiaries, Diamond Bank expects Group earning structure to sustain the growth path of top-line.
One key positive feature of profitability profile reported by the Bank during the year is a reduction in net provision for doubtful assets from N755 million in N162 million. Considering the increase in loan assets by almost 100 per cent, this is significant. It arose largely from recovery of N571 million of facilities previously written off. The bank also maintained appreciably high standard of credit process risk management which resulted in improvement in credit quality. Direct cost of funds also grew at a lower rate such that overall margin on funds business increased from 62 per cent in 2005 to 69 per cent.
The “decisiveness” of management of costs led to duly modest increases in operating expenses and is an indication of improvement in efficiency against the background of enormous consolidation expenses incurred during the period.
Accordingly, by the bottom-line response in the desired direction in absolute measures as Profit After Tax increased from N2.53 billion to N3.85 billion. This also translates to increase in Earnings Per Share from 42 kobo to 51 kobo. However, return on average equity moved in the opposite direction from 18.4 per cent in 2005 to 13.8 per cent. As a result of outstanding goodwill arising from consolidation in its books, the law stopped the bank from paying dividend to shareholders.
However, the Bank subsequently took a decision to write-off the entire goodwill in the last quarter of 2006, thereby clearing the way for a bountiful reward to shareholders in 2007. Interim results for the year suggest exactly this and the capital market has since taken notice by responding with a price rally.
CAPITALISATION AND MARGIN SAFETY
Prior to its acquisition of Lion Bank, Diamond Bank made a highly successful private placement which put it in a position to drive its consolidation efforts. It subsequently did an Initial Public Offer (IPO) which fetched additional N4.7 billion capital hence, by October 31, 2005, it eventually consummated the acquisition of Lion Bank with the issue of additional 840 million units of its shares at indicative price of N7.75.
As a result of all these, shareholders’ fund increased first from N6.75 billion in 2004, to N20.7 billion in 2005 and N34.97 billion in 2006.
Again, like most other banks that consolidated, the resultant higher capital base provided the impetus for the Bank to significantly increase lending activities.
But as it turned out, the pace of increase in capital base could not match that of risk assets creation. The result is a decline in the estimate of the all-important Risk Weighted Asset Ratio from 26 per cent in 2005 to 22 per cent. However, the level of comfort and safety implied by this ratio is considerably adequate for current operations and leaves room for appreciable growth within prudential limits. This is because ordinarily, traditional expectation of prudential standard is 10 per cent. But one thing clear from the trend is that if current rate of growth is sustained, current capital may yet prove inadequate in a few years time.
Quality of assets and liabilities
One thing the recently consolidation exercise was supposed to do is to raise the level of confidence in the system. This was to a large extent achieved. However, to Analysts, sustainable confidence can only be assured if quality in all aspects of banking operations is kept at high level. Two key result areas identified by P.A. Data & Management Services are Risk Assets and Liquidity. In 2006, the Bank improved the quality of risk assets greatly. Perhaps, as a validation of the CEO’s testimony that management remained very cautious about risks, the non-performing loans ratio declined from six percent in 2005 to 4.9 per cent at the close of 2006 period despite sharp increase in volume of risk assets. This is impressive and suggests that only one in an average of 21 loan facilities was so classified. This found a space in the top five industry performance.
But during the period, Diamond Bank held less proportion of its asset portfolio in liquid assets at 44 per cent slightly down from 46 per cent in 2005. Notwithstanding that these figures appeared dangerously close to the minimum required liquidity ratio of 40 per cent, as specified by regulation, there were no reported reports of violation by the bank during the period and this is not surprising. A further analysis of its asset/liability gap showed no negative mis-match in all maturity categories. This is another veritable suggestion of efficient management in the face of impressive profitability achieved.