Financial solutions firm Renaissance Capital (RenCap) has recommended Diamond Bank’s rights issue to qualifying investors citing the bank’s steady rising growth that the firm says makes Diamond bank the potential next tier 1 bank.

The details of the rights issue, expected to open on 30 July and close 26 August, was released by Diamond Bank on 13 June. The bank is looking to issue 8,685,145,863 ordinary shares of 50 kobo each at NGN5.80/share with which it plans to raise NGN50.4bn ($310mn) to improve its capital adequacy ratio and support business growth.

RenCap described the shares issue as “a step in the right direction” by Diamond (bank) which it called the fastest-growing Nigerian bank over the past three years. “(we) recommend qualifying investors should take up their (the bank’s) rights” the financial services firm said.

According to RenCap’s research, Diamond bank grew total assets by 155 percent between FY10 and FY13 and is now the largest tier 2 bank by assets with a 6.1 percent market share, vs 3.7 percent in FY10, and potentially the next tier 1 bank.

The firm applauded the bank for such impressive growth despite its capital constraints and recording two consecutive years of 23 percent RoE in FY12 and FY13. “What this bank needs at this stage in its cycle is capital to support the next phase of its strategic growth plan, in our view” RenCap added.

Deal dynamics

As explained by RenCap, Diamond Bank seeks to issue 60 percent of current shares (50 percent if convertibles are included). The rights issue is at a 14 percent discount to the current market price, a 9 percent discount to RenCap’s computed theoretical ex-rights price of NGN6.36 using the qualification price (NGN6.7), and 30 percent discount to their revised TP. The firm estimated the post-money P/B using the theoretical ex-rights price, at 0.72x. The issue is at a ratio of three for every five shares currently held. At the rights price, the deal is priced at 0.65x fully diluted FY13 BVPS, which is a 63 percent premium to tier 2 peers trading at an average FY13 P/B of 0.4x.

Forecast changes

Forecast changes by RenCap, which it said it carried out following discussions with management, has a loan growth of 20 percent in FY14E expected to be maintained over the next two years to 2016E. Diamond Bank’s deposit growth will also be coming in higher at 25-30 percent over the same period. We think Diamond can sustainably deliver 20% RoE (Return on Equity) in three-to-five years, RenCap stated.

Renaissance Capital is a leading emerging and frontier markets investment bank with operations in Russia, Central and Eastern Europe, Asia and Africa.

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