• Earnings up 21% Y-o-Y on strong revenue growth; miss estimates ADIB Egypt’s 2Q16 net income of EGP74mn rose 21% Y-o-Y, but fell 40% Q-o-Q from a high base in 1Q16 when earnings were boosted by one-off FX gains. The actual earnings in 2Q16 were 23% below our estimate of EGP96mn. Net interest income, fee income and total revenue growth were stronger-than-expected, with the earnings miss due to higher-than-expected provisioning costs and tax charges. The effective tax rate rose to 61% in 2Q16, from 45% in 1Q16, on large deferred tax charges. Revenue growth was strong at 35% Y-o-Y, thanks to good net interest income and fee income, both of which saw double-digit growth.
• Strong asset growth and efficiency gains continue to underpin ADIB Egypt’s turnaround story Loan growth was strong at 8% Q-o-Q (+22% Y-o-Y), driven by an 11% Q-o-Q increase in corporate loans. Spreads rose 20bps Y-o-Y and 27bps Q-o-Q on stronger asset yields, which more than offset an increase in funding costs. Operating costs rose 26% Y-o-Y, but revenue increased 35% Y-o-Y and as a result the cost-to-income ratio improved further Y-o-Y, down to 48% in 2Q16 from 52% in 2Q15. Asset growth and improving cost efficiency continue to be the keystones of ADIB’s restructuring story: its cost to income ratio was 54% in FY15, 64% in FY14 and 89% in FY13.
• Credit quality broadly flat Q-o-Q; NPL coverage improves on higher provisioning The NPL ratio fell slightly by 30bps Q-o-Q to 5.3% in June 2016, with absolute NPLs broadly flat. However, provisioning rose to 226bps in 2Q16, up from 53bps in 1Q16 and 89bps in 2Q15. With no asset quality deterioration in 2Q16, we believe that the increase in provisioning is aimed at improving NPL coverage, which had fallen in 4Q15, when a large single customer exposure drove up NPLs. Credit quality has improved slightly since then, and NPL coverage has risen from 47% in Dec 2015 to 60% in June 2016.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel