• Strong earnings beat on higher-than-expected revenues ADIB Egypt reported strong 1Q16 results, with earnings of EGP124mn, up 156% Y-o-Y and 68% Q-o-Q, well ahead of our forecast of EGP66mn. The key driver was strong revenues, up 46% Y-o-Y. Strong loan growth and higher spreads boosted net interest income up 42% Y-o-Y and fees up 30% Y-o-Y. ADIB Egypt booked an FX gain of EGP158mn stemming from it having a share of its shareholders’ equity denominated in USD, leading to gains post the recent EGP devaluation. However, this gain did not feed into earnings as it also booked a one-off provision for a similar amount: this was in order to face a potential change in the accounting rules for FX gains as the parent company, ADIB UAE, has reservations about the current accounting methodology. We believe that while it could slow later on in the year, growth momentum for ADIB Egypt will remain one of the strongest in Egypt banks, with valuations very low at just 2.9x P/E in 2016e.
• Strong loan growth; spreads widen Y-o-Y Loan growth was strong at 7% Q-o-Q (+20% Y-o-Y). While it was boosted by the EGP devaluation that positively impacted USD loans, it also saw solid growth in EGP loans, up 4% Q-o-Q. Deposit growth was also strong at 6% Q-o-Q (+26% Y-o-Y), with EGP deposits up by 4% Q-o-Q. The net interest spread widened 21bps Y-o-Y on higher asset yields and lower funding costs. The CAR stood at 10.2% in 1Q16. This is below the 10.63% minimum requirement by Dec- 2016. We believe therefore that loan growth is likely to slow in the next few quarters.
• Credit quality improved Q-o-Q following spike in NPLs in 4Q15 Credit quality improved Q-o-Q, with the NPL ratio down 34bps to 5.6%. Following a rise in NPLs in 4Q15, ADIB Egypt’s NPL ratio is now higher than larger private sector banks but still better than most small cap banks, and better than the system ratio of 7.2%. NPL coverage has risen, but at 50%, we believe it is likely that provisioning will be high this year, in order to increase NPL coverage. We factor this into our forecasts, and estimate the cost of risk at c85bps in 2016 versus 46bps in 2015 and 55bps in 1Q16.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel