ADIB Egypt reported 2Q16 net income of EGP74mn, an increase of 21% Y-o-Y, albeit down 40% Q-o-Q, from a high base in 1Q16, when earnings were boosted by one-off FX gains. The actual earnings in 2Q16 missed our estimate of EGP96mn by 23%, owing to higher-than-expected provisioning costs and tax charges, with the effective tax rate surging to 61% in 2Q16, compared to 45% in 1Q16.   Main positives: i) Spreads expansion both Q-o-Q and Y-o-Y; ii) Strong net interest income and fee income; iii) Strong loan growth (+8% Q-o-Q; +22% Y-o-Y); iv) Lower-than-expected operating costs   Main negatives: i) Higher-than-expected provisioning costs; ii) Spike in tax charges; iii) Decline in trading and investment income   Our view on the results: A mixed bag, in our view. Loan growth was strong at 8% Q-o-Q (+22% Y-o-Y), boosted by an increase in the corporate loan book of 11% Q-o-Q. Spreads widened 20bps Y-o-Y and 27bps Q-o-Q on higher asset yields. Stronger spreads and volume growth fueled strong net interest income growth of 46% Y-o-Y and fee income growth of 63% Y-o-Y. Revenue growth was solid at 35% Y-o-Y, despite a decline of 13% Y-o-Y in trading and investment income. Operating costs growth was in double-digits, up 26% Y-o-Y, but below revenue growth of 35% Y-o-Y, and as a result, the costs-to-income ratio on a Y-o-Y basis continues to improve, down to 48% in 2Q16 from 52% in 2Q15. Improving costs efficiency has been and continues to be a key aspect in ADIB Egypt’s restructuring story. Credit quality improved Q-o-Q, with the NPL ratio falling 30bps Q-o-Q to 5.3% in June 2016, although this was driven solely by volume growth, with absolute NPLs broadly flat Q-o-Q. The cost of risk increased on a Y-o-Y and Q-o-Q basis to 226bps in 2Q16, up from  53bps in 1Q16 and 89bps in 2Q15. With broadly stable credit quality Q-o-Q, we believe the increase in provisioning costs aims at improving NPL coverage, which had fallen in 4Q15, when a large single customer exposure drove up NPLs. Tax charges came as a negative surprise this quarter, with the effective tax rate surging to 61% in 2Q16, from 45% in 1Q16, on high deferred tax charges. (Earnings release, Elena Sanchez-Cabezudo, Rajae Aadel)   Abu Dhabi Islamic Bank - Egypt: EGP4.10 as of 15 August 2016, Rating: Buy, FV: EGP5.20 per share, MCap: USD92mn, ADIB EY / ADIB.CA