Al Baraka Bank of Egypt reported 3Q16 net income of EGP133mn, up 94% Y-o-Y and 4% Q-o-Q. The actual earnings in 3Q16 came in 11% ahead of our forecast of EGP119mn, owing mainly to higher-than-expected net interest income and lower-than-expected operating expenses.   Main positives: i) Expansion in the net interest spread Q-o-Q; ii) Decline in operating costs Y-o-Y and Q-o-Q; iii) Decline in the NPL ratio both Y-o-Y and Q-o-Q; iv) Higher-than-expected net interest income   Main negatives: i) Decline in fee income Y-o-Y and Q-o-Q; ii) Drop in investment and trading income Y-o-Y and Q-o-Q; iii) Higher-than-expected loan loss provisions; iv) Higher-than-expected tax charges   Our take on the numbers: A good set of results, in our view, but we still have concerns on the bank’s tight capital adequacy. Loan growth slowed to 4% Q-o-Q (30% Y-o-Y), compared to 7% Q-o-Q in 2Q16 and 11% in 1Q16, but remained fairly strong. Deposit growth was also strong at 11% Q-o-Q and 31% Y-o-Y. Net interest spread fell 29bps Y-o-Y on higher funding costs, but widened 16bps Q-o-Q. Net interest income growth was solid, up 26% Y-o-Y and offset a decline of 5% Y-o-Y in fee income and 30% Y-o-Y in investment and trading income, driving total revenues up 21% Y-o-Y. Operating costs declined 11% Y-o-Y, with the cost-to-income ratio falling to 28% in 3Q16, from 38% in 3Q15. Provisioning costs picked up Q-o-Q in 3Q16, with cost of risk at 118bps, up from 44bps in 2Q16, but down from 171bps in 3Q15. Provisioning has been at very low levels in 2016, as the bank booked EGP60mn write-offs in 2Q16. Credit quality continues to improve, with the NPL ratio down 15bps Q-o-Q and 194bps Y-o-Y to 4.3% in 3Q16, NPLs were broadly unchanged Q-o-Q. Capital adequacy ratio fell to 11.3% in September 2016, down from 11.6% in June 2016 and 12.6% in Dec-2015, just above the minimum regulatory requirement of 10.63% in 2016. Al Baraka has 19% of its loan book denominated in USD, that translated into EGP post last week’s currency devaluation would push up the bank’s RWAs and add additional pressure on its capital adequacy levels. We have earlier highlighted that Baraka had a tight capital adequacy and we believe a capital raising is likely in order to grow RWAs. (Earnings release, Elena Sanchez-Cabezudo, Rajae Aadel)   Al Baraka Bank Egypt: EGP8.91 as of 06 November 2016, Rating: Neutral, FV: EGP9.97 per share, MCap: USD76mn, SAUD EY / SAUD.CA