Al Baraka Bank of Egypt reported 4Q16 net income of EGP124mn, up 121% Y-o-Y (-6% Q-o-Q), coming in line with our forecast of EGP127mn. Strong earnings growth Y-o-Y in 4Q16 was driven mainly by: i) strong net interest income and fee income; ii) higher trading and investment income (up four folds Y-o-Y); and iii) a decline in provisioning costs of 24% Y-o-Y. FY16 earnings reached EGP512mn, up 93% Y-o-Y and bang in line with our estimate of EGP515mn.

-          Main positives: i) Strong net interest income and non-interest income; ii) Decline in provisions Y-o-Y; iii) Strong loan growth and deposit growth

-          Main negatives: i) Compression in net interest spread Y-o-Y and Q-o-Q; ii) Increase in the NPL ratio both Y-o-Y and Q-o-Q; decline in NPL coverage

No cash dividend for 2016: The Board of Directors did not recommend a cash distribution for FY16 (there was no cash dividend distribution in 2015). We had forecast a DPS of EGP0.5 for 2016, but we had seen cash dividends as a potential area of downside risk, as the devaluation of the EGP has driven a decline in capital adequacy ratio. The Board of Directors recommended a bonus share of 15% in 2016, similar to 2015.

Our take on the results - a mixed set of numbers, in our view: Loan growth jumped to 21% Q-o-Q (48% Y-o-Y), up from 4% Q-o-Q in 3Q16, on the back of the translation of FX loans at a higher EGP value (share of USD loans up from 19% in September 2016 to 31% in December 2016); however, EGP loan growth was slow, up just 2% Q-o-Q. EGP devaluation also drove a strong increase in deposits (+15% Q-o-Q, +49% Y-o-Y in 4Q16), while EGP deposits fell 1% Q-o-Q. Strong volumes drove strong net interest income and fee income, up 21% and 24% Y-o-Y, respectively, despite compression in the net interest spread of 57bps Y-o-Y and 55bps Q-o-Q. Provisioning costs fell 24% Y-o-Y, with cost of risk at 124bps in 4Q16, down from 223bps in 4Q15, but up from 118bps in 3Q16. However, credit quality worsened in 4Q16, with the NPL ratio up to 6.5% in 4Q16, compared to 4.3% in 3Q16 and 5.2% in 4Q15, likely due to the translation of FX NPLs into EGP (NPLs spiked 80% Q-o-Q and 78% Y-o-Y in 4Q16). NPL coverage has fallen to 86% in December 2016 from 141% in September 2016. Capital adequacy ratio fell Y-o-Y to 11.9% in December 2016 from 12.56% in December 2015, but it is above the minimum regulatory requirement of 10.63% in 2016.

Al Baraka Bank Egypt: EGP9.57 as of 1 Mar. 2017, Rating: Buy, TP: EGP12.83/share, MCap: USD81mn, SAUD EY/SAUD.CA