Rating: Buy
Target Price: EGP15.4
Closing Price: EGP13.9

Earnings up 25% Y-o-Y on strong revenue and cost control; in line with our estimate
Al Baraka Bank Egypt reported 2Q17 net income of EGP160mn, up 25% Y-o-Y and 3% Q-o-Q, which was in-line with our forecast of EGP166mn. The key drivers of the Y-o-Y earnings growth were i) strong revenue growth of 30% Y-o-Y; and ii) decline in operating costs of 9% Y-o-Y. Fee income was very strong, up 49% Y-o-Y, likely fueled by higher trade finance volumes. Net interest income was solid, up 26% Y-o-Y, despite a decline in spreads. The operating costs decline was driven by “other operating expenses”, which were exceptionally low this quarter. But it is worth noting that the increase in personnel expenses of 11% Y-o-Y was contained given the high inflation backdrop. 
 
EGP loan growth weaker-than-peers; spreads fell on higher funding costs
Loans fell 0.5% Q-o-Q in 2Q17 due to i) a decline of 7% Q-o-Q in FX-denominated loans (we have seen a similar trend for other Egypt banks); and ii) growth in EGP loans of 2% Q-o-Q; this was well below sector level and below growth rates reported by other Egyptian banks. The net interest spread surprised negatively and fell 41bps Y-o-Y (-7bps Q-o-Q) as higher funding costs outpaced higher asset yields. As expected, asset yields were boosted by corridor rate hikes, and rose 83bps Y-o-Y and 53bps Q-o-Q. However, funding costs increased at a higher pace (+124bps Y-o-Y and +61bps Q-o-Q). There was an increase in costly deposits, with the CASA mix deteriorating to 23% in 2Q, from 26% in 1Q. 
 
NPLs stable, but past due loans up strongly Q-o-Q 
The cost of risk rose to 148bps in 2Q17, up from 109bps in 1Q17 and 44bps in 2Q16. The NPL ratio was broadly unchanged Q-o-Q at 6.2% (NPLs up just 2% Q-o-Q). The increase in provisioning was nevertheless in line with a more prudent provisioning approach by most banks in Egypt since 4Q16. NPL coverage rose to 203% in 2Q17, from 192% in 1Q17. There was a large increase in past due loans to 7% of gross loans in 2Q17, up from 1% in 1Q17. There could be a timing issue here and not all these past due loans will eventually turn into NPLs, but this could also be a sign of upcoming loan downgrades.

Elena Sanchez-Cabezudo, CFA