2Q17 net income tops our estimate on net provisions reversals
CAE’s 2Q17 net income of EGP475mn rose a strong 51% Y-o-Y (+2% Q-o-Q) and came in 13% above our estimate of EGP419mn on lower-than-expected provisioning costs. While earnings growth was helped by net provision reversals in 2Q17, revenue growth was also strong, +36% Y-o-Y, outpacing operating cost growth of 24% Y-o-Y and driving further cost efficiency gains (1H17 cost to income ratio fell to 28% from 33% in 1H16). The pace of Y-o-Y revenue growth decelerated slightly in 2Q17 compared to 1Q17, but it remained at very healthy levels, both in terms of net interest income, +38% Y-o-Y, and fee income, +30% Y-o-Y. 
 
EGP loan book continues to grow, albeit at slower rates than in 1Q17
Total loans were flat Q-o-Q. As was the case in 1Q17, and as we have seen for the sector in 2Q17, USD loans (27% of total) fell further (-13% Q-o-Q). There was however expansion in EGP loans, up 6% Q-o-Q, vs 11% Q-o-Q in 1Q17. We note that banks saw 1Q17 as an exceptionally strong quarter for EGP loan growth as there was very strong built up demand for working capital financing that started to be unlocked post the Nov-16 devaluation, and as there were conversions/rescheduling of USD trade loans into EGP. Retail loan growth is holding up better-than-expected: retail loans rose 14% Y-o-Y in June 2017, at very similar growth rates as seen in 2016. Deposit growth picked up to 4% Q-o-Q, mainly driven by USD denominated deposits, for which growth was unusually strong this quarter.
 
Slight Q-o-Q decline in net interest margins, but at a very healthy level of 5.8%
There was a slight Q-o-Q decline in the net interest spread (-13bps), on higher funding costs. This is line with management’s view that it would be difficult to further improve funding costs in 2017 compared to 2016. Higher funding costs also reflect the lagged impact of interest rate hikes on deposit rates, as well as the central bank’s requirement to apply higher deposit rates to cash collateral linked to USD trade loans booked before the Nov. deval. Despite the slight decline, the net interest margin remains at a very healthy 580bps in 2Q17. There was slight upward pressure in the NPL ratio, up to 4.8%, from 4.2% in March-17. NPL coverage remained strong at 172% in June 2017.