Egyptian Gulf Bank (EGB) reported 2Q16 net income of EGP147mn, a strong increase of 144% Y-o-Y and 57% Q-o-Q. The actual net income in 2Q16 came in 55% above our forecast of EGP95mn, owing to exceptionally strong investment and trading income and higher-than-expected net interest income and fee income. Higher-than-expected revenue compensated for higher-than-expected operating expenses and provisioning costs.   Our take on the results: Loan growth was very strong, at 29% Q-o-Q (95% Y-o-Y) mainly driven by EGP-denominated loans that rose 43% Q-o-Q. Deposit growth was also strong at 19% Q-o-Q (148% Y-o-Y), with the bulk of the incremental growth Q-o-Q stemming from time deposits. Net interest spread widened 7bps Y-o-Y and 27bps Q-o-Q with stronger asset yields offsetting higher funding costs. Higher volumes and spreads boosted net interest income and fee income up 114% Y-o-Y and 70% Y-o-Y respectively. In addition, investment and trading income was strong in 2Q16. Credit quality further improved in 2Q16, with the NPL ratio falling to 3.1%, on lower absolute NPLs (-5% Q-o-Q) and higher gross volume base. However, operating expenses surged in 2Q16, up 201% Y-o-Y, on the back of the bank’s aggressive growth strategy and heavy investments in infrastructure and human capital. The strong growth in the bank’s balance sheet drove down its capital adequacy ratio to 11.7% in June 2016, compared to 12.5% in March 2016. The capital adequacy ratio is set to improve as the first tranche of EGB’s rights issue of USD32mm that was executed in 2Q16, and was not reflected in its shareholders’ equity as of June 2016 and was booked as a reserve under capital increase.   Main Positives: i) very strong loan growth and deposit growth; ii) solid net interest income and fee income; iii) very strong trading and investment income; and iv) decline in the NPL ratio Q-o-Q and Y-o-Y. Main Negatives: Surge in operating expenses Y-o-Y and Q-o-Q. (Elena Sanchez-Cabezudo, CFA, Rajae Aadel)   Egyptian Gulf Bank: EGP1.07 as of 2 August 2016, Rating: Neutral, FV: EGP1.33 per share, MCap: USD308mn, EGBE EY / EGBE.CA