Egyptian Gulf Bank (EGB) reported 3Q16 net income of EGP69mn, down 30% Y-o-Y and 53% Q-o-Q. It is worth noting that 2Q16 net income was a high base, owing to exceptionally strong investment and trading income and that 3Q15 was also a high base because there were almost no provisioning charges. The actual 3Q16 net income came in 37% below our forecast of EGP110mn, due to higher-than-expected provisioning costs and tax charges.   Main positives: i) Stronger-than-expected net interest income; ii) Decline in cost of risk Y-o-Y and Q-o-Q to just 8bps; iii) Decline in the NPL ratio Q-o-Q and Y-o-Y; iv) Lower-than-expected operating expenses   Main negatives: i) Spread compression Y-o-Y and Q-o-Q; ii) Decline in fee income Y-o-Y and Q-o-Q; iii) Surge in other provisioning costs; iv) Pick-up in tax charges with effective tax rate up to 52%   Our take on the results: Loan growth slowed Q-o-Q, but remained very strong, up 18% Q-o-Q (95% Y-o-Y) in 3Q16 (from 29% Q-o-Q in 2Q16), with retail loans up 8% Q-o-Q in 3Q16, down from 41% Q-o-Q in 2Q16. EGB has been aggressively growing its retail book since mid-2015, with retail loan growth at high double-digits Q-o-Q since 2Q15 (retail accounts for 15% of total loans). Corporate loan growth has also been strong since 2015, and it remained also strong in 3Q16, up 20% Q-o-Q and 82% Y-o-Y. Deposit growth slowed to 6% Q-o-Q (85% Y-o-Y) in 3Q16, from 19% in 2Q16, below loan growth, driving an increase in the loan-to-deposit ratio to 45% in 3Q16, from 40% in 2Q16. The interest spread shrunk 3bps Y-o-Y and 12bps Q-o-Q on higher cost of funding. Net interest income rose 89% Y-o-Y on volume growth, but the net interest spread fell 3bps Y-o-Y and 12bps Q-o-Q on higher funding costs. The bank is growing aggressively market share, and this is coming at the expense of margins. Fee income fell 17% Y-o-Y, in line with sector trends, with the hard currency shortage denting trade finance volumes. Operating costs of 70% Y-o-Y were in line with revenue growth, with the cost-to-income ratio flat Y-o-Y at 43%. The key areas of negative surprises this quarter were: i) EGP89mn ‘other’ provisions booked by EGB that drove up provisioning costs, from a very low base of EGP2mn in 3Q15; and ii) a surge in tax charges with effective tax rate up to 52% in 3Q16, from 27% in 3Q15. However, cost of risk (loss provisions to average loans) fell to just 8bps in 3Q16, from 90bps in 2Q16 and 69bps in 3Q15. In addition, credit quality improved, with the NPL ratio falling 18bps Q-o-Q to 2.9% on volume growth, as NPLs increased 11% Q-o-Q. (Earnings release, Elena Sanchez-Cabezudo, Rajae Aadel)   Egyptian Gulf Bank: EGP1.15 as of 13 November 2016, Rating: Neutral, FV: EGP1.33 per share, MCap: USD331mn, EGBE EY / EGBE.CA