Earnings down 5% Y-o-Y on lower non-int. income and higher provisions; in-line with EFGe
EGB reported 2Q17 net income of EGP139mn, down 5% Y-o-Y and broadly flat Q-o-Q (+1%), coming in line with our forecast of EGP137mn. Net interest income was strong (+36% Y-o-Y), but revenue increased just 3% Y-o-Y on lower non-interest income (-56%), with trading income being a high base in 2Q16. Key negative surprises were fees (-11% Y-o-Y) and spreads, which fell Y-o-Y (-60bps) and Q-o-Q (-48bps), as higher funding costs outpaced higher asset yields. Opex fell 15% Y-o-Y on lower “other operating expenses”, although salaries rose 49% Y-o-Y as the bank opened 15 new branches and has increased headcount since 2Q16. Ambitious growth plans have driven high double-digit growth in opex since early 2015, but incremental revenues have led to a lower cost-to-income ratio: 35% in 1H17, down from 42% in 2015.  
 
Slower loan growth in 2Q17 on tight CAR; upcoming rights issue to provide room for growth
Loan growth decelerated to 8% Q-o-Q in 2Q17, from 19% Q-o-Q in 1Q17, driven by a drop in FX loans of 4% Q-o-Q and a slowdown in EGP loan growth to 15% Q-o-Q (from 39% Q-o-Q in 1Q17), although this is still very strong growth in the context of Egypt. We believe that EGB’s stretched capital adequacy, in the short term, led to some slowdown in 2Q17 loan growth. CAR fell further to 11.3% in 2Q17, from 12.1% in 1Q17 and just above the min. required of 11.25% in 2017. EFSA just approved a USD28mn second tranche rights issue with a subscription period from 28 August to 27 September, which we estimate will add 217bps to CAR and provide additional room for growth.  
 
Cost of risk lower Q-o-Q, credit quality stable
Cost of risk fell to 46bps in 2Q17, from a high base of 352bps in 1Q17 and compared to 90bps in 2Q16. However, provisioning costs picked up 70% Y-o-Y driven by “other provisions”. Credit quality metrics were broadly stable with the NPL ratio unchanged at 1.7% in 2Q17 and absolute NPLs also broadly stable Q-o-Q (+2%). NPL ratio has been on a downward trend since 4Q15 because of strong loan growth and is the lowest in our coverage. NPL coverage widened to 270% in 2Q17, from 264% in 1Q17. 

Rajae Aadel 

Elena Sanchez-Cabezudo, CFA