Egyptian Gulf Bank (EGB) has reported 1Q16 net income of EGP94mn, an increase of 55% Y-o-Y and 61% Q-o-Q. The actual net income in 1Q16 came in 35% ahead of our forecast of EGP69mn. The key driver of the earnings beat was higher-than-expected revenue, which offset higher-than-expected operating expenses and provisioning costs.   Main positives: i) Very strong loan growth and deposit growth; ii) Solid net interest income and fee income; iii) Higher-than-expected trading income; iv) Decline in the NPL ratio Q-o-Q and Y-o-Y   Main negatives: i) Surge in operating expenses Y-o-Y and Q-o-Q; ii) Higher-than-expected tax charges   Our take on the results: Loan growth was strong, at 19% Q-o-Q and 92% Y-o-Y, driven mainly by the devaluation of the EGP in March, which boosted USD-denominated loans, but loan growth in EGP loans was also strong, up 9% Q-o-Q. Deposits increased 28% Q-o-Q and 149% Y-o-Y, owing mainly to strong growth in EGP-denominated deposits, up 29% Q-o-Q. Strong volume growth boosted net interest income and fee income, with revenues up 103% Y-o-Y. The net interest spread expanded 16bps Q-o-Q on lower funding costs, which mitigated lower asset yields Q-o-Q. However, as expected, operating expenses continued to increase strongly, in line with EGB’s management aggressive growth strategy and investments in infrastructure and human capital. The cost-to-income ratio further increased to 47% in 1Q16, up from 37% in 1Q15. Credit quality improved in 1Q16, with absolute NPLs falling Q-o-Q. The capital adequacy ratio stood at 12.54%, up from 11.4% in 4Q15, with RWAs growth surprisingly low at just 3% Q-o-Q, well below loan growth. The upcoming first tranche of EGB’s approved rights issue, amounting to USD32mm, which should be reflected in shareholders’ equity in 2Q16, will further shore up its capital base and finance its growth plans. (Earnings release, Elena Sanchez-Cabezudo, Rajae Aadel)   Egyptian Gulf Bank: USD1.23 as of 22 May 2016, Rating: Neutral, FV: USD1.33 per share, MCap: USD354 million, EGBE EY / EGBE.CA