• Earnings fall 20% Y-o-Y, misses estimate Faisal Islamic Bank reported 2Q16 net income of EGP152mn, down 20% Y-o-Y and 45% Q-o-Q, and 23% below our forecast of EGP199mn. The key drivers of the earnings miss were lower-than-expected fee income and higher-than-expected tax charges with the effective tax rate surging to 55% from 39% in 1Q16. Revenue growth was weak, down 4% Y-o-Y, on lower net interest income (-7% Y-o-Y) due to narrowing spreads, lower fee income (-12% Y-o-Y), and despite an increase in trading and investment gains.
• Loan growth subdued; spreads fall Y-o-Y on higher funding costs The loan book was flat Q-o-Q and increased just 2% Y-o-Y, down from 2% Q-o-Q and 4% Y-o-Y growth in 1Q16, owing to a decline of 1% Q-o-Q in the retail book in 2Q16. The sluggish loan growth does not come as a surprise, in our view, as Faisal’s strategy is not focused on loan growth but rather centred on collecting deposits and investing liquidity in T-Bills and T-Bonds. Deposit growth slowed in 2Q16 to 1.2% Q-o-Q (8% Y-o-Y), down from 3% Q-o-Q (9% Y-o-Y) in 1Q16. The net interest spread shrunk 70bps Y-o-Y (and was broadly flat Q-o-Q) due to higher funding costs.
• Credit quality worsens after improving for several quarters The NPL ratio increased 353bps Q-o-Q to 20.4% in June 2016, as absolute NPLs rose 22% Q-o-Q with the bulk of incremental NPLs in the corporate segment (+27% Q-o-Q). The increase in NPLs in 2Q16 reverses the trend of the previous nine quarters, when the NPL ratio steadily improved. The cost of risk increased to 68bps in 2Q16, from 21bps in 2Q15, and just 2bps up from 1Q16. NPL coverage declined to 117% in 2Q16 from 135% in 1Q16.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel