• Cut FV to USD1.77; reiterate Buy on large discount to book value We have cut our fair value on Faisal Islamic Bank from USD1.82 to USD1.77, as we lower our earnings estimates and raise the CoE by 50bps to 17.5%. Faisal trades, in our view, at very low multiples: 2016e P/E of 4.5x and P/B of 0.7x, despite it having a decent ROE of 17.6% (ROA of 1.30%). Our FV implies a 2016 P/B of 0.9x, which factors in the stock’s poor liquidity as well as its above average exposure to Egypt’s government debt. We reiterate our Buy rating on the stock, with our FV implying 23% upside potential to the current share price.
• Strong retail deposit franchise; ST focus centred on deposit growth We view Faisal as a strong deposit franchise in the low and middle income retail segments, and seen by its much higher deposits to branch ratio versus other Egypt private sector banks we cover. However, on the asset side, it has adopted (for several years) a very conservative approach, and the loans-to-asset ratio has ranged from 9-10% in the past 8 years. We believe that in the short term, deposit growth will exceed loan growth and that the loan-to-asset ratio will remain unchanged from current levels.
• Downside risks to NIMs if yields on government securities normalise Faisal has above average exposure to Egypt sovereign debt instruments, with T-Bills and T-Bonds accounting for 58% of total assets. We believe the bank’s NIM of 399bps will only see minor downward pressure in 2016, as Faisal will launch higher yielding CDs. We see downside risks to NIMs if yields on government securities fall sharply, as most of its interest income is sourced from T-bonds and T-bills. We do not believe this is a short-term risk, particularly as we see upside risks to interest rates in Egypt on potential inflationary pressures.

Rajae Aadel
Elena Sanchez-Cabezudo, CFA