Kuwait Finance House (KFH) has reported 2Q16 net income of KWD36.8mn, an increase of 13% Y-o-Y (+8% Q-o-Q). Revenue increased 6% Y-o-Y on higher net interest income and fee income, with earnings growth also driven by lower Y-o-Y operating expenses. The actual earnings came in 6% below our estimate, mainly as a result of a net loss from discontinued operations of KWD29mn, linked to the ongoing sale of KFH’’s subsidiary Aref Investment Group, for which the sale was approved by KFH’s Board of Directors on 30 June. Excluding this non-recurring loss, earnings were better than expected, with net interest income, fee income and operating costs surprising positively.      Positives: i) Q-o-Q increase in the net interest spread; ii) Lower Y-o-Y operating expenses; iii) Strong fee income   Negatives: i) Weak loan growth and deposit growth; ii) Increase in provisioning costs   Our view on the numbers: Growth in loans was slow, up 2% Y-o-Y and 1% Q-o-Q. Customer deposit growth was also weak, flat Y-o-Y and up 2% Q-o-Q. The key positive surprise in the results was spreads, which increased by 31bps Q-o-Q due to a strong increase in asset yields. Strong spreads drove net interest income up 14% Y-o-Y and 13% Q-o-Q. Fee income was also strong this quarter. Provisioning costs increased Y-o-Y and Q-o-Q, but given the limited information available on a quarterly basis (there is no split of general, specific or investment provisions on a quarterly basis), it is difficult to have a view on credit quality trends YTD. There was also a decline in minority expenses, suggesting a weakening in profitability in the bank’s subsidiaries. The bank’s ROE continues to be low at just 8.4%, although it has improved by almost one percentage point Y-o-Y. (Earnings release, Elena Sanchez-Cabezudo, Rajae Aadel)   Kuwait Finance House: KWD0.46 as of 01 August 2016, Rating: Neutral, FV: KWD0.52 per share, MCap: USD7,950mn, KFIN KK / KFIN.KW