RAK Bank reported net profit of AED195mn (EPS: 0.12) for 2Q16, -22% Q-o-Q and -45% Y-o-Y. Earnings missed our expectation of AED244mn (Bloomberg consensus AED247mn).   Main positive: Strong investment income   Main negatives: i) Pressure on spreads (-40bps Q-o-Q to 7.09%); ii) Elevated provisioning (cost of risk was 600bps in 2Q16 versus 556bps in 1Q16)   Our view of the results: RAKB results were poor, with trends in spreads and credit quality weaker than what we had envisaged. Revenue growth was flat (-1.2% Q-o-Q, +0.4% Y-o-Y), owing to strong investment income this quarter. Spreads continue to contract (-40bps Q-o-Q to 7.09% in 2Q16) due to pressure on asset yields. Management had flagged post 1Q16 results that spreads would continue to be under pressure as the bank focuses on growth in low-yielding but relatively low-risk corporate segment to mitigate pressure on credit quality. RAKB grew its corporate book by 30% Q-o-Q and de-leveraged the RAK Finance book (small SMEs) which contracted 7% Q-o-Q. Provisioning rose further with the cost of risk increasing to 600bps from 556bps in 1Q16 driven by unsecured loans in the retail and SME segments. We look forward to management’s comments on credit quality as they had earlier expected an improvement from 3Q16. The bank was disciplined on operating costs (+1% Q-o-Q and -11% Y-o-Y) to cope with pressure on profitability. (Earnings release, Shabbir Malik, Murad Ansari)   RAK Bank (AD): AED4.90 as of 28 July 2016, Rating: Neutral, FV: AED6.10 per share, MCap: USD2,238mn, RAKBANK UH / RAKB.AD