Credit Agricole Egypt (CAE) released its detailed financial statements for FY18 (financial highlights were published last week). Net income came in at EGP2.2bn, +13% Y-o-Y and 4% ahead of our estimate of EGP2.1bn, with ROE at 46% in FY18. This compares with 48.5% in 2017, the decline of which was mainly driven by lower balance sheet leverage, as ROA improved to 4% in 2018 from 3.9% in 2017. Net interest income increased 7% Y-o-Y, while revenue increased only 3% Y-o-Y because of lower trading and FX income and flat fee income; a key driver of earnings growth in 2018 was lower provisioning costs (CAE booked reversals in 9M18 of EGP81mn). Net income in 4Q18 came in at EGP526mn, up by 15% Y-o-Y, beating our forecast of EGP433mn by 21%, mainly due to lower-than-expected provisioning costs. Earnings growth Y-o-Y was driven by: i) higher net interest income (+13% Y-o-Y and +9% Q-o-Q) as spreads increased Q-o-Q; ii) higher non-interest income (+18% Y-o-Y and 1% Q-o-Q); and iii) lower provisioning costs Y-o-Y (-30% Y-o-Y), following three consecutive quarters in which the bank booked provision reversals.
 
Proposed dividend ahead of our forecast; dividend yield at 10%: The Board of Directors proposed a cash dividend of EGP4.4/share, ahead of our estimate of EGP3/share, and up from EGP3.77/share in FY17. The proposed dividend implies a 66% payout ratio (66% in 2017 as well) and a dividend yield of 10%. 
 
Key highlights of FY18 / 4Q18 results:
        Loan growth ends at a strong 23% Y-o-Y, driven by the corporate segment: Total loan growth Y-o-Y was driven by both FX loans, up 28% Y-o-Y and EGP loans, up 18% Y-o-Y. The corporate book increased 26% Y-o-Y, while retail loans increased 10% Y-o-Y. The share of retail loans to total loans fell slightly Y-o-Y to 33% from 36% in 2017. Q-o-Q loan growth was 2%, compared to 1% in 3Q18. Loan growth was stronger in 1H18 vs. 2H18, particularly in 2Q18, when there was strong FX loan growth (syndicated loans to state-owned companies). On a Q-o-Q basis, there was a pickup in corporate loan growth to 4% Q-o-Q, while retail loans fell 2% Q-o-Q. Deposits increased 1% Q-o-Q (+18% Y-o-Y) after a strong 10% Q-o-Q growth in 3Q18. 
 
        Increase in spreads Q-o-Q on higher asset yields: The net interest spread increased 17bps Q-o-Q to 540bps, thanks to a 48bps Q-o-Q increase in asset yields, while funding costs increased by just 32bps Q-o-Q. Net interest income increased 13% Y-o-Y and 9% Q-o-Q. For FY18, the net interest spread fell by 30bps because of higher funding costs, as there was a strong acceleration in deposit growth in 2018.
 
        Cost of risk falls in 2018 on provision write-backs booked in 9M18: In 4Q18, provisioning costs were at 100bps, lower than the 170bps booked in 4Q17.
 
        Increase in NPLs in 4Q18: The NPL ratio increased to 3.3% in 4Q18, up from 2.5% in 3Q18 and 2.9% in 4Q17, as NPLs rose 34% Q-o-Q. NPL coverage fell to a still comfortable 168% in 4Q18, from 217% in 3Q18 and 240% in 4Q17. (Company disclosure, Elena Sanchez-Cabezudo, Ahmed El Shazly)
 
Credit Agricole: EGP43.50 as of 13 Feb. 2019, Rating: Buy, TP: EGP53.10/share, MCap: USD771mn, CIEB EY/CIEB.CA