Egyptian Gulf Bank (EGB) issued its full financial statements for Sep 2018 (after releasing key highlights of 3Q18 results earlier this week). Earnings in 3Q18 came in at EGP144mn, up 8% Y-o-Y (-2% Q-o-Q), slightly ahead of our estimate of EGP136mn (5% ahead). The earnings beat was driven by: i) higher-than-expected net interest income, up 7% Y-o-Y and 3% Q-o-Q (+6% vs. EFGe); ii) higher-than-expected non-interest income (+36% Y-o-Y and 41% Q-o-Q, +11% vs. EFGe) on both higher fees and trading income; and iii) lower-than-expected provisioning costs, on reversal of ‘other’ provisions worth EGP15mn. 9M18 earnings increased 12% Y-o-Y, mostly driven by lower provisions in 9M18 (-52% Y-o-Y).

Key highlights of 3Q18 results:
-        Slowdown in loan growth, slight recovery in deposit growth: Q-o-Q loan growth was slower in 3Q18, at just 1% Q-o-Q (+9% Y-o-Y), following 3% Q-o-Q in 2Q18 and 4% in 1Q18. EGP loans increased 4% Q-o-Q, while FX loans fell 4% Q-o-Q. Deposit growth picked up in 3Q18 to 3% Q-o-Q (+8% Y-o-Y), after a flat growth in 2Q18.

-        Stable net interest margin Q-o-Q: EGB has the lowest net interest margins in Egypt banks, at 278bps in 3Q18. This is a result of the bank’s focus on increasing market share over the past three to four years, which has been driving both lower asset yields and higher funding costs than the rest of the market. However, EGB has now changed focus from strong growth to improving profitability, and margins have been stable Q-o-Q (although down 21bps Y-o-Y).

-        Strong growth in non-interest income: Fee income increased a strong 41% Y-o-Y and 24% Q-o-Q in 3Q18, while investment and trading income rose 28% Y-o-Y and almost doubled Q-o-Q, leading to an increase in non-interest income of 36% Y-o-Y and 41% Q-o-Q.

-        Deterioration in asset quality on large jump in NPLs: Absolute NPLs grew 3.3x Q-o-Q; the NPL breakdown shows that all the increase is coming from higher corporate NPLs. The NPL ratio rose to 1.9% in Sep 2018 from 0.6% in Jun 2018; NPL coverage fell to 190% in 3Q18 vs. 599% in 2Q18. The cost of risk was 62bps in 3Q18 vs. 4bps in 3Q17 and 42bps in 2Q18.

Elena Sanchez-Cabezudo, Ahmed El Shazly

Egyptian Gulf Bank: USD0.81 as of 15 Nov. 2018, Rating: Neutral, TP: USD0.87/share, MCap: USD277mn, EGBE EY/EGBE.CA