Faisal Islamic Bank issued its full financial statements for Sep 2018 (after releasing key highlights last month). Net income for 3Q18 came in at EGP628mn, up 47% Y-o-Y and 12% Q-o-Q, beating our estimate of EGP496mn by 27%. The earnings beat was mainly driven by lower-than-expected ‘other’ provisions in 3Q18 of just EGP1mn vs. our estimate of EGP96mn and to a lesser extent by higher-than-expected net interest income (+27% Y-o-Y and +1% Q-o-Q, 3% ahead of our estimate). 9M18 earnings increased 72% Y-o-Y, driven by a 33% Y-o-Y increase in net interest income and an FX revaluation gain of EGP635mn in 1H18. Excluding this gain, Faisal’s Y-o-Y earnings growth in 9M18 was 16%. 

Key highlights:
-        Good growth in loans in 3Q18: The loan book grew 12% Y-o-Y and 6% Q-o-Q in 3Q18, driven by EGP loan growth of 7% Q-o-Q and 20% Y-o-Y; FX loans increased 2% Q-o-Q (-3% Y-o-Y). Customer deposits increased 12% Y-o-Y and 1% Q-o-Q. The pick-up in loan growth is positive, although it continues to be a weak revenue driver for Faisal, as income from customer loans only represents 10% of total interest income. The loan-to-deposit ratio was unchanged Y-o-Y and Q-o-Q at just 10% in 3Q18, which is very low relative to the industry (sector average c44%). 

-        Y-o-Y increase in net interest spread: Faisal’s net interest spread increased by 41 bps Y-o-Y (-10bps Q-o-Q) on higher yields. Net interest income increased 27% Y-o-Y and 1% Q-o-Q (+3% vs. EFGe).

-        Slight increase in cost-to-income ratio: Operating costs came slightly higher than expected in 3Q18, up 48% Y-o-Y and 11% Q-o-Q, leading to an increase in the cost-to-income ratio to 21% in 3Q18 vs. 18% in 3Q17 and 9% in 2Q18, although it still remains at a low level.

-        Slight improvement in asset quality: Faisal’s NPL ratio fell slightly to 13.5% in 3Q18, from 13.7% in 2Q18, as the absolute NPL balance grew 4% Q-o-Q. Faisal’s NPL ratio has fallen over the past years, but it is still much higher than the industry average of 5%, due to Faisal’s legacy NPLs. NPL coverage stood at 70% in 3Q18 (vs. 69% in 2Q18). Faisal’s loan loss provisions increased 24% Y-o-Y (c7x Q-o-Q, from a low base in 2Q18), with its cost of risk hitting 183bps in 3Q18 vs. 161bps in 3Q17 and 28bps in 2Q18. 

Elena Sanchez-Cabezudo, Ahmed El-Shazly

Faisal Islamic Bank of Egypt: USD1.02 as of 15 Nov. 2018, Rating: Neutral, TP: USD1.20/share, MCap: USD361mn, FAITA EY/FAITA.CA