Abu Dhabi Islamic Bank of Egypt (ADIB-Egypt) earnings missed out on higher-than-expected loan-loss provisions, yet achieved lower effective tax rate-boosted earnings, according to report issued by Beltone Financial. The report explained that ADIB-Egypt's Q1 2018 net income after minority came in at EGP 159m, doubling year-over-year (y-o-y) and 21% higher quarter-over-quarter (q-o-q). Earnings, however, missed Beltone's estimate of EGP 225m and market consensus of EGP 193m on higher-than-expected provisions. Beltone stated it expects cost of risk levels to normalise over the coming quarters. Moreover, ADIB's lower effective tax rate (ETR) of 39% versus 63-67% in the comparable quarters has been the main contributor to earnings growth. Beltone noted that ADIB has been impairing a deferred tax asset (DTA), which has been historically weighing on the bank's ETR and earnings. ADIB's DTA was fully impaired in December 2017. That said, earnings before taxes grew at only 11% y-o-y and dropped 26% q-o-q to EGP 261m in Q1 2018. Furthermore, Beltone said that in line with its peers, ADIB'S net interest margin (NIM) contracted on a sequential basis, declining 40 basis points (bps) q-o-q to reach 651 bps in Q1 2018. However, NIM remained above Q1 2017 levels of 620 bps. It explained that NIM's sequential contraction was primarily driven by a 70-basis point drop in asset yields, which has been the case for all peers owing to lower treasury yields, which fell 450 bps during Q1 2018 versus July 2017's peak levels. ADIB's lending momentum remained solid, with gross loans adding 15% q-o-q to EGP 24bn. Unlike other banks, ADIB's foreign currency (FCY) loan book (46% of total loans) grew 25% q-o-q being the main contributor to corporate loan growth. Retail lending (40% of loans) momentum was sustained (+7% q-o-q, +119% y-o-y). Deposit growth was also strong at EGP 34.2bn (+14% q-o-q). Most deposit growth was driven by FCY deposits (+67% q-o-q), comprising 24% of ADIB's total deposits, according to Beltone. ADIB-Egypt has been the fastest growing of the three Islamic banks in Egypt, Beltone stated, adding that the bank has gone through a restructuring phase after being acquired by ADIB-UAE in 2007, experiencing significant improvements at the operational level, posting profits starting in 2013 after years of net losses. "ADIB-Egypt has also been outpacing the market over the last two years, gaining decent loan market share to reach circa 41% of the Islamic lending space. ADIB-Egypt has been posting a robust net interest margin of about 500-600 bps between 2014 and 2017, thus managing to expand its return-on-average-equity (ROAE) to an average of 28% over the past years," the report read. Beltone noted that the bank's tight capital adequacy ratio has recently been a priority for the bank's management, which demonstrated an improvement, recording 13.1% in September 2017 versus 10% in December 2015. The report pointed out that the bank is still running a retained earnings deficit and as such is not expected to distribute dividends in the medium term. Finally, Beltone has a future value estimate of EGP 21.00 per share for ADIB-Egypt, which is derived using a discounted equity cash flow valuation.
