Bank Hapoalim B.M. (POLI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Q1 2020 Results Conference Call. For your convenience, this call will be accompanied by a PowerPoint presentation. May we suggest, if you have not done so, that you access the presentation on the bank's website, www.bankhapoalim.com, by clicking on Financial Information on the home page and then click on the Q1 2020 Results Conference. [Operator Instructions] As a reminder, this conference is being recorded, May 14, 2020. Our speaker today is Mr. Ram Gev, CFO. Also with us today are Mr. Ofer Levy, Chief Accountant; Mr. Victor Bahar, Chief Economist; and Ms. Karen Mazor, Head of Investor Relations. I would like to remind everyone that forward-looking statements for the respective company's business, financial condition and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development and the effect of the company's accounting policies as well as certain other risk factors that are detailed from time to time in the company's filings with the various securities authorities. Mr. Gev, would you like to begin?

Yes. Thank you. And good afternoon, everyone, and thank you for joining today's call. I will begin my comments with a summary overview of COVID-19 in Israel, mainly for those of you joining us from overseas. I will then run through how the bank has addressed the crisis, the support we provided our customers and the community. And I will then dive into the results of the first quarter. Before I do, I would just like to add that the crisis has proven to be what we call a moving target with new information accumulated on a weekly and even daily basis. So today's date of reporting is also important to factor in and serves as a snapshot of how we see things today. Let me start on Slide 3 and address the macroeconomic context we have been operating in since the outbreak of the crisis. So Israel entered the crisis with a favorable economic condition, robust growth, full employment and high private savings rate. It was one of the first countries to close its borders and adopt a strict lockdown. This proved favorable as this shows one of the lowest infection rates globally. While the government has recently eased many of the restriction imposed on the onset of the pandemic, the initial lockdown in Israel was tight. This is why we can expect severe impact on growth in the short term. Policy measures taken by the government and the central bank may have potentially mitigated some of this impact on household and the business sector. It is very difficult and likely too early to provide a longer-term view of what the scope of the impact will be mainly because there are a wide range of possible scenarios, including what will be the effect of the recent easing of lockdown restrictions on different sectors, I mean, which sectors will adapt faster to the new normal; the mitigating impact of the measures applied by the government and the Bank of Israel; and globally, the likelihood of a second wave of mobility and even the timing of second wave a few weeks from now or further in the winter; the vaccine timing and many other uncertainties. For now, the bank's baseline scenario is forecasting a sharp contraction in the first 2 quarters of 2020 followed by a recovery in economic activity while the recovery of some economic sectors like aviation and tourism and recreation to lag behind. This is also reflected in the Bank of Israel expectations for a GDP contraction of 5.3% this year and a recovery of 8.7% in 2021. In our view, a game changer will be how unemployment will track in 2020 and 2021. You will note the 5.5% to 6% on this slide are annual averages, and we may see higher peaks in unemployment along the way. As I mentioned, the Israeli government and regulators have been responding to the crisis at best, and Slide 4 provides a summary of some of the key fiscal and monetary initiatives that have been introduced. I won't take you through all of them but note a few. The central bank took several steps to ensure market liquidity, including a ILS 50 billion purchasing program of government bonds and cutting interest rates into 0.1%. Specifically relating to the local banking system, Bank of Israel reduced CET1 ratio requirements to the local banks by 100 basis points. The low public and private debt in Israel supports the relative stability in the financial sectors, providing the government with the necessary cushion to increase government support and expenses. You will note, the capital market in Israel has reacted favorably with many indicators showing a bounce back to more resilient heights. In summary, the uncertainty in the market is still considerable, and it is not possible to accurately predict at this stage the full magnitude of the crisis or its duration. But what we can say with higher certainty is that we are facing challenging times with lower interest rates remaining for the foreseeable future, inflation expected to be low and unemployment to probably rise. I will move forward in my comments now, but just say that if you have any questions on the macro environment, we are joined on the call today by Victor Bahar, our Chief Economist. And Victor will be happy to take any of those questions at the Q&A session. With the economic environment as a backdrop, Slides 5 and 6 cover our response to COVID-19. From day 1 of the crisis, our priority was to take care of our employees and ensure business continuity. We wanted to ensure our employees felt secure in their jobs, including necessary measures to protect their work environment. I will share with you that at the peak of the crisis, 65% of the bank employees reported to work either remotely from home or physically in the branches and offices as we -- as was permitted under the restrictions. As you will note from the slide, we took many actions to ensure business continuity. And I'm happy to say that the bank did not miss a beat over the past 6 to 8 weeks. Next, as Israel's biggest lender, we continue to support our customers and community during the crisis with Bank Hapoalim being the first bank in Israel to open, on Sunday of this week, all of its 208 branches. Services will be provided by appointment only, a step-up in service quality and one of the many insights the bank has adopted as a result of the crisis. Our call center and digital service offering has been identified as a hotspot and rapidly beefed up to ensure high availability. We experienced a 45% surge in incoming calls, exponential growth in customer inquiries via mail or Facebook with financial transactions performed in our digital platforms, the web, apps and Bit, our payment app, at a record level. We have also extended customers who need payment holidays in order to provide cash flow relief. We continued our tradition of supporting the community. Since the onset of the pandemic, we donated over ILS 2.5 million to different health and social causes and helped raise over ILS 16 million in national campaigns to support those financially affected by the crisis. We put in place proactive measures to help business, playing a sizable part in the government in digital scheme and providing versatile credit solution to help business, small and large, manage their cash flow. To be clear, we use these initiatives to support our existing customers with no change to our approach to risk and consistent diligence and underwriting standards, and we are comfortable with the volumes we are writing. As you can see on Slide 7, against the uncertain economic conditions and impact of COVID-19, Bank Hapoalim came into the crisis from a position of absolute and relative strength; resilient capital position well above internal and regulatory thresholds; strong liquidity with LCR considerably exceeding targets; significantly derisked and diversified loan book, which reflects the bank's more conservative approach to risk over past few years; disciplined cost base; and a strong commitment to reduce headcount. And finally, our high digital preparedness allowed us to ability -- the ability to provide the majority of our frontline services digitally and in high capacities. All these have made Bank Hapoalim's entry point into the crisis a very strong and resilient one. I hope this gives you some context to the environment in which we are operating in. And with that said, let me move to the results of the first quarter. As a reminder, we started the year with a few targets, removing significant action items that have burdened management attention. We signed a collective wage agreement and put to rest 2 years of negotiation with the union. We fully divested from Isracard ahead of the mandated time line and most recently, signed a final resolution with the U.S. authorities to which bank has fully provisioned for. So Slide 8 shows the highlights of the quarter. I'll start with the net results. Net results for the quarter were significantly impacted by ILS 603 million in collective provisions as we build our reserves against the uncertain economic outlook resulting from the COVID-19 pandemic. I will take you through credit losses in more detail later, but our main message here is that we opted to take a conservative approach and provide thoughtfully in the face of uncertainty. Key here is that we have weathered through the initial impact of the crisis with strong fundamentals in terms of liquidity, funding and capital. We continue to push forward our business operations with an increase in credit balances and deposits, balancing growth and risk. Accordingly, the bank's operating parameters continued to improve. The increase in activity as well as the effects of the period contributed to continued growth in the bank's income with financing revenues growing in the quarter, alongside an increase in fees. Alongside this, the positive trend in the expense lines continues as the bank continued to make this an active priority, ending the quarter with a cost -to-income ratio of 56.6%. Moving to our P&L on Slide 9. I will run you through most of the line items in detail shortly, but a note on the bottom line of performance of the bank, our net profit for the quarter was ILS 192 million, significantly impacted by credit losses of ILS 809 million, of which ILS 603 million, as I mentioned, were reserves built against the potential future impact of COVID-19. In addition, as we already reported, the completion of the separation from Isracard earlier this year in the form of dividend in kind has adversely impacted results by NIS 109 million. Moving on to take a look at the balance sheet. As you can see on Slide #10, Bank Hapoalim continues to lead the domestic banking system with the largest credit portfolio in Israel, presenting a 2.3% growth for the first quarter. This growth is a mix of trends we saw in the past quarters and unique COVID-19 behaviors. Let's move to next slide for a breakdown of how this translated in each segment. Let me start by saying that credit lending in January and February continued in line with previous quarters with particularly strong performance in mortgages and commercial credit. But the entry of the economy to lockdown in March has affected the trends we saw in the bank's core business in a number of areas. Starting with corporate lending growth, it was driven by growing our revolving credit facilities by our clients, particularly from large corporates looking to enhance their liquidity position in the face of disruption at the end of the quarter. The bank's resilient position allow us to help our customers navigate through this period and allow them to best manage their cash flow. As for mortgages, mortgages performed strongly in January and February. And we continue to see the strong growth also in March, in part driven by customers wanting to finalize the mortgages based on preapproved terms received before the outbreak of the crisis. In consumer lending, we continue to trade carefully, monitoring risk and underwriting. The majority of the activity in March centered on managing customer requests for deferment of loans and mortgages. Moving on to look at our deposit base. Bank Hapoalim holds the largest retail deposit base in Israel, so the first quarter saw a sharp price in retail deposits of close to 11% compared with year-end as customers liquidated the capital market position. This growth has contributed even further to the resiliency of our balance sheet. Slide 13. Slide 13 looks at the financing performance for the quarter. So income from regular financing activity grew this quarter, mainly driven by increased corporate commercial and mortgage lending and income from trading activities as the markets fluctuated on COVID-19 news flow. This growth was offset by negative CPI, which affected income by around ILS 17 million, also offset by negative effect of U.S. rate reduction on deposit margins and the reduction in retail credit balances. Next, let me address credit impairment on Slide 14. The high level of uncertainty involved in COVID-19 guided our impairment approach for the quarter. As an advanced measure in confronting the effect of the crisis, we decided to increase collective allowance by ILS 603 million in order to reflect the potential future increase in individual credit losses and in automatic charge-offs, which have not yet been expressed. You will note, the ratio of collective allowance shown on the bottom of the slide has risen accordingly. With collective provisions serving as an advanced measure in confronting the effects of the crisis, when we look at the problematic debt and NPL on the next couple of slides, those represent our assessment of the state of the loan book as of the date of reporting and hence are relatively stable compared with year-end balances. Moving on to operating expenses on Slide 17. We continue to be committed to diligent improvement of our cost base. The bank has led the Israeli banking sector with its efficiency plans and announced a fifth efficiency plan on the eve of the crisis. The plan should see us reduce approximately 10% of our workforce by end 2022, and we are highly committed to its execution. In addition, we are directing considerable efforts to streamlining our other expenses lines. Accordingly, the cost income ratio that you can see for the quarter declined to 56.6%. Moving on to our capital base. I've already noted the high levels of capital buffers the bank holds with a CET level of 11.21% at the end of the quarter, a strong asset to us during this time. I will just note that on the back of the uncertainty involved in the COVID-19 crisis and in line with the Bank of Israel directive, the Board of Directors has opted to continue not to pay dividends from current profits at this stage. Moving on to the next and final slide. I would like to leave you with a few concluding remarks. COVID-19 has thus far challenged us all in anticipation of the scope and duration of its impact. However, Bank Hapoalim is a strong financial institution and our position is one of strength and resilience, which allows us an important cushion to weather the crisis and support our customers. Our robust capital balances, strong liquidity parameters and healthy funding sources provide the bank an important advantage during this time. With that said, let me open the call for any questions you may have. Reminding everyone that I am joined by our Chief Economist, Victor Bahar, for any relevant questions you may have. Operator?

[Operator Instructions] Our first question is from Tavy Rosner of Barclays.

This is Chris Reimer on for Tavy. Just one regarding the U.S. settlement. Despite the fact that you've finished with that, you still have very large amount of excess capital. So looking ahead, are you planning on increasing loan growth to a larger extent?

Okay. Look, when looking -- when talking about the growth of the loan book, it's important to understand that there is a correlation between the economic activity and the economic situation and the ability to close on the loan book, especially in a large bank like Bank Hapoalim. So historically, when you look at the previous crisis, you see that there was a growth also in this time, but it was lower than the normal pace. I think that our strong liquidity and also resilient balance sheet with the high level of CET1 and overall capital ratio will let us to -- will enable us to keep growing but taking into mind the activity or level of activity in the Israel economy. So the short answer is yes, there is a room to grow. There's still uncertainty of the situation of the crisis. But historically, you can see that there is a correlation between growth and the market activity or the economic activity.

Okay. And just with regards to the ILS 603 million on the loan loss provisions directed for COVID, can you provide some color to the assumptions used to drive this figure? Is there a particular industry that's reflected in this figure?

Look, we are now -- still, we think the level of uncertainty is high. So of course, there are some sectors that are more vulnerable. But overall, when we looked at our portfolio, we didn't see yet any indicators for specific borrowers other than what we classified at the end of 2019 and partially this quarter. So we decided to make a collective adjustment or a collective provision with no allocation for specific sectors like you mentioned because uncertainty is still high. And when we stand today and look at the situation of the borrowers, we don't see specific problems, but it doesn't mean that we won't meet it in the next quarter or 2 quarters. But at this level, we thought that making the adjustment of ILS 603 million for the provision -- collective provision is the appropriate measure whilst taking into consideration the level of uncertainty.

The next question is from Borja Ramirez of Citi.

I have 2 questions. My first question is on loan losses. I would like to ask if it could be possible to provide outlook for cost of risk for 2020. And my second question is on net interest margin. You registered a strong deposit growth in the first quarter. I would like to ask how this affects your net interest income. And also, if it could be possible to provide outlook for net interest income into 2020.

Okay. As for the first question, I think it's too early to give our projection or to decide what will be for 2020. I think as I said at the beginning of the coronavirus, it's a moving target. It depends on many parameters that every parameter can change in a week or a month. So it's too early to decide what will be the level. But we feel comfortable as for today and the information we have today with the provisions we made and the credit losses we recorded at this quarter. So that's for the credit losses. As for the net interest income, and Victor can elaborate more, what we see in the future is, like I said, still low level of interest, maybe some possibility of even lower interest rates in Israel. But the situation is -- for the future is for the foreseeable future is low interest rates. And of course, it's impacting the deposits and the margins. Victor, do you want to elaborate a little bit more?

Yes. So at least at the short run, deposits are growing fast also because of the Bank of Israel are conducting a quantitative easing policy, which means actually, they're kind of printing money. So all the money they generate at the end of the day are going back to our deposits. And as Ram said at the beginning, probably interest rate is going to be -- are going to remain at a very low level of 0.1%, and there is even a chance that it will cut interest rate to 0. Also, inflation can affect the net interest margin, and we believe that inflation is going to be very low, 0, and there is also a chance that inflation is going to be negative for all the years.

[Operator Instructions] The next question is from Micha Goldberg of Excellence.

A couple of follow-ups on previously asked questions. I just want to understand the provision, the general provisions made in Q1. How does one look at that when thinking about Q2? Should we expect a similar kind of general provision? Or these general provisions we made in case of future deterioration, and therefore, future quarters should likely have more specific provision but less [ group provision ]?

It depends on the scenario and therefore, how circumstances will evolve. Let's say, if we would say that the situation is improving, it's logic to assume that we will see specific provision and [ damaging ] of debt and write-offs. Of course, the provision we made today is for -- it's a measure that we take before that. If the situation or the scenario will be worse than what we expect, so that the overall credit losses can be different than what we expect. And also, there is a different scenario that situation like we -- returning to normal and getting out of the lockdown was faster than we thought at about 1 month ago. So if it will be faster and the returning to the new normal will be faster, you can be in a situation that the write-offs and the specific is even lower than [ bad ] debt provisions. So it depends on the scenario and what will be at the next weeks to come and also what will be in the second quarter when looking on the economic activity. So it's hard to say how it will evolve. But when looking from now and taking from -- into consideration our scenario, we think that there will be some specific write-offs or borrowers that we will have to reclassify, and that's the reason why we did the general provision.

But wouldn't it be -- I mean the general provisions you made right now are assuming on the current -- based on the current assumptions. So if things don't get worse, should we expect additional general provisions?

It's hard to say because it depends what you mean by don't get worse. Like we said, our scenario is that there will be recovery. And finally, unemployment will be in a higher percentage than now but later on, also recovery on that. So it's hard to say. But we think we feel at this moment, we're very comfortable with that provision, but the level of uncertainty is relatively high. So I can't say to you that this is what reflects to the end of the year because we don't know what will be at the end of this month. But for today, we feel comfortable with this provision. But later, I assume we will need some specific provision at the second or third quarter. The level of the provision or write-offs depends on what will happen also with specific boards. It's not a matter of sector because also in the same sectors, there can be 2 different businesses, one that has the exclusion for the 2 months of the lockdown and will recover in a very good way, and other will face some problems. So it's hard to tell.

Okay. Another question, if I may, is you mentioned the fact that U.S. rates have come down drastically. And I was just wondering, what is the impact on Bank Hapoalim? And can you quantify the significant drop in U.S. rates?

Sorry, can you return on the beginning of the question?

Yes. I'm sorry. I was just asking, could you quantify what the impact is of the drop in U.S. rates on Bank Hapoalim?

Yes. So there is an impact of the U.S. drop. I think it was at the mid of March that it was dropped. If you want to quantify it, I think it's in our report. We have disclosure or a note about it that's saying overall, the impact of change in interest rates. So you can find there the numbers and do some estimation about the U.S. effect.

How can I extrapolate from that interest to U.S. rates? Because I think it relates to the entire rate change, not just the U.S. rate.

Okay. Look -- yes. It's a good question. I think you can take that note on the FX and look on the other note and see the dollar assets, the dollar deposits and see the percentage of that from all over our balance and assume -- it's not the exact number, but assume that the percentage that -- of our balance is correlated to the percentage it takes from the effect of change in interest.

Okay. Another question. I saw risk-weighted assets, it only grew by 1%, significantly lower than your credit growth, even if I account for the drop from -- in the dividend of Isracard. I was just wondering why that is? And secondly, with the utilization of credit lines, is that something that could eventually show up and accelerate this credit growth or not?

Yes. You asked about the risk-weighted assets. So there wasn't much change in the credit risk with the asset. And like you mentioned, the divesting from Isracard has an effect. And I think the mix of the growth, like the growth in mortgages, affected that. And on the other side, the decrease in household offsetted -- household credit offsetted it partially. And of course, we are managing our risk assets. Mainly when you're in a situation of a crisis, you manage your liquidity. You manage your risk assets. So that's the main cause for not being in a lot of change from the year-end.

Do you see a large amount of utilization of credit lines in Q1? Or is most of that going to happen in Q2?

No. The uses of credit lines usually characterize the situation of a crisis. And what we saw is a major part of increase in credit for corporate and business was use of credit lines. And I think from previous crises, it's reasonable to assume that after that, the level of use of credit line will decrease partially as long as you are getting far from the crisis and the situation is getting back to normal. So in a short answer, the increase we saw in the end of the quarter, part of it, it's reasonable to assume that will be decreased in April or May.

There are no further questions at this time. This concludes the Bank Hapoalim Q1 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.