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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Q2 2020 Results Conference Call. For your convenience, this call will be accompanied by a PowerPoint presentation. May we suggest, if you have not yet done soon, that you access the presentation on the bank's website, www.bankhapoalim.com by clicking our Financial Information on the homepage and then click on the Q2 2020 Results Presentation. [Operator Instructions] As a reminder, this conference is being recorded August 13, 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 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, which are detailed from time to time in the company's filings with the various securities authorities. Mr. Gve, would you like to begin?

Okay. Thank you, operator. Good afternoon, everyone, and thank you for joining us today for our second quarter results call. I'll begin my comments today with a quick update on COVID-19 in Israel, mainly for those of you joining us from overseas. I will then run you through how we have been managing our business through the crisis and the progress we have made on our strategic priorities during the period. I will then run through the numbers in more detail before I wrap up and open up the call for any questions you may have. So let's start with Slide 3 and address the macroeconomic context we have been operating in since we last spoke in May. As a reminder, Israel entered the crisis with favorable economic conditions, 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, which favorably affected the initial stage of the crisis. Based on which in mid-May, the Israeli government lifted many of the restriction imposed at the onset of the pandemic. The early easing of the restrictions allowed Israel to exit the first wave of the crisis earlier than most countries. But it also met the second wave with significantly higher levels of mobility sooner than many markets around the world. So what we are seeing now is that the market is slowly regaining activity and shaping into a new normal or what I'd like to call COVID economics with confirmed cases stabilized, yet still in high levels and the market regaining activity. So let's look at a few examples. The labor market partially recovered from the peak in April, roughly speaking, the unemployment, including furloughs and now stand at 12% compared with over 26% in May. Those levels are still high. I remind everyone that Israel entered the crisis with a very low unemployment rate of 3.6%. The housing and mortgage market, as can be expected, new home sales fell at the beginning of the outbreak and then jumped in May when the lockdown was lifted. The demand for mortgages in the second quarter was solid, actually with no major change compared to last year's second quarter. It should be noted that these mortgages might reflect the resilient market before COVID-19, but we still believe that the underlying drivers that support the growth in this market are still there to an extent. Credit card. Credit card purchases are now about 10% below pre-COVID levels. The closing of the skies and reduction in cross-border transactions have been partially offset by demand for local services. But we need to see how this tracks going forward. Credit spreads in the fixed income market, which picked up at March declined considerably, and now they are pretty close to the level at the beginning of the year. Looking forward, while we have seen some positive activity in the economy over recent weeks, there continues to be significant uncertainty regarding the timing and shape of the recovery and deteriorating economic outlook compared with that prior to the second wave. This has led us to put more meaningful weight on the downside scenario this quarter and increased our reserve build accordingly, as you can see on the next slide, Slide #4. Net profit in the quarter was negatively impacted, mainly as a result of ILS 1.1 billion of provision for credit losses, of which ILS 806 million were added to the bank's collective allowance as an advanced measure in confronting the potential effect of the COVID-19 crisis. I will take you through key aspects of the P&L in more detail later in my presentation. I move now to Slide #5. I want to touch on how we see management priorities in this challenging period. First and foremost, we are committed to ensuring the resilience of our balance sheet. Given the current economic uncertainty, we are pleased to have entered the crisis with strong foundations in terms of capital buffers, even after building high levels of reserves. And this is a critical point of strength for us. And as noted on the next slide, joins the bank's very strong liquidity and funding position with LCR and LDR levels considerably exceeding targets. And finally, cautious credit growth aligned with our responsible risk appetite is guiding us when we look at our loan book objectives, at least in the short to medium terms as economic uncertainty remains in its current high levels. In addition to executing diligent balance sheet, management priorities remain focused on streamlining the bank cost structure and driving increased client adoption of digital and self-service channels. COVID-19 represents an opportunity to accelerate both those priorities. So we have pushed forward the timetable of our current efficiency plan. The plan originally called for retirement of 900 employees or about 10% of our current workforce by end of 2022. And we are now tracking at a much faster pace and aim to accelerate timetables. One of the vectors allowing the acceleration of efficiency measures is the rapid change we are witnessing in customer adoption and appetite also of digital banking services. And I can give you some examples. More than 80% of top banking services are now done digitally or through self-service platforms. 81% of customer visits to branch are now by appointment only, and we are hoping for that number to grow further. More customers are discovering the convenience of opening an account from comfort of their home, bringing digital account opening to record high, doubling since the first quarter. And finally, Bit, our payment app continues to lead the industry with over 4 million downloads. With these priorities as a backdrop, let me move to Slide 8 and address the results of the second quarter in more detail, starting with credit losses, which were the main influence on the quarter. So as I mentioned, the deteriorating economic outlook guided our provisioning approach for the quarter. We decided to increase the collective allowance by an additional ILS 806 million is in order to reflect the potential future increase in specific credit losses, which have not yet been expressed. You will note the bank's total allowance for credit losses, including the reserve build for COVID-19 now totals over ILS 6.7 million. With collective provisions serving as an advanced measure in confronting the potential effects of the crisis, when we look at problematic debt and NPL on the next slide, those reflect the current state of the loan book and the fact that we have not encountered specific losses and hence remain at relatively low levels. One of the main reasons current balances have not been affected by the crisis to date is the lending relief program introduced by Bank of Israel, as you can see on Slide 10. You will note from the graph on Slide 10 that most of the deferrals have picked quickly at the end of March or early April, indicating part of the initial reaction of the public to be reactionary in nature and the request for deferrals have tapered off significantly since. Hence, the current balance of credits still in deferral is significantly lower than the cumulative amount of deferral. Moving onto take a look at the balance sheet. The bank's diversified loan book is a strong asset at the face of the crisis. It allows us better flexibility in managing risk and growth. You will note the tapering off of overall credit balances reflecting the more cautious appetite for credit in the market. Let's move to the next slide for our breakdown of how this translated in each segment. Some of the trends we are seeing are different from our previous conversations, so let me run you through each segment. Looking at our commercial middle market segment, we continue to see this segment as an important growth driver for the bank. However, naturally, during times where companies are more cautious in spending and investments, this may affect the growth potential compared with pre-corona levels. Corporate credit pulled back this quarter, reflecting the return of revolving credit lines drawn down by companies, looking to enhance the liquidity position at the onset of the crisis. Mortgages. Mortgages continued to perform well. And as I mentioned in my earlier comments, we feel comfortable with the underlying fundamentals for growth in this segment. Growth in credit for small business is mainly driven by loans provided under the government guarantee fund, which accommodates for the current risk profile of the segment. In consumer lending, we continue to trade carefully as can be expected with the increased risk in the market. Moving onto look at our deposit base, Bank Hapoalim holds the largest retail deposit base in Israel, providing the bank with an important liquidity advantage, especially amidst the current crisis. Slide 14 looks at the financing performance for the quarter. As can be expected, net financing profit negatively impacted this quarter, mainly reflecting the fed and local interest rate reduction and their impact on deposit margins, coupled with decline in income from trading activities and the negative CPI for the quarter. Moving onto operating expenses on Slide 15, those continue to remain relatively stable. And as I mentioned, we continue to be committed to a diligent improvement of our cost base. The efficiency program currently underway should see us reduce approximately 10% of our workforce ahead schedule. This, in addition to directing considerable efforts to streamlining our other expenses line. Moving onto our capital base. I've already noted the high levels of capital buffers the bank holds with a CET level of 11.23% at the end of the quarter. A strong asset to have, especially during these times. So in conclusion, COVID-19 is obviously challenging us, challenging us all in anticipation of the scope and duration of its impact. In the midst of the high level of uncertainty involved, Bank Hapoalim is demonstrating strength and resilience of capital and liquidity, which allows us an important cushion to weather the crisis and support our customers. With that said, let me open the call for any questions you may have. Reminding everyone that I'm also joined by our Chief Economist, Victor Bahar; and also Chief Accountant, Ofer Levy for any relevant questions you may have. Operator?

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

This is Chris Reimer on for Tavy. You talked about the strong capital position and giving of dividends are currently on hold. I'm wondering how come the loan book isn't growing at a higher pace. Is it because there's lack of demand or is simply because risks have increased beyond your comfort level?

Okay. Thank you, Chris for the questions. I think it's a mix of both elements that you mentioned. The demand for credit is reflecting the situation in the market today. And as we look on consumer, some consumer may limit their spendings or reducing their spendings, for example, cross-border spendings, tourism, et cetera. And maybe, like I mentioned, some of the companies manage their liquidity more carefully. So maybe it affects a little bit demand at the moment. As for the future, it depends on the recovery shape of the pandemic and what will happen with the pandemic. And of course, the risk of -- during this time, the risk is higher than before, and Bank Hapoalim, in previous years and also entering the crisis, managed the risk very carefully. So I think what you see is a mix of both elements, both what we see in the market and risk appetite of Bank Hapoalim. So it's affecting the growth of the balance. But like you can see and as I mentioned before, when you look, for example, at mortgages or the fund, the governmental fund, you see that we're still growing there in nice numbers. So where we see risk that we can handle and align with our risk appetite and there is a demand, we grow and we feel comfortable with that.

Okay. And then just one quick one on the loan loss provisions. Specifically, the collective part. Is there a particular industry or sector which accounts for most of the provisions?

It's -- I remind you that this is a collective provision that we made in a very high uncertainty level. It's not a regular provision in regular times. There is uncertainty of the scope or length of the crisis. But of course, there are some segments that we see them as more vulnerable for this crisis. For example, tourism, aviation, for example, hospitality. So those segments, if you look at our numbers and percentage, you will see that we have a higher percentage of provisioning there, we provided there more carefully. So the short answer is yes, but it's still in high -- very high uncertainty.

Our next question is from Ethan Etzioni of Etzioni Portfolio Management.

Yes. Again, about the group provision. I wanted to ask, one, did the inspector of the banks put pressure on you to increase the provision? Two, should we assume that this is going to continue for the rest of the year? And three, once this whole episode of COVID is over, what is the process of reversing the group provision, assuming that the actual default is -- turns out to be relatively low?

Okay. Thank you, Ethan, for your questions. I think all over the world, there is an active dialogue and helpful dialogue between companies and banks and supervisors. That's for your first question. For the second question, I think it's too early to talk about recovery because we are still in the stage that we are estimating the scope of the crisis and the length of the pandemic. So we are still in the quarter that we are building reserves, but when -- if you're talking theoretically about the future, let's take some quarters ahead, of course, there is possible effect of recovering if the pandemic will be less than what we expect in the different scenarios, and the line of recovery depends whether it's a collective provision or specific provision.

So a collective provision can be reversed?

If the macroeconomic terms and situation will be less worse than what we see in different scenarios, so there can be a possibility for that. But we can't tell specific detail on that because it's too early to estimate what will be with the pandemic. The level of uncertainty is high and this is a quarter to build reserves, not to see a recovery.

Right. So more likely than that, for the rest of the year, there's going to be more group provisions?

It's too early to say. But like we were at the end of this first quarter and we saw different elements of the future and we are only 3 months after and we have more information about the pandemic, more information about the effect, I think that it's too early to say what will be the next of the year. I think we have to wait to the September, October, November to say those times what will be, and then we will be able to estimate and maybe answer more clearly.

The next question is from Micha Goldberg of Excellence.

I noticed that the general provisions for the house loans more than, I think, went up by 7x that -- in the first quarter. And yet, I think you said there was no major deterioration in your asset quality. So I'm just wondering why is that number so significantly higher than in Q1, what has deteriorated that required such a significant increase in that specific segment?

Okay. Thank you, Micha. You are right that we don't see defaults in that area, and we think this is relatively a solid segment. But when we made our collective provision, we gave sort of how to allocate it to the different segments. And we were at a very basic and low provisioning before that. And we looked about the deferrals that we see. And we took into consideration that some of those deferrals will have some effect in the future. And we can't expect what it will be, but we didn't think that it will be -- to feel comfortable with leaving the existing provision. So we added some percent to the provision. And I think, overall, the number is ILS 240 million provision for that segment. But we don't see defaulter or difference or material change in that. And I think the proof for that is that we still feel comfortable in growth in this segment. We grew at more than 5% since year-end in mortgages. But we still think to be -- we need to be cautious at provisioning, so we allocated part of the provisioning to this segment.

So if I understand correctly, you're saying you are not witnessing any deterioration, and that's why you continue to grow significantly in the mortgage segment. But because you provided less in the first quarter and because there is a huge amount of deferrals, that's the reason why you're sticking -- so it's mostly with the fact that you didn't provide a lot in Q1, you started a low basis. Is that -- do I understand correctly?

Yes, 2 reasons. The first quarter, we had a general provision, and we didn't made a specific allocation. So now we are doing some specific allocation. The second is that we see deferrals. The customers use these tools for deferrals, and we think that part of the deferrals made in some scenarios reflecting future defaults, but we don't know what will be the extent. We think that this is a strong segment. So we're still growing that, but we felt comfortable to put some provisioning on that segment and not leave it without any treatment.

Okay. And just one question on that as well because there are lot of bankers who published some data on the deferrals of mortgages, and it seemed to me, maybe mistakenly, so -- that number actually went down over the last couple of months. Are you seeing an increase in deferrals at mortgages or is that not -- because that's what the bank hasn't published, I think?

No. We don't see increase in the net deferrals.

Because I think the banks recently reported a decline in net deferrals over the last couple of months.

Maybe when they are counting the cumulative number of application for deferrals to see -- that is getting high. But the net deferral, we don't see it getting high at all on the contrary. And like you can see on slide, I think we saw it on Slide #10. You can see the payment deferrals granted. This is the accumulative number if you check what happens every week. So if the accumulative number is increasing but you have the current balance of credit still under deferral is significantly lower than the accumulative amount.

Yes. So it's primarily on the back of a low basis. That's why the increase is significant. Another question, if I may. On your reserve build, you're now pretty much around 2% loan loss reserve. And when you're looking globally, and I think the Israeli regulator tends to look heavily at what happens in the large U.S. banks, that seems to be very low compared to the top 10 or 15 large banks in America that, I think, the average, say, close to 3%. But how do you see the current level? Is it sufficient? Do you think the Bank of Israel believes that you should be closer to what the U.S. goes? Or is Europe more of a guideline? How do you look at your reserve build to 2%?

It's a good question because it's -- the U.S. bank, it's kind of a benchmark but not classic benchmark because the U.S. bank used the CECL accounting for provisioning and they have, I think, different mix of credit than what we see here in Israel and risk appetite. So if you take our numbers today, including the second quarter with the large provision -- collective provision, you'll see that we are, let's say, at the middle, not at the high numbers, not at the low numbers. So I can't say where they will -- the U.S. banks will be in the future and where we will be compared to them. But taking into consideration that they are using the CECL and they have different credit. I think you should expect that potentially the numbers for the U.S. banks will be higher than what you will get without the CECL accounting. But where exactly will be the Israelis banking system, it's hard to say. But at the current, with the second quarter, we are, let's say, at the middle.

Okay. So you're comfortable with this level? You think this is a reasonable cushion for where you think we are right now in the crisis?

Yes. At the moment, it's reasonable. Compared to the U.S., compared to the Europe banks, we are in a different situation.

Okay. And a question on fees, and I apologize if this was already asked, I wasn't paying attention. But fees dropped significantly in Q2. And I assume that part of that is due to the lockdown and the cannibalization of digital fees over branch fees and the capital market going down. And I'm just wondering looking at a significant drop in Q2 and looking ahead to Q3, we're already at the end of August, or pretty much 2 months into Q3, is that level of activity something that's reflective of what we're going to be looking at in the next couple of quarters? Or since we've come out of the lockdown in the middle of June, activity has gone up and we should be -- at least we could be expecting to see fee income go up slightly above what we currently see.

Okay. Part of the decline in the fees is because of the social distancing and lockdown. So the decrease in fees is reflected in activity of credit cards, cross-border transactions. So I think cross-border transactions, I don't see the opening -- skies opens in the next quarter still. So we will still see these numbers. As for the branches and activity in branches, the second quarter -- at the beginning of the second quarter, some of the branches were closed. So if you take into consideration that most of the branches were open to the end of the quarter and we don't see closing of branches at that level today, so -- I think the activity will be higher. But still the -- let's say, the activity in the economic and the social distancing still will affect the numbers of fees. So it's -- I don't think it will be faster at the level before the crisis. So maybe it won't be the second quarter, but still the social distance will affect that.

So kind of a low. Another question, going back into provisions. And I'm just wondering, I mean, your previous company reported numbers recently, too. And provisions went down -- I mean, talking about Isracard, the credit card company, which is primarily consumer-related loans. And provisions went down there. Yet when you look at your provisions for the consumer market, they're also skyrocketing. They were like ILS 250 million in Q2. Can you -- is there a difference between the consumer loans that Bank Hapoalim gives and the consumer loan in Isracard. What is the explanation for the drop in consumer-related provisions of Isracard and the significant rise in consumer-related provisions in Bank Hapoalim?

Okay. I can't comment on other public company reports. But generally, I can say that when you look on credit card companies and banking, there can be some differences in the nature of credit when you talk about the duration of credit, the use of credit, the average sum of credit for customers. So maybe part of the difference you see related to those elements, the duration, the use for the credit, et cetera, and also risk appetite. But speaking generally, I really don't want to relate to other company statements.

Okay. And my last question, if I may, and I apologize I'm hogging all your time. If you have to rate today, the -- from the most risky through the most -- the safest segment of credit, what would be the top and what would be the bottom?

It's a good question. I think that the answer for that is to look where we grow. And we manage our growth with our risk appetite. So the answer is, I think, very simple when you look where we grow.

Okay. So if I take that to your credit growth in Q2, mortgages, it seems to be, in your view, of the highest or most space kind of loans right now and the corporate -- the large corporates are more risky than the SMEs, which seem to have some kind of growth or at least those that have government secured credit lines, is that correct conclusion?

I think it depends on the underwriting and risk appetite. And specifically for every company and bank, in each segment, the risk appetite for every bank can be different. But overall, I think at the moment, we choose to grow where we think we can manage our risk appetite well and feel comfortable with that growth. Also, the diversification is very important by itself, of course.

[Operator Instructions] We have a follow-up question from Micha Goldberg of Excellence.

Can you hear me? I'm sorry, I was on mute.

Yes, Micha.

I'm sorry. So just one more question then. I saw there was a significant drop in the total securities on the balance sheet in Q2. Now I realize that in Q1 you guys did an excellent job of scooping up government bonds at the level that they were trading at the end of the quarter. And yet, it looks like there's been huge drop in Q2, not a significant amount of realized profits. I was just wondering where, I think, it was like ILS 11 billion, or maybe I'm wrong to remember, I'm not looking at the notes right now. What's your reason for that drop? And are we going to see any kind of realization of the profit in the next couple of quarters coming through from that huge increase in Q1?

Okay. Thank you, Micha. What you can see -- you won't see the profit recorded to the P&L. It's because it's directed to the capital to the other comprehensive income. About 9 -- if you look at our reports, about, I think, ILS 900 million recorded directly to equity as a result of change in the value of those investments, mainly, of course, bonds. So I think the reason is because it's recorded directly to the equity and not going through the P&L.

The next question is from Ron Alkon of LHR.

Can you shed some light please on how the financial margin went down from 2.27% to 1.96%, especially as I know you raised the interest rates to many companies and individuals?

Okay, thank you. I won't refer to your last comment because I don't think this is the situation. I think overall, the banking system, especially Bank Hapoalim increased the lending for the customers with very competitive pricing. But as for your question, why the margin is lower, there are 2 reasons. First is the decrease in the fed interest rate and also the local interest rate. That's the first element. The second element is the deposit base is very large. Our liquidity -- the LCR reached 130%. Of course, this has an effect on the net margin. So there are 2 effects, the decrease in the interest rate that affects the income, the revenue. And the second is the deposit base that is helping for the liquidity to reach high levels, but of course affecting the net margin. It's a technical issue. The second one is more technical issue.

There are no further questions at this time. This concludes the Bank Hapoalim Q2 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.