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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Third Quarter 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 so, that you access the presentation on the bank's website at www.bankhapoalim.com, by clicking on the financial information on the home page and then clicking on the third quarter 2020 results presentation. [Operator Instructions] As a reminder, this conference is being recorded on November 19, 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 respected 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 and 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. Gev, would you like to begin?

Thank you. Good afternoon, everyone, and thank you for joining us today for the third quarter results call. Let me start with a quick recap of the results and then touch on the macroeconomic environment in Israel as it serves an important backdrop to this quarter results. We'll then run you through the areas of key focus as we steer the bank through COVID-19, run you through the numbers in more detail before I wrap up, and open up the call for any questions you may have. So looking at Slide 3. Third quarter results were strong although the challenging environment we are operating in, showcasing our resilient profitability base parallel to very strong fundamentals. While we continue to fortify our balance sheet with strong capital generation performance, adding to the already high surpluses. Our liquidity position further strengthened this quarter on the back of ongoing growth in retail deposits. This side-by-side, the high reserve build we made in the first half of 2020. Looking at this from bird’s eye and acknowledging the relatively uncertainty of the period we are in, these strong fundamentals are crucial to evaluate the resilient standing of the bank going forward. This, in addition to the responsible way we are looking at credit growth, balancing growth, and risk during this period, and vigilant cost control, as we continue to invest in IT and digital transformation initiatives to support our future growth. Moving on to touch on the macroeconomic backdrop. Israel entered the crisis with very favorable economic conditions. It was one of the first countries to move quickly and adopt a strict lockdown, which favorably affected the initial stage of the crisis. The early easing of the restriction in May allowed Israel to exit the first wave of the crisis earlier than most countries. And what we saw in July and August is a solid rebound in economic activity, a drop in unemployment levels, and a healthy uplift in credit card purchasing. Naturally, the strong exit from the lockdown resulted in the return of high infections level, which led to a second more moderate lockdown in mid-September. With a second lockdown behind us, Israel is ahead of many other regions around the world. When you look at the economic data, post-second lockdown. You will note that the impact of the second lockdown on the economy was less severe than the first. Both credit card usage and unemployment rate have performed well in September, October compared with the aftermath of the first lockdown, pointing to a positive learning curve as lockdown restrictions are better mediated and mitigated, resulting in a milder impact on the economy. So this learning curve combined with the positive news flow we are hearing on potential vaccines, brings us to a place that we can say cautiously that this is clearly is not the end. There are challenges ahead of us, but it looks like perhaps the end of the beginning. Moving to the next slide. Despite the volatility the lockdowns are creating, the Israel economy is continuing to demonstrate underlying resilience with several strong factors, I think, are important to emphasize. Firstly, the mortgage market continues to track strongly. Housing loans granted in the third quarter rebounded from second quarter and were up 7% year-on-year, reflecting continued strength in housing market. Second, current account balances and deposits continued their upward trend, reflecting a high level of liquidity in the system and helped by the monetary and fiscal policy. This includes Bank of Israel purchasing of ILS 37 billion of government bonds since the start of the crisis and the low-interest environment, reminding you that interest rates were cut in early April from 25 basis points to 10 basis points. Third, the public debt to GDP levels remain lower than in other advanced economies. Again, it reflects the sound initial conditions while the deficit is quite similar to other advanced economies. And finally, fiscal credibility remains high. The Israeli government 10-year bond yields have remained stable since April, and it's currently at 0.9%, providing the government with a favorable platform for capital raising in the local market and overseas. So moving onto look at the bank's financial results on Slide 6. Briefly going through the highlights. Total income was strong in the quarter, growing by over 4% compared with the comparable quarters, despite the impact of the crisis on various income items. As I noted earlier, expenses continue to remain a main focus for us as we balance streamlining costs on one hand and investing in areas of the business that support our future business growth and customer service. Note that the lower levels of provisions this quarter, the following 2 quarters of significant reserve build allowed us to make lower provisions this quarter. As a result, we achieved a net profit for the quarter of ILS 816 million, representing an ROE of 8.8%. I will take you through the P&L in more detail later in my presentation. So moving on, the next couple of slides illustrates our commitment to ensuring we operate with a fortified balance sheet as we steer the bank through the challenging period. Given the current economic uncertainty, we are pleased to be operating with strong fundamentals in terms of capital buffers. You will note the bank's CET1 levels grew by 30 percentage points this quarter with our leverage ratio at 6.9%, significantly above regulatory target of 5.5%. Our strong capital cushion continues to sit side-by-side substantial reserves. Our own balanced collective allowance ratio for the quarter stood at close to 1.6%. So 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 of 132% and LDR of 70%, both considerably exceeding targets. And finally, as you can see on the right-hand side, the bank continues to operate with a highly diversified credit book, cautious credit growth aligned with responsible risk appetite is guiding us when we look at our loan book objective, at least in the short to medium-term as economic uncertainty remains in its current levels. In addition to executing our balance sheet objectives, we remain focused on streamlining the bank's cost structure and driving the increased client adoption of digital and self-service channels. COVID-19 represents an opportunity to accelerate both these priorities or at least reevaluate timing and scope. Moving on the next slide and touching more on cost. We are evaluating a few key actions that will drive our cost base going forward. As a reminder, we announced our efficiency plan at the beginning of the year. The plan originally called for the gradual retirement of 10% of our current workforce by the end of 2022. We are now aiming to accelerate the plan, so a larger portion will retire earlier than planned. In parallel, we are looking at our branch reach, understanding that it also requires streamlining as do our headquarters, where we would like to unify our multiple office presence into one location and vacate our current headquarters, which are spread across a few prime locations in downtown Tel Aviv. And finally, implementing wide cost reduction program across bank to ensure we continue to invest in growth while maintaining a restrained expense line. As I indicated in my previous call, one of the vectors allowing the acceleration of efficiency measures is the rapid change we are witnessing in customer adoption of digital banking services. As you will note from the data on the right-hand side of the slide, digital activity at the bank is growing and gradually holding a more central place in how we service our customers. With these priorities as a backdrop, let me move to Slide 10 and address key items of the third quarter in more detail, starting with credit losses. The macroeconomic environment has again dictated our outlook for credit losses. The bank has put aside significant allowance for credit losses over the past quarters in order to cushion the potential future increase in specific credit losses, which have not been -- yet been expressed. This quarter, in light of the significant cushion and without a further deterioration in the macro conditions, we made a relatively smaller adjustment, the net effect of which was ILS 193 million of credit losses. Now 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 next slide, those reflect the current state of the loan book and the fact that we have yet to encounter specific losses, mainly as a result of the Bank of Israel lending relief program, which was introduced at the onset of the pandemic. A closer look at the current data of the relief program on Slide 12, threatened my statement back in August when we noted that most of the deferrals have peaked at the onset of the pandemic and dropping off significantly as the crisis devolved, indicating part of the initial reaction of the public to be reactionary in nature. Similarly, you will note on Slide 12 that the initial request for payment deferrals have tapered off significantly, with total deferrals down by 51% from peak level. Even more so with mortgages, where we see almost 2/3 of the loan returning to their payment routine. Moving on to take a closer look at the loan book. As I mentioned, the bank's highly diversified loan book is an important asset to have more so in the face of the crisis. It allows us better flexibility in terms of how we manage growth and risk objectives across the various segments. The more cautious demand for credit is reflected in the overall balance, which was moderate year-on-year. The next slide shows how credit growth is translated in each segment, much in line with what we have been seeing since the beginning of the crisis. Looking at our business segments, large corporate customers, commercial middle market and small businesses are similarly showcasing relative pullback of credit, as can be expected during times where businesses are more cautious with spending and investment. Mortgages continued to perform well in line with the vibrant housing market in Israel. We continue to feel comfortable with the underlying fundamentals for growth in this segment. In consumer lending, we continue to tread carefully as can be expected with the increased squeeze in the market. Moving on to look at our deposit base .Bank Hapoalim holds the largest retail deposit base in Israel, an important funding source, providing the bank with a liquidity advantage, especially amidst the current crisis. Slide 16 looks at the financing performance for the quarter. Net financing profit continues to reflect the low-interest rate environment and their impact on the deposit margins. Margins are similarly affected as interest rates decline, affects the top part of the equation. While significant decrease in deposits impacts the denominator. Moving on to operating expenses on Slide 17. I touched on expenses earlier in my comments. Those continue to remain relatively stable, although the bank has been making substantial investments to support of its future growth objectives. Lastly, our capital base. I've already noted the high levels of capital buffers the banks holds with a CET1 level of 11.53% at the end of the quarter. Clearly, an important asset. In conclusion, COVID-19 is obviously challenging us all in anticipation of the scope and duration of its impact. As I noted in previous quarters, the key to weathering the crisis is an [ adaptly ] set in the resiliency of your entry point and the adoption of quick learning process. This quarter echoes those statements. So 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, for any relevant questions you may have. Operator?

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

First, you guys mentioned your strong capital positions, and you keep on generating excess capital every quarter. So in light of the cautiously optimistic outlook that you guys talked about. Could we potentially see a resumption of dividend?

Okay. Tavy, thank you for the question. You are right, this quarter is very important because it supports our liquidity and capital base and enhance the surplus that we have. When talking about capital distribution, I think we have to remember that after the relief that Bank of Israel gave in the minimum requirement, we were the first to declare that we are suspending the capital distribution from a responsible approach. But overall, from then, we did some steps to strengthened our capital surplus to give us flexibility if the demand for credit will be high. But on the other hand, to be flexible when the uncertainty will be lower and terms will be clearer to be able to be in a position to potentially return to distribution of capital. It's too early to say because the pandemic is still here and uncertainty is still high, it's too early to say when it will happen. But we're maintaining and creating our flexibility that when everything will be more clearer, we will be able to be back to normal in distribution of capital.

That's helpful. And then just to touch on the credit growth. So you guys gave details about the different segments. I'm more interested into the level of demand that you guys have seen because that's data that we don't have. So has there been an increase in demand during this third quarter? And as a result of potentially changing your underwriting policies and some of those were declined, help us out a little bit with some color on how the demand and supply have played out during the quarter?

Okay. First, it's a very good question, and it's an interesting one because it deals with demands and behavior and not only economics. I think when talking about demand or credit demand, we should split and talk on every segment in a different way. Let's start with, let's say, housing and mortgages, like I said, the market is strong. We see the performance. We see the demand also in the last quarter, very high and I think the vectors pushing it to keep being high numbers at the present and maybe in the future. So as for mortgages, there is enough room for demand. As for consumer lending, we see all over the world that the demand for credit is getting lower. I think in Israel, we can say cautiously that we see some signs for that. But the future depends on the way of the pandemic, but today, I think we see that the demand is lower than before. It's very logic that that will be the situation because of social distancing, people buying less, people less traveling, less doing events, et cetera. So that's the reason why the demand is a little bit lower and also manage their consumption more carefully. And I think the situation for the mid-term, maybe short-term. As for the long-term and mid-term, it depends really on the -- what will be with the pandemic, control of the pandemic, and social distancing. I think that what we are choosing today because it's not a growth in consumer, it's not only the demand but also the risk appetite. We think that it's too early to change the risk appetite in consumer lending today, but we're evaluating it. And that's for the present, maybe in the future, if we'll see some changes in the economy, in the terms we will consider a change. But today, we don't think the situation is a situation when the uncertainty is still high, situation for changing in risk appetite. And as for the business and corporate segments, I think it depends on the sector but overall, businesses manage their working capital and investments more carefully today. But as long as terms will be clearer, I think the companies will be back for investments. And I think the strong sectors are real estate, still real estate, and also infrastructure. There, we see demand while other sectors manage very carefully with the working capital. So overall, it's a different story for each segment when we are talking about the demand, but I gave you the exact answer.

Thanks for the detailed answer. I appreciate it, and congrats on the strong results.

The next question is from Micha Goldberg of Excellence.

Congratulations on a strong set of results. A couple of questions for me. I noticed that NIMs are getting squeezed a little bit. And I saw that deposits have increased significantly around by ILS 55 billion year-to-date. And it looks like most of that money has gone into the central bank deposits, et cetera, which is about ILS 40 billion. And I'm just wondering, with all that cash on hand, will you be considering putting some of that to work to increase yields?

Micha, you are right, we see that the level of deposit is very high. The change in the quarter, also 9 months is a lot of change. I don't think that's the reason to change the risk appetite of [Technical Difficulty], but we are looking at it. And we are, let's say, calculating and making our analytics to decide what is the duration for this deposit level. And I think it will affect, it will affect elements of financing, maybe in the future, relying more about those elements than long-term liabilities. But this is something we are examining and making some analytics on that. It depends to benefit from that more than just putting in central bank. It depends on the valuation of how long this level of deposits will be with us. I think it won't be for a short-term, but it depends whether it will be years or some quarters ahead. But as long as it will be here, it will help on the financing side, less on taking more risk that for today, but we are evaluating that.

Okay. Another question I want to ask about your international operations. I mean it looks like that this quarter, you recorded a significant -- or at least the first 9-year -- 9 months significant losses, both on your Swiss operations, I think something like ILS 170 million also and Pozitif in Turkey. And also, I saw since the beginning of the year, still over ILS 100 million on the back of the U.S. litigation investigation. I'm just wondering when do you think you'll be able to lose those costs? Will that be in the near future? And how much of that should we be counting into our models?

Okay. So I'll talk about Pozitif in Turkey and then Switzerland for Pozitif, we announced our willing to sell our holdings in Pozitif. We're making in efforts to -- all the time to sell it. It depends on offers and the other size. It's not an easy thing, but we're doing all the time, efforts, continuous efforts to end our holdings there in Pozitif. So I can't say whether it will be a issue of some quarters or next year. But we all the time, keep making the efforts in selling that. As for Switzerland, we are in a process of closing the operation. Actually, we -- overall, the operations there are very low, but we still have expenses there -- operating expenses there that still reflected in our cost line or expense line. And we have some procedures to do there with the regulators to close the operation and the activity. It will take some time. I don't see -- I don't think it will be in the next few months, but we're doing our best efforts to close the activity and get that with those expenses that's still on our P&L, maybe it will take some quarters, maybe a little bit more. But the path is very clear for us, both in Pozitif and Switzerland to get it off our P&L.

So just to sum up, I mean I just think correctly, once all this is done in Switzerland, and hopefully, you find a buyer for Pozitif, you should be losing around ILS 300 million from your cost as in the [ end now ]. Is that correct?

Yes. Generally, yes.

Okay. And another question. I mean, I think taxes remain relatively high. Is that a new trend? Is there something that we should be aware of? Or is this just something temporarily of expenses are not tax-deductible?