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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Fourth Quarter and Full Year 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, www.bankhapoalim.com by clicking on Financial Information on the homepage and then click on the Annual Report presentation. [Operator Instructions] As a reminder, this conference is being recorded March 11, 2021. With us on the line today are Mr. Ruben Krupik, Chairman of the Board of Directors; Mr. Dov Kotler, CEO of Bank Hapoalim; Mr. Ram Gev, Chief Financial Officer; 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 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. Chairman, would you like to begin?

Thank you, operator, and thank you all for joining us today as we summarize 2020 and look ahead at 2021 and beyond. 2020 was not just another year. Leading through a global pandemic tested us as a nation and institution and not at a lesser extent as human being. I'm proud to say that in these unchartered circumstances, Bank Hapoalim remained committed to our customers, employees and shareholders and delivered strong financial performance. In acute volunteer, the bank maintained its resilient balance sheet and capital stability, ensuring a fortress financial position and the diligent cost base. While taking measures to mitigate patent risk, we continued forward with our future growth plans. Amongst our many initiatives this year, we pushed forward the development of unique products that set the bank's value proposition apart from those of other financial institutions, announcing our pioneer digital wallet initiative, expanding its value proposition and launching our fully digital onboarding applications to name a few. We also advanced the modernization project of the bank's core IT system, an important factor in the competitiveness of our future time to market. This time and these markets, of course, still abound with challenges. COVID-19 is still here. The wounds inflicted by the pandemic on the domestic economy will take time to heal. And we must prepare with an updated risk map and continued adaptation of our activity to our customers' needs. The bank's high capital adequacy ratios proved an asset and will allow us to navigate forward with confidence, expanding credit balances as we partake in our customers' expected recovery. As the economic environment improves and the economy begins to recover, we will also work to convert capital resources into rising returns through an efficient allocation of capital. Our expense structure and business results required continued efficiency measures in addition to those we completed this year. Thinking about the future of banking and avenues for the growth of new differentiating revenue sources is important to us and will become physically essential. We will have all our commitment to growth through innovative and fair banking for our customers as adopted in our vision. And we will remember the valuable lesson of 2020, that is to expect the unexpected to sometimes materialize and when it does to have the capabilities to respond and add dynamically and flexibly. As Israel's leading Bank, Bank Hapoalim has always recognized its social responsibility and considered it accordingly, more so in such a singular year which tested our communal backbone. Our foundation to earning for the community supported a wide range of projects this year, particularly in the area of assistance to job seekers whose numbers have unfortunately grown during the crisis. I wish to acknowledge the diligence and persistent efforts of the Board of Management and the Board of Directors to improve the corporate governance and corporate responsibility of the bank. These endeavors have been recognized in local and global ESG ratings. Bank Hapoalim tops the Maala ratings for companies in Israel, leads international ESG ratings compared to other Israeli banks and is ranked with the top tier of banks worldwide. This year, we are proud to be the first Israeli bank to be included in the Bloomberg Gender Equality Index. Finally, I would like to express my deep gratitude and appreciation to the employees of the bank, who rallied in this difficult year with exceptional talent and dedication. I wish to thank our CEO, Dov Kotler, for his achievement in leading the bank forward through hard working and devoted professional excellence. I'm also thankful to the members of the bank's Board of Directors. Their rich experience and capabilities are indispensable for a large and complex organizations such as ours. Together, we will continue to work for the benefit and success of Bank Hapoalim. Thank you to you, our shareholders. We are here because of you and for you. With this said, let me pass on to Dov.

Thank you, Ruben, and good afternoon, everyone. I'm happy to join today's call to sum up the unusual year we had. 2020 was a year filled with challenges for Bank Hapoalim, its employees and its customers, although the economic impact in Israel was fairly moderate. During the year, we made heavy effort to maintain services for our customers with minimal disruption despite lockdown in the transition of working from home. We offered our customers the option of deferring payments on loan and mortgages and granted state-backed loan mainly to small business who needed. Today, only a relatively small portion of the original deferred loans have yet to resume, and the amount of loans in deferral continues to trend down. I do believe we have demonstrated our resilience and ability to cope with the new and challenging situation and respond rapidly. The capital base of the bank remain high and is the highest in Israel. In fact, we are waiting for the approval of the regulator to distribute dividend. Despite the decrease in business activity, we continue to grow our credit portfolio. Notably, we saw 10% growth in mortgages and 5% growth in commercial banking. And more important, 10% growth in off-balance credit, mainly in the fourth quarter. We leveraged the negative effect of the coronavirus event to accelerate digital empowerment process with our customers. This endeavor allowed us to strengthen our efficiency plan. We closed over 10% of the branches in our network over the course of 1 year. We shed a net of 400 employees this year well ahead of our efficiency plan, which accumulated to 70% over the last 5 years. The vaccination rate in Bank Hapoalim has reached 80% among the bank's employees and we are very proud of Denver. In 2020, we completed key tasks that were a burden on the banks, key indeed. We reached the resolution with the U.S. authorities, the DOJ and DFS about the investigation. We reached an agreement of the sale of Bank Pozitif in Turkey, pending the regulatory approval and we advanced the closure of our operation in Switzerland. We signed a multiyear collective wage agreement with the Employee Union. Last but not least, we completed the sale of Isracard. These 4 milestones were a big burden on the bank shareholders for the last few years. Looking forward, and as you know, I'm quite an optimistic guy. It is my goal to increase the bank's market share in retail banking, mortgages, corporate banking and the capital market. This is my personal message to our executives and employees, and I'm confident we can achieve it. I'm glad to advise you that we have built a strategic plan based on 3 pillars. Growth in traditional banking, yes, we do believe there is a way and there is a lot of room to grow. It will consist of improving the loyalty in customer services significantly, shortening the response time to both small and large businesses and continuing to elevate digital sales, so that can be a far more substantial component of our revenues. We can see the results in the fourth quarter already. And one more example is POLI capital market, as you can notice, with enlarged debt business substantially in 2020, mainly in the fourth quarter. Another component of the strategic planning is leading the new banking revolution. We plan to leverage our payment app Bit, yes, indeed, Bit together with other capabilities to create a leading payment platform in the industry, serving customers of all banks. You should know that Bit has more than 2 million active customers, half of which are customers of other banks with exceptional NPS and high penetration rate in relevant target audience. We intend to build this foundation for sales of other services and products. The last component and the most important one is strengthening the capabilities of the bank as an organization that encourage growth. Investment in technology and data. It's a data-driven organization to attain more precise, rapid and inexpensive execution of businesses initiative and imperative of this era. In conclusion, I would like to thank our Chairman of the Board, Ruben Krupik, for his partnership in leading the bank and for his support throughout this complex year. As you know, Bank Hapoalim is celebrating its centennial year in 2021. Despite the challenging time, I'm confident that this year, as in the last 100 years of the bank, existence will continue to fortify our standing as the leading financial institution in Israel. Thank you very much, guys. Speaking next is Ram Gev, our CFO, which will discuss our financial results for 2020. Ram, the floor is yours.

Good afternoon, everyone, and thank you, Ruben, and Dov, for your opening statements. Definitely, 2020 was an exceptional year and this is reflected in Bank Hapoalim's results for the full year and the fourth quarter. So before we dive into the financials, let me mention 3 points that can be drawn from our discussions in the past year. We stated that as with any evolving events, the entry point of an organization into the situation is critical. Bank Hapoalim entered the crisis strong and even further fortified its position throughout the year. At the early stage, we know that the crisis is an evolving event, and we can all see that new information is being accumulated on a daily basis. Each lockdown is different. Even the virus shifted from one variant to several. And we were early to speak of a positive learning curve of the economy with the impact of every lockdown less severe than the previous one, building a positive track ahead. Understanding these 3 parameters at the onset of the crisis allowed us as a Bank Hapoalim to steer through the crisis with confidence, make the necessary adjustments quickly and ensure customer service did not miss a bit. It allowed us to summarize 2020 with strong results and with heightened momentum in the fourth quarter. All this is also reflected in the economic data for 2020 and the cautious yet positive outlook for 2021, as you will note on the next 2 slides, starting on Slide 4. As you can see, Israel's economic performance in 2020 was better than most preliminary expectations. GDP contracted by only 2.4% better than initially estimated and much lower than most advanced countries. The Israeli market's favorable initial condition had a significant role in this regard as well as its other unique characteristics. Looking forward, on Slide 5, Israel is leading the global vaccination rates, 57% of the total population vaccinated, representing more than 80% of the population over the age of 16. This is a game changer as we look at the potential for economic rebound in Israel in 2021. The latest economic forecast, in particular Dov's, for positive inflation of around 1% this year are also supporting our cautious optimism. I will caveat this optimism by saying that the current high unemployment rate continues to be a crucial point to be addressed to ensure healthy market recovery. Standing at 18% today, we expect this level of unemployment to decline to as low as 10% when the economy regains more traction. So in this environment, Bank Hapoalim's resilient performance in 2020 and more so in the fourth quarter is a testament to its strong fundamentals and sound business steering. Slide 6. Slide 6 provides a snapshot of some of the key indicators of our results. It also illustrates the strategic pillars that carried us this year. First, ensuring the strength of the bank through strong capital buffers and high liquidity ratio. Second, putting profitability as a guide for how we run our business by addressing both income and costs. Third, bringing forward our growth DNA and doing so certainly growing where it makes sense, balancing between vectors of demand, risk and pricing. And finally, keeping strong taps on maintaining a high-quality asset book as market condition evolves. Let me take you through each pillar in more detail. And with that, the financial performance for 2020. Moving to Slide #7. This illustrates our commitment to ensuring we operate with a strong balance sheet as we steer the bank forward. You will note the bank's CET1 level remains strong and well above requirements and our own internal target, with our leverage ratio at 6.8%, significantly above the regulatory target of 5.5%. Our strong capital cushion continues to see side-by-side substantial reserves. Our allowance for credit losses ratio, which looks at our total allowance divided by our credit risk-weighted assets setting close to 2.2% at the end of the fourth quarter. This is a critical point of strength for us. And as noted on Slide 8, joins the bank's very strong liquidity and funding position with LCR of 140% and LDR of 69%, 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. As you can see on Slide #9, from a profitability standpoint, our conservative cushioning allowed us to navigate and operate with strength and confidence during this past year, but has had a negative impact on our net profit for 2020 with ROE for the year at 5.3%. Breaking down the year on a quarter-by-quarter basis, as you can see on the right-hand side, here, you will note the effect of the collective reserve build of the first half to that of the bank's ROE performance with fourth quarter ROE performance strong at 9.6%. Moving on for a closer look at the profit and cost items of the P&L on Slide 10. So this slide outlines the financial performance for the year. Net financing profit was strong in 2020, particularly when considering the low rate impairment margins were affected by 2 key items. Interest rates declined affecting the top part of the equation, while significant increase in the bank's deposit base impacts the denominator. Looking at expenses on Slide 11, streamlining our cost base continues to be a key managerial objective, with 2019 expenses mainly burdened by costs associated with the U.S. investigation. 2020 shows a cleaner picture of the bank's cost profile. We continue to balance cost and investing in areas that support our future business growth. Moving on to Slide 12 and touching more on costs. Let me point to a few priorities we expect will drive our cost base going forward. First, accelerating our fifth efficiency plan. We are now more than halfway through the plan with net impact of more than 400 employees this year, representing a decline of 4.4% of our workforce. In parallel, as part of our streamlining, we reduced 26 branches in 2020 and cut down over 6% of our commercial space. In addition, we are looking to unify our multiple office presence into 1 location. This move will be executed over a few years will result in significant value creation. And finally, implementing wide cost reduction programs across the bank. Moving on to look at our gross parameters. Let me address the performance of our loan book on Slide 13. Overall credit grew by 3% in 2020 with an increased momentum in the fourth quarter, much in line with customer behavior as the pandemic evolved and matured. Looking at our business segment, mortgages, a strategic segment for the bank in recent years, continued to perform well. In this segment, we are seeing contrary trends to a typical recession with residential real estate emerging as a safe haven for borrowers and the bank mortgage execution, reaching new record levels. Commercial middle market, also a key growth segment for the bank tracked well with companies in most sectors showing an encouraging resiliency and maturity. Larger corporates also maintained resiliency. And this year, we continued to balance both our growth and pricing objectives in this highly competitive sector. This segment will be an increased focus for us in 2021. Small businesses were more affected by the crisis and most of the growth you see in this segment is supported by the government guarantee fund. Consumer credit, as can be expected, was demand dependent as household navigated consumption through the crisis, but also in line with the bank's cautious risk appetite in this segment. On Slide 14, we note a 17% surge in retail deposits, which continue to be an important funding source providing the bank with a liquidity advantage, especially amidst the current prices. Note that retail deposits comprised 63% of our deposit base. Moving on for a look at our asset quality on Slide 15. 2020 was undoubtedly challenging to households and businesses. In line, the bank moderately grew its substandard and other supervision levels, reflective of the cautious approach we adopted to the potential effects of the crisis. However, looking at impaired credit, which represents the most deteriorated portion of problematic debt, those have declined in 2020 from ILS 5.3 billion to ILS 4.6 billion correlating to the 26 basis point decline in NPL levels to 1.04%. The decline in NPL level is a result of repayments made and our relatively positive view on the condition of local businesses, mainly commercial middle market and larger scale corporate, which have shown a better-than-expected resilience in the face of the crisis. Moving to Slide 16. The asset quality trends we are seeing also support our encouraging outlook. The bank's NPL ratio has declined to 1.04%. This is also supported by the continuous reduction in customer deferrals, as you can see, those have declined significantly from their peak level. Yet the bank increased collective allowance, which, as you can see on the right-hand side is reflected in the total allowance for the year-end and credit loss ratio. The high provision helped build a robust NPL coverage ratio of 216%. We expect this reserve will allow us to steer to any necessary challenges, including that of prolonged higher levels of unemployment. So before we conclude and open the call for any questions you may have, I would like to take this opportunity to thank Karen Mazor, who has led the Investor Relations effort of the bank in the past 4 years. Karen will be taking on the role of Chief of Staff for the office of the Chairman, Ruben Krupik, adding up the ear of our shareholder for the duration of role. I believe Karen will be an asset as she reflects those priorities and sentiments in a new role. So with that said, let's open the call for questions. Operator?

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

This is Chris Reimer on for Tavy. First off, with regard to dividends, the Bank of Israel has indicated that it won't allow dividend resumptions before third quarter. So if that's the case and given your significant excess capital position, do you anticipate the potential distribution of a onetime or a special dividend in 3Q?

And I understand that Tavy is not attending, so please send him our best wishes. Dividends, indeed, that's a very interesting component because we do believe that we have strengthened our capital base, we have enough capital reserve. But I assume -- I would say that I can understand Bank of Israel approach to maintain conservative approach in the meantime. I believe that everyone in the Bank of Israel is following the pandemia and its effects and, hopefully, the numbers in Israel, which are improving on a daily basis, will allow Bank of Israel to rethink its decision. So far, we are watching its decision, which is up to September 2021, but I hope that the reserve that we have, the banking system, especially Bank Hapoalim will allow Bank of Israel to reconsider the decision early on. And one remark with a smile, we are not in the insurance, we are in the banking industry. So we are following the instruction of Bank of Israel very adequately. And if they say so, we are going to following it, hopefully, deliberately because we do have the enough capital reserve to give a dividend.

Understood. Understood. And secondly, you've talked a bit about the Bit platform and the digital wallet platform. Can you elaborate a little bit on the business model and the potential for revenue generation down the road?

First of all, let me point out, Chris, that you should ignore comments of other banks that does not have such good services. They are talking from their position back to me. But to be seriously, Bit has a business model with 7 stages. We are only at stage 3 or 4. And on a longer term, it's a platform that enable us to give other services on this existing successful platform -- other banking services, A and B. It will allow us to report to Bank Hapoalim customers which are working with other banks and are satisfied from Bit. Let's not forget that today, about more than 2 million users are using the Bit, more than 50% of them are customers which are not Bank Hapoalim customers. NPS is very good. So the combination certainly brings us the optimism based on the business model that we have build for the next few years that it's going to continue to be successfully. Last but not least, again, I cannot avoid smiling from time to time. You know it's a serious conversation. And I know that the regulator is listening to us and the competitor's tone is clear. But in February, as you know, there was a lot of discussion in the newspaper in the media against -- brought in against the Bit. I can tell you that more than 100,000 customers, newcomers joined application, which is the largest, the record high of new customers joining Bit since inception. So we do think -- thank the media for its involvement. I hope I was clear.

Okay. Yes, that's very helpful.

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

Congratulations on a great ending of the year. Hopefully, next will be even better. A couple of quick questions, if I may. First of all, are you seeing any potential expansion in net interest margins in 2021 after 2020 wasn't the greatest one for NIM?

You were talking about the net interest margin?

Correct.

I would say that when the industry -- the banking industry is growing rapidly compared to the past, the chance for growing spreads, I would hesitate to answer positively. Usually, demand plus competition, don't forget that only 50% of the financing is done by the banking system and the rest is done by the institutional, I believe there will be a pressure on the margins. So I'm less optimistic that the margins will grow.

Okay. And another question. I mean cost-income ratio this year has been pretty good. Looking forward, what do you think is a decent objective that can be reached and by what time?

Well, Micha, you know us that we have plans for the next 3 years. And of course, we have budget for the expected CI. But we are not revealing them, exposing them. However, the trend should be down, improving. Just to give you an example, in 2020, I will give 2 examples. In 2020, we have closed more than 10% of the network. You cannot see the effect in this P&L, it will come in the next few years. And we have reduced the workforce by more than 400 employees, mainly at the end of the year, September 30, were the largest number. You cannot see it in the P&L of 2020. So these are actions that have been taken care of, but the effect will be in future P&L, thereby. I do expect that the trend is done.

If I can add to what Dov elaborated on the cost-income ratio we had, so what we see this year that also the cost-income ratio improved. And we're looking forward to some measures that we took this year to have a full effect, for example, the efficiency plan we ran out at the beginning of the year and accelerating it. So the fourth quarter and going forward to 2021, it will have an effect. Also about 26 branches were merged and closed this year. So it's also one element on our cost base. And of course, looking forward in the years ahead, we have project in the final, let's say, terms of project, choosing a project of consolidating our headquarters in one building that will allow us to vacate some spaces here in Tel Aviv and that also will have to support the cost-income ratio. And of course, we have to take into consideration that we are in a low interest rate environment. So overall, the cost-income ratio also affected by the top line. So as long as the growth will have a -- growth like this quarter and our momentum and recovery in feed, so we'll also see more improvement in the cost-income ratio.

So the 57% in 2020 is just the first is the right direction. It can go lower, you think?

56.3%, if I may. I mean I'm correcting.

I was rounding it up.

Well, this was rounded down, not up.

But it can go down, that's what you're saying.

Yes.

Okay. One more question, if I may. I see that the deposits have grown significantly, very similar to other banks locally and globally. And together with your security portfolio, it looks like there's a huge amount of low interest or low-yielding assets on your balance sheet, close to 40% of your balance sheet. Is there any way that you would consider increasing risk with your risk-weighted assets being as they are in your commentary pointing so high?

This is exactly what I said in the margin. On one hand, we are enjoying unbelievable amounts of deposit or all over the banking system, it's not only Bank Hapoalim, the balance sheet has grown by ILS 80 billion. And on the other hand, we have to manage the risk or opportunity. And if you remember your first question in regards to margin, I said that there is demand, part of it is deposits. But on the other hand, there is enough competition. I do not believe that we should increase the risk appetite too much. Of course, in my position, I cannot work if I'm not an optimistic guy. But it's not our goal to enlarge the risk portfolio or appetite of the bank. It's to check each deal on its merit, but not as a general statement.

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