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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Q1 2021 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 homepage and then click on the Q1 2021 Results Presentation. [Operator Instructions] As a reminder, this conference is being recorded May 13, 2021. Our speaker today is Mr. Ram Gev, CFO. Also with us today is Mr. Victor Bahar, Chief Economist. 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, which are detailed from time to time in the company's filings with the various securities authorities. Mr. Gev, would you like to begin?

Good afternoon, everyone, and thank you for joining us today for our first quarter 2021 earnings call. In our call today, I would like to share with you our perspective on the quarter's performance and key elements driving our results. But first, I'll start with the bottom line. Bank Hapoalim is starting 2021 with strong financial results of ILS 1.35 billion in net profit. These results are supported by strong underlying business performance and the improved macroeconomic environment that allowed for a reserve release. The results also reflect larger than usual contribution from capital markets. But before we dive into our financial performance during the first quarter, let us take a few moments to discuss the macroeconomic environment, which we can see on Slide 3 of the presentation. As you probably know, the Israeli economy is emerging from the COVID-19 crisis quicker than most other developed economies. This strong opening of 2021 is, of course, highly correlated to the fast pace of COVID-19 vaccination. According to latest data, about 60% of population are now fully vaccinated with 2 shots, and the daily number of confirmed new COVID-19 cases is less than 100, an amazing change relative to the peak of over 10,000 daily new cases just in January. To put it in a global context, Israel is actually leading the world in its vaccination coverage, allowing early emergence from the crisis. As we noted in previous calls, a healthy population drives a healthy economy. This is very evident in Israel and is a key strength for our country and for Bank Hapoalim, specifically as the leading financial institution in Israel. This impressive COVID-19 indicators allowed for a gradual lift of restrictions, which led to a rebound in private consumption as Israelis have returned to offices, hotels, restaurants, concerts, shopping malls and now stadiums. It has also led to a moderate rise in inflation expectations, which like in other countries have risen in recent months. Last 12 months, inflation is currently only slightly positive. But according to our expectations, we substantially increase to a level of 2% by year-end. Our Chief Economist, Victor Bahar, who is joining me today, will be happy to elaborate on that in the Q&A session. The relatively rapid recovery is also being supported by a very strong high-tech sector performance, which has been a positive surprise. In fact, capital raised by tech companies in the first quarter at more than $5 billion is 89% higher than in previous quarter and equal to the total amount raised in all of 2017. Putting all of these factors together, the expectations are for a strong GDP growth of 6.3% in 2021 and in certain scenarios, even higher. This will clearly have a positive impact on Bank Hapoalim's financial metrics and performance going forward. Lastly, on the domestic political situation, uncertainty still remains following the March election, which is yet to yield a decisive victory for either side. With this background of prolonged political uncertainty, the economic recovery is even more noteworthy. The fiscal picture should also improve in 2021, and the government does not have any difficulty in financing the deficit. So to summarize, the macroeconomic backdrop, as we assessed it just a couple of months ago, there is room for optimism. This quarter's strong results reinforced our previous estimations. And in this environment, Bank Hapoalim's resilient performance in the first quarter following previous quarters is an indication of bank's -- the bank's conservative approach at the onset of the pandemic, its robust fundamental and growth appetite and the prospects going forward. Having said that, and as you probably aware, in the last several days, the security situation, mainly in the southern region of Israel, has escalated. The bank is monitoring the developments and acting to support its customers and employees. In Slide 4, we highlight the main messages of the quarter: very strong profitability; 14.2% return on equity; and ILS 1.35 billion in net profit. Continued credit growth momentum at 1.4% in the quarter, led by the commercial and mortgages segment, is a testament to our commitment to deliver on our strategy. As a reminder, in the fourth quarter, we grew by 3%, so that altogether, we grew by 4.5% in the last 6 months. The high quality of our credit book is demonstrated by our relatively low NPL ratio and its positive trend and a further decline in deferral balances. This currently stands at only 1.6% of the credit portfolio, dropping from 14.5% in June. On our capital position, shareholders' equity continues to grow by 8.5% year-on-year, bringing us to a strong CET1 ratio of 11.67%. This position implies a substantial buffer over both the current regulatory requirements and the Board's internal targets, which once the Bank of Israel directive is lifted, will support future capital distribution. I will now elaborate on each of those topics. Moving to Slide #5, you can see the sharp increase in profit versus previous quarters to the bank's highest ever quarterly net profit. This was impacted by income from provision for credit losses in line with the improved macroeconomic environment and a further decline in loan deferrals. In addition, strong income and flat expenses had a meaningful contribution to profitability. I will now go over the main items of the balance sheet, our loan book and deposits. On Slide 6, total credit grew by 1.4% in the quarter, continuing the strong momentum of the fourth quarter. Looking at segments, commercial middle market, a key growth segment for the bank, tracked very well as borrowers took advantage of the crisis to cut costs, and in some cases, expanded their business. In this segment, we grew by 3.6% versus the previous quarter and by 8% compared to the corresponding quarter. Corporate credit also grew nicely in most economic sectors, continuing the strong growth in the previous quarter. However, a decline in derivative collateral offset this growth. It's important to note that our focus on corporate credit growth continues. As can be seen in the regulatory segment data, there was actually a material increase in credit to large businesses. Mortgages are another area of positive momentum. This grew by 1.9% versus the last quarter and by 9.3% in the last 12 months. With regard to small businesses and households, we are still monitoring the pace of the recovery and encouraged by the sharp reduction in deferrals among these customers. Household credit stayed stable following a period of a few years in which we aligned our growth appetite and risk levels. While 2020 was characterized by a decline in demand for household credit, the first quarter dynamic provides initial signals for renewed demand. Moving to Slide #7. This illustrates one of the most outstanding strengths of the bank as 62% of the deposit base is retail. These deposits grew by 2.5% quarter-on-quarter and the LCR is 139%. On the next 2 slides, we take a closer look at the key P&L items, starting with income items on Slide 8. On the left-hand side, total income increased by 7.3% versus last quarter, continuing the strong momentum of recent quarters and driven mainly by the growth in net financing profit. Fees also show a positive trend, growing 3.3% versus the last quarter, driven mainly by increased capital markets activity. On the right-hand side, income from regular financing activity was up 2.6% this quarter, supported by credit growth and strong capital markets activity and mitigated by the slight decrease in NIM. It's important to note that NIM was technically impacted by the significant increase in the bank's large deposit base. Moving to discuss expenses on Slide 9. Streamlining our cost base continues to be a key managerial objective. Reported total expenses in the quarter stayed relatively flat, representing a cost-income ratio of 53.6%. The increase in salary and related expenses in the first quarter of 2021 is attributed to an increase in the provision for bonuses, in line with the sharp increase in the bank profitability. However, the underlying salary expenses reflect further cost savings resulting from our efficiency programs. As I mentioned in our previous call, cost control continues to be a top priority for the bank. The main focus on that front will be on continuing the execution of our fifth efficiency plan and further downsizing of our real estate space as we are looking to centralize our multiple office presence into one location. This move, while it is to be executed over several years will result in significant operational value. On Slides 10 and 11, we present a positive trend in asset quality. We continue to see a reduction in deferred loans, which at the end of the quarter accounted for only 1.6% of total credit versus 14.5% in June 2020. The decline in deferrals is providing greater clarity on the actual condition of our credit portfolio. On the right-hand side, NPLs, which have declined continuously since the peak at the outbreak of the pandemic, stabilized at ILS 3.3 billion or 1.05% of total credit, also reflecting the encouraging trend in asset quality. On the next slide, you can see how the bank has built up its allowance for credit losses over the last 6 quarters, which is now at high levels of almost 2% of our credit risk-weighted assets and almost twice the NPL balances. This reserves, together with the improving economic fundamentals and positive asset quality trends led to the reduction in the collective provision. This was the main driver of the ILS 508 million income from credit losses in the quarter, although this number was also supported by a negative net individual provision. Slide 12 shows the development of our capital base. Our core Tier 1 capital ratio increased 15 basis points in the quarter to 11.67%, well above the current Bank of Israel minimum requirements and our own internal targets. The bank has a significant capital buffer to both support growth and fund capital return, indicating that dividend distribution may be resumed, subject, of course, to the required approvals among other matters. Lastly, I want to summarize the key takeaways from the quarter on Slide 13: first, high return on equity of 14.2%; positive core banking revenue evolution supported by credit growth despite the challenging environment; strong cost control as we continue to implement our efficiency plan; solid risk indicator provide an encouraging outlook; and robust capital generation with a significant capital buffer to support growth and fund capital return in the future. A final word on Bit, our powerful digital asset and the #1 payment app in the market. Bit continues to solidify its popularity in the P2P payments market as well as in B2C and e-commerce. And recently, we launched a digital wallet. Looking ahead, I'm confident in the bank's ability to continue the current positive trends and further deliver on our strategy and targets. With that said, let's open the call for your questions. Operator?

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

This is Chris on for Tavy. You talked about the recoveries posted during the quarter. Looking ahead to the coming quarters, given the strong recovery in the Israel economy, do you foresee further recoveries?

Okay. Thank you, Chris, for the question. First, what is needed to be understand is the reason for the recovery of the reserve release this quarter, the reason is both the recovery in the economy, the vaccination in the population that let us see major and material changes in the economy and open up the economy. That's the first one. The second one -- element that supported our approach was the low level of write-offs and real improvement that we see in the last quarters in deferral levels and also the write-offs, which are in low levels. So if we look at the future, it's hard to say what will be the numbers or what the level of reserve release will be, if any. But as long as the macroeconomic conditions here in Israel will improve, keep improve with growing GDP, and as long as we'll see positive trends in deferrals and the quality of credit, then it's reasonably to assume that we will reevaluate our reserve. Maybe a result of that will be another release of reserve, but we can't say now in what amount or if any. It depends on the vectors going forward. Of course, it also depends on, like we say all over the pandemic, the governmental support and what the other governmental measures will be in the future.

Okay. And you mentioned earlier on the call about dividends. And the Bank of Israel may have an opinion going forward. But given your significant level of excess capital, do you believe that the Bank of Israel may bring the date forward even?.

Like you mentioned, we have significant surplus above the minimum requirements, also our internal targets. I think about a couple of weeks ago, the supervisor of banks gave an interview, and he said that he sees a probability that the second half of the year, the banks in some conditions will be back to dividend distribution. So we hope it will be early in the second half and not at the end of the second half. But that really depends on Bank of Israel's approach. I think what we will see overall the system and what will be the trend in the second quarter, we hope we are ready, but we hope that it will be earlier in the second half of the year and not later in the second half. But it really depends on their decision. We have enough surplus, and we are ready to be back for capital distribution and implementing our policy on that as soon as possible.

Okay. And last question. You mentioned that the capital market contributed to a sizable part of this quarter. Is that the result of timing and scope of large exits? Or do you guys allocate a bigger envelope to the capital markets division?

Okay. Well, it depends -- the outcome of this quarter depends on 2 elements. The capital market trend, which was positive this quarter and affected both Poalim Capital Markets portfolio and also our own proprietary investments, what is called Nostro investment. And this quarter, those 2 elements in the numbers that we see has the contribution at the same time. But what's important, when we look -- looking forward, we are developing those revenue streams and investing in Poalim Capital Markets -- Poalim Capital Markets enlarging their investing. And we -- when we are looking at the future, we hope and believe that in the next quarters, there will be another -- or will be effect on that. It's not something that happens every quarter or every quarter in the same level. But overall, going on the quarters forward, we hope that there will be contribution partially from Poalim Capital Markets or by our own proprietary portfolio. So in short, it had a material contribution this quarter, both Poalim Capital Markets and our proprietary portfolio. Several effects came together in this quarter. That will usually be spread over a longer period. But certainly, we developed these revenue streams in order to benefit from them in the future.

The next question is from Borja Ramirez of Citi.

I have 2 quick questions. Firstly, I would like to ask if you could please provide the asset quality developments in the expiring loans under deferrals. And the second question is, for the remaining part of the year, I understand that any potential dividend distribution is subject to the regulator approval, that we will have to wait. My question is if you would consider -- I mean given your strong capital position, if you would consider an ordinary distribution over the profit? Or you could also consider potentially in addition, an extraordinary distribution as well?

Borja, thank you for your questions. I relate first to your first question about the deferrals. What we see here on the deferrals is very -- it's correlated with what we see on the pandemic. I mentioned the numbers of infections that dropped very dramatically. And we see it also in the deferrals. From a peak of more than ILS 40 billion, we are now a little bit -- slightly more than ILS 5 billion, and in ratio, it's 1.6% of total credit balances and that reflects the very significant improve over the quarters. And even within the quarters, every month that passed, we saw this improvement. As for your second question about capital distribution, the surplus that we have implies that we can do, when it is approved, both return to our routine dividend distribution as part of the profit, the current policy, but also what we call some catch-up to the surplus that we have. So we're aiming for both in the near future and after that. But of course, both of them depends on the regulatory approval and maybe it will be gradually, but we're aiming for both.

The next question is from Micha Goldberg of Excellence.

Congratulations, first of all, on an excellent quarter. A couple of questions, if I may. First of all, regarding CECL, is there any guidance you can give us on the onetime impact expected towards the beginning of the year? And secondly, what do you expect will be the longer-term impact of CECL?

Micha, thank you for the question. As for the impact of credit losses, what is the onetime, the credit losses for this quarter was an income, it was impacted by 3 elements. The first one is the reserve release. That, I elaborated in the beginning, we can't know today what will be, if any, the reserve release in the future. But as long as the situation will be good and improved, we will reevaluate our provision, which is large and conservative. That's the first element. The second element is the write-offs, What we are witnessing is low level of write-offs, and this low level of write-offs, we see it also in the previous quarter. So we assume that this situation will be with us in the near future. Maybe part of the deferrals will be developed into write-offs, but we have adequate provisions and allowances for that. But the levels of write-offs are low for a couple of quarters. So that's what I can say about a future -- possible future trends on that. So we are in the different situation as we see it now than what was in 2020, right? It depends, of course, on the pandemic, what will be, if there will be any mutation or something like that. But as we see it today, it's a different situation than 2020. And the second question?

Ram, I was primarily referring to the impact of the transition to current expected credit losses [indiscernible] in 2021.

Okay. The second question about CECL. We currently don't have information about the CECL impact. It's too early to say. Guy Kalif, our Chief Accountant, maybe will elaborate when we think we'll have some information about that, but it's too early. But what I can say is that what we see with the reserve release or what we see with the allowances for the pandemic, that's a tough correlation with what we'll see on CECL. It's 2 different elements. But still, we don't have information about the CECL impact, but maybe Guy will -- can elaborate it.

We will have the CECL effect on the -- when we publish the third quarter results [ next time ].

Okay. I believe that's regulatory, right? But Q3 would have all the banks publish the initial indication. Is that correct?

Yes.

Okay. Another question. I just noticed that -- I noticed first time and your liabilities are growing significantly. And I'm just wondering how that impacts your long-term margin on the credit side. Is there anything you can do to reduce the impact investing in higher risk, and therefore, higher yielding? Or is this, something I just have to take the course of [ unknowing ]?

Okay. Thank you. Well, that's a good question. I think the effect that we see on the NIM, the margins, it's a global effect on banks, mainly large banks and retail banks. The increase -- the effect is mostly technical by the increase of the deposit base. And what we are doing with the liquidity that we have, first, it supports our stability, but it depends on the risk appetite of the banks. As for now, there is no change in the risk appetite for the bank, taking into consideration that the increase in deposits is in billions, so it's effect that's happening all over the system. Even a change in the risk appetite won't absorb all this liquidity increase, but maybe in the future. As for today, there is no change or material change in the risk appetite of the bank. But I think banks all over the globe will take into consideration the liquidity issue and the deposit -- large deposit base, maybe when building the strategy looking ahead.

Okay. My last question is, I think relative to [indiscernible] back to your dividend. I just wondered, from your perspective, looking at the myriad of options that you have when trying to reduce your excess capital being absolutely ongoing payouts, onetime payout and buyback, what is the preference from your -- from the Bank Hapoalim? And how you see those 3 tools? Would you like to use them together? Is one preferred to the other? What do you think is the right way to go once the Bank of Israel allows you to reinstate [indiscernible]?

Okay. Well, thank you. That's a good question. I think from my perspective, as the CFO, the better way is to have a combination of all these 3: routine dividend distribution from ongoing profit, buyout and onetime or a couple of times gradual catch-up distribution. So in my perspective, all these 3 elements are correct and to be used. The high surplus enables us to make programs to use all these 3 elements. But like you said, we are waiting for a Bank of Israel approval. And we will examine that upon the approval of Bank of Israel. But like I said, a combination of all these 3 elements, from my perspective, is the right combination. But of course, it's the privilege of the Board of Directors to decide on it.

[Operator Instructions] There are no further questions at this time. This concludes the Bank Hapoalim Q1 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.