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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Q2 2021 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 Q2 2021 results presentation. [Operator Instructions] As a reminder, this conference is being recorded, August 16, 2021. Our speaker today is Mr. Ram Gev, CFO. Also with us today are Mr. Victor Bahar, Chief Economist; and Ms. Tamara Glen, 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. Gev, would you like to begin?

Good afternoon, everyone. And thank you for joining us today for our second quarter 2021 earnings call. In our call today, I will run you through the main drivers of our results and touch upon the strategic initiatives that support them. For the second consecutive quarter this year, Bank Hapoalim has delivered significant profitability driven by robust growth of our loan book, the continued recovery of the global and Israel economy and the increase in CPI. We generated ILS 1.4 billion in net profit for the quarter and ILS 2.77 billion in net profit in the first half of 2021. Return on equity was 14.5% for the quarter and 14.1% for the 6-month period. Before we elaborate on our performance, let us take a few moments to discuss the macroeconomic environment, which we can see on Slide 3 of the presentation. The macro picture of the second quarter was very supportive for local banks. It was the first quarter since the upbreak of the pandemic, free of economic restrictions, while economic policy, monetary and fiscal remained fairly expansionary. As a result, we witnessed a rebound in growth, which encompassed most economic sectors. The lifting of restrictions led to a surge in all kinds of services, even leisure and recreation, new home sales broke records and Israeli high-tech companies raised unprecedented amounts of money in global markets. On the fiscal front, a new government was formed and successfully agreed on the budget for 2021 and 2022. More on the positive side, the trailing 12-month deficit decreased significantly to 9.3% of GDP. The decrease reflects the resilience of the economy and its ability to cope with adverse shocks. Another outcome of the reopening of the economy is the rise of inflation against the backdrop of the reopening of the economy, inflation picked up in the second quarter to an annual rate of 1.7%. This mainly resulted from energy and other commodity price hikes during the lockdowns. As for monetary policy, the current level of inflation is within the Central Bank target range. Hence, we do not anticipate a rate hike in the near future. We do see changes in other monetary tools. For example, the Bank of Israel plan to provide the banking system with fixed rate loans in order to increase the supply of bank credit for small businesses has ceased. And we also expect the government bond purchase program will come to an end this year. Before we conclude the macroeconomic parts assumed are probably aware, the COVID case rate has risen in recent weeks, challenging the defenses created by the vaccine. The development of the fourth wave, the delta wave will clearly affect the pace and extent of restrictions to be reinstated. But having over 60% of the population fully vaccinated with 2 shots, the learning curve of the public in coping with lockdowns and restrictions and the third shot booster rollout are relative advantages in dealing with the delta wave. Our Chief Economist, Victor Bahar, who is joining me today will be happy to address any questions you may have in the Q&A session. In Slide 4, we highlight our strong achievements in the second quarter and first half of the year. On the bottom line, we posted yet another very strong set of results with 14.5% return on equity and ILS 1.4 billion in net profit. For the first 6 months of 2021, net profit is ILS 2.77 million and ROE is 14.1%. This impressive quarterly results were driven by growth of our operations, continued improvement in the economic environment that led to a further reserve release and a positive impact of CPI. Beyond this robust results, the main achievement that we are proud of is our credit growth. We saw strong growth in the quarter across all segments of activity, which comes down to double-digit year-on-year growth. I'll discuss this in depth in the coming slides. No less important then the growth momentum is the quality of our book. Our credit quality indicators this quarter, once again showcased the power of our conservative yet realistic approach to underwriting and risk. NPL declined to an almost pre-COVID level. And although we felt confident enough to further release the COVID reserve, we maintained it at a relatively high level to withstand any future development. On our capital position, as we filed a couple of weeks ago, our large buffers led us to declare a ILS 670 million dividend in respect of 2020 net profit to be paid in the coming days. Even after this distribution, our capital buffer remains substantially over target and will allow for continued growth of our book and further investments in our strategic initiatives. And lastly, on our strategy, we believe that our focus on rigorous execution is continuously bearing fruit, and our performance in recent quarters is a testament to our commitment to continuing on this path. Another strategic priority relates to our planned move to the new Poalim center, which will centralize all head office units into 1 building in Tel Aviv. Our decision to stay in Tel Aviv and close to future significant public transportation hub is further validated in light of the expected changes in public transportation and the growing competition for employees, mainly IT employees. Our planned move is a step taken in order to improve efficiency as well as to improve our organizational culture, as I will detail later. I will now elaborate on each of these achievements. Moving to Slide 5, in which we present another strong quarter and half year with new highs in net profit and ROE. Our profitability in the quarter was positively impacted by an increase in financing income and by income from credit losses. Total expenses increased both on a Q-on-Q and year-on-year basis, reflecting a provision for performance-based bonuses as expense, that we are happy to provide for. Moving to the main items of the balance sheet, our loan book and deposits on the next 3 slides. So on Slide 6, total credit grew by 5.8% in the quarter or 10.2% year-on-year, continuing the strong momentum of the proceeding 2 quarters. This is indeed an exceptional pace of quarterly growth, and it is a direct outcome of our strategic focus on significantly growing across all segments of operations. And when looking at segments in next slide, Slide #7, we see, in fact, that commercial middle market and corporate 2 key growth segments for the bank grew by 16.1% and 14.4% year-on-year, respectively, reflecting our execution capabilities to deliver against the backdrop of the rebound of the Israel economy. Most of the growth is driven by prosperity in real estate as well as in commerce, industry and financial services. Mortgages, which are another focus area continued to grow by 11.8% versus last year, following 4.3% growth in the preceding quarter. As reflected in the official Bank of Israel data, the mortgage market continues to soar to new heights and the volume of new mortgages taken reached an all-time high in July. The bank's continuous growth in the mortgage segment reflects its quick deployment of resources its flexibility and customers' trust. We believe that the trend in this segment is here to stay, and we continue to invest in strengthening our sales and service capabilities to further support future growth. Small businesses and households are segments we are closely monitoring, as they were directly affected by the crisis. The trend in this segment is positive, defer the client to very low numbers. The unemployment rate declined and private consumption covered, more and more businesses reopened and we hired employees and made adjustment to live with COVID challenges and restrictions. Generally, being able to become leaner and pivot towards online models helped many businesses ride out the pandemic. The same can be said for individuals who learned to cope with the new normal. Accordingly, demand for credit in this segment is gradually coming back, and we sold 2.1% growth in credit for small businesses and 0.7% growth in credit for households in the quarter. Moving to Slide 8. Slide 8 illustrates one of the most outstanding strengths of the bank as deposits amounted to ILS 483 billion, 58% of which are retail deposits. These deposits grew by 7.8% year-on-year and the LCR reached 140%. On the next 2 slides, we take a closer look at the income and operating expenses. Starting with income items on Slide 9. On the left-hand side, net financing profit, which includes net interest income and noninterest income grew by 1% versus the last quarter, driven by the aforementioned growth of our loan book and the 1.3% change in the non CPI. Fees were 1.8% lower than in the previous quarter, mainly due to a decrease in capital market fees. Note that other income in the previous quarter was affected by relatively high real estate realization. On the right-hand side, income from regular financing activity was up 8.6% this quarter supported by credit growth and the increase in the CPI. Accordingly, the financial margin shows an increase to 1.87%. The growth in regular financing activity was mitigated by a slight decrease in income from investment in shares, which in the previous quarter included higher income from Poalim equity, our real investment arm as well as from another investment by the bank. Moving to discuss expenses on Slide 10. Reported total expenses in the quarter increased by 3.2% versus the last quarter as a result of an increase in the provision for bonuses, in line with the high performance of the bank. However, the underlying expenses stayed relatively flat and reflect our disciplined management of cost and efficiency program, an impressive achievement taking into account our growth momentum. As I mentioned in previous calls, cost control continues to be a top priority for the bank. Our recent announcement regarding the deal to purchase land in Tel Aviv and centralized all its office units is another expression of our approach to efficiency as a way of life. On Slide 11 and 12, we present the continued positive trends in asset quality. We continue to see a reduction in deferred loans, which at the end of the quarter accounted for only 1.1% 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, NPL substantially declined in the quarter due to high recollections as well as an improvement in Poalim's economic position. NPLs are now almost at pre-COVID level, reflecting the encouraging trend in asset quality. On the next slide, you can see how we further adverse the cushion we built during the first 3 quarters of 2020. But this quarter, we also booked income from individual provision as we recognized high collections, coupled with relatively low regular individual provision. Overall, we recognized income of ILS 647 million from credit losses. On the right-hand side, we present the development of the allowance for credit losses. The allowance was built up in 2020. And in the last 2 quarters, the improving economic fundamentals and positive asset quality trends led us to partially reduce it. The allowance currently stands at 1.72% of RWA. And is more than twice the NPL balances. To summarize these 2 slides, maintaining a high-quality loan book supported by large reserves is a key for us. And we remain vigilant in following COVID-19 developments and implications. Slide 13. Slide 13 shows the developments of our capital base, our core Tier 1 capital ratio slightly decreased this quarter due to the rapid growth in credit we introduced to a level of 11.61%. This is well above the current Bank of Israel minimum requirements and our own internal targets. This substantial reserve has already allowed us to declare a dividend payment with respect to 2020 profit which will be paid in the coming days. Even after this distribution, the bank has a significant capital buffer to both support growth and fund additional capital return. Together with our proactive approach during the current distribution announcement, it may support the resumption of capital return, subject, of course, to the required approval and development of COVID in Israel, among other methods. Let us now move to Slide 14, where we detail our strategy. It's important to highlight that all our efforts, projects, initiatives and achievements are the result of rigorous execution of our strategy. The main pillar growth in existing lines of business touches upon all spheres of our activity. The aim is to grow the volume of our activity with retail, commercial and corporate banking customers while continually improving the value proposition for our customers. The broad-based growth of our loan book demonstrates our high capability to execute our strategy. The second pillar, creating a new way to bank is centered on the development of new digital distribution channels, services and products with an emphasis on advanced data analysis capabilities and an outstanding user experience. Clearly, our most remarkable move within this pillar is the Bit application used by 2.5 million customers from all banks. While it is still too early to assess how this market may develop, Bit provides us with a substantial footprint in the world of future banking. The third pillar deals with the infrastructure required in order to power our growth strategy. The bank will work to provide processes encouraging a customer-centric growth supporting organizational culture, enabling to improve its delivery and time to market. One of the ways to realize this goal was the broad implementation of an agile model at the bank in order to enhance processes of product development. I'm now moving to Slide 15 to touch upon our strong brands of the bank and Bit, which continuously win prizes and recognition. We were recently ranked top brands in the banking and financial services category and in the apps and digital wallets category of the prestigious Globes Brand Index. This is just one of many expressions of Bit's popularity and of the way it's becoming a synonym for payments. Before we conclude and open the call for the Q&A session, let me summarize the key takeaways from the quarter on Slide 16. This is yet another quarter of high profitability with return on equity of 14.5%. Our loan book growth of 10.2% versus last year was characterized by broad and diversified growth. We delivered strong core banking income. Our loan book continues to improve showing almost prepandemic levels of quality indicators. Our capital position reflects a significant buffer, allowing for capital distribution, the first of which was just recently declared. And finally, Bit, our most important digital asset, which as presented in the previous slide, continues to gain popularity. Looking ahead, we are satisfied with the bank's performance this quarter. Obviously, it was affected by the economic rebound in market conditions in the quarter but more important, it reflects our strong growth in core banking and our commitment to deliver on our strategy. With that said, let's open the call for your questions. Back to you, operator.

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

This is Chris Reimer on for Tavy. You talked about the strong loan growth. This is something we've seen across the industry at different paces. So I was wondering what are the driving forces there? And do you see it as sustainable? And is there a risk that increased level of competition will lead to some pricing pressures?