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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Q3 2021 Results Conference Call. For your convenience, the 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 Q3 2021 Results Presentation. [Operator Instructions] As a reminder, this conference is being recorded November 15, 2021. Our speaker today is Mr. Ram Gev, CFO. Also with us today are Mr. Victor Bahar, Chief Economist; and Ms. Tamar Koblenz, 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 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 third 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 supported these outcomes. So I'm pleased to start with the headlines. Bank Hapoalim delivered solid financial results for the third quarter at ILS 1.2 billion in net income and return on equity of 11.8%. These results reflect our persistent focus on execution of our strategy, supported by the positive economic and business environment. Before we get into our results and strategy, I will give a brief update on the economy in Slide 3. It has been only 2 months since the peak of the fourth wave of COVID-19 in Israel, and today, we are seeing a sharp drop in new cases to less than 1,000 a day, mainly thanks to the booster shot campaign. COVID-19 is a dynamic event. The fourth wave demonstrates, as we mentioned in previous calls that there is an impressive process of businesses, household and government bodies learning to cope with COVID. The living with COVID strategy led to a minor adverse effect of the economy, which was kept open during the last few months. Accordingly, the economy continued to grow at a rapid pace, supported by growth in the activity of high tech companies, a rebound in domestic consumption of services and, of course, the support of expansionary monetary policy. This favorable performance enabled the government to gradually phase out unemployment benefits for furlough workers and the broad unemployment rate fell to 7.9% in September. The new government also succeeded in improving a new national budget, which will further accelerate the growth of the economy. The fast growth is already well reflected in tax receipts and the trailing 12-month deficit fell to 5.5% of GDP in October. More on monetary policy. Inflation increased, but remained lower than in most advanced countries. The strong shekel and the fact that Israel does not need to import natural gas, have mitigated global inflation purchases. However, we see a scenario that inflation will be close to the upper limit of the target range by year-end. Consequently, the markets now expect 2 rate hikes for 2022. The timing of the changes, if any, will depend in our view, among other things, on the inflation environment and decisions of other central banks. Moving on to discuss our results, starting with Slide 4. Third quarter results were strong. Quarterly return on equity of 11.8% and 13.1% for the 9-month period. Profitability was driven by an increase of 10.4% in total income year-on-year and by some income from credit losses as most of credit loss reversals occurred in previous quarters. The increase in income is an outcome of the continuous credit growth we are showing in the last year. The quarter, we grew by 3.6% that completed 14.5% growth in the last 12 months. The growth drivers were the corporate, commercial and mortgage segment. At the same time, asset quality continued to be resilient due to the improved credit environment. Deferred continue to drop, loan loss provisions are low and even negative, and NPL is at pre-COVID levels. On capital, this quarter's level of profit, coupled with our CET1 ratio of 11.2% and growth in risk-weighted assets, allowed us to declare a dividend of 30% of the quarter's net profit as well as the dividend in respect of the net profit of the first half of 2021. So in total, the bank will pay ahead ILS 162 million. This followed the dividend payment we met last August in respect of 2020 net profit. In total, we distributed roughly ILS 1.5 billion to our shareholders alongside impressive growth in activity. Another point on capital, as you probably remember, in order to support further credit growth and improve the capital structure, we raised Tier 2 capital in the amount of $1 billion in October. A word on strategy. We believe that our focus on consistent execution is continuously bearing fruit as can be seen in our growing loan book and increased income. Our primary focus remains growth in core banking activity, meaning mainly growth in credit, but we are also developing our reinvestment operation through Poalim Equity, which is increasing its portfolio quarter-by-quarter and already contributing a material amount to net profit. Moving to Slide 5, in which we present another strong quarter in 9 months period with double-digit return on equity. As previously mentioned, our profitability in the quarter was positively impacted by an increase in all lines of income and by income from credit losses. Total expenses increased both on a Q-and-Q and year-on-year basis, reflecting a provision for performance-based bonuses, coupled with a special grant, which I will elaborate on in the recorded slide. Moving to the main items of the balance sheet, our loan book and deposits on the next 3 slides. On Slide 6, total credit grew by 3.6% in the quarter or 14.5% year-on-year. The growth was widespread and even more important, it was translated into income growth. Turning to Slide 7. We see that commercial middle market and corporate, 2 key growth segments for the bank grew by 17.2% and 15.1% from the beginning of 2021, respectively. Accordingly, total income in this segment grew this quarter by 5.9% and 9.1%, respectively. This income growth is an outcome of the loan growth we have seen in the last year and will, of course, continue to impact profitability as we proceed on that path. In Slide 8, we present the same breakdown for the retail segment. The main component is mortgages, which continued to grow by 10.9% versus the end of 2020, bringing total income in this segment to a 9.7% increase quarter-on-quarter. Retail is slowly showing signs of return of demand. But as can be seen, we remain cautious with our pace of growth. Moving to Slide 9, where we show the development of deposits, which crossed the ILS 0.5 trillion threshold this quarter. The bank's deposits grew by 21.2% in the last 12 months to ILS 505 billion, of which 58% are retail and 45% are noninterest bearing. LCR is at 127%, well above regulatory requirements. In Slide 10, we present the revenue momentum in core banking. Income from regular financing activity, which includes financing profit, excluding extraordinary effects, increased by 11.2% versus last year. The increase mainly resulted from loan growth and the increase in the CPI. The financial margin stayed relatively flat, supported by loan growth in the CPI, partially mitigated by the significant increase in deposits. Other financing income, which includes profits from Poalim Equity slightly increased this quarter. Overall, with economic recovery, we are seeing a resurgence in activity leading to steady growth in net financing profit. Another achievement that we are proud is our fee growth, as presented in Slide 11. Almost all types of fees benefited from the rebound in the economy and the increase in the volume of business, bringing 11% and 4.5% growth in year-on-year and quarter-on-quarter, respectively. The trend in fees is encouraging. We are still not back at pre-COVID levels, mainly in FX exchange fees and account management fees, so there is still room for further growth in the future. Moving to discuss expenses on Slide 12. Reported total expenses in the quarter increased slightly by 1% versus the last quarter and by 8% versus the corresponding quarter last year. The increase is a result of provision for performance-based bonuses in line with the high profitability of the bank for the period. This quarter, we also provided for a special grant of ILS 7,000 per employee, marking 100 years since the establishment of the bank. This century of operation is a testament to our solid foundation, our deep understanding of the market and of course, our strong relationship with our customers. We couldn't have reached this milestone without our professional and committed employees. At the end of the day, what's important to highlight on cost is that the underlying expenses stayed essentially flat, reflecting our disciplined cost management and efficiency program, an impressive achievement considering our growth momentum and much higher level of activity. On Slide 13 and 14, 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 0.7% of total credit versus 14.5% in June 2020. The COVID-19 deferral, a major event at the onset of the pandemic, are in fact almost behind us. On the right-hand side, NPLs remained relatively unchanged at ILS 2.8 billion and constitutes 0.82% of the loan book, similar to pre-COVID levels. On the next slide, you can see the more moderate reversal of the collective provision this quarter, coupled with a recovery in individual provisions. On the right-hand side, we present the development of the allowance for credit losses. While the allowance was built up in 2020, in the last 3 quarters, the improving economic fundamentals and positive asset quality trends led us to partially reduce it. The allowance currently stands at 1.62% of risk-weighted assets, and it's more than twice the NPL balances. So to summarize these 2 slides, credit quality indicators reflect the resilience of the Israel economy and of our customers who continue to perform well and have demonstrated their ability to cope with the pandemic. Let's move to Slide 15, which shows several important points. First, our core Tier 1 capital grew by 9.2% in the last 12 months, reflecting strong organic capital generation and a responsible approach to capital allocation. Second, Against the backdrop of our enhanced credit growth this quarter, it is important to understand our CET1 ratio development. This ratio currently stands at 11.18%, reflecting the profitability in the quarter, the growth in risk-weighted assets, the dividend we paid in August in respect of 2020 profit and some additional minor impacts. Third, with regard to the total capital ratio, we stood at 13.69% at the end of the third quarter. The $1 billion Tier 2 issuance we finalized a month ago will be recorded in the capital of the fourth quarter. Therefore, the reported total capital ratio at the point -- at this point does not include the funds rate. As of today, based on third quarter balances, the issuance will contribute roughly 84 basis points to the ratio. And lastly, on capital. As we approach the end of the period of the Bank of Israel relief, we remind you that our Board's internal target for the CET-1 capital ratio post release is 10.5%. Let us now move to Slide 16, where we describe the strategy that drives and direct us towards achievement of our goals. The main pillar of growth in existing line of business touches upon all sales 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 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. Third pillar deals with the infrastructure in various meanings required to power our growth strategy. In the next slide, we describe the Tier 2 green issuance, we successfully completed in October, which is a major factor in the required infrastructure, allowing future growth. The offering was undoubtedly an impressive one. We are the first Israeli bank to issue a green bond abroad with 2.6x oversubscription. The demand and final results reflect the trust investors put in us as the leading financial institution in Israel. Before we conclude and open the call for the Q&A session, let me summarize the key takeaways from the quarter on Slide 18. This is yet another quarter of high profitability. We created growth momentum in our loan book and plan to maintain it. This growth is trickling down to P&L. At the same time, our loan book continues to improve, showing almost pre-pandemic levels of quality indicators. Our capital position allowed us to pay a dividend of 30% of Q3 net profit, plus ILS 500 million in respect of the first half of 2021. This is following the distribution we made in August in respect of 2020 net profit. And lastly, we continue to be strongly focused on execution, primarily in terms of credit growth and increasing activity with customers. We are satisfied with the bank's performance in recent quarters, mainly in its underlying business. And looking ahead, our fundamentals are strong, our balance sheet is robust and can support our growth aspirations, and we have the best people to continue delivering on our strategy. So 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, and congratulations on the strong results. I was wondering if you could comment on the Bank of Israel draft directive aiming at increasing transparency and competition for mortgages. Do you think this might have an impact on the bank?

Ram, are you on the line?

[ Gev ] can you hear us?

Yes.

We can hear you. Would you like to answer the question?

Yes. Great. So Chris, thank you for your question. You mentioned the Bank of Israel last initiative, it's still a drag and there is time to it will be implemented. But overall, generally speaking, the initiative deals with more information for customers that enables them to compare offer from different banks relating to mortgages. So it's still with that data. As for today, customers are comparing the offers from banks, one that goes and have an offer for our mortgage as for offer mainly more than 1 bank and compare them and part of them using advisers to help them in the process. So we see this initiative as good for transparency as good for more information for the customer to compare the offer, but mainly it will affect the process in our view. It will enable part of the customers to enrich their process to enrich the first phase of the process to compare offers from different banks. And overall, the market today is very competitive. It's highly competitive. Then as for today, customers compare offers. So it will affect the process. And as for today, the final decision of the customer depends on the pricing. It depends also on the service. So it will continue to be. And overall, we are very supportive for any initiative that supports information for the customers. And as a bank that's growing in this segment, we think it can also help us support the growth trend that we have.

Okay. That's helpful. Also, just regarding loans and the growth rates, which already 2 quarters in a row, continue to be very high. Do you see these levels sustainable into 2022?

Okay. That's a good question, and thank you for that. You mentioned the 2 quarters, we look -- if you look at the 4 last consecutive quarters, you see that the Bank Hapoalim generates very impressive and actually a higher growth levels. That's part of our strategy, like we declared it. The main pillar of our strategy is growth in core banking business. And the growth is widespread. It's obviously, material element in that is infrastructure and real estate, but we are growing in commercial segments, corporate segments also mortgages, and we see rise of demand in housing. Obviously, this depends on the factors that support it is 2: the first one is the rebound in the economy and the supportive fundamentals of the Israeli economy and also the effect of the booster campaign; and the second one is the bank capabilities to execute and to translate this supportive macroeconomic environment into growth. So if you look at these 2 elements, while it's hard to project what will be in the future. But obviously, we are still aiming at growth. It's part of our strategy, a continuous growth. But obviously, when looking at 2022 part of the trends that we see, the supportive trend of recovery and rebound will be less material in the future. So if you look at Bank of Israel forecast and also our forecast, the next year, the demand will be still high. But comparing to 2021, it will be lower than 2021. So in short, the market will be -- we think will be supportive. We are ready to transfer this market into growth according to our strategy. But obviously, 2021 is 2021, the rebound. 2022 will be, in our opinion, higher than the steady state but lower than 2021.

The next question is from Borja Ramirez of Citi.

My first question is related to the sensitivity to interest rates. So I find it very interesting the chart in your presentation on the pricing of the interest rate rises. And I would like to ask what is the sensitivity of your net interest income to increases in interest rates? And my second question would be as a follow-up to the -- to your previous answer. I find interesting that in Israel not only you have a strong mortgage loan growth that we see in many other developed economies across the world in Europe, but also there is a strong corporate loan growth, and this is better than other developed economies. And I would like to ask if you could provide more details on underlying this strong corporate loan growth.

Okay . Thank you to -- you asked a couple of questions. I'll start with the last one relating to our growth in corporate. Well, the reason for the growth is that will be the first one, like I mentioned in the previous answer, is the supportive market conditions. But the second one, which is more important that that's what enabled us to execute our strategy and grow in impressive numbers is our capabilities, our expertise in these segments in areas of complex financing of real estate, infrastructure, syndication, et cetera. So we have expertise so we can respond to the market demand better than other players, while maintaining very good risk management and risk appetite and balance growth and risk. So that's for the -- for your last question, obviously, I will add on that one. Obviously, the market conditions support that, and it enabled us to balance the growth and the risk. As for your first question about the effect of change in the interest rate, so we have a full disclosure on that in our report Table 3-25. But I can say, generally, that we have -- you can look at that table and extract from that very clearly what the effect of increase, for example, of 1% in interest rate. What affect that is our balance sheet scheme, how we built it, what affect that and affect the positive trend in case of 1%, for example, increase in interest rate is the large deposit -- retail deposit base that we have, the percentage of retail deposits of overall deposits, the percentage of noninterest-bearing deposits of total deposits that stands at 45%. So overall, there is a positive exposure to change in the interest rate. You can see it in the table, I can add for you if you're doing a comparable -- doing a comparison, take into account that every bank -- I think every bank has its own models and its own assumptions, for example, for what will happen with the deposit, what will happen with the balance sheet, et cetera. So I think every bank has its own assumptions. What you can do is you can take, for example, our table like, I mentioned Table 3-25, see the fundamentals that create our position, like I mentioned, is the balance sheet structure, the deposit level -- the retail deposit level and take the same assumption and do some adjustment while comparing to other banks.

[Operator Instructions] There are no further questions at this time. This concludes the Bank Hapoalim Q3 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.