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 2022 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 the financial information on the homepage and then click on the annual report presentation. [Operator Instructions] As a reminder, this conference is being recorded March 9, 2023. With us on the line today are Mr. Dov Kotler, CEO of Bank Hapoalim; Mr. Ram Gev, Chief Financial Officer; 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 respected company's business financial condition and results of its operations are subject to risks and uncertainties and 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. Kotler, would you like to begin?

Thank you, operator. Thank you, everyone, on the call for joining us today. I'm happy to begin today's call for summarizing our results for 2022. Despite the various global and local challenges, 2022 was a highly successful year to -- for Bank Hapoalim. It was a year that demonstrates again our circumstances may surprise us and how crucial it is to be agile and focused on our customer needs. We ended the year with net profit of NIS 6.5 billion, 14.8% return on equity compared to 11.8% last year, while the efficiency rate decreased to 44.5%. A key driver of sustained future growth in maintaining strong positive jobs discipline and the year's result where we succeed in this goal. Our total income grew by 24.5% in 2022, while adjusted costs grew only by 2.8%, creating substantial positive job. We are proud of these numbers, and over the next few minutes, I would like to share our story behind the figures with you. In the early days of 2022, a shift began in the global economy, the bank choose to lead a course of responsible growth. This approach enabled us to maintain a high-quality credit portfolio and focus on spreads and risk, which I believe -- which we believe will serve us well in the upcoming years. Our balance sheet proved to be competitive advantage this year. Our position in Israel largest retail bank significantly boosted our revenues as reflected soaring financing income and higher spreads as well as strong growth in fees. Meanwhile, we continue to manage the bank's resources resulting in improvement in the efficiency and productivity metrics. We are applying an agile work based on the rights already with hundreds of our employees. This transformation position Bank Hapoalim on par with leading organizations worldwide and has already started to make its mark in more efficient technological development process and shorter time to market of products for our customers. Another important focus for us is credit quality. Bank Hapoalim has been working on optimization process in this area for several years. This year, again, we were able to maintain low rates of problematic debt and appropriate allowance and record recoveries of individual debt for which allowances were recorded in the past. At the same time, we demonstrated strong capital management capabilities even during a period of frequent changes in the market. We strengthened our capital base, which grew by about 9%, solely on organic sources while optimizing our risk-adjusted assets, which also contributed to the capital ratio. Thereby, we distributed more than NIS 1.5 billion in dividends for our shareholders in respect of our profits in 2022. The bank has the largest retail deposit base in the industry, which contributed to our ability to maintain high liquidity of -- and with good quality. These accomplishments are the direct result of the excellent dedicated work of our employees. Our organization DNA and culture showed that the strength of working together as one is greater than the sum of its parts. To reflect that, our employees and managers will receive a decent and substantial bonus this year. Looking ahead, there are several significant achievements that we would like to maintain going forward. During 2022, we have designed a strategic plan for the coming years based on a few key elements: strengthening of the leadership of Bank Hapoalim in core banking, resource optimization and enhanced productivity, differentiating influential innovation. The principle of the plan support continued responsibility growth and a leap forward in customer service. I will say more about it later on. Our competitive advantage will continue to serve us well in 2023 and beyond. The bank has quality core banking and well-defined strategy with the potential for further progress over the coming years. Now let's turn to Ram, our beloved CFO, for a review of the financial results.

Thank you, Dov, and good afternoon. I'm happy to take you through our quarterly and annual results starting with Slide 8. Let me begin by stating again that Bank Hapoalim is reporting powerful results with 15.3% return on equity in the fourth quarter and 14.8% for the full year. In every parameter in our report, we show excellent performance. Our credit growth was responsible, having already been adjusted to the changing economic environment at the beginning of the year when the level of uncertainty began to rise. Looking back now on our decision then, one can realize how conservative and responsible it was. This growth boosted by the rate hike and higher inflation was translated into 24.5% total income growth. We continued to strongly deliver on cost, and we're able to maintain the increase below the rate inflation bringing the cost income ratio to less than 40% in the fourth quarter and 44.5% for the full year. Our loan book continued to demonstrate its trend with almost 0 provision for the full year, only 0.87% NPL ratio and a gradual increase in the collective provision to reflect further macro uncertainties. And lastly, on capital and liquidity, we maintained our robust position with CET1 ratio of 11.25%. We declared a 30% payout ratio in respect of the fourth quarter and a total of NIS 1.5 billion in dividends in respect of 2022. LCR was 122%, well above the regulatory minimum. All this led to consistent delivery of excellent bottom line in the fourth quarter and full year 2022, as you can see on Slide 9. In the next few slides, we will go through main factors and other effects driving the results. As we can see on Slide 10, our core revenues were boosted by activity growth and spreads. On the left side, we see the continued growth in income from regular financing activity and the jump in the financial margin, both affected by credit growth, the CPI and the rising rates. On the right-hand side, we show another important element demonstrating our strong performance. Fees grew by more than 10%, where the Isracard agreement contributed NIS 145 million as the agreement entered into 4th on April. Excluding the effect of the Isracard agreement, fees were up 6%, reflecting broad-based growth in fees such as credit cards, FX exchange, current accounts and more. Income from regular financing activity and fees reflect, in our view, the core banking performance. On Slide 11, we take a quarterly look at our revenues. Total income grew by 10.1% this quarter, mainly driven by income from regular financing activities. This line item is also presented without the effect of the CPI, which contributed NIS 1.3 billion this year. Even when excluding CPI, income from regular financing activity grew materially by 7.9% and by 60% year-on-year. Let's move now to Slide 12. The important message here is the one we highlighted in previous quarters. We believe that we have taken a conservative and responsible approach to credit growth based on forward-looking capabilities and data driven. This approach led us to align the growth pace to the changing environment while maintaining the diversification of our book. We, therefore, grew our credit by 10%, a slower pace than in 2021, but yet significant. In the fourth quarter further illustrates our balanced approach with growth of 1.9%. As you can see on Slide 13, growth was broad-based. The corporate and commercial group grew by more than 12% and by almost 10%, respectively. Mortgages grew 11.4% and small business credit grew by 3.2% year-on-year. In consumer credit, the demand is affected by the tailwind of COVID-19 rebound but at the same time by the increased rates. This environment led us to continue balancing between growth and risk, bringing the balance of consumer credit to stay somewhat flattish. Moving to Slide 14, where we show another depreciate of Bank Hapoalim, our deposit base, of which 58% are retail deposits, the largest retail deposit base in the sector. In terms of liquidity, we are well above both LCR and NSFR regulatory targets. Moving to Slide 15. Costs increased slightly to support the growth across all business lines. But due to the substantial growth in revenues, the cost income ratio dropped to 44.5% this year and 39.1% in the fourth quarter. The next slide gives a good perspective on where our focus is, increasing efficiency and productivity. Productivity ratios show a consistent improvement, and in our view, our sustainable drivers for future profitability. Income per employees as well as credit per employee, both sharply increased while headcount and number of branches gradually decreased. On Slide 17, we touched upon a very important driver of cost efficiency going forward. As you probably know, in 2021, we decided to centralize all of our head office units in one building. We entered into an agreement for the construction of Hapoalim Center. The future building will not only provide us with benefits in the field of employee management and the employee experience but will also bring operational efficiencies and safe maintenance costs. In addition, the relocation will allow us to sell the existing building in the center of Tel Aviv, the main of which is the headquarter site in Rothschild and [indiscernible]. I can share with you that only recently, we submitted a betterment plan to the Tel Aviv municipality for higher construction rights. Continuing our discussion on Slide 18. We ended 2022 with almost 0 credit losses as a result of NIS 579 million collective provision that was offset by over NIS 600 million of income from individual credit losses. The quarterly breakdown of credit losses shows the trend of gradually building the collective provision quarter-by-quarter. On the backdrop of potential macroeconomic effects and further uncertainties in the global economy, we gradually increased the collective provision this quarter, following the increase in the second and third quarters. It is important to understand that the gradual increase in the collective provision was recorded despite the fact that asset quality continued to improve this year. On Slide 19, you can see that during 2022, problematic debt and specifically, the NPL balance and ratio declined. The NPL coverage ratio strengthened and the balance of the allowance as well as the ratio of the allowance to credit risk-weighted assets stayed relatively stable. Let's move to Slide 20. On capital, we demonstrated tight management, and we're focused on risk-weighted assets optimization, allowing growth, dividend distribution and maintaining a sufficient buffer. We ended the year with a CET1 ratio of 11.25% and the Board of Directors declared a dividend of NIS 525 million in respect of the fourth quarter constituting 30% of our quarterly net profit. Total dividend distribution in respect of 2022 was NIS 1.5 billion. Our continuous effort this year to work towards optimization increase risk-weighted assets, we're also fruitful as we can see on the bottom left of the slide. Our ability to mitigate risk-weighted assets is particularly impressive, taking into account that in 2022, we also implemented regulations that had an impact on our risk-weighted assets. Lastly, on Bit in Slide 21. Bit, our unique asset already serves 3 million customers, the majority of which are not originally Bank Hapoalim customers. Bit is developing and already implementing measures we have taken to reduce its costs while continuing to develop new products and value offerings. We believe that Bit's existing and future capabilities are a strong foundation for future advanced banking value proposition. Before I hand over back to Dov, I would like to comment on the macro environment in Slide 22 to 24. 2022 was a positive year for the local economy with GDP actually closing the beta with a pre-COVID footprint. The 6.5% annual growth was still partially affected by the reopening of the economy in 2021 and does not represent a long-term potential of the current cost base. We expect software growth this year as a result of global substances and tighter monetary conditions. However, we don't project a recession, but low growth of 2.5%. With respect to the planned changes in the judicial system, markets do not like any kind of uncertainties. And this alone can cause adverse effects on the economy. Israel has a legacy of strong governance and fiscal discipline, and we hope that any change will be made with broad consent. Like in most advanced countries, inflation was far above expectations and reached 5.3% in 2022. It takes time for monetary policy to reduce inflation, particularly as the labor market is tight and some 140,000 job vacancies still exist. The Bank of Israel is determined to combat inflation and markets now expect that rates will reach 5.25% this year. Inflation expectations have increased recently. But even with respect to this estimate, we'll export interest rates are high compared to the past years. Although I mentioned some uncertainties, we should always take into account that the Israel economy has a sound and stable external and domestic position, a surplus in the balance of payments, current accounts, large reserves of foreign currency and low public debt. The housing market, just like in most countries nowadays, the market is cooling down with a drop in new home sales. The stock of unsold homes has increased, but the level itself isn't considered high. The country-wide average in the CBS survey does not reflect price declines yet, but we are including out the possibility that prices might start to fall in the near future. We don't project a prolonged period of the plan and stocks of homes are low. In any case, we believe the bank is well positioned in its exposure to this sector. Before I hand back to Dov, I will only summarize that the fourth quarter and 2022 as a whole demonstrates our ability to look forward and act responsibly to leverage our competitive advantage into impressive profitability while maintaining high quality of the book and creating value for our shareholders. I'll now hand back to Dov.

Thank you, Ram. I would like to take a few minutes and elaborate on the strategic plan we adopted. I will refer to Slide 27 up to 30. The bank results in 2022 clearly demonstrate our strong business momentum. In every parameter you may choose, we show a clear positive trajectory. We understand that in order for us to maintain the positive trend, lead further responsible growth, improve customer service and enhancing our leadership in the various segment, we need to be focused on where we put our resources and efforts going forward. Therefore, we worked with a global firm, McKenzie, to formulate the strategy planning for the next several years. In Slide 30, we describe our strategy. The first 2 elements deal with core banking. The first is aimed to corporate -- at corporate banking customers where the bank will strengthen its leadership in the area of infrastructure, syndication, real estate and capital market activity. To support this ambition, we will implement advanced database pricing tools and develop advanced digital means to improve service and customer portfolio management. On retail banking, we aim to improve our customer service substantially by transitioning to a digital self-service concept and allowing full digital availability and seamless experience across service channels. In addition, we will focus on the subsegments of private banking and small business, where we will introduce new value propositions. Later in the period of the plan, we will change the operational model in retail banking by refocusing the branches on advisory and sales mainly. The second element in our strategy deals with optimization and resource of enhancement of productivity. We will implement global best practice process to improve asset and liability management efficiency and achieve further optimization and mitigation of RWA. In the area of technological resources, the bank will continue to invest in core IT infrastructure modernization, transformation to a shortened time to market. We will also allocate almost all of the technological development budget to implement strategic initiatives of the bank. On productivity of our workforce, we will shift to an agile working method end-to-end management of banking products. In simple terms, it means that we are reorganizing most of our workforce into tribes. These are teams of engineers and business product managers who work together as a group to speed up product development. I assume that we will be the only bank in Israel implying such a change. We've established CTO, Chief Transformation Officer, under my supervision headed by a Chief Transformation Officer, Rivka Gugig, who will drive the desired change across the entire organization. I believe that our competitive advantage in core banking supported by a well-defined strategy will ensure that we stay on the right trajectory to create substantial value for the stakeholders. With that, I would like to open the call for your questions, gentlemen, ladies.

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

I wanted to follow up on the strategic plan that you talked about in details. You mentioned the different measures and the growth drivers and the opportunities for streamlining. I was wondering what would it take for you guys to share, to quantify potential targets down the road? I'm thinking of ROE targets or cost-income targets. I'm assuming that the numbers must be very clear on your end. So why not share some of them with the [ street ] would be great.

Can I answer.

Yes, please.

Thank you very much, everyone, for joining our call. Now it's live and not recorded. Finally, what just mentioning Tavy, going back to your question. Certainly, we have internal KPI for each segment and project under the strategic planning, starting the implementation at the beginning of this year. However, we did not share it in our report, but I would like to remind everyone that in our [indiscernible] call at the beginning of the day, I emphasized the fact that the banks changed its position from return on equity of 1 digit, 6%, 7%, 8%, 9% to double digit which in the last couple of years is in the range of 12% to 14%. We published the annual report with 14.8% in the last quarter, 15.3%. And I also want to emphasize that my goal and the strategic planning goal is to maintain the double-digit in the next coming year despite the uncertainty that we are facing. So this is in general direction trajectory, but not specific numbers yet.

Tavy, you have any follow-up on this?

The next question is from Micha Goldberg of Psagot.

Congratulations on the strong quarter and excellent year. A couple of questions, if I may. First, I noticed that your number of employees have come down this year by around 150. And I was just wondering, would this imply cost savings? I mean, the average cost for wages you record is around NIS 0.5 million. So is there any chance we're going to see any cost savings on the back of the reduction in employees in 2022?

Micha, with your permission, could you repeat the question a little bit lower? For some reason, the machine here was not clear enough. Could you repeat it, please?

I'm sorry, of course. I was just wondering if due to the decline in employees during 2022, which I saw in your presentation is around 150. Should this imply that in 2023, Hapoalim will be saving some cost?

I see, I hear you. I would say that I don't expect substantial reduction in workforce going forward at least in 2023 because we've increased our balance sheet by 25%, 26% in the last 20 -- in the last 2 years. On the other hand, don't forget that there is an automatic pilot with the union, which, if we are not releasing the employees, is influencing our cost -- wages cost. So going back to your question, I do not expect a reduction in 2023 at this stage.

No, I understand that. I'm just wondering that you reduced already employees in 2022 based on your numbers. Is that going to allow cost to go down?

I understand the question, direct result is yes, but the pilot is stronger than 150. And the bottom line to conclude combining the number is not a decrease, it's an increase.

Micha, if I can add to what Dov mentioned, and you described correctly, the number exploring 170 employees this year, and it enabled us to offset some of the effects of, let's say, the autopilot that Dov mentioned, an increase in IT personnel, that's very important. Looking forward, we will be focusing in increased productivity of employees due to the basic elements in our strategic plan that's supposed to support the continued responsible growth.

Great. Okay. Now I also noticed that you're still losing money in your Swiss subsidiary. Is there any chance that that's going to be finished and closed off in 2023? And will that, if it goes down, save money?

This is the plan. But with -- in Godspeed, it's in the hands of the Swiss guys. So this is the plan to do it. But again, it's in the regulatory hands. We have the assistance of certain [ CPA FMs ] that ended the situation. It takes too long, but certainly, our intention is to finalize it during 2023.

Okay. And one more question on cost. I mean, I noticed that you reduced your branch network by around 50 branches since 2019. It's like, I don't know, 1/4 of your entire branches and yet, when you look at the expenses for maintenance and buildings, the number actually increased by like 8%. Is that because there's a lag in the cost savings because there something else going on? Or are we -- is there -- I mean, why are the costs for buildings and maintenance not going down?

The cost -- Micha, the cost difference is mainly as a result of IT depreciation. And we are combining under the same number a few items. So it's a technology IT depreciation that influence and contradict your assumption.

Yes, I understand.

It's not from real estate. Like Dov mentioned, this onetime effect of depreciation of software and capitalized costs -- IT capitalized costs.

Okay. I understand. And another question, a little while back, Dov, you were quoted been saying that there is money flowing out of Israel. Again, that's after the balance sheet closed, I think, at the end of the year. So it's not in the actual financials. Are we continuing to see that? And if that's true, is that any concern? And what kind of concerns should that be for the bank?

You're talking about the elephant in the room. But first of all, if you quote me from newspaper, do not trust it. Never, Micha, never. It's not accurate definition and my accurate quotation was that I see the first time, but it does not influence our liquidity or stability of any banks that I know of, but the second part was not quote ever. And I assume it will be never. So this is going back to quotation and newspaper men. But going back to the elephant in the room, I would answer as follow: first of all, Bank of Israel is monitoring the situation. And based on what he announced, you don't see direct or substantial influence, A. B, we are reviewing mainly our LCR indicator. If you see in the report, the average of the fourth quarter last year was 122%, I can reveal to you that the number as of year-end was higher because we raised certain bonds and the numbers that we see by year-end remain intact as of today or as of last week. So the numbers are the same. So this is the answer.

Okay. Very, very clear. One more question. I saw margins have increased nicely over the last couple of quarters, including the last quarter. And again, it seems like margins are now -- credit margins are now pretty close to levels in 2011 and '12. And I'm just wondering, looking forward to 2023, do you see more upside for more widening of the margins? Or are we at the end of that process?

My inner feeling is that we are closer to the end, maybe there will be some slight changes, but such an increase from 1.7%, 1.8% to 2.35% is very substantial. As you said, it was the peak a few weeks ago. I believe these were also the margins at the beginning of 2000, 20 years ago when interest rates were higher. So we are back to that scope or margin that we used to see at that time. So going back to your question, I don't see increase, and I would be satisfied if this number will remain intact.

Okay. My last question is just to do with the regulatory environment. I mean, we saw some issues that are mentioned by some of the people on the Knesset regarding regulations on margins and interest rates and mortgages, are there any substantial or significant specific worries that we should be worried about? And can you maybe quantify it?

This time with your permission, I will quote Mr. Smotrich, the Treasury Minister that says that he is against any popular private legal offers to the Knesset, and he is going to fight against it. So let's see that he's keeping as well.

The next question is from Ethan Etzioni of Etzioni Portfolio Management.

Yes. So 2 follow-up questions. First, with regard to the money going out of Israel what you told the Prime Minister. Can you give us some figures what that number is? And my second question, please. Looking at the provision for doubtful debt, I see a sequential increase on quarters quarter-by-quarter within '22. Should we expect that to continue? Or is the fourth quarter pretty much the peak of it?

Ethan, thank you very much for the questions. The first answer, I -- the first question, I already answered Micha, and it's not -- it's insignificant, and there's no point to waste time about it because the numbers are -- were insignificant, excuse me, and there are parameters to check it. Going back to your second question, you should realize that you should inspect our report via the allowance quarter-by-quarter, but the first 2 quarters, we have a huge recovery of about NIS 0.5 billion or whatever the number, NIS 600 million. So if you are eliminating debt, you can see that allowance in the third and fourth quarter went up from about NIS 200 million, NIS 196 million. This was the group allowance to NIS 350 million or NIS 330 million, something like this. In our -- in my view, change from NIS 200 million to NIS 300 million and something is not substantial. It's something that we are used to. Let's not forget that in the past, Bank Hapoalim has announced for bad debt on the average of, let's say, 10 or 20 years of 0.2% or 0.3%. And if you'll calculate the numbers, it's in the range of NIS 1 billion to NIS 1.2 billion a year. So we are in that range. But again, comparison to the beginning of the year, you enjoy bigger -- huge recovery.

Right. So we should look at the second half as being representative or given the less good macro environment currently, should we expect some deterioration from that?

Ethan, I would like to make it clear. when we are using the collective provision, it's based on uncertainty, it does not reflect specific change because you have 3 layers of provision. One is the [ CECL ]. The other one is the collective and the last one is individual. So we are using the collective based on the uncertainty. We don't have numbers to support. Otherwise, it would have shown in the system. So it's more -- being more cautious building a cushion going forward, then we have specific indicators of bad debt.

[Operator Instructions] The next question is a follow-up question from Micha Goldberg of Psagot.

I'm sorry, I didn't want to release you too early. Another question on cost. I think, Ram, you said that some of the cost savings in the past should offset, Dov, I think you said about the automatic pilot going forward and the same on branches going towards is IT appreciation. So I'm just wondering, when one looks forward, should we be assuming a flattish kind of OpEx? Or we still should be seeing increased cost pile?

I hope it will be flattish. We are going to start the negotiation with the union shortly after we finish this interesting project, which is called the annual report. We'll have time to start the negotiation with the unions. I have a certain level of comfort because the public agreement was pretty reasonable. Our Chief Economist defined it as a reasonable agreement. So I have a certain level of comfort, but we'll see it in the near future when we'll start and finalize the negotiations.

And I noticed that you -- relocation moved to 2026, wasn't originally supposed to be 2024? And if so, why has that changed?

It was originally Micha, 2026. The project is for 3 or 4 years going forward, of course. And I don't think it has changed. I can check the report -- our annual report when we signed the project, which is 2 years ago. But as far as I remember, it's a project for 2026, but just to be accurate, we'll check what we have announced in our annual report a year or 2 ago. I don't want to mislead you.

Micha, if -- to add to what Dov described but of course, you have to take into account, obviously, there is some vectors that are global vectors, but here in Israel as well, the inflation that is a negative vector on cost and the agreement with the union that may affect the cost, and we are expanding our activity. But overall, we're aiming to relatively be flattish on cost, and if there would be any increase, then it will be lower, we're aiming it to be lower than inflation. And what is more important to support increasing productivity and create or maintain the positive jobs mechanism that we were able to create in the last couple of years.

Great. One more question, and I'll let you guys go. On density, on the optimization of risk-weighted assets. I mean it's clear you guys did a great job there with credit growing significantly faster than the risk-weighted assets. Now density is 62% or 63%. Do you see more space to optimize that? Or are we there to pretty much towards the end of the process?

Part of the strategic planning that should be implemented -- that is being implemented is additional improvement of the RWA. So answering your question, there is expectation -- positive expectation to additional improvement going forward in 2023.

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