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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim First Quarter 2023 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 first quarter 2023 report presentation. [Operator Instructions] As a reminder, this conference is being recorded May 22, 2023. With us on the line today are 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 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, and thank you all for joining us today to review Bank Hapoalim's first quarter results. We are reporting very strong results today, more than NIS 2 billion in net profit and 17% return on equity. Let's focus on the main factors supporting this strong set of results. I will start with Slide 4. Three important elements stand out when reviewing our results. First, profitability, which is mainly driven by the continuous increase in income from our core banking activity. In addition, due to strong capital generation and buffers, the board decided to raise the payout ratio to 40% of net profit in accordance with our dividend policy. In respect of the first quarter, we will distribute dividends of more than NIS 800 million to our shareholders. Second, our balance sheet is fortified with a CET1 ratio of 11.36% and LCR of 127% both well above regulatory minimum targets. And third, our portfolio is characterized by high underwriting standards and reflects our prudent approach as reflected, for example, by 2 important metrics. The average LTV of our mortgage book is 46%, and our real estate under construction loan book has very low sensitivity to price drops. On Slide 5, we illustrate the leap in income and profitability driven by an almost 40% decrease in total income year-on-year and a low cost-to-income ratio of 39%. Moving to Slide 6. Looking at our balance sheet, it's clear that we have built the right buffers. On capital, our CET1 ratio is more than 100 basis points over the minimum regulatory requirements and the leverage ratio is 6.53% versus the current minimum requirement of 5.5%. Liquidity is another major strength of Bank Hapoalim, LCR and NSFR are both at 127% and well above the 100% minimum requirement. Another 2 important figures to take into account the liquidity, our LDR, which in our case, is now at 75%, and and our important well-developed base of retail deposits, which constitutes 59% of total deposits. On credit quality, all metrics are strong. NPL declined slightly to 0.85%, and the NPL coverage ratio increased to 166%. Nevertheless and despite the still low credit loss expenses, we have continued to build our allowance for credit losses now constituting 1.65% of total credit. Moving to Slide 7. The third element we are highlighting this quarter is our risk management and underwriting approach. We were the first bank to identify that the risk environment has changed already at the beginning of 2022. And as a result, we adjusted the pace of credit growth in 2022 and to make sure that risk and pricing were well balanced. This responsible approach is still leading our operations and reflected in the pace of growth. In the real estate sector, our approach is consistently prudent. As an example, we can take a look at the metrics we are showing in this slide. We are more focused on housing construction segment, and we built reserves of 1.95% of real estate allowance for potential negative scenarios. Moreover, our sensitivity to price drops in the real estate under construction book is quite limited. In our mortgage book, the indicators are resilient as well. The average LTV of the entire book is 46%, and the average rate of credit losses is close to 0. I will now review in short the macroeconomic environment and further details from the balance sheet and P&L. As shown on Slide 9, the economy is cooling down with first quarter growth of 2.5%, which is close to 0 in per capita terms. Global circumstances are affecting exports and the tight monetary conditions, coupled with inflation, have rolled comsumers' purchasing power. Having said that, this is not a recession, not according to official data. And maybe more importantly, not in terms of the labor market, which is still tight and at full employment. In the housing market, we see a major decline in the number of new home sales and some increase in the stock of unsold apartments. Prices of new apartments have declined moderately. Inflation which was previously lower than in other advanced economies is now converging to the same level as fluctuations in energy crisis have less influence on the local economy. We still have some price increases in the pipeline, but overall, we believe inflation will slowly decline in the second half of the year. About interest rates, we project as we are close to the terminal rate. Monetary conditions are now tight, the real interest rate is high, and hopefully, it will curb inflation over time. Coming back to the bank's 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 the rising rates, credit growth and the CPI. Let's move to Slide 11 and 12. We grew our book by 1.5% this quarter and 8.3% in the last 12 months. while maintaining diversification. Our credit growth demonstrates our responsible approach and the impact of different market dynamics in each segment. Moving to Slide 13, where we show one of the most important differentiators of Bank Hapoalim, our deposit base, of which 59% are retail deposits, is the largest in the sector. Retail deposits continue to grow, but at a slower pace. And the share of noninterest-bearing deposits now stands at 32%. As mentioned before, LCR and NSFR are well above regulatory targets. On costs, on Slide 14, total expenses increased this quarter, mainly due to an increase in salaries and bonuses. At the same time, the cost-to-income ratio stayed at a low level of 39.1%. In addition, we continue to report strong positive jaws. Moving to Slide 15. We continued building reserves of collective provision in the first quarter in view of potential macroeconomic effects and uncertainties. Accordingly, credit losses amounted to NIS 185 million or 0.2% of total credit. The next slide is on capital. Our equity grew by 11.3% year-on-year, and the CET1 ratio increased to 11.36% and well above both internal and regulatory minimum targets. Given the bank's resilient buffer and the strong profitability, the Board decided to increase the payout ratio to 40% as I mentioned earlier. The dividend declared in the last 12 months amounts to NIS 2.3 billion, representing a dividend gain of 5.2%. Before we open the call for your questions, I will summarize by saying the first quarter continues a long period of strong delivery and responsible management of the bank. The first quarter, in particular, demonstrates the leap in income as well as our fortified balance sheet. But not less importantly, we did not compromise on risk or transaction profitability in order to grow faster. And we have allocated the right buffer and allowances for future negative developments. Our income continues to benefit from a favorable balance sheet structure. Cost to income is below 40% with substantial positive jaws. And lastly, the dividend payout ratio has increased to 40% with more than ILS 800 million [ dividend. ] I'm happy to answer your questions now. Operator?

[Operator Instructions] The first question is from Micha Goldberg of Psagot.

Congratulations on a very strong quarter. A couple of questions, if I may. First of all, can you happen to give us any insight as to the progress you're making versus the wage agreement and the new labor union agreement?

Okay. Micha. Thank you for the question. Like we are in negotiation with the union relating to a new agreement with them. I can say that the discussions and negotiation is with respect for each party, and we hope it will be fruitful. It's hard to predict when it will be finalized, but we will hope it will be finalized in the next few weeks.

Okay. And should we be anticipating additional cost once an agreement has been signed or has everything already been provided for?

Yes. It's hard to say today. Obviously, management want to create an agreement which is to benefit of the bank for the long term, balancing, let's say, salary terms and the needs for the bank for the future. So we want to achieve a balanced result.

Okay. I understand. Just a question on margin expansion. I mean, obviously, margins have been growing nicely over the last couple of quarters. I'm just looking forward and where do you see that balancing out when higher interest rates have no longer a positive impact on top line and dropping CPI or will hurt the top line? Is there a period in time that you could see margins contracting again this year? Is that too early to estimate?

Yes. Well, this is a very good question. There are several vectors that affect the margin, the first one and the most important is the interest rate. Obviously, higher interest rate basically mean higher margins, but there are some vectors that offsetting partially this effect. For instance, the shift from current account deposits to time deposits as long as we are in a high interest rate environment. And as long as it's getting higher, then it is -- we want to assume that we see a shift. This is a very logical behavior and preferences by customers. So that's the first element, the interest rate. The second one is the inflation CPI. We think that the second half of the year inflation rate will be lower than the trend we see today. So that's the second element. The third element is, let's say, the demand for credit and the relation between the demand and the supply. Our strategy, like we talked before in previous conference call is to balance growth and profitability in transactions. So we don't usually put, let's say, bad transaction on our balance sheet. So these are the 3 factors that affect the margins. In short, we -- I can say that higher interest rate means higher net interest margins, but the effect is lower each time than before.

And my last question, so what you just mentioned about switching out of current account. I mean, it definitely seems in the last couple of quarters, the switching has increased significantly. You're now down to 11% over the quarter, 30% year-to-date in literally 1 year. Is that picking up in this coming quarter? Are we seeing that number coming down? Or are people -- like how is that trending into the current account?

Yes. You're right. You mentioned 11%, and that's the number for the quarter. The shift between, let's say, current account deposits and time deposits, like I said, earlier, this is very reasonable to assume that this will continue. It's hard to say whether we are now at the peak or it will be higher because it depends on, let's say, the interest rate environment, but as well as, let's say, the average amount of current deposits, how it's spread among customers, et cetera. I can share with you that if you look at our previous numbers, it's not acting the same or increasing from month-to-month. There are some months that you see different pace than others. But the level we saw for the last quarter was 11%. If we're talking liquidity-wise, it's important to note that this shift from current accounts to time deposits is not affecting the liquidity in some circumstances, it's improving even liquidity.

Okay. And congrats on the strong quarter.

[Operator Instructions] The next question is from [ Serena Glove ] of [ Insight Investments ].