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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Second Quarter 2023 Results Conference Call. For your convenience, this call will be accompanied by a PowerPoint presentation. May we suggest, if you haven't done so yet that you access the presentation on the bank's website, at www.bankhapoalim.com. By clicking on financial information on the homepage and then click on the second quarter 2023 report presentation. [Operator Instructions] As a reminder, this conference is being recorded. August 14, 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 Second Quarter Results. We are reporting another strong quarter to date. Highlights are presented in Slide 4. ILS 1.9 billion in net profit, 15.8% return on equity and 38.1% cost-to-income ratio. We continue to lead responsible and diversified credit growth as the growth in our business was spread over several economic sectors. This approach is especially important now in light of the increase in macroeconomic uncertainties. This growth was achieved while maintaining the high quality of our book as demonstrated by various credit quality metrics. And lastly, we are continuing to fortify our balance sheet with offers of loan loss reserves, capital and liquidity while also creating substantial shareholder value by paying 40% of our net income to our shareholders. In the next 3 slides, I will elaborate on each of these messages starting on Slide 5. Profitability was mainly driven by the continuous increase in income from our core banking activity, driving total income of ILS 5.7 billion, a 40% increase year-on-year. In addition, we declared a dividend of ILS 769 million, and in total dividends amounted to more than ILS 1.5 billion in respect of the first half of 2023 owing to our strong capital generation and buffers. Let's move to Slide 6. On liquidity, we continue to maintain ample liquidity, mainly thanks to our large retail deposit base. All liquidity metrics are strong. LCR is 126% and NSFR is 125%, both well above the 100% minimum regulatory target. Our balance sheet is also fortified with a CET-1 ratio of 11.51% supported by the impressive growth of almost 12% in shareholders' equity in the last 12 months. Another important buffer is the credit loss reserve. We continued to increase the balance of the allowance now standing at 1.74% of total credit in covering all economic sectors. Our high reserve covers 185% of our NPL. Moving to Slide 7. Our strong asset quality metrics are the outcome of our strict and responsible risk management approach. And as I mentioned earlier, this is a crucial factor in times of uncertainty. This is exemplified by our diversified growth in debt across all our business sectors, such as financial services, commerce, electricity and water supply and more. Another inflection of our approach the underwriting in the real estate and housing segment. In the upper pie chart, you see that our focus in the real estate sector has been traditionally and instilled customers whose main activity is the residential segment. Exposure to yield-generating properties is much lower. Second, our real estate under construction loan book has low sensitivity to price drops. And lastly, the average LTV of our mortgage book is 46%, and clearly, the effective LTV is lower. Before we continue to the rest of the results, I will now briefly review the macroeconomic environment. As shown on Slide 9, some risk factors became more tangible in the second quarter of this year and may have an adverse effect on future growth prospects. Global and domestic circumstances posed a challenge to economic growth. Inflation and tight monetary policy all over the world eroded the purchasing power of consumers and investors are now less keen to take risk. High tech companies are facing difficult times, with a significant drop in the capital raising. However, it should be noted that it is very difficult to attribute the change in the local economic environment to a specific risk factor. As to the political situation in Israel, the bank estimates that a combination of economic and political factors are currently increasing the risk in the economic environment in which the bank operates. Having said that, the Israel economy is still characterized by full employment, the fiscal stance is far more stable than in most advanced countries, and the public debt is on a downward trajectory. Going back to the bank's results. On Slide 10, our core revenues were boosted by activity growth and spreads, which were clearly affected by the supportive interest rate impairment and the high CPI. Income from regular financing activity grew by 2.5% versus the first quarter and 31.4% year-on-year with the financial margin from regular activity increased to 2.8%. However, looking ahead, we estimate that these supportive macro conditions are close to exhaustion. Inflation has decreased to some extent to 4.2% in the last 12 months and is now quite similar to that in the U.S. in the Eurozone. Inflation expectations are well anchored below the 3% upper limit of the target range. In terms of the Bank of Israel interest rate, monetary policy is tight, and we are probably close to the terminal rate. Markets imply a gradual decline in interest rate next year following the decline in the fed funds rate. Obviously, at the same time, in a persistent high interest rate environment, customers' preferences, translated into more migration from non-interest bearing to interest-bearing deposits. Let's move to Slide 11 and 12. We grew our credit book by 1.5% this quarter and 2.9% from the beginning of 2023 to ILS 400 billion, well-diversified between segments of activity. Credit growth was aligned to the change in impairment in 2022 and moreover, in 2023 as we had already anticipate rising risks and uncertainties in the global market. Our credit growth base demonstrates our responsible approach and reflects the impact of macro dynamics on the demand for credit in the different segments. Moving to Slide 13. Retail deposits continued to grow this quarter, supporting our strong liquidity metrics. Retail deposits constitute 59% of total deposits and the share of noninterest-bearing deposits stand at 29% on costs. On Slide 14, Total expenses increased this quarter versus the first quarter, mainly due to an increase in nonsalary expenses. This resulted, among other things, from some seasonality and onetime effects. On the other hand, salary and related expenses are down 6% this quarter as a provision for bonus during the first quarter in relation to the collective wage agreement was higher than the one we booked in the second quarter. In the first half of 2023, we booked a onetime expense of approximately ILS 200 million in total in respect of the nonrecurring bonus. Before we move on a few words on wage agreements signed in July. We believe it will allow us to continue to improve productivity. The agreement provides a nominal wage rate and set a lower cap on the maximum annual bonus. In addition, the agreement allows for the termination of employment of employees with ongoing low productivity and guarantees that the relocation to our new building Poalim Center will be done without condition from the union. We believe that this agreement will further threaten employee commitment and improve our corporate culture, which is performance-based and excellence-driven. Moving to Slide 15. As I mentioned before, we continued building reserves of collective provision in the second quarter in view of the increase in macroeconomic uncertainties and the probability of a slowdown. In addition, we applied some stricter assumptions in the CECL model that led to another increase in the collective provision. This quarter, we also recorded a specific provision of ILS 113 million following a period of zero to negative specific provisions, which was clearly not sustainable. In total, credit losses amounted to ILS 579 million or 0.56% of total credit in the quarter and 0.38% in the first half of 2023. The next slide shows our resilient asset quality. Total problematic debt increased this quarter as a result of an increase in special mentioned debts. NPLs, however, continued to decline constituting 0.81% of the total credit. On the right-hand side, you can see the high reserve and its further improvement leading to an improvement in the NPL coverage ratio as well. The next slide is on capital. Our equity grew by 11.6% year-on-year and the CET-1 ratio increased to 11.51% well above both internal and regulatory minimum targets. Following the Board's decision last quarter to increase the payout ratio, the Board declared a dividend of ILS 769 million, which is 40% of net income. The dividends were declared in respect of the last 4 quarters, reflects a dividend yield of 6.2%. Before we open the call for your questions, I will summarize the key takeaways. The second quarter continues a long period of consistent delivery and responsible management of the bank. Profitability metrics are strong. Total income grew by 40% year-on-year, but we understand that the supportive factors, interest rates and high inflation are close to being exhausted. The growth in credit was responsible and the phase allows us to maintain high-quality and a strict underwriting policy. And looking ahead, we continue to build reserve as the macroeconomic continues to weaken, and we are further strengthening our balance sheet and buffers to cope with any developments that may occur. We continue to benefit from strong organic capital generation and payout 40% of our net income as a dividend to our shareholders. I'm happy to answer your questions now. Operator?

[Operator Instructions] The first question is from Chris Reimer of Barclays.

First off, I wanted to ask if you've seen any client behavior in renegotiating loans in any particular segment?

Chris, we don't see significant plans for negotiations in, let's say, mortgages or loans. I can share with you that we are running stress tests from time to time. And we see that our portfolio, our loan portfolio is very good. The quality of the loan book is very good. The underwriting standard support the ability of our customers to cope with a situation like that of increased or high interest rate environment. And I can mention that we did some proactive measures to help some customers with the interest rate environment like we published at the last quarter. But short -- to answer your question, we don't see significant change.

Great. And just touching on expenses, especially salaries, going forward in terms of the new agreement. Can you just maybe touch on how we should be looking at that and maybe how the new bonus mechanism works? How is it triggered?

Yes. Like we disclosed, we signed agreement with the union and the agreement affected some expenses in the first half and the second quarter as well. If you look at our numbers in the slides, you can see that we recorded a ILS 200 million onetime expense for the first half for bonuses upon the agreement. The agreement allows us for the future more flexibility in employment, more flexibility in performance-based compensation. We capped the bonus-based compensation for 2.5 salaries. And as we disclosed in the media report, the average annual increase in salary expenses in the agreement is on average, ILS 25 million per year. Obviously, at the first and the fifth year, it can be different than the average due to the mechanism, but that the average of increase under the agreement. This is the element that above the mechanism that going forward as for the salary.

The next question is from [ Urik Bar of Fenics Investment ]. Please go ahead.

Thank you for the presentation. Congratulations again for your strong results. I have 2 questions, in fact. The one is -- the first one is relating to the problem loans, which are still well, the volume, well, just program loans. I see that in real estate, construction, you had increase of around ILS 850 million. Is it related to a exchange of the assumption you put in the model? Or it's really related to problems that your client encounter?

Thank you for the questions. You asked about problematic debt and in particular the real estate. So I can share with you that -- as you can see in the numbers, we have a very good quality of the loan books, and we see -- you can see it in the different metrics of the credit. NPL ratio overall was down and current states are 0.81% of total credit. And we have a large provision of more than ILS 6 billion collective provision. As for problematic debt, we adopted a more cautious and conservative approach towards the real estate sector, we don't see, let's say, much change, in particular, debt or customers, but we adopted a more conservative approach we see some changes in the economic environment, not in the situation of the customers, in the economic environment. And these changes points to an increase, let's say, in the probability of forcing in this sector. And accordingly, of, let's say, possible continued to increase in the level of borrowers' credit risk. So that's the reason why we decided to be more cautious and conservative in that sector.

So you classify that as a Stage 2 debt without really seeing in the -- so in the reality, any...

Yes, it's a special -- it's a classification in the special mention. You can see that the NPL is actually staying relatively low.

Yes. But what you -- we see increase -- doubling more than double?

Yes. In Bank Hapoalim, our situation is that the NPL is decreasing, is low at 0.81% and it's about 185% coverage ratio.

Okay. And the other question is related to maybe potential intervention of the regulator due to I don't know, worsening economic activity, macroeconomic environment. So do you think that you will be required to add additional layer of capital, I don't know to -- in order to cope better with the worsening economic activity?

If you look at our metrics and capital ratio, you can see that we have very strong position on capital, liquidity and very high reserves. So the buffers on capital are very high compared to the minimum regulatory requirement and the internal requirement. And the organic capital generation capability is very good due to the profitability. So the bank position now taking into account like the liquidity position, which is very good CRE is 125%, and NSFR, the same level as well. And the capital buffers we have and the reserves, like I mentioned, are very strong and large put us in a situation in a very good situation to cope with any deterioration in the macroeconomic terms. We are not aware of any initiatives by regulators, current initiatives to add let's say, capital requirements due to a macroeconomic situation.

Not only on Bank Hapoalim but I thought about the global Israeli banking sector like, okay, additional layer like an account of cyclical buffer or something like that?

No, no. We are not aware that for any requirements from the system. I think the reason is very simple. The position of the overall, the sector is very good. The metrics, not only in Bank Hapoalim are very good for the whole sector. If you look at the track record of Israeli banks is very good in the different crisis I assume -- and I think that Bank of Israel has traditionally conservative approach that is already reflected in the requirements from banks. For example, the standardized approach for capital management, the provisioning approach. So it's very -- as for today, it's relatively very conservative -- already very conservative. Maybe in the future, when Basel 3 calibration or what's called Basel IV will be introduced or adopted by Bank of Israel, there will be some implementation issues for bank in Israel as well. But we are not aware of any specific requirements as for now.

There are no further questions at this time. This concludes Bank Hapoalim's Second Quarter 2023 Results Conference Call. Thank you for your participation. You may now go ahead and disconnect.