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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Third 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 third quarter 2023 report presentation. [Operator Instructions]. As a reminder, this conference is being recorded November 16, 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. As you all know, on October 7, Israel [indiscernible] monstrous terrorist attack launched by Hamas ISIS took control of Gaza on Israeli civilians. I would like to dedicate my opening today to send our thoughts and prayers to the families of the victims, wounded and missing men, women and children taking hostage by Hamas ISIS. My presentation today will begin with several slides in which we review the macroeconomic situation in Israel, the government and Bank of Israel measures to support individuals and businesses and the bank's operations and support for its customers and civilians in Israel. Following this part, I will briefly review the financial results. In times like this, it's important to understand the environment we operate in as well as the bank's position. Bank Hapoalim has entered the current situation with a very high level of preparement in every aspect. Business continuity, financial buffers and a track record of [ swift ] underwriting. A clear proof of our strong position is the dividend distribution we declared this morning. Before w discuss the Bank's position a few words on the macroeconomic situation, starting with Slide 3 and 4. Israel has a track record of recovering from external economic shocks like security events and COVID-19. Maybe this time, it's a bit different in several ways such as the length of time, consumers mood, the economic toll and more. The immediate effect of the war was a drop in economic activity. Consumption increased, construction projects were shut down and more than 300,000 civilians were recruited as reserve. But now almost 6 weeks from the outbreak of the war, we have managed to create a sort of wartime routine. The economy is not running at 100% capacity, of course, but not very far. Traffic is almost back to normal, consumption is recovering and the education system is almost fully functioning. Unlike the real economy, the reaction of financial markets was moderate. Israel's risk premium in the fixed income market increased to 130 basis points, while in the local market, the Bank of Israel launched a plan of selling up to [ $30 billion ] from its foreign currency reserves and actually managed to calm the market. The level of exchange rates now is not much different than the pre-war levels. And government bond yields are similar to pre-war levels, even though the deficit is going to be high. The stability of the financial markets can be attributed to the exceptional favorable initial conditions of the economy. Full employment, low public debt, high ForEx reserves all of these are working for the economy and the markets now, providing a good entry point based on strong fundamentals. On Slide 5, government policy is, of course, an important pillar providing corporate and households a bridge over this challenging time. The government aid package is still evolving, but the framework is basically similar to what they use during COVID-19. It's important to bear in mind that economic prices in Israel are usually limited in time. One cannot expect a rebound in activity like after COVID, mainly because global circumstances are different now. But on the other hand, we do see the economy getting back on track as soon as the war is over. And moving to Slide 6. I Bank Hapoalim is fully operational since the first day of the war. The bank has strong capabilities to deal with different situations and create high operational flexibility and business continuity in different scenarios. Now moving to Slide 7. Several days after the outbreak of the war, the Bank introduced a series of significant support measures and benefits we offered our customers mainly for those who are directly affected by the war. The benefits include those in accordance with the outline published by the Bank of Israel as well as additional benefits beyond that outline. These benefits include deferral and exemption of loan and mortgage payments, exemption from various fees, loans with preferred terms and more. As we discussed in our financial report, if all relevant clients redeemed the maximum benefit, the overall cost will be approximately ILS 420 million, which will be booked mainly in the fourth quarter. The final amount is subject, of course, to customers' behavior and extend, they will redeem the benefits. In addition to introducing customer benefits, we have decided to donate ILS 100 million through the foundation of Poalim Rebuild. In Aid Fund, we established focus on the restoration of the communities in South of Israel. Villages were [ deferred ] and part of their members were [indiscernible]. Moving to Slide 8. As I mentioned before, our starting point for this period is significant. And let me mention 4 extension aspects. I'll begin with credit growth. As we mentioned before in previous investor calls, we have already aligned the pace of growth since 2022. Taking into account the global uncertainties we saw back then. So we reduced growth from 4% to 5% in a quarter to 1% to 2% each quarter in the last 4 quarters. This pace of growth is allowing us to be more selective and maintain the quality of the book. While doing so, we consistently build the allowance buffer now standing at ILS 7.7 billion, constituting 1.86% of total credit. The combination of these 2 factors, responsible growth and solid allowance buffer positions us as the best in sector preparedness to cope with future developments. Let's move on to discuss the other 2 elements, capital and liquidity on Slide 9. Another important decision we made in 2022 was to increase the capital buffer quarter-by-quarter, while continuing to distribute dividends to our shareholders. We increased our capital buffer to 130 basis points over the minimum regulatory requirement of 103 basis points over minimum internal target. And actually, we hold the highest CET1 ratio in the sector. Liquidity has always been a strength of the bank, and we continue to present robust liquidity metrics, thanks to our stable retail deposit base. So to summarize this part, our conservative approach and the high buffers we consequently built have proved to be the right decision taking at that time as it puts us in a strong position today to cope with what potentially lies ahead. I will now discuss the bank's third quarter results. Slide 11 summarize the highlights. 13.4% return on equity for the quarter, 15.4% for the 9-month period with a 38.9% cost-income ratio. We continue to lead responsible and diversified credit growth as the growth in our business was spread over several economic sectors. This growth was achieved while maintaining the high quality of the book. And lastly, we are continuing to qualify our balance sheet with factors of loan loss reserves, capital and liquidity, while also creating substantial shareholder value by continuing paying dividend. This quarter, the Board of Directors decided on paying 20% of net income for our shareholders. Moving to Slide 12. Our profitability relies on a relatively high level of income, coupled with a low-cost income ratio. Following 6 quarters of growth during which total income grew by 58%, total income decreased this quarter, mainly as a result of exhaustion of the rise in interest rates. As we can see on Slide 13, income from regular financing activity is lower this quarter, mainly due to the lower CPI and the continued migration to interest-bearing deposits. Income from non-regular finance activity was negative this quarter as a result of relatively high realization of bonds. Fees on the other hand, grew 8% this quarter versus the second quarter. However, some of this growth is driven by refunds of premiums paid in the past for portfolio insurance. Let's move to Slide 14 and 15. We grew our credit book by 1.1% this quarter and by 4% from the beginning of 2023 to ILS 404 billion, well diversified between segments of activity. As I mentioned before, credit growth was aligned to the changing environment in 2022 and moreover in 2023, reflecting our responsible approach as well as the impact of macro dynamics on the demand for credits in each segment. Our deposit base on Slide 16, continued to show stability with 59% of total deposits attributed to the retail segment. The migration to interest-bearing deposits continues for bank at slower pace than in previous quarters, 4% versus roughly 10%, bringing the share of non-interest bearing deposits to 28%. On costs, on Slide 17, total expenses increased this quarter, mainly due to a decline in salary expenses as well as the maintenance and depreciation. The lower salary and related expenses are attributed to the collective wage agreement signed in July. In maintenance and depreciation expenses, we also recorded higher figures last quarter due to some IPR&D assets impairment. Now moving to Slide 18. As I mentioned before, following the last 4 quarters in which we increased the collective allowance, we continued doing so in the third quarter as well. At the back the increase in the probability of a slowdown due to the consequences of the war. The specific provision, however, remained very low, lower than long-term representative level. This quarter, we also recorded higher recoveries, which even turned it into a negative figure. So in total, credit losses amounted to ILS 662 million or 0.66% of total credit in the quarter and 0.47% in the 9-month period. The next slide shows our resilient asset quality as well as the buffer recovering problematic debts. Total problematic debt increased this quarter as a result of an increase in nonperforming loans. This increase is not directly attributed to the potential effects of the war on our customers. However, it does reflect our tighter approach regarding classifications in this environment. The NPL ratio is now 0.97% of total credit. On the right-hand side, you can see the high reserves and its gradual build. The total reserve is ILS 7.7 billion, of which ILS 6.8 billion is a collective allowance. The balance sheet reserve covers 168% of the NPLs. The next slide is on capital. The CET1 ratio increased to 11.53%, well above both internal and regulatory minimum targets. Considering the solid capital buffers and the importance we, of course, to continue dividend distribution and taking into account the high uncertainty, the potential impacts of the war on the economy and the financial results of the Bank, the Board of Directors decided to declare a dividend of ILS 334 million, which is 20% of net income. The dividend we declared in respect of the last 4 quarters amount to ILS 2.4 billion, reflecting a dividend yield of 5.8%. Before we open the call for your questions, I will summarize the key takeaways. Clearly, the economic position of Israel has changed significantly in the last 6 weeks. But the Israeli economy has strong fundamentals, and we see the economy getting back on track as soon as the war is over. Bank Hapoalim arrived at this period with best in sector preparedness, thanks to a good combination of responsible credit growth, capital buffers, ample liquidity and a strong allowance buffer. The third quarter results reflect continued good performance with 13.4% return on equity and a 38.9% cost income ratio. We gradually increased the collective provision in the last few quarters. This quarter's increase was also due to potential consequences of the war. Our capital is robust, and it was important for us to continue dividend distribution, taking into account the high uncertainty. As a leading financial organization, Bank Hapoalim is an integral part of the economy and society of Israel. We have always stood by our customers in terms of need and will continue to do so in the current period. With that, let's open the call for your questions now.

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

I have a couple of short ones. First one would be on the dividend. Given your strong buffers, I'm wondering if the 20% is more of a conservative decision given the environment or it's more of a Bank of Israel directive not to go over 20%?

You asked about dividends. So obviously, the bank has a higher level of capital ratios, Tier 1 and overall capital ratios. And we have significant surplus comparing to the minimum and internal requirements. So obviously, these levels allowed us to continue with our policy and it was important to the Board of Directors to distribute this quarter as well. Obviously, we are aware and taking into account Bank of Israel guideline concerning capital planning and profit distribution policy, reflecting, let's say, the war and uncertainty about, let's say, the length of the war. And the combination of this choose the position -- a very strong position of the bank and importance we see in dividend distribution, but taking into account the guideline, the Board of Directors decided distribution of 20%.

Okay. Thanks for that. And then I wanted to talk about the impact of the current war. So you alluded to banking facilities to customers. And we've read headlines about banks offering clients to postpone more debt repayments by a couple of quarters and same thing with some retail loans and so on. So I guess it makes sense that we wouldn't see an increase in bad debt or debt under consideration. I guess, can you give us a sense of how many people reach out and have to reschedule their payments or anything that can help us in terms of percentages of retail base that are asking to delay payments. So I just want to get a sense that there is really an impact. So it's more -- it's more headlines and overall, the economy is doing well and people overall are doing okay.

Yes, this is very important and interesting question about the effect of the war. Obviously, we are 40 days into the war and the answer what is -- and the future depends on how, let's say, the things will go from now what will be the length of the war or military operation, et cetera. You are right. And the main aspect is the support and benefits we give to our customers. It's important to note that there are different benefits for different, let's say, circles of customers depends on the level of damage or how the customers are affected. We are giving full disclosure about the maximum impact of this benefit and support. Obviously, depends what will be the customer behavior. But the maximum is disclosed and it's about ILS 420 million. If all the customers will use all the benefits and support that we are giving. Obviously, past experience in fact that not all the customers use all the, let's say, measures and benefits. That's the first element. The second one is the behavior we see now is mainly, let's say, some psychological or behavior elements due to the level of uncertainty that characterized the first weeks of the war. Obviously, in times of uncertainties customers, let's say, in some circles use benefits in order to manage their cash flow. So part of what we see the numbers that we see for now is some [ psychological ] element and behavioral elements. Very similar to the [ psychological ] element that we saw in COVID -- but in COVID-19 but lower numbers. But we have a table that we put in our financial reports about the amounts and the deferrals. So I can direct you to the table, Table 3-1, including details regarding debt modification. And you can see it's very comprehensive table, but total amount of deferred payments is, let's say, less -- a little bit less than ILS 1 billion.

The next question is from [indiscernible].

Just one question about credit ratings. We understand that Moody's put the ratings of Israel and Israeli banks more downgrade, what could be, well, the cost for you increasing cost of -- did you model that downgrade -- the downgrade of the Israeli government or the downward the Bank Hapoalim debt, can you just a little bit elaborate on that, what could be the impact of such downgrade?

If you mentioned Moody's but what is affecting Bank Hapoalim modeling is S&P rating, for the [ test ] of Israel. So we disclosed the impact of downgrades of the face of Israel rating. And it's -- the direct impact is 0.23% on Tier 1 capital ratio and 0.29% on total capital ratio. Obviously, downgrade in the rating of the state of Israel can have some indirect effects, but we saw that in volatile times, the Bank of Israel put some measures and act very fast in order to come market and deal with different situations. So the direct effect is like I mentioned. And again, it's for a situation of downgrade by S&P.

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

I have a couple of -- okay. First of all, I saw that the sensitivity tables you guys put out on a potential impact of a decline of interest rates went down significantly versus the last quarter by ILS 400 million. What's the reasons for that?

You're right, there is a change in the table. Actually, from time to time, there are some changes. And the reason is very simple, the table is based on assumptions. And part of the assumptions are assumptions regarding the behavior of the customers and the behavior of the customers, we're learning about it because we are in a different interest rate environment. And before we're learning about it from, let's say, the behavior in the last quarter. So it's reasonable to assume that we are changing or updating the models and the change you see is the change -- the result of the behavior we see by our customers.

Is it safe to assume that this is something that will continue? Like is it a behavior that is likely to reduce the impact of lower interest rates also in coming quarters? Or is that irrelevant?

Yes. It's hard to say whether it will continue the trend, like you mentioned, it depends how customers will act or what will be the interest [indiscernible]. So it's hard to say whether next time it will be lower or higher. But what we saw is the behavior led us to, let's say, decrease the impact.

You mentioned that nonperforming loans increased in Q3, and it actually went up quite significantly. And I'm just wondering is that a certain amount of specific loans is some across all your loan book. What does that number imply quite significant jump Q-o-Q, and I assume it doesn't really include everything that happened where in the last 1.5 months.

If you look at the absolute numbers, they are still relatively low. In percentage, like you mentioned, there is a change, but the absolute numbers are relatively low. From time to time, it's something that we characterize every quarter, there is, let's say, 1 or 2, let's say, borrowers that there are classification -- changing the classification. So it's not related to the war, but it's affected from the war, and I expect the situation of the customer is not related to the war, but we tightened and let's say, we're more cautious in classification of those customers. So indirectly, it's affected by the situation of the war. But the -- let's say, the situation of the customers, like you mentioned, specific customers, 1 or 2 is not related to the war. So we are like -- in other elements, more conservative and cautious.

Understand. Okay. And I also noticed that the arrears 90-plus days were down significantly in the quarter, I think like counterintuitive to what's currently going on. Can you explain that drop? Or is that a technicality?

Can you repeat? Micha?

Yes, in your credit rating table and I think in Note 6 of 5 or one of those, you also provide the 90-day arrears -- and it went down quite significantly by 34% Q-on-Q. And I was just wondering, it seems to be like counterintuitive when things are deteriorating and people have less cash flow to pay. So I was just wondering what the reasons for that significant decline was or is just a technicality or something.

Yes, it's not a significant change or something related to technical, but we can check this one the back.

And another question I have is, I was just wondering because I saw some of the other banks mentioned that they're not leaving their headquarters as planned. I remember you scheduled to move headquarters towards 2025. And I'm just wondering based on what's currently going on. Is it safe to assume that, that's probably be delayed?

No, the plans are still there. We are about to move -- late 2025. The building is located in Tel Aviv, it's in initial stages of building. By the way, everyone who is driving in -- Tel Aviv can see already, I think, 14 floors. But the plans are still when we are on track. Obviously, the war situation affects some construction in the area of Tel Aviv for the short term, but we are continuing as usual. And obviously, it will enable us to realize some capital gains while selling our current location, let's say, in the next coming years.

This concludes the question-and-answer session. This concludes the Bank Hapoalim Third Quarter 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.