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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Second Quarter of 2024 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 second quarter 2024 report presentation. [Operator Instructions] As a reminder, this conference is being recorded August 14, 2024. With us on the line today are Mr. Ram Gev, CFO; 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 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?

Thank you, and good afternoon to you all. I'm happy to review the financial results of the second quarter and first half of 2024. Bank Hapoalim delivered yet another strong quarter, with a high double-digit return on equity and a strong balance sheet. Let's turn to Slide 3 for the main messages of the quarter. The bank ended the quarter with ILS 2.2 billion net profit, representing 16.4% return on equity. The main drivers alongside recording income from credit losses were the 12.6% Q-on-Q growth in total income, which coupled with the continued restrengthen costs, led to an improved cost/income ratio of 36.7%. These impressive results were achieved on the background of the war. It has already been 10 months since October 7. And when we look at the Israel economy as a whole, and particularly, the position of households and businesses, it is demonstrating impressive resilience. Victor Bahar, our Chief Economist, will discuss that in more detail soon. We continue to responsibly grow our book across various segments of operations, while maintaining its high quality and a high allowance reserve. We have also continued to hold material buffers of liquidity and capital, both well above minimum regulatory requirements. Our funding base continues to grow, relying mostly on retail deposits. And lastly, before we dive into the numbers, keeping shareholder interest in mind this morning, we announced a ILS 1 billion share buyback plan to be executed in the next 12 months. Now let's move on to the macroeconomic review. Victor, please go ahead.

Thanks, Ram. I'm starting on Slide 4. As you mentioned, 10 months of war and economically speaking, we have managed to create a kind of a routine. Daily economic life in most regions of the country is back to normal. The number of workers who were absent from work has declined to less than 30,000, while the unemployment rate still represents a full employment situation. Also on the positive side, we can see even some improvement in the high-tech sector and in particular, an increase in money raised by these companies as seen on the right-hand side. However, the economy is not working at 100% capacity as thousands of people from the north and the south are still evacuate and the shortage of Palestinians workers is also a constraint. We do not anticipate that the first quarter rebound will continue, and the second quarter data will probably show moderate growth. Again, on the positive side, are the development in the housing market on Slide 5. New home sales increased to a level not seen in the last 2 years and home prices are up some 5% in the last 6 months. Some of the recovery represents compensation from the low level of sales in the period of the beginning of the war, but some probably show that homebuyers expectations for prices have changed, and they prefer not to stay on the sidelines. I'm moving to Slide 6. The economic toll of the war is mainly reflected on the fiscal front. Not only we've seen an increase in defense expenditures, but also in civilian expenditures related to the situation. The government created a firewall that protected households and corporate from the direct impact of the war. The budget deficit expanded to a level of 8.5% of GDP in the last 12 months. We believe this figure will decline by year-end, but it still has an adverse effect on the market and that weigh a policy response. As for inflation, the year-on-year level is in the target zone as seen on Slide 7. The uncertainty around the future path of inflation is high. As the labor market is tight, wage growth does not align with price stability and the budget deficit, it is also a concern. We believe that inflation will remain relatively high in the coming months. Monetary policy, as inflation is still uncertain, rate cuts will probably lag behind the Fed and the ECB. Geopolitics and the fiscal concerns resulted in an increase in the country risk premium. The shekel long-term yields are now some 70 basis points above the U.S. treasury. We strongly believe that the government has the ability to service the debt in almost any circumstances. The widening spreads were probably influenced by the high level of debt issuance. To sum up, taking the circumstances into account, the economy is still doing well, but the economic toll of the war is high and that possess some risk. Back to you, Ram.

Thank you, Victor. Your insights are always valuable in our discussion. I'm continuing on Slide 8. The bank is consistently delivering robust results. This quarter, we reported again a high level of net income and return on equity both for the quarter and the first half. The return on equity in the quarter was positively impacted by the higher CPI and the income from credit losses. But it also includes higher tax due to the legislative amendments for the achievement of the state budget goals for 2024 and 2025 in view of the war and the high capital surplus. Let's turn to Slide 9 to discuss the drivers of the profitability. Total income this quarter or income from regular financing activity in particular, as well as the financial margin were positively affected by the higher CPI, which contributed ILS 556 million this quarter. Nevertheless, income from regular financing activity, excluding the CPI effect, remains strong and is even higher than last quarter. Another factor positively affecting income from regular financing activity is the growth in activity. At the same time, the share of noninterest-bearing deposits currently standing at 27% of total deposits, and the Bank of Israel interest rate stayed stable and support the top line. In addition, we recognized a ILS 149 million income from bond buyback transactions. On the other hand, income in the quarter includes some financing costs in respect of the benefits and support granted by the bank to its customers, due to the war in the amount of approximately ILS 64 million this quarter. I'm moving to Slide 10 to discuss expenses. Total expenses in the quarter compared to comparable quarters were mostly impacted by the other expenses. In this line item, we recorded a ILS 41 million expense as a donation for the restoration of the southern area of the country, as part of the activity of the Poalim Rebuild Fund. Another factor impacting expenses is salary and related expenses, in which changes between quarters are usually attributed to performance-based bonuses. In comparison to the corresponding quarter, salary and related expenses were lower due to the collective wage agreement signed last year. The cost income ratio is currently below 40% on a quarterly and half year basis. On Slides 11 and 12, we present our credit book. We grew our credit book by 1.2% this quarter and by 4% in the last 12 months to ILS 416 billion. Credit growth continues to be diversified among segments and the pace also reflects the impact of macro dynamics on the demand for credit in each segment. But not less important is that this growth was achieved while the quality of the book remained high and even improved. As I mentioned before, despite the background of the war, households and businesses, are currently demonstrating impressive resilience, and this is reflected in our credit losses and credit quality. On Slide 13, we can see that this quarter, we have increased the collective provision to reflect the potential consequences of the continuation of the war and the increase in uncertainty. But on the other hand, we recorded recoveries from a small number of borrowers. So that on the bottom line, credit losses amounted to income of ILS 49 million, that's minus 5 basis points of total credit. Another indication of the quality of the book is the balance of customer deferrals. On the right-hand side of the slide, deferrals granted at the onset of the war are decreasing fast, showing 84% of the loans, the deferral has ended. More on our strong credit quality, thanks to our prudent risk management approach and tight underwriting on Slide 14. Total problematic debt increased slightly since the beginning of the year, but NPL substantially decreased and the NPL ratio is down to 0.82%. In the real estate book, our underwriting characteristics continue to stand out uniquely. For example, in land financing, only 2% of the loans have LTV ratios greater than 80%. This is also true when looking at our mortgage book, which is characterized by an average LTV of only 46%. Although the quality of the credit book is high, we have built significant reserves to support any negative scenarios. On Slide 15, the allowance reserve reached ILS 7.8 billion, of which ILS 7.1 billion is the collective allowance. This allowance constitutes 1.84% of the credit book and is almost double the NPL balances. In liquidity, we also maintained strong buffers. LCR of 134% and NSFR is 127%, both versus the minimum regulatory requirement of 100%. On the right-hand side is the third buffer of capital. The CET1 ratio stood at 11.96%, while our minimum internal target is 10.5%. This gap of approximately ILS 6.8 billion will serve various objectives, including growth and the potential for further capital distributions as well as buffers for the negative scenarios and more. Our deposit base on Slide 16, continued to be strong with 60% of total deposits attributed to the Retail segment. Retail deposits grew nicely by 1.8% this quarter and 5.7% in the last year. Moving to Slide 17. As mentioned before, the CET1 ratio stood at 11.96%. The impact of the S&P sovereign rating downgrade was 25 basis points, which were already accounted for in the current ratio. Our solid position derives from strong organic capital generation capabilities reflected in the 12.5% growth in shareholders' equity in the last 12 months. In addition to the solid CET1 ratio, both the total capital ratio and the leverage ratio are comparably above minimum requirements. I'm moving to Slide 18. Our strong profitability and high capital buffers support our ambition to provide our shareholders with substantial and growing capital distributions. This quarter, we are happy to announce a ILS 1 billion share buyback plan to be potentially executed in the coming year. The plan will be executed in 4 tranches of up to ILS 250 million. In approving the plan, the Board of Directors took into account the bank's robust financial position of capital surplus versus requirements, favorable market conditions and investor preferences regarding capital distribution and buyback. This quarter, the Board declared a ILS 645 million cash dividend. This cash dividend plus the ILS 250 million buyback sum up to a total of ILS 895 million or 40% of second quarter net profit. Distribution will be made according to Bank of Israel guidance regarding profit distribution. I will now summarize the key takeaways in Slide 19. Bank Hapoalim is consistently delivering high double-digit return on equity and a strong cost income ratio. The economy is presenting impressive strength despite the ongoing war, but we do see material economic challenges ahead. Credit growth was diversified while credit quality indicators continued to improve. We are presenting a best-in-class level of preparedness, both for negative and positive scenarios, thanks to capital, liquidity and allowance buffers. We have launched a ILS 1 billion share buyback plan to be executed in the coming year. Alongside the ongoing dividend distribution, total capital to be distributed with respect to second quarter profit constitutes 40% of net profit. And lastly, as you all know, the Board of Directors has elected Yadin Antebi to replace Dov Kotler as CEO. Yadin will take office starting tomorrow. I'm certain that business-focused culture of the bank will support the new CEO and the management in achieving our goals, and I believe that the bank has the ability to continue the trajectory of presenting strong results. With that said, let's open the call for your questions.

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

Congratulations on the solid results. I have 2 short ones; I'll ask them at the same time. I wanted to get your -- the outlook for potential loan loss provisions in the second half of the year, assuming that the macro it doesn't deteriorate? And I guess, alongside that one, your outlook for dividends, I mean, congratulations on the buybacks. Do you see scope for an increase in dividend payout in the second half, assuming there's no deterioration in the macro?

Tavy, thank you for your questions. I'll start with the question about the provisions. Like you can see, we have sufficient reserves and significant reserves that we built mainly in third quarter and fourth quarter in 2023. When we look -- and we built the reserves on time. And when we look today at the position of the customers and the economy, we see that the economy situation is better than what was expected before or at the onset of the war. And we see that the situation of the customer is very good. There are no business and households as well, learn how to cope with the situation. So the economy is more resilient than expected, and the situation of the customers is relatively good. Obviously, like I mentioned in the presentation, the war will have some effect. When looking, let's say, forward at the second half and even longer -- you need to take into account the fact that we have already built reserve conservatively. So if the situation is not deteriorating, we feel very comfortable with the reserves. We're still adjusting the reserves and like we did this quarter, the collective allowance, we increased it a little bit to reflect the uncertainty. Obviously, if the situation is improving, it's reasonable to assume or to expect that the effect will be on customers or credit losses will be lower than reflected in the models. But I think it will take time until uncertainty will be clear. So let's say, in a positive scenario, let's say, reverse of the reserves will be gradual reserves. But like I'm saying, we don't have a crystal ball. We are mainly prepared for the different scenarios, both positive and negative. That's for the first question. As for the second question about distribution and dividend, like -- so we declared a cash dividend and launched our buyback plan, total those 2 about 40% of second quarter profit. We have very -- let's say, large buffer of surplus above internal targets and regulatory requirements and good capital ratio that can serve growth in a positive scenarios or larger distribution in the future and can serve as buffers in different negative scenarios. As for higher distribution levels, this depends on the level of uncertainty and Bank of Israel prospective towards the level of uncertainty. I assume that as long as the situation will be improved, that means, let's say, lower intensity of confrontation or fewer fronts or more fronts that are back to, let's say, a situation that was before the war then the possibility for higher distribution will be higher, but it's too early to assess. We have the ability. Nevertheless, we have the ability to serve higher distribution.

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

Congratulations on the strong quarter and a great half. A couple of short ones. First of all, on the tax rate, I saw it was 38%, pretty much the same as the last quarter. Is that correct?

Micha, thank you for your feedback and a great question. Yes, it's about 38%, very similar to last quarter.

So does that mean that you did not have any DTA gains? Or is that not in this quarter?

Yes. There was some, let's say, income from tax assets, but relatively minor effect.

Okay. And a question on risk-weighted assets. Like I think that risk-weighted assets grew by over 4%, yet credit grew by 1%. What's the difference? Where is it coming from? And just wondering.

Yes. There are 2 elements. The first one is the effect of the downgrade by S&P for sovereign rating, that has an effect of a few billions in risk assets, 25 basis points, if I remember. Then obviously, risk assets affected not only by credit by also, but by off balance, items like credit line or guarantees, et cetera.

Okay. That's clear. On group releases or collective releases, does the Bank of Israel currently allow Bank Hapoalim to release corporate group collections? Or is that not part of what's currently allowed?

I think the level of uncertainty is high at the moment. So both Bank of Israel and the banks are very cautious in dealing with allowances. And it's too early to, let's say, release or reverse some allowances, even though the situation of the economy is better than was expected and the households and businesses cope well -- relatively well with the situation. I assume that Bank of Israel, if we'll see any change, positive change, we'll have dialogue as well as negative change. But overall, the banks and Bank Hapoalim evaluate by itself, the situation. And you can see that we already built the reserves at the beginning of the year, and we had to do some really major adjustments by increasing a little bit the collective allowance. So there is not -- there isn't, let's say, a guidance on what to do, but just to be, let's say, cautious in evaluating the situation and uncertainty.

Great. So just to be clear, assuming that uncertainty clears up, would it be fair to assume that you would want your loss from reserves to go back to similar levels that you had pre-war, or would you still retain higher collective provisions?

Yes, that's a good question because it depends when you're implementing the CECL methodology, it depends a lot of macroeconomic inputs. And like Victor mentioned earlier, some macroeconomic elements can be still affected because of long-term let's say, complexity of the war, even if the situation will be better on the military aspect. So we have different scenarios. And in some scenarios, positive scenarios, there is, let's say, a situation that we'll see gradual reverse, but I think the right way in a situation like we are today in the state is a gradual reverse as long as the uncertainty is cleared. Obviously, there are some negative or pessimistic scenarios, and we built the reserves for that. But I think in short, that it will take time. It will be gradual, but there is a possibility to that, let's say, the level of allowances will be lower than what we see today in the upcoming quarter.

I understand. And another question. You mentioned the excess capital you have and the fact the Bank of Israel is currently limiting your payout and turning your return on equity by, I think, more than 1.5%. I'm just wondering, are there different ways that you can utilize your excess capital in order to increase return?

Well, like you see, we launched the buyback program. In the future, if it will be, let's say, the situation will allow to further higher distribution, then we can combine these 2 elements, we can adjust, let's say, the dividend policy, but it depends on the situation, the uncertainty and Bank of Israel perspective towards capital distribution. But the first thing that needs to happen is lower level of military confrontation and lower level of uncertainty.

Yes, I understand that. I was actually referring to non-dividend or cash payments efforts such as increasing the risk on your security portfolio or as the -- some other stuff that you can do maybe potentially to increase return on equity.

Yes. Obviously, we're looking for opportunities to deploy excess capital, mainly growth in core business. We need to remember that demand for credit is lower than pre-war. Obviously, we have our areas of expertise like syndication, like infrastructure transaction and financing, and I think in that area, we will see some decent demand still in the situation of war. And moreover if the war will end or will be in a more optimistic scenario.

I understand. Great. My last question is versus Bit. I'm just wondering with some recent regulatory clarification and changes. I'm just wondering how beneficial that is likely to be for it -- for Bit?

It had some effect on part of our customers, mainly the heavy users of the Bit app. This is important development because when looking at the usage of Bit and the way we want to see this -- the app develops, and more services carry out for our customers through this app. This is a very important development. But looking on the, let's say, monetary aspect. It has some minor effect this draft.

I understand. By the way, the Bank of Israel's interest to finalize A2A facilities by year-end. Is that still on track? And is that something that will allow Bit to grow faster and more profitable? Or would that irrelevant?

We hope that it will -- Bit develop. It depends on their agenda and their priorities can be changed, but we hope it will go as planned.

And it's beneficial to Bit if that goes ahead?

Let's say, Bit is now working on that credit card rails. So A2A account can't -- can support lowering expenses operating Bit.

Understood. Congratulations on a great quarter.

There are no further questions at this time. This concludes the Bank Hapoalim second quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.