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

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Second Quarter 2025 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 2025 Report Presentation. [Operator Instructions]. As a reminder, this conference is being recorded August 13, 2025. With us on the line today are Mr. Ram Gev, CFO; 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?

Good afternoon to you all. We are happy to announce the bank's second quarter results, as I will elaborate on in the coming minutes. So let's start with Slide 3. We reported this morning a 16.7% return on equity for the quarter and 16.5% return on equity for the first half, driven by a remarkable almost 20% increase in the net profit in the first 6 months of 2025. Cost income ratio came in at 33.8% in the first half. Aligned with our strategy, credit growth continues to be strong, 3% in the quarter and significant growth of 12.7% in the last 12 months. Total income is up 12% and 13% in the first half and second quarter versus comparable periods. On balance sheet metrics, the CET1 capital ratio increased to 12.02% NPL ratio is down to 0.5% and LCR is at 125%. Alongside these strong numbers, we'd also like to highlight several updates. We are increasing the rate of profit distribution to our shareholders to 50% of net profit, in line with the bank's financial targets. To allow this, we have updated our dividend policy to the distribution of up to 50% of net profit instead of the previous threshold of up to 40%. Lastly, we reported that in the third quarter, the bank will record onetime profit of ILS 380 million net from insurance reimbursement. I'm now moving on to discuss the results in more detail. On Slide 5, we see the net profit, return on equity and earnings per share development. This quarter, net income was ILS 2.5 billion, and the EPS was ILS 1.93, reflecting the very strong top line growth and the strong positive jaws we created. And I also remind you that last quarter, we recorded tax income due to the liquidation of Hapoalim Switzerland. Next, let's talk about our credit book on Slide 6 and 7. Credit growth reached almost a 13% increase in the last 12 months, of which 3% in the last quarter. Growth was recorded across all segments and in various economic sectors. Slide 8 presents our financing income. Total financing income grew 15.1% in the quarter, driven by the growth of customer activity, higher CPI contribution and higher income from equity investments, mostly attributed to our subsidiary, Poalim Equity. Financing income is growing over time, even excluding the CPI effect and despite the impact of war-related benefits granted to customers as we present in the right-hand side of the slide. In the second quarter, we accounted for 2 new benefit outlines. This includes financial assistance to households and businesses impacted by the ongoing conflict in Israel in the form of reduced interest charges, exemption from certain fees, credit deferral and more. Moving to Slide 9, where we present our fees. These were up 8.2% in the last quarter and 12.2% in the last 12 months. This quarter, we recorded special income from the international credit card organization. But in general, we see fees growing over time as underlying business activity is expanding. On Slide 10, we present our disciplined cost management. [indiscernible] operating and other expenses stayed almost unchanged versus the corresponding quarter. Keeping costs fairly flat is particularly impressive considering that some costs are activity growth driven or impacted by inflationary pressure. Versus the last quarter, costs increased by 6.2%, reflecting some timing effects and fluctuations between quarters. The cost restraint, coupled with robust income growth produces very strong positive jaws and efficiency ratio in the low 30s. Moving on to discuss provision for credit losses and the quality of our book on Slide 11 and 12. Provision for credit losses amounted to ILS 302 million or 0.26% of our credit book, driven by ILS 334 million provision in respect of the collective allowance and net automatic charge-offs. The increase in the collective allowance was due to the growth of the credit portfolio as well as the effects of the economic uncertainty due to the prolonged war. The individual provision, on the other hand, saw income recorded due to recoveries from several borrowers. In the next slide, we present our excellent credit quality metrics. NPL ratio dropped to 0.5% NPL coverage ratio rose to 298%. The allowance to loans ratio continued to be high at 1.74% and over 95% of total allowance is collective allowance. Our deposit base on Slide 13, continued to be strong and stable with 56% of total deposits attributed to the retail segment. Liquidity ratios, LCR and NSFR continue to be well above the minimum requirement. Now let's move to Slide 14. CET1 capital ratio stood at 12.02%, well above both minimum internal target and minimum regulatory requirement. Our solid capital position derives from strong organic capital generation as shareholders' equity grew almost 12% this year. Both the total capital ratio and the leverage ratio are comfortably above minimum requirements. I'm moving to Slide 15. In line with the bank's financial targets we announced last March, we increased the distribution of second quarter net profit to 50% and will distribute a high amount of ILS 1.3 billion cash dividend. To allow this, the Board of Directors updated the dividend policy to a distribution of up to 50% of net profit. Going forward, the actual dividend payout ratio may be influenced by the volume of share buybacks. In respect of the last 4 quarters, we distributed ILS 3.7 billion to our shareholders. Before I review the macroeconomic slides and sum up the call, an important reminder on our financial targets for '25 and '26 is on Slide 16. The key assumptions for these targets are detailed in the 2024 financial report. The macroeconomic environment on Slide 17 and 18. Local financial markets outperformed in the second quarter, probably reflecting reduced geopolitical risk. The Tel Aviv 125 was up 24%. The shekel strengthened by 9.3% against the U.S. dollar and risk premiums have fallen. Even though the 12 days of war with Iran negatively affected economic activity, and we won't be surprised if GDP growth was negative in the second quarter, more recent economic indicators point to a rebound in July. However, considering the direct damage of the war, markets believe that the total effect over time on the economy is positive and robust. Inflation is still running at level above the target, 3.3% in the last 12 months, mainly a contribution of an increase in services prices. Looking ahead, we expect inflation to decrease in the fall as the shekel is stronger and wage inflation has moderated. The markets imply 2% inflation in the next 12 months. The Bank of Israel kept its key rate unchanged at 4.5%, basing the decision on geopolitical and inflation risks, which still prevail. Markets now anticipate one rate cut until the year-end. So to summarize, a continued strong start of the year with a solid second quarter. Return on equity of 16.7% and 16.5% for the first half, influenced by a positive business momentum aligned with and even surpassed the bank's financial targets. This is due to a more favorable economic environment than what we anticipated and some onetime profits. The main driver of the profitability was the impressive growth in income, both in financing income and fees. The strong growth in credit was broad-based across segments and economic sectors. Credit quality continues to be strong with NPL ratio of only 0.5%. Our capital is organically growing and producing a growing surplus. In this quarter, we increased the dividend payout ratio to 50% and declared a ILS 1.3 billion distribution to our shareholders. With that said, let's open the call for your questions. To you, operator.

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

First off, congratulations on the solid ROE figures. I was wondering if you have an idea of what ROE would look like if you assume normalized levels of Tier 1 core equity ratios.

Chris, thank you for the compliments for the performance and figures. Obviously, we don't talk about future projections, but I can direct you to the public guidance that we published, where we talked about targets of between 14% to 15% return on equity for 2025 and 2026. Obviously, we are -- if you look in the last 2 quarters, we feel very comfortable on track and even above those targets. When talking about what will be the effect of the capital surplus or what will be the return on equity without the capital surplus, it depends on timing and different assumptions. So I can't give you the exact number or projections, but you can do the math by taking our targets, the current return on equity and taking into account that, let's say, minimum regulatory requirements stand at the 10.23% minimum internal target, 10.5%, obviously, we'll keep a buffer above that and get figures that about what is the normalized.

Got it. Yes. Also, again, on the excess capital, do you see a case where the Bank of Israel might let you distribute a onetime special dividend to decrease the balance?

Yes. Thank you. This is a very good question. I think a lot asked these questions. Look, if we look at the Bank of Israel, Bank of Israel during the war decided to allow banks to distribute about 40%, and this was very important. Bank of Israel capped it to 40%. But on the positive side, he allowed bank during war to distribute up to 40%. And all the time mentioned the geopolitical situation and uncertainties. And I think the current decision of Bank of Israel to allow increasing it to up to 50% reflects 2 elements. First, the confidence in the situation of the banks and solid capital and stable situation. And second, understanding that, let's say, geopolitical risk is lower than before. But we have to take into account that there are still some uncertainties. And I think that's the reason why Bank of Israel is still cautious and prudent on that. Obviously, we, as a bank, have the ability to distribute more than 50%. We reflected that in our guidance. Whether it will be a question of onetime dividend or a gradual increase, this is something that I think we will evaluate at the right time. But certainly, it depends on the macroeconomic terms and geopolitical developments. As long as geopolitical developments will be positive, with continuous trend of lower geopolitical risk and much lower uncertainties, I think the Bank of Israel may consider releasing more distributions, but it's hard to say when it will happen. We, in our guidance, put our target on being in 50% and even up. So far, we reached this quarter 50%. So it really depends on, let's say, macro and geopolitical situation. It's hard to predict what will be in the next quarters.

The next question is from Liran Lublin of IBI.

Congratulations on an excellent quarter. My question is regarding credit growth. The way I see it, given the relatively moderate growth of the Israeli economy in the first half of the year, how do you explain the significant credit growth that you achieved in the first half? It's quite above the growth of the economy.

Liran, thank you. Well, it's really impressive, I think, for the Israeli market, the growth that we see. And I think the research department in Bank of Israel published I think a couple of months ago, some projection even to 2026 with even higher growth of the GDP. And we think that basically, what we see in the growth and the demand is a result of several elements. First is the strength of the Israeli economy. Israeli economy performed during the war much more or better than any scenario and better than anyone expected. That's the first element. Second element is the GDP growth. The third element is the inflation, which takes the real GDP growth and turn it into nominal. And the fourth element is our ability to perform and answer demands in every segment. After all, Bank Hapoalim have a very significant position in all the segments. So whenever there is a demand, let's say, in consumer, in mortgages, in corporate, commercial, we are ready with enough resources to answer this demand and be competitive. So taking all these elements and basically very important, the strength of the Israeli economy and some effect of rebound create the demand and our ability to grow.

Great. And just a follow-up on that one. You're currently running on a growth rate that is way above your projections for the year in credit. Any thoughts on changing those projections?

We grew -- you're right, we grew about 12.7% in the last 12 months and 3% this quarter and 2.7% in the first quarter. It's higher so far. The pace is higher than the, let's say, average 7% that we put in our targets. Obviously, it's hard to say, let's say, what will be in the future, but it implies that the current trend of the Israeli economy creates potential for higher growth than in our targets, but it depends on the development in the Israeli economy and geopolitical situation. As for targets, let's say, we published a target for a couple of years, and the reason was balancing between uncertainties and our, let's say, projection targets and aspirations. We feel very comfortable with the targets. And like I mentioned, we are even beyond our targets. It's -- so far, it's early to talk about, let's say, updating. But I think that when we will end the year, plan -- our plans or work plans for the next year is something that we will evaluate. And if there will be something to update, we will consider it.

The next question is from Priya Rathod of Jefferies.

Just another follow-up on the credit growth, more specifically for your mortgage lending. We saw another strong quarter of growth. But when you look at the housing market transaction data, the story does look a little different. So we're seeing new home sales falling and the stock of unsold homes rising. Could you just speak to where that mortgage growth strength is coming from? And how sustainable is that going forward?

Priya, thank you. Indeed, we see overall in the market, a little bit cooling down of the mortgage market. There are several reasons for that. Still, the numbers that we see for the quarter are relatively strong. Even though the market, there are some signs of cooling down, maybe temporarily -- the market is still strong. So we can create, let's say, growth in our portfolio. We see the demand come from all, let's say, profiles within this segment. So there is nothing special in one profile or other. It's too early to say whether this is a little bit cooling down, it's a trend or change in the trend. So we are still looking at the current data, but the performance is relatively strong. And you can see that in the second quarter, we grew in our mortgage booking 1.6% overall 8% in 12 months. And it's, let's say, growth during war. So it's really relatively impressive.

Sorry, just to follow on that. So I guess like when you look at the data like from the Central Bank, it seems like the new stock or new sales of housing is going down. I guess where -- if it's not coming from new sales, where is that growth coming from?

Maybe part of it can come from investments. But it's important to note that in Israel, the motivation to own a home, and that's the vector that supports the trend or the demand for mortgages. And it's a very healthy vector. It's still there. It's something that has even a cultural effect. And still people need to live somewhere. So -- and they want to own their home. So the basic vector is still very strong. Maybe this cooling down can be something that is shifting from one period to other period after all at the beginning of June, we had the 12-day war with Iran. Maybe it has some psychological effect. Maybe Bank of Israel guidance towards benefit of, let's say, in factors to homebuyers has some psychological effect. It's early to say or too early to say what is the exact trend. We need to wait, I think, for the next quarter to see the exact trend. But basically, the demand is still there because the population growth in Israel is here to stay and the demand for housing is very -- is part of, let's say, lifetime and cultural elements in Israel.

The next question is from Canberk Benning of Citi.