Bank Hapoalim B.M. ($POLI)

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim First Quarter of 2026 Results Conference Call Webinar. For your convenience, this call will be accompanied by a presentation. May we suggest if you've 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 2026 Report Presentation. [operator instructions] As a reminder, this conference is being recorded, May 14, 2026. 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 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 to you all, and thank you for joining us today. I'm pleased to review the bank's 2026 first quarter results. Let's start with the highlights on Slide 3. The first quarter marks a strong start to the year with continued business momentum and our resilient balance sheet, ILS 2.1 billion net profit with 13% return on equity. As a reminder, 2026 will be impacted by the special tax payments applied to Israeli banks. As we disclosed in our financial report, the impact on Bank Hapoalim in 2026 is expected to be ILS 950 million, equivalent to 1.3% to 1.4% in ROE terms, which brings the ROE for the quarter, excluding that to above 14%, in 2027, the impact will be ILS 40 million. Now turning from that temporary technical item to the underlying business performance. The quarter was characterized by continued strong credit growth while maintaining and even improving portfolio quality metrics. The 3.3% growth rate in the quarter, while the NPL ratio continued to drop and now stands at 0.44%. The last point to highlight here is capital. We continue to maintain a high capital ratio comfortably above the minimum requirements while delivering meaningful profit distribution. This quarter, we distributed 50% of net profit in line with our targets. Net profit in the quarter came in at ILS 2.1 billion, a 2.2% increase Q-on-Q and EPS is up to ILS 1.62. Return on equity for the past 2 quarters has been affected by one-off or temporary items. In the current quarter, it's the special tax, while in the prior quarter, we recorded a provision related to discussions with the labor union. Next, let's talk about our credit book. Our credit portfolio grew impressively by 14% in the last 12 months, of which 3.3% since the beginning of the year. Growth was diversified across segments and in various economic sectors. This is a reflection of our ability as a leading bank to translate the strength of Israeli economy into growth in the bank's activity. Slide 7 presents our financing income. Income from regular financing activity grew by 2% this quarter compared to previous quarter due to the continuous growth in activity and less negative CPI in the quarter as we note on the right-hand graph. On the other hand, we have already seen 2 rate cuts since last November, bringing the average interest rate in first quarter about 40 basis points lower than the fourth quarter of 2025. On nonregular financing activity, we recorded a small loss mainly driven by market volatility, primarily including mark-to-market of shares in our nostro portfolio and adjustments to fair value of derivative instruments. The financial margin remains a key strength of the banks versus our peers. It's slightly up quarter-on-quarter, though affected by the lower rate environment, while the impact of the negative CPI in the quarter was more moderate. Looking ahead, the inflation backdrop is expected to be more supportive to income. On fees, the positive trend continues as our business activity continues to expand. Fees grew 0.5% in the quarter and 5.3% in the last 12 months. Another factor affecting fees this quarter was the market volatility around the war in March, which typically drives higher levels of capital market activity. Moving on to present our disciplined cost management. We are continuing to show discipline across all lines despite the continuous growth in activity. Expenses were down 10.3% Q-on-Q. Excluding the ILS 200 million provision in the fourth quarter, the decline is more moderate at 1.6%. Salary expenses notably remained broadly flat year-on-year. The cost-to-income ratio remains around the mid-30s at 36.6%. Looking ahead on expenses beyond the early retirement program already provided for at the end of 2024, we took another supporting step this quarter. Changes to the retirement model reduced actuarial liabilities by ILS 360 million, which will be booked to P&L over time and will generate annual savings of several tens of millions of shekels. Moving on to discuss provision for the credit losses and the quality of our book on Slide 10 and 11. Provisions for credit losses or cost of risk amounted to ILS 35 million, a 0.03% ratio. Cost of risk in the first quarter was lower than in previous quarters due to a decrease in the collective provision as a result of continuous economic stability and improvements across certain risk indicators. In addition, the decrease is to income recorded in respect of the individual allowance as a result of recoveries from a small number of borrowers. On credit quality metrics, -- on the left-hand side, we see the NPLs continue to drop now at 0.44%, while the NPL coverage ratio continued to rise now 3.3x the NPLs. We continue to increase the collective allowance, but at a slower pace than last year. On the right-hand side, the allowance to loans ratio remained high at 1.68%, actually the highest in the sector. Over 96% of the total allowance is collective. Our deposit base continued to grow by 1.7% in the last quarter and 6.5% in the last 12 months. Retail deposits stayed flat this quarter and slightly decreased in last year, but still represents 53% of total deposits. Liquidity ratios, LCR and NSFR continue to be well above the minimum requirement. Now let's move to present our capital position. The message here is that we are growing while maintaining substantial payout. Shareholders' equity grew by 8.8% in the last 12 months and the CET1 capital ratio stands at 11.71%. This is versus a minimum internal target of 11%. Total distribution continues to be high to 50% of net profit. Total profit distributed and declared is ILS 1.1 billion in respect of the first quarter, of which ILS 850 million in cash dividend or ILS 0.65 per share. Before we conclude, a quick reminder of our financial targets and a brief macro update. On the targets, following the completion of the legislation of the special tax on banks, which will mainly affect this year, we updated our guidance at the end of March. For 2026, we are targeting net profit in the range of ILS 8.5 billion to ILS 9.5 billion with ROE between 13% to 14%. Looking ahead to next year, we return to our original ROE target of 14% to 15%, with net profit increasing to ILS 9.5 billion to ILS 10.5 billion. both years, we are planning loan growth of 8% to 9%, and we continue to target a payout ratio of 15% to 16%. The underlying assumptions, including the impact of special tax are outlined on the next slide. On the macroeconomic environment, the third quarter was overshadowed by the confrontation with Iran, which began at the end of February. The Israel economy has accumulated experience in coping with such events and most sectors of the economy continue to function during the 40 days of filing. Nevertheless, we believe that GDP contracted significantly in the first quarter. In April, economic indicators such as credit card purchases pointed to a marked improvement and in effect, a return to normalcy. Inflation in Israel is low relative to the rest of the world, partially due to the appreciation of the shekel and the relatively limited impact of rising energy prices on inflation. Markets are currently pricing in 2 interest rate cuts over the coming year, contrary to the trend among most central banks around the world during this period. Throughout the entire period, Israel's financial markets assessed that the country's geopolitical position has improved as a result of the campaign. This is reflected in the equity bond and foreign exchange markets. Israeli institutional investors sold large amounts of foreign currency over the last 3 quarters and were a major factor behind the strengthening of the shekel. Israel's 10-year government bonds are now trading at about 50 basis points below U.S. treasuries. To summarize, we started the year on a strong note with continued business momentum and a solid balance sheet. ROE was at 13% or above 14%, excluding the impact of the special tax. We delivered strong loan growth both this quarter and over the past year, alongside a consistent improvement in portfolio quality. Financing income and the margin remained robust despite the impact of lower interest rates and the negative CPI. Expenses continue to be well controlled, supporting an efficiency ratio in the mid-30s. And we returned 50% of net profit to shareholders through cash dividends and buybacks. With that, we will now open the call for your questions.

[operator instructions] The first question is from Canberk Benning.

Congrats on a good quarter. Just 2 questions on capital, please. I think Slide 13 is a really good summary of the evolution of the CET1 ratio from March last year to obviously the end of this quarter. I note that in that bridge, the CET1 ratio has gone down by 3 bps. But across on a quarter-by-quarter basis, the CET1 ratio has gone from almost 12% to 11.71%. I'm just wondering if you could talk about the dynamics and the evolution of the capital build quarter-on-quarter as opposed to this year-on-year figure. And then somewhat related to that is, at what level do you think you'll be happy to start paying out above 50% in terms of capital return? So obviously, this quarter, you paid 50%, but your target is 50% to 60%. So when can we sort of expect that?

Hi Can, thank you for the questions, and it's good to have you on our call. I'll answer both of your questions. This quarter was characterized by a significant and strong growth in activity and in credit 3.3% which contributed to growth in risk-weighted assets higher than the growth in CET1. There was some effect as well at the end of the quarter due to increase in yield this year on the OCI. It wasn't material, but it's characterized at the beginning of the war. So the growth in risk-weighted assets due to the very strong growth was higher than the growth in CET1 ratio, and that's what changed the ratio. We have capital buffers that allowed us to support both the growth and the distribution that we did after the year-end at 60%. This quarter, we decided on a 50% payout, which is certainly a high level of distribution. But at the same time, we continue to see growth opportunities. across the business with strong demand, and we allocate capital to serve the growth. So the balance we are trying to maintain is very clear. On one hand, delivering an attractive and consistent distribution policy. And on the other hand, preserving the capacity to support continued business expansion and growth, and we see the opportunity so far in the Israeli economy. As for your second question, we can't say what's the exact number because it's a dynamic issue. We look at the growth, we look at the demand and the mix we want to create. But we'll evaluate this every quarter. We publish our targets that we want to be between 50% to 60%. That's where we want to move. As long as we will see growth opportunities, we think that for the long term, we want to balance the growth with the payout ratio like we reflected this quarter as well. Obviously, our capital position is very strong, and it's comfortably above the minimum regulatory requirement and the minimum internal requirement standing at 10.23% and 11%, respectively.

There are no further questions at this time. This concludes the Bank Hapoalim First Quarter 2026 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.