Bank Leumi le-Israel B.M. (LUMI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Leumi's Fourth and Full Year 2020 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded March 9, 2021. With us on the line today are Mr. Hanan Friedman, President and CEO; and Mr. Omer Ziv, First EVP and CFO. I would like to remind everyone that forward-looking statements for the respected company's business, financial condition and results of its operations are subjected 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 security authorities. A PowerPoint presentation, which is available on the bank's website at www.bankleumi.com, will be used during this conference call. I would now like to turn over the call to Ms. Daphna Golden, VP, Investor Relations. Ms. Golden, would you like to begin, please?

Yes. Thank you, operator. Ladies and gentlemen, we thank you for taking the time to join us on this results call of Bank Leumi's financial statements for Q4 and the year ended December 31, 2020. Hanan Friedman, President and CEO; Omer Ziv, First EVP and CFO, will be presenting the development strategy and major takeaways from the financial statements. We are also joined today by our colleagues, Shlomo Goldfarb, First EVP and Chief Accountant; and Dr. Gil Bufman, Chief Economist. The presentation can be found on the IR section of our website and on the TASE website as well. Now on a personal note, this is my last quarter at Leumi. I would like to thank you all investors and analysts for over 4 extremely interesting years. I also want to welcome Adi Molcho Weinstein who will be taking over the role. Welcome, Adi and good luck. I'd now like to turn the call over to Hanan.

Thank you, Daphna, and welcome, Adi. I'm happy to be here with you for our annual results call. During 2020, the world changed dramatically due to the pandemic. Last year, we presented our upcoming milestones, leveraging and expanding our digital leadership and capabilities. COVID-19 has proved that our digital strategy was the right strategy at the right time. During this challenging year of COVID, we at Leumi has taken our digital and our advanced technology capabilities many steps forward. For example, I can share with you that nowadays, the majority of our consumer lending is done digitally using the best AI capacities and models. I will review what we have achieved and how we have accelerated our digital journey. I will also share some of our forthcoming milestones for 2021. Before I hand over to Omer, it's worth mentioning that in spite of the crisis, we concluded the year with a strong quarter. This is in line with the trend of improvement we achieved quarter-by-quarter over the year. Now I will hand over to Omer to present our financial results for 2020.

Thank you, Hanan. I will start with a brief overview of solid update in Israel. I am on Slide 3. As see on the graph on top, Israel is leading the global vaccination effort. At this stage, the number of active cases is lower than 40,000, down from a peak of 85,000 in early February of this year. Currently, nearly 5 million people, 57% of the entire population have received the first dose of the vaccine; and over 3.7 million people, 42% of the entire population had received both doses. Moreover, the ratio of the eligible population, those over the age of 16 is much higher. This country-wide application of the vaccines will hopefully speed up the economic recovery in the market, positively impacting Israel GDP. I'm moving on to Slide 4. Israel's GDP fell by 2.4% in 2020. A moderate decline compared to the impact of COVID on other markets, such as the U.S., minus 3.5%; and the Euro Zone at an average decline of 7%; and the U.K. at a 10.2% drop. The personal consumption in Israel decreased by 9% in 2020. However, during Q4 2020, personal consumption in Israel grew by 18% compared to Q4 2019. Moreover, looking at the data from the beginning of 2021, the total credit card spending returned to a level similar to those seen at the beginning of 2020 before the outbreak of the pandemic. The Bank of Israel's forecast from early January assumes a 6.3% growth in GDP in 2021 based on the expectation that the Israeli market will recoup rapidly, assuming that COVID-19 is contained following the extensive vaccination rollout in Israel. In December, the broad unemployment rate was down to 13.2% for a peak of 37.1% in April 2020. As a reminder, it includes employees temporarily absent from work due to the coronavirus crisis and those dismissed since the beginning the pandemic in March of 2020. According to the Bank of Israel, unemployment is also expected to improve by the end of the year with a further substantial decline expected in 2022. All this, of course, is dependent on the success of the vaccination given widely in Israel. Now I will turn to the financial results. Moving on to Slide 5. 2020 results were affected significantly by the outbreak of COVID and the cautious provisions for credit losses that we put in place throughout the year in order to cope with COVID fall out. Due to the increase in the credit provisions, the ROE for 2020 was relatively low compared to previous years and reached only 5.7%. Having said that, during 2020, we substantially and consistently improved our results quarter-after-quarter, and we're proud to end the year with an ROE of 9.8% for the fourth quarter. We should keep in mind that this high-yield was achieved despite our high Tier 1 equity ratio, which reached almost 12%. The loan loss expense ratio in Q4 dropped to 0.37%, substantially lower than the 1.2% recorded in the first half of 2020 and the 0.76% in Q3. Regarding our cost income ratio, we have continued to improve it consistently and significantly as in previous year. This steady drop in the cost income ratio is not a minor achievement. I'm continuing to Slide 6. As I pointed out, the credit loss expenses had a material effect on our 2020 results. During 2020, we recorded credit loss expenses of ILS 2.6 billion, of which 74% is due to an increase in the collective provision, mostly in order to deliver the passive and negative development in the following quarters due to COVID effects. The credit loss expense ratio reached 0.88% compared to 0.22% last year. But as I mentioned earlier, the credit loss expense ratio rose in the fourth quarter to only 37 basis points. The loan loss provision ratio as a percentage of total debt remained at a high level of 1.76% in the previous quarter. This high level contained a cautious provision that we established throughout 2020. There is still uncertainty in different areas, and there are still similar strengths in effect that even may come to an end. As we expected in previous quarters, the NPL ratio rose in the fourth quarter and reached 1.15%. This increase was driven by the increased applications with significant amount of debt in the fourth quarter in order to ease our customers' difficulty in coping with the pandemic. The total amount of problematic debt remained similar to the previous quarter. The rate of the impaired debt increased at the expense of the other categories of problematic debt due to debt restructuring, which I mentioned earlier. In any case, since we had put a cautions provision in place in previous quarters, the increase in the NPLs didn't have a material effect on the credit loss expenses in the fourth quarter. The increase was the expense of the collective provision. I'm moving on to Slide 7. As for deferrals in payments due to COVID-19, the total payment deferred at the end of December 2020 were ILS 1.1 billion. At the end of January 2021, they were cut by 40% and amounted to only ILS 0.7 billion. Almost half of the outstanding payment deferrals are related to housing loan to private individuals in which Leumi's average LTV ratio based on the date of the approval is only 45%. Furthermore, approximately 80% of the total debt, which were deferred, returned to pay and the percentages of delinquency in payment in those debt was negligible. I'm continuing on Slide 8. The net interest income decreased by 1.3% compared to last year. The decrease is mainly attributed to the difference in the CPI between the period. The CPI in 2020 was minus 0.6%, while the CPI last year was a positive 0.3%. If you neutralize the effect of the difference in the CPI between the periods, the net interest income is very similar to last year. The NIM reached 1.9%, a decrease of 24 basis points compared to last year. This was mainly the result of the difference in the CPI within the period and the result of the decrease in the Fed and the Bank of Israel interest rates. The decrease in the interest rate was offset by the increase in the average credit portfolio. The decrease in the non-interest finance line item is mainly related to the losses in the capital market in the first quarter of the year and to derivative and foreign exchange, mainly as a result of the decrease in the noninterest rates in the first quarter. I would also like to mention that the noninterest finance income for 2020 includes income before tax of ILS 86 million from the sale of its shares in the third quarter, while last year's figures included before tax of ILS 123 million from the sale of Super-Pharm and SHVA. As for commissioning expenses, during 2020, we were able to increase our fees and commissions and to reduce our expenses substantially. And we elaborate on these items later in the presentation. Moving on to Slide 9. The Q4 results of 2020 were impressive in all respects. The finance income increased by 8.2% compared to Q4 last year, reaching ILS 2.8 billion, mainly driven by the noninterest finance income. The NIM reached 1.88% for Q4 2020, a decrease of 25 basis points compared to Q4 2019. This decrease is mainly attributed to the drop in the Fed and the Bank of Israel interest rates at the beginning of 2020. We have been able to offset this decrease with the increase in our credit portfolio. The improvement compared to Q4 last year was not only in the finance income. Fees and commissions increased by 3.1% and the expenses dropped by 12.1%. I will elaborate on that shortly. All this increased the ROE for the fourth quarter to 9.8%, significantly higher than Q4 last year despite COVID. Turning to Slide 10. Fees and commissions increased in 2020 by 1.7% compared to last year and reached ILS 3.3 billion. This increase was driven by the increase in securities transactions and exchange differentials as a result of extensive activities. The increase was offset by financing transactions due to, among other things, a decrease in activity as a result of COVID-19. It should be noted that we have also been able to increase the credit card commissions despite the negative effect of COVID on credit card turnover. As for Q4, fees and commissions were 3.1% higher compared to Q4 last year. The increase was driven by an increase in securities transactions, which was offset by a decrease in account management fees. Moving on to Slide 11. In 2020, we were able to reduce our expenses by almost 11%. In Q4, the reduction was even higher 12% percent. The decline in expenses was both in salary expenses and in other expenses. The reduction in salary expenses was mainly due to the lower provision for bonuses and the decrease in the number of employees at the end of last year. The reduction in other expenses is in different areas as a result of the measures that we took in order to mitigate the negative effect of COVID. Also, we should keep in mind that the crisis led to a significant acceleration in digital activities in all segments. The cost income ratio in 2020 continues to improve and reached 53.8%. The cost income ratio for Q4 2020 reached a very low level of 50.7%, similar to the previous quarter and much lower than Q4 last year. Even though the Q4 cost income ratio doesn't yet reflect our position, the direction is very clear. I'm continuing on to Slide 12. On the right, we present a consistent improvement in our cost-income ratio over the years. The improvement is substantial. On the left, we present a steady decline in our employee numbers over the years. In 2020, again, we were able to reduce our workforce by over 400 employees. The acceleration in digital activity and the automation of operation activities have had a material effect on these numbers. I'm turning now to the next slide. As in previous quarters, we have continued to focus our growth in middle market, mortgages and corporate. In middle market, we increased our credit portfolio by nearly 10% compared to last year. In mortgages, by nearly 7%; in corporate, by 10.7%. This growth sped up in the first -- in the fourth quarter. At the same time, we continue to be very cautious in the unsecured retail and small businesses, which are considered to be riskier segments. Continuing on to Slide 14. In 2020, our deposits increased sharply by ILS 73 billion and reached ILS 447 billion at the end of December 2020. This was mostly due to the transfer of funds from the capital markets to deposits and to the reduction in consumption. As such, the loan-to-deposit ratio continued to be conservative and reach a level of 66%. I'm proceeding now to Slide 13. 2 days ago, the Bank of Israel extended its instructions regarding the reduction in the medium regulatory capital adequacy requirement and the leverage ratio. The instruction will be in effect until September 2021, which transitioned instructions for 24 months following this day. In according with these instructions, the minimum capital requirement from the bank are 9.23% for CET1 and 12.73% for the total capital ratio. The leverage ratio requirement is 5.5%. The Bank of Israel has added that respective banks not to distribute dividend until the end of September 2021. At any rate, this slide illustrates our solid capital ratio, CET1 and TCR and our leverage and liquidity ratios. In all of this, we present ratio much above the minimum requirement. In a year with a severe pandemic, and a significant increase in the credit provision of ILS 2.6 billion, this is not insignificant. Moreover, the figures demonstrate clearly that we have a strong capability to distribute dividends when it is allowed. I'm moving on to the next slide into my final remarks. The strong ROE of 9.8% in the fourth quarter, along with the consistent improvement in our results throughout the year show that we are on the right path. We have managed to implement our strategy and increase our credit portfolio significantly in mortgages, middle market and real estate in a year with a negative GDP. We have been able to offset the negative effect of the reduction in the interest rate by increasing our credit portfolio. And we have succeeded in reducing our salary expenses, our employee numbers and our other expenses substantially. As a result, we have continued to improve our cost income ratio as we have done consistently in previous years. Looking ahead, our fundamentals are strong. We have established quite conservative and strong credit provision in order to be prepared for COVID possible negative development. We have the capabilities to continue increasing our credit portfolio according to our strategy as we did in 2020. And we have created a strong and diverse deposit base. We have also built high equity ratio, which will enable us to distribute dividends when it is allowed. And we have implemented a unique digital solution along with strengthening our traditional banking activities. All of this, together with the significant decline in hospitalization, and the severe cases directed from the third lockdown and the improvement of many macro KPIs put Leumi in a very strong position at the beginning of 2021. I will now turn the call over to Hanan. Hanan?

Thank you, Omer. As I mentioned earlier, 2020 was indeed a challenging year. The COVID-19 crisis has had a strong impact on society, banking and Leumi. It directly accelerated change in customer behavior and expectations. For a long time, we spoke about the major strategic goal of accelerating growth without raising our conservative risk appetite, growing in places where we feel comfortable to grow, especially middle market, mortgages and real estate. This goal has been achieved. During the COVID-19 crisis, we have shown that we were able to grow much faster than previously thought possible. We saw it all through 2020 in corporate business, in middle market and in the mortgages. This growth was even greater in fourth quarter. The ability to show strong business growth can be ascribed to 2 major attributes. The first is our ability to build on our digital capabilities developed during the past years. The second is a quicker implementation of our digital and AI strategy, which happened due to the crisis, and I would like to elaborate on these 2 important points. Today, customers in all segments want to be served immediately. For most banking services, they do not want to go to a branch. They expect service to be tailored to the specific needs and available almost 24/7. This market trend is not new, though the COVID-19 has sped it up dramatically and expanded it to all segments. Leumi's ongoing strategy regarding the future of banking is based on several layers which include the use of advanced digital tools and processes, enhanced leveraging of data and use of AI, rapid development and implementation of advanced digital real-time credit models, the use of customer journeys is the main channel to offer specific customer propositions, offering advanced banking solutions and service to customers of all banks. During the past year, we significantly reduced the time frame for implementing our strategy of transferring our customers' activities to digital. This was accomplished due to our ability to move almost all of our customers to digital services. We have seen that not only in banking, but even in health services, patients prefer to meet their family physicians via digital channels, and will continue to do so even in the future. Our pre COVID digital capabilities enabled us to transfer customers to digital channels much faster. Obviously, customers who have experienced this model of quick and simple banking will not be going back. Each of the layers in our strategy has been leveraged during the past year to better accommodate the bank's goals and customer needs. Regarding the private customers, during the crisis, we were able to leap several years ahead in implementation of digital services, introducing new digital products and activities, so raising customer satisfaction. Specifically, when we look at our main product credits, we set a goal, which we have achieved almost completely. Our goal is to using automatic models and automatically underwriting the majority of our consumer loans. Even during the crisis, it was proven that advanced credit models can be more accommodating to customer needs. This is done by providing a swift response, while giving an offer tailored to each customer's credit profile with more accurate and individual risk assessment. In addition, automatic underwriting can utilize more extensive data and be more accurate than human underwriting. The models we implemented have also been leveraged for offering products to customers of other banks. We launched a digital loan for customer of all banks, and currently we are the only bank in Israel offering an end-to-end digital loan experience for other bank's customers. Our enhanced credit models, and in particular, the ability to match them to each customer, an accurate assessment of risk to a price based on their specific risk profile, gives us the edge over those who do not have these capabilities. As I mentioned before, with regard to service, we have leveraged our capabilities, and today, all appointments at the branch are set up in advance. Since we know the subject of the meeting beforehand, it enables us to call ahead and provide the service on the spot for simple activities without the need for a meeting at all. In addition, we have been enhancing our customer journey capabilities to be able to offer products and services tailored for customer-specific needs. Here, we have seen strong results, and we'll continue to invest in this. These steps leave much more time for the bankers to initiate calls and offer tailor-made services to customers with more complex needs. These combined with the enhanced use of advanced credit models and automatic underwriting gives us the reassurance that the streamlining potential is much higher than originally expected, and that the marginal cost of the additional business is insignificant. We have also extended these abilities into the arena of mortgages. With mortgages, customers still want the human touch and the advice, but will rather not go into a branch. This year, on top of our digital mortgage, we also launched a mortgage via zoom that provides the customer the ability to have a Zoom meeting with the banker to finalize and sign the mortgage. Currently, we are the first and only bank in Israel offering a truly end-to-end digital mortgage experience. There is no need to meet in person or sign papers at a branch, but we still maintain the human touch by giving the customer the possibility of speaking to a banker via Zoom. We are also in the process of launching an underwriting model to give immediate response to most applicants. This will allow -- this will also assist our major initiative to further announce our mortgage penetration in the Israeli, Arab as well as the ultra orthodox communities, where we see tremendous growth potential. Pepper has continued to grow, and it remains the leading customer recruiter in the entire Israeli banking industry. Today, with Pepper, we offer a full range of banking services, including payments, credit and also securities trading. We'll continue to enhance our offering via Pepper, so allowing us to be well positioned for the expected entry of a new digital bank in 2021. With regard to our business and corporate customers, receiving a prompt response and having the ability to close the deal quickly is extremely important not only for private customers, but maybe even more for business customers. We have seen this many times in the past and even more so during the COVID-19 crisis, where customers have signed a credit agreement with Leumi because of our quick response and our ability to accommodate their needs, even though the main banking activity is down with different banks. We achieved accelerated growth in the corporate division, particularly in the fourth quarter of the past year. The outstanding level of growth achieved in the fourth quarter is impressive. Within this by implementing digital capabilities and processes, this enabled us to attend quick response time and swift underwriting. It will continue and will even be enhanced. This year, almost all business requests will be handled within 48 hours. This is a key initiative, which will support our growth strategy for the Corporate division. This year, we benefited from the fact that 2 years ago, we launched the operations division. It helped us tremendously. It enabled us to keep operational continuity for our customers and even improved our level of service. It also helped us to achieve more than 100% of our streamlining targets for 2020. There are many more initiatives in the pipeline, which will lead to additional streamlining activities during 2021. Regarding our investment platforms, Leumi Trade our digital trading platform, Pepper Invest and Videa a digital portfolio management platform have proven themselves over the past year. We can see this in the increased income from service charges due to the growth in the activity of our customers in the capital markets. The payments arena is an additional innovative area of focus. We are the first bank to launch a digital wallet, enabling our customers to pay in the stores with Leumi and Pepper apps. We believe our customers will prefer to conduct the payment activity from one safe wallet. This will give them the best customer experience. We're in the process of leveraging this innovative capabilities, specifically our credit models and processes with our quick digital onboarding to be able to offer credit and trading products to all individuals in the market. The open banking reform is a great opportunity. We have set up initiatives and offering to enrich and enhance our value propositions for all customers, not only current Leumi customers but other bank's customers as well. We'll achieve this by using existing and best data capabilities and models. The open banking regulations also opens up the opportunity to connect and partner with fintechs. We will also provide the fintechs with a cloud-based easy-to-connect platform enabling a win-win relationship. We expect this to let us offer groundbreaking services to the customer with minimal effort. In the era of open banking, in order to sell products to customers of other banks, there is no need for partnership with retailers, which makes the products much more expensive, but rather to partner with fintechs in order to offer innovative and cheaper propositions. So looking forward, after making a great leap forward in our digital strategy implementation during the past year, we are now better positioned for next year's opportunities as well as challenges. Our ability to achieve faster growth and penetrate new areas and introduce new products has increased dramatically. We have greater streamlining potential, and therefore, we feel confident in our strategy and positioning. Thank you.

Thank you, Hanan. With that, we will now open the call for Q&A. Operator?

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

I first wanted to touch on digital because that's the thing that you guys mentioned. When I take all the information into account, the success in our digital uses by clients, working from home throughout the pandemic, but when you look at it from a big picture perspective, does that mean that you can decrease your real estate footprint and do streamlining at a higher pace than originally anticipated?

Tavy, thank you for your question. The answer is yes. The major driver for the -- in our cost income ratio was the digitalization of our customers and something like that, and the automation of day-to-day activities in the back office. And looking forward, on the top of these 2 elements that drove sharply in 2020 due to COVID, there is also the working from remote that you mentioned. It's a potential that we look at it deeply. And of course, it will -- one of the benefits of that will be selling of some of our real estate which are located in major cities in Israel, mainly in Tel Aviv. Even without this movement to work from remote, we are in a process of transferring our headquarters from Tel Aviv to Lod. It's a city, about 20 minutes from Tel Aviv near the airport. And we are in the middle of this process. So it means that, first, we will relocate our employees in much more advanced system than those in which they're sitting in a traditional way of sitting. So it will lower significantly the place that we need, the real estate that we need. And secondly, by doing that, we will be able to reduce our expenses because not only we will decrease the office space that we need, but the costs in Lod are much lower than the costs in Tel Aviv. And on top of that, we will record profit from selling our real estate here in Tel Aviv. It will happen during 2021 or 2022.

Great. I appreciate the color. And then talking about provisions, given what you mentioned, a significant amount of provisions throughout the pandemic. But on the other hand, what seems to be a recovery and you guys being cautiously optimistic about 2021. Do you think that if the trends were to confirm itself, we would see a high level of recoveries towards the second half of the year?

Well, it depends on the development. Currently, the expectations are optimistic. As I mentioned, the forecast of the Bank of Israel, the Ministry of Finance and also in Leumi are optimistic since the vast majority of the population already been vaccinated in Israel. It means that we will see a movement. In 2020, we built quite cautious provision in order to cope with negative development regarding COVID that might happen in 2021 when the similar trend that's still in effect will come to an end. So when it happens, we expect to see a movement between the -- from the collective provision to the specific provision, as we have seen in 2021. And maybe we also will decrease some of the provision based on the economic situation. But in short, I would say that we expected much lower credit loss expenses in 2021 than they were in 2020.

The next question is from Joseph Dickerson of Jefferies.

Just with the sharp recovery that's expected both in Israel and other countries globally, the volume pickup should be quite large. There's also the opportunity for operating leverage is quite large. Can you give us a sense on how you expect costs to pan out in 2021 and the sustainability of cost improvements outside of the staff expenses, where they were down, I believe, 14% quarter -- 17% quarter -- year-on-year in the fourth quarter. How sustainable is that? And what do you -- what are you thinking about the cost base for 2021?

Okay. So with regard to the salary expenses, we have been able also in 2020 to reduce our employees by more than 400 employees. And the trend is very clear due to digital and the automation of back office activities, operational activities. So we expected that we will be able to decrease this trend in 2021. Regarding the other expenses that you mentioned, so as you pointed out, there was a significant decrease in expenses in 2020. It was in all areas. We expect to maintain a major part of it as a permanent decrease because, as Hanan mentioned, the vast majority of this improvement is due to the movement of our customers toward digital channels. And this is going to increase because when a customer cross the bridge, he doesn't want any more the traditional channel. So we expect that -- of course, there will be expenses that related to COVID and they will increase next year. But because of that, which is a permanent call and because of the tightened way that we manage our expenses for a long period, we expect that a major part of this decrease we'll maintain in 2021.

And maybe I will -- it's Hanan. Maybe I will add a few sentences regarding what Omer just mentioned. According to our strategy, we should do more and more digital, not only as a service channel vis-à-vis the clients, but also in all processes in our back office. And we implemented many initiatives during the last year; and in the pipeline, there are many more. And in our vision, banks will shortly become more tech companies than banks. And for me, tech company is a company that could grow dramatically without additional operational expenses. And I believe that when most of our processes and most of the significant channel the customers will be based just on digital, and we are far ahead in this journey. We will be able to make much more with the same level of costs and even less. And therefore, I believe that there will be more tech companies rather than banks, but the potential of streamlining is getting greater and greater as we are stepping ahead with our journey towards the digital and AI capabilities.

[Operator Instructions] There are no further questions at this time. This concludes Leumi's Fourth quarter and Full Year 2020 Results Conference call. Thank you for your participation. You may go ahead and disconnect.