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

Ladies and gentlemen, thank you for standing by. Welcome to Leumi's Third Quarter 2022 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded November 29, 2022. With us on the line today is Mr. Omer Ziv, First EVP and CFO. 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 and 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. A PowerPoint presentation, which is available on the bank's website, bankleumi.co.il will be used during this conference call. I would like now to turn over the call to Mr. Michael Klahr, Head of Investor Relations. Mr. Klahr, please go ahead.

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 the third quarter of 2022, ending September 30, 2022. I recently joined Bank Leumi, Head of Investor Relations. I look forward to meeting and working with many of you in the future. Omer Ziv, first EVP and CFO, will be presenting the development, strategy and major takeaways from the financial statements. We are joined today by our colleagues, Hadar Zamir, Head of Accounting; and Dr. Gil Bufman, Chief Economist. The presentation can be found on the IR section of our website and on the TAS website. I'd now like to turn the call over to Omer.

Thank you, Michael. Welcome, and good luck, and thank you all for joining us for the review of the new results for the third quarter of 2022 in the first 9 months of the year. I would like to start with a short review on Slide 3, which presents the main macroeconomic parameters in this economy. As for the GDP, we can see that this year, the GDP is expected to be around 6%. Next year, it's expected to be around 3% according to the latest focus of the Bank of Israel, and the concern is around 3.2%. Regarding the unemployment rate, it currently is around 4% and next year it is expected to grow to a level of 3.5%. As for the inflation rate, it's expected to be lower next year than this year, around 3.5%. I mentioned all of that because even though next year, the parameters are not going to be as strong as in this year, there are still strong parameters across the board and much better than in many other countries. Moreover, as you know, more than 95% of Bank Leumi activity is in Israel, and we are impacted significantly from the strongest of Israel's economy. Now with your permission, I would like to dive into the results on Slide 4. We present a strong result for the third quarter as well as for the first 9 months of the year. The ROE for the third quarter reached slightly less than 15%, as in 2021, and a level of 16.3% for the first 9 months of the year. This strong ROE was led by an impressive increase in our credit portfolio. The credit portfolio increased by 5% in the first 9 months by almost 8%. This increase was, of course, also impacted by the increase in the interest rate CPI. Despite the expansion in our credit portfolio and the expansion in our activities, the expenses of Bank Leumi dropped in the third quarter, as well as in the first 9 months of the year, by 2% to 3%. As a result of this significant increase in income and the decrease in expenses, we will [indiscernible] significantly in our PP&L of 33% year-over-year in the third quarter. Also, as a result of this movement in which we are able to significantly increase the income while we're decreasing our expenses, the cost-to-income ratio reached to a level of 39.1%. The equity ratio also improved significantly, and the CET1 reached a level of 11.4%, the highest level in the industry. On Slide 5, we present a broad picture about the improvement in the cost/income ratio and the credit loss expenses in the last 4 years. And we can see the substantial improvement in our cost/income ratio, the low level of the credit loss expenses and as a result, the significant improvement in our ROE in 2021 and in 2022. I'm continuing to Slide 6. Our finance income increased year-over-year in the first 9 months by 15.6%. This increase was driven by the significant increase in our net interest income, an increase of 28%. The increase in the net interest income, as I pointed out earlier, was led by the significant increase in our credit portfolio as well as from the increase in the interest rates and the CPI. As for the noninterest finance income, they were significantly lower than last year, mainly due to the results in the capital market. Regarding fees and commissions, they were up by 8%. This increase was a result of the increase in our activities, our freight portfolio, and as a result of high activity regarding foreign exchange. As for the expenses, they were down by 3%. We can see that the expenses also went down in the salary area and also in other expenses. As a result, the pre-provision net revenue increased by 24%. On the next slide, we analyze the third quarter and the trends are very similar. The increase in income was 22%, mainly due to the increase in the net interest income. You can also see that the NIM reached a level of 2.3%, and we can see that as a result of the increase in our activity, the fees and commissions increased by 9%. In the third quarter, year-over-year, we can see a decrease of 2% in our expenses. And also here, we can see an impressive increase in our pre-provision net revenue. On Slide 8, we analyze the main reason for the increase in our fees and commission by a level of 8% in the first 9 months, and 9% in the third quarter. We can see here that this increase was driven mainly by an increase in our finance commission due to the increase in our credit portfolio, and with an increase in the exchange differential commission and in credit card commission. On Slide #9, we can see the improvement in our cost-to-income ratio in the first 9 months and in the third quarter. The results for the first 9 months were also impacted from the profit of the merger in the USA with Valley Bank. Initially neutralizing that, we will reach a level of 41%, and we can see that in the third quarter, this level improved and got to a level of 39%. On Slide #10, we present the increase in the credit portfolio. As in previous years and according to our strategy, this increase of focus in middle market, mortgages and corporate, including [indiscernible], in which we feel much more comfortable due to strong collections. On Slide #11, we present the credit loss expenses for the last 3 quarters and for the total 9 months of the year. We can see that the credit loss expenses remained at a low level of 7 basis points for the total 9 months, and 11 basis points for the third quarter. This is very similar to the level of the second quarter. We can also see that while there were similar expenses in the collective provision of around ILS 230 million in the third quarter as well in the second quarter, there was an income from specific provisions, mainly due to collection. The level of the collective provision in the second quarter as well as in the third quarter is around 25 basis points. On Slide #12, we see the improvement in the NPL, which reached a level of 55 basis points. We can also see the improvement in our total trouble debt, which for the third quarter reached a level of only 1.5% from our total credit portfolio. The total provision to NPL reached a level of almost 200%, and the total provision to the credit portfolio reached a level of 1.26%. I mentioned all that because despite the significant increase in our credit portfolio last year and this year, the main parameter, which reflects the quality of our credit portfolio, remains robust and strong. On Slide #13, we can see that in the last 12 months, we increased our deposits by 14%. We can also see that the loan-to-deposit ratio remains at a very conservative level of 70%. Also, the NSFR and the LCR remain at a very strong level of around 127%. On Slide #14, we can see the significant increase in our equity ratio. On CET1, we reached a level of 11.4% for the end of September 2022, and the total capital ratio reached a level of 14.3%. Each of these are much higher than the regulatory requirements. Also the leverage ratio came to a level which is much higher than the regulatory requirements. Based on that, the Board of Directors decided yesterday on a dividend distribution of ILS 356 million for the third quarter, which reflects a dividend payout ratio of 20%. I would like to end this part by saying that again, Bank Leumi presents a very strong performance. We continue to increase our credit portfolio in significant amounts, with robust performance of credit quality indicators. I mean low NPL, low problematic debt, and low loan loss expenses. We again were able to significantly increase our income, and despite this increase, to decrease our expenses. As a result, we reached a cost/income ratio of 39%, which is the lowest cost/income ratio in the industry. We also improved our capital ratio, and this strong capital ratio will support our ongoing growth in the future and the capital return for our shareholders. With that, I would like to open the line for questions. Operator?

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

Congratulations on the strong results. Just referring to the DOI comments last week, referring to early signs of macroeconomic slowdown. Are you seeing any impact at this stage of any kind of slowdown?

This is Gil Bufman here. In some segments of activity, we are seeing a little bit of a slowdown. I think it pertains mainly to the household sector that is still expanding, but slowing down its growth. And obviously, that is something that you would expect with interest rates going up and inflation being a little bit on the high side. Not as high as in, let's say, the U.K., or the U.S., or the Eurozone. So, we are seeing a little bit of a slowdown there. Where we're not seeing a slowdown in general is the export sector, which is doing fine. High-tech exports are doing well. There's a big increase going on in housing starts and housing activity. So, the slowdown does seem to be very gradual. And Leumi's forecast for GDP growth next year is 3.4%, which is slightly above the Bank of Israel's forecast. So it does appear to be a slowdown in growth, but nothing beyond that.

Okay. And just assuming for the moment, there was a slowdown. What segment of the portfolio do you see as most at risk of facing higher provisions?

Chris, it's Omer. First, as you know, in the last few years, we focused our growth in middle market, mortgages, and corporate, including real estate. Even though the margins in this segment are much are much lower than the margins in consumer individuals and in small business, in which we were very conservative in the last few years. And of course, these segments are the most exposed increase to the toleration if there will be a significant slowdown in the economy because the collection, if it at all exists, is not strong, and the profile of the customer is less solid than in other customers. This is the reason why we focus our growth in the other segments, even though the margins there are much lower.

Got it. And just one touching on dividend. How are you looking at the scope of dividend payout given the excess capital balance that you have?

It's a very good question, and I must admit that yesterday, there was a long discussion about it in the board meeting. We are aware of the fact that our equity levels allow us, if we would like to increase the dividend above the dividend that we distributed in this quarter. But our main target in using our equity is that this equity will support our growth as it did in 2021 and 2022. So, this is a question which is on the table. Currently, we prefer to be more conservative and keep the equity for supporting our growth. But as you mentioned, it can also enable us in the future to pay extra dividend above the 20% that we are currently distributing.

The next question is from Konstantin Rozantsev of JPMorgan.

I wanted to ask a bit further on the loan quality trends that you see in the coming periods. Do you see any emerging signs of stress? I see that the loan quality metrics that you report that are quite robust. So it doesn't look from these metrics that there have been any market stress, but giving forward in the coming quarters, do you expect any pressure from the high rates, high inflation, possible economic deceleration? And could you please maybe build this into the numbers as well? What kind of credit loss ratio, cost of risk should we expect in the coming quarters that you're going to report?

Thank you, Konstantin. I would say as follows. First, as I pointed out, the main indicator of the macroeconomic situation is expected to continue to be strong. I mean, the unemployment level is expected to remain at a low level. The inflation rate is expected to decrease compared to this year. And the GDP, although it will be lower than 2020 and 2021, is still very similar to the GDP pace of growth in 2019, 2018. It's not far from there. So at this stage, we don't see significant stress or something like that in our activity. The deferrals on payments are still at a very low level, almost across the board. At this stage, we don't see it. Of course, if the interest rates continue to increase, it might change the picture a little bit. But at this stage, as I mentioned, we don't see a significant effect on that in our different matrix. We do see, for example, in mortgages, some requests for extending the loan period, but not further than that. Now, the second part of your question was what will be the impact of that on the credit loss expenses. I agree that the current credit loss expense ratio doesn't reflect in the future. I don't believe that the level of 11 basis points or 10 basis points is a level that reflects our position at this stage. And we can see it from the collective provision. The 11 basis points are a combination of a 25 basis points equation, which is very similar to the level in the second quarter and income due to collection in the specific provision. Now at the end, this income will end. We don't expect that every quarter in the following quarters, we will have a net collection in the specific provision. So, the bottom line is that we do expect to an increase in the credit loss expenses. But what will be the pace of that and when happens - it's very hard to predict. It depends on a very large number of forces.

[Operator Instructions] There are no further questions at this time. This concludes Leumi's Third Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.