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

Ladies and gentlemen, thank you for standing by. Welcome to Leumi's First Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded May 23, 2023. 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. I would now like 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 these results call for Bank Leumi's financial statements for Q1 2023. On the call today are Ms. Hagit Argov, CFO; and Mr. Omer Ziv, Deputy CEO and Head of the Capital Markets Division. We are joined today by our colleagues, Dr. Gil Bufman, Chief Ecoonomist of the Bank. The presentation can be found on the IR section of our website and on the TASE website. I'd like now to turn the call over to Hagit.

Thank you, Michael, and good day all. Thank you for joining us today for a review of Leumi's first quarter of 2023. This is my first conference call as the CEO of the bank, and I look forward to meeting many of you in the coming months. Let us turn to Slide 3 in the presentation, where we present key highlights on the quarter. Net income was ILS 1 billion, excluding the Valley stake impairment. We grew at a faster rate than the market, both in credit and also core deposits. Credit grew by 5.9% [ 4.9% ] in the quarter with growth in all our strategic segments, but mainly in corporate, including real estate. While total deposits declined in the quarter, core deposits from private individuals were up by 3.2% in the quarter and by 12% year-on-year. Higher volume, together with higher NIMs and higher fees and commissions drove revenue growth of close to 40% year-on-year to ILS 5 billion. Operating expenses were down 0.4% year-on-year. The cost-to-income ratio continues to improve consistently and was 32.6% in the quarter from 45.7% in the first quarter last year. The increase in credit loss expenses continues to be focused on collective provision, NPLs at 0.53% remain close to multi-year lows. The coverage ratio that is [indiscernible] for adjusted debt to NPL is close to 2.5x. Lastly, the Board of Directors improved the buy-back program of ILS 800 million. This is in addition to 30% quarterly digital payout and reflects our commitment to increase long-term value for shareholder. Turning to next slide, Slide 4. We can see on the major developments since our last report. First, the impairment of stake in Valley National Bank by ILS 1.1 billion that was announced earlier this month. The impact on CET1 from this write-down is not been negative. Secondly, the collective agreements with employees for year 2023 to 2026, the [indiscernible] side industry. This agreement gives the bank more flexibility in managing its local, while time the higher self employee compensation to profitability. Lastly, we announced the sale of 50% of second headquarter building in Tel Aviv. We expect the pre-tax of almost ILS 800 million will be saved and the sale of another headquarter building, which will be recorded later this year or early next year. Moving to the bank headquarter out of Tel Aviv to launch later this year will lead to further cost savings. Now let's move to Slide 5. Here we present the snapshot of the key drivers of the increase in – preprovision net revenue. We can see on the right that that we grow 73% year-on-year to ILS 3.4 billion. On the top left, we see the second income, financial income increased by 47% to almost ILS 3.4 billion. The non-CPI in the third quarter was 1.1%, similar to the third quarter of 2022. We see the fees and commissions grown by 7.5%. Operating expenses were down by 0.4% year-on-year. So turning to Slide 6. We see the development of net interest income, which grew more than 45% year-on-year. Hence, the higher volumes and higher NIMs, as interest rate growth, the net interest margin in the first quarter was 2.59%, up from 1.91% in the first quarter of 2022, and 2.44% in the last quarter of 2022. Jumping to Slide 7. We can see the breakdown of quarterly fee and commission income. The strong year-on-year increase came in from an increase in financing transactions from foreign currency differential and account management fees. Now let's turn to Slide 8 to the expenses. We can see here that operations -- operating expenses declined by 40 basis points when compared with the first quarter of 2022, due to lower salary and related expenses. The debt cost income ratio declined to 32.6% from almost 46% in the first quarter of 2022, a dramatic change. Next on Slide 9. You can see the margin is decline in the cost income ratio. This is something, which, as a bank, we are very proud of. And moving ahead now to Slide 10. Credit loss expenses, stood at 0.41% from 0.32% in the previous quarter. We continue to increase our collective provision providing the buffer in light of the current political and economic uncertainty. On the next slide, Slide 11. We can see that NPL as a percentage of gross loans remained low on historical basis while coverage ratio that is amounted for nonaccrual debt to NPLs, is the highest among the large and medium size then at 246%. Moving to Slide 12. Which shows that our loan portfolio in the top left, increased to ILS 403.8 billion in the third quarter, a solid return quarter-on-quarter increase, while we see -- at bottom right, we continue to grow in each our target segment, we saw strong growth in corporate credit, which includes real estate. Let's take a brief look at Slide 13, Deposit base. Total deposits were up 3.1% year-on-year, but down quarter-on-quarter, mainly due to lower institutional and also corporate balances. However, core banking deposits from private individuals were up 3.2% quarter-on-quarter and 11.9% year-on-year. Let's continue to Slide 14, which shows our solid capital ratio. We entered the quarter with a CET1 capital ratio of 11.23%, down quarter-on-quarter due to the strong credit flow, but still significantly above the regulatory requirements. Our total capital ratio, top right equate to 14.45% following the Tier 2 international bond offering in January. And now last but not least, on Slide 15. We present the long-term development of shareholder equity and book value per share. The bank strong profitability and our [ SE ] capital buffer, enabled us to grow in our strategic segments, while also allowing us to share higher returns to shareholders through dividends and now a buyback of shares. With that, I will now open the floor for questions. Operator?

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

Congratulations on the strong results. I wanted to start with Valley Bank. The current market value of the shares are below the value recorded on your book. So I was wondering how should we think about the potential impact on P&L and on capital, and if the value of Valley Bank were to stay where it is today or even potentially go down further?

So first of all, currently, the market value of Valley, our portion in the market value of Valley is around ILS 1.9, while after the deduction, the book value of the investment is around ILS 2.4 billion. So this is currently the gap. Now we are recording Valley National Bank is going to the equity matters, they are not recording mark-to-market. So by the end of the quarter, we will look at the market value of Valley, and we will have to consider whether the need for additional deduction in Valley. At this stage, according to our analysis, there is no need for further decrease. As I mentioned, the gross [indiscernible] 500, net of cost be around 350. But at this stage, we don't see a need for further reduction. But of course, it has to continue to follow the entire industry impact by the end of the quarter and to take a decision then. As you can see from the number, even if we decide to do additional increase, the number is not significant.

Got it. Okay. And you talked about the robust asset quality in the first quarter. I was wondering if following the two most recent rate hikes, you're starting to face customers that are maybe struggling to service their debt. How should we think about LLP levels at the current interest rates did stay unchanged for the foreseeable future?

First of all, Reimer, when you try to figure out -- when you look on our credit loss expense ratio. So it's 41 basis points for the first quarter, but it's all focused in the collective provision. The specific provision is around 0, it is impacted mainly by higher [ IFS ] growth, as Hagit mentioned, our base of growth in the first quarter, which is not reflected for the following quarter is 5%. So because the increment is [indiscernible] or the impact of that on our credit loss expenses is imported [indiscernible] material. And secondly, it was impacted by the macroeconomic environment. In this macroeconomic environment, we prefer to be more conservative in our credit loss provision. When we look at the other parameters of the credit portfolio, for the NPL, as Hagit pointed out, is still very low, 0.5%. Also, the ratio between the total debt to the total credit portfolio is very low, 1.6%. So when we analyze the credit portfolio, we don't see a significant signal for deterioration in the credit portfolio. When we look about the different segments or different -- in different segments of the NIM. So we should differentiate between the segment, but we are focused on royalty. I mean the middle market, mortgages and corporate, including real estate and private individuals and small businesses. But from our perspective, private individual and small business are more exposed to credit risk based on the interest rate. Most of these loans is not strong collateral or some of them is not collateral at all. This is the reason, if you look at the number, you will see that we decreased our credit portfolio impact individuals and small businesses in the first quarter. In the other segment, all of the collateral are much better and also the analysis when we give the loan is much more [indiscernible] not based only on model. It's more specific. Now looking forward, it's very hard at this stage to estimate how we will end the year. What I can say is that the level of the credit loss expenses in this interest rate level, in the assist at the stage reasonable. We should keep in mind that the higher the interest rate, and you can see across the both the higher the interest rate, the higher the fund profit. So even though with a negative impact on the credit loss expense ratio at the bottom line, it has a positive effect because the increase rate is much higher than the increase in the credit loss expense.

There are no further questions at this time. This concludes Leumi's first quarter -- excuse me, there is an additional question from the [indiscernible].

I don't know if you can hear me clearly if not, I'll hang up. But if you can, I have a couple of short questions. Could you explain [indiscernible] the buyback instead of increasing your dividend payout?

Thank you for your question. So we decided to -- first of all, we are found to be again the only making is we'll get the approval on the bank appraisal to implement the [ microtrend ]. We used to add [indiscernible] pre-COVID in 2018, 2019. We stopped with the [indiscernible] now we renew it. Effectively, if we will take the buyback plan, which is ILS 800 million, which we are going to start implementing in more [indiscernible] so if we assume that the following quarter, we get more the same profitability as the first quarter after neutralize the reduction in Valley National Bank. So it means that effectively, we are around 40% dividend payout ratio. We decided to make it and do as in the past. The vast majority we have cash -- remain via dividend. And part of it, we are -- buyback plan because we believe that first of all, there are different investors with different returns towards the dividend in cash or via buybacks. And secondly, we believe that the buyback plan reflects the -- the way that we miss it in cash and buyback is more -- give us more flexibility and more efficient way to managing our equity ratio in the following quarter.

So just a follow-up on that. I mean, in the past, you mentioned 2018 and '19, I think, you paid out 40% dividend. On top of that, you have the buyback. So would you consider along the next couple of quarters if things pan out in the right fashion, to also increase your dividend payout in addition to your buyback? Or is this what it's going to be?

First of all, we have considered every quarter. It will depend on the credit growth pace. And on the macroeconomic environment, these days after a 5% growth in the first quarter, which I mentioned again, is not reflected when we are considering what will be the credit growth in the following quarters, it will be lower. So we think that with the macroeconomic environment, this is the right place to be, of course, is -- we will continue to consider it again in the following quarter based on the parameters of the adjustments.

And I have a question about the loan growth. I mean it's pretty unique to see you as a large bank continue to grow at this current very rapid pace, and I think a large part of it, as you mentioned, is in the corporate/real estate market, which seems to be in somewhat of a freeze. So I'm just wondering -- when you look at what's going on in the economy and the conservativeness that you usually have applied, is this something unique in this quarter? Or should we be expecting similar kind of relatively rapid loan growth in the next couple of quarters as well?

Very good question. As I mentioned earlier, you should not expect this pace of growth in real estate in the following quarter. I would say that the way we work with our customers with our leading customer is a way that is not linear in real estate along the year, and also due to the increase in the interest rates, of course, the demand for new loans become lower. So you should not expect that this pace of growth will continue in the following quarter. After saying that, I would say that we are proud in our pace of growth in the last 4, 6 quarter which is much, much -- which was not significant above the industry. The vast majority of the growth in the first quarter was, again, in the residential projects. It is in project that the LTV is very strong, the absorption rate is very strong. Project it'll reach the pace of sales is much higher than the pace of the project. The other side there is very strong. So we feel comfortable with that. Also the -- within all what happened in the macroeconomic environment, the prices are still according to our model and according to our -- the underwriting analysis that we've done before, advancing this loan. So in the bottom line, the answer is that it's not linear. We should not expect this pace of growth in the following quarter. But -- and regarding this -- when we analyze the risk in both in our real estate project, we believe that this sector and this segment is one of the stronger segment due to the reason I mentioned and due to the collateral increments.

As the grow -- loan growth that you are experiencing, which seems to be significantly faster than the other banks, is that accompanied by pressure on margins? Are you lowering margins when you compete on loans right now? Or that's not the necessity?