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

Ladies and gentlemen, thank you for standing by. Welcome to Leumi's Second Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, August 15, 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, would you like to begin?

Thank you, operator. Ladies and gentlemen, thank you for taking your time to join us on this results call of Bank Leumi's financial statements for Q2 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 Economist. The presentation can be found on the IR section of our website and on the TASE website. I'd now like to turn the call over to Hagit.

Thank you, Michael, and good day, everyone. Thank you for joining us today for a review of Leumi's second quarter of 2023. Let us turn to Slide 3 in the presentation, where we present our first performance of the quarter. Q2 2023 net income was ILS 2.45 billion was up 23% year-on-year and reflects an ROE of 19.4%. Net income for the first half of the year was ILS 3.4 billion and was impacted by ILS 1.1 billion impairment of the [indiscernible] stake in Valley. The cost-to-income ratio consistently continued to decline and was 29.5% in the second quarter from 35% in the second quarter of 2022. Credit expenses were 0.31% in the quarter, down 10 basis points on the previous quarter. And like in previous quarters, came almost completely from collective provision. Credit grew by 6.4% in the first half of 2023 and 1.4% in the second quarter. Core deposits to private individuals, a key focus for the bank, are up 5.4% and grew 2.2% in the second quarter. Until the start of August, the debt has completed ILS 300 million of ILS 800 million buyback program which is in addition to ILS 736 million, representing effectively 40% payout for the second quarter. The next 2 slides show a snapshot of the key drivers of the pre-provision net revenue in the first half and second quarter. Slide 4 shows almost 60% year-on-year increase in pre-provision net revenue in the first half of 2023 to ILS 7.4 billion. Financing income increased by 34% to ILS 8.7 billion, driven by net interest income. Fees and commissions rose by 4.8%. Operating expenses were up 1.1% year-on-year. Slide 5 shows a snapshot of the second quarter. Pre-provision net revenue grew 32% year-on-year, dragging mainly by net interest income up 37% year-on-year. Turning to Slide 6. We can see the quarterly development of net interest income helped by higher revenue and higher needs as interest rate [indiscernible]. The NIM in the second quarter increased to 2.79% from 2.59% in the previous quarter and 2.15% in the second quarter of 2022. Slide 7 shows the year-on-year increase in breakdown of quarterly fee and commission income. The year-on-year increase in the first half was driven mainly by an increase in financing transaction and moderate increase in account management that we can see. Turning now to expenses on Slide 8. In the first half, operating expenses increased by 1.1% when compared with the first half of 2022, while quarterly expenses grew 2.6% year-on-year. On the right-hand side, we present the net positive cost-income ratio trends. Quarterly cost-income ratio declined to 29.5% or 35% in the second quarter of 2022. Slide 9 shows the expenses versus the previous quarters. Like in previous quarters, almost all the expense comes from collective provisions. Credit expenses in first half were at 0.36%. Slide 10 shows a small uptick in NPL, although this remains low on historical basis. Allowances for doubtful debt increased to 1.32%, while the ratio of the allowances for doubtful debt to NPS remains among the highest in the sector at close to 230%. By moving ahead now to Slide 11. The slide shows our loan book increased to ILS 410 billion in the first half, a 6.4% increase since the end of 2022. While we continue to grow in each of our target segments, we started stronger growth in corporate credit, which include real estate. We know that loan growth slowed in the second quarter of the year to 1.4%. Slide 12 shows deposit rents. We highlight here the growth in current deposits for private individuals, which increased 5.4% in the first half and they are almost 10% year-on-year. Important to note that our deposit base is well diversified and our liquidity ratios remain strong. Slide 13 shows the best solid capital ratio. The common equity Tier 1 capital ratio was 11.23% at the end of the second quarter and is more than 1% above the regulatory requirements. The total capital ratio stood at 14.44%. Slide 13 shows the key investment highlights for Bank Leumi. Bank Leumi continues to present consistent with strong financial performance, supported by a best-in-class cost income ratio and robust credit quality indicators. The bank's strong profitability and capital buffer enable us to continue to grow market share in our target segments while also allowing us to share higher returns with shareholders through dividends and our buyback, as I mentioned earlier in the highlights. It's worth noting that the debt will [ revolve ] around ILS 800 million of pretax profits from selling two headquarter buildings either in Q4 or in the third quarter of 2024. With that, I will now open the call for questions. Operator?

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

Congratulations on the strong results. I was wondering if you have any customers who are asking to renegotiate their loans for any particular segment or any uptick in that kind of activity?

Chris, thank you for your question. And I would say that we do see that partially -- mainly in the unsecured retail, it seems that currently, the most affected factors of the increase in interest rates are the unsecured retail as well as the small business. So we do see a slight increase in the payment in this segment. And as a result, a different arrangement around [indiscernible].

Okay. And just looking at expense going forward, can you give any color around the new employee agreement and maybe how the bonuses are triggered just if there's any real difference from the previous?

Okay. First of all, [indiscernible] has already signed a few months ago. It's not now. And the result of this agreement are already reflected in the salary expenses of the first quarter as well as the second quarter. So you can see from there that the salary expenses actually did increase, they even decreased a little bit. So you can assume for the results of the 2 quarters from the salary expenses in the last 2 quarters, which already reflect the new employee agreement that there's no effect on our salary expenses -- no significant effect on our salary expenses. The main reason is that within the increase in the salaries that is including in this agreement, we decreased our employee number last year, as we did in previous year by [indiscernible] one another.

The next question is from Borja Ramirez of Citi.

I have 2 questions. Firstly, I would like to ask regarding the profitability drivers for the cost to income, which is now, I think, a bit below 30%. And then my second question is asset quality. Your loan growth somewhere is around 12% year-over-year above the peer average. I would like to ask you if you are seeing any deterioration in the loan portfolio. I think your NPL ratio is below your peer average. So I would like to ask on that as well.

Thank you, Borja. I would say that, first of all, the high visibility is only from core business. There are no onetime items in the second quarter for the total 90.4% is driving from core businesses. And the main driver in this final capability are, first of all, as I mentioned, the improvement in our cost-to-income ratio, which as far I remember the first time that we present from core business, cost-to-income ratio below 30%, the best cost-to-income ratio in the market for a long period. The second parameter, which affected this high profitability is the credit cost expenses, which, as Hagit mentioned, decreased compared to the first quarter, the sales of expense ratio in the second quarter was 31 basis points compared to 41 basis points in the first quarter and moreover, [ unlike our peer ], which presents increase in the specific provisions, which are really [indiscernible] because the collected provision has a lot of [indiscernible] in that and Bank Leumi the specific provision in the second quarter as well as the previous quarter is around 0. All the provisions is composed of collective provision. And as we mentioned, the NPL -- even though it's slightly increased to a little of 58 basis points, it's still significantly lower than [ our peers ]. So in the bottom line, even though we increased our credit portfolio significantly in the last 2 years above the market base of growth. When we look at the main parameters that reflects the quality of the credit portfolio, the main parameter are very strong. And also in terms of the total credit loss expense ratio and the specific provision, which is around 0 and the NPL. And they are not -- and they're even better from the results that we saw in the market. So coming back to your question, even though we were able to receive [indiscernible] significantly to at least at this stage, and it's for a few quarters already when we having high [ profit ] level, the performance of -- the risk performance there are even better than the industry. And in the bottom line, this strong increase in our credit portfolio is one of the major drivers alongside with the increase [indiscernible] in our high profitability.

The next question is from [ Yuri Bar ] of the Phoenix.

And congratulations again for your excellent emerging results. And I have 2 questions. One is related to the -- well, the public pressure on the profitability of the banks lately. And do you think that maybe the regulator will intervene and require, let's say, to large payment on noninterest [ barring ] the current accounts? Or do you think that it is possible that you will be required by the Bank of Israel, let's say, to improve substantially your LLPs and or other measures that will limit or could limit your ability to distribute dividend going forward now. So in light of the difficult political and macroeconomic situation.

[ Yuri ], thank you. I would say that, first of all, the bank is owned completely by the public. So the profit that the bank generates are coming back to the public. Let me say that there is an environment that the bank earn too much. It's not new. And in the media, there are different politicians or a different proposal in the media, but nothing that can't be [indiscernible] is on the table. And if you talk about the Bank of Israel. So first of all, you mentioned current account. I would say that regarding current account, we were the first bank that started to pay interest on current account. And after us, all the banks proposed different formula about how they pay interest on current account. So we are already in a position that we are paying interest on current account based on the conditions that entitled the customer to get this interest. Regarding provision, I would say that the Bank of Israel is aware and I'm talking now the name of the industry, that the industry is very well conservative in this provision. In our provision, I assume that, that is also the case in other banks, there are significant demand of conservative provisions in order to mitigate any scenario that might happen in the future. So I think at this stage, especially when we look at the NPL, when we look at the [indiscernible], I mean the specific provisions and stuff like that, we don't see any needs to a significant increase in our credit provision. But of course, we have to look at it on a monthly basis, and of course, things can change. And as for dividends, I would say that we present 11.23%, which is 100 basis points above the requirement. So I don't see a reason for the bank [indiscernible] intervene in dividend distribution. Mainly when I look forward and I see that due to the interest rate level, I don't -- we don't expect that the credit portfolio will increase in a significant number. So it means that if the credit portfolio will not increase significantly as we [indiscernible] in the second quarter. And due to the high level of the interest rate as well [indiscernible], the bank will continue to generate double-digit ROE. So it means that in the bottom line, we can expect that within the different distribution ratio, which is high in the Bank of Israel, we should expect that the equity ratio might even increase. So because of that, I don't see a reason why the Bank of Israel will intervene at this stage in dividend this year.

Understood. But you don't think also that the Bank of Israel could might add additional or require additional capital reserves to -- I don't know, to present any [indiscernible]?

I would say, first of all, I am not aware of any initiative in this area. And secondly, we should keep in mind that the equity requirement in Israel are already in a very conservative position comparing our periods outside Israel. We implied the [indiscernible] in a very conservative way. So in already in equity requirements much higher than our period outside of Israel. So this is the first point. And also because of the trends in the market, I mean the decrease in the demand for loans and the high profitability, I don't see a reason for intervention and dividend position at this stage.

Understood. The second question is related to your growth driver, let's say, in the coming months through the end of the year or even a little bit beyond that. Because if I look at the segments now, the credit growth in the different segments, so we see -- or see declining lending demand or credit demand from particular -- some individual consumer loans, we see -- well, grow -- very low growth rate mortgages, very low or even shrinking rates in the small businesses. So you have your large businesses and in the large businesses, you are already exposed to the real estate. What do you see -- what would be your main segment targets going forward now?

First of all, I would say that we are focusing on Israel, about 95% of productivity is in Israel, and this is our main source of growth. Now you are right that due to the interest rate level, the demand for loan decreased. And we see that in the market -- in growth in the market, which is currently still okay, 1.5%, 1.6% for a quarter in the year [indiscernible]. We just get a double-digit number, but we are -- it's not the situation currently. And more -- I would say that there is a trade-off between interest rates and pay for growth because this pace of growth is impacted by the high interest rate level, but in the high interest rate level demand here from the high interest rate level. So there is a trade-off between the amount and price. In any scenario that you will assume [indiscernible] down for the pace of growth to increase, if interstate rate remain high where we continue to add high profitability because of the [ trial ]. So in any case, I see that the bank will continue to perform strong performance then, of course, the interest rate will remain strong for a long period. So we will see eventually increase in the credit cost expense ratio. But even if we will [indiscernible] 19%, strong double-digit ROE, will still be satisfied with that.

But do you see -- do you expect any, I don't know, margin -- credit margin pressure from mix change in credit and new credit?

First of all, for a long period, our strategy is focused in the mortgages, middle market and corporate include real estate as we mentioned. Most of these credits are -- most of our segment with relatively low margin, but strong collateral. This is one of the reasons why even though we increased the credit portfolio significantly, we present very good parameters in our credit portfolio analysis. Because we look at the bottom line, I don't care about the margin. I care about the ROE. So there is a tradeoff between that. And also that -- and but keep in mind that the -- portfolio currently is around problem ILS 415 billion, something like that. So ILS 510 billion, sorry. So it means that the incremental increase is not significant to the total number. So you're right that the mix is affecting the NIM. If we look for growth period of time because of our focus in the segment that I mentioned, the effect of that one will be over a long period.

The next question is from Micha Goldberg of Psagot.

And congratulations on a very strong quarter. A couple of questions. You mentioned that your common equity Tier 1 levels are relatively strong 11.23%. You mentioned 1% above minimum requirement. And I think that's indeed the case. That's excess capital of close to ILS 5 billion, would you consider increasing your dividend?

First of all, the question that is on the table of the buffer that you mentioned. And when we look forward and see that the -- due to the interest rate level, the demand for loan is not expected to be high. So it's a question on the table. And currently, we are satisfied with the 40% effectively if [indiscernible] share dividend. So we're effectively around 40%. But it's a question that we are looking at it. We are looking at it for both in the quarter. We also take in mind the macroeconomic environment, which will be prepared. You are right that we have a very strong equity buffer, but currently, they're still uncertainty so we prefer to be more cautious.

I understand. And just a related question. I mean, there's still some concern about a potential credit downgrades for the sovereign in Israel. I'm just wondering, you were different than the other banks, right? I mean you take the lower of S&P and Moody's? Or how would it impact -- the downgrade impact to you, if at all?

So there will be no impact on Bank Leumi S&P the rating of Israel because as we mentioned, we are using 3 rating companies. And we took in the higher fuel, but the minimum of these side. So we are ready, like our peers not using -- we are not using the S&P rating. Our risk-weighted assets are -- our measures based on A+ rating, not on the [indiscernible]. So there will be a decrease in the rating, will not impact our equity. If the impact on our equity, it will be -- there will be a decrease of [indiscernible] and it's reasonable at this stage.

So it seems to me that compared to at least the other local banks, you actually have less potential risk to your capital ratios, which would, I think, should motivate you to increase your dividend more than the other banks. Am I seeing that incorrectly?

In this respect, you are completely right, as I mentioned in the question that is on the table.

Okay. I mean do I remember correctly that in the past, you guys paid out up to 60% between buyback and dividend? Or am I confused?

This is correct. That was the rate before COVID.

Is there any reason to assume that, that could not be reached if you guys would decide to do that? Or is that too farfetched?

It depends on the macroeconomic environment and the pace of growth of our credit portfolio. Our first priority is to increase our pay portfolio of cost based on our appetite -- our risk appetite. But in this rate of growth, it seems for me that the equity will increase -- will increase. And we made a lot if the macroeconomic environment will be a little bit down to consider increasing our dividend [indiscernible].

Understood. Okay. Another question. I mean your margin widened very nicely this quarter. Actually, when you compare it to the other banks who reported, you've outdone quite nicely. And I'm just wondering what the reason for that is? And what that could mean for the next couple of quarters?

I will say that first of all, the main parameter that impact the increase in NIM [indiscernible] in the interest rate of [indiscernible], which was 1.4% for the quarter is relatively high for one quarter. And the increase in our unsecured retail in the policy. As Hagit mentioned, there was an increase in our core deposits -- I mean, the individual deposits of 10% year-over-year, 5.4% in the first half of the year and 2.2% in the second quarter. It's relatively high to our peer. So cost also impact the increase in NIM.

Very interesting. Okay. I also saw your noninterest earning liabilities went down than the other banks.. Is that also anything that you guys are working on? Or is that just happened to be the case in the quarter?

I don't understand the question, Micha. Can you repeat?

I also noticed that your current account deposits are the ones that we call is non-interest earning liability went down in this quarter less than the rest of the banks. And I'm wondering if that's related.

We have to look at it in a few more quarters and take -- understand that. I will not take any conclusion based on one quarter...

From the beginning of the year, you guys have about 5% less than your biggest competitor, which is quite possible.

[indiscernible].

Another question. I noticed for a couple of quarters already that although your staff costs are now lower, absolutely than what you're a small competitor who has a couple of thousands of less employees. I'm just wondering, is there some major difference between you and, I don't know, some other banks that have higher actual costs will have a significantly lower amount of employees.

You're talking about salary expenses?

Yes. Staff costs, you are -- I mean you're absolutely lower than discount back and still quite size bigger than the [indiscernible] I think.

I can just refer to Leumi and say that Leumi in the last 6 years, we did -- we took a lot of measures in order to handle our cost, the salary expenses as well as the other cost. You can see the consistently decreasing our work force by 100 employees every year in the last few years. I think this is the major reason for our ability to keep our expenses or salary expenses that relatively [indiscernible] level to last year into the previous year despite the increase in the salaries and also in other expenses. We took a lot of measures in order to be more efficient, mainly IT procedure. This is the main reason when I talked about...

Impressive. Another question. I saw you recorded ILS 122 million in profits and included companies. I'm just wondering, I mean, Valley National, which is I think the majority of that had close to ILS 140 million of profit this quarter, which should account for around ILS 75 million of that ILS 122 million. I'm just wondering what's the remaining ILS 50 million?

Most of the profit of a significant part of the profit is related to Valley Bank as we mentioned, in which we apply the equity method. The other profits are related to equity, obviously, that the affiliate company that we own in -- which is our fully owned subsidiary, which manage our non-traded investment company. So there are other parts coming from during...

Understood. Okay. One of your competitors reported a significant deterioration in some real estate loans, which on the surface of them were loans that were probably also at one of the other banks. And I'm just wondering, are you seeing any problem in these large development loans in Tel Aviv?

We don't see nothing significant. Of course, in this level of interest rates, there are, let's say, specific companies that more [ share ]. It is more difficult in this area -- in this period, but nothing that is currently significant for the first quarter.

[Operator Instructions] There are no further questions at this time. This concludes Leumi's Second Quarter 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.