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 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded May 28, 2024. I would like to remind everyone that forward-looking statements for the respected 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 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 for Bank Leumi's First Quarter 2024 Results Conference Call. Joining me today is Mr. Hagit Argov, the CFO and Head of the Finance Division; and Mr. Omer Ziv, Deputy CEO and Head of the Capital Markets Division. We are also joined by our colleague, Dr. Gil Bufman, Chief Economist. The presentation can be found on the IR section of our website and on the TASE website. I would like now to turn the call over to Hagit.

Thank you, and good afternoon. Let's now turn to Slide 3 for the highlights of the quarter. Q1 2024 was a strong quarter across all parameters. Net income was ILS 2.8 billion with ROE at 20.2%. The quarter included post-tax gains of ILS 632 million from the sale of the headquarters building in Tel Aviv. If we normalize only this profit without its effect on other items like bonus provision, the normalized ROE would be 15.6%. The cost-income ratio declined to 29% from 32.6% a year ago. Credit loss expenses declined to 0.21% and actually includes income mainly from collections and the specific provisions of 0.15%. Credit growth increased growing 2.2% since the start of the year. Core deposits also increased substantially by 2%. Apart from the increase in core deposits, the total deposits also increased at a greater rate than our peers. Turning to Slide 4. You can see that for a sustained period, the bank has been able to generate high and stable profits and ROE. While first quarter net income and ROE was positively impacted by the sale of Leumi headquarters buildings in Tel Aviv as mentioned, it also included higher bonuses due to the high profitability. Slide 5 shows a snapshot of income and expenses in the first quarter. The financing income increased by 14% compared to the corresponding quarter last year, mainly as a result of the increase in credit portfolio and the increase in interest rates. The net interest income decreased mainly to a lower CPI, which was only 0.3% in the first quarter compared to 1.1% in the corresponding period last year. The increase in noninterest financing income was mainly driven by derivatives net of foreign exchange. The 12% increase in operating and other expenses year-on-year was mainly due to higher employee bonuses due to the record profits. In Slide 6, we can see how credit growth picked up in the first quarter, growing 2.2%. Our loan book remains well diversified. Indeed, as you can see on the next slide, Slide 7, we continue to grow faster than the market in our target segments, especially in mortgages and corporate, including real estate. Slide 8 shows the bank's diversified deposit base and the healthy liquidity ratios. Core deposits grew by a healthy 2% since the start of the year, continuing the strong growth recorded in 2023. In Slide 9, you can see the continued improvement in the bank's cost-income ratio, which improved further to 29% in the first quarter. This ratio was impacted by the profit from the sale of the headquarters and also from the high bonuses due to the high profitability. Slide 10 shows the quarter-on-quarter and year-on-year decline in loan loss expenses, which declined further to 0.21%. The lower loan loss expenses were due to both a lower collective provision and also due to income from specific provisions due to recoveries. The next slide, Slide 11, presents the high quality of our credit portfolio. Despite the fact that we increased our credit portfolio at a faster rate than our peers, we have continued to present the lowest NPLs and the lower troubled debt ratio among the large banks. The NPL improved to a level of 0.65% at the end of the first quarter and troubled debt improved to a level of 1.6%. At the same time, as can be seen on the right-hand side, the bank's total provision was stable at 1.6% of gross loans, covering almost 250% of the bank's NPL. I'm moving ahead now to Slide 12, which shows our very healthy capital and leverage ratios. The core Tier 1 ratio increased more than 30 basis points in the quarter to a level of almost 12%. The total capital rose to a level of 15%. Note that we don't expect any impact on capital from the S&P downgrade of the sovereign rate to A+ in April. Turning to Slide 13. The strong profitability and large capital buffer allowed us to declare a cash dividend of ILS 835 million for the first quarter. In addition, we launched a new buyback program of ILS 1 billion to be paid in out in 4 tranches from May 2024 to May 2025. The first tranche of this buyback is ILS 280 million and will be effected in the coming days. Together, this brings the total capital returned for the first quarter to more than ILS 1.1 billion, equal to a 40% quarterly payout ratio and the 10.3% annualized yield. In conclusion, and turning to Slide 14, the bank continued to present consistent and strong financial performance with high ROE despite the challenging economic backdrop. Long-term asset growth is driving higher revenues and profitability, supported by best-in-class cost-income ratio and strong credit quality indicators. The bank's strong profitability and the healthy capital buffer enable us to continue to grow in our target segments, while also allowing us to share higher returns with shareholders through dividends and our buyback program. With that, I will now open the call for questions. Operator?

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

Congrats for the strong results. I have 2 questions, please. First one, I wanted to talk about loan loss provisions. How should we think of recoveries going forward, assuming the geopolitical situation doesn't deteriorate? So what would be a fair level of provisioning going forward?

Tavy, good afternoon and thank you for your question. [ I'm Omer ]. I would say as follows. As you mentioned, it's mainly dependent on geopolitical circumstances. But assuming that we will not see a significant deterioration in the geopolitical environment, and currently we don't see a deterioration in the -- in terms of the economic perspective, I would say that as Hagit pointed out in the presentation on Slide #10, you can see the significant increase that we made in the collective provision in the second half of 2023, mainly regarding the macroeconomic environment. So if the situation will not deteriorate, it will be like we saw in the first quarter, more or less stable. I will say that we should expect that on an annual basis, the credit loss expenses should be lower than last year. We can see that the specific provision in the first quarter was negative. I mean, we had the income, we had collections -- mainly from collection in the first quarter. And so I assume that in the total year, the credit loss expenses should be like we saw before the war. I don't want to put numbers, because it could be any numbers, but it can be around 30 basis points, maybe more, maybe less, but this is the area.

Okay. That's helpful. And just last one for me. Deposits, we've seen a nice acceleration over the past couple of quarters. And I'm just wondering what's driving that momentum.

There was 2 points. First of all, we increased our core deposit, I mean, our individual deposits, much greater than the market because it's one of our strategic targets to increase significantly our core deposits because they are -- first of all, regarding deposits, there are no equity requirements. So in terms of ROE, it has a normal effect on the ROE since there are no equity requirements. And moreover, when we recruit new customers or new deposits, it doesn't end with only deposits. So we've done that. Secondly, in the first quarter and also in the fourth quarter last year, we had a significant increase in deposits in the business division as well as in the capital market division. Also there, the margin is not high. It's much lower than margin on loans, but it contributed to the ROE. So we've done significant work -- we've done a very good work, and we were able to increase it significantly much more than our peers.

The next question is from Micha Goldberg of Psagot.

Congratulations on a very strong quarter. My first question is on dividend policy. I seem to remember that you stated that your policy is 50% of net income. You seem to have so much excess capital. Is there a chance you're going to be [ increasing ] that 50%?

Micha. Good afternoon. First of all, you are right, before the war, we had the approval of the Bank of Israel to pay up to 50%. Currently, the Bank of Israel instructs all the banks in Israel to be more cautious in the dividend distribution ratio. This is the reason why -- I assume that why Bank Leumi and other banks pay around 40%. We prefer to combine it, as Hagit pointed out, by buyback and dividend distribution in cash. And we also got the approval that the buyback plan will be implemented not only in the first quarter, but also in the following quarters, of course, depends on the geopolitical development. When you look at our equity ratio, I mean our Tier 1 equity ratio, which is 12% currently or almost 12% and on our total capital ratio, which is 15%, so we have all the ability to increase it. But currently, as I mentioned, due to the geopolitical circumstances and due to the instruction of the Bank of Israel to be more cautious, that's what we decided to this quarter.