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 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded August 14, 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 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 for Bank Leumi's Second Quarter 2024 results conference call. Joining me today is Ms. Hagit Argov, CFO and the 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, Michael. Good day, everyone. I'm happy to be here with you all. Before we delve into the financials of a strong second quarter, I would like to say a few words about the macro backdrop in the second quarter, which after 9 months of war showed the modest recovery, which began in the first quarter of the year and is continuing, positively contributed to our results. Sales of new and secondhand apartments continue to pick up. And for the 3-month period to May 2024 were up significantly on the corresponding period last year. Consumer confidence remains low affected by the war, but retail sales continued to increase in March to May, following the recovery in the first quarter. Wages continue to rise and the unemployment rates continue to fall. Foreign trade data indicates an increase in the volume of the exports in the second quarter with an emphasis on the export of IT goods and services. While geopolitical risks remain high, Bank Leumi estimates a 1.4% GDP growth in 2024 and the rebound in 2025 provided that the war ends by then and does not extend with growth driven by domestic demand, investments in fixed assets and private consumption. Returning to the bank's performance in Q2 of 2024, let me pinpoint 3 key takeaways, and we will go into the details later in the presentation. Firstly, the bank continues to report strong profit. Second quarter 2024 ROE was 15.9% and would have been 20.2%, excluding the ILS 0.6 billion impairment of the Valley Bank stake versus 19.4% in the second quarter of 2023. Since the end of the second quarter, Valley stock has increased and the value of Leumi's [ 14.2% ] stake is above the value reported on our books. Secondly, our improved credit position. The quarter saw a meaningful decrease in troubled debt and NPLs, which combined with recoveries on specific loans and lower collective provisions resulted in much lower loan loss expenses. And finally, the continuing improvement of our cost-to-income ratio, which continues to be the best in the sector. Now let us turn to Slide 3 for the highlights of the quarter. The second quarter was another strong quarter with net income of ILS 2.3 billion and ROE of 15.9%. Reported ROE for the first half of 2024 was 18% and was similar on a normalized basis to the value impairment in the quarter, more or less offsetting the profits from the sale of Leumi's headquarters building in the first quarter. The cost income ratio declined to 28.7% from 39.5% a year ago. Credit losses were almost 0 as collections offset lower collective provisions. Credit growth was up 1.2% on the previous quarter but was up 2.4% when excluding capital markets as economic activity continues to recover. Credit-to-capital markets can be volatile on a quarterly basis. Core deposits were up 1.4% and are up 3.4% year-to-date. Slide 4 shows a snapshot of income and expenses in the second quarter. Net interest income and fee income increased by 2% compared to the parallel quarter last year, mainly as a result of the increase in the credit portfolio and activity offset by lower NIMs and lower rates and higher funding costs. Total expenses declined by 2%, mainly due to lower bonuses. On Slide 5, you can see the same snapshot for the first half of the year. Financing income was up 7%, while the 5% increase in operating and other expenses year-on-year was mainly due to higher employee bonuses on higher profits. In Slide 6, we can see the development of net interest income, supported by credit growth and helped by higher CPI in the second quarter. Turning to Slide 7. Fees increased by 2.2% as economic activity continued to recover, supported by financing transactions and security activity and also a year-on-year increase in credit card income. Slide 8 shows the continued improvement in the bank's multiyear cost income ratio which improved further to 28.7% in the second quarter. Slide 9 shows the quarter-on-quarter and year-on-year decline in loan loss expenses, which we have close to zero due to a lower collective provision and also due to income from specific provisions due to recoveries. Note the decline in the collective provision to ILS 68 million was despite an increase its macro-related provisions due to higher macro uncertainties. Net provisions in the first half of the year was 0.09%. The next slide, Slide 10, presents the high quality of our credit portfolio. The NPL improved to a level of 0.56% at the end of the second quarter and troubled debts decreased to a level of 1.5%. At the same time, as can be seen on the right-hand side, the bank's total provision remains stable at ILS 6.7 billion, covering almost 270% of the bank's NPLs despite the fact that we increased our credit portfolio at a faster rate than our peers in recent years. Leumi continue to present low NPL and trouble debt ratios. Slide 11 shows that the bank continues to grow credit in its target segment of mortgage units and corporate, including real estate and middle market. Demand for credit in mortgages and corporate, in particular, rebounded in the first half of the year. The next slide, Slide 12, shows the bank's diversified deposit base and robust liquidity ratios. Core deposits grew by a healthy 3.4% since the start of the year, continuing the strong growth recorded in 2023. I'm moving ahead now to Slide 13, which shows our very healthy capital and leverage ratio. The core Tier 1 ratio has increased by almost 40 basis points in the first half of the year to 12.04% despite the higher 40% total payout. The total capital ratio rose to a level of 15.04%. Turning to Slide 14. The strong profitability and large capital buffer allowed us to declare a cash dividend of ILS 681 million for the second quarter, in addition to the second tranche of our ILS 1 billion share buyback plan, reflecting a 40% total payout and equal to around a 7.5% annualized yield. Together, this brings the total capital return for the first half of the year to more than ILS 2 billion. In conclusion, and turning to Slide 15. The bank continues 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 healthy capital buffer enable us to continue to grow in our target segment, 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.

Congratulations on the strong results. I have 3 quick ones, please. The first one is, I wanted to ask about the deferrals. I know that most banks allowed resident of the North to delay mortgage repayments and so on. I wanted to get a sense of the scope, like what's the percentage of the total book that's been deferred for these reasons.

We have a specific number in our financials for that, and you can see that the total deferrals for the end of June are negligible. The total payment that were deferred are only ILS 2 billion. And also the total credit that involved with the deferral is only ILS 9 billion, significant decrease from the level that we had by the -- in the end of 2023. This is one of the parameters that we saw significant improvement in the second quarter as well as in the [ write-off ] and other underwriting parameters that all of them [indiscernible] one direction, improvement in the quality of our credit portfolio.

And then the second one is on provisions. So we're seeing recoveries. My usual question is, assuming nothing changes with the macro and the geopolitical concern, should we expect further reversals over the next coming quarters?

I would say as following. First of all, in this quarter, as in the first quarter, we have continued to see collections. You can see that we have the specific provisions, which was negative. As for the collective provision, as a matter of fact, we didn't release provisions despite the fact that we have increased the buffers in our collective provision in order to be prepared for any eventuality. And the collective provision was in the second quarter only 6 basis points and the reason for that is what we mentioned earlier, I mean, the improvement in deferrals, the improvement in the ratio of the problematic debt, as Hagit mentioned in the review, we can see that the problematic debt has continued to improve and it rose to a level of 1.5%. We can see a consistent improvement in the NPLs. So all of that led to only 6 basis points collective provision, and this is despite the fact that we increased the portion that is related to the geopolitical circumstances. So looking forward, of course, it depends on the geopolitical situation. But if the situation with -- of our customers, I mean, the main trade parameters will continue to improve as we've seen in the last 2 quarters, it means that the credit loss expense ratio for the following quarters will continue to be low as well.

And the last one is around the dividend and cash back. So I mean you guys are sitting on a lot of excess capital. Am I assuming that the current payout is whatever the Bank of Israel is allowing you to pay at the moment. And do you think that it's going to allow you to increase the payout in the future?

That is correct. Currently, the 40% are mainly due to the geopolitical situation. As Hagit mentioned, our CET1 is above 12%. Our total capital ratio is above 15%. So we have the ability to increase it, and I assume we will consider it when it's possible.

The next question is from Priya Rathod of Jefferies.

Just 2 from my side, please. So the first is, obviously, this quarter, we saw some good loan growth come through, which is really encouraging. But since the end of the second quarter, have you seen any changes in the patterns in terms of loan demand? And my second question is, and I appreciate this is quite forward, especially since you've increased it this quarter, but what are the hurdles or criteria for you to eventually release some of the war uncertainty provisions that you put on? And I guess a follow-on from this is, like, more specifically in your loan book, are there any areas of concern in your loan book that we should be aware of looking forward in the next 2 or 3 quarters, for example, commercial real estate.

Thank you. First of all, we don't see any significant changes since the beginning of July. Of course, we are in the summer, which is lots of people are in vacation and seasonally, not regarding the war, the demand for loan is lower than in other months but nothing significant. As for the threshold or any other parameters that we use for the collective provision, we look at many parameters. It's a complicated model in which we look at the collections, we look at prepayment, we look at the different macroeconomic parameters. We look at the fair -- we look at different things and combine them into a model in which we try to forecast in very conservative approach what should we keep as provision. And as I mentioned, in this quarter, due to the macroeconomic environment, it actually -- we actually increased the buffer that relates to this portion in the provision. Of course, the most exposed segment to any deterioration in the geopolitical situation is the unsecured retail and small businesses because in the other sectors, the borrowers are much -- are much stronger borrowers, the collaterals are much stronger. And even in real estate that you mentioned, the NPL is improving, the problematic debts are improving, I mean, they are going down. And specifically for the real estate, I will say that our biggest exposure is to the construction loans. And then we have lots of mitigation. The main mitigation is related to the collateral, of course, but also to the absorption rate. And I can say that apart from very, very specific projects and small projects, in almost all of our other projects, the absorption rate is above 40%. So you can understand that the scenario in which the price goes down by 40% or the costs go up by 40% is very remote, if at all.

[Operator Instructions] The next question is from Micha Goldberg of Psagot.

Congratulations on an excellent quarter and a very strong first half year. A couple of short questions for me, please. I saw fee income has been declined in this quarter. I was just wondering what the background on that was and what should we be expecting in the next couple of quarters? Secondly, I saw tax rate was much lower than originally, I think thought about. Can you tell me how much the war levy this quarter?

I missed your second question. First question was regarding the commission. What was the second question?

Tax rate, war levies, the war taxes.

Yes. okay. So as for the commission, they were more or less similar to the previous quarter. There was a very, very light decrease mainly related to the benefits that we grant to our customers due to the war, but the decrease is very low. For the second quarter, I think the commissions were 910; and in the first quarter, they were 935. So the decrease is very -- is insignificant. As for the tax rate, the tax rate for the second quarter was relatively low. It was impacted mainly by the improvement in our deferred tax. Our deferred taxes are mainly related to our pension liabilities. So when -- so due to the increase in the VAT that is expected to be implemented from 2025 or from 2026 actually, so it affects positively our deferred tax. And this effect positively our tax rate. I think that in the long term, the following quarter, you should expect on a long-term basis, tax rate of 35%. But for the next one and half year, because of the additional tax that was imposed by the government, so we should expect a tax rate between 37% to 38%.

The difference between the 37%, 38%, 5% was the DTAs, Is that it, deferred taxes?

It was the special tax that was implemented on -- that was imposed on banks for 2024 and for 2025.

Great. And my last question. I see that you guys have tried not to release any group revisions over the last couple of quarters, although some of the other banks did. I'm just wondering, is the Bank of Israel allowing you currently to release? And if it is, when do you think it's going to be appropriate to release some of that excess provision?

I don't think there is for business for the -- by the Bank of Israel for listing a collective provision, but we didn't release collective provision. As I pointed out in the second quarter, we even increased the collective provision that it relates to different scenarios that can develop due to the geopolitical situation. And the decrease is coming from other elements, mainly real elements, I mean it's our model, and when there is a significant improvement in deferrals, when there is a significant improvement in write-offs. So by definition, the model will lead to lower collections -- to lower provision, sorry. And if you add to that collections that we include in the provision, so at the end -- so you end with only 6 basis points collective provision. Looking forward, we have a significant buffers in our provision. And when the situation gets better, we will consider to release it. We didn't release it yet.

There are no further questions at this time. This concludes Leumi's Second Quarter 2024 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.