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 2024 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded November 19, 2024. And -- 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 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. I would now like to turn over the call to Mr. Michael Klahr, Head of Investor Relations. Michael -- 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 Third Quarter 2024 Results Conference Call. Joining me today is Ms. Hagit Argov, 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 colleagues, Dr. Gil Bufman, Chief Economist. The presentation can be found on the IR section of our website and on the SaaS website. I would now like 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 with the financials of a strong third quarter I would like to say a few words about the macro bank growth in the third quarter, which more than a year into the war continues to show a recovery positively contributing to our results. Recently published national accounts figure show that Israel's GDP rose in the third quarter of 2024 by 3.8% in annualized terms. And the more important indicator of the business sector output grew by 5.4% in annualized terms. The recovery has been led by domestic demand, mainly fixed asset investments and private consumption. The level of GDP in the third quarter of 2024 is still 1% lower than in the corresponding period in 2023, but the gap is closing. The fiscal deficit declined in October to below 8%. The first decrease since the outbreak of war, supported by an increase in state revenue. Sales of apartments continue to pick up in the period to August this year and retail sales recovered in the first half of 2024 and maintained their level. Foreign trade data indicates an increase in the volume of exports since the beginning of 2024 with an emphasis on the export of IT groups and services. Bank Leumi expects a 0.6% GDP growth rate in 2024 and the rebound in 2025 to 3.9%, and -- provided that the war ends in early 2025, hopefully, with growth driven by domestic demand, investments in fixed assets and private consumption. Inflation remained slightly elevated at 3.5% year-on-year and the Bank of Israel is not expected to cut rates in the near term. Last but not least, Israel's market-based risk indicators have improved recently across the board. This includes declines of Israel's CDS spreads and the yield gap, the increase in the effective value of the Shekel and the relatively strong performance of the Tel Aviv Stock Exchange. Returning to the bank's performance in Q3 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. Third quarter 2024 ROE was 15.5%. Note that ROE in the quarter was negatively affected by losses from derivatives which hedge our securities portfolio and where the profit is reported to other comprehensive income in the OCI. I will elaborate on this later. Secondly, despite the challenging economic backdrop, our credit position remains very strong. In the third quarter, NPL declined further to 0.52% of gross loans, while problematic loans also declined to 1.44%. I -- At the same time, the bank continued to increase our reserves, which now stands at 1.5% of gross loans. And finally, core Tier 1 equity increased further in the quarter to 12.07% with the buffer to the minimum regulatory requirement of more than ILS 9 billion. Now let us turn to Slide 3 for the highlights of the quarter. The third quarter was another strong quarter with net income of ILS 2.3 billion and ROE of 15.5%. I -- Reported ROE for the first 9 months of 2024 was 17.1%. The cost income ratio declined to 31.1% in Q3 from 32.6% a year ago. The cost income ratio for the first 9 months was 29.6%. Credit losses were 0.28% and -- all due to higher collective provisions following the expansion of the world on the northern border. Specific provisions remain negative due to collections. Credit growth was up 3% from the previous quarter and is up 6.5% since the start of the year. Our book value per share grew 3.8% quarter-on-quarter and is up 16.1% over the last 12 months to almost ILS 40. I should also mention here that our investment in Valley which following a strong share price performance is now trading more than 35% above the value reported in our books. Valley recently raised $450 million in equity, which together with other significant measures the bank is taking, including reducing the real estate exposure, will reduce risk and support growth. Turning to Slide 4. I -- we showed a snapshot of income and expenses in the third quarter. Net interest income increased by [ 16% ] compared to the parallel quarter last year due to the increase in our credit portfolio and due to higher CPI. The negative noninterest income was impacted mainly due to losses related to interest rate derivatives that hedge our securities portfolio. Actually, the bank's security portfolio recorded strong gains in the quarter. But for accounting reasons, only the cost of derivatives is reported in the P&L while the gain of ILS 1.2 billion are recorded straight to the equity account, as I mentioned, in the OCI. Total expenses were down slightly, mainly due to lower other expenses. On Slide 5, you can see the same snapshots for the first 9 months of the year. Financing income was up 6% at the 9% increase in interest earning assets was partially offset by the negative impact of the shift from current accounts to deposit accounts. The 3% increase in expenses year-on-year was mainly due to higher employee benefits on higher profit. In Slide 6, we can see the development of net interest income. The higher NIM in the third quarter was positively impacted by the change in the mix of assets as well as various other measures being taken by the bank. Average current account balances as the share of total deposits were stable quarter-on-quarter. Turning to Slide 7. Quarterly fees increased 2.2% year-on-year and 8.1% over the previous quarter as economic activity continued to recover, supported by financial reductions, securities activity and FX trading. Slide 8 shows the continued improvement in the bank multiyear cost-income ratio, which improved further to 29.6% in the first 9 months. Turning to Slide 9. The credit loss expense ratio has continued to be low. On the one hand, we have continued to increase our collective provision due to the war. On the other hand, the bank continued to record income from specific provisions due to recoveries despite the macroeconomic challenges. The net credit loss expense ratio in the first 9 months of the year was only 0.16%. The next slide, Slide 10 presents the high quality of our credit portfolio. The NPL improved to a level of 0.52% at the end of the third quarter and troubled debt decreased to a level of 1.4% (sic) [ 1.44% ] NPL has dropped by ILS 1.2 billion since the beginning of 2024, while problematic debt declined by more than ILS 1 billion. At the same time, as can be seen on the right-hand side, the bank's total provision remains stable, actually increasing slightly in the quarter to ILS 6.8 billion, covering almost 290% of the balance NPLs. Leumi continues to present lower NPL and trouble debt ratio than our peers. Slide 11 shows the bank is continuing to grow credit in service segments of mortgages and corporate, including real estate and middle market. Demand for credit in mortgages and real estate and corporate has continued to be strong in the first 9 months of the year. The next slide, Slide 12, show the bank's diversified deposit base and robust liquidity ratios. Core deposits grew by 4.2% 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 ratios. The core Tier 1 ratio increased by more than 40 basis points in the first 9 months of the year to 12.07% despite a 40% total payout ratio. The bank's capital buffer, the difference between the CET1 ratio and the minimum regulatory requirements now stands at more than ILS 9 billion. The chart on the right-hand side of the slide shows the gradual improvement in the leverage ratio to 7% at the end of the quarter and also the increase in common tangible equity as a percentage of total assets. Turning to Slide 14. The bank declared a cash dividend of ILS 688 million for the third quarter in addition to the first tranche of our ILS 1 billion share buyback plan, reflecting a 40% total payout. Together, this brings the total capital return for the first 9 months of the year to more than ILS 2.9 billion and significantly more than ILS 2.3 billion of capital return for the whole of 2023. The 9 months return is equal to an annualized return at yesterday's close of around 6.4%. A -- 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 growing 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 Chris Reimer of Barclays.

Congratulations on a strong quarter. I wanted to talk about provisions and loan growth considering we've seen different levels of provisions over the last few quarters high. We've seen recoveries back to normalized levels. And then the loan growth has been resilient, I would say, surprisingly so. How should we be looking at those 2 items going forward just in terms of modeling?

Chris. I would say first of all, in the first 9 months of the year, despite the fact that the GDP pace of growth, the real GDP pace of growth in Israel in 2024 is expected to be only 0.5%. As Hagit pointed out, we were able to increase our credit portfolio by 6.5%. So it reflects the fact that despite the geopolitical challenges, we have -- we present again our ability to increase our credit portfolio and it was driven mainly by demand, demand for credit in corporate including real estate, mortgages and middle market. It seems that after the first 2 quarters after the war started that the market, the economy started to rebound and different figures that Hagit just mentioned, reflected that. The figures, the macroeconomic figures for October as well as for the third quarter are much better than the figures in previous quarter. And this, of course, created demand for loans. Now I don't know what will be in the following quarters. But when I look forward for the next following quarters, the main scenario that we see in front of us is that at the end like any war, the war will be settled, and when it happens, we will start to see a rebound in the economy and that, of course, will create a demand. So in the bottom line, I believe that even this year, we were able to increase our credit portfolio only in the first 9 months by 6.5%, it means that we have the ability even to increase it in better years. That's first. Now as for the provision, as Hagit mentioned, First of all, all the credit loss excesses were composed of the collective provision. If you look at the strategic provision, it's very stable and consistent. It's negative quarter after quarter, the write-offs are lower than the collections. In the collective provision is impacted by the geopolitical circumstances. And due to the development in this earlier in the third quarter, you see you see an increase, which after the increase, I would say that credit loss expense ratio of less than 0.3% is a very reasonable credit loss expense ratio in this environment. And moreover as we did in previous quarters, we increased also in this quarter significantly the buffer that relates to the geopolitical circumstances. And if the situation improves, as we believe, so we'll be able also in the following quarters to start to release it and if you look at the other [indiscernible] that are more, I would say, which have less consideration of geopolitical circumstances. So if you look at the NPL, not only that the NPL has declined, but in terms of number, the NPL dropped by ILS 1.2 billion since the beginning of the year. The troubled debts dropped by ILS 1.1 billion since the beginning of the year. So overall, despite our fast growth in the last few years, we continue to present very strong credit performance and this strong performance reflects, again, the quality of our credit portfolio.

That's really great color. Just one more, if I could get your view on the potential regulation of the BOI that would potentially allow other institutions to take deposits. Do you have any take on that and the impact on the sector?

First of all, it's too early to estimate because it's nothing really we were published. But basically, I would say that we are in favor of competition because it makes us more sharp and it makes us to do better. And we are -- we believe that we have -- our ability to be the leader or to provide our customers 360-degree solutions in all of their needs in any scenario will give us a significant advantage compared to any competition that will be raised.

The next question is from Borja Ramirez of Citi Bank.

I have 2. Firstly is on the margins. So your net interest margin has been increasing even if we adjust for the CPI. So that's better than the peer average. So I would like to ask if you could provide a bit more color also on the expectations. And then my second question would be on the capital return. So your capital continues to grow. You have a strong buffer above the requirement. I would like to ask if there's any view on potential distributions going forward in addition to the 40% payout

First of all, as for the NIM, so in this quarter, as we mentioned, and also in the previous quarter, we were able to increase our NIM even if we exclude the effect of the CPI. And this is in a period in which we -- there was not a slight movement from current account toward time deposits. We were able to do mainly via the mix of our assets. At the end it's a question of ALM. We look at the profitability of each investment we are making, it can be on the side of the assets, it can be on the deposit side and we will price it. And when you price it you have a lot of possibilities and we are very satisfied that in the last 2 quarters, we were able to do even better than the negative effect that -- that affect the NIM due to the movement from current account towards time deposit. Now as for the dividend, first of all, we present the highest CET1 ratio in the market, 12.07%. We have the full capability in any pace of growth of credit. We have the full capabilities to increase our payout ratio. And currently, due to the geopolitical circumstances, there are limitations on bank on the maximum dividend or buyback that they can make and as I mentioned earlier, at the end, I hope to short it. But at the end the war will end and this limitation will be lifted. So when it's done, I believe that we will be able to consider it substantially.

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

Congratulations on a strong quarter and a very strong year-to-date. I just have a follow-up question on your -- on the NIM expansion. I was wondering, you mentioned several ways to improve your NIM despite pretty much the flat CPI and competition in the market. Is this something that has to do with the optimization of your deposit base? Or have you been repricing your credit line?

It is both. At the end, when we price, we price anything, we price loan. We price deposits. We decide about duration. We decide whether any loans will be linked to the CPI or it being Shekel. There are a lot of -- lots of questions that a lot of things that we are doing not only in Shekel, only in dollars. So it's a mix, it's a full world. I don't know if any quarter we will be able to improve it. But in the last 2 quarters, we took a few significant measures, and we are [indiscernible] reflects increase in the NIM which is a little bit different from what we saw in our peers in the last 2 quarters.

So are you not witnessing strong competition on pricing side?

There is a strong competition on the loan side as well as on the deposit side, not only in the bank themselves, but also from other players in the capital markets. That is why as I mentioned before, I think that our customers understand that when they come to the bank, they get -- they get solutions for the 360-degree NIMs for it gives us an advantage. And also, when we look at the competition, also for customers that all interest in the price, we have our solutions. Sometimes it succeeds, sometimes it does not succeed. But there is a strong competition, and we are handing it in a good way, I believe.

Great. And also a follow-up on the capital question asked before. So yes, you have a ton of excess capital. And I think you said that after war you might consider or might have other options. Assuming for one second tomorrow Israel has peace and there is no uncertainty left anymore, what are the options out there? Do you think you want the Bank of Israel roll out a onetime payment, it will allow you to increase your payout of 60% or 70%? What are the potential options on the table that the Bank of Israel would allow assuming things are significantly better geopolitically and everything else?

I believe all the options are on the table. It relates not only if we will distribute it, if we pay onetime dividend or we will increase the quarterly dividend payout ratio. It also relates to the GDP pace of growth and the demand for loans. We will look at all the parameters on the table and we will consider it when it is.

Understood. Would you consider taking on more risk?

Taking what?

Taking on more risk, meaning that your risk-weighted assets by higher yielding.

I don't think so. Basically, our growth in the last 2 years was focused on mortgage, corporate and real estate and middle market. So it might be that when the situation comes down, we might increase a little bit our retail portfolio. But basically, Bank Leumi, as we did in previous years, in any growth that we will make it will be a responsible growth because at the end, we are looking at the bottom line. And I don't want to be in a position in which I will increase the loan and very much -- much higher credit loss expenses in the credit loss line. So in any scenario, it will be responsible growth, it might be that we will start to increase our business in other segments but currently, we are more cautious, but we have to be patient.

That's great and clear. I mean, you could, in theory, take on more risk on your security portfolio, which I think is almost entirely government sovereign bonds. Would that be considered basing the fact you have a new manager of that security portfolio?

We consider it as well. When you look at the security portfolio, as we mentioned, around 90% is in non-risk assets. So if we will believe that there is a significant advantage to change a little bit, so we might change a little bit, but currently, the vast majority of our securities portfolio as in other bank is a very conservative portfolio, which mainly based on noncredit risk assets.

Very clear. Another question. I mean, you seem to -- I think you alluded to the fact that you have a seen significant fluctuations in your gains and the losses from derivatives. And I'm just wondering what the cost for that is. It's very significant. And is there a way for you to smooth that out? And is that related to the fact that you've been growing your mortgage book and now you're hedging that? Is that what's causing us? I'm just wondering if there's a way to smooth that out.

Okay. As Hagit pointed out, the vast majority of our derivatives hedge our risks. So it hedges our FX risk because we don't take any FX exposure. And it also hedge our risk exposure. Now due to accounting reasons, the derivatives -- the effect of the derivatives, that hedge in some of the derivatives, not all the derivatives, but some of the derivatives that hedge the security. So according to the accounting rules, we have to record the profit or loss to the P&L, while we see the other side in the OCI. . So it depends on the yields on the market. And the yields on the market at the end affected the derivatives that hedged our credit risk. There are other effect on the derivatives mainly from foreign exchange.

Yes. I totally understand. I was just wondering if you would consider smoothing out in the past, other banks have similar issues and fluctuation of ILS 6 million gain in quarter 1 and a couple of hundred Shekel losses in Q3 or make it somewhat complicated to have transparency when trying to look forward.

We have different thoughts about this issue. In order to mitigate the fluctuation in P&L, it should be according to the accounting rules a perfect hedge. Perfect hedge has advantages and disadvantages. So we are looking at this and we will decide it in the future.

Great. Another question about Valley National. I mean, I remember a couple of quarters ago, you guys had a write-down of about close to ILS 1 billion or maybe even more than that. It seems that the market value has gone up significantly, and you might actually have theoretical gains on that. Are there ways to capitalize that and record that if there are? Are you considering those?

Well currently, after this cycle and after the significant increase in Valley market cap, the market cap of Valley is almost 40% above our book value. There are different -- we adopt in our financial the equity method regarding this investment. Of course we will decide to move it toward a mark-to-market. So we'll be able to record a profit immediately. And there are other ways. So what we are looking mostly is about the economic potential profit in Valley. And currently, the gap between the markets value and the book value is a few hundreds of Shekel. And we are very satisfied with that.

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