Bank Leumi le-Israel B.M. ($LUMI)

Good day, everyone, and thank you for joining Bank Lumi's conference call for the first quarter of 2026. Joining me today are Mr. Hanan Friedman, President and CEO and Ms. Hagit Argov, CFO and Head of the Finance Division. The presentation accompanying this call is available on the bank's Investor Relations website. At the conclusion of the presentation, we will have a Q&A session. Before we begin, I would like to remind you that the conference call may include forward-looking statements, while actual results may be different. I would also refer you to the disclaimer on Slide 2, which applies equally to this call. I will now hand it over to Mr. Hanan Friedman, Hanan, go ahead.

Good afternoon, good morning for those who join us from the U.S., and thank you for joining Bank Lumi's conference call on the financial results for the first quarter of 2026. We concluded the first quarter with strong results reflected in high profitability of ILS 2.3 billion, the highest in the Israeli banking system. We also achieved solid growth in both credit and deposits outpacing the rest of the banking system. On the learning side, growth was primarily driven by the corporate segment, while deposit growth was particularly strong among households. Both totally in line with our strategy, as presented to you at the beginning of the year. Net income reflected a return on equity of 13.6%. Earnings were impacted by the special tax imposed on the Israeli banks earlier this year. Excluding this tax, ROE would have been 15.1%. And I remind you that the main impact of the special tax will be in 2026. The total amount for the industry is ILS 3 billion this year. Well, next year, it is expected to be natural amounting to ILS 125 million, which means about ILS 40 million for Bank Lumi. And as I said, ILS 125 million for the entire banking system. So next year, it's negligible. We have also maintained a significant excess capital and when normalized to the banks to our internal capital target, ROE stands at 16.3%. Our performance reflects the successful implementation of our strategy, which is based on technological edge that enables business leadership alongside disciplined risk management and excellent customer experience among all lines of business. Our strong results were achieved in a quarter marked by geopolitical and security tension in our region. Bank Lumi entered this period with -- from a position of strength with a strong capital position and high liquidity. We continue to operate fully throughout this period, maintain business continuity for our customers, and by that, support the Israel economy. Today, we also announced a dividend distribution and the share buyback totaling to ILS 1.3 billion, reflecting a dividend yield of 4.7%. The payout ratio stands at 55% of net income and is aligned with our strategic targets, and it's also the highest in the industry. We view this as the right balance between our capital return policy and our growth strategy, allowing us to seize the opportunities we expect to see this year, and we want to pick as many as possible. The first quarter was characterized by significant growth. Our credit portfolio expanded by 5.4% or ILS 28 billion compared with a growth of 3.1% across the banking system. So we achieved much higher growth. This was supported by a strong expansion in corporate credit, which increased by 10.3% during the quarter. The growth remains focused on our strategic segments, including real estate, infrastructure and mortgages. A major performance driver within corporate credit is the infrastructure and power station sector. It is a strategic anchor based on a strong, stable and multiyear project pipeline. It's exactly in line with our strategy. In 2024, we established a specialized infrastructure sector with dedicated bankers, experienced bankers. And since then, our growth has accelerated and the customer satisfaction is also speaks for itself. This activity, including syndications is also supported by advanced technological tools. We are focused on infrastructure, transportation, power stations and data centers. We are also underwriting power stations and data center transaction globally, mostly in the United States. This is a stable line of activity, giving the long-term nature of the credit, which is drawn over the life of the project. In addition, the credit in this sector is deployed gradually throughout the construction phase, which is also a benefit. As a result, during the quarter, existing projects continue to draw additional funds. This represented a meaningful portion of the growth in our credit portfolio this quarter alongside new transactions that were underwrited. For this reason, looking ahead, we continue to have a strong and healthy growth potential in the pipeline in line with our strategic focus on this segment. It is important to emphasize that the growth in the credit portfolio is a responsible growth. It is carried out while maintaining strict underwriting standards and credit quality. That's an integral part of our business model and our philosophy. This is reflected in our credit quality metrics, including an NPL ratio at only 40 basis points an excellent figure by international standards and the best in the Israeli banking system. In addition, it's tough to emphasizing that for the last 9 quarters over 2 years, we have recorded income in specific provision for credit losses, reflecting the high quality of our credit portfolio and our conservative risk management approach. The bottom line is that we continue to grow above market levels without compromising the high quality of our credit portfolio. For us, accelerated growth does not contradict disciplined risk management. Alongside credit growth, public deposits increased by 1.2% this quarter compared with just 0.2% across the rest of the banking system. So we achieved much better figures. Over the past 12 months, our total deposits increased by 16.5%. We continue to strategically expand our retail business with household deposits increased by ILS 3.7 billion this quarter. We plan to drive further growth in this segment throughout innovative products and services. Bank Lumi's efficiency ratio stood at 29.1% in the first quarter and continues to be among the best globally. This figure reflects a structural change in how we operate ourselves or the bank. It is driven by the constant improvement of our platform to technological leverage and invest tools. We intend to accelerate this strategy through the implementation of more and more advanced AI tools, as we already started in the last year. In line with that, the bank successfully implemented several key AI projects during this quarter. And of course, it creates for us additional motivation to accelerate this wonderful journey. As part of our strategy, we established a unique AI center to drive the development and implementation. To ensure efficiency, every project is measured against a clear ROI framework at the beginning of the project and along the execution of the project. These tools will further enhance our growth potential and scalability across the business lines to file personalized products and proactive customer service while also strengthening credit quality and, of course, optimizing our cost structure. On the technological front, AI integration is allowing us to dramatically reduce our time to market while driving a meaningful cost reduction. Looking ahead, I believe that Bank Lumi is well positioned to continue executing its strategy and achieving the ambitious targets we have set and published in the beginning of the year. We remain committed to responsible growth, growth that does not come at the expense of ROE or credit quality. And we remain committed to creating value for you, our shareholders, both in the short term and in the long term. And now Mr. Hagit Argov, our CFO, will present the financial results. Hagit,please go ahead.

Thank you, Hanan. Good day, everyone. I'm very pleased to be here with you today and to present our strong results for the first quarter 2026. The next 2 slides summarize our key financial results and strategic targets for the coming year. Hanan already covered the highlights, so I will briefly touch on the macro environment and then walk through the results in more detail. So let's get started. During the first 2 months of 2026, the Israel economy maintained its recovery momentum from 2025, supported by a further improvement in Israel's credit profile, which was reflected in Moody's decision to revise Israel's rating outlook to stable. At the same time, the economic impact on Israel and the global economy will depend mainly on the scope of the conflict. So near-term uncertainty for 2026 remain relatively high. However, a sustained reduction in geopolitical risk going forward, could support Israel's medium-term growth and lower risk premium. The strong appreciation of the shekel has helped offset inflationary pressures. With inflation in 2026 projected at 2.2%. The 2026 growth forecast was revised to 3.8%, and with a strong recovery expected in 2027, where GDP is projected to grow by 5.5%. And finally, unemployment remained low at 3.2%. Moving on to the key drivers of the quarterly performance, starting with a detailed breakdown of our revenues. Net interest income in the first quarter was ILS 3.9 billion compared with ILS 4 billion in 2025, reflecting the impact of a negative CPI and the lower interest rate environment versus Q1 last year. This was partly mitigated by strong growth in the loan portfolio. Excluding CPI effect, NIM for the quarter was 1.95% compared with 2.1% for Q4 2025. The decline was mainly driven by lower interest rates with loan growth helping to partly compensate for part of this impact. Noninterest income increased supported by higher income from derivatives and FX differentials. Overall, year-over-year, finance income was ILS 4.3 billion, similar to Q1 2020. While total revenues were ILS 5.5 billion versus ILS 5.4 billion in Q1 2025, representing a 1.5% increase. Turning to fees and commission income. Fees were particularly strong, totaling ILS 1.1 billion, reflecting a record increase of 10.6% compared with Q1 2025. This growth was mainly driven by higher activity in financial transactions and securities as well as increased from FX differentials. This slide presents the expenses in detail and the pre-provision net revenue. Total expenses declined impressively by 8% compared with Q1 2025. despite the expansion of the bank's activity. This was driven mainly by a decrease in salary costs of 11.6%, reflecting a lower headcount achieved without using costly voluntary retirement programs and because of lower bonuses. In addition, other operating expenses decreased by 2.1%. As a result, PPNR increased year-over-year by 6% and totaled ILS 3.9 billion. Here, we can see the bank's excellent multiyear cost income ratio. Driven by ongoing cost control and sustained investment in technology and AI. We continue to present one of the best cost income ratios of 29.1% for the quarter. invest in the sector and probably the best globally. On the credit loss expenses, this quarter, the bank continued to record income from specific provisions, which reflects, among other factors, our high-quality credit portfolio. Collective provisions were higher compared with the oral quarter in 2025, driven by strong credit growth in the quarter. Overall, total credit loss expenses were 0.12% of gross loans compared with 0.05% in the parallel quarter in 2025, while maintaining our strong coverage ratio. This slide presents the high quality of our credit portfolio. Despite our strong credit growth in the first quarter, asset quality continued to improve and trouble debt ratio decreased to 1.11% of gross loans, while maintaining the nonperforming loans ratio at 0.4%. We maintained a strong coverage ratio, while the bank's provision for bad debt covers NPL by 3.1x. These parameters remain among the strongest in the banking sector. Now we turn to our strong credit growth. In Q1 2026 net loans grew at a strong pace of 5.4% focusing on our target segment. The corporate credit was especially strong, helped by real estate and infrastructure sectors, among others. On the deposits, total deposits were up 1.2% in Q1, while deposits from private individuals grew by 1.6%. Liquidity ratios were strong with the LCR standing at 117%, well above the regulatory requirement of 100%. We also maintained a healthy loan-to-deposit ratio of 78.8%. This slide summarizes our credit and deposits, Here, we can see a well-diversified credit portfolio and deposit base alongside the quarterly development. Moving on to our solid capital ratios and the capital return. The core Tier 1 ratio was 11.74% compared with 12.05% in the previous quarter, mainly due to higher activity. The total capital ratio was 14.07% above the Bank of Israel minimum requirement of 13.5%. For the first quarter, Home declared a total payout of ILS 1.3 billion, of which almost ILS 1 billion is a cash dividend and the rest in buyback. This represents 55% of the quarterly net income and a dividend yield of 4.7% based on the average share price. With that, let me conclude. Our results reflect a strong combination of profitability, efficiency and financial resilience, supported by a solid capital, positioning the bank well to capture opportunities and deliver sustainable growth and long-term value to our shareholders. Thank you for your attention. With that, we will now be happy to take your questions. Thank you.

[Operator Instructions], The first question is from David Taranto from Bank of America.

Good afternoon. Thank you for the opportunity. One question, please. We've seen a meaningful decline in your earnings sensitivity to interest rates this quarter, almost a 50% reduction. Could you walk us through the key drivers here? And how should we think about the durability of this? Is it more tactical, for example, through hedging or more structural in terms of balance sheet positioning?

Thank you, David. I'm very glad that you asked this question. This is a result of a great job of our ALM department. -- that invest in assets that -- with a lower sensitivity to the interest rate like fixed interest bonds -- these activities decreased our sensitivity to decrease in the interest rate going forward.

The next question we got on the chat from Valentina Stoykova from Barclays. She has 2 questions. The first question is how do you see your loan growth developing from here? Do you think you can reach the 8% to 10% growth target you set at the beginning of the year? Which are the areas where you see the best opportunities for growth? The second question is how do you see the net interest income and the NIM developing going forward? And how this compares with your policy rate expectation.

Thank you for this question. I will pick the first one, and if I give one to elaborate regarding the second one, so please. So we as we published at the beginning of the year, we are aiming to achieve the 8% to 10%. And if the Israel economy will do even better than expected. So potentially, there will be opportunities to pick and do even better. But as I said in the previous meeting, and as I also mentioned today, we are focused on healthy growth, which means growth that is in line with our underwriting criteria with our credit risk appetite. And our philosophy that the volume is not instead of margins and keeping the targets for our ROE is the first priority. And as you could see, we are in line with our strategic plans regarding the growth and regarding the ROE targets. Now regarding the NIM going forward, it's true that the competition is quite high in the last few quarters. But we already took many measures in order to be able to do better with the margins. It's true in the credit side, and it's true in the liability side in the passive -- and therefore, we launched and implement more and more products, and we are much more proactive vis-a-vis the customers in order to implement and execute the right measures to manage those challenges. And of course, we are aiming, as I said, is first priority to achieve our ROE targets.

Thank you again for participating in today's call, and have a pleasant day. Thank you so much.

Thank you.