Israel Discount Bank Limited (DSCT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank Fourth Quarter and Full Year 2019 Results Conference Call. [Operator Instructions ] As a reminder this conference is being recorded March 16, 2020. If you have not yet done so, please access the Presentation on the bank's website, investors.discountbank.co.il. I would like to remind everyone that forward-looking statements with respect to the company's business, financial condition and results of 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. Ms. Koblenz, would you like to begin?

Thanks, Ilana. Good afternoon, and welcome to Discount Bank's 2019 Fourth Quarter and Full Year Financial Results Conference Call. Participating in today's call are Uri Levin, CEO; Barak Nardi, CFO; and Joseph Beressi, Chief Accountant. We will start with an opening remarks by Uri, followed by a summary of the results by Barak, and we'll then open it up for your questions. I will now hand over to Uri.

Thank you, Tamar. Hello to everyone, and welcome to this call. We were expecting to get on this call with you today to talk about our record results of 2019. Net income of ILS 1.7 billion, return on equity of 9.4%, cost-to-income ratio of 65.2% and our dividend payment of 15% of net income. 2019 was a very strong year. That is yet another year in what is already a long line of strong years for the bank. What a wonderful journey it was. That's what we would have focused on today. However, recent development in the global economy and the revolving impact of the COVID-19 pandemic moved the focus away from our results. It is very difficult, if not impossible, to estimate, at this time, the length of this crisis or the extent of its influence, but there is no doubt that it will have a substantial adverse impact on the global economy, on the Israel economy and on our clients and on the bank. Whatever lies ahead, it is clear that the transformation the Discount Group has gone through in the past years resulted in our ability to withstand any crisis successfully. The bank is as strong as it has ever been with total equity of over ILS 19 billion, tier 1 capital ratio of over 10.3%, a robust and well-diversified credit portfolio and enhanced profitability, we are entering this challenging period with great confidence. While we face the near-term challenges, we are still focused on the future and certain that our execution capabilities and our change-enabling culture will drive the continuation of this wonderful journey. Discount Bank is looking forward to multiple years of increasing growth and profitability in which we'll execute on our vision to be the best bank for our clients and to maximize value for our shareholders. I look forward to the challenge, and together with my management team, we are fully prepared for whatever lies ahead. Before I hand over to Barak, our new CFO, as this is my first earnings call as Discount Group's CEO, I would like to take a moment to say what an honor and a privilege it is to be in this position. As someone who joined this group 6 years ago, to lead together with the prior CEO and the rest of the management team, the significant turnaround, I am proud to stand here before you and to present this record results of 2019. Thank you. And with that, I turn over to Barak.

Thank you, Uri, and good afternoon. Before we go into 2019 and Q4 numbers, I would like, on a personal note, to say that I am very happy to join the leadership team of Discount Bank, and I look forward to continuing the fruitful dialogue with the investment community and seeing and speaking with you in person soon. Now moving into the numbers. I'll start with Slide 8. 2019 was a very strong year for us. We grew and improved in all parameters. We achieved the record net income of ILS 1.7 billion, which is 13% higher than last year. We reached ROE of 9.4%, and we moved forward towards our 10% target. Cost income continued to improve and reached 65% compared with 68% last year. Given the current uncertainty in the marketplace related to the coronavirus, it is important, especially now, to highlight our robust balance sheet. Our total equity reached ILS 19.2 billion, with common equity tier 1 ratio of 10.3%, much higher than our Board's target of 9.9%. Our LCR stood at 120%, and our leverage ratio is around 7%. We increased our dividend payed this year by 24%. And as we reported in the last quarter, we increased the policy to up to 30% and at the right time, also taking into account the fluid economic situation, we have intention of getting to the point that we will pay 30%. Looking at Q4, we continued to grow our loan book. Net interest income increased by almost 6% and NIM was higher than the last quarter. At the same time, we saw an increase in loan loss provision, part of it as a result of specific cases that have no wider implications and part of it as a result of first indications of the impact from corona on our customers. In addition, we saw an increase in expenses. Some of that is related to a small number of factors that happened to fall in this quarter. As a result of this, Q4 net income was ILS 325 million, similar to Q4 2018. Moving now into Slide 9. One of the main drivers of our positive momentum in the continues growth in our loan book -- is the continue -- continues growth in our loan book, which grew this year by 9.5%, including the roughly ILS 5 billion of Municipal balances. Looking at the composition of our loan book, we saw growth in all segments, while mortgages continued to drive a significant portion of the growth growing 30% -- 13% this year. But maybe more importantly is that even after a few years of double-digit growth in mortgages, our market share of around 10.5% is still way below our natural market share, which stands at around 16%. Another area where we see a potential to grow our book is in medium enterprises, where we grew by 25%, some of which is related to Municipal, but still have more room to grow as we are below our natural market share actually. We also saw double-digit growth in consumer credit in Cal, as it continues to focus on its non-banking activity and offer credit to all banks' customers. Behind our impressive growth in loan book, we have built a solid platform to manage our exposure. It is based on strong underwriting policy and monitoring capabilities. This has ensured that our growth was balanced and in line with our risk appetite. We are confident, therefore, in our ability to successfully navigate the impact of the current complication as presented by the corona crisis. Moving now into Slide 10. The other key driver of our performance in 2019 was our ability to restrain cost and reduce the cost/income ratio to 65.2% versus 68.2% in 2019. For the sixth consecutive year, we achieved a positive Jaws ratio with income increasing 7.1%, while expenses increased only by 2.5%. On the income side, we recorded material growth in all lines of income. Net interest income grew by 6.6%, supported by our credit growth, partially offset by the lower CPI. Fees grow -- grew by 4.2%, mainly credit card fees. And noninterest financing income increased by more than 26%, resulting from gains from capital markets, including through bonds, shares and derivatives. On the expense side, salary expenses has decreased by 1.2%, mostly due to a decline in salary expenses in Discount Solo. Other expenses, on the other hand, increased this year as these are in part expenses that are generated as cards business grows. Cost-to-income ratio is one of the main areas, where, although we have made a significant progress during the last year, we still have a great potential to improve efficiency, as I will elaborate later in this presentation. I am moving now into Slide 11. Our credit loss expenses picked up in Q4, as I already said, in part from the normal course of business and in part from the first signs of corona. On a full year basis, credit loss expenses were 0.4% of average credit balance, which is within our long-term range. Our credit quality indicators, which improved in the last years, are in line with the industry. Due to several classifications that were made in the last period to reflect the potential impact of the corona, our indicators picked up a bit, however, still mostly in line with peers' average. Overall, we feel comfortable with the quality of our book. Moving now to Slide 12. One of the main things that differentiates Discount Group and generates added value is our diversified business through strong and successful subsidiaries. All of our subsidiaries improved their performance this year. IDB New York grew its loan book by 11.4% and delivered over $100 million in net income and almost 10% ROE. Mercantile completed the merger with Municipal and grew its loan book by 24.5%, or 6% excluding Municipal, mainly in mortgages and small enterprises. Mercantile's net income grew by 27.6% and reached ILS 305 million, with ROE of 10.5%. It's important to highlight that since the Municipal merger took place on December 2019, it had almost no impact on 2019 P&L. And Cal had a very strong year with net income of ILS 200 million, 28% growth versus 2018, and ROE of 11%. During 2019, Cal outgrew the market and solidified its position as the leading provider of non-bank credit with the largest loyalty club. A very important milestone for Cal in 2019 was the initiation of co-issuance activity with the 2 largest banks in Israel, opening up a potential to continue and increase its customer base and market share. Looking ahead, we remain very optimistic about our subsidiaries. Moving now to Slide 13. Before we conclude the financial part of the presentation, it's important to highlight the strength of the Discount Group. All group subsidiaries presented continued growth and profitability with 2019's performance continuing the trend of year-on-year improvement. Behind the financial success of all of our subsidiaries is the change in our culture into more performance-based and execution-led ones. This allows us to implement complex strategic initiatives across the group without compromise. Some of these changes we are already seeing in the financial results, while others will become evident in the future. But even with all the great achievements we have marked in recent years, we still have a material potential across the group, as we present in Slide 14. We identified 4 areas that have significant potential to further increase the group's value. The first has to do with credit and revenue growth and our potential to increase market share in targeted segments, especially those where we are below our natural market share, such as mortgages and medium enterprises. In addition, there is still a big portion of our customers that don't use us as their primary bank. And with them, we have great potential to increase our share of wallet. The second area of great potential is around cost and efficiency. Although it has improved dramatically in recent years, our cost/income ratio is still higher than peers. Most of the gap comes from salary costs, and we believe that we have the potential to enhance cost-cutting measures. Third is the potential to create and implement processes that will drive excellence in our value proposition and develop leadership in customer experience. In recent years, we improved some processes, but we still haven't led a cross-organization project of process excellence as many other large banks have. Moreover, we have yet to implement the automation of processes. It will enable us to improve our customers' experience and drive operational efficiency. Fourth, we have potential to bring disruptive innovation. With 16% market share, we are big enough to make an impact and yet small enough to be flexible and not be concerned about cannibalization of our business and to come up with a real disruptive innovation. Last year, we have launched our API store, being the first Israeli bank to bring this innovation to the Israeli financial sector, with the goal to eventually offer our customers with unique and innovative services. In the last 3 years, we have developed the capacity to work and collaborate with fintechs and became their first choice as partners in the banking system. Fifth is the potential to maximize the group value. Our unique corporate structure creates a potential to maximize synergies and develop designated strategic plan for each subsidiary. To summarize this slide, we clearly have a unique opportunity to continue our positive momentum and excellent results given the potential identifiers, and the changing environment. In the coming months, we will refresh our strategic plan and update the financial plan accordingly. With our 2021 targets in mind, where the cost/income ratio remains more challenging and we are almost at our ROE targets, our focus is on a plan that will take us to the next phase. This plan will reflect the challenging arising from the markets and, on the other end, the great potential for further enhanced growth, increased efficiency, disruptive innovation and group synergies. Moving into the last slide. At this stage of our transformation, after closing more gaps and even taking a leadership position in some areas, in order to continue and win in the future, we need to be the best, the best bank for its customers and the best bank for our shareholders, delivering superior returns. Our identified potential, together with our proven execution capabilities and based on our robust platform, gives me the confidence that the Discount Group will continue and deliver on our plans in the future and reach new heights. Thank you, and we can now open it up for your questions.

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

I was wondering if we can start with the corona a little bit. I'm not going to ask about what will happen to your customer because it's really too early to tell. But I'm just wondering for you guys, as an organization, what are you doing in terms of business continuity? And I saw earlier today, Bank of Israel recommended banks to try and shut down branches to -- and keep just a minimum open. So I'm just wondering how you're weathering this? And what's your plan overall to tackle this internally?

Thank you, Tavy. I will take this question, if you wish. Well, I'll only say a few things. First, I think it's worth noting that Israel is probably taking more extreme measures than other countries to fight the coronavirus. Hopefully, that will be successful and the spread of this virus in Israel will be moving in a different direction than the rest of the current Western world. In addition to that, I also think it's worth noting that not only Discount, that the whole Israeli banking system enters this potential crisis where its position is much more conservative than other banks in the world, our underwriting principles has -- have always been more conservative, and you can -- just looking at the mortgage loan to value limit here, which is 75%, average of 50%, definitely very different than the other areas or the other banking systems in the world. This is true for other underwriting guidance and even areas where we had problems in the past, such as concentration on large 4s, and means of control has been reduced significantly over in recent years. So as an industry and as a -- and Discount Bank particularly, we entered this crisis with significant strength. Having said that, clearly, the business continuity is a significant challenge, especially given the extreme measures that Israel is taking. And there are always rumors of taking more extreme measures. The bank has worked very hard to ensure the sustainability of its services to our clients, our ability to continue and serve our clients regardless of the situation that will happen in the market, avoiding the spread our infected people within the organization and the impact of it. We've worked on that over the last month to really make sure that we are as robust as possible, and we are very robust. And yes, tomorrow, we will move into a -- only a few of our branches will be open for cashier services. All other services will be delivered digitally and over the phone. And luckily, the Israeli banking system is in position that we can actually provide service digitally and remotely for 99% of the services, and with the remaining 1%, we'll probably manage and find ways to overcome it. So it is a complicating and challenging times, but I think we're very well prepared and ready for whatever lies ahead in terms of business continuity and in terms of financial impact.

That's helpful. And then maybe another big picture question. Looking at your costs, you talked about past 5 years how you decreased the cost significantly. Looking at 2019, if I'm not mistaken, you decreased the cost base by a bit over 2%. So I guess, looking ahead, when you look at the retirement levels and potential early retirements and other cost cutting, you're going to move your offices at some point down the road outside of Tel Aviv and other streamlining measure, what would be a conservative number for us to put in our model, let's say, down -- 1 to 3 years down the road from here?

As I told before, although we have done a very impressive improvement regarding cost/income ratio, we still have way to go. And the main potential, as you mentioned, is around people, around people cost. And in the coming 5 years, we have around 500 people that are going to be retired, reaching the retirement age. So based on it and other steps we are going to make, we do believe we have a very good potential to continue in improving overall cost/income ratio and, specifically, the people costs moving ahead.

Got it. And maybe just a technical one to finish. Looking at the Mercantile number, provisions were large, attributable to the acquisition of Municipal. So is that a onetime thing? You guys taking over and then deciding on specific provisions to make? Or this is something that's just the new structural level of provisions taking into account the acquisition?

So it's not related to the actual merger. And it went up a little bit also a little bit part of, as I told you before, for the entire Discount Group, part of the corona circumstances. And we believe that more or less, this is currently the right level, the right -- the more representative level.

[Operator Instructions] There are no further questions at this time. Ms. Koblenz, would you like to make your concluding statements.

Thank you for joining us today. Be well, and hope to see you very soon in Q1 2020 conference call.

Please excuse the interruption. We have another call -- question. Would you like to answer?

Okay. Yes, sure. Yes, please go ahead.

Okay. The next question is from Bruce Schoenfeld of BlueStar Indexes.

Bruce, Please go ahead.

It seems the caller has disconnected from the call.

Okay, never mind. So again, thank you for joining us today. Be well, and hope to see you very soon in Q1 2020 conference call. Have a nice evening.

Thank you. This concludes Israel Discount Bank's Fourth Quarter and Full Year 2019 Results Conference call. Thank you for your participation. You may go ahead and disconnect.