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

Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank Second Quarter 2021 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded August 16, 2021. If you have not yet done so, please access the presentation on the bank's website, investors.discountbank.co.il. I would now 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. Mr. Nardi, would you like to begin.

Thank you. Good afternoon, everyone, and I hope you all are well. Today, we once again reported record results with robust net income of ILS 860 million, ROE of 18.3% and credit growth of 8.3% year-over-year, which crossed the ILS 200 billion milestone. We also provided our normalized adjusted ROE of 10.1% that uses the average LLP from the years 2016 to 2019 instead of the reported negative LLP of 0.82%, to help give a better idea of where our underlying ROE could stand and highlights the strength of our core business. Slide 5 lays out the major highlights of our results. There were several factors that contributed to our strong performance this quarter. First, net interest income growth of 12% during Q2 and 15.2% year-over-year was generated by a combination of core banking growth and positive CPI. Second, the recent early retirement plan that is bearing fruit that salary expenses, excluding bonuses, were lower. And third, the negative LLP was also a driver. Our high rate of credit growth is being generated without lowering our value standards as our overall credit quality is improving with problematic debt down 9.5% versus Q1 and our NPL ratio down to 0.72%. Lastly, we announced that we expect to reintroduce dividend payments totaling 20% of net income once the Bank of Israel removed its current limitation and presuming that no further limitations will be set in respect of ongoing profits. Moving to Slide 6, you can see that we delivered strong credit performance with overall credit growth of 8.3% year-over-year and 5.1% since the beginning of this year. What stands out in the year-to-date period, our focused segments of mortgages and medium enterprises up 10.6% and 10.2%, respectively. Corporate growth remains solid, while consumer lending continues to pick up the pace. As we mentioned earlier, Slide 7 highlights the success we are seeing from our core banking activities of net interest income and fee generation that improved 10.9% in the quarter and 16.9% year-on-year. Even if we exclude the impact of CPI on core activities, we delivered a high rate of growth year-on-year. Noninterest financing income was lower in the quarter mainly due to losses from derivatives and fewer bond realizations. On Slide 8, we can clearly see the benefits from our early retirement plans in 2020. Our total adjusted expenses were up only slightly, and that is mainly on account of larger provisions for profit-based bonuses. Salary expense, excluding bonuses, were down 4.6% quarter-over-quarter and 8.3% year-on-year. Our total adjusted expenses, excluding bonuses were actually down both quarter-on-quarter and year-over-year. Slide 9 speaks for itself. Negative LLP of 0.83% in the quarter was driven by low write-offs, significant recoveries and a release of provisions on the balance sheet that were made during the crisis. The credit expense release leaves our reserves ratio at a still conservative ratio of 1.62%, above where we were pre-COVID. Our NPL improved significantly to 0.72% as NPLs were either reclassified as performing or paydown. Deferrals have continued to trend down and do not present the concern. Moving on from the discussion at the group level. Let's focus a bit on our main subsidiaries, starting with Mercantile on Slide 10. Mercantile produced a record quarter in terms of both net income and ROE, even excluding gains from the valuation gain on shares of ZIM shipping, similar to the trends as the group negative LLP and impressive credit growth were significant drivers of the ILS 201 million net income and 26.2% ROE results. Mercantile continues to perform well and achieved strong results as it focuses on its strategy. New York, presented on Slide 11, credit demand remained strong, particularly in C&I, while negative LLP and noninterest financing income helped reduce $25 million in net income and an 8.7% ROE. Spreads have begun to improve as yield on loans remained stable. The quarter included roughly $6 million in onetime expenses associated with the move of our headquarters into a new building. On Slide 12, we present yet another record quarter this time at Cal with net income of ILS 79 million and 16.7% ROE. Cal produced strong performance across all key business drivers, including transaction turnover, consumer credit and acquisition of new active cards. The strong results were achieved despite one of Cal's major drivers, international transactions are still well below the level of pre-COVID activity, which continues to negatively impact the business. We hope that this may begin to change later in the year. That closes out the final section of the presentation. And on Slide 13, we move on to talk a bit about our strategy. As we have laid out in the past, we are fully focused on being the best financial institution for our customers and delivering superior value to shareholders over time. Our strategy has 3 main pillars: first, to accelerate the evolution of traditional banking; second, to lead the revolution in baking with disruptive innovation; and third, to maximize group's value. We define mortgages as one of our key strategic pillars. And on Slide 14, we dive into some details. You can see that our mortgage generation business is booming. We have grown 130% over the past 2.5 years and have increased our market share in generation to 13.7% versus 11.2% 2 years ago. Not only are we growing quickly as we mentioned the 18.3% year-on-year growth earlier, but also, we are doing it without letting down our lending standards at all. You see that we are better than our peers both in terms of percent of loans over 60% LTV and loans in arrears of over 90 days. We are able to achieve these great results by launching digital mortgages, realigning our processes and working closely with mortgage brokers. After talking about one of the key pillars of our traditional banking strategy, I want to say a few words about PayBox, our main disruptive innovation initiative as highlighted on Slide 16. We are happy to say that in Q2, we received all of the approvals necessary to relaunch PayBox with Shufersal and leverage its wide user engagement to be fully innovative initiative in the world of personal finance. PayBox crossed a 2 million download threshold, long stop to pay and just announced that Israel's leading gift card program will be digitally available on the platform as well. This is just the beginning for PayBox with much more to come before we enter into Phase 2 and create a financial marketplace for personal finance. To summarize, 2Q was a great way to close out the first half of 2021, and we look forward to building on our success in creating value for our stakeholders. With that, let's open it up for questions. Thank you.

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

I wanted to start with the loan growth. I mean you mentioned very strong growth during the quarter. And one of the key drivers has been mortgages. It's something that we're seeing to a different extent across all banks, but there seems to be a strong demand across the market. And I was wondering what are the driving forces here? Do you see that as sustainable? And I guess, as the last point, is there a risk that a high level of competition will hurt the bank's margins?

Thanks, Tavy. So I'll answer. Regarding mortgages, at the beginning of our strategy, we highlighted this as one of our key pillars because what we found out that it's not -- for us, it's not an issue of demand, it's issue of capacity. And we worked very, very hard to solve the capacity issue, and we launched a digital process and we streamlined the processes. And we now we can say we fixed most of the issues we had, and we can answer the demand. So what we are seeing, we see our growth after we fix those capacity issues and a sustainable growth. We don't see any decline of margin. We are not increasing the risk appetite over there. So overall, we feel very comfortable with the current numbers, and we believe we will be able to support them going forward. We need to take into consideration that we are still below our natural market share when it comes to mortgages. So we believe that even if the overall demand in the Israeli market will be a bit lower, we will be able to still support our substantial mortgage numbers. Regarding risk overall, when we are looking at the LTV, the LTV in the mortgage market is relatively low with an average of around maybe 60%. The maximum is 75%. So overall, we believe that in this line of business, the risk is lower than other line of business. So we feel very comfortable with the growth -- with the fast growth over there.

That's helpful. And then talking about provisions. When you look back the last 18 months, you obviously had way more provisions than you had recoveries. So I guess looking at the situation as a CFO, what would be the reason why you haven't released more recoveries? Is it because you still have some doubts with regards to certain creditors or you're being careful? How should we look at recovery going forward?

So we feel very comfortable with the quality of our core portfolio. And as you mentioned, we are still -- our overall coverage ratio is still higher than pre-COVID. It's on 162% right now versus 1.38% prior to COVID. We think it's -- COVID is not over yet. So we wanted to have some buffer in our balance sheet. It's still too early to say what will happen in next quarter. But overall, when we are looking at all the credit quality indicators, we feel very comfortable. Write-offs are very low. NPL looks good. Deferrals almost gone. So we feel very comfortable. But yes, we still wanted to make sure that we can -- we will be ready for any potential developments. But currently, we feel very confident with the current situation and the current -- with the current situation.

[Operator Instructions] There are no further questions at this time. Mr. Nardi, would you like to make your concluding statement?

Well, thank you very much all for joining and see you all next quarter. Thank you.

Thank you. This concludes the Israel Discount Bank Second Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.