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

Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank Third Quarter 2021 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded November 23, 2021. 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 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. Kaplan, would you like to begin?

Sure. Thank you very much, Joni, and thank you everyone for joining us on the call today. I'm going to turn it over to Barak, who's going to run through the presentation and some comments on the quarter. Barak?

Thank you, David. Good afternoon, everyone, and I hope you are all well. Today, we once again reported strong results with net income of ILS 722 million, ROE of 14.5% and a credit growth of 8.7%. We once again provided our normalized ROE of 10.3% that uses the average LLP from the years 2016 to 2019 instead of the reported negative LLP of 0.25%. This gives an idea of where our underlying ROE currently stands and highlights the strength of our core business. We are also happy to announce today that Discount is resuming our dividend payout. Slide 5 lays out the major highlights of our results and the main factors that led us to our return on equity of 14.5%. First was the increase in Q3 total financing income, up 4.6% quarter-over-quarter and 4.4% year-over-year on the back of strong NII growth, solid noninterest financing income and the positive impact of CPI. Second was the negative LLP ratio, which due to our responsible lending and risk management saw a reversal of provision and continuing low levels of write-offs. Last is our continued focused effort on controlling expenses, which were down in the quarter compared to Q3 of last year. These current results led to the group reintroducing the dividend totaling ILS 144 million and equal to 20% of Q3 net income. Moving to Slide 6. You can see that we delivered strong credit performance with overall credit growth of 8.7% year-over-year. In July, the Competition Commissioner implemented the change in requiring the bank to move to day clearing of credit card charges on bank-issued card. This reduced the balances of consumer credit as a credit card company while improving their cash flow. Excluding credit cards, our total credit grew 10.3% year-on-year. What stands out is the 22.4% year-on-year mortgage growth, driving a significant change in the mix of credit book with mortgages amounting to 24.1% of our total credit, up from 21.9% of the total credit at the end of 2020 and highlighting the effectiveness of our strategy and the ability to execute on our plan. Slide 7 highlights our total income growth of 4.4% quarter-over-quarter and 7.7% year-on-year, driven mostly by core banking activity that includes NII, excluding CPI and income from fees, which together increased 2.2% versus the second quarter and 9.4% year-on-year. On Slide 8, you can see how our effective management of expenses resulted in a positive Jaws ratio of 1.6% in Q3 and 12.9% over the past 12 months. Salaries, excluding bonuses, were down 6.3% versus last year, highlighting the positive impact of the retirement plan we executed in 2020. Our total expenses were up only slightly versus the previous quarter, and that is mainly on account of larger provisions for profit-based bonuses as well as higher revenue-related expenses at Cal. Slide 9 highlights the LLP reversal brought about by the recovery in the economy. Underlying this is our high-quality loan book and conservative underwriting that produced low write-offs and improving NPLs. Problematic debt was down 7.7% versus Q2, and our NPL ratio is down to 0.69%. Our subsidiaries all produced strong results where we saw growing credit balances, continued low level of LLP and above average ROE. This is highlighted in the following slides, starting with Mercantile on Slide 10. Mercantile had a very strong quarter with net income of ILS 120 million and a 14.1% ROE. LLP ratio continues to be well below historical levels, similar to the trend of the group. Mercantile total gross loan book expanded 9.4% year-on-year with mortgages growing by 29.7%. In New York presented on Slide 11, credit demand remained strong, while negative LLP and noninterest financing income helped produced $27 million in net income and a 9.3% ROE. IDB New York achieved significant growth in both the C&I and CRE sectors, up 9.9% and 16.9%, respectively, in the past year. On Slide 12, our Cal record results with net income of ILS 92 million and 18.7% ROE. Cal produced strong performance across all key business drivers, including transaction turnover, consumer credit and acquisition of new active cards. That closes out the finance 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 our shareholders over time. Our strategy has 3 main pillars: first, to accelerate the evolution of traditional banking; second, to lead the revolution in banking through disruptive innovation; and third, to maximize group value. Focusing on the pillar of traditional banking, the next 2 slides will drill down on our strategies impact on both income and expenses. On Slide 14, you can see the growth of total income at the group. This is in large way generated by our focus on mortgages, which continues to boom for us as we grow at a 3-year CAGR of 16.3%. We continue to take a large share of generation, increase our market share, and as we mentioned earlier, increased the portion of mortgages in our total credit book mix. Slide 15 presents the cost side and highlights the effectiveness of the 2020 early retirement program. At just the completion of the plan in early 2021, 8% of the group's workforce retired. The lower quarterly salary costs, excluding bonuses and their retirement provisions was down 6.3% year-on-year. Combining this with a 7.7% increase in total income is improving profitability at the group with salary expenses as a percent of total income down to 26.9% in Q3 from 30.9% in Q3 '20. We'll present the figures excluding bonuses to give a better picture of the underlying salary costs as a percent of total income. To summarize the presentation, Q3 was yet another quarter where we executed on our strategy, achieved robust and responsible growth, driving 14.5% ROE and announcing a reinstated dividend. With that, let's open it up for questions.

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

This is Chris Reimer on for Tavy. Congratulations on the strong results. I wanted to get your comments on the Bank of Israel draft directive aimed at increasing transparency and competition for mortgages. Do you think this might have an impact on the bank?

Thanks for the question. Indeed, in mortgages, as you know, we are focused a lot on mortgages and the issue we had was the capacity issue. Now that we have solved -- or mostly solved the capacity issue, we can see that we increased the mortgage generation, more than double the mortgage generation. Regarding to your question about the Bank of Israel new regulation or new ideas, we are happy with this. I think we are at the challenges in the mortgage market, and we are very happy with transparency. We think we have a lot to gain from it. We adopt competition and happy with this competition. And we believe that with all the steps we are taking, together with this new element, we will be able to continue and substantially grow our mortgage business.

Okay. And on loan growth, loans continue to grow at a high pace. Do you see this as sustainable heading into 2022?

Yes. The current estimation that we see market-wide that the growth and the demand will continue to grow into 2022. And we believe that in the targeted sectors that we are targeting, especially around mortgages and mid-market we will be able to outgrow the market. So we do see that the pace -- the high pace or the high growth rate pace will continue into 2022.

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

Thank you, everyone, for joining us on the call today. Just to note, we are going to be in New York on December 15 and are available for meeting. If anyone in the area is interested, please feel free to reach out to me. I can be reached at [email protected]. Thanks.

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