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

Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank First Quarter 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded May 20, 2024. If you have not yet done, please access the presentation on the company -- on the bank's website, investors.discountbank.co.il. I would now like to remind everyone the 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. I would now like to turn the call over to Mr. Assaf Pasternak, Head of Strategy and CFO. Mr. Assaf, would you like to begin?

Thank you all for joining us today. In these extraordinary times, both for Israel and the bank, I extend my warm welcome to this investor call. As we mark the passing of 227 days since the onset of this devastating conflict, our heart weighs heavy with a collective burden of loss and sorrow. We long deeply for the release of our hostages and looking for the moment they are free again. And in a passage to today's agenda, we are presenting today our financial results for the third time since the beginning of the war. Our first quarter financial reports are demonstrating our stability, resilience and high-quality asset metrics as evidenced by consistently delivering throughout this time, improved and robust results. Starting with Slide 3. We will begin the review of the financial results. Our first quarter results underscore our steadfast stability and resolute ability to consistently generate value of time with a net income of over ILS 1 billion and return on equity of 14.6%. Our efficiency ratio is maintained at 53% and excluding card, would be set at 48%. Looking at our banking activity in Israel, which combines Discount and Mercantile results, represent return on equity of 17.1% and efficiency ratio of 45%. Given our strong results and our confidence in the robustness of our core business, we have decided to reinstate dividend payouts to 30% of net income. This reflects our strong capital position and confidence in continuously bringing value to our shareholders. Despite the reversal of the trend in the central bank rate which decreased by 25 basis points in the last quarter, we successfully maintained our net interest margin, experiencing only a marginal decline of 0.7%. In light of the military conflict, total credit grew by 1.2% this quarter and 5.2% year-over-year in line with market conditions and our expectations. Moving to Slide 4. Delving into the macroeconomic landscape following 8 months of military conflicts and sovereign rating downgrades, the Israel economy has adapted to operate within these parameters. Starting with the left side, we show the demand for housing is growing steadily since October '23 and sales are even exceeding the pre-war levels. On the bottom left, the market has reverted to pre-war levels, while the GDP is indicating a modest upward trajectory. On the right side, we refer to macro parameters, which have direct impact on our results. The market's current expectations is for Bank of Israel interest rate to reach 4.2% by the end of 2024, higher than prior market expectations that stood at 3.3% last December and 3.8% in March. Coupled with a substantial local deficit, we anticipate no reduction in rates in the near term. As government receive clients, the short-term inflation 2 years is expected to reach 3% substantially higher than the expectations in January, but still within Bank of Israel upper limit. As the economy stabilized, both interest rate and inflation parameters are giving a tailwind to the bank performance in 2024. Asking now over the past 8 months, the economy has managed to the ongoing challenges remarkably. However, the increase in government deficits is beginning to raise concerns for the future. As for the last 12 months, the figure has risen to 13% and some estimates in the market reached up to 9% around 2024. Although inflation and higher rates support our strong results, we are aware of the negative impact of high interest rates on our borrowers and closely monitor our loan book. Turning to Slide 5. We will begin the review of the financial results and elaborate a bit on the financial highlights of the fourth quarter. Our ILS 1.5 billion net income and 14.6% return on equity for the first quarter were largely resulted by an increase in noninterest financing income and reduction in collective allowances supported by lower expenses and increasing income from the fees. Credit grew mildly by 1.2% quarter-over-quarter, mainly due to corporates. Credit growth slowed down in the first quarter as a result of the continuous [indiscernible] conflict high interest rates aligned with lower demand for consumer credit. At the same time, we remain focused on the quality of our lending. In the first quarter, we have lent some of the collective allowances, which were provisioned in the last 2 quarters, which led to a credit loss expense of 12 basis points of the average credit balance. NII decreased slightly for the quarter due to a decrease of 24 basis points in [Technical Difficulty] combined with restraint expenses set our cost-to-income ratio of 62.8% compared with 63.4% [Technical Difficulty] and to bring the efficiency ratio to lower levels. On Slide 6, you can see our credit growth. As mentioned before, in the first quarter, credit growth slowed down to 1.2% as economy was set back due to the war. The corporate segment continued to show relative strength during the first quarter and grew by 2%. Consumer and private credit, as well as medium and small businesses are demonstrating low demand due to the war and the interest rate environment. Nevertheless, on a year-on-year basis, we grew by 5.2%, focusing on our targeted segments. Corporates grew by 10.3% year-over-year; medium enterprises by 8.4%; and mortgages grew by 4.8% year-over-year. Moving to Slide 7. The average interest rate in the first quarter was 4.51% compared to 4.75% in the fourth quarter of '23. Yet the net interest income decreased by [indiscernible] quarter-on-quarter with the support of higher CPI. In addition, fee income grew by 4.8% and noninterest financing income grew by ILS 53 million. Total income declined by 0.8%, which is attributed to the decrease in other income related to onetime realization of assets in the fourth quarter. As you can see from the chart on the right-hand side, the income from regular financing activity, what we define as financing income from current operations, declined in the first quarter by 2.4% as a result of Bank of Israel rates and higher deposit beta, resulting in higher cost of funds. Nevertheless, we have seen that the payments has been slowed down and NIM has remained at 2.83% in this quarter. I will move to Slide 8 to discuss expenses and cost-to-income ratio. In the last 2 quarters, we have managed to stabilize our expenses, though we continue to increase maintenance and depreciation expenses resulting from relocation to our new campus. Other expenses declined by 9% to ILS 619 million and salary expenses grew slightly by 0.7% compared to the fourth quarter. In '24, [Technical Difficulty], shifting activities from branches to the back office and optimizing IT resources. We understand that our efficiency is critical for our future growth and success and therefore, we raised the value of cost and efficiency in our workers' comp for '24. Switching to the Slide 9. You can see that overall credit loss expense sharply declined to 12 basis points in the first quarter as macro assumptions related to the war in Gaza are mitigated. In the first quarter, we reversed some of the collective allowances provisions from the last 2 quarters. Those were above the normal due to the uncertainties during the first months of the war. At this point, the economy and labor market are demonstrating resilience facing the ongoing military pressure. As you can see in this slide, in this quarter, we do not observe any material deterioration in specific debts as reflected from the low provision for specific credit losses. On the right-hand side, you can see additional asset quality metrics. Nonperforming loans with NPL was slightly decreased to 0.86% compared with 0.91% in the previous quarter. The allowance to loan loss provision from total credit is set at 1.57% reflecting our conservative approach. Moving now to Slide 10, you can observe our ample liquidity and diversified deposit base. On the left, you can see that 46% of our local deposits are from our retail and private customers and only 10% are from institutional. On the right-hand side, we present the stability of the total liquidity base over time, while customers are keeping 58% of the funds in interest-bearing time deposits. Our liquidity ratios are well above the regulatory demand, presenting a solid LCR of 142% and NSFR of 122%. Now I would like to move on and quickly review our main subsidiaries on Slide 11. Starting with Mercantile Bank that presents a net income of ILS 184 million and return on equity of 14.7%. The cost-to-income ratio reached 43%. Mercantile grew its loan book by 6% year-over-year and a well-balanced growth across most payments. Moving to talk on IDB New York. In this quarter, the bank has presented a net income of $21 million and a return on equity of 7.1%. The bank maintained total assets of $12 billion with asset quality continued to be strong. CAL is presenting strong results in the first quarter with net income of ILS [indiscernible] million and equity of 14.2%. Consumer credit grew by [Audio Gap] year-over-year [Technical Difficulty] income from credit card transactions. [Technical Difficulty] amounted to ILS 40 million, 60% decrease from last quarter. The future separation of CAL is expected to have a limited impact of 7% to 8% on Discount Group ongoing profitability and almost no impact on the group return on equity while it will improve the efficiency ratio by more than 4%. I'm turning to Slide 12. In light of the current situation, we would like to elaborate about the stability of our capital ratio in volatile capital markets. As you can see a slide, we are continuously growing our capital ratios in our buffer. At the same time, our capital ratios remain solid and well hedged against various market scenarios such as interest rate shift, exchange rate and CPI and the last credit downgrade of State of Israel by S&P. On April 18, '24 S&P Global Ratings lowered its long-term sovereign and local currency [indiscernible] credit ratings on Israel to A+ from AA-. This measure will impact the recorded assets and capital [Technical Difficulty] in the second quarter. The sovereign downgrade will deduct 21 basis points from our Tier 1 capital ratio, but also after this reduction, the capital cushion remains exceptionally robust exceeding the minimum requirements set by the Board of Directors by ILS 2.5 billion. Slide 13 illustrates the progression of net profit and dividend payouts over the years from 15% in '22, up to 30% in the first half of '23. Given the confidence in our stable profit drivers and the quality metrics of our loan book, the Board of Directors has decided to reinstate distribution of 30% of our net income as dividend. This decision is in line both with the bank's strong capital position and confidence in generating consistent profits together with the aim to strengthen our capital in line with the projected post-war credit demand. To summarize my overview on Slide 15, I would like to emphasize the key takeaways from this quarter results. First, we delivered solid results with net income of over ILS 1 billion and return on equity of 14.6%; second, our conservative risk approach in previous quarters combined with the resilience of the economy allowed us to reverse some of the collective allowances made while NPL ratio reduced to 0.86%; third, we presented responsible credit growth in line with market conditions; fourth, we continue to closely manage and control our net interest income and net interest margin in an environment of decreasing interest rates; fifth, we remain focused on taking down our costs, it is a long journey that will occupy us in the upcoming quarters; and lastly, dividend payout reinstated to 30%, reflecting our ability to generate stable long-term profitability and maintain substantial capital buffer. With this, I will finish, and I would like to open to Q&A.

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

I wanted to discuss first the broader environment in the context of the war, I was wondering if you had customers, whether retail or small businesses that kind of reached out and asked to extend their loans or delay payments? And if so, what's the percentage of the loan book that's been impacted, if at all?

Thanks, Tavy. So we published in our quarter results and there is a section that is deducted to the war. The amount of loans that were postponed, I remind you that the Bank of Israel has declared for the areas that are under the war the ability to postpone the loans. So far, as we published, we have [Technical Difficulty] treated in any kind of postponement. But -- it was at ILS 17 billion. But out of that, only ILS 8 billion is left. So most customers, 60% of the customers although they can, decided to go back to the regular payment of the loan, and we have still ILS 8 billion that are under any kind of postponement in line with Bank of Israel instructions, of course.

Okay. That's helpful. And I guess in general, when you look ahead, assuming there's no deterioration of the environment and the military situation, did you expect to cause further recoveries throughout the end of the year?

So the general allowance reflects the current state of instability and loans due to the war. As long as that we have more clarity, as long as that we have a better condition from this aspect, naturally, we will reduce this allowance back. As long as we have deterioration in the [North] or any other declaration in this situation, we might make bigger allowances. So it's -- of course, if we go back where we finished and business come to the usual pace, we should expect reduction in the general allowances.

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

Congratulations on a strong quarter. I have a question. Looking ahead, the Bank of Israel published recently, they're looking to provide nonbanks with licenses to provide deposits and there's some other legislation on the plate. I'm just wondering if it's direct to the banking sector? And if so, are you able to quantify or qualifying what that means?

Well, it's a good question. I mean, first of all, it's -- this regulation is, of course, in process, and we are learning it and reacting to it. And naturally, if more people will be in the competition, there will be more competition. I believe that [indiscernible] of deposits will be not so big. We've seen in the last 2 years new competitors coming in and so far that the banks are giving the whole suite of service to the customers. The main deposit base will stay in the banks. And of course, we should expect some marginal liquidity going out of the bank to these alternatives looking for yield. But the majority of the retail deposits, I believe, will stay with the banks.

And other regulatory enrollment, I think, is Basel IV. I understand it's still pretty much not close to implementation, but do you have a general indication of what that would mean for that discount?

We are doing our internal calculation. We have our estimations. We didn't publish this, so I cannot tell them here. But in general, I would say that they are incorporated into capital plan for the next 3 years. They are not a great effect, they are not affecting anything strategic in our way of behavior in the next in the coming year.

Last question is toward the separation of Visa ICC. I went through the first reading, do you have an expectation of when the final [indiscernible].

Of when?

When the final legislation for the extension of the sale of Visa ICC will be proved by...

No, I don't know that.

There are no further questions at this time. This concludes the Israel Discount Bank First Quarter 2024 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.