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 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, August 15, 2024. 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. I will now turn the call over to Mr. Assaf Pasternak, CFO. Assaf, please go ahead.

Thank you all for joining us today. I would like first to extend my warm welcome to this investor call. As we mark the passing of 314 days since the onset of this devastating conflict, our hearts weighed heavily with the 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 passage for today's agenda, we are presenting today our financial results for the fourth time since the beginning of the war. Our second quarter financial reports indicate our continuous momentum and demonstrating our stability, resilience and high-quality asset metrics as evidenced by consistently delivering throughout this time, stable, yet robust results. Starting with Slide 3, we will begin the review of the financial results. Our first quarter -- our second quarter results underscore our steadfast stability and resolute ability to consistently generate value over time with a net income of over ILS 1 billion and return on equity of 14.1%. Our efficiency ratio is maintained at 51% and excluding CAL would be set at 47%. Looking at our banking activity in Israel, combining Discount and Mercantile results, represent return on equity of 17.7% and efficiency ratio of less than 44%. Bank of Israel rate remained at 4.5%. NII grew by 12.2% quarter-over-quarter and net interest margin to 3.19%, mainly due to the contribution of the high CPI rate in the second quarter. Demand for credit has rebounded across all sectors. Total credit grew by 2.5% this quarter and 6% year-over-year, driven mainly by large corporates. Given our strong and stable results and our confidence in the robustness of our core business, we have decided to issue a 30% dividend payout of net income. This reflects our strong capital position and confidence in continuously bringing value to our shareholders. Although the economy is performing well, macroeconomic factors are fluctuating in both directions, as I will elaborate in the next few slides. Moving to Slide 4. Delving into the macroeconomic landscape, following 11 months of military conflict and sovereign rating downgrades, the Israel economy still demonstrates resilience and strength. On the left side, we show the demand for housing is growing steadily since October '23, and sales are even exceeding the pre-war levels reaching over 8,000 units per month. On the right-hand side, we can observe private consumption in last 8 months, we can see the recovery in most sectors except tourism, while gross rates are higher than the pre-war figures. Moving to Slide 5. We can watch the IVC report on the left side, high-tech capital raise signal turn around with over $3 billion capital raise in the second quarter, double as much as the fourth quarter of last year. Number of deals is back to the pre-war numbers with 114 rounds, exhibiting a healthy environment. On the right side, unemployment is reaching as low as 3.6%, equal to the rate we observed in September '23, demonstrating an economy well adjusted to working under stressed conditions. Moving to Slide 6, but not all the parameters are strongly positive. We can see some evidence to the complexity of the economy coping with ongoing war situation and long-term uncertainties. On the left side, although unemployment rate has reverted to pre-war levels, the amount of total working hours in the market is stagnating, indicating higher rate of part-time job. The right-hand side presents a different angle to the high-tech sector, which is experiencing slower growth as reflected from the services export numbers. Looking at the government fiscal deficit at Slide 7, which continues to widen in July up to 8.1%, and the forecast is between 7% and 7.5% at '24 altogether. As an outcome, the spread between 10-year U.S. versus 10-year Israeli government bonds continues to open, and so the spread of the dollar government bonds -- Israeli government bonds. Slide 8 shows the most relevant macro parameters for the bank. We can see that the market's current expectation for Bank of Israel rate and inflation for 2024 are stabilizing at the high levels they have reached in the last quarter. The market-focused Bank of Israel rate to decrease around 2025 due to the change in the expected trend in the rate of freight in the world. Turning to Slide 9. We will begin the review of the financial results and elaborate a bit on the financial highlights of the second quarter. Our ILS 1.045 billion net income and 14.1% return on equity for the second quarter were largely resulted by an increase in the net interest income supported by CPI asset as well as increase in income and fees. Credit growth was strong across all segments with 2.5% quarter-over-quarter, mainly attributed to the large corporates in spite of the continuous military conflicts. At the same time, we remain focused on the quality of our lending and keep strict underwriting policies. In the second quarter, we have increased the allowance to 38 basis points due to the extension of the credit portfolio and most stringent worst-case scenario. NII increased by 12.2% quarter-over-quarter, mainly due to the effect of the CPI with Bank of Israel interest rate remains at 4.50%. Efficiency ratio was retained at 51%, with restraint salary and maintenance expenses, we are focused to keep expenses we spent and to bring the efficiency ratio to lower levels. On Slide 10, you can see our credit growth. As mentioned before, in the second quarter, credit portfolio resumed its growth to 2.5% as economy and housing markets are gradually recovering. The Corporate segment continues to show relative trends during the first quarter and grew by 4%. Consumer & Private credit as well as medium and small businesses are demonstrating lower levels of demand due to the war and the interest rate environment. Nevertheless, on a year-to-year basis, we grew by 6.1% focusing on our targeted segments. Corporate grew by 11.9% year-over-year, medium enterprises by 5.6% (sic) [ 5.3% ] and mortgages grew by 5.1% year-over-year. Switching to Slide 11. You can see that overall credit loss of 38 basis points was driven mainly by an increase in collective allowances. In this quarter, we do not observe any deterioration in specific debt as reflected from the low provision for specific credit losses. The increase in collective allowances provision reflects the natural growth of our loan book and stricter worst-case scenarios related to the continuity of the military conflict. On the right-hand side, you can see additional asset quality metrics. Nonperforming loans with NPL ratio slightly decreased to 83 basis points compared with 86 in previous quarter. The allowance to loan loss provision from total credit is set at 1.53%, down from 1.60% at the fourth quarter of last year. Moving to Slide 12 to discuss our income. The interest rate in the second quarter remained at 4.5% as in the previous quarter. Yet NII increased by 12.2% with the effect of the higher CPI. In addition, fee income grew by 6%, while noninterest financing income decreased by ILS 94 million. Total income increased by 7.1% quarter-over-quarter. As you can see from the chart on the right-hand side, the income from regular financing activity, what we defined as financing income from current operations grew in the first quarter by 2.4% as our portfolio grew. NIM spiked to 3.19% compared with 2.83% in last quarter. We also can indicate that CPI adjusted NIM has improved as well. I will move to Slide 13 to discuss expenses and cost income ratio. In the last 2 quarters, we have managed to stabilize our salary, maintenance and depreciation expenses after the relocation to our new campus. As our expenses grew by 20%, mainly due to the growth of clearing fees in CAL, which are covered back-to-back with income from fees and other onetime expenses such as donations and effect of settlements for early retirement. Salary expenses are down by 5%, compared with the previous quarter mainly for seasonal adjustments. In 2024, we remain focused on reducing costs by improving procurement processes, digitalizing operational procedures, shifting activities from the branches to the back office and optimizing IT resources. We understand that our efficiency is critical for the future growth and success. Moving now to Slide 14. You can observe our ample liquidity and diversified deposit base. On the left, you can see that 45% of our local deposits are from our retail and private customers, 18% from SMEs and only 13% are from institutional. On the right-hand side, we present the stability of our total liquidity base over time, while customers are keeping 59% of the funds in interest-bearing time deposits. Our liquidity ratios are well above the regulatory demand, presenting a solid LCR of 133% and NSFR of 120%. Our Tier 1 capital ratio stands at 10.67%, well above the 9.22% requirements of Bank of Israel. As we disclosed in previous quarters, the decrease of 23 basis points compared to last quarter is related to Israel rating downgrade by S&P that took place in April this year. Now I would like to move and discuss the latest developments and initiatives in our group review -- and review our main subsidiaries. Moving to PayBox in Slide 14 (sic) [ Slide 15 ] . Discount is about to acquire full ownership of PayBox after buying 49% of the shares from Shufersal. Through PayBox, Discount demonstrates its competitive approach by the steps it takes to offer out-of-the-box value propositions to all the customers of the banking system. PayBox is becoming Israel's leading wallet for managing money outside the bank. In its third year as a stand-alone entity, PayBox presents a substantial growth in all the key business drivers, reaching [ ILS 750 million ] deposit balance and around 1.4 million active quarterly users. The company introduced in June a new product that allows any partners to manage together a joint e-wallet for a distinctive course. With this disruptive nature -- with its disruptive nature, PayBox will continue to introduce new products and features to compete with the banking sector. We have high expectations for PayBox in the coming year. Moving to Slide 16. We disclosed this yesterday. Discount bank has officially entered into an agreement with the American investment fund, Gallatin Point Capital for the sale of approximately 15% of the equity of Israel Discount Bank of New York in exchange for a $150 million investment. The transaction is a strategic move for the New York subsidiary and is aimed to enhancing IDB New York's activity while leveraging the strategic ties that the fund has in the U.S. financial sector alongside its familiarity with presence in the U.S. domestic market. Moving to Slide 17, I will briefly touch on our main subsidiaries. Starting with Mercantile bank that presents a net income of ILS 225 million and return on equity of 17.9%. The cost-to-income ratio reached 42.4%. Mercantile grew its loan book by 7.4% year-over-year by a well-balanced growth across most segments. Moving to talk on IDB New York Bank. In this quarter, the bank has presented debt income of $17 million and return on equity of 5.3%. The bank maintained total assets of $12.2 billion with asset quality continues to be strong. CAL is presenting strong results in the second quarter with a net income of ILS 81 million and return on equity of 14.3%. Consumer credit grew by 1.4% year-over-year and transaction turnover is growing by 11.7% year-over-year. The future separation of CAL is expected to have a limited impact on the Discount group, ongoing profitability and almost no impact on the group of return on equity, while it will improve the efficiency ratio by more than 4%. To summarize my overview on Slide 18, 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 14.1%. Second, we present a solid credit growth of 2.5% as the economy and the housing market resumes activity. Third, our conservative risk approach continues to dictate our strict underwriting policies with sufficient collective allowances stand at 1.53%, while NPL ratio went down to 83 basis points. Fourth, we remain focused on taking down our costs. Salary expenses and maintenance and depreciations are contained while other expenses are affected by increase in the activity in CAL and non-time items. It is long journey that will occupy us in the upcoming quarters. And lastly, the latest reported deals in IDB New York and PayBox demonstrates our agility in reshaping the group to capture market share and better serve our clients. With this, I will finish and would like to open to Q&A.

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

I wanted to ask with IDB on the announcements that you made yesterday. I was wondering what's the thought process behind selling a stake in IDB. And what's the plan for the remainder of the IDB for the coming foreseeable future?

Thank you, Tavy. So IDB New York return on equity, as we reported are smaller than the group. And it has difficulties like many other regional banks in the U.S. market. We thought that entering a partner with us that is familiar with the financial market, the banking market and has record success in its investment and changes that they've done in companies and together with them to build a new plan for the bank for the next few years in order to bring it back to the return on equity that we expect to see in such a bank.

Okay. So you basically want to leverage on their operational capabilities and advisory to turn things around?

Yes. We believe that they can give us a lot of value sitting with us and being partners with us.

[Operator Instructions] The next question is from Priya Asud of Jefferies.

Just one for me, please. So obviously, this quarter, you had quite solid loan growth. I'm guessing, like since the end of the quarter, have you seen any changes in terms of like the loan demand that you see?

Lower demand for credit or lower demand for what?

Just like any changes in patterns of loan demand or demand for credit, both households or corporate?

Right. So actually, I mean, the third quarter start quite good. It looks more or less like the second quarter. There is demand, but the spreads are smaller. As everyone knows, that the spreads all across the credit market in Israel right now are smaller than we used to see in '23, for example.

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