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 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded November 18, 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 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. Now I would like to pass the call to Mr. Assaf Pasternak, CFO. Mr. Pasternak. Please go ahead.

Thank you, Joni. Thank you all for joining us today. I extend my warm welcome to this investor call. As we marked the passing of 409 days since the onset of this conflict, we long deeply for the release of our hostages and looking for the moment they are free again. And in the passage to today's agenda. We are presenting today our financial results for the fifth time since the beginning of the war. Our financial reports for the third quarter indicate our continuous momentum in growing our loan book and balance sheet, demonstrating our stability and high-quality asset metrics as evidenced by consistently delivering throughout this time, stable and robust results. Our first quarter results underscore our steadfast stability and resolute ability to consistently generate value over time with a net income of over ILS 1.1 billion and return on equity of 14.9%. I'm in Slide 3 now. Demand for credit has grown across all the sectors. Total credit grew by 3.2% this quarter and 7.2% year-over-year. Looking at our banking activity in Israel, combining Discount and Mercantile results represent return on equity of 18% and efficiency ratio of less than 41%. While Bank of Israel rate remained at 4.50%, we have kept a mild growth in NII of 0.7% quarter-over-quarter, while the net interest margin was reduced to 3.06%. 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 and a share buyback of 10% of net profit amounting to a total of 40% of net profit for the third quarter. The share buyback program is limited to ILS 500 million over the next 4 quarters. Looking at the economy, we observed stability in macro factors, as I will elaborate on the next few slides. At Slide 4, delving into the macroeconomic landscape, following more than a year of military conflict and sovereign ratings downgrades to A-, the Israel economy still demonstrates the resilience and strength. On the left side, we show that the demand for housing remains stable with over 8,000 units per month. On the right-hand side, we can observe the stable private consumption growth rate. On Slide 5, on the left side, we can observe that during 2024, the war has had a significant impact on GDP growth, reducing it to 0.4%. The bank projects GDP growth of 3.5% for 2025 but this estimate depends on the duration of the war, assuming tensions ease along the northern border early in the year and along the southern border later in the year. On the right side, unemployment is stabilizing at low levels of less than 4% at the pre-war range. September numbers saw the jump to 3.9%, and we will have to see how it will behave in the coming months. Looking at the government fiscal deficit, which speak to 8.5 -- sorry, Slide I'm at 6 now. Looking at the government fiscal deficit, which peaked at 8.5% in September and gradually decreasing. Our most recent forecast predicts a decrease to total of 7.7% in 2024. These levels are still too high to maintain a healthy economy and business environment for the long time -- for the long term. We hope to see the government taking strong measures in order to bring down the deficit in 2025. On the right side, the spread between 10-year U.S. and Israeli government bonds has lowered significantly over the past 3 months. However, it remains volatile and is still elevated compared to Israel's current credit rating. Slide 7 shows the most relevant macro parameters for the bank. We can see that the market expectations for Bank of Israel rate are higher for longer with rates expected to remain at current levels until the end of 2025. We do not anticipate that Bank of Israel will lower interest rates in the near term, given the inflationary environment and the current government deficits. On the right side, following a year of high inflation, 3.9% through October and the market anticipates CPI rates to decline throughout 2025 and aligned with Bank of Israel's upper target range. Now we will begin the review of the financial results. Slide 8 provides an overview of the group performance for the quarter. I will elaborate on each area in the upcoming slides. On Slide 9, we show our credit growth. As mentioned before, in the third quarter, our credit portfolio across of all sectors and segments, mainly in the corporate segment that grew by 4.6% and small business segment that grew by 3.6%, credit spreads are narrowing across all sectors due to the high supply of credit in the market. Switching to Slide 10. You can see that overall credit loss of 40 basis points was driven by an increase in collective allowances. The collective allowances provisions were affected mainly by the strong growth of our loan book and provisions in CAL. On the right-hand side, you can see additional asset quality metrics. The NPL ratio continues to decrease for the third consecutive quarter down to 76 basis points compared to 83 basis points in the previous quarter. The allowance to loan loss provision from total credit is set at 1.52%. Although we cannot face any deterioration in our asset quality metrics, as can be seen in our specific basis provision and NPL level, we do believe that further continuation of the war will have any impact on the risk levels of our loan portfolio. Moving to Slide 11 to discuss our income. Total income grew to ILS 4.2 billion, an increase of 5% quarter-over-quarter and 7.2% year-over-year. The interest rate in the third quarter remained at 4.50% as in the previous quarter. NII was 0.7% growth quarter-over-quarter. As you can see from the chart on the right-hand side, the income from regular financing activities, what we define as a financing income from current operation that does not include CPI is remaining stable throughout the year. The stability was achieved despite the growth in loan book and balance sheet as our margin on loans and deposits are lowering. NIM was reduced to 3.06% from 3.19% in previous quarter. In addition, fee income grew by 5.7%, mainly from credit card fees in CAL and noninterest financing income increased by ILS 135 million. I will move to Slide 13 (sic) [ Slide 12 ] to discuss expenses and cost-to-income ratio. In the last quarter, we have managed to stabilize our salary maintenance and depreciation expenses after relocation to our new campus. Our expenses are stable compared to the second quarter, but excluding and increase in the clearing fees expenses in CAL as activity in credit cards expensed, it represents a reduction of over ILS 30 million. Moving now to Slide 13. We can observe our ample liquidity and diversified deposit base. On the left, you can see that 42% of our local deposits are from retail and private customers, 18% (sic) [ 17% ] from SMEs, 19% from large corporate and 22% are from institutionals. On the right-hand side, our Tier 1 capital ratio after the S&P sovereign downgrade in April stands at 10.57%, well above that 9.75% broad limit. Our liquidity ratios are well above the regulatory demand presenting a solid LCR of 130% and NSFR of 121%. Moving to Slide 14, I will briefly touch on our main subsidiaries. Starting with Mercantile Bank, it presents a net income of ILS 226 million and return on equity of 17.1%. The cost-to-income ratio reached 38.5%. Mercantile grew its loan book by 7.3% year-over-year by a well-balanced growth across most segments. IDB New York Bank, in this quarter, the bank has presented net income of $21.3 million and return on equity of 6.7%. The bank grew its loan book by $560 million and total assets to $13.2 billion. Working with our partners, new partners from Gallatin fund, we are dedicated to enhancing the bank performance and overall efficiency. CAL is presenting strong results in the third quarter with net income of ILS 90 million return on equity of 13.6%. Consumer credit grew by 4.9% year-over-year and transaction turnover is growing by 11.4% year-over-year. The future separation of CAL is expected to have a limited impact on Discount group ongoing profitability and almost no impact on the group return on equity, while it will improve the efficiency ratio by 5%. 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 1.1 billion in return on equity of 14.9%. Second, represent a continuous and solid credit growth of 3.2% this quarter as the economy and the housing market remains stable. Third, our conservative risk approach continues to dictate our strict underwriting policies with sufficient coverage ratio at 1.52%, while NPL ratio is down to 0.76%. Fourth, we remain focused on containing our costs, salary expenses and maintenance and depreciation are contained. Other costs remain stable except for the expand of the activity in CAL. And lastly, the bank announced a dividend payout of 30% and a share buyback of 10% of the net profit amounted to a total of 40% of the net profit of the third quarter. With this, I will finish, and I would like to open to Q&A.

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

First, I wanted to ask how we should think of the coming quarters in terms of modeling for provisions and loan growth, assuming there's no deterioration in the military situation?

Well, I think that the loan growth surprised us a little bit. The last 2 quarters were -- the last 1 was 2.5% in the previous quarter, it was 2.5%. The last quarter was 3.2%. This is a strong pace. I think the next quarter will be a little bit slower. So long the war is not finished if we have a much better situation, I think we will have the same pace and even stronger for going into '25. As for the provisions, so far, we see stable numbers. I think that if the situation in the north keeps on going, we will see some more specific provisions greater than they are -- they were in the last 2 quarters towards mid-'25 not in the first quarter, but as long as the situation continues, we might see a little bit greater numbers. If we have -- if the situation is resolved, it's a completely different story. And probably, we will be able even to turn down some of the allowances we have done in the past.

Okay. That's helpful. I wanted to ask us about IDB New York. So you mentioned the prospect of [ loan ] turning the company around delivering the returns. I was wondering what areas are you focusing on? Is it mostly on the business, refocusing or cost cutting or streamlining and just wanted to get a sense of the scope of what you're doing there.

So we see 2 directions here. One is cost, of course. The efficiency ratio is not good enough. And the second is we're growing the balance sheet on both sides, both on the loan side and deposit side. And on both sides, I mean, it's -- the market is not so easy right now. But I think that together with Gallatin we will be able to build a new program and find new markets to extend the balance sheet.

Okay. And very last piece for me. I saw directly from Bank of Israel, talking about allowing new players to enter the market. I think specifically was targeted for the insurance companies. Do you see a threat there? Or it's more anecdotal at this stage?

I think it's early to declare. Of course, there is a threat there in general. I mean if this proposition will take place. There are new players that will be able to gather deposits, and we'll have more competition on the deposit side probably it will affect the market. So I think there is a threat, but it's too early to know how it will evolve in the next coming quarters.

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