Israel Discount Bank Limited ($DSCT)

Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank Full Year and Fourth Quarter 2025 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on March 10, 2026. In today's conference call, Mr. Avi Levi, CEO, will first present the 2025 financial highlights and the main takeaway points. Mr. Morris Dorfman, CFO, will then review the fourth quarter financial results. If you have not yet done so, we recommend downloading the presentation from the financial results of the bank's website, investors.discountbank.co.il. I would like to remind everyone that forward-looking statements for the respective company's business, financial conditions 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, risk and 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 hand over the call to Mr. Avi Levi. Mr. Levi, would you like to begin, please?

Thank you very much, and good afternoon, everyone. Thanks for joining us in our annual investor call. On this call, we will summarize the main events that shaped 2025, how Israel Discount Bank faired through those challenges and how it is -- how it will be shaping the group's future. I will start with Slide 3. Despite a challenging and complex 2025, we delivered strong '25 results with a net income of ILS 4.14 billion and ROE of 12.6%. Adjusted net income for our one-offs amounted to ILS 4.5 billion, representing an ROE of 13.7%. Banking operation in Israel comprising of Discount Bank and Mercantile recorded ILS 3.5 billion and ROE of 14.4%. Discount's cost efficiency ratio in 2025 was 49.2%, while the cost/income ratio at the banking activity in Israel was slightly lower at 46.9%. Total credit in the group grew by 8%, while net interest income increased by 0.7% year-on-year despite the lower CPI, the drop in interest rates and the composition of funding rates -- the competition on funding rates. The bank paid out 47% of 2025 net earnings in dividends and buybacks. As we can see on Slide 4, ROE in 2025 remains similar to ROE in recent years with a healthy double-digit ROE of around 13%. Excluding one-offs, ROE for 2025 would have been 13.7% with similar to recent years performance. Moving to Slide 5. On the graph on your left, you can see loan growth continued to be significant in 2025 as Discount grew its loan book, excluding CAL by 8%, while nominal loan growth, excluding the sharp appreciation of the Israeli shekel, was almost 10% year-on-year. Most of 2025 loan growth, 61% of it stems from the -- from notable demand in the corporate segment. Strong demand for mortgages were the bank's second largest driver, accounting for 26% of total 2025 growth, while SMEs loan grew by 4% year-on-year. On the right side, you can see that although loan growth remained strong, it did not hurt the bank's credit quality. The bank's total problematic debt declined to 1.9% of the loan in 2025 from 2.4% in 2024 and versus 3.5% of loan in 2023. Overall, in 2025, problematic loans dropped by ILS 1.2 billion. Now moving to Slide 6. Discount continue to focus on concentrate -- constraining costs and increasing efficiencies. This is an ongoing process, and we believe we can still improve a lot in the coming years, but we have come far. Just half a decade ago, Discount cost-income ratio was above 67%. In 2025, our reported cost-income ratio was 49.2%, significantly lower, but still not low enough. We strongly believe we can do much better. And as we published in our strategic long-term plan, we expect ratio down even further. In the graph on Slide 6, we decided to show the improvement of Discount's cost efficiency efforts in balance sheet terms as a ratio between operating expenses and our assets. This ratio is independent of the bank's revenue. In recent years, revenue have been positively affected by the higher interest rate, and that distorts some of the real efforts made by the bank. We expect that the rates likely to continue to drop. Our efforts to reduce costs and increase productivity and efficiency will have to increase. We have a plan to continue and focus on growing the bank's assets and reducing costs in an effort to do more with less. Now please move to Slide 7. As a result of Discount's consistent double-digit ROE, we have been able to keep capital ratios at a high -- at a heavily healthy level of well above 10% with more than 1% above regulatory requirements. As we can see the graph on the right hand. As a result, Discount has been able to pay out more of its earnings back to investors, increasing its payout ratio from a mere 5% just a couple of years ago to 47% in 2025. While we paid 50% of the net earnings in the second half, as can be seen on the left side of Slide 7. Looking ahead, we believe it's crucial for Discount to keep a healthy balance sheet -- sorry, between its ability to grow its balance sheet and pay out sufficient dividends. The pending sale of CAL once approved, should boost our capital ratios by up to 0.5%, potentially leaving our common equity Tier 1 ratio at closer to 11%. This should provide the bank with ample capital buffers to allow it to continue to grow its asset base and seek to optimize shareholders' return. Please move to Slide 8. The bank continues to focus on expanding its strategy. At the bank, the focus is on 20 main efficiency projects that will allow the bank to reach its cost-income targets. The bank continues to focus on reducing the number of employees. And during 2025, over 90 employees left the group. And we expect this trend to intensify in coming years. Likewise, the bank continues to reduce its branch footprint. And during 2025, the bank reduced its branches square meters by another 5%, bringing the group's branch square meter down by almost 20% since 2020. Discount also continues to focus heavily on AI. And in 2025, we introduced a first-of-a-kind talking AI bot. This talking bot is an effort to improve customer service satisfaction and the bank introduced Smart Future, a first of its kind pension planning bot. At Mercantile, we appointed a new CEO, reduced the number of senior management, and we intended to early retirement -- initiated early retirement, which should allow the bank to reduce its workforce by more than 12% through 2028. At IDB New York, we entered a strategic partnership with Gallatin Point Partners back in late 2024 in an effort to create better value for its shareholders. During '25, we entirely changed management, reduced senior management and initiated a new aggressive 3-year strategic plan focused on improving profitability. At the same time, IDB New York completed its consent order, allowing new management to focus entirely on creating value. At CAL, we signed a binding agreement to sell the company to consortium of union investors -- investments and other insurance. The deal is currently awaiting regulatory approval. And once approved, this will significantly boost the bank's capital ratios and allow the bank to continue to grow its assets while paying out excess capital to its investors. Overall, I'm proud to say that Discount is making notable headways into every one of its strategic targets. Moving to Slide 9. Looking ahead, we expect loan demand to remain strong as the Israeli economy is expected to rebound sharply. As you can see on Slide 9, GDP is projected to rebound significantly and it's expected to grow by over 5% in 2026 after a 3% growth rate of GDP in 2025. At the same time, the labor market remains exceptionally resilient. Turning into Slide 10. The rebound in economic activity is expected to be driven by post-war pickup in -- we expect these conditions, together with the strong labor market to remain a healthy driver for continued loan demand, while easing monetary policy should continue to reduce borrower stress and provide a positive backdrop for improving credit quality. Moving to Slide 11, where we summarize our main takeoffs -- takeaways for 2025. Profitability remains strong at mid-double-digit ROE despite challenging backdrops and onetime events. Discount continues to grow its loan book, but at cautious and conservative way in effort to increase profitability but reduce risk. Discount is committed to retain strong capital ratios, which will be boosted by the pending CAL sale, allowing the bank to continue to balance healthy loan growth with optimal investor return. We continue to implement our long-term strategy, reducing headcounts, streamlining our group structure and increasing in-group synergies and continue to develop technological solutions in an effort to provide our customers with best-of-breed service platform. Overall, 2025 has been a year of major transformation. We entirely changed the senior management at IDB New York, cleared the plate from regulatory consent order and initiated a new strategic plan focused on significantly improving return on equity. At Mercantile, we changed management, launched an aggressive early retirement plan, which together with its new strategic plan should notably increase profitability in coming years. We are in the final stage of selling CAL, which will allow the bank to continue to grow its loan book and pay out ample available earnings to its shareholders. We are not done yet and the plan to work tirelessly and consistently to continue to improve efficiencies, streamline synergies and increase shareholders' return. Our strategy is set. Execution is on the way. With that, I would like to hand over the presentation over to Mr. Morris Dorfman, the bank's CEO. Morris?

Thank you, Avi, and good afternoon to you all, and thank you for joining our investor call. I will start at Slide 13. In the fourth quarter, Israel Discount Bank reported a net income of ILS 856 million and ROE of 10.2%. Q4 earnings were hurt by an early retirement plan at Mercantile Bank, which reduced net income by some ILS 104 million. Earnings were also hurt by negative CPI, which was minus 0.6% which reduced net income by some ILS 80 million and by a weak growth in IDB New York, among others, the result of changes in senior management. Net income, excluding the retirement cost at Mercantile amounted to ILS 960 million, representing ROE of 11.4%. Discount reported cost/income ratio was 59.3% in Q4. Excluding the retirement plan at Mercantile, the cost-income ratio would have been 53.9%. Total credit in the group grew by 0.7% as appreciation of the shekel hurt the dollar-denominated loans, while new management at IDB New York has been taking a more cautious approach to loan growth while focusing on improving profitability. Loan loss expenses dropped to 0.2% of total loans. In light of these results, the Board decided to pay out 50% out of the group Q4 net income, ILS 428 million in dividends. Please turn to Slide 14. ROE in Q4 was 10.2%, below the ROE recorded in previous quarters when ROE consistently remained well above 13%, as it can be seen in the graph on the left side of the slide. The right-hand graph illustrates the main 3 reasons ROE in Q4 was lower than ROE in Q3, for example, the significant lower CPI, which was minus 0.6% in Q4 versus a positive 1.4% in Q3. This 2% quarter-over-quarter drop hurt Q4 ROE by some 3.2%. We note that Bank of Israel expects the CPI to average a positive 1.7% in 2026. Mercantile's early retirement plan reduced net profit by ILS 104 million, reducing Q4 ROE by another 1.2%. We expect that the retirement plan will have an ROI of 2 to 3 years, implying the retirement plan has a cost now but will improve the bank ROE in the future. A weak quarter IDB New York with net income in Q4 just 50% of Q3 earnings further hurt Q4 ROE by 0.4%. The bank also benefited from a lower tax rate and from the decline in loan loss expenses as can be seen in the graph. On Slide 15, we summarize our credit portfolio growth and structure. In the fourth quarter, loan growth slowed to 0.7% quarter-over-quarter increase. Overall, loan grew by 7.9% year-over-year. The lower loan growth in Q4 is mostly due to the change in strategy of IDB New York and the weaker dollar. As you can see on the right side, our loan book remains very well diversified with over 1/4 of the loan book focused on mortgage loans, while SME loans make up some 22% of the loan book and corporate loans account to close to 33%. As can be seen on Slide 16, loan growth was strong among most of the segments of the operations as household loans grew by 2% quarter-over-quarter and by 7% year-over-year. Mortgages grew by 1.3% quarter-over-quarter and by almost 8% year-over-year. Corporate loans were one of the main loan growth driver in 2025 and grew by 16% year-over-year and by close to 3% quarter-over-quarter. International business was primarily hurt by the strong shekel, which appreciated by 13% year-over-year. In dollar terms, IDB New York loan book grew by 6.9% year-over-year. Switching to Slide 17. This slide presents our credit portfolio quality. Despite the robust growth in our loan portfolio, the bank's credit quality remained benign as -- is reflected in a consistent NPL ratio of 0.7%. The bank's allowance ratio has remained steady at around 1.3% of total credit, while Discount Group continued to enjoy a strong coverage ratio of 178%. On the right-hand side, credit loss expenses dropped to 19 basis points in the fourth quarter. Most of the provisions in Q4 were due to the several isolated corporate incidents. On a full year comparison, loan loss expenses remained low at 16 basis points, slightly lower than the 17 basis points recorded in 2025. Overall, in 2025, 41% of provisions were collective while the majority of specific provisions were made against several isolated corporate incidents made in Mercantile Bank and IDB New York. We see no deterioration in our loan book and are optimistic that strong economic backdrop projects for 2026 will provide a positive tailwind for the continued strong credit quality. Moving to Slide 18 to discuss revenues. Total revenues fell by 13% quarter-over-quarter, mostly due to the 14% decline in net interest income. Net interest income was held by negative CPI, which reduced interest income by ILS 430 million quarter-over-quarter, while ongoing pressure on lending and deposit margins are consistently eroding the bank's net interest margin. Fee income grew by a healthy 6.3% quarter-over-quarter and 15.3% year-over-year, mainly from higher capital market-related revenues and FX-related revenues. The lower noninterest finance income was mostly due to lower gains from Discount Capital, which had a very strong quarter in Q3. At the right-hand side, the income from regular financing activities decreased by 1.1% quarter-over-quarter despite a 0.7% expansion of our loan portfolio, primarily driven by the compression of margins across both credit and deposits. I will move to Slide 19 to discuss expenses. Operating expenses increased by 70% quarter-over-quarter, primarily due to onetime expenses recorded at Mercantile Bank on account of its early retirement plan. According to the retirement plan at Mercantile, some 170 employees are expected to leave the bank until 2028. This accounted for 12% of Mercantile's current labor force. These expenses were recorded in other costs and accounted for the entire quarter-over-quarter increase. Higher staff costs, up 7% quarter-over-quarter, were mostly the result of a higher staff cost in IDB New York as almost the entire existing management left the bank as part of the bank's new strategic plan. IDB New York also completed its consent order, allowing the bank to refocus management attention on profitability and growth. As a result of the mentioned one-offs, the group cost-income ratio was 59.3%. Excluding the early retirement, we have left the cost-to-income ratio at 53.9%. Moving now to Slide 20, you can observe our ample liquidity and diversified deposit base. On the left, you can see that 57% of our deposits are from our retail segment. On the right-hand side, our Tier 1 capital ratio stands at 10.38%, well above the 9.2% required by the Bank of Israel. We know that the pending sale of CAL will add some 0.4% to 0.5% to our capital ratios, potentially leaving our CET1 ratio at close to 11% once the sale of CAL has been completed, significantly above the Bank of Israel regulatory requirements. Our liquidity ratio also remain well above the regulatory requirements, presenting a solid LCR of almost 121% and an SFR of 117%. Please move to Slide 21. As a result of Discount consistent double-digit ROE and a healthy capital ratios above 10%, Discount has been able to consistently pay over 40% of earnings back to investors, as can be seen on the graph on the right hand. In Q4, the Board decided to pay out 50% of net earnings, some ILS 428 million in cash. Overall, Discount paid out some ILS 2 billion, of which ILS 1.7 billion in cash and the remainder in the buyback of shares, representing a 5% gross dividend yield. Looking ahead, we believe it's crucial for Discount to keep a healthy balance between its ability to grow its balance sheet and pay out sufficient dividend to its investors. The pending sale of CAL, once approved, should provide the bank with ample capital buffers to allow the bank to continue growing its asset base and seek to optimize shareholder return. Moving to Slide 22. I will briefly touch on our main subsidiaries. Starting with Mercantile Bank on the left-hand side, Mercantile presents a net income of ILS 106 million and ROE of 7%. As mentioned, Q4 earnings were negatively affected by early retirement plan, which caused the bank some ILS 104 million. Excluding the one-off retirement costs, ROE would have been 14.2%. IDB New York reported net income of $13 million and ROE of 3.6%. Q4 earnings were adversely impacted by increase in loan loss expenses and an increase in operating costs due to the change in management. The bank grew its loan book by 6.9% year-over-year and deposit by 3.6% year-over-year. CAL reported net income of ILS 47 million, reflecting ROE of 6.7%. Before opening the call to your questions, I would like to summarize my overview and emphasize the main takeaways from this quarter results. Lower ROE in Q4 was primarily due to a combination of negative CPI and early retirement plan at Mercantile and a weak quarter in IDB New York. Both the new management of IDB New York and the retirement at Mercantile are steps that will allow the bank to improve cost efficiency in the future and boost its ROE. Similarly, the pending sale of CAL should allow the bank to continue to grow its loan book, maintain a decreased capital ratio and pay out dividends to shareholders. Overall, the steps taken by Discount Bank in recent quarters and in Q4 specifically, might have a negative impact -- might have negatively impacted earnings in the short term, but will improve earnings and profitability in the future. With this, I will finish and would like to open the call to Q&A.

[Operator Instructions] The first question is from Chris Reimer of Barclays.

I was wondering if you could just touch on, again, the results you expect from the initiatives you've taken at Mercantile and IDB Bank. And then also going forward this year, do you anticipate any further one-offs will be required?

Yes. Chris, thank you for your question. Firstly, on -- in Mercantile, there is -- the initiated 2030 plan. We didn't elaborate on specific targets. But on the provision of ILS 105 million, we do expect, as mentioned, the return that we'll get between 2 and 3 years. So it's one of the best investments we can make. Hopefully, we will do more of this in the future. But that's the return that we expect to get from it. And IDB New York, as again, as mentioned, we established -- we replaced the management over there. We shrinked the management from 13 members of the management to 7 members of the management. We started to take care of the costs and the NIM and nonprofitable or less profitable credits. We started seeing the fruits of the investment earlier than we expected, but we expect the major result to appear in -- during 2026 and 2027. And just we need to mention that we saw a provision one-off, hopefully, of 2 main clients of IDB New York, which cut the profit in the fourth quarter to what it was. But again, we don't see any specific provisions in the future, although there might be additional provisions.

Got it. That's helpful. And can you give any color on loan growth? And do you see any specific sectors maybe showing more demand than others? Or is there any segment where you intend to focus more?

Well, I think the one that experienced -- the one sector that experienced problems, but we're still operating and we're providing credit is the real estate sector. We tend to focus on more resilient clients, but we don't compete where we see nonreasonable, not reasonable risk and nonreasonable risk-adjusted margins. We'll leave it to maybe nonbanks competition or to other institutions. Where we see the potential, but still lower margins is defense sector. There is still a lot to expect in the future. We have a strong defense industry. And obviously, there's a lot of demand all over in Israel and outside of Israel, of course. And we see a great potential, although, as I said, not very high margins. Another very potential -- high potential sector, hopefully, after we end the current situation is the infrastructure. We saw -- we actually were engaged in many energy projects and there are still a lot to come, both on transportation, energy, utilities, all kind of utilities and so on. And the Israel post the war should be a big consumer of the government and major projects on the infrastructure segment. So definitely, we are prepared and would like to invest in this. We think it's generally speaking, a low risk and high potential and reasonable margins, of course.

The next question is from Liran Lublin of IBI.

I have another question on credit growth. We've seen all banks in the system growing their credits at about low double digit this year and the bank grew by approximately 8%. How do you explain this more cautious approach to credit growth? And maybe you can give a little bit of color on how do you look at credit growth going forward?

Yes. So if we are neutralizing the exchange rate, we grew up by 10%. IDB New York, as I mentioned, grew -- actually had a negative growth in the fourth quarter, which impacted the Group's growth. We are being very cautious at the credit growth this time because at this point, because of the high competition and relatively low margin given the risk. So we are trying to focus on resilient companies and reasonable margins. We do grew up -- grew in the corporate segment and in the mortgages segment, again, cautiously because the margins -- current margins in the mortgage segment is relatively low, much lower than they used to be 2 years ago and very high competition, both with banks and nonbanks as well to provide mortgages. But we think it's -- the risk is relatively low. And although the lower margins it's to create stickiness to our clients with the bank. So we are to tend to keep their -- the market shares that we currently have, not expand too much and get lower margins, but not also to go down on our market share as well, just to keep it, give or take, as it is currently. So I think both on the mortgages and the corporate, we grew this year. We tend -- and we are focusing -- our strategic plan is focused on the retail segment, and we are expecting and we'll do whatever we can within our strategic plan to grow credit -- retail credit wherever we can, again, where the margins justify the risk.

[Operator Instructions] There are no further questions at this time. Thank you. This concludes the Israel Discount Bank Fourth Quarter and Full Year 2025 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.