Mizrahi Tefahot Bank Ltd. (MZTF) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Ltd. First Quarter 2021 Business Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded May 19, 2021. With us on the line today are Mr. Adi Shachaf, CFO; and Mr. Menahem Aviv, Chief Accountant. We would like to draw your attention to Slide #2 of the financial statements for the first quarter 2021 presentation, which includes general comments regarding legal responsibility, including that, the information contained in the presentation constitutes information from the bank's 2021 quarterly reports and/or immediate reports as well as the periodic quarterly and annual reports and/or immediate reports published by the bank in previous years. Accordingly, the information contained in the presentation is only partial and is not exhausted and does not include the full details regarding the bank and its operations or regarding the risk factors involved in its activity and certainly did not replace the information included in the periodic annual and/or quarterly or immediate reports published by the bank. In order to receive the full picture regarding the bank's 2021 quarterly reports, the aforesaid report should be pursued fully as published to the public. The bank's results and practice may be significantly different from those included in the forecasting information as a result of a large number of factors, including inter alia, changes in the domestic and global equity markets, macroeconomic changes, geopolitical changes, legislation and regulation changes and other changes that are not under the bank's control, which may lead to destinations, not realizing and/or changes in the business's plans. The forecasting information may change subject to risks and uncertainties due to being based on the management's estimations regarding future events, which include inter alia, global and local economic development forecast, particularly regarding the economic situation in the market, including the effect of macroeconomics and geopolitical conditions; expectations for changes and developments in the currency and equity market; forecasts related to other various factors affecting exposure to financial risks; forecasts with respect to changes to borrowers' financial strength, public preferences, changes in legislation and provisions of regulators, competitors' behavior and the status of the bank's perception, technological developments and human resources development. Mr. Shachaf, would you like to begin.

Yes, we can begin. So welcome to our first quarter results call. As you saw, results for the quarter were quite robust, and I would like to use this call to highlight a couple of points. Before we start, maybe one word regarding the macroeconomic environment in Israel. We have seen a decline in unemployment with Bank of Israel forecast to further improvement by year-end. And after a negative GDP growth in 2020, the Bank of Israel forecast for 2021 is around 6.3% and 1 year inflation expectation from OTC market is just shy of 2%. Please bear in mind that we take the known CPI in our report. So for the second quarter, 2 of the 3 rates are already known, and their combined inflation is plus 0.9%. As you know, we are naturally long inflation. So this should be good for our future results. As for the first quarter results, we have seen an increase in all major balance sheet items. Given the quarantines during Q1 and the economic forecast for GDP growth, credit can possibly grow at a faster rate in the coming quarters. As the macro parameters are improving, we are gradually reducing the 2020 COVID collective provisions. And again, given the GDP growth and unemployment would continue to improve and that the COVID status would not deteriorate than the macro collective provisions could be lower. The ILS 676 million net profit and 14.9% ROE reflects the strong balance sheet, the good efficiency ratio and the contribution of Union Bank to our results. We see a continuous growth in mortgages, and we see that financing revenues from current operations continue to grow. These results are despite the low interest rates and inflation in Q1. And the variable nonlinear increase in salary expenses related also to variable remuneration. This affected also the cost-to-income ratio. And given that we would meet our strategic plan outline, we should see a gradual improvement in cost-to-income ratio. Liquidity is also improving, with core deposits around 68% of all deposits and deposit-to-loan ratio continue to improve. As for capital adequacy ratio, we see Tier 1 ratio at 10.15% and total capital ratio at 13.42%. Please bear in mind that the total ratio does not include the $600 million cocoa issuance that would be recognized only starting the second quarter. As part of the merger plan with Union Bank, we have identified 7 or 8 branches that would remain after the completion of the merger. And we already established mortgages representative desk in these branches in order to achieve not only cost synergies but also business synergies. As you know, we have just recently published our 5-year strategic plan, and we are working hard to make it happen. And I think that the fact that we have a transparent plan is importing by itself. And of course, that meeting the plan targets would make us an even more universal and complete bank. I would like to thank you for your attention. And with that, I leave you with the hands of Mr. Menahem Aviv, our Chief Accountant.

Thank you, Mr. Shachaf. So net profit in Q1 2021 reached ILS 676 million compared with ILS 357 million in the same period last year. Return on equity in Q1 2021 reached 14.9%. The equity amounted to ILS 19.4 billion. Total revenues in Q1 2021 reached ILS 2.423 billion. Financial revenues from current operations in Q1 reached ILS 1.440 billion. The ratio of provisions to loans in Q1 reached 0.02%. Operating and other expenses in Q1 2021 totaled ILS 1.341 billion. And Tier 1 capital to risk elements reached 10.15% and total ratio reached 13.42%. Thank you.

We can go to Q&A now.

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

This is Chris on for Tavy. I'd like to ask about provisions this quarter, the $13 million number. Could you just give us any color around reaching that level? And what maybe, if anything, has changed in terms of how you're seeing risk? Or if you're still maintaining a level of conservatism in certain segments?

So as you remember, we also discussed it on the last call. In 2020, most of the provisions were collective provisions, mainly due to the deterioration in the macroeconomic environment. So in 2020, we saw negative GDP growth and increase in unemployment. And this led us to increase our provision. And again, most of them were collected. Now given that we are starting to see also because of the vaccination campaign and expectations and even current environment with better unemployment 2020, and consensus that 2021 currently should be with a positive GDP growth. Then gradually, some of these collective provisions are coming down. And yes, we're still using accounting methods and conservative approach. And we look at the situation on the macro situation as it is, and it reflects in the provisioning. So if macro parameters would improve, then -- it is good for provisions, if we will see deterioration or coming back with a different COVID status, then things could be otherwise. So we are taking the accepted accounting approach and the change in macro parameters reflect in the collective provisioning.

Understood. Regarding operating expenses, can you give a little color on the recent employee agreement that was made? And also on the time frame in achieving the other synergies that were mentioned in the strategic plan, for example, the branch closures, is that a 1-year or like is that a 2-year process?

So all of the merger is relatively close to 2 years process, which is gradual. So both the cost synergies and the closure of branches and also the -- getting a part for some of the employees designed the retirement after we have reached an agreement with the union of Union Banks, all of it is gradual. So the agreement stated that from the main group of employees, which is the unionized group that have seniority, 340 are entitled to live with the economic arrangement agreed. And the actual depart of the employees would be gradual as part of the agreement. And of course, it is mirroring the branches' closure or mergers to our own branches.

The next question is from David Fingold of Dynamic Funds.

I think on the Capital Markets Day conference, you mentioned that you were going to be moving the headquarters. I was wondering if that was going to lead to the sale of any real estate.

So the current building in Ramat Gan is we are currently, the headquarters of the bank is not on ownership or rather on lease. We have sold it a couple of years ago. So we would not need to sell the current headquarters building. And yes, we do intend. It was also in the strategic plan to build a campus in Lord. It will take us probably something like 4 years to, give or take, to go there. And it will give us other benefits besides, of course, the cost benefit of having the entire headquarters sits together in the same place, in the same campus. So we can achieve also, hopefully, business synergies and not just cost synergies.

Next question is from Micha Goldberg of Excellence.

Congratulations on a strong quarter. A couple of questions, if I may. First of all, on the market share in your mortgage segment, I see your presentation, you have 37% right now, which is pretty much what you guys have been for a while. And I'm just wondering, the numbers that are out there by the Bank of Israel show that mortgages are growing by around 15% to 25%. You are growing around 2%. So I'm just wondering, are you losing market share? How does that coincide with what we're hearing at other banks who seem to be growing double digits on their mortgage market? Is that something that's just not in sync? Or I'm missing something here?

So the 37% is on inventory. And it also, of course, reflects the purchase of Union Bank. So on the currents going -- on the flow, basically, we are keeping roughly the same market share that we used to have. Of course, you can give or take 1%, depends on the quarter. But on the total portfolio, this is around where we see the market. Maybe I didn't understand the question, but we didn't see other banks taking 15% growth in market share, but maybe I didn't understand you right.

We're seeing -- some of the banks growing double digits in mortgages in the last couple of quarters. And I'm just wondering if that's showing up in any market share...

So if you take, for example, 10% on the flow and your initial market share was, let's say, 10%. Then now it is 10 points and just making up a number, 10-point something...

Marginally small, okay. Okay.

Exactly.

Okay. Another question, if I may, is on the taxes. I saw taxes were relatively close to the statutory rate. The negative goodwill is not allowing you to have less than that. How does that work? And kind of wise? I thought in theory, you would have lower tax rates in there.

The negative goodwill is not for tax purposes. And so we would measure -- not measure, but the consolidated of the balance sheet of the P&L, it's roughly the same as was at the last year, with us with good and with [indiscernible] So there is no something special or different from the other -- the previous years.

The goodwill recorded in the other income is net-net is before taxes? So that was part of net?

Net. I said net.

In that case -- so why wouldn't then -- why would the tax rate not be lower then because you have an income at taxes over [indiscernible] just not significant?

You know that it's not significant in the quarter. And the second one, there are some expenses that they are not tax deductible. So -- close to the -- always, it was close to the tax regulatory thing.

I understand. Okay. And 2 more questions. First of all, on [indiscernible] which is going to -- I think you guys haven't published it by Q3 and supposed to happen in 2022. Can you give us any guideline? Is this going to be a positive for you or negative? And is it a negative, is it going to be significant? Any initial indication, I mean?

Well, we cannot give guidance there yet. But generally speaking, it should be good for the mortgages. And maybe to the other side, on the commercial side. So we have 2 effects, opposite effects in different directions and maybe the magnitude is not that different. So -- but it is too early to give an exact number.

Okay. And my last question then just on margins. Following the change, regulatory change on the mortgage loan, the listing of the third limit on the plan. Are you seeing any noticeable pressure on your margins in the mortgage market? Or is that still too early to see?

So we saw in the last 18 months or so pressures on the margins. We saw similar phenomenon a couple of years ago. So the market is very competitive. We are, of course, competing. We did see a reduction in margin in the last couple of months or year or so. And it will probably stabilize somewhere, but we are competing.

The next question is from Ethan Etzioni of Etzioni Portfolio Management.

I wanted to ask about the salary expenses. Looking at the comparison from Q4 '20 to Q1 '21, I see an increase from ILS 785 million to ILS 870 million. I wanted to ask for you to comment on that.

So of course, some of it was referring to in the call earlier. Some of it is, of course, connected to variable remuneration. So because that the Q1 return on equity is 14.9%, which is very high, then we must allocate more bonuses, more expenses for the variable salary rate to reflect it. I do not expect it to be linear all along the year.

And in the other direction, the other expenses went down from ILS 300 million to ILS 231 million. And what is the reason for that, please?

So in Q4, we had a couple of one-off expenses that was related to the merger with Union Bank.

So ILS 231 million is a representative run rate?

I cannot comment to a representative number, but the ILS 300 million in Q4 was including a couple of one-off items related to the merger.

There are no further questions at this time. This concludes the Mizrahi Tefahot Bank Ltd. First Quarter 2021 Business Results Conference Call. Thank you for your participation. You may go ahead and disconnect.