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

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Ltd Third Quarter 2021 Business Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, November 15, 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 statement for the third 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, is not exhaustive and does not include the full details regarding the bank and its operations or regarding the risk factors involved in its activity and certainly does 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 in 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 the estimations, not realizing and/or to changes in the business plan. The forecasting information may change subject to risks and uncertainty 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 macroeconomic and geopolitical conditions, expectations for changes and developments in the currency and equity markets, 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 the provisions of regulators, competitors' behaviors, the status of the bank's perception, technological development and human resource developments. Mr. Shachaf, would you like to begin?

Thank you, and welcome to another, if I may say [indiscernible] Mizrahi Tefahot Results Conference Call. As we feel 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 on the macroeconomic environment in Israel, a government deficit is going down and the shekel is strengthening. We have seen a decline in unemployment with the forecast of further improvement by year-end. And after a negative GDP growth in 2020, Bank of Israel's forecast for 2021 is around plus 7%. And one year inflation expectation from OTC market is now around 2.6%. We saw an increase in actual inflation, both in Israel and especially in the U.S. We also saw an increase in residential property prices, and this is not reflected in CPI. As for the third quarter results, we have seen an increase in all major balance sheet items. And negative provisioning has also contributed to Q3 results, but less than Q2. I remind you that in 2020, the vast majority of the provisions were collective and not specific. And based on the macroeconomic environment, they were mainly COVID-19-related. As the macro parameters are improving, we are gradually reducing the 2020 COVID collective provisions. We see that from the sinking deferrals in May 2020, mortgage full deferrals are now practically behind us. So given current health conditions, we could say that the mortgage portfolio is also immune to COVID. Pick them up for all parameters, would continue with current trend, then everything else being equal, collective provisioning could continue to gradually recover. The net profit and the return on equity reflects the strong balance sheet, the good efficiency ratio and the contribution of Union Bank to our results. You can see that our 9-month cost-income ratio is almost where it was in 2020 before the Union Bank transaction. The merger is advancing as planned. We already started the migration of branches and of course, most of the cost synergies are expected to materialize gradually along 2022 and with full effect starting 2023. Our cost-income ratio target as published in our strategic plan is to be below 50% by the end of the plan. We see a continuous growth in mortgages with great demand coming from real people who want to buy an apartment, and I will elaborate later on the new Bank of Israel from currency initiatives. Financing revenues from current operations continue to grow, a very healthy growth. You can see that from Q3 of 2020, financing revenues from current operations follow a positive and consistent trend quarter-by-quarter. Liquidity is very robust with core deposits around 67% of all deposits. And total deposits now continue to grow to more than ILS 300 billion. And for capital adequacy ratio, we see Tier 1 ratio at 10.44%, and total capital ratio at 14.3%. The total ratio includes the USD 600 million CoCo issuance, which was recognized starting the second quarter. We have announced the ILS 753 million in dividend, which represents 30% of 2021 9 months' profit in line with Bank of Israel directive. Last but not least, the Bank of Israel announced yesterday on the new transparency initiative for the mortgage market. We embraced the new initiative. We think that more transparency is always good for the market as a whole. And of course, as a major participant in the market, we support any initiative that improves the transparency of the market. Already, today, we usually discuss with our clients multiple alternatives and we think that the fixed format of the initial approval document is a very good idea. The availability of more data with increased demand for professional bankers advice, which is one of our core strategic pillars in the mortgage market, and we always favor an intelligent dialogue with our clients. It is worth noting that before and after the new initiative, each client will take a tailor-made mortgage, which is best suited to its need, and it's not necessarily identical to the three fixed format alternatives, which are for comparison proposals. We are still examining the exact details of the new initiative. But from what we saw so far, we could say that it looks like a good step in the right direction. Just to conclude, back to our results. I think that all in all, we are following our strategic plan. And like always, the healthy balance sheet growth of this quarter will continue to contribute to the profitability of future quarters. Thank you very much for your attention. And with that, I leave you with the hands of Mr. Menahem Aviv, our Chief Accountant.

Thank you, Mr. Shachaf. Here are some highlights from the financial statements, are as follows: Net profit in Q3 2021 reached ILS 845 million, and the net profit in the first 9 months of 2021, reached ILS 2,509 million. Return on equity in Q2 -- in Q3 2021 reached 17.3%, and in the first 9 months, it reached 17.1%. Equity amounted to ILS 20.8 billion, and financial revenues from current operations in Q3 reached ILS 1,551 million. In Q3 '21, the operating and other expenses totaled ILS 1,339 million, and the total ratio reached 14.94% and the rate ratio of Tier 1 reached 10.44%. That's all.

We can go to Q&A now.

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

This is Chris Reimer on for Tavy. And congratulations on the strong results. In your comments, you noted that you thought the Bank of Israel plan for mortgages was good, but could you give some color on how, or if there would be any changes or anything you might do differently because of it?

So the program we just announced yesterday. As I was saying, we are still examining the exact details, but the big picture is more transparency into the market, which I think is always good, both for the market and for the bank and for the clients. And we, of course, embrace it. We also see a demand to reduce the time it takes to print the initial approval, which is also, I think, good both for the client and for ourselves. We try to do it also from commercial reasons, not just because of expected regulation. And more the market will be more transparent, there will be more common data. And I think the need for professional advice of the banker, which is one of our pillars in the strategy will be more demanded. And [indiscernible] -- I think it's a very good idea.

Okay. And just about loans, they're growing at quite a high pace. Do you see this level sustainable heading into 2022?

It's hard to predict. We still see this demand for mortgages. As I would say, we see real people buying real apartments. So in that respect, it is not a speculative demand but rather a real demand. We know that there's a backlog shortage of supply. And it takes time to increase the supply side because these are long processes. So for the near future, I think we will still see a healthy demand because people need to live somewhere. And you see all the banks increasing their capacity in mortgages. Of course, this is a major business line for us, and we'll go there.

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

I add my congrats for a great quarter. I wanted to ask about the effect of the derivatives on the reconciliation between current income and reported income. I see a number of ILS 154 million for the quarter, and for the 9 months, I see ILS 438 million. Can you please elaborate on this effect?

It's the third value of the derivatives. It's technical. It's going up and down. So it's only technically because of that we are eliminating them from the current operations.

Can you elaborate what kind of derivatives and how this happens?

The interest rate derivative and CPI-linked derivatives to hedge our balance sheet.

So that gets offset against the actual exposure?

Exactly.

How does the ILS 154 million relate to the ILS 244 million number also regarding derivatives in the income -- the income, not from interest. The financial income, not from interest, ILS 244 million, how does that relate to the ILS 154 million, please?

In our financial statements in page number -- you cannot find the exact connection but this is why we are giving the current operation in the English version -- Page #25. So you cannot connect this number to the number in the number in the -- but it's included inside the number, that in the profit and loss statement. So this is why we eliminated, as you cannot find the connection, the exact connection.

So the correct thing to do looking at recurring revenue is to eliminate ILS 154 million from the quarter? Am I...

Yes. That we did on Page #25.

Yes. If you look at Page 25, in the middle, where it said total financing revenues from core operations. Then you can see the more representative number, which I was referring to when I talked about it later, which is currently ILS 1,551 million. And you see the continuous growth goes from the third quarter of 2020 because it neutralizes a CPI as it is related to.

The next question is from Borja Ramirez of Citi.

I have a quick question related to the efficiency. So you have overall, I think, very good operating plans. And the efficiency is at 51.2% in the quarter, getting closer to the target in the -- with your business plan. I would like to ask if you could kindly provide details on the cost synergies from the Union Bank merger? And also, any outlook for potential cost savings going forward?

So regarding the Union Bank transaction, cost synergy will come from three major pillars: one is real estate, the close of most of the branches; the second one is retirement according to the plan signed with the union of -- Union Bank employees; and the third one is the computer, expanded currently Union Bank's take the IT services from Bank Leumi and the agreement will end by the end of 2022. So besides -- I see that we'll start and we'll -- only on 2023. The other two pillars are coming gradually. So according to the plan, and as far as we know from this point of time, we are advancing according to the plan. We saw some gradual synergies in 2021. And of course, we will see more in 2022. And the full effect will commence starting 2023. And as you can see, if you compare our cost-income ratio to the third quarter of 2020, which was the last one before Union Bank, then you see that we are already almost there. So obviously, a second after we bought Union Bank and the cost-income ratio of Union Bank was higher than Mizrahi's, then we saw an increase. And we took the last quarter to reduce and to improve this ratio. And it looks like [ is that the plan? ]

Understood. Very clear.

As for the income, of course, we have two pockets of income for Union Bank; one is the actual operation of the business; and the second one is the opportunistic price, which is spread over 5 years and contributes roughly, slightly more than ILS 50 million each quarter for 5 years, starting Q3 2021.

That part is understood. One follow-up question, if I may? The mortgage demand continues to be quite strong in Israel. May I ask for any details on the outlook going forward for the mortgage demand in Israel, please?

So as I was saying before, we see strong demand in the market, not just in our bank, but in the entire market. And of course, we take our traditional share there. And again, as long as there is a shortage of supply, both on the inventory as maybe even on the flow, then we will see a strong demand there. This is part of the reason why this market has grown in this stage for 2021. And at least until now, it has continued to grow. I take you back in terms of risk, but not on volume that after the COVID-19 deferrals or the mandatory deferral program with the Bank of Israel, we feel that now almost all of the deferrals, all the full deferrals are gone and almost everybody is paying either 100% or a partial payment on the new -- according to the new mandatory plan. So in that respect and again, because these are real people which buy regular normal real apartment, I think that the market is still very strong in one of the best quality assets actually, not just in Israel.

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