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 2023 Business Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, November 28, 2023. 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 #1 of the financial statement for the third quarter 2023 presentation, which includes general comments regarding legal responsibility, including that the information contained in the presentation constitute information from the bank's 2023 quarterly reports and/or media 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 nonexhaustive, 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 2023 quarterly reports, the aforesaid reports 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 plans. 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, forecast 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' behavior, the status of the bank's perception, technological developments and human resources development. Mr. Shachaf, would you like to begin?

Thanks. Good afternoon, and welcome all to the Mizrahi Tefahot third quarter analyst call. Obviously, the first thing I would like to talk about is the impact of the war on the market and on the bank. So on the first day of the war, the bank has taken a pro-client approach, trying to offer immediate relief to its client beyond the mandatory relief plan of the Bank of Israel by adopting the COVID experience and best practice to the current situation. In the first days, we have seen a typical response of the market to the unfolding events with equity prices going down, yields on bonds going up, and the strong depreciation of the shekel vis-a-vis the U.S. dollar. The Bank of Israel came up with a market-oriented plan, which included the repo facility and FX swap facility and the dollar-shekel selling program. Although the actual utilization of the plan was very modest, its existence created a positive effect. And in the days after we have seen equity prices going up, volumes going down, and the dollar-shekel rate went back down to even below its pre-war level. As for the bank, you can see from the report that the major difference between the second quarter and the third quarter is the collective provisioning item. We have taken a cautious and conservative approach, both in mortgages and commercial credit provisioning. This collective provisioning increase reflects a scenario of a severe potential future deterioration of the war and of its effect on the Israeli market and the bank. It's important to note that we have decided to take a prudent approach. Even though we have not seen yet indication that this adverse scenario is expected, it reflects a negative GDP growth of 7% or more and unemployment rate of 8% or more, and future rate hikes of 1%, all of which are not currently expected. We have also published that the impact of all the donations, the embracement of the [indiscernible] and the banking benefits and other clients relief measures we have taken within the Bank of Israel relief plan and beyond it could reach hundreds of millions of shekels, assuming a theoretical full utilization along the entire prospective future period. This calculation is taking into account also theoretical future extra interest not earned, again, given full utilization of all benefits. As for the regular items, results for the quarter were robust, and I would like to use this call to further highlight a couple of points. We have seen an increase in most of the major balance sheet items. We think that our credit metrics reflect a balanced credit portfolio with adequate risk monitoring. And as stated before, the increase in provisions is coming from collective provisions due to the war. The net profit and the return on equity reflects the strong balance sheet, the CPI figures, the good efficiency ratio, and the contribution of human bank to our results. Our cost/income ratio for the quarter is below 40%. I remind you that our cost/income ratio target as published in our strategic plan is to be below 50% by the end of the plan in 2025. Financing revenues from current operations continued to be strong. On the expense side, you can see the improvement vis-a-vis previous quarters, reflecting also the post Union Bank merger synergies. And as always, salaries are also affected from variable remuneration related to the bank's results. Liquidity is very robust with high share of core deposits and capital ratios are in tandem with profitability. Credit growth for the last 9 months is responsible. Demand for mortgages is still low, and we continue to follow our strategy to retain our market share in the market. Competition is aggressive. And as always, we are competing. It is possible that demand for mortgages will begin to recover next year, but we are not expecting to see it soon back to where it was in the beginning of 2022. We do expect to see responsible credit growth following our strategic plan. As can be seen from our results, we have already reached the main targets of our strategic plan before 2025. Given the current environment, we will distribute 15% of the third quarter profit as dividend. We believe that also in this aspect, it is better to take a more prudent approach. All in all, I think we are following a strategic plan and accommodating to the new environment. The main point I would take is that despite everything, we were still able to produce 16.8% return on equity, which is not yet bad even on an international scale. 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. So the figures in the financial statements are as follows: Net profit in Q3 reached NIS 1.98 billion, and the net profit in the first 9 months of 2023 reached NIS 3.863 billion. Return on equity in Q3 reached 16.8%. In the first 9 months of 2023, it reached 20.3%. The equity amounted NIS 26.5 billion. The cost/income ratio reached in Q3 to 36.6%, and in the first 9 months of 2023 reached 37.4%. Financing revenues from current operations in Q3 reached NIS 2.937 billion. The total revenues in Q3 reached NIS 3.868 billion. The operating and other expenses in Q3 totaled to NIS 1.415 billion. The ratio of provisions to loans in Q3 reached 0.86%. The increase in this ratio is mostly due to collective provision for credit losses, recognized for as to reflect increase in credit ratio in the market due to war. So no material indicators of increase in these rates have been seen to date. The ratio of T1 (sic) [ CET1 ] reached 10.12% and the total ratio reached 13.02%. And I think we can go now to Q&A.

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

Congratulations on the strong results. I wanted to touch on provisions and credit demand. As -- in the first half of the year, we already saw provisions increasing slightly and credit demand slowing. How do you see the war impacting these 2 items going forward?

So regarding your remark on the first half, of course, it has nothing to do with the war. It was mainly due to the new monetary environment with higher rates that impacted the demand for mortgages. Of course, the war also will impact the near-term demand for mortgages. So as I was saying before, we do not expect demand in Q4 to be very high. We do expect to see some improvement in 2024, but not to reach the level of demand we have witnessed in 2022. I hope this answers your questions.

Sure. Yes. And just about expenses, I was wondering if you could talk about some of the moving parts. What drove the strong decrease in salaries this quarter? And maybe how we should be looking at the ramp-up to the headquarters?

Sure. So there are a couple of things to look at. First one is our level of expenses post the Union Bank merger. So in 2023, it is the first year that we enjoyed the full cost synergies. The second thing is the agreement with the union of the employees of the bank that we have signed a couple of months ago that makes sure that everything is fixed and in place in terms of future salaries increase for the next coming years. And the third one is the variable remuneration reflected in the results. Obviously, the first 6 months, so the equity was higher. This quarter, it was lower. So it is also reflected in the expenses.

The next question is from [ Uri Farr ] of the [indiscernible].

Also congratulations for the strong results. I just wanted to ask one question that we discussed also this morning. Regarding your noninterest financing income, it was like inflated by noncash, nonrecurring [indiscernible] MTM adjustment of the derivative instruments of NIS 146 million this quarter, that, well, I think, had a positive ROE impact of 1.6 percentage points, yes? Or nearly that much. I just wanted to ask what kind of derivatives on this item leads to -- is it more hedging product or is it trading, I don't know. Can you please elaborate on that?

Sure. So there are 2 sides basically of derivatives that take the main play to that respect. One is us serving the clients and making derivatives vis-a-vis the operation. Of course, we hedge that, but the hedge is never fully back to that. So there is some mark-to-market there. The second part of hedges is hedging our own balance sheet to make sure that when the market rates go to a certain way, we are at least somewhat hedged. So it's a mix of both kind of activities.

Thank you. There are no further questions at this time. This concludes the Mizrahi Tefahot Bank Third Quarter 2023 Business Results Conference Call. Thank you for your participation. You may go ahead and disconnect.