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

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Ltd. Fourth Quarter 2023 Business Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, March 12, 2024. With us online 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 fourth quarter 2023 presentation, which includes general comments regarding legal responsibility, including that the information contained in the presentation constitutes information from the bank's 2023 quarterly reports and/or immediate reports as well as the periodic quarterly and the 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 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 management 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?

Yes. Thank you very much. Welcome, everybody, to the Mizrahi Tefahot Annual 2023 Analyst Call. Obviously, the first thing I would like to talk to you about is the impact of the war on the markets and on the bank. From the first day of the war, the bank has taken a pro-client approach trying to offer immediate relief to its clients, beyond the mandatory relief plan of the Bank of Israel, while adapting the COVID experience and best practice to the current situation. On the first days, we have seen a typical response of the market to the unfolding events with equities prices going down, yields on bonds goes up and the depreciation of the shekel vis-a-vis the U.S. dollar. Later rating agencies have downgraded and/or put on a negative watch both the government and the banks. But in the weeks after, we've seen equity prices going up, bond yields 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 Q3 and Q4 is the collective provisioning item. In Q3, we have taken a cautious and conservative approach, both in mortgages and commercial credit provisioning. This collective provisioning increase reflects a scenario of a very severe potential future deterioration of the war and of its effects on the Israeli market and the bank. It is important to note that we have decided to take a prudent approach, even though we haven't seen yet indicators that this adverse scenario is happening. As you can see, our Q4 provisioning is lower than Q3, but is still higher than our pre-war levels of provisioning. And on an annual basis, provisioning is very high to the most part due to the post-war collective provisioning. So if in 2022, our provisions for the entire year were around, I'm rounding the numbers, around NIS 0.5 billion in 2023. And again, I'm rounding, our annual provisions were around NIS 1.5 billion, NIS 1 billion more. So given that in 2024, we would not see a further escalation in the war, provision for the year of 2024 should be probably somewhere in between '22 and '23. As for the regular items, 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 in the year. We think that our credit metrics reflect a balanced credit portfolio with adequate risk management, the net profit and the return on equity reflects the strong balance sheet, the low CPI figures and the good efficiency ratio and the contribution of Union Bank to our results. I will elaborate on it in a second. Our cost/income ratio for the quarter is below 40%, and I remind you that our cost/income ratio target published in our strategic plan is to be below 50% by the end of the plan in 2025. On the expense side, you can see the improvement vis-a-vis previous quarters, reflecting also the post Union Bank merger synergies. As always, salaries are also affected from variable remuneration related to the bank's results. It would be reasonable to assume that in the next quarter, expenses for salary would be somewhere between Q3 and Q4, depending, of course, also on the future variable remuneration. And if this would be the case, then our average salaries expense would be lower in 2024. Liquidity is very robust with high share of core deposits and capital ratios are in tandem with profitability. The credit growth in the last quarter is responsible and reflecting also the impact of the war. Demand for mortgages was 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 and it is possible that demand for mortgages will begin to recover in 2024, but we are not expecting to see it back to where it was in the beginning of '22, but still better than the last quarter. We do expect to see responsible credit growth following our strategic plan, and as can be seen from our results, we have already reached the main target of a strategic plan before 2025. Given the current environment, we will distribute 20% of Q4 profit as dividend. And we believe that also in this aspect, it is better to take a prudent approach and to be aligned with the regulators' expectations. All in all, I think we are following our strategic plan and accommodating to the new environment. The main point I would take is that despite everything and despite a negative mark-to-market loss, on the hedging derivatives of around NIS 285 million, we were still able to produce a very decent return on equity even on an international scale. Assuming this is not a permanent quarterly item, you can calculate the profitability also without it. 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. We'll go through the numbers -- through the figures. Net profit in 2023 reached NIS 4.910 billion compared with NIS 4.472 billion in 2022. The return on equity in 2023 reached 19.1%. The equity amounted NIS 27.5 billion. Total revenues in 2023 reached NIS 14.780 billion. Financing revenues from current operation in '23 reached NIS 11.7 billion compared with NIS 9.2 billion in '22. Provisions loan -- the ratio of provisions to loans in '23 reached 0.45%. Operating and other expenses in '23 totaled NIS 5.6 billion. The main balance sheet items developed on are as follows: Total assets grew by 4.6%, loans to the public by 5.8%, deposits from the public by 4.1%. The ratio of Tier 1 capital to risk elements reached 10.32% and the total ratio reached 13.36%.

Thank you, Mr. Aviv, and we can go to Q&A now.

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

Congratulations on the strong results. I was wondering if you could give any color on the trend you're seeing in the loan book segments, given the slower sequential growth this quarter, I realize that was kind of expected, but if there's anything you can talk about to the trends that you're seeing in the different segments in the loan book?

Sure. So I will take the mortgage sector first and then the big corporate. So as you were seeing in the mortgage sector, due to the war, Q4 growth was low. However, even today, before this call, which I've just heard that Central Bureau of Statistics has published a new number on the January number of real estate deals which is much higher than it was in the last quarter. So that gives us a reasonable reason to assume that 2024 would be higher in the growth than what we saw in 2023, especially in the last quarter. Probably not where it was in the beginning of '22, but we expect to see a growth there. On the corporate book, again, we saw very low growth in the quarter. We do expect the entire year to be around our strategic plan, which means a single digit, let's say, 6% to 8% of growth.

That's great comments. And just again on expenses, if you could talk about some of the moving parts there now that the completion of Union Bank is finished? I'm just wondering how should we be looking at those numbers going forward.

Sure. So if you look at it on an annual basis, then you would see the most of the quarter, we've written there something around [ NIS 900 million ] on the salaries side. And while in the last quarter, it was closer to [ NIS 700 million ], again, as I was saying, mainly due to closing the year with the variable remuneration. So taking the headcount number the better synergies that we have now from Union Bank, the 2024 should be better in that respect if other things being equal than 2023, even if it would not be like this quarter. So again, somewhere in the middle is more reasonable.

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