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

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Limited First Quarter 2024 Business Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded May 23, 2024. 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 first quarter 2024 presentation, which includes general comments regarding legal responsibility including that, the information contained in the presentation constitute information from the bank's 2024 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 banks 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 2024 quarterly reports, the aforesaid reports should be pursued fully as published in 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 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 situations 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 borrower's financial strength, public preferences, changes in legislation and the provisions of regulators, competitors' behavior, the status of the bank's perception, technological development and human resource development. Mr. Shachaf Shah, would you like to begin?

Thank you very much. Welcome all to the Mizrahi Tefahot First Quarter 2024 Analyst Call. Obviously, the first thing that I would like to talk about is the impact of the war on the market 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, rating agencies have downgraded and/or put on a negative watch both the government and the bank. In the weeks after, we have seen equity prices going up, bond yields going down, but later up again. 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, the robustness of the results. As you can see, we took what we think is a prudent approach to provisioning given the prolonged duration of the war. It is worth noting that most of the provisions are collective and to put it in the right context, in 2022, our provision for the entire year were around ILS 0.5 billion and in 2023, our annual provisions were around ILS 1.5 billion and again, to the most part, provision were collective. And for the other 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. 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 still low CPI figures and the good efficiency ratio and the contribution of Union Bank to our results, given that the next CPI reading would be as expected by analysts, then after 2 consecutive quarters of relatively low inflation, CPI contribution to the P&L in Q2 2024 could be better in that respect. In spite of the 0.25% interest rate cut in the quarter, you can see that financing revenues from current operations are close to where they were in Q4. Commissions are, of course, affected from both the war and client-oriented relief approach the bank has taken. Our cost-income ratio for the quarter was well below 40%, and 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. On the expense side, you can see the improvements vis-a-vis 2023, reflecting also the post Union Bank merger synergy. As always, salaries are also affected from variable remuneration related to the bank's results. And the result also takes into account the relative extra tax Israeli banks are paying in 2024 and 2025. Liquidity is very robust with high share of core deposits and capital ratios are in tandem with profitability. Credit growth in the last quarter is responsible, reflecting also the impact of the war. Demand for mortgages were still relatively 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 recover in 2024, 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. And as can be seen from our results, we have already reached the main target of our strategic plan before 2025. We will distribute 40% of Q1 profit as dividend according to our dividend policy. All in all, I think we are following our strategic plan and accommodating to the new environment. I would like to 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. The main figures in the financial statement for the first quarter of 2024 are as follows: Net profit in Q1 reached -- in Q1 2024 reached ILS 1.272 billion compared with ILS 1.367 billion in Q1 2023. Return on equity in Q1 reached 18.1%. The equity amounted ILS 28.6 billion. Total revenues in Q1 reached ILS 3.598 billion. Financial revenues from current operations reached ILS 2.780 billion. The ratio of provision to loans reached 0.21%. The operating and other expenses totaled ILS 1.279 billion. Our cost income ratio reached 35.5%. The ratio of Tier 1 reached 10.60% and the total ratio reached 13.63%.

And we can move now to Q&A if anybody has any questions.

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

I have 2 questions. One, how should we be looking at provisions for the remainder of the year, assuming there's no deterioration of the geopolitical situation? And two, can you comment on the loan book performance and whether or not you're seeing maybe a little more strength in any of the segments versus expectations going into the year?

Thanks for the questions. I'll start with the second question because it also later will relate to the first one. So we haven't witnessed so far any material deterioration in the credit quality of the portfolio. And this is why we emphasized that and to the most part, both in the second half of 2023 and also in the first quarter -- this quarter of 2024, most of the provisions were collected. So we try to took some sort of, let's call it, Goldilocks approach that from one hand, a provisions were smaller than in Q4, but still because we are in a prolonged war, we thought it would be prudent to still keep these kinds of provisions. And as you probably mentioned, given that we will see no further deterioration, for example, in the north or in the world, it is possible that we'll see later on the next quarter in recoveries from this collective provision.

And any strength in the segments of the loan book where you maybe weren't expecting the performance? Has it turn out...

We actually -- we did kind of expect it, but mortgages are very, very solid in Israel and as a big mortgage bank, we're happy to see the solidness is still with us.

The next question is from Micha Goldberg of Psagot.

Congratulations on a strong quarter. A couple of questions there, if I may. First of all, you mentioned that your cost-to-income ratio continues to be below your 2025 target. And it seems to me that the last almost 3 years for every quarter, your return equity has also exceeded your '25 target for [indiscernible] equity. I'm just wondering, are you considering publishing a revised strategic plan? If so, when will that be published?

And rightfully so, you've mentioned it was bit in the strategic plan. We cannot know for sure where -- if a new one will be published ahead of time because we thought of it, but changing it during the war seems like not the very cautious thing to do. So we thought it would be maybe more prudent to wait and see how the war will unfold but it is possible that we'll change it. And maybe another remark, when we published the core and strategic plan monetary environment without any connection to the war, rates were close to 0, and we gave in the strategic plan. What maybe could happen if money, their environment would be closer to where it is today, but not where it is today. And this is also one of the reasons why we are ahead of the strategic plan with our return on equity and cost-income ratio.

Okay. Another question. I mean your common equity Tier 1 ratio is now 10.6%. And you always in the past have kept a very small margin to your climate. It seems like this is significantly above what you used to hold. It's almost like ILS 2.5 billion more, which I think is running your return on equity, that was 1%. I'm just wondering, would you consider divvy that out or paying out in some formats to get back to your original buffers of, I don't know, 2010 base bps?

Well, of course, we came back to the dividend policy and distributed 40% for this quarter according to the policy. We do intend to also grow responsibly in credit. And if we will achieve that, then by nature, the 10.6% could be lower but we will be happy to see that we have a good usage for the capital in terms of credit growth.

Okay. So at this point in time, there's no consideration on paying out more dividend than you currently pay?

The core dividend policy is 40%. I don't think that now with the war, it would be a good to increase this portion of policy. Of course, with time go by and maybe the situation will change, then we could consider it, and we do consider things on a continuous basis. But I would not expect, for example, next quarter to go above the 40%.

Yes, that's clear. Okay. Another question. I understand the Bank of Israel is working on Basel IV. And I was wondering from an initial viewpoint, is that something that's going to hurt your risk-weighted assets? Or is it going to allow you to release? What's the initial thought on your impact about Basel IV?

So it is, I think, a bit too early to tell because we don't know how to be implemented. We do know, for example, that comparing to typical European banks we do allocate much more on the same mortgage, not to say on the [ safer ] mortgage in Israel, but we don't know yet, how and if the Bank of Israel will adopt the Basel IV, which parts of it and to what extent is a little bit too early.

Okay. And the paper has been talking [indiscernible] talking about effective Bank of Israel considering granting non-bankers, some insurers, some kind of a partial bank license to take deposits. Is that something that we should be concerned about? Is that going to pressure margins? How should we look at that?

Again, it's a bit hard detail. Given the current LCR regime, there's no contributes to the liquidity, to all institutional deposits under 30 days, and I don't know what -- how significant the impact would be in that respect. But again, it's too early to tell.

Okay. Understood. My last question is about your provisions. Typically, I think Mizrahi always has had a relatively low cost of risk compared to the other banks. In the last 3 quarters, since onto the war, your absolute provisions have been higher than pulling and discount and definitely over the other smaller banks. And I'm just wondering, is that because the wars primarily hurt mortgages? Is that because your credit portfolio has deteriorated compared to what it used to be? What's the reason to that? I mean [indiscernible] a significantly bigger bank and discount have historically much higher provisions. And yet, in the last 3 quarters, it seems that you have outpaced both of them in absent terms.

I would say to the contrary, maybe we took a more prudent approach, but the fact that the most part provisions are collective and to the most part, our portfolio is mortgage oriented than the long run, I would expect the actual different all other things being equal, to be lower. We did, especially in Q3 2023 took a more conservative approach there. And you mentioned 2 banks that's already published. So I don't know what happened to them. What we saw that they list one of them gave back some of the provisions, we thought that because of the prolonged war, it would be more prudent to provision as we have provisioned. But for sure, I don't think that I see more risk in our portfolio, not an expert on their portfolio. But again, given the skill to have towards mortgages, again, all other things being equal, I would expect our portfolio to be less risky.

Thank you. There are no further questions at this time. This concludes the Mizrahi Tefahot Bank Limited First Quarter 2024 Business Results Conference Call. Thank you for your participation. You may now go ahead and disconnect.