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

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Ltd. Second Quarter 2024 Business Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded August 15, 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 second quarter 2024 presentation, which includes general comments regarding legal responsibility, including that, the information contained in the presentation constitutes 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 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 2024 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 contemplated in the forecasting information as a result of a large number of factors, including inter alia, changes in the domestic and global equity market 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 forecast related to other various factors affecting exposure to financial risks, forecasts with respect to changes to borrowers, financial strength, public references, changes in legislation and the provision of regulators, competitors' behavior, the status of the bank's perception, technological developments and human resources developments. Mr. Shachaf, would you like to begin?

Yes. Thank you very much. Welcome, everybody, to the Mizrahi Tefahot's Second Quarter 2024 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. From the first day of the war, the bank has taken a pro-client approach, trying to offer immediate relief to its clients even 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 equity prices going down, yield on bonds going up and the depreciation of the shekel vis-a-vis the U.S. dollar, also rating agencies have downgraded and/or put on a negative watch both the government and the banks. And 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 results and 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. We have sorted terms of the provision from collective to specific, but still retain the prudent in there. To put it in the right context, in 2022, our provisions for the entire year were around ILS 0.5 billion. And in 2023, our annual provisions were around ILS 1.5 billion and to the most part provisions were collective. And for the other item, I would like to use this call to further highlight maybe 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 CPI figures, the good efficiency ratio and the contribution of Union Bank to our results. You can see that financing revenues from current operations are back on a positive trend. Commissions are, of course, affected from both the war and the 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 is published in our strategic plan to be below 50% by the end of the plan in 2025. On the expense side, you can see the improvement vis-a-vis 2023, reflecting also the post Union Bank merger synergies. As always, salaries are also affected from variable remuneration related to the bank's results. 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 is improving 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 even more in the second half of 2024, but we are not expecting to see 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 Q2 profit and dividend according to our dividend policy. All in all, I think we are following our strategic plan and accommodating to the new environment. Thank you very much for your attention. And with that, I leave you with the hands of Mr. Menahem our Chief Accountant.

Thank you, Mr. Shachaf. The main figures in the financial statements are as follows. Net profit in Q2 2024 reached ILS 1.452 billion in the first half of 2024, reached ILS 2.724 billion. The return on equity in Q2 reached 19.9%. The equity amounted ILS 29.5 billion. The cost income ratio reached in Q2 2024, 34.6%. Financing revenues from current operations in Q2 reached ILS 2.890 billion. Total revenues in Q2 reached ILS 3.835 billion. In Q2 2024, the operating and other expenses reached totaled to ILS 1.328 billion. The ratio of provision to loans in Q2 reached 0.10%, and the ratio of T1 reached 10.44% and the total ratio reached 13.64%.

Thank you, Mr. Aviv. See if you have any questions, we can go to the Q&A part.

[Operator Instructions] The first question is from Micha Goldberg of Psagot.

Congratulations on an excellent quarter and a very good first half. I'm just wondering, because of the excess capital in the banking sector, are you experiencing some compression on margins, specifically in mortgages?

As I was saying this related to the extra capital, we've seen a very aggressive competitive environment in the mortgage market for many, many quarters. We still retain our position to retain our market share. This is our strategy. And I think we were doing it not that bad. We don't say anything specific to this quarter, which we haven't seen in previous quarter, again, competition is very aggressive.

And yet, when you strip out the CPI impact in Q2 and Q1, it looks like your margins actually have increased. Is there anything that you can explain what's going on in the market that allows you to widen your margin? Or is that a onetime item?

Things are roughly in the same area. For sure, this quarter, CPI is higher than it was in the last 2 quarters. I think analysts forecast for next quarter, CPI should be somewhere in the middle between this quarter and maybe the first quarter. With this stabilization in the trend from cash accounts to deposits, that we see it all around the market.

And then a question about asset quality. Most of the other banks are reported in the last 2 days seem to have a drop in decline in nonperforming loans, you have a slight increase. Does that has to do with your exposure to mortgages and the war? Or is that something specific? What's the reason for that?

[ I say it's talking ] -- as Mr. Shachaf said before, we have credit for this -- I cannot say nothing about the other banks, but you can see that if you compare to the previous quarter, our -- it wasn't more than the first quarter is like a little bit less of that. So we cannot say nothing about the other banks, but we think that our approach to this matter is adequate.

I didn't really understand. You said NPLs went down in the quarter? Because I think that maybe I'm wrong, my memory went up.

The first quarter.

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