Bank Hapoalim B.M. S/Adr

Ladies and gentlemen, thank you for standing by. Welcome to the Bank of Berlin Q1 2020 Results Conference Call. For your convenience, this call will be accompanied by a PowerPoint presentation. May we suggest, if you have not done so, that you access the presentation on the Bank's website, www.bankofberlin.com, by clicking on Financial Information on the homepage, and then click on the Q1 2020 Results Conference. All participants are present in the listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded May 14, 2020. Our speaker today is Mr. Ram Gant, CFO. Also with us today are Mr. Ofer Ebi, Chief Accountant, Mr. Victor Bahar, Chief Economist, and Ms. Karen Muser, Head of Investor Relations. I would like to remind everyone that forward-looking statements for the respective company's business, financial condition, and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are now limited to, product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development, and the effects of the company's accounting policies, as well as certain other risk factors that are detailed from time to time, in the company's balance with the various securities authorities. Mr. Ghez, would you like to begin?

Yes, thank you. Good afternoon, everyone, and thank you for joining today's call. I will begin my comments with a summary overview of COVID-19 in Israel, mainly for those of you joining us from overseas. I will then run through how the bank has addressed the crisis, the support we provided our customers and the community, And I will then dive into the results of the first quarter. Before I do, I would just like to add that the crisis has proven to be what we call a moving target, with new information accumulated on a weekly and even daily basis. So today's date of reporting is also important to factor in and serves as a snapshot of how we see things today. Let me start on slide three. and address the macroeconomic context we have been operating in since the outbreak of the crisis. Israel entered the crisis with favorable economic conditions, robust growth, full employment, and high private saving rates. It was one of the first countries to close its borders and adopt a strict lockdown. This proved favorable as Israel shows one of the lowest inflation rates globally. While the government has recently eased many of the restrictions imposed on the onset of the pandemic, the initial lockdown in Israel was tight. This is why we can expect severe impacts on growth in the short term. Policy measures taken by the government and the central bank may have potentially mitigated some of this impact on households and the business sector. It is very difficult and likely too early to provide a longer-term view of what the scope of the impact will be, mainly because there are a wide range of possible scenarios, including what will be the effects of the recent easing of lockdown restrictions on different sectors, I mean, which sectors will adapt faster to the new normal, the mitigating impact of the measures applied by the government and the Bank of Israel and globally, the likelihood of a second wave of mobility, and even the timing of second wave, a few weeks from now or further away in the winter, the vaccine timing, and many other uncertainties. For now, the Bank's baseline scenario is forecasting a sharp contraction in the first two quarters of 2020, followed by a recovery in economic activity, while the recovery of some economic sectors like aviation and tourism and recreation to lag behind. This is also reflected in the Bank of Israel expectations for a GDP contraction of 5.3% this year and a recovery of 8.7% in 2021. In our view, a game changer will be how unemployment will track in 2020 and 2021. You will note the 5.5 to 6% on the slide are annual averages and we may see higher peaks in unemployment along the way. As I mentioned, the Israeli government and regulators have been responding to the crisis at best and slide 4 provides a summary of some of the key fiscal and monetary initiatives that have been introduced. I won't take you through all of them, but not a few. The central bank took several steps to ensure market liquidity, including a 50 billion shekel purchasing program of government bonds and carrying interest rates into 0.1%. Specifically relating to the local banking system, Bank of Israel reduced CET1 ratio requirements to the local banks by 100 basis points. The low public and private debt in Israel supports the relative stability in the financial sector, providing the government with the necessary cushion to increase government support and expenses. You will note the capital market in Israel has reacted favorably, with many indicators showing a bounce back to more resilient height. In summary, The uncertainty in the market is still considerable, and it is not possible to accurately predict at this stage the full magnitude of the crisis or restoration. But what we can say with higher uncertainty is that we are facing challenging times with lower interest rates remaining for the foreseeable future, inflation expected to be low, and unemployment to probably rise. I will move forward in my comments now, but just say that if you have any questions on the macro environment, we are joined on the call today by Victor Barr, our chief economist, and Victor will be happy to take any of those questions at the Q&A session. With the economic environment as a backdrop, slide five and six cover our response to COVID-19. From day one of the crisis, our priority was to take care of our employees and ensure business continuity. We wanted to ensure our employees felt secure in their jobs, including necessary measures to protect their work environment. I will share with you that at the peak of the crisis, 65% of the bank employees reported to work either remotely from home or physically in the branches and offices as was permitted under the restrictions. As you will note from the slide, we took many actions to ensure business continuity, and I'm happy to say that the bank did not miss a bit over the past six to eight weeks. Next, as Israel's biggest lender, we continue to support our customers and community during the crisis, with Bank of Poland being the first bank in Israel to open on Sunday of this week, all of its 208 branches. Services will be provided by appointment only, a step up in service quality, and one of the main insights the bank has adopted as a result of the crisis. Our call center and digital service offering has been identified as a hotspot and rapidly beefed up to ensure high availability. We experienced a 45% surge in incoming calls, exponential growth in customer inquiries via mail or Facebook, with financial transactions performed in our digital platforms, the web, ACT, and BIT, our payment app, at our record level. We have also extended customers in need payment holidays in order to provide cash flow relief We continued our tradition of supporting the community. Since the onset of the pandemic, we donated over 2.5 million shekels to different health and social causes and helped raise over 16 million shekels in national campaigns to support those financially affected by the crisis. We put in place proactive measures to help business playing a sizable part in the government in this scheme. and providing versatile credit solution to help business, small and large, manage their cash flow. To be clear, we use these initiatives to support our existing customers with no change to our approach to risk and consistent diligence and underwriting standards, and we are comfortable with the volumes we are writing. As you can see on slide seven, Against the uncertain economic conditions and impact of COVID-19, Bank of Berlin came into the crisis from a position of absolute and relative strength, resilient capital position, well above internal and regulatory thresholds, strong liquidity with LCR considerably exceeding targets, significantly diversified loan book, which reflects the bank's more conservative approach to risk over past few years, disciplined cost base and a strong commitment to reduce end count, and finally, our high digital preparedness allowed us the ability to provide the majority of our frontline services digitally and in high capacity. All these have made Banker Poilim's entry point into the crisis a very strong and resilient one. I hope this gives you some context to the environment in which we are operating in. And with that said, let me move to the results of the first quarter. As a reminder, we started the year with a few targets. Removing significant action items that have burdened management attention. We signed a collective wage agreement and put to rest two years of negotiations with the union. We fully divested from each account ahead of the mandated timeline, and most recently signed a final resolution with the U.S. authorities to which the bank had fully provisioned. So slide 8 shows highlights of the quarter. I'll start with the net results. Net results for the quarter were significantly impacted by 603 million shekels in collective provision as we built our reserves. against the uncertain economic outlook resulting from the COVID-19 pandemic. I will take you to credit losses in more detail later, but our main message here is that we opted to take a conservative approach and provide thoughtfully in the face of uncertainty. Key here is that we have weathered through the initial impact of the crisis with strong fundamentals in terms of liquidity, funding, and capital. We continue to push forward our business operations with increased balances and deposits, balancing growth and risk. Accordingly, the banks operating their parameters continue to improve. The increasing activity, as well as the effects of the period, contributed to continued growth in the bank's income, with financing revenues growing in the quarter alongside an increase in fees. Alongside this, the positive trend in the expense lines continues as the bank continues to make this an active priority, ending the quarter with a cost income ratio of 56.6%. Moving to our P&L on slide nine, I will learn you through most of the line items in detail shortly, but a note on the bottom line of performance of the bank. Our net profit for the quarter was 192 million shekels, significantly impacted by credit losses of 809 million shekels, of which 603 million shekels, as I mentioned, were reserved built against the potential future impact of COVID-19. In addition, as we already reported, the completion of the separation from ISRACARD earlier this year in the form of dividend in kind has adversely impacted results by 109 million shekels. Moving on to take a look at the balance sheet, as you can see on slide number 10, Bank of Wallim continues to lead the domestic banking system with the largest credit portfolio in Israel, presenting a 2.3% growth for the first quarter. This growth is a mix of trends we saw in the past quarters and unique COVID-19 behaviors. Let's move to next slide for a breakdown of how this translated in each segment. Let me start by saying that credit lending in January and February continued in line with previous quarters, with particularly strong performance in mortgages and commercial credit. But the entry of the economy into lockdown in March has affected the trends we saw in the bank's core business in a number of areas. Starting with corporate lending growth, It was driven by growing on revolving credit facilities by our clients, particularly from large corporates looking to enhance their liquidity position in the face of disruption at the end of the quarter. The bank's resilient position allowed us to help our customers navigate through this period and allow them to best manage their cash flow. As for mortgages, mortgages performed strongly in January and February, and we continue to see the strong growth also in merch, in part driven by customers wanting to finalize their mortgages based on pre-approved terms received before the outbreak of the crisis. In consumer lending, we continue to trade carefully, monitoring risk and answer writings, The majority of the activity in March centered on managing customer requests for deferment of loans and mortgages. Moving on to look at our deposit base, Bank Apollim holds the largest retail deposit base in Israel. So the first quarter saw a sharp rise in retail deposits of close to 11% compared with year-end. As the customer liquidated the capital market position, this growth has contributed even further to the resiliency of our balance sheet. Slide 13. Slide 13 looks at the financing performance for the quarter. So income from regular financing activity grew this quarter, mainly driven by increased corporate commercial and mortgage lending, and income from trading activities as the market fluctuated on COVID-19 news flow. This growth was offset by negative CPI, which affected income by around 17 million shekels, also offset by negative effect of U.S. rate reduction on deposit margins, and the reduction in referred credit balances. Next, let me address credit impairment on slide 14. The high level of uncertainty involved in COVID-19 guided our impairment approach for the quarter. As an advanced measure in confronting the effect of the crisis, we decided to increase collective allowance by 603 million shekels in order to reflect the potential future increase in individual credit losses and in automatic charges, which have not yet been expressed. You will note the ratio of collective allowance shown on the bottom of the slide as well as accordingly. With collective provisions serving as an advanced measure in confronting the effects of the crisis, When we look at the problematic debt and NPL on the next couple of slides, those represent our assessment of the state of the loan book of the date of reporting and hence are relatively stable compared with year-end balances. Moving on to operating expenses, on slide 17, we continue to be committed to a diligent improvement of our cost base. The bank has led the Israeli banking sector with its efficiency plans and announced a fifth efficiency plan on the eve of the crisis. The plan should see us reduce approximately 10% of our workforce by end 2022, and we are highly committed to its execution. In addition, we are directing considerable efforts to streamlining our other expenses lines. According to me, the cost-income ratio that you can see for the quarter declined to 56.6%. Moving on to our capital base, I've already noted the high levels of capital buffers the bank holds. with a CET level of 11.21 at the end of the quarter. A strong asset to have during this time. I will just note that on the back of the uncertainty involved in the COVID-19 crisis and in line with the Bank of Israel directive, the Board of Directors has opted to continue not to pay dividends from current profits at this stage. Moving on to the next And final slide, I would like to leave you with a few concluding remarks. COVID-19 has thus far challenged us all in anticipation of the scope and duration of its impact. However, Bank of Berlin is a strong financial institution and our position is one of strength and resilience, which allows us an important cushion to weather the crisis and support our customers. Our robust capital bond sets, strong liquidity parameters, and healthy funding sources provide the bank an important advantage during this time. With that said, let me open the call for any questions you may have, reminding everyone that I'm joined by our chief economist, Victor, but for any relevant questions you may have. Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star 1. If you wish to answer your request, please press star 2. If you are using speaker equipment, kindly lift your hands up before pressing the numbers. Your questions will be pulled when the other day are received. Please stand by while we pull for your questions. The first question is from Tavi Rodner of Barclays. Please go ahead.

Hi, this is Chris Reimer on for TAVI. Thank you for taking my questions. Just one regarding U.S. settlement. Despite the fact that you've finished with that, you still have a very large amount of excess capital. So looking ahead, are you planning on increasing loan growth to a larger extent?

Okay. Look, when talking about the growth of the loan book, it's important to understand that there is a correlation between the economic activity and the economic situation and the ability to grow from the loan book. And especially in a large bank like Bank of Berlin. So historically, when you look at... previous crises, you see that there was a growth also in this time, but it was lower than the normal pace. I think that our strong liquidity and also resilient balance sheet with the high level of CET1 and overall capital ratio will enable us to keep growing but taking into mind the level of activity in the Israeli economy. So the short answer is yes, there is room to growth. There is still uncertainty of the situation of the crisis, but historically you can see that there is a correlation between growth and the market activity or the economic activity.

Okay. And just with regards to the $603 million on the loan loss provisions directed for COVID, can you provide some color to the assumptions used to drive this figure? Is there a particular industry that's reflected in this figure?

Look, we are now still, we think the level of uncertainty is high. So, of course, there are some sectors that are more vulnerable. But overall, when we looked at our portfolio, we didn't see yet any indicators for specific borrowers other than what we classified at the end of 2019 and partially at this quarter. So we decided to make a collective adjustment or a collective... provision with no allocation for specific sectors like you mentioned because uncertainty is still high and when we stand today and look at the situation of the borrowers we don't see specific problems but it doesn't mean that we won't meet it in the next quarter or two quarters but at this level we thought that making adjustments of 603 million shekels for the provision, collective provision, is the appropriate measure while taking into consideration the level of uncertainty.

Okay. That's helpful. Thank you.

The next question is from Borja Ramirez of Citi. Please go ahead.

Hello. Good afternoon. Thank you for your time. I have two questions. My first question is on loan losses. I would like to ask if it could be possible to provide an outlook for cost of risk for 2020. And my second question is on net interest margin. You registered a strong deposit growth in the first quarter. I would like to ask how this affects your net interest income. and also if it could be possible to provide an outlook for net industry income into 2020. Thank you.

Okay, as for the first question, I think it's too early to give a projection or to decide what will be for 2020. I think, as I said at the beginning, the coronavirus is a moving target. It depends on many parameters that every parameter can change in a week or month. So it's too early to decide what will be the level, but we feel comfortable as for today and the information we have today with the provisions we made And the credit losses we recorded at this quarter. So that's for the credit losses. As for the net income, and Victor can elaborate some more, what we see in the future is, like I said, still low level of interest, Maybe some possibility of even lower interest rates in Israel, but the situation for the future is low interest rates. And of course, it's impacting the deposits and the margins. Victor, do you want to elaborate a little bit more?

Yes, well, at least at the short run, deposits are growing fast also because of the Bank of Israel are conducting a quantitative easing policy, which means actually they're kind of printing money. So all the money they generate at the end of the day are going back to our deposits. As Swam said at the beginning, probably interest rates are going to remain at a very low level of 0.1%, and there is even a chance that they will cut interest rates to zero. And also inflation can affect the net interest margin, and we believe that inflation is going to be very low, zero, and there is also a chance that inflation is going to be negative for all the years.

Understood. Thank you very much.

If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by with multiple questions. The next question is from Nico Gilbert of Excellence. Please go ahead.

Hi. Good afternoon. Thanks for taking my questions. A couple of follow-ups on previously asked questions. I just want to understand the provisions, the general provisions made in Q1. How does one can look at that when thinking about Q2? Should we expect a similar kind of general provision, or are these general provisions made in case of future deterioration, and therefore future quarters should likely have more specific provision but less group of provisions?

It depends on the scenario and how circumstances will evolve. Let's say if we will say that the situation is improving, it is logic to assume that we will see a specific provision in damaging of debt and write-offs. Of course, the provision we made today is for a measure that we take before that. If the situation of the scenario will be worse than what we expect, So the overall credit losses can be different than what we expect. And also there is a different scenario that a situation like we are returning to normal and getting out of the lockdown was faster than we thought about one month ago. So if it will be faster and the returning to the new normal will be faster, you can be in a situation that the write-offs and the specific is even lower than the provision. So it depends on the scenario and what will be at the next weeks to come and also what will be in the second quarter when looking on the economic activity so it's hard to say how it will evolve but when looking from now and taking into consideration our scenario we think that there will be some specific write-offs or borrowers that we will have to reclassify and that's the reason why we did the general provisions

Thank you. The general provisions you need right now are based on the current assumption. So if things don't get worse, should we expect additional general provisions?

It's hard to say because it depends what you mean by don't get worse. Like we said, our scenario is that there will be recovery. And finally, unemployment will be in higher percentage than now, but later on also recovery on that. So it's hard to say, but we think, we feel at this moment very comfortable with that provision, but the level of uncertainty is relatively high. So I can't say to you that this is what reflects to the end of the year because we don't know what will be at the end of this month. But today we feel comfortable with this provision, but later I assume we will meet some specific provision at the second or third quarter. The level of the provision or write-off depends on what will happen. Also with specific boards, it's not a matter of a sector, because also in the same sectors there can be two different businesses, one that has exclusion for the two months of the lockdown and will recover in a very good way, and other will face some problems. So it's hard to tell.

Okay, thank you. Another question, if I may, is you mentioned the fact that U.S. upgrades have come down drastically. And I'm just wondering, what is the impact on Bank of Poland, and can you quantify the significant drop in U.S.

rates?

U.S. rates. Sorry, can you return from the beginning of the question?

Yes, I'm sorry. I was just asking, can you quantify what the impact is of the drop in U.S. rates on Bank of Poland?

Yes, so there is an impact of the use drop. I think it was at mid of March that it was dropped. If you want to quantify it, I think it's in our report, we have disclosure or a note about it that saying overall the impact of change interest rate so you can find the numbers and do some estimation about the US rate.

How can I extrapolate from that to a US rate because I think it relates to the entire rate chain.

It's a good question you can take that note on the effect and look on the other note and see the the dollar assets, their dollar deposits, and see the percentage of that from all over our balance, and assume, it's not the exact number, but assume that the percentage of our balance is correlated to the percentage it takes from the text of changing interest.

Okay, thank you for that. Another question, I saw this great asset. only grew by 1%, significantly lower than your credit growth, even if I account for the drop from the dividend of your store card. I was just wondering why that is, and secondly, was the utilization of credit lines, is that something that would eventually show up and accelerate risk-based growth or not?

Yeah. You ask about the risk-based assets, So there wasn't much change in the credit risk with assets. And like you mentioned, the debiting from InstraCard has an effect. And I think the mix of the growth, like with growth in mortgages, affected that. And on the other side, the decrease in household credit Of course, we are managing our risk assets, mainly when you're in a situation of a crisis, you manage your liquidity, you manage your risk assets, so that's the main cause for not being in large chains from the year end.

Did you see a large amount of utilization of credit lines in Q1, or is most of that going to happen in Q2?

No. The use of credit lines usually characterize the situation of a crisis. And what we saw is a major part of increase in credit for corporates in business was the use of credit lines. And I think from previous practices, It's reasonably to assume that after that the level of use of credit line will decrease partly as long as you get getting far from the crisis and the situation is getting back to normal. So in a short answer the increase we saw in the end of the quarter part of it It is simply to assume that there will be degrees in April or May.

Okay. Thank you very much. Have a great weekend.

Thank you.

There are no further questions at this time. This concludes the Pinker Podium Q1 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.