Bank Hapoalim B.M. S/Adr

Ladies and gentlemen, thank you for standing by. Welcome to the ThinkUp Hall of Fame Q2 2020 results conference call. For your convenience, this call will be accompanied by a PowerPoint presentation. May we suggest, if you have not yet done so, that you access the presentation on the bank's website, www.thinkuphalline.com, by clicking on Financial Information on the homepage and then click on the Q2 2020 results presentation. All participants are present in the listening mode. Following management's full 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 August 13, 2020. Our speaker today is Mr. Ram Jain, CFO. Also with us today are Mr. Ofer Bibi, Chief Accountant, Mr. Victor Behar, Chief Economist, and Ms. Karen Mazur, 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 risk and uncertainties if it was actually built to differ materially from those contemplated. Such forward-looking statements include, but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risk in product and technology development, and the effect of the company's accounting policies. as well as certain other risk factors which are detailed from time to time in the company's filing with the various securities authorities. Mr. Gev, would you like to begin?

Okay. Thank you, operator. Good afternoon, everyone, and thank you for joining us today for our second quarter results call. I'll begin my comments today with a quick update on COVID-19 in Israel, mainly for those of you joining us from overseas. I will then run you through how we have been managing our business through the crisis and the progress we have made on our strategic priorities during the period. I will then run through the numbers in more detail before I wrap up and open up the call for any questions you may have. So let's start with slide three and address the macroeconomic context we have been operating in since we last spoke in May. As a reminder, 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, which favorably affected the initial state of the crisis. Based on which, in mid-May, the Israeli government lifted many of the restrictions imposed at the onset of the pandemic. The early easing of the restrictions allowed Israel to exit the first wave of the crisis earlier than most countries, but it also met the second wave with significantly higher levels of mobility sooner than many markets around the world. So what we are seeing now is that the market is slowly regaining activity and shaping into a new normal, or what I like to call COVID economics, with confirmed cases stabilized, yet still in high levels, and the market regaining activity. So let's look at a few examples. The labor market partially recovered from the peak in April. Roughly speaking, the unemployment, including the furlough, now stand at 12%, compared with over 26% in May. Those levels are still high. I remind everyone that Israel entered the crisis with a very low unemployment rate of 3.6%. The housing and mortgage market can be expected. New homes fell at the beginning of the outbreak and then jumped in May when the lockdown was lifted. The demand for mortgages in the second quarter was solid, actually with no major change compared to last year's second quarter. It should be noted that these mortgages might reflect the resilient market before COVID-19, but we still believe that the underlying drivers that support the growth in this market are still there to an extent. Credit card purchases are now about 10% below press COVID levels. The closing of disguise and the reduction in cross border transactions have been partially offset by demand for local services. But we need to see how this tracks going forward. Credit spread in the fixed income market which picked up at March declined considerably and now they are pretty close to the level at the beginning of the year. Looking forward, while we have seen some positive activity in the economy over recent weeks, there continues to be significant uncertainty regarding the timing and shape of the recovery, and a deteriorating economic outlook compared with that prior to the second wave. This has led us to put more meaningful weight on the downside scenario this quarter, and increase our reserve bills accordingly as you can see on the next slide, slide number four. Net profit in the quarter was negatively impacted mainly as a result of 1.1 billion shekels of provision for credit losses of which 806 million shekels were added to the bank's collective allowance as an advance measure in confronting the potential effects of the COVID-19 crisis. I will take you through key aspects of the PML in more detail later in my presentation. I move now to slide number five. I want to touch on how we see management priorities in this challenging period. First and foremost, we are committed to ensuring the resilience of our balance sheets Given the current economic uncertainty, we are pleased to have entered the crisis with strong foundations in terms of capital buffers, even after building high levels of reserves. And this is a critical point of strength for us, and as noted on the next slide, joins the bank's very strong liquidity and funding position, with LCR and LDR levels considerably exceeding targets. And finally, cautious credit growth aligned with our responsible risk appetite is guiding us when we look at our loan book objective, at least in the short to medium term, as economic uncertainty remains in its current high levels. In addition to executing a diligent balance sheet, management priorities remain focused on streamlining the bank cost structure and driving increased client adoption of digital and self-service channels. COVID-19 represents an opportunity to accelerate both these priorities. So we have pushed forward the timetable of our current efficiency plan. The plan originally called for retirement of 900 employees or about 10% of our current workforce by end of 2022. And we are now tracking at a much faster pace and aim to accelerate timetables. One of the vectors allowing the acceleration of efficiency measures is the rapid change we are witnessing in customer adoption and oversight also of digital banking services. And I can give you some examples. More than 80% of stock banking services are now done digitally or through self-service platforms. 81% of customer visits to branch are now by employee-spent only, and we are hoping for that number to grow further. More customers are discovering the convenience of opening an account from Comfort of the Home. bringing digital account opening to record highs, doubling since the first quarter. And finally, BIT, our payment app, continues to lead the industry with over 4 million downloads. With these priorities as a backdrop, let me move to slide 8 and address the results of the second quarter in more detail. Starting with credit losses, which were the main influence the quarter. So as I mentioned the deteriorating economic outlook guided our provisioning approach for the quarter. We decided to increase the collective allowance by an additional 806 million shekels in order to reflect the potential future increase in specific credit losses which have not yet been expressed. You will note that The bank's total allowance for credit losses, including the reserve bill for COVID-19, now totals over 6.7 million shekels. With collective provisions serving as an advanced measure in confronting the potential effects of the crisis, when we look at problematic debt and NPL on the next slide, those reflect the current state of the loan book. and the fact that we have not encountered specific losses and hence remain at relatively low levels. One of the main reasons current balances have not been affected by the crisis today is the lending relief program introduced by Bank of Israel, as you can see on slide 10. You will note from the graph on slide 10 that most of the deferred have peaked quickly at the end of March or early April, indicating part of the initial reaction of the public to be reactionary in nature, and the requests for deferrals have tapered off significantly since. Hence, the current balance of credit still in deferral is significantly lower than the cumulative amount of deferrals. Moving on to take a look at the balance sheet. The bank's diversified loan book is a strong asset at the face of the crisis. It allows us better flexibility in managing risk and growth. You will note the suffering of overall credit balances reflecting the more cautious appetite for credit in the market. Let's move to the next slide for our breakdown. of how these funds are slated in each segment. Some of the trends we are seeing are different from our previous conversations. So let me run you through each segment. Looking at our commercial middle market segment, we continue to see this segment as an important growth driver for the bank. However, naturally, during times where companies are more cautious in spending and investments, This may affect the growth potential compared with pre-corona levels. Corporate credit pulls back this quarter, reflecting the return of revolving credit lines drawn down by companies looking to enhance their liquidity position at the onset of the crisis. Mortgages continue to perform well. And as I mentioned in my earlier comments, we feel comfortable with the underlying fundamentals for growth in this segment. Growth in credit for small business is mainly driven by loans provided under the government guarantee fund, which accommodates for the current risk profile of the segment. In consumer lending, we continue to trade carefully as can be expected with the increased risk in the market. Moving on to look at our deposit base, Bank of Berlin holds the largest retail deposit base in Israel, providing the bank with an important liquidity advantage, especially amidst the current crisis. Slide 14 shows looks at the financing performance for the quarter. It can be expected net financing profits was negatively impacted this quarter, mainly reflecting the Fed and local interest rate reduction and their impact on deposit margins, coupled with declining income from trading activities and the negative CPI for the quarter. Moving on, to operating expenses on slide 15 does continue to remain relatively stable. And as I mentioned, we continue to be committed to a diligent improvement of our cost base. The efficiency program currently underway should see us reduce approximately 10% of our workforce ahead schedule. This in addition to directing considerable efforts to signaling our other expenses line. Moving on to our capital base, I've already noted the high levels of capital buffers the bank holds with a CET level of 11.23% at the end of the quarter. A strong asset to have, especially during this time. So in conclusion, COVID-19 is obviously challenging us challenging us all in anticipation of the scope and duration of its impact. In the midst of the high level of uncertainty involved, Banker Pauline is demonstrating the strength and resilience of capital and liquidity, which allows us an important cushion to weather the crisis and support our customers. With that said, Let me open the call for any questions you may have, reminding everyone that I am also joined by our Chief Economist, Victor Barr, and also Chief Accountant, Ofer Levy, 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 cancel your request, please press star 2. If you are using speaker equipment, please press star 2. Your questions will be pulled in the order they are received. Please stand by while we pull through your questions. The first question is from Tavi Lawson of Barclays. Please go ahead.