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.

Hi, this is Chris Reimer. I'm for Tavi. Thank you for taking my questions. You talked about the strong capital position and getting that dividends are currently on hold. I'm wondering how come the loan brook isn't growing at a higher pace. Is it because there's lack of demand or simply because risks have increased beyond your comfort level?

Okay. Thank you, Chris, for the questions. I think it's a mix of both elements that you mentioned. The demand for credit is reflecting the situation in the market today. And as we look on consumers, some consumers may limit their spending or reducing their spending, for example, cross-border spending, tourism, etc. And maybe, like I mentioned, some of the companies manage their liquidity more carefully, so Maybe it affects a little bit the demand at the moment. As for the future, it depends on the recovery shape of the pandemic and what will happen with the pandemic. And of course, the risk of, during this time, the risk is higher than before. And Banca Poalim in previous years and also entering the crisis managed the risk very carefully. So I think what you see is a mix of both elements, both what we see at the market and the risk appetite of Bank Apollon. So it's affecting the growth of the balance. But like you can see, and as I mentioned before, when you look, for example, at mortgage rates, or the fund, the governmental fund, you see that we're still growing there in nice numbers. So where we see risk that we can handle and align with our risk appetite and there is a demand, we grow and we feel comfortable with that.

Okay. And then just one quick one on the loan loss provisions. Specifically the corrective part, is there a particular industry or sector which accounts for most of the provisions?

I remind you that this is a collective provision that we made in a very high uncertainty level. It's not a regular provision in regular times. There is uncertainty of the scope or length of the crisis. But, of course, there are some segments that we see them as more vulnerable for this crisis. For example, tourism, aviation, for example, hospitality. So, those segments, if you look at our numbers and percentage, you see that we are the higher percentage of provisioning there. We provided there more carefully. So, the short answer is yes, but it's still in very high uncertainty.

Okay. Thank you very much. The next question is from Eitan Acioni of Acioni Portfolio Management. Please, go ahead.

Yes, again about the group provision. I wanted to ask, one, did the inspector of the banks put pressure on you to increase the provision? Two, should we assume that this is going to continue for the rest of the year? And three, once this whole episode of COVID is over, what is the process of reversing the group provision, assuming that the actual defaults turned out to be relatively low?

Okay, thank you, Rehsan, for your question. I think all over the world there is an active dialogue, a helpful dialogue between companies and banks and supervisors. That's for your first question. For the second question, I think it's too early to talk about recovery because we are still in the state that we are estimating the scope of the crisis and the length of the pandemic. So we are still in the quarter that we are building reserves. But when, if you're talking theoretically about the future, let's say some quarters ahead, Of course, there is possible effect of recovery if the pandemic will be less than what we expect in the different scenarios. And the line of recovery depends whether it's a collective provision or specific provision.

So a collective provision can be reversed?

If the microeconomic terms and situation will be reversed, less worse than what we see in different scenarios. So there can be a possibility for that, but we can't tell specific data on that because it's too early to estimate what will be with the pandemic. The level of uncertainty is high, and this is a quarter to build reserves, not to see a recovery.

So more likely than not, for the rest of the year, there are going to be more group provisions.

It's too early to say, but like we were at the end of this first quarter and we saw different elements of the future, and we are only three months after, and we have more information about the pandemic, more information about the fact that things that it's too early to say what will be at the next of the year. I think we have to wait to September, October, November to see those times, what will be, and then we will be able to estimate and maybe answer more clearly to your question. Thank you. Thank you.

The next question is from Michael Goldberg of S1. Please go ahead.

Hi, good afternoon, and thank you for taking my question. I noticed that the general provisions for the house loan more than, I think, went up by seven times in the first quarter. And yet, I think you said there was no major deterioration in your asset quality. So I'm just wondering, why is that number so significantly higher than in Q1? What has deteriorated that required such a significant increase in that specific segment.

Okay. Thank you, Micha. You are right that we don't see a default in that area, and we think this is relatively a solid segment, but when we made our collective provision, we... gave thought of how to allocate it to the different segments, and we were at a very basic and low provisioning before that, and we looked about the deferred that we see, and we took into consideration that some of those defers will have some effect in the future, and we can't expect what it will be but we didn't think that it will be to feel comfortable with leaving the existing provision so we added some percent to the provision and I think overall the number is 240 million shekels provision for that segment but we don't see a default or difference or material change in that and I think the proof for that is that we are still feel comfortable in growth in this segment we grew at a more than 5% since year end in more digits but we still think to be we need to be cautious at provisioning so we allocated part of the provisioning to this segment so if I understand correctly you're saying that

You are not witnessing any deterioration, and that's why it's continued to grow significantly in the mortgage segments. But because you provided less in the first quarter, and because there's a huge amount of deferrals, That's the reason why it's mostly with the fact that you didn't provide it in Q1. You started with a basis. Is that correct?

Yes. Two reasons. The first quarter, we had a general provision, and we didn't make a specific allocation. So now we are doing some specific allocation. The second is that we see the first. The customers use this tool for the first. And we think that part of the difference may, in some scenarios, reflect future defaults, but we don't know what will be the extent. We think that this is a strong segment, so we're still going with that, but we felt comfortable to put some provisioning on that segment and not leave it without any treatment.

Okay, thank you very much. And just one question on that as well, because I saw the Bank of Israel publish some data on the deferrals and mortgages, and it seemed to me, maybe mistakenly so, that the number actually went down over the last couple of months. Are you seeing increase in deferrals and mortgages? Or is that, is that not, because that's what the Bank of Israel published, I think.

No, we don't see increase in the net deferrals. We don't see increase in the net deferrals.

Because I think the bank will report a decline in the net deferral over the last couple of months.

Maybe when they are counting the cumulative number of applications for these deferrals, they see that it's getting high, but the net deferrals, we don't see it getting high. So, on the contrary, and like you can see on slide, I think we saw it on slide number... Slide number 10, you can see the payment deferral granted. This is the accumulative number if you check what happens every week. So the accumulative number is increasing, but you have the current balance of credit still under deferral is significantly lower than the cumulative amount.

That's all right, guys. So it's primarily on the back of a low basis. That's why the increase is significant. Another question, if I may, on your reserve bill. You're now pretty much at around 2% loan load reserve. And when looking globally, and I think, you know, the Israeli regulator tends to look heavily at what happens to the large U.S. banks. That seems to be very low compared to, you know, the top 10 or 15 large banks in America. I think the average is close to 3%. How do you see the current level? Is it sufficient? Do you think the Bank of Israel believes that you should be closer to where the U.S. goes, or is Europe more of a guideline? How do you look at your reserve world that you present? Thanks.

It's a good question, because the U.S. Bank is kind of a benchmark but not classic benchmark because the the US bank used the CISL accounting for provisioning and they have I think different mix of credit than what we see here in Israel and this capital so if you take our numbers today including the second quarter with the large provision collective provision You'll see that we are, let's say, at the middle, not at the high numbers, not at the low numbers. So I can't say where the US banks will be in the future and where we will be compared to them, but taking into consideration that they are using the C-Cell and they have different credit, I think you should expect expect that potentially the numbers for the U.S. banks will be higher than what you will get without the CISLA accounting. But where exactly it will be, the Israeli banking system, is hard to say. But at the current, with the second quarter, we are, let's say, at the middle.

Okay, so you're comfortable with this level? You think this is a reasonable... question for where you think we are right now in the crisis.

Yeah, at the moment, it's reasonable. Compared to the U.S., compared to the Europe banks, we are in a different situation.

Okay, thank you. And the question I'm seeing, and I apologize if this was already asked, I wasn't paying attention, but Fees dropped significantly in Q2, and I assume that part of that is due to the lockdown and the consolidation of digital fees over branch fees and the capital missing going down. And I'm just wondering, looking at that significant drop in Q2 and looking ahead to Q3, we're already at the end of August, so pretty much two months into Q3, is that level of activity something that's reflective of what we're going to be looking at in the next couple of quarters, or is Since we've come out of the lockdown in the middle of June, activity has gone up, and we should be, at least we could be expecting to see income go up slightly above what we're trying to see.

Okay. Part of the decline in the fees is because of the social distancing and the lockdowns. So the decreasing fees is reflected in activity of credit cards, cross-border transactions. So I think cross-border transactions, I don't see the opening skies open in the next quarter still. So we will still see these numbers. As for the branches and activity in branches, At the second quarter, at the beginning of the second quarter, some of the branches were closed. So if you take into consideration that most of the branches were open to the end of the quarter and you don't see closing of branches at that level today, so I think the activity will be higher. But still, let's say the activity in the economics and the social distancing still will affect the numbers of fees. So I don't think it will be faster at the level before the crisis. So maybe it won't be the second quarter, but still the social distancing will be on the ground. will affect us.

Thank you. Another question, go back into provisions. I'm just wondering, I mean, your previous company reported numbers recently, too, and provisions have been down, and you're talking about the credit card company, which is primarily consumer-related loans, and provisions have been down there, yet when you look at your provisions for the consumer market, they're also skyrocketing. There are like 250 million shekels in Q2. For you, is there a difference between the consumer loans that Bank of Poland gives and the consumer loans in YistroCard? What is the explanation for the drop in consumer related provisions of YistroCard and the significant rise in consumer related provisions in Bank of Poland?

Okay, I can't comment on other public company reports but generally I can say that when you look on credit card companies and banking, there can be some differences in the nature of credit when you talk about the duration of credit, the use of credit, the average sums of credit. for customers. So maybe part of the difference you see related to those elements, the duration, the use for the credit, et cetera. And also risk appetite. But speaking generally, I really don't want to relate to other company statements.

Okay. And my last question, if I may, and I apologize, I know it's already your turn. If you have to rate today these from the most risky to the safest segment of credit. What would be the top and what would be the bottom? Thank you very much.

It's a good question. I think that the answer for that is to look where we go. And we manage our growth with our risk appetite. So the answer is, I think, very simple, when you look where we go.

Okay, so if I take that to your credit growth in Q2, mortgages, it seems to be, in your view, the highest, almost safe kind of loans right now, and the corporates. the large corporates are more risky than the SMEs, which seem to have some kind of breadth, or at least those that have government-secured platforms. Is that a correct conclusion?

I think it depends on the underwriting and risk appetite, and specifically for every company and bank. In each segment, the risk appetite for every bank can be different. but overall I think at the moment we choose to grow where we think we can manage our risk appetite well and feel comfortable with that growth. Okay. Thank you very much. Also the diversification is very important by itself. Of course.

Okay.

Thank you very much.

If there are any additional questions, please press star 1. If you wish to carry out your request, please press star 2. Please stand by as we pull from our questions. We have a follow-up question from Mika Goldberg of Excellence. Please go ahead. Mika, please go ahead.

Can you hear me? I'm sorry.

I was going to leave. Mika.

I'm sorry. So, just one more question then. I saw there was a significant drop in the total securities on the balance sheet in Q2. Now, I realize in Q1, you guys did an excellent job of scooping up, you know, government bonds at the level they were trading at the end of the quarter. And yet, it looks like there's been a huge drop in Q2 and not a significant amount of realized profit. I was just wondering... where I think it's like $11 billion. I'm wrong to remember. I'm not looking at the numbers right now. What's your reason for that drop, and are we going to see any kind of realization of the profits in the next couple of quarters coming through from that huge increase in Q1? Thank you.

Okay. Thank you, Mirha. What you can see, you won't see the profits recorded to the P&L. It's recorded directly to the capital, to the other comprehensive incomes, About nine, if you look at our reports, about, I think, 900 million shekels recorded directly to equity as a result of a change in the value of those investments, mainly, of course, bonds. So I think the reason is because it's recorded directly to the equity and not going to the P&S.

The next question is from Ron Alcon of LHR. Please go ahead.

Hi. Good afternoon. Can you shed some light, please, on how the financial margin went down from 2.27% to 1.96%, especially as I know you raise the interest rates to many companies and individuals?

Okay. Thank you. Okay. I want to refer to your last comment because I don't think this is the situation. I think overall the banking system, especially Bank of Berlin, increased the lending for the customers with very competitive pricing. But as for why the margin is lower, There are two reasons. First is decreasing the Fed interest rate and also the local interest rate. That's the first element. The second element is the deposit base is very large. Our liquidity, the LPR reached 130%. Of course, this has an effect on the net margin. So there are two effects, the decrease in the interest rate that affects the income, the revenue, and the second is the deposit base that is helping for the liquidity to reach high levels, but of course affecting the net margin. It's a technical issue. The second one is a more technical issue.

Okay, thanks.

There are no further questions at this time. This concludes the Binka Pauline Q2 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.