Bank Hapoalim B.M. S/Adr

Ladies and gentlemen, thank you for standing by. Welcome to the Bank of Berlin third quarter 2020 result 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 at www.bankofberlin.com by clicking on the financial information on the home page and then clicking on the third quarter 2020 result presentation. All participants are present in listen-only mode. Following Madeline'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 November 19, 2020. Our speaker today is Mr. Ram Gev, CFO. Also with us today... from Mr. Ofer Levy, Chief Accountant, Mr. Victor Bahar, Chief Economist, and Ms. Karen Mazur, Head of Investor Relations. I would like to remind everyone that forward-looking statements for the respected company's business, financial condition, and results of its operations are subject to risk and uncertainties that could cause actual results 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 filings with the various securities authorities. Mr. Ghez, would you like to begin?

Thank you. Good afternoon, everyone, and thank you for joining us today for the first quarter resource call. Let me start with a quick recap of the results and then touch on the macroeconomic environment in Israel as it serves as an important backdrop to this quarter's results. I will then run you through the areas of key focus as we steer the banks through COVID-19, run you through the numbers in more detail before I wrap up and open up the call for any questions you may have. So looking at slide three, Third quarter results were strong, although the challenging environment we are operating in showcasing a resilient profitability base parallel to very strong fundamentals. We continue to fortify our balance sheet with strong capital generation performance, adding to the already high supplicants. Our liquidity position further strengthened this quarter on the back of ongoing growth in retail deposits, This side by side, the high reserve bill we made in the first half of 2020. Looking at this from a bird's eye and acknowledging the relatively uncertainty of the period we are in, these strong fundamentals are crucial to evaluate the resilient standing of the bank going forward. This in addition to the responsible way we are looking at credit scores, balancing growth and risk during this period, and vigilant cost control as we continue to invest in IT and digital transformation initiatives to support our future growth. Moving on to touch on the macroeconomic backdrop, Israel entered the crisis with very favorable economic conditions, it was one of the first countries to move quickly and adopt a strict lockdown, which favorably affected the initial stage of the crisis. The early easing of the restrictions in May allowed Israel to exit the first wave of the crisis earlier than most countries, and what we saw in July and August is a solid rebound in economic activity, a drop in unemployment levels, and a healthy uplift in credit card purchasing. Naturally, the strong exit from the lockdown resulted in the return of high infection levels, which led to a second, more moderate lockdown in mid-September. With a second lockdown behind us, Israel is ahead of many other regions around the world. When you look at the economic data post-second lockdown, you will note that the impact of the second lockdown on the economy was less severe than the first. Both credit card usage and unemployment rates have performed well in September, October, compared with the aftermath of the first lockdown, pointing to a positive learning curve as lockdown restrictions are better mediated and mitigated, resulting in a milder impact on the economy. So this learning curve combined with the positive news flow we are hearing on potential vaccines brings us to a place that we can say cautiously that this is clearly is not the end. There are challenges ahead of us, but it looks like perhaps the end of the beginning. Moving to the next slide. Despite the volatility the lockdowns are creating, the Israeli economy is continuing to demonstrate underlying resilience with several strong factors I think are important to emphasize. Firstly, the mortgage market continues to track strongly. Housing loans granted in the third quarter rebounded from second quarter and were up 7% year-on-year reflecting continuous strength in housing market. Second, current account balances and deposits continue their upward trend, reflecting a high level of liquidity in the system and helped by the monetary and fiscal policy. This includes Bank of Israel purchasing 37 billion shekels of government bonds since the start of the crisis and the low interest rate environment. reminding you that interest rates were cut in early April from 25 basis points to 10 basis. Third, the public debt to GDP levels remain lower than in other advanced economies. Again, it reflects the sound initial conditions, while the deficit is quite similar to other advanced economies. And finally, fiscal credibility remains high. The Israeli government's 10-year bond yield has remained stable since April and is currently at 0.9%, providing the government with a favorable platform for capital raising in the local market and overseas. So moving on to look at the bank's financial results on slide 6, briefly going through the highlights, Total income was strong in the quarter, growing by over 4% compared with the comparable quarters, despite the impact of the crisis on various income items. As I noted earlier, expenses continue to remain a main focus for us as we balance finlanding costs on one hand and investing in areas of the business that support our future business growth and customer service. Note that the lower levels of provisions this quarter, the following two quarters of significant reserve bills, allowed us to make lower provisions this quarter. As a result, we achieved a net profit for the quarter of 816 million shekels, representing an ROE of 8.8%. I will take you through the P&L in more detail later in my presentation. So moving on, the next couple of slides illustrates our commitment to ensuring we operate with a fortified balance sheet as we steer the bank through the challenging period. Given the current economic uncertainty, we are pleased to be operating with strong fundamentals in terms of capital buffers. You will note the bank CET1 level grew by 30 percentage points this quarter with our leverage ratio at 6.9%, significantly above a regulatory target of 5.5%. Our strong capital quotient continues to see side-by-side substantial reserves, our own balance collective allowance ratio for the quarter stood at close to 1.6%. So this is a critical point of stress for us, and as noted on the next slide, it joins the bank's very strong liquidity and funding position with LCR of 132% and LDR of 70%, both considerably exceeding targets. And finally, As you can see on the right-hand side, the bank continues to operate with a highly diversified credit book. Cautious credit books aligned with 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 levels. In addition to executing our balance sheet objective, we remain focused on streamlining the bank's cost structure and driving increased client adoption of digital and self-service channels. COVID-19 represents an opportunity to accelerate both these priorities or at least re-evaluate timing and scope. Moving on the next slide and touching more on cost, we are evaluating a few key actions that will drive our cost base going forward. As a reminder, we announced our efficiency plan at the beginning of the year. The plan originally called for the gradual retirement of 10% of our current workforce by the end of 2022. We are now aiming to accelerate the plan, so a larger portion will retire earlier than planned. In parallel, we are looking at our branch reach, understanding that it also requires streamlining, as do our headquarters, where we would like to unify our multiple office presence into one location and vacate our current headquarters, which are spread across a few prime locations, in downtown tel aviv and finally implementing wide cost reduction program across banks to ensure we continue to invest in growth while maintaining a restraint expense line as i indicated in my previous call one of the vectors allowing the acceleration of efficiency measures is the rapid change we are witnessing in customer adoption of digital banking services. As you will note from the data on the right-hand side of the slide, digital activity at the bank is growing and gradually holding a more central place in how we service our customers. With these priorities as a backdrop, let me move to slide 10. and address key items of the third quarter in more detail, starting with credit losses. The macroeconomic environment has again dictated our outlook for credit losses. The bank has put aside significant allowance for credit losses over the past quarter in order to caution the potential future increase in specific credit losses which have not yet been expressed. This quarter, in light of this significant crushing and without a further deterioration in the macro conditions, we made a relatively smaller adjustment, the net effect of which was 193 million shekels of credit losses. With collective provisions serving as an advanced measure in confronting the potential effects of the crisis, When we look at problematic debt in NPL on the next slide, those reflect the current state of the loan book and the fact that we have yet to encounter specific losses, mainly as a result of the Bank of Israel lending relief program, which was introduced at the onset of the pandemic. A closer look at the current data of the relief program on slide 12 Freshened my statement back in August when we noted that most of the deferrals are peaked at the onset of the pandemic and dropping off significantly as the crisis devolved, indicating part of the initial reaction of the public to be reactionary in nature. Similarly, you will note on slide 12, that the initial request for payment deferrals have tapered off significantly, with total deferrals down by 51% from peak levels, even more so with mortgages, where we see almost two-thirds of the loan returning to their payment routine. Moving on to take a closer look at the loan book, as I mentioned, the bank's highly diversified loan book is an important asset to have, more so in the face of the crisis. It allows us better flexibility in terms of how we manage growth and risk objectives across the various segments. The more cautious demand for credit is reflected in the overall balance, which was moderate year on year. The next slide shows how credit growth is translated in each segment. Much in line with what we have been seeing since the beginning of the crisis, looking at our business segments, large corporate customers, commercial middle markets and small businesses are similarly showcasing a relative pullback of credit, as can be expected during times where businesses are more cautious with spending and investment. Mortgages continue to perform well in line with the vibrant housing market in Israel. We continue to feel comfortable with the underlying fundamentals for growth in this 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, an important funding source, providing the bank with a liquidity advantage, especially amid the current crisis. Slide 16 looks at the financing performance for the quarter. Net financing profit continues to reflect the low interest rates in farmers and their impact on the deposit margins. Margins are similarly affected as interest rates decline affects the top part of the equation, while significant decrease in deposits impacts the denominator. Moving on to operating expenses on slide 17, I touched on expenses earlier in my comments, It does continue to remain relatively stable, although the bank has been making substantial investments to support its future growth objectives. Lastly, our capital base. I've already noted the high levels of capital buffers the bank holds, with a CT1 level of 11.53% at the end of the quarter. Clearly an important asset. In conclusion, COVID-19 is obviously challenging us all in anticipation of the scope and duration of its impact. As I noted in previous quarters, the key to wavering the crisis is an audacity set in the resiliency of your entry point and the adoption of quick learning process. This quarter echoes those statements. So with that said, let me open the call for any questions you may have, reminding everyone that I'm also joined by our Chief Economist, Victor Baja, 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, kindly lift the headset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Tavi Lasner of Barclays. Please go ahead.

Hi, good afternoon, and thanks for taking my questions. First, you guys mentioned your strong capital position. and you keep on generating excess capital every quarter. So in light of the cautiously optimistic outlook that you guys talked about, could we potentially see a resumption of dividends?

Okay. Hi, Tavi. Thank you for the question. You are right. This quarter is very important because it supports our equity and capital base and the surplus that we have. When talking about the capital distribution, I think we have to remember that after the relief that Bank of Israel gave in the minimum requirement, we were the first to declare that we are suspending the capital distribution from a responsible approach. But overall, from then, we did some steps to certain our capital stoploss to give us flexibility if the demand for credit will be high. But on the other hand, to be flexible when the uncertainty will be lower and terms will be clearer, to be able to be in a position to potentially return to a distribution of capital. It's too early to say because the pandemic is still here. and uncertainty is still high. It's too early to say when it will happen, but we're maintaining and creating our flexibility that when everything will be more clear, we will be able to be back to normal in the distribution of capital.

That's helpful. And then just to touch on credit growth, you guys gave details about the different segments. I'm more interested into the level of demand that you get that thing because that's data that we don't have. So has there been an increase in demand during this third quarter? And as a result of potentially changing your underwriting policies and some of those were declined, help us out a little bit with some color of how the demand and supply have played out during the quarter.

Okay. First, it's a very good question and it's an interesting one because it deals with demands and behavior and not only economics. I think when talking about demand or credit demand, we should split and talk on every segment in a different way. Let's start with housing and mortgages. Like I said, the market is strong. We see the performance. We see the demand also in the last quarter very high. And I think the vectors pushing it to keep being high numbers at the present and maybe in the future. So as for mortgages, there is enough room for demand. As for consumer lending, we see all over the world that the demand for credit is getting lower. I think in Israel we can say cautiously that we see some signs for that. But the future depends on the way of the pandemic. But today I think we see that the demand is lower than before. It's very logical that that will be the situation because of social distancing, people buying less, people less traveling, less doing events, etc. So that's the reason why the demand is a little bit lower. And they also manage their consumption more carefully. And I think this is the situation for the midterm, maybe short term. As for the long term and midterm, it depends really on what will be with the pandemic, control of the pandemic and social distancing. I think that what we are choosing today, because it's not growth in consumers, not only the demand, but also the risk appetite, we think that it's too early to change the risk appetite in consumer learning today, but we are evaluating it, and that's for the present. Maybe in the future we'll see some changes. In the economy, in the terms, we will consider a change, but today we don't think the situation is a situation where uncertainty is still high, a situation for changing risk appetite. As for the business and corporate segments, I think it depends on the sector, but overall businesses manage their working capital and investments more carefully today. But as long as things will be clearer, I think the companies will be back for investment. And I think the strong sectors are real estate, still real estate, and also infrastructure. There we see demand, while other sectors manage very carefully the working capital. So overall, it's a different story for each segment. when we are talking about the demands, that I gave you the exact answer.

Thanks for the detailed answer. I appreciate it. And congrats on the strong results.

Thank you. The next question is from Misha Goldberg of Excellence. Please go ahead.

Hi, good afternoon. Congratulations on a strong set of results. A couple of questions for me. I noticed that names are getting squeezed a little bit. And I saw that deposits have increased significantly, around $55 billion a year to date. And it looks like most of that money has gone into the central bank deposits, et cetera, which is around $40 billion. And I'm just wondering, with all that cash on hand, would you be considering putting some of that to work to increase yields? Mm-hmm.

Thank you, Micha. You are right. We see that the level of deposits is very high. The change in the quarter also, nine months, is a large change. I don't think that's the reason to change the risk appetite on the asset side, but we are looking at it, and We are, let's say, calculating and making our analytics to decide what is the duration for this deposit level. And I think it will affect elements of financing. maybe in the future relying more about those elements than long-term liabilities but this is something we are examining and making some analytics on that it depends To benefit from that more than just putting in central bank, it depends on the valuation of how long this level of deposits will be with us. I think it won't be for a short term. But it depends whether it will be years or some quarters ahead. But as long as it will be here, it will help on the financing side. Less on taking more risk than for today, but we are evaluating that.

Okay, thank you. Another question I want to ask about your international operations. I mean, it looks like that this quarter, You reported significant, or at least in the first nine years, significant losses, both on your SWIFT operations, I think from like 170 million tackles, and also on positive in Turkey, and also, I saw since the beginning of the year, it's still in the 100 million tackles on the dock of the U.S. for the Jason investigation. I'm just wondering, when do you think you'll be able to lose those costs? Will that be in the near future, and how much of that should we be counting into our models?

Okay. So I'll talk about positive in Turkey and then Switzerland. For Switzerland, we announced our willingness to sell our holdings as positive. We're making an effort all the time to sell it. It depends on offers and other things. It's not an easy thing, but we're doing all the time efforts, continuous efforts, to end our holdings there in positive. So I can't say whether it will be issue of some quarters or next year, but we all the time keep making the effort in selling that. As for Switzerland, we are in a process of closing the operation. Actually, overall the operations there are very low, but we still have expenses there, operating expenses there that's still reflected in our cost line or expense line. And we have some procedures to do there with the regulators, to close the operation and end the activity. It will take some time. I don't think it will be in the next few months, but we're doing our best efforts to close the activity and get to the end with those expenses that are still on our P&L. Maybe it will take some quarters, maybe a little bit more, but the price is very close for us, both in positive and Switzerland, to get it off our P&L.

So just to sum up, I'm going to think once all this is done in Switzerland and hopefully you find a buyer for positive, you should be losing around 3 million shekels from your cost as in this 9 months. Is that correct? Yes, generally yes. Okay, thank you. Another question, the tax has remained relatively high. Is that a new trend? Is it something that we should be aware of, or is it just something temporarily of expense that are not tax-reducible?

You asked about the tax rate.

The tax rate, the effective tax rate is slightly higher than the statutory tax rate. I'm just wondering, three-quarters in a row. Is this a new trend we need to be aware of, or just something temporary?

No, okay. So, thank you. If you look at the third quarter, you see that the tax reflects the regular, let's say, the regular tax rate. And what you see on a nine-month base is the effects of the first quarter. Mainly, we had some, we recorded some expenses and losses that we didn't record tax assets. against those expenses, mainly Switzerland and Turkey, by the way. So that's the reason why the tax line was higher in percentage. But today we are in the regular numbers. So in short, it's the effect of the first quarter. Nothing to mention about the third quarter in that area.

So the third quarter effective tax rate was 35.7. Is that what we should be calculating?

Because I thought it was 34.2. You know, from time to time, you have these minor differences between the quarters, but the impact of the first quarter is not returning also today as a third quarter. Mainly, we didn't record tax or write tax assets And that's the reason why you get tax item higher at the first quarter.

Okay, thank you. Another small question. Risk-weight assets actually creeped up a little bit QMQ, and I saw loans going down. I'm just wondering why is the risk part, the loan part of the risk-weight assets going up while your loans are going down?

Okay. The reason, that's a good question when you are tracking the credit and the risk asset. The reason is guarantees and credit lines or credit facilities that were higher on this quarter compared to the parallel one. So it's not credit, but guarantees and credit facilities, credit lines.

I got it. Okay, thank you very much.

Okay.

Maybe my last question for all persons, I think, is this going to be an offer on the line or two? Yes. Offer is on the line, yes. So maybe a goodbye question for all. I mean, I understand CECL has not been postponed. The bank has just announced it's going to be implemented on January 2020. And just wondering, as the expert on that card, What will be assuming as the impact will be on capital from CFO? Thank you very much.

Miha, I'll take that one. You asked about the impact of the system. I think it's too early. We can't say what will be the impact. Also, part of the instructions are not still finalized. So it's too early. We're making our preparations and calculation about that. But we still cannot give a number. Do you have something to add on that?

No, it's okay. We mentioned in the financial statement that we don't have, we can't estimate the effect of the fee system. Okay. Thank you very much, and good luck, and good afternoon.

Thank you, Misha.

If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we pull for more questions. There are no further questions at this time. This concludes the Bank of Pauline third quarter results conference call. Thank you for your participation. You may go ahead and disconnect.