Bank Leumi Le Israel

Ladies and gentlemen, thank you for standing by. Welcome to Lumi's third quarter 2023 results conference call. All participants are present in 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 November 29, 2023. 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 risks 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, risks in product and technology development, and the effect of the company's accounting policies as well as certain other risk factors such which are detailed from time to time in the company's filings with the various securities authorities. I would now like to turn the call over to Ms. Chagit Argov, CFO. Ms. Argov, please go ahead.

Thank you, and good afternoon to you all. Thank you for joining us today for a review of your mid-third quarter of 2023. Today, I am joined by Mr. Omar Zim, Deputy CTO and head of the Capital Market Division. and our colleague Dr. Geek Bassman, Chief of Honor. The presentation can be found on the IR section of our website and on the TAFE website. As you know, on 7 October, Israel woke up to a horrible terrorist attack launched on its citizens. Our assault and prayers are with the families of many victims, the missing men, women and children, taken hostage, the fallen soldiers, and with all the soldiers in the IDF and the security forces. Before we discuss the Belt's position in more detail, firstly a few words on the macro situation and some key messages. Slide 3 shows some key economic indicators. While we expect the surge of the Iran war to weigh on the level of economic activity in the fourth quarter and 2024, the Israeli economy started this period in strong health with good underlying growth, following inflation, low unemployment, and low government debt to GDP. We assume that the main part of the war remains limited to Gaza, and that its intensity declines gradually. Ben Flohmi estimates that GDP growth will slow to 1% in 2024, mainly reflecting the negative impact of the war on early 2024. We see a resumption of quarter-on-quarter growth in 2024, with an emphasis on government consumption, both civilian and defense, and also investments in fixed assets, including construction. We also expect that private consumption will rise advantageously as authors start to rebuild their purchases of durable goods. On slide four are the key messages from the quarter. The sword of Iran war, which began in Israel on 7 October, resulted, among other things, in a decline in economic activity and an increase in economic uncertainty and risk. Q3 2023 results include an increased loan loss provision of one billion shekels, or 0.95% of average loans, to reflect the lower economic activity caused by the war and the increased uncertainty. Despite the fact that the war began in October, which was after the reporting period of Q3, the supervisor of Bank of Bank Israel, instructed us to include provisions based on conservative assumptions of the impact of the war. In addition to the government aid package and the various Bank of Israel measures to soften the economic impact on households and corporates, further measures taken by Bank Numi include exemptions and deferrals on loan payments and cuts to fees for affected customers. The Bank has also established an aid fund to support the rebuilding and rehabilitation of Sibusberry on the Gaza border. Assuming that 100% of the eligible customers take advantage of this benefit, the bank estimates that the cost would be around 560 billion shekels. Futury net income was 1.8 billion shekels, reflecting an ROE of 13.6%. Earnings were supported by a 32.3% cost-income ratio and count despite the higher quarterly loan loss provision. Let us turn to slide 5 in the presentation where we present the key metrics and indicators for quarter and the first 9 months. Net income for the first 9 months of the year was 5.2 billion shekels and includes the higher step-quarter provision and also the 1.1 billion shekel in permits of the best stake in value in the first quarter. The cost-income ratio stood at 32.3% in the third quarter from 39% in the third quarter of 2022. The cost-income ratio for the first nine months of 2023 was 31.4%. Credit expenses were 0.95% in the quarter and 0.56% for the nine months with almost all of the charge coming from collective provisions due to the geopolitical situation. Credit grew by 1.9% in the third quarter and hit 4% in the first nine months of 2023. Core deposits to private individuals, a key focus for the bank, are up 6% year-to-date. The Bank of Israel's supervisor, Ben, also requested that as a result of the war, we reconsider the size of the dividend that we distribute. As a result, the bank has announced a 20% dividend payout from Q3. This is in addition to the 1.4 billion shekels of dividends announced in the previous quarter of 2023 and the buyback program of which 600 million out of 800 million was already completed. Together, this represents a 38% payout overall. The bank has, for the present, put the buyback program on hold. Let us turn to slide 6 in the presentation, where we display the bank's strong starting point. As we enter this period, we show three parameters. Firstly, in recent quarters, the bank has been building a large cushion for credit losses. At the end of the third quarter, this stood at almost 1.5% of gross loans and close to double the rate of NPS. Secondly, the bank's high profitability, averaging above 15% over the last three years, provides a large buffer with which to absorb a slowdown in activity and any potential credit losses. Lastly, the bank's strong capital position and the capital buffer of more than 1%, which allows us to absorb any potential losses and also to continue to support customer needs. Slide 7 shows the breakdown of income and expenses. At the bottom right, the 45% year-on-year increase in pre-provisioned revenue in the first nine months of 2023 to 11 billion shekels. Financing income, top left, increased by 33% to 13 billion shekels, driven by higher net interest income. Season commission, top right, rose by 6.7%. Operating expenses bottom left were up 1.7% year-on-year. Slide 8 shows a snapshot of income and expenses in Q3. Pre-provision net revenue grew 39% year-on-year, driven by financing income, up 30% year-on-year, and fees up 10%. Turning to slide 9, we can see the quarterly development of net interest income helped by higher volumes and higher NIMs as interest rates rose. Net interest income was up 31.5% year-on-year in the first nine months and 15% in the quarter. The decline in NIMs in the third quarter was due to the lower CPI and the increase in interest-paying deposits. Slide 10 shows the year-on-year increase and breakdown of fee and commission income. The main increase in financing transaction in the period came as a result of the increase in credit activity. Turning now to expenses on slide 11. In the first nine months, operating expenses on the left increased by 1.7% when compared with the first nine months of 2022, while quarterly expenses grew 3.1% year on year. The higher costs are due to higher pensions, depreciation, marketing and IT expenses. On the right-hand side, we present the bank's policy cost-income ratio trend. Quarterly cost-income ratio declined to 32.3% for 39% in the third quarter of 2022. Nine-month cost-income ratio declined to 31.4% from 39.5% in the parallel period last year. slide 12 shows the development of loan loss expenses. As mentioned earlier, we have been increasing the collective provision in recent quarters to reflect the higher interest rates and slower economic activity, and increased the provision significantly in the third quarter in anticipation of the negative impact of the war as per Bank of Israel instructions. You can see that in the third quarter and previous quarter, almost all of the expenses comes from collective provisions. Credit expenses in the first nine months were 0.56%. Slide 13 shows our credit quality indicators. We see a small increase in NPS on the left, although this remains low on historical basis. Provision for doubtful debt on the right increased to 1.47%, while the ratio of allowances for doubtful debt to NPS remain as healthy two times. And moving ahead now to slide 14. The slide shows that our loan book increased to 417 billion shekels in the first nine months, and 8.4% increase since the end of 2022. While we continue to grow in each of our target segments, we saw the strongest growth in the third quarter in mortgages, which were up 3.1%. Slide 16 shows deposit trends. Here we highlight the growth in core deposits from private individuals, which increased 6% in the first nine months and are up almost 10% year-on-year. It is important to note that our deposit base is well diversified and our liquidity ratio remains strong. Our LCR at the end of the quarter was 130%. Slide 16 shows the bank's solid capital ratio. The Core T1 capital ratio was 11.3%, up from 11.23% at the end of the second quarter, giving the bank a cushion of more than 1% above the regulatory requirement. The total capital ratio stood at 14.42%. Slide 17 shows the key investment highlights for Bank Lumix. As I mentioned before, the bank is entering this period of uncertainty with very good performance indicators. It's worth noting that the bank will record around 800 million shekels of pre-tax profits in the first quarter of 2024 from selling two headquarters buildings. In conclusion, Bank Lumi continues to present consistent and strong financial performance supported by a best-in-class cost-income ratio and robust credit quality indicators. The bank's strong profitability and healthy capital buffer enable us to continue to grow market share in our target segment and put Looney in a strong position for the future, despite the effects of the war. With that, I will now open the poll for questions.

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 two. If you're using speaker equipment, kindly lift the handset 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 Chris Reimer of Barclays. Please go ahead.