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spk04: 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.
spk09: 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.
spk04: 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.
spk01: Hi, thank you for taking my questions and congratulations on the strong results. First off, I was wondering if you could talk about some of the trends you're seeing in the US, particularly how you see the performance of Valley Bank.
spk08: Hi, Chris. Thank you for your question. First of all, Valley is doing very well. After the After all the mess that happened with the national banks in the US at the beginning of the year, we see a gradual recovery in value activity. We do see improvement in the stock price. We do see improvement in the results, as well as increasing the deposit base. and continuing keeping very low credit loss expense ratio. I would like to mention that apart from the equity profitability that we write due to our investment in Valley, Valley contributes to the bank profitability also by the different corporations. that we have with Valley. I mean, Valley supports our customers outside of Israel, and there are dozens of participations that we are making with Valley in our credit portfolios, so the profitability from Valley is not only in the equity line, but it's as well in the credit line as a result of the and the cooperation that we are making with Valley, quote, unquote.
spk01: Thanks. Thanks. That's some good color there. And I wanted to touch on expenses also. If you could talk about some of the moving parts in the expense line. What's driving the decrease in salaries this quarter, and how should we be looking at the ramp up to the move to the new headquarters?
spk08: Overall, if we look at the first nine months of the year, the total expenses increased by 1.7%. And in the third quarter, we do see also a slight increase compared to the year-on-year and to the previous quarter. Now, the decrease in the salary expenses First of all, when you look at the expenses and you talk about the decrease in the salary expenses, you should bear in mind that part of the salary expenses, according to the accounting rules, are recorded in the other expenses. The effect of the interest rate on the pension expenses, according to the accounting rules, is classified to the other expenses. So you should look at both of these parts together. In the salary expenses, you will see a slight decrease due to the growth of the employee numbers at the end of the year in Bank No. And due to the fact that the ROE in this quarter was lower than the ROE in the previous quarter, and the provision for bonus is, of course, lower than the previous quarter because it's connected to the rate of the ROE. But, as I mentioned, there is an increase. in the pension expenses which related to the interest rate due to the increase in the interest rate.
spk01: Got it. And just related to the building expenses and how you're ramping up to the move.
spk08: Can you repeat the question?
spk01: If you could give a little more color on building expenses and if there's anything left material in that as you complete the move early next year.
spk08: First of all, we expect that when we will move next year to our headquarters from Tel Aviv to Lodz, not only will we see the profit of 800 million shekels, but we will see another another decrease in the maintained expenses due to the fact that in laws, the way we are organized is much more effective, much more cost effective than here in Tel Aviv, a building that was, two buildings that were built, I don't know, 20 years ago. So by this respect, you should expect An additional decrease in the maintained costs regarding the headquarters at the beginning of 2024. On the other side, we expect that the IT costs will continue to increase because as long as we're moving our customers from branches to digital channels, we decrease the building expenses, but on the other side, we increase the IT expenses as well.
spk01: Got it. Thanks. Thanks for that. That's it for me.
spk08: Thank you, Chris.
spk04: The next question is from Loren Bonnet of BNP Paribas. Please go ahead.
spk06: Good afternoon, Omer. Good afternoon, all. Firstly, congratulations for your results. I mean, business model is robust, good capital buffer, and liquidity is around. I had only one question, unique questions, looking at provision. They are moderate, but we see from compared to Q2 2023 that those provisions in amounts have tripled. My only question is, I mean, how do you foresee, I know it's related to get by geopolitical situation, but do you see this trend continuing and Leone keep on increasing those provisions? or have we reached a peak?
spk08: Hi, Loren. Thank you for your question. First of all, Sagit mentioned that out of the 95 basis points credit loss expense ratio in the third quarter, 83 basis points are composed of the collective provision, and only 12 basis points are related to the specific provision. Secondly, a significant part of this increase is related to the geopolitical circumstances, according to the instructions of the Bank of Israel. And as we did with the outbreak of COVID, we always prefer to be more cautious and to build our provisions based on conservative assumptions. And of course, if it turns out that the geopolitical situation will be less severe, means that we'll be able to even release some of these provisions. Now, when we look forward, the main parameter that we should bear in mind is the development in the geopolitical circumstances. As long as the world will be limited and focused in the southern border, according to our forecast, We already built the quotient provisions, which will enable us to deal with the effect of the war after that. And you should expect a decrease in the credit loss expense ratio in the following quarter. But if the war will extend to the northern border or to other border, so we should look at it again and see what will be the effect of the war. Currently, it seems to us that we are in a very conservative assumption. We took into account a few months' war with the fact that with a relatively low GDP base of growth next year, year over year. So, if the situation will be focused only on the southern border, as I mentioned, you should expect a decrease in the credit loss expense ratio in the following quarter. Thank you very much. Maybe I should mention another parameter which is important. If you look at the NPL, the NPL is only 74 basis points. The NPL is less effect by different conservative function. The rules are more tough. And the NPL is only 74 basis points. And if you compare it, for example, to 2021, It was 75 basis points, so it's not something which is high. Also, when you compare us to our peers, you will find that our NPL is significantly lower than most of our peers.
spk04: Okay, thank you, Matt. The next question is from... Ali Dalumaou of Bank of America. Please go ahead.
spk07: Good afternoon and thank you for the call. I have just a question regarding the deferral programs. Can you elaborate on these and give us a bit more color? Are the length of these up to six months? Who are the customers who have opted in? Are they essentially retail or corporate customers? And also, will the bank bear all the cost of these deferrals? Thank you.
spk08: Okay. So, first of all, there is a table in the financial. I tried to find it currently. There is a table that is, I think it's on page 64 on the EBO version. And there you can see that the total deferral till now are 1.3 billion shekels. of which, and you can see that in which the deferral that don't bear interest is about 25% of the total deferral. So currently we are not talking about a significant number. If you look at this page, you will find that the deferral are mainly in the mortgage area and in SME. This is the main segment that use the deferrals. The deferrals are up to five months. It depends if you are a customer that lives near the border or a customer that didn't defect by the war and lives more far away from the border. But the maximum period of deferral is up to five months. And based on this number, currently the deferrals are not significant, but we should wait and see.
spk07: Understood. Thank you.
spk04: The next question is from Irid Bar of the Phoenix. Please go ahead.
spk03: Hi. Thank you very much for taking my call. Good evening to everyone. I just have two questions, one related to your specific provisions compared to the rise in NPL in the quarter. So I see that the specific provision is 122 and the rise in NPL was about 600 million. I just wanted to ask if it's because Well, the low amount of specific provisions is mainly because you expect high recovery on those loans. And I would like also to ask about what you see this period in this regard. So your real estate clients... Do you see further deterioration, material deterioration in this sector now, so in this period?
spk08: Okay. So maybe I will touch first of all about how we see the real estate market, and then we go to the number, because the specific provision is only part of the NPL, and the 122 is the expenses. It's not the total... specific provisions, so it cannot be equal to the NPL. Now, if you talk about the real estate business, so currently due to the war in Gaza, we do see a slowdown in selling, a slowdown in the completion pace of projects, and a slight decrease in apartment price. First of all, the slowdown in selling is natural. Israel is now in a war. People are not in customers, not in the mood to go to buy an apartment. And of course, this is something temporarily that we start to see as long as the war continues. And it's also different in different parts of the country. For example, in Tel Aviv, we do see a slowdown in in selling, but in Jerusalem, the rate of selling is high. So it's something that is different between different parts of the country. And moreover, a significant part of our project, a project of affordable house. So in this kind of project, because the government subsidized a significant portion of the price, the chance that the buyer will lose their opportunity to buy a in a parliament with a subsidized price is very, very low. Now, regarding the pace of completion, it's of course related to the fact that there is lack of Palestinian employees currently due to the war, but the government already approved additional 10,000 foreign employees to the real estate sector. I can say that regarding our customers, the sites that are closed are negligible and the vast majority of our projects are based on foreign employees and moreover, the portion of human resources in the total in the total budget of projects is not significant. So even if we will see an increase in the cost of projects due to the fact that there will be more foreign employees that are more expensive than Palestinian employees, because we already have an unexpected cost in all of our budgets of at least 10%, the effect of that will not be significant. Now, regarding the decrease in, the temporary slight decrease in apartment prices in Israel, so of course it's due to the war, it's not significant, and we expect that because of the lack of supply in Israel, even before the war started, so this lack of supply just will be more severe. So we expect that after a few months we will see an increase in the price. But in any way, currently, the current selling prices are higher than our underwriting prices. Our underwriting prices in the budget are very conservative. So with this slight decrease in the price, it's still higher than the prices in our budget. And at the end, you can always look at the absorption rate. The absorption rate is very conservative. We are not entering into a project with absorption rate which is lower than 30%. The absorption rate is the rate that presents how much the price can go down or the cost can go up. And we are not even close to this area. This is the reason why despite the war, the NPL in real estate, the problematic debt in real estate. If you will compare the problematic debt in real estate in Bank of America to our peers, you will find that our ratio is very low compared to our peers. So in the bottom line, we feel that we have a lot of mitigates to the trends that I just mentioned. We have very strong customers. We don't have non-recourse loans. So the macro picture is less relevant to our portfolio.
spk03: And the other question is related to the credit growth for Q. Can you please just give a thought on that? Do you see a real decrease in demand for credit from the different segments or only a few segments? Can you please just provide some insight on that?
spk08: We expect that the pace of the credit growth in the fourth quarter will be low due to the war. People are less, the consumption is lower, the activity is lower. Now it starts to recover, but October was very, very weak, as well as the first half of November. So we expect that the fourth quarter will not be significant in the credit pace of growth. But we are okay with that. It's been mentioned since the beginning of the year. Our credit growth was 8.4%, much higher than our peers. And what is more important is that despite the fact that our pace of growth was higher than our peers, when you look at the parameters that reflect the quality of the critical portfolio, you will find that our parameters in most of the ratio are better than our peers.
spk03: Yeah. Okay. Thank you.
spk08: Thank you.
spk04: The next question is from Mika Goldberg of Psegot. Please go ahead.
spk02: Hi, good afternoon, and congratulations on a strong quarter. You mentioned that you wrote down 1.1 billion shekels for your investment in Bali, and I'm just wondering under what scenario will you be able to recover some of that?
spk08: The simple answer would be that in most of the cases we will be able to recover that when we sell the loan. When we sell the, sorry, the investment or part of the investment. But you should bear in mind that every quarter we record equity profit due to the fact that we present the value on an equity basis. So effectively, you see this coming back via the equity profit, which every quarter positive, and from economic perspective, every quarter it will bring us back to the place that we were before. But the simple answer is that if we will not write equity profit, which is theoretical, we will write the profit when we sell part of the investment.
spk02: Thank you for that. And do you have any limitations, any lock-up for selling part or all of your stake in Valley National?
spk08: Currently, according to the agreement, we can sell at least 25% of our investment without lock-up. So we don't have an effective barrier regarding that.
spk02: Understood. Thank you very much. You also mentioned some sizable real estate gains that you're looking to gain in Q1. Are there more real estate gains likely to happen following you move to a new headquarters, or have you completed all the potential real estate gains?
spk08: First of all, out of the two buildings that Raghid mentioned, we sold only half of it. So we have the second part that we didn't sell. We are moving to Lomir, but half of the building, the more expensive one, still belongs to Lomir. We decided currently not to sell this house. Apart from that, we do have a few other buildings with potential profitability, because we record the real estate in our financials based on the historical value, but not in the amount or in the size of these two headquarters. David Chambers- Great.
spk02: Thank you very much for that. You also mentioned some potential cost savings following your move to the LUT headquarters. I'm just wondering, can you cost-income ratio go further down than it's currently at, like the 32, 34 percent? Can it go lower? And if so, where would that potentially be going?
spk08: First of all, you are right. When we moved to Lodn, it's a potential for further decrease in our maintaining cost because our new headquarters are much more effective than this building in Tel Aviv. But as I pointed out earlier, we do see an increase in the IT cost because of the movement of our customers So, I assume it will balance one another. So, I think in the bottom line, we will see an increase in maintenance costs, we will see an increase in IT costs, and regarding the cost-income ratio that you mentioned, our target is to remain the cost-income ratio between the range of 30% to 35%. We believe we can do this.
spk02: Great. You mentioned you lowered your payout by 20% on the request of the Bank of Israel and also all of your buyback. And I'm just wondering, when do you foresee that the Bank of Israel will allow you to reinstate your dividend policy? And once that is done, will you seek to go back to your original payout? I think it was up to 40%, and maybe I'm wrong.
spk08: You are not wrong. Effectively, we were around 40%. If you add the buyback to the 30% dividend payout ratio in cash, together we were on 40%. I think the answer for that is related to the geopolitical development in Israel. Currently, the Bank of Israel is trying to be more cautious because of the war. I assume that by March, 2024, when we publish the annual reports, we will know much more about the geopolitical situation than we do now. So it seems to me that until then, the Bank of Israel, if the situation continues to be relatively calm like it is in the last month, I expect that the Bank of Israel will enable banks to pay more and If you look at other numbers, we have, of course, the capabilities to pay more. We have a T1 equity ratio of 11.3%. We have total equity ratio of 14.5%. Very high profitability ratio, LCR of 130%. So by all parameters, we have all the capabilities to increase our dividend payout ratio, but currently we cannot do it due to the geopolitical situation.
spk02: I understand. Now, I seem to remember that a while back, maybe in the heyday, you guys paid up up to 60%. Once things get reinstated and the economy gets back on track, would that definitely be a similar kind of longer-term objective, or is that something that seems above what you currently would like to pay out?
spk08: First of all, it's too early to say something about that because of the many unknowns around us. I would say that the 60% was in a period that our pace of growth was just slightly above the GDP pace of growth. Since then, we proved that we have the capability to increase our credit portfolio much more than the GDP pace of growth. And at the end, we should split our sources between dividends And the answer for that will be dependent on the opportunities in the market in the future, which is currently too early to predict.
spk02: Okay, clearly understood. My last question, based on what you just said, I was just wondering, you've gained significant market share, or it looks like you gained market share, on much faster loan growth. And I think you mentioned that you'd be growing faster both compared to GP as well as compared to some of your larger peers. And I'm just wondering, does this imply over the longer term that the cost of risk should also be longer, should be higher?
spk08: First of all, if you compare our cost of risk in the previous quarter, before this quarter, because this quarter doesn't reflect anything. It depends on the level of sensitivity that you are targeting. But previous to this quarter, our cost of risk were very similar to our peers. And if you look at numbers that are less related to, let's say, judgment, like NPL, or if you look at the ratio of the problematic debt out of the total out of the total loan you will find that despite the fact that our pace of growth is higher not only in this year it was also in 2022 it was also in 2021 we are talking about a very long period you will not find that our cost of risk was higher so i don't assume that according to the data i have and according for example to the review that i just gave about the real estate exposure which is one of our biggest drivers in our Facebook group, I don't expect that our cost of risk will be different or higher than our peers.
spk02: Thank you very much, Omar and Chagit.
spk08: Thank you. Thank you.
spk04: There are no further questions at this time. This concludes the Banq Lumi third quarter 2023 results conference call. Thank you for calling in. You can disconnect.
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