Bank Leumi Le Israel

Ladies and gentlemen, thank you for standing by. Welcome to LUMI's second quarter 2024 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. As a reminder, this conference is being recorded August 14th, 2024. I'd 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 and the effect of the company's accounting missing market acceptance, changing economic conditions, risks in product and technology development 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. I would now like to turn over the call to Mr. Michael Klar, Head of Investor Relations. Mr. Klar, please go ahead.

Thank you, Operator. Ladies and gentlemen, we thank you for taking the time to join us for Bank Loomis' Second Quarter 2024 Results Conference School. Joining me today is Ms. Chagit Agor, CFO and the Head of the Finance Division, and Mr. Omer Ziv, Deputy CEO and Head of the Capital Markets Division. We are also joined by our colleague, Dr. Gil Bussman, Chief Economist. The presentation can be found on the IR section of our website and on the TAS website. I would like now to turn the call over to Chagit.

Thank you, Michael. Good day, everyone. I'm happy to be here with you all. Before we delve into the financials of a strong second quarter, I would like to say a few words about the macro backdrop in the second quarter which after nine months of war showed the modest recovery, which began in the first quarter of the year, and this continuing positively contributed to our results. Sales of new and secondhand apartments continue to pick up, and for the three-month period to May 2024, were up significantly on the corresponding period last year. Consumer confidence remains low affected by the war, but retail sales continued to increase in March to May, following the recovery in the first quarter. Wages continued to rise, and the unemployment rate continued to fall. Foreign trade data indicate an increase in the volume of the exports in the second quarter, with an emphasis on the export of IT goods and services. While geopolitical risks to remain high, Bank Lumi estimates a 1.4% GDP growth in 2024 and a rebound in 2025, provided that the war ends by then and does not extend, with growth driven by domestic demand, investments in fixed assets, and private consumption. Returning to the bank's performance in Q2 2024, let me pinpoint three key takeaways and we will go into the details later in the presentation. Firstly, the bank continues to report strong profits. Second quarter 2024 ROE was 15.9% and would have been 20.2% excluding the 0.6 billion shekel impairment of the Valley Bank stake versus 19.4% in the second quarter of 2023. Since the end, of the second quarter, value stock has increased and the value of Leumi's 14.2% stake is above the value recorded on our books. Secondly, our improved credit position. The quarter saw a meaningful decrease in trouble debts and NPLs, which combined with recoveries on specific loans and lower collective provisions resulted in much lower loan loss expenses. And finally, the continuing improvement of our cost-income ratio, which continues to be the best in the sector. Now let us turn to slide three for the highlights of the quarter. The second quarter was another strong quarter with net income of 2.3 billion shekels and ROE of 15.9%. Reported ROE for the first half of 2024 was 18% and was similar on normalized basis to the value impairment in the quarter, more or less offsetting the profits from the sale of Leomi's headquarters building in the first quarter. The cost income ratio declined to 28.7% from 39.5% a year ago. Credit losses were almost zero as collections offset lower collective provisions. Credit growth was up 1.2% on the previous quarter, but was up 2.4% when excluding capital markets as economic activity continued to recover. Credit to capital markets can be volatile on a quarterly basis. Core deposits were up 1.4% and are up 3.4% year-to-date. Slide 4 shows a snapshot of income and expenses in the second quarter. Net interest income and fee income increased by 2% compared to the parallel quarter last year, mainly as a result of the increase in the credit portfolio and activity offset by lower NIMS on lower rates and higher funding costs. Total expenses declined by 2%, mainly due to lower bonuses. On slide five, you can see the same snapshot for the first half of the year. Financing income was up 7%, while the 5% increase in operating and other expenses year on year was mainly due to higher employee bonuses on higher profits. In slide six, we can see the development of net interest income supported by credit growth and helped by higher CPI in the second quarter. Turning to slide seven, fees increased by 2.2% as economic activity continued to recover supported by financing transactions and security activity, and also a year-on-year increase in credit card income. Slide 8 shows the continued improvement in the bank's multi-year cost-income ratio, which improved further to 28.7% in the second quarter. Slide 9 shows the quarter-on-quarter and year-on-year decline in loan loss expenses, which were close to zero due to a lower collective provision and also due to income from specific provisions due to recovery. Note the decline in the collective provision to 68 million shekels was despite an increase in macro related provision due to higher macro uncertainty. Net provisions in the first half of the year was 0.09%. The next slide, slide 10, presents the high quality of our credit portfolio. The NPL improved to a level of 0.56% at the end of the second quarter, and trouble deaths decreased to a level of 1.5%. At the same time, as can be seen on the right-hand side, the bank's total provision remains stable at 6.7 billion shekels, covering almost 270% of the bank's NPLs. Despite the fact that we increased our credit portfolio at a faster rate than our peers in recent years, Leumi continued to present low NCL and trouble debt ratios. Slide 11 shows that the bank continues to grow credit in its target segment of mortgages and corporate, including real estate, and middle markets. Demand for credit in mortgages and corporate in particular rebounded in the first half of the year. The next slide, slide 12, shows the bank's diversified deposit base and robust liquidity ratios. Core deposits grew by healthy 3.4% since the start of the year, continuing the strong growth recorded in 2023. I'm moving ahead now to slide 13, which shows our very healthy capital and leverage ratios. The core T1 ratio has increased by almost 40 basis points in the first half of the year to 12.04% despite the higher 40% total payout. The total capital ratio rose to a level of 15.04%. Turning to slide 14, the strong profitability and large capital buffer allowed us to declare a cash dividend of 681 million shekels for the second quarter in addition to the second range of our 1 billion shekel share buyback plan reflecting a 40% total payout and equal to around a 7.5% annualized yield. Together, this brings the total capital return for the first half of the year to more than 2 billion shekels. In conclusion, and turning to slide 15, the bank continues to present consistent and strong financial performance with high ROE despite the challenging economic backdrop. Long-term asset growth is driving higher revenues and profitability, supported by best-in-class cost-income ratio and strong credit quality indicators. The bank's strong profitability and healthy capital buffer enable us to continue to grow in our target segment while also allowing us to share higher returns with shareholders through dividends and our buyback program. With that, I will now open the call for questions. 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 handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Tavi Rosner of Barclays. Please go ahead.

Hi, good afternoon. Thanks for taking my questions and congratulations on the strong results. I have three quick ones, please. The first one is I wanted to ask about the deferrals. I know that most banks allowed residents of the north to delay mortgage repayments and so on. I wanted to get a sense of the scope, like what's the percentage of the total book that's that's been deferred for these reasons.

Hi, Tavi. Good to hear you. We have a specific number in our financial for that, and you can see that the total deferral for the end of June are negligible. Only the total payment that were deferred are only 2 billion shekels. And also the total credit that involved with the farewell is only 9 billion shekels, significant decrease from the level that we had in the end of 2023. This is one of the parameters that we saw significant improvement in the second quarter, as well as in the roto and other underwriting parameters that all of them, because the both show on one direction, improvement in the quality of our Crate portfolio.

Thanks, Omer. And then the second one is on provision. So we're seeing recoveries. My usual question is, assuming nothing changes with the macro and the geopolitical concern, should we expect further reversals over the next coming quarters?

I would say the following. First of all, in this quarter, as in the first quarter, we have continued to see a collection. You can see that we had a specific provision which was negative. As for the collective provision, as a matter of fact, we didn't release provision. Despite the fact that we have increased the buffers in our collective provision in order to be prepared for any eventuality, the collective provision was in the second quarter only six basis points. And the reason for that is what we mentioned earlier. I mean, the improvement in deferral, the improvement in the ratio of the problematic debt, as Sagit mentioned in a review, we can see that the problematic debt has continued to improve and drop to a level of 1.5%. We can see a consistent improvement in the NPL. So all of that led to only six basis points collective provision. And this is despite the fact that we increased the portion that is related to the geopolitical circumstances. So looking forward, of course, it depends on the geopolitical situation. But if the situation of our customers, I mean the main credit parameters will continue to improve, as we have seen in the last two quarters. It means that the credit loss expense ratio for the following quarters will continue to be low as well.

Thank you, Omer. And the last one is around the dividend and cashback. So, I mean, you guys are sitting on a lot of excess capital. Am I assuming that the current payout is whatever the Bank of Israel is allowing you to pay at the moment? And do you think that it's going to allow you to increase the payout in the future?

That is correct. Currently, the 40% are mainly due to the geopolitical situation. As Hagith mentioned, our CET1 is above 12%. Our total capital ratio is above 15%. So we have the ability to increase it. And I assume we will consider it when it's possible.

Thank you. I'll get back to the queue.

Thank you, David. The next question is from Priyathood of Jefferies. Please go ahead.

Hi. Thanks for taking my questions. Just two from my side, please. So the first is, obviously, this quarter we saw some good loan growth come through, which is really encouraging. But I'm just guessing, since the end of the second quarter, have you seen any changes in the patterns in terms of loan demand? And my second question is, and I appreciate this is quite forward, especially since you've increased it this quarter, but what are the hurdles or criteria for you to eventually release some of the war uncertainty provisions that you've put on? And I guess a follow-on from this is, more specifically in your loan book, are there any areas of concern in your loan book that we should be aware of looking forward in the next, you know, two or three quarters, for example, commercial real estate. Thank you.

Thank you. First of all, we don't see any significant changes since the beginning of July. Of course, we are in the summer. which is, you know, lots of people are on vacation and seasonally, not regarding the war, the demand for cologne is lower than in other months, but nothing significant. As for the threshold or any other parameters that we use for the collective provision, We look at many parameters. It's a complicated model in which we look at the collections, we look at prepayments, we look at the different macroeconomic parameters, we look at the farewells, we look at different things and combine them into a model in which we try to focus. in very conservative approach what should we keep as provision. And as I mentioned, in this quarter, due to the macroeconomic environment, it actually, we actually increased the buffer that relates to this portion in the provision. Of course, the most exposure segment to any deterioration in the geopolitical situation is the unsecured retail and the small businesses. Because in the other sector, the borrowers are much stronger borrowers. the collateral are much stronger. And even in real estate that you mentioned, the NPL is improving. The problematic debts are improving. I mean, they are going down. And specifically for the real estate, I would say that our biggest exposure is to the construction loans. And then we have lots of mitigation. The main mitigation is related to the collateral cost, but also to the absorption rate. And I can say that apart from very, very specific projects and small projects, in almost all of our other projects, the absorption rate is about 40%. So you can understand that the scenario in which the price goes down by 40% or the costs go up by 40% is very remote, if at all.

Perfect. Thank you very much.

Thank you. 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 poll for more questions. The next question is from Micha Goldberg of Psagot. Please go ahead.

Good afternoon. Congratulations on the next quarter and a very strong first half here. A couple of short questions for me, please. I saw fees, income from fees declined in this quarter. I was just wondering what the background on that was and what you'll be expecting in the next couple of quarters. Secondly, I saw tax rate was much lower than originally expected. I think thought about, can you tell me how much the war levy was this quarter?

First question was regarding the commission. What was the second question? Tax rate, war levies, the war taxes, the national tax. Yeah. Okay. So as for the commission, they were more or less similar to the previous soldiers. There was a very, very light decrease mainly relates to the benefits that we want to our customer due to the war. But the decrease is very low. For the second quarter, I think the commission were 910. And in the first quarter, they were 935. So the decrease is very, is insignificant. As for the tax rate, the tax rate for the second quarter was relatively low. It was impacted mainly by the improvement in our deferred tax. Our deferred tax mainly relates to our pension liabilities. So due to the increase in the VAT that is expected to be implemented from 2025 or 2026, actually, so it affects positively our deferred tax, and this affects positively our tax rate. I think that in the long term, the following quarter, you should expect on a long-term basis a tax rate of 35%, but for the next five and a half years, because of the additional tax that was imposed by the government, So you should expect a tax rate between 37 to 38%.

The difference between the 37, 38, 5% was the DTAs, is that it, for taxes?

Yeah, it was the tax, the special tax that was implemented on tax that was imposed on banks for the, for 2024 and for 2025.

Great. Thank you very much. And my last question. I see that you guys have tried not to release any group provisions over the last couple of quarters, although some of the other banks did. I'm just wondering, is the Bank of Israel allowing you currently to release? And if it is, when do you think it's going to be appropriate to release some of that access provision? Thank you.

I don't think there is a for business for the budget bank for releasing a collective provision, but in this we didn't release collective provision. As I pointed out in the second quarter, we even increase the collective provision that it relates to different scenario that they can develop due to the geopolitical situation and the decrease. is coming from other elements, mainly real elements. I mean, it's a model. And when there is a significant improvement in the ,, when there is a significant improvement in vitals. So by definition, the model led to lower collection, to lower provision, sorry. And if you add to that the collections that we include in the provision, So you end with only six basis point collective provision. Looking forward, we have a significant buffer in our provision. And when the situation gets better, we will consider to release it. We didn't do it yet.

Thank you very much. Thank you, Mirza.

There are no further questions at this time. This concludes Lou Mee's second quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.