Bank Leumi Le Israel

Ladies and gentlemen, thank you for standing by. Welcome to LUMI's fourth 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 March 4th, 2025. I'd like to remind everyone that forward-looking statements for the respective 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, 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. Quar, please go ahead.

Thank you, operator. Ladies and gentlemen, we thank you for taking the time to join us for Bank Loomis' fourth quarter and full year 2024 results conference call. Joining me today is Mr. Hanan Friedman, President and CEO, Mr. Omer Ziv, Deputy CEO and Head of the Capital Markets Division, and Ms. Chagita Goff, CFO and head of the finance division. A presentation will be presented during the call for those joining by webcast. The presentation is also available on the IR section of the bank's website for those dialing in. I would now like to turn the call over to Hanan.

Good afternoon to everyone. Earlier today, we published our financial results for 2024. We also published for the first time key financial targets for 2025 and 2026 based on our strategic plan. Although 2024 has been a challenging year for Israel, I am very pleased to say that we have demonstrated another strong year with record results and profitability, the highest ever, in line with our targeted growth strategy. Before presenting the highlights of Bank Luumi's 2024 results, I wish to share some points about the Israeli economy, which have a great impact on our business. At the beginning of 2024, yearly forecasts predicted negative performance of the Israeli economy. However, during the year, the economy showed its resilience with GDP growth of 1% in real terms. This performance not only defied early expectations, but also highlighted the strength of the Israeli economic fundamentals and the unique resilience of the Israeli population. This reinforces our confidence in Israel's long-term growth prospects. Based on our technology capabilities data and AI-based models, we reaffirmed the execution of our strategy. doing more and better with fewer resources. We increased revenue by 10% while keeping expenses flat. We once again did so while attaining the best results in quality of our credit portfolio. We have one of the lowest NPLs in the market. And I remind you, NPL is the sole objective parameter for the quality of the credit portfolio. We also did better in our service revolution as part of our vision to be the bank that offers the best and the most convenient service. The service revolution was a major catalyst for our rapid growth in the raising of retail deposits much more than our competitors. We attained a net income of 9.1 billion shekels, up approximately 40% on 2023. ROE was 16.9%. This was achieved against the backdrop of an ongoing war and a challenging macroeconomic environment. Notably, in 2024 and in previous years, we managed to responsibly grow our credit portfolio with improving credit quality metrics. Our NPL and trouble debts as a share of gross loans have both declined and remain much lower than the industry average. Our expenses have remained stable despite continuing high inflation in recent years. We achieved this through the bank's ongoing investments in technology. This led to improved customer experience and service, improved operational processes, and reduced operational risks. Our cost-to-income ratio, which further declined, to 29.9% is the best, not only in the Israeli banking system, but also, I am proud to say, one of the lowest globally. We aim to maintain this strategy and keep it that way. Our strong report is a further demonstration of Bank Luumi's excellent execution capabilities and their ability to deliver. Our quote to one capital ratio of 12.17% at year end is comfortably the highest in the sector and about 2%, approximately 10 billion shekels above our minimum regulatory requirements, supporting asset growth and significant capital return. Today, we announced that we will distribute a payout of 40% of the earnings of Q4, totaling 1 billion shekels. With the world winding down, We are optimistic that the regulator will permit us to distribute more of our excess capital to our shareholders in the near future. Our leadership in technology continues. We continue to successfully execute our growth strategy in the mortgage sector, supported by our Zoom Mortgage product. This has significantly increased our share of new mortgages to close to 30% market share. Nomi's mortgages book has grown by more than 30% in the last three years, outpacing the market. We did this without compromising on price or risk management, maintaining the lowest rate of high-risk mortgages and the lower mortgage NPLs than the market. We are in the process of launching a new platform for deposits that will allow us to expand our offering to customers and increase deposits. In 2024, co-deposits in our retail division increased by 5.1%, greater than the competition. Customer service offerings defined by the bank as a strategic goal are being transformed by upgrading the application and the website by expanding products and services, and by responding rapidly to customers within minutes and improving SLA. For example, Lumi customers today can message their branch manager directly or message my personal team if an issue is unresolved within one business day. Another feature is that English-speaking customers can use our English language app, the first one on the local market. These efforts and many more are highly appreciated by our customers who are making Bank Lumi their first choice. In the most recent Bank of Israel customer satisfaction survey published last month, Lumi ranks first among the five large banks for service in five categories out of nine, and in addition, ranks second in another category. We are ranked number one in telephone banking, the mobile app application, and our website. Aside from the clear revenue benefits, more satisfied customers also reduce customer friction and improve efficiency. At Pepper, our digital bank, we are launching a new strategy following the migration to Lumis core systems. Pepper is already a leading digital option for our younger customers, But these changes allow us to improve the customer interface and then many new products, further to improving our offering. From now on, Petro will play a material role in implementing our strategy for the retail sector, including in raising cold deposits. Looking forward, following the recent ceasefire in Gaza and in the north, there has been a decrease in macro risks, credit risks, and risk related to global market attitude towards Israel. We expect GDP growth of 4% in 2025 as the economy rebounds after the challenging 17 months. In the fourth quarter of 2024, we already saw a peak in domestic consumption and higher fixed investment. We expect this trend to continue at greater pace. Our customer-focused model, together with our high operating leverage, advanced capabilities in rapid production of tailor-made solutions for our customers' needs, and our healthy balance sheet mean that we are best positioned to take advantage of this growth. The excellent execution of our recent strategy and our well-proven performance give us the confidence to publish key financial targets for 2025 and 2026 based on our strategic plan. This strategy will accelerate our journey in the segments that we have already selected as part of previous strategy. In addition, the new strategy includes other segments that will grow rapidly and many other new initiatives. The key financial targets for 2025 and 2026 are ROE of 15 to 16%, annual net profit of 9 to 11 billion shekels, credit growth of 8 to 10% annually, and capital return of minimum In addition, the publishing, in addition to publishing these key targets, we'll also present our new strategy for the coming years at the local investors conference on March 20, followed by presentations to our foreign investors. I invite you to join us. On a personal note, the last 17 months have been a very challenging time for the whole country. Everyone is affected. I would like to share with you how proud I am with our employees and the organization for overcoming this difficult period. I would like to take this opportunity of thanking our stakeholders, our employees, our customers, and you, our investors, for your continued support and trust. With that, I will hand over to Chagik, who will walk you through the financial results.

Thank you, Hanan. Good day, everybody. I'm very happy to be here with you today and to present our excellent results for the first quarter and the full year 2024. Hanan just gave you the big picture for our really great year. Now I will drill down to some of the details. Before we discuss the bank's position in detail, a few words on the macro situation and some key messages. Slide 8 shows some key economic indicators. The recovery began in the third quarter and continued into the fourth quarter with real GDP up 2.5% on an annualized basis. Credit card purchases and department sales both accelerated in the first quarter ahead of increases in VAT and other taxes at the start of this year. In February, the State of Israel raised $5 billion from international investors in a well-received and many times covered placement, demonstrating Israel's improved risk profile. Bank Lumi estimates that real GDP will grow by 4% this year, with an emphasis on domestic demand and fixed investments. Slide 9 shows a snapshot of the year and the quarter. Net income for 2024 was 9.8 billion shekels. ROE was 16.9%. Cost income ratio declined to 29.9% from 32.6% in 2023. Credit loss expenses declined to 0.16% from 0.58% in 2023. At the start of the war, the bank took a cautious stance and increased its collective provisions significantly. While the consequences of the war have been less severe than initially expected, we have not released any of these provisions yet. Credit growth was 8.6% in 2024, similar to 2023. Book value per share increased by 14.6%. The core T1 ratio increased by 50 basis points in 2024 to 12.2%. In the fourth quarter, net income was 2.45 billion shekels. ROE was 16.2%. There were no one-time items in the quarter, and the cost-income ratio was 30.9%. Slide 10 shows a snapshot of income and expenses in Q4. Financing income and fees both rose strongly, up 8% and 6% yearly, respectively. Operating expenses were down mainly due to higher severance pay in Q4 2023. Pre-provision net revenue was up by 17% to 3.8 billion shekels. Slide 11 shows the breakdown of income and expenses for the full year. Pre-provision net revenue, bottom right-hand side, increased 13% year-on-year to 16.2 billion shekels, supported by higher financing income and higher fees. Operating expenses were flat year-on-year. In slide 12, we can see the quarterly development of net interest income and margin. Net interest income and NIM were both lower in the first quarter, mainly due to the lower CPI and also due to the fall in the U.S. rates and foreign exchange. Year on year, the NIM was down slightly due to the lower average interest rate and the shift from non-interest bearing to interest bearing deposits. Slide 13 shows the year-on-year increase and breakdown of fee and commission income. Fees were up 2.3% for the full year in 2024 and 6.2% in the first quarter, compared with the corresponding quarter last year, mainly due to the higher securities transactions and higher credit card activity. Fees were weaker in the first quarter of 2023 following the outbreak of the war. On slide 14, you can see the continuing improvement in the DEMCS cost-income ratio, which improved further in 2024 to 29.9% from 32.6% in 2023. As Hanan mentioned earlier, we have successfully leveraged our technological advantage to accomplish more with fewer resources, which enhance our efficiency ratio. Slide 15 showed the development of loan loss expenses, which remained low through 2024 with 1 billion shekels of total collective provision, partially offset by 320 million shekels of specific provision income. On a net basis, 2024 loan loss expenses were 0.16% versus 0.58% in 2023. Q4 credit expenses were at similar levels to the full year. As mentioned, the bank took a conservative stance due to the continuing uncertainty in Israel. With that in mind, and turning to slide 16, we can see that despite the war, a tough macroeconomic backdrop and the high interest rate, NPLs of 0.5% and travel debts of 1.45% remain at historically low levels and are among the lowest in the Israeli banking system. At the same time, the bank's provision for bed debts stood at 6.9 billion shekels, covering NPS by three times. This data illustrates the continuing high quality of our credit portfolio. Moving ahead now to slide 17 to our loan book. Our loan book increased to 455.5 billion shekels in 2024, up 8.6%, and following a 9% increase in 2023. We continue to grow in our target segments of mortgages, middle market, and corporate. Slide 18 shows deposit rents. Total deposits increased by 9% in 2024 to 618.3 billion shekels. Leone's retained deposits increased by more than 5% after 5% growth in 2023. It is also important to note that our deposit base on the right is well diversified and our liquidity ratios remain strong. And moving ahead now to slide 19, we chose our very healthy capital ratios. The core tier one ratio increased by 50 basis points in 2024 to 12.2%. The bank's capital buffer, the difference between the 51 ratio and the minimum regulatory requirement now stands at almost 10 billion shekels. Total capital at the end of the year was 14.8%. Turning to slide 20, payouts. Today, we announced that we would distribute a cash dividend for the fourth quarter of 0.7 billion shekels, which in addition to the last range of the existing share by the plan will bring the total payout to 1 billion shekels or 40% for the quarter. Together, this brings the total capital return for 2024 to 3.9 billion shekels and significantly more than 2.3 billion shekels of capital return for the all of 2023. The first quarter return is equal to an annualized return at yesterday's close of around 5.3%. In conclusion, slide 21, let me summarize. 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 growing in our target segments while also allowing us to share higher returns with shareholders through dividends and buybacks. With that, I will now open the calls for questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you're calling in, please press star 1. If you are on the Zoom, use the chat button or the raised hand at the bottom of the screen. Please stand by while we poll for your questions. The first question is from Chris Reimer of Barclays. Please go ahead.

Yeah, hi. Thanks for taking my questions, and congratulations on a solid quarter. I was wondering if you could discuss the assumptions behind your targets and give any color on really what you think is driving the confidence in reaching those numbers.

So maybe I will start by saying that we will elaborate regarding that and present a dedicated presentation for that before the conference of March 20 and following that meetings with our international investors. We have many initiatives, detailed initiatives that are part of this strategic plan for the coming three years, and we published the figures for 2025 and 2026. And as we said, it's based on the capabilities that we built the last years. We want to take advantage of these capabilities take the next leap in leveraging those capabilities for the segments that we are already focused on, and we performed with very impressive quality of the credit portfolio, together with continuing and make additional leap in the raising of deposits, which will contribute a lot to our ROE. And together with other segments that, as I said, we prepared ourselves with the right products, the right processes, the right capabilities, and most important, with the right underwriting and the risk management capabilities. So this is in a nutshell. More details will be presented later this month. So I do love, you know, the interest of that. other please elaborate if you wish maybe have you read a few comments about the financial assumption uh behind the numbers first of all of cannot mention uh we expect a credit base of growth of eight to ten percent a year that's first uh secondly uh we face this uh the ROE of 15 to 60% on interest rate, which will be 2026 on average 3.75 and on inflation rate, we should be between 2.5 to 3%. So the bottom line is that as we present in the last few years, very strong ROE of above 15% in all of the last four years. We believe that even if the interest rate will decrease by almost 1% on average, and even if we see a lower inflation rate, we still have the capability to maintain a stronger rate of 15 to 16%. This is the most important financial number in our expectation. Even if the interest rate goes down, we'll be able to maintain our phone compatibility above 15%.

Thanks for that. That's really great, Kolar. One more, if you could just maybe comment any of your thoughts on last week's Bank of Israel announcement, which suggests a framework to provide additional relief to customers, and how might that compare with programs you already have in place

So, again, thank you for this question as well. First of all, it's quite new. We are still on the process of calculating the final outcome of it, but at the end of the day, it is, since it's totally 1.5 billion shekels for the industry per year, and our market share in retail, as you probably remember, is lower than our total market share. So our first reaction and our first assumption is that it will not be immaterial. It will have some impact, but we, first of all, we are still calculating it, but we believe and we are working to make the right steps to compensate these expenses by increasing other revenues. So, at the total, we believe that we, we believe and, you know, it's modern belief that we will be able to execute the figures that we published, taking into consideration the last, the last regulatory expectation that Bank of Israel published.

Great. Okay. Thanks for that. That's it for me.

Thank you. The next question is from Anad Dembo of Citi Group. Please go ahead. Hi.

Thank you for taking my questions. First question is, which segments do you see the most opportunity for credit growth in 2025-26? Okay. In the last two years, Sanan pointed out we were focused in our strategic sectors. I mean, mortgages, middle market, corporate, including real estate. As a matter of fact, we did increase at all our, almost at all, our trade portfolio in anti-cruise retail and in SME. As I mentioned, we will elaborate on it more in our conference on March 20, but we are in a position in which we are looking also at the other segment that I mentioned, and we are looking what we examine what would be the best point in time to start increasing our market share also in this area. Okay, thank you for that. I have one more question. As you have already taken significant collective provisions over the last six quarters, what is the reasonable allowance level going forward? First of all, I would like to mention again that the specific provision in the last few quarters was negative. Also, on annual basis, it was negative. So, on the one hand, we cannot maintain the specific provision at the negative level forever. So, I expect that somewhere along the way, we will start to see some increase in the specific provision, so it will be a positive number. The collective provision that we build a very conservative buffer in our collective provision with the outbreak of the October war in 2023. We didn't release it yet because we are cautious. So on the other end, we expect that the collective provision will remain low. So the bottom line is that we expect the credit loss expense ratio to remain low in the next week. And if I may, I will add additional sentence. In Israel, there is a direct and strong connection between the rate of unemployment and the specific provisions. The expectation, the focus for the coming years is that the level industry will be very sticky, so expectation is for almost zero unemployment rate, which means lower risks in this respect. Thank you. If I may, one final one. As all banks are now mostly sitting on excess capital, are you seeing any margin pressure anywhere? Well, there is competition all over, but as you see, we have the results. We have our way to deal with that because at the end, the choice of the customer is not based only on the price. It's based on the service. It's based on your appetite for business. It's based on technology, on our different AI vehicles. So at the end, the competition is there already. And if you look at the margin, excluding the CPI effect, you will find that in the last, you can see that in the last few quarters, the NIM is quite stable. Of course, if the interest rate goes down or the CPI goes down, it will have a negative effect on the NIM. On the other hand, now the NIM is also affected by the mix of the credit portfolio. And as I mentioned earlier, we were very cautious in the segment that pay higher yields but higher credit loss expenses. And also, in the last two years, there was a significant movement from current account over time deposit. And if the interest rates go down, I assume that there will be maybe some turnaround in this trend. So the bottom line is that the composition of the marginal loans and the interest rate on our deposit. So the bottom line is that we were able to keep the NIM quite stable in the last few quarters, and we believe that also when we look forward to 2025, we have the capability to keep it quite stable.

Thank you. That is it from me.

Thank you.

The next question is from David Kaplan of Psegold. Please go ahead.

Hi, everyone. I have two, I think, probably quick questions. On your guidance for capital return of a minimum of 50%, that's up from the current 40%. The additional 10%, are you also planning to split between cash and buyback, or are you planning on leaning more towards one of them.

So for now, for you, we combine the dividend by buyback and dividend in cash. So when we increase the ratio, the minimum of 40% of course subject to the limitation of the Bank of Israel, our preference is to mix it and to split it between the buyback and cash. We believe they're also the preference of most of our investors, and then we hear them. We are not able to reach a consensus among them. So we believe that we make the right balance, and we will continue a similar balance going forward.

Okay, great. Thank you. And on the second question, how do you see the sustainability of your cost-to-income ratio? What you produced in 2024 was quite impressive. seemingly mostly driven by top line. Expenses stayed kind of flat over the course of 2024 versus 2023. So going forward, do you think that's a sustainable cost-income ratio, or do you expect if there's contraction of either interest rates or of inflation, that you expect a cost-income ratio to range back towards the mid-30s?

Okay. So, first of all, as Anand pointed out, this year, again, as we did consistently in the last few years, we were able to increase our income significantly, around 10%, while maintaining our expenses at the same level. That's what we did in 2024. That's what we did in 2023. That's what we did in the last few years. We believe we have the capability to continue increasing our income and maintaining our costs more or less at the same area. As you mentioned, of course, if the interest goes down, it has a negative effect on income, but we have other ways to increase the income by increasing our business. So we believe we have the capability to maintain our cost-income ratio around the current ratio, and maybe even to improve it. Yeah. On the expenses side, we have many, many more initiatives in the pipeline, and we strongly believe that it's not just a matter of efficiency and cost reduction. It's also a matter of risk management, operational risk management, and on top of it is a matter of making the customer experience and the bankers experience much better, which has a material impact on our ability to make our business much healthier and much stronger.

Okay, great. Thank you very much.

The next question is from Valentina Sojkova of Barclays. Please go ahead.

Thank you very much for the presentation, and congratulations on the good results. My first question is the implications for capital. So you're targeting fast, long growth in 2024 and high distribution from profits. So I was wondering what this means for your Tier 1 buffers. And is there any minimum target level that you can share with us? And then my next question is on your Tier 2s. It will be great if you can share your thoughts on the Tier 2 call option and also any bond issuance plans that you have budgeted for this year.

Okay. So, Ivan and Dina, thank you for your question. First of all, regarding equity surplus. So as pointed out before, currently we are at the level of 12.2%, much, much higher than our regulatory requirement, which are 10.2%. So it's reflect around 10 billion shekels buffer. Now we have different buffer and limitation about the 10.2. First of all, we have internal buffer of at least 10.6% in our CT1. On top of it, we have in our buyback plan a threshold in which if the CT1 goes below 10.8%, so we stop the buyback plan. We have different thresholds regarding dividends. So it's not one answer. We have different thresholds which as the capability to respond to any eventuality, but currently our is significantly higher above this buffer. Now, as for our tier two series, our preference, of course, is to call it on time. We had a few local series till now that we called them on time, but of course, the final decision, taken in the second half of the year.

Thanks. Thanks a lot for that.

The next question is from Liran Lublin. Liran, please go ahead. Open your mute.

Hi. Thanks for taking my question. Congratulations on very impressive results. price pressure building up in the housing sector in Israel, and you're obviously, your exposure to real estate is obviously material. How do you see that risk profile developing in the coming years?

Maybe I will start and then I will elaborate. At the end of the day, we are focusing on housing. And in Israel, we still have a greater and greater buffer between demand and supply is a shortcut between demand and supply. And the war make it even worse because the timeframe for between starting a project and completing a project became longer and longer. Part of it is the lack of employees and there are other issues. And, you know, the Israeli population is increasing by almost 2% year after year. So, the expectation for the coming decade is that the shortage will not be closed and they will keep at least on the level that we have today. Now, it's true that the price of apartments cannot, increase every year by 8% like it happened in the whole year of 2024. But still, you know, the demand creates pressure and creates psychological pressure on young couples to buy a apartment as soon as possible. Otherwise, they will pay much more. Now, regarding our portfolio, so the We don't have any project with affordability percentage of less than 25%, and over 82% of our portfolio, the observation rate is greater than 50%. So even if both come to worse and prices decrease, By 20%, we are still, we still are not expected to suffer any losses. And as I mentioned, for 82% of the book, even 40 and 45% will not harm us. So, and you see it also, not just from these figures, you see it from the impressive NPS that we have for a long period of time. since we underwrite each and every project carefully and we are supervising each and every project carefully, we prove year after year the quality of our loan portfolio, mainly in the real estate segment. And I believe that you will not find banks with so strong that again, I repeat the figure. We don't have even one project with less than 25% and so on. Maybe I have a few more comments. First of all, when you look at the NPL, the NPL is 0.4, lower than our average. When you look at the ratio, lower than the average, which is 1.45. And it is, as far as I remember, the best in the market, despite the fact that we have the biggest market share and the biggest space of growth in real estate. Now, when you talk about real estate, so the vast majority of our exposure is, as I mentioned, to residential construction and real estate, and we have lots of mitigation around that, and I mentioned a few of them, the adoption rate, which is very strong and in this area there is no one project with an absorption rate below 25%. It's very well diversified, it's very well geographically diversified, almost very little exposure to high-end and luxury apartments, and we have very strong guarantees in lots of cases, even personal guarantees, very strong collateral, very strong collateral. And also the way it works in Israel is very different from the way it works outside of Israel, because in Israel, it's final and binding, and the customer pay payments over the period of the project. So the risk involved in construction with the state are relatively low. You see here the number. The number are very clear. The NPS is low for a long period, and the travel debts are low also for a long period.

Thank you very much. That's very helpful. Thank you very much.

The next question from the chat from Vinod Surendran. Can you please comment on your funding plans? Any plans to approach Eurobond market to issue USD senior UNSEC notes or capital instruments, including AT1s and T2s? Second question, update on asset quality. Which sectors are expected to see deterioration in 2025 and ahead?

Okay, so for the first question, in Israel, you're not allowed to None of the banks issue 81. As for senior or tier 2, first of all, every year we do a few issues of seniors and also almost every year we do, we take to Syria, and every time we look at it on a, we look where it's better or more efficient to do it, either in Israel or outside of Israel. It's part of our regular way of business. And this year, we already issue a few series here in Israel, and we intend to issue more seniors. and maybe two in the next four quarters, and we will decide based on the circumstances and the numbers and the figures whether to do it locally or internationally. Of course, we have interest to do it both because we want to build our curve also outside of Israel. Now, as for the asset quality, I think the numbers speak for themselves. As we mentioned, the NPR is the lowest in the market. Pakistan, the travel debt ratio is the lowest in the market. Now, of course, the sectors that are most exposed to any deterioration in the economy are the unsecured retail and the SMEs. And I would like to mention that these two sectors are only 13%, one-third of our total credit portfolio. uh in the last few years we were very cautious regarding this uh this uh this segment because of the risk involved in this and then and despite the fact that this sector have higher margins uh so so this is this sector which pays the highest margin of those are the most exposed planning deterioration in in economy and they're only 13 percent of our total crisis