Bank Leumi Le Israel

Ladies and gentlemen, thank you for standing by. Welcome to Lou Mee's first quarter 2025 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 May 20, 2025. 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, which are detailed from time to time in the company's filing 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 Lumi's first quarter 2025 results conference call. Joining me today is Ms. Chagita Gov, CFO and Head of the Finance Division, and Mr. Omer Ziv, Deputy CEO and the Head of the Capital Markets Division. The presentation that we will be using is available on the bank's website. I would now like to turn the call over to Hagi.

Thank you, Michael. Good day, everybody. I'm very happy to be here with you today and to present our first quarter 2025 financial results. Before we discuss this, a few words on the macro situation and some key messages. Let's start with slide three that shows some key macro indicators. Firstly, the recovery of the Israeli economy continued in the first quarter of 2025 with annualized GDP growth of 3.4% compared with 1.9% growth in the previous quarter with GDP now above pre-war levels. Secondly, indicators of household conditions such as credit card purchases and consumer confidence, point to year-over-year improvement. And moreover, export of high-tech services, an important component of the local economy, accelerated in recent months. The labor market remains tight. And finally, the Bank of Israel estimates the real GDP will grow by 3.5% this year, with an emphasis on domestic demand and fixed investments. Turning to slide four, this shows our consistently high ROE and profitability. Bank Lumi continues to present high and stable ROE and net profit already for many quarters. Third quarter 2025 net profit of 2.4 billion shekels was up 12% year-on-year when excluding the one-time profits from the sale of the bank's headquarter buildings in the third quarter of 2024. And despite the buildup of excess capital over the period, the bank is consistently delivering ROE above 15% in line with our strategic plan. Slide five shows a snapshot of the quarter's performance. Net income for 2024 was 2.4 billion shekels. ROE was 15.4%. Cost income ratio was 32.1% and was down from 33.4% in Q1, 2024 when excluding proceeds from Headquarters real estate sales. The cost income ratio at Headquarters was negatively impacted by the low CPI and the P&L impact of the . Let me stress that our cost income ratio continues to be the best in class and one of the best in the world. Credit loss expenses improved to 0.05% from 0.21% in the first quarter of 2024 due to negligible specific provisions and due to the lower collective provisions, which is consistent with the low NPL ratio and the improvement in problematic debt. Credit growth was 1.6% in the quarter and up 8% year-on-year. When we exclude capital markets credit, which is more volatile, credit was up 2.2% in the quarter. Moreover, we have a very strong pipeline, which is reflected in the growth of risk-weight assets and credit risk, which was up by 2.7%. Book value per share increased 3.6% in the quarter and has increased by almost 15% over the last year. All in all, quite an impressive, consistent and strong performance. Slide 6 shows a snapshot of income and expenses in Q1. Net interest income increased 7% year-on-year to 4 billion shekels, mainly due to the increase in volumes. non-interest financing income was down due mainly to losses from derivatives that age our securities portfolio. Actually, the bank securities portfolio recorded gains in the quarter. However, for accounting reasons, the cost of the derivatives is recorded in the P&L, while the gains of 240 million shekels are recorded directly to the equity account. Fees were up strongly, up 9% year-on-year, due to higher securities activity, higher fees from financial transactions, and higher fees from credit cards. Total expenses were down by 5.2% year-on-year, due to lower salary expenses, and despite the significant increase in the bench activity. In slide seven, we can see the quarterly development of net interest income and margin. Mean increased in the first quarter to 2.35% from 2.21% in the previous quarter, mainly due to the higher CPI and the more favorable deposits and credit mix. Slide eight shows the year-on-year increase and breakdown of fee and commission income. Fees were very strong a record 9.2% in the first quarter compared with the corresponding quarter last year, mainly due to higher securities and financing transactions and higher credit card activity. Slide nine shows the development of loan loss expenses as mentioned before. Credit loss expenses improved to 0.05% from 0.21% in Q1 2024 due to negligible specific provisions and due to the lower collective provisions, it consisted with the low NPL ratio and the improvement in problematic debt. Turning to slide 10, shows the continuing high quality of our credit portfolio. We can see that despite the war, a tough macroeconomic backdrop and high interest rates, NPS remains stable at 0.5%. Trouble debts declined further to 1.4%. Both measures are 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 6.8 billion shekels, covering NPS by almost three times. Let's move ahead now to slide 11, our loan book. The bank's loan book increased in the quarter to 463 billion shekels, up 1.6% and 8% year-on-year. When we exclude capital markets credit, credit was up 2.2% in the quarter. Corporate credit was especially strong, held by infrastructure and project finance. Moreover, we have a very strong pipeline which is reflected in the growth of risk-weighted assets and credit risk, which was up by 2.7% in the quarter. Slide 12 shows deposit rent. Total deposits fell in the quarter to a little under 600 billion shekels, mainly due to the volatility of capital market deposits. Our deposit base on the right is well diversified and our liquidity ratios remain strong. Moving ahead now to slide 13, we chose our very healthy capital ratios. This remains stable in the quarter. Our CT1 ratio was 12.15% at the end of the quarter, similar to year-end levels and remains the highest in the sector. The total capital ratio was stable at 14.83%. The bank's capital buffer which is the difference between the 51 ratio and the minimum regulatory requirement, stands at almost 10 billion shekels. Turning to slide 14, talking about payouts. The bank will distribute a cash dividend for the first quarter of 0.72 billion shekels, together with the buyback of 0.24 billion shekels, bringing the total payout to about one billion shekels, or 40% of quarterly earnings. The bank's continued strong profitability, combined with the very healthy capital buffer, give us confidence that we can increase our payout ratio to at least 50%, of course, as soon as the Bank of Israel permits. In conclusion, slide 15, let us summarize. The bank continues to present consistent and strong financial performance with high HROE despite the ongoing economic uncertainty. 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, as I mentioned earlier. 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. Please stand by while we poll for your questions. The first question is from Chris Reimer of Barclays. Please go ahead.

Hi, thanks for taking my questions and congratulations on the strong results. First off, what do you think needs to happen for the Bank of Israel to give approval for higher dividends?

Hi, Chris. Good afternoon. I would say a follow. The Bank of Israel decided this quarter to remain its limitation about the distribution of dividends due to the uncertainty of the geopolitical circumstances which are still around. We expect that when there will be a significant reduction of this uncertainty, we will lift this limitation.

Got it, yeah. And also touching on the geopolitical situation, the military situation here, do you Do you believe it can continue to deliver the same pace of loan growth over the coming quarters?

Yes. So, as Sangeet mentioned, in the first quarter, the pace of growth of our credit portfolio, when I put aside the negative effect of the institutional credit, which is very volatile throughout the year due to margins, for the pace of growth in the first quarter was 2.2%. Moreover, the risk-credited asset, the credit risk-credited asset pace of growth was nearly 3%, which reflects the strong pipeline that we have, which will be reflected in the following quarter. I don't think that the current situation has a significant effect on the ground program. I believe the opposite can mean that mainly in the northern border, but also in the southern border, we start to see the effect of the walls in different infrastructure projects. And the current situation doesn't really have a significant effect on the demand for long because it's focused in the southern border. The situation in the northern border is much better than it was before, and the effect of the war in Gaza on the day-to-day activity is a little bit low.

Got it. Got it. Yeah, thanks for the color. That's it for me.

The next question... The next question is from Borja Ramirez of Citigroup. Please go ahead.

Hello. Thank you very much for your time and for taking my questions. I have two. Firstly, regarding the provisions, was the low collective provisions one of or should we expect a low level to continue in the coming quarters? And my second question will be on the fish. There was a strong growth in fish in the quarter. I would like to ask if you could provide more color on the main drivers. Thank you.

Hi, Bofa. As for the collective provision, so pointed out, We continue to see very low NPL, 0.5%. We continue to see a decline in the problematic debt ratio. Not only the ratio itself, the total problematic debt declined despite the fact that we increased significantly our portfolio. The provision is currently three times the NPL. So all the parameters that reflect the quality of the credit portfolio remain strong. And this is in addition to the significant increase in the collective provision that we have made at the beginning, when the world broke out. And until now, the situation is much better than the scenario we've taken into account when we created this provision in 2023. So we expect that the total credit force expense ratio in the following quarter will remain at a low level. Now, as for the main driver of the credit portfolio, so consistent with our strategy, the main, as for the fee, I thought you asked about the credit portfolio, as for the fee, And the main driver for the fees were the credit fees. We increased significantly the credit portfolio, so it reflects also in fees. The second driver were the exchange differential fees. And the third component was related to security fees due to high activity in the security. Actually, the fees increased by 9%. very strong increase, very healthy increase with zero equity requirements.

Very clear. Thank you.

The next question is from Vinod Chaturani of Alliance Bernstein. Please go ahead.

Hello. Am I audible?

Yes, we can hear you.

Okay, perfect. I have one question regarding the Euro bonds that are outstanding. You have one 750 million subordinate debt that is callable in 2026, January. I understand. So, any plans to come to the market to refinance them in the near term? And just on the calling of the bonds, how should we see you approaching the sub-debt?

First of all, our total capital ratio is currently a level of 14.8%, significant above our equity requirements, which are 13.5%. So actually, there is no specific needs or urgent to come to the market and to refinance it in 2025. We might do it, but there is no specific need currently. As for the call date, as I mentioned, we have a series in which the call date is in January 2026. I believe that we will take the final decision in the second half of 2025. What I can share with you at this stage is that we had a few series of Q2 that their call dates were in the last two years, and we called them on the call date. As for the series that the call date is in January 2026, as I pointed out, we will take the final decision, I believe, in the second half of 2025.

Sorry, could you, it wasn't clear, could you repeat the last sentence in terms of the call dates earlier? I'm so sorry, the line is not clear. Correct.

So what I mentioned is that for the year that the call date is January 2026, we will take the decision in the second half of this year. I just mentioned that we had a few local bonds that the call date came into effect in the last two years, and we called them on the call date. We didn't extend the period of this year to Local bonus.

Understood. Perfect. Thank you very much.

Thank you.

The next question is from Priya Rasood of Jefferies. Please go ahead.

Hi. Thanks for taking my question. Just one on deposits. So I noticed a decrease this quarter, and it seems to be a common theme in the sector as well. I also noticed there was a decrease in deposits, or you noted that there was a decrease in deposits by capital market customers. So I guess two parts of the question. The first is, what is the competition like in the deposit market at the moment? And two, where are the deposits of the capital market customers going? Are they staying within Lumi or are they going elsewhere? Thank you.

okay the line wasn't so good but I hope I answered your question as for the deposit so as I mentioned there was a decline in the capital market deposit the capital market deposits are very volatile it depends on there was a movement for money from deposit to the capital market to all balance sheet items so on the one hand we saw a decrease in the capital market deposit. On the other end, we saw significant increase of balance sheet items. The competition in the capital market, of course, is strong, but we are a very strong player in this area. As a matter of fact, there was not only in the capital market, but also in other segments around the deposit in the first quarter, movement of money. from on-balance sheet items, I mean deposits, to off-balance sheet items. This is one of the reasons for the significant increase in our security from fees. As I pointed out earlier, we increase our fees year-on-year by 9%, and a significant driver of that was increase in our security fees, and this is due to the movement from on-balance sheet deposits to off-balance sheet deposits. Did it answer your question?

Yeah, that's great. Thank you.

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. This concludes Lou Mee's first quarter 2025 results conference call. Thank you for your participation. You may go ahead and disconnect.