Bank Leumi Le Israel

Good day everyone, and thank you for joining Bank Leumi's conference call for the second quarter of 2026. Joining me today are Mr. Hanan Friedman, President and CEO, and Ms. Hagit Argov, CFO and Head of the Finance Division. The presentation accompanying this call is available on the Bank's Investor Relations website. At the conclusion of the presentation, we will have a Q&A session. Before we begin, I would like to remind you that the conference call may include forward-looking statement, while actual results may be different. I would also refer you to the disclaimer on slide two, which applies equally to this call. I will now hand it over to Mr. Hanan Friedman. Hanan, go ahead.

Hello, everyone, and thank you for joining us today. We concluded the second quarter with strong results. Net income reached above 2.8 billion shekels, marking the highest quarterly net income ever recorded by an Israeli bank. Our ROE in the second quarter was 16.3%, among the highest in the sector. Every quarter we present our results and discuss our strategy, which is built around technological leadership and the adoption of AI that enables us to differentiate ourselves from the competitors. There was one figure in our second quarter results that in my view clearly reflects the impact of the consistent execution of this strategy. I'm referring of course to Leumi's efficiency ratio which was especially strong and stood at just 24.7%, 24.7% This is the best efficiency ratio ever recorded in the Israeli banking system, and one of the best globally, if not the best globally. Our second quarter efficiency ratio reached a record level, reflecting the strength of our operational model. While the efficiency ratio may naturally change from a quarter to quarter, we expect to remain among the most efficient banks globally. supported by our disciplined approach to operating efficiency and cost management, as well as the consistent execution of our technology strategy and early adoption of AI tools. Our second quarter net income was impacted by the special Israeli tax imposed on all banks. Excluding the special tax, our ROI would have reached 17.9%. I would like to emphasize that the main impact of the special tax is in 2026 and it is expected to be measurable next year amounting to 125 million shekels for the entire banking system which means that our portion will be around 40 million shekels. For the first half of 2026, Lumi's net income was close to 5.2 billion shekels Reflecting an ROE of 14.9%. These results are the upper end of our strategic targets for 2026, which we published earlier this year. In addition to delivering strong profitability, I would like to highlight the significant excess capital of about 8.5 billion shekels above our regulatory capital target. Beyond that, there is additional value within the bank that is not fully reflected in our reported financial statements. One example is our investment in Valley Bank, where the current value is approximately 55% above its book value. This represents an unrealized gain of approximately 1 billion shekel. Furthermore, Our provisions for credit losses also continue to reflect a conservative approach. This is driven in part due to the significant buffers we built at the beginning of the war three years ago, which have not yet been fully released. Earlier today, we announced a dividend distribution and a buyback totaling to 1.4 billion shekels, reflecting a dividend yield of 5.5%. This represents the right balance between consistent shareholder return and capturing the growth opportunities we see this year and we want to pick. And in fact, the strong growth continued into the second quarter. Our credit portfolio grew by 3.4%, adding 19 billion shekels. In the first half of 2026, Leumi's credit portfolio grew by 9%. As a reminder, We set an annual credit growth target of 8 to 10% according to the figures that we published in January this year. In practice, within just six months, we have already reached out full year long growth target. Growth was particularly strong in the corporate segment with credit increasing by 14% in the first half of the year. We remain focused on growing in the segments we have identified as strategic for us, including infrastructure, real estate, and mobages. Infrastructure, which includes transportation, data centers, and power stations, are important growth engines for us. This is a strategic area supported by a strong and stable multi-year pipeline of projects. Just last month, a consortium led by Ben-Kluumi reached a financial close of nearly 10 billion shekels of financing for the Light Friend project in the north of Israel. This is a project of strategic importance to the future of the transportation in Israel. We are proud to play a central role in its financing. It is important to emphasize that the growth in the credit portfolio is conducted in a responsible manner, in line with our DNA. It is carried out while maintaining strict underwriting standards and credit quality. That's an integral part of our business model and our technological capabilities. This is reflected In metrics such as our NPL ratio, which stands at just 45 basis point, an excellent level by international standards, and among the lowest in the Israeli banking sector. Additionally, for the last 10 quarters, we have recorded income from the specific provisions for credit losses, reflecting the high quality of our credit portfolio, conservative risk management, and advanced underwriting capabilities. As I mentioned, our efficiency ratio was particularly strong in this quarter, standing at 24.7%. This figure reflects a structural change in how we operate. It is here to stay. It is driven by the constant improvement of our platform through technological leverage and advanced tools. We are accelerating this strategy by implementing more and more AI tools across the bank, and the pace of adoption is ahead of our expectations and plans. Our successful implementation of AI was recently recognized by Evident, which ranks financial institutions based on their adoption of AI. Evident, a global leader in this field, ranked Leumi in June as the leading bank in Israel for AI adoption and one of the leaders globally. To accelerate development and implementation, we established Leumi's dedicated AI center. Every AI project is measured against clear ROI targets and we have many initiatives in our pipeline with high projected returns. We started by focusing mainly on back office We then expanded it into our contact center and service centers. Today, we are moving further into the business front line and to our technology division, which is very important for us. As we continue on this journey, we see even greater potential than we have anticipated when we started. Their transformation will take our capabilities another step forward, both on the business side and in the areas such as credit quality and further improvement in our cost structure. Our second quarter results demonstrate that Leumi is well positioned to continue executing its strategy and delivering on the ambitious targets we have set for ourselves. This also includes Leumi partners. which made an important contribution to our strong profitability this quarter. We remain committed to responsible growth, growth that is focused on returns while maintaining disciplined risk management. And now, Hagit Argov, our outstanding CFO, will review the financial results in greater details. Hagit, please go ahead.

Thank you, Hanan. Good day, everyone. I'm very pleased and excited to be here with you today and to present our very strong results for the second quarter, 2026. The next slide provides a summary of our key financial results for the quarter and the first half of the year, most of which Hanan has already covered. Before briefly touching on the macro environment, let me highlight our annual targets and the bank's progress in the first half of the year. As you can see, we are well on track to meet all our targets, and in credit, we have already succeeded in passing our annual target. With that, let's start with the macro analysis before moving to a detailed analysis. In the second quarter, following the fifth fire, the Israeli economy continued its recovery. In the short term, uncertainty regarding economic developments remains high due to the geopolitical environment. However, positive developments on this front could support further growth during the year. The strong appreciation of the shekel helped moderate inflationary pressures. According to the latest forecast by the Bank of Israel, inflation in 2026 is expected to be 1.8%. Against this backdrop, the Bank of Israel reduced its policy rate at the beginning of July to 3.5% and projects a rate of 3% by the second quarter of 2027. Labor market remains strong and resilient, with the unemployment rate expected to remain low, with an average around 3% in 2026. Finally, the Bank of Israel has revised up its 2026 growth forecast to 4% with even stronger performance expected in 2027 with GDP projected to expand to 5.5%. Moving on to the key drivers of the quarterly performance. Let's start with a detailed breakdown of our revenues in the second quarter. Net interest income in the second quarter was 4.6 billion shekels, supported by volume growth and partly offset by a lower interest rate environment versus Q2 last year. Excluding CPI effect, NIM for the quarter was 1.9% compared with 1.95% for Q1 2026. The dip was mainly driven by lower interest rates and some compression in credit and deposit spreads With loan growth helping to partly compensate this impact. Non-interest income increased significantly to almost 1 billion shekels compared with 0.4 billion shekels in Q2 2025. This was mainly driven by gains from the sale of securities, derivatives, as well as income from investments in non-trading equities. Overall, year over year, finance income increased by 11.8% compared with Q2 2025. Total revenues in the quarter were 6.6 billion shekels versus 6 billion shekels in Q2 2025, representing a 10.1 increase. Turning to fees and commission income. Quarterly fees increased by 2.8% year over year, partly affected by the benefits granted to customers as part of the Bank of Israel program. Excluding these benefits, fees grew strongly by 9.1%, supported by higher activity in financial transactions and securities, as well as by FX differentials. We saw similar trend in the first half of 2026 over the first half of 2025. This slide presents the expenses in detail and the pre-provisioned net revenue for the second quarter. Higher performance-based bonuses in the quarter resulted in a 0.5% increase in salary costs compared with the parallel quarter last year. This was partly offset by the continuing decrease in ad count. Total expenses were 1.6 billion shekels, similar to expenses in the parallel quarter in 2025. Free provision at revenues increased impressively year over year by 13.4% to 5 billion shekels As we see here on the right. Looking at the first six months' performance, the income side followed a similar trend to the one in the second quarter. On the expenses side, salary costs declined by 5.8% compared with AF1 2025, and overall expenses were down by 3.7%. This was mainly as a result of the decrease in headcount and other expenses Thanks to our advanced technology and AI as Hanan mentioned. Here we can see the bank's excellent multi-year cost-income ratio. The cost-income ratio reached an especially excellent level in the second quarter at 24.7%, driven by higher income and continued strict cost management. The cost-income ratio for the first half of the year was also exceptional, standing at 26.7%. Let's now take a look at the credit loss expenses. On the specific provision side, we recorded income of 4 billion shekels. This continues the trend of an income from specific provision over the past 10 quarters, reflecting the strong quality of our credit portfolio. Collective provisions reflect the credit growth in the quarter. Overall, total credit loss expenses were 0.2% of gross loans Similar to Q2 2025, while maintaining our strong coverage ratio. This slide presents the high quality of our credit portfolio. Credit quality remained high in the quarter, with the trouble debt ratio standing at 1.11% of gross loans. NPL was also at a low level of 0.45%. We maintain a strong coverage ratio while the bank's provision for bed debt covers NPLs by almost three times. These parameters remain among the strongest in the banking sector. Now we turn to our strong credit growth. Credit growth over the last six months was impressive at 9% with a 3.4% rise in Q2. The growth was focused on our target segments, mainly coming from the corporate segment, including infrastructure, real estate, as well as mortgages and capital markets. On the deposits, total deposits were up 4.7% in six months. Liquidity ratios were strong, with the liquidity coverage ratio standing at 122%, well above the regulatory requirements of 100%. We also maintain a healthy loan-to-deposit ratio of 78.8%. The next two slides provide a high-level overview of our loan and deposit portfolios. They highlight our well-diversified portfolio mix and deposit base, as well as growth across segments during the quarter and the first half of the year. Moving on to our solid capital ratios and the capital return. The core tier 1 ratio was 11.65% compared with 11.74% in the previous quarter due to higher activity and well above the regulator requirements of 10.23%. The total capital ratio increased to 14.43% compared with 14.07% in the previous quarter supported by a tier 2 bond issuance. Leumi also declared a total payout of this quarter of 1.4 billion shekels, which represents 50% of the quarterly net income. With that, let me conclude. Our results reflect a strong combination of profitability, efficiency, and financial resilience supported by solid capital. These parameters position the Bank well to capture opportunities and deliver sustainable growth and long-term value for our shareholders. Thank you for your attention. With that, we will now be happy to take your questions. Thank you.

Thank you, Hagit. We will now begin the Q&A session. If you would like to ask a question, please click the raise hand button and we will call on you in turn. Or you can type your question in the chat. The first question is from David Taranto from Bank of America. David, please unmute your microphone and proceed.

Good afternoon. Thanks for the opportunity and congratulations on this strong set of results. I have two questions, please. First, corporate lending growth remains exceptionally strong. How would you characterize the competitive environment today? Are you seeing any signs of increased pricing pressure or does the market remain as disciplined as it has been in the recent years? And second question, Bank Leumi is generating mid-teen returns, carries excess capital and has already delivered its annual loan growth target in the first half. Looking ahead, where would you prefer incremental capital to be deployed, supporting faster growth or enhancing shareholder distributions? And what factors will ultimately determine that balance? Thank you.

Thank you, David, for your question. So for the first question, I will start with the second question, maybe it's better. We published our targets in the beginning of the year of a long growth of between 8 to 10 percent, but we always said that we will try to pick opportunities in the Israeli market since we believe there will be opportunities. Many surrounding project finance because in Israel in the last years and in the years to come there is a need for massive investments in infrastructure projects. We have uniqueness experience in this business. We have capabilities. Eyal Efrat, As we always say, for us ROE is before growth. We are first of all players of ROE and careful underwriting that is meeting our credit policy, our conservative credit policy, and then we look at growth. So ROE and high standards of quality of our loan book before a volume and this is the way we will continue to make our decisions. Regarding our access capital, so since we still believe that it might be that later this year we will have additional We believe that we should at the meantime keep the access capital that we have. We distributed this quarter 50% of the net profit. Last quarter we distributed even more. And we believe this is the right balance in order to give us the opportunity to continue with healthy growth focused, as I mentioned, on our RA ambitious.

The next question comes from David Kaplan from Psegot. David, please unmute your line and go ahead.

Hi. Good afternoon. Just a quick question on guidance. We see that your growth is already, after half a year, pretty much at your full-year targets. How do you see the second half of the year? Do you expect the updating guidance anytime soon? And how should we think that where that growth is going to come from? Is it going to be as, I guess, continuation of the previous question, focused again on corporate markets or are there other markets that you're looking at?

Thank you, David, for your question. So the answer is that we believe that we will be able to continue with rapid growth that will meet our criteria that I just mentioned. I cannot assure you that it will be in the same level because some of the large project finance could take time and you know that there is a time difference between entering to the deal and granting the loans in such a large project. But we know what we already have in the pipeline that will support our growth the years to come. Some of the governmental plans regarding infrastructure and all of that together give us the confidence that it will continue to be a material part of our loan growth.

The next question is from the chat. And it's about asset quality outlook. How sustainable is the positive trend in specific provisions given that you have reported net recoveries for the past 10 quarters? Do you expect any pressure to emerge in the coming months as a result of the ongoing war? And how should we think about your cost of risk and NPL ratios over the coming quarters into year end 2027?

Okay, so I will start and Hagit probably will elaborate because she discussed some of these topics in her presentation. So three points that I want to mention. First of all, at the end of the day, credit quality is totally related to the To the economy of the state of Israel. And as you are aware, the Israeli economy is resilient even three years into the war. The resilience derived from many parameters. It's not the right time to discuss it, but At the end of the day, the Israeli economy performed very well, much better than the expectations of the rating companies at the beginning of the war. And that should bring some confidence to the discussion.

Second point that I want to mention.

is the fact that we record a quarter after quarter positive outcome from specific provisions which reflect the quality of our loan book and the high standards of our underwriting and our capabilities to underwrite and monitor our portfolio the day after we underwrite a deal. We don't have any reason or any flag that caused us to change our mind regarding the quality of our long book. The third point that I want to mention, and Hagit touched this point in her presentation, is the fact that we are well provisioned the ratios between provision and NPL and all other metrics regarding the level of provisions that we have are very high which reflect our conservative approach and therefore we strongly believe that we will be able to continue running our portfolio in a very low environment of credit losses.

Just to add that as we see in the numbers, the numbers speak for themselves. All the numbers of credit quality is very low for a long time. As Hanan mentioned, we monitor it very closely. The underwriting policy of Bank Leumi is very conservative, and we believe that we can keep it going forward.

The next question. Could you please elaborate on the drivers for the decline in CET1 ratio, and how do you plan to boost it further to historic levels?

So our safety one ratio is much greater than the regulatory requirements. I remind the Our investors that are not from Israel, that according to Bank of Israel regulation, the RWA calculation in Israel is much more conservative than in Europe or in the state. We published once a year what would have been our C to 1 ratio if our assets were, the RWA was calculated in line with the IRB. Regulation and the results are much higher than the CT1 that we recorded in our financial statements and therefore we believe that we have sufficient buffers above the regulatory requirements and as I said the regulatory requirements are very very conservative We grew our loan books in the first half of the year in very nice way in rapid growth and we distributed dividend above our minimum Thank you again for participating in today's call and have a pleasant day.

Thank you Thank you