Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank third quarter 2022 results conference call. All participants are at present in a 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. With us online today are Mr. Barak Nardi, Mr. Yossi Bar-Sidi, and Ms. Lena Schwarz. As a reminder, this conference is being recorded November 23, 2022. If you have not yet done so, please access the presentation on the bank's website investors.discountbank.co.il. I would 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 would 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. Mr. Nardi, would you like to begin?
Thank you. Good afternoon, everyone, and I hope you are well. Starting with slide four, we will begin the review of the financial results. Our exceptional third quarter results show the clear execution of our strategy that combined with higher interest rates helped us to generate net income of ILS 893 and ROE of 15%. Our efficiency ratio improved materially and stood at 55.2% for the third quarter, bringing us very close to our long-term strategic target of 55%. Now, I would like to elaborate a bit on the financial highlights of the third quarter and first nine months of the year as you can see on slide five.
Our ILS 809.3 million net income in the third quarter did not include any special one-off items and was largely driven by increasing revenues from core banking activity, supported with rising interest rates. Net NII in the third quarter increased by 37.6% from parallel quarter in 2021 and reached almost ILS 2.3 billion. This material growth in revenue drove an improvement in our Cost-to-Income Ratio that improved to 55.2%. Credit growth slowed down a bit in the third quarter, aligned with lower demand we are observing. Nevertheless, we remain focused on our targeted segments, where we believe we have the greatest potential to outgrow the market and which can bring the highest contribution to the bank and our shareholders. At the same time, we remain focused on the quality of our lending.
In the third quarter, we have recorded ILS 101 million of credit loss expense, which is about 80 basis points of the average credit balance and is related largely to increase in group-based provision, which reflects worsening macro assumptions, partially offset by the improvement of the quality of the loan book according to our models. Other credit metrics continue to remain solid. Lastly, this is another quarter where we have announced on a 20% dividend distribution, totaled about ILS 179 million . On slide six, I would like to briefly touch upon some key macroeconomic indicators of the Israeli economy and explain the potential impact on the bank's results.
The fundamentals of the Israeli economy are still strong. The expectation is for economic growth to continue in 2023, at a much lower pace, as the rising interest rate is cooling down the economic activity and the demand. Labor market is still strong and expected to remain relatively resilient, although we have seen slight increase in unemployment in recent data. Inflation is rising, nevertheless, it remains structurally lower compared to many other developed economies. I would like to discuss the impact of the macro developments on the bank. We start to observe early signs of slowdown in economic activity and cool down of the demand. As such, the credit growth slowed down in Q3. We expect similar trends to continue in the next quarter.
At the same time, the impact of increasing interest rates on the profitability is material and positive, as we have seen in the substantial increase in Net Interest Income in the third quarter, in line with our previous expectations. Another impact of interest rate increase is on the borrowers. So far, we have not observed a deterioration in individual borrowers' capabilities to service the debt. Yet, we continue to increase the credit loss provision to reflect worsening macro assumptions. Finally, we are looking at the development in the economy and expect the operating conditions to remain volatile. Nevertheless, we are confident in our performance and expect the net outcome of the mixed impact of the macroeconomic environment, in part particularly of the increasing interest rates, to be positive for the bank. On slide seven, you can see our credit growth.
As mentioned in the third quarter, credit growth slowed down. We grew by about 2%, which was evident across all segments. Nevertheless, compared with third quarter of 2021, we grew by 16% focusing on our targeted segments. Mortgages, which grew by 26% year-on-year and are now comprising about 26% of our loan book, compared to about 22% two years ago. Credit to medium enterprises, which grew by about 18% year-on-year. Looking ahead, we continue focusing on sustainable, profitable, and responsible lending opportunities. On slide eight, you can see a very good demonstration of the strength of our core business and the impact of higher interest rates on the performance.
The average interest rate in third quarter was 1.5% compared to almost 0.5% only in previous quarter and close to 0 in Q3 2021. As a result, and in line with our anticipation, NII grew by 37.6% versus last year to about ILS 2.3 billion. In addition, fee income grew by about 8%. Total income grew by 23.8% in third quarter compared to same quarter in 2021. As you can see from the chart on the right-hand side, we continue growing in what we define as financing income from current operations. This is the income for our core banking activities, our bread and butter. These numbers exclude the impact of few items such CPI, derivative, and fair value adjustments.
The income from regular financing activity grew this quarter by 42% versus last year, and NIM increased to 2.74%. Going forward, we expect that the impact of additional increase in interest rates will remain positive, although its marginal impact will moderate. Moving to slide nine. The expenses grew this quarter, mostly because of growth in other expenses, largely due to revenue-related expenses linked to increased activity at Cal. Nevertheless, due to the exceptional increase in revenue, which materially outpaced the growth in expenses, as you can see on the right-hand chart, and evidenced by positive jaws of 12.8%, cost income ratio continually improving, reaching 56.5% for the first nine months of 2022, and 55.2% for third quarter, bringing up close to our strategic target of below 55%.
On slide 10, you can see the evolution of credit loss expenses. This quarter, we are still not observing a material deterioration in specific borrower conditions, as evidenced by very low specific basis provisions. We continue to increase group-based provisions to reflect worsening macro assumptions, in particular increasing interest rates. Overall, credit loss expense to the 0.18% from credit in third quarter and cumulative credit loss expense in nine months was 0.1%. On the next slide, you can see additional asset quality metrics. Allowance for loan loss provisions from total credit increased slightly to 1.31%. Non-performing loans from total loans were 0.67%, slight improvement from previous quarter, largely due to improved classification of problematic borrowers. NPL coverage is also very strong as the loan loss provision covers non-performing loans by almost twice.
These indicators reflect the solid quality of our loan book and our conservative underwriting. Touching briefly on funding and liquidity on slide 12. Our deposit base is granular and diversified, with about 54% in retail banks, households and small enterprises. Deposit base continue to grow. Total deposits grew by 3.3% from the previous quarter and by almost 20% from third quarter of 2021. We continue to maintain solid liquidity ratios or above, far above the regulatory limits. Moving on the performance of our subsidiaries, starting with slide 13. Mercantile produced very strong results this quarter, with net income of ILS 185 million and ROE of 19.3%. This was mainly due to increase in Net Interest Income and improvements.
Loan growth slowed down Mercantile as well, but overall credit grew by 17.54% year-on-year, with year-on-year growth of 30% in mortgages. Mercantile Cost-to-Income Ratio continued to improve and was below 50% this quarter. In New York, seen on slide 14, we saw higher Net Interest Margin, which led to 43.8% increase in Net Interest Income. After five consecutive quarters of credit loss provision release, credit losses were positive this quarter at 0.23%, reflecting the shifting economic environment. Cal, shown on slide 15, continues to enjoy a very positive momentum in 2022, following 24.1% increase in consumer credit and 16% increase in credit card transaction turnover.
Cal recorded net income of ILS 109 million in Q3, with ROE of 20.9%, which included also profit from sales of Visa Inc. shares of about ILS 30 million. To summarize, I would like to emphasize the key takeaways from this quarter results. First, we delivered record Q3 results with ROE of 15% and Cost-to-Income Ratio of 65.2%, as we remain focused on continuous execution of our strategic initiatives. Second, we benefited from increase in interest rates, which became evident during the quarter and led to increase of 37.6% Net Interest Income to ILS 2.3 billion in Q3. Third, the credit growth in Q3 slowed down aligned to market conditions.
We remained focused on our targeted segments and grew by 26% year-on-year in mortgages and 18% year-on-year in medium enterprises. Lastly, loan book continues to display resilience with solid asset quality metrics that reflects worsening macro indicators in building group rates provisioning. With this, I will finish the overview and would like to open to Q&A. Thanks.
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. 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 Chris Reimer of Barclays. Please go ahead.
Hi. Thank you for taking my questions. First off, I wanted to touch on the macroeconomic slowdown. What you mentioned in your opening statement that you are seeing a cooldown in demand. If you could just give some color on what segment you might be seeing impacted, more than others.
Well, thanks. First of all, the slowdown is across the board. I think one of the things that the Bank of Israel increased their interest rates in order to cool down inflation, to bring down inflation, they are expecting or they're pushing to see a slowdown in economic activity. This is not a surprise. The slowdown is across the board. I think the most dominant segment that we start seeing it is one is around consumer credit. It's first that we see substantial slowdown. Second, the second area is mortgages, where the higher interest rates cool down the market a little bit, and the growth rate this quarter is lower than what we've seen in the past.
I do believe that Q3 growth difficulty experiencing is a more accurate reflection of what is expected to be fall.
Okay. Assuming that the level of activity does slow down more, what segment of the portfolio do you see most at risk of facing higher provisions?
Overall, as I said before, at this point, we still don't see specific, any specific signs yet. The level of write-off is very low. Currently, we don't see that it's negative signs. We do expect that with higher interest rates, a higher level of LLP will come. First of all, I think we will experience it across the board. We start, as I mentioned before, we already start putting group provisioning for exactly for this scenario. If I try to be more specific, I think the two areas that we might see a higher LLPs, it might be set around real estate, where in recent years, the leverage over there was quite high.
I think, with higher interest rates, we might find some negative maybe activity over there. Second is around consumer credit. With higher interest rates aligned with household that have both mortgages and maybe other consumer credit, I do believe that they will do everything they can to pay their mortgage, but in other consumer credit, we might see some more defaults than we used to see in the past.
Got it. Thank you. That's very helpful. That's it for me.
Thanks.
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we poll for more questions. The next question is from Micha Goldberg of Psagot. Micha, please go ahead.
Hi, good afternoon. First of all, congratulations on an excellent quarter. Just a short one on the numbers. Is there anything unique one time in this quarter that one should try to exclude in order to get to some kind of representative return equity?
As I mentioned before, in this quarter, we don't have any, like, one time that we shouldn't expect to see in future quarters. It's a very solid and clear quarter. Of course, as I mentioned before, you know, I'm not sure that we can expect that the low, very low LLP in this quarter, you know, will continue to next quarter. We don't have any special, like, one time that we should exclude.
Okay. Thank you. My, my second question then is, I mean, it looks like the last, I don't know, several quarters, if not the last couple of years, your profitability has been significantly above your long-term strategic guidelines of 12.5% by 2025. I'm just wondering, will you be reconsidering that return equity target? If so, will you be publishing something in that direction later on?
I think, as you mentioned, and you are right, we actually reached this quarter, the long-term target we have put for 2025. That's both in terms of ROE and cost information. We need to take into consideration that when we put the target, it was only a year ago, but it was in total different economic environment, in total different interest rate expectation. We are working, you know, internally on our future in target. After we let it, we need to see whether we communicate updated targets or not. It's too early to call. I think there are also, in this period, there is some uncertainty around, you know, around the interest rate level, the implication.
I think it would be wise to wait a little bit before setting, long-term goals and communicating them.
Okay. One more question. I mean, you mentioned there could be potential deterioration in asset quality in the future, although you're, at this point in time, not seeing that. I'm just wondering, under provision policy, would it have been more prudent to provide more this quarter on that behalf to put more aside in the case of a future deterioration?
Based on our models, also this quarter, in the previous quarter, we put based on macro indicators and the rising interest rates, we put aside. For country, we feel very comfortable with our current level of provisioning, and we think it will serve us in future, you know, future development. I don't think there was a need to put more aside at this stage.
I understand. My last question is, you mentioned that credit demand is slowing down, and you expect that might continue to slow down even more. If the current, you know, profitability is somewhat sustainable even with a slightly higher cost of risk, then my question to you is why do you need to sort of practice in growth rate and, I don't know, let's say 12% return equity, why do you need to keep so much capital on? In other words, would you consider paying out more dividend?
First of all, I think always, we like to look at the equity as a scarce resources and to have the right balance between supporting growth and paying our dividend. We have a policy of up to 30%, and I do think that if the trend of very high ROE of double-digits and a fulfillment of the current expectation of low-growth rate, you know, it might make sense in the future to continue to, you know, to look at the dividend payout and to see what is the right timing to continue the increase trend toward the 30% policy we have.
Okay. Thank you very much. Congratulations.
Thank you. Thank you.
There are no further questions at this time. Thank you. This concludes the Israel Discount Bank third quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.