Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank's first quarter 2022 results conference call. All participants are in a listen only mode. Following management's formal presentation, instructions will be given for a question-and-answer session. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded May 23rd, 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 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, risk in products 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. Kaplan, would you like to begin?
Hi, thank you very much, and welcome to our first quarter 2022 earnings call. I'll turn it over to Barak now, who will go through our presentation, which is available on our website, and then we will open up for Q&A.
Thank you, David. Good afternoon, everyone. I hope you are all well. Starting with slide four in our presentation, we will begin the review of the financial results. Our strong first quarter results show the clear execution of our strategy with solid credit growth, especially in mortgages, that helped generate net income of ILS 983 million and an ROE of 18.3%. Adjusted for the sale of real estate assets, net income was ILS 668 million, and the ROE was 12.4%. Lastly, our CET1 ratio of 10.55 following the equity raise, puts us in an excellent position to continue to grow and to achieve our goals. Expectations for higher rates continue to be priced into the market, and we talk about that on slide five.
The yield curve in Israel and in the U.S. continue to imply higher rates of all duration. Looking at the five-year duration, the expectation for where rates in Israel will be has moved from 0.42% at the beginning of the year to 2.16% now. PPI expectations have also moved significantly with the one-year forward expectation at 3.3% versus a 0.3% one-year forward expectation at the beginning of 2021. The expected increases in rates and CPI will contribute to the bank's financial results. At the same time, we are monitoring the ongoing development of the macro situation and will react accordingly. On slide six, we present the financial highlights and the main factors that led to a strong result this quarter.
First was the credit execution across each of our subsidiaries, and we'll touch on this a bit later in the presentation. Second was the focus on our targeted strategy to grow in the areas that have the greatest impact and highest returns for the bank and its shareholders. Mortgages, our key strategic pillar, were up 5.2% year to date and 27.7% over the past year. Our focus on mortgages and our tight risk management continued to produce low level of LLP and write-offs. At the end of Q1, we completed a successful equity raise in which we increased our equity capital by ILS 1.4 billion, and this was a major part of the 10.55% CET1 in the quarter this morning.
The capital raise enabled the bank to continue its growth momentum and realize its significant potential with an emphasis on the areas and strategic focus of the bank, mortgages and medium-sized businesses, taking advantage of the opportunities that currently exist in the market. Lastly, we announced a dividend in respect of Q1 2022, totaling almost ILS 200 million and equal to 20% of Q1 net income. Moving to slide seven, you can see that we delivered strong credit performance, especially in our targeted segments, mortgages and medium businesses. The growth of our mortgages, which is the main focus areas of our strategy, was 27.7% over the past year and 5.1% in Q1 alone. This growth would have been higher if not for the sale of a portion of our mortgage portfolio during the quarter.
This brought the mix of mortgages to 25.4% of our total credit book, up from just under 22% at the end of 2020 when we set out on our new strategy. We also delivered significant growth in medium enterprises, another one of the core areas of our strategy. Through Q1, we deliberately held back corporate lending growth. Now, post our successful equity raise, we are well-positioned to grow in this sector as well. Looking ahead, we see many additional opportunities for growth, and we examine each of them to make sure that our credit growth is sustainable, profitable, and responsible. Total non-interest income shown on slide eight highlights the strength of the underlying business with NII growth of almost 20% and fees up 40% versus Q1 2021, driving the growth.
This was largely offset by a decrease in non-interest financing income as a result of our interest derivative position, much of which will likely reverse and generate income in the rest of the year. Total income increase of 21.6% includes the sale of real estate assets. On the expense side, the main impacts were increased activity at Cal, which comes along with higher payments with partners and salary increases as a part of the wage agreement. Slide nine highlights our high-quality loan book and conservative underwriting. LLP of negative ILS 60 million and low levels of write-offs continue to contribute a positive impact. Negative LLP is a result of collections and reclassification of existing customers and of new models and methodologies implemented through systems. Moving on to the performance of our subsidiaries, starting with slide eleven.
Mercantile produced a set of very strong results, with net income of ILS 121 million and an ROE of 12.9% this quarter. This was mainly generated from robust loan growth, particularly in mortgages that were up 7.5% in the quarter. In New York, as seen on slide twelve, we saw credit growth of 16.5%, and deposits were up 13.3% in the past year. This growth, coupled with lower LLP, helped to deliver ROE of 9.7%. Cal, shown on slide thirteen, opened 2022 with a very strong Q1, delivering net income of ILS 80 million and ROE of 14.3%. The results were driven by 22.9% year-over-year consumer credit growth, 20.5% year-over-year transaction turnover, and low levels of LLP.
In addition to the financial strength, Cal also completed a number of strategic agreements with major players in Israel to provide credit and payments as a service. To finish up, we continue to focus on execution of our strategy as we build towards achieving our 2025 financial target of more than ILS 3.5 billion in net income, more than 12.5% ROE, and a cost income ratio lower than 55%. As shown on slide five, the interest rate expectations today are almost half a point higher than when we announced our target, and this gives us an additional tailwind towards achieving the target. Thank you all, and we can open now for your questions.
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 pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Tavy Rosner of Barclays. Please go ahead.
Hi, good afternoon. Thanks for taking my questions. I have two, please. When you look at your growth rates, combined with the fact that, you know, the expectations for rates going up, I mean, what do you see as a sustainable level of growth, you know, without compromising your underwriting policy? I guess my second question is related. I mean, when you also look at the LLP levels, what do you think is a sustainable rate once you're factoring the rates going up in the foreseeable future?
Regarding growth rates, as you can see, in this quarter, we grew a little bit more than 2%, and this is with corporate segments went down and because of high equity because of held equity that we're going to raise it in the future. We think that the current rate of about 2% is sustainable also for the future. Regarding LLP, you know, negative LLP is not something that's sustainable. CECL is new, and we need to wait a little bit and to see within a few quarters what is the new normal.
The new normal, of course, is not negative, but we expect that the new normal should be lower than historical LLP levels prior to Corona.
Great. Thank you.
The next question is from Micha Goldberg of Psagot. Please go ahead.
Hi, good afternoon. First of all, congratulations on what looks like another stellar quarter. I'm sorry. A couple of questions if I may. The first question is regarding your risk-weighted assets. They grew by 2.3% while your credit grew by 2.2%. Could you explain what the difference is, and is this something we should consider to be a kind of looking forward as well, so every, I don't know, 2% growth in credit will be accompanied with an additional 2% growth on your risk-weighted assets or 3% growth?
Micha, you want to ask all the questions at once, and then we'll go through them as we answer.
Sure. My second question has to do with your capital ratio. Currently, after raising CET1 to 10.55, I understand that since the end of the quarter, the impact of capital markets and yields has reduced capital adequacy by another 11 basis points. You're really just 70 basis points above your internal target. Assuming a 1-for-1 ratio on risk-weighted asset growth and loan growth, that really supports something like 6%-7% loan growth. If I take into account impact of new accounting practices and Bank of Israel's real estate capital requirements, I'm just wondering how much loan growth can you go based on the current levels of capital ratio?
Are you concerned that if the capital markets continue to go south, you would need to be in additional need of more capital? That's my second question. My third question is, can you explain how the dollar impact on your P&L and your risk-weighted assets? Lastly, I was just wondering as to recovery. You know, one of the other banks have reported they had huge recoveries, and it's one of those things that seems to me elusive to Discount. I was wondering, are there significant recoveries for Discount Bank? It's just a very different credit book, that's why that thing doesn't come through at Discount. Just wondering how that compares to some of the other banks. Thank you very much.
Sorry, can you just repeat the third question? It was a little hard to hear you.
I'm sorry. On the recovery, I was just wondering-
No. The one before recoveries.
Was it on the actual capital ratio? Is that the question? I'm just wondering.
One on the U.S. Dollars. You asked to explain one on U.S. dollar.
I just want to know the dollar impact is on your P&L and your risk-weighted assets. Nothing major.
Yeah. I'll answer your question. I hope I won't miss anything. Regarding, start with the second question of loan growth. Yes. As you mentioned, we are well above our regulatory targets. The targets are 9.75%. We are 10.65%. Even with the additional negative impact of 0.11%, we are still well above. When you're looking ahead, we don't think we have limitation for growth. Because if we are able to produce double digits ROE on ongoing basis, it can support our loan growth. We don't see currently in the equity any limitation for future loan growth. This is regarding the loan growth.
Regarding the risk-weighted assets, I think the excess growth in risk-weighted assets versus the loan growth is coming from some off balance sheet item. Overall, it's not something that is very significant. Overall, on a long-term basis, we expect the risk-weighted asset to grow at the same pace as the loans. It's something that is temporarily. Regarding the impact of dollar, it's not very significant. As we published, there is a positive impact on equity, I think of around ILS 80 million in terms of equity and CET1 ratio. In terms of P&L, it's not. Currently, it's not something very significant.
In terms of recoveries, as we published, some around half of the negative LLP is coming from specific customers with some recoveries. It's not very significant, but it exists and it's not any specific customer we should mention.
Okay, thanks very much.
The next question is from Joseph Dickerson of Jefferies. Please go ahead.
Good afternoon. Sorry. Thank you for taking my question. I just had a quick question on the cost income ratio target of 55%. Even the adjusted business is 63.7%. You had a pretty strong quarter for both loan growth and expansion. What are the building blocks to get to the 55% target in 2025?
First of all, if I start with the current number, the adjusted one of a little bit above 63%, we need to take into consideration that it's higher. One of the reasons it's higher than other banks is because we are consolidating between our company, Cal, its operational company and with higher cost income ratio. Excluding Cal, we are at around 60%. We still, but it's less a number, but still with a great room for potential. The way we are going to reach the 55% is growing revenue much faster than costs.
We expect in the following years, the revenue growth pace coming from loan growth, which will be a function of interest rate and inflation, will grow much faster than expenses. By that, we'll reach gradually a cost income ratio lower than 55% in 2025.
Thank you very much.
The next question is from Michael Klahr of Citi. Please go ahead.
Hi. Thanks for my questions. Just again on the costs. We saw salary growth was up 3% year-on-year, excluding bonuses. I just wanted a bit of help whether we should be expecting that kind of growth through the remainder of the year, at that kind of rate. My second question was on credit growth, and whether you're seeing any signs of a slowdown in mortgages or corporate as interest rates start to rise and also given you know, more general market turmoil, especially in the capital markets, whether you're starting to see an impact there. Thank you.
Regarding salary, the 3% increase is more or less representing the wage agreement. On ongoing basis, this is more or less the salary growth. As I mentioned earlier, answering Joe's question, assuming that this is more or less primary for salary growth. They expect the revenue to grow much in a much faster pace. Regarding slowdown, I think if we look at the overall macro conditions, overall they are favorable to the banks. The expectation around interest rates and inflation are positive. As we indicate in our financial statements, every 1% in terms of interest rate increase, it records generates additional ILS 1 billion in terms of revenue. On the other hand, we need to take into consideration there might be a decrease in demand.
Currently, we don't see it yet, but it might evolve. Specifically around mortgages, we think that even if there will be some decrease, some decline in mortgage demand for mortgages, we believe that we'll be able to keep our fast pace because we still at a low market share. We still are not working on the demand side, which will solve our capacity issue. We believe that even with a lower demand in terms of overall market, we will be able to continue our strong growth momentum around mortgages.
Thanks. Can you just remind us what the risk weighting of your or the rough, you know, rough tiers of your mortgage portfolio?
Mortgages, it's around 50%. Translated to risk-weighted assets is around 50%. We need to take into consideration that we are quarter-over-quarter, we are increasing our mortgage mix. Currently we are at 25%, above 25% of total loan book, and we will continue to increase this, the mortgage mix.
Thank you. Thanks very much.
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. There are no further questions at this time. Mr. Kaplan, would you like to make your concluding statement?
Yeah. Thank you all for joining us for Q2, and we look forward to talking to you again in August.
Thank you. This concludes the Israel Discount Bank first quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.