Earnings Call: Q2 2021

Aug 16, 2021

Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discomp Bank Second Quarter 2021 Results Conference Call. All participants are at 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 August 16, 2021. If you have not yet done so, please access the presentation on the bank's website, investors. Discompbank.co.il. I would now 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 filings with the various securities authorities. Mr. Nardi, would you like to begin? Thank you. Good afternoon, everyone, and I hope you're well. Today, we once again reported record results with robust net income of NIS860 million, ROE of 18.3 percent and credit growth of 8.3 percent year over year, which crossed the ILS 200,000,000,000 milestone. We also provided our normalized adjusted ROE of 10.1% that yielded the average LRP from the years 2016 to 2019 Instead of the reported negative LIP of 0.82 percent to help give a better idea of where our underlying ROE currently stands and highlights the strength of our core business. Slide 5 lays out the major highlights of our results. There were several factors that That contributed to our strong performance this quarter. 1st, net interest income growth of 12% during Q2 And 15.2% year over year was generated by a combination of core banking growth and positive CPI. 2nd, The recent early retirement plan that is bearing fruit that salary expenses excluding bonuses were lower. And third, the negative LLP was also a driver. Our high rate of credit growth is being generated without lowering our lending standard as our overall credit quality is improving with problematic debt down 9.5% versus Q1 and our NPL ratio down to 0.72%. Lastly, we announced that we expect to reintroduce dividend payments totaling 20% of net income Moving to Slide 6, you can see that we delivered strong credit performance with overall credit growth of 8.3% year over year And 5.1% since the beginning of this year, what stands out in the year to date period, our focus segments of mortgages and Medium Enterprises up 10.6% and 10.2% respectively. Corporate growth remains solid while Consumer lending continues to pick up the pace. As we mentioned earlier, Slide 7 highlights the success we are seeing For our core banking activities of net interest income and fees generation that improved 10.9% in the quarter and 16.9% year on year. Even if we exclude the impact of CPI on core activities, we delivered a high rate of growth year on year. Non interest financing income was lower in the quarter, mainly due to losses from derivatives and fewer bond realizations. On Slide 8, we were up only slightly and that is mainly on account of larger provisions for profit based bonuses. Salary expense, Excluding bonuses, we are down 4.6% quarter over quarter and 8.3% year on year. Our total adjusted expenses excluding bonuses We're actually down both quarter on quarter and year over year. Slide 9 speaks for itself. Negative LLP 0.83 percent in the quarter was driven by low write offs, significant recoveries and a release of provision On the balance sheet that were made during the crisis, the credit expense relief leaves our reserves ratio at a still conservative ratio of 1.62 percent above where we were pre COVID. Our NPL improved significantly to 0.72% as NPLs were either reclassified as performing or a pay down. Deferrals have continued to trend down and do not present the concern. Moving on from the discussion at the group level, let's focus a bit on our main subsidiaries, Starting with Mercantile on Slide 10. Mercantile produced a record quarter in terms of both net income and ROE, Even excluding gains from the valuation, again on shares of ZIM Shipping, similar to the trend as a group, negative LLP and impressive credit growth were significant drivers of the ILS201 million net income and 26.2 percent ROE results. Mercantile continues to perform well and achieved strong results as it focuses on its strategy. In New York, presented on Slide 11, Credit demand remains strong, particularly in C and I, while negative LLP and non interest financing income helped produce $25,000,000 in net income and an 8.7 percent ROE. Spreads have begun to improve. The yields on loan remained stable. The quarter included roughly $6,000,000 in one time expenses associated with the move of our headquarters into a new building. On Slide 12, we present yet another record quarter, this time at CAL with net income of ILS 79,000,000 and 16.7 percent ROE. Carl produced strong performance across all key business drivers, including transaction turnover, consumer credit and acquisition of new active cards. The strong results were achieved despite one of CAL's major drivers, international transaction are still well below the level That closes out the final section of the presentation. And on Slide 13, we move on to talk a bit about our strategy. As we have laid out in the past, we are fully focused on being the best financial institution for our customers and delivering superior value To shareholders over time, our strategy has 3 main pillars: 1st, to accelerate the evolution of traditional banking 2nd, to lead the revolution in banking through its disruptive innovation and third, to maximize group's value. We define mortgages as one of our key strategic pillars And on Slide 14, we dive into some details. You can see that our mortgage generation business is booming. We have grown 130% Over the past two and a half years and have increased our market share and generation to 13.7% versus 11.2% 2 years ago. Not only are we going quickly as we mentioned the 18.3% year on year growth earlier, but also we are doing it without letting down Our lending standards at all. You see that we are better than our peers both in terms of percent of loans over 60% LTV and loans in arrears of over 90 days. We are able to achieve these great results by launching digital mortgages, streamlining our processes and working closely with mortgage brokers. After talking about one of the key pillars of our traditional banking strategy, I want to say a few words about Payvos. Our main disruptive innovation initiative is highlighted on Slide 16. We are happy to say That in Q2, we received all of the approvals necessary to re launch Paybox with SuperSal and leverage its growing user engagement to be fully Innovative initiative in the world of personal finance. Paybox closed the $2,000,000 download threshold, launched stop to pay and just announced that Israel's leading gift card program will be digitally available on the platform as well. This is just the beginning for Paybox With much more to come before we head to Phase 2 and create a financial market a marketplace for personal finance. To summarize, 2Q was a great way to close out the first half of twenty twenty one, and we look forward to building on our success and creating value for our stakeholders. With that, let's open it up for questions. Thank you. Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. The first question is from Tavy Rosner of Barclays. Please go ahead. Hi, good afternoon and thanks for taking my questions. I wanted to start with the loan growth. I mean, you mentioned very strong growth during the quarter And one of the key drivers has been mortgages. It's something that we're seeing to a different extent across all banks, There seems to be strong demand across the market. And I was wondering what are the driving forces here? Do you see that as sustainable? And I guess as a last point, is there a risk that the high level of competition We'd hurt the bank's margins. Thanks, Tavi. So well answer. Regarding mortgages, at the beginning of our strategy, we highlighted this as one of our key pillars because what we found out that it's not for us, it's not an Issue of demand, it's issue of capacity. And we worked very, very hard to solve the capacity issue, and we launched a digital process, And we streamlined the processes. And we now we can say we fixed most of the issues we had and we can answer the demand. So what we are seeing, We see our growth after we fix those capacity issue and the sustainable growth, we don't see any Decline of margin, we are not increasing the risk appetite over there. So overall, we feel very comfortable with the current Numbers, and we believe we will be able to support them going forward. We need to take into consideration that we are Still below our natural market share when it comes to mortgages. So we believe that even if the overall demand The Israeli market will be a bit lower. We will be able to still support our substantial mortgage numbers. Regarding risk overall, when we are looking at the LTV, the LTV in the mortgage market is relatively low With an average of around maybe 60%, maximum is 75%. So overall, we believe that in this line of business, The risk is lower than other line of business. So we feel very comfortable with the growth with the Thanks. That's helpful. And then talking about provisions, When we look back the last 18 months, you obviously had way more provisions than you had recovery. So I guess looking at the Situation as a CFO, what would be the reason why you haven't released more recoveries? Is it because you still have some doubts with regards to Certain creditors, are you being careful? How should we look at recovery going forward? So we feel very comfortable with the quality of our COIL portfolio. And as Joao mentioned, we are still our overall COVID ratio is still higher than pre COVID. It's on 162% right now versus 1.38% Prior to COVID, we think COVID is not over yet, so we wanted to add some buffer In our balance sheet, it's still too early to say what will happen in next quarter, but overall, When we are looking at all the credit quality indicators, we feel very comfortable. Write offs are very low, NPL looks good, deferral is almost gone. So we feel very comfortable, but yet We still wanted to make sure that we can we will be ready for any potential development. But currently, we feel very comfortable With the current situation and the current situation. Great. Thank you. There are no further questions at this time. Mr. Nardi, Would you like to make your concluding statement? Well, thank you very much all for joining and see you all next quarter. Thank you. Thank you. This concludes the Israel Discomp Bank Second Quarter 2021 Results Conference Call.