Earnings Call: Q1 2021

May 25, 2021

Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank First Quarter 2021 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. As a reminder, this conference is being recorded May 25, 2021. If you have not done so, please access the presentation on the bank's website at investors. Discountbank.co.il. 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 filings with the various security authorities. Mr. Narvi, would you like to begin please? Yes. Thank you. Good afternoon, everyone, and I hope you're all well. Today, we reported record results on both an adjusted and unadjusted basis. Robust net income, ROE and credit growth was driven by executing on our strategy and further supported by an improving economy as seen by our negative ASP. We also reached 2 milestones passing NIS 300,000,000,000 in assets and NIS 20,000,000,000 in equity. On Slide 5, we show That health and macro trends continue to improve with positive COVID cases near 0, unemployment trends improving, credit growth on the rise And deferral related to the pandemic almost entirely behind us. At the same time, we remain cautious monitoring all indicators like the recent GDP numbers, which may signal that we are not entirely in the clear yet. Slide 6 lays out the major highlights of the quarter, Including adjusted ROE of 16.2 percent, quarterly net income of NIS662 million A negative LLP of 0.3 percent. The higher NII up 3.4% and the tight expense control down 3.2% led to an adjusted cost to income ratio of 60.6% and a positive jaws ratio That began in Q3 of 2020 and ended early in January of this year. Moving to Slide 7, You can see our strong credit growth, especially in targeted segments. Our overall credit grew by 5.7% year over year And 2.3% from the beginning of this year. Mortgages, which is one of the key pillars of our strategy, grew by 16.7% year over year And 4% from the beginning of this year, continuously increasing its market share. Another key pillar, corporate lending, We're 12.5 percent year over year and 1.8% quarter over quarter. We are also seeing some slight improvement in the medium sized business portfolio. And as we move further out of the crisis, we expect to see the consumer lending pick up. On Slide 8, you can see that our credit growth and strong non interest financing income drove the growth In total income versus the last quarter, this continues to be held back somewhat by the low interest and inflation environment. CPI, however, seems to be back on the rise with March April CPI at plus 0.9%, which generally And the positive impact on NII. On Slide 9, you can see that the tight expense control and the efficiency program led to an improved adjusted income ratio. Salary and related costs are 4% down versus previous quarter, beginning to reflecting the impact Of the 754 employees that participated in our early retirement plan and those that reach natural retirement, Clearly, the strong ROE result will result in higher bonus sales as well. But overall, our expenses are under control In the coming quarters, we'll give a better picture of the impact full of the retirement plan. The clearest example of the Strong underlying macroeconomic situation is in Slide number 10. The negative LLP was driven mostly by a release of provisions on the balance sheet that were made during the crisis. Even with this release, we still maintain A reserve ratio of 1.83, higher than pre COVID, continuing the trend we have seen throughout the crisis, If customer deferral trend downward, write offs are not increasing and our customers continue to work to pay down their loan. Please note that in this slide that there is a small mistake in the graph color that we have switched. Moving on our Moving on to our subsidiaries, starting with Mercantile on Slide 11. From credit growth, devaluation gain On shares of ZIM Shipping and the negative LLP were significant drivers of Mercantile's record ILS 150,000,000 Shekel's net income and 20 percent ROE results. American Tile continues to perform well and achieved strong results As it focuses on its growth strategy, as well presented on Slide 12, we continue to see demand for credit growing, While the net income continues to be impacted by qualitative factors adjustments for COVID. On Slide 13, we present another record quarter, This time for CAL with net income of ILS 60,000,000 and 12.9 percent ROE, significant growth in transaction turnover And sustained growth in active cars are the underlying factors that drive the business for CALA. CALA continues to be negatively impacted by the reduction in air travel And to reason, which we all may begin to change later in this year. Lastly, on Slides 1415, just a few words on our strategy. As we laid out in detail in March on the call with you, we are fully focused on being the best financial institution for our customers And delivering superior value for our 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 disruptive innovation and 3rd, to maximize group value. We are tenaciously On Slide 15, we highlight a number of achievements that we hit during the quarter, Including completing our early retirement program, maintain high loan growth in targeted sector, receiving recognition for innovation In retail banking and lastly, preparation for launching the tokenization of credit card in our leading digital wallet Paybox Along with our partner, Schuplersal, the largest retailer in Israel. Q1 was a great start to 2021, And we look forward to more positive updates as the world economy continues to recover. With that, let's open it up for your questions. Thank Your questions will be pulled in the order they are received. Please stand by while we poll for your questions. The first question is from Tavy Rosner of Barclays. Please go ahead. Hi, good afternoon and thanks for taking my questions. I was wondering if you could comment a little bit about the NIM trajectory that we've seen over the past couple of quarters. Can you repeat the question, Javier? Yes. Could you comment on the NIM trajectory, Net interest margins, I think they've been declining for the past couple of quarters. Sure. So I think the NIM going down is a combination of 2 things. First of all, we do see a change of the mixture When mortgages are up and consumer loans are down, as a result, you see the NIM as a percentage going lower. So this is one impact. The second element is we do see in some segments a stronger competition Around price, especially in the areas where there is still low demand for credit like consumer and small businesses, we do expect That when the demand is going to increase, especially around consumers and small businesses, we will start seeing It's an opposite trend. Okay. That's helpful. And then just talking about the growth in mortgages, Is that a result of your strategic plan to grow among your existing customer? Or are you competing on price? What's driving the growth? So we at the start of our strategy, we announced and we decided that mortgages It's one of the top three pillars of our strategy. We identified huge potential over there. Currently, we are below our natural market share and mortgages, of course, is not limited to the natural market share because every customer that take mortgages usually checks More than one bank. So we have huge potential over there and we see a substantial demand. We were able to increase our market share during the last four quarters, but the good news that there is huge Potential for to continue growing and the story is not around price. The demand is huge and currently our challenge It's to answer is a capacity challenge and to answer all the demand. So we are working on to improve our platform. We just introduced a digital mortgage and we are optimistic that with the steps we are taking, we'll be able to answer All the demand and to continue growing our market share and the size of the business without the need To reduce prices. All right. Got it. Thank you very much. The next question is from Michael Goldberg of Excellency. Please go ahead. Hi, first of all, congratulations on a very strong quarter. A couple of questions. It seems to me that your balance sheet is starting to balloon with deposits and cash and low yielding securities. It's almost 32%, I think, Of your total balance sheet, which is like, I don't know, 7% or 8% more, I know it's just last year. Is there any way you can deploy those low yielding assets in a different way Do you support your margins or increased yield? First of all, I mean, we are not sure it's something that will be stable like this. Some of it is temporarily the increase of deposits. We do believe that with the market The overall economic environment in Israel is changing. We will see more these line items will go down And people will invest more. So we don't think it's ongoing. Always, we are looking for smart ways To where we should invest the money and do with the money, so when there are opportunities, we are taking them. So this is not a general answer. But is 30% of your assets in No yielding or low yielding, is that phone app reasonable over time or is there like a target that you think that the number should be at? We didn't declare on specific numbers. We are working To have a different to work on a better mix, but I can't share with you a specific target we are having. Okay. Another question, which I think is related to the same trend. I mean, loans and deposits have come down again to 80% after, I think a couple of years of hard work of getting it rightly up. I mean that too obviously will pressure something on margins. Is that something I mean deposit went up significantly in this quarter and I mean the crisis seems to be pretty much behind us. Is there any policy I mean, in place, I'm trying to see that number doesn't grow too fast or I mean, what are you guys thinking about that? First of all, the best solution is to continue increasing the loan. So as you can see in Q1 results, we are growing We have substantial growth in terms of loan in this quarter. According to the banks that published until now, we are growing faster than our peers. And regarding deposits, As I mentioned before, I don't we do expect deposits to start going down. So I do expect the ratio of loan to deposit ratio We'll get higher further this year. But you realize that deposits are growing on the triple rate Matt, your credit is growing, right? Yes. This what happened in 2020 and in the Q1, but we do expect to see this trend changing. Okay. Another question about your non performing loans or non accrual. It's a little different than the other banks that reported so far. You haven't seen a 20% increase in Quarter over last quarter, the other 2 banks I published have seen either a flat or a decline. Are you seeing something different or is the Yes. The rapid loan growth that over the last couple of years of discount has succeeded in managing, starting to hurt you on the NPL side. Where is that coming from and how So regarding NPL, when you look versus Q4, you're right, it's growing. When you're looking at versus quarters before pre COVID, for example, Q1 2020, it's declining. And so we think overall our number It's reasonable even when you compare the percentage of NPL out of total credit This is other banks. So it seems very, very reasonable. But overall, we do expect that as part of this Crisis, which we accrued a lot and the LLP was very high in 2020. Some of it will by the end of the day will hit NPL will hit write off. So for us, it's something we are expecting and it's not surprising us. And as you can see, we still have a very high coverage ratio, although we had a negative LLP. So we do feel very comfortable With the reserve ratio with the overall reserve we have at this stage. Okay. Thank you. Another small question on OCI. It looks like your fair value adjustment for fixed income and other Relevance, the venture is like over $400,000,000 has all negatives. Where is that coming from? Can you repeat the question, if I'm sorry? Yes. On the OCI, the article grants of income, There's a net loss of around 4 something,000,000 shekels due to securities. I was wondering where is that coming from? Market seems to be pretty strong. So I was wondering, On one side, you're requiring a significant amount of gain and the other one you have seemed to have accumulated losses. I'm just wondering where it's coming from. So we'll check and we'll get back to you. Okay. Thank you. And then, 2 more small questions. I saw that the risk weighted asset grew Quite nicely over the quarter. I think the loan part of the risk went up by over ILS5 billion. I'm just wondering because loans didn't grow that quarter so much. So like what if Is that because the NPLs grew and they're more than 100% of risk weighted assets? Why are risk weighted assets on the loan risk growing faster Then your loan growth, I mean, assuming that as you said, mortgages are the main part of that. And I think there's something like 35 to 45 Risk weight on that, so in theory, the number should be lower. How come it's higher? So overall, there is a very strong correlation between the credit growth and the risk weighted asset growth. For more specifically, why it grew a little bit more, we can provide later on the detail. Okay, thanks. Thank you very much for that. The next question is from Borja Ramirez of Citi. Please go ahead. Hello, good afternoon. Thank you very much for your time. I have a couple of quick questions. The firstly is regarding the volume growth. It was quite strong in the Q1. I would like to check if you could provide some color for the rest of the year if we could See this strong volume growth or if it could potentially slow down? And My second question is regarding the The early retirement plan, if it could be possible to provide some details on the And potential cost savings going forward? Thank you. Well, I'll start with the early retirement plan. As I mentioned, this was the last quarter of with the negative impact Overall, in this plan, which we launched in Q3 2020 and just now finished, more than 750 employees Left the bank, around 100 of them are financial retirement and the rest is part of the early retirement program. Overall, I think we can start when you're looking at our salary cost, especially when we are deducting the bonus elements, you can see the decrease In salary cost versus 2020, and we do expect to continue seeing the positive impact Later on in 2021, of course, as I mentioned before, I think the 2 key or 2 major elements of our Strategic plan, 1 was around cost cutting and it's mainly coming from people cost and the second is coming from revenue growth, especially in mortgages. And we do see very good results in both aspects. Regarding the deposit growth you asked about, So we did see in Q1 a substantial increase in deposit growth. It mainly came From corporate and not from consumer. And we do expect That not continue seeing this trend at the rest of 2021. Thank you. Sorry, my question when I also or more Towards the loan side, if you could kindly provide details on loan volumes Going forward. Sure. So overall, we had a very strong Q1 growth in terms of loan. We do expect That around mortgages and corporate and midsize business, we'll continue to see a substantial growth, especially in mortgages. There is a very big demand In the overall market and we continuously taking and gaining market share, so we expect this trend to continue. We do expect at areas where we had not only us, the entire market had negative growth, so Not growth at all like consumers and small businesses. With the recovery of the economy, we do expect that those sectors We'll start growing, start back growing unlike what we have seen in the last 12 months, And it's something we are expecting to have to see industry wise, not only in discount bank in the next few quarters. Very clear. Thank you very much. Please stand by while we poll for more questions. The next question is from Michael Goldberg of Excellence. Please go ahead. Hi, thank you. Just one more question, if I may. I mean, you just pretty much wrapped up around the 600 earlier time and plan And it's not showing up that much in your staff costs. What should we be expecting going forward? So first of all, when you look at the staff costs, you need to eliminate the The bonus amount because in 2020, the bonus were of the bonus accrual was very minimal. And in 2021, It's based on the existing ROE or the ROE expectation is higher. But even and when you look at the numbers without salary cost, without the bonus component, you do see when you look at Q1 This is a quarterly average of 2020, you can see the reduction, for example, versus Q1 2020, You will see 4% reduction. So overall, it is a very positive sign. And overall, in 2021, we do That salary cost will be will show a very good trend versus 2020. We of course, we cannot share specific focus or specific numbers. Okay. But in general, now that the auto retirement scheme is Completed in Q1, we should be or we should anticipate that staff costs should be going down. Is that a reasonable anticipation assumption? There are different elements. For example, there is the annual salary increase that you take into consideration, and It's something which should be seen later this year. On the other end, in some cases, we are recruiting. So I think what we already see in Q1 It's very positive trend. I cannot comment whether Q2 to Q4 numbers are going to be at the same level or a bit higher, a bit lower. But overall, I think the trend in the picture is very positive. And as I mentioned earlier, the people cost or the salary cost is the main cost pillar, And we do see in Q1 an adjusted cost income ratio of 60.6%. So overall, we are very I'm very happy with the cost situation. And of course, we will always continue to see how we can improve and continue to reduce costs. Thank you very much, Barak. There are no further questions at this time. Mr. Narvi, would you like to make your concluding statement? I only I would like only to thank everyone Thank you. This concludes the Israel Discount Bank First Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.