Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank Fourth Quarter 2024 Results Conference Call. All participants are present in 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. As a reminder, this conference is being recorded. March 11th, 2025. In today's conference call, Mr. Avi Levi, CEO, will first present the 2024 and fourth quarter financial results and then review the strategic plan for 2025-2030. We recommend downloading the presentations for the financial results and the strategic plan from our website at investors.discountbank.co.il to follow along during the call. Mr. Asaf Pasternak, CFO, will then present the financial highlights for the year and the fourth quarter.
Before we begin, 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, risks in product and technology development, and the effects of the company's accounting policies as well as certain other risk factors, which are detailed from time to time in company filings with the various security authorities. I will now hand over the call to Mr. Avi Levi. Mr. Levi, would you like to begin, please?
Yeah, thank you very much, and good afternoon to everyone who joined us. Thank you for joining us today. I'm pleased to present the group's results for 2024 along with the group's strategic plan for 2030. Could you please open the first page of the financial highlights review? I'll start there with the first page and then move to the strategic presentation. Firstly, to begin, over the past 16 months of ongoing conflict, Israeli society and the economy have shown remarkable resilience and solidarity in overcoming challenges, ensuring the burden. At Discount Bank and across the group, our employees and management remain fully committed to supporting our customers as well as the communities in North and South. Throughout our flagship initiative, Keren Or, A Beam of Light, we reached and impacted over 12,000 children and young people, making a meaningful difference in their lives.
Discount Bank has dedicated to standing by them in the years ahead. We are all praying for the swift and safe return of all hostages still held in captivity by Hamas terrorists. Now to the first page of the presentation, the highlights. Discount Group delivered robust financial results for the year, achieving a net income of ILS 4.3 billion, marking a record net profit for the group and a return on equity of 42%. Banking operations in Israel, comprising Discount Bank and Mercantile, recorded an ROE of 16.9%, reflecting strong growth and operational resilience. Efficiency ratio for the year stood at 52.1%, with banking activity in Israel reaching 44.1%. Credit grew by 8%, accompanied by an improvement in the credit quality, and meanwhile, net interest margin tightened, leading to a 0.0% year-on-year decline in our net interest income.
In light of these results, the bank has declared a dividend payout of 30% for the fourth quarter, combined with our 10% share buyback program. We will distribute a total of 40% of the net profit for the quarter. At this point, I would like to switch to our strategic plan for 2030, a different presentation. Please move to the presentation and slide three, please. After this presentation, I will return and provide—we will return and provide further insights into our financial performance by Asaf. I will review key initiatives that will drive sustained growth, enhance shareholder return, and strengthen our competitive position in the market. Before diving into the specifics of our strategic roadmap, I'll take a moment to reflect on our transformative decade that shaped our journey and brought us to where we stand today.
Over the past 10 years, we have undergone a profound transformation, successfully executing our two five-year strategic plans. These initiatives have propelled the bank to new heights, fostering strong financial performance. From 2014 to 2024, we have achieved remarkable milestones that reflect our disciplined execution and long-term strategic vision. We doubled our return on equity to 14%, improved our efficiency ratio from 78% to 52%, optimized our cost structure and significantly enhanced profitability, and quadrupled our net profit to ILS 4.3 billion. This decade of strong execution has built a solid foundation for the next phase of our journey. Looking ahead, we are now poised to launch our 2030 strategic plan, focusing on expanding growth opportunities in key segments, driving further operational efficiency, and ensuring sustainable value creation for our shareholders. Moving to slide four.
Before diving into our 2030 goals, it's essential to outline the key macroeconomic assumptions that form the basis of our projections. Naturally, significant deviations in these variables could impact actual outcomes. Inflation is expected to gradually moderate into the target range by mid-year, stabilizing at approximately 2-3% over the next five years. Economic growth is expected to exceed its long-term potential in short term, closing the recent output gap. Thereafter, growth is expected to stabilize at a sustainable pace of 3-4%, reflecting resilient recovery and continued expansion. Taking into account an inflationary environment of 2-3%, we anticipate the Bank of Israel rate stabilizing at the range of 3.5-4.5% over the coming years. Moving to slide five. As we embark on our 2030 strategic plan, Discount Bank is uniquely positioned to seize new opportunities and build on strong fundamentals.
A leader in digital banking, Discount Bank is widely recognized for its pioneering digital banking excellence, consistently ranking among the top banks in consumer satisfaction surveys over the past five years. A robust IT infrastructure, our technology ecosystem is anchored by a stable, robust core banking system and a nearest cloud-based CRM platform. Market leadership in client acquisition. We continue to lead in attracting customers in high-growth segments, including young professionals and students, the Arab community, and the Orthodox Jewish population. The new campus serves us as more than just physical space. It is a catalyst for cultural transformation, fostering the spirit of engagement, collaboration, and innovation. This marks a fundamental shift in the DNA of the bank, laying the groundwork for more dynamic and forward-thinking organizations. Furthermore, Discount Bank is uniquely positioned to drive strategic disruption.
It possesses the agile to innovate while also maintaining the strength and ability needed for industry-wide transformation. This balance ensures that the bank remains in the forefront of the financial evolution, shaping the future of banking in Israel. Slide six, please. We have embraced a bold mission to lead the future of banking in Israel. To fulfill this vision, we will execute our strategy through three core pillars, each designed to drive sustainable growth, enhance customer experience, and strengthen our market position. Discount Bank Solo, focusing on sustainable growth and operational efficiency. The Challenger Group, disruptive and innovative, a disruptive force designed to reshape the industry. By leveraging non-banking initiatives, fintech innovation, and embedded financial services, this group will drive market expansion, particularly in the household and small businesses segment. Group subsidiaries, specialization, and synergy.
The third pillar focuses on our subsidiaries, each excelling in its respective domain while collaborating to create synergies across the group. By enhancing cross-business integration, we will unlock new revenue streams, improve customer offerings, and optimize overall performance. I'll go on a quick review on each of these strategic priorities. Slide seven, the Bank of 2030. Our goal is to enhance efficiency and optimize operations through a comprehensive digital and operational transformation, ultimately improving our financial ratio. This transformation is built on three key pillars: excellence in operational efficiency. We are committed to redefining our operating model to drive cost reductions, streamline processes, and enhance productivity. By leveraging automation, AI-driven decision-making, and advanced data analytics, we will improve efficiency, reduce complexity, and ensure a more agile and cost-effective organization. The second one is a fully digital retail banking experience.
We are designing a seamless digital ecosystem that will become the primary platform for retail customers to manage their banking relationship. This includes end-to-end digital services, personalized banking product offering tailored to customers' needs, AI-powered assistants, and self-service tools. This transformation will elevate customer engagement. The third one is targeted growth in the small business segment. We see immense potential in the small business segment, which remains underserved by the traditional banking system. On one hand, many businesses struggle to access the banking services they need. On the other, this sector is a key driver of economic growth in Israel. Our goal is to bridge this gap by providing tailored financial solutions, supportive credit models, and digital banking tools that cater to the unique needs of small businesses.
Through these three pillars, we are positioning Discount Bank to be a more efficient, customer-centric, and innovation-driven financial institution ready to lead the banking landscape of 2030. Slide eight. The second pillar, the Challenger Group. Our goal is to extend our market share in the retail and SME segments by leveraging innovation in disruptive financial solutions that cater to a broad customer base. The first one, PayBox, which you already know, the bank outside the bank, PayBox, is a flexible and innovative financial platform that operates as a banking alternative for customers across all banks. It is designed to provide seamless financial management solutions, especially for groups, youth, and families.
PayBox provides a diverse range of financial services, such as liquidity management with daily interest rates of up to 5%, flexible joint accounts for families and partners, effortless peer-to-peer transfers and group payments, credit solutions, PayBox for kids, digital flexible financial platform for children aged eight and above under a parent's supervision. GreenLend is a second initiative, a digital credit service provider through partnership with hosting platforms, a collaboration with Ezbob, a fintech firm. A platform provides seamless data-driven credit services to customers regardless of their primary bank. Based on the experience with PayBox and Green Lend, we are committed to establishing new disruptive ventures targeting underserved markets and customers of all banks. Moving to slide nine, the third tier, specialized and synergist subsidiaries are main subsidiaries. Discount Group is expected to undergo changes following the separation of Cal, our credit card company.
The group will lead initiatives that are expected to make a significant contribution to the group's value and strengthen synergies. IDB New York, IDB is the leading US-based bank, leading Israeli US bank. It remains the cornerstone of the group's international presence. We successfully introduced Gallatin Point as a minority shareholder, marking a significant milestone that will support the bank's long-term expansion and operational enhancement. The second target is the sale of Cal, strategic shift to unlock value. Throughout the past year, we have been preparing for the sale of Cal. We engage with J.P. Morgan as our financial advisor to execute the process effectively. We have recently opened an investor data room. Mercantile, expanding in high-growth segments, Arab and Orthodox Jewish communities, as well as municipalities where it has a major market share.
Just yesterday, only yesterday, a new CEO came on board, Barak Nardi, who used to be a member of the management of Israel Discount Bank. We wish him good luck. The last but not least, Discount Capital, the group investment arm, it plays an important role in expanding and diversifying Discount's investment portfolio by leveraging deep market expertise. Moving to slide 10. As part of the development of the strategic plan, a series of projects have been formulated to support achieving the multi-year goals. The first one, operating models for the retail customer. The project is the foundation of the strategic transformation and future growth. Second one, growth, growing the retail market share and strengthening customers' loyalty. The third one, and quite obvious, is the GenAI, establishing infrastructure and governance for the AI to enhance services and drive sales growth.
IT strategy, aligning IT infrastructure with the strategic goals and with the new working method of Agile, which we already started. We have more than 1,300 employees working in Agile methodology. Organizational culture, we aim to foster a culture of innovation and excellence at every level of leadership in the bank. The last slide, number 11, the bottom line, our financial targets we plan for 2030, and these are the minimum numbers. Our target is to achieve at least 13.5% return on equity in 2030, to have at least an efficiency ratio of 43%, to achieve at least a net profit of ILS 5.2 billion, and to pay a dividend of 50%. The number of taking into account the separation of Cal in the next two years. As I mentioned in the beginning, these targets are subject to our estimations of main macroeconomic factors and subject to regulatory changes.
With this, I will forward the presentation to Asaf, our CFO, that will go over the fourth quarter results. Please, Asaf.
Thank you, Avi. And good afternoon, everyone. Please switch back to the investor presentation. I will open my part of the presentation with an overview of the macroeconomic main factors, starting with slide four. After 15 months of military conflict, it is evident that the Israeli economy is resilient and the fundamentals are strong. On the left-hand side, after a modest 0.6% growth in 2024, we anticipate a rebound in 2025 with projected growth of 4%. On the right side, the job market remains resilient along 2024, maintaining unemployment rates below 3%. Slide five shows the most relevant macroeconomic parameters for the banking sector. Market expectations are for two to three Bank of Israel rate cuts in 2025. The trajectory is moving down since November 2024.
On the right side, following a year of high inflation, the market anticipates CPI to decline throughout 2025 and align with Bank of Israel's mid-target range. Moving to slide six. The slide provides an overview of the group performance for the fourth quarter, starting with a net income of over ILS 1 billion and a return on equity of 13.4%, credit loss expenses of 0.12%, credit growth of 1.6%, NIM at 2.63%, and efficiency ratio at 52.1%. I will elaborate on each area in the next slides. On slide seven, you can see our credit growth composition. In the fourth quarter, our credit portfolio continued its stable growth across all sectors and segments. The corporate segment continues to show strength with 3.5% growth, completing an annual growth of 14.8%.
Mortgages grew by 1.4% quarter over quarter and 6.1% annually, and the household segment grew by 1.1% quarter over quarter and 9.1% in 2024. We continue to strictly monitor the credit portfolio as well as the real estate and construction section. Switching to slide eight, you can see some numbers that reflect the risk in our credit book. Overall, credit loss decreased to 0.12%, driven by the decrease in collective allowances, mainly due to improvement in macroeconomic parameters such as unemployment and growth, and more important, an increase in collections as more borrowers return to serve their loans. These are also evident in the decrease of the non-performing loan ratio to 0.61% of total credit, adjusting to the pre-war levels. During the first two quarters into the war, we have taken a prudent approach with total allowances amounting up to 1.6% of total credit.
It is only after the resurgence of the economy that we have started to release the additional allowances down to 1.46%. Moving to slide nine to discuss our income. Total income remains stable, accounting to ILS 16 billion in 2024. Compared with 2023 and excluding one-time items in the amount of ILS 425 million, mainly from sales of buildings, we have increased the recurring revenues from financing activities and fees by 1.8%. Net interest income was lower by 1%, mainly due to spread compression. Fee income grew by 5.7%, mainly from credit card fees in Cal, and non-interest financing income increased to ILS 1.4 billion in 2024, mainly from stock realization and valuation adjustments in Discount Capital. In the middle section of the slide, we can observe the quarterly changes. The flat CPI deducted ILS 330 million quarter over quarter, decreasing NIM to 2.63%.
At the right side, the income from regular financing activities, what we define as financing income from current operations, increased by 4.2% from the first quarter due to the growth in our loan book and balance sheet, as our margins on loan and deposits are narrowing. I will now move to slide 10 to discuss expenses and cost income ratio. In 2024, we have managed to stabilize the recurring salary costs with a slight increase of 0.8%. The increase of 9% in maintenance and depreciation expenses is attributed to the relocation to our new campus. We should expect some further growth in this section in the next few quarters. Other expenses grew by 7.6%, mainly due to the increase of ILS 180 million in clearing fees expenses in Cal, as the turnover in credit cards grew.
As we prepare to the sale of Cal, we do mention that efficiency ratio will drop from 52% to 47% after the separation. As we presented in our strategic review, our managerial focus on reducing costs is in the heart of our multi-year strategic plan. Moving now to slide 11, you can observe our ample liquidity and diversified deposit base. On the left, you can see that 76% of our deposits are from our retail and private customers, 15% from SMEs, 18% from large corporates, and 15% are from institutions. On the right-hand side, our tier one capital ratio stands at 10.66%, well above the 9.19% requirement of Bank of Israel. Our liquidity ratios are well above the regulatory demand, presenting a solid LCR of 130% and NSFR of 121%.
Moving to slide 12, I will briefly touch on our main subsidiaries, starting with Mercantile Bank, that presents a net income of ILS 843 million in 2024 and a return on equity of 16.2%. The cost-to-income ratio reached 42.3%. Mercantile grew its loan book by 6.5% year over year by a well-balanced growth across most segments. IDB New York has presented net income of $89 million in 2024 and a return on equity of 7.1%. The bank grew its loan book by 14%, and total assets grew to $13.9 billion. Working with our partners from Gallatin Point, we are dedicated to enhancing the bank performance and overall efficiency while continuing growth. Cal is presenting strong results in 2024, with a net income of ILS 324 million and an adjusted return on equity of 12.4%, as consumer credit grew by 11.8% and transaction turnover by 13.9% year over year.
At Discount Capital, with a record year and substantial contribution of ILS 311 million from investment realizations and mark-to-market. To summarize my overview on slide 13, I would like to emphasize the key takeaways from this quarter results. First, we deliver solid results with net income of ILS 4.3 billion and a return on equity of 13.4%. Second, we present a continuous and solid credit growth of 8% this year as the economy and the housing market stabilize. Third, as macroeconomic factors improve, collective allowances reduced, NPL ratio went down to 0.61%, and coverage ratio is at 1.46%. Fourth, we remain focused on containing our costs. Salary expenses are contained, but this is not enough. We will see a gradual improvement in the coming quarters. Lastly, the bank continues the payout of 40% dividend.
At this point, we will be happy to answer any questions regarding the strategic plan or the results.
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 Chris Reimer of Barclays. Please go ahead.
Yeah, hi. Thanks for taking my questions. Congratulations on a strong quarter. I was wondering if I could get your comments on the Bank of Israel voluntary plan announced earlier this month to set aside more funds for families impacted by the last two years here.
Any thoughts on that and how it might compare with the programs you already have in place?
Yeah, hi, Chris. Thank you for the question. Yes, you should always consider what you're offered versus the alternative. I think it's a fair and decent alternative that what the Bank of Israel is offering. Currently, we have some voluntary and mandatory plans we take from before. The impact on ourselves and probably on other banks are not that substantial given the net income. It can be helpful and useful for the households and small businesses. I think for the perspective of time, I think this is a good plan. We support it, and we'll definitely join the voluntary plan. We'll do our best to support our clients and the Israeli economy. I hope this answers your question, but if you'd like to further—
Sure.
Yeah, that's good, Avi. My other question regarding expenses. You guys, over the last few periods, have really increased year on year. One thing, if you've reached the maximum or if there's still more to go, I realize some of that might have been because of the ramp-up to the move to the new campus. How should we be looking at going forward? Are you going to return to some more normalized levels, or do you still see some growth there with further investment in your operations?
I will answer this question. First of all, we definitely focused on this area. We see our position in the market in this aspect. We definitely have room to go. We initiated a few months ago, just now, a strategic project led by Avi, by the CEO, of efficiency in the bank.
The main area where we feel comfortable is not on the depreciation, but on other costs and salary costs. This project is a long project. Therefore, I said it's not in one quarter. It includes changing and adapting our operating model and mechanizing manual processes. As I said, you will see the outcome gradually in the next quarter. The plan will be with us for the next two and a half or three years.
Yeah, just to add to yourself, this is a wide-range project. It doesn't only deal with the retiring of employees. It deals with real estate efficiency, procurement, organizational structure, internal processes, and so on and so forth. Eventually, you'll get to the people as well. It has a broad vision of where we can and should cut expenses.
Got it. Great. Yeah, that's very helpful. Thank you. That's it for me.
The next question is from Priya Rohira from Jefferies. Please go ahead.
Hi there. Thanks for taking my question. I have a couple on the 2030 targets, please. The first is on costs and in terms of the shape of the cost growth over the strategy plan. You look to achieve growth and cost efficiency through the use of your digital platform and technology. Will we see an upfront cost or investment into that technology before we start to see the cost benefits, or should we expect the benefits to come in straight away? The second is on your 50% dividend payout ratio. There have been a number of articles suggesting that the Bank of Israel are reluctant to increase the ceiling on the dividend payout ratio from 40%. How confident are you in being able to achieve or deliver the 50% target?
It would be great to understand a little bit more on your thinking to focus on dividends for the payout ratio target as opposed to a mix of step-by-step and dividend. I've seen some of your peers have introduced a similar target, which suggests a mix of both. Any color on that would be helpful. Thank you.
Regarding the dividend, first of all, regarding the—there were three questions. What was the first one? Sorry.
The Bank of Israel, there have been articles suggesting they're reluctant to increase the dividend payout ratio from 40%.
No, this was the last. What was the first one?
Something IT.
Oh, sorry. The cost.
Okay, the IT. The IT. Should we see? Our plan is to shift the investment program into the processes. We should not see a big change in our investment.
Therefore, we'll not see a big change in our depreciation. As in any program, there are short-term targets and long-term targets. Along the way, as I said, you will see a gradual change in our expenses and not a long period of time where we build it and then it comes. It should be gradual. Just let me add to that. As Asaf said, we're going to divert the IT developments into the areas we are looking to save money, to cut expenses. We also started and will continue to improve our productivity by moving to agile. We already did it quite dramatically, I would say, in the last year. We see an immense improvement in the productivity. We would continue this direction. We are hoping to achieve more with the same resources that we currently have. Back to the dividends.
Bank of Israel, of course, as we know, is not letting the bank right now to be above 40%. This is a five-year plan or even six-year plan. We believe and forecast that the natural course of business for the bank would be to make 13.5% and grow in credit by 6-8%. Therefore, there is room for 50% in natural course of business in the long term. I believe that after the Israeli economy will be post-war and post-crisis, the Bank of Israel will feel confident in the markets. It will open it to different dividend payouts. As for the diversification between dividend payouts and buybacks, we have the current program, which is ILS 500 million. We are on the second notch right now. We have two notches before it ends. When it ends, we will make this discussion internally.
Right now, I can't say how we will divide it. In any case, for the investors, both of them are more or less the same. It's giving money back to the investors. I just can assume that the Bank of Israel, in a few quarters, when the economy will stabilize and they will feel more confident, will allow a higher distribution of dividends. I assume that probably all the banks, or the majority of them, will go up to 50%. That's my assumptions. I don't know anything.
Got it. Thank you.
The third question is from Liran Lublin from IBI. Please go ahead.
Hi, guys. Thanks for taking my question. My question is on credit growth. We've seen other banks set the credit growth targets for the upcoming years way above GDP at around 8%. What are your views or targets regarding that matter?
I will answer that.
First of all, they were talking about two years, and we have the five-year in general. I would say for the five years, we estimate the long-term credit goals at between 5% and 7%. In general, of course, it differs between different credit segments. This is what we took into account. Of course, we can grow more because we have enough capital and grow less if there is less demand. It's a matter of price, of course, and risk. Right now, as it seems to us, this is the pace that we should expect.
Just to expand on Asaf's answer, as you can see in the current reports, we grew up quite high double-digit numbers in corporate lending and consumer lending, 9%, which we thought was beneficial for us and for the shareholders.
We stayed a bit, we were a bit reluctant of growing dramatically in the mortgages area because of the very low pricing in the market. We grew up only 6%, but that's because we choose not to participate in the margins, the very low margins environment on mortgages. That's what Asaf referred to, that we will choose where we will provide credit and where not, given the risk and the margins involved.
Thank you very much. That's very helpful.
Thanks, Liran.
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 pull for more questions. There are no further questions at this time. Thank you. This concludes the Israel Discount Bank Fourth Quarter 2024 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.