Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank First Quarter 2025 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 May 19, 2025. If you have not yet done so, please access the presentation on the bank's website, investor.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 securities authorities. I would like to move first to Mr. Asaf Pasternak, Executive Vice President, Head of Strategy and Finance. Mr. Pasternak, would you like to begin?
Yes, thank you very much. Thank you all for joining us today. I extend my warm welcome to this investor call. As we mark the passing of 591 days since the onset of this conflict, we long deeply for the release of our 58 hostages and looking for the moment they are free again. In a passage to today's agenda, our financial reports for the first quarter indicate a continuous momentum in growing our loan book, demonstrating stability and high-quality asset metrics, as evidenced by consistently delivering, throughout this time, robust results. Starting with slide three, this group delivered strong financial results, achieving a net income of ILS 1.036 billion and return on equity of 13%. Banking operations in Israel, comprising Discount and Mercantile banks, recorded return on equity of 14.9%. Efficiency ratios stood at 53.4%, with banking activity in Israel at 45.3%.
Credit grew by 2.1%, accompanied by solid credit quality metrics, and our net interest income grew by 2.6% quarter over quarter. In light of these results, the Board of Directors has approved an update to the dividend policy, according to which the maximum dividend would be 50% of net income as we continue our long-term journey to increase value for our shareholders. In the first quarter, we declared a dividend payout of 30% that, combined with our 10% share buyback program, sums up to 40% of net profits. Before delving into the numbers, I would like to briefly touch on the macroeconomic environment. At slide four, after 17 months of military conflict, it is evident that the Israeli economy is resilient and the fundamentals are strong. On the left side, projected growth for 2025 is at 3.5%, after a modest 0.9% growth in 2024.
The economy is returning to a growth trajectory. On the right side, the job market remains resilient throughout this time, maintaining healthy unemployment rates below 3%. Moving to slide five. Yet, despite the stability and resilience demonstrated by the economy throughout this period, the last quarter reveals indicators that could point a potential shift in the trend. On the left, a decline in apartment sales following December peak. On the right, the stagnation in the growth of private consumption. We are monitoring the macro trends in our loan book closely. Slide six shows the most relevant macroeconomic parameters for the banking sector: Bank of Israel rates and the CPI.
Contrary to early market expectations of two rate cuts till the end of the year, the outlook has shifted after the last reported elevated CPI, and market now anticipates only one rate cut to 4.25% by year-end, following a stabilization at 3.75% towards the end of 2026. On the right side, following a year of high inflation and the last CPI, the market anticipates CPI to decline in the next 12 months and align with Bank of Israel's 2% mid-target range. We believe that the weakness in the private spending, as presented in the former slide, will be offset by an increase in government spending and investments. Now I will delve into the bank's results. Slide seven provides an overview of the good performance for the first quarter. I will elaborate on each area in the next slides. At slide eight, slide eight summarizes our credit portfolio growth and structure.
In the first quarter, it continued its stable growth across all sectors and segments, with 2.1% growth quarter over quarter and 9.3% year over year. The corporate segment continues to show strength with 3.2% quarter over quarter and 14.5% year over year. SMEs with 1.6% and 5.9% respectively. Households and mortgages grew by 1.4% and 1.3% quarter over quarter respectively. Switching to slide nine, overall credit loss was 16 basis points, driven mainly by collective allowances. The total provision in the group without KAL stands at 8 basis points. NPL ratio increased to 0.69% of total credit due to classifications of a few borrowers across the banking group, but remained at low levels. As the economy remained stable, we continued to gradually release the total allowances down to 1.42% of total credit. Moving to slide 10 to discuss our income.
Total income remained stable quarter over quarter, while increasing by 5.5% year over year. Net interest income increased by 2.5% quarter over quarter, mainly due to the support of the CPI that contributed ILS 60 million in comparison with minus ILS 20 million in the fourth quarter. NIM maintained stable at 2.65%. Fee income grew by 3.8% quarter over quarter and 15.5% year over year, mainly from credit card fees and KAL, securities operation fees, and credit and financing fees. Non-interest financing income decreased from ILS 389 million to ILS 280 million, mainly due to the very strong Q4 performance in gains from stock realization and valuation adjustments in Discount Capital Ltd.
At the right side, the income from regular financing activities, what we define as financing income from current operations, decreased by 2.3% from the fourth quarter due to the spread compression in loans and deposits, as well as a decrease of ILS 2.5 billion in non-bearing interest deposits. I will move to slide 11 to discuss expenses and cost incrementation. As we presented in our strategic review in March, our managerial focus on reducing costs is in the heart of our multi-year strategic plan. Total expenses increased by 6.7% year over year, and efficiency ratio has increased slightly by 0.6%. The primary factor behind the rise in expenses is the other costs category, mainly driven by clearing fees associated with clearing income in KAL. Salary expenses are contained, and maintenance depreciation expenses are stable following the completion of our migration to our new campus.
As we prepare to divest of KAL, we mentioned the efficiency ratio will drop from 53.4% to 48.8% after the separation. Moving now to slide 12, you can observe our ample liquidity and diversified deposit base. On the left, you can see that 50% of our deposits are from our retail segments, 18% from large corporates, and 14% are from local institutions. On the right-hand side, our tier one capital ratio stands at 10.53%, well above the 9.19% requirement of Bank of Israel. Our liquidity ratios are well above the regulatory demand, presenting a solid LCR of 131% and an NSFR of 121%. Moving to slide 13, I will briefly touch on our main subsidiaries, starting with Mercantile Bank, that presents a net income of ILS 206 million and return on equity of 14.2%. The cost-to-income ratio stands at 40.2%.
Mercantile grew its loan book by 7.7% year over year by a well-balanced portfolio. KAL is presenting strong results with a net income of ILS 97 million and return on equity of 14.5%, as consumer credit continues to grow at 7.4% and transaction turnover by 13.9% year over year. IDB New York Bank has presented net income of $22 million and return on equity of 6.6%. The bank grew its loan book by 16.5% year over year, with total assets growth of 13.9% year over year to $13.9 billion. With the new management and with our partners from Gallatin Fund, we are dedicated to enhancing the bank's performance and overall efficiency while continuing the growth. The future separation of KAL is expected to have a limited impact on Discount Group ongoing profitability and almost no impact on the group's return on equity.
To summarize my overview on slide 14, I would like to emphasize the key takeaways from these quarter results. First, we delivered solid results with net income of ILS 1 billion and 36 million and return on equity of 13%. Second, we present a continuous and solid credit growth of 2.1% quarter over quarter and 9.3% year over year as the economy remains strong. Third, as macroeconomic factors remain strong, provisions are kept low at 16 basis points. We have kept our asset quality strong, and NPL ratio stands at 0.69%. 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 quarter. Lastly, given our continuous strong performance and the confidence we have in our ongoing profitability, we have raised the dividend policy to up to 50% of net profits.
At this point, actual dividend payout and share buyback remain at 40% of net income. With this, I will finish and would like to open to Q&A.
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 Tavi Rosner of Barclays. Please go ahead.
Good afternoon. Thanks for taking my question, and thank you for the presentation. You talked about the increase of the dividend policy to 50%. Currently, the Bank of Israel has a 40% limit. I'm just wondering what's the timing around the resumption of the 50%? Did you have a conversation with the Bank of Israel, and what is your sense about what needs to happen in order for you guys to be allowed to execute on the 50% policy?
Thank you, Tavi. Unfortunately, right now, I could not say what is the focus for that. I could say that the bank has the self-confidence to get up to 50% of profits. We think the profits are with us for a long time, and we will have to wait for Bank of Israel approval. They are looking at the total economy, of course. My personal belief is that so long as we still have the war situation, it will be difficult for them to change the policy, but this is my personal view.
Right. Thanks for that. Maybe just a broader question. Thinking about how do you see the outlook going forward, let's say, next 12 months, assuming the war doesn't end or stays in the same kind of magnitude, are you confident you can continue to deliver the same pace of growth that we've been seeing for the past couple of quarters?
I think from a matter of income, the risk of the credit risk, so long, I mean, in the current situation, we do not see much risk coming from there in the current war status. As for the market, I think interest rates will be difficult to be, it will be difficult for Bank of Israel to reduce interest rates so long as we are in this situation. The credit spread of Israel bonds are high, and the pressures on the budget are high. I do not think we will see interest reduced. That will be good for our profitability. I think, yes, if the situation continues like this, I do not see a risk for the bank's result. The only thing is that all the banks have excess capital, and we see the credit spreads are shrinking.
The pressure on NIM will stay with us in the coming quarters at this situation.
Thanks. I appreciate the caller. Get back to the queue.
The next question is from Priyatut of Jefferies. Please go ahead.
Hi there. Just a couple of questions from me. First is on the credit loss expense. Can we get a bit more color on the increase quarter on quarter, especially with the higher collective allowance? What was the drive behind that increase? For example, have you changed any of the macroeconomic assumptions behind that allowance? My second question, it's more around the strategy. Obviously, we've recently had the news about a potential sale of KAL, and there's a non-binding offer submitted. What are the next stages to this? Are you still open to other buyers? Are you conducting your own due diligence? With the current offer, how confident are you that the competition authority will allow the sale to go through? Many thanks.
Okay. I will start with the first one. First of all, I do not think we have the change between this quarter and last quarter is less than ILS 20 million. If I look at the percentages, it is a shift from 12 basis points to 16 basis points. In general, this is a steady, I look at it as a steady place. There are always fluctuations between quarter and quarter, so I cannot put a finger to anything specific that changed. I cannot say that we have done a major change in our model. I think between 10 and 20 basis points, these are good numbers in general for the long term. This is where we are right now. As for the KAL offer, I guess it is all in the papers, so I cannot really give you new information, but we have five offers.
We are working now on creating a shortlist. We have good players who I think all of the offers are coming from very good and strong players. I think all of them will get approval of the authority. I believe that we will be able to complete the process, at least the choosing process, in a matter of months. It will go to the authorities to approve it, which will take some more time. In general, I think we have seen very good demand, and we are happy with that.
Thank you. Can I just ask one follow-up question, if you are able to? I guess post-sale, how easy is it for you to divest from KAL? For example, post-sale, would you be able to still benefit from cross-selling products through KAL, or is this a complete separation from the business?
We are already working not only with KAL, we are working with other players as well. In general, it would not change our business model. The only thing that it will create is excess capital, of course, that we will have to handle. This is the big question that we have: how much of it can we deploy?
Perfect. Thank you.
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. This concludes the Israel Discount Bank First Quarter 2025 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.