Earnings Call: Q2 2025

Aug 14, 2025

Summary

Net income reached ILS 1.12bn and adjusted net income ILS 1.27bn, with credit growth and solid asset quality. A 50% profit distribution and efficiency initiatives underpin the outlook, while conflict and margin pressure remain risks.

Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank Q2 2025 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. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded August 14, 2025. 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 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? Thank you, Karen. Thank you all for joining us today. I extend my warm welcome to this investor call. As we mark the passing of 678 days since the onset of this conflict, we long deeply for the release of our 50 hostages and looking for the moment they are free again. In a passage to today's agenda, starting with slide 2, I would like to begin the review by examining the achievements of the past quarter in alignment with the bank's strategic execution. First, earlier this week, the bank signed a historic collective labor agreement with the employees' union designed to support the bank's strategic objective and focus on enhancing managerial flexibility. The new terms aim to encourage excellence and adapt organizational culture to fit the evolving market and challenges. It allows for termination of up to 75 permanent employees with tenure under certain terms in the next three years. We estimate the total cost at approximately ILS 65 million annually, which represents a 30% saving compared to the previous agreement. We do not foresee any material impact on the bank's profits for 2025 to 2027. Second, as outlined in our strategy, we are focused on growing our loan book. In the last quarter, the portfolio grew by 1.9%. Banking in Israel consisted of Discount and Mercantile achieved 3.6% growth in line with the strategy we have set. Third, we continue to implement our efficiency plan across the bank's divisions and across the group. The results of the initiatives would materialize in the coming quarters. Fourth, as part of our strategy, we have defined the digital space as a preferred channel for customers. In this context, in July 2025 survey conducted by Bank of Israel, the bank's website and mobile application received high ratings. Moving to slide 3, to discuss the impact of CAL's sale process. As stated, the bank is in negotiations with three bidding groups, which have advanced to the second stage to enter into a binding agreement for the sale of its holding in CAL. Accordingly, beginning this quarter, CAL is presented as a discontinued operation. The current consolidated report presents financial data excluding CAL, and prior period figures have been reclassified accordingly. Lastly, last week on August 6th, the Tel Aviv District Court partially accepted CAL's appeal together with other credit card companies against VAT assessment regarding interchange fees from international acquiring and fees on foreign currency transactions. The court ruled that transactions conducted abroad with the physical presence of the card are subject to zero VAT rate, while card not present transactions are subject to full rate. CAL is reviewing the judgment, and at this stage, the bank has recorded a provision of the bank's share in CAL of ILS 75 million. Now, I will delve into the details of the bank's results. At slide 4, Discount Group delivered strong financial results, achieving a net income of ILS 1.12 billion and return on equity of 13.6%. The adjusted income amounts to ILS 1.27 billion and return on equity of 15.6%. Banking operation in Israel, comprising Discount Bank and Mercantile, recorded ILS 1.1 billion and return on equity of 18.1%. The following numbers have been reclassified: efficiency ratio at 46.1%, where banking activity in Israel at 42.2%. Total credit in the group grew by 1.9%, accompanied by a solid credit quality metrics, banking Israel by 3.6%, and net interest income grew by 10% quarter-over-quarter. In light of this result, the dividend payout ratio was increased from 30% to 40%, coupled with a share buyback of 10%, amounting to a total of 50% of the total net profit, marking a milestone as the highest distribution in the bank's history. Now, I would like to briefly touch on the macroeconomic environment. At slide 5, on the left-hand side, projected growth for 2025 stands at 3.3%, lower than our former forecast of 3.5%, as the military conflict prolongs. The consensus forecast anticipates 2026 to be a rebound year with GDP growth of 4.6%. On the right-hand side, the job market remained resilient throughout this time, maintaining a healthy unemployment rate below 3%. Slide 6 shows the most relevant macroeconomic parameters for the banking sector, Bank of Israel rates, and the CPI. The market anticipates, since last May, only one rate cut to 4.25% by year-end, followed by stabilization at 3.6% in the second half of 2026. On the right side, following higher inflation in the last quarter, the market anticipates CPI to decline in the next 12 months and align with Bank of Israel's 2% mid-target range. Slide 7 provides an overview of the group performance for the second quarter. I will elaborate on each financial area in the next slide. Therefore, we'll move to slide 8, where we summarize our credit portfolio growth and structure. In the second quarter, it continued its strong growth across most segments, with 1.9% growth quarter-over-quarter and 8.9% year-over-year. I would like to stress that the 1.9% growth is after deducting approximately 1%, almost ILS 3 billion growth, reflecting the impact of the shekel's appreciation on the US dollar-denominated credit portfolio in IDB New York. The credit portfolio of banking in Israel grew by 3.6% quarter-over-quarter. The corporate segments continue to show strength with 5.3% quarter-over-quarter and 16.9% year-over-year. SMEs align with our growth strategy with 1.8% and 6.5%. Households are stagnant with -1% quarter-over-quarter and +3.3% year-over-year. Mortgages grew by 2.6% this quarter and 7.4% over the year. Switching to slide 9. The slide presents our credit portfolio quality. Herein, we illustrate the impact of the reclassification post-exclusion of CAL from financial statements. In 2024, credit loss expenses restated from 26 basis points to 17. The first quarter, with total provision rate of 9 basis points and a low level of specific provision. The reclassified asset quality metrics affirms the strong quality of our loan book. On the right-hand side, NPL ratio increased marginally to 70 basis points of total credit as the economy remains stable and with low LLPs, we continue gradually to release the total allowances down to 1.3% of total credit. Moving to slide 10 to discuss our income. Total income increased by 7.4% quarter-over-quarter, supported by a 10% growth in net interest income, primarily driven by the contribution of CPI that added ILS 277 million compared to ILS 62 million in the first quarter. Accordingly, the NIM increased to 2.7%. Fee income grew by 1.5% quarter-over-quarter and 10.3% year-over-year, mainly from fees and commissions on financing activities and operations in securities. At the right-hand side, the income from regular financing activities, what we defined as financing income from current operations, decreased by 1.3% quarter-over-quarter, mainly due to the impact of the benefits granted by the bank to its customers under the Bank of Israel outline. I will move to slide 11 to discuss expenses and cost-income ratio. Total expenses increased by 1.6% quarter-over-quarter and 3% year-over-year, and efficiency ratio has improved to 46.1%. Salary expenses are contained, and maintenance and depreciation expenses are stable. In other expenses, the increase in this quarter is attributed to non-recurring items, mainly claims. 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. Within the plan, the bank has launched a comprehensive efficiency program covering all divisions. The program combines workforce optimization targets with a review and enhancement of work processes. Together with the ongoing digitization of operations and transition of customers to digital channels as the preferred mode of interaction, the bank sees a substantial efficiency potential. In addition, the efficiency program would be extended to Mercantile Bank and IDB New York. Moving now to slide 12, you can observe our ample liquidity and diversified deposit base. On the left, you can see that 48% of our deposits are from our retail segments. On the right-hand side, our tier one capital ratio stands at 10.53%, well above the 9.75% board limit. Our liquidity ratios are well above the regulatory demand, presenting a solid LCR of 129% and NSFR of 118%. Moving to slide 13, I will briefly touch on our main subsidiaries, starting with Mercantile Discount Bank, that presents a net income of ILS 230 million and return on equity of 15.6%. The cost-to-income ratio stands at 40.3%. Mercantile grew its loan book by 6.5% year-over-year by a well-balanced portfolio. CAL is presenting a net income of ILS 73 million and return on equity of 10.5%. Given the bank's provision of ILS 75 million for its share in the VAT ruling, CAL's contribution to the group resulted in a loss of ILS 30 million in the quarter. IDB New York Bank has presented net income of $17 million and a return on equity of 5%. A one-time LLP expense resulted in an increase in the provision to $9 million. The bank grew its loan book by 13.5% and deposits by 15.7% year-over-year. To summarize my overview on slide 14, I would like to emphasize the key takeaways from this quarter results. First, we delivered solid results with net income of ILS 1.12 billion and return on equity of 13.6%, adjusted net income of ILS 1.27 billion, and adjusted return on equity of 15.6%. Second, we present a continuous and solid credit growth of 1.9% quarter-over-quarter and strong growth of 3.6% in Israel, led by the corporate sector. Third, as macroeconomic factors remain strong, provision are kept low at 9 basis points. We have kept our asset quality strong, and NPL ratio stands at 0.70%, which allows a reduction of allowance coverage ratio to 1.3%. Fourth, we remain focused on containing our costs. Salary expenses are contained, but it is not enough. We will see a gradual improvement in the coming quarters as our comprehensive efficiency program will gain momentum in the bank and in the group, as mentioned before. Fifth, the new collective labor agreement will serve as a key enabler of the bank's efficiency program and the transformation of its organizational culture. Lastly, given our continuous strong performance and the confidence we have in our ongoing profitability, we have announced a dividend payout of 50% of net income, making a milestone as the highest distribution of the bank in the bank history. 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 1. If you wish to cancel your request, please press star 2. If you're 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 Chris Reimer from Barclays. Go ahead, please. Hi. Yeah, thanks for taking my questions, and congratulations on the strong results. I was wondering if you could talk about credit for a bit. How do you see the scope for continued loan growth, and what are the drivers behind that, given what we've seen is sustained high single-digit year-on-year growth? Thank you, Chris. We see the growth focus on the corporate sector on one side, which is double digits in the last four quarters. We've seen slower growth in mortgage and retail. I think part of the growth is coming from the excess capital that all banks have. I think that the fact that Bank of Israel let the banks give out 50% of their dividend will start to have impact, maybe not in the coming quarter, but later on when capital excess will be smaller. We probably will see slower growth rates and probably also higher spreads. Got it. Yeah. You touched on the disposal of CAL and the new employee agreement, but what are some of the other areas you're targeting in lowering the cost-income ratio, and what strategies are you implementing for those targets? We have a strategic project in the bank that we've started two quarters ago. We have very detailed project lists for different areas of the bank. We are talking about moving activities from branches to back office, moving activities from manual into mechanized processes, putting AI models into customer treatment in our call centers. All these projects are happening now. Naturally, they are taking some time because we are talking about projects that are looking at put models into mechanized. As I said, we will see their outcome in the next few quarters. Got it. Okay, that's it for me. Thanks. Thank you, Chris. The next question is from Lawrence Bonnet from BNP. Go ahead, please. Yes, good afternoon. Congratulations for the solid result. Just one quick question. Even still the uncertainty in terms of geopolitics, and we all know what's going on, and we all know that you have now a track record, if I could say, for more than two years. My question is the following. Given this element, this parameter, do you expect further deterioration on one of your credit portfolio? If you think yes, for which specific segment this deterioration would be affecting this type of portfolio? Thank you. Thank you, Lawrence Bonnet. Naturally, all our expectations are already within the numbers in the collective allowances. We have done higher collective allowances, if you remember, at the beginning of the war, in the last quarters of 2023, first quarters of 2024. Now moving on, some of this over-collective allowances are coming back simply due to the fact that we don't see any actual signs in specific areas, and the macro numbers are better. We see better GDP growth, unemployment rates are very low. Of course, housing is under more We are more cautious about the whole housing sector, that this is natural, but we don't have any specific signs where we could say this is more than the usual dangerous right now. Thank you. The next question is from Priya Rathod from Jefferies. Go ahead, please. Hi. Thanks for taking my question. I've got two questions on costs and then one on the NPL coverage ratio, please. The first is on other costs. That came in higher this quarter. Could you provide a bit more color on the moving parts and what was the driver of the higher other costs? The second is on the new collective labor agreement. Can I just check if the savings you're making from this is already incorporated in your cost income guide? When should we start to see that ILS 65 million cost start to come through the P&L? Finally, on the NPL coverage ratio, it seems to have come down from the end of 2024. Could you provide a bit more color on why this has come down since then? Thank you. I hope I have got it all, so I will start, and if I miss something, Priya, just tell me, okay? Regarding other costs, they are up about ILS 40 million compared to last quarter, and it is mainly from suits, for lawsuits. This is one-timers. Regarding coverage ratio, the non-performing loans, as I said, the actual conditions of the companies are better, so we see a lower NPL in the last quarter. It is more or less the same as the quarter before, but in the last four quarters, compared to last year, we do see NPL is moving down naturally. I missed this. What was the second one? Sorry about that. It was on the new collective labor agreement, whether the savings have already been incorporated into your cost income guide, and then when that ILS 65 million cost will start to come through in the P&L. Right. As I said, we do not see any major influence on our forecast. It was already taken into account when we built our forecast for the next three years. We are going to see it naturally starting on 2026 compared to No, even 2025, we will see some, naturally, because on every year we have adjustments of the salaries of the worker at between 2% and 3%. This is more or less in the range. Therefore, I said that it is not something that we did not take into account when we planned before. Great. Thank you. I think what is important is that we have the flexibility to remove up to 75 tenured workers. This is a new thing for Discount Bank, historical in Discount Bank, and we believe it will enable us to improve the culture within the bank. The next question is from Liran Lublin from IBI. Please go ahead. Hi, guys. Congrats on the results. I have just one question. Looking at your NIM excluding CPI, we have seen about 30 basis points contraction over the past year. I was wondering what drove this decline, and if you can, as much as you can, please break it down to all the components. I think I was talking about this in the past shows. We see the NIM compression coming from both sides of the balance sheet, both from the liability side and the asset side. In the liability side, we see the biggest element is the migration of non-interest-bearing deposit into interest-bearing deposit. It is happening at a slow pace, but it is happening all the time. It started, of course, when the Bank of Israel rates started to climb. On the asset side, we see a very strong supply of credit coming from all the banks in general, and Discount Bank in particular, because we have excess capital. Therefore, you see a decline in the rates in the credit side. I would say that if I was talking one year ago, the liability side was stronger in the influence, and right now, the liability side is more stable, and we see more pressure coming from the credit side. That is why I was a little bit optimistic, because Bank of Israel allowance to give up to 50% dividend might change that when banks will have less supply of credit. Therefore, we might see some change in the trend there. Yeah, but when I look at Discount Bank compared to the banking system, I see that the compression is quite unique at Discount, much higher than other banks. What is unique in Discount Bank in that regard? The starting point of Discount Bank margin is higher than the other banks. So the pressure on the liability side was stronger, and you see it when you compare it to other banks. Okay, got it. Thank you. If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. There are no further questions at this time. Thank you. This concludes the Israel Discount Bank Second Quarter 2025 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.