Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank third quarter 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, November 17th, 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 respected companies' business, financial condition, and results of its operations are subject to risk 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, risk 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 filing with the various securities authorities. I would like to move first to Mr. Morris Dorfman, Executive Vice President, Head Strategic and Finance. Mr. Dorfman, would you like to begin?
Yes, thank you. Thank you all for joining us today. I extend my warm welcome to this investor call. Starting with slide two, Discount Group delivered strong Q3 results with net income of ILS 1.13 billion and ROE of 13.7%. Adjusted net income for one-offs amounted to ILS 1.25 billion, representing an ROE of 15.1%. Banking operations in Israel, comprising Discount Bank and Mercantile Bank, recorded ILS 890 million and an ROE of 14.3%. Discount's cost-efficiency ratio was 44% in Q3, while the cost-income ratio in the banking activity in Israel was slightly lower at 42.6%. Total credit in the group grew by 3.4%, accompanied by solid credit quality metrics, while net interest income (NII) remained flat QoQ in Q3. In light of these results, the board decided to pay out 50% of Q3 net income.
Moving to slide three, despite two challenging years, Discount Bank has consistently shown double-digit ROE of 14% and stable net income. These figures exhibit the strength of the bank and the resilience of the Israeli economy. At slide four, on the left side, 2025 GDP is now expected to grow by 2.5%. That said, Bank of Israel expects 2026 GDP to rebound notably, with GDP growth at 4.7%. On the right-hand side, the job market remained resilient throughout this time, maintaining a healthy unemployment rate of 3.4%. On slide five, we summarize our credit portfolio growth and structure. In the third quarter, it continued its strong growth across most segments, with a 3.4% growth rate quarter-on-quarter and an 8.9% year-over-year. The corporate segment continued to show notable strength, as credit grew by 5.6% quarter-on-quarter and 17.4% year-over-year.
SME credit grew 1.6% and 4.6% respectively, while household credit grew a healthy 4.3% QoQ, and mortgage grew by 2.2% QoQ and 7.8% year-over-year.
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Switching to slide six, this slide represents our credit portfolio quality. A stable economic environment is reflected in the consistent NPL ratio of 0.70%. The allowances ratio stands at 1.3% of total credit, with a strong coverage ratio of 191%. On the right-hand side, credit loss expenses climbed to 28 basis points in the third quarter. The observed increase in provision is mainly due to two isolated corporate incidents made at Mercantile Bank, amounting to approximately ILS 50 million. Excluding the Mercantile provisions, collective provisions amounted to almost 90% of all Q3 provisions, reflecting Discount's conservative stance on our credit portfolio. However, a nine-month year-over-year comparison revealed a decline in overall provisions, as prior quarters exhibited comparatively lower provision levels. Moving to slide seven to discuss revenues.
Total revenues increased by 0.9% QoQ, while fee income grew by 2.5% QoQ and 10.9% year-on-year, mainly from fees and commissions from financing activities. Net interest income, NII, slightly decreased by 0.2%, while CPI contribution remained stable. Ongoing pressure on lending and deposit margins is persistently eroding the bank's net interest margin. At the right-hand side, the income from regular financing activities decreased by 1.1% QoQ, despite a 3.4% expansion on our loan portfolio. Financing income declined, primarily driven by the narrowing of credit and deposit margins.
I apologize, we had a problem with the line. I will move to slide eight to discuss expenses and cost-income ratio. Before we delve into these quarter figures, let's briefly review the bank's journey over the past decade, marked by significant improvement in its efficiency ratio, from 67% to 52% post-COVID, and further reduction to 45% following the divestiture of CAL. While we have come a far way, we think we can still improve our cost efficiency notably in coming years, as we mentioned in our strategic plan announced earlier this year. Moving to slide nine, total expenses decreased by 3.8% quarter-on-quarter and by 1.2% year-over-year, and the cost-income improved to 44%. Salary expenses dropped 6% this quarter as we continue to maintain expense discipline. As previously communicated in the last quarter's report, the recently concluded wage agreement is expected to provide enhanced operational flexibility for management.
Maintenance and depreciation expenses and other expenses are stable, with changes mostly attributed to non-recurring items. Moving now to slide ten, 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 segment. On the right-hand side, our T1 Capital Ratio stands at 10.47%, well above the 9.2% Bank of Israel requirements. Our liquidity ratios are well above the regulatory requirements, presenting a solid LCR of 170% and NSFR of 116%. Moving to slide 13, I will briefly touch on our main subsidiaries, starting with Mercantile Bank, that present a net income of ILS 234 million and ROE of 15.8%. The Cost-Income Ratio stands at 37.5%. Mercantile grew its loan book by 7.6% year-over-year by a well-balanced portfolio. CAL is rising a net loss of ILS 88 million.
The loss in the third quarter is attributed to the expenses related to the VAT assessment ruling, totaling ILS 137 million net, and an increase in the Phantom Stock Option provision of ILS 75 million after tax impact. As the VAT ruling loss recognized in the consolidated report in the previous quarter, CAL profit contribution amounted to ILS 40 million in this quarter. IDB NY Bank reported a net income of $24 million and ROE of 7%. The bank grew its loan book by 12.9% year-over-year and deposit by 30.9% year-over-year. To summarize my overview on slide 12, I would like to emphasize the main takeaways from this quarter results. First, we delivered solid results with net income of ILS 1.13 billion and ROE of 13.7%. Second, our cost-income ratio dropped to 44%. Credit continues to grow at a healthy rate of 3.4% quarter-on-quarter and 8.9% year-over-year.
Q1 equity remained stable at 10.5%, which allowed further expansion next year. Stable asset quality metrics with NPL ratio of 0.70%. The CAL sale is likely to boost our 2026 ROE by 1.2%, while stressing a T1 ratio by 0.6%. Lastly, given our continued strong performance and the companies we have in ongoing profitability, we announced a dividend payout of 50% of net income, reflecting a gross dividend yield of 5%. With this, I finish. I would like to open to Q&A.
Thank you. Ladies and gentlemen, at this time, we'll 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're using speaker equipment, kindly leave the answer before pressing the number. Your questions will be pulled in the order they're received. Please stand by while we pull for your question. The first question is from Priya Rathod of Jefferies. Please go ahead.
Hi there. Thanks for taking my questions. I just have two questions, please. The first is on AUM, specifically for your small businesses section. There was a notable jump in AUM quarter-on-quarter. Would you be able to give a bit more color on what is actually driving that AUM number, but then also what's driving the increase in the third quarter? The second question is on mortgages. Again, it was a really solid quarter in terms of growth and volumes, but how should we be looking at that number in the context of the sector data, particularly the declining of new home sales? I guess my questions are what drove the higher mortgage volumes this quarter, and then how should we think about volumes going forward? Thank you.
I didn't get your first question, but I will answer about the mortgages question, and then maybe if you can repeat the first one. What's happening with mortgage, as you understand, the real estate sector in Israel at the moment is not moving too much, but most of the mortgages that have been sold this quarter, the last quarter, are one of the houses that were bought two years ago. There's this model in Israel when you pay 20% in advance and 80% just when the house is finished. Most of the people that bought houses about two, three years ago, they took mortgages this year. What you see now is a movement of money of the houses that were bought a couple of years ago. I didn't hear your question, the first question. I didn't understand the question.
Yeah, so the first question was on assets and the management, so AUM, particularly in the small businesses segment. There was quite a notable jump in AUMs quarter-on-quarter. I just wanted to ask what actually drives that AUM number and what drove the increase quarter-on-quarter?
We do not see something special about the small businesses. It is part of our strategy, so we really focus on that. I cannot say there is something unique in that. It is just our focus on this sector, if I got your questions right.
Perfect. Thank you.
Thank you.
The next question is from Chris Reimer of Barclays. Please go ahead.
Hi, thanks for taking my question. Sorry if this was asked already, but how do you see dividends going forward in relation to the Bank of Israel announcement on the easing of restrictions for dividends?
Sure. Of course, we had a discussion about it in our board, and our thought and our decision is to be consistent in the way we pay dividends. We thought it's better to keep the same level of dividend and not change it every quarter. Therefore, we chose to pay 50%, and we plan to do it, of course, to keep the same in the future.
Got it. Regarding expenses, aside from the divestment of CAL, do you see room for cost efficiencies in other areas?
Yes, of course. As you know, it's part of our strategy to improve our efficiencies, so we're doing it both in the bank and in addition in Mercantile, also working on that. We're also examining what can be done together, Discount with Mercantile. Of course, also in IDB New York, there's a new management team, and they're working on new strategies, which will emphasize efficiency.
Great. Got it. Thanks. That's it for me.
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 third quarter 2025 results conference call. Thank you for your participation. You may go ahead and.