Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank full- year and fourth 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 March 10th, 2026. In today's conference call, Mr. Avi Levi, CEO, will first present the 2025 financial highlights and the main takeaway points. Mr. Morris Dorfman, CFO, will then review the fourth quarter financial results. If you have not yet done so, we recommend downloading the presentations from the financial results of the bank's website, investors.discountbank.co.il.
I would like to remind everyone that forward-looking statements for the respective company's business, financial conditions 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, 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 filings with the various securities authorities. I will now hand over the call to Mr. Avi Levi. Mr. Levi, would you like to begin, please?
Thank you very much, and good afternoon, everyone. Thanks for joining us in our annual investor call. On this call, I will summarize the main events that shaped 2025, how Israel Discount Bank fared through those challenges, and how it will be shaping the group's future. I will start with Slide 3. Despite the challenging and complex 2025, we delivered strong 2025 results with a net income of ILS 4.14 billion and ROE of 12.6%. Adjusted net income for our one-offs amounted to ILS 4.5 billion, representing an ROE of 13.7%. Banking operation in Israel comprising of Discount Bank and Mercantile recorded ILS 3.5 billion and ROE of 14.4%.
Discount cost efficiency ratio in 2025 was 49.2%, while the cost income ratio at the banking activity in Israel was slightly lower at 46.9%. Total credit in the group grew by 8%, while net interest income increased by 0.7% year-on-year, despite the low CPI, the drop in interest rates, and the composition of funding rates, the competition on funding rates. The bank paid out 47% of 2025 net earnings and dividends and buybacks. As we can see on Slide 4, ROE in 2025 remained similar to ROE in recent years, with a healthy double-digit ROE of around 13%. Excluding one-offs, ROE for 2025 would have been 13.7%, with similar to recent years' performance. Moving to Slide 5.
On the graph on your left, you can see loan growth continued to be significant in 2025 as Discount grew its loan book, excluding Cal, by 8%, while nominal loan growth excluding the sharp appreciation of the Israeli shekel was almost 10% year-on-year. Most of 2025 loan growth, 61% of it, stemmed from notable demand in the corporate segment. Strong demand for mortgages were the bank's second-largest driver, accounting for 26% of total 2025 growth, while SME loans grew by 44% year-on-year. On the right side, you can see that although loan growth remains strong, it did not hurt the bank's credit quality.
The bank's total problematic debt declined to 1.9% of the loan in 2025 from 2.4% in 2024 and versus 3.5% of loan in 2023. Overall, in 2025, problematic loans dropped by ILS 1.2 billion. Now moving to Slide 6. Discount continued to focus on concentrate constraining costs and increasing efficiencies. This is an ongoing process, and we believe we can still improve a lot in the coming years, but we have come far. Just half a decade ago, Discount cost income ratio was above 67%. In 2025, our reported cost income ratio was 49.2%, significantly lower, but still not low enough. We strongly believe we can do much better, and as we published in our strategic long-term plan, we expect ratio down even further.
In the graph on Slide 6, we decided to show the improvement of Discount's cost efficiency efforts in balance sheet terms as a ratio between operating expenses and our assets. This ratio is independent of the bank's revenue. In recent years, revenue have been positively affected by the higher interest rate, and that distorts some of the real efforts made by the bank. We expect that the rates likely to continue to drop. Our efforts to reduce costs and increase productivity and efficiency will have to increase. We have a plan to continue and focus on growing the bank's assets and reducing costs in an effort to do more with less. Now please move to Slide 7.
As a result of Discount's consistent double-digit ROE, we have been able to keep capital ratios at a very healthy level of well above 10%, with more than 1% above regulatory requirements. As we can see the graph on your right hand. As a result, Discount has been able to pay out more of its earnings back to investors, increasing its payouts ratio from a mere 5% just a couple of years ago to 47% in 2025. While we paid 50% of the net earnings in the second half, as can be seen on the left side of Slide 7. Looking ahead, we believe it's crucial for Discount to keep a healthy balance between its ability to grow its balance sheet and pay out sufficient divi.
The pending sale of Cal, once approved, should boost our capital ratios by up to 0.5%, potentially leaving our Common Equity Tier 1 ratio at closer to 11%. This should provide the bank with ample capital buffers to allow it to continue to grow its asset base and seek to optimize shareholders' return. Please move to Slide 8. The bank continues to focus on expanding its strategy. At the bank, the focus is on 20 main efficiency projects that will allow the bank to reach its cost income targets. The bank continues to focus on reducing the number of employees, and during 2025, over 90 employees left the group. We expect this trend to intensify in coming years.
Likewise, bank, the bank continues to reduce its branch footprint, and during 2025, the bank reduced its branches square meters by another 5%, bringing the group's branch square meter down by almost 20% since 2020. Discount also continues to focus heavily on AI, and in 2025, we introduced a first-of-its-kind talking AI bot. This talking bot is an effort to improve customer service satisfaction, and the bank introduced Smart Future, a first-of-its-kind pension planning bot. At Mercantile, we appointed a new CEO, reduced the number of senior management, and initiated early retirement, which should allow the bank to reduce its workforce by more than 12% through 2028. At IDB New York, we entered a strategic partnership with Gallatin Point Capital back in late 2024 in an effort to create better value for its shareholders.
During 2025, we entirely changed management, reduced senior management, and initiated a new aggressive three years strategic plan focused on improving profitability. At the same time, IDB New York completed its consent order, allowing new management to focus entirely on creating value. At Cal, we signed a binding agreement to sell the company to consortium of Union Investments and Harel Insurance. The deal is currently awaiting regulatory approval, and once approved, this will significantly boost the bank's capital ratios and allow the bank to continue to grow its assets while paying out excess capital to its investors. Overall, I'm proud to say that Discount is making notable headway in every one of its strategic targets. Moving to Slide 9. Looking ahead, we expect loan demand to remain strong as the Israeli economy is expected to rebound sharply.
As you can see on Slide 9, GDP is projected to rebound significantly, and it's expected to grow by over 5% in 2026 after a 3% growth rate of GDP in 2025. At the same time, the labor market remains exceptionally resilient. Turning to Slide 10. The rebound in economic activity is expected to be driven by post-war pickup. We expect these conditions, together with the strong labor market, to remain a healthy driver for continued loan demand, while easing monetary policy should continue to reduce borrower stress and provide a positive backdrop for improving credit quality. Moving to Slide 11, where we summarize our main takeaways for 2025. Profitability remains strong at mid-double-digit ROE, despite challenging backdrops and one-time events.
Discount continues to grow its loan book, but in a cautious and conservative way in an effort to increase profitability but reduce risk. Discount is committed to retain strong capital ratios, which will be boosted by the pending Cal sale, allowing the bank to continue to balance healthy loan growth with optimal investor return. We continue to implement our long-term strategy, reducing headcounts, streamlining our group structure, and increasing in-group synergies, and continue to develop technological solutions in an effort to provide our customers with best-of-breed service platform. Overall, 2025 has been a year of major transformation. We entirely changed the senior management at IDB New York, cleared the slate of regulatory consent order, and initiated a new strategic plan focused on significantly improving return on equity.
At Mercantile, we changed management, launched an aggressive early retirement plan, which together with its new strategic plan, should notably increase profitability in coming years. We are in the final stage of selling Cal, which will allow the bank to continue to grow its loan book and pay out ample available earnings to its shareholders. We are not done yet, and the plan to work tirelessly and consistently to continue to improve efficiencies, streamline synergies, and increase shareholders' return. Our strategy is set. Execution is on the way. With that, I would like to hand over the presentation to Mr. Morris Dorfman, the bank CFO. Morris.
Thank you, Avi, and good afternoon to you all, and thank you for joining on investor call. I will start at Slide 13. In the first quarter, Israel Discount Bank reported a net income of ILS 856 million and ROE of 10.2%. Q4 earnings were hurt by an early retirement plan at Mercantile Discount Bank, which reduced net income by some ILS 104 million. Earnings were also hurt by negative CPI, which was minus 0.6%, which reduced net income by some ILS 80 million and by a weak quarter IDB New York, among others, the result of changes in senior management. Net income, excluding the retirement costs at Mercantile Discount Bank, amounted to ILS 960 million, representing ROE of 11.4%. Discount reported cost income ratio was 59.3% in Q4.
Excluding the retirement plan at Mercantile, the cost income ratio would have been 53.9%. Total credit in the group grew by 0.7% as depreciation of the shekel hurt the dollar-denominated loans, while new management at IDB New York has been taking a more cautious approach to loan growth while focusing on improving profitability. Loan loss expenses dropped to 0.2% of total loans. In light of these results, the board decided to pay out 50% out of the group Q4 net income, ILS 428 million in dividends. Please turn to Slide 14. ROE in Q4 was 10.2%, below the ROE recorded in previous quarters, when ROE consistently remained well above 13%, as can be seen in the graph on the left side of the slide.
The right-hand graph illustrates the main three reasons ROE in Q4 was lower than ROE in Q3, for example. The significantly lower CPI, which was -0.6% in Q4, versus +1.4% in Q3. This 2% quarter-over-quarter drop hurt Q4 ROE by some 3.2%. We note that Bank of Israel expects the CPI to average +1.7% in 2026. Mercantile early retirement plan reduced net profit by ILS 104 million, reducing Q4 ROE by another 1.2%. We expect that the retirement plan will have an ROI of two to three years, implying the retirement plan has a cost now but will improve the bank ROE in the future.
A weak quarter IDB New York with net income in Q4, just 50% of Q3 earnings, further hurt Q4 ROE by 0.4%. The bank also benefited from a lower tax rate and from the decline in loan loss expenses, as can be seen in the graph. On Slide 15, we summarize our credit portfolio growth and structure. In the first quarter, loan growth slowed to 0.7% quarter-over-quarter increase. Overall, loan grew by 7.9% year-over-year. The lower loan growth in Q4 is mostly due to the change of strategy of IDB New York and the weaker dollar.
As you can see on the right side, our loan book remains very well diversified with over a quarter on the loan book focused on mortgage loans, while SME loans make up some 22% of the loan book, and corporate loans account for close to 33%. As can be seen on Slide 16, loan growth was strong among most of the segments of the operations, as household loans grew by 2% quarter-over-quarter and by 7% year-over-year. Mortgages grew by 1.3% quarter-over-quarter and by almost 8% year-over-year. Corporate loans were one of the main loan growth drivers in 2025 and grew by 16% year-over-year and by close to 3% quarter-over-quarter.
International business was primarily held by the strong shekel, which appreciated by 13% year-over-year. In dollar terms, IDB New York loan book grew by 6.9% year-over-year. Switching to Slide 17. This slide presents a credit portfolio quality. Despite the robust growth in our loan portfolio, the bank's credit quality remained benign as is reflected in a consistent NPL ratio of 0.7%. The bank's allowance ratio has remained steady at around 1.3% of total credits, while Discount Group continued to enjoy a strong coverage ratio of 178%. On the right-hand side, credit loss expenses dropped to 19 basis points in the fourth quarter. Most of the provisions in Q4 were due to several isolated corporate incidents.
On a full- year comparison, loan loss expenses remained low at 16 basis points, slightly lower than the 17 basis points recorded in 2025. Overall, in 2025, 41% of provisions were collective, while the majority of specific provisions were made against several isolated corporate incidents made in Mercantile Discount Bank and IDB New York. We see no deterioration in our loan book and are optimistic the strong economic backdrop projected for 2026 will provide a positive tailwind for the continued strong credit quality. Moving to Slide 18 to discuss revenues. Total revenues fell by 13% quarter-over-quarter, mostly due to the 14% decline in net interest income.
Net interest income was held by a negative CPI, which reduced interest income by ILS 430 million quarter-over-quarter, while ongoing pressure on lending and deposit margins are persistently eroding the bank's net interest margin. Fee income grew by a healthy 6.3% quarter-over-quarter and 15.3% year-over-year, mainly from higher capital market-related revenues and FX-related revenues. The lower non-interest finance income was mostly due to lower gains from Discount Capital, which had a very strong quarter in Q3. At the right-hand side, the income for regular financing activities decreased by 1.1% quarter-over-quarter, despite a 0.7% expansion of our loan portfolio, primarily driven by the compression of margins across both credit and deposits. I will move to Slide 19 to discuss expenses.
Operating expenses increased by 70% quarter-over-quarter, primarily due to one-time expenses recorded at Mercantile Discount Bank on account of its early retirement plan. According to the retirement plan at Mercantile Discount Bank, some 170 employees are expected to leave the bank until 2028. This accounts for 12% of Mercantile Discount Bank's current labor force. These expenses were recorded in other costs and accounted for the entire quarter-over-quarter increase. Higher staff costs, up 7% quarter-over-quarter, were mostly the result of a higher staff cost in IDB New York, as almost the entire existing management left the bank as part of the bank's new strategic plan. IDB New York also completed its consent order, allowing the bank to refocus management attention on profitability and growth.
As a result of mentioned one-offs, the group cost income ratio was 59.3%. Excluding the early retirement would have left the cost income ratio at 53.9%. Moving now to Slide 20, you can observe our ample liquidity and diversified deposit base. On the left, you can see that 57% of our deposits are from our retail segment. On the right-hand side, our Tier 1 capital ratio stands at 10.38%, well above the 9.2 required by the Bank of Israel. We know that the pending sale of Cal will add some 0.4%-0.5% to our capital ratios, potentially leaving our CET1 ratio at close to 11% once the sale of Cal has been completed, significantly above the Bank of Israel regulatory requirement.
Our liquidity ratio also ran well above the regulatory requirements, presenting a solid LCR of almost 121% and an NSFR of 117%. Please move to Slide 21. As a result of Discount consistent double-digit ROE and a healthy capital ratio at above 10%, Discount has been able to consistently pay over 40% of earnings back to investors, as can be seen on the graph on your right-hand side. In Q4, the board decided to pay out 50% of net earnings, ILS 428 million in cash. Overall, Discount paid out ILS 2 billion, of which ILS 1.7 billion in cash, and the remainder in the buyback of shares, representing a 5% gross dividend yield.
Looking ahead, we believe it's crucial for Discount to keep a healthy balance between stability to grow its balance sheet and pay out sufficient dividend to its investors. The pending sale of Cal, once approved, should provide the bank with ample capital buffers to allow the bank to continue growing its asset base and seek to optimize shareholder return. Moving to Slide 22, I will briefly touch on our main subsidiaries. Starting with Mercantile Discount Bank on the left-hand side, Mercantile Discount Bank presents a net income of ILS 106 million and ROE of 7%. As mentioned, Q4 earnings were negatively affected by early retirement plan, which cost the bank some ILS 104 million. Excluding the one-off retirement cost, ROE would have been 14.2%. IDB New York reported net income of $13 million and ROE of 3.6%.
Q4 earnings were adversely impacted by increase in loan loss expenses and an increase in operating costs due to the change in management. The bank grew its loan book by 6.9% year-over-year and deposit by 3.6% year-over-year. Cal reported net income of ILS 47 million, reflecting ROE of 6.7%. Before opening the call to your questions, I would like to summarize my overview and emphasize the main takeaways from this quarter results. Lower ROE in Q4 was primarily due to a combination of negative CPI and early retirement plan at Mercantile and a weak quarter in IDB New York. Both the new management of IDB New York and the retirement at Mercantile are steps that will allow the bank to improve cost efficiency in the future and boost its ROE.
Similarly, the pending sale of Cal should allow the bank to continue to grow its loan book, maintain a decreased capital ratio, and pay out dividends to shareholders. Overall, the steps taken by Discount Bank in recent quarters, and in Q4 specifically, might have negatively impacted earnings in the short term, but will improve earnings and profitability in the future. With this, I will finish and would like to open the call to Q&A. Operator?
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.
Hi. Thanks for taking my questions. I was wondering if you could just touch on, again, the results you expect from the initiatives you've taken at Mercantile and, IDB Bank. Then also going forward this year, do you anticipate any further one-offs will be required?
Yeah. Hi, Chris. Thank you for your question. Firstly, on Mercantile, there is, you know, they initiated 2030 plan. We didn't elaborate on specific targets, but on the provision of ILS 105 million, we do expect, as mentioned, a return that we'll get between two and three years, so it's one of the best investments we can make. Hopefully, we will do more of this in the future, but that's the return that we expect to get from it. IDB New York, as mentioned again, we replaced the management over there. We shrink the management from 13 members of the management to 7 members of the management.
We started to take care of the costs and the NIM and non-profitable or less profitable credits. We start seeing the fruits of the investment earlier than we expected, but we expect the major results to appear during 2026 and 2027. We just need to mention that we saw a provision one-off, hopefully, of two main clients of IDB New York, which cut the profit in the fourth quarter to what it was. Again, we don't see any specific provisions in the future, although there might be additional provisions.
Got it. Thanks. That's helpful. Can you give any color on loan growth? Do you see any specific sectors maybe showing more demand than others, or is there any segment where you intend to focus more?
The one sector that experienced problems, but we're still operating and, you know, providing credit is the real estate sector. We tend to focus on more resilient clients, but we don't compete where we see unreasonable risk and unreasonable risk-adjusted margins. We leave it to maybe non-bank competition or to other institutions. Where we see the potential but still lower margins is defense sector. There is still a lot to expect in the future. We have a strong defense industry, and obviously there's a lot of demand all over in Israel and outside of Israel, of course. We see a great potential. Although, as I said, not very high margins.
Another very potential, you know, high potential sector, hopefully after we end the current situation, is the infrastructure. We saw, actually, we were engaged in many energy projects, and there are still a lot to come, both on transportation, energy, utilities, all kind of utilities and so on. Israel, post the war, should be a big consumer of, you know, the government and major projects on the infrastructure segment. Definitely we are prepared and would like to invest in this. We think it's, generally speaking, a low risk and high potential and reasonable margins, of course.
Uh-huh. Great. Thanks for that. That's it for me.
Thank you, please.
The next question is from Liran Lublin of IBI. Please go ahead.
Hi, everyone. Thanks for taking my question. I had another question on credit growth. We've seen all banks in the system growing their credits at about low double digits this year, and Discount Bank grew by approximately 8%. How do you explain this more cautious approach to credit growth? Maybe you can give a little bit color on how you look at credit growth going forward.
If we are neutralizing the exchange rate, we grew by 10%. IDB New York, as I mentioned, actually had a negative growth in the fourth quarter, which impacted the group's growth. We are being very cautious at the credit growth this time because at this point, because of the high competition and relatively low margin given the risk. We're trying to focus on resilient companies and reasonable margins. We grew, you know, in the corporate segment and in the mortgages segment.
Again, cautiously because the current margins in the mortgage segment is relatively low, much lower than they used to be two years ago, and very high competition, both with banks and non-banks as well, who provide mortgages. We think the risk is relatively low, and although the lower margins, it creates stickiness to our clients with the bank, so we tend to keep the market shares that we currently have, not expand too much and get lower margins, but not also to go down in our market share as well. Just to keep it give or take as it is currently.
I think both on the mortgages and the corporate we grew this year and we're focusing. Our strategic plan is focused on the retail segment, and we are expecting and we'll do whatever we can within our strategic plan to grow credit, retail credit, wherever we can. Again, where the margins do justify the risk.
Okay. 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. We'll look for more questions. There are no further questions at this time. Thank you. This concludes the Israel Discount Bank fourth quarter and full- year of 2025 results conference call. Thank you for your participation. You may go ahead and disconnect.