Earnings Call: Q1 2026

May 18, 2026

Summary

Q1 net income was ILS 330 million, pressured by the bank tax, negative CPI and collective provisions. Loan growth and asset quality remained strong, while management advanced cost cuts and awaited the CAL sale.

Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank First Quarter 2026 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 May 18, 2026. If you have not yet done so, we recommend downloading the presentations for the financial results on 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 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, change in 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. Morris Dorfman, Executive Vice President and Head of Israel Discount Bank Strategy and Finance Division. Mr. Dorfman, would you like to begin, please? Yes, thank you. Good afternoon to you all, and thank you for joining us today in Q1 2026 Investor Call. Following the renewed military escalation with Iran on February 28, tens of thousands of reservists were called up, and the economy shifted temporarily into emergency mode. As a result, Bank of Israel revised its 2026 GDP growth forecast to 3.8% from 5.2%. Following the ceasefire, which took effect on April 8, economic activity has rebounded rapidly, consistent with previous events. Credit card spending has rebounded sharply. April tax revenues exceeded expectation, and consumer activity recovered quickly. Overall, Israeli economy remained resilient. The labor market is tight, inflation is contained, and shekel has strengthened, and financial markets have recovered sharply. The tech sector continues to be key growth engine, supporting foreign investment economic momentum. Throughout the quarter, all the bank branches remained fully operational. All digital channels continued as usual, while remote work and backup systems ensuring full business continuity. In parallel, the Bank of Israel introduced target relief measures for affected households and businesses, while the Ministry of Finance imposed a special ILS 3 billion tax on banks in effort to help finance increased defense spending. Banks are required to pay this levy throughout 2026, beginning in the second quarter, though it accorded with Bank of Israel reporting guidelines, the tax payments were represented across four quarters, starting in Q1. Please turn to slide 3. Against this challenging background, Israel Discount Group reported a net income of ILS 330 million and ROE of 10.9% in the first quarter of 2026. As mentioned, Q1 earnings were hurt by a special bank tax, which reduced net income by some ILS 107 million. Earnings were also hurt by a negative CPI. Net income, excluding one-offs, amounted to ILS 1 billion 40 million, representing an ROE of 12.2%. Discount reported cost-income ratio was 48.3% in Q1. Total credit in the group grew by 2.2%, while credit in Israel grew by 2.8%, as depreciation of the shekel hurt the dollar-denominated loans, while new management at IDB New York continues to focus on improving profitability instead of growing its loan book. Loan loss expenses totaled 0.25% of total loans, but were entirely due to conservative collective provisions. In light of this result, the board decided to pay out 50% of the group's Q1 net income, ILS 465 million in dividends. Please turn to slide 4. Discount continues to focus on its implementation of its strategy, and we are looking for ways to accelerate the execution of our strategic plan. In recent months, Discount management renegotiated its retirement plan for the bank. As a result, we expect more employees will sign up for the plan in the coming months, thereby accelerating the execution of the plan. We also succeeded to better align performance-based compensation with shareholder interest. As of now, bonuses will be only paid if ROE is above 10%, as opposed to 9% originally. At Mercantile, the Q4 retirement plan is going faster than expected, and by the end of Q1, almost 100 employees signed up for the plan, accounting for some 60% of the total retirement plan throughout 2028. At IDB New York, new management continues to execute its strategy, improving core profitability by reducing cost of funding and improving asset quality. Furthermore, over the last two quarters, IDB New York reduced the number of employees by some 70, cutting its workforce by some 10%. We expect the bank to continue to focus on improving profitability in the coming quarters. At CAL, we expect to receive a final ruling before the end of this quarter. Once the sale has been completed, the sale will increase Discount capital ratio by some 0.5%. It will improve liquidity ratios, and of course, the bank will record a one-time net gain of some ILS 307 million. On slide 5, on your left hand, you can see that while ROE in Q1 was better than in Q4, it still lacks the 13% profitability we saw during the first nine months of 2025. The graph on the right-hand side illustrates the main reason behind the changes in Q1 ROE versus Q4. On the one hand, the significant decline in operational costs, which dropped by almost 70% versus Q4, added notably to core profitability, while higher revenues, mostly fees, and better performance in our subsidiaries would have left ROE at above 13%. In contrast, the significantly higher taxes and high collective provisions led ROE to 10.9%. On slide 6, we summarize our credit portfolio growth and structure. In the first quarter, loan growth accelerated to 2.2% quarter-over-quarter increase. Overall, loans grew by 8.4% year-over-year. The higher loan growth in Q1 is mostly thanks to the rapid economic recovery following the end of the initial military conflict in 2025, but slowed considerably during March as the military conflict with Iran flared up again. As in Q4, loan growth was entirely domestic. Excluding IDB New York, loans grew by 2.8% in Q1. As you can see on the right side, our loan book remains very well diversified with over a quarter of the loan book focused on mortgage loans, while SME loans make up for some 25% of the loan book, and corporate loans account to close to 34%. Turning to slide seven. This slide presents our credit portfolio quality. Despite the robust growth in our loan portfolio, the bank credit quality remained benign, and the NPL ratio dropped in Q1 to below 0.7%. The bank's allowance ratio has remained steady at around 1.3% of total credit, while the bank NPL coverage ratio increased to 184% versus 178% in Q4. On the right-hand side, you can see that while credit loss expenses increased to 25 basis points in the first quarter, all the provisions in Q1 were due to the collective provisions. Higher collective provisions were partially due to the rapid growth in the group's loan book and partially due to the anticipated deterioration of the economy as portrayed by the Bank of Israel reduced growth projections, as well to the more conservative approach to some segments following the renewal of the military conflict with Iran. Moving to slide eight to discuss revenues. Total revenues increased by 2.2% quarter-on-quarter, mostly the result of a 4% quarter-on-quarter increase in operating income and a 1.6% quarter-on-quarter increase in net interest income. Fee income grew by 2.8% quarter-on-quarter and 13.7% year-over-year, mainly from higher credit-related and FX-related revenues. The higher non-interest finance income was mostly thanks to the higher trading gains. On the right-hand side, the income from regular finance activities decreased by 1.9% quarter-on-quarter, despite the noted loan growth, as ongoing pressure on lending and deposit margins are persistently eroding the bank's net interest margin. I will move to slide nine to discuss expenses. Operating expenses declined by 16.7% quarter-on-quarter, primarily due to one-time expenses recorded in Q4 at Mercantile Bank on account of its early retirement plan. These expenses were recorded on the other costs. Year-over-year, operating expenses declined by 4.8%, primarily on the back of lower staff costs, which dropped by 7.8%. Lower staff costs were partially the result of lower performance-based compensation, but even excluding those, staff costs declined by 5.5% year-over-year, as Discount continues to reduce headcount and improve cost efficiencies. Overall, the group cost-income ratio was 48.3% in Q1 versus 53.9% in Q4, excluding the aforementioned early retirement plan in Mercantile. Moving now to slide 10, you can observe our ample liquidity and diversified deposit base. On the left, you can see that 56% of our deposits are from our retail segments. On the right-hand side, our Tier 1 capital ratio stands at 10.24%, well above the 9.2% required by the Bank of Israel. We note that the pending sale of CAL will add some 0.5% to our capital ratio, potentially leaving us at one ratio closer to 10.7% once the sale of CAL has been completed, significantly above the Bank of Israel regulatory requirements. Our liquidity ratios also remain well above the regulatory requirements, presenting a solid LCR of 128% and NSFR of 170%. The pending sale of CAL will also improve our liquidity ratios once completed. Please move to slide 11. As a result of Discount consistent double-digit ROE and healthy capital ratio far above 10%, Discount has been able to consistently pay over 50% of earnings back to investors, as can be seen on the graph on the right-hand side. In Q1, the board decided to pay out 50% of net earnings, some ILS 465 million in cash. 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 dividends 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 12, I will briefly touch on our main subsidiaries. Starting with Mercantile Bank on the left-hand side, Mercantile presented a net income of ILS 178 million and ROE of 11.7%. Loan grew by 7.5% year-over-year, while deposit grew by 9.5% year-over-year. IDB New York reported net income of $19 million and ROE of 7.2%. The bank grew its loan book by 2.2% year-over-year and deposit by 1.5% year-over-year, but loans declined quarter-on-quarter as per the bank's new strategic plan. CAL reported net income of ILS 64 million, reflecting an ROE of 10.3%. Before opening the call to your questions, I would like to summarize my overview and emphasize the main takeaways from this quarter result, as can be seen in slide 13. ROE in Q1 was 10.9% despite the special bank tax. Excluding the taxes, ROE would have been 12.2% as large collective provisions and the negative CPI kept ROE below the profitability of previous quarters. Loan growth was robust as the economy saw a short spike up in economic activity before the outbreak of the recent Iran war. Despite rapid loan growth, credit quality continued to improve as problematic debt continues to drop and the bank's NPL coverage ratio improved. The bank continues to pay 50% of dividend as it retains sufficient capital levels and taking into account the pending CAL deal that will add some 0.5% to CET1. The group continues to execute on its strategy, and it's making an effort to accelerate its cost-cutting efforts across all of its operations, both IDB New York, Mercantile, and the bank itself. We are far from being done. We know we have lots of work to do, and we are firmly committed to increase shareholder value over time. 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 1. If you wish to cancel your request, please press star 2. 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 David Taranto of Bank of America. Please go ahead. Good afternoon. Thanks for the opportunity. Costs were strong this quarter, supported by early delivery on headcount reductions. Can you help us understand how much of the targeted FTE savings is still to come, given only part of the exits have been realized so far, and whether that implies further net cost reduction ahead or a more stable run rate as savings are reinvested? Thank you. Sure. As you mentioned, yes, we see cost reductions, and it is both bonuses and it is also a headcount reduction. We expect this year to reduce headcount by about roughly 600 employees in the group. There will be a lot of costs letting them to go, but saving, we are not sure exactly at the moment. You can see in our report, the average cost of employee is roughly 400,000 ILS a year. You can do this rough calculation about the saving next year, more or less. The exact cost depends on what employee will leave, people that are younger, older, and their salaries. We cannot know exactly the amount of the money we will save, but roughly, you can see the average cost in the bank. Another thing I want to add, most of the employees will leave by the end of the year because of the tax issues, personal tax issues. All of the saving will be recorded next year. Thank you. The next question is from Valentina Stoykova of Barclays. Please go ahead. Hi, good afternoon. Thank you very much for the call. I was just wondering whether you can talk a little bit more about the impact from the war on your financials and update us on your macro forecast and also the full-year guidance. My second question is related to your issuance plans. Any color on that will be very welcome. Thanks. Can you please repeat the question? The second one, I didn't hear it. It's about your issuance plans for Eurobonds. Okay. As for the macro, to be honest, it is really hard in Israel to say anything about macro because every week we have a difference. But what I can see and what I think you can see in the system, the credit is growing. Even if we have the GDP growth and have the credit growth, they are not exactly in the same path. We expect to see strong growth this year. I think the macro is not that relevant to the growth of the credit this year, to be honest. It is a bit surprising that what we see, the economy is really strong, and every time we have this issue, short war, it is coming back really fast. We expect to see strong growth this year, and that is why we are expecting to see, as I mentioned, the approval of CAL that will help us in growing fast. So this hopefully will answer the question you have about the macro. As about the issue of the, we are planning to have an issue of debt this year, later this year. I am not sure yet what kind of debt it will be. We are considering different options, but I assume it will be between second and the third quarter of this year. A public debt, I mean. Thank you. Thank you very much. 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. Thank you. This concludes the Israel Discount Bank's first quarter 2026 results conference call. Thank you for your participation. You may go ahead and disconnect.