Earnings Call: Q2 2026

Aug 13, 2026

Summary

Q2 net income reached ILS 1.2B with 14% ROE, stronger credit metrics, and a 44% cost-income ratio. CAL’s pending sale may lift capital by 0.6 percentage points, while cost reductions and digital initiatives continue.

Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank Second Quarter 2026 Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will begin for the question-and-answer session. For operator assistance during the conference, please press star zero. A reminder, this conference is being recorded August 13th, 2026. If you have not yet done so, we recommend downloading the presentation 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's Strategy and Finance Division. Mr. Dorfman, would you like to begin, please? Thank you. Good afternoon to you all, and thank you for joining us today in our Q2 2026 investor call. I will start in slide 2. Economic activity showed signs of sharp recovery in Q2, and as a result the Bank of Israel increased its growth projection and now expects GDP to grow by 4% in 2026. The labor market remains very resilient, with wage growth and the creation of new job opportunities reflecting sustained demand for labor. Inflation remains under control and is projected to remain within the Bank of Israel target range over the course of 2026. The shekel continues to strengthen and appreciated by 7% year to date. The fiscal budget deficit continues to surprise, with latest figures leaving last 12 months deficit at 3.3%, its lowest in over two last years. Please turn to slide 3. Israel Discount Bank reported Q2 2026 result with net income totaling ILS 1.2 billion, representing an ROE of 14%. Excluding the special bank tax, ROE for Q2 was 15.4%. The group cost-income ratio improved to 44%, while loan growth remained strong at 3.1% Q-on-Q. Loan loss expenses dropped to a low 9 basis points of gross loans. As a result of strong result, the board of directors decided to pay out 40% of the group net income. Please turn to slide 4. Looking at the first half of 2026, net income totaled ILS 2.1 billion, representing an ROE of 12.4%. Excluding the special bank taxes, ROE for first half was 13.8%. The group cost-income ratio for first half of 2026 was 46%, while the bank loan book grew by 5.4% year to date, and loan loss expenses averaged at modest 17 bps, almost entirely, some 87%, due to large collective provisions in the effort to remain conservative and build reserves. As you can see on slide 5, over the longer perspective, profitability remains around 14%, similar to recent years. Slide 6. Discount continues to grow its loan book at a robust but healthy growth rate. Since 2021, the bank loan book has grown at a CAGR in over 9%. At the same time, the bank continues to put a lot of efforts and emphasize on improving its loan book. You can see on the graph on the right-hand side, problematic loans has steadily declined by 50% over the last couple of years, at the end of June 2026, accounting for 1.4% of total gross loans. Slide 7. In the real estate segment, Discount continues to focus mostly on the high-quality customers and prime locations. As a result, as you can see on the graph on the right-hand side, problematic loans in the real estate sector have declined by close to 50% in recent years, from 3.9% just several years ago to 1.4% in the real estate loans in the first half of 2026. On the left-hand side, you can see the breakdown of the group total real estate credit risk by sub-segment. As you can see, over two-thirds of the bank's real estate credit risk is to the residential-backed loans, residential mortgages, and residential projects. Land acquisitions account for less than 9% of the group real estate credit risk. Slide 8. At the same time, the bank has made significant efforts to improve its cost efficiencies. As you can see on slide 8, cost to assets have consistently declined in recent years, and at the end of June 2026, average 1.3% of assets. The bank continues to be committed to further improve its cost efficiency using all available venues, including reducing the bank headcount, improving procedures, reducing the branch network, improving assets and capital allocation while leveraging AI capabilities to allow the bank to eventually do more with less. Slide 9. The bank continues to execute its long-term strategy, improving cost efficiency, accelerating its digital transformation by positioning artificial intelligence as a central growth engine, while looking for ways to simplify its group structure in an effort to better align the bank structure with the challenges of the banking system. In Q1, the bank announced that in effort to accelerate cost efficiency measures, it would target to reduce its headcount by 600 employees by end of year 2026. I am pleased to say that by the end of June, 213 employees have already left the bank, and another 264 employees signed the plan and will leave by end of the year, accounting for almost 80% of the 600 target that we put to the end of the year. The estimated cost saving for the above-mentioned signed FTEs will be approximately ILS 250 million on a fully loaded annualized basis. The bank also continues to accelerate its digital transformation, including key initiatives that have already been implemented, such an intelligent voice agent in a customer call center, an internal AI-powered assistant for staff, and automated document analysis tools. Looking ahead, the bank is committed to responsible and phased expansion of the AI integration across more processes, supported by development of robust corporate governance and infrastructure to ensure scalable and sustainable innovation. At Mercantile, we announced that we are examining the possibility of a merger. The examination of potential merger is focused on leveraging complementary strengths of the two banks to create greater value and maximize synergies. At IDB New York, new management continues to execute its new profitability center strategy. Year to date, IDB New York reduced its workforce by 76 FTEs, improving the bank cost-income ratio. At the same time, management has notably reduced funding costs and improved the quality of its credit portfolio. At CAL, our credit card company, we are in final discussion with the regulator regarding the approval of the sale of CAL. Once the sale has been completed, the sale will increase Discount capital ratios by some 0.6% and will improve liquidity ratios. As of Q2, Discount could record a one-time net gain of some ILS 221 million. On slide 10, we summarize our credit portfolio growth and structure. Loan growth was 3.1% Q-on-Q and 9.7% year-over-year, while domestic loan growth was 4% Q-on-Q and 11.6% year-over-year. Overseas loans declined by 3% both Q-on-Q and year-over-year, in line with IDB New York new strategy, which focuses on profitability and not on loan growth. Loan growth in Q2 stemmed predominantly from strong loan demand in the financial sector, which accounted for some 40% of domestic loan growth. The residential mortgage segment accounted for another 24%. Real estate loans grew by a modest 2.9% Q-on-Q. As you can see on the graph on the right-hand side, our loan book remains well-diversified with mortgage loan accounting for 27%, SMEs for 20%, and corporate loans at 37%. Turning to slide 11. Credit quality continued to improve in Q2, and the NPL ratio declined to 0.65%, while the group's NPL coverage ratio increased to 186%. As can be seen on the right-hand side, credit loss expenses remained low and accounted for 9 basis points of loans. In first half of 2026, credit losses averaged 17 basis points of loans, primarily due to large collective provisions, which accounted for close to 90% of first half provisions. The bank continues to provide conservative and collective provisions, accounted for 1.2% of the group's loan book, similar to levels in the recent years. Moving to slide 12 to discuss revenues. Revenues increased 10% Q-on-Q, primarily thanks to the positive CPI in Q2, which added some ILS 214 million, with the reminder was driven mostly by loan growth. Net interest income also grew by impressive 7.8% Q-on-Q, mostly on the back of a high derivative and fair value gains. Fees declined by 3.7% Q-on-Q, as Q1 included bigger than unusual syndication fees. Financial fees from regular operations declined by 4.5% as low interest rates and the ongoing pressure on lending and deposit margins are persistently eroding the bank's net interest margin. I will now move to slide 13 to discuss expenses. Operating expenses remained almost unchanged Q-on-Q and declined by 5.3% year-over-year, primarily on the back of lower staff costs, which dropped by 4.2%, as Discount continues to reduce headcount and improve cost efficiencies. On a slightly longer perspective, you can see on the right-hand side graph, staff costs in absolute terms have been steadily declining in recent years, and first half staff costs are now 6% lower than the first half cost of last year. While it is clear we are making serious headway to improving our cost base, we are committed to reduce costs further. By the end of 2026, we expect the headcount to be 600 lower than in the end of 2025, further reducing costs. Overall, the group cost-income ratio was 44% in Q2 versus 48.3% in Q1. Moving now to slide 14, you can observe our ample liquidity and diversified deposit base. On the left side, you can see that 53% of our deposits are from our retail segment. On the right-hand side, our Q1 capital ratio stands at 10.27%, well above the 9.2% required by the Bank of Israel. We note the pending sale of CAL will add some 0.6% to our capital ratio, potentially leaving our CET1 ratio closer to 11% 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 122% and NSFR of 114%. The pending sale of CAL will also improve our liquidity ratios by 5% before proceeds once completed. Please move to slide 15. As a result of Discount's consistent double-digit ROE and healthy capital ratios of above 10%, Discount has been able to consistently pay over 40% of earnings back to investors. The board decided to pay out 40% of Q2 earnings as dividends, as the much longer than expected regulatory approval process regarding the sale of CAL requires the bank to be slightly more conservative. Moving to slide 16, I will briefly touch on our main subsidiaries, which all recorded improved quarterly results. Starting with Mercantile Bank on the left-hand side, Mercantile presented a net income of ILS 205 million and ROE of 14%. Loans grew by 9.5% year over year, while deposits grew by 12.4% year over year. IDB New York reported net income of $27 million and ROE of 7.3%. The bank grew its loan book by 3.8% year over year and deposit by 5.2% year over year. But due to depreciation of the US dollar versus shekel, this does not show in the group consolidated figures. CAL reported net income of ILS 104 million, reflecting an ROE of 14.3%. Before opening the call to your questions, I would like to summarize my overview and emphasize the main takeaways from this quarter results, as can be seen in slide 17. ROE in Q2 was a strong 14%. Excluding the bank's special bank tax, ROE would have been 15.4% despite the low interest rate environment and the subdued inflation backdrop. ROE in first half was 12.4%, and excluding the special bank taxes, would have been 13.8%, in line with recent year profitability. Loan growth remained robust, but Discount prefers to grow selectively, primarily focusing on high-quality customers with proven track record and strong cash flows. This allowed the bank to consistently improve credit quality. The bank decided to pay out 40% of Q2 earnings as dividends, as the much longer than expected regulatory approval process regarding the sale of CAL requires the bank to be slightly more conservative. The pending CAL deal will add some 0.6% to CET1. The group continues to execute its strategy and is making an effort to accelerate its cost-cutting efforts across all its operations, 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. 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 leave 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, and thank you for taking my questions. First, on CAL, I noticed the expected gain from the divestiture has been revised from around ILS 300 million in the first quarter presentation to around ILS 220 million in this quarter, while the capital benefit has increased from 50 bps to 60 bps. Could you help us understand what has changed in the expected transaction economics and whether there are any remaining uncertainties around the final accounting or capital impact? Secondly, on Mercantile, as you evaluate the potential merger, how should we think about the value creation opportunity? In particular, where do you see the most meaningful efficiency gains? How material could the cost benefits be, and over what timeframe could those benefits start to become visible in the group's profitability? Thank you. Thank you for your questions. I will start with CAL. The way the deal was structured, every quarter, the real profit is going into We need to reduce it from what we will get from the buyer. Because as time goes by, we are getting the profits every quarter. So, let's say if we have another quarter, the profit of this quarter also will be reduced from the final price, and therefore from the profitability of the deal. I hope you understood that. Or you want me to explain? No, it is clear. Thank you. Okay. As for what happened to why it is now 0.6 and not 0.5, we asked the Bank of Israel, there is another now operational risk that has to do with when you hold the company. So, the Bank of Israel, we got the approval to reduce this risk and the weighted assets that is coming with that. So, we will benefit from the deal much faster than we thought, once it will be approved. You want me to No, it is clear. Thank you. Okay. For the Mercantile, so we are now The board of directors asked us to do examination of the merger. So, we are really now focused on doing that. We are interested to do it quite fast, because this situation where there is uncertainty regarding whether we will do that or not, it is not good for the business. So, we are really focused on that, and I assume that this process will end of bringing back to the board and to the decision will be, I assume that probably a month or two, a couple of months, and then it will be brought back to the board and to make the decision. So, where we see the benefits, there are a lot of things that are doubled. You can start with the board, the management, a lot of things that we think that a lot of synergies. I assume that if the merger will happen, majority of the branches, both in the Arab sector and the Jewish ultra-Orthodox sector, will remain. All the rest, there is a significant cost cutting we can do. Also, one thing, another thing I said, we see a lot of chances to increase the profitability due to the fact that Mercantile Bank is not strongly digitized, there is a lot of things that using Discount digital assets, we can improve. We both believe we can lower the costs significantly and also improve the profitability in the same time. That's perfect. Thank you very much. All good. 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. Thank you. This concludes the Israel Discount Bank Second Quarter 2026 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.