Ladies and gentlemen, thank you for standing by. Welcome to Leumi's 1st Quarter 2023 Results Conference Call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question- and- answer session. For participants dialing in, please press star zero for operator assistance. As a reminder, this conference is being recorded May 23rd, 2023. 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 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 now like to turn over the call to Mr. Michael Klahr, Head of Investor Relations. Mr. Klahr, please go ahead.
Thank you, operator. Ladies and gentlemen, we thank you for taking the time to join us on this results call of Bank Leumi's financial statements for Q1 2023. On the call today are Miss Hagit Argov, CFO, and Mr. Omer Ziv, Deputy CEO and Head of the Capital Markets Division. We are joined today by our colleague, Dr. Gil Bufman, Chief Economist of the bank. The presentation can be found on the IR section of our website and on the TASE website. I'd like now to turn the call over to Hagit.
Thank you, Michael. Good day, all. Thank you for joining us today for a review of Leumi's first quarter of 2023. This is my first conference call as the CFO of the bank. I look forward to meeting many of you in the coming months. Let us turn to slide three in the presentation, where we present key highlights from the quarter. Net income was ILS 1 billion, excluding the bank stake in Valley. We grew at a faster rate than the market, both in credit and also in core deposits. Credit grew by 5% in the quarter, with growth in all our strategic segments, but mainly in corporate, including real estate. While total deposits declined in the quarter, core deposits from private individuals were up by 3.2% in the quarter, and by 1% year-on-year.
Higher volumes, together with higher NIMs and higher fee and commission, drove revenue growth of close to 40% year-on-year to ILS 5 billion. Operating expenses were down 0.4% year-on-year. The cost-income ratio continued to improve consistently and was 32.6% in the quarter, from 35.7% in the first quarter of last year. The increase in credit loss expenses continues to be focused on collective provisions. NPLs, at 0.53%, remain close to multi-year lows. The coverage ratio, that is allowances for doubtful debts to NPLs, is close to 2.5 x. Lastly, the board of directors approved a buyback program of ILS 800 million. This is in addition to 30% quarterly dividend payout and reflects our commitment to increase long-term value for shareholders. Turning to next slide four.
We can see of the main developments since our last call. First, the impairment of the bank stake in Valley National Bank by ILS 1.1 billion that was announced earlier this month. The impact on CET1 from this write-down is not significant. Secondly, the collective agreement with employees for years 2023- 2026 that was signed in April. This agreement gives the bank more flexibility in managing its workforce while tying a higher share of employee compensation to profitability. Lastly, we announced the sale of 50% of second headquarter building in Tel Aviv. We expect a pre-tax profit of almost ILS 800 million on this sale and the sale of another headquarter building, which will be recorded later this year or early next year.
Moving the bank's headquarters out of Tel Aviv to Lod later this year will lead to further cost savings. Let's move to slide five. Here we present a snapshot of the key drivers of the increase in pre-provision net revenue. We can see bottom right that it rose 7.3% year-on-year to ILS 3.4 billion. On the top left, we see that financing income increased by 47% to almost ILS 4 billion. The non-CPI in the first quarter was 1.1%, similar to the first quarter of 2022. We see that fee and commission rose by 7.5%. Operating expenses were down by 0.4% year-on-year. Turning to slide six.
We see the development of net interest income, which rose more than 45% year-on-year, helped by higher volumes and higher NIMs as interest rates rose. The net interest margin in the first quarter was 2.59%, up from 1.91% in the first quarter of 2022, and 2.44% in the last quarter of 2022. Jumping to slide seven. We can see the breakdown of quarter fee and commission income. The strong year-on-year increase emanated from an increase in financial transactions, foreign currency trading, and account management fees. Let's turn to slide eight for the expenses. We can see here that operating expenses declined by 40 basis points when compared with the first quarter of 2022 due to lower salary and related expenses.
The bank's cost-income ratio declined to 32.6% from almost 46% in the first quarter of 2022, a dramatic change. On slide nine. We can see the multi-year decline in the cost-income ratio. This is something which as a bank we are very proud of. Moving ahead now to slide 10. Credit loss expenses were up to 0.41% from 0.32% in the previous quarter. We continue to increase our collective provisions, providing a buffer in light of the current political and economic uncertainty. On the next slide 11, we can see that NPLs as a percentage of gross loans remain low on a historical basis, while cover ratio, that is the allowances for doubtful debt to NPLs, is the highest among the large and medium-sized banks at 236%.
Moving to slide 12, which shows that our loan portfolio at the top left increased to ILS 403.8 billion in the first quarter, a 5% quarter-on-quarter increase. While we see at bottom right, we continue to grow in each of our target segments, we saw the strongest growth in corporate credit, which includes real estate. Let's take a brief look at slide 13, deposit loans. Customer deposits were up 3.1% year-on-year, but down quarter-on-quarter, mainly due to lower institutional and also corporate balances. However, core banking deposits from private individuals were up 3.2% quarter-on-quarter and 11.9% year-on-year. Let's continue to slide 14, which shows our solid capital ratio.
We ended the quarter with a CET1 capital ratio of 11.23%, down quarter-on-quarter due to the strong credit growth. Still significantly above the regulatory requirements. Our total capital ratio, top right, increased to 13.45% following the Tier 2 international bond offering in January. Now last but not least, on slide 15, we present the long-term development of shareholder equity and book value per share. The bank's strong profitability and our CET1 capital buffer enable us to grow in our strategic segments, while also allowing us to share higher returns with shareholders through dividends and now a buyback of shares. With that, I will now open the call for questions. Operator?
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you are dialing in via phone, please press star one to ask a question. 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. If you joined the call via link, please click on the chat button at the bottom of the screen and send your question. Before the question, please write your full name and company. 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 of Barclays. Please go ahead.
Yeah, hi. Thanks for taking my questions. Congratulations on the strong results. I wanted to start with Valley Bank. The current market value of the shares are below the value recorded on your books. I was wondering how should we think about the potential impact on the PNL and on capital and if the value of Valley Bank were to stay where it is today or even potentially go down further?
Hi, Chris. Thank you for your question. First of all, currently, the market value of Valley, our portion in the market value of Valley is around ILS 1.9 billion, while after the deduction, the book value of the investment is around ILS 2.4 billion. This is currently the gap. Now, we are recording Valley National Bank according to the equity method. We are not recording it mark to market. By the end of the quarter, we will look at the market value of Valley, and we will have to consider whether there is need for additional deduction in Valley. At this stage, according to our analysis, there is no need for further decrease.
As I mentioned, the gross gap is currently ILS 500. Net of tax is around ILS 300, ILS 350. But at this stage, we don't see need for further reduction, but of course, we will have to continue to follow the entire industry impact by the end of the quarter, and to take a decision then. As you can see from the number, even if we decide to do additional de-risk, the number is not significant.
Got it. Okay. You talked about the robust asset quality in the 1st quarter. I was wondering if following the two most recent rate hikes, you're starting to face customers that are maybe struggling to service their debts. How should we think about LLP levels if the current, the current interest rate stays unchanged for the foreseeable future?
First of all, when you try to figure out when you look at on our credit loss expense ratio, so it's 41 basis points for the first quarter, but it also includes in the collective provision. The specific provision is around zero. It is impacted mainly by our high pace of growth, as Hagit mentioned. Our pace of growth in the first quarter, which is not reflected for the following quarter, is 5%. Because we implement a system method, so the impact of that on our credit loss expenses is material. Secondly, it was impacted by the macroeconomic environment. In this macroeconomic environment, we prefer to be more conservative in our credit loss provision.
When we look at the other parameters of the credit portfolio, the NPL, as Hagit pointed out, is still very low, 0.5%. Also, the ratio between the troubled debt to the total credit portfolio is very low, 1.6%. When we analyze the credit portfolio, we don't see a significant signal for deterioration in the credit portfolio. When we look about the different segments or different segments of Leumi, we should differentiate between the segments that we are focused on growth in. I mean the middle market mortgages and corporate, including real estate, and the private individuals and small businesses.
Uh-huh.
From our perspective, private individuals and small businesses are more exposed to credit risk based on the interest in the interest rates, and most of these loans have no strong collateral, or some of them have no collateral at all. This is the reason, if you look at our number, you will see that we decreased our credit portfolio in private individuals and in small businesses in the 1st quarter. In the other segment, all the collateral are much better, and also, the analysis when we give the loan is much more deep and not based only on models. It's more specific. Looking forward, it's very hard at this stage to estimate how we will end the year.
What I can say is that the levels of the credit loss expenses in this interest rate level seems at least at this stage reasonable. We should keep in mind that the higher the interest rate, and we can see it across the board, the higher the interest rate, the higher the bank profit. Even though it has negative impact on the credit loss expense ratio, at the bottom line, it has a positive effect because the interest in the income is much higher than the increase in the credit loss expense.
Got it. Thanks. That's very helpful. That's it for me.
Thank you.
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two or click on the chat button on the bottom of the screen. Please stand by while we poll for more questions. There are no further questions at this time. This concludes Leumi's first quarter. Excuse me, there is an additional question from Micha Goldberg of Psagot. Please go ahead.
Hi. I don't know if you can hear me clearly. If not, I'll hang up. If you can, I have a couple of short questions. Could you explain to me, doing a buyback instead of increasing your dividend payout?
Hi, Micha. Thank you for your question. Just if you can put mute because we hear the noise. Thank you. We decided. First of all, we are proud to be again the only bank in Israel to get the approval of the Bank of Israel to implement a buyback plan. We used to have a buyback plan pre-COVID in 2018, 2019. We stopped it with the outbreak of COVID, and now we renew it. Effectively, if we will take the buyback plan, which is ILS 800 million, and which we are going to start implementing it tomorrow morning.
So if we assume that the following quarter will have more or less the same profitability as the first quarter after I neutralize the reduction in Valley National Bank , so it means that effectively we are around a 40% dividend payout ratio. We decided to mix it and do, as in the past, the vast majority via cash, I mean, via dividend, and part of it via buyback plan, because we believe that first of all, there are different investors with different preference, and so was the dividend in cash or via buyback. Secondly, we believe that the buyback plan reflects the...
That the way that we mix it in cash and buyback is more, give us more flexibility and more efficient way to managing our equity ratio in the following quarter.
Thank you. Thank you very much. Just a follow-up on that. I mean, in the past, you mentioned 2018 and 2019, I think. You paid out 40% dividend. On top of that, you have the buyback. Would you consider along the next couple of quarters if things pan out in the right fashion to also increase your dividend payout in addition to your buyback, or is this what it's gonna be?
First of all, we are considering every quarter. It will depend on the credit growth pace and on the macroeconomic environment. At this stage, after a 5% growth in the first quarter, which I mention again, is not reflected when we are considering what will be the credit growth in the following quarters, it will be lower. So we think that with the macroeconomic environment, this is the right place to be. Of course, if we will continue to consider it again in the following quarter based on the parameters that I just mentioned.
Thank you very much. I have a question about the loan growth. I mean, it's pretty unique to see you as Israel's largest bank continue to grow at this current very rapid pace. I think a large part of it, as you mentioned, is in the corporate and the slash real estate market, which seems to be in somewhat of a freeze. I'm just wondering, when you look at what's going on in the economy and the conservatism that you usually have applied, is this something unique in this quarter, or should we be expecting similar kind of relatively rapid loan growth in the next couple of quarters as well?
Very good question. As I mentioned earlier, you should not expect this pace of growth in real estate in the following quarter. I would say that the way we work with our customers, with our leading customer, is a way that is not linear in real estate along the year. Also, due to the increase in the interest rates, of course, the demand for new loans become lower. You should not expect that this pace of growth will continue in the following quarter. After saying that, I would say that we are proud in our pace of growth in the last four, six quarters, which was much significant above the industry.
The vast majority of the growth in the first quarter was again in residential projects. In projects that the LTV is very strong, the absorption rate is very strong. Projects in which the pace of sales is much higher than the pace of the project. The other side there is very strong, so we feel comfortable with that. Also within all what happened in the macroeconomic environment, the prices are still according to our models and according to our the underwriting analysis that we've done before granting this loan. In the bottom line, the answer is that it's not linear. You should not expect this pace of growth in the following quarter.
Regarding risk, when we analyze the risk involved in our real estate project, we believe that this sector and this segment is one of the stronger segment due to the reason I mentioned, and due to the collateral that I mentioned.
Thank you very much. As the loan growth that you are experiencing, which seems to be significantly faster than the other banks, is that accompanied by pressure on margins? Are you lowering margins when you compete on loans right now, or that's not the necessity?
No, the margin are more or less are the same place. The world in the market, a slight decrease in the mortgages market, not in the real estate and not in the middle market, but most significant. In terms of margin, the margin are continues to be as they were in the past, even higher because of the risk involved. In the mortgages, due to the stronger competition. There was a slight decrease in the margins, in the margins of new mortgages. That's it.
Great. Can I ask you, is Gil Bufman on the line?
Yeah, I'm here. I'm here, Micha.
Can I ask you a question? I mean, recently, we've heard both the Bank of Israel governor as well as quite a lot of economists talk about the impact of the current coalition agreement, as well as the, you know, the judiciary reform on the economy. I was just wondering, from your perspective as an economist, as the outlook towards Leumi, how risky is this, and what should we worry about when looking at the current path of the coalition agreement, how is that gonna impact the economy and risks for Leumi? Thank you very much.
Thank you for your question. Well, I think that so far the economy has been doing quite good. We got a GDP number for the 1st quarter of 2.5% growth. The composition was not the best. It was kind of a narrow-based growth figure that we had there. All in all, despite all the risks that have materialized so far, and you mentioned the, let's call it in general, the social unrest, but maybe add on to that, the security events and the weakening global background. All in all, I think that the economy has been doing pretty good so far.
Our revised forecast for growth this year of the economy is 2.6% in GDP, which is pretty much the numbers that the IMF has. The OECD, I believe they have something like that. Moody's has something like that. Looking ahead a bit further and maybe even a little bit into 2024, the risks are there. You have the social risks, which might be related not only to the changes to the legal system, but maybe cost of living, which has been getting out of hand. Just today, we have some news regarding the security situation that was strong enough to move the market somewhat. That remains a risk.
Of course, we have the global economic risk because we're not out of the woods there. The risks are there. Despite all of those risks and despite all of the events, it does seem like the economy has been doing pretty well so far.
Thank you very much, Gil. Thank you, Omer, and thank you, Hagit.
Thank you.
Thank you.
The next question is from Irit Bar of Excellence. Please go ahead.
Hi. Congratulations for the strong, operating results. I would like to ask you about the trend in the deposits. We saw, this quarter,
Irit, sorry, can you raise your voice? We can't hear you.
Can you hear me?
Now better.
Better? Okay. We just saw this quarter, well, the shift in mix, in deposit mix, toward retail and, you know, the expenses of institutional deposit, which is good for the bank. I would like to ask about the money moving from non-interest-bearing current accounts to time deposits. What do you see in the near future? How much money? How this should influence your in margins, you know, credit margins, going forward? What would be the pace of, you know, the migration from OSH to time deposits?
Thank you, Irit. First of all, you're right. There is a trend of moving of money from. There is a decrease on the one hand, in deposits from institutional investors, and on the other hand, there is a significant increase in deposits of private individuals, which we support. It's a very positive trend. We look at it as one of our strategic targets to increase our core deposits, which are mainly driven from an individual domestic individual sector. There, we see there an increase of three point margin. In the first quarter. When we are looking about the weight of current accounts to total deposits, it's around a third, around 33%.
It was much higher last year, or in the previous quarter, and it decreased. The pace of movement from current accounts to deposits, it slowed down, because it reached a level which is much more reasonable, not only in the local industry, but also in other industries, for therapies, it's something that is very rational ratio. What will be in the future, it depends on the level of the interest rates, and it depends on the question for how long we will continue to see high interest rate levels.
Of course, the higher the interest rate, the higher the period that we will see a high interest rate level, it will cause to this trend of transferring money from a current account to deposit to continue. That's what I can comment at this stage.
Yeah. Do you think that at some point, the increase in interest rates then will not have impact on credit spread or interest rate gap, because of this migration to time deposit that you have to pay, well, more to deposit, to attract deposits?
Well, I would say like that. When you try to analyze the NIM, it's impacted by a few parameters. I will mention just a few of them. It depends, first of all, on the mix of the credit portfolio and the up to the individual as the highest margin, while mortgages, for example, is the lowest margin. As you know, on the other end, the credit loss expenses in mortgages are negligible, and private individual are much higher. You have to look not only on the margin, also on the credit loss expenses on the other. Secondly, I will say that the NIM is impacted by the average interest rate.
The average interest rate in the following quarter is expected to be significantly higher than in the corresponding period last year. This is impact the NIM positively. On the other end, of course, transferring of money from current account to deposit affected the NIM negatively. Till now, the effect of the increase in the interest rate, it was much higher than the effect of the transferring money from current account to deposit. Even though the current account levels were much, much higher in previous quarters, the effect of the increase in interest rates on the NIM, the positive effect was much higher. In the following quarter, I expect that this trend of increase in NIM will moderate.
Because of the fact that when you look at the average interest rate, this is the main factor that affected the NIM, so it will depend on the further interest in the interest rates and, of course, on the period that you compare the quarters. I mean, in this, if you will measure the second quarter and compare it to the first quarter, because of the increase in interest rates, we will continue to see an increase on the NIM on that side, which is expected to be at least of the effect of the continuing transferring of money from current account to deposit.
Thank you very much.
There are no further questions at this time. This concludes Leumi's first quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.