Ladies and gentlemen, thank you for standing by. Welcome to Leumi's Third Quarter 2022 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 29th, 2022.
With us on the line today is Mr. Omer Ziv, the first EVP and CFO. 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. A PowerPoint presentation, which is available on the bank's website, bankleumi.co.il, will be used during this conference call.
I would like to now 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 the third quarter of 2022, ending September the 30th, 2022. I recently joined Bank Leumi as Head of Investor Relations. I look forward to meeting and working with many of you in the future. Omer Ziv, first EVP and CFO, will be presenting the development strategy and major takeaways from the financial statements. We are joined today by our colleagues, [Hagit Argov] , Head of Accounting, and Dr. Gil Bufman , Chief Economist. The presentation can be found on the IR section of our website and on the TASE website.
I'd now like to turn the call over to Omer.
Thank you, Michael. Welcome and good luck, and thank you all for joining us for the review of Leumi results for the third quarter of 2022 and the first nine months of the year. I would like to start with a short review on Slide Number 3, which present the main macroeconomic parameters in the Israel economy. As for the GDP, we can see that this year the GDP is expected to be around 6%. Next year it's expected to be around 3%, according to the latest forecast of the Bank of Israel, and the consensus is around 3.2%. Regarding the unemployment rate, currently is around 4% and next year is expected to drop to a level of 3.5%.
As for the inflation rate, it's expected to be next year lower than this year, around 3.5%. I mention all of that because even though next year is not going to be-- the parameters are not going to be as strong as in this year. They are still a strong parameter across the board and much better than in many other countries. As you know, more than 95% of Bank Leumi activity is in Israel, and we are impacted significantly from the strongest of the Israel economy. With your permission, I would like to dive into the results on Slide Number 4. We present a strong result for the third quarter as well, as well as for the first nine months of the year.
The ROE for the third quarter reached slightly less than 15%, as in 2021, and a level of 16.3% for the first nine months of the year. This strong ROE was led by impressive increase in our credit portfolio. The credit portfolio increased in the third quarter by 5% and in the first nine months of the year by almost 18%. This significant increase led to impressive increase in our finance income, as well as for-- This increase was of course also impacted from the increase in the interest rate and from the CPI.
Despite the expansion in our credit portfolio and the expansion in our activities, the expenses of Bank Leumi dropped in the third quarter as well as in the first nine months of the year by 2%-3%. A result of this significant increase in income and the decrease in expenses, we present a significant increase in our PPNR of 33% year-over-year in the third quarter. As a result of this movement in which we are able to increase significantly the income while we decreasing our expenses, the cost to income ratio reached to a level of 39.1%.
The equity ratio also improved significantly. The CET1 reached a level of 11.4%, the highest level in the industry. On Slide 5, we present a broad picture about the improvement in the cost income ratio and the credit loss expenses in the last four years. We can see the substantial improvement in our cost income ratio, the low level of the credit loss expenses, and as a result, the significant improvement in our ROE in 2021 and in 2022. I'm continuing to Slide 6. Our finance income increased year-over-year in the first nine months by 15.6%. This increase was driven by the significant increase in our net interest income, an increase of 28%.
The increase in the net interest income, as I pointed out earlier, was led by the significant increase in our credit portfolio, as well as from the increase in the interest rates and the CPI. The non-interest financing income, they were significantly lower than last year, mainly due to the results in the capital market. Fees and commission, they were up by 8%. This increase was as a result of the increase in our activity, our trade portfolio, and as a result of a high activity regarding foreign exchange. The expenses, they were down by 3%. We can see that the expenses went down also in the salary area and also in other expenses. The pre-provision net net revenue increased by 24%.
On the next slide, we analyze the third quarter and the trends are very similar. The increase in income was 22%, mainly due to the increase in the net income. We can also see that the NIM reached a level of 2.3%. We can see that as a result of the increase in our activity, the fees and commission increased by 9%. In the third quarter, year-over-year, we can see a decrease of 2% in our expenses. Also here we can see an impressive increase in our pre-provision net revenue.
On Slide Number 8, we analyze the main reason for the increase in our fees and commission by a level of 8% in the first nine months and 9% in the third quarter. We can see here that this increase was driven mainly by an increase in our finance commissions due to the increase in our credit portfolio and by an increase in the exchange differential commissions and in credit card commissions. On Slide Number 9, we can see the improvement in our cost income ratio in the first nine months and in the third quarter. The results for the first nine months were impacted also from the profit of the merger of Leumi USA with Valley Bank. If we neutralize that, we will reach a level of 41%. We can see that in the third quarter, this level improved and got to a level of 39%.
On Slide Number 10, we present the increase in our credit portfolio. As in previous years, according to our strategy, this increase was focused in middle market, mortgages, and corporate, including real estate, in which we feel much more comfortable due to strong co-collateral.
On Slide Number 11, we present the credit loss expenses for the last three quarters and for the total nine months of the year. We can see that the credit loss expenses remain at a low level of 7 basis points for the total nine months and 11 basis point for the third quarter, very similar to the level of the second quarter. We can also see that while there was similar expenses in the collective provision of around ILS 230 million shekels in the first quarter as well as in the second quarter, there was an income from specific provisions, mainly due to collection. The level of the collective provision in the second quarter as well as in the third quarter is around 25 basis points.
On Slide Number 12, we see the improvement in the NPL, which reached a level of 65 basis points. We can also see the improvement in our total troubled debt, which for the third quarter, reached a level of only 1.5% from our total credit portfolio. The total provision to NPL reached a level of almost 200%. The total provision to the credit portfolio reached a level of 1.26%. I mention all that because despite the significant increase in our credit portfolio last year and this year. The main parameter which reflect the quality of our credit portfolio remain robust and strong.
On Slide Number 13, we can see that in the last 12 months, we increased our deposits by 14%. We can also see that the loan to deposit ratio remain at a very conservative level of 70%. Also, the NSFR and the LCR remain at a very strong level of around 127%. On Slide Number 14, we can see the significant increase in our equity ratio. CET1 reached a level of 11.4% for the end of September 2022, and the total capital ratio reached a level of 14.3%, each of them much higher than the regulatory requirement. Also, the leverage ratio came to a level which is much higher than the regulatory requirement.
Based on that, the board of directors decided yesterday on dividend distribution of ILS 356 million for the third quarter, which reflects a dividend payout ratio of 20%. I would like to end this part by saying that, again, Bank Leumi present a very strong performance. We continue to increase our credit portfolio in significant amount with robust performance of credit quality indicator. I mean, low NPL, low problematic debt, and loan loss expenses. We, again, we're able to increase significantly our income, and despite this increase, to decrease our expenses.
As a result, we reach a cost income ratio of 39%, which is the lowest cost income ratio in the industry. We also improved our capital ratio, and this strong capital ratio will support our ongoing growth in the future and the capital return for our shareholders.
With that, I would like to open the line for questions. 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 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.
Hi. Thanks for taking my questions, and congratulations on the strong results. Just referring to the BOI comments last week, referring to early signs of macroeconomic slowdown, are you seeing any impact at this stage of the any kind of slowdown?
Hi, this is Gil Bufman here. In some segments of activity, we are seeing a little bit of a slowdown. It, I think, pertains mainly to the household sector that is still expanding but slowing down its growth, and obviously that is something that you would expect with interest rates going up and inflation being a little bit on the high side, not as high as in, let's say the U.K. or the U.S. or the Eurozone. We are seeing a little bit of a slowdown there. Where we're not seeing a slowdown, in general, is the export sector, which is doing fine. High tech exports are doing well. There's a big increase going on in housing starts and housing activity.
The slowdown does seem to be very gradual, and Leumi's forecast for GDP growth next year is 3.4%, which is slightly above the Bank of Israel's forecast. It does appear to be a slowdown in growth, but nothing beyond that.
Okay. And just assuming for the moment there was a slowdown, what segment of the portfolio do you see at most at risk of facing higher provisions?
I agree. It's Omer. First, as you know, in the last few years, we focus our growth in middle market mortgages and corporate, including real estate, even though the margins in this segment are much lower than the margins in consumer individual and in small business, in which we were very conservative in the last few years. Of course, this segment are the most exposed to increase to deterioration, if there will be a significant slowdown in the economy, because in this segment, the collateral, if at all exists, are not strong. The profile of the customer is less solid than in other customers.
This is the reason why we focus our growth in the other segment, even though the margin there are much lower.
Got it. Touching on dividend, how are you looking at the scope of dividend payout given the excess capital balance that you have?
It's a very good question, and I must admit that yesterday there was a long discussion about it in the board meeting. We are aware of the fact that our equity levels allow us if we would like to increase the dividend above the dividend that we distribute in this quarter. Our main target in using our equity is that this equity will support our growth as it did in 2021 and 2022. This is a question which is on the table. Currently, we prefer to be more conservative and keep the equity for supporting our growth.
As you mentioned, it, can also enable us in the future, to pay extra dividend above the 20% that we are currently distributing.
Got it. Thanks. That's helpful. That's it for me.
Thank you.
The next question is from Konstantin Rozantsev of JP Morgan. Please go ahead.
Yes. Thanks a lot for the presentation and for taking my questions. I wanted to ask a bit further on the loan quality trends that you see in the coming periods. Do you see any emerging signs of stress? Well, I see that the loan quality metrics that you report, they are, they're quite robust, so it doesn't look from these metrics that there have been any market stress. You know, going forward in the coming quarters, do you expect any pressure from the high rates, high inflation, you know, possible economic deceleration? And could you please maybe build this into the numbers as well?
What kind of credit loss ratio, cost of risk, should we expect in the coming quarters that you're gonna report? Thank you.
Okay. Thank you for your question. I will say as follows. First, as I pointed out, the main indicator of the macroeconomic situation expected to continue to be strong. I mean, the unemployment level is expected to remain at a low level. The inflation rate is expected to decrease compared to this year. The GDP, even though it will be lower than 2022 and 2021, it's still very similar to the GDP pace of growth in 2019, 2018. It's not far from there. At this stage, we don't see significant stress or something like that in our activity. The defaults in payment are still at a very low level almost across the board.
At this stage we don't see it. Of course, if the interest rate continue to increase, it might change a little bit the picture, but at this stage, as I mentioned, we don't see significant effect on that in our different metrics. We do see, for example, in mortgages, some requests for extending the loan period, but not further than that.
The second part of your question was what will be the impact of that on the credit loss expenses. I agree that the current credit loss expense ratio doesn't reflect the future. I don't believe that the level of 11 basis points or 10 basis points is the level that reflect our position at this stage. We can see it from the collective provision. The 11 basis points are a combination of 25 basis points collective provision, which is very similar to the level in the second quarter, and income due to collection in the specific provision.
At the end, this income will end. We don't expect that every quarter in the following quarters, we will have a net collection in the specific provision. The bottom line is that we do expect to an increase in the credit loss expenses, but what will be the pace of that and when it happens is very hard to predict. It depends in, on a very large number of promises.
Okay. Understood. Thanks a lot for the details. Appreciate, appreciate it.
Thank you.
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