Ladies and gentlemen, thank you for standing by. Welcome to Leumi's first quarter 2022 results conference call. All participants are present in a 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 24, 2022. With us on the line today is Mr. Omer Ziv, 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 operation 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 products 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, www.bankleumi.co.il, will be used during this conference call. I would now like to turn the call over to Miss Adi Molcho Weinstein, VP Investor Relations. Miss Molcho Weinstein, 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 statement for the first quarter of 2022, ended March 31 of this year. Omer Ziv, First EVP and CFO, will be presenting the development, strategy and major takeaways from the financial statement. 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 Tel Aviv Stock Exchange website. I'd now like to turn the call over to Omer.
Thank you, Adi, and thank you all for joining us this afternoon for the review of Leumi results for the first quarter of 2022. I would like to start on slide 3 with a short review about the main macroeconomic parameters in Israel. The GDP pace of growth in 2021 was high, 8.2%. The expectation for the GDP pace of growth in 2022 are between 5-5.5%. Israel's growth forecast for 2022 accounts for the global impact of the war in Ukraine and the lockdown in China. The direct impact of the war in Ukraine on Israel is small, and the impact is mainly of an indirect nature.
The slight decline in Israel's GDP in the first quarter of 2022 of 1.6% annualized was a technical decline and not a slowdown in the economy. The decline in GDP in the first quarter of this year represents a correction to the extraordinary rise in the fourth quarter of 2021, such that the GDP level in the first quarter of 2022 is still 9% greater than the GDP in the first quarter of last year. As for the employment rate, the employment rate has continued to improve. In the first quarter of 2022, the unemployment rate reached a level of 3.8%. By the end of this year, the unemployment rate is expected to decline to a rate of 3.5% lower than the unemployment rate pre-COVID.
As for inflation, the inflation expectation for the total year of 2022 is expected to be between 4%-5%. Most of the acceleration in inflation is coming from imported items. I would like to mention that Israel has natural gas independence and a stable currency, and this helps to mitigate some price increase pressures. In light of the rise in inflation, the inflation outlook, the strength of the economy and the acceleration of housing price inflation, the Bank of Israel has hiked its benchmark rate in the last two interest rate decisions by an overall 65 basis points from a level of 10 basis points to a level of 75 basis points.
The magnitude of further rate hikes will be influenced by the level of inflation expectation, asset price inflation in Israel, monetary development around the world and the economic situation in Israel. The Bank of Israel is expected to continue to raise the interest rate to a level of 1.75% by the end of this year and to a level of 2%-2.5% by mid-2023. With your permission, now I would like to dive into the Leumi results for the first quarter. I'm moving on to slide number four. The ROE for the first quarter reached a level of 15.6%, higher than the level of the corresponding period last year and higher than the level of the annual results for 2021.
This higher ROE was impacted significantly by the significant increase in our credit portfolio. In the first three months of 2022, we increased our credit portfolio by 7.6% on top of the 16% increase last year. As a result, our net income, our net interest income increased by over 23% in a period in which we again succeeded in reducing our expenses. The fact that we were able to increase significantly our income and to decrease slightly our expenses led to an improvement in our cost income ratio to a level of 46.6% compared to a level of 49.4% last year. The results were also impacted by the credit loss expenses which were around zero. The credit loss expenses were affected by collections regarding the specific provision.
The results were also affected by tax income of ILS 174 million due to the classification of the assets and liabilities of our U.S. subsidiary as held for sale due to the finalization of the merger of our U.S. subsidiaries with Valley National Bank on the first of April 2022. I'm moving on to the next slide. In this slide, you can see the significant increase in our net interest income. This income was driven by the increase in our trade portfolio of seven point six.
20% growth regarding the first quarter last year, and of course, also by the increase in the CPI from a level of 10 basis points last year to a level of one point two in the first quarter of 2022. Fees and commission increased by 7%, mainly as a result of the increase in activity. Operating and other expenses decreased by 2.4%, mainly due to the decrease in our salary expenses. I'm moving on to the next slide. The credit loss expenses reflect an income of 0.04%, which composed of 18 basis points income in the specific provision, mainly due to collections and 14 basis points expenses in the collective provision. The expenses in the collective provision was mainly due to the increase in our trade portfolio.
I would like to mention that from this quarter, we apply a new method for measuring our collective provision, the CECL method. On the left, we can see the coverage ratio, which reached a level of 1.36%. The coverage ratio is the ratio between our provision to the total credit, and we can see that this level of 1.36% is much higher than the level pre-COVID, which was 1.16%. In the next slide, we can see that the NPL ratios remain at a low level of 76 basis points. As a matter of fact, if we take out Glusker, the NPL ratio reach a level of 71 basis point, which is a very low level.
We can also see that the total provision to NPL reached almost a level of 190%. I mention all that because despite of the significant increase in our credit portfolio, all the parameters that reflect the quality of our credit portfolio remain at a very strong position. I'm moving on to the next slide. As I pointed out, fees and commission increased by 7.1%. This increase was led by financial transaction commission due to the increase in our credit portfolio, by exchange differential commission, and by credit card commissions, mainly due to the increase in activities. I'm moving to slide number nine. As I mentioned, despite the increase in our credit portfolio of 20% compared to the corresponding period last year, we were able to decrease our expenses by 2.4%.
The decrease was led by a decrease in the salary expenses, mainly due to decrease in bonus provision. The increase in other income was led by increase in our interest cost due to the increase in the interest regarding our pension liability. As a result of the increase in income and decrease in the expenses, we were able to improve our cost-income ratio from a level of 49.4% to a level of 46.6%. On the next slide, we present the growth in our credit portfolio. In the first quarter, we were able to increase our credit portfolio by ILS 25 billion, which reflects an increase of 7.6%. According to our strategy, the goal will focus again in middle market, mortgages, and corporate.
In middle market, we increased our portfolio by 10%. In corporate, including real estate, we increased our portfolio by 11.2%, and in mortgages, we increased our portfolio by 4.2%. As for the deposits, we can see in the next slide that after the significant increase last year of 20% in deposits, the deposits by the end of March remain at 11%, which is very close to the level of December 2021, and the loan to deposit ratio remains conservative at a level of 68%. I'm moving on to slide number 12. Our Tier 1 equity ratio declined to a level of 10.8%, and our total capital ratio declined to a level of 13.54%.
The drop regarding the ratio at December 2021 was led by three major elements. First, the high pace of growth in our trade portfolio. The higher the growth, the higher the equity requirement. Secondly, the depreciation in the shekel against the dollar. The last element is regarding the losses in our securities regarding the drop in the capital market. In the first quarter of 2021, we recorded in other income, losses in our securities due to the increase in the interest rate of about ILS 2 billion. In parallel, we recorded a profit in the pension liabilities due to the drop in the pension liabilities as a result of the increase in the interest rate. From accounting perspective, the other income is positive.
Having said that, the drop in the securities is recorded to the regulatory capital immediately, while the improvement in the pension liabilities is recorded to the regulatory equity over eight quarters. There is just a time gap between the period in which we are recording the losses from our securities to our regulatory capital and the improvement in the pension liability due to the increase in the interest rate. On top of that, I would like to mention that we finalized the merger between our subsidiary in the U.S., Leumi USA, on the first of April 2022. Effectively, and this merger is expected to increase our equity ratio by 0.5%.
Effectively, we kick off the second quarter of 2022 with CET1 of around 11.2% and total capital ratio of around 14%, both of them much higher than our internal threshold. As for dividend, we decided this quarter to distribute dividend of 20%. We decided that due to the opportunities in the market, which reflected in our pace of growth, 16% last year, 7.6% in the first quarter, pace of growth, which is much higher than the pace of growth in the banking industry in Israel because of the opportunities. In order to...
That we will be able also in the following quarter to use these opportunities and to increase our credit portfolio, we decided to distribute dividend of 20% in the first quarter of 2021. To conclude, we ended another strong quarter with a significant improvement in our core business. The pace of growth last year and this year is significant, and you can see the effect of that significant improvement in our cost income ratio. With that, I would like to give the floor for Q&A. Thank you. 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're 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 Micha Goldberg of Psagot. Please go ahead.
Hi, good afternoon, and thank you for taking my questions. Congratulations, and it looks like an exceptional good quarter. A couple questions, if I may. First of all, it looks like your group provision was not very significant, and yet there was huge growth in your loan book. Does this imply that you are releasing additional provisions or is that irrelevant?
Hi, Michael. Good afternoon. I would say like that, the pace of growth in our collective provision reflects more or less what we think is suitable for the first quarter. It reflects mainly the increase in our credit portfolio, as you mentioned. It reflects also, of course, the improvement in the macroeconomic situation in Israel as I described earlier. The better the Israel economy situation, the lower will be the credit loss expenses and the better forecast for the future in the Israel economy, the lower will be the credit loss expenses, which also affected by the macroeconomic situation here in Israel. I would like also to mention that during COVID, we built quite conservative reserve.
You can see it through the coverage ratio, which level, as I pointed out, of 1.36%. Taking all of these elements into consideration, the credit loss expenses ratio of 14 basis points reflect the quality of credit portfolio, and this, and there's nothing special in this ratio for the first quarter.
Okay, thank you. Next, I saw that your NPL ratio dropped versus the last quarter from 1% to 0.78%. Is that due to the deconsolidation of Glusker or is that a real improvement in the quality of your credit portfolio? I mean, I assume it's CECL adjusted, right?
Well, I would say like that, the 76 basis points include Glusker. If I take Glusker outside, it's only 71 basis points, the NPL. The improvement is a real improvement. It's improvement due to the fact that the risk repayment declined. The restructured debt declined. All of the elements that reflect the, you know, the risk that's involved in the credit decline. It's a real improvement.
Right. All this together implies that your quality of credit is great, and there's still upside chances of low provisions in future quarters as well.
I don't want to, you know, in this call to go into specific forecast, but as I mentioned, there's nothing special in the first quarter regarding our collective provision. The specific provision, of course, was impacted by collections which, you know, change from quarter to quarter. But in the collective provision, nothing really special.
Okay, thank you very much. Another question, all the new loans that you're making, I mean, I'm trying to calculate the ex-CPI margin. Is it contracting or are the new loans be made at higher margins?
We focus our growth again in mortgages, middle market and corporate. In these segments, the margins are lower than in our secured retail and mortgages. Sorry, and small businesses. In small businesses and private individual loans, the margins are the highest according to the different banking sectors. The mix of this, as in previous years, continue to be more conservative. You know, the margins are lower, but the risk is lower as well. Looking because you look at the total credit, and the marginal credit is mainly in these three segments.
The mix of the loan take the margin a little bit down. On the other hand, we are in inflation rate of 4% this year. Next year, the expectation are still for high level of inflation. This is mainly what will affect the margin. Also the competition, of course. In the competition, there is some decrease in margin regarding the competition, but not something significant.
All right. Thank you. Another question, your cost income ratio seems to be amazing, about 52%, and there seems to be not a lot of one-time items in there. Is that a number that's sustainable or even improving in future quarters?
Sorry, Michael, I didn't catch you. You asked about the cost income ratio?
Yes, correct. I'm just wondering if that, you know, that number can still be improved. It seems very strong.
You know, every time I look at the numbers, I'm surprised by myself from the pace of the improvement. And as long as we will continue to increase our income and to keep our expenses more or less at the same level, we will be able to continue to improve it. When I look backwards, we were able to do it consistently in the last four or five years. There is no reason why we will not be able to do it also in the future. It doesn't mean that every quarter or every year we will see this improvement, but if I'm looking for more medium-term and long-term, we have all the capability to do that. The major engine to do that is to continue moving our customers to go via digital.
The more digital we are, the less expenses we need.
Excellent. Maybe last question on what you're expecting. I mean, you mentioned interest rates and inflation as being beneficial to you. What is Leumi's current projections, and when should that, you know, how does that materialize in the next couple of quarters? Thank you very much.
Sorry. Hi, Micha. Gil Bufman here. Thanks for your question. As far as inflation, on a known basis, we have Q1 was about 1.2% for Q2, for which we have quite a great deal of info already. It's about, it's gonna be about 2%, so it's another big number. Q3 looks like about 1.2%. Then Q4, which is pretty far out at this time with all the uncertainty, looks closer to 0.4%. Overall, the number, as Omer Ziv mentioned earlier, 4%-5% for the year. Next year, it looks closer to 2%, but even that is subject to quite a few assumptions and things stabilizing and converging, mainly global commodity prices.
As to the interest rate, yesterday's increase of 40 basis points to 0.75 was our forecast. We were not surprised by that. I think it pretty much fits in with what we've been hearing from the Bank of Israel, that they want to tighten earlier rather than later, and they believe that the state of the economy can enable a more rapid tightening in order to kind of stem inflation as early as possible.
We see the Bank of Israel continuing to tighten in each and every one of the upcoming meetings, I think by 25 basis points and not more than that, in each one of those meetings, bringing the interest rate to about 1.75 year-end this year and 2.5% sometime later on in 2023. It appears that yesterday's move by the Bank of Israel has caught part of the market by surprise. Today we've been seeing some adjustments in the views, mainly on where the terminal rate will be, which I believe will be somewhere in the areas about 2-2.5% later on next year.
Thank you very much, Gil, and great quarter. Thanks.
Thank you.
The next question is from Michael Klahr of Excellence. Please go ahead.
Hi. Good afternoon, and thank you for taking my questions. Firstly, looking for a bit more color on the lending in real estate and construction. If you can tell us a bit about your or how close you are to your regulatory limits there, and also a bit about margins. There, there's obviously a lot of competition. Are you seeing any margin compression? How can you make us feel a bit more comfortable about the risk you're taking on in those particular segments as interest rates are starting to rise? What can you tell us about the loans in terms of the LTVs, security, et cetera, insurance, and so we can get a bit more comfortable around that credit growth? That's my first question.
Hi, Michael. Thank you for your question. First, there are limitations, but we manage them. You can see through the number that we were able to increase our real estate portfolio in the first quarter by 10%. We managed the limitation, and we were able to increase the real estate portfolio by 10% by different ways. You mentioned insurance, but it's not only insurance. It's insurance, it's participation, syndication, whatever. This is the way we handle it. At this stage, when I look backward, and when I look at the first quarter, we have quite a success buffer regarding the limitation.
Now, the real estate loans are mainly to residential area and for infrastructure projects. The risk in infrastructure projects is very low. The risk regarding residential projects is low as well, since the collaterals are very strong. Also, the way we oversee the project is so tight, so we have a complete control about the outflow of the loan and about the money that enter to the project. Regarding the LTV, I don't remember if Gil mentioned that, but the apartment price in Israel last year increased by over 16%. Even if we take the high level of the
The high risk, let's say, in terms of LTV of this loan, which you can understand from the draft of the Bank of Israel document that it's around 75%. So even if you take this stake of loans, you can understand that the effective LTV of this stake of loans which were granted last year because of the increase of apartment price is much lower than the LTV that they were granted initially only a few months ago. So to sum up, I will say that the collateral are strong, the oversight is strong, and this is the reason actually why the margin in the real estate sector are relatively low compared to most of the other segments.
I will say that in real estate, the margin are much lower than most of the other sector because the risk involved is lower due to the strong collateral involved in this kind of business.
Hi. That's very helpful. Thank you. Just quickly on costs. Are you seeing any impact from the inflation? Are you seeing any inflation pressures? Obviously, your cost income ratio has come down significantly. I'm just seeing whether you see any headwinds coming as you know, as we start to see some inflationary pressures.
Well, till now we succeeded in managing it very well because, you know, apart from inflation, for example, there is an increase in the salary regarding IT teams due to the high demand for IT professionals. Until now, we managed it quite good, and we were able to keep our expenses more or less at the same level despite the increase regarding the inflation that you mentioned, and especially regarding the increase in salary in the IT division. Of course, the higher the inflation, the higher the pressure. Let's keep in mind that the higher the inflation, we also collect higher income due to the fact that some of our loans are CPI-linked.
It's coming in both ways. You can see in the financials that the CPI level has a significant positive effect on our income. Every 10 basis point increase in the CPI, you can translate to around ILS 30 million pre-tax. There will be, I assume, as you mentioned, a pressure on the cost, but I believe that the effect in income will be not lower, maybe higher.
Great. Thank you.
Thank you, Michael.
The next question is from Chris cant of Barclays. Please go ahead.
Hi. Thank you for taking my questions, and congratulations on a great quarter. You touched a little bit about on expenses already, but could you just mention what contributed the most to the reduction we saw, year-over-year this quarter, and if you have any specific initiatives that are ongoing which could potentially contribute to further efficiencies?
Hi, Chris. Thank you for the question. For the points outlined in the presentation, the decreases in cost was mainly in the salary expenses due to the decrease in provision for bonuses. The decrease in the provision for bonuses were due, first, last year, the bonuses were relatively higher because 2021, like, fixed the 2020 results. We cannot look only on 2021 without looking on 2020. In 2020, we didn't pay bonuses for our employees. In 2021, the bonuses was relatively high because we compensate our employees for the fact that in 2020 they didn't get bonuses. Secondly, part of the bonuses is related to the trader, and you can understand that the results in the capital market are not so good.
This, in this part, the provision for bonuses are lower from last year. Thirdly, you saw it in the annual report, we were able to reduce our employee number significantly last year. The lower the employee numbers, the lower the bonuses. This is the main reason for the reduction in the bonus provision. Now, regarding initiatives in the future, there are lots of initiatives, but I will mention just one. We are in a process in which we are going to transfer our headquarters to Lod, from Tel Aviv to Lod. It will be by the end of 2023.
Also the profit of selling one of these headquarters, the transaction was in the second quarter, in April, and the profit that we expect to record from this transaction is around ILS 400 million, and it will be recorded next year when we will transfer our headquarters to Tel Aviv. There is another significant headquarters which we negotiate now what to do with it. By moving to Lod, we will achieve a lot of things. First, the cost per meter are much lower in Lod than in Tel Aviv.
Secondly, we will be able to decrease significantly the office space because here in Tel Aviv, our offices were built, you know, decades ago, and now we are going to sit in completely different way of that will enable us to cut significantly our office space. Thirdly, we decided in Leumi to move to a model in which every day 20% of the employees work from remote. It means that we will need less office space because every day we will need less 20% office space.
Mm-hmm.
This is just one initiative, which of course will have a positive effect on our expenses, after we will implemented the total process.
Okay. Yeah. Thank you. Also just regarding Valley Bank, can you describe what the opportunity is there for you to actually be more active or is there any plan to be more active in that group's activities?
Sure. We are the highest shareholders in Valley National Bank. Valley National Bank and us see. We see in Valley a strategic partner, and Valley see in Bank Leumi a strategic merger, a strategic partner. This is the reason why we look at this merger as a strategic merger. There are lots of initiatives that we start with Valley. In its appetite for risk, Valley is very similar to Leumi. It's a very conservative bank. You can see it through its credit loss expenses ratio, which is very low. Now Valley has opportunities to participate Leumi in different loans that it runs in the U.S. Valley is interested in the high-tech sector that Leumi has in Israel.
There is lots of places in which from doing it together, we can create much more value for Valley and for Bank Leumi.
Got it. Thank you. Thank you very much.
Thank you, Chris.
The next question is from Lior Shilo of IBI. Please go ahead.
Hi. Thank you for taking my call and for very strong quarter. Just one question for me. I've noticed you decreased the impact of the federal rate hike of 4% on your NII, while all the other banks have actually raised their impact. Can you please explain the reason for that? I mean, is it only a change in your assumption or is it possible that the rate hike has less of an impact on your NII? Or my third guess is that it excludes uncertain numbers. Thank you.
I mean, I'm not sure I understand your question. You are asking why the growth in financial income is 4.4% QoQ?
No, no. You have the impact of 1% rate hike on your NII in your report on page 79. On your NII and on the other.
You're asking why 1%.
Yes.
Is ILS 1.3 billion, this is the question?
Yeah. It actually looks like it's ILS 967 million in the scenario that there is a rate hike and -ILS 1.3 billion in increase in the rate hike.
1.3.
Just a minute. I'm trying to find the figures that you are looking for.
It's on page 79.
When I look at on page 79, I see that 1% increase in the interest rate led to an increase in our interest income of almost ILS 1 billion. This is the number that you're asking about?
Yeah. Yes. Definitely.
Okay. Now please repeat the question. The question is why it's ILS 1 billion and the decrease is ILS 1.3 billion?
Why it actually decreased from the numbers you presented in last quarter?
I understand. I understand. It's mainly due to two elements. First is, as you mentioned, this figure is without Leumi USA. Okay?
Yeah.
This is the main reason. No, this is the main reason. The second reason is.
Okay. Okay.
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. This concludes Leumi's first quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.
Thank you.
Thank you.