Ladies and gentlemen, thank you for standing by. Welcome to Leumi's first quarter 2024 results conference call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded May 28th, 2024. 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 Michael Klar, Head of Investor Relations. Mr. Klar, please go ahead.
Thank you, operator. Ladies and gentlemen, we thank you for taking the time to join us for Bank Leumi's first quarter 2024 results conference call. Joining me today is Miss Hagit Argov, CFO and Head of the Finance Division, and Mr. Omer Ziv, Deputy CEO and Head of the Capital Markets Division. We are also joined by our colleague, Dr. Gil Bufman, Chief Economist. The presentation can be found on the IR section of our website and on the Trust website. I would like now to turn the call over to Hagit.
Thank you and good afternoon. Let's now turn to slide three for the highlights of the quarter. Q1 2024 was a strong quarter across all parameters. Net income was ILS 2.8 billion, with ROE at 20.2%. The quarter included post-tax gains of ILS 632 million from the sale of the headquarters building in Tel Aviv. If we normalize only this profit without its effect on other items, like bonus provision, the normalized ROE would be 15.6%. The cost income ratio declined to 29% from 32.6% a year ago. Credit loss expenses declined to 0.21% and actually includes income mainly from collections in the specific provision of 0.15%. Credit growth increased, growing 2.2% since the start of the year.
Core deposits also increased substantially by 2%. Apart from the increase in core deposits, the total deposits also increased at a greater rate than our peers. Turning to slide four, you can see that for a sustained period, the bank has been able to generate high and stable profits and ROE. While first quarter net income and ROE was positively impacted by the sale of the Leumi headquarters building in Tel Aviv, as mentioned, it also included higher bonuses due to the high profitability. Slide five shows a snapshot of income and expenses in the first quarter. The financing income increased by 14% compared to the corresponding quarter last year, mainly as a result of the increase in credit portfolio and the increase in interest rates.
The net interest income decreased mainly to a lower CPI, which was only 0.3% in the first quarter, compared to 1.1% in the corresponding period last year. The increase in non-interest financing income was mainly driven by derivatives, net of foreign exchange. The 12% increase in operating and other expenses year-on-year was mainly due to higher employee bonuses due to the record profits. In slide six, we can see how credit growth picked up in the first quarter, growing 2.2%. Our loan book remains well diversified. Indeed, as you can see on the next slide, slide seven, we continue to grow faster than the market in our target segments, especially in mortgages and corporate, including real estate. Slide eight shows the bank's diversified deposit base and the healthy liquidity ratios.
Core deposits grew by a healthy 2% since the start of the year, continuing the strong growth recorded in 2023. In slide nine, you can see the continuing improvement in the bank's cost-income ratio, which improved further to 29% in the first quarter. This ratio was impacted by the profits from the sale of the headquarters and also from the high bonuses due to the high profitability. Slide 10 shows the quarter-on-quarter and year-on-year decline in loan loss expenses, which declined further to 0.21%. The lower loan loss expenses were due to both a lower collective provision and also due to income from specific provisions due to recoveries. The next slide, slide 11, presents the high quality of our credit portfolio.
Despite the fact that we increased our credit portfolio at a faster rate than our peers, we have continued to present the lowest NPLs and the lowest troubled debts ratio among the large banks. The NPL improved to a level of 0.65% at the end of the first quarter, and troubled debts improved to a level of 1.6%. At the same time, as can be seen on the right-hand side. The bank's total provision was stable at 1.6% of gross loans, covering almost 250% of the bank's NPLs. I'm moving ahead now to slide 12, which shows our very healthy capital and leverage ratios. The Core Tier 1 ratio increased more than 30 basis points in the quarter, to a level of almost 12%. The total capital rose to a level of 15%.
Note that we don't expect any impact on capital from the S&P downgrade of the sovereign rating to A+ in April. Turning to slide 13, the strong profitability and large capital buffer allowed us to declare a cash dividend of ILS 835 million for the first quarter. In addition, we launched a new buyback program of ILS 1 billion to be paid out in four tranches from May 2024 to May 2025. The first tranche of this buyback is ILS 280 million and will be effected in the coming days. Together, this brings the total capital return for the first quarter to more than ILS 1.1 billion, equal to a 40% quarterly payout ratio and a 10.3% annualized yield.
In conclusion, and turning to slide 14, the banks continue to present consistent and strong financial performance with high ROE, despite the challenging economic backdrop. Long-term asset growth is driving higher revenues and profitability, supported by best-in-class cost income ratio and strong credit quality indicators. The bank's strong profitability and healthy capital buffer enable us to continue to grow in our target segments, while also allowing us to share higher returns with shareholders through dividends and our buyback program. 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 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 Tavi Rosner of Barclays. Please go ahead.
Hi, congrats for the strong results, and thanks for taking my questions. I have two questions, please. The first one, I wanted to talk about loan loss provisions. How should we think of recoveries going forward, assuming that the geopolitical situation doesn't deteriorate? So what would be a fair level of provisioning going forward?
Hi, Tavi. Good afternoon, and thank you for your question.
Hi, Omer.
I would say as follows, so as you mentioned, it mainly depend on geopolitical circumstances. But assuming that we will not see significant deterioration in the geopolitical environment, and currently we don't see deterioration in the... In terms of the economic perspective, I would say that as Hagit pointed out in the presentation on slide number 10, you can see the significant increase that we made in the collective provision in the second half of 2023, mainly regarding the macroeconomic environment. So if the situation will not deteriorate, it will be like we saw in the first quarter, more or less stable.
I will say that we should expect that on annual basis the credit loss expenses should be lower than last year. We can see that the specific provision in the first quarter was negative. I mean, we had income, we had collections, mainly from collection in the first quarter. So I assume that in the total year the credit loss expenses should be like we saw before the war. I don't want to put numbers, because it could be any numbers, but it can be around 30 basis points, maybe more, maybe less, but this is the area.
Okay, that's helpful. And just last one for me, deposits. We've seen a nice acceleration over the past couple of quarters, and I'm just wondering what's driving that momentum?
There was two points. First of all, we increased our core deposit, I mean, our individual deposit, much greater than the market, because it's one of our strategic targets to increase significantly, our core deposit. Because there are, first of all, you know, regarding deposits, there are no equity requirements, so it's... So, so in terms of ROE, it has an enormous effect on the ROE, since there are no equity requirements. And, and moreover, when we recruit a new customers or new deposits, you know, it doesn't end with only deposits. So, we've done that. Secondly, in the first quarter and also in the fourth quarter last year...
We had a significant increase in deposits in the business division, as well as in the capital market division. Also there, the margin is not high. It's much lower than a margin on loans, but it contribute to the ROE. So we, we've done there a significant work. We've done a very good work, and we're able to increase it significantly, much more than our peers.
Great. Thank you for that, and I'll get back to the queue.
Thank you, Tavi.
The next question is from Micha Goldberg of Psagot. Please go ahead.
Thank you very much. Congratulations on a very strong quarter. The first question is on dividend policy. I seem to remember that you stated that your policy is 50% of net income. You seem to have so much excess capital. Is there a chance you're gonna be increased that to 50%?
Hi, Micha. Good afternoon. First of all, you're right. Before the war, we had the approval of the Bank of Israel to pay up to 50%. Currently, the Bank of Israel instruct all the bank in Israel to be more cautious in the dividend distribution ratio. This is the reason why, I assume that's why Bank Leumi and other banks pay around 40%. We prefer to combine it, as Hagit pointed out, by buyback and dividend distribution in cash. And we also got the approval that the buyback plan will be implemented not only in the first quarter, but also in the following quarters. Of course, depends on the geopolitical development.
When you look at our equity ratios, I mean, our Tier 1 equity ratio, which is 12% currently, or almost 12%, and on our total capital ratio, which is 15%, so we have all the ability to increase it. But currently, as I mentioned, due to the geopolitical circumstances, and due to the instruction of the Bank of Israel, to be more cautious, that's what we decided to this quarter.
I understand. Thank you very much. I'm just wondering, I mean, in the past, I think you had an internal target around 10.7, I think, in the buyback. It said 10.9 minimum in order to see continued buyback. I mean, is the Bank of Israel in conversations with... When you guys have conversations, is it considering at some point in time, allowing the bank to go back to much lower common equity Tier 1 ratios, or is that just totally off the table? Because you guys will keep on giving a lot of profit, and your excess capital will keep on hurting your return equity, and if you know, if credit demand doesn't pick up, then it's gonna, you know, it's gonna be pretty big burden on your profitability.
Is that a worry for the Bank of Israel at some point in time, increasing risk and other issues, or it's just not on the table?
I, as far as I know, Bank of Israel take all in all of these considerations, which you are right in part of them, into account. You know, no, there are advantage and disadvantage for each of the decisions the Bank of Israel will take in the future. I agree with you that the banking industry in Israel, especially, you know, the banks who have a much greater equity buffer. I agree with you that they have the ability, and maybe there are more advantages to let them distribute more.
But currently, I can understand the other point, which says that there are still lots of unknown regarding the geopolitical circumstances. So nothing will happen if we will wait more time and see how things will develop.
Right. Okay, thank you. I mean, your loan growth went up by 2%, over 2% in this quarter, which I think mostly was still a relatively weak quarter. Does that mean that we should be looking for almost double-digit growth if things pick up a little bit?
It's very hard to say, because apart from the geopolitical circumstances, there are, there is also, a high interest rate environment, which also now affect the demand for loans. So there are two things on the table that could a little bit the demand for loan. It's the interest rate level, which is still high, 4.5%, the Bank of Israel interest rate, and the geopolitical circumstances. So I think that, that, in this year, we should expect... It will be a little bit aggressive to assume that we will see double-digit growth in loans. I assume that it will be, high double, high one-digit number.
Thank you. Do you see any potential economic impacts from what's going on in The Hague right now? And how do you see the overall recovery coming up after the first quarter was published recently as growing rather quickly? Thank you.
It's very hard to say, you know, it's more a political issue. Currently, I don't see any direct impact in the pipeline. It seems to me more like, you know, a declaring thing and a political thing. And I hope that, you know, Israel will take the right decision, and but I think Gil might e laborate on that.
Yeah. You know, in general, I think the current situation is a bit uncomfortable, because aside from the war, we have this change in how the world is perceiving Israel. So, I don't think that the ICC or ICJ issues change much in that area. And in general, just going back to the data that we already have for so far this year, it does seem like the economy is coming back in a rather non-uniform way, but there was nice positive growth for the fourth quarter... For the first quarter of this year. And the monthly data that we have seems to be okay. So, it does look like the... There is an economic rebound underway, and I do not think that we've seen anything in terms of how the world views Israel that has really changed recently and is undermining this recovery that is now underway.
Okay, thank you. And my last question, I saw margins, you know, contract a little bit, and yesterday we saw the interest rates not going down. Have you changed your outlook for where interest rates will wind up? And should we be looking for margins to contract further in the next couple of quarters, or is no change in interest rates gonna allow that to break even? Thanks.
Well, the NIM is a mix of... it is affected mainly by three main components. First of all, the level of CPI, which was quite low in the first quarter, only 0.3%, and on annual basis, it much higher, around 2.5, maybe 3%. Secondly, the mix of the credit portfolio. As Hagit mentioned, our target segments are mainly mortgages and real estate. These segments is have a lower rate, lower rate, but lower credit loss expenses. As we presented consistently, we present the lowest NPL in the market and the lowest troubled debt ratio.
It's driven by the fact that our growth is mainly in segment in which the collateral are very strong and the credit loss expenses are very low. And thirdly, it depends on how much we will increase our deposit, because as I pointed out earlier, the margins on deposits are lower, mainly in the corporate, are lower than the margin on loans, but there are not equity requirements. So, as long as the more you increase your corporate or capital market deposit, the lower the NIM, but the higher the ROE. And our target is to be as much as more effective in terms of ROE, not in terms of margin.
So, it depends how much we will go in deposit, what will be the mix of the credit portfolio, and what will be the level of the CPI. The level of the CPI has a positive effect. The second two component has negative effect, and we would like to see the combination of these three parameters together.
Thank you. Very clear. Thank you for a strong quarter. Thanks.
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 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.