Ladies and gentlemen, thank you for standing by. Welcome to Leumi's second quarter 2024 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. As a reminder, this conference is being recorded August 14, 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 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 for Bank Leumi's second 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 TASE website. I would like now to turn the call over to Hagit.
Thank you, Michael. Good day, everyone. I'm happy to be here with you all. Before we delve into the financials of a strong second quarter, I would like to say a few words about the macro backdrop in the second quarter, which, after nine months of war, showed the modest recovery, which began in the first quarter of the year, and this continuing positively contributed to our results. Sales of new and secondhand apartments continued to pick up, and for the three-month period to May 2024, were up significantly on the corresponding period last year. Consumer confidence remains low, affected by the war, but retail sales continued to increase in March to May, following the recovery in the first quarter. Wages continued to rise and the unemployment rate continued to fall.
Foreign trade data indicates an increase in the volume of the exports in the second quarter, with an emphasis on the export of IT goods and services. While geopolitical risks remain high, Bank Leumi estimates a 1.4% GDP growth in 2024 and a rebound in 2025, provided that the war ends by then and does not extend, with growth driven by domestic demand, investment in fixed assets and private consumption. Returning to the bank's performance in Q2 2024, let me pinpoint three key takeaways, and we will go into the details later in the presentation. Firstly, the bank continues to report strong profits.
Second quarter 2024 ROE was 15.9% and would have been 20.2%, excluding the NIS 0.6 billion impairment of the Valley Bank stake, versus 19.4% in the second quarter of 2023. Since the end of the second quarter, Valley stock has increased, and the value of Leumi's 14.2% stake is above the value recorded on our books. Secondly, our improved credit position. The quarter saw a meaningful decrease in troubled debt and NPLs, which, combined with recoveries on specific loans and lower collective provisions, resulted in much lower loan loss expenses. Finally, the continuing improvement of our cost-income ratio, which continues to be the best in the sector. Now let us turn to slide 3 for the highlights of the quarter.
The second quarter was another strong quarter, with net income of NIS 2.3 billion and ROE of 15.9%. Reported ROE for the first half of 2024 was 18% and was similar on a normalized basis to the value impairment in the quarter, more or less offsetting the profits from the sale of Leumi's headquarters building in the first quarter. The cost-income ratio declined to 28.7% from 39.5% a year ago. Credit losses were almost zero, as collections offset lower collective provisions. Credit growth was up 1.2% on the previous quarter, but was up 2.4% when excluding capital markets, as economic activity continued to recover. Credit to capital markets can be very little on a quarterly basis.
Core deposits were up 1.4% and are up 3.4% year to date. Slide 4 shows a snapshot of income and expenses in the second quarter. Net interest income and fee income increased by 2% compared to the parallel quarter last year, mainly as a result of the increase in the credit portfolio and activities, offset by lower needs on lower rates and higher funding costs. Total expenses declined by 2%, mainly due to lower bonuses. On slide 5, you can see the same snapshot for the first half of the year. Financing income was up 7%, while the 5% increase in operating and other expenses year-on-year was mainly due to higher employee bonuses on higher profits.
In slide six, we can see the development of net interest income, supported by credit growth and helped by higher CPI in the second quarter. Turning to slide seven, fees increased by 2.2% as economic activity continued to recover, supported by financing transactions and securities activity, and also a year-on-year increase in credit card income. Slide eight shows the continued improvement in the bank's multi-year cost income ratio, which improved further to 28.7% in the second quarter. Slide nine shows the quarter-on-quarter and year-on-year decline in loan loss expenses, which were close to zero, due to a lower collective provision and also due to income from specific provisions due to recovery. Note the decline in the collective provision to NIS 68 million was despite an increase in macro-related provision due to higher macro uncertainty.
Net provisions in the first half of the year were 0.09%. The next slide, slide 10, presents the high quality of our credit portfolio. The NPL improved to a level of 0.56% at the end of the second quarter, and troubled debt decreased to a level of 1.5%. At the same time, as can be seen on the right-hand side, the bank's total provision remains stable at NIS 6.7 billion, covering almost 270% of the bank's NPLs. Despite the fact that we increased our credit portfolio at a faster rate than our peers in recent years, Leumi continued to present low NPL and troubled debt ratios. Slide 11 shows that the bank continues to grow credit in its target segment of mortgages and corporate, including real estate and middle market.
Demand for credit in mortgages and corporate, in particular, rebounded in the first half of the year. The next slide, slide 12, shows the bank's diversified deposit base and robust liquidity ratios. Core deposits grew by a healthy 3.4% since the start of the year, continuing the strong growth recorded in 2023. Moving ahead now to slide 13, which shows our very healthy capital and leverage ratio. The core tier 1 ratio has increased by almost 40 basis points in the first half of the year to 12.04%, despite the higher 40% total payout. The total capital ratio rose to a level of 15.04%.
Turning to slide 14, the strong profitability and large capital buffer allowed us to declare a cash dividend of NIS 681 million for the second quarter, in addition to the second tranche of our NIS 1 billion share buyback plan, reflecting a 40% total payout and equal to around a 7.5% annualized yield. Together, this brings the total capital return for the first half of the year to more than NIS 2 billion. In conclusion, and turning to slide 15, the bank continues to present consistent and strong financial performance with high ROE, despite the challenging economic backdrop. Long-term asset growth is driving higher pre-provision 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 segment, 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 Tavy Rosner of Barclays. Please go ahead.
Hi, good afternoon. Thanks for taking my questions, and, congratulations on the strong results. I have three quick ones, please. The first one is, I wanted to ask about the deferrals. I know that most banks allowed residents of the North to delay, mortgage repayments and so on. I wanted to get a sense of the scope, like, what's the percentage of the total book that's been deferred for these reasons?
Hi, Tavy. Good to hear you. We have a specific number in our finances for that, and you can see that the total deferral for the end of June are negligible. Only the total payment that were deferred are only NIS 2 billion shekels, and also the total credit that involved with deferral-
... is only NIS 9 billion, significant decrease from the level that we had by the end of 2023. This is one of the parameter that we saw significant improvement in the second quarter, as well as in the ratio and other underwriting parameters that all of them across the board show in one direction, improvement in the quality of our credit portfolio.
Thanks, Omer. And then the second one is on provision. So we're seeing recoveries. My usual question is, assuming nothing changes with the macro and the geopolitical concern, should we expect further reversals over the next coming quarters?
I will say as following. First of all, in this quarter, as in the first quarter, we have continued to see a collective. You can see that we had a specific provision, which was negative. As for the collective provision, as a matter of fact, we didn't release provision, despite the fact that we had increased the buffers in our collective provision, in order to be prepared for any eventuality. And the collective provision was in the second quarter only six basis points. And the reason for that is what we mentioned earlier. I mean, the improvement in the portfolio, the improvement in the ratio of the problematic debt, as Hagit mentioned, in the review.
We can see that the problematic debt has continued to improve and drop to a level of 1.5%. We can see a consistent improvement in the NPLs. So all of that led to only 6 basis points collective provision, and this is despite the fact that we increased the portion that is related to the geopolitical circumstances. So looking forward, of course, it depends on the geopolitical situation, but if the situation of our customers, I mean, the main trade parameter will continue to improve as we have seen in the last two quarters. It means that the credit cost expense ratio for the following quarters will continue to be low as well.
Thank you, Omer. And then the last one is around the dividend and cash back. So you guys are sitting on a lot of excess capital. Am I assuming that the current payout is whatever the Bank of Israel is allowing you to pay at the moment? And do you think that it's gonna allow you to increase the payout in the future?
That is, that is correct. Currently, the 40% are mainly due to the geopolitical situation. As Hagit mentioned, our CET1 is above 12%, our total capital ratio is above 15%, so we have the ability to increase it, and I assume we will consider it when it's possible.
Thank you. I'll get back to the queue.
Thank you, Tavy.
The next question is from Priya Rathod of Jefferies. Please go ahead.
Hi, thanks for taking my questions. Just two from my side, please. So the first is, obviously this quarter we saw some good loan growth come through, which is really encouraging. But I'm just guessing, like, since the end of the second quarter, have you seen any changes in the patterns in terms of loan demand? And my second question is, and I appreciate this is quite forward, especially since you've increased it this quarter, but what are the hurdles or criteria for you to eventually release some of the more uncertainty provisions that you've put on? And I guess follow on from this is, like, more specifically in your loan book, are there any areas of concern in your loan book that we should be aware of, looking forward in the next, you know, two or three quarters, for example, commercial real estate? Thank you.
Thank you. I will say as follows. First of all, we don't see any significant changes since the beginning of July. Of course, we are in the summer, which is, you know, lots of people are on vacation, and seasonally, not regarding the war, the demand for loan is lower than in other months, but nothing significant. As for the threshold or any other parameter that we use for the collective provision, we look at many parameters. It's a complicated model in which we look at the collection, we look at prepayment, we look at the different macroeconomic parameters, we look at the fair value. We look at different things...
combine them into a model in which try to focus in very conservative approach what should we keep as a provision. As I mentioned, in this quarter, due to the macroeconomic environment, actually, we actually increased the buffer that relates to this portion in the provision. Of course, the most exposed segment to any deterioration in the geopolitical situation is the unsecured retail and small businesses. Because in the other sector, the borrowers are much stronger, the collateral are much stronger.
Even in real estate that you mentioned, the NPL is improving, the problematic debt are improving. I mean, they are going down. Specifically for the real estate, I will say that our biggest exposure is to the construction loans. And then, we have lots of mitigation. The main mitigation is related to the collateral, of course, but also to the absorption rate. And I can say that, apart from very, very specific projects and small projects, in almost all of our other projects, the absorption rate is above 40%.
So you can understand that the scenario in which the price goes down by 40% or the cost go up by 40% is very remote, if at all.
Perfect. Thank you very much.
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. The next question is from Micha Goldberg of Psagot. Please go ahead.
Good afternoon. Congratulations on an excellent quarter and a very strong first half year. A couple of short questions for me, please. I saw fees, income from fees declined in this quarter. I was just wondering what the background on that was and what should we be expecting in the next couple of quarters? Secondly, I saw tax rate was much lower than originally, I think, thought about. Can you tell me how much the war levy was this quarter?
I missed you. First question was regarding the commission. What was the second question?
Tax rate, war levies. The war taxes, special tax.
Yeah. Okay. So as for the commission, they were more or less similar to the previous quarters. And there was a very, very light decrease, mainly related to the benefits that we grant to our customers due to the war. But the decrease is very low. For the second quarter, I think the commission were NIS 910, and in the first quarter they were NIS 935, so the decrease is very insignificant. As for the tax rate, the tax rate for the second quarter was relatively low. It was impacted by mainly by the improvement in our deferred tax. Our deferred tax are mainly related to our pension liabilities.
So when, so due to the increase in the VAT that is expected, to be implemented from 2025 or for 2026, actually, so it, so it affects positively our, our deferred, deferred tax, and this is, affect, positively our tax rate. I think that, you know, in the, in the long term, the following quarter, you should expect, on a long-term basis, a tax rate of 35%. But for the next financial year, because of the additional tax that was imposed by the government, so you should expect a tax rate between 37%-38%.
The difference between the 37%-38.5% was the DTA, is that it, deferred taxes?
Yeah, it was the tax, the special tax that was imposed on banks for 2024 and for 2025.
Great. Thank you very much. And, my last question, I see that you guys are trying not to release any group provisions over the last couple of quarters, although some of the other banks did. I'm just wondering, is the Bank of Israel allowing you currently to release? And if it is, when do you think it's going to be appropriate to release some of that excess provision? Thank you.
I don't think there is a forbidding by the Bank of Israel for releasing a collective provision, but in the, w e didn't release collective provision. As I pointed out, in the second quarter, we even increased the collective provision that is related to different scenarios that can develop due to the geopolitical situation. And the decrease is coming from other elements, mainly, you know, real elements. I mean, it's a model, and when there is a significant improvement in the deferral, when there is a significant improvement in variables, so by definition, the model led to lower collective, to lower provision, sorry.
And if you add to that, the collections that we include in the provision, so at the end, so you end with only six collective provision. Looking forward, we have a significant buffer in our provision, and when the situation gets better, we will consider to release it. We didn't do it yet.
Thank you very much.
Thank you, Micha.
There are no further questions at this time. This concludes Leumi's second quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.