Ladies and gentlemen, thank you for standing by. Welcome to Leumi's Third Quarter 2024 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. As a reminder, this conference is being recorded November 19th, 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. Michael, 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 Third Quarter 2024 results conference call. Joining me today is Ms. 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 now like 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 third quarter, I would like to say a few words about the macro backdrop in the third quarter, which, more than a year into the work, continues to show a recovery, positively contributing to our results. Recently published national accounts figures show that Israel's GDP rose in the third quarter of 2024 by 3.8% in annualized terms, and the more important indicator of the business sector output grew by 5.4% in annualized terms. The recovery has been led by domestic demand, mainly fixed asset investments and private consumption. The level of GDP in the third quarter of 2024 is still 1% lower than in the corresponding period in 2023, but the gap is closing.
The fiscal deficit declined in October to below 8%, the first decrease since the outbreak of war, supported by an increase in state revenues. Sales of apartments continue to pick up in the period to August this year, and retail sales recovered in the first half of 2024 and maintained their levels. Israeli trade data indicates an increase in the volume of exports since the beginning of 2024, with an emphasis on the export of ICT goods and services. Bank Leumi expects a 0.6% GDP growth rate in 2024 and a rebound in 2025 to 3.9%, provided that the war ends in early 2025, hopefully, with growth driven by domestic demand, investment in fixed assets, and private consumption. Inflation remains slightly elevated at 3.5% year on year, and the Bank of Israel is not expected to cut rates in the near term.
Last but not least, Israel's market-based risk indicators have improved recently across the board. This includes the decline of Israel's CDS spread and the yield gap, the increase in the effective value of the shekel, and the relatively strong performance of the Tel Aviv Stock Exchange. Returning to the bank's performance in Q3 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. Third quarter 2024 ROE was 15.5%. Note that ROE in the quarter was negatively affected by losses from derivatives, which hedge our securities portfolio and where the profit is recorded to other comprehensive income in the OCI. I will elaborate on this later. Secondly, despite the challenging economic backdrop, our credit position remains very strong.
In the third quarter, NPLs declined further to 0.52% of gross loans, while problematic loans also declined to 1.44%. At the same time, the bank continued to increase our reserves, which now stand at 1.5% of gross loans. And finally, Core Tier 1 equity increased further in the quarter to 12.07%, with a buffer to the minimum regulatory requirement of more than ILS 9 billion. Now let us turn to slide three for the highlights of the quarter. The third quarter was another strong quarter, with net income of ILS 2.3 billion and ROE of 15.5%. Reported ROE for the first nine months of 2024 was 17.1%. The cost-income ratio declined to 31.1% in Q3 from 32.3% a year ago. The cost-income ratio for the first nine months was 29.6%. Credit losses were 0.28%, all due to higher collective provisions following the extension of the war on the northern border.
Specific provisions remain negative due to collections. Credit growth was up 3% on the previous quarter and is up 6.5% since the start of the year. Our book value per share grew 3.8% quarter on quarter and is up 16.1% over the last 12 months to almost ILS 40 . I should also mention here that our investment in Valley, which, following strong share price performance, is now trading more than 35% above the value recorded in our books. Valley recently raised $450 million in equity, which, together with other significant measures the bank is taking, including reducing real estate exposure, will reduce risk and support growth. Turning to slide four, we chose a snapshot of income and expenses in the third quarter. Net interest income increased by 16% compared to the parallel quarter last year due to the increase in our credit portfolio and due to higher CPI.
The negative non-interest income was impacted mainly due to losses related to interest rate derivatives that hedge our securities portfolio. Actually, the bank's securities portfolio recorded strong gains in the quarter, but for accounting reasons, only the cost of derivatives is recorded in the P&L, while the gains of ILS 1.2 billion are recorded straight to the equity account, as I mentioned in the OCI. Total expenses were down slightly, mainly due to lower other expenses. On slide five, you can see the same snapshot for the first nine months of the year. Financing income was up 6%, and the 9% increase in interest earning assets was partially offset by the negative impact of a shift from current accounts to deposit accounts. The 3% increase in 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. The higher NIM in the third quarter was positively impacted by the change in the mix of assets, as well as various other measures being taken by the bank. Average current account balances and the share of total deposits were stable quarter on quarter. Turning to slide seven, quarterly fees increased 2.2% year on year and 8.1% over the previous quarter as economic activity continued to recover, supported by financial transactions, securities activity, and FX trading. Slide eight shows the continued improvement in the bank's multi-year cost-income ratio, which improved further to 29.6% in the first nine months. Turning to slide nine, the credit loss expense ratio has continued to be low. On the one hand, we have continued to increase our collective provision due to the war.
On the other hand, the bank continues to record income from specific provisions due to recovery despite the macroeconomic challenges. The net credit loss expense ratio in the first nine months of the year was only 0.16%. The next slide, slide 10, presents the high quality of our credit portfolio. The NPL improved to a level of 0.52% at the end of the third quarter, and troubled debts decreased to a level of 1.4%. NPLs have dropped by ILS 1.2 billion since the beginning of 2024, while problematic debts declined by more than ILS 1 billion. At the same time, as can be seen on the right-hand side, the bank's total provision remains stable, actually increasing slightly in the quarter to ILS 6.8 billion, covering almost 290% of the bank's NPL. Leumi continues to present lower NPL and troubled debt ratios than our peers.
Slide 11 shows the bank is continuing to grow credit in target segments of mortgages and corporate, including real estate and middle markets. Demand for credit in mortgages and real estate and corporate has continued to be strong in the first nine months of the year. The next slide, slide 12, shows the bank's diversified deposit base and robust liquidity ratios. Core deposits grew by 4.2% since the start of the year, continuing the strong growth recorded in 2023. I'm moving ahead now to slide 13, which shows our very healthy capital and leverage ratios. The core tier 1 ratio increased by more than 40 basis points in the first nine months of the year to 12.07%, despite a 40% total payout ratio. The bank's capital buffer, the difference between the CET1 ratio and the minimum regulatory requirements, now stands at more than ILS 9 billion.
The chart on the right-hand side of the slide shows the gradual improvement in the leverage ratio to 7% at the end of the quarter, and also the increase in common tangible equity as a percentage of total assets. Turning to slide 14, the bank declared a cash dividend of ILS 688 million for the third quarter, in addition to the third tranche of our ILS 1 billion share buyback plan, reflecting a 40% total payout. Together, this brings the total capital return for the first nine months of the year to more than ILS 2.9 billion and significantly more than ILS 2.3 billion of capital return for the whole of 2023. The nine-month return is equal to an annualized return at yesterday's close of around 6.4%.
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 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 growing 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're using speaker equipment, kindly lift the handset before pressing the numbers. 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 a strong quarter. I wanted to talk about provisions and loan growth, considering we've seen different levels of provisions over the last few quarters. High, we've seen recoveries back to normalized levels, and then the loan growth has been pretty resilient, I'd say surprisingly so. How should we be looking at those two items going forward just in terms of modeling?
Hi, Chris. Good afternoon. I would say as follows. First of all, in the first nine months of the year, despite the fact that the GDP base of growth, the real GDP base of growth in Israel in 2024, is expected to be only 0.5%, as Hagit pointed out, we were able to increase our credit portfolio by 6.5%.
It reflects the fact that despite geopolitical challenges, we present again our ability to increase our credit portfolio. It was driven mainly by demand, demand for credit in corporate, including real estate, mortgages, and middle market. It seems that after the first two quarters after the war started, that the market, the economy, started to rebound, and the different figures that Hagit just mentioned reflect that the figures, the macroeconomic figures for October of the third quarter are much better than the figures in previous quarters, which, of course, created demand for loans. Now, I don't know what will be in the following quarters, but when I look forward for the next following quarter, the main scenario that we see in front of us is that at the end, like any war, the war will be settled.
And when it happens, we start to see a rebound in the economy, and that, of course, will create demand. So in the bottom line, I believe that if in this year we were able to increase our credit portfolio by only in the first nine months by 6.5%, it means that we have the capability even to increase it in better years. That's first. Now, as for the provision, as Hagit mentioned, first of all, all the credit loss expenses were composed of the collective provision. If you look at the specific provision, it's very stable and consistent. It's negative. Quarter after quarter, the write-offs are lower than the collections.
In the collective provision, it's impacted by the geopolitical circumstances, and due to the development in this area, in the third quarter, you see an increase, which, after the increase, I would say that a credit loss expense ratio of less than 0.3% is a very reasonable credit loss expense ratio in this environment, and moreover, as we did in previous quarters, we increased also in this quarter significantly the buffer that relates to the geopolitical circumstances, and if the situation improves, as we believe, so we'll be able also in the following quarter to start releasing, and if you look at the other parameters that are more, I would say, which have less consideration of geopolitical circumstances, so if you look at the NPL, not only that the NPL has declined, but in terms of numbers, the NPL dropped by ILS 1.2 billion since the beginning of the year.
The troubled debt dropped by ILS 1.1 billion since the beginning of the year. So overall, despite our fast growth in the last few years, we continue to present very strong credit performance. And this strong performance reflects, again, the quality of our credit portfolio.
Thanks. That's really great color. Just one more. If I could get your view on the potential regulation of the BOI that would potentially allow other institutions to take deposits, do you have any take on that and the impact on the sector?
First of all, it's too early to estimate it because nothing really was published. But basically, I would say that we are in favor of competition because it makes us more sharp, and it makes us do better. And we believe that we have our ability to deliver or to provide our customers 360-degree solutions in all of their needs.
In any scenario, we'll give us a significant advantage compared to any competition that will be raised.
Got it. Thanks. That's it for me.
The next question is from Borja Ramirez of Citibank. Please go ahead.
Hello. Good afternoon. Thank you for taking my questions. I have two. The firstly is on the margins. So your net interest margin has been increasing, even if we adjust for the CPI, so that's better than the peer average. So I would like to ask if you could provide a bit more color also on the expectations. And then my second question would be on the capital return. So your capital continues to grow, you have a strong buffer above the requirement. I would like to ask if there's any view on potential distributions going forward, in addition to the 40% payout. Thank you.
Good afternoon, Borja.
First of all, as for the NIM, so in this quarter, as we mentioned, and also in the previous quarter, we were able to increase our NIM, even if we exclude the effect of the CPI. And this is in a period in which there was not a slight movement from current account toward the time deposit. We were able to do it mainly via the mix of our assets. At the end, it's a question of pay and lend. We look at the profitability of each transaction that we are making. It can be on the side of the assets, it can be on the deposit side. We price it. And when you price it, you have a lot of possibilities.
And we are very satisfied that in the last two quarters, we were able to do even better than the negative effect that affects the NIM due to the movement from current account toward time deposit. Now, as for the dividends, first of all, we present the highest CET1 ratio in the market, 12.07. We have the full capability in any space of growth of credit. We have the full capability to increase our payout ratio. And currently, due to the geopolitical circumstances, there are limitations on banks on the maximum dividend or buyback that they can make. And as I mentioned earlier, at the end, I hope very shortly, but at the end, the war will end, and this limitation will be lifted. So when it's done, I believe that we will be able to consider it substantially.
Thank you. Very clear.
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.
Congratulations on a strong quarter and a very strong year to date. I just want to follow up a question on the NIM expansion. I was wondering, you mentioned several ways to improve your NIM despite pretty much a flat CPI and competition in the market. Is this something that has to do with an optimization of your deposit base, or have you been repricing your credit line?
It's both. Good afternoon for you as well. It's both. At the end, when we price, we price anything. We price loans, we price deposits. We decide about duration.
We decide whether any loans will be linked to the CPI or it will be in shekels. Also, there are lots of questions that lots of things that we are doing not only in shekels, only in dollars. So it's a mixed. It's a full world. I don't know if any quarter we'll be able to improve it, but in the last two quarters, we took a few significant measures, and we are up. It reflects an interest in the NIM, which is a little bit different from what we saw in our period in the last two quarters.
So are you not witnessing strong competition on pricing side?
There is a strong competition on the loan side as well as on the deposit side, not only in the bank themselves, but also from other players in the capital markets.
But as I mentioned before, I think that our customers understand that when they come to the bank, they get solutions for their 360-degree needs. So it gives us an advantage. And also, when we look at the competition, also for customers that are only interested in the price, we have our solutions. Sometimes it's successful, sometimes it's not successful. But there is a strong competition, and we are handling it in a good way, I believe.
Great. Thank you very much. And also follow up on the capital question asked before. So yes, you have a ton of excess capital, and I think you said that after the war, you might consider or might have other options. Assuming for one second tomorrow, it'll have peace and there is no uncertainty left anymore, what are the options out there? You think the Bank of Israel will allow a one-time payment?
It will allow you to increase your payouts of 60% or 70%? What are the potential options on the table that the Bank of Israel would allow, assuming things are significantly better geopolitically and everything else?
I believe all the options are on the table. And it relates not only if we distribute it, if we will pay one-time dividend or we will increase the quarterly dividend payout ratio. It also relates to the GDP basic goal and the demand for loans. We will look at all of the parameters and decide. All the parameters are on the table, and we will consider it when it will be relevant.
Understood. Would you consider taking on more risk?
Taking what?
Taking on more risk, meaning increasing your risk-weighted assets by higher yielding.
I don't think so.
Basically, our growth in the last two years was focused on mortgages, corporate and home real estate, and middle markets. So it might be that when the situation comes down, we might increase a little bit our retail portfolio. But basically, Bank Leumi as we did in previous years. In any growth that we will make, it will be a responsible growth because at the end, we are looking at the bottom line. I don't want to be in a position in which I will increase the loan and pay much higher credit loss expenses in the credit loss line. So in any scenario, it will be a responsible growth. It might be that we will start to increase our business in other segments that currently we are more cautious, but we'll have to be patient and wait for that.
That's great and clear.
I mean, you could, in theory, take on more risk on your securities portfolio, which I think is almost entirely government and sovereign bonds. Would that be considered based on the fact that you have a new manager of that securities portfolio?
We will consider it as well. When we look at the securities portfolio, as we mentioned, around 90% is in non-risk assets. So if we will believe that there is a significant advantage to change a little bit, so we might change a little bit. But currently, the vast majority of our securities portfolio as any other bank is a very conservative portfolio, which is mainly based on non-credit risk assets.
Very clear. Another question. I mean, you seem to, I think you alluded to the fact that you have seen significant fluctuations in your gains and now losses from derivatives.
I'm just wondering what the cause for that is. It's very significant. Is there a way for you to smooth that out? Is that related to the fact that you've been growing your mortgage book and now you're hedging that? Is that what's causing it? I'm just wondering if there's a way to smooth that out. Thank you.
Okay. As Hagit pointed out, the vast majority of our derivatives hedge our risk. It hedges our FX risk because we don't take any FX exposure. It also hedges our risk exposure. Now, due to accounting reasons, the effect of the derivatives that hedge some of the derivatives, not all the derivatives, but some of the derivatives that hedge the securities. According to the accounting rules, we have to record the profit or loss to the P&L while we see the other side in the OCI.
So it depends on the yield on the market. And the yield on the market at the end affected the derivatives that hedge our credit risk. There are other effects on the derivatives, mainly from foreign exchange.
Yeah, I totally understand. I was just wondering if you would consider smoothing that. In the past, other banks had similar issues and fluctuation of ILS 600 million gain in quarter one and a couple of hundred-million-shekel losses in Q3 or make it somewhat complicated to have some transparency when trying to look forward.
We have different thoughts about this issue. In order to mitigate the fluctuation in the P&L, it should be according to the accounting rules, perfect hedge. Perfect hedge has advantages and disadvantages. So we are looking at it, and we will decide on it in the future.
Great. Another question about Valley National.
I mean, I remember a couple of quarters ago, you guys had a write-down of close to ILS 1 billion or maybe even more than that. It seems that the market value has gone up significantly, and you might actually have theoretical gains on that. Are there ways to capitalize that and record that? And if there are, are you considering those?
Well, currently, after this cycle and after the significant increase in Valley market cap, the market cap of Valley is almost 40% above our book values. There are different ways we adopt in our financials, the equity method regarding this investment. Of course, if we will decide to move it towards public markets, so we'll be able to record the profit immediately. And there are other ways. So what we are looking mostly is about the economic potential profit in Valley.
Currently, the gap between the market value and the book value is a few hundred shekels. We are very satisfied with that.
Great. Thank you very much.
Thank you, Michael.
There are no further questions at this time. This concludes Leumi's third quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.