Earnings Call: Q2 2025

Aug 13, 2025

Summary

Q2 net profit was ILS 2.6 billion, with 16.2% ROE and a 26.9% cost-income ratio. Strong lending growth and improved credit quality supported results, while geopolitical uncertainty remained a risk.

Ladies and gentlemen, thank you for standing by. Welcome to Leumi's second quarter 2025 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 August 13, 2025. I would like to remind everyone that forward-looking statements for the respected 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 2025 results conference call. Joining me today is Mr. Omer Ziv, Deputy CEO and Head of the Capital Markets Division, and Ms. Hagit Argov, CFO and Head of the Finance Division. The presentation that we will be using is available on the IR section of the bank's website. I would like now to turn the call over to Hagit. Thank you, Michael. Good day, everyone. I am very pleased to be here with you today and to present our strong second quarter 2025 financial results. Let's get started. First, some key takeaways. Bank Leumi, over many quarters, continues to present high and stable results. This quarter, ROE was 16.2% and net profit was ILS 2.6 billion. It is worth noting if we adjust for excess capital, meaning if capital was reduced to the bank's internal CET1 requirement, our ROE would have been even stronger, above 18% in the second quarter and the first half of the year. Credit and deposit growth increased significantly, both reflecting the resilience of the economy and driving increased activity and higher revenues. We continue to manage costs effectively, driving the further improvement in our efficiency ratio. Credit quality metrics further improved. They have been among the best in the sector consistently for a long period. We continue to present significant excess capital, as I mentioned, and healthy liquidity ratios. Following the Bank of Israel approval to increase the payout ratio to 50% from 40%, Leumi announced a combined dividend and buyback of ILS 1.3 billion for the second quarter. This represents 50% of the net profit. We can see that Leumi is well on the track to meet its 2025 and 2026 financial targets. Before we dive into the details, let me start with a brief update on the macroeconomic environment. Let's turn to slide 4, highlighting key macro indicators. Despite the conflict with Iran that happened in June and the ongoing war in Gaza, the Israeli economy continues to demonstrate resilience. Economic indicators showed continued expansion in the second quarter. While the conflict with Iran had a temporary negative impact on economic activity, the end of the conflict saw a strong improvement in market sentiment and a reduction in Israel's sovereign risk. The Bank of Israel estimates real GDP growth of 3.3%, as you can see in the top left graph, for 2025, driven by domestic demand and fixed investment. In addition, exports of high-tech services, a key engine of the Israeli economy, have accelerated in recent months, and the labor markets remain tight, as we can see in the bottom left. But a high level of uncertainty still continues around the macroeconomic outlook, given the geopolitical environment. Let's move to slide 5. Slide 5 provides a snapshot of our quarterly performance. As mentioned, net income for Q2 2025 was ILS 2.6 billion and ROE was 16.2%. The cost-income ratio was especially low at 26.9%, down from 28.7% in Q2 2024, supported by higher net interest income, higher fees, and lower costs. Our cost-income ratio continues to lead the Israeli banking sector and is among the best globally. We at Leumi continue doing more with less. Credit loss expenses were 0.19% in Q2 and 0.12% for half one 2025. Specific provisions were offset by strong collections in the quarter. Collective provisions were higher. The increase reflects both the strong growth in the loan portfolio and the cautious approach in light of ongoing geopolitical uncertainty. Credit growth of 5.7% quarter-on-quarter, with strong demand for corporate credit in particular as the economy continues to recover. The book value per share of the bank increased 3.2% in the quarter and is up 14% over the past 12 months to almost ILS 44. Overall, we delivered strong, consistent, and high-quality performance, as you see. Moving to slide 6, which shows the breakdown of income and expenses. Net interest income rose 4% year-on-year to ILS 4.5 billion, supported by volume growth and partly offset by a lower CPI compared with Q2 2024. Fee income grew strongly, up 11.4% year-on-year, supported by higher financing transactions fees on higher activity and higher securities and FX fees. Expenses declined, reflecting tight cost control. As a result of the above, pre-provision net revenues, bottom right, increased year-on-year by 7%. By the way, Bank Leumi continues to support and assist its customers affected by the war. Benefits to those impacted by the war were ILS 112 million in the first half of 2025. Most of this was in the second quarter as part of the recently announced Bank of Israel program. Slide 7 summarizes our H1 2025 results, and as you can see, H1 results followed a similar trend to the one in the second quarter. Let's turn to the next slide 8. In slide 8, we can see the net interest income and NIM. Net interest income increased by more than half a billion ILS quarter-on-quarter, helped by the higher quarterly CPI and strong credit growth. NIM, excluding CPI, has remained stable over the last five quarters. Turning to slide 9, which highlights our fees. Here we see that quarterly fees increased by 11.4% year-on-year, and we are very happy about that, as economic activity continues to recover and was supported by financing transactions due to higher volumes, strong securities activities, and FX trading. H1 2025 over H1 2024 displayed similar trends. Slide 10 showed the continued improvement in Bank Leumi's multi-year cost-income ratio. Our cost-income ratio improved further to 26.9% in the second quarter and overall 29.4% in the first half. Turning to slide 11, the development of credit loss expenses in H1. Specific provisions continue to be very low, reflecting Bank Leumi's high-quality credit portfolio. In H1 2025, Bank Leumi recorded income from specific provisions of ILS 180 million from strong recoveries. In H1 2025, total credit loss expenses were 0.12% of gross loans, at a similar level to H1 2024. Slide 12 presents the high quality of our credit portfolio. NPLs declined to a low level of 0.43% in Q2 from 0.51% at the end of Q1. Troubled debt were stable at 1.43% of gross loans. Provisions for credit losses were up slightly at ILS 6.8 billion, and while the coverage ratio declined slightly due to the strong credit growth in the quarter, the rate of provisions to NPLs increased 3.2 times. Slide 13 shows the strong credit growth. Credit growth in the first half of the year was 7.4%, supported by the ongoing resilience of the economy, with growth mainly coming from mainly corporate and mortgage. Within the corporate division, there was a strong demand from real estate and infrastructure projects. The next slide 14, shows Bank Leumi's diversified deposit base. Total deposits were up 4% in H1 2025. Liquidity ratios remain robust with the LCR ratio at 130%. Let me now move to slide 15. Slide 15 shows our liquidity, capital and leverage ratios. The core Tier 1 ratio increased by 13 basis points in the quarter to 12.28%, with Bank Leumi's capital buffer now standing at more than 2% or almost ILS 11 billion, which is up almost ILS 1 billion from the previous quarter. The total capital ratio was stable at 14.86%, also well above the Bank of Israel minimum requirement of 13.5%. Turning to slide 16, Bank Leumi's capital returns. Bank Leumi declared a cash dividend of almost ILS 1 billion for the second quarter, in addition to an approved share buyback of ILS 326 million, bringing the total capital return to shareholders in the quarter to more than ILS 1.3 billion. This represents 50% of quarterly net profit versus 40% in Q1 2025. The quarterly capital return is equal to an annualized return of almost 6% at the current share price. In conclusion, and turning to slide 17, let me summarize. The bank continues to present consistent and strong financial performance with high ROE, even during macroeconomic and geopolitical uncertainty. We remain highly disciplined on cost, resulting in ongoing efficiency improvement and the best cost-income ratio among Israeli banks, and one of the best globally. The bank's strong profitability and healthy capital buffer enable us to continue growing in our target segment, and 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. Oh, hi. Thanks for taking my questions, and congratulations on the solid ROE figures. Regarding the excess capital balance, do you see a case where Bank of Israel would potentially allow a special one-time dividend to decrease the balance? Hi, Chris. Good afternoon. Hi. It's hard to answer this question. It depends on the geopolitical circumstances. As we saw in this quarter, due to the improvement in the situation, the Bank of Israel increased the dividend distribution ratio from 40% to 50%. I believe that as long as we will see the situation stable for a longer time, the Bank of Israel will also continue to release the limitation on dividends. If we look backward, I think it was 2 or 3 years ago when there were limitations that were caused by the COVID. When the Bank of Israel released this limitation, it enabled the bank to distribute also one-time dividend. We just have to be patient, and I assume that when the situation will be stable for a longer period, the Bank of Israel will release gradually its limitation. Got it. On credit, how do you see the scope for continued growth in the credit portfolio, particularly corporate and mortgages? Would continued double-digit growth potentially cause you to revise your guidance? First of all, as in the previous quarter, we consistently focused on growth, as you mentioned, in mortgages, middle market, and corporate. We are currently strongly above the target that we put at the beginning of the year, which were 8% to 10% pace of growth, while only in the first half of the year, we are already on pace of growth, which is nearly 7.5%. The growth is coming from different areas in corporate, lots of infrastructure projects. I would say that it relates partially to the rebound that happened after any war that Israel had in the past. There is a strong demand. It's still early to say whether we are going to update the target. We will discuss it at the end of the year. Got it. Thanks. That's very helpful. Maybe I will add one more thing, Chris. Yeah. Maybe I will add one more thing. I would like to add that despite the high pace of growth that the bank presents for a long period, it is not the first quarter that the bank presented a very high pace of growth, we continue to preserve very strong parameters regarding the quality of our credit portfolio. As Hagit mentioned, the NPL even improved to a level of 0.4%. The troubled debt ratio remained at the level of 1.4%. The specific provisions were negative 15 basis points. So by all dimensions, Bank Leumi, despite the high pace of growth, continued to preserve a conservative and very strong parameter regarding the quality of its credit portfolio. Great. Thanks. Thank you. The next question is from Priya Rathod of Jefferies. Please go ahead. Hi, there. Thank you for taking my question. Just two for me. The first is a follow-up on the credit growth, more specifically on your mortgage lending. Again, it was a really strong quarter of growth, but when I look at housing market transactions, the story does look a little different. So, new home sales are falling, and stock of unsold homes are rising. Can you just speak to where the mortgage growth or the strength in mortgage growth is coming from, and how sustainable is that going forward? Secondly, on the payout cap, in the case the 50% is or the BOI allows the 50% to continue. How are you thinking about your capital priorities in terms of dividend versus a buyback? Thank you. Okay. As for the question, the mortgage demand is mainly related to construction, to private individuals who buy their apartments. The demand is equal to both. I think you mentioned the increase in the inventory of unsold apartments, but this number is a bit misleading, since it counts apartments from the date of the permission that a contractor gets. So it counts actually apartments that didn't even start to be built. So it's a little bit misleading. The demand is strong despite the high level of the interest rate. I believe it's related to two factors. First of all, the high level of the interest rate is here to stay. When the interest rate went up, people, some of our customers thought that if they will postpone the acquiring of the house, the interest rate might went down significantly. As we look at the inflation rate, it doesn't seem that the interest rate is going to decrease significantly. Secondly, when you look at the rental market, the prices in the rental area continue to increase. So most of the customers prefer, despite of the high level of the interest rate, to buy their mortgages. The dividends and the buyback, for years, we meet the dividend payout ratio between buyback and dividend and cash. We do it for a long period, because there are different considerations of our shareholders, and we think that the mix is the best way of the bank to meet our shareholders' needs. So we have continued to do it consistently in this quarter, and we will continue to do it in the following quarters as well. Perfect. Thank you. Thank you. The next question is from Canberk Benning of Citi. Please go ahead. Hi. Just two questions. Number one, on the cost-to-income ratio. Your half-year cost-income ratio is already below the 2024 figure. I am just wondering how much lower do you think it can go, and have you got a specific target in mind? The second question is on fees. The fee income grew pretty strong this quarter. Can you elaborate what drove this, and what are the trends going forward for the rest of the year? Hi. Thank you for the question. First of all, as we talk about the cost-income ratio, it's a moving target. Bank Leumi consistently, quarter after quarter, has continued to increase its income and decrease its expenses. When we say that we are doing more with less, it reflects in the financial parameters. Quarter after quarter, consistently, year after year, we increase our income and decrease our expenses. It's a moving target because it's mainly based on technology. The better technology we have, we can do much better with less, and the technology is here to stay and to improve. Just, I think, six or seven years ago, we were around 60% or 70% cost-income ratio. Currently, in the quarter, we are below 27%. In the first half of the year, we are slightly less than 30%. As I mentioned, this number will continue to improve due to technology. It doesn't mean that every quarter we will see an improvement, but on a long-term basis, we continue to improve, and we are very proud of this ratio. According to our model, it's one of the best cost-income ratio, not only in Israel, which is the best, of course, but also in the world, and we are very proud of it. As for the fees, the fees are driven by the increase in our activities. I mean, financial transactions fees, which are due to the high pace of growth of our credit portfolio, FX fees, and security fees, because not only we increased our activity in the on-balance sheet items, but also we saw a significant increase in our non-balance sheet activity, which is reflected in our fees. Perfect. Thanks. The next question is from Lorenz Bonnet of BNP. Please go ahead. Yes. Good afternoon. Congratulations for the solid performance in the light of the occasion of the Q2 2025. One question. Due to uncertainty, geopolitics, looking at your credit portfolio among different segments, do you foresee further deterioration on some of them? Maybe for one of the segments, if any, can you elaborate a bit more if you expect, and if yes, for which segment you would expect? You referred, you mentioned you alluded to the real estate market mortgage, but I'd like to know what is your opinion. Thank you. Okay. Thank you for the question. First of all, Israel is involved in, unfortunately, in a war for the last 2 years. After these long 2 years, we have continued to present very strong parameters regarding our credit portfolio. You can see that the NPL is improving. You can see a very low troubled debt ratio. You can see that for a long period, we present negative specific credit loss expense ratio, which is the main parameter that reflect the quality of our credit portfolio among the credit loss expense ratio. Despite that, we continue to be cautious. As Hagit mentioned, despite this very strong parameter, we still increase the collective provision, not only because of the increase in our credit portfolio, but also because of our cautious approach towards the geopolitical circumstances. Now, when you look at the business that we are focused at, we are focusing our growth in mortgages, in middle market, corporate, including real estate. When you look at our SME portfolio or our individual portfolio, unsecured individual portfolio, you will see that the increase is very limited since these segments are exposed much more to the credit risk than the other segments. Our target is to improve the ROE and not the NIM. So we look at the NIM net of the credit loss expenses, and our strategy is to focus our growth in the less risky segments, which I just mentioned. As for the mortgages, the mortgages in arrears of over 90 days are negligible, and this number is improving quarter after quarter. So, the credit risk involved in mortgages is very low. This is apart from the fact that we have a very strong collateral, which is the apartment itself. As for the real estate, so the real estate business are composed of three major components: residential construction loans, which are about 50% of our real estate exposure, office space, which is around 15%, and the commercial real estate. As for the residential construction loans, so the main issue that we are looking at there is the absorption rate, which is a very high number. The absorption rate measures how much the price can go down, and we will still be able to collect our loan. We don't have even one project with absorption rate which is lower than 25%. Actually, when you look at the NPL of this business, you can see that it's even lower than the total NPL. It's about 0.3%. As for the office space, the rental prices are quite stable with very high occupancy rates. As for the commercial real estate, it is mainly small neighborhood centers with a very strong demand. It is true that Israel is going through a complex geopolitical situation, but this is the picture for a long period. We can see, we already have experience of 2 years, and we can see that the quality of the credit portfolio, despite the geopolitical situation, continues to be very well. The next question is from Liran Lublin of IBI. Please go ahead. Hey, guys. Good afternoon, and well done on another very strong quarter. My question is on credit growth in the first half of the year. The way I look at it, I see significant part of this growth coming from credit to financial services. I was wondering, is this growth sustainable in nature, or is it more of a one-time event? Hi, Liran. Good afternoon. I will say as follows. First of all, even if you neutralize the capital market activity, you will still remain with a pace of growth, which is 5.6% for the first half of the year, which is still very strong. As for the capital market activity, I will say that it is volatile from quarter to quarter. We are in a trend in which we increase significantly our customer base because of the full solution and the very good solution that we give these customers via our Capital Markets Division. Increase significantly and consistently our customer base and the product that we provide to these customers. We are entering into new activities, which increase this activity by definition. But of course, it is volatile and depends on the capital market. As I mentioned, even if you neutralize that, we are still in a very high pace of growth for the first half of the year. Great. Thank you very much. If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. The next question is from David Kaplan of Psagot. Please go ahead. Hi. One quick one on your specific provisions. Was that based on collections in the quarter, on a change in the model in the quarter? Was it a specific customer? Was it across the board? Can you explain how you were able to register such a significant reduction in provision on a specific level? Thanks. Sure. Thank you. Thank you for the question. We did not change any model. At the end, basically, it is based on the fact that we collect more than we write off. So, there were collections in the second quarter. Secondly, when the situation of our customer is improving, so you see a movement from the specific provision to the collective provision. I mean that, for example, if a customer was under There are three classifications for the situation of our customers, which are 120 customers. It is a customer under special mention, subordinate, and impaired. So if, for example, there is a customer which his situation improved and he is no longer anymore classified as subordinate, but now he is classified as customer under special supervision, so we see an income in the specific provision and an increase in the collective provision. But in the bottom line, it means that the quality of the credit was fully improved because the situation of the specific customer has improved. So basically, it is based on the fact that we collect more than we write off and improvement in the situation of our customers. It was not a specific customer, but rather across the board is what you are saying? Yeah, it is across the board. Okay. Then one just quick question about the Bank of Israel's announcement about the 50% dividend payout. Is that retroactive as well, or is it only from this point forward? In other words, is there additional capital you can pay out from 2024, or net income you can pay out from 2024, when you only paid 40% dividend payout ratio at that point? No. The decision of the Bank of Israel or the release that enables banks in Israel to pay 50% dividend is only for the second quarter. We do not have the ability to do catch-up. As you can see from our number, we have the full capability to pay much higher dividend when it is impossible. Okay, so it is not for 2025. It is from Q2 forward. So even for the first quarter of 2025, it would not be applicable to 50%, correct? Currently, you are correct. But of course, in the following quarter, the Bank of Israel, I assume, will consider it again. As I mentioned at the beginning of the discussion, if the situation continues to be stable, I expect that the Bank of Israel will consider to release more limitations regarding the dividend distribution ratio. Okay. Thanks very much. There are no further questions at this time. This concludes Leumi's second quarter 2025 results conference call. Thank you for your participation. You may go ahead and disconnect.