Earnings Call: Q2 2024

Aug 15, 2024

Summary

Q2 net profit was ILS 1,452 million, ROE 19.9% and cost-income ratio 34.6%. Management cited prudent credit growth, improving mortgage demand and continued uncertainty from the war and aggressive competition.

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Ltd second quarter 2024 business 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. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded August 15, 2024. With us online today are Mr. Adi Shachaf, CFO, and Mr. Meno Aviv, chief accountant. We would like to draw your attention to slide number one of the financial statement for the second quarter 2024 presentation, which includes general comments regarding legal responsibility, including that. The information contained in the presentation constitutes information from the bank's 2024 quarterly reports and/or immediate reports, as well as the periodic, quarterly, and annual reports and/or immediate reports published by the bank in previous years. Accordingly, the information contained in the presentation is only partial, is not exhaustive, and does not include the full details regarding the bank and its operations or regarding the risk factors involved in its activity, and certainly does not replace the information included in the periodic, annual and/or quarterly or immediate reports published by the bank. In order to receive the full picture regarding the bank's 2024 quarterly reports, the aforesaid reports should be perused fully as published to the public. The bank's results in practice may be significantly different from those contemplated in the forecasting information as a result of a large number of factors, including inter alia, changes in the domestic and global equity market, macroeconomic changes, geopolitical changes, legislation and regulation changes, and other changes that are not under the bank's control, which may lead to the estimations not realizing and/or to changes in the business plan. The forecasting information may change subject to risks and uncertainty due to being based on the management's estimations regarding future events, which include inter alia, global and local economic development forecasts, particularly regarding the economic situation in the market, including the effect of macroeconomic and geopolitical conditions, expectations for changes and developments in the currency and equity markets, forecasts related to other various factors affecting exposure to financial risks, forecasts with respect to changes to borrowers' financial strength, public references, changes in legislation, and the provisions of regulators, competitors' behavior, the status of the bank's perception, technological developments, and human resources developments. Mr. Shachaf, would you like to begin? Yes, thank you very much. Welcome, everybody, to the Mizrahi Tefahot second quarter 2024 analyst call. Obviously, the first thing that I would like to talk about is the impact of the war on the market and on the bank. From the first days of the war, the bank has taken a pro-client approach, trying to offer immediate relief to its clients, even beyond the mandatory relief plan of the Bank of Israel, while adapting the COVID experience and best practice to the current situation. On the first days, we have seen a typical response of the market to the unfolding events, with equity prices going down, Israel bonds going up, and the depreciation of the shekel with the USD. Also, rating agencies have downgraded and/or put on a negative watch, both the government and the banks. In the weeks after, we have seen equity prices going up, bonds going down, and later up again, and the dollar-shekel rate went back down to even below its pre-war level. As for the bank, you can see from the results and from the report the robustness of the results. As you can see, we took what we think is a prudent approach to provisioning, given the prolonged duration of the war. We have shifted some of the provisions from collective to specific, but still retained the prudent endeavors. To put it in the right context, in 2022, our provisions for the entire year were around half a billion ILS, and in 2023, our annual provisions were around 1.5 billion ILS, and to the most part, provisions were collective. I would like to use this call to further highlight maybe a couple of points. We have seen an increase in most of the major balance sheet items. We think that our credit metrics reflect a balanced credit portfolio with adequate risk management. The net profit and the return on equity reflect the strong balance sheet, the CPI figures, the good efficiency ratio, and the contribution of Union Bank to our results. You can see that financing revenues from current operations are back on a positive trend. Commissions are, of course, affected from both the war and the client-oriented relief approach the bank has taken. Our cost-income ratio for the quarter is well below 40%, and I remind you that our cost-income ratio target, as published in our strategic plan, is to be below 50% by the end of the plan in 2025. On the expense side, you can see the improvements vis-a-vis 2023, reflecting also the post Union Bank merger synergies. As always, salaries are also affected from variable remuneration related to the bank's results. The result also takes into account the relative extra tax Israeli banks are paying in 2024 and 2025. Liquidity is very robust, with high share of core deposits and capital ratios are in tandem with profitability. Credit growth in the last quarter is responsible, reflecting also the impact of the war. Demand for mortgages is improving, and we continue to follow our strategy to retain our market share in the market. Competition is aggressive, and as always, we are competing. It is possible that demand for mortgages will recover even more in the second half of 2024, but we're not expecting to see it back to where it was at the beginning of 2022. We do expect to see responsible credit growth following our strategic plan, and as can be seen from our results, we've already reached the main targets of our strategic plan before 2025. We will distribute 40% of Q2 profits as dividends according to our dividend policy. All in all, I think we are following our strategic plan and accommodating to the new environment. Thank you very much for your attention, and with that, I leave you with the hands of Mr. Meno Aviv, our chief accountant. Thank you, Mr. Shachaf. The main figures in the financial statements are as follows. Net profit in Q2 2024 reached ILS 1,452 million, and in the first half of 2024, reached ILS 2,724 million. The return on equity in Q2 reached 19.9%. The equity amounted to ILS 29.5 billion. The cost-income ratio reached in Q2 2024, 34.6%. Financing revenues from current operations in Q2 reached ILS 2,819 million. Total revenues in Q2 reached ILS 3,835 million. In Q2 2024, the operating and other expenses reached a total of ILS 1,328 million. The ratio of provisions to loans in Q2 reached 0.13%, and the ratio of Q1 reached 10.44%, and the total ratio reached 13.64%. Thank you. Thank you, Mr. Aviv. If we have any questions, we can go to the Q&A part. 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. I repeat, if you have a question, please press star one. The first question is from Micha Goldberg of Psagot. Please go ahead. Hi. Good afternoon, and thank you for taking my call, and congratulations on an excellent quarter and a very good first half. I am just wondering, because of the excess capital in the banking sector, are you experiencing some compression on margins, specifically in mortgages? As I was saying, completely related to the extra capital, we have seen a very aggressive competitive environment in the mortgage market for many, many quarters. We still retain our position to retain our market share. This is our strategy, and I think we are doing it not as bad. We do not see anything specific to this quarter, which we have not seen in the previous quarter. Again, competition is very aggressive. Thank you. Yet, when you strip out the CPI impact in Q2 and Q1, it looks like your margins actually have increased. Is there anything that you can explain what is going on in the market that allows you to widen your margin, or is that a one-time item? I think they are roughly the same, in the same area. For sure, this quarter's CPI is higher than it was in the last two quarters. I think analysts forecast for next quarter's CPI should be somewhere in the middle between this quarter and maybe the first quarter. We do see stabilization in the trend from cash accounts to deposits, but we see it all around the market. Thank you. A question about asset quality. Most of the other banks that reported in the last two days seem to have a drop, a decline in non-performing loans, yet you have a slight increase. Does that have to do with your exposure to mortgages and the war, or is that something specific? What is your reason for that? It's Meno talking. As Mr. Shachaf said before, we are prudent for this. I cannot say nothing about the other banks. You can see that if you compare to the previous quarter, it wasn't more than the first quarter. It was a slight, a little bit less of that. We cannot say nothing about the other banks, but we think that our approach to this matter is adequate. Thank you, Meno. I didn't really understand. You said NPLs went down in the quarter? I think that maybe I'm wrong, that number went up. The first quarter. Okay. I'll check. Thanks. There are no further questions at this time. This concludes the Mizrahi Tefahot Bank Ltd. second quarter 2024 business results conference call. Thank you for your participation. You may go ahead and disconnect.