Earnings Call: Q1 2024

May 23, 2024

Summary

Q1 net profit was ILS 1.272 billion, with 18.1% ROE and a 35.5% cost-income ratio. Management maintained prudent collective provisions amid the prolonged war, while targeting responsible credit growth and a 40% dividend payout.

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Limited first quarter 2024 business results conference call. All participants are at present in listen-only mode. Following management's formal presentation, instruction 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 May 23rd, 2024. With us on the line today are Mr. Adi Shachaf, CFO, and Mr. Menahem Aviv, Chief Accountant. We would like to draw your attention to slide number one of the financial statement for the first 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 banks 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 included in the forecasting information as a result of a large number of factors, including, inter alia, changes in domestic and global equity markets, 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 plans. 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 situations 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 preferences, changes in legislation and the provisions of regulators, competitors' behavior, the status of the bank's perception, technological developments, and human resource developments. Mr. Shachaf, would you like to begin? Thank you very much. Welcome all to the Mizrahi Tefahot first 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 day of the war, the bank has taken a pro-client approach, trying to offer immediate relief to its clients, 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 markets to the unfolding events, with equities prices going down, yield on bonds goes up, and the depreciation of the shekel vis-a-vis the USD. 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, bond yields going down, but 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 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. It is worth noting that most of the provisions are collective. To put it in the right context, in 2022, our provision for the entire year were around half a billion ILS, and in 2023, our annual provisions were around ILS 1.5 billion. Again, to the most part, provision were collective. As for the other items, I would like to use this call to further highlight a couple of points. We have seen an increase in most of the major balance sheet items. We think that our credit metrics reflects a balanced credit portfolio with adequate risk management. The net profit and the return on equity reflects the strong balance sheet, the still low CPI figures, the good efficiency ratio, and the contribution of Union Bank to our results. Given that the next CPI reading would be as expected by analysts, then after two consecutive quarters of relatively low inflation, CPI contribution to the P&L in Q2 2024 could be better in that respect. In spite of the 0.25% interest rate cut in the quarter, you can see that financing revenues from current operations are close to where they were in Q4. Commissions are, of course, affected from both the war and 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, and 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 was still relatively low, 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 in 2024, but we are not expecting to see it soon back to where it was in the beginning of 2022. We do expect to see responsible credit growth following our strategic plan. As can be seen from our results, we have already reached the main target of our strategic plan before 2025. We will distribute 40% of Q1 profit as dividends according to our dividend policy. All in all, I think we are following our strategic plan and accommodating to the new environment. I would like to thank you very much for your attention, and with that, I leave you with the hands of Menahem Aviv, our Chief Accountant. Thank you, Mr. Shachaf. The main figures in the financial statements for the first quarter of 2024 are as follows. Net profit in Q1 2024 reached ILS 1,272,000,000, compared with ILS 1,367,000,000 in Q1 2023. Return on equity in Q1 reached 18.1%. The equity amounted ILS 28.6 billion. Total revenues in Q1 reached ILS 3,598,000,000. Financial revenues from current operations reached ILS 2,780,000,000. The ratio of provisions to loans reached 0.21%. The operating and other expenses totaled ILS 1,279,000,000. Our cost-income ratio reached 35.5%. The ratio of Tier 1 reached 10.60%, and the total ratio reached 13.63%. We can move now to Q&A if anybody has any questions. 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 called in the order that they are received. Please stand by while we call for your questions. The first question is from Chris Reimer of Barclays. Please go ahead. Hi, thanks. I have two questions. One, how should we be looking at provisions for the remainder of the year, assuming there is no deterioration of the geopolitical situation? Two, can you comment on the loan book performance and whether or not you are seeing maybe a little more strength in any of the segments versus expectations going into the year? Thanks for the questions. I will start with the second question, because it also later will relate to the first one. We have not witnessed so far any material deterioration in the credit quality of the portfolio, and this is why we emphasized that to the most part, both in the second half of 2023 and also in the first quarter, this quarter of 2024, most of the provisions were collective. We tried to do some sort of, let us call it Goldilocks approach, that from one hand, provisions were smaller than in Q4, but still, because we are in a prolonged war, we thought it would be prudent to still keep these kinds of provisions. As you probably mentioned, given that we will see no further deterioration, for example, in the north or in the war, it is possible that we will see later on the next quarter, recoveries from these collective provisionings. Any strength in the segments of the loan book where you maybe were not expecting the performance, has it turned out? Actually, we did kind of expect it, but mortgages are very solid in Israel, and as a big mortgage bank, we are happy to see that this solidness is still with us. Great. That's helpful. Thank you. The next question is from Micha Goldberg of Psagot. Please go ahead. Thank you. Congratulations on a strong quarter. A couple of questions, Rami. First of all, you mentioned that your cost-income ratio continues to be below your 2025 target. It seems to me that for the last almost 3 years, for every quarter, your return on equity has also exceeded your 2025 target for return on equity. I'm just wondering, are you considering publishing a revised strategic plan? If so, when will that be published? Excellent question, and rightfully so. You've mentioned that we've beaten the strategic plan. We cannot know for sure if a new one will be published ahead of time, because we thought of it, but changing it during the war seemed like not the very cautious thing to do. We thought it would be maybe more prudent to wait and see how the war will unfold. But it is possible that we'll change it. Maybe another remark, when we published the current strategic plan monetary environment, without any connection to the war, rates were close to zero, and we gave, in the strategic plan, what maybe could happen if monetary environment would be closer to where it is today, but not where it is today. This is also one of the reasons why we are ahead of the strategic plan with our return on equity and cost-income ratio. Okay. Thank you. Another question. Your common equity, your Tier 1 ratio is now 10.6%, and you always in the past have kept a very small margin to your requirement. It seems like this is significantly above what you used to hold. It is almost ILS 2.5 billion more, which I think is hurting your return on equity by almost 1%. I am just wondering, would you consider divvying that out or paying it out in some formats to get back to your original buffers of, I don't know, 20, 30 basis points? Well, of course, we came back to the dividend policy and distributed 40% for this quarter according to the policy. We do intend to also grow responsibly in credit. If we will achieve that, then by nature, the 10.6% could be lower. We will be happy to see that we have a good usage for the capital in terms of credit growth. Okay. At this point in time, there is no consideration of paying out more dividends than you currently pay? Because the current dividend policy is 40%, I don't think that now, with the war, it would be good to increase this portion or policy. Of course, with time go by and maybe the situation will change, then we could consider it. We do consider things on a continuous basis. I would not expect, for example, next quarter to go above the 40%. Yeah, that's clear. Okay, another question. I understand that Bank of Israel is working on Basel IV, and I'm just wondering from an initial viewpoint, is that something that's going to hurt your risk-weighted assets, or is it going to allow you to release? What's the initial thought on your impact of Basel IV? It is, I think, a bit too early to tell because we don't know how it will be implemented. We do know, for example, that comparing to typical European banks, we do allocate much more on the same mortgage, not to say on a safer mortgage in Israel. We don't know yet how and if the Bank of Israel will adopt the Basel IV and which parts of it, and to what extent. So it's a bit too early. Okay. Thank you. The newspapers have been talking about the fact that Bank of Israel is considering granting non-banks, such insurers, some kind of a partial bank license to take deposits. Is that something that we should be concerned about? Is that going to pressure margins? How should we look at that? Again, it's a bit hard to tell, given that the current LCR regime does not contribute to the liquidity to all institutional deposits under 30 days. I don't know how significant the impact would be in that respect. Again, it's too early to tell. Okay, understood. My last question is about your provisions. Typically, I think Mizrahi always has had a relatively low cost of risk compared to the other banks. In the last three quarters since onset of the war, your absolute provisions have been higher than Poalim and Discount Bank, and definitely over the other smaller banks. I'm just wondering, is that because the war primarily hurt mortgages? Is that because your credit portfolio has deteriorated compared to what it used to be? What's the reason for that? Poalim is a significantly bigger bank, and Discount Bank have historically much higher provisions, and yet in the last three quarters, it seems that you have outpaced both of them in absolute terms. I would say to the contrary, maybe we took a more prudent approach, but the fact that to the most part, provisions are collected, and to the most part, our portfolio is mortgage-oriented, then at the long run, I would expect the actual default, all other things being equal, to be lower. We did, especially in Q3 2023, took a more conservative approach there. You mentioned two banks that already published, so I don't know what happened to them. What we saw, at least one of them, gave back some of the provisions. We thought that because of the prolonged war, it would be more prudent to provision as we have provisions. But for sure, I don't think that I see more risk in our portfolio, not an expert on their portfolio. Again, given the tilt we have toward mortgages, again, all other things being equal, I would expect our portfolio to be less risky. Thank you very much. Thank you. There are no further questions at this time. This concludes the Mizrahi Tefahot Bank Limited first quarter 2024 business results conference call. Thank you for your participation. You may now go ahead and disconnect.