Earnings Call: Q4 2023

Mar 12, 2024

Summary

FY2023 net profit rose to ILS 4.91B and ROE reached 19.1%, while post-war collective provisioning lifted annual provisions to ~ILS 1.5B. Management expects 2024 loan growth of 6%–8%, lower provisions if the war does not escalate, and a 20% Q4-profit dividend.

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Ltd. Fourth Quarter 2023 Business 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. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded March 12, 2024. With us online 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 fourth quarter 2023 presentation, which includes general comments regarding legal responsibility, including that the information contained in the presentation constitutes information from the bank's 2023 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 2023 quarterly reports, the aforesaid reports should be pursued 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 the 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 management 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 preferences, 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 Annual 2023 Analyst Call. Obviously, the first thing 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 market to the unfolding events, with equities prices going down, yield on bonds goes up, and the depreciation of the shekel vis-à-vis the US dollar. Later, rating agencies have downgraded and/or put on a negative watch both the government and the banks. But in the weeks after, we've seen equity prices going up, bond yields going down, 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 that the major difference between Q3 and Q4 is the collective provisioning item. In Q3, we have taken a cautious and conservative approach both in mortgages and commercial credit provisioning. This collective provisioning increase reflects a scenario of a very severe potential future deterioration of the war and of its effect on the Israeli market and the bank. It is important to note that we have decided to take a prudent approach even though we haven't seen yet indicators that this adverse scenario is happening. As you can see, our Q4 provisioning is lower than Q3, but is still higher than our pre-war levels of provisioning. On an annual basis, provisioning is very high, to the most part due to the post-war collective provisioning. So, if in 2022, our provisions for the entire year were around, I'm rounding the numbers, around ILS 0.5 billion, in 2023, and again, I'm rounding, our annual provisions were around ILS 1.5 billion, ILS 1 billion more. So given that in 2024, we would not see a further escalation in the war, provisions for the year of 2024 should be probably somewhere in between 2022 and 2023. As for the regular items, I would like to use this call to further highlight a couple of points. We've seen an increase in most of the major balance sheet items in the year. We think that our credit metrics reflect a balanced credit portfolio with adequate risk management. The net profit and the return on equity reflects the strong balance sheet, the low CPI figures, and the good efficiency ratio, and the contribution of Union Bank to our results. I will elaborate on it in a second. Our cost-income ratio for the quarter is 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 improvement vis-à-vis previous quarters, reflecting also the post-Union Bank merger synergies. As always, salaries are also affected from variable remuneration related to the bank's results. It would be reasonable to assume that in the next quarter, expenses for salary would be somewhere between Q3 and Q4, depending, of course, also on the future variable remuneration. If this would be the case, then our average salary expense would be lower in 2024. Liquidity is very robust with high share of core deposits, and capital ratio are in tandem with the profitability. The credit growth in the last quarter is responsible and reflecting also the impact of the war. Demand for mortgages was still 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 begin to recover in 2024, but we are not expecting to see it back to where it was in the beginning of 2022, but still better than the last quarters. We do expect to see responsible credit growth following our strategic plan, and as can be seen from our results, we have already reached the main target of our strategic plan before 2025. Given the current environment, we will distribute 20% of Q4 profit as dividend, and we believe that also in this aspect, it is better to take a prudent approach and to be aligned with the regulator's expectations. All in all, I think we are following our strategic plan and accommodating to the new environment. The main point I would take is that despite everything, and despite a negative mark-to-market loss on the hedging derivatives of around ILS 285 million, we were still able to produce a very decent return on equity, even on an international scale. Assuming this is not a permanent quarterly item, you can calculate the profitability also without it. Thank you very much for your attention, and with that, I leave you with the hands of Mr. Menahem Aviv, our Chief Accountant. Thank you, Mr. Shachaf. We will go through the numbers, through the figures. Net profit in 2023 reached ILS 4 billion 910 million, compared with ILS 4 billion 472 million in 2022. The return on equity in 2023 reached 19.1%. The equity amounted ILS 27.5 billion. Total revenues in 2023 reached ILS 14 billion 780 million. Financial revenues from current operation in 2023 reached ILS 11.7 billion, compared with ILS 9.2 billion in 2022. Provisions loan, the ratio of provisions to loans in 2023 reached 0.45%. Operating and other expenses in 2023 totaled ILS 5.6 billion. The main balance sheet items development are as follows: Total assets grew by 4.6%, loans to the public by 5.8%, deposit from the public by 4.1%. The ratio of CET1 capital to risk elements reached 10.32%, and the total ratio reached 13.36%. Thank you. Thank you, Mr. Aviv. We can go to Q&A now. 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 pulled in the order they are received. 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 question, and congratulations on the strong results. I was wondering if you could give any color on the trends that you're seeing in the loan book segments, given the slower sequential growth this quarter. I realize that was kind of expected, but if there's anything you can talk about to the trends that you're seeing in the different segments in the loan book. Sure. I will take the mortgage sector first and then the big corporates. As you were saying, in the mortgage sector, due to the war, Q4 growth was low. However, even today, before this call, I just heard that the Central Bureau of Statistics has published a new number on the January number of real estate deals, which is much higher than it was in the last quarter. That gives us a reasonable reason to assume that 2024 would be higher in the growth than what we saw in 2023, especially in the last quarter. Probably not where it was in the beginning of 2022, but we expect to see a growth there. On the corporate book, again, we saw a very low growth in the quarter. We do expect the entire year to be around our strategic plan, which means single digit, let's say 6%-8% of growth. Thank you. Thanks. That's great comments. Just again on expenses, if you could talk about some of the moving parts there now that the completion of Union Bank is finished. Just wondering how should we be looking at those numbers going forward? Sure. If you look at it on an annual basis, then you would see that most of the quarter we've written something around ILS 900 on the salaries side, while in the last quarter it was closer to ILS 700. Again, as I was saying, mainly due to closing the year with the variable remuneration. Taking the headcount number and the better synergies that we have now from Union Bank, then 2024 should be better in that respect, if other things being equal, than 2023, even if it would not be like this quarter. Again, somewhere in the middle is more reasonable. Got it. Thanks. That's it for me. Thank you. There are no further questions at this time. This concludes the Mizrahi Tefahot Bank Ltd. Fourth Quarter 2023 Business Results Conference Call. Thank you for your participation. You may go ahead and disconnect.