Earnings Call: Q3 2023

Nov 28, 2023

Summary

Q3 net profit was ILS 1.098bn and ROE was 16.8%, while collective provisions rose prudently for war-related risk. Mortgage demand is expected to remain subdued in Q4, with gradual improvement in 2024.

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Ltd. Third 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 November 28, 2023. With us on the line today are Mr. Adi Shachaf, CFO, and Mr. Menno Aviv, Chief Accountant. We would like to draw your attention to slide number 1 of the financial statement for the third 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 non-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 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 preferences, changes in legislation, and the provision of regulators, competitors' behavior, the status of the bank's perception, technological developments, and human resources developments. Mr. Shachaf, would you like to begin? Thanks. Good afternoon. Welcome all to the Mizrahi Tefahot third quarter 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. In the first days, we have seen a typical response of the market to the unfolding events, with equity prices going down, yields on bonds going up, and the strong depreciation of the shekel vis-à-vis the USD. The Bank of Israel came up with a market-oriented plan, which include a repo facility, an FX swap facility, and a dollar-shekel selling program. Although the actual utilization of the plan was very modest, its existence created a positive effect, and in the days after, we have 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 reports that the major difference between the second quarter and the third quarter is the collective provisioning item. We have taken a cautious and conservative approach, both in mortgages and commercial credit provisioning. This collective provisioning increase reflects a scenario of a 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 have not seen yet indication that this adverse scenario is expected. It reflects a negative GDP growth of 7% or more, an unemployment rate of 8% or more, and future rate hikes of 1%, all of which are not currently expected. We have also published that the impact of all the donations to embrace residents of the north and Kfar Aza, and the banking benefits and other client relief measures we have taken within the Bank of Israel relief plan and beyond it, could reach hundreds of millions of ILS, assuming a theoretical full utilization along the entire prospective future period. This calculation is taking into account also theoretical future extra interests not earned, again, given full utilization of all the benefits. As for the regular items, results for the quarter were robust, and 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 reflect a balanced credit portfolio with adequate risk management. As stated before, the increase in provisions is coming from collective provisions due to the war. The net profit and the return on equity reflects the strong balance sheet, the CPI figures, the good efficiency ratio, and the contribution of Union Bank to our results. Our cost-income ratio for the quarter is below 40%. 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. Financing revenues from core operations continue to be strong. 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. Liquidity is very robust, with high share of core deposits, and capital ratios are in tandem with profitability. Credit growth for the last nine months is responsible. Demand for mortgages is 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 next year, 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 targets of our strategic plan before 2025. Given the current environment, we will distribute 15% of the third quarter profit as dividend. We believe that also in this aspect, it is better to take a more prudent approach. All in all, I think we are following the strategic plan and accommodating to the new environment. The main point I would take is that despite everything, we are still able to produce 16.8% return on equity, which is not that bad even on an international scale. 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. The figures in the financial statement are as follows. Net profit in Q3 reached ILS 1 billion and 98 million, and the net profit in the first nine months of 2023 reached ILS 3 billion 863 million. Return on equity in Q3 reached 16.8%. In the first nine months of 2023, it reached 20.3%. The equity amounted ILS 26.5 billion. The cost-income ratio reached in Q3 to 36.6%, and in the first nine months of 2023, reached 37.4%. Financing revenues from current operations in Q3 reached ILS 2 billion 937 million. The total revenues in Q3 reached ILS 3 billion 868 million. The operating and other expenses in Q3 totaled to ILS 1 billion 415 million. The ratio of provisions to loans in Q3 reached 0.86%. The increase in this ratio is mostly due to collective provision for credit losses, recognized so as to reflect the increase in credit risk in the market due to war, though no material indicators of increase in this risk have been seen to date. The ratio of T1 reached 10.12%, and the total ratio reached 13.02%. I think we can go now to Q&A. 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. The 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, thank you for taking my questions, and congratulations on the strong results. I wanted to touch on provisions and credit demand. In the first half of the year, we already saw provisions increasing slightly and credit demand slowing. How do you see the war impacting these two items going forward? Regarding your remark on the first half, of course, it has nothing to do with the war. It was mainly due to the new monetary environment with higher rates that impacted the demand for mortgages. Of course, the war also will impact the near-term demand for mortgages. As I was saying before, we do not expect a demand in Q4 to be very high. We do expect to see some improvement in 2024, but not to reach the level of demand we have witnessed in 2022. I hope this answered the question. Sure. Yeah. Thanks a lot. Just about expenses, I was wondering if you could talk about some of the moving parts. What drove the strong decrease in salaries this quarter, and maybe how we should be looking at the ramp-up to the headquarters? Sure. There are a couple of things that moved to the up. First one is our level of expenses post the Union Bank merger. In 2023, it is the first year that we enjoy the full cost synergies. The second thing is the agreement with the union of the employees of the bank that we have signed a couple of months ago, that made sure that everything is fixed and in place in terms of future salaries increase for the next coming years. The third one is the variable remuneration reflecting the result. Obviously, the first six months when the return on equity was higher, this quarter it was lower, so it is also reflected in the expenses. Got it. Thanks. That is it for me. The next question is from Yifat Bar of The Phoenix. Please go ahead. Hi. Thank you for taking my call, and also congratulations for the strong results. I just wanted to ask one question that we discussed also this morning regarding your non-interest financing income. It was inflated by non-cash, non-recurring item, MTM adjustment of derivative instruments of ILS 146 million this quarter, that was, I think, had a positive ROE impact of 1.6 percentage points, yes? Or nearly that much. I just wanted to ask what kind of derivatives this item linked to. Is it more hedging the product, or is it to trading? I do not know. Can you please elaborate on that? Sure. There are a few types basically of derivatives that take the main place in that respect. One is us serving our clients and making derivatives vis-à-vis the operation. Of course, we hedge that, but the hedge is never fully back-to-back, so there is some mark-to-market there. The second type of hedges is hedging our own balance sheet to make sure that when market rates go to a certain way, we are at least somewhat hedged. So, it is a mix of both kind of activities. Okay. Thank you very much. Thank you. There are no further questions at this time. This concludes the Mizrahi Tefahot Bank Third Quarter 2023 Business Results Conference Call. Thank you for your participation. You may go ahead and disconnect.