Earnings Call: Q2 2023

Aug 15, 2023

Summary

Q2 net profit reached ILS 1.398bn with 22% ROE and a 38.1% cost-income ratio. Credit growth and mortgage demand moderated, while current-operation financing revenue growth slowed; 35% of Q2 profit will be distributed as a dividend.

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Ltd. Second 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 August 15, 2023. With us on the line today are Mr. Menno Aviv, Chief Accountant, and Mr. Moshe Kaufman, Head of Accounting Sector. We would like to draw your attention to slide 1 of the financial statement for the second 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 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 provisions of regulators, competitors' behavior, the status of the bank's presentation, technological developments, and human resource developments. Mr. Aviv, would you like to begin? Yes, thank you. Thank you, and welcome to the Mizrahi Tefahot Q2 2023 analyst call. As you saw, the results for the quarter were robust, and I would like to use this call to highlight a couple of points. We have seen an increase in most of the major balance sheet items. We have seen moderate financing revenues growth, which also reflects the balance sheet growth in the previous quarters. We think that our credit metrics reflect a balanced credit portfolio with adequate risk management. To the most part, the increase in provision is coming from collective provisions due to growth in the credit portfolio and also from CECL macro adjustments for the higher interest rate and inflation environment. The net profit and ROE reflect the strong balance sheet, the CPI figures, the good efficiency ratio, and the contribution of Union Bank to our results. The 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 current operations continue to grow. You can see that from Q3 of 2020, financing revenues from current operations follow a positive and consistent trend quarter by quarter. On the expense side, we can see the improvement vis-à-vis Q4 2022. As always, salaries are also affected from variable remuneration related to the bank's results. Liquidity is very robust and with a high share of core deposits, and capital ratios are growing in tandem with profitability. As expected, given the macroeconomic environment, credit growth in Q2 is lower than the credit growth we witnessed in 2022. Demand for mortgages was similar to Q1, 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 the next month, but we are not expecting to see it soon back to where it was in the beginning of 2022. Having said that, as mentioned before, we think that 2022 credit growth is not a steady state growth level for the bank. We do expect to see reasonable credit, responsible credit growth following our strategic plan. We believe that it will be reasonable to assume that future rate hikes would have a diminishing marginal contribution. Given the macroeconomic environment and our future credit growth targets, we will distribute 35% of Q2 profits as dividend. All in all, I think that we are following our strategic plan and accommodating to the new monetary environment. The figures for the first half year and for the quarter, for the second quarter are as follows: Net profit in Q2 2023 reached ILS 1 billion 398 million, and net profit in H1 2023 reached ILS 2 billion 765 million. Return on equity in Q2 2023 reached 22%, and in H1 it reached 22.2%. The equity amounted ILS 25.8 billion. The cost-income ratio reached 38.1%. Financial revenues from current operations in Q2 reached ILS 2 billion 962 million. Total revenues in Q2 reached ILS 3 billion 995 million. In Q2, operating and other expenses in Q2 totaled ILS 1 billion 521 million. The ratio of provisions to loans in Q2 reached 0.31%. The ratio of CET1 reached 10.23%, and the total ratio reached 13.46%. Thank you again, and we can move 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. 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 Tavy Rosner of Barclays. Please go ahead. Hi, good afternoon. Thank you for the presentation. You talked about the strong asset quality, and that was exemplified in the low level of provisions. I was wondering if you're seeing any early signs of potential credit deterioration, any customers starting to reach out to renegotiate the loan. As a follow-up, how should we think of loan loss provisions for the second half of the year? As I mentioned before, the main provision that we made in this quarter and the first half is coming from collective provisions. I cannot, we cannot expect what will be the next month, the next quarters, and this all I can say in this moment. Thank you. The next question is from Irit Bar of Hapoalim. Please go ahead. Hi. Good afternoon. Thank you for the presentation. Congratulations for the results. I have just quick question about what you expect in term of mortgage lending growth in the coming months. If we take into account that we expect a sharp decrease in the CPI in the second half of the year, do you think that this will influence the demand, will drive demand up, or the demand is only driven or mainly driven by the level of interest rate and, well, economic activity, like the uncertainty we have here? As we mentioned, as I mentioned before, we cannot predict any changes in mortgages in the next quarters, but we can see that in the first half, it was much lower than in 2022. Let's see what the macro environment will do the next months, and according to that, we will see what will be the expectations of the consumers to the mortgages. Thank you. Okay, thank you very much. The next question is from Borja Ramirez of Citi. Please go ahead. Hello. Good afternoon. Thank you for your presentation. I would like to ask on the net interest margin going forward, if you could please provide some, at least some qualitative indications on how we should think on the main moving parts going forward for net interest margin, please. The raises in the interest in the last, it was consequently 10 times. I think it's reflected in our NII, and we don't know what to expect in the next quarters. As you can see that the financial revenues from current operations are slowing in the Are growing, but in the modest way. So, the growth is slowing, and I think that we don't know yet what will be the raising of the Bank of Israel, if it raised the interest. So, I think it's early now to say what it will affect, but we can say definitely that the growth of current operation is slowing, and not only in our bank, and also in all of the banks in Israel. Understood. Thank you. The next question is from Micha Goldberg of Psagot. Please go ahead. Hi, good afternoon. Congratulations on a very strong quarter. A couple of questions, if I may. First of all, there are still concerns that the rating agencies in the world might downgrade the Israeli sovereign rating, and I am just wondering, if S&P would downgrade, what would be the impact on your risk-weighted assets and your common equity tier 1? The answer to that, I don't know what to think about that. We don't know how it will affect. We are monitoring it. The ratio of what it will affect our ratio of CET1 and total ratio. I think that it will be insignificant effect on the capital ratio of our bank. This is about that. Okay, thank you. So marginal, not significant. I noticed that deposits dropped in this quarter at Mizrahi. Most of the other banks that have reported saw an increase. What is the explanation for that, or is there an explanation for that? I don't understand. Increase of what? Your consumer deposit. Deposits from the public dropped in this quarter compared to previous quarter by 1%. I think to say drop is a little bit strong word. If you can see compared to the end of the year, there was some increase. We know that some large depositor affected us, and you can see it in the financial statement. It's very, very minor. It's not so big, so it's not dropping, as I said. Clearly understood. Thank you very much, and have a good afternoon.