Earnings Call: Q1 2023

May 17, 2023

Summary

Q1 net profit reached ILS 1,367 million, with 22.4% ROE and a 37.6% cost-income ratio. Collective provisions reflected higher rates and CPI; mortgage demand weakened, while a 30% payout of Q1 profit was planned.

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Ltd. First 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 May 17th, 2023. With us on the line 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 first 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 and 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 estimation 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, partially 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? Thank you, and welcome to the Mizrahi Tefahot Q1 2023 analyst call. As you saw, 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 all of the major balance sheet items. We have seen strong financing revenue 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, and to the most part, the increase in provisions is coming from collective provisions due to the growth in the credit portfolio and also from system macro adjustments for the higher interest rates and inflation environment. 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. Our cost-income ratio for the quarter is below 40%. I remind you that our cost-income ratio target, as published in the 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 2020, financing revenues from current operations follow a positive and consistent trend quarter by quarter. On the expense side, you can see the improvements vis-à-vis Q4 2022, and as always, salaries are also affected from variable remuneration relating to the bank's results. Liquidity is very robust with high share of core deposits. As expected, given the macroeconomic environment, credit growth in Q1 is lower than the credit growth we have witnessed in Q1 2022. Demand for mortgages went down in 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 months, but we are not expecting it to see it soon back to where it was in the beginning of 2022. Having said that, and as mentioned before, we think that the 2022 credit growth is not the steady state growth level for the bank. 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. We believe it would 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 30% of Q1 profits as dividends. All in all, I think we are following our strategic plans and accommodating to the new monetary environment. I would like to 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, Aviv. The main figures that included in the financial statements for the first quarter of 2023 are as follows. Net profit in Q1 2023 reached ILS 1,367 million, compared with ILS 1,154 million in Q1 2022. The return on equity in Q1 reached 22.4%. The equity amounted ILS 24.8 billion. The total revenues in Q1 reached ILS 3,826 million. Financials revenues from current operations in Q1 reached ILS 2,942 million. The ratio of provisions to loans in Q1 reached 0.29%. Operating and other expenses in Q1 totaled to ILS 1,437 million. The cost-income ratio reached 37.6%. The ratio of CET1 capital to risk elements reached 10.12%, and the total ratio reached 13.34%. That's all. I believe we can go 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 1. If you wish to cancel your request, please press star 2. 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 pull for your questions. The first question is from Micha Goldberg of Psagot. Please go ahead. Hi, good afternoon, and congratulations on an excellent quarter. Just a couple of questions. I mean, I noticed there are two other local banks that reported, and when I compared them, it looks like Mizrahi is the only bank which saw some deterioration in its NPLs. At least historically, your cost of risk used to be significantly lower than most other banks, and it doesn't seem to be that notably different anymore. My question is, has there been a significant change in your asset quality? Are you being more conservative? Has something happened that's specifically hurting the mortgage part of your segment or your loan book? What's causing that historical differentiation in your better asset quality to be slightly eroded? So maybe we will tackle it in two different ways. The first one is, since the composition of our credit portfolio within ourselves is more tilted towards mortgages, which obviously have lower provisions, then the weighted average, given everything else being equal, should show that provisions on the weighted average are lower here. But the right way to look at it is segment by segment. This is one way. The other way, I would say, and I was referring to it earlier, that we have been provisioning mainly due to collective provisions, and we took the current macroeconomic environment, the higher interest rates, and the CPI in our system equations. And in that respect, for a couple of quarters consecutively, we have increased our provisioning. Okay. So are you at all seeing any deterioration in your asset quality, in your credit book anywhere? Again, most of the provisions are collective. We do expect that the higher interest rates and the higher CPI eventually will have some effect, and this is why we have increased our provisions on the collective level. Right. Okay, thanks. Now, another question. You mentioned that the marginal impact of rising interest rates is slowly waning and won't be substantially more in coming quarters, and I am just wondering if you see increased competition on mortgage margins and maybe more deposit switching and higher beta. If that is the case, should we be expecting margins to start contracting in coming quarters? Excluding CPI, of course. For relatively long time, we see very aggressive competition in the mortgage market. Our strategy is to retain our market share. Of course, when the total demand is lower, for example, from where it was a year ago, then the same market share have a lower absolute performance. We are, for a very prolonged time, competing in a very aggressive competitive environment. Cannot forecast what will happen to future margins, but we do feel the competition, and we feel that we are competing properly. Okay, thank you. The quite notable rise in fee income in this quarter, was that all organic, or was there something specific in there one time that made the number go higher? Can you please repeat it? We couldn't hear you. I'm sorry. The fee income number in the quarter, the 528, which grew quite significantly compared to the last couple quarters. I was just wondering if there's something one-time in there, or this is the current pace of fee income. You are talking about the fees? Sorry, couldn't hear you. Yeah. Fees went up. We don't consider it to be something dramatic. When you look at this item by item, most of the increase was relatively gradual. Of course, each quarter, sometimes there could be something which is a one-off, if this is what you're talking about, but it's nothing dramatic. If we look at the last five quarters on fees, then you see relatively low variation between quarters. Sometimes it's a couple of millions more, and sometimes a couple of million less with the same handle. Nothing dramatic there. Okay, thank you very much. On cost, there's quite a nice drop in your staff cost. Is this all due to cost savings from Union Bank? If so, is there more coming in the next couple of quarters, and should we be expecting additional savings coming through? Indeed, costs in Q1 were lower than they were in Q4 2022. You can attribute a lot of it to the completion of the merger of Union Bank. Since there is no longer Union Bank, the employees that were with the group until 2022 and decided to leave the group are no longer on our payroll. This is one portion of the reduction. The payment for the IT systems that was done by Union Bank to another provider is not with us anymore. Yes, to the most part, it can be attributed to the completion of the merger of Union Bank. Are there additional cost savings expected in the next couple quarters, or we're at the end of that? I think that you can look at it in the following way. The non-payment of the IT system and the lesser headcount is relatively with us. Of course, quarter by quarter, you can go up and down with the number of headcounts, but the change should not be as significant because now it's more business as usual, and the shift from being with Union Bank and without Union Bank is, of course, more significant. Very clear. Okay. My last is a theoretical question. I mean, I see your capital adequacy ratios have increased nicely this quarter. I mean, obviously, your loan growth is not at the same pace as the last year, and yet your profitability continues to be very nice. I'm just wondering, I mean, if you keep on doing return on equity, anywhere in double digits and numbers you're doing right now, and your growth remains around current levels, that would mean approximately every quarter you'll be adding like over 20 bps in Common Equity Tier 1. Do you have a target of where limit you want to be in Common Equity Tier 1, or because of the uncertainty out there, you will just keep on boosting it? Or on the other side, would you consider raising your dividend payout at some point in time? Thank you very much. Excellent question. We always try to find the right sweet spot and the good trade-off between, from the one hand, being efficient and also capital efficient. The other hand, being conservative to face both potential future credit growth and macroeconomic shocks that can be with us. So yes, we have increased the Q1 capital in the last quarter. We do not have a target to increase it dramatically more, and we try to find the right balance. Of course, everything is subject to market conditions. Yes, if we would not have a better use for our capital, then we'll distribute the dividend according to the policy and all the regulations. Thank you very much, Aviv, and congratulations on an excellent quarter. Thank you very much. Thank you. There are no further questions at this time. This concludes the Mizrahi Tefahot Bank Ltd. First Quarter 2023 Business Results Conference Call. Thank you for your participation. You may go ahead and disconnect.