Earnings Call: Q4 2022

Mar 14, 2023

Summary

FY22 net profit reached ILS 4.472bn and ROE was 20.1%, with strong financing revenue and loan growth. Management expects responsible credit growth and further merger cost savings in 2023, while higher rates and inflation informed collective provisions.

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Limited Fourth Quarter 2022 Business Results Conference Call. All participants are at present in a 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 14, 2023. 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 1 of the financial statement for the fourth quarter 2022 presentation, which includes general comments regarding legal responsibility, including that, 1, the information contained in the presentation constitutes information from the bank's 2022 quarterly and annual 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. 2, 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 2022 quarterly and annual reports, the aforesaid reports should be perused fully as published to the public. 3, 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. 4, 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 resources developments. Mr. Shachaf, would you like to begin? Yeah. Thank you, and welcome to the Mizrahi Tefahot 2022 Annual Report Analyst Call. As you saw, results for the year were robust. 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 revenues growth, which also reflect the balance sheet growth in the previous quarters. Provisions came back to a more normal territory compared to 2021. 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 provision due to the growth in the credit portfolio, and also from cyclical macro adjustment for the higher interest rates and inflation environment. 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. The merger is now behind us, and most of the cost synergies are still ahead of us with full effect starting 2023. Our cost-income ratio for the year is 45.2% or 46.4%, excluding the effect of Q1 capital gain. 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, increase in salaries is strongly affected from variable remuneration related to the bank's results, and other expenses also include expenses related to Union Bank's merger costs that would not be relevant in 2023. Liquidity is very robust with high share of core deposits. As expected, credit growth in Q4 is lower than the first half of the year. Demand for mortgages went down in Q4, and we continue to follow a strategy to return our market share in the market. We think that the 2022 credit growth is not the steady state growth level for the bank. We expect to see decent and 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. Having said that, we think it would be reasonable to assume that future rate hikes would have a diminishing marginal contribution. All in all, I think we are following a strategic plan and accommodating to the new monetary environment. I would like to thank you very much for your attention. With that, I leave you with the hands of Mr. Menahem Aviv, our Chief Accountant. Thank you, Mr. Shachaf. The main figures in the financial statements for the year 2022 are as follows. Net profit in 2022 reached ILS 4 billion 472 million, compared with ILS 3 billion 188 million in 2021. Return on equity in 2022 reached 20.1%. The equity at the end of the year amounted ILS 23.8 billion. Our total revenues in 2022 reached ILS 13 billion 668 million. Financial revenues from current operation in 2022 reached ILS 9.2 billion, compared with ILS 6.6 billion in 2021. The ratio of provision to loss in 2022 reached 0.17%. The operating and other expenses totaled ILS 6.2 billion. The main balance sheet items development are as follows. The total assets grew by 9.2%. Loans to the public grew by 13.3%. Deposits from the public grew by 11.9%. The ratio of Tier I capital to risk elements reached 9.94%, and the total ratio reached 13.12%. Mr. Shachaf. I think 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 pull for your questions. The first question is from Konstantin Rozantsev of JP Morgan. Please go ahead. Yes, hello. Thanks a lot for the presentation and for taking my questions. I had a few questions which I wanted to ask, and all relate to the loan quality outlook that you have. The first one is, how sensitive do you see the loan quality to rising rates? If you could please detail this by segment, corporate lending and retail, with a particular focus on mortgages within retail. If rates stay high for an extended period of time, what parts of the loan portfolio would you be more concerned about overall? The last question, as well on loan quality, could you please share some guidance that you have for the cost of risk for the bank in the coming quarters? Where should you see it trending? Thank you. Okay, I'll start with the last one. We do not give forward guidance for these metrics. I can say what I already said, that we have increased our provision in the quarter and in the year with respect to 2021. As I stressed before, to the most part, the increase in provision was due to collective provisions, and also because of the high interest rate or higher interest rate environment and CPI, the system accommodated for this also. As for the mortgage portfolio, we do see a decline in demand for new mortgages, but for the existing portfolio, with the current rate, we did not see anything unusual so far. If you can repeat the first question, because I'm not sure I could understand it. You asked for something by segment, but I missed what kind of segmentation you were asking for. Yes. Thanks a lot. Just a general question. How sensitive do you see loan quality to the higher rate environments that we're currently in? If you could discuss this by segments, in corporate lending and in retail lending, with a particular focus on mortgages. Yeah. We think the mortgage portfolio is behaving very well. I cannot predict, of course, anything for the future, and I don't think there is anything unique in this portfolio vis-à-vis other normal ones with respect to sensitivity to interest rates. The effect, if you'd like to put it this way, of the interest rate is reflected, as I was saying before, in the collective provisioning. There, due to the cyclical macro adjustments in the system, you can look at it as some sort of expectation for something that will happen related to the higher interest rate. I hope it at least partially answers the question. Understood. Okay. Thank you very much. The next question is from Micha Goldberg of Psagot. Please go ahead. Hi, good afternoon. Congratulations on an excellent quarter and a very strong year. A couple of questions, if I may. First of all, you mentioned that expenses in the quarter went up on the back of variable remuneration. I'm just wondering, the number went up by ILS 200 million approximately. Is that all performance-based, or is there something else in there that we should be aware of? Can you repeat only the last sentence, Micha, because we couldn't hear clearly? I asked if the entire ILS 200 million, ILS 192 million increase in cost and wages in Q4 are due to the compensation. Well, most of it, of course, not to the shekel, but most of it was due to the variable remuneration, due to our high return on equity and good results. Okay, thank you very much. The same question regarding the other expenses, which went up by ILS 52 million. You mentioned a lot of that has to do with the finalization of the merger and the closure of some of the branches. Is that also the majority of that? So these are both one-time expenses we should be considering, or? Of course, the final cost of the merger are one-time in that respect because they will not repeat in 2023. Okay, thank you very much. Another question regarding the merger. I saw in your annual statement that approximately something over 350 employees are still supposed to be leaving the bank this year, right? 370, something like that, at the beginning of the year, or already left the beginning of 2023. Are we expecting to see, or should we be expecting to see cost savings on the back of that, or will you be recruiting new employees, and therefore we're not going to see any cost savings? I mean, 370 employees are quite significant from a cost-saving perspective based on the average cost per employee. Yeah. As you rightly mentioned, we also talked about this in the report. There would be a reduction in the cost due to the depart from a couple of hundreds of Union Bank former employees, and this will not be on the payroll in 2023. This is supposed to be reflected in a reduction in the salary cost. Have all these employees already left by this time, or they are going to be leaving throughout the year? The vast majority are not with us in 2023. Have already left? Yes. Oh, okay, fine. That's going to be significant. Cost savings from the merger are the 380 employees, the savings of your IT service, and as well as branches. Is that correct? Yes, from branches, from personnel, and from the IT, because Union Bank did not have an independent IT system, and they bought the service from Leumi, and now we would not keep on with this in 2023. Would you be able to quantify what the gross savings of these three would be, or is that something that you don't? No, we cannot do it, but you have the amount that we paid for Leumi because they were public. You see the number of employees, so you can try to assess the area. Okay, very good. Another question, if I may. You adequately mentioned that your cost-income ratio went down to around 59%, and it is exceptionally low. You also mentioned that you guys are going in the right direction with your strategic plan. I am just wondering, I mean, we just came off of another conference call in which one of the other local banks was talking about cost-income ratios of going to 35%. I am just wondering, do you see that as something achievable at Mizrahi Tefahot, who has traditionally been probably the most efficient bank in Israel? Secondly, in line with the strategic plan, you are already at 20% this year, last year 16%. I think your strategic plan calls for 14%-16% on the various rate assumption. Where is that going to bring us, that cost-income ratio, and could you expect to see a change in your strategic return on equity? The way we look at it is because of what you rightly mentioned, and I also had a note on it in the beginning of the conversation, since we are two years ahead of the 2025 end of strategic plan, we are thinking of looking at where should it be changed, if at all. Of course, once and if we think it will be reasonable to come up with new numbers, we will do it. But this will probably take time. In that respect, we do not have other numbers, not for cost-income ratios and not for return on equity, as long as we are with the current strategic plan. You rightly so mentioned that in reality, in 2022, we have beaten the expected numbers. Okay, thank you very much. Thank you. Thank you. There are no further questions at this time. This concludes the Mizrahi Tefahot Bank Limited Fourth Quarter 2022 Business Results Conference Call. Thank you for your participation. You may go ahead and disconnect.