Earnings Call: Q3 2022

Nov 28, 2022

Summary

Q3 net profit reached ILS 1.178B with 20.8% ROE and a 43.3% cost-income ratio. Merger integration was progressing, while credit growth eased and provisions reflected portfolio growth and CECL macro adjustments.

Ladies and gentlemen, thank you for standing by. Welcome to the Mizrahi Tefahot Bank Ltd. Third Quarter 2022 Business Results Conference Call. All participants are 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 November 28, 2022. With us on the line 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 third quarter of 2022 presentation, which includes general comments regarding legal responsibility, including that the information contained in the presentation constitutes information from the bank's 2022 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 2022 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 uncertainties 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, factors with respect to changes to borrowers' financial strength, public preference, 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? Thanks. Welcome to the Mizrahi Tefahot third quarter 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. Before we start, maybe one word on the macroeconomic environment. We have seen a solid Israeli economy with low unemployment rate, decreasing debt-to-GDP trend, and practically no deficit in the government budget. We also saw positive actual inflation both in Israel and in the U.S. Nevertheless, one-year inflation expectation from OTC market went down since our last call from around 3.15% to around 2.9% as of yesterday, and the Bank of Israel rate went up to 3.25% as of today, and 2% for Q3 end. As for our Q3 results, we have seen an increase in all major balance sheet items. We have seen strong financing revenues growth, which reflects the balance sheet growth in the previous quarter. Provisions came back to a more normal territory. We think that our credit metrics reflect a balanced credit portfolio with adequate risk management. For the most part, the increase in provisions is coming from collective provisions due to the growth in the credit portfolio and also from CECL macro adjustment for the higher interest rate and inflation environment. The net profit and the return on equity reflects the strong balance sheet, the CPI figures in the quarter, the good efficiency ratio, and the contribution of Union Bank to our results. The merger is advancing as planned and is currently expected to be completed by year-end. We already closed the majority of Union Bank branches, and of course, most of the cost synergies are still ahead of us with full effect starting 2023. We have completed the migration of clients from Union Bank to Mizrahi, and the focus for the next month is to finalize the operational closure of the last branches. Our cost-income ratio for the quarter is 43.3%. 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 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. Liquidity is very robust with core deposits around 67% of all deposits, and total deposits continue to grow. As expected, credit growth in Q3 is lower than the first half of the year. Demand for mortgages went down in Q3, and we continue to follow a strategy to retain our market share in the market. We think that the last couple of months has presented a unique opportunity to gain market share with decent margins in the corporate market. We still see a demand for corporate credits, although in a decreasing pace, and that is the main reason why we feel comfortable to distribute a dividend of 30% of our profit for this quarter. All in all, I think we are following our strategic plan and accommodating to the new monetary environment. Thank you very much for your attention, and with that, I leave you with the hands of Mr. Menahem Aviv, our chief accountant. Please, Menov. Thank you, Adi. Our main figures from the financial statements are as follows. Net profit in Q3 2022 reached ILS 1 billion and 178 million. In the first nine months of 2022, reached ILS 3 billion 385 million. Return on equity in Q3 reached 20.8%, and in the first nine months of 2022, reached 20.6%. The equity amounted ILS 23 billion. Cost-income ratio reached in Q3 2022, 43.3%, and in the first nine months of 2022, reached 43.8%. Financials revenues from current operations totaled ILS 2 billion 547 million. Total revenues in Q3 2022 reached ILS 3 billion 533 million. The operating and other expenses in Q3 totaled ILS 1 billion 529 million. The ratio of provisions to loans in Q3 2022 reached 0.15%. Ratio of T1 reached 9.92%, and the total ratio reached 13.12%. Mr. Shachaf. And I think now is a good time for 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 poll for your questions. The first question is from Michael Goldberg of Psagot. Please go ahead. Hi, good afternoon. First of all, congratulations on an impressive quarter. A couple of balance sheet items, a question. I saw that your current account deposits only dropped by 4% year to date, which is less than half what the rest of the market meant. Can you explain what you do differently to keep more of those current account, checking accounts? I cannot know what others are doing, so it will be hard for me to refer to that. I can tell you that, hopefully this answers the question, we saw on the aggregate level, the trend in M1 and M2, and we did see a shifting from M1 to M2. But still, M2 is also increasing, even though in a lower pace than the years before. Okay. Just another question on that account. I mean, every year, every quarter, you provide a sensitivity analysis as to a potential impact of an additional rise of 1%, parallel 1% interest rate. That number went down from ILS 1.6 billion to half of that, ILS 863 million. That is significantly steeper decline than the other banks that have already reported. Is there something else except for deposits? What else is impact the sensitivity of your top line to interest rates? Again, I cannot refer to what others are doing, but it makes sense that a gradual extra 1% from a higher level should have a lesser effect than coming from zero. That significant decline, it is like half. Again, it is hard to isolate each aspect or sub-contribution of each of the components, but maybe we link it together to your first question. Probably more should shift from current accounts to deposits, and this would also, of course, impact the magnitude of a 1% parallel increase. Okay, I understand. The last question about the quality of your loan book. Your NPLs seem to have improved from 1.2% to 0.9%, yet your cost of risk, your provisions, seem to be the highest in the market. It seems like in the past, you used to have one of the lowest cost of risk. Are you seeing it creeping up faster in the couple of quarters? How should we look at that number compared to what's going on around the market? Thank you very much. Hello, Michael. You have to understand that the new system of provision, the CECL, is implicated by all of the banks, not in the same way that was before. I can assume that the diversity of us or the diversity between the banks is due to the models that every bank is implementing in their financial statements. I think we are conservative in this point, and I do not know what about the other banks. Okay, thank you very much. If there are any other questions, please press star 1. There are no further questions at this time. Thank you. This concludes the Mizrahi Tefahot Bank Ltd. Third Quarter 2022 Business Results Conference Call. Thank you for your participation. You may go ahead and disconnect.