Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim second quarter of 2026 results conference call webinar. For your convenience, this call will be accompanied by a presentation. May we suggest, if you have not yet done so, that you access the presentation on the bank's website, www.bankhapoalim.com, by clicking on Financial Information on the homepage and then click on the second quarter 2026 report presentation. All participants are at present in listen only mode. Following management's formal presentation, we will open the question and answer session. You may send questions via chat. Please type your name and company before your question, or you can use the raise hand button on the bottom of your screen. As a reminder, this conference is being recorded August 11, 2026. With us on the line today are Mr. Ram Gev, CFO, and Mr. Tamar Koblenz, Head of Investor Relations.
I would like to remind everyone that forward-looking statements for the respective company's business, financial condition and results of its operations are subject to risks and uncertainties that would cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risk in product and technology development, and the effect of the company's accounting policies, as well as certain other risk factors, which are detailed from time to time in the company's filings with the various securities authorities. Mr. Gev, would you like to begin?
Good afternoon to you all, and thank you for joining us today. I am pleased to review the bank's 2026 second quarter and first half results. Let's start with the highlights on slide 3. We delivered an excellent second quarter, generating a return on equity of 15%, or approximately 16.4% without the special bank tax impact. This brought our first half return on equity to a strong 14%, or roughly 15.4%, excluding the special bank tax, reflecting continued strong business momentum, cost restraint, and of course, the positive impact of the CPI in the quarter. Credit growth. This quarter, we recorded 3.3% credit growth, or 6.6% since the beginning of the year. While the NPL ratio continues to be very low at 0.50%. The last point to highlight is capital.
Alongside our continued growth, we remain committed to distributing a meaningful portion of our earnings with a 50% payout ratio, generating an attractive dividend yield while maintaining strong capital ratios. Net profits in the quarter stood at ILS 2.5 billion, a 17.1% increase quarter- on -quarter. Earnings per share is up to ILS 1.9. ROE for the past two quarters have been affected by the special tax, which on an annual basis will have a 1.3%-1.4% impact on ROE terms. Next, let's talk about our credit book. Total credit with a balance of ILS 536 billion grew impressively by 14.3% in the last 12 months, of which 3.3% in the last quarter. Growth was diversified across all segments and in various economic sectors. This reflects the strength and unique characteristics of the Israeli economy, which continues to expand and develop despite ongoing security and other challenges.
It also demonstrates a continued confidence of Israeli households and businesses in the long-term prospects of the Israeli economy. Alongside continued growth in retail credit, mortgages, and mid-market lending, we saw strong growth in our corporate credit portfolio. A portion of this growth consists of balances, attributed to securities lending, and derivatives transactions. Slide 7 presents our financing income. Income from regular financing activity grew 13.7% quarter-on-quarter, mainly due to high contribution of ILS 431 million of the CPI in the quarter, as well as the growth in banking activity, including lending, deposits, and dealing rooms. Excluding the CPI, income from regular financing activity grew 3.4%. Impressive growth was achieved despite a headwind from lower interest rates, with the average Bank of Israel rate during the quarter being 11 basis points lower than in the previous quarter.
On non-regular financing activity, we recorded a high income of ILS 325 million, mainly thanks to income from shares derived by our nostro investments as well as Poalim Equity, our investment platform. The financial margin remains a key strength of the bank versus our peers. It is substantially up quarter-on-quarter from 2.49% to 2.70%, affected mostly by the CPI, while being adversely affected by the aforementioned rate cut and lower credit margins. On fees, on slide 8, the positive trend continues as our business activity continues to expand. Fees grew 2.7% in the quarter and stayed unchanged versus the corresponding quarter last year. As in the second quarter of 2025, we recorded special income from the international credit card companies. The growth in fees in the second quarter was recorded mostly in credit cards, securities, and conversion differences. Moving on to present our disciplined cost management.
The benefits of our continued expense management efforts are clearly evident in this quarter results. Expenses stayed flat quarter-on-quarter and were down 4.4% versus the second quarter last year. This decrease is mainly attributable to salary expenses, which were down 7.3% year-on-year, mainly due to a decrease in performance-based bonuses. Underlying salary expenses stayed stable. The cost-income ratio is down to 30.6%, 33.3% for the first half. Moving on to discuss provision for credit losses and the quality of our book on slide 10 and 11. Provision for credit losses or cost of risk amounted to ILS 298 million, a 0.22% ratio. We recorded a collective provision that primarily reflected portfolio growth and other standard provisioning effects, as uncertainty still persists. On the individual side, there were no exceptional recoveries during the quarter.
As a result, as shown on slide number 11, while the allowance balance increased in absolute terms, the allowance ratio actually declined slightly to 1.65%. On the left-hand side, we see the NPLs marginally increasing this quarter, but still at a very low level of 0.5%. This change primarily reflects normal quarter-to-quarter variations related to routine classifications. Against the NPL balance, our allowance coverage remains robust at close to 3x , providing a significant cushion. On slide 12, our deposit base continued to grow by 2.5% in the last quarter and 7.1% in the last 12 months. Retail deposits decreased slightly due to customer preferences to move funds to capital markets products, but still represents 52% of total deposits. Liquidity ratios, LCR and NSFR, continue to be well above the minimum requirements. Now let's move on to present our capital position on slide 13.
Shareholders' equity grew by 8.1% in the last 12 months, and the CET1 capital ratio is 11.83% versus a minimum internal target of 11%. On the left-hand side, you see the CET1 ratio development. The bank continues to demonstrate strong organic capital generation, alongside the effects of robust growth and a high payout ratio, which led to a decrease in the capital ratio and a reduction in capital buffers. Total distribution continues to be high at 50% of net profit, meaning ILS 1.2 billion in respect of the second quarter, of which ILS 995 million in cash dividends or ILS 0.76 per share. The remaining amount is the buyback of shares at 20% of the total distribution. Slide 15, Bit, our unique financial app, has gained 3.5 million active customers. Two-thirds of them conduct their primary banking activity with other banks.
P2P transaction volume continues to grow, now standing at ILS 2.9 billion per month. On slide 16, our future headquarters, Poalim Center, construction is progressing and we are simultaneously advancing the vacating and selling the current properties. Before we conclude, a quick reminder of our financial targets and a brief macro update. For 2026, we are targeting net profits in the range of ILS 8.5 billion-ILS 9.5 billion, with return on equity between 13%-14%. Looking ahead to next year, we return to our original return on equity target of 14%-15%, with net profits increasing to ILS 9.5 billion-ILS 10.5 billion. Across both years, we are planning growth of 8%-9% on average, and we continue to target a payout ratio of 50%-60%. The underlying assumptions, including the impact of the special bank t ax, are outlined in slide 18.
On the macroeconomic environment, even though the contraction in economic activity in the first quarter was moderate, we witnessed a major rebound in the second quarter in almost all sectors: exports, private consumption, and investments. The labor market is tight and the broadening of growth probably relies on improved productivity. Inflation, despite rising was affected by the strength of the shekel, and its year-on-year levels decreased to 1.6%. Markets now implying a 25 basis points rate cut for this year and some probability for one more cut next year. The worldwide steepening in yield curves hit Israel, and the 10-year bond is trading 8 basis points below the U.S. Treasury. To summarize, we are concluding a strong second quarter with robust profitability and continued business momentum. ROE was 15%, roughly 16.4% excluding the impact of special bank tax.
This quarter, ROE was actually above our target for the year. We delivered strong growth both this quarter and over the past year while maintaining very low NPLs. Financing income and margin were boosted by the CPI as well as activity growth mitigated by lower interest rates. Expenses continue to be well controlled, supporting an efficiency ratio in the low 30s, and we returned 50% of net profit to shareholders through cash dividends and buybacks. With that, we will now open the call for your questions. Thank you.
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. In order to send a question, use the chat button located at the bottom of your screen. Please type your full name and your company's name before the question, or use the raise hand button at the bottom of your screen and the option for speaking will be given at the right time. The first question. This quarter, you provided 0.22% cost of risk following the first quarter in which credit loss expenses were very low. Can you walk us through what drove the increase? Looking ahead, when we can expect some provision release?
Okay. Thank you for the question. The bank h as a high-quality credit portfolio, as reflected across all key asset quality indicators. At the same time, we built a meaningful reserve buffer throughout the war period as a prudent measure given the elevated uncertainty. In fact, compared to peers, we currently maintain the highest reserve ratio in the sector, which positions Bank Hapoalim well across different scenarios, positive and negative as well. Credit loss expenses for the quarter were 22 basis points, which reflects a level without exceptional effects. I mean, there was no material reserve release or recovery during the quarter, nor did we build any significant additional reserves. So the expense level primarily reflects the underlying quality of the credit portfolio, including ongoing net charges as well as portfolio growth.
As you know, portfolio expands, the collective provision naturally grows as well and impacts the quarterly expense line. I think it is also worth noting that Bank Hapoalim delivered a strong 15% return on equity this quarter, despite maintaining this conservative provisioning approach. Looking ahead, it is hard to say what will be the reserve release or when it will happen because it depends on the circumstances and conditions, economic and geopolitical. As long as the situation will be stabilized, we will consider that, but it is early to say.
The next question. Expenses were down versus the same quarter last year and broadly flat quarter-over-quarter. What drove that? Should we expect further improvements going forward?
Expenses is an important item for us, and expenses declined by 4.4% versus the same quarter last year. They were essentially stable compared to the previous quarter. The main driver of the year-over-year decline was salary expenses, which decreased by 7.3%, primarily due to lower performance-based compensation. While base salary expenses remain broadly stable and reflect our ongoing efforts to control underlying salary costs, even while growing the business and taking into account labor cost inflation in Israel. In addition, during the previous quarter, we implemented an actuarial adjustment related to the transition to a severance-based retirement model, which is expected to reduce actuarial expenses by roughly saying several tens of millions of shekels annually. Beyond that, the results reflect disciplined management of ongoing salary costs, including retirement and promotions, as well as efficiency measures that we take across a broad range of all the other operating expenses.
Looking ahead, these efficiency efforts will continue. We also remind that the early retirement program, which was announced at the end of 2024, is expected to generate annual savings of approximately ILS 300 million compared with the 2024 expense base.
The next question. Credit growth has already reached 7% year-to-date, putting you close to the lower end of your 8%-9% full-year target. Given the momentum you've seen, should investors interpret the current guidance as prudently conservative, or do you expect growth to slow meaningfully in the second half of the year?
Thank you for this question. Growth is a very important element. The bank operates across a broad range of segments, and our credit portfolio as well as our growth profile, is well-diversified. So growth this quarter reflected the expansion across retail lending, mortgages, middle market, and corporate banking. Naturally, these trends are influenced by demand patterns in the Israeli economy, including infrastructure, real estate, financial services, and broader capital market activity across various financial products. The growth is significant for the first half of the year. We have our targets or guidance that we published, and we talk about 8%-9% growth. The figures for the first half certainly give us very good feedback for our strategy and confidence in achieving our targets.
It is important to remember that we are still at the middle of the year, and it is important to us not only the growth, but balancing between growth, profitability, and risk, and not only working only on growth. In short, it is giving us good feedback for our strategy and very good confidence with our initial guidance. Obviously, we are not usually updating during the year our guidance, but like we did at the beginning of this year, I assume that at the end of the year, when we see our actual growth compared to the guidance we gave, we will consider updating guidance for the next year as long as we see it is important.
The next question. Congratulations on the results. My question is mainly on the impact of the war on your liquidity and asset quality metrics. Have you used any repo facilities with the Central Bank? Also, where are you seeing the most pressure on asset quality in Q2? What can you share on trends so far in Q3 across sectors of customer segments?
Thank you for the question. The answer is, we have a very good liquidity base. We do not see any effects of the war. We have a well-diversified funding base. We actually have the largest retail deposit base in Israel and with strong liquidity. LCR stood at 126%. As for the impact of the war on credit quality, as you know, the Israeli economy performs very good or performs well during the war. Actually, we are almost three years in kind of a war situation, and the economy performs well. Obviously, the war has an impact on the economy, deficit, et cetera, that the government and other will have to handle. But we do not see material impact on credit quality. The numbers and the figures of the credit quality are very, very good. Historical low, you can see the NPLs. Nevertheless, we built along the war reserves.
Actually, we have the highest allowance to credit ratio in the sector, reflecting our prudent approach. That position us in a very good position to any scenario, positive or negative. But we do not see material impact on a specific element. Obviously, there are some sectors that are more sensitive to a war situation, but we do not see a material effect like I mentioned.
The next question, how do you see NIM developing from here, given that the market is implying further policy rate cuts? Should we expect NIM deterioration from current levels? Can you share your NIM level expectation for FY 2026?
Okay. Thank you. NIM is another important element. Obviously, NIM is affected by different vectors, and the final outcome depends on the materiality of every effect. First, we have the inflation CPI. Obviously, this quarter was affected by relatively high CPI, and we see it clearly on the NIM. Another factor that affects the NIM is the change in the interest rates. We have a change quarter to quarter that creates a negative effect on the NIM, and obviously competitive pressures as we see in different segments. Nevertheless, we are putting a lot of efforts to manage the NIM in a very good way. So position Bank Hapoalim relatively in a very good position compared to our peers.
Actually, if you look at the numbers, we have the highest NIM in the sector, and we want to, let's say, do all the efforts that we need to manage the NIM in the right way. Obviously, I mentioned the factors, the macro factors of the interest rate that are negative factors on the NIM. I can't say where exactly the NIM will be. It depends on the interest rate environment in the future.
The next question, do you concern lately regarding the deterioration situation at the residential market?
Can you repeat the question?
Do you concern lately regarding deterioration situation at the residential market?
Yes. We have Victor, our Chief Economist, with us. Victor, can you take this question?
Yes, sure. Thanks, Ram. In the housing market, I think that over the last year, we see a decrease in the transaction level, something like 35,000 units per year, while the housing starts is much higher than that, maybe close to more like 80,000 per year, which means there is a gap between the supply and the demand side. We see that some accumulation of stock of unsold apartments. The question is whether we are concerned or not. I think that the level of stocks is not so high compared to the demographic trends in Israel.
Even though we see that some demographic changes in the Israeli society, we still see that there is growing population of something like 1.5% per year, which means that if we take the stock of unsold apartments, 85,000 units, maybe it is a stock enough for two years, not much more than that. In terms of the demographic changes of the Israeli population, I would not say that we are concerned. You see there are much people waiting on the fence. They are looking for the interest rate to decline. They are waiting for the political situation to be maybe more clear.
I think that next year, when maybe we will see some political stability together with some decline in interest rate, all these people waiting on the fence might return to the housing market, and the level of unsold apartments doesn't look so high in our perspective. The question is, again, if prices can further decline. I would say it is even reasonable that we might see a further decline in prices in the next 12 months, but I think it would be very moderate one.
The next question, how comfortable are you with your current CET1 and total capital ratios and buffers given the ongoing geopolitical uncertainty? You have Tier 2 instruments callable in October. Could you share your approach to the call decision and whether it will be driven primarily by economics or considered more holistically? Also, could you update us on your issuance plans through year and across in local currency, senior, and Tier 2 instruments?
Hi. Thank you. I believe for the first element about, let us say, CET1 capital ratio. Bank Hapoalim has a very strong capital and very good capital ratio. We ended the quarter with 11.83%, while the minimum regulatory requirement is 10.23%, and internal board of directors target is 11%. So we are in a very good position with sufficient buffers. The way we look at that is we want the capital to serve growth and distribution, like we mentioned in our guidance, and at the same time maintain buffers for different scenarios. So we feel very comfortable with our Tier 1 capital ratio. It is important to note that we implemented standardized approach, which is very conservative in capital management. As for the Tier 2 instruments and the call option, obviously, I cannot relate to future call options or what will be our decision. But I can say a few things.
First, our great track record is that we exercise all options. Second, we understand, let's say, investors or market expectations. Third, the decision will be taken when we need, and we consider all the elements, obviously, the economic elements as well.
There are no further questions at this time. This concludes the Bank Hapoalim second quarter 2026 results conference call. Thank you for your participation. You may go ahead and disconnect.