Earnings Call: Q2 2025

Aug 13, 2025

Summary

Q2 net income was ILS 2.5B, ROE was 16.7%, and credit grew 12.7% YoY as financing income and fees advanced. The payout ratio rose to 50%, while provisioning and outlook remain sensitive to geopolitical and economic conditions.

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim second quarter of 2025 results conference call. For your convenience, this call will be accompanied by a PowerPoint 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 2025 report presentation. All participants are 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 13, 2025. With us on the line today are Mr. Ron Geb, CFO, and Ms. Tamar Koblenz, Head of Investor Relations. I would like to remind everyone that forward-looking statements to the respective company's business, financial condition, and results of its operations are subject to risks and uncertainties that could 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, risks 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. Geb, would you like to begin? Good afternoon to you all. We are happy to announce the bank's second quarter results, as I will elaborate on in the coming minutes. Let's start with slide 3. We reported this morning a 16.7% return on equity for the quarter and 16.5% return on equity for the first half, driven by a remarkable almost 20% increase in the net profit in the first 6 months of 2025. Cost-income ratio came in at 33.8% in the first half. Aligned with our strategy, credit growth continues to be strong, 3% in the quarter, and significant growth of 12.7% in the last 12 months. Total income is up 12% and 13% in the first half and second quarter versus comparable periods. On balance sheet metrics, the CET1 capital ratio increased to 12.02%. NPL ratio is down to 0.5%, and LCR is at 125%. Alongside these strong numbers, we would also like to highlight several updates. We are increasing the rate of profit distribution to our shareholders to 50% of net profit, in line with the bank's financial targets. To allow this, we have updated our dividend policy to the distribution of up to 50% of net profit instead of the previous threshold of up to 40%. Lastly, we reported that in the third quarter, the bank will record one-time profit of ILS 380 million net from insurance reimbursement. I am now moving on to discuss the results in more detail. On slide 5, we see the net profit, return on equity, and earnings per share development. This quarter, net income was ILS 2.5 billion, and the EPS was ILS 1.93, reflecting the very strong top-line growth and the strong positive jaws we created. I also remind you that last quarter, we recorded tax income due to the liquidation of Hapoalim Switzerland. Next, let's talk about our credit book on slides 6 and 7. Credit growth reached almost a 13% increase in the last 12 months, of which 3% in the last quarter. Growth was recorded across all segments and in various economic sectors. Slide 8 presents our financing income. Total financing income grew 15.1% in the quarter, driven by the growth of customer activity, higher CPI contribution, and higher income from equity investments, mostly as attributed to our subsidiary, Poalim Equity. Financing income is growing over time, even excluding the CPI effect and despite the impact of war-related benefits granted to customers, as we present on the right-hand side of the slide. In the second quarter, we accounted for two new benefit outlines. These include financial assistance to households and businesses impacted by the ongoing conflict in Israel in the form of reduced interest charges, exemption from certain fees, credit deferral, and more. Moving to slide 9, where we present our fees. These were up 8.2% in the last quarter and 12.2% in the last 12 months. This quarter, we recorded special income from the international credit card organization, but in general, we see fees growing over time as underlying business activity is expanding. Slide 10, we present our discipline cost management. Operating and other expenses stayed almost unchanged versus the corresponding quarter. Keeping costs fairly flat is particularly impressive considering that some costs are activity growth driven or impacted by inflationary pressure. Versus the last quarter, costs increased by 6.2%, reflecting some timing effects and fluctuations between quarters. The cost restraint, coupled with robust income growth, produces very strong positive jaws and efficiency ratio in the low 30s. Moving on to discuss provision for credit losses and the quality of our book on slide 11 and 12. Provision for credit losses amounted to ILS 302 million, or 0.26% of our credit book, driven by ILS 334 million provision in respect of the collective allowance and net accounting charge-offs. The increase in the collective allowance was due to the growth of the credit portfolio, as well as the effects of the economic uncertainty due to the prolonged war. The individual provision, on the other hand, saw income recorded due to recoveries from several borrowers. In the next slide, we present our excellent credit quality metrics. NPL ratio dropped to 0.5%. NPL coverage ratio rose to 298%. The allowance to loans ratio continued to be high at 1.74%, and over 95% of total allowance is collective allowance. Our deposit base, on slide 13, continued to be strong and stable, with 56% of total deposits attributed to the retail segment. Liquidity ratios, LCR and NSFR, continue to be well above the minimum requirement. Now let's move to slide 14. CET1 capital ratio stood at 12.02%, well above both minimum internal target and minimum regulatory requirement. Our solid capital position derives from strong organic capital generation as shareholders' equity grew almost 12% this year. Both the total capital ratio and the leverage ratio are comfortably above minimum requirements. Now moving to slide 15. In line with the bank's financial targets we announced last March, we increased the distribution of second quarter net profit to 50% and will distribute a high amount of NIS 1.3 billion cash dividend. To allow this, the board of directors updated the dividend policy to a distribution of up to 50% of net profit. Going forward, the actual dividend payout ratio may be influenced by the volume of share buybacks. In respect of the last four quarters, we distributed ILS 3.7 billion to our shareholders. Before I review the macroeconomic slides and sum up the call, an important reminder on our financial targets for 2025 and 2026 is on slide 16. The key assumptions for these targets are detailed in the 2024 financial report. The macroeconomic environment on slide 17 and 18. Local financial markets outperformed in the second quarter, probably reflecting reduced geopolitical risk. The TA-125 was up 24%, the shekel strengthened by 9.3% against the USD, and risk premiums have fallen. Even though the 12 days of war with Iran negatively affected economic activity, and we won't be surprised if GDP growth was negative in the second quarter, more recent economic indicators point to a rebound in July. However, considering the direct damage of the war, markets believe that the total effect over time on the economy is positive and robust. Inflation is still running at level above the target, 3.3% in the last 12 months, mainly a contribution of an increase in services prices. Looking ahead, we expect inflation to decrease in the fall as the shekel is stronger and wage inflation has moderated. The markets imply 2% inflation in the next 12 months. The Bank of Israel kept its key rate unchanged at 4.5%, basing this decision on geopolitical and inflation risks, which still prevail. Markets now anticipate one rate cut until the year end. To summarize, a continued strong start of the year with a solid second quarter. Return on equity of 16.7% and 16.5% for the first half, influenced by a positive business momentum aligned with and even surpassed the bank's financial targets. This is due to a more favorable economic environment than what we anticipated and some one-time profits. The main driver of the profitability was the impressive growth in income, both in financing income and fees. The strong growth in credit was broad-based across segments and economic sectors. Credit quality continues to be strong, with NPL ratio of only 0.5%. Our capital is organically growing and producing a growing surplus. In this quarter, we increased the dividend payout ratio to 50% and declared a NIS 1.3 billion distribution to our shareholders. With that said, let's open the call for your questions. To you, operator. 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 polled in the order they are received. Please stand by while we poll for your questions. The first question is from Chris Reimer of Barclays. Please go ahead. Hi. First off, congratulations on the solid ROE figures. I was wondering if you have an idea of what ROE would look like if you assume normalized levels of Common Equity Tier 1 ratios. Hello? Hello. Hi, Chris. Yeah. Thank you for the compliments for the performance and figures. Obviously, we do not talk about future projections, but I can direct you to the public guidance that we published, where we talked about targets between 14%-15% return on equity, for 2025 and 2026. Obviously, if you are looking at the last two quarters, we feel very comfortable on track and even above those targets. When talking about what will be the effect of the capital surplus or what will be the return on equity without the capital surplus, it depends on timing and different assumptions, so I cannot give you the exact number or projections, but you can do the math by taking our targets, the current return on equity, and taking into account that, let us say, minimum regulatory requirements stand at the 10.23 minimum internal target, 10.5. Obviously, we will keep a buffer above that and get figures about what is the normalized. Got it. Thanks. Also, again, on the excess capital, do you see a case where the Bank of Israel might let you distribute a one-time special dividend to decrease the balance? Yes, thank you. This is a very good question. I think a lot ask these questions. Look, if we look at the Bank of Israel. Bank of Israel, during the war, decided to allow banks to distribute about 40%, and this was very important. Bank of Israel capped it to 40%, but on the positive side, it allowed banks during war to distribute up to 40%. All the time, mentioned the geopolitical situation and uncertainties. I think the current decision of Bank of Israel to allow increasing it to up to 50% reflects two elements. First, the confidence in the situation of the banks and their solid and capital and stable situation. Second, understanding that, let's say, geopolitical risk is lower than before. We have to take into account that there are still some uncertainties, and I think that is the reason why Bank of Israel is still cautious and prudent on that. Obviously, we, as a bank, have the ability to distribute more than 50%. We reflected that in our guidance. Whether it will be a question of one-time dividend or a gradual increase is something that I think we will evaluate at the right time. Certainly, it depends on the macroeconomic terms and geopolitical developments. As long as geopolitical developments will be positive with a continuous trend of lower geopolitical risk and much lower uncertainties, I think the Bank of Israel may consider releasing more distribution, but it is hard to say when it will happen. In our guidance, put our target on being in 50% and even up. So far, we reached this quarter 50%. So it really depends on, let's say, macro and geopolitical situation. It is hard to predict what will be in the next quarters. All right. Thanks. That is really helpful. That is it for me. The next question is from Liran Lublin of IBI. Please go ahead. Hi, guys. Thanks for taking my question, and congratulations on an excellent quarter. My question is regarding credit growth. The way I see it, given the relatively moderate growth of the Israeli economy in the first half of the year, how would you explain the significant credit growth that you achieved in the first half? It is quite above the growth of the economy. Hi, Eran, and thank you. Well, it's really impressive, I think, for the Israeli market, the growth that we see. I think the research department in Bank of Israel published, I think, a couple of months ago, some projection even to 2026, with even higher growth of the GDP. We think that basically, what we see in the growth and the demand is a result of several elements. First is the strength of the Israeli economy. Israeli economy performed during the war much more or better than any scenario and better than anyone expected. That's the first element. Second element is the GDP growth. The third element is the inflation, which takes the real GDP growth and turn it into nominal. The fourth element is our ability to perform and answer demands in every segment. After all, Bank Hapoalim has a very significant position in all the segments. Whenever there is a demand, let's say in consumer, in mortgages, in corporate commercial, we are ready with enough resources to answer this demand and be competitive. Taking all these elements and basically, very important, the strength of the Israeli economy and some effect of rebound, create the demand and our ability to grow. Great. Just to follow up on that one. You're currently running on a growth rate that is way above your projections for the year, I mean, credit growth. Any thought on changing those projections? You're right. We grew about 12.7% in the last 12 months and 3% this quarter and 2.7% the first quarter. It's higher so far. The pace is higher than the, let's say, average 7% that we put in our targets. Obviously, it's hard to say, let's say, what will be in the future, but it implies that the current trend of the Israeli economy creates potential for higher growth than in our targets, but it depends on the development in the Israeli economy and geopolitical situation. As for targets, let's say we publish a target for a couple of years, and the reason was balancing between uncertainties and our, let's say, projection, targets, and aspiration. We feel very comfortable with the targets, and like I mentioned, we are even beyond our targets. So far, it's early to talk about, let's say, updating, but I think that when we will end the year, our work plans for the next year is something that we will evaluate, and if there will be something to update, we will consider it. Great. That's very helpful. Thank you very much. The next question is from Priya Rathod of Jefferies. Please go on. Hi. Thanks for taking my question. Just another follow-up on the credit growth. More specifically for your mortgage lending. We saw another strong quarter of growth, but when you look at the housing market transaction data, the story does look a little different. So we're seeing new home sales falling and the stock of unsold homes rising. Could you just speak to where that mortgage growth strength is coming from, and how sustainable is that going forward? Thank you. Hi, Ria, and thank you. Indeed, we see overall in the market a little bit cooling down of the mortgage market. There are several reasons for that. Still, the numbers that we see for the quarter are relatively strong. Even though the markets, there are some signs of cooling down, maybe temporarily, the market is still strong, so we can create, let's say, growth in our portfolio. We see the demand come from all, let's say, profiles within this segment. There is nothing special in one profile or other. It is too early to say whether this little bit cooling down, it is a trend or change in the trend. We are still looking at the current data. But the performance is relatively strong. You can see that in the second quarter, we grew in our mortgage booking 1.6%. Overall, 8% in 12 months. It is, let's say, growth during war. So it is really relatively impressive. Sorry, just to follow from that. I guess when you look at the data from the central bank, it seems like the new stock or new sales of housing is going down. I guess, if it is not coming from new sales, where is that growth coming from? Maybe part of it can come from investments. But it is important to note that in Israel, the motivation to own a home, and that is the vector that supports the trend or the demand for mortgages, and it is a very healthy vector, is still there. It is something that has even a cultural effect. Still people need to live somewhere, and they want to own their home. So the basic vector is still very strong. Maybe this cooling down can be something that is shifting from one period to other periods. After all, at the beginning of June, we had the 12-day war with Iran. Maybe it had some psychological effect. Maybe Bank of Israel guidance towards incentives to home buyers had some psychological effect. It is early to say or too early to say what is the exact trend. We need to wait, I think, for the next quarter to see the exact trend. But basically, the demand is still there because the population growth in Israel is here to stay, and the demand for housing is part of, let's say, lifetime and cultural elements in Israel. Perfect. That's helpful. Thank you. The next question is from Kanberg Benning of Citi. Please go ahead. Hi, just a quick question. Firstly, on the credit book as well. So we saw a 50% tariff coming from the United States last Thursday, and I'm just wondering, do you foresee any impact on the corporate credit book for that? And have corporates been saying anything to you in particular based on these tariffs? Can you repeat the question? I don't think it was too clear. Can you repeat it? Sorry, I don't know if it's my line. I'm just wondering if you foresee any slowdown in the corporate book. It's had pretty strong growth, quarter-on-quarter and year-on-year, based on the tariffs coming in from the United States, which were enacted last Thursday. Okay. I understand. Thank you for the question. You're asking about the effect of the tariffs. We don't see a material effect. I think for the overall Israeli economy, especially the local economy, the effect is not material so far or as people expect it to be. In short, we don't see any material effect or significant. Just the second question. Obviously, these have been very strong results. Does Bank Hapoalim intend to update its financial targets for 2025 or 2026? You ask about updating the targets, if I heard you clear? Yes, that is correct. Sorry. Yeah. Okay. I related to that earlier. We published our targets at the beginning of March. We are five months from that moment. After two quarters, we had very good performance, even above targets with the return on equity and growth. I think we need to, let us say, finalize or see the upcoming quarters, looking at the year-end, summarizing it, and prepare our work plan for 2026. Then we will decide whether we might update our targets. We feel a very good feedback implementing our strategy when we see our performance so far, but this is something we might consider, after the year-end or something like that. Perfect. Thank you. The next question is from Lawrence Bonnet of BNP. Please go ahead. Yes. Shalom, good afternoon. Congratulations for these very solid results. I had two questions. When we look at inflation and derives mostly on services, we saw a graph as of today. First question, what are your forecasts in terms of inflation moving forward for Israel, and maybe especially your focus on services? The second question, it is about credit growth portfolio. Congratulations again. You do report substantial growth in all the segments. In the meantime, you increased a little bit, I would say, provision on credit loss. You explain it is derived from the fact that credit growth portfolio, but also about uncertainty. My second question is about, if any, for which segment would you see a further deterioration in terms of credit portfolio among all the segments you service? Thank you. Okay. Thank you, and shalom. You asked about several issues. First, the inflation have led to that. I think you talked about maybe the Bank of Israel interest rate and the credit demand, if I remember correctly. Let us start with the inflation. We tend to believe that the inflation risks have not disappeared, and our inflation forecast for the coming year stands at 2.3%. Okay? That is for inflation. In our targets and guidance, we assume for 2025 inflation at about 2.5%. The actual forecast for 2025 is a little bit higher than that. I think 12 months inflation is 3.3%, but the forecast for the next 12 months is 2.3%. So that is for inflation. Interest rates. As for interest rates, interest rate decisions are becoming, let us say, increasingly data dependent. A rate cut may occur in one of the upcoming decisions. We are in our targets, assume two rate cuts, so it is in 2025. It is hard to say whether it will be like in our basic assumptions or not, but we feel that the decisions will be data dependent. So Bank of Israel will look on inflation, labor market, and other elements. As for the GDP growth. GDP growth, our estimates for 2025 is about 3%. For 2026, if I remember correctly, is about 4.1%. I think the research department in Bank of Israel published a couple of months ago their forecast for 2026, and they talked about 4.6%, but I may be wrong. That is what I remember. Our assumptions is 3% for 2025 and 4.1% for 2026. The last aspect you talked about is credit demand. Credit demand will be dependent on geopolitical situation, but GDP growth and inflation. So if you take, let's say, positive and strong GDP growth, let's say, in the rest of the year and 2026 as well, like I mentioned in our forecast, add to that inflation. So it is reasonable to assume that in those circumstances, the demand for credit will be still high. The next question is from David Kaplan of Psagot. Please go ahead. Hi. Good afternoon, everyone. I guess just a quick question on your interest spreads and on your net interest margin. When we look through the numbers, we can see that most of the increase in your interest spreads came on the liability side of the balance sheet, less so on the asset side of the balance sheet. So could you talk a little bit about how that is developing? How is competition playing out on the market, and what should we expect going further? I see probably further contraction on the liability side, perhaps. Talk a little bit about that. I appreciate it. Thanks. Hi, David, and thank you for the question. The NIM, you are right. The NIM for the last quarter was relatively high. It is around 2.85, and it was higher than the first quarter and the fourth quarter of 2024. There are a few factors that affect the NIM, and I will go over them. The first one is the inflation. Obviously, inflation affects that, and I have talked about our expectations and what the basics assumption. Obviously, from quarter to quarter, there is volatility that affect the NIM. Nevertheless, when we look at our income from retail life financing activity, excluding CPI, we see continuous trend of improving and growth in that element. And that is very important because we obviously cannot control the inflation itself. So that is the first element, inflation. The second element that you see that affects the increase in our NIM is, let's say, replacement of securities that we had. We sell some securities in 2024 and replaced it with other securities with higher interest rates. So we locked in higher interest rates for the future. That's the second element that supported the increase in the NIM. And obviously, the increase in the core activity, you mentioned right, the liability side, but as well, the asset side. As for trends, in the asset side, I won't talk about prices, obviously, because we are in a competitive market, and I want to be cautious. But obviously, the segments that we operate in are highly competitive. Mortgages are highly competitive, corporate, and other elements. So our ability to create, let's say, positive effects on that depends on our service, depends on our product, and engagement with our customers. Okay, thanks very much. The next question is from Valentina Stoykova of Barclays. Please go ahead. Hello. Thank you. Thank you very much for the presentation. Most of my questions have been answered, but I do have two more. My first question is on cost of risk. Where do you see the cost of risk by the end of the year, and which segments of your loan portfolio are most affected? And then my second question is on the recently proposed measures that aim to increase competition in the banking sector. Is that something that worries you? Do you have any preliminary estimates on how big the impact will be for you? And do you plan to change your current strategy, and in what aspects? I think that's my questions. Shalom, Valentina, and thank you for your questions. Firstly, to the question about cost of risk. It needs to be explained what we did in the last quarter and the first half. The growth or the cost of risk reflects two elements, the growth in our portfolio and our conservative approach relating to the uncertainties. You can see that our allowance is about ILS 8.3 billion, but more than 95% of it is collective allowance. That implies our very prudent and conservative approach. Most of the expense that you see reflects the growth and the conservative approach. So let's say so far, it was for the second quarter, I think 26 basis points, not from individual provision, but mostly collective allowance. Looking at the future, it depends on the change in geopolitical situation and uncertainties. As long as we will see improvements in both geopolitical situation and uncertainties, obviously, we will evaluate it and compare it to our current level of provision, which is relatively in a good position with very good buffers. Questions that we have been asked all the time, should someone expect, let's say, reverse? It depends on the situation. Obviously, we have buffers. Obviously, we are prepared for any scenario, even negative scenario. But happily, as for now, the scenario is the positive one. If, let's say, the situation will be improved and the development will be in positive trend, then we will consider, let's say, some reverse, but it is too early to say. It can be gradual, but it should reflect the economic situation. So that is for the first question about, let's say, provisioning. As for regulation, let's say the regulator and the parliament released some initiative. I do not think we are not too worried because we are not dealing with worrying, we are dealing with being prepared. We are monitoring the developments. Like past developments, Bank Hapoalim proved that it has the ability to, let's say, cope with different situation. We think that competition is very good for the customers, very good for Bank Hapoalim and the participants. The latest initiative is something that we monitor, and we will be prepared for any scenario. If you ask about, let's say, the regulation regarding, let's say, additional tax on banks for this year or benefits related to the war. I will note that our numbers for the second quarter already include this effect. Thank you. Thank you very much. That is very clear. If there are any additional questions, please press star one. If you want to cancel your request, please press star two. Please stand by while we poll for more questions. There are no further questions at this time. This concludes the Bank Hapoalim second quarter 2025 results conference call. Thank you for your participation. You may go ahead and disconnect.