Earnings Call: Q1 2025

May 19, 2025

Summary

Q1 net income rose 25% YoY to ILS 2.4bn, with 16.4% ROE and broad-based credit growth. 2025–2026 targets remain ILS 8.5bn–9.5bn net profit and 7% average annual loan growth, subject to macro and regulatory conditions.

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim First Quarter 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 First 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 May 19, 2025. With us on the line today are Mr. Ram Gev, CFO, Mr. Victor Bahar, Chief Economist, and Ms. 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 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. Gev, would you like to begin? Good afternoon to you all. I am happy to review the bank's first quarter results. As we can see on slide 3, we are starting 2025 with very strong momentum of robust profitability, significant growth, and continued solid balance sheet metrics. Clearly, the first quarter's results exceeded our expectations and are on track with regard to our guidance, positioning us well as we navigate the rest of the year. Return on equity for this first quarter was 16.4%. Net profit is up 25% versus the corresponding quarter. The cost-to-income ratio is 35.0%. Credit growth, 2.7% in the last quarter, 10.8% in the last 12 months. Total income, 3.2% versus the fourth quarter, 11.8% versus last year. On balance sheet, CET1 ratio at 11.74%. NPL ratio dropped further to 0.52%, and LCR at 128%. On slide 4, we see the net profit return on equity and earnings per share development. This quarter, net income was ILS 2.4 billion, and the EPS came in at ILS 1.83, reflecting the positive jaws we created, as I'll discuss in the next few slides, as well as a ILS 0.3 billion tax income due to liquidation of Hapoalim Switzerland. On the other hand, we recorded the special war tax expense, as we did in 2024. Next, let's talk about our credit book on slides 5 and 6, with a focus on its diversification and strong growth. Credit growth reached low double-digit growth in the last 12 months, supported by a pickup in demand for credit among households and businesses. Growth was recorded across all segments. The corporate book, which led the momentum, saw high demand for credit in several segments such as the real estate industry and commerce and financial services economic sectors. Slide seven presents our financing income. Total financing income grew 2.3% in the quarter, driven by the growth of the credit book, asset portfolio rollover, or in other words, asset repricing, duration extension of the portfolio, and a higher CPI contribution. Financing income is growing over time, even excluding the CPI effect. Moving to slide eight, where we show another strong earnings lever of the bank. Fees are up 6.2% in the last quarter and 9.2% in the last 12 months, driven mainly by growth in account management, credit card and securities fees, as well as lower benefits granted to customers in connection with the war. It's important to mention that on March 30, 2025, the Bank of Israel issued an outline of relief to assist customers during 2025 and 2026, which has been voluntarily adopted by the banking system. The total sum of benefits to be provided by the banking system is ILS 1.5 billion per year, of which the bank has announced a series of grants and benefits in the amount of ILS 400 million per year, beginning in the second quarter of 2025. On slide nine, we present our disciplined cost management. Operating and other expenses dropped by 29.1% compared to the previous quarter, as in the fourth quarter, the bank recorded a ILS 597 million expense for an early retirement plan. Excluding the retirement plan, total expenses decreased by 10% versus the preceding quarter due to some end-of-year expenses recorded in the previous quarter. The increase in income, coupled with the aforementioned decline in costs, led to a cost-to-income ratio of 35%. Moving on to discuss provision for credit losses and the quality of our book on slides 10 and 11. Provision for credit losses amounted to ILS 262 million, or 0.23% of our credit book, driven by a ILS 293 million provision in respect of the collective allowance and net automatic charge-offs. The increase in the collective allowance was due to the growth of the credit portfolio, as well as reflecting potential impacts of the change in the economic, political, and security landscape in Israel. 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. On the left-hand side, NPL balances consistently continue to decrease, so that the NPL ratio dropped to 0.52%. The NPLs are well covered by almost triple the provision, bringing the NPL coverage ratio to 293%. On the right-hand side, the total balance of the allowance for credit losses continued to grow to ILS 8.1 billion, where the vast majority is the collective allowance, which increased to ILS 7.7 billion. The allowance to loans ratio continued to be high at 1.75%. Our deposit base, on slide 12, continued to be strong, with 57% of total deposits attributed to the retail segment, despite a slight decrease in the last year. The share of non-interest-bearing deposits continues to be relatively stable, now standing at 26% of total deposits. Liquidity ratios, LCR and NSFR, continue to be well above the minimum requirement. Now let's move to slide 13. The CET1 capital ratio stood at 11.74%, while our minimum internal target is 10.5%, and the minimum regulatory requirement is 10.23%. This reflects a ILS 6.3 billion capital surplus above our minimum internal target. Our solid capital position derives from strong organic capital generation capabilities. Shareholders' equity grew 11.4% this year. Alongside the high profitability, the CET1 ratio was also impacted by the substantial RWA growth. Both the total capital ratio and the leverage ratio are comfortably above minimum requirements. I am moving to slide 14. This quarter, we continue to declare a distribution of 40% of net profit through a ILS 720 million cash dividend, ILS 0.55 per share, and ILS 250 million share buyback, a total distribution of almost ILS 1 billion. This is in line with the Bank of Israel conservative guidance regarding capital distribution in a period of war-related uncertainties, which still prevails. In respect of the last four quarters' profits, total dividends paid or declared is ILS 2.2 billion, reflecting a 3.7% dividend yield, which, along with the ILS 1 billion buyback, provides our shareholders with high returns. On slide 15, we see our financial targets for this year and 2026 as published in March 2025. Net profit in the range of ILS 8.5 billion-ILS 9.5 billion in each of the years. Return on equity in the range of approximately 14%-15% in each of the years. Growth of the credit portfolio at an average annual rate of approximately 7%. Profit distribution at a rate of at least 50% or more through cash dividends or buybacks, subject, of course, to the guidelines of the Bank of Israel. The key assumptions for these targets are detailed in the annual report. Before I summarize the key takeaways, I will briefly review the macroeconomic environment on slides 16 to 19. Considering the current geopolitical environment, economic performance has been more than satisfactory. In the first quarter, GDP expanded at an annual rate of 3.4%, and excluding the effect of net taxes on imports, GDP growth was actually 5.4%, and that despite shifts in fiscal policy and a hike in tax rates. The labor market remains tight, indicating continued demand for workers. Inflation stood at 3.6%, still above the target, partly driven by the recent tax hike. Regarding monetary policy, market expectations have adjusted, now anticipating one or two interest rate cuts by the end of the year. To summarize, our first quarter results of 16.4% return on equity constitute a strong opening of the year and position us very well as we navigate the rest of the year. Financing income and fees grew nicely due to the growth in customers' activity, asset portfolio rollover, and duration extension. The strong growth in credit was broad-based across segments and economic sectors. Credit quality continued to improve, and the NPL ratio dropped to 0.52%. Our capital is organically growing at a double-digit rate, allowing us to continue to distribute the current maximum of 40% of net profit. With that said, let's open the call for your questions. 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. Please stand by while we poll for your questions. I repeat, if you have a question, please press star one. The first question is from Tavi Rosner of Barclays. Please go ahead. Hi. Good afternoon. Thanks for the presentation, and thanks for taking my questions. First question, you just mentioned the current limitation with regards to dividends and buyback. I was wondering if you have any thoughts around when the Bank of Israel might lift those restrictions. What do we need to see in terms of macro and war environment before we could see that going higher? Hi, Tavi, and thank you for your question. First, like I mentioned, we distributed 40% of net profit, nearly ILS 1 billion, a significant amount. Like we mentioned in our guidance, we have the ability and the aspiration to go higher than that, to 50% and even higher. But it is subject to the guidance of Bank of Israel and instructions. Bank of Israel this quarter as well, capped the dividend payout ratio for the whole sector for 40%. The reason is the same reason that characterized the last quarters, and this is the level of uncertainties that Bank of Israel see in the geopolitical situation and risk to the economy due to the uncertainties. So answering your question, it depends about the level of uncertainty and how Bank of Israel will see it. As long as the level of conflict will be lower, the economy will perform well, and the risk that maybe Bank of Israel will think reflected, the market will be lower, then they will evaluate it. But they are taking the decision quarter by quarter. So it is hard to say what is the timeframe for the change, but it will depend on the uncertainty. By the way, the Commissioner of Banks gave today an interview, I think, about that, and he mentioned the uncertainty and that they will evaluate it over time. That sounds cool. I wanted to get your broad view around the outlook next couple of quarters. You do not guide by quarter, but assuming that the war stays in the same kind of pace and magnitude that we are seeing at the moment, do you think you guys can continue to deliver the same amount of loan growth that we have seen over the past couple of quarters? We grew 2.7% this quarter. What is important is not only the momentum, it is the broad-based growth over all segments. If I, taking this quarter, let us say, the fourth quarter of 2024, which was characterized by 3% growth, then it is very impressive growth. The opening of the year is very strong. Like you mentioned, we published a guidance talking about on average for the next couple of years, 2025 and 2026, of 7% on average growth in the portfolio. It is based on assumptions of the growth on GDP and inflation. So, as long as, let us say, the economy, the GDP growth, inflation will be on that trend, then the basic assumptions under our guidance is still there. If it will be even better, there is even a potential for more. But basically, we are ready to catch any opportunity. We have enough capital. We have a surplus in liquidity and capital to be ready for different opportunities. Like I mentioned, it is based on the status of the economy, GDP growth, and inflation. If the economy performs well, then we are well on track with the growth. Great. Thank you. If there are any additional questions, please press star one. If you wish 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 first quarter 2025 results conference call. Thank you for your participation. You may go ahead and disconnect.