Earnings Call: Q4 2024

Mar 3, 2025

Summary

2024 delivered 13.8% ROE, 8.9% credit growth and improving asset quality despite a ~ILS 600m retirement-plan charge. Targets for 2025–26 call for ILS 8.5bn–9.5bn net profit and at least 50% payout, subject to conditions.

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim fourth and full year 2024 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 Annual Report Presentation. All participants are at 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 March 3rd, 2025. With us on the line today are Mr. Yadin Antebi, CEO of Bank Hapoalim, 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 filings with the various securities authorities. Mr. Antebi, would you like to begin? Good afternoon to you all. I am excited and honored to lead my first conference call as the CEO of Bank Hapoalim. For those of you whom I haven't had the chance to meet yet, I was appointed CEO six months ago. I joined the bank 11 years ago as the CFO, and later served as the head of Financial Markets division of the bank. Amongst my previous roles, I served as CEO of Dash Investment House, and before that, as the head of Capital Markets, Insurance, and Savings, and the Supervisor of Insurance in the Ministry of Finance of Israel. This morning, we reported our results for the fourth quarter and full year of 2024, along with another significant step we are taking to enhance transparency for our shareholders. We have published our financial targets for 2025 and 2026, which I will elaborate on shortly. Before that, I want to emphasize that the bank's current performance, its very strong market position, and its significant potential for further improvement give me great confidence in our ability to achieve these targets. I am starting on slide 4. 2024 was a good year for Bank Hapoalim operations, 13.8% return on equity, nearly 9% credit growth diversified across all sectors, and at the same time, we distributed 40% of our profits currently in line with the Bank of Israel guidelines. This is also reinforced by our CET1 capital ratio of 11.8%, reflecting the significant capital buffers we have built, as well as the excellent quality of our credit portfolio, as evidenced by our NPL ratio. On slide 5, we detail our financial targets for this year and 2026. 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%, and profit distribution at the rate of at least 50% or more through cash dividends or buybacks, subject to the guidelines of the Bank of Israel. The key assumptions for these targets are detailed in the next slide and include a market implied BOI interest rate and inflation, and our forecast for GDP growth. We also clarified that the targeted profitability did not take into account two non-recurring events which might be relevant. The recording of the insurance reimbursement in the amount of $135 million U.S. before tax, and future realization of our real estate assets, the main ones of which are Prime located in Tel Aviv. We have also updated our strategic focus areas, detailed on slide 8 as follows. One, growth in sales. Two, leadership in customer service and fairness. Three, Bit, a successful app as a driver of innovation. Four, operational efficiency, and five, lastly, Gen AI and AI. Regarding growth in sales on slide 9, as the largest retail bank in Israel with probably the highest volume of interactions with customers, while our customers show up at our branches and call us hundreds of thousands of times a month, they log into our digital and web channels over 30 million times a month. We intend to leverage a strong engagement in our various channels, many digital and web, to offer our customers additional products and services. In the next slide, we discuss our mortgage operation, in which we intend to increase our market share through a reorganization of the operation model to be customer-centric, updating the compensation models of the mortgages bankers, expanding the types of transactions to also include complex ones, and leading a significant leap forward in our service. Moving to slide 11, in our business banking operations, where Bank Hapoalim is a market leader, we aim to accelerate the growth of the book, particularly in our real estate and infrastructure segments. To support this growth, we will improve our processes to shorten SLA response times and step up the pace of new customer acquisition. Another area of business where Bank Hapoalim is a leader is our capital markets operation on slide 12. We aim to maintain this position going forward to continue to be a leader in brokerage and trading, and to drive further growth of Poalim Equity, our private investment arm. Moving to discuss Bit on slide 13. Bit is a proven success story with its over 3 million active customers, constituting roughly 70% market share in Israel. Bit just introduced two new developments, which are in fact two new revenue streams. Based on this evolutionary development, we aim to continue to offer additional products and services that make it even easier for our customers to manage their finances. On slide 14, we discuss operational efficiency. We have already taken the first step and introduced an early retirement plan at the end of 2024, through which 770 employees will leave the bank in the coming 4 years. This will bring a 300 million shekel cost saving when the plan is concluded. We have further potential to also cut other expenses by simply implementing stricter cost control measures, including closer oversight of our large budget. Lastly, on Gen AI and data on slide 15, I want to bring the wealth of technology available today into the bank's processes and workflows. Data can be used in almost everything we do, and we have already adopted several use cases in the areas of loan underwriting and personalized offers. In addition, by capitalizing on our economies of scale, we have an opportunity to integrate Gen AI into our day-to-day operations, improve the efficiency of our processes, and accelerate code development. In conclusion, before I hand over to Ram Gev, our CFO, we are committed to rigorously executing our strategic focus and meeting our financial targets, supported by the positive macroeconomic environment and the importance we place on creating value for our shareholders. Thank you for your trust and support as we build a stronger and more successful bank. Ram, please go ahead. Thank you, Yadin. Good afternoon to you all. I am starting with slide 17. We are concluding 2024, a year that was undoubtedly unique for the Israeli economy. The economy demonstrated remarkable resilience, and as a leading bank, we were there for our customers. We are closing the year with strong results, delivering a consistent double-digit return on equity. At the same time, today we are presenting significant and diversified growth. Alongside it, we have maintained and even improved the high quality of our portfolio. Our NPL ratio declined to 0.59% and is well covered by a more than double allowance. Our strong capital and liquidity ratios are well above our targets, and we continue to distribute dividends and execute share buybacks. In slide 18, we can see that the bank ended 2024 with a return on equity of 13.8%, reflecting its high underlying profitability and the growth of its activity. It is important to note that these results are after recording significant expenses of approximately 600 million shekels in the fourth quarter related to the employee retirement plan we introduced last December, which reflects our commitment to long-term operational efficiency and will have a meaningful cost-saving effect in the coming years. Naturally, these expenses impacted our bottom line and return on equity, but even with that effect, our full-year reported results continued the trend of a mid-double digit return on equity. I will further elaborate on this later. Next, let's talk about our credit book on slide 19 and 20, with a focus on its diversification and strong growth. Credit growth reached 8.9% in the last 12 months and 3% in the last quarter, boosted by the resilience and recovery of the Israeli economy. Growth was recorded across all segments. The corporate book, which led the momentum, saw high demand for credit in the real estate and financial services segments. Slide 21 and 22 demonstrate the impact of this growth among other factors. Our financing income grew 3.2% in 2024, driven by the growth of the book, a higher CPI contribution, and profits recorded from investments in shares and buyback of bonds. On the next slide, we present the quarterly results where we can see the continuous growth in our top line. Excluding the impact of the difference in CPI between the fourth and the third quarters, income from regular financial activity increased by 5.3%, affected by the growth of the book. Moving to slide 23, where we show our unique income diversification. Alongside interest income, fees also saw notable growth. It should be noted, as we disclosed over the last year, that fees growth was partially offset by benefits granted to our customers as part of our war-related support. On slide 24, we present expenses. The main factor impacting annual expenses and the cost-income ratio is the aforementioned retirement plan of approximately 600 million shekel. Expenses also reflect an increase in donations, provision in respect of legal proceedings, and IT expenses. Salary and related expenses, on the other hand, declined as a result of the 200 million shekel bonus paid in 2023 in respect of the collective wage agreement. On the quarterly expenses, the increase is due to the aforementioned items, as well as an increase in end-of-year adjustments for performance-based bonuses. On slide 25, we present the improvement in productivity ratios, where income and the credit portfolio grew consistently over the years, while the number of employees gradually decreased. Slide 26 presents the provision for credit losses. In 2024, the provision was driven by an increase in the collective allowance for credit losses due to the growth of the credit portfolio during the year, as well as our prudent approach in view of the continued war-related uncertainties. In addition, automatic charge-offs increased. On the other hand, income was recorded in respect of the individual allowance as a result of recoveries from a small number of borrowers. In the fourth quarter, we continued to increase the collective allowance, albeit at a slower pace than in previous quarter, to reflect the continuation of the war-related uncertainties and the high credit growth during the quarter. In addition, unlike previous quarters earlier in the year, the bank recorded an 85 million shekel net individual provision due to an increase in specific provisions and lower collection of individual debts. On slide 27, we take a look at the quality of our credit portfolio, which continued to improve. On the left-hand side, NPL balances declined, so that the NPL ratio dropped to 0.59%. The NPLs are well covered by more than double the provision, bringing the NPL coverage ratio to 255%. On the right-hand side, the total balance of allowance for credit losses slightly declined due to some write-offs, but the collective allowance continued to grow, now standing at 7.6 billion shekel. On the bottom of the slide, we also highlight the real estate sector risk parameters, which point to our tight underwriting, demonstrated by the very low exposure to LTV ratios over 80% in land financing, and a 2.44% allowance buffer allocated to this segment. Our deposit base on slide 28 continued to be strong, with 57% of total deposits attributed to the retail segment. Among other factors, this explains our relatively low reliance on capital market funding, as described in the bottom graph. Another very important parameter to follow is the share of non-interest-bearing deposits, which in the last year seemed stable at around 26%-28% of total deposits. Liquidity ratios continue to be well above targets, and the LDR is 77%. Now let's move to slide 29. The CET1 capital ratio stood at 11.8%, while our minimum internal target is 10.5%, and the minimum regulatory requirement is 10.23%. Our solid capital position derives from strong organic capital generation capabilities. Shareholders' equity grew 10.9% this year, supported by strong profitability. Both the total capital ratio and the leverage ratio are comfortably above minimum requirements. Now moving to slide 30. This quarter, we continue to declare distribution of 40% of net profit through our ILS 372 million cash dividend and ILS 250 million buyback. This is in line with the Bank of Israel conservative guidance regarding capital distribution in a period of war-related uncertainties. However, it's important to emphasize that in its decision, the board of directors considered the guidelines of the Banking Supervision Department and noted the potential ability of the bank to distribute a higher percentage of its profit. In view of the significant capital surplus that exists at the bank in relation to the capital requirements. The board of directors and the board of management of the bank will aspire, among other methods, with due attention to the financial goals of the bank, as stated in the section business strategy, to increase the distribution policy, subject to the guidelines and directive of the Bank of Israel, and the full relevant circumstances, including geopolitical conditions, the growth of the bank's operations, the results of its operations, and more. In respect of the last four quarters profits, total dividend paid or declared is ILS 2.3 billion, reflecting a 4.5% dividend yield, which along with the ILS 750 million buyback, provides our shareholders with a high return. On slide 31, we remind you of the future relocation to our new best-in-class headquarter building, Poalim Center, which will result in a process of selling our own properties. Some of these have undergone a betterment plan that substantially increased building rights and therefore incorporates future value. Before I summarize the key takeaways, I will briefly review the macroeconomic environment on slides 32 and 33. GDP growth totaled 1% in 2024, which is a contraction of 0.3% in GDP per capita. But considering the circumstances, we can say it's better than we could have expected. One reason for that is probably the fact that the majority of firms and households did not experience a substantial deterioration in their economic situation, mainly as a result of government policy. Another strong parameter is the labor market, which continued to be tight, with wages growing at a fast rate. Looking ahead, assuming the ceasefire lasts, we expect some rebound in the coming quarters, mainly, but not only, in the construction industry. GDP growth is expected to reach about 3.3% in 2025. Risk premiums dropped in the fourth quarter as markets started to digest the chances for ending the war in the north and negotiations in the south. However, the current level is still high, probably pricing in a possibility of resuming the war. The annual inflation rate increased in January to 3.8%, partly due to contribution of the VAT increase. However, the tight labor market still poses some risk for inflation. In terms of interest rates, the market now implied two rate cuts in the second half of the year to a level of 4%. To summarize, today we introduced financial targets for the years 2025 and 2026. Net profit of ILS 8.5 billion-ILS 9.5 billion. Return on equity of approximately 14%-15%. Annual credit growth of approximately 7%. Distribution of at least 50% of net profit, subject, of course, to Bank of Israel guidelines. We concluded 2024 with strong profitability despite the high expense for retirement. Credit growth was strong, almost 9%, and diversified, while the quality of the book improved. NPL ratio is down to 0.59%. Our capital continues to be strong. This quarter, we distributed 40% of net profit considering Bank of Israel guidelines to the banking sector. Lastly, the board elected Noam Hanegbi as the new chairman of the bank last month. Noam brings extensive experience with the bank and the Israeli banking sector as a whole. We extend our best wishes for his success and for the success of the bank. With that said, let's open the call for your questions. Back 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. Please stand by while we poll for your questions. The first question is from Chris Reimer of Barclays. Please go ahead. Yeah. Hi. Thanks for taking my questions, and congratulations on the quarter. First off, I was wondering if you could comment maybe on the Bank of Israel framework, announced last week, where they suggest setting aside extra funds for customer relief, and how might that compare with any of the programs you have in place? Hi, Chris. Thank you for the question. This is Yadin. Actually, we got it only Thursday afternoon, but of course, we intend to understand it and fully comply with Bank of Israel's expectations. We will probably introduce them to the public in a few weeks. I'm not sure. They didn't publish the timeline yet. But yes, we intend to follow their expectations, and I think that will be the right way to deal with them. Got it. Yeah. Looking at slide 6, your assumptions for your targets, can you give us any color on the reasoning behind your assumptions and if they were to change, perhaps how that might affect the targets? We published the main assumptions, as you probably saw, meaning the BOI interest rate and inflation, GDP growth, and the way we look at other income. It's a tricky question because if you change one element, that always reflects on other elements. We didn't do that exercise. But of course, you can get different flavors from different growth rates or GDP growth rates. So, I think it's quite clear if you put a few different assumptions in. Got it. Okay, thanks. That is it for me. Thank you. The next question is from Priya Rathod of Jefferies. Please go ahead. Hi, everyone. Thank you for taking my question. Just one on capital, please. I appreciate your comments regarding you taking guidelines from the Bank of Israel, but going forward, what mix of share buyback and dividend are you currently assuming to reach that 50% payout ratio? Or better, how should we think about the mix going forward to reach that target? Thank you. Thank you, Priya, for the question. As you know, today, we are paying out 40% dividend, where 250 million shekels goes to buybacks and the rest to cash. Looking forward, we do believe that we will be able to convince Bank of Israel in terms of the following quarters to increase the dividend payout. It, of course, relates to the macro conditions, and we, of course, understand Bank of Israel's consideration of being very conservative at this stage. Going back to your question, looking forward, I think that the ratio between buyback and cash will depend on the amount of dividend that we can pay out and, of course, on the different market conditions and what we believe or what we see within the stock. So, we will have to follow up on your question in the next quarter. Perfect. Thank you. The next question is from Valentina Stoykova of Barclays. Please go ahead. Yes. Thank you very much for the presentation. My first question is on your outlook for net interest income and NIM trajectory. So how do you see margins developing this year? Then I have another question regarding your Tier 2 call option. I was just wondering how you are thinking about it. Do you see the market conditions good enough to refinance the bonds this year, and will it be in local or international markets? Any color will be very much appreciated. Thank you. Regarding the margins, we have different assumptions internally for different scenarios. It of course, goes back to different segments and the way they act as different market conditions evolve in terms of interest rates and inflation and credit demand and deposit demand. It is a little bit difficult to answer your question looking forward. Regarding the second question regarding the call option, I think that we follow best practice of other banks in the world, and because of the fact that we know that we want to build the right relationship with the market, we will do all that is possible not to change market expectations in terms of calling back the Tier 2 capital. 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 fourth and full year 2024 results conference call. Thank you for your participation.