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Edited Transcript of POLI.TA earnings conference call or presentation 15-Aug-19 2:00pm GMT

Q2 2019 Bank Hapoalim BM Earnings Call

Tel Aviv Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank Hapoalim BM earnings conference call or presentation Thursday, August 15, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ofer Koren

Bank Hapoalim B.M. - CFO, Head of Finance, Senior Deputy MD & Member of the Board of Management

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Conference Call Participants

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* Chris Reimer

Barclays Bank PLC, Research Division - Analyst

* Joseph Dickerson

Jefferies LLC, Research Division - Head of European Banks Research & Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Q2 2019 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 Q2 2019 Results Presentation. (Operator Instructions) As a reminder, this conference is being recorded August 15, 2019.

Our speaker today is Mr. Ofer Koren, CFO. Also with us today are Mr. Ofer Levy, Chief Accountant; and Ms. Karen Mazor, 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 and 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. Koren, would you like to begin?

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Ofer Koren, Bank Hapoalim B.M. - CFO, Head of Finance, Senior Deputy MD & Member of the Board of Management [2]

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Thank you, operator. Good afternoon, everyone, and thank you for taking the time to join us on the call today. My remarks today will accompany the presentation that can be accessed on our website, starting with Slide 3.

Before we look at the financial results of the second quarter, I would like to begin with an overview of a few recent developments. Firstly, as reported, in mid-July, the Board of Directors of the bank result to appoint Mr. Dov Kotler as the next CEO of the bank, replacing Arik Pinto, who will be retiring following 4 years with the bank. Dov's appointment is subject to the approval of the supervisor of the bank. Following the approval, Dov is expected to take office from the 1st of October this year.

Also recently, S&P has rated its long and short-term issue credit rating for Bank Hapoalim to A+/A-1 impressively. Separately, Fitch Rating upgraded the bank's short-term rating to F1+.

Recent months have also been marked by several digital initiatives that positioned the bank at the forefront of digital banking activity in Israel. One of which is the launch of Israel's first fully digital on-boarding application, which allows customers to open a new bank account in just 7 minutes from the comfort of their home. The app is one of the many initiatives of the bank to gradually digitize daily banking activities.

We have also significantly enhanced B2C and e-commerce offering with the signing of 2 new insurance companies and its roster of insurance. We have reembarked their brand claims directly via Bit. This, in addition to adding Bit as an official online payment option for Domino's Pizza and Cinema City. This day, Bit is nearing 2 million customers, solidifying its position as Israel's leading payment app. Recognizing this and many other of the bank initiatives that turned the bank-wide industry recognition, including some of the most prestigious industry awards for best banking brand, best payment app and friendliest bank for local SMEs.

Moving on to look at the financial results for the quarter. Slide 4 outlined several items as they have affected this quarter's results. The sale of Isracard contributed ILS 137 million from net profit. They now include ILS 210 million of capital gain, offset by reduction to market price at the end of the reporting period in the amount of approximately ILS 73 million. Also, as a result of this sale, ILS 3.6 billion of credit balances that have previously been consolidated were recognized, increasing credit balances in the corporate segment. The recognition mandated collective provision of ILS 47 million, negatively affecting credit losses for the quarter.

Profits from the sale as well as the reduction in risk-weighted assets associated with Isracard contributed an increase of 0.3% in the bank's CET1 ratio. In addition, the sale of the bank shares in the automated banking services company, SHVA, benefited gross profit by ILS 65 million. The quarter also incurred an income of ILS 158 million on the back of the positive CPI.

This quarter, we made an important step forward in the closure of our international private banking operation in Switzerland and Luxembourg, with the signing of an agreement with Hyposwiss to transfer our remaining assets. The agreement as well as other expenses associated with the closure, added ILS 76 million to the quarter's operating expenses, and it will allow the bank to expedite the closure of these offshore activities into further reduction in their costs.

Separately, legal and other expenses associated with the investigation of the U.S. authorities in the amount of ILS 111 million continued to weight on the quarter's results, reflecting the extensive efforts of the bank -- that the bank continues to make in this regard as it continues to pursue an active battle with the DOJ.

Importantly, we'll continue to operate with significant capital surpluses. We ended the quarter with a CET ratio of close to 12% versus our internal target of 10.75%. This surplus has accumulated mainly as a result of the sale of Isracard and by the fact the bank has not paid dividends for a while.

Slide 5 provides a snapshot of the P&L for the quarter. Net profit for the second quarter stood at ILS 871 million and ROE of 9.3%. This compared with a net profit of ILS 821 million and ROE of 9% in the previous quarter.

Next, looking at the vast core business parameters on Slide 6. The bank's core business continues to track well. Looking at the growth parameters, the bank continued to focus on differentiated profitable credit growth in various sectors led by housing loans, which grew in the first half of the year by 5.3%, and commercial credit, which grew by 3.2%. It has also continued to show growth in financing income while maintaining a healthy market. Net provision for credit losses of 0.44% were relatively higher this quarter and non-indicative of our recent run rate. This, mainly on the back of some exceptional provisions made this quarter. That said, as demonstrated by the low NPL ratio, the underlying quality of the bank's credit portfolio remains high.

Costs continue to be a strategic focus. Although we continue to bear heavy legal and other costs associated with the U.S. investigation, the bank presented another efficient quarter, with cost income ratio of 57.5%. Underlying these parameters, the bank continues to sustain significant capital surplus, as I mentioned earlier.

Next, on Slide 7, overall credit balances grew by 2.2% compared with year-end balances, reflective of the bank's differentiated growth strategy in different customer segments as can be seen on the next slide. Of note is the continued strong growth in housing loan and commercial credit this quarter, growing over 5% and 3%, respectively, compared with year-end balances. These 2 segments continue to be strategic growth segments for the bank.

Corporate credit balances grew 5.3% since year-end. These balances include, as I mentioned earlier, previously consolidated loans provided with total.

Finally, looking at consumer lending and small businesses, the bank continues to direct underwriting and other efforts of reducing the risk profile of both these segments. While these efforts have affected growth, improved underwriting and risk evaluation process have been contributing to the overall reduction in credit losses in the retail activity.

Moving to Slide 9. Retail deposits continue to maintain the lion's share of the bank's total deposits, and the base of expanding structure grown to ILS 232 billion at the end of the quarter and comprising 66% of its total deposit base.

Looking at our financing activity for the quarter on Slide 10. The bank presented strong growth of 4.1% in income from regular financing activity compared with the second quarter of 2018. Income from these activities totaled close to ILS 2.6 billion this quarter, reflecting the overall growth in business activity and increasing financing spreads to these segments.

Moving to Slide 11. The quality of the bank's loan portfolio remained strong, as NPL levels continue to track at low levels. NPL for the first half of the year stood at 0.81%.

Moving to Slide 12. We note an increase in problematic debt. Also, this continue to track relatively low balances. Total problematic debt in the period has risen, maybe on the back of the -- of an increasing special supervision, as I alluded earlier. While imperative, representing the more severe of the levels, declined in the second quarter.

Next, on Slide 13. As I mentioned, credit losses this quarter were relatively higher than our recent run rate, reflecting the cumulative impact of some exceptional items on this quarter's result, mainly an increase in the collective provision spending from the classification of certain loans under special supervision and an increase of ILS 47 million in the collective allowance associated with the first time inclusion of Isracard's credit balances.

Slide 14 looks at operating and other expenses. Excluding special items mentioned on this slide, total expenses have remained relatively flat Q-on-Q, with continued adoption in wage cost, offset by other expenses and provisions for share-based compensation and bonuses related to higher share, price and ROE. Cost income ratio for the quarter stood at 57.5% despite the hefty legal costs associated with the investigation of the U.S. authority.

Finally, on Slide 15, a look at the capital resilience of the bank. The bank continued to maintain a strong capital base, ending the quarter with a Common Equity Tier 1 capital ratio of 11.97%, well above regulatory and internal targets.

With that said, let me open the call for any questions you may have. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Tavy Rosner of Barclays.

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Chris Reimer, Barclays Bank PLC, Research Division - Analyst [2]

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This is Chris Reimer on for Tavy. I was wondering if there's any update you can share with us with regards with the investigations with the DOJ.

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Ofer Koren, Bank Hapoalim B.M. - CFO, Head of Finance, Senior Deputy MD & Member of the Board of Management [3]

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Thank you for the question. We continue to fully cooperate in advanced negotiations to the extent possible. Other than that, information regarding the investigation is detailed extensively in the financial statement of the bank. And anything that can and should be disclosed is available there. So at this phase, we can only say that things are progressing, and we are fully cooperating and -- in the purpose to bring it to an end.

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Chris Reimer, Barclays Bank PLC, Research Division - Analyst [4]

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Okay. And also, I'd like to ask about the decrease in fees, considering it seems to be a reduction beyond the exclusion of Isracard. And is that just a cyclical effect? Or are there some other trends contributing to that?

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Ofer Koren, Bank Hapoalim B.M. - CFO, Head of Finance, Senior Deputy MD & Member of the Board of Management [5]

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Actually, in this quarter, we had an increase in fees compared to the first quarter. However, the level of fees is a bit lower than the average of 2018. I think that some of it is cyclical and some of it is related to trends. One in particular is the fact that we are digitizing and a lot of our customers are moving to digital, which means that some of the fees are moving from a face-to-face fees, which are higher to digital fees, which are lower. But at the same time, this is what allows us to cut down our costs. So we look at that as a positive trend.

And then an example for the other, which is a bit cyclical, is the capital markets fees, which have decreased a little bit due to the fact that I still recall, in the last quarter of 2018, there were pretty bad capital markets, so the balance has decreased. And as we look at the average balances, it took some time to bounce off -- to bounce back, sorry. So you still don't feel the full recovery. However, the balances have recovered and even increased over what we had in the last quarter of 2018. So this should come back.

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Operator [6]

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The next question is from Joseph Dickerson of Jefferies.

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Joseph Dickerson, Jefferies LLC, Research Division - Head of European Banks Research & Equity Analyst [7]

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I just -- it's just a technical one, really, or a steer, if you will, which is on the tax rate. Where should the tax rate be headed? Because it seems like it's been coming down from something in the 40s that you reported into the high 30s. Should we be plugging in mid-30s in the out years? Some steer there would be helpful. And then just on the kind of corporate credit loss experience. I appreciate that there may have been 1 or 2 single names. But I guess how do you see that -- how do you see the backdrop for corporate credit quality playing out over the rest of the year? Do you expect anything based on what you're seeing to transpire in terms of provisions? Or is it going to be back to more of the recent run rate over the past couple of quarters in terms of the P&L charge for corporates?

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Ofer Koren, Bank Hapoalim B.M. - CFO, Head of Finance, Senior Deputy MD & Member of the Board of Management [8]

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Thank you for the questions. Regarding the tax rate, I would say that average rate should be around the regulatory rate, which is the mid-30s. There are sometimes some quarterly influences, but over time, that should be the average tax rate.

And regarding the credit losses, as I mentioned in the call, credit losses this quarter were relatively higher, but in our view, not indicative of the recent run rate that we have been witnessing. And that should reflect some exceptional items on this quarter's results. And as I said, it's mainly an increase in the collective provision on classification of certain loans and the special supervision and an increase in regards to Isracard's credit, which is really technical.

So basically, we are not seeing any change in trends. And on the contrary, some of our key indicators are improving. So we look at it as an -- in ordinary exceptional items this quarter.

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Operator [9]

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(Operator Instructions) There are no further questions at this time. This concludes the Bank Hapoalim Q2 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.