Bank Hapoalim B.M. (POLI) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the Bank Hapoalim Second Quarter 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. [Operator Instructions] As a reminder, this conference is being recorded August 11, 2026. With us on the line today are Mr. Ram Gev, CFO; 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, 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'm 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 continued to be very low at 0.5%. 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 profit 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 2 quarters have been affected by the special tax, which on an annual basis will have a 1.3% to 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 the 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 from 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%, the 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 nonregular 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's substantially up quarter-on-quarter from 2.49% to 2.70%, affected mostly by the CPI while being adversely affected by the aforementioned rate cuts 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 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 #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 our 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 effect of fast 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 billion 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, 2/3 of them conduct the primary banking activity with other banks. B2B 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 in vacating and sell the current properties. Before we conclude, a quick reminder of our financial targets and a brief macro update. For 2026, we are targeting net profit in the range of ILS 8.5 billion to ILS 9.5 billion with return on equity between 13% to 14%. Looking ahead to next year, we return to our original return on equity target of 14% to 15% with net profit increasing to ILS 9.5 billion to ILS 10.5 billion. For both years, we are planning growth of 8% to 9% on average, and we continue to target a payout ratio of 50% to 60%. The underlying assumptions, including the impact of the special bank tax are outlined on 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 consumptions and investments. The labor market is tight and the broadening of growth probably relies on improved productivity. Inflation in [ second quarter ] was affected by the strength of the shekel and its year-on-year level 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 [ reached ] Israel and the 10-year bond is trading 80 basis points below the U.S. treasury. So 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.

[Operator Instructions] 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? And looking ahead, when we can expect some provision release?

Okay. Thank you for the question. The bank has a high-quality credit portfolio as reflected across all key asset quality indicators. And at the same time, we built a meaningful reserve buffer throughout the war periods as a prudent measure given the elevated uncertainty. And 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 level without exceptional effects. I mean there was no material reserve release or recoveries 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 charge-offs as well as portfolio growth. As you know, the portfolio expense, the collective provision naturally grows as well and impact the quarterly expense line. I think it's also worth noting that the bank delivered a strong 15% return on equity this quarter despite maintaining this conservative provisioning approach. Looking ahead, it's hard to say what will be the reverse methodology or whether it will happen because it depends on the circumstances and conditions, economic and geopolitical. As long as situation will be stabilized, we will consider that, but it's early to say.

The next question. Expenses were down versus the same quarter last year and broadly flat quarter-over-quarter. What drove that? And 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, and 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 remained 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 severance-based retirement model, which is expected to reduce actuarial expenses by several tens of millions of shekels annually. And 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% to 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 economy, including infrastructure, real estate, financial services and broader capital market activity across various financial products. Growth is significant for the first half of the year. We have our targets or guidance that we published and we talk about 8% to 9% growth. The figures for the first half certainly give us a very good feedback for our strategy and confidence in achieving our targets. It's 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 on growth. So in short, it's giving us a 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 this year, when we will see our actual growth compared to the guidance we gave, we will consider updating guidance for the next year as long as we see this quarter.

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? And what can you share on trends so far in Q3 across sectors or customer segments?

Thank you for the question. The answer is still we have a very good liquidity base. We don't see any impact of the war. We have a well-diversified funding base. We actually have the largest retail deposit base in Israel with a strong liquidity. LCR stood at 126%. As for the impact of the war on credit quality, so as you know, the Israel economy performs very good, performs well during the war. Actually, we are almost 3 years in kind of a war situation, and the economy perform as well. Obviously, the war has an impact on the economy, deficit, et cetera, that the government and other will have to handle. But we don't 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. And 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 don't see material impact on a specific element. Obviously, there are some sectors that are more sensitive to a war situation, but we don't see a material effect yet commenced.