Net Profit: NIS2.2 billion for the second quarter. Return on Equity: 16.4% for the second quarter. Total Income Growth: 12.6% quarter-on-quarter. Cost Income Ratio: Improved to 36.7%. Credit Book Growth: 1.2% this quarter, 4% over the last 12 months, totaling NIS416 billion. Credit Losses: Income of NIS49 million, equivalent to minus 5 basis points of total credit. Allowance Reserve: NIS7.8 billion, with NIS7.1 billion as the collective allowance. Liquidity Coverage Ratio (LCR): 134%. Net Stable Funding Ratio (NSFR): 127%. CET-1 Ratio: 11.96%. Retail Deposits Growth: 1.8% this quarter, 5.7% over the last year. Share Buyback Plan: NIS1 billion to be executed in the next 12 months. Cash Dividend: NIS645 million declared for the quarter.

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Release Date: August 14, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

Bank Hapoalim BM (BKHPF) reported a strong net profit of NIS2.2 billion for the second quarter, with a return on equity of 16.4%. The bank achieved a 12.6% quarter-on-quarter growth in total income, contributing to an improved cost-income ratio of 36.7%. Despite the ongoing war, the Israeli economy and the bank's operations have shown impressive resilience, with continued growth in various segments. The bank announced a NIS1 billion share buyback plan to be executed over the next 12 months, reflecting confidence in its financial position. Credit quality indicators have improved, with a decrease in non-performing loans (NPL) ratio to 0.82% and a strong allowance reserve of NIS7.8 billion.

Negative Points

The ongoing war has increased fiscal pressures, with the budget deficit expanding to 8.5% of GDP, posing economic challenges. Inflation remains a concern, with uncertainty around its future path due to tight labor markets and wage growth not aligning with price stability. The bank's risk-weighted assets grew by over 4%, while credit only grew by 1%, indicating potential inefficiencies or increased risk exposure. The S&P sovereign rating downgrade impacted the bank's capital ratios, adding pressure to maintain strong financial metrics. The Bank of Israel's current limitations on payout are affecting the bank's ability to increase return on equity, despite having excess capital.

Q & A Highlights

Q: What is the outlook for potential loan loss provisions in the second half of the year, assuming the macroeconomic situation does not deteriorate? Also, is there scope for an increase in dividend payout in the second half? A: (Ram Gev, CFO) We have built significant reserves, mainly in the third and fourth quarters of 2023, and the economy is more resilient than expected. If the situation does not deteriorate, we feel comfortable with the current reserves. Regarding dividends, we have a large capital surplus and can potentially increase distributions if the situation improves and uncertainty decreases.

Q: The tax rate was 38%, similar to last quarter. Does this mean there were no DTA gains this quarter? A: (Ram Gev, CFO) There was some income from tax assets, but it had a relatively minor effect.

Q: Risk-weighted assets grew by over 4%, yet credit grew by only 1%. What accounts for this difference? A: (Ram Gev, CFO) The growth in risk-weighted assets is partly due to the S&P sovereign rating downgrade, which affected risk assets by a few billion. Additionally, risk assets are influenced by off-balance items like credit lines and guarantees.

Q: Can Bank Hapoalim release corporate group collections, or is this not currently allowed by the Bank of Israel? A: (Ram Gev, CFO) The level of uncertainty is high, so both the Bank of Israel and banks are cautious with allowances. It's too early to release or reverse allowances, even though the economy is performing better than expected.

Q: Are there ways to utilize excess capital to increase return on equity, aside from dividends or cash payments? A: (Ram Gev, CFO) We are looking for opportunities to deploy excess capital, mainly through growth in core business areas like syndication and infrastructure financing. Demand for credit is currently lower than pre-war levels, but we expect decent demand in these areas.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.