Edited Transcript of POLI.TA earnings conference call or presentation 19-Mar-20 3:00pm GMT

Before I hand over the call, I would like to note that this is the first annual financial report of our new CEO, Dov Kotler, who began his term less than 6 months ago and smoothly took over this complex low-fascinating leadership role. Though we are very happy for you to be here with us today, I want to thank you for all your impressive achievements thus far and wish you the best of luck with the upcoming challenges we are going to face in the future. Also, we have a new CFO, Ram Gev. Ram was the CFO of Isracard during the past year. And we are lucky enough to have him on board. Thank you, Ram. I want to thank our stakeholders, investors, employees, regulators and the public, and most notably our customers for putting their trust in Bank Hapoalim. I have no doubt that with the strong leadership of Dov, the support and guidance of the Board of Directors, the professional execution of the management team and with our dedicated employees, we’ll be able to confront and course any challenge and cross any challenge we’ll face in the future and continue to be the leading financial institution in Israel.

With that said, I want to thank you all for your attention and pass on the call to Dov. Dov?

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Dov Kotler, Bank Hapoalim B.M. – CEO & Member of the Board of Management [3]

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Thank you, Oded, and good afternoon, everyone. I understand that we have guests all over the world, especially competitors. So also welcome to our competitors that are listening to this call. Thank you very much. I am pleased to join us — to join you on this call, which is my first as a CEO of Bank Hapoalim. I would like to start by taking the opportunity to thank the Board of Directors as well as Oded, our Chairman, for the trust in appointing me as the CEO of the bank. This is also an opportunity to thank Arik Pinto, my predecessor, for his 40 years of service and contribution to Bank Hapoalim.

This is not an ordinary analyst call. We are publishing our annual results only weeks into the beginning of a global pandemic that is quickly becoming a global financial crisis, with significant economic and social turmoil. The initial effect of corona already reflected in our results for the first quarter, but it is difficult to assess the full magnitude of this crisis and it’s still unfolding.

A previous draft of my comments prepared only a couple of weeks ago highlight the strong results of our core business, and I would emphasize. We succeeded in our work on improving our retail credit portfolio cutting retail provision and focusing in highly quality credit. We’ve also increased the size of our mortgage portfolio by more than 10%. Our corporate and commercial credit portfolio continued its solid responsible growth, while diversifying our risk assets.

The new economic situation is creating significant dislocation in the global and Israeli economy. We are already seeing its impact in our financial statement as stated in the immediate report that we published today on the matter. First and foremost, we are here to service and support our customers in good times as well as in difficult times. I can assure you, we can — we have the resources and determination to fulfill our promise in a responsible manner.

In recent weeks, we have offered tailored deposits product, deferred mortgage payments and awarding government secured loans program for small business and increase the use of ways to deliver financial product for our customers who cannot reach our branch as well as other initiatives. It goes without saying that the global economy is undergoing a major dislocation, yet allow me to quote Major Kilgore in the movie Apocalypse Now. “Someday, this war is going to end. Life will go on.” Please remember this quotation. Pandemic as well as financial cases are tough, but they come and go. I am entirely dedicated to lift the bank through the crisis, and I’m confident of the bank abilities. My job, as a business leader, is constantly to build a better, more efficient, more resilient and a more profitable bank.

On a personal note, as Oded mentioned, I am completing my first 6 months in my office as CEO of the bank. Upon taking the role of the CEO, I set a few objectives to ensure long-term sustainable growth of the bank. I am glad to report that we have acted decisively to achieve these objectives. We made the necessary required organizational changes, we built a new HR division, we merged our innovation, strategic and bizdevs to one division, and tightened our management by the team — by reducing it by 20% to become a more efficient management.

We worked on regaining the confidence of our employees union and signed a new collective wages agreement. The new agreement is fair, while increasing the flexibility in areas such as technology and professional services. We continued our pursuit of becoming more efficient and announced a new efficiency plan for 2020 up to 2022, trying to reduce 900 jobs positions. We complied with the regulator requirement and completed our separation from Isracard. We rationalized our international activity, maintaining our focus in the U.S. middle market and finalizing the closing down most of our other subsidiaries.

Finally, as reported yesterday and by Oded, we invested immense effort in advancing the American tax investigation towards conclusion and reaching resolution with the United States authorities.

Preparing for the future, our Board of Directors approved a strategic plan for the next 3 years. We perceived the bank’s success in continuing digitization, while keeping a position of leadership in lending. We are well positioning and maintained the responsibility growth of our portfolio, taking an advantage of particular pockets of growth, like mortgage, et cetera.

I wish to conclude my comments by saying that I wake up every day with a strong sense of privilege by leading the exceptional financial institution that, by the way, next year, we’ll celebrate 100 years, amazing. I am certain of the energies and capabilities of the bank to adversity in the situation. I want to thank our dedicated employees whose efforts and professionalism make this bank a pillar, an important one, in the Israeli economy. Our people and dedication and commitment during the difficult times are notable.

I will now pass to Ram Gev, our new CFO, to discuss our financial results. Thank you very much. Ram, the floor is yours.

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Ram Gev, Bank Hapoalim B.M. – CFO & Member of Management Board [4]

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Okay. Thank you, Dov, and good afternoon, everyone. My comments today will accompany the presentation that can be accessed on our website. So let me start with Slide 3. I would like to begin by addressing the financial aspects of the initiatives related by Dov in his comments. The successful signing of a new collective wage agreement in January had an impact on the fourth quarter of onetime expense in the amount of to NIS 210 million. As you all know, the collective agreement was announced in parallel with a new 3-year efficiency plan, whereby 900 employees will leave the bank in 2020 till 2022 on the basis of voluntary retirement. I’m reminding you that this efficiency plan is our fifth in a row. It reflects our determination to reduce costs to the most competitive levels. The net effect of the plan on shareholders’ equity was NIS 352 million as of the end of 2019.

The completion of the separation from Isracard in the form of distribution of dividend in kind fulfilled also our obligation under the soon performed. As we already announced, the distribution will adversely impact the results of this first quarter of 2020 by about NIS 109 million, mostly due to market-wise fluctuations. Nevertheless, the full transaction of the sale was profitable one. We recorded a profit from the sale offering of the lion’s share of the company.

Yesterday’s announcement regarding the U.S. tax investigation was of great importance to us. We are moving towards leaving the bank from a significant burden in resources and management attention. The negotiated resolution called for the bank to pay $870 million. This required us to provision an additional $259 million in the last quarter, which is approximately NIS 900 million. I’d like to remind you that the negotiated resolutions are subject to reaching agreed upon final terms as well as receiving the necessary approval at each of the U.S. authorities.

In my perspective, one of the most important takeaways from this is that we now have more attention towards cultivating the bank’s core. We can dedicate the necessary resources and attention towards steering the bank through the challenges at hand with focus on the recent economic disruption of the coronavirus. As with any evolving event, where uncertainty of its duration and magnitude is great, my experience is that the entry point of an organization into the situation is of paramount importance. And Bank Hapoalim is a strong financial institution, and our starting point is one of strength and resilience.

We are well capitalized with strong liquidity parameters and hold a portfolio of assets, which have been considerably derisked in recent years. Because of our reporting date of today, we are able to take into account the most current information about the evolving events, while making our estimates of their effects on our loan portfolio and give our shareholders a transparent picture. As a result, we recorded in our statement today, a top-up to the ongoing provision for credit losses that affected net profit by NIS 450 million.

Looking ahead, because of the great deal of uncertainty in both, it is difficult to determine the full future effects. Naturally, there is a correlation between the length of the event and the potential impact on the economy. The sum of all the development, I just mentioned, significantly impacted the bank’s ROE and profit for 2019 as indicated in Slide 4.

With that said, let’s move ahead and look at how we grew our business fundamentals in 2019. I’m happy to report on our responsible business growth in 2019. We were able to grow our main business line, maintain NIM and make further steps in reducing the risk parameters of our retail loan book. We remained focus on our cost base, driving efficiency and maintained a robust capital base, ending the reported period with a CET1 of 11.53%.

As you can see on Slide 6, in 2019, the bank continued to lead the domestic banking system with the largest credit portfolio in Israel, presenting a 3.7% growth, this while ensuring its diversification and differentiated risk parameters. Next slide outlines the responsible growth in commercial and corporate credit, in line with the bank’s risk appetite. The 3.3% growth in income reflects the lower risk profile of the loan book in these segments.

Looking at consumer lending and small business on the next slide, the bank continued to focus on improving the credit quality and reducing the risk profile of both these segments, as we have been doing in the past 2 years. While these efforts have affected growth, the improved underwriting and risk evaluation processes have been contributing to the overall reduction in credit losses in this segment, which declined by 52% and 24%, respectively, allowing us to increase net income in these segments. And retrospectively, this way, it better positions our portfolio for these events.

Finally, looking at housing loans on Slide 9. In 2019, Bank Hapoalim grew its mortgage portfolio by over 10%, all the while, maintaining our rigid loan parameters. The majority of our portfolio consists of Bank Hapoalim customers, and it’s characterized by relatively higher income populations and low-risk indicators. I would like to also point out that the Israeli mortgage market is conservative in nature and highly regulated.

Moving to Slide #10. The bank is also well positioned in the area of deposits. 65% of deposits at the bank are retail deposits with strong stickiness. This important financing source grew by 2.3% in 2019.

Now let’s look at our financing activity for the quarter on Slide 11. Total financing profit came close to NIS 10 billion, which reflects the overall growth in the bank business activity and strong financing spread of certain segments.

Moving to Slide 12, I already said to the adverse effect of the coronavirus on the bank results that are also reflected in the increase in problematic debt. Bear in mind, balances recorded for 2019 includes the virus effect up-to-date of publication of our financial statements.

The same is reflected in the NPL ratio. As you can see on Slide 13, noting that the bank is still tracking at relatively low levels compared with historical benchmark. Likewise, credit losses on the next slide, Slide 14, reflect the impact of the provision made in respect of a number of borrowers related to sectors that have so far been affected by the coronavirus or its derivatives in the various markets.

In the next couple of slides, I would like to cover key aspects of our efficiency program, which remains an important strategic focus for Bank Hapoalim in 2019. You will note on Slide 15 that the bank continues to reduce headcount with an additional decrease of over 460 positions this year, marking an impressive 27% decline in headcount since 2012. Looking forward, the bank will continue to reduce headcount in line with its recently announced efficiency program, whereby over 900 employees will voluntarily retire in the next 3 years.

Moving on to operating expenses on Slide 16. Overall expenses this year were primarily influenced by the material update of the provision in respect of the investigations of the U.S. authorities. They also include significant legal and other costs associated with the investigations. Onetime costs resulting from the new wage agreement and costs associated with the closure of the bank’s private banking activities in Switzerland. The majority of these costs will not be accompanying us in 2020. Looking at our cost profile indicate that the bank has been able to restrain expenses, most of all of which is the continued reduction in wage costs.

Moving on to our capital base, following the material effect I mentioned on our fourth quarter, the bank recorded a common equity tier 1 capital ratio of 11.53%, higher than both its regulatory and internal threshold, a strong asset to have during these times.

I would like to leave you with a few concluding remarks. Today’s results demonstrates the Bank Hapoalim is a strong financial institution, managed with great responsibility and experience. This crisis, too, will end. And I am certain Bank Hapoalim will weather the storm.

Before we take your questions, I want to emphasize that this event is changing all our daily lives. We are personally affected, our families are affected. The way we do things are affected, our social lives are affected. We no longer — if you think about it, we no longer open doors the same way we did. But what we can safely say is that as it’s related to cooperate and economy, scale, scope and a healthy business fundamentals matters.

I conclude on a personal note, the most important thing at this moment is the safety and health of yourself and your loved ones. Stay safe and healthy. We are all together in that.

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) First question is from Tavy Rosner, 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. With regards to dividends, you put the distribution on hold due to the investigations. Can we assume that once the authorities sign off on the settlement, you will resume dividend distribution? Or Maybe due to the corona situation, the Bank of Israel may ask that you hold off for the time being?

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Dov Kotler, Bank Hapoalim B.M. – CEO & Member of the Board of Management [3]

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We assume that Bank of Israel will release the ability to give dividend after signing the agreement with the authorities, but my belief is that as the CEO — as a responsible CEO, it’s too early to consider additional dividend until we’ll understand the full implication of the corona. And this will be my recommendation at this stage.

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

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Okay. And can you give us some color on the traction you’re seeing for the Bit application? And what’s the business model for that down the road?

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Dov Kotler, Bank Hapoalim B.M. – CEO & Member of the Board of Management [5]

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Bit application is growing too fast because of the corona and the mid — while you are in your houses growing fast. We are concentrating in having the largest market share in the Israeli market. There is a business model going forward. But at this stage, we’re focused on our market share.

I assume that competitors are listening to me, so I’m giving a short answer, with your permission.

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Operator [6]

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Next question is by 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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Can you just discuss on the — so the credit charge, so probably that is NIS 450 million for coronavirus. The credit charge is still NIS 150 million to NIS 200 million higher than what we were thinking for the quarter. Were there any specific provisions on the corporate side? Apologies if you may have mentioned this earlier. I had a few issues dialing in, but that would be helpful, any color.

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Dov Kotler, Bank Hapoalim B.M. – CEO & Member of the Board of Management [8]

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I will try, but Joe, if I understood correctly your question, you are focused on the NIS 450 million allowance for the corona, specifically. Did I understood correctly?

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Joseph Dickerson, Jefferies LLC, Research Division – Head of European Banks Research & Equity Analyst [9]

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No. If I look at the total impairment charge, and I back out the NIS 450 million for the coronavirus, the number was still a couple hundred million higher than I might have thought. So I was wondering if there was something on the corporate side that was specific in the quarter around any given names?

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Ram Gev, Bank Hapoalim B.M. – CFO & Member of Management Board [10]

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I’ll take that question. Thank you, Joe. You have to take into consideration that the NIS 450 million is the net effect. Before tax, it’s about NIS 680 million. So if you take our overall credit losses expenses for 2019 and deduct from it the NIS 680 million, you will be around NIS 600 million. That is very similar to what we had in 2018. So if you look at our statement overall…

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Joseph Dickerson, Jefferies LLC, Research Division – Head of European Banks Research & Equity Analyst [11]

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That clears it up for me. So I didn’t appreciate it was an after-tax number. So that clears it up for me. I understand now.

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Operator [12]

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Next question is by Micha Goldberg of Excellence.

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Micha M. Goldberg, Excellence Nessuah Brokerage Services Ltd., Research Division – Head of Research & Banking Analyst [13]

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First of all, congratulations on standardizing on the U.S. investigation. And I guess, the whole 2019 wrap up, an exception at that time, but congratulations anyhow. A couple of questions, if I may. First of all, could you try and maybe detail for us a little bit what you view to be the most exposed segments and sectors in the current economy that could suffer from the ongoing current coronavirus impact?

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Dov Kotler, Bank Hapoalim B.M. – CEO & Member of the Board of Management [14]

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Micha, frankly, I will try to answer this question from a different angle totally. In my position, I am more focused and worried about my business continuity to service the customer base, thereby we are trying to support our employees with all the rules and regulation, so we can keep them safe. Mainly the technology division should be working in full power. And if I would rank my highest role is the technology ability to service. And so far, I’m pleased to say that this is being handled properly, and we’re ready for the next stage of the quarantine, if it will be imposed on the Israeli market. So this is — on contrary to what you are asking is my main trouble, and I am glad to said that it’s being handled properly. By the way, we have reduced, as of yesterday, our staff substantially and we still maintain a nice level of service to the customer base.

Going back to your question, as we said in our report this morning, it’s too soon to analyze all the industries in the Israeli market. This quick pace between the adoption of this virus and our — and today, which are a few days, we focus our efforts in 3 industries, as we publish; energy, transportation and hotels and tourism. And in those fields, we go to the conclusion that we have to have additional allowance of net NIS 450 million, which is about NIS 600 million or so growth. And this is what has been accomplished in the last few days. Don’t forget that we are the third bank that have already put in the books allowance before any other banks so far. Going forward, I believe that between today and the next quarter that we will publish, either sometime during May, we will have much more accurate tools to assess the risk, specifically in each industry or in the level of customers specifically, but it’s too early to assess it a bit today, and this is the reason we’ve published the immediate report this morning.

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Micha M. Goldberg, Excellence Nessuah Brokerage Services Ltd., Research Division – Head of Research & Banking Analyst [15]

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Okay. Thank you very much. First of all, very much comforting that you are definitely caring importantly about the business to continue and the support IT and — in certainly a country that’s pretty down. Just on the 3 segments — sectors that you mentioned, energy, transportation and tourism, is there anyway you guys can give us an indication with — the size of the exposure there is?

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Dov Kotler, Bank Hapoalim B.M. – CEO & Member of the Board of Management [16]

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Unfortunately, Micha, this is a very legitimate question, and I would like — I would love to answer you personally, but we are strictly but we are strictly with the answer that we are not able to expose such specific numbers, either on a specific borrower or on a specific industry at this stage.

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Micha M. Goldberg, Excellence Nessuah Brokerage Services Ltd., Research Division – Head of Research & Banking Analyst [17]

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Okay, okay. I appreciate it. Another question. You mentioned just now that you already have been reducing your staff and just remain — I think, it’s supposed to be down to 70% out of the office, I think. Does that mean they’re on lease without payment? Or is that — how does that work? And how does that impact both your services to the public and all European offices?

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Dov Kotler, Bank Hapoalim B.M. – CEO & Member of the Board of Management [18]

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At this stage, let’s say that it’s — I believe it’s 35% of the workforce. They are being paid out of the relief allowance. It’s not — it’s under their expense than the bank expense. But going forward, we’ll have to rent a different arrangement with the employees, it cannot work on a long-term basis. So far, the understanding of the bank management for the next few weeks, and then we will assess the situation.

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Micha M. Goldberg, Excellence Nessuah Brokerage Services Ltd., Research Division – Head of Research & Banking Analyst [19]

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Okay. Thank you very much for that.

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Dov Kotler, Bank Hapoalim B.M. – CEO & Member of the Board of Management [20]

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How is everything in Dutch, in Berlin, in Amsterdam, in Ireland?

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Micha M. Goldberg, Excellence Nessuah Brokerage Services Ltd., Research Division – Head of Research & Banking Analyst [21]

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I think things seems to be a little more relaxed in Israel, but since I’m in Israel.

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Dov Kotler, Bank Hapoalim B.M. – CEO & Member of the Board of Management [22]

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Let me assure, you, Micha, that my son is working in Amsterdam for a bank, a small bank by the name of ING, it’s not a small, it’s a huge bank. And everyone there is at home, working out of the office. They don’t — they are not in the offices for a few weeks, for 10 days already. So it’s similar to us.

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Micha M. Goldberg, Excellence Nessuah Brokerage Services Ltd., Research Division – Head of Research & Banking Analyst [23]

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Yes, I think we’re doing okay. Thank you very much for comforting us all.

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Operator [24]

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(Operator Instructions)

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Dov Kotler, Bank Hapoalim B.M. – CEO & Member of the Board of Management [25]

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The time are very intensive times, so everyone is focusing in other matter. So I would like to thank everyone for attending the meeting, and I want to wish best of luck to our competitors again. And hopefully, everyone is in good health. Best of luck to everyone. Thank you, guys.

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Operator [26]

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This concludes the Bank Hapoalim Fourth Quarter and Full Year 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.