Bank Leumi le-Israel B.M. (LUMI) Earnings Call Transcript

Good day, everyone, and thank you for joining Bank Lumi's Conference Call for the Second Quarter of 2026. Joining me today are Mr. Hanan Friedman, President and CEO; and Ms. KagitArgov, CFO and Head of the Finance Division. The presentation accompanying this call is available on the bank's Investor Relations website. At the conclusion of the presentation, we will have a Q&A session. Before we begin, I would like to remind you that the conference call may include forward-looking statements, while actual results may be different. I would also refer you to the disclaimer on Slide, which applies equally to this call. I will now hand it over to Mr. Hanan Friedman, Hanan, go ahead.

Hello, everyone, and thank you for joining us today. We concluded that the second quarter with strong results. Net income reached above ILS 2.8 billion, marking the highest quarterly net income ever recorded by an Israeli bank. Our ROE in the second quarter was 16.3%, among the highest in the sector. Every quarter we present our results and discuss our strategy, which is built around technological leadership and the adoption of AI that enables us to differentiate ourselves from the competitors. There is one figure in our second quarter results that in my view, clearly reflects the impact of the consistent execution of this strategy. I'm referring, of course, to Lumi's efficiency ratio, which was especially strong and stood at just 24.7% in the second quarter. This is the best efficiency ratio ever recorded in the Israeli banking system and one of the best globally, if not the best globally. Our second quarter efficiency ratio reached a record level, reflecting the strength of our operational model. While the efficiency ratio may naturally change from quarter-to-quarter, we expect to remain among the most efficient bank globally, supported by our disciplined approach to operating efficiency and cost management, as well as the consistent execution of our technology strategy and early adoption of AI tools. Our second quarter net income was impacted by the special Israeli tax imposed on all banks. Excluding the special tax, our ROE would have reached 17.9%. I would like to emphasize that the main impact of the special tax is in 2026 and it is expected to be nestable next year amounting ILS for the entire banking system, which means that our portion will be around ILS 40 million. For the first half of 2026, Lumi's net income was close to ILS billion, reflecting an ROE of 14.9%. These results are at the upper end of our strategic targets for 2026, which we published earlier this year. In addition, to delivering strong profitability, I would like to highlight the significant excess capital of about ILS 8.5 billion above our regulatory capital target. Beyond that, there is additional value within the bank that is not fully reflected in our reported financial statements. One example is our investment in Valley Bank where the current value is approximately 50% above its book value. This represents an unrealized gain of approximately ILS 1 billion. Furthermore, our provisions for credit losses also continue to reflect a conservative approach. This is driven in part due to the significant buffers we built at the beginning of the wall three years ago, which have not yet been fully released. Earlier today, we announced a dividend distribution and a buyback totaling to ILS 1.4 billion, reflecting a dividend yield of 5.5%. This represents the right balance between consistent shareholder return and capturing the growth opportunities we see this year, and we want to pick. And in fact, the strong growth continued into the second quarter. Our credit based portfolio grew by 3.4%, adding ILS 19 billion. In the first half of 2026, Lumi's credit portfolio grew by 9%. As a reminder, we set an annual credit growth target of 8% to 10% according to the figures that we published in January this year. In practice, within just 6 months, we have already reached our full year loan growth target. Growth was particularly strong in the corporate segment, with credit increasing by 14% in the first half of the year. We remain focused on growing in the segments we have identified as strategic for us, including infrastructure, real estate and mortgages. Infrastructure would include transportation, data centers and power stations are important growth engines for us. This is a strategic area supported by a strong and stable multiyear pipeline of projects. Just last month, a consortium led by Bank Lumi reached a financial close of nearly ILS 10 billion of financing for the Light rent project in the north of Israel. This is a project of strategic importance to the future of the transportation in Israel. We are proud to play a central role in its financing. It is important to emphasize that the growth in the credit portfolio is conducted in a responsible manner in line with our. It is carried out while maintaining strict underwriting standards and credit quality. That's an integral part of our business model and our technological capabilities. This is reflected in metrics such as our NPL ratio, which stands at just 45 basis points, an excellent level by international standards and among the lowest in the Israeli banking sector. Additionally, for the last 10 quarters, 10 quarters, we have recorded income from the specific provisions for credit losses, reflecting the high quality of our credit portfolio conservative risk management and advanced underwriting capabilities. As I mentioned, our efficiency ratio was particularly strong in this quarter, standing at 24.7%. This figure reflects a structural change in how we operate. It is here to stay. It is driven by the constant improvement of our platform through technological leverage and invent tools. We are accelerating this strategy by implementing more and more AI tools across the bank and the pace of adoption is ahead of our expectations and plans. Our successful implementation of AI was recently recognized by Evident which ranks financial institutions based on their adoption of AI. Evident, a global leader in Israel, ranked Lumi in June as the leading bank in Israel for AI adoption and one of the leaders globally. To accelerate development and implementation, we established Lumi's dedicated air center. Every AI project is measured against clear ROI targets, and we have many initiatives in our pipeline with projected returns. We started by focusing mainly on back-office functions and as you know, we closed already our operational division. We then expanded it into our contact center and service centers. Today, we are moving further into the business front line and to our Technology division, which is very important for us. As we continue on this journey, we see even greater potential than we have anticipated when we started. The transformation will take our capabilities another step forward, both on the business side and in the areas such as credit quality and further improvement in our cost structure. Our second quarter results demonstrate that Leumi is well positioned to continue executing this strategy and delivering on the ambitious targets we have set for ourselves. This also includes Lumi Partners, which made an important contribution to our strong profitability this quarter. We remain committed to responsible growth that is focused on returns while maintaining disciplined risk management. And now RagitaAgov, our outstanding CFO, will review the financial results in greater details. Agid, please go ahead.

Thank you, Jana. Good day, everyone. I'm very pleased and excited to be here with you today and to present our very strong results for the second quarter 2026. The next slide provides a summary of our key financial results for the quarter and the first half of the year, most of which Hanan has already covered. Before briefly touching on the macro environment, let me highlight our annual targets and the bank's progress in the first half of the year. As you can see, we are well on track to meet all our targets. And in credit, we have already succeeded in passing our annual target. With that, let's start with the macro analysis before moving to a detailed analysis. In the second quarter, following the ceasefire, the Israel economy continued its recovery. In the short term, uncertainty regarding economic developments remains high due to the geopolitical environment. However, positive developments on this front could support further growth during the year. The strong appreciation of the shekel helped moderate inflationary pressures. According to the latest forecast by the Bank of Israel, inflation in 2026 is expected to be 1.8%. Against this backdrop, the Bank of Israel reduced its policy rate at the beginning of July to 3.5% and projects a rate of 3% by the second quarter of 2027. Labor market remains strong and resilient, with the unemployment rate expected to remain low with an average around 3% in 2026. Finally, the Bank of Israel has revised up its 2026 growth forecast to 4% with even stronger performance expected in 2027 with GDP projected to expand to 5.5%. Moving on to the key drivers of the quarterly performance. Let's start with a detailed breakdown of our revenues in the second quarter. Net interest income in the second quarter was 4.6 billion, supported by volume growth and partly offset by a lower interest rate environment versus Q2 last year. Excluding CPI effect, NIM for the quarter was 1.9% compared with 1.95% for Q1 2026. The dip was mainly driven by lower interest rates and some compression in credit and deposit spreads with loan growth helping to partly compensate this impact. Noninterest income increased significantly to almost ILS 1 billion compared with ILS 0.4 billion in Q2 2025. This was mainly driven by gains from the sale of securities derivatives as well as income from investments in nontrading equities. Overall, year-over-year, finance income increased by 11.8% compared with Q2 2025. Total revenues in the quarter were ILS 6.6 billion versus ILS 6 billion in Q2 2025, representing a 10.1% increase. Turning to fees and commission income, quarterly fees increased by 2.8% year-over-year, partly affected by the benefits granted to customers as part of the Bank of Israel program. Excluding these benefits, fees grew strongly by 9.1%, supported by higher activity in financial transactions and securities as well as by FX differentials. We saw a similar trend in the first half of 2026 over the first half of 2025. This slide presents the expenses in detail and the preprovision net revenue for the second quarter. Higher performance-based bonuses in the quarter resulted in a 0.5% increase in salary costs compared with the paler quarter last year. This was partly offset by the continuing decrease in headcount. Total expenses were ILS 1.6 billion, similar to expenses in the Paraquat in 2025. Pre-provision net revenues increased impressively year-over-year by 13.4% to ILS 5 billion as we see here on the right. Looking at the first 6 months performance, the income side followed a similar trend to the 1 in the second quarter. On the expenses side, salary costs declined by 5.8% compared with F1 2025. And overall, expenses were down by 3.7%. This was mainly a result of the decrease in headcount and other expenses, thanks to our advanced technology and AI, as Ronan mentioned. Here, we can see the bank's excellent multiyear cost/income ratio. The cost/income ratio reached an especially excellent level in the second quarter at 24.7% driven by higher income and continued strict cost management. The cost income ratio for the first half of the year was also exceptional, standing at 26.7%. Let's now take a look at the credit loss expenses. On the specific provision side, we recorded income of ILS 4 billion. This continues the trend of an income from specific provision over the past 10 quarters, reflecting the strong quality of our credit portfolio. Collective provisions reflect the credit growth in the quarter. Overall, total credit loss expenses were 0.2% of gross loans, similar to Q2 2025, while maintaining our strong coverage ratio. This slide presents the high quality of our credit portfolio. Credit quality remained high in the quarter with the troubled debt ratio standing at 1.11% of gross loans. NPL was also at a low level of 0.45%. We maintained a strong coverage ratio, while the bank's provision for bad debt covers NPLs by almost 3x. These parameters remain among the strongest in the banking sector. Now we turn to our strong credit growth. Credit growth over the last 6 months was impressive at 9% with a 3.4% rise in Q2. The growth was focused on our target segments, mainly coming from the corporate segment, including infrastructure, real estate as well as mortgages and capital markets. On the deposits, total deposits were up 4.7% in 6 months. Liquidity ratios were strong with the liquidity coverage ratio standing at 122%, well above the regulatory requirements of 100%. We also maintain a healthy loan-to-deposit ratio of 78.8%. Next to slide provide they highlight our well-diversified portfolio mix and deposit base as well as growth across segments during the quarter and the first half of the year. Moving on to our solid capital ratios and the capital return. The core Tier 1 ratio was 11.65% compared with 11.74% in the previous quarter due to higher activity and well above the regulatory requirement of 10.23%. The total capital ratio increased to 14.43% compared with 14.07% in the previous quarter, supported by a Tier 2 bond issuance. Lumi also declared a total payout of this quarter of ILS 1.4 billion, which represents 50% of the quarterly net income. With that, let me conclude. Our results reflect a strong combination of profitability, efficiency and financial resilience, supported by solid capital. These parameters position the bank well to capture opportunities and deliver sustainable growth and long-term value for our shareholders. Thank you for your attention. With that, we will now be happy to take your questions. Thank you.

Thank you, Hagit. We will now begin the Q&A session. [Operator Instructions] The first question is from David Taranto from Bank of America. David, please unmute your microphone and proceed.

Good afternoon and congratulations on the strong set of results. I have 2 questions, please. First, corporate lending growth remains exceptionally strong. How would you characterize the competitive environment today? Are you seeing any signs of increased pricing pressure? Or does the market remain as disciplined as it has been in the recent years? And second question, Bank Leumi is generating mid-teens returns, Kerry's excess capital and has already delivered its annual loan growth target in the first half. . Looking ahead, where would you prefer incremental capital to be deployed, supporting faster growth or enhancing shareholder distributions? And what factors will ultimately determine that balance?

Thank you, David, for your question. So for the first question, -- we -- I will start with the second question, maybe it's better. We published our targets in the beginning of the year of loan growth of between 8% to 10%, but we always said that we will try to pick opportunities in the Israeli market since we believe there will be opportunities, mainly surrounding project finance because in Israel in this -- in the last years and in the years to come, there is a need for massive investments in infrastructure projects. We have uniqueness experience in this business. We have capabilities that are, I believe, are better than other players in the market and we are keen to take advantage of it and to have the right ROE for this -- from this business. Now as we always say, for us, ROE is before growth. We are, first of all, players of ROE and careful underwriting that is meeting our credit policy, our conservative credit policy. And then we look at growth. So ROE and high standards of quality of our loan book before volume. And this is the way we will continue to make our decisions. Regarding our excess capital. So since we still believe that it might be that later this year, we'll have additional opportunities that we will be able to pick subject to the 2 parameters that I just mentioned. We believe that we should, in the meantime, keep the excess capital that we have. We distributed this quarter, 50% of the net profit last quarter we distributed even more. And we believe this is the right balance in order to give us the opportunity to continue with healthy growth focused, as I mentioned, on our ROE ambitious.

The next question comes from David Kaplan from Sago. David, please unmute your line and go ahead.

Just a quick question on guidance. We see that your growth is already after half a year, pretty much at your full year targets. How do you see the second half of the year? Do you expect to be updating guidance anytime soon? And how should we think about where that growth is going to come from? Is it going to be as, I guess, a continuation of the previous question. focused again on corporate markets? Or are there other markets that you're looking at.