| Lior Shilo, Bank Analyst, IBI Investment House
Discount Bank (TASE 🙂 published on Wednesday the fourth good reports of 2021. On the face of it, these were lower than our estimates, but the main difference is due to expenses for credit losses.
The return on capital amounted to 10.2%, and excluding some non-recurring items 13.1%.
| Highlights from the report:
- Strong credit growth at a rate of 4.5% compared to the previous quarter – the growth was exactly in the places where Discount emphasizes, which shows the adherence to the strategic plan.
- Expenses for credit losses were negative (i.e. revenue), but the coverage ratio implies that there is not much left to repay. Therefore, it is likely that some will return later this year.
- Total revenues grew by 12.7% compared to the corresponding quarter and expenses grew by about 6.5%. In the one-time neutralization, revenues grew by 10.5%, compared with a 3% decrease in operating expenses. This means that the bank is focusing on efficiency and this is evident in the results.
- Discount’s financial margin neutralizing the index has risen thanks to the scattered growth in the mix seen above.
Above all, the Bank has published a strategic plan until 2025 with ambitious goals: a return on capital of 12.5% ​​or more, an operating efficiency ratio of 55% and below, an annual profit of NIS 3.5 billion and over and a 30% dividend policy with the option to increase it.
According to our model, the bank may reach these targets under relatively favorable macro conditions, noting that the bank did not share its assumptions about the macro environment.
Overall, the current likelihood of 2-4 increases and the high inflation that is likely to be maintained in the short term against the background of geopolitical events will be a backbone to the Bank’s results.
In light of these things, we raised the bank’s representative return, with the strategic plan strengthening this assumption to 11%.
Therefore, we update our target price to NIS 24.8 and remain in the recommendation of an excess return for the Discount share.
| A little about discount reports
Interest income grew by 1.6% compared to the previous quarter and increased by 12% compared to the corresponding quarter despite the index differences between the comparison quarters
Excluding the index, interest income increased by 6.3% compared to the corresponding quarter.
Although non-interest-bearing financing income remained the same for the corresponding quarter, it should be noted that Discount Capital’s contribution was significant and accounted for approximately 65% ​​of revenues.
The commissions remained the same as in the previous quarter, due to the fact that ICC’s impact on commissions is high and the third quarter is usually stronger seasonally.
The operating efficiency ratio was 71.2%, but excluding non-recurring items was 62.1%. Still high, but mainly due to seasonally high expenses in the fourth quarter.
The net profit amounted to NIS 529 million, of which the bank distributed 20% as a dividend.
The capital adequacy ratio remained stable at 10.14%, about 0.95% above the regulatory requirement.
| The Bottom Line
Overall a good report for Discount, when the publication of the strategic plan pushed gave a boost to the stock.
| The return on capital of Bank Leumi – above the forecast
Bank Leumi (TASE 🙂 also published the fourth quarter on Wednesday and in fact closed the banks’ reporting season.
The bank posted for the fourth quarter with a return on equity of 14.8%, above our forecasts.
Undoubtedly, Bank Leumi presented the strongest reports in the system in the current quarter, when beyond the expression in the share price last night, a number of interesting points were presented:
- The credit portfolio showed good growth in all sectors, with most of the growth in the business sector leading to a proportionate erosion in the margin.
- Expenses for credit losses were positive, but the coverage ratio in the balance sheet indicates a significant pillow that will further moderate the provisions over the coming year.
- The nostro profits along with the growth in commission income more than Haifa on the sale of Leumi Card (Max) over the period.
- And the most prominent point – streamlining, streamlining, streamlining. Despite revenue growth over the past few quarters, spending remains low.
- The high capital adequacy ratio allows the bank to grow and distribute high-volume dividends.
Beyond the above, there is the improvement in the macro data – raising future interest rates and inflation that seems to keep rates high.
A combination of these two things will greatly contribute to the bank as its sensitivity to the index is high and of course raising interest rates contributes to the bank’s profits once on the revenue side (interest) and a second time in reducing actuarial liabilities.
Hence, we We update our target price to NIS 39.1 per Leumi share and raise the recommendation for an excess return.
| A little about national reports
Interest income decreased by 4.4% compared to the previous quarter and increased by 15.2% compared to the corresponding quarter due to index differences between the periods.
Excluding the index, interest income rose by 2.8%. It should be noted that Leumi’s exposure to the index has risen even more in the current quarter, which will give a boost to the results in the coming quarters.
Non-interest financing income increased by 34% compared to the previous quarter as a result of increases in the markets during the quarter.
Commissions grew by 11% compared to the previous quarter, mainly due to an increase in capital market commissions, conversion differences and financing transactions.
On the expenditure side, there was an increase of 1.1% compared to the previous quarter, which was mainly due to seasonal expenses. Wages remained the same as in previous quarters
The operating efficiency ratio was 47.9%, a fourth consecutive quarter with a ratio of less than 50%. Unusual figure.
Net profit amounted to NIS 1,470 million, slightly lower than the previous two quarters but numbers are still very impressive.
The credit portfolio grew by 5.2%, mainly in the business sector, but there was also good growth in the other sectors.
The financial margin eroded slightly compared to the previous quarter due to the high growth in business credit along with the continued rapid growth in deposits during the quarter (7.3%)
The bank reported a dividend distribution of 40% of last quarter’s profit.
| The Bottom Line
Bank Leumi continues to implement its strategy well with gradual growth in revenues alongside control over expenditures.
We will also mention that in the second quarter the Bank is expected to complete the sale of BLUSA, which will yield a high one-time profit of around NIS 650-750 million gross, a 5% -6% contribution to the return on capital in the quarter.
The author is a banking analyst at IBI Investment House. The review is based on information published to the general public by the companies reviewed in it, as well as on assessments and estimates and other information that the IBI investment house assumes to be reliable, without conducting independent tests in relation to the information. IBI, the reviewers and its editors are not responsible for the reliability of the information, its completeness, the accuracy of the data contained in it or any omission, error or other defect in it. This review does not constitute investment advice and does not constitute an invitation to purchase or an order to sell the securities mentioned in it. Therefore, the information contained therein should not be relied upon and does not replace independent judgment and obtaining professional advice that takes into account the data and special needs of each person. IBI Investment House, its employees and members of its Board of Directors may hold the securities and / or financial assets described in the review.