| Lior Shilo, Bank Analyst, IBI Investment House
The credit card company Isracard (TASE 🙂 published on Wednesday, below expectations, with a return on capital of 7.2%, compared to our forecast at the IBI investment house, which stood at about 10%.
| One-time events in the first quarter that affected the results of:
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An expense of NIS 10 million, resulting from the shortening of the contractual lease period in the sold Isracard house.
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An expense of NIS 7 million caused by the decision to stop operating the app for validation and payment for travel on public transportation.
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If one-time expenses were neutralized, the return on capital would have risen to a level of 9%.
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We at IBI remain at a target price of NIS 17.4 per share, on the recommendation of a market return.
| Key points from the Isracard report:
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The amount of Isracard’s active credit cards has decreased by 9,000 new cards – a decrease of 0.2% compared to the balance of the previous quarter. The balance of non-bank cards is reduced by the same rate.
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The volume of credit card issuance cycles increased by 14% compared to the corresponding quarter and decreased by 5.5% compared to the previous quarter. Recall that in the first quarter there was a decrease in activity due to the Omicron variant.
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Meanwhile, we note that starting at the end of the first quarter and into the second quarter there seems to be an increase in the volume of turnover – once due to the decrease in morbidity and limitations, and a second time due to the increase in the volume of tourism.
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The volume of transactions per card also decreased, by 5.7% compared to the previous quarter, after several quarters of increase.
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A look at credit card revenues shows that revenues from net businesses showed a decrease of 6.5% compared to the previous quarter as a result of the decrease in turnover, but also following the decrease in the cross commission starting in January 2022 in accordance with the reform.
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Revenue from credit card holders also declined, albeit by 5.5%, similar to the decline in turnover. It should be noted that as long as there is an increase in outbound tourism, this is expected to support foreign exchange commission revenues and improve profitability.
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Isracard’s credit portfolio showed lower-than-expected growth, at 3.4% compared to the previous quarter. The retail portfolio grew by 0.9%, while the business portfolio grew by 14.4%, showing optimism for the continuation after the portfolio was cut during the Corona crisis.
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Interest income remained the same as in the previous quarter and amounted to NIS 111 million. This is despite the portfolio’s growth apparently from minor erosion at intervals. Thus, although the interest rates on the balance of the portfolio remained relatively the same, the interest rates on transactions in the past month suggest high market competition and future erosion. On the other hand, it should be remembered that an essential part of Isracard’s portfolio is at a variable interest rate, so that raising the interest rate will contribute later.
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Expenses for credit losses amounted to 0.51% of the total debtors in respect of each, while the group of credit losses remaining from the Corona crisis remained in balance.
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Total expenses excluding credit losses decreased by 9.1% compared to the previous quarter, and in one-time neutralization decreased by 10.5%, mainly due to the decrease in turnover. On the other hand, income without other income decreased by 4.5%.
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The efficiency ratio in the quarter was 82%, compared with 78.5% in the previous quarter and 78.5% in the corresponding quarter. In the one-time neutralization, the efficiency ratio was 78.9% in the current quarter compared to 83.5% and 78.5% in the previous quarter and the corresponding quarter, respectively.
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The company’s total capital adequacy ratio was 15.4%, slightly lower than in the previous quarter due to the dividend distribution, but high above the regulatory requirement.
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The net profit amounted to NIS 50 million, compared with NIS 57 million in the previous quarter and NIS 74 million in the corresponding quarter last year.
| Recent insights
Isracard presented a lukewarm quarterly report and below expectations also in the neutralization of the one-time items. The positive side is that no surprises are expected in the upcoming reports when it comes to moving to the new building, and the decision to leave the public transportation app project seems like the right decision.
There are a number of issues to keep in mind that will be critical in the coming quarters:
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Retail credit growth – one of the company’s main growth engines. In the last two quarters the company has shown growth, but the market’s expectations are for higher growth especially in a period when economic activity is rising.
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Payments to banks and agreements with clubs – Isracard reported on the renewal of agreements with Ashmoret, Lifestyle and Hot, as well as a memorandum of understanding with Golf, Steimatzky and Sonol for the establishment and operation of a joint customer club, including the issuance of non-bank credit cards.
We have learned in the past that new agreements and contracts increase turnover and support customer growth, but with the erosion of the cross and the strengthening of clubs’ strengths, profit sharing tends to be less profitable for credit cards and entails heavy expenses at first in some cases. We will also mention that in February 2023, Isracard’s agreement with Bank Hapoalim expires, and the next agreement may be critical to the company’s profitability in the future, since most of the bank card status that Isracard operates is that of Hapoalim.
The company noted in the investors’ call that the joint venture on Buy Now Pay Later (BNPL) is expected to start in the second half of the year. This may push up commercial credit as well as increase exposure to retail credit through the joint venture.
Isracard’s new management has chosen to “clean stables” in the current reports, so the coming quarters will greatly affect the way the market looks at the company and its new strategy.
We at IBI remain at a target price of NIS 17.4 for an Isracard share on the recommendation of a “market return”.
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.