Bank Hapoalim BM (BKHPF) (Q2 2026) Earnings Call Highlights: Strong Profit Growth and Robust ...

Negative Points

• The special bank tax negatively impacted the bank's ROE by 1.3-1.4% on an annual basis, reducing reported profitability.

• Net interest margin (NIM) was adversely affected by lower interest rates and competitive pressure, with the average Bank of Israel rate declining 11 basis points in the quarter.

• Provision for credit losses increased to ILS298 million (0.22% cost of risk), reflecting collective provisions due to ongoing uncertainty and no exceptional recoveries.

• The allowance ratio declined slightly to 1.65% despite an increase in the absolute allowance balance, indicating a marginal reduction in coverage.

• Retail deposits decreased slightly as customers shifted funds to capital market products, potentially impacting the bank's funding mix.

• The CET1 capital ratio decreased to 11.3%, just above the internal target of 11%, due to strong growth and high payout ratio, reducing capital buffers.

• The housing market showed a decrease in transaction levels and an accumulation of unsold apartments, with potential for further moderate price declines in the next 12 months.

• Geopolitical uncertainty persists, with the bank maintaining a conservative provisioning approach and no material reserve releases expected in the near term.

• Expenses, while controlled, still face headwinds from labor cost inflation in Israel, and the early retirement program savings are expected to be offset by ongoing cost pressures.

• The bank's growth guidance of 8-9% for 2026 may be conservative, as first-half growth already reached 7%, but management did not update the full-year target.

Q & A Highlights

Q: This quarter, you provided 0.22% cost of risk following the first quarter in which credit loss expenses were very low. Can you walk us through what drove the increase? And looking ahead, when can we expect some provision release? A: Ram Gev (CFO): The bank maintains a high-quality credit portfolio and a meaningful reserve buffer, holding the highest reserve ratio in the sector as a prudent measure given elevated uncertainty. The 22 basis points expense level reflects the underlying portfolio quality without exceptional effects, as there were no material reserve releases or recoveries during the quarter. The collective provision naturally grows with portfolio expansion. Looking ahead, it's difficult to predict if or when a release will occur, as it depends on stabilizing economic and geopolitical conditions.

Q: Expenses were down versus the same quarter last year and broadly flat quarter-over-quarter. What drove that? And should we expect further improvements going forward? A: Ram Gev (CFO): Expenses declined 4.4% year-over-year, primarily driven by a 7.3% decrease in salary expenses due to lower performance-based compensation, while base salaries remained stable. An actuarial adjustment related to the transition to a severance-based retirement model will reduce actuarial expenses by several tens of millions of shekels annually. The early retirement program announced at the end of 2024 is expected to generate annual savings of approximately ILS300 million compared with the 2024 expense base, and efficiency efforts will continue.

Q: Credit growth has already reached 7% year-to-date, putting you close to the lower end of your 8% to 9% full year target. Given the momentum you've seen, should investors interpret the current guidance as prudently conservative? Or do you expect growth to slow meaningfully in the second half of the year? A: Ram Gev (CFO): Growth is a very important element, and the bank's credit portfolio is well diversified across retail lending, mortgages, middle market, and corporate banking. The first half figures give us very good feedback for our strategy and confidence in achieving our 8% to 9% growth target. However, it's important to balance growth with profitability and risk. We are not usually updating guidance during the year, but we will consider updating guidance for the next year at the end of the year based on actual performance.

Q: Congratulations on the results. My question is mainly on the impact of the war on your liquidity and asset quality metrics. Have you used any repo facilities with the Central Bank? Also, where are you seeing the most pressure on asset quality in Q2? And what can you share on trends so far in Q3 across sectors of customer segments? A: Ram Gev (CFO): We have a very good liquidity base and don't see any impact of the war. We have a well-diversified funding base with the largest retail deposit base in Israel, and our LCR stood at 126%. The Israeli economy has performed well during the war, and we don't see material impact on credit quality, with NPLs at historical lows. We built reserves along the war and have the highest allowance to credit ratio in the sector, positioning us well for any scenario. While some sectors are more sensitive, we don't see a material effect.

Q: How do you see NIM developing from here, given that the market is implying further policy rate cuts? Should we expect NIM deterioration from current levels? Can you share your NIM level expectation for FY26? A: Ram Gev (CFO): NIM is affected by several factors, including the CPI, which had a positive impact this quarter, and changes in interest rates, which create a negative effect. Competitive pressure in different segments also impacts NIM. We are putting significant effort into managing NIM and currently have the highest NIM in the sector. The final outcome depends on the future interest rate environment, so I can't provide a specific NIM level expectation, but we are doing all we can to manage it in the right way.

Q: Do you concern lately regarding deterioration situation at the residential market? A: Victor Bahar (Chief Economist): In the housing market, we see a decrease in transaction levels to about 35,000 units per year, while housing starts are much higher at around 80,000 per year, creating a gap between supply and demand and some accumulation of unsold apartments. However, the stock of unsold apartments (85,000 units) is not high compared to Israel's demographic trends, with a growing population of about 1.5% per year. Many people are waiting on the fence for interest rate declines and political stability. We might see a further moderate decline in prices in the next 12 months, but we are not concerned.

Q: How comfortable are you with your current CET1 and total capital ratios and buffers given the ongoing geopolitical uncertainty? You have Tier 2 instruments callable in October. Could you share your approach to the call decision and whether it will be driven primarily by economics considered more holistically? Also, could you update us on your issuance plans through year and across and local currency senior and Tier 2 instruments? A: Ram Gev (CFO): We ended the quarter with a CET1 ratio of 11.3%, above the minimum regulatory requirement of 10.23% and the internal Board target of 11%. We feel very comfortable with our capital position, which allows us to maintain buffers for different scenarios while supporting distribution. We implement a standardized approach, which is very conservative in capital management. Regarding the Tier 2 instruments, I cannot relate to future call options, but our track record is that we exercise all options, and we understand market expectations. The decision will be made considering all elements, including the economic factors.

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