Bank Leumi (TASE: LUMI) is beginning the process of selling Leumi Card. The credit card company today published its annual financial reports, enabling the banks to complete the preparation of a prospectus in the near future, should it decide to conduct a stock exchange offering for the company. Sources inform “Globes” that the management of Leumi Card, owned by Bank Leumi (80%) and Azrieli Group Ltd. (TASE: AZRG) (20%), is expected to embark on a roadshow in a few weeks in order to present the company to potential investors, mainly foreigners.
It is likely that the method of selling the company will be decided in the roadshow – sale of a controlling interest, thereby taking advantage of the positive momentum in the markets by holding an IPO, or a combination of these two possibilities. Leumi Card’s equity is nearly NIS 1.9 billion, and it is believed that the company will be sold at a value of around NIS 2 billion.
Bank Leumi is gearing up to sell Leumi Card following relative clarifications of the regulatory conditions: the Bank of Israel recently published a plan for the cross charge (the floor price of clearance fees for businesses). In addition, the Bank of Israel early this week published a document stating which concerns would be eligible to acquire the credit card companies, and on what terms, thereby removing some of the uncertainty. The document indicates that under certain conditions, the Bank of Israel will also allow investment funds to acquire the companies.
8% revenue growth
The main remaining regulatory uncertainty is whether the market will switch to daily clearance for payment to businesses, as the Antitrust Authority is advocating, a measure regarded by the market as extremely significant. “Beyond making a daily accounting, the measure will create problems for the companies’ sources of credit. The result will be that the banks will be able to finance service that we will be unable to, and this could be the end of Promotion of Competition and Reduction of Concentration Law,” Leumi Card CEO Ron Fainaro told “Globes” today.
Leumi Card’s profit was down 22% to NIS 143 million in 2017. There were two one-time reasons for the decrease related to the company’s employees: Leumi Card gave employees NIS 26 million in bonuses for the sale of shares in Visa Europe, and also made a NIS 37 million provision for a voluntary retirement plan for 130 employees, thereby reducing its quarterly profit to NIS 20 million, compared with NIS 36 million in the corresponding quarter in 2016. The early retirement program cost NIS 285,000 per employee, substantially less than the banks’ plans, some of which cost as much as NIS 1 million per employee.
Leumi Card reported growth in all other figures: its credit card usage turnover rose 8.6% to NIS 80.4 billion, its revenue was up 8% to NIS 1.22 billion, and the number of active credit cards increased 4.2% to 2.21 million cards.
Following publication of the results, Fainaro commented today on the many changes in regulation affecting Leumi Card, saying, “We are in a state of regulatory imbalance. On the one hand, we are preparing for an important and historic change, while on the other hand, we daily face additional regulatory measures that are sometimes contradictory. The regulation shaping the sector should set clear priorities, so that one policy does not reverse its predecessor.”
The 2017 results are far from reflecting what the company projects for the coming year. Several months ago, Shufersal Ltd. (TASE:SAE) decided to terminate its decade-long partnership with Leumi Card, and to work with Israel Credit Cards-Cal (ICC-Cal), which offered better commercial terms. This is a severe setback for Leumi Card. The Shufersal customers club includes more than 500,000 cards, accounting for over 20% of the company’s credit cards. The loss of this club already had an effect in the fourth quarter of 2017, when Leumi Card’s credit portfolio grew by only NIS 65 million, because the sale of loans to club members was halted almost completely. Shufersal’s customer club loans total NIS 1.5 billion, 25% of Leumi Card’s credit portfolio, and will be repaid mainly in the next two years.
Shufersal and ICC-Cal are also in the process of transferring customers to the new credit card, and it is therefore believed that 70-80% of the Leumi Cards held by customers club members will be canceled during the coming year. Leumi Card will find it a big challenge making up for this projected decrease in activity. The company has already launched a new club with Fox-Wizel Ltd. (TASE: FOX), and has launched new cards, but it is unclear whether this will be enough to compensate for the loss of the Shufersal customers club.
As part of the changes, Leumi Card is also altering the composition of its credit portfolio to improve its profit margin. Leumi Card is the largest credit card company in loans with a NIS 5.47 billion loan portfolio, following 24% growth in 2017. At the same time, Leumi Card trails its competitors in financing revenue because of the composition of its loans. The company is very exposed to car loans, in which profit margins are low; these loans amounted to NIS 1.68 billion, as of the end of 2017, accounting for 30% of Leumi Card’s portfolio. This proportion, however, is expected to decline.
Profit margins on credit granted to Shufersal customers’ were also low, given the mechanism for distributing revenue between it and the food chain. The company projects that its credit portfolio will shrink this year, following many years of strong growth. At the same time, revenue from this activity will remain stable, or even increase. One indication of the change in composition is the average interest rate in the credit portfolio, which reached 6.5% at the end of 2017, compared with 6.2% in 2016.
Like the banks and the other credit companies, Leumi Card made larger provisions for credit losses in 2017: NIS 71 million, compared with NIS 37 million in 2016. The reasons are partly accounting ones (accelerated growth in the portfolio automatically causes an increase in provisions), but also include a deterioration in payment ethics among the public. Nevertheless, the relatively sound composition of the company’s credit portfolio results in its provisions being smaller than those of its competitors. The question is what will happen in the future if Leumi Card changes the composition of its credit portfolio, thereby increasing its profit margin, but also its risk.
Weak points and potential
Leumi Card chairperson Yaron Bloch, who is also CEO of Leumi Partners Ltd. and has quite a bit of experience in investment banking, faces a considerable challenge in trying to sell the company.
Complicating the sale is the uncertainty during the period following the Promotion of Competition and Reduction of Concentration Law. There is still no solution for problems such as the sources that can be recruited for credit activity (the company currently has liquid sources from Bank Leumi). Investors do not like uncertainty.
Another disadvantage is that in contrast to its competitors, Leumi Card has no exclusive brand in clearance (Isracard charges high clearance fee for American Express, and ICC-Cal for Diners Club). There is also the painful loss of Shufersal’s customer club, which is also expected to affect the company’s results.
On the other hand, there is also potential for improvement in Leumi Card. Because it is smaller than Isracard (also slated for sale), it has more room for growth. Leumi Card is now working with Bank Leumi and Mizrahi Tefahot Bank (TASE:MZTF), and recently signed a cooperation agreement with Bank Hapoalim (TASE: POLI) and Israel Discount Bank (TASE: DSCT) that will take effect next year.
There is also potential for streamlining in Leumi Card. The company has the same number of employees as Isracard, whose activity is much greater than that of Leumi Card. At the same time, it should be said that in contrast to the banks, massive personnel cuts cannot be made in the credit card companies because they are services companies, and a large personnel cut means a decline in service.
Another advantage of Leumi Card is that it is a young company that has been doing business for only 18 years, and its technological infrastructure is therefore newer than that of older financial concerns. Leumi Card also faces the considerable challenge of rebranding after it is separated from Bank Leumi. On the one hand, a new brand name is an opportunity for a company to reinvent itself. On the other hand, it also involves risk, because the public tends to be suspicious of new financial brands.
Published by Globes [online], Israel Business News – www.globes-online.com – on February 21, 2018
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