Clal Insurance CEO: Q2 results explain Max acquisition

Yoram Naveh  credit: Cadya Levy
Yoram Naveh credit: Cadya Levy

While stock market declines tipped Clal into a loss, credit card company Max posted a peak quarter.

Many on the capital market thought that Clal Insurance’s acquisition of credit card company Max would not go ahead, because of its high price - NIS 2.47 billion. This when Isracard, the largest credit card company in Israel, was dealt a severe blow by Bank Hapoalim, which forced it to sign a new operating agreement and transfer an additional NIS 50 million to it monthly for operating the bank credit cards that it issues and clears.

The new operating agreement cut Isracard’s market cap, which is currently NIS 2.2 billion, after a slight recovery in the share price following the 18% drop after the agreement was announced.

The quarterly financials of the credit card companies released last week revealed a turnaround, with Isracard falling to last place for profitability. While the two smaller companies, Max and CAL, reported net profits for the second quarter of NIS 66 million and NIS 81 million respectively, Isracard posted a profit of NIS 51 million after the increased payment to Bank Hapoalim (excluding one-time expenses).

Clal Insurance CEO Yoram Naveh, who pushed for the deal to buy Max, received the companies’ results with great satisfaction. Naveh managed to persuade the Clal board to approve the deal, by a majority of six directors in favor versus three against. The three opponents included David Granot, the director on behalf of Alrov, controlled by Alfred Akirov, which is the largest shareholder in Clal Insurance, with a 15% holding. Granot led the opposition to the deal on the grounds that it was a single deal at a huge investment that was not in the course of regular business, as stated in a letter to board chairperson Haim Samet.

Naveh, who recruited Samet to his side, explains in conversation with "Globes" why he insisted on carrying out the deal. "After the publication of Max’s results, the market is now starting to see what we saw and expected, namely the fact that Max is the best positioned company in the industry. It has good management and a good management focus. It can certainly now be seen that the price we will pay is reasonable, when in addition the deal includes Hyp (a sister company of Max that deals in payment solutions for businesses, R.W.), which earns a bit more. Max posted a profit of NIS 120 million for the first half year, and everyone now understands the deal," Naveh states confidently.

The results of which he speaks include the largest credit portfolio among the three credit card companies, which totaled NIS 7.5 billion at the end of the second quarter, 17% more than at the end of 2021, and generated interest income of NIS 277 million in the first half year. This is besides revenue of NIS 600 million from operating credit cards, on a transaction turnover of NIS 54 billion.

Max is still the smallest company in the industry for transaction turnover, and in the first half year the gap between it and its competitors actually widened, but Max is growing at a faster rate than Isracard and CAL in transactions using non-bank credit cards. On these transactions, the company does not have to share commissions with a bank.

"It took time for people to understand the pricing of the deal," says Naveh. "It can already be seen that Max charges low interest rates for the sector, with a high-quality portfolio. I think we have shaken up the industry, and everyone understands that the aim of the deal is to encourage competition in consumer credit."

Contrary to the optimism arising from Max’s financials, assuming that revenue will not be materially harmed in the near future by macro-economic conditions expected to be characterized by falling consumption and lower demand for loans, the financials of Clal Insurance itself bring home its dependence on the capital market. As a result of the declines on the markets in the first half of this year, Clal Insurance was unable to collect variable management fees on its with-profit policies, and at the end of the second quarter the balance of variable management fees that the company will be unable to collect stood at NIS 550 million.

In addition, Clal Insurance made a provision of NIS 627 million (before tax) because of changes in mortality tables, leading to a loss of NIS 510 million in the second quarter, which compares with a profit of NIS 357 in the corresponding quarter of 2021.

The revision to the mortality tables, because of which the major insurance companies will record an aggregate loss of some NIS 1.5 billion for the second quarter, was made by the Capital Markets, Insurance and Savings Authority, which raised the life expectancy figure for the purposes of calculating pension fund coefficients from 78 years to 80 years. This means that pension funds have to provide larger sums to ensure that they will meet their commitments to savers. Clal had already reported in July the provision would cause a loss of NIS 400 million.

How will the loss in your financial statements affect completion of the Max acquisition?

Naveh: "The provision on account of the change in the mortality tables is old news, and was already priced into Clal’s share price because we reported the expected loss. Besides that, we have no problem in raising money. We have NIS 500 million cash from the offering in January and NS 400 million is in an allocation of shares to the controlling shareholders in Max (US fund Warburg Pincus and its partners, among them Menorah Mivtachim and Allied, R.W.). So the challenge is not raising the money, but obtaining the regulatory approvals."

Clal is expected to receive approval from the Supervisor of Banks, who regulates the credit card companies, but could encounter greater difficulty vis-à-vis the Competition Authority, chiefly because of opposition to the deal on the part of Ministry of Finance director general Ram Belinkov, although he has no authority to approve it or rule it out. With the Capital Markets, Insurance and Savings Authority, which regulates Clal Insurance, a few small details remain to be ironed out, among other things concerning the insurance agencies that Max owns.

Do Clal Insurance’s second quarter results raise or reduce the need for the Max deal?

"There’s no need to guess. Look what happened in the second quarter, when the markets collapsed. A company like Clal, which is very much affected by the capital market, loses money, and in addition it has actuarial risks. Even when we posted a profit of NIS 1.4 billion for 2021 I kept modest and said that I would have been happy if the correction had come in the final quarter and not in 2022 when all the indices are a mirror image of last year.

"On the other hand, Max had a peak quarter. Although it too is in the financial sector, it does not behave in correlation with the same risks as Clal does, and its activity is different. If you’re an investor, you don’t like volatility, so the Max deal gives a great deal of value, and the second quarter explains the rationale of the deal precisely."

Published by Globes, Israel business news - en.globes.co.il - on August 23, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Yoram Naveh  credit: Cadya Levy
Yoram Naveh credit: Cadya Levy
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018