Leumi in 2025: Profit Is Still Exceptional, but Net Interest Margin Is No Longer Doing All the Work

Getting To Know The Company

Leumi is entering 2026 not as a bank that still needs to find earnings, but as a bank that needs to defend the quality of earnings after a peak year. That distinction matters. In 2025 Leumi earned NIS 10.262 billion, generated 15.8% return on equity, pushed the cost-income ratio down to 29.3%, and expanded net credit to the public by 14.1% to NIS 519.95 billion. A quick read sees another very strong year. A deeper read shows that the earnings engine is no longer the same one investors were reading in 2023 and 2024.

What is working now is clear. Leumi still benefits from a wide distribution base, deep deposits, exceptional efficiency, and a capital-markets arm that generates material profitability on its own. The active bottleneck is no longer demand for credit. It is the combination of margin compression, a relatively aggressive capital-return policy, and tighter management of total capital while the balance sheet keeps expanding.

That is also the point a superficial reader can miss. 2025 still looks like an easy record year, yet net interest margin fell to 2.31% from 2.44%, and in the fourth quarter it was already down to 2.01% after peaking at 2.53% in the second quarter. So annual profit is still very high, but the earnings base Leumi is taking into 2026 is weaker than the mid-year peak suggests.

What is holding the story together right now is not only rates. It is volume growth, strong fees, lower expenses, and capital markets activity that contributed NIS 2.712 billion of net profit in 2025 on the management view. What is still missing for a cleaner thesis is proof that this high level of profitability can hold even without the earlier rate tailwind, and without forcing the bank to manage capital through a more active cycle of issuance and redemption.

There is also an early market screen. In early April 2026 Leumi's market value stood slightly above NIS 103.6 billion, and short interest was only 0.01% of float, with an SIR of 0.04 days. This is not a market signaling aggressive bearish conviction. The debate is not whether Leumi is strong. It is whether 2025 was a stable peak year, or mainly the last year in which margin was still strong enough to hide how much friction was building underneath.

Leumi's Economic Map

Events And Triggers

The first trigger: in 2025 Leumi moved from an earnings model that relied mostly on rates to one carried by multiple engines at the same time. Net interest income rose only 2.1% to NIS 16.852 billion while the credit book grew 14.1%. That means volume expanded far faster than price. The bank closed the gap through fees, lower expenses, and a strong capital-markets contribution. That worked in 2025. The question is whether it can keep working in 2026.

The second trigger: Leumi chose to return capital to shareholders at a scale that now changes how the balance sheet should be read. Capital return reached NIS 5.9 billion in 2025, a 58% payout ratio. In early March 2026 the board approved a total 65% distribution for the fourth quarter, made up of about NIS 1.275 billion of cash dividend and about NIS 382 million of buyback. That is positive for shareholders, but it is also a clear signal that capital is not simply accumulating on the balance sheet. It is being actively managed.

The third trigger: early 2026 proved that even a very strong bank is still building new funding layers. In January Leumi completed a local issuance with gross proceeds of about NIS 4.923 billion, including bonds, CoCo, and commercial paper. In the same month it completed a EUR 750 million covered-bond issuance, rated AA- by Fitch. In March the bank also flagged a possible additional CoCo issuance of up to NIS 600 million par value. This is not a distress story. It is a funding-optimization story at a bank that is simultaneously growing, distributing capital, and managing total capital tightly.

The fourth trigger: the risk report is already describing the problem area in housing and construction more sharply. The bank points to labor shortages, longer execution periods, higher financing and execution costs, slower sales rates, and more non-linear contracts in 20/80-style structures. In April 2025 the Bank of Israel also capped contractor-subsidized balloon and bullet mortgages at 10% of quarterly mortgage execution, and Leumi says it complies. The meaning is straightforward: 2025 did not end in a credit event, but it did end with a market where the quality of residential-construction credit requires a much more careful read.

Efficiency, Profitability And Competition

Margin Compressed, but It Did Not Break the Year

The analytical heart of 2025 is a simple paradox: profit went up while margin came down. Net interest income rose to NIS 16.852 billion from NIS 16.509 billion, yet net interest margin fell to 2.31% from 2.44%. Two forces sit underneath that move. The first is strong growth in the credit book. The second is erosion in credit and deposit spreads, alongside a weaker CPI contribution than in 2024.

The clearest sign is the internal breakdown. Credit spread contribution rose to NIS 8.569 billion from NIS 8.346 billion, but deposit spread contribution fell to NIS 6.804 billion from NIS 7.740 billion. So the asset side still worked, but the funding side was materially less comfortable. That is exactly what happens when competition for money tightens and the bank no longer enjoys the same easy funding gap it had earlier in the rate cycle.

The quarterly numbers make the point even sharper. After peaking at 2.53% in the second quarter, margin fell to 2.37% in the third quarter and only 2.01% in the fourth. Anyone reading the year only through the annual average misses that 2026 begins from a much less convenient starting line.

Fees, Cost Discipline, and Capital Markets Did the Heavy Lifting

This is the main reason the year still looks excellent. Fees rose to NIS 4.084 billion from NIS 3.823 billion. The presentation says this figure included NIS 148 million of customer support, so on an adjusted basis fee growth was 10.7% rather than 6.8%. That matters because it says two things at once: customer activity was strong, but the bank also chose not to fully maximize pricing power.

Expenses also worked in Leumi's favor. Operating and other expenses fell to NIS 6.648 billion from NIS 6.904 billion, mainly because performance-linked bonuses were lower. That pushed the cost-income ratio down to 29.3%. At the scale of a large bank, this is more than just "good efficiency." It is a real protection layer against margin erosion.

And there is another layer that needs to be said plainly. On the management view, the capital-markets segment generated NIS 2.712 billion of net profit in 2025, almost as much as retail banking at NIS 3.284 billion. This is the point many readers miss when they think about Leumi only as a spread bank. A meaningful part of earnings quality comes from balance-sheet management, trading, and capital-markets services, not only from classic lending.

Credit Quality Is Still Good, but the Warning Zone Is Clear

At the consolidated level, 2025 was a comfortable credit year. Credit-loss expense fell to NIS 450 million from NIS 713 million, and the expense ratio fell to 0.09% from 0.16%. The allowance balance stood at 1.30% of credit to the public. Total problematic credit after deductions was almost unchanged, NIS 5.426 billion versus NIS 5.455 billion.

But that is only half the picture. Construction and real estate look less comfortable. The problematic-credit ratio in Israeli construction and real estate rose to 0.87% from 0.74%, and the total credit allowance for that area rose to NIS 3.062 billion from NIS 2.824 billion. This is still not a crisis. It does, however, tell you that if trouble comes, it is unlikely to start across the whole book. It will probably start in a much more defined pocket.

What matters here is tone as much as numbers. The bank is not pointing to collapsing demand. It is pointing to longer project cycles, higher financing costs, higher execution costs, and slower sales. That is no longer just a credit issue. It is a growth-quality issue in the housing market.

Cash Flow, Debt And Capital Structure

For a bank, the right frame is not industrial-style free cash flow. What matters is how the bank builds capital, how it funds balance-sheet growth, and how much regulatory and liquidity room is left after capital return and credit expansion. Put differently, the key question is not capex coverage. It is how much real flexibility remains after credit growth, deposits, market funding, liquidity, and capital rules.

Growth Is Still Comfortable, but Total Capital Is Tighter Than It First Looks

Equity attributable to shareholders rose to NIS 68.13 billion from NIS 61.658 billion, and that is clearly strong. CET1 at 12.05% also looks comfortable. The bank's presentation says the capital surplus above the CET1 target stood at about NIS 10 billion. That is exactly why it is easy to feel too relaxed about the story.

But two layers need to be separated. At the CET1 layer the picture really is comfortable. Against a minimum requirement of 10.24%, the bank has a 181-basis-point buffer, and even against its internal target of 10.85% it still has 120 basis points of room. Total capital looks different. The total-capital ratio stood at only 14.08% against a minimum requirement of 13.50%. That is just 58 basis points of buffer. So anyone looking only at CET1 can miss that the tighter layer is total capital.

The risk report also explains why. The decline in total capital was driven not only by risk-weighted asset growth, but also by early redemptions of Tier 2 instruments, especially the early redemption of series 403, and by the fact that another instrument scheduled for redemption in January 2026 no longer contributed at year-end. So this is not just a story of credit expansion. It is also a story of a capital architecture that is moving underneath the surface.

Capital Return Is Generous, So Active Funding Becomes Part of the Normal Story

Leumi's capital story in 2025 is not simply "there is plenty of capital." That is true, but incomplete. The fuller story is that the bank generated capital, returned capital, and expanded its funding toolkit at the same time. That model works, but it already requires more coordination than the simpler story many investors still hold.

The decision to raise the payout policy to 50% to 65% from 2026 onward, subject to capital targets, matters as much as the payout amount itself. It says the bank believes it can keep returning capital to shareholders, but it also explicitly ties distributions to the availability of different capital layers. That is why the issuance and redemption wave at the start of 2026 should be read as part of the thesis, not as a footnote.

The EUR 750 million covered-bond deal is especially important. It broadens Leumi's toolbox, diversifies the funding base, and shows the bank is not waiting for pressure before it acts. On the other hand, the very fact that it is building another funding layer and examining another CoCo issuance in March 2026 is a reminder that the balance sheet is no longer resting only on retained earnings and deposits.

Liquidity Is Still Strong, and the Balance Sheet Is Nowhere Near Stress

It is important not to lose proportion. Average LCR in the fourth quarter was 127%, NSFR was 115%, and public deposits kept growing to NIS 686.887 billion. The loan-to-deposit ratio remained 75.7%, so the bank is not operating under liquidity pressure.

That is the core complexity in Leumi today. This is not a bank being forced into funding action. It is a bank choosing to manage funding and capital layers in advance, because credit growth, capital return, and margin compression no longer allow it to rely only on the easy comfort of the recent past.

Outlook And Forward View

Before moving into 2026, five points deserve to be fixed in place because they do not jump out in a first read:

• 2025 profit rose despite lower net interest margin and despite lower non-interest financing income than in 2024, when the base still included a larger contribution from a headquarters-property sale and from FX and derivatives income.
• The fourth quarter already shows a much weaker margin base than the annual average, so 2026 is not starting from the headline number investors may instinctively anchor on.
• The tighter point in the balance sheet is not CET1 but total capital, which is why the early-2026 funding and redemption wave is a material part of the story.
• Fees and efficiency offset a large part of margin pressure in 2025, but it is not obvious they can do so at the same pace if compression continues.
• The warning signal in credit is not broad but concentrated in construction and real estate, exactly where sales, financing, and execution conditions have become more complicated.

That leads to the right read on next year: 2026 looks like a stabilization year with a proof burden, not another easy peak year.

Management's Targets Already Tell a More Conservative Story

The 2026 to 2027 targets are clear: net profit of NIS 10 billion to NIS 12 billion, return on equity of 14.5% to 16%, credit growth of 8% to 10%, and capital return of 50% to 65%. These are very good targets, but they are not acceleration targets. After 14.1% credit growth in 2025, the bank is already pointing to a slower pace. After 15.8% ROE, it is comfortable living even in the lower part of the range. This is not breakout language. It is stabilization language.

The background assumptions say the same thing. The bank built the plan on a Bank of Israel rate of 3.2% to 3.7%, inflation of 1.8% to 2.0%, and a continuation of the special tax and customer-benefit program similar to the last two years. In plain terms, management is not building on an easy macro tailwind. It is building on a reasonable environment, but a less generous one.

What Has to Happen Over the Next 2 to 4 Quarters

For the read on Leumi to improve, four things need to happen almost together. First, net interest margin needs to stop compressing at the pace seen in the fourth quarter. It does not have to go back to 2.53%, but it does need to stabilize enough to avoid a situation where credit growth has to run too fast simply to keep net interest income in place.

Second, residential and construction real estate need to remain an area of friction rather than deterioration. Right now the data point to higher problematic credit and higher allowances in that sector, but not to a broad hit across the book. That can stay manageable, but only if sales and execution conditions do not worsen again.

Third, capital markets contribution cannot suddenly look like a one-off bonus. In 2025 it was a material part of the earnings mix. If 2026 comes with weaker margin and a lower capital-markets contribution at the same time, the equation becomes much less comfortable.

Fourth, the bank has to keep proving that the active funding steps taken in early 2026 are about building flexibility forward, not reacting late to capital tightness. This is exactly where the market will test whether the issuance wave, the covered bond, and the possible CoCo are opening options, or mainly protecting the current position.

Risks

The first risk is faster-than-expected margin erosion. If what showed up in the fourth quarter continues into 2026, fees, efficiency, and credit growth may not fully close the gap.

The second risk is construction and residential real estate. This is not a broad credit-loss event at the moment, but the data are moving in a less comfortable direction: more problematic credit, more allowances, and an operating environment the bank itself describes as more difficult. If one variable there worsens materially, this is probably where it will first show up.

The third risk is relatively high reliance on capital-markets contribution and balance-sheet management. That capability is real, but it also makes part of earnings more exposed to market conditions, curve structure, and funding conditions than the simple banking read of "loans versus deposits" would suggest.

The fourth risk is the combination of generous capital return with a tighter total-capital layer. CET1 still looks very comfortable. Total capital looks much less so. If balance-sheet growth remains fast and payout stays high, capital-instrument management will remain a central part of the story.

The fifth risk is a regulatory and political environment that continues to lean on bank profitability. The bank itself assumes the continuation of a special tax and customer-support program. That does not break the thesis, but it does mean part of the high earnings base now sits inside a less comfortable public-policy framework than before.

Conclusions

Leumi ended 2025 in a very strong position, but not with the same simplicity that defined the easier rate years. What supports the thesis now is a mix of balance-sheet growth, fees, high efficiency, and a proven ability to generate earnings outside pure net interest margin. The central friction is that margin is already off its peak, and total capital requires tighter management in the same year the bank is choosing to return a large amount of capital. That is also the point that will shape how the market reads the next few reports.

Current thesis: Leumi remains a very strong bank, but 2026 will test whether it can preserve exceptional profitability after the peak margin period, without allowing growth and distributions to eat too much of its capital flexibility.

What changed versus the simpler old read is that the center of gravity moved from rates to earnings composition. In 2024 it was easier to read Leumi mainly as a bank benefiting from the rate environment. In 2025 it became clear that profit is leaning more on volume, fees, efficiency, and capital markets, and that the main question is how durable that mix really is.

Counter-thesis: it is possible that the concern is overstated. Even after margin compression, Leumi still earned more than NIS 10 billion, preserved excellent efficiency, reported strong liquidity, and held a comfortable CET1 surplus. It is possible that the fourth quarter was simply a temporary trough, and that the bank will prove it can stay at unusually high profitability even without peak margin.

What could change the market reading in the near to medium term is a combination of four indicators: whether margin stabilizes, whether problematic credit in real estate stays contained and manageable, whether capital markets keep contributing, and whether the early-2026 funding wave genuinely strengthens flexibility rather than merely preserving it.

Why does this matter? Because Leumi is no longer being judged on whether it can earn money. It is being judged on earnings quality, on its ability to keep distributing capital without damaging flexibility, and on whether 2025 was a peak that can be stabilized or a peak that has already begun to erode.

Over the next 2 to 4 quarters, the thesis will strengthen if margin stabilizes, credit quality in construction and real estate holds, and capital management remains smooth despite high payout. It will weaken if margin keeps falling, if real-estate stress spreads beyond a contained pocket, or if total capital requires even more maintenance through capital markets.