Direct Finance 2025: Mortgages Are Carrying Profit, but 2026 Still Depends on the Car Book

Getting to Know the Company

Direct Finance is not just a car-finance company anymore, and it is not a pure mortgage growth story either. It is a consumer credit machine built on two very different layers: a large car book, and a smaller but cleaner mortgage book that is growing quickly and is already reshaping the profit mix. In 2025 the company originated ILS 11.135 billion of loans, up from ILS 8.449 billion in 2024, and the total managed portfolio rose to ILS 18.49 billion. On the surface that looks like a strong growth year. But net profit still went down.

That is the core point. Net profit fell to ILS 131.1 million from ILS 148.9 million even though the company grew fast, the mortgage business kept expanding, and about 96% of 2025 originations were secured. Anyone stopping at the origination headline misses the main issue: volume growth is no longer enough to hide the deterioration in the economics of the car book.

What is working now? Mortgages. The mortgage segment generated ILS 73.4 million of net profit in 2025 versus ILS 52.0 million in 2024, with a credit-loss rate of just 0.19% and a financing spread of 4.08%. What is still not clean? Part of that profit comes from loans initially measured at fair value and from securitization activity, and 15% of the mortgage subsidiary belongs to minority holders. So the improvement is real, but not all of it reaches Direct Finance common shareholders in the same straightforward way.

The active bottleneck is still the car book. That is where the company still produces most of the volume, but not the cleanest profit. In that segment 2025 met high interest rates, higher government bond yields that hurt the economics of the fair-value book, credit-loss expenses of ILS 255.8 million, a 7% decline in recovery rates, and a sharp increase in commissions and marketing costs. That is why 2026 looks less like a breakout year and more like a proof year: can car efficiency improve enough, and can cheaper mortgage funding plus continued transfers and securitizations translate into cleaner group profitability?

Four things the headline does not tell you:

• The headline is growth, but profit still fell by 12%. This is not a demand problem. It is a quality-of-earnings problem, mainly in the car segment.
• Mortgages have already become the larger reported profit bucket, ILS 73.4 million versus ILS 57.7 million in cars, but part of that gap comes from fair value, securitization and minorities.
• The company itself transfers roughly half of the car loans it originates, and the transferred loans carry materially lower credit losses. That means the book retained on balance sheet is structurally rougher than the origination headline suggests.
• The cash story here is not about classic free cash flow. It is about a funding machine: raise, transfer, securitize, repay short-term credit, and repeat.

The quick economic map looks like this:

That structure also explains why a shallow read can mislead. About 75% of 2025 originations still came from cars, but the car share of originations fell from about 81% in 2024 and about 83% in 2023. In other words, the car book is still the volume engine, but no longer clearly the quality engine. Mortgages are still smaller in scale, but they are carrying more and more of the economic story.

Events and Triggers

The late 2025 and early 2026 triggers matter here more than usual because they are not just background. They explain how the company plans to fund the next stage.

A broader funding toolbox

First trigger: on December 9, 2025 the company received a notice from the Capital Market Authority approving the voluntary application of the circular on additional capital and liquidity. The practical meaning is clear: the amount of debt securities the company can have held by the public rose to as much as ILS 15 billion par value, up from ILS 5 billion previously, and the path to issuing commercial paper to the public also opened up.

The company moved quickly. Second trigger: on December 18, 2025 it issued public commercial paper, Series 5, in the amount of ILS 236.022 million par, at Bank of Israel rate plus 0.3%, due in December 2026. This is not just another short-term funding instrument. It is a sign that the company can turn a regulatory change into real financing flexibility almost immediately.

Cheaper funding in mortgages, longer funding at the parent

Third trigger: on January 1, 2026 the mortgage subsidiary amended its funding agreement with Menora. The facility was extended through December 31, 2026, and pricing improved at the same time. On the CPI-linked fixed-rate track, the spread declined to 1.75% to 2.25% from 2.5% to 3.5%, and on the prime-rate track it fell to 0.25% to 0.75% from 0.5% to 0.9%. At signing there were still ILS 180 million of undrawn lines. That sharpens two points: a major funder remains supportive, and the cost of scaling mortgages has started to come down.

Fourth trigger: on January 7, 2026 the company privately expanded Series Z by ILS 425 million par, for gross proceeds of ILS 447.3 million, at 105.25 agorot per bond. Midroog reaffirmed an A1.il rating with a stable outlook and stated that the proceeds were expected to be used for refinancing and general corporate purposes. This is an important outside signal: not only can the company raise money, it can do so on terms that still reflect open capital-market access.

After year-end, the transfer machine kept moving

What happened after December 31, 2025 matters just as much. In the post-balance-sheet events note, the company aggregates four transfer and securitization transactions totaling ILS 1.503 billion: ILS 316 million of car securitization through SPV 24, ILS 613 million of assignments to Bank Mizrahi, ILS 175 million of assignments to Bank Jerusalem, and ILS 399 million of mortgage securitization. The company also states explicitly that the proceeds were used to repay short-term bank credit.

During the mortgage securitization announced on February 19, 2026 and then updated on February 23 and 24, the company completed a private placement of a senior layer totaling ILS 368.37 million par for total proceeds of ILS 401.1 million. In that filing the company estimated net profit attributable to shareholders of ILS 13.5 million to ILS 17.5 million from the completed deal. That is the number the market may focus on near term. Not because it changes 2025, but because it tests whether the mortgage funding machine can generate both liquidity and profit.

Efficiency, Profitability and Competition

The gap between the segments is why this company has to be read through quality of earnings, not just origination volume.

The car book: volume came back, economics did not

The car segment ended 2025 with revenue of ILS 1.223 billion and net profit of ILS 57.7 million, versus ILS 1.284 billion and ILS 94.4 million in 2024. That is a 39% decline in profit even though car originations rose by 28% and the mix leaned more toward new vehicles.

The problem is not just commercial. It sits on three separate layers.

First layer, pricing. Interest and linkage income from lending fell 5% to ILS 700.9 million even though the average held loan book grew by about ILS 0.4 billion. Part of the reason was lower CPI uplift, but the company also says customer loan pricing declined. So the company grew, but not on better price terms.

Second layer, fair value. Income from changes in the fair value of loan portfolios increased to ILS 277.4 million from ILS 244.6 million, but management also states that the profitability of the fair-value portfolio declined, mainly because higher yields on CPI-linked government bonds raised the discount rate used to value the loans, and because customer rates declined. This is exactly the kind of figure that can look fine in the headline while weakening underneath.

Third layer, selling cost and risk. Credit-loss expenses in the car segment rose to ILS 255.8 million, and the credit-loss rate on car loans increased to 4.08% from 3.32%. The company attributes that deterioration both to the war period and to a lower recovery rate. In the collateral note you can see why that matters: impaired car loans had a gross carrying amount of ILS 482.6 million against collateral value of only ILS 318.1 million. That is not a collateral structure that easily repairs a mistake.

There is another friction layer on top. Selling, marketing and G&A expenses in the car segment rose 12% to ILS 521.3 million. The company details about ILS 25 million of higher commissions, partly because of a new settlement structure with Trade Mobile and Eldan and partly because average commissions rose under competition, plus another roughly ILS 8 million of extra advertising tied to a rebranding effort. In other words, part of the growth was purchased at a higher economic cost.

This is also where readers can miss the difference between origination volume and the quality of the book that remains inside the company. Direct Finance states explicitly that, as part of its business model, it transfers about half of the car loans it originates, and that transferred loans carry meaningfully lower credit losses. So the book retained on balance sheet is not a random sample of total originations. It is a rougher book by construction. That is a material point. It explains how volume can grow nicely while on-balance-sheet profitability still deteriorates.

Mortgages: cleaner profit, but not all of it is free

Against that backdrop stands the mortgage segment, and the picture there is different. Revenue rose to ILS 312.3 million from ILS 229.5 million, and net profit climbed to ILS 73.4 million from ILS 52.0 million. The credit-loss rate stood at only 0.19%, versus 0.12% in 2024, and the financing spread improved to 4.08% from 3.86%. Average LTV was 62.55%, and the mortgage subsidiary's workforce rose to 89 from 68, a direct sign of operating investment in the platform.

But here too the gap between reported profit and economically accessible profit matters. Management states that the improvement in accounting profitability came mainly from gains on loans first measured at fair value, and the presentation explicitly marks ILS 19.0 million of profit from securitization in the third quarter of 2025. That means mortgages have indeed become a profit engine, but it is still an engine that partly relies on transfer and securitization mechanics, not just on plain recurring spread income.

The shareholder layer matters too. The mortgage subsidiary has a 15% minority shareholder, so the ILS 73.4 million of segment profit does not fully belong to Direct Finance common shareholders. In practice, non-controlling interests amounted to ILS 11.0 million in 2025, which means the more economically accessible contribution to common equity holders is lower than the headline segment profit.

On the other hand, asset quality here looks fundamentally different. For impaired mortgage loans, gross carrying amount was ILS 139.6 million while collateral value was ILS 257.9 million. That is the reverse of what you see in the car book, and it explains why even rapid mortgage growth has not turned into a large provisioning story.

What the market may miss on first read

The market may be tempted to read Direct Finance as a mortgage story and assume the car book is now just background noise. That would be a mistake. The car book still carries most of the origination volume, much of the distribution complexity, and most of the exposure to competition and commissions. Mortgages can improve the profit mix, but only if the funding machine stays open. So 2026 will not be judged only by how many mortgages the company originates, but by whether the car book stops offsetting that improvement.

Cash Flow, Debt and Capital Structure

Which cash bridge actually matters here

At Direct Finance it is important to define the cash frame before making any judgment. In an all-in cash flexibility view, net cash used in operating activity in 2025 was ILS 212.4 million, net cash from financing activity was ILS 263.1 million, net cash used in investing activity was ILS 53.2 million, and overall cash declined by only ILS 2.5 million. In addition, total lease-related cash outflow was ILS 15.5 million.

That is a good view of how much cash is left after real cash uses, but it is not enough to explain the economics. The company itself says that part of the long-term debt it raises is classified as financing cash flow, while the same-day repayment of short-term credit funded by those proceeds passes through operating cash flow. That creates a recurring accounting distortion.

In the narrower normalized view presented by the company, operating cash flow after neutralizing capital raises and short-term debt repayment associated with long-term debt issuance was actually positive at ILS 154.4 million, versus ILS 122.7 million in 2024. Both readings are valid, but they answer different questions. The first asks how much cash remained after all real uses. The second asks whether the lending, servicing and fee engine generates operating cash before refinancing flows.

In Direct Finance's case, the more important thesis is financing flexibility, so the all-in view matters more. It says the company still needs an open funding machine in order to grow, and that this is not a business generating clean surplus cash with little dependence on capital markets and banks.

Funding is available, but value still depends on access to it

That said, the financing position is not weak. The company presentation shows total credit sources of ILS 8.2 billion at the parent and unused parent credit facilities of ILS 2.1 billion. The mortgage subsidiary shows about ILS 2.6 billion of funding sources. In the notes, the company details that at year-end 2025 the mortgage subsidiary had available banking and institutional facilities of ILS 2.308 billion, of which ILS 1.959 billion were drawn. So there was still about ILS 349 million of headroom, including ILS 180 million left under the Menora framework.

The covenant picture is also comfortable. Capital adequacy stood at 12.7% versus a 6.0% minimum requirement. Tangible solo equity to tangible solo assets stood at 16.2%, above the 12% minimum in the bond series, and tangible solo equity was about ILS 1.282 billion versus a floor of ILS 695 million. This is not a tight-covenant story.

But it is still critical not to confuse balance-sheet strength with freely accessible value. The company and the mortgage subsidiary both operate with floating and fixed liens in favor of banks and funders, and the company explicitly states that it adjusts origination pace to available funding sources. So value created in mortgages is real, but its accessibility still depends on continued ability to roll funding, transfer portfolios and securitize. That is not an immediate weakness, but it is the difference between accounting value creation and value that moves upward with little friction.

Outlook

Four proof points for 2026

• The car efficiency program has to become visible in the numbers. Management is guiding to about ILS 40 million of annual savings starting in 2026, but the fourth quarter of 2025 still showed only negligible impact.
• Mortgages have to keep growing without losing spread. At year-end 2025 the financing spread was 4.08%, and the stated strategic goal is to keep at least a 2.5% spread.
• Transfers and securitizations have to keep working. The company already completed ILS 1.503 billion of transactions after the balance sheet date, but the real question is whether this becomes a standing channel rather than a one-off burst.
• Quarterly profit has to look less erratic. Q4 2025 ended with only ILS 26.1 million of group net profit, and that is too low a base for a company trying to prove it has already moved into a cleaner earnings phase.

That is why 2026 looks like a proof year, not a breakout year. It is not a reset year, because funding channels are open, capital is strong, and mortgages have already built a clear economic leg. But it is not a clean breakout year either, because the car book has not yet returned to a comfortable margin, and mortgage profits still receive support from fair value, securitization and the funding structure.

Management frames 2026 around four levers: improving the company's financial spread, delivering about ILS 40 million of annual savings in the car segment, increasing mortgage originations, and increasing both the scale and number of securitizations, including second-lien mortgages and continued fair-value designation. That is a coherent strategic framework. The real question is not whether it makes sense. It is whether it shows up in profit attributable to common shareholders without excessive reliance on one-off fair-value effects.

This matters now because investors no longer need proof that Direct Finance can generate volume. 2025 already proved that. What they need now is proof that the next layer of growth will be higher quality: cheaper to fund, lighter on capital, and less dependent on holding a car book whose economics are still under pressure from competition.

Risks

The car book is still more exposed than the origination headline suggests

Cars remain the first risk center. The combination of lower customer pricing, higher commissions, a 7% decline in recovery rates, and a 4.08% credit-loss rate means the company is still buying volume at a meaningful economic cost. If competition intensifies further, or used-car values weaken, that friction may persist even if origination volume keeps rising.

Mortgages are cleaner, but they still depend on the funding machine

The mortgage segment looks much better in terms of losses and collateral, but it is also a business that needs fuel. It grows through bank and institutional facilities, through the Menora agreement, through transfer transactions, and through securitizations. If any of those channels slows, the company can still originate, but probably at a lower pace or at a higher cost of funds. In addition, 15% of the economics in that segment belong to minority holders.

Regulation and liquidity remain a permanent screen

The company itself ranks liquidity risk as a high-impact risk. The December 2025 regulatory approval improves the picture, but it does not erase the fact that this is a non-bank credit platform that still depends on ongoing access to capital markets, banks and institutions. Any tightening in financing markets would meet a company growing quickly, which also means a company with high sensitivity to funding availability.

Short Interest View

Short interest does not tell a crisis story, but it does signal that the market is not giving the equity a free pass. On March 27, 2026 short interest stood at 1.72% of float and SIR stood at 3.13. That is below the peak of 3.64% and 6.0 in November 2025, but still materially above the sector average of 0.36% of float and 1.314 SIR. Put simply, there is moderate, persistent skepticism here, not distress.

Conclusions

Direct Finance exits 2025 as a company that has already changed its profit mix, but has not yet cleaned up its profit structure. Mortgages have become the reported earnings anchor, funding looks more open, and capital is comfortably above minimums. On the other hand, the car book still determines whether all of that turns into higher-quality profit or just another year of growth with friction.

Current thesis: the reported profit engine has moved toward mortgages, but the real test for 2026 still sits in the car book and in the ability to fund mortgage growth without diluting the value that reaches common shareholders.

What has changed versus the old read is straightforward: mortgages are no longer a side option, but a unit carrying a growing share of profit; at the same time, the car book has shifted from default engine to the main source of margin, commission and credit-cost friction. The strongest counter-thesis is that cheaper funding, Series Z, public commercial paper and the February 2026 mortgage securitization already mark a new stage, and that what currently looks like temporary friction in cars will later look like the trough.

Over the short to medium term the market is likely to measure four points: whether the ILS 40 million efficiency program starts to appear in the numbers, whether mortgages keep reporting very low loss rates even as growth continues, whether transfer transactions keep reducing short-term bank exposure rather than merely inflating volume, and whether quarterly profit can move meaningfully above the Q4 2025 level. This matters because Direct Finance is no longer a question of whether it can generate demand. It is now a question of growth quality, accessible funding, and converting volume into profit.