Mizrahi Tefahot in Q1: profit holds while the CET1 cushion narrows again

Mizrahi Tefahot did not report a weak quarter, but it also did not solve the issue that remained open at the end of 2025: profitability is still high, while the common-equity cushion remains narrow relative to credit growth and the payout policy. Reported net profit fell 4% to NIS 1.238 billion, mainly because of the special tax and customer benefits, and excluding those two effects it would have reached NIS 1.440 billion with a 16.3% return on equity. That figure shows that the operating engine still works, but it hides two harder tests: interest spreads contracted and risk-weighted assets grew faster than common equity. CET1 fell to 10.17%, only 0.57 percentage points above the regulatory requirement, while the bank again declared a 50% payout. Credit quality still looks stable in the aggregate ratios, but the low provision expense relied on a collective release while individual provisions actually rose. That makes 2026 less of a profit turnaround year and more of a capital proof year: can the bank keep growing, distributing cash and maintaining clean credit without further erosion in its capital cushion.

Company Setup

The bank is an interest-margin, credit-quality and cash-return machine. The mortgage portfolio is the main anchor, the business book is the faster growth source, and competition for deposits and rates determines how much of that growth remains in profit. The quarter is therefore measured by common equity, not only by net profit.

Prior coverage focused on that issue. The year-end 2025 analysis showed high profitability alongside a narrow CET1 cushion, while the analysis of the dollar debt issuance noted that Tier 2 debt improves total capital and funding tenor, but not common equity. The first quarter did not close that gap: profit remains strong, but credit growth is still consuming part of the regulatory buffer.

Net credit to the public stood at NIS 413.6 billion at the end of March, up 13.5% from March 2025 and 3.3% from the end of 2025. Public deposits were NIS 450.7 billion, and liquidity remained comfortable, with an average liquidity coverage ratio of 147% and a net stable funding ratio of 111%. Immediate liquidity is not the active bottleneck. The bottleneck is common equity against a fast-growing credit portfolio.

Profit Holds, But Credit Is Consuming The Capital Cushion

Adjusted Profit Remains Strong

Stopping at reported net profit would produce a picture of moderate decline. That is not enough. Reported net profit was NIS 1.238 billion compared with NIS 1.290 billion in the same quarter last year, and return on equity fell to 14.1% from 16.2%. But the bank also provides an adjusted figure: excluding the 2026 special tax and customer benefits, profit would have reached NIS 1.440 billion and return on equity 16.3%. In the comparable 2025 quarter, excluding that year's special tax only, profit was NIS 1.361 billion.

The adjusted number prevents an overly harsh reading of the quarter, but it does not make the quarter clean. Net interest income fell to NIS 2.693 billion from NIS 2.799 billion, and financing income from regular activity fell 2.1% to NIS 2.769 billion. Excluding customer benefits, total financing income was almost flat at NIS 2.953 billion. The issue is not a collapse in the financing engine, but pressure on the conditions around it.

That pressure shows up in interest spreads. In Israeli operations, the total interest spread fell to 1.44% from 1.63%, and to 1.52% excluding customer benefits. In unlinked shekel activity, the spread fell to 1.50% from 1.82%, and in foreign-currency activity to 0.26% from 0.49%. Average interest-earning assets in Israel still grew 12.6%. The bank expanded the base on which it earns, but the profitability rate on parts of that base declined.

The operating side remained disciplined. Operating expenses fell 0.8% to NIS 1.328 billion, mainly because salary expenses declined 3.9%. The cost-income ratio was 38.1%, almost unchanged from 37.8% in the comparable quarter, but still above the improvement investors would want to see if the rate environment continues to pressure income. Fees and other income were relatively stable, and fees themselves rose 10.1%, mainly in securities, foreign exchange and financing activity.

Credit Is Growing Faster Than The Capital Cushion

The important number in the quarter is not only credit growth, but where that growth lands. Net credit to the public rose to NIS 413.6 billion. Mortgages grew 9.2% from March 2025 to NIS 248.3 billion, but the sharper growth came from business activity: business credit grew 24.7% to NIS 121.7 billion. Large-business credit rose 30.9%, medium-business credit rose 25.7%, and credit to institutional clients almost doubled from a low base.

That growth creates profit, but it also increases risk-weighted assets. Risk-weighted assets rose to NIS 351.0 billion, up NIS 6.9 billion from the end of 2025 and NIS 36.4 billion from March 2025. Against that, the common equity Tier 1 ratio fell to 10.17%, from 10.24% at the end of 2025 and 10.37% in March 2025. The regulatory requirement is 9.60%, so the CET1 excess fell to only 0.57 percentage points.

The disclosed sensitivity shows how narrow that cushion is. A NIS 100 million change in CET1 capital changes the ratio by about 0.03 percentage points, and a NIS 1 billion change in risk-weighted assets changes it by the same amount. A 0.57 percentage point excess is not a large cushion for a bank that keeps growing credit at a double-digit rate while distributing half of its profit.

This is where the dividend matters. In March, the bank paid a NIS 702 million dividend for the end of 2025, and on May 18 the board declared another NIS 619 million dividend, equal to 50% of first-quarter net profit. The question is not whether the bank earns enough to distribute, but whether it can distribute 50% of earnings and still expand its CET1 excess while risk-weighted assets grow.

The January 2026 dollar Tier 2 issuance, at $750 million, helps total capital and the funding structure. It does not change the CET1 test. The total capital ratio was 13.02%, above the 12.50% requirement, but common equity is the layer that supports growth and distributions. Debt issuance can buy flexibility. It cannot replace internally generated common equity.

Credit Quality Still Looks Good, But Provisions Are Less Clear

Aggregate credit quality does not look broken. The ratio of non-performing loans or loans 90 days past due was 1.03%, almost unchanged from 1.02% at the end of 2025 and below 1.12% in March 2025. In commercial activity, the ratio fell to 1.04% from 1.64% in the comparable quarter. The risk report also says there was no material deterioration in credit quality indicators.

But the low quarterly provision is not a simple number. Credit-loss expenses were only NIS 31 million, an annualized rate of 0.03%, compared with NIS 103 million in the comparable quarter. Behind that, individual provision expense rose to NIS 92 million from NIS 71 million, while the collective provision reduced expense by NIS 117 million. The quarter benefited from a collective release, not only from improvement across the individual risk pockets.

The risk mix is where the follow-up work belongs. In mortgages, the bank recorded NIS 53 million of credit-loss income, but the ratio of non-performing loans or loans 90 days past due rose to 1.07% from 0.94% in March 2025. In small and micro businesses, provision expense was NIS 93 million, and in overseas activity it rose to NIS 64 million, an annualized rate of 1.65%. These figures do not cancel the positive credit-quality case, but they keep it from being too simple.

The mortgage book also still requires monitoring of the relief layer. At quarter-end, loans totaling NIS 4.9 billion had been modified and were still in deferral or extension periods, almost all of them mortgages. Among loans where the relief period ended, NIS 1.1 billion failed after modification, mostly mortgages. The prior analysis of the housing and real-estate book marked this as a central 2026 test: whether credit quality remains stable as relief measures roll off.

Sector exposure also matters. Construction and real estate represent about 18.3% of total credit risk to the public, and most exposure is backed by real-estate collateral and closed project-finance structures. That is partly reassuring, but it does not replace quarterly monitoring of arrears, individual provisions and project sales pace. In a bank with a narrow CET1 excess, small credit deterioration can turn into a capital question more quickly.

Conclusion

The first quarter of 2026 reinforces a mixed but clear conclusion. The bank's profitability remains high, and the adjusted number shows that the decline in reported profit alone is not enough to change the business picture. But the more important data point is that the bank continues to grow credit and distribute 50% of profit while the CET1 excess declines. That makes common equity the central test for the year.

The rest of the year needs to prove three things. First, financing income has to stabilize without relying on adjustments that strip out the special tax and customer benefits. Second, provisions need to stay low without a meaningful collective release. Third, the CET1 excess has to start widening despite risk-weighted asset growth and the dividend. If all three happen together, the first quarter will look like tax and regulatory noise around a profitable bank. If not, 2026 will look less like a profit year and more like a capital-constraint year.