Direct Finance in the first quarter: profit came back, but the quality test moved to securitization and recovery

The first quarter gives Direct Finance an initial answer to the open questions left at the end of 2025: profit recovered, but the company has not yet proven that the full improvement comes from a steadier recurring economic base. Net income rose to NIS 53.4 million, and profit attributable to shareholders reached NIS 48.1 million, well above Q4 2025 and the same quarter last year. The working pieces are mortgage growth, large loan sales, vehicle-book efficiency, and better funding costs. The less clean part is the source of the profit: the quarter included NIS 157.95 million of fair value changes on loan portfolios, including NIS 46.5 million in mortgages, where about NIS 38 million came from a securitization transaction. At the same time, credit loss expenses rose to NIS 73.4 million, and the vehicle segment absorbed an estimated NIS 11 million hit from lower recovery assumptions during Operation Lion's Roar. The current read is more positive than at year-end 2025, but still conditional: the company needs to show that the vehicle book can recover without relying on fair value gains, that mortgages can keep rolling through affordable funding, and that shareholder distributions are not running ahead of the economic cash engine.

The company is no longer only a vehicle-credit story

Direct Finance is a non-bank consumer lender, but this quarter its economics look more like a two-engine funding machine: a large vehicle book that produces volume, and a smaller mortgage business that explains most of the profit jump. The previous annual analysis framed the key checkpoint as whether mortgages could keep carrying profit while the vehicle book rebuilt margins. Q1 gives a partial answer. Mortgages generated NIS 35.5 million of segment net income versus NIS 17.9 million in vehicles, but much of the mortgage result came through fair value and securitization, not only through recurring interest spread.

That changes the test for the next few quarters. The profit looks like a sharp return to a high run-rate, but the split shows a lender that can recycle and sell loan portfolios, lower part of its funding cost, and cut expenses, while still depending on recurring funding and assignment windows. That is not a flaw by itself. It is the model. But profit needs to be tested against credit quality, source availability, and the quality of the portfolio left on balance sheet after loan sales.

Profit came back, but much of it ran through fair value and loan sales

Net financing income rose to NIS 301.8 million, up 41% year over year, and pre-tax profit more than doubled to NIS 84.1 million. The numbers are strong, but the mix matters more. Interest and linkage income fell to NIS 167.5 million from NIS 198.6 million, partly because the CPI moved down during the period, while fair value changes on loan portfolios jumped to NIS 157.95 million from NIS 49.3 million. A large part of the earnings recovery therefore came from valuation, sales, and securitization of loan portfolios, not only from a wider recurring interest spread.

In this business, selling loan portfolios at good terms is part of the economics, not a side event. In Q1 the company completed assignments and securitizations totaling NIS 1.814 billion, and the proceeds were used to repay short-term bank credit. This is the mechanism the company needs in order to keep originating credit without carrying the entire portfolio on its balance sheet. The yellow flag is that readers should separate profit from recurring spread and profit from recycling portfolios under favorable transaction conditions.

The cash picture points in the same direction. Reported operating cash flow was negative NIS 78.1 million, but after neutralizing short-term credit repayment linked to long-term credit raising, the company shows positive operating cash flow of NIS 50.6 million. This is not a plain free-cash-flow picture. It is the cash picture of a lender replacing layers of debt, selling loan portfolios, and continuing to originate credit.

The vehicle book is leaner, while mortgages require more funding recycling

The vehicle segment provides both the most encouraging signal and the clearest risk. Segment profit rose to NIS 17.9 million from NIS 12.1 million, and the presentation shows NIS 34.2 million after excluding a one-time reduction tied to class-action developments. At the same time, vehicle-segment selling, marketing, general, and administrative expenses fell by about 5% despite roughly 27% growth in originations, and the presentation shows a NIS 9.5 million saving compared with the 2025 average expense level. That is initial evidence that the efficiency plan is starting to work.

The vehicle book is still not a clean engine again. Segment credit loss expenses rose 62% to NIS 71.5 million. The credit loss rate on vehicle loans rose to 4.02% from 3.18%, and the rate on complementary loans rose to 5.14% from 2.25%. The immediate driver was Operation Lion's Roar: vehicle originations in March were down about 11% versus the January-February pace, the company deferred customer payments, and collection restrictions hurt recovery estimates on delinquent vehicle loans. Originations recovered in April, but recovery and arrears will determine whether this was a temporary disruption or deeper pressure.

The mortgage business looks stronger, but also more funding-intensive. Revenue jumped to NIS 110 million, net income reached NIS 35.5 million, and the financing spread improved to 4.20% from 3.97%. The presentation shows a managed mortgage portfolio of NIS 3.746 billion, and the mortgage subsidiary's rating was upgraded to A2.il with a stable outlook. On the other hand, the NIS 1 billion Menora facility was fully utilized at quarter-end even after its terms improved at the start of 2026. The February securitization of a NIS 399 million mortgage portfolio contributed about NIS 38 million to fair value income and helped repay short-term credit, but parent-company shareholders receive only the economics left after debt layers, minority interests, and funding costs.

The next quarters will test quality, not only portfolio size

Two post-balance events sharpen the test. The first is a non-binding memorandum signed by an 85%-owned subsidiary to acquire 85% of a private company active in credit to real-estate developers, including mezzanine loans, for about NIS 36 million. If completed, existing subordinated loans of about NIS 25 million may also be repaid. The move would broaden the activity base, but the current disclosure is not sufficient to judge the acquired portfolio quality. For now, it is mainly a proof bar for future diversification.

The second event is a NIS 33.66 million dividend, about 70% of profit attributable to shareholders in Q1. A policy of distributing up to 70% fits a cash-return equity, but in a quarter with negative reported operating cash flow, meaningful fair value income, and loan assignments used to repay short-term credit, the distribution relies on confidence in the recycling machine as much as on accounting profit. Short interest declined to 1.67% of float, but it remains above the sector average of 0.38%.

The company exited Q1 stronger, but not simpler. For the interpretation to keep improving, the next three quarters need to show stabilization in vehicle credit losses and recovery, continued securitizations and loan sales without erosion in mortgage spread, and attributable profit that remains high without an unusually large fair value contribution. If rates, competition, or collection quality come under pressure again, the strong quarter will look more like a good window for portfolio realization than a new earnings base.