Naoi in the First Quarter: A Nearly Flat Book, Higher Provisions, and Capital Moving Into Direct Finance

Naoi opened 2026 without a break in reported profitability, but with a more important change: the first quarter does not prove a new acceleration in the credit book, it tests whether the large book built in 2025 is good enough to keep producing profit without raising the risk level. Net financing income was NIS 75.7 million, almost identical to NIS 75.5 million in the fourth quarter, and net profit was NIS 46.3 million versus NIS 46.0 million in the previous quarter. That looks calm, but underneath it the total credit portfolio grew by only NIS 77 million from year-end, while Stage 3 loans rose to NIS 176.7 million and credit-loss expenses increased to NIS 8.0 million. At the same time, the company invested NIS 72.7 million in Direct Finance shares and reached a 9.9% holding after the balance-sheet date, while Naoi & Luzon already has a credit book of about NIS 400 million but still contributed a small equity-method loss. The quarter therefore supports the view that Naoi can still earn and fund itself, but it does not close the central debate from 2025: whether credit-book growth can arrive with stable credit quality, reasonable funding cost, and disciplined capital allocation. The next few quarters will be decided less by book size itself and more by collections from problem loans, the pace of provisions, funding cost, and the economic contribution of adjacent credit investments.

The Book Barely Grew, but Profit Stayed Close to the Previous Quarter

Naoi is a non-bank business lender now focused mainly on financing residential real-estate activity. About 95% of the credit book is based on loans backed by the borrower's own deferred checks, and about 74% of the book is in real estate. Its economic model is easy to define and harder to execute: raise money from banks and the capital market, lend it at a higher rate, hold enough collateral, and keep credit losses from consuming the spread.

Financing income rose 20.2% year over year to NIS 126.0 million, mainly because the average book was much larger, about NIS 5.15 billion versus about NIS 3.9 billion. Sequentially, the picture is different: financing income fell 1.2%, and net financing income rose by only 0.3%. The first quarter is therefore not another growth step. It is a quarter showing that the company can preserve profitability after the jump in the book.

The more important point is earnings quality. In 2025, annual profit benefited from large other income, mostly from the Isracard holding. In the first quarter of 2026 there was no other income, and pre-tax profit still rose to NIS 60.9 million from NIS 55.2 million in the comparable quarter. That strengthens the argument that the core business can earn without large one-off investment gains. Still, the average annual interest rate on the customer book fell to 9.38%, compared with 10.7% in the comparable quarter and 10.2% in the 2025 average. Scale is helping, customer pricing is lower, and that gives every increase in credit losses more weight.

That is also progress relative to the question raised in the previous annual analysis. Back then, Naoi needed to show that the larger book would translate into net financing income rather than only into a larger balance sheet. The first quarter provides a partial answer: the core remains profitable, but the book barely moved from year-end and provisions rose. The proof point now moves from accounting profit to credit quality and the cost of the capital that funds it.

Stage 3 Rose Again, and the Provision Is Less Theoretical Now

The sharper story sits in the credit note. Stage 3 loans, impaired loans due to credit risk, rose to NIS 176.7 million at the end of March 2026, from NIS 145.3 million at the end of 2025 and NIS 32.4 million in the comparable quarter. This increase is not explained only by book size: gross customer credit before provisions rose by about 1.0% from year-end, while Stage 3 rose by 21.6%.

On the other hand, the provision ratio inside Stage 3 rose to 14.78% from 12.89% at the end of 2025. That is an improvement from year-end, but still far from 44.59% in the comparable quarter. The specific provision expense in the customer book was NIS 7.4 million out of total credit-loss expenses of NIS 8.0 million, so this is not only a general reserve added because the book grew. Specific loans required more provisioning.

The yellow flag is not the existence of collateral. Naoi reports NIS 4.202 billion of collateral-backed loans against NIS 6.610 billion of collateral before haircuts and NIS 4.962 billion after haircuts. The problem is that disclosure still does not map Stage 3 by collateral type, lien rank, or LTV. At the total-book level, there is a meaningful collateral layer, but the reader does not know how much of the impaired debt sits behind first-ranking mortgages and how much relies on project surplus or other collateral.

The delinquency split sharpens the point. Inside Stage 3, NIS 73.8 million is more than one year overdue, NIS 58.7 million is 181 to 365 days overdue, and NIS 41.2 million is 91 to 180 days overdue. The decline in Stage 2 from NIS 31.7 million at the end of 2025 to NIS 15.3 million in the first quarter looks positive, but it is not enough by itself to settle the debate while Stage 3 itself continues to rise. This is where the discussion from the previous credit-quality analysis becomes more practical: actual collections and collateral realizations matter more now than another aggregate collateral percentage.

Liquidity Exists, but It Relies on Facilities and the Debt Market

On the balance sheet, Naoi does not look under immediate pressure. Equity rose to NIS 1.057 billion, about 19.1% of total assets, versus a minimum capital requirement of NIS 369.6 million and a surplus of NIS 687.1 million. The company has credit facilities from three banks totaling NIS 4.020 billion, including NIS 3.720 billion of current operating lines and a NIS 300 million long-term loan due in January 2028.

Still, liquidity has to be read through the type of funding, not through the cash balance. At the end of March, cash was only NIS 178 thousand, and after overdraft the net cash balance was negative NIS 732 thousand. That is not unusual for a lender operating through financing lines, but it means the real cushion is access to facilities: NIS 1.136 billion of unused bank facilities at quarter-end and about NIS 1.060 billion near publication, alongside NIS 680 million of binding facilities backing commercial paper.

All-in cash flexibility after actual cash uses in the quarter depended on external funding. Operating cash flow was negative NIS 12.0 million, investing activity used NIS 116.2 million mainly because of marketable bond purchases and the equity investment, and financing activity brought in NIS 121.8 million net, mainly from the expansion of commercial paper series 11 net of bond series VI repayment. This is not a normalized cash-generation calculation. It is an all-in cash flexibility test: after investments and debt activity, the company remains dependent on access to banks and the debt market.

After the balance-sheet date, Naoi fully repaid tradable commercial paper series 10, NIS 170.5 million, and issued tradable commercial paper series 12, NIS 112.8 million, at Bank of Israel interest plus 0.44%. That event matters because one sign the market needed in 2026 was smooth rolling of short-term funding. The quarter provides a positive signal, but it does not make the funding stack long. Non-tradable commercial paper totaled NIS 1.053 billion at quarter-end, while binding backup facilities totaled NIS 680 million.

Capital policy adds another test. The company declared an NIS 11.5 million dividend from fourth-quarter profit, and after the balance-sheet date approved another NIS 11.6 million dividend from first-quarter profit, equal to 25% of quarterly net profit. It also updated the buyback plan to up to NIS 30 million, although no buyback had been executed by publication. The distribution itself is not unusual relative to profit, but when it comes alongside the Direct Finance investment, marketable bond purchases, and continued expansion of credit activity, Naoi must keep a comfortable buffer in both equity and facilities.

Direct Finance and Naoi & Luzon Expand the Story, but Do Not Replace Core Proof

The newest move in the quarter is the purchase of Direct Finance shares. Naoi invested NIS 72.7 million during the quarter, and at the end of March the holding was carried at NIS 80.2 million. After the balance-sheet date, it purchased additional shares and reached 9.9% of Direct Finance's equity, almost the full permit it received to hold up to 9.99%.

The move makes sense as diversification inside credit, but it changes the tracking question. The investment is not yet operating earnings contribution. It is capital allocation into a financial asset adjacent to the core business. If it remains a financial holding, the market will measure it through quoted value and volatility. If it becomes a strategic move, Naoi will need to explain the economic channel: access to knowledge, cooperation, broader credit products, or another future option. For now, the report mainly proves that the company is willing to use capital for more than expanding its own direct credit book.

Naoi & Luzon is at a different stage: it already has activity. At the end of March, its credit book was about NIS 400 million, and Naoi owns 45% of the venture. But Naoi recorded an equity-method loss of NIS 497 thousand in the quarter, and the investment is carried at NIS 88.8 million. This is still not profit contribution. It is a business option that has moved beyond setup but has not yet proven recurring earnings.

The 2026 and 2027 work plan gives the frame: a credit book of about NIS 5.6 billion in 2026 and NIS 6.4 billion in 2027. Against NIS 5.326 billion at the end of the first quarter, the 2026 target does not require an unusual leap through the rest of the year. But after the increase in Stage 3, the question is no longer whether Naoi can grow the book. It is under what terms it will grow, and how much capital it will choose to move into adjacent investments instead of direct credit.

Conclusion

Naoi's first quarter is stable, not clean. It strengthens the view that the core business still produces profit without large one-off income, that funding remains accessible, and that credit facilities allow it to operate even with almost no cash on the balance sheet. But it also raises the burden of proof: Stage 3 grew faster than the book, specific credit-loss expense rose, and capital is now working in Direct Finance and the mortgage venture, not only in the direct credit book.

The current read is that Naoi entered 2026 with profitability and funding capacity, but not yet with full proof that credit-book quality is keeping pace. The strongest counter-thesis is that better collateral, the relatively short average life of the book, excess capital, and access to funding are enough to absorb the rise in Stage 3. For the read to improve in the next few quarters, impaired loans need to stabilize or decline, net financing income needs to hold without aggressive book expansion, and the expected contribution from Direct Finance and Naoi & Luzon needs to become clearer. What would weaken the read is a further increase in Stage 3 without collateral realizations that justify the provision ratio, or growing use of capital for adjacent investments before the core proves that 2025 growth was high quality.