Bank Leumi
Bank Leumi has set aside a provision to settle a U.S. tax probe related to its Swiss unit. Photo by Bloomberg
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Bank Leumi, Israel’s second largest bank, beat forecasts with a smaller-than-expected decline in quarterly net profit yesterday despite setting aside a provision to settle a U.S. tax probe related to its Swiss unit.

Net profit fell 39%, to 290 million shekels ($82 million) in the second quarter from 474 million shekels a year earlier, but beat the 161 million shekels expected by analysts polled by Reuters. Excluding the provision, Leumi said profit in the April-June period was 765 million shekels.

In June, Leumi said it was close to reaching a deal with the U.S. Department of Justice, which has been investigating possible tax evasion by the bank’s American clients. It is unclear when a settlement will be reached and Leumi has declined to offer a timetable.

Following Credit Suisse’s settlement in May, in which the Swiss bank paid penalties of more than $2.5 billion, a banking source said Leumi’s provision was a sign the bank could be the next to settle.

“We are probably closer to the end than the middle,” said Adi Scop, financial services analyst at the IBI Israel Brokerage & Investments.

Leumi has urged its U.S. clients to disclose information about their accounts to the authorities, who are investigating Leumi and other foreign banks in a wide-ranging campaign to crack down on Americans using offshore banks to evade taxes.

Leumi has so far provisioned 950 million shekels for the impending settlement, which covers the period 2002 to 2010. Some 460 million of that came in the second quarter, weighing on its bottom line and its share performance so far in 2014.

Nevertheless, Leumi shares closed up 2.1%, to 13.64 shekels in Tel Aviv Stock Exchange trading. Since the start of the year, the shares are down about 5.8% after gains of 28% in the prior two years.

In contrast, shares of its chief rival Hapoalim, Israel’s largest bank, are up 1.3% in 2014. Last week, Hapoalim beat expectations with a quarterly profit of 783 million shekels.

Hapoalim and Mizrahi-Tefahot, Israel’s fourth-largest bank, which also have Swiss units, may be targeted by the DOJ, but analysts say any fines would be small since Leumi has the largest operations of an Israeli bank in Switzerland.

Barclays analyst Tavy Rosner reiterated his Overweight rating for Leumi and has a price target of 16 shekels. He said the road to a higher rating will likely be bumpy but that “most of the overhangs are in the stock.”

Despite falling interest rates as policy makers try to boost a weakening economy, Leumi said net interest income rose 3.6% in the second quarter, to 1.9 billion shekels.

“Even with the 460 million shekel provision for the DOJ settlement, it’s a decent set of results,” Scop said, pointing to interest income gains and 2% fall in salary expenses. “Leumi has been talking about operational efficiencies for a long time, and now we are finally seeing the first signs of it.”

Like its peers, Leumi said it was focusing more on higher margin loans. In the first half of 2014, credit to small businesses grew 3.4 percent while credit to mid-sized companies rose 5.9 percent.