bank hapoalim
Bank Hapoalim offices in Tel Aviv. Photo by Eyal Toueg
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Motti Kimche
Bank Leumi branch. Photo by Motti Kimche
Ofer Vaknin
Israel Discount Bank. Photo by Ofer Vaknin

Israel's three biggest banks on Thursday all reported lower profits in the second quarter as they struggled with a host of problems ranging from a slower economy to a weaker stock market.

Bank Hapoalim said its net profit for the three months ending June 30 was NIS 607 million - off 15% compared to a year earlier, and slightly under the NIS 613 million average forecast given in a Reuters poll of analysts. That left the bank with a net return on equity of 10.2%.

In spite of the stickier economy, Hapoalim only set aside 0.55% of its loan portfolio for possible credit losses - not much higher than the 0.49% rate in the first quarter and lower than 0.61% in the fourth quarter of 2011.

Bank Leumi saw its net profit fall by a sharper 50% to NIS 280 million, coming in well under the NIS 435 million average that analysts forecast. Credit-loss charges rose to NIS 333 million, which were also above expectations. Net ROE dropped to 4.7% from 10.3% a year earlier.

The bank was also hit by a NIS 101 million charge for the value of its stake in cell-phone operator Partner Communications, whose shares slid 45% in the quarter.

No. 3, Israel Discount Bank, also saw its second-quarter earnings pulled down by a non-bank investment. In Discount's case it was its stake in First International Bank of Israel, whose falling share price erased NIS 73 million in value. That contributed to a 28% drop in Discount's quarterly profit to NIS 165 million. Its ROE fell to just 6.1%.

Subtracting the impact of the FIBI stake, however, Discount's net profit was NIS 238 million - above the average forecast in a Reuters poll of NIS 184 million.

Israel's economy will probably grow 3.1% this year, down from 4.6% in 2011, but even that forecast may prove optimistic as a troubled Europe cuts into exports.

The declining profits at the big three contrasted with increased earnings at smaller lenders, which reported their second-quarter financial results earlier this month.

Mizrahi-Tefahot Bank, Israel's fourth-largest lender, boosted its net profit in the second quarter by 17%, while No. 5, First International Bank, reported a 43% jump - both saying earnings were boosted by higher interest income and lower credit-loss charges.

Nevertheless, analysts said the big three performed well under difficult circumstances. Leader Capital Markets analyst Alon Glazer said one reason is that corporate borrowers have been turning to banks rather than the bond market for credit.

"On the other hand, operating income is falling, mainly due to the weak capital markets," he said. "At some of the banks we saw a fall in commissions from ongoing activities due to a decline in the level of economic activity ... We assume this trend will continue in the light of estimates that economic growth is expected to drop."

Glazer added that credit-loss charges at Israel's banks will likely continue to rise, though not dramatically.

Hapoalim's shares ended 1.8% lower in Tel Aviv Stock Exchange trading yesterday. Shares of Leumi also ended off 1.8%, while those of Discount Bank gained 0.7%.

The Bank of Israel wants banks to raise their core capital adequacy ratio to 9% of assets by the end of 2014 with a view to complying with the international Basel III regulatory standards.

At the end of the second quarter Hapoalim had a core Tier 1 ratio of 8.3%, while Leumi had a ratio of 8.38%, and Discount 8.25%.