Bank Hapoalim (TASE: POLI)  today presented a relatively good report for the first quarter of 2007, though the bank's income from credit shrank.

Hapoalim, which is controlled by Shari Arison, reported an 11% increase in income from regular activity, to NIS 690 million.

Strong economic growth in the first quarter improved the financial status of corporate Israel, allowing Bank Hapoalim to cut back its provision for doubtful debt, which offset the 2.5% year over year decrease in income from credit.

The bank netted NIS 635 million in the first quarter of 2007, down from NIS 1.17 billion in the same period of 2006. It is not that business deteriorated at the bank, it's that its quarterly results a year ago were heavily distorted by income from selling its holdings in provident and mutual fund management companies, pursuant to the Bachar reform. It also posted capital gains in the parallel quarter from selling shares in Industrial Building Corporation (TASE: IBLD).

In the first quarter of 2007, Bank Hapoalim posted an NIS 55 million nonrecurring tax cost on selling its shares in Bank Yahav.

First-quarter return on equity sank to 14.6% compared with 31.3% in the parallel quarter, for the same reasons as above - then the bank's results were non-representative of its operations.

Return on equity from ordinary business was 16%, up from 15.7% in the corresponding three months of 2006.

Bank Hapoalim shares

For the year 2006 Bank Hapoalim had netted NIS 3.36 billion, of which NIS 863 million originated from nonrecurring events, including the sale of Bank Otsar Hahayal. The first quarter of 2007 is virtually free of nonrecurring items and therefore faithfully represents the bank's true performance.

Later in the year Bank Hapoalim is expected to sell Gadish, a group of provident funds with NIS 20.8 billion in assets under management, for NIS 660 million. The transaction has yet to be finalized and Bank Hapoalim refrained from recognizing any income from it.

Dropping income from credit

Like all banks, Hapoalim makes most of its money from interest on loans it grants and from fees. Again like all banks, it charges higher interest rates on loans that it extends than it pays customers for deposits.

The bank's net income from financing (interest it charges, minus the interest it paid out) shrank by 2.5% to NIS 1.84 billion in the first quarter of 2007. Total credit to the public totaled NIS 187 billion at the quarter's end.

Provision for doubtful debt contracted 25% compared with the parallel quarter to NIS 181 million.

Financing income after provision for doubtful debt increased by a tiny degree to NIS 1.66 billion, the bank said.

Further indicative of the improvement in its loans portfolio is the fact that provision for doubtful debt in the parallel quarter amounted to 0.65% of its portfolio. In the last quarter, that dropped to 3.87%.

Fees for banking services brought the bank NIS 993 million, an increase of one percent against the parallel quarter.

Wage costs shrank by 2.5% because the drop in Hapoalim's share price, during the relevant period, ate into bonuses.