Bank Leumi (TASE: LUMI) delivered a good report for the first quarter of 2007, thanks to the upswing in Israel's economic status. On the one hand, it lent more; on the other hand, its problems with problem debt abated.

Leumi, the second-biggest bank in Israel, provisioned a mere NIS 11 million on a loans portfolio of more than NIS 185 billion.

Fees for banking services increased by 11% to NIS 825 million, Bank Leumi said.

The bank's net profit did drop, this is true, but the most important criterion for a bank - net interest income - increased, and by a lot.

First-quarter profit was NIS 917 million, down 17.5% from the parallel quarter. Its net includes NIS 259 million in gains from selling some of its provident and mutual funds to Markstone's investment arm Prisma.

In the parallel quarter of 2006 Leumi had booked a one-time gain of NIS 712 million from selling its holdings in conglomerates Africa Israel (TASE: AFIL)  and Migdal Insurance (TASE: MGDL). Under the law, a bank may have holdings in only one conglomerate and it chose to keep its shares in The Israel Corporation (TASE: ILD) .

In pro forma terms, without one-time items, Leumi earned NIS 658 million in the first quarter of 2007, compared with about NIS 400 million in the same period of 2006.

Bank Leumi stock

First-quarter 2007 return on equity receded to 22.2% in annualized terms, compared with 30.4% in the corresponding quarter of 2006.

Net return on interest income was 15.6% in annualized terms, versus 10.3% in the same quarter of 2006.

During the last year and a half the banks have been gradually shedding their asset management subsidiaries, under the Bachar reform.

During the year 2006 Leumi earned NIS 3.5 billion - of which NIS 2 billion were from divesting assets, including its shares in Migdal and Africa Israel, as well as the Psagot Ofek mutual funds management company.

Selling Psagot to York Capital Management netted Bank Leumi NIS 682 million.

The bank's interest income from lending totaled NIS 1.79 billion in the first quarter of 2007, on its NIS 185.9 billion loans portfolio.

Provision for doubtful debt shrank by a drastic 95% compared with the parallel quarter, indicating that Leumi is radically more confident of the quality of its outstanding loans.

The bank's income from financing after provision for doubtful debt rose by 23% to NIS 1.78 billion.

Fees for banking services rose to NIS 825 million in the first quarter, an increase of 11% against the parallel quarter.

No controlling interest

Bank Leumi is at present the only bank in Israel that nobody actually controls, outside of its management, that is. It has no defined controlling shareholder.

The Cerberus-Gabriel group of hedge funds had won a tender in 2005 to buy the 20% controlling interest from the state, but failed to arrange regulatory approvals in time to complete the transaction. At present it owns 9.99% and must, under law, reduce its stake to less than 5%.