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For decades, the two large commercial banks, Hapoalim and Leumi, have been racing against each other for top spot in the Israeli banking sector. In the 1980s, Leumi held the lead; but in the 1990s, the bank lost ground because of miscalculations in the United States, and and Hapoalim became the largest, most profitable bank in the country. A status quo has been reached in recent years and a small difference between the values and profit margins of the two banks remains unchanged.

The valuations released now indicate, however, that the gap between Hapoalim and Leumi is far greater than the financial reports and the market caps reflect.

A valuation that Leumi has commissioned from Kesselman & Kesselman for Migdal Insurance - one of Leumi's shareholders - was published yesterday. The assessment indicates that Leumi's actual value is NIS 10.9-11.9 billion - some 18 percent less than the NIS 13.2 billion equity reported by the bank at the end of Q2. Considering that at the end of November, Leumi is expected to post positive results for Q3 that will slightly increase the bank's equity, the value to equity ratio is even lower.

At the same time, Israel Salt Industries, one of Hapoalim's main shareholders, received an assessment from Prof. Amir Barnea indicating that Hapoalim's value is NIS 16-17 billion - 24-32 percent above the bank's equity, which, in June 2002, totaled NIS 13.6 million. Barnea also valued Leumi at NIS 13.7 billion.

The differences between Barnea's and Kesselman's valuations are striking. Hapoalim only has NIS 400 million more in equity than Leumi, but the difference between the valuation of the two banks is NIS 4-5 billion. The gap between the two valuations of Leumi is substantial as well: NIS 1.8 billion as opposed to NIS 2.8 billion.

No one ever said that valuation is an accurate science, but this kind of a difference gives rise to questions about the reliability of these estimates, the actual condition of the banks and the special role of the banks' accountants, who the supervisor of banks is trying to turn into his delegates.

Although no unequivocal answer can be given, several factors may have been at play here. Firstly, as an economist, Barnea may have been more optimistic than Kesselman's Avi Berger, who, as a CPA, is trained to be conservative with figures. Secondly, Leumi last week announced a substantial rise in its provisions for doubtful debt in Q3. Thirdly, in the months that have passed between Barnea's valuation and Kesselman's estimate, the market went from bad to worse. And finally, Kesselman & Kesselman suffered a blow to their reputation as CPAs of the fallen Industrial Trade Bank and, therefore, may have been doubly cautious in their estimate.

There is also the conspiracy theory concerning the animosity between Berger and Gad Somekh, who is Leumi's CPA and signs the bank's reports. But this kind of juicy gossip is best left for the coffee breaks at the accounting firms in Tel Aviv.