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To understand just how large and dramatic Bank Hapoalim's provisions for doubtful debts were in 2002, one needs to go back two years. In 2000, the entire banking system set aside NIS 2.5 billion for the entire year. In 2002, Bank Hapoalim set aside NIS 2 billion for the fourth quarter alone and NIS 3.3 billion for the year.

The bank's announcement yesterday surprised even the most pessimistic analysts, as well as its competitors - all of whom had predicted that itsprovisions for the fourth quarter would be much lower. No one believed that the bank would reach a situation in which, in a single quarter, it would set aside a sum equal to 15 percent of its equity while its provisions for the year would total about one-quarter of its equity. But Hapoalim, which has produced several surprises over the last few months, from its dramatic layoff program to its purchasing spree on the capital markets, continues to do so - and this time, it was an unpleasant one.

In contrast to the previous surprises, which stemmed solely from decisions by the bank's management and board of directors, external factors played a role in its provisions for doubtful debts. The most significant was the involvement of Supervisor of Banks Yoav Lehman. The supervisor keeps a close eye on the bank's credit portfolios, and this time - even though he has not yet completed his report on some of the loans for which the bank made provisions - his demands fell on attentive ears. At a time like this, when the supervisor says something accountants stand at attention and don't argue. "You'd have to be suicidal to argue with a demand from the supervisor of banks at a time like this," one senior accountant said recently.

Additionally, two new players at the bank - CEO Eli Yones and the head of its business division, Shy Talmon - took office only in 2002, so they have little sentiment about the borrowers and their loans. In order to begin 2003, which will be the first full year in office for both of them, in a reasonable manner, a massive cleaning of the stables was necessary. But while these personal interests played a substantial role, they were rooted in the deteriorating situations of many borrowers - such as Lumenis, Shamrock (because of its purchase of Pele-Phone), Noga Electrotechnic, Gibor Sport, Zeevi and Tevel - and the deteriorating situations of entire sectors, such as real estate, tourism and communications, which continue to claim many victims among the bank's customers.

In previous quarers, the bank still entertained itself by rolling over loans to several borrowers. But the succession of negative developments forced the bank's executives to conclude that they could no longer avoid acknowledging the fact that they will apparently never recoup a large part of the loans they gave in previous years.

Every time a bank reports an increase in provisions for doubtful debts, there are two possible explanations. The first is that it is a cleaning of the stables which will not repeat itself in 2003. The second is that it was an indication of the level of provisions that can be expected in the coming quarters as well. The message that the bank's executives tried to send yesterday was that in this case, the first interpretation is the correct one.

The good news from Hapoalim's perspective is that despite the enormous provisions for doubtful debts and the costs of its layoffs program, it nevertheless finished 2002 with a profit - albeit a very low one, NIS 360 million - and its capital adequacy ratio did not suffer significantly. The bad news is that the sheer scope of the bank's problematic debts create a potential for additional huge provisions in the future - and absent a positive turnaround in the economy, the possibility of a loss in 2003 cannot be ruled out.