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Bank Hapoalim presented a weak first quarter yesterday morning in its first financial report for the year, posting a negligible profit of NIS 42 million. While this appears to be an improvement over the same period last year, when the bank reported a NIS 1.6 billion loss, appearances can be misleading.

Bank Hapoalim's first quarter results for 2008 were highly unusual, affected as they were by the huge loss from the sale of its mortgage-backed securities portfolio.

Hapoalim chairman Danny Dankner, who Bank of Israel's governor is seeking to oust, published his comment on the financial report without reference to his future at the bank: "Bank Hapoalim's performance for the first quarter of 2009 reflects the fact that the Israeli economy is in recession, the depth of which is indicated in macro-economic figures published over the past few days. The bank continues to strive toward its goal for the year, which is 4%-7% return on equity. In addition, the bank has made progress toward its goal, which is to reach a capital adequacy ratio of 12% by the end of the year."

Dankner went on to say that based on data from all over the world, we clearly haven't seen the end of the global crisis yet. If it turns out to be deep and lengthy, he added, the negative effects on the Israeli economy will continue to be felt. Dankner wound up with congratulations to "the government of Israel, Prime Minster, Histadrut labor federation chairman and business organizations, on their success in reaching an agreement on the national budget."

The bank's quarterly profit reflects a 0.9% return on equity, even lower than analyst forecasts, which had predicted that Bank Hapoalim would post weak profit of between NIS 87 and NIS 147 million.

Hapoalim reported NIS 314 million for its provision for doubtful debt in the first quarter, compared to just NIS 32 million in the first quarter of 2008. This was nevertheless an improvement over the previous quarter, when Hapoalim reported a provision of NIS 765 million. The bank also posted a 0.5% provision for doubtful debt from its credit portfolio, half the level predicted by analysts.

The bank's capital adequacy ratio rose to 11.27%, up from 10.92% in the previous quarter.

UBS research analyst Darren Shaw believes that without the effect of the exceptional accounting expense of NIS 855 million due to revaluation of the bank's derivative instruments, its results were better than expected.

"Investors in Bank Hapoalim securities would be happy to finally see an end to the battle between the bank's controlling shareholder Shari Arison and central bank governor Stanley Fischer," said the head of Clal Finance's research department Yuval Ben Zeev, commenting on the quarterly financials published yesterday. Nevertheless, Ben Zeev and UBS analyst Shaw are in agreement. Groping through a screen of smoke, "we find that Hapoalim's financial report is a good one, he says. The smoke, he says, is comprised mainly of the negative influence of Bank Hapoalim's accounting expense related to revaluation of the bank's derivative instruments, totaling NIS 855 million.

The relative calm in the capital markets over the past few months has facilitated the financial stability of some of the bank's clients, and brought down the bank's provisions for doubtful debt from the previous quarter, says Zvi Ziv, Bank Hapoalim's chief executive who resigned over differences of opinion with the bank's chairman Dankner (his resignation has yet to come into effect), "but unfortunately we still don't see signs of recovery from the recession in the Israeli economy."