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Israel's largest bank announced the dismissal of 900 employees in the most ambitious streamlining plan in the sector's history.

The board of directors yesterday approved management's agreement with the bank's labor union to lay off 10 percent of its workforce, in the coming weeks. The restructuring plan will cost NIS 580 million, provisions for which will appear in Q4 2002 and Q1 2003 financial reports.

Meanwhile, CEO Eli Yones will negotiate with its mortgage subsidiary Bank Mishkan's union to lay off another 100 employees. Bank Hapoalim recently completed a buy offer for the smaller bank, which it plans to swallow, saving on redundant staffing at Mishkan.

Yones said at a press conference yesterday that there was no avoiding the layoffs. "We have recognized that a far-reaching, cost-cutting plan is necessary due to the economic situation, the ongoing recession and its impact on our clients."

The layoffs are based on early retirement plans for employees over 56 years of age and severance packages based on 2.3 monthly salaries per year of seniority for younger employees who receive pink slips. Although the terms are less generous than earlier voluntary early retirement plans, they are still considered far above the accepted practice of basing severance packages on a single salary per year.

The cost extrapolates to an average NIS 645,000 severance package per employee, however the balance sheet cost of the package only reflects payment beyond the legally-mandated single salary package. The base cost of the severance packages, which does not come from the bank's coffers, brings the average severance package to NIS 1 million and the total cost of the plan to NIS 900 million.

Yones said the layoffs will lead to an annual gross savings of NIS 277 million, with return on investment in the plan in 2.1 years. Yones and the rest of the bank's senior management also agreed to a 7-percent cut in their own salaries.

This is the first time the bank has opted for a layoff plan instead of a voluntary early retirement plan. Sector sources attributed the earlier reticence against firings to the bank's desire to preserve labor relations and the strong banking employee unions.

Watch for rerun at Leumi

The last time the Israeli banking sector issued pink slips was at United Mizrahi Bank in 1995 and then only after a drawn-out battle in which the unions published newspaper ads calling on bank clients to withdraw their funds from the bank.

But Bank Hapoalim is not Mizrahi and its union has always been considered reasonable, one that didn't make trouble and didn't go on strike. As things look now, even this unprecedented 1,000-person layoff round won't lead to strikes or even a labor dispute.

One look at the press release reveals how unusual the move is - it never mentions layoffs. Instead, the bank preferred to use the more euphemistic "departure."

At any other bank, even preliminary mentions of a 10 percent cut in the workforce would lead to a general strike at the bank.

Bank Hapoalim is one of the most efficient banks in the sector, presumably the last to cut costs and workers. But the flattering efficiency data is only good for comparison in the media. In the end, a bank's controlling shareholders measure the quality of their investment by its ability to pay a dividend.

Since acquiring the bank in 1996, the controlling shareholders have seen the bank make money hand over fist and collected handsome dividends. But in the past year, the dividend stream dried up, forcing shareholders, who need that cash flow to service the loans they took to buy the bank in the first place, had to make tough decisions.

The round of layoffs won't solve the dividend problem right away, damaging short-term profitability, but it does afford a view of a more optimistic horizon, after years of dreaming of a drastic streamlining move.

Bank Hapoalim's decision is not just a big moment for the bank, but for the entire banking sector. Trendsetter Hapoalim's move will likely provide good reason for competitors in worse condition - like Bank Leumi and Israel Discount Bank - to follow suit. But this doesn't mean their moves will also encounter the type of understanding demonstrated by the Hapoalim labor union.