Leumi, Discount profits fall short of forecasts

Analysts were stunned as profits at two of Israel's three biggest banks fell short of expectations. Bank Leumi, the biggest bank in the land by market cap, and Israel Discount Bank both suffered from lower financing income, higher expenses and weaker capital markets.

	Galia Maor.
	Photo by: Ofer Vaknin

In contrast Hapoalim, the No. 2 bank in terms of market value, last week reported a higher-than-expected rise in net profit as a stronger economy led to lower bad debt provisions and higher income from credit transactions and credit card fees.

Leumi yesterday reported quarterly net profit of NIS 660 million, up from NIS 507 million a year earlier but less than the NIS 672 million forecast in a Reuters poll. "Relative to our forecasts the main misses were lower net interest income and higher operating expenses, partially offset by lower loan loss provisions, higher non-interest income and a lower tax rate," Citi analyst Michael Klahr said.

He said salary expenses rose due to a significant decline in the value of the employee severance fund that is managed in-house, a factor that also weighed on the results of No. 3 bank Discount.

Clal Finance head of research Yuval Ben Zeev said he was surprised by the decline in core financing activity compared with the first quarter, given the rise in interest rates. "At this stage we don't have an explanation for this sharp drop," said Ben Zeev, who rates Leumi at Outperform with an NIS 18 price target.

The real news at Leumi: Dividends

Ben Zeev said the real news in Leumi's report was the resumed dividend after a more than two-year suspension in the wake of the global financial crisis.

Leumi said it would pay on November 30 a dividend of NIS 500 million, or 34 agorot a share, representing 40% of the net profit for the first half of 2010. It will be the bank's first dividend payment since May 2008.

Leumi's bottom line was lifted by an extraordinary gain of NIS 182 million, mainly from the sale of its stake in Paz Oil. Income from financing operations before provisions for doubtful debts fell to NIS 1.64 billion from NIS 1.93 billion a year ago, while the loan loss provision declined 42% to NIS 196.

Most of Israel's banks posted lower debt provisions as the economy bounced back from a brief recession, growing an annualized 4.7 percent in the second quarter. But Discount's loan loss provisions rose to NIS 261 million from NIS 231 million, which contributed to a 53% drop in the bank's net profit to NIS 158 million. The bank had been expected to earn NIS 184 million.