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Bank Leumi's second quarter net profit plummeted 80 percent compared to the parallel quarter last year, totaling only NIS 77 million, the bank reported yesterday. The bank's profits for the first six months of the year totaled NIS 304 million, a 56 percent drop on figures for the same period last year. This reflects a yield on capital of 4.7 percent, down from 11.7 percent in the first six months of 2001.

Israel's second largest bank saw Q2 profits from financing operations fall by 25 percent on the parallel period, to NIS 987 million. The bank blamed the fall in profitability mainly on the ongoing recession, the rise in inflation and the rise in interest rates, which it said had caused a decrease in the market value of negotiable financial instruments. As a result, it had to make a provision of NIS 220 million for the decline in value of financial derivatives, compared with NIS 13 million in the parallel quarter last year. The bank said the provisions would return to the profit and loss account when the transactions are paid up and most of the provision would be returned in the coming year.

Another technical factor that affected financing profits was the difference between the estimated consumer price index and the actual index, which resulted in financing losses of NIS 133 million, compared with NIS 30 million in the corresponding period last year.

The bank also registered a loss of NIS 121 million from adjustments to fair value of tradable debentures, compared with a profit of NIS 62 million in Q2 last year. The bank said that eliminating technical and accounting factors, net profits would have amounted to NIS 546 million, reflecting a yield on capital of 8.4 percent.

While financing profits were affected by technical and accounting factors, provisions for doubtful debt were affected primarily by the situation of the economy and by a decline in borrowers' repayment capabilities. As a result the bank registered doubtful debt provisions of NIS 329 million in the second quarter compared with NIS 190 million in the same quarter last year, a 73.2 percent increase.

In the first six months of the year, the bank made doubtful debt provisions of NIS 696 million compared with NIS 289 million in the same period last year - an increase of 141 percent.

The bank's doubtful debt provision ratio in the first six months of the year rose to 0.81 percent of total credit to the public, compared with 0.36 percent in the same period last year. In the second quarter the ratio stood at 0.77 percent compared with 0.47 percent in the parallel quarter last year. Leumi does not expect the rate of provisions to rise in the next two quarters and based on this assumption, doubtful debt provisions for the year will total NIS 1.4 billion.

The only encouraging column in the bank's second quarter report was its operating revenues which totaled NIS 737 million, up 2.2 percent on the parallel quarter last year. In the first six months of the year operating revenues totaled NIS 1.48 billion, up from NIS 1.4 billion in the corresponding period last year. The increase in revenues was primarily the result of increased commissions on capital market, foreign currency and income from credit cards.

Second quarter operating expenses, on the other hand, were up 10.5 percent to NIS 1.244 billion, with wages accounting for NIS 761 million, a 12 percent increase on the parallel quarter last year.