Bank Hapoalim, Israel’s largest lender, said on Thursday it had boosted net profit more than 13% in the second quarter, but the good news was offset by a decision to suspend its quarterly dividend to save money it may need to cover the costs of a U.S. tax investigation.
Investors had been waiting to see whether Hapoalim would take a provision to cover any expected penalties from the probe after the U.S. Justice Department offered last week to end a similar tax investigation against Mizrahi Tefahot Bank in exchange for a $342 million fine.
Mizrahi was surprised by the size of the proposed penalty and rejected the offer, but the news aroused concerns that Hapoalim could face an even bigger penalty. To date Hapoalim has provisioned $365 million in connection with the U.S. investigation, which alleges that the bank aided U.S. clients to evade American taxes.
The bank said on Thursday it did not make additional provisions this quarter.
“Yet, for reasons of conservatism and in coordination with the Bank of Israel, the board of directors did not declare a distribution of dividend from second quarter 2018 net profits at the date of the approval of the financial statements,” Hapoalim said, adding that the move did not change its policy of paying dividends of up to 40% of quarterly net profit.
Shares of Hapoalim, which have lagged other Israeli banks this year in part over concerns about the cost of the probe, finished 0.2% higher at 25.79 shekels ($7.01).
The decision to suspend its dividend rather than setting aside more money came in coordination with Bank of Israel Banks Supervisor Hedva Ber. Not paying the dividend saved the bank 368 million.
“We believe this is for sake of conservatism in the context of the ... offer made to, and then rejected by, Mizrahi Tefahot last week,” Barclays analyst Tavy Rosner said.
Hapoalim said it earned 920 million shekels ($250 million) in the second quarter, the highest among Israeli banks and up from 812 million a year earlier. It was also higher than the 875 million average forecast in a Reuters poll of analysts.
Return on equity reached 10.52% in the second quarter, up from 9.51% a year earlier.
Hapoalim’s legal expenses for the U.S. investigation amounted to 100 million shekels in the second quarter. Its net interest income rose to 2.3 billion shekels in the quarter from 2.17 billion a year earlier while credit loss expenses fell to 90 million shekels from 138 million.
Hapoalim said that in view of progress it has made in spinning off its Isracard credit card unit, as ordered by the Israeli government, the unit has been classified as a “discontinued operation.”
Its core Tier 1 capital ratio to risk-weighted assets, a key measure of financial strength, slipped to 11.16% from 11.26% at the end of 2017.
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