Bank Leumi, Israel’s second-largest lender, said on Thursday it had reached an agreement with labor unions to lay off about 700 staff by the end of this year as part of a plan to reduce costs and enable it to step up lending.
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The early retirement program will offer employees who opt to take it either increased severance pay or an interim pension payout until they reach retirement age, as well as a bonus. All told, Leumi said, the layoffs will cost the bank about 550 million shekels ($142.4 million), which will appear as a charge in its second quarter results.
“The efficiency program is another critical stage in readying Leumi for tomorrow’s banking,” CEO Rakefet Russak-Aminoach said. “The dramatic changes in the operating environment require all leading businesses and banks in particular to show better operating efficiency and management flexibility.”
Leumi shares were down 0.7% at 13.74 shekels in late trading on the Tel Aviv Stock Exchange.
Leumi had planned to make as many as 1,500 job cuts over the next three years, but accounting issues have forced it to settle for now at the 700 agreed on yesterday.
Nevertheless, the current round of layoffs will enable Leumi to take advantage of the offer to banks by Hedva Ber, Bank of Israel’s supervisor of banks, to banks to ease their capital adequacy requirements as a measure of a bank’s financial strength – if they act to cut costs.
Ber ordered Israel’s banks last December to improve their cost structure, which is conventionally measured as costs-to-operating revenues and promised to ease capital adequacy ratios for the banks that undertake the most aggressive streamlining efforts. Israeli banking costs are too high relative to banks in other countries belonging to the Organization for Economic Cooperation and Development (OECD) – an average of 70.2% in the years 2012-14 versus just 60% for OECD banks.
In Leumi’s case, it will be able to enjoy relief from the capital adequacy requirement by the 550 million-shekel cost of the program over five years. The easier requirement means the bank should be able to step up lending, Leumi said.
Leumi’s core Tier 1 capital-to-risk-weighted-assets ratio in Basel III terms rose to 9.96% at the end of March from 9.58% at the end of 2015. The bank must meet a minimum ratio of 10.3 percent by the start of 2017.
Leumi said that next year it will examine the success of the program and depending on the results, it could expand it.