Israel's Discount Bank Reports Sharp Drop in 4Q Profit

But shares rally in anticipation of turnaround as bank cuts costs

Ofer Vaknin

Israel Discount Bank reported a sharp drop in fourth-quarter profit due to nonrecurring items, in line with last month’s profit warning, but underlying fundamentals were strong.

Once Israel’s most troubled bank, the third-largest lender has begun to turn itself around, cutting costs, selling off unprofitable assets and improving its credit portfolio. “I’m very optimistic even though I know the path is still long,” chairman Yossi Bachar told a news conference on Monday.

Discount earned 5 million shekels ($1.2 million) in the quarter, down from 72 million shekels a year earlier. But excluding nonrecurring items such as an early-retirement provision and a 50-million-shekel loss from the sale of Discount Bank Latin America, net profit was 237 million shekels.

Discount’s workforce shrunk by 560 positions, or 8%, in 2014.

The bank warned last month its quarterly profit would be near zero due to nonrecurring items so the market was ready for the poor earnings report. Instead, they looked to the future and bid up its shares 3.9% to a close of 6.64 shekels in Tel Aviv Stock Exchange trading.

“Discount is our top pick among Israeli banks,” Barclays analyst Tavy Rosner, who rates the shares Overweight, said in a note to clients. “We believe the bank has room to rerate despite the challenging macro environment.”

Trading at a 33% discount to its historical average, the valuation does not give new management credit for its strategic plan, Rosner added.

After years of shrinking, the bank’s loan book grew 3.7% last year, driven by growth in consumer lending.

In addition to selling its Latin American unit, Discount is in the process of closing its London branch and is reviewing its small Swiss operation. At the same time, it is adding resources to its New York branch, where it sees strong growth potential.

“We believe the United States is right for us and we have a significant bank there with critical mass,” said Lilach Asher-Topilsky, who took over as Discount’s CEO a year ago.

Discount’s core Tier 1 capital to risk-weighted assets rose to 9.4% under Basel 3, from 8.9% at the end of 2013, surpassing the banking regulator’s minimum requirement of 9%.

Meanwhile, First International Bank of Israel, the country’s fifth-largest lender, reported a 5.5% drop in quarterly profit due to regulatory and accounting items imposed on the bank.

FIBI posted a fourth-quarter net profit of 61 million shekels ($15 million), compared to 136 million shekels a year earlier. The cumulative effect of the one-off items in the quarter amounted to 41 million shekels.

Net interest income slipped to 498 million shekels from 534 million shekels. The bank increased its provisions on credit losses to 97 million shekels from 32 million.

FIBI’s Tier 1 capital ratio under Basel III fell to 9.73%, from 9.98% at the end of 2013.

“The group is continuing to maintain a high level of financial resilience that is reflected by high capital ratios, high liquidity and by the quality of the asset portfolio,” said CEO Smadar Barber-Tsadik.

FIBI shares rose 1.9% to close at 53.81 shekels.