Israel Discount Bank, Israel’s third-largest lender, warned over the weekend that it would probably report a “near zero” profit for fourth-quarter 2014, a move that will likely reduce its full-year earnings to just 600 million shekels ($155.4 million), or a return on equity of just 4.6%.
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The trigger for the profit warning was its sale of 7% of First International Bank of Israel shares last Thursday for 349 million shekels, which left Discount with a loss of 47 million shekels. The shares were sold to unnamed investors at 49.51 shekels each, a 2.5% discount to FIBI’s Thursday base price, Discount said in the warning issued Saturday night
It also said it would be increasing provisions for possible bad loans to consumers by a net 34 million shekels, as required by the Bank of Israel’s banks supervisor.
Other factors contributing to lowering earnings in the fourth quarter had already been reported by the bank – a 66 million shekel loss from the sale of its Latin American operations completed in December and another 110 million shekel provision to cover the cost of an early-retirement plan for employees.
These provisions, which together add up to about 257 million shekels, “will have a material effect on the business results for the fourth quarter, reducing net income to almost zero, and for 2014 as a whole,” Discount said, in a statement to the Tel Aviv Stock Exchange.
Discount is due to report its fourth-quarter financial results on March 9.
The bank sought to portray the move positively, saying it would begin 2015 with its books clear of any concerns about extraordinary provisions hanging over it. That view apparently succeeded in convincing investors: After trading as low as 6.28 in the morning on Sunday, Discount shares rebounded, cutting their daily loss to just 0.2% and closing at 6.38 shekels in TASE trading.
Although it will report a loss on the sale of FIBI, it also reduced Discount’s stake in FIBI to 9.28%, which the bank said meant it no longer had to provide the enlarged financial cushion required by regulators for shareholdings above 10%. As a result, Discount said will have an extra 1.5 billion shekels free to use for lending.
It will also mean that Discount’s capital adequacy ratio will improve in the first quarter of 2015 by 0.1 percentage point, which will also enable it to increase lending.
Two years ago, Israel’s antitrust commissioner ordered Discount to cut its 26.5% stake in FIBI, Israel’s fifth-largest bank, to below 10% by the end of 2015. In the last six months, Discount has sold 17% for a combined 800 million shekels, which has increased FIBI’s float and daily trading volume, enabling it to enter the TA-25 index of blue chip stocks.
Discount will have to continue selling FIBI shares, to meet a second deadline to reduce its holding to 5% by 2017. Discount, however, will likely hold off any further sales in the hope that FIBI shares will trade at better multiples than the 0.7 of book value they are valued at now.
FIBI shares rose 2% to close at 50.88 shekels on Sunday.