Hapoalim, Mizrahi Profits Fall as the Israeli Banks Set Aside Money for Tax Probe

Hapoalim admits provisions for probes for the first time as the bank's fourth-quarter net profit drops 24.5%.

A branch of Bank Hapoalim.
A branch of Bank Hapoalim. Credit: Tomer Appelbaum

Bank Hapoalim and Mizrahi-Tefahot Bank both reported lower fourth-quarter profits yesterday as they took a combined 291 million shekels ($72 million) in provisions against possible penalties for helping Americans evade taxes.

Hapoalim, Israel’s largest lender, posted a fourth-quarter net profit of 478 million shekels, down 24.5% from 633 million a year earlier. The number was well below the 615 million shekels forecast in a Reuters poll of analysts.

At Mizrahi, Israel’s fourth-largest bank, net profit fell 15.5% to 213 million shekels in the quarter, down from 252 million a year earlier and below the 226 million shekels in a Reuters poll.

Hapoalim said it had set aside 196 million shekels for all of 2014, including 89 million shekels in the fourth quarter, to cover expected penalties in an investigation by U.S. authorities on allegations the bank helped clients evade taxes. Mizrahi provisioned 95 million shekels for expected penalties.

The two banks are part of the same investigation in which Bank Leumi, Israel’s second-largest lender, agreed in December to pay fines of $400 million. Hapoalim had quietly made provisions in the second and third quarters, but was forced by regulators to disclose the amounts in the fourth quarter.

Bank Hapoalim CEO Zion Kenan.Credit: Ofer Vaknin

Both Hapoalim and Mizrahi said they could now estimate their exposure to penalties. Hapoalim said it had had little contact with U.S. investigators since the probe began in 2011.

But Hapoalim said that on March 5, the New York State Department of Financial Services issued a document disclosure order referring to its investigation of the bank’s activity with American clients.

Though Leumi agreed to sell its private banking operations in Switzerland last year to Bank Julius Baer, Hapoalim said it would maintain its Swiss business.

“We have a successful operation and plan to continue. There is a market, there is demand,” Hapoalim Chairman Yair Seroussi told Reuters.

Hapoalim, meanwhile, made a 360-million-shekel provision for cost-cutting, which CEO Zion Kenan said would entail shrinking the payroll by several hundred positions, mainly through voluntary early retirement. Two similar plans in the past two years each reduced staffing by more than 500 workers, leaving the bank with nearly 12,700 employees.

Hapoalim shares fell 1.3% to close at 18.06 shekels on the Tel Aviv Stock Exchange. Mizrahi ended down 2.6% at 42.21 shekels.

Hapoalim’s underlying results were good, but regulatory risks remain the main concern, Barclays analyst Tavy Rosner said.

“Leumi’s recent settlement ... emphasizes the risk of fines in the industry,” Rosner said. “We believe this mostly explains Hapoalim’s share weakness seen over the last couple of months as investors may fear a potential contagion to other banks.”
Hapoalim’s Tier 1 capital ratio in Basel III terms rose to 9.3% from 9.1% at the end of 2013, just above the 9% minimum required by the Bank of Israel for the start of 2015.

At Mizrahi, the provision for possible credit losses jumped to 150 million shekels in the fourth quarter from 5 million a year earlier, while net interest income rose to 846 million shekels from 784 million.

Late last year, banks supervisor David Zaken ordered lenders to raise their provisions for credit losses in consumer loans amid concerns that lending was growing too quickly.

Mizrahi, Israel’s largest mortgage lender with about a third of the market, said its Tier I capital ratio had risen to 9.12% at the end of 2014 from 9.01% a year earlier.

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