Israel’s banks have lowered their profile overseas in the last several years, but the country’s big three lenders are starting to think about reversing the process in the key American market – if they can surmount some serious obstacles.
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Bank Leumi is still dealing with the fallout from its $400 million settlement with federal and New York State authorities reached nearly four years ago over charges it helped American clients evade taxes. The settlement includes an agreement on stricter monitoring by U.S. financial regulators over the next several years to ensure it is in compliance with U.S. regulations. Such monitoring could limit its freedom of action.
Bank Hapoalim and Mizrahi Tefahot Bank are still under investigation and, while the terms of their settlements have yet to be determined, they are likely to include a monitoring component as well. For Hapoalim, it means that acquiring a U.S. bank to expand its American footprint will almost certainly meet with resistance from U.S. bank regulators.
The other barrier is the Bank of Israel and Bank Supervisor Hedva Ber, who has said she looks askance at Israeli banks expanding overseas.
“Their operations have been cut back drastically and the banks have closed branches – and justifiably, because the risks overseas are very big and they have to abide by rules. They were right to reduce their international operations and focus on just a few countries,” Ber said in in an interview with TheMarker in April.
The banks’ first-half financial reports testify to how small their international operations have become.
At Hapoalim, the contribution of overseas profits amounted to just 50 million shekels ($13.2 million), down from 74 million a year earlier. By comparison, net profit for the entire bank in the six months was 1.8 billion shekels.
At Leumi, which divested its international bank operations due to the tax investigation, overseas banking operations contributed just 34 million shekels, reversing from a 1.1 million loss. Net profit for the period for the Leumi group was 1.43 billion shekels.
Only Israel Discount Bank, the smallest of the big three, relies heavily on overseas activities. In the first half they generated profits of 97 million shekels, down slightly from the year before, but accounting for 20% of the group’s total.
The depth of Hapoalim’s interest in growing in the U.S. is the fact that during last month’s changing of the guard, outgoing CEO Zion Kenan and his successor, Arik Pinto, spent a week in New York meeting clients.
Unlike other Israeli banks, Hapoalim operates in New York through a branch rather than a locally incorporated subsidiary. Pinto is keen on expanding the business and believes the best way to do that is by buying an American lender.
The catch is, apart from overcoming skepticism and resistance from regulators in Israel and the U.S., that buying and expanding a U.S. bank is a costly proposition. That will pressure Hapoalim at a time when it is seeking to raise its dividend payout from 20% of net profit to 50%. Moreover, Hapoalim’s core business at home is also under pressure, as evidenced by the 4.6 billion shekel decline in its business-lending portfolio.
At Leumi, meanwhile, plans to expand American operations have been dealt a setback by U.S. regulators, who left it little choice but to stop lending to the local diamond industry. That was a very profitable business, which Leumi was forced to cede to Discount and other Israeli banks, and left its U.S. operations with a paltry 4% return on equity.
The bank is counting on the deployment of a new computer system that will give it better capabilities for managing clients and reduce costs, to enable CEO Avner Mendelson to lift profits and expand lending.
Like Leumi, Discount pared back its overseas operations after Lilach Asher-Topilsky took over as CEO two years ago. But while the bank offloaded operations in Latin America and Switzerland, it turned down offers for its New York banking business, the biggest of the Israeli lenders in New York.
Discount, after some quiet years, is now focused on building in New York lending business, especially for business customers.