Israel’s top two banks posted quarterly profits above estimates Monday, reflecting the benefits of reduced loans to large companies and a focus on the more lucrative household and small- and mid-size business segments.
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Earnings at Bank Leumi were also flattered by a capital gain which helped offset a provision to settle a U.S. tax investigation, while market leader Bank Hapoalim benefited from improved credit quality.
No. 2 lender Leumi said Monday it earned 677 million shekels ($176 million) in the third quarter, up 22% from 555 million shekels a year ago and higher than an average forecast of 649 million shekels in a Reuters poll of analysts.
Leumi shares gained 0.9% to close at 13.47 shekels in Tel Aviv Stock Exchange trading.
Leumi, second to Hapoalim on measures including stock market value and assets, booked a profit of 331 million shekels from its 18% stake in conglomerate Israel Corporation, which posted a gain from a debt settlement at its shipping unit Zim Integrated Shipping Services and from the sale of another unit.
Leumi has been negotiating with U.S. authorities for months and had said it was close to a deal to pay 950 million shekels to the U.S. Justice Department, an amount the bank set aside. But in October it said the penalty could be higher since New York State’s regulator is also seeking a settlement.
As a result, the bank took another 476 million shekels in provisions in the third quarter. Leumi’s net interest income fell 2.4%, to 1.899 billion shekels, while expenses in respect to credit losses were 56 million shekels.
Citi analyst Michael Klahr said the key question is whether the U.S. tax investigation costs are complete, which would allow the bank to focus on accumulating capital, “with a view to the resumption of dividends, perhaps in the second half of 2015.” He rates Leumi shares a Buy.
In related news, Banks Supervisor David Zaken ruled Monday that Israel did not have a “deep” corporate bond market, a decision that means Israeli banks will not be able to capitalize their pension obligations to employees based on Israel bond yields.
Leumi is the sole bank to be affected by the decision, since it continues to fund the pension obligation of its most veteran employees. The new Bank of Israel directive will force it to write down as much as 3.8 billion shekels of its 20 billion shekels in equity, sources said.
Meanwhile, Hapoalim said it earned 740 million shekels, up 13.8% from 653 million shekels a year earlier and above average expectations for 726 million shekels in a Reuters poll. It has posted the highest profit among Israel’s banks for 16 straight quarters.
Nevertheless, shares of Hapoalim, which will pay a 117 million shekel dividend for the quarter, finished down 1.6% at 18.86 shekels.
The bank’s improved credit quality has enabled it to lower provisions against loan defaults, which fell to 80 million shekels in the quarter, from 375 million.
Credit to retail clients rose 7.2% from the end of 2013, while mortgage lending grew 4.5% and credit to the small- and medium-size business segments each increased 7.8%.