Deflation Bogs Down Earnings of Israel's Two Biggest Banks

Two biggest lenders Hapoalim and Leumi fall short of analyst’s forecasts.

Bank Leumi in Tel Aviv.
Bloomberg

Israel’s top two banks reported fourth-quarter earnings yesterday that fell short of expectations, hurt by the impact of deflation on interest income.

Israel has been in a deflation trend since September 2014 amid lower global oil prices, with its annual inflation rate at minus 0.6% in January. Benign inflation has kept the benchmark interest rate at 0.1% a year.

As a result, net financing income at Bank Hapoalim, Israel’s largest lender, slipped to 2.11 billion shekels ($540 million) in the quarter from 2.15 billion shekels a year earlier, while it fell to 1.73 billion shekels from 1.8 billion shekels at No. 2 Bank Leumi.

Hapoalim was also hit by a one-time tax cost of 50 million shekels, while Leumi had one-off gains and losses from the sale of assets.

Hapoalim and Leumi also blasted the Strum committee’s recommendations to increase retail banking competition by requiring the two banks to divest their credit-card subsidiaries and prohibiting them from issuing credit cards entirely. The second part of the plan is also opposed by the Bank of Israel.

Hapoalim chairman Yair Seroussi said credit to consumers and small businesses has been growing by over 10% annually in the past few years while Israeli credit-card interest rates are low in comparison to Europe and the United States.

He said he hoped the committee would reevaluate the changes the banking system has undergone “and not attempt to enforce measures that will harm its stability and could cause irreversible damage to the Israeli economy.”

Hapoalim posted quarterly net profit of 586 million shekels ($150 million), compared to 487 million shekels a year earlier and below expectations of 731.5 million shekels in a Reuters poll of analysts.

Leumi earned 431 million shekels compared to a loss of 43 million shekels a year and analysts’ average forecast of 667 million shekels.

Hapoalim declared a quarterly dividend of 117 million shekels, equal to 20% of 2015 profit, for a total annual payout of 616 million shekels.

Hapoalim shares ended the day down 0.5% at 19.10 shekels. Leumi shares ended down 0.6%% at 13.05 shekels.

Citigroup equities analyst Michael Klahr said Leumi is a “buy as a reasonably priced low-risk bank in a low-risk economy with upside from higher rates and capital return.”

Meanwhile, No. 3 Israel Discount Bank reported a smaller-than-expected gain in quarterly profit, hurt by higher provisions to cushion against loan defaults.

Discount said it earned 60 million shekels in the fourth quarter, up from 4 million shekels a year earlier but below a forecast of 152 million shekels in a Reuters poll of analysts. Excluding one-time items, such as selling stakes in its Swiss and Latin American units as well as for a retirement plan, Discount recorded a quarterly profit of 93 million shekels.

Credit loss expenses rose 16.7% to 98 million shekels while net interest income edged up 0.4% to 1.04 billion shekels. Its core Tier 1 capital adequacy ratio rose to 9.5% in Basel III terms from 9.4% at the end of 2014.

Discount shares finished down 0.4% at 6.30 shekels.