Earnings at Israel’s Top Three Banks Fall on Tax-rate Reduction

Hapoalim, Leumi and Discount all suffer double-digit profit declines.

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Bank Leumi in Tel Aviv.
Bank Leumi in Tel Aviv.Credit: Bloomberg

Israel’s top three banks fell short of earnings forecasts in the first quarter, hit by one-off costs due to a reduction in the corporate tax rate.

Bank Hapoalim, Israel’s largest lender, said on Thursday it had a one-time tax cost of 114 million shekels ($30 million), while the changes cost its biggest rival Leumi 122 million shekels.

As a result of a reduction in Israel’s corporate tax rate to 25% from 26.5%, its banks had to reduce the value of deferred tax assets on their books in the first quarter.

This meant quarterly net profit fell almost 17% to 674 million shekels at Hapoalim, down from 808 million a year earlier and below an average forecast of 717.5 million in a Reuters poll of analysts.

Lower income from capital market activity also weighed on Hapoalim’s profit as fees and other income fell to 1.34 billion shekels from 1.38 billion during the same period a year earlier.

Despite negative inflation and rock bottom interest rates, net financing income rose as the bank increased the more profitable areas of its loan book – the retail, small business and middle market segments – while cutting big corporate loans.

Hapoalim declared a 135 million shekel quarterly dividend, in line with its policy of paying out 20% of profit.

Leumi earned 459 million shekels, sharply down from 1.18 billion a year earlier, when it had a significant boost from the sale of sizeable stakes in two Israeli companies. The bank had been expected to earn 531 million shekels during the first quarter, according to a Reuters poll of analysts.

Hapoalim’s shares finished down 1% at 19.07 shekels and are down about 6% since hitting a year high in January.

Leumi shares ended 1.4% lower at 13.66 shekels and have lost 4.5%since hitting a year high a month ago.

Barclays analyst Tavy Rosner has a 22-shekel price target for Hapoalim, but despite a 15% upside potential has an Underweight rating, citing the overhang of a potential fine from a U.S. tax evasion probe into the bank’s activity with American clients.

“This impacts efficient capital planning and might put pressure on the stock,” Rosner said.

He has a 17-shekel target for Leumi, which is his top pick in the industry due to strong progress it has made on capital.

No. 3 Israel Discount Bank earned 179 million shekels, down 29% from 252 million shekels a year earlier and in line with analysts’ average forecast. It recorded a one-time tax expense of 50 million shekels in the quarter.

Credit loss expenses rose 43.8% to 46 million shekels while net interest income increased 3.6% to 1.06 billion shekels.

Discount shares ended down 2.4% at 6.22 shekels.

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