Few Profits, Tax Probes Spur Israeli Lenders to Exit Private Banking

The sales of two units by Discount and Leumi this week are the latest in a series of divestments.

Ofer Vaknin

The news this week that Israel Discount Bank and Bank Leumi were selling their Swiss and Luxembourg private banking operations shouldn’t come as a surprise.

Israel Discount Bank, the country’s third-largest lender, said Monday it was selling the operations of its Swiss unit to Hyposwiss Private Bank Geneve for 10.9 million Swiss francs ($10.7 million), while No. 2 Leumi said it was selling the assets of its subsidiary in Luxembourg to Banque J. Safra Sarasin for $3.5 million.

Israeli banks began expanding into overseas private banking decades ago, but with the exception of Bank Hapoalim’s investment in Signature Bank 10 years ago, the business never proved to be very successful.

“For small and medium-sized banks, which are what Israeli banks are, there’s no place anymore for them in international private banking. Operations will cease and the only ones who will remains are boutique and the giant gorillas. For everyone else it isn’t a profitable business and has big risks,” said one senior banker, who asked not to be identified.

In the first nine months of this year, the international operations of Israel’s five biggest banks, which also include Bank Hapoalim, Bank Mizrahi Tefahot and First International Bank of Israel, contributed just 264 million shekels of profits to the bottom line. That amounted to just 3.9% of the lenders’ combined 6.8 billion shekels in net earnings.

Against that, Israel’s banks have been swept up in the global crackdown of tax evasion. Leumi agreed nearly a year ago to pay the United States and New York state a combined $400 million to settle charges it helped clients evade taxes between 2002 and 2010. Hapoalim has already set aside 200 million shekels and Mizrahi 143 million shekels, in expectation of making similar settlements next year.

In Discount’s case, the sale was valued at just 0.8% of the value of assets under management, far less than the 2% such sales are usually done at. After it covers the costs of closing the operation Discount is unlikely to have much left over from the sale proceeds.

Discount is not under investigation for helping tax evasion. Nevertheless, the U.S. crackdown has cast a shadow over the private banking industry and has a lot to do with the low valuation, which has forced the bank to stop taking deposits when the sources of the client’s money is unclear.

Discount has already sold its London branch and it sold its Latin American bank in Uruguay at a loss of 66 million shekels. It is now going to focus its overseas operations on its Discount New York unit, which also operates in South America.

Unlike Israel’s other banks, Discount got a significant 20% of its nine-month net profit from overseas, mainly from Discount New York. The unit boosted profit by $15 million to $42 million, lifting its return on equity to 7.4% from 6.5% a year ago.

Leumi exited the Swiss private banking business and the $6 billion in assets it managed in July 2014, selling it to Julius Baer. It is now believed looking for a buyer for its Isle of Jersey operations, too, as its CEO, Rakefet Russak-Aminoach, acts to ensure Leumi is handling only “clean” money.

All told, the bank has sold 16 operations. Divesting the Luxembourg bank finally gets Leumi out of private banking altogether. Now the lender is focused on commercial banking in the United States and Britain, with a specialization in business lending and high-tech finance. Leumi recently opened an office in Shanghai.

Banking sources say that Hapoalim and Mizrahi are likely to retain their private banking businesses at least until the U.S. tax probes wind up. Hapoalim has some $8 billion in assets under management.