Mizrahi Takes $116.5 Million Provision on U.S. Tax Probe, Halting Dividend

The bank is moving to cut profits by nearly 50% in its second quarter, but nevertheless its shares rally on signals that probe is winding up

Eldad Frisher speaks
Tomer Appelbaum

Mizrahi Tefahot, Israel’s third-largest bank, said on Thursday that it made a large, 425 million shekel ($116.5 million) provision against an expected second-quarter penalty from the U.S. in a tax probe, suspending its dividend to help cover the cost.

The provision had been expected after the bank was informed three weeks ago of a settlement proposed by the U.S. Justice Department to pay a $342 million fine, which the bank rejected. 

The set-aside slashed Mizrahi’s quarterly profit by 48% to 207 million shekels. It also left the bank’s tier I capital ratio, a key measure of financial strength, as 9.95%, is below the regulatory minimum as of June 30. It had been 10.15% a year earlier.

Despite the news, Mizrahi shares ended 3% higher at 65.09 shekels on the Tel Aviv Stock Exchange, apparently because the bank said negotiations had begun with the U.S. and should be completed shortly, removing the cloud of uncertainty over its impact. In addition, the bank’s underlying performance was strong for the quarter. 

Mizrahi shares had slid 13% since the U.S. settlement offer was revealed Augusts 7, a decline that as of Wednesday had wiped out 2 billion shekels in market cap -- far more than the proposed penalty.

Mizrahi is one of three Israeli banks that have been swept up in an investigation into their aiding American clients to evade taxes. 

Bank Leumi settled with the U.S. and New York State nearly four years ago and paid a $400 million penalty. Bank Hapoalim opted two weeks ago against making another provision as Mizrahi did on Thursday but did suspend its dividend to save costs.  Hapoalim had previously set aside $365 million to cover a possible settlement.

Rejecting the Justice Department earlier this month, Mizrahi said that any “reasonable calculation” based on the behavior of its employees as cited by the Justice Department should result in a much smaller fine. Until Thursday, Mizrahi had set aside 161.9 million shekels for expected penalties.

Mizrahi CEO Eldad Fresher said on Thursday that he believed the investigation was nearing the end. “Negotiations with the American Justice Department have begun; the goal is to put the investigation behind us as quickly as possible so that we can continue moving ahead with our strategic plans,” he said.

“We intend to conduct an intensive dialogue, to the extent that it depends on us, in order to reach a proper settlement as soon as possible,” he added. 

Meanwhile, Fresher noted that Mizrahi’s banking business continued to perform well. Excluding the provision, its second-quarter net profit was 472 million shekels, compared with 400 million shekels a year earlier and a 390 million shekel average forecast in a Reuters poll of analysts.

Financing income before credit loss expenses rose to 1.47 billion shekels from 1.19 billion, while the bank’s credit loss provision climbed to 90 million shekels from 42 million. Credit to the public in the quarter rose 5.6%, while deposits from the public grew 5.1%.

“Developments in the American investigation and the increased provision naturally stand at the center of our second-quarter report. Nevertheless, it should be recognized that the bank performed strongly in its current banking activity with continued growth in revenue, credit and deposits,” Fresher said.

He promised that the bank would return to a capital adequacy ratio of more than 10% in the third quarter and expressed confidence that it would resume paying a divided during 2019.”