Mizrahi Tefahot Posts Record Profit on Buoyant Mortgage Market

Bank sets aside more money in expectation of penalty in U.S. tax-evasion probe.

Eliyahu Herkowitz

Booming demand for home loans brought Mizrahi Tefahot Bank, Israel’s biggest mortgage lender, record high profits in the second quarter.

Mizrahi, which controls some 39% of the mortgage market, said yesterday that its net profit reached 340 million shekels ($89 million), up from 330 million shekels a year earlier. That was higher than the forecast of 318 million shekels, according to a Reuters poll of analysts. Return on equity for the quarter, however, was 11.6%, down from 12.6% a year earlier.

Shares of Mizrahi, the first of Israel’s banks to report earnings for the quarter, ended the day up 0.9% at 47.50 shekels on the Tel Aviv Stock Exchange.

The bank said profits were also given a lift by an increase in the consumer price index, after a sustained period of deflation, as well as by increased lending to households and small businesses and a modest provision for credit losses of 57 million shekels, although the latter figure was up from 40 million in the year-earlier period.

Financing income before the provision grew 4.4% to 1.08 billion shekels. But while its overall lending grew 4% to 165.5 billion shekels since the start of the year, Mizrahi’s mortgage portfolio grew at a much faster 10%. Retail lending, not including mortgages, also grew by 10% to 18 billion shekels.

While the bank has been selling off chunks of its mortgage portfolio and reducing its exposure to the London property market with the aim of improving its capital-adequacy ratio, it has also embarked on a strategy of opening new branches, expanding lending and paying dividends.

As a result, Mizrahi’s Tier I capital ratio, a key measure of its financial strength, did no more than edge up to 9.72% in the first half, from 9.65% a year ago. The bank said it would pay a quarterly dividend of 51 million shekels, or 15% of its profit, after a 43.2 million shekel payout in the first quarter.

Mizrahi, along with Bank Hapoalim, is being investigated by U.S. authorities over its alleged role in helping American clients evade U.S. taxes. The bank set aside another $3.5 million for future penalties in the quarter, bringing total provisions to $42.5 million.

“The issue of the investigation and its possible impact on the bank will continue to weigh on the bank’s shares,” said Excellence Brokerage analyst Micha Goldberg.