U.S. Tax Investigation Weighs on Profits at Israel's Largest Lender

The affair has already cost Bank Hapoalim $155 million in set-asides and legal costs and the amount will probably grow by hundreds of millions more shekels.

Tomer Appelbaum

Bank Hapoalim, Israel’s largest lender, said Thursday that its third-quarter net profit declined almost 13% from the same time last year after it made a 255 million shekel ($66.1 million) provision connected with a U.S. tax investigation.

Hapoalim earned 699 million shekels, down from 802 million shekels a year earlier but above a forecast of 664 million shekels, according to Thomson Reuters I/B/E/S.

The provision, which the bank had announced previously, was made in anticipation of penalties connected with a U.S. investigation into whether its Swiss unit helped American clients evade U.S. taxes. The affair has already cost the bank 600 million shekels in set-asides and legal costs and the amount will probably grow by hundreds of millions more shekels.

The decline in profit left Hapoalim as the only Israeli bank to show a down quarter after Israel Discount Bank and First International Bank of Israel both reported double-digit profit increases yesterday. Mizrahi Tefahot Bank, Israel’s biggest mortgage lender, said this week profit rose 18% amid surging demand for home loans.

In addition, Hapoalim’s No. 2 rival Bank Leumi, which settled with U.S. authorities on similar allegations and paid a $400 million penalty, reported this week that its third-quarter net climbed 30% after it recouped part of the penalty in payments from its insurers.

Shares of Hapoalim ended down 0.5% at 22.81 shekels on the Tel Aviv Stock Exchange.

Hapoalim’s board raised the bank’s dividend to 30% of net profit, or 210 million shekels for the third quarter, after it received permission last month from regulators to raise it from 20%.

Barclays analyst Tavy Rosner, who rates Hapoalim Underweight, said the main catalyst for the shares will be the settlement of the U.S. investigation. “In our view this would pave the way to a dividend payout increase from the current 30% to 50%,” Rosner said.

Meanwhile, Discount reported a 12% rise in quarterly net as it expanded lending. Discount earned 188 million shekels, up from 168 million a year earlier but below a forecast of 209 million shekels in a Reuters poll of analysts, due to higher expenses and credit loss charges.

Net credit to the public at Israel’s third-largest lender grew by 12.7% in the first nine months of the year, boosting interest income 11.2% in the quarter to 1.19 billion shekels. Credit loss expenses in the quarter were 141 million shekels, up from 85 million shekels a year ago, while overall expenses rose 4% to cover the costs of an early-retirement plan.

Shares of Discount ended edged up 0.3% to a close to 7.60 shekels.

First International Bank, Israel’s No. 5 lender, reported third-quarter net profit jumped 48% to 128 million shekels from 86 million shekels a year earlier as net interest income rose 11% to 553 million shekels. Credit loss expenses, however, more than doubled, to 21 million shekels.

FIBI updated its plans for cost-cutting, saying it planned to reduce its payroll by an average of 130 employees a year by 2020. FIBI shares finished up 1.25% at 51.87 shekels.

With reporting from Reuters.