Israel's Bank Hapoalim Ambushes Investors With News of Big Provisions

The country's largest lender will take 890 million shekels in charges mainly on loan losses and the U.S. tax probe.

Tess Scheflan

Bank Hapoalim ambushed investors late on Thursday, disclosing long after trading was over and ahead of the weekend that it would be taking a massive 890 million shekels ($244.9 million) in charges for the fourth quarter.

The profit warning, which Israel’s biggest bank reported to the Tel Aviv Stock Exchange at 7:38 P.M. Thursday night, will leave it with a fourth-quarter profit in the tens of millions of shekels, although the bank did not offer any estimate. Shares of Hapoalim, which will report its quarterly earnings on Thursday, ended down 1.8 percent at 22.72 shekels yesterday.

The biggest of the provisions the lender said it would take is a loan loss provision of 470 million shekels in the fourth quarter, an unexpectedly high figure for which Hapoalim declined to provide details.

In addition, it will also set aside 157 million shekels for an accounting measure related to the drop in Israel’s corporate income tax rate that went into force this year, a step all of Israel’s banks are required to make.

Finally, Hapoalim said it would take $68.5 million – or about 263 million shekels – in provisions for the costs of a U.S. investigation underway on suspicions the bank’s Swiss unit helped clients evade American taxes. Hapoalim has already set aside $120 million for the costs.

Of the $68.5 million, $25 million will go to covering a potential settlement of the U.S. Department of Justice investigation and for a separate investigation being conducted by the New York State Department of Financial Services.

Hapoalim said it was too early to say how much the New York State penalties would amount to, but said they would be “significant” and that Supervisor of Banks Hedva Ber has ordered it to set aside the sum.

Hapoalim has denied the allegations, but Bank Leumi, its biggest rival, paid $400 million in fines in late 2014 to settle two similar investigations. Mizrahi Tefahot bank, which is also being probed by U.S. authorities, didn’t make any provision for the fourth quarter above the $44.3 million it had already set aside.

Capital market sources, who asked not to be named, said the timing of the announcement wasn’t planned. Hapoalim only received instructions from the Bank of Israel in the morning regarding the tax-probe provisions and needed to get clarifications before it could issue a formal announcement.

However, TheMarker has reported that Hapoalim met with U.S. regulators nearly a month ago and already had good indicators about the size of the penalties it faced.

Together with an estimated 100 million shekels of legal costs, the tax investigation will cost the bank at least 800 million shekels, but the figure will almost certainly rise as the probe continues and could match Leumi’s $400 million.

“It’s pretty surprising that for two years the bank could keep on saying everything is okay when all along it’s been clear that the provisions would be similar to those of Leumi,” said Ilan Glazer, a banking analyst at Leader Capital Markets. “What we’re learning from this provision is that it’s really not a good idea to ruin up against American regulators.”