Leviev's Triumph, Leumi's Shame

It will take years for Bank Leumi (TASE: LUMI) to recover face from its gargantuan mistake in selling its stake in Africa Israel (TASE: AFIL).

Bank Leumi had held significant stakes in three conglomerates: Africa Israel, The Israel Corporation (TASE: ILD)  and Migdal Insurance (TASE: MGDL). Under the law, it could only own a significant stake in one conglomerate, and it chose to keep The Israel Corporation.

The mistake takes the form of lost income. A year ago the bank sold its 16% stake - 7.5 million shares - to Africa Israel's controlling shareholder, Lev Leviev, for NIS 150 per share, totaling NIS 1.1 billion.

On Wednesday, yesterday, hours before Africa Israel pulled off the flotation of its Russian subsidiary AFI Development in London, its share price closed trading in Tel Aviv at NIS 564.

By selling its shares a year ago, Bank Leumi lost NIS 414 per share, or NIS 3 billion. Bank Leumi CEO Galia Maor, chairman Eitan Raff and the rest of the management would have had much fatter bonuses if they'd sold the right conglomerate, or at least timed the sale of the bank's Africa Israel shares better. Their timing in negotiating with Leviev, with hindsight, was terrible.

Bank Leumi also suffered from poor judgment in respect to Moti Zisser, when it eleced to sell its holdings in Elbit Medical Imaging (Nasdaq: EMITF)  for practically nothing during the religious businessman's slump. Four years later Elbit Medical (yes, it's a real estate company) has quadrupled in value.

Bank Leumi has had its troubles these days: it's been privatized in part but it's far from a done deal that Cerberus-Gabriel will be able to complete its takeover. It seems, in fact, the Bank of Israel won't let it. Meanwhile, the prosecution is pursuing charges against the bank's management over that mutual funds-marketing scandal.

Like other banks, Leumi has been hurting in the stock market as investors turn clammy on bank stocks, because of the fierce competition on lending to businesses (which have discovered the alternative of borrowing from investors, through issues of corporate bonds); because the banks were forced by the Bachar reform to sell their holdings in asset management companies, specifically provident and mutual funds; because they seem unable to cut wage costs, which are gargantuan; and because they just aren't doing that well in their thrusts into foreign markets, with all that implies for their growth potential.

Based on all that, one can only applaud Leumi for buying 20% of SuperPharm, which it did this week, according to a company value of a billion shekels. Leumi has been seeking investments in market-leading companies, usually privately-held ones, that it can float to add value. Its portfolio has long since included companies like The Israel Corporation (as we mentioned above), but it also has holdings in Direct Insurance (TASE: DIFI) , Paz Oil, the clothing chain Fox-Wizel (TASE:  FOX) and TV broadcast company Keshet. Among its newer investments are Cellcom (NYSE: CEL), Netafim, Caesar Stone (Even Kaisar) and Africa Israel Properties.

From many perspectives, Bank Hapoalim (TASE: POLI)  is at the forefront of Israeli banking, but when it comes to non-bank investments, it lags far behind its slightly smaller arch-rival. In its defense Bank Hapoalim sneers that a bank should focus on banking, but for years Leumi has presented strong results based on correct investment strategy and focus.

Leumi's amply-proven claim is that real investments are a complementary business to banking, and reduce its risk. When the banking business goes through a lean period, these investments can help it weather the tough times.

True enough, and it would have weathered the times a lot better if it had kept Africa Israel in its portfolio.