Discount Bank to Prepare Plan to Sell NY Subsidiary

But treasury wants to know how proceeds would be used

The Finance Ministry's accountant general, Nir Gilad, has advised the directors of Israel Discount Bank to prepare a plan for selling its New York subsidiary, including details on how it plans to use the proceeds of this sale.

However, Gilad is still unenthusiastic about the idea of selling Israel Discount Bank of New York.

Discount reported last week that real progress has been made in its talks with various government authorities on the sale of its New York subsidiary. The bank did not provide many details but noted that Bank Hapoalim, Bank Leumi and the Safra Group are among the potential buyers.

"The only progress is that they were asked to prepare the paperwork. The final approval will only be granted if there is a clear plan for the sale and the use of its proceeds, and if the question of buyers is addressed," Gilad told Haaretz.

The accountant general explained that the bank's management was asked to demonstrate its ability to make appropriate use of the proceeds of this potential sale because these proceeds will clearly add up to a considerable sum.

"Discount was asked to present measures to improve its performance. Over the years, Israel Discount Bank of New York has served as a source of income for the bank in Israel. Now that it will turn into a cash account, we have to see that this is used to create additional income. It's not wise to sit on the money," Gilad said.

Gilad hinted that the treasury plans to demand that Discount distribute some of the proceeds from the sale of its New York venture as a dividend to stock holders, including the bank's principal owner - the State of Israel.

"We didn't say that we wouldn't take anything from the proceeds. The treasury's position was that the sale of Israel Discount Bank of New York was not the preferred alternative and this position has not changed. But we haven't prevented the bank from preparing this option."

During the term of the previous finance minister, Silvan Shalom, the treasury refused to approve the sale of Discount's New York subsidiary, arguing it would make the parent bank a less attractive investment when it is privatized in the future.

The idea of selling Israel Discount Bank of New York was proposed as a way to help the Israeli bank solve its capital shortage, which is making it difficult for it to develop credit activities and finance an early retirement program for its workers.

Discount's capital adequacy ratio is the lowest among Israel's major banks at 9.35 percent. The sale of the New York operation would enable the bank to record a capital gain, since the sale price would significantly exceed the bank's capital and reduce its risk assets.

Discount's management is not interested in selling its complete ownership of Israel Discount Bank of New York. It would prefer to sell control of the New York bank, while retaining a role as a junior partner. In this way, it could continue to reap some of the profits of the New York bank.

This arrangement could also represent an attractive option for potential buyers, since acquiring complete ownership is expected to cost in the range of $700-800 million.