Discount's Provisions Could Reach NIS 200M

Israel Discount Bank's heads are leaning toward making provisions of NIS 100-200 million for doubtful debts, to account for the drop in value of its holdings (26 percent) in First International Bank of Israel.

Although FIBI's market cap reflects a value of NIS 464 million for Discount's holding in FIBI, so far, Discount has refrained from making any provisions. Discount relied on the valuation prepared by Prof. Yoram Eden, who asserted that Discount's holding in FIBI is indeed worth NIS 870 million, the same as entered in Discount's books.

However, Zadik Bino and the Australian Lieberman family have recently entered a deal to buy a 52-percent stake in FIBI Holdings (FIBI's parent corporation) from the Safra family for $90 million, reflecting a value of less than half the bank's equity. This value is close to the current market cap.

Over the last two months FIBI shares have jumped 40 percent, and if the share continues to climb, Discount may be able to cut its provisions to a minimum.

Provisions of NIS 400 million would slash Discount's capital adequacy ratio by around 0.2 percent, Discount has calculated. Capital adequacy ratio is a measure of a bank's capital, expressed as a percentage of a bank's risk-weighted credit exposures. The Bank of Israel sets a minimum requirement of a 9-percent ratio for any commercial bank. At the end of 2002, the ratio was 9.36 percent; thus, if the bank breaks even at the end of the first quarter of 2003 and makes all the necessary provisions to account for the difference between FIBI's book and market value, the ratio will drop to 9.16 percent.

However, in the last two quarters of 2002, Discount managed to post some profit, and the bank expects this trend to continue into the first quarter of 2003. The larger the profit, the smaller the impact on the capital adequacy ratio.

A few days ago Discount asked Tel Aviv District Court to issue an injunction stopping the FIBI deal from going through. Discount maintains it has right of first refusal for the offered stock. Sources familiar with the FIBI deal told Haaretz before Independence Day that an injunction is unlikely to be issued, but added that should it transpire that Discount really has a right of first refusal, the Bino and Lieberman will sue the Safra family.

District Court Judge Yehuda Zaft has scheduled an urgent hearing for this Tuesday to discuss the request for injunction. Zaft was also the judge who presided in the suit filed by Africa Israel Investments against Vladimir Gusinsky, who had tried to take over the Russian TV channel. In that case, Zaft handed down a ruling stating that a right of first refusal applies also to the sale of a parent corporation. It is on this very ruling that Discount is basing its current suit, since the Bino deal is not for the acquisition of FIBI stock directly, but for the purchase of stock in its parent corporation.