Leumi's Big Bet on Securities Sours, Too

For 2007, Bank Hapoalim admitted to losing NIS 1.3 billion on investment in securities, which cut its profit for that year to NIS 2.7 billion. Bank Leumi had no such losses and posted a net of NIS 3.3 billion. Hapoalim notoriously lost well over a billion dollars on mortgage-backed securities, while Leumi hadn't dabbled in such dodgy stuff. But it turns out that Leumi had losses of its own on overseas adventures.

The collapse of Lehman Bros and Fannie Mae and Freddie Mac in September 2008 decimated the value of Leumi's portfolio, even though it had been more conservative than arch-rival Hapoalim. For 2008 Bank Leumi reported a loss of NIS 1.3 billion on securities, which flattened its profit for the year to just NIS 92 million.

In late May, when the banks published their first-quarter reports, it turned out that while Hapoalim had clawed its way out of the trouble, Leumi was still immersed up to its neck. During 2008 Hapoalim lost NIS 4.8 million on investments, and posted a loss of NIS 895 million in net terms for the year. But it has cleaned out its portfolio. Leumi on the other hand ended the quarter with losses of NIS 2.7 billion on its balance sheet, which could reach its profit & loss statement and even force the bank to raise fresh capital in order to meet the Bank of Israel's capital adequacy ratio requirements.

At the first quarter's end, Leumi had NIS 47.7 billion invested in securities, while Hapoalim had NIS 27.6 billion (after having sold most of its mortgage-based financial assets).

For 2007 and 2008 Hapoalim booked an accrued loss of NIS 6 billion from securities in its profit & loss statement, but it cleaned up its capital reserve and at the first quarter's end, had a positive balance of NIS 169 million in reserve. Leumi on the other hand lost NIS 1.3 billion on securities in 2008 but at year-end had negative capital reserves of NIS 648 million, a figure that grew by NIS 430 million by the first quarter's end, even though stock markets rallied throughout the world.

The reason for the retreat is a sharp drop in the price of deferred notes issued by foreign banks that Leumi holds in its portfolio. These are considered riskier securities than ordinary bonds because ordinary bondholders have superior rights to holders of these instruments. In Israel, the banks issue deferred notes only to institutional investors. But the banks do not cavil at buying these things from foreign banks, and at 2008's end, Leumi had NIS 2.6 billion of the stuff. By the first quarter's end, the value of these notes had shrunk to the degree that Leumi had to book an NIS 400 million charge, which inflated its negative capital reserve.