The Bottom Line / Net Of' Households

One of the phrases bankers love to include in their financial reports is "net of." This magical phrase isolates unusual events that happened to the bank during regular business, and presents a completely different picture than the one in the bottom line. If, for instance, a bank implements an early retirement plan that costs it a pretty penny, then there will always be a punch line in the financials and accompanying press release in which the bank reports that "net of the early retirement costs, net profits would have been 20 percent higher."

Until a year ago, the item served mostly to explain that the bank made an enormous amount of money and not just a huge amount. But in the past year something has happened in the Israeli banking world and banks that used to be considered profitable are now reporting huge losses.

The banking sector hasn't looked as bad as it does now in more than a decade. The glut of miserable financial reports for Q2 the banks have published indicates the problem is no longer a bank or two that got mixed up in something, but a sector-wide problem. First International Bank lost NIS 148 million in the first half of the year. Israel Discount Bank will publish increased losses at the end of the week. Continental Bank, small but always profitable, lost NIS 64 in Q2 while Industrial Development Bank will report a NIS 100 million loss. Even Investec Bank reported a NIS 3.8 million loss for the quarter and it looks like Union Bank will also report a loss.

All the losing banks have a common denominator: they have all taken the hit from their business sector clients. Essentially three or four big clients caused most of the losses: Gad Zeevi, financially-troubled cable television carrier Tevel, the collapsing group of Peled-Givony companies, and debt-laden Gilat Satellite Networks (Nasdaq: GILTF). In other words, "net of" those clients, the banks would have continued to turn a profit.

The fact that all this is about just three or four clients should be far more worrying than calming. If this is the havoc that so few can wreak, we can only guess what ten or twenty big clients in trouble could do. In light of the current economic situation, it is not an unreasonable scenario.

At the end of the week Bank Hapoalim and Bank Leumi will publish their second quarter financial results. They naturally also granted credit to those three or four clients who brought down the banking system, and they will also be forced to post provisions for doubtful debt on those loans. But in their cases, no one needs expect a loss in the bottom line. Those two big players have an army of households and small private clients that contribute and will continue to contribute to the banks' sure-fire, stable profits. The key difference between the two giants who will keep raking in the profits and the rest of the banks is the ability to compensate for business sector losses with revenues from households and small clients.

In order to determine the big banks' performance in the business sector, we will have to borrow the phrase "net of" from the bankers and look at their results net of profits on households in order to determine the depth of their losses in business.