May 21 (Bloomberg) -- Bank Hapoalim Ltd., Israel's biggest bank by assets, sold its mortgage-backed securities to Pacific Investment Management Co. for $2.55 billion as the lender seeks to stem losses tied to the subprime collapse.

Hapoalim will record a pretax loss of $870 million from the sale in the first quarter of 2008, the Tel Aviv-based company said in a statement today.

Hapoalim, which has the most losses related to the U.S. subprime crisis of any Israeli bank, said in April it had an additional $209 million in writedowns in the first quarter after the value of its holdings backed by mortgages declined.

The company will also post a $103 million markdown in the quarter because of a decline in the value of its structured investment vehicles. In addition, Hapoalim will take a 300 million-shekel ($88.8 million) charge for its early retirement plan in the first quarter.

``Even though the bank will post major losses, we see this as a very positive move,'' said Yuval Ben-Zeev, an analyst at Clal Finance Batucha Investment Management Ltd. in Tel Aviv. ``The MBS portfolio was the major challenge that the bank had to overcome.'' Ben-Zeev raised his recommendation on Hapoalim's shares to ``market outperform'' from ``market perform.''

Hapoalim rose as much as 0.89 shekel, or 5.7 percent, to 16.40 shekels, its steepest gain in two months, and traded at 15.98 shekels at 11:35 a.m. in Tel Aviv.

Credit Crunch

Defaults of subprime mortgages in the U.S. have triggered a worldwide credit crunch, with banks and financial institutions facing more than $380 billion in writedowns and losses related to bad debt.

Bill Gross, chief investment officer of Newport Beach, California-based Pacific Investment Management, known as Pimco, said in February that the company was investing in ``high- quality'' municipal bonds and mortgage loans.

The decision to sidestep subprime-linked debt has helped Gross's $128 billion Total Return Fund, which has surged 12 percent in the past year to beat 95 percent of its rivals, according to data compiled by Bloomberg.

While Hapoalim will post a first-quarter loss because of the writedowns and charges, it expects to report a full-year profit of more than 1 billion shekels, the company said.

Target Missed

Hapoalim added it won't reach its target of a return-on- equity ratio of 15 percent this year. It now expects a return of between 7 percent to 10 percent.

The lender said its capital adequacy ration fell to 9.8 percent at the end of the first quarter from 10.3 percent at the end of 2007. Hapoalim added that following the sale of its mortgage-backed securities holdings as well as the disposal of a 4 percent stake in the bank to York Capital Management LLC, the bank will boost its ratio to 10.1 percent.

Merrill Lynch & Co. raised its rating on Hapoalim's shares to ``buy'' from ``neutral'' before the bank announced the sale of the mortgage-backed securities.

``The valuation has been slashed by more than it deserves following the MBS/sub-prime fiasco,'' Haim Israel, an analyst at Merrill Lynch in Tel Aviv, wrote in an e-mailed report today. ``It's time to look beyond recent problems and think that investors should go back to basics.''

To contact the reporter on this story: Tal Barak in Tel Aviv at tbarak@bloomberg.net

Last Updated: May 21, 2008 05:41 EDT