Leumi Bad Loan Provisions Rise Fivefold as Profit Halves

Bank Leumi Le-Israel (LUMI) Ltd. set aside almost five times as much cash in the second quarter as it did a year earlier to cover bad loans amid increased concern companies will be unable to repay debts as the economy slows.

Bad debt provisions at Israel’s largest bank by assets rose to 333 million shekels ($82 million) from 73 million shekels a year earlier, the Tel Aviv-based bank said in an statement. Profit fell 50 percent to 280 million shekels, trailing the mean analysts’ estimates of 455 million shekels. Bank Hapoalim Ltd. (POLI), the second-largest bank, said net income fell 15 percent to 607 million shekels, less than the 610 million shekels mean estimate of five analysts surveyed by Bloomberg.

“The big banks are struggling,” Terence Klingman, head of research at Psagot Investment House Ltd. in Tel Aviv, said today by phone. “We fear they will have to continue increasing provisions for loan losses also in coming quarters as the whiff of debt settlement hovers over big lenders,” Klingman added in an e-mailed note today.

Israeli companies will struggle to roll over maturing liabilities to pay obligations coming due in 12 months, Moody’s Investors Service said in a report on May 8, the same day it cut the outlook on the nation’s banks to negative from stable. Economic growth is expected to slow to 3.1 percent this year, from 4.8 percent in 2011, according to central bank estimates.

Economic Slowdown

The Bank of Israel kept its benchmark interest rate unchanged for the second consecutive month on Aug. 27 at 2.25 percent, as it seeks to shore up the economy. It has gradually been reducing the rate from 3.25 percent.

The central bank said it will probably lower its domestic growth forecast of 3.4 percent for next year in September. About 40 percent of gross domestic product is made up of exports, with Europe and the U.S. representing the country’s largest markets.

Leumi’s profit was also affected by a drop in the value of its stake in Partner Communications Ltd. (PTNR), Israel’s second- largest mobile phone operator, whose shares slumped 45 percent in the three-month period as competition in the market increased.

Bad Debt

The bank’s bad debt provisions stem from at least 1 billion shekels in loans it’s given to big borrowers such as Tao Tsuot Ltd. (TAO), Delek Real Estate Ltd. (DLKR) and Ganden Holdings Ltd., financial news website TheMarker said on Aug. 21 without saying where it got the information.

More than 30 Israeli companies sought debt forgiveness since 2011 as refinancing costs rose and growth slowed, the Israel Securities Authority said in a July 1 report. Nonperforming loans may increase to 5 percent of the total by mid-2013 from 3.8 percent in September, according to Moody’s Investors Service Inc., amid the biggest wave of restructures in three years.

Leumi’s net return on equity was 4.7 percent for the quarter, falling from 10.3 percent in the year-earlier period.

“The bank has the lowest return on equity in the sector,” Psagot’s Klingman said.

Hapoalim’s put aside 344 million shekels for bad loans in the quarter, from 327 million shekels a year earlier. Psagot cut the rating for the bank to “hold” from “buy” after the release of the results.

At Israel Discount Bank Ltd. (DSCT), the country’s third-largest lender, provisions declined to 118 million from 188 million shekels a year ago as profit fell to 165 million shekels from 229 million shekels, less than the mean estimate of 182 million shekels by three analysts surveyed by Bloomberg.

Leumi dropped 1.8 percent to 9.2 shekels at the close in in Tel Aviv, trimming this month’s gain to 2.6 percent. Hapoalim fell 1.8 percent to 12.35 shekels, cutting its August advance to 7.1 percent. Discount added 0.7 percent, bringing this month’s climb to 13 percent. The Tel Aviv Banking Index (TABANK) has dropped 8 percent since the beginning of the year compared with a 3.2 percent advance for the benchmark TA-25 (TA-25) measure.

To contact the reporters on this story: Gwen Ackerman in Jerusalem at gackerman@bloomberg.net; Shoshanna Solomon in Tel Aviv at ssolomon22@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

LUMI IT <Equity> POLI IT <Equity> DLKR IT <Equity> TAO IT <Equity>

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