The sale of Israel Discount Bank of New York by Israel Discount Bank (TASE: DSCT) is moving forward. Sources inform ''Globes'' that bids for the bank are due within two weeks. Discount NY may be acquired in one of two ways: full acquisition of the bank; or the acquisition of a 30% stake.
Discount Bank is reportedly asking around $1 billion for Discount New York, which had shareholders' equity of $831 million at the end of June.
JPMorgan Chase & Co. (NYSE: JPM) and boutique investment house Sandler O'Neill & Partners LP are handling the sale. An information room has been opened for parties interested in buying Discount New York. 20 companies, including foreign banks and private equity funds, have reportedly visited the information room.
After the bids are submitted, Discount Bank's board of directors will meet to decide on the next steps, and it cannot be ruled out that the sale will be called off if the bids are disappointing. In its financial report for the second quarter, published today, Discount Bank stated, "The bank is working on a detailed plan for meeting its capital targets. Among other things, the bank is reviewing the sale of holdings in whole or in part. As part of the review of the options, the bank approached an investment bank in New York to obtain indications from investors on a sale of all or part of the holding in Discount New York. At present, the process is just beginning, and no offers have yet been submitted. At this stage, it is not possible to assess which, if any, of the alternatives will be chosen."
The idea of selling Discount New York is due to regulatory requirements concerning capital. Banks must achieve a core capital adequacy ratio (the ratio between shareholders' equity and risk assets, including the credit portfolio) of 9% by the end of 2014. Although Discount Bank's core capital adequacy ratio is currently 9.1%, it will drop by more than one percentage point under Basel III guidelines.
The sale of Discount New York should greatly improve Discount Bank's capital adequacy ratio. But a sale involves a dilemma: selling this important asset will enable it to achieve the capital targets, which will allow the bank to expand its credit portfolio, but at the long-term cost of losing a major source of income.
Discount New York posted a net profit of $18 million in the first half of 2013, giving an annualized return on capital of 4.4%. An alternative to the sale of the bank is to rely on streamlining to boost its profits to reach the Bank of Israel's target. But this would result in a long chase after that capital adequacy target.
Published by Globes [online], Israel business news - www.globes-online.com - on August 28, 2013
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