Although Bank Hapoalim (LSE: BKHD; TASE: POLI) is Israel’s leading bank, and Bank Leumi (TASE: LUMI) is only number two, the narrow gap between them has made people think of them as Israel’s two banking leaders. Bank Hapoalim’s lead has never grown into a significant margin.
The gap did not widen even after Bank Hapoalim was privatized in late 1999 and sold to the Arison-Dankner group. Bank Leumi’s management has proven time and again its ability to successfully compete with a privately owned bank, and that government ownership is not a handicap. Recently, however, Bank Hapoalim has been gaining the advantage in the international sphere a theater that has traditionally been the province of Bank Leumi, which sprang from its British origins in the distant past as the Anglo-Palestine Bank.
Signature Bank a success
Bank Hapoalim’s most significant move was the founding three years ago of Signature Bank (Nasdaq: SBNY), a private banking venture in New York. Bank Hapoalim started Signature Bank from scratch, without mergers or acquisitions, in the financial capital of the world, which contains many large competitors. Signature Bank has since held a successful IPO, and is currently traded at a $600 market cap.
Bank Hapoalim and Bank Leumi have usually taken measures to close any gaps emerging between them. In this case, Bank Leumi has looked, but did not follow, its rival’s example. The reason, which also explains how the gap came about, lies in the ownership of Bank Hapoalim. Bank Leumi’s government ownership is not preventing its development, but Bank Hapoalim’s US ownership is enabling it to penetrate foreign markets.
Our markets in Israel are distant and unfamiliar. People like Michael Steinhardt, Lewis Ranieri, and Scott Shay are known in Israel because they each own small stakes in Bank Hapoalim, but they are even more well known in the US capital market.
When the US owners came to Bank Hapoalim chairman Shlomo Nehama at the beginning of 2000 and proposed founding Signature Bank, his response was the same as it would have been at Bank Leumi, or at any other Israeli bank why should Israelis be successful in running a US bank? Nehama had a hard time doing the necessary persuading and getting the project off the ground. He faced strong opposition from the CEO and much of the Israeli bank’s management.
The venture proved a great success, thanks mostly to the familiarity of Ranieri and the other partners with the US market, which enabled Nehama to present an ambitious target for Bank Hapoalim’s international business 30% of Bank Hapoalim’s revenue and profits, compared with 14% at present.
A further advantage was gained in Switzerland, where Bank Leumi has been stung by a huge embezzlement, estimated at $110 million. Bank Leumi’s Swiss subsidiary has since been rehabilitated and set on the right track, but Bank Hapoalim has meanwhile gained a slight advantage in the private banking capital of the world, where Bank Leumi has always been the leader.
Bank Hapoalim’s alertness to chances for overseas expansion led it to negotiate with Israel Discount Bank (TASE: DSCT) of the acquisition of Israel Discount Bank of New York. When the negotiations made headlines, Bank Leumi got into the act, saying that it, too, wanted to buy. Meanwhile, however, the seller the State of Israel, which owns Discount Bank hurried to announce that Discount Bank of New York was not for sale.
Bank Leumi responds
Let it be stressed that, regardless of Bank Hapoalim’s significant steps in the US, Switzerland, and its impending entry into Far Eastern markets, as reported in “Globes”, Bank Leumi is not standing still in this department. Bank Leumi recently opened a number of branches and offices in the US, mostly in Miami, California, and New York State, and is planning more offices, mostly on the US East Coast.
Another plan is to acquire a local bank through Bank Leumi USA, which will be floated on the US stock exchange, with the proceeds being used to pay for the acquisition. Another venture is in Eastern Europe, where Bank Leumi is talking about launching activity in Russia. Preparations have reached the advanced stage, following the recent opening of offices in Hungary and Austria.
Other news concerns the managerial department. Bank Leumi recently conducted a long-delayed management shake-up. Bank Leumi USA CEO Dr. Zalman Segal retired, and was replaced by Bank Leumi (UK) plc CEO Uzi Rosen. Baruch Lederman replaced Rosen at Bank Leumi (UK) plc.
Bank Leumi currently has 50 offices and branches in 21 countries, which yielded an aggregate profit of NIS 178 million, amounting to 38% of the Leumi group’s NIS 461 million total profit, a much higher percentage than Bank Hapoalim’s target. It is true that accounting distortions caused by currency exchange rates and differences accounts for this, but the bottom line is that Bank Leumi is also seeking to expand its overseas business, despite the disadvantage caused by its lack of allies in the US market, in contrast to Bank Hapoalim’s strong and well-connected owners.
Time will tell whether Bank Hapoalim’s accelerated overseas activity will make the expected contribution, and whether Bank Leumi, without Signature Bank or US owners, will be able to give Bank Hapoalim a run for its money, as it has been doing for decades until now.
Published by Globes [online] - www.globes.co.il - on August 25, 2004