Hapoalim makes NIS 890m Q4 provision

Arik Pinto  photo: Tamar Matsafi

Bank Hapoalim published what was in effect a profit warning just before the weekend.

Bank Hapoalim (TASE: POLI) may have hoped that publishing a profit warning on Thursday night would soften the impact on capital market players. Today, however, it discovered that the weekend did not make the investors forget the news. Bank Hapoalim's share price fell 1.82% today. The bank also decided to cancel its annual press conference for the publication of its results, scheduled for this Thursday, and to hold briefings with journalists instead.

The bank announced on last Thursday that it would make a provision of NIS 890 million in its fourth quarter financials (for the investigation in the US, credit losses, and an increase in tax expenses) which is likely to decrease its net profit by NIS 730 million. This means that Bank Hapoalim will report profits of NIS 100 million for the fourth quarter and NIS 2.6 billion for all of 2016, reflecting a 7.5% return on equity. The figure is rather mediocre for the bank, which has become accustomed to reporting 9-10% returns on equity, and will have several important consequences.

The first is a narrowing of the gap between Bank Hapoalim and Bank Leumi (TASE: LUMI). Bank Hapoalim will increase its allowance for the investigation into its affairs by US authorities by NIS 263 million. The previous amount allowed was NIS 724 million. Although the investigation of the bank for abetting tax evasion by its customers has been going on for several years, most of the allowances have been made in the past six months. It appears that since Arik Pinto took the reins as CEO of Bank Hapoalim last August, he has changed the bank's approach to the investigation, in contrast to his predecessor Zion Kenan. During Kenan's term, the bank's attitude was that as long as the US did not demand a fine, the amount of the fine could not be predicted, and therefore almost no provision was made (except for the provisions that the Bank of Israel forced Bank Hapoalim to make).

Pinto, on the other hand, decided on a provision two months after taking up his position, and he is now increasing it still further. It appears that like many CEOs before him, Pinto is cleaning out the stables and trying to attain as clean a balance sheet as possible for 2017, the first year in which the bank's results will be fully attributable to him.

As in many respects, Bank Hapoalim and Bank Leumi are also comparing themselves to each other with respect to the US investigation. Bank Hapoalim has claimed for years that its situation is completely different than that of Bank Leumi, which paid a huge $400 million fine, and that it did not engage in the practices that Bank Leumi admitted to in the framework of its settlement with the US authorities.

With the passage of time, Hapoalim has been "narrowing the gap" between it and Bank Leumi. As of now, the provisions that Bank Hapoalim has made amount to nearly half of Bank Leumi's provisions, but the final word in the matter has not yet been said. Bank Leumi realized this when it discovered at the last minute a larger-than-expected fine by the New York state regulator. A scenario in which Hapoalim winds up with damage similar to that of Bank Leumi is a real possibility.

The provision for the US investigation has attracted more attention, but another item in Bank Hapoalim's report should be more alarming - the provisions for credit losses. At the end of the document sent to the Tel Aviv Stock Exchange (TASE), the bank stated laconically that the expense for credit losses in the fourth quarter was projected to amount to NIS 470 million - a larger provision than the one in the quarter for the US investigation. Bank Hapoalim is refusing to itemize this item at this stage. It is probably not due to the collapse of a single borrower, but the cumulative effect of several events, headed by a decline in recovery (of problem debt for which an provision has been made) and an increase in provisions for the household sector, following the steep increase in these loans and problems in collection, due to legislation favoring the borrower.

Both Mizrahi Tefahot Bank (TASE:MZTF) and First International Bank of Israel (TASE: FTIN) which have already published their 2016 results, also reported an increase in their fourth quarter credit losses, but not on the same scale as that expected from Bank Hapoalim. The increase in provisions leads to the question whether this quarter is an exceptional one-time event, following the clearing of the bank's books in preparation for 2017, or perhaps a reversal of the trend, following several years with small credit losses in the banking system, indicating the beginning of a negative cycle.

Provisions for credit losses are a flexible affair. There are all sorts of accounting rules, but in the end, it is also a matter of the managers' discretion. Bank Hapoalim is apparently providing as much as possible in the fourth quarter of the year. What does it get out of this? Bank Hapoalim has wanted for some time to increase the dividend for its shareholders, headed by controlling shareholder Shari Arison. The bank has already obtained permission to increase the dividend from 15% of profit to 30%, but it will not settle for that. The bank's target is a dividend amounting to 50% of profit. We will not be surprised if the aggressive provisions made in the quarter help new Bank Hapoalim chairman Oded Eran persuade the Supervisor of Banks that they have set up a reserve fund that can allow them to approve an increased dividend, even before the US investigation is concluded.

Bad taste

Bank Hapoalim's decision to publish such a momentous announcement on Thursday night is no less than astonishing. When a corporation is the size of Bank Hapoalim, such announcements cannot really be hidden. Even if a delay of two and a half days after publication is involved, the investors responded today by sending the share price downward. Sources close to the bank said that the bank had had no choice, and that the announcement had been published immediately after the expected provisions had been agreed with the Bank of Israel. At the same time, an issue like provisions in the financial statements is not determined overnight, especially when the media reported several weeks ago that Bank Hapoalim was likely to make a provision for the US affair. The event could have been managed better. Companies sometimes have to make a negative announcement - it is a natural event in the life of a public company - but it is not necessary to leave a bad taste in the way it is published.

Published by Globes [online], Israel Business News - www.globes-online.com - on March 26, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Arik Pinto  photo: Tamar Matsafi
Arik Pinto photo: Tamar Matsafi
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