Negative inflation, the corporate tax cut, and the weakness in the capital market had a negative impact on the banks, causing most of them to publish weak results for the first quarter. The aggregate first quarter profit of the five leading banks totaled NIS 1.73 billion, down 34%, compared with the corresponding quarter last year. At the same time, keep in mind that the corresponding quarter last year also included exceptional one-time profits, mainly by Bank Leumi (TASE: LUMI).
The only two banks with improved first quarter results were Mizrahi Tefahot Bank (TASE:MZTF) and First International Bank of Israel (TASE: FTIN). Mizrahi Tefahot Bank, managed by CEO Eldad Fresher, reported 15% growth, thanks to a profit of nearly NIS 80 million on the sale of real estate, negligible provisions for credit losses, and growth in the bank's business - especially in its credit portfolio. Mizrahi Tefahot Bank was also the only bank with a return on equity of over 10%. First International Bank, managed by CEO Smadar Barber-Tsadik, also reported a gain in profit, which rose 17.6% to NIS 147 million, achieved mainly through an exceptional NIS 67 million in recovery of debts for which provision was already made.
A number of factors dragged down the banks' results. First of all, corporate tax was slashed in the first quarter, thereby reducing the deferred taxes item and increasing the provision for taxes. This item also caused a NIS 332 million rise in the banks' provision for taxes. The negative inflation last quarter detracted from profit margins and lowered financing profit. At the same time, financing revenue reached NIS 5.9 billion, 12% more than in the corresponding quarter last year, because negative inflation in the first quarter of 2015 was even greater.
Another exogenous event affecting the reports was the executive salary law enacted several weeks ago. This law limits executive salaries in the financial sector to NIS 2.5 million, including retirement benefits. As a result of the law, there is concern that dozens of veteran and/or senior employees may prefer to leave the banks before the law takes effect in October in order to avoid a situation in which their benefits will be affected. As a result, as reported by "Globes" at the beginning of the week, Bank Hapoalim (TASE: POLI), Bank Leumi, and Israel Discount Bank (TASE: DSCT) set aside provisions: NIS 167 million by Bank Hapoalim, NIS 117 million by Bank Leumi, and NIS 50 million by Discount Bank - a total of NIS 334 million. These provisions were in the banks' balance sheets, and did not affect the net profit. On the positive side, most of the banks benefited from low provisions for credit losses, mainly as a result of repayment of business debts by large borrowers for which provisions had already been made. Bank Leumi was the standout in this area with NIS 123 million in the provisions item, as well as First International Bank. The provisions by the other banks were quite low.
Revenue from fees was also weak in the first quarter, totaling NIS 3.61 billion, down 4%, compared with the corresponding quarter last year. Most of the decrease was caused by weakness in the capital market in the first quarter, also reflected in lower trading turnovers and falls in the markets, which reduced the value of assets, and consequently the fees charged for them. First International Bank stood out in this category with NIS 327 million in revenue from fees, 8.4% less than in the first quarter of 2015. Bank Leumi and Discount Bank also suffered substantial losses of 5-6% in revenue from fees, because both banks closed some of their international business last year, thereby reducing the number of customers and revenue from fees. The only bank to increase its revenue from fees was Mizrahi Tefahot Bank - a 2.5% rise to NIS 365 million, as a result of growth in its business.
Published by Globes [online], Israel business news - www.globes-online.com - on May 19, 2016
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