Last year was not an easy one for Bank Hapoalim, and particularly compared to its main competitor, Bank Leumi. In terms of market cap, Leumi managed to overtake Hapoalim in the first quarter of 2007. And then there was the subprime credit crisis. End-of-year results show that Leumi outdid Hapoalim in its choice of investments last year, writing off comparatively small sums on U.S. mortgage-backed securities. Hapoalim wrote off major sums.
Thus Leumi outperformed Hapoalim in more ways than one. And though there is no question of Hapoalim's stability being undermined at this point, punishment from investors has been swift.
Hapoalim reported netting NIS 219 million in the fourth quarter of 2007, down 70% from the same period the previous year. Excluding nonrecurring transactions, Hapoalim's quarterly net was NIS 895 million.
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Consolidated net profits for 2007 as a whole were down 29%, to NIS 2.69 billion, while operating profits (excluding one-time capital gains) were down by 6.5%, to NIS 2.27 billion. Leumi, on the other hand, said that its fourth-quarter net fell by "only" 52% to NIS 517 million. For the year, Leumi's consolidated net fell 5% to NIS 3.36 billion. But profits from ongoing activities - without nonrecurring profits of NIS 373 million from selling provident and mutual funds, and thus a truer reflection of the bank's performance, more than doubled, to NIS 2.98 billion. In the fourth quarter alone, profits from regular activities were NIS 512 million, up 31% from the parallel.
The main question about the banks, of course, relates to their investments in American mortgage-backed securities - namely, how much value the banks think they can recoup and how much they admit is unrecoverable.
Reversible loss must be provisioned for, but it remains a loss on paper until classified otherwise. Unrecoverable loss must be booked in the company's profit and loss statement and is a true-blue loss.
The bottom line is that Leumi reported just $7.2 million (NIS 27.7 million at the dollar exchange rate prevailing at the end of 2007) in unrecoverable loss on mortgage-based securities. It also reported provisions of $44 million (NIS 169 million), meaning it thinks that over time, it can make this money back. That compares to loss provisions of $56 million in the third quarter, meaning that Leumi showed some recovery in the fourth quarter. Nevertheless, all provisions have a negative effect on the bank's equity.
Hapoalim was hit much, much harder. The bank wrote off NIS 1.176 billion in its profit and loss report as a result of investments in mortgage-backed securities, meaning the bank considers these losses to be permanent. It also reported $153 million in capital losses.
Moreover, like all other banks, Hapoalim makes its living from the difference between the interest it pays on deposits and the interest it charges for loans. And in this regard, it presented a very poor fourth quarter indeed, with revenues from financing activities down 58% from the same period the year before. For 2007 as a whole, revenues from financing activities were down 8.5%, even though it increased its credit activity by about 10%.
In contrast, Leumi's revenues from financing activities grew by 1% in the fourth quarter, to NIS 1.781 billion, and were up 10% for the year.
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