Israel Discount Bank, the country's third-largest bank, is seeking to expand its business activities in the United States via an acquisition of a small bank in the New York area. "We cannot take the risk of expanding our activities in a country in which we don't have a presence," Shlomo Zohar, chairman of Israel Discount Bank, said in an interview with The Jerusalem Post Thursday in Tel Aviv. "Our strategy is to focus on our existing banking structures. In the US, we want to expand the domestic-banking activities of our subsidiary in New York through a matching acquisition of a small local bank." Israel Discount Bank of New York, also known as IDB Bank, started its operations in 1962 and is a commercial bank offering domestic, international, personal and commercial banking services to its US and foreign clientele. "We are looking for an opportunity to acquire a small local bank with $500 million to $1 billion in deposits located in the New York area that matches our traditional clientele of the Jewish market and is active in similar fields," Zohar said. "It needs to be a fit. We will not take the risk of entering new fields in which we are not active, such as real estate." In the aftermath of the global financial crisis, small banks in the US are struggling to survive. On the one hand, US banking authorities are trying to reduce the number of banks; some are on the verge of closure because of financial problems, while others need to merge with larger banks. On the other hand, US regulators have severed capital requirements and oversight demands, which many small banks cannot meet. "This environment offers buying opportunities, and the cost today is much better than before the crisis," Zohar said. "We are looking around and have also been getting requests." The Israeli banking sector will report second-quarter results later this month. Merrill Lynch said in a research note Thursday that the Israeli banking sector had recovered during the second quarter of 2009, but it cautioned that its underlying return on equity is still only 7 percent. Merrill Lynch said the banks' second-quarter results should be much better than in the preceding quarter, with an average return on equity of more than 9%, compared with 5% for the first quarter and a negative return on equity in the second half of 2008. Stripping out one-time gains, the underlying return on investment would remain a low 7%, Merrill Lynch said. "We think Israel Discount Bank is likely to record a relatively strong set of results in Q2, as we expect the bank to continue to benefit from notable trading gains and from gains on its severance-payment funds," Merrill Lynch analysts Haim Israel and Micha Goldberg said in the report. "We expect loan-loss provisions to decline slightly as a result of some small recoveries, and we forecast net income to total NIS 188 million, reflecting a return on equity of 8%," they said. In addition, Merrill Lynch expects most banks, apart from Discount Bank, to have already reached the capital-adequacy ratio target of 12% in the second quarter ahead of the deadline set by the Bank of Israel for the end of 2009. Merrill Lynch rated Discount Bank "underperform," on concerns about the bank's asset quality, its US exposure and its low capital ratios. "We still think the bank is likely to require an equity injection," Merrill Lynch said. But Zohar is confident Discount Bank will reach the mandated minimum-capital-adequacy ratio of 12% in the third quarter of 2009 without plans for an equity injection. "Capital-adequacy ratio has become a buzzword around the world in the aftermath of the global financial crisis," he said. "No bank will collapse because of a low capital-adequacy ratio. Liquidity and asset portfolio are much more critical parameters for the stability of a bank. "We are more or less there [capital adequacy ratio of 12%]," Zohar said. "In addition, we plan to raise our Tier-1 capital-adequacy ratio to 7% by the end of the year." Discount Bank's capital-adequacy ratio was 10.42% at the end of March and over 11% at the end of June. Banks need to maintain a high capital-adequacy ratio in view of the Basel II requirements - the new Basel Capital Accord of the Basel Committee on Banking Supervision - that will come into effect by the end of the year. "Overall, the implementation will be positive since it will force the banking industry to examine how to best use capital by assessing risks, including operational risk of every activity opposite profits," Zohar said. "Capital-adequacy ratios will rise, which will be harder for the small banks to reach. "Putting the same conditions on everyone gives a relative advantage to the large banks, which have a market share of 70%. Since mergers between the small banks are not much of an option in a small market, the regulator will need to enable them to merge with insurance companies." Although the outbreak of the global financial crisis started barely a year ago, the pains are much deeper for Zohar. "Looking back, it feels like 20 years," he said. "In the last quarter of 2008 the pressure and the panic in the market reached its peak. The recession has not come to an end, although the financial markets are seeing the start of a recovery. Exporters are still suffering and small and medium-sized companies are still having credit difficulties." Zohar warned about the lack of regulation within the nonbanking sector. "The lessons from the crisis in the nonbanking sector have not been taken," he said. "If the nonbanking sector will not be subjected to a form of regulation like the banks, we could see ourselves in the same situation in six months or in a year's time."

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