Higher profits at the larger banks as a result of capital gains from asset sales kept the banking sector in favor among analysts Wednesday, even as their smaller counterparts posted sharp declines in earnings.
"We saw Hapoalim and Leumi reporting profits of over a NIS 1.1 billion each and a significant part of those were from capital gains," said Yuval Ben Zeev, head of research at Clal Finance Batucha Investment Management. "Besides that, strong macroeconomics reflect very positively across the board for all the banks."
While Bank Leumi said Wednesday that profits doubled in the first quarter, boosted by one-time gains from selling its stakes in two holding companies, these were contrasted by Israel Discount Bank and Mizrahi Tefahot Bank, which each posted significant declines in earnings, resulting from different one-time expenses. Earlier this week, Bank Hapoalim said gains from the sale of its mutual funds unit helped its profits grow 27%.
Ben Zeev expects to see more growth from capital gains in the coming quarters.
"We haven't seen the capital gains from many of the asset management businesses sold to date and which are expected to close in the second and third quarters," Ben Zeev said. "We can, therefore, expect more capital gains throughout the year from the whole industry, Mizrahi and Discount included."
Leumi said net income rose to NIS 1.1b., or NIS 0.79 a share, from NIS 528 million, or NIS 0.37, a year earlier. The company earned more from lending and cut provisions for bad debt. Israel's second largest bank had NIS 711m. in one-time gains after it sold a 10% stake in Migdal and 15.8% of Africa-Israel Investments Ltd.
Leumi's first-quarter net interest income increased 3% to NIS 1.65b. and it cut provisions for debt that may not be repaid by 55% to NIS 201m. Income from fees and commissions rose 6% to NIS 940m.
Meanwhile, Israel Discount Bank Ltd. said first quarter profit fell 83% because it paid employees a one-time bonus after the government sold a controlling stake in the bank. Net income dropped to NIS 27m., or NIS 0.03 a share, from NIS 163m., or NIS 0.17, a year earlier. Net return on equity fell to an annualized 1.6% from 10.6% a year ago.
Discount paid its workers a NIS 232m. bonus after an investor group led by Canada's Matthew Bronfman bought a 26% stake in Discount in February. The bank said it also reversed a NIS 173m. charge taken three years ago on the value of its First International Bank of Israel Ltd. stake.
Income from lending in the first quarter edged up 1.4% from a year earlier to NIS 889m., while doubtful-debt provisions increased 10.1% to NIS 142m. Income from fees and charges grew 7.4%. The bonus, as well as a new wage accord with unions, helped increase total expenses at the bank by about 37% in the quarter to NIS 1.43b. Total assets reached NIS 156.1b. at the end of March, an increase of 8.6%.
Also reporting Wednesday, Mizrahi said first-quarter profit fell 47% because of charges related to an early retirement program and changes in mortgage debt provision rules. Net income fell to NIS 53m. from NIS 100m. a year earlier. Excluding the charges, Mizrahi's net income was NIS 144m., a 44% increase from last year.
Mizrahi reached an agreement with the labor unions on April 11, ending a two-year work slowdown that began after United Mizrahi Bank Ltd. merged with its Tefahot Mortgage Bank Ltd. unit to form Mizrahi Tefahot. Mizrahi was required to include the costs in the first quarter on the basis of the management's best estimates of expected costs as of March 31. Income from fees and commissions rose 10% to NIS 296m. Money put aside for debt that may not be repaid more than doubled to NIS 119m. because of new accounting rules for mortgage debt provisions. Operating expenses rose 19% to NIS 503m.
Earlier this week, Hapoalim reported first quarter profits of NIS 1.18b., up 27% from last year.
Ben Zeev said all the earnings were in line with expectations.
While investors have expressed deep confidence in the banks over the last year, they have underperformed the market in the last two weeks as investors move their funds to the US from emerging markets.
As long as this trend continues, Ben Zeev said it would be difficult for Israeli banks to outperform the market, but he believes that with the expected increase in profits they eventually will.
Bloomberg contributed to this report.