Bank Otsar Hahayal Ltd. and its subsidiaries 2007 Annual Report

Transcription

Bank Otsar Hahayal Ltd.
and its subsidiaries
2007
Annual Report
This is a translation from the Hebrew version of the 2007 Annual Report and has
been prepared for convenience only.
In the case of any discrepancy, the Hebrew version will prevail.
and its subsidiaries
2007
Annual Report
Contents
Page
Directors’ Report
2
Management Review of the Bank’s Financial Position and the Results of its Operations
80
Certification of the General Manager
94
Certification of the Chief Accountant
95
Report of the Board of Directors and Management on their Responsibility for the Annual Report
96
Financial Statements for 2007
97
1
BOARD OF DIRECTORS’ REPORT FOR 2007
At the Board of Directors’ meeting held on February 28, 2008, it was resolved to approve and publish the
consolidated financial statements of Bank Otsar Hahayal Ltd. for the year ended December 31, 2007.
Detailed below are the principal developments and changes that occurred during 2007.
General
In 2007, there was an increase in the economic activity in the majority of the economic sectors in Israel,
concurrent with a significant increase in private consumption, investments and exports.
Gross Domestic Product (GDP) increased by 5.3% in 2007, following a 5.2% increase in 2006. The product of
the business sector increased by 6.3%, in 2007, following a 6.5% increase in 2006. The total private
consumption increased by 7.2% in 2007, following a 4.5% increase in 2006.
The trade deficit increased sharply by 34% in 2007, amounting to approximately $10.2 billion, compared with
$7.6 billion in 2006. The trade deficit was affected by the low exchange rate of the dollar, and reflects an 18.6%
increase in imports to $56.1 billion and a 15.6% increase in exports, to $45.9 billion.
The domestic deficit in the Government’s budget over the year amounted to approximately NIS 100 million,
which accounts for 0.02% of GDP, compared with an annual target deficit of NIS 18.7 billion, which
represented 2.9% of GDP. The low deficit originates from a higher than planned increase in Government
revenues from taxes, resulting from the rapid growth of the economy and from an increase in the imports of
consumer goods, electrical appliances and cars.
Unemployment fell to 6.6%, in November 2007, compared with 7.9% at the beginning of 2007 and a record
high of 11% at the beginning of 2004.
The consumer price index (CPI) increased in 2007 by 3.4%, an increase that is higher than the upper limit of
the inflation target range set by the Bank of Israel, which called for a 1% – 3% increase. The increase in the
CPI in 2007 was affected by a sharp increase in energy prices and in the prices of goods in the worldwide
markets. The decrease in the exchange rate of the dollar during the year mitigated the effect of these factors.
The foreign currency market was characterized over the year by high volatility, and was affected by
developments in the global financial markets, mainly the weakening of the dollar worldwide, and narrowing of
the negative interest gap of the shekel relative to the dollar, up to its nullification at the end of December 2007.
Over the year, the shekel appreciated against the dollar by 8.97% and depreciated against the euro by 1.7%.
The monetary policy of the Bank of Israel, designed to attain stability in the local financial markets and to
achieve the inflation target, has led to a decrease of 0.25% in monetary interest in 2007, to 4.25% at the end of
December 2007. The monetary interest rate reflects a real interest rate of 1.75%, equal to the dollar interest rate
in the U.S. The means of payment in the economy increased sharply by approximately 18.4% over the year, and
amount to approximately NIS 61.7 billion.
In 2007 the capital market was characterized by high trade volumes and price increases. The capital market
activity was affected by positive economic data for the Israeli economy, a positive trend in most of the financial
market worldwide, strengthening of the shekel against the dollar and weakening of the dollar against other
currencies worldwide. Starting the second half of July 2007, the global financial markets were affected by the
crisis in the US sub-prime mortgage market. Due to this crisis, volatility in the local financial markets increased
and the prices of shares and debentures declined. During the year, the general share index rose by a nominal
rate of 23.26%, the Tel Aviv 25 Index rose by a nominal rate of 31.39%, and the Tel-Tech Share index declined
by a nominal rate of 3.51%.
On the debentures market, trade was highly volatile and afforded relatively low profitability, being affected by
fluctuations in the financial markets abroad and their effect on foreign investors, the increase in the inflation rate
and the weakening of the dollar. Over the year, the index of CPI-linked Government debentures rose by a
nominal rate of 6.69%, the index of unlinked debentures rose by a nominal rate of 3.1%, and the index of
foreign currency-linked debentures declined by 2.6%.
Foreign investments in the Israeli economy decreased by 55% in 2007, amounting to approximately $10.1
billion, compared with $22.4 billion in 2006. Of this total, approximately $0.4 billion are investments in Israeli
securities on Israeli and foreign stock exchanges, compared with $8.1 billion in 2006, and approximately $9.7
billion were invested directly in the various economic sectors, compared with $14.3 billion in 2006. The said
2
decline in financial investments originated in the crisis in the sub-prime mortgage market in the US. The
volume of foreign investments in the Israeli real estate sector increased by 7% in 2007, amounting to
approximately $1.5 billion.
Activities of the Bank Group and Description of its Business Development
Otsar Hahayal Ltd. was established in 1946 by funds for mutual aid set up by soldiers serving in the British
Army during the Second World War. In 1970, the company received a license to operate as a bank, and
changed its name to Bank Otsar Hahayal Ltd.
The Bank is a licensed banking corporation, in accordance with the provisions of the Banking Law (Licensing)
– 1981. In its 61 years, the Bank has developed a network of branches and activities in all areas of banking, and
provides its customers with a wide range of banking and financial services.
According to its financial statements published as at September 30, 2007, the Bank's share of the banking sector,
based on the criteria of credit volume and deposits from the public, is 1.2%.
Subordinated notes issued by the Bank are rated Aa3 by Midroog.
The Bank operates through divisions and according to the services rendered to its customers in various banking
segments: a retail division, which serves customers in the personal, private banking and small business
segments, and a corporate division, which serves business customers.
In addition, the Bank operates through subsidiaries and other companies that provide services comprising
mainly:
a. Credit card activities – provided by Isracard Ltd. and American Express Ltd., companies that issue, market
and operate credit cards for use in Israel and abroad.
Within the framework of the transaction for the sale of control in the Bank from Bank Hapoalim to First
International Bank of Israel Ltd. (“First International”), the parties were required to obtain the approval of
the Antitrust Commissioner ("the Commissioner") for the transaction. On March 29, 2006, the
Commissioner announced her agreement to the transaction, as prescribed by the Antitrust Law – 1988. Her
agreement was contingent on cancellation of the exclusivity agreements between the Bank and First
International and certain credit card companies, if and insofar as such arrangements exist and are in force,
and that notice to that effect shall be given to the Commissioner.
On April 10, 2006 an agreement was entered into between the Bank and First International, Isracard Ltd.,
Hapoalim American Express Ltd. and Europay (Eurocard) Israel Ltd., that involves abrogation of all
exclusivity arrangements, if and insofar as such agreements had been made in the past, so that no limitation
shall be imposed on the Bank in respect of the marketing of credit cards that are not issued by Isracard Ltd.
and American Express Ltd., and abrogation of any arrangement that involves an undertaking by the bank to
market a certain percentage of credit cards issued by Isracard and American Express Ltd. The Commissioner
was notified to that effect on April 10, 2006.
b. Investment portfolio management – provided by "Otsarot" Investment Management Ltd., a company wholly
owned by the Bank.
In 2006 and 2007, the Bank sold its operations in the following segments:
a. Provident fund management – until July 2007 the Bank managed 8 provident funds, 5 of which were owned
by it.
In July 2007, the Bank sold the provident funds management operation owned by it to Ayalon Provident
Funds Management Ltd. and Ayalon Insurance Company Ltd. Concurrently, in 2007 and at the beginning of
2008, some of the other funds managed by the Bank transferred their management operation to other entities.
As at December 31, 2007, the Bank provides management and operating services to one provident fund that
is not owned by it and operating services to the provident funds it sold to Ayalon.
See the "Activity in the Capital Market" Section for full details of the sale transaction.
3
b. Mutual fund management – until August 2006, the mutual funds were managed through "Otsarit" Mutual
Fund Management Co. Ltd., a company wholly owned by the Bank. In August 2006, the mutual fund
management operations were sold to Gaon Mutual Fund Management Ltd.
Principal holdings:
Bank Otasr Hahayal
Ltd.
95%
Trust Company of Bank
Otsar Hahayal Ltd. (1)
86.2% (44.6%)
90.9%
100%
2.1% (8.5%)
0.0%
9.1%
Investment
Company of Bank
Otsar Hahayal Ltd.
(1)
(2)
(3)
Property Company
of Otsar Hahayal Ltd.
Otsarot Investment
Management Ltd.
In February 2008, the Bank was assigned the rights of the Trust Company of Bank Otsar Hahayal Ltd. in
investments in other affiliated companies of the Bank that are shown in the figure.
As at the signing date of the financial statements, the Bank holds 100% of the control and of the right to receive
profits in Otsarot Investment Management Ltd. and in the Property Company of Otsar Hahayal Ltd. as well as
88.3% of the rights to appoint directors and 53.1% of the rights to share in profits in the investment company of
Where the rights to share in profits differ from the rights to appoint directors, the rights to share in profit appears in
parentheses.
A controlling interest of 0.0% presents a positive controlling interest that is lower than one hundredth of a percent.
Forward-looking information:
Some of the information in the Directors' Report, which does not relate to historical facts, is forward-looking
information as defined in the Securities Law – 1968.
Differences between the actual results of the Bank and those appearing in the forward-looking information can
be attributed to a number of causes, such as macro-economic, regulatory and intra-organizational factors.
Forward-looking information will typically use words such as "we believe", "expected", "projected", "it is
estimated", "intend", "plan", and similar expressions, as well as words such as "wish", "should", "can", "will
be", etc.
These forward-looking expressions involve risks and uncertainty since they are based on assessments made by
Management about future events, such as forecasts and assumptions about macro-economic developments in
Israel and worldwide, working assumptions about internal organizational developments, estimates of the effects
of changes in legislation on the organization, and so on.
The information relies, inter alia, on the forecasts of economic advisors, forecasts made within the organization,
public information concerning estimates of influential parameters, etc.
4
Control of the Bank:
The controlling shareholder of the Bank is First International that holds approximately 68% of the rights to
share in profits and 66% of the voting rights and the rights to appoint directors.
Other shareholders in the Bank are Hever, The Association of IDF Servicemen and Veterans Ltd. ("Hever"),
with 24% of the rights to share in profits, the voting rights and the rights to appoint directors, and The Workers'
Compensation Fund of Israel Aircraft Industries Cooperative Association Ltd., with approximately 8% of the
rights to share in profits and 10% of the rights to appoint directors.
According to the control permit obtained by First International and Hever from the Bank of Israel, First
International and Hever were permitted, inter alia, to control the Bank jointly, and First International was
permitted to control and to hold directly means of control up to 100% of any means of control, provided that it
shall hold at any time at least 67.99% of the equity, 66% of the voting rights and 66.67% of the rights to appoint
directors in the Bank. "Hever" was permitted to hold directly up to 24% of the equity and of the voting rights
and 33.3% of the rights to appoint directors in the Bank.
First International and Hever were permitted to cooperate under restrictive conditions, and additional conditions
were set pertaining to control, prevention of competition and services rendered to the Bank.
Investments in the Bank's capital and transactions in its shares:
In 2007, no transactions were effected that involved the Bank's shares, no capital was issued, and no dividend
was declared or distributed.
In January 2006, the Board of Directors of the Bank and the General Meeting resolved to pay a dividend in the
mount of NIS 430 million. In addition, in January 2006, the Board of Directors and the General Meeting
resolved to invest the amount of NIS 350 million in the Bank's equity by issuing 3.0 million ordinary shares of
NIS 0.0001 par value each to the existing shareholders. The shares were issued at a price per share of
NIS 116.67.
In accordance with the agreement entered into on January 24, 2006, on August 17, 2006, Bank Hapoalim Ltd.
("Bank Hapoalim") transferred to First International its entire holdings in the Bank.
Profit and Profitability
Net profit for 2007 amounted to NIS 114.7 million, compared with a profit of NIS 46.4 million in 2006, a
147.2% increase.
Net profit in 2007 includes profit from the sale of the provident funds that amounted to NIS 39.4 million.
The net profit in 2006 includes:
a.
Expenses in respect of a sale bonus, in the amount of NIS 48.3 million, paid to the Bank's employees in
accordance with a collective agreement entered into between the Bank and its employees, as well as a
contribution in the amount of NIS 0.8 million out of the bonus funds and the Bank's own resources.
b.
Profit after tax in the amount of NIS 14.5 million, from the sale of the Bank's mutual funds operation.
Net profit in 2007, net of the said effects, amounts to NIS 75.3 million compared with NIS 60.4 million in 2006,
a 24.7% increase.
Net return on equity is calculated based on average equity, in accordance with the Public Reporting Directives
of the Supervisor of Banks from May 2007. The return data published in the years 2006 and 2005 were 4.77%
and 11.12%, respectively.
The net return on equity is as follows:
2007
2006
2005
2004
2003
17.17%
7.73%
10.64%
10.40%
9.87%
5
The net return on equity in 2007, net of the impact of the profit from the sale of the provident funds, amounted
to 11.27%.
The net return on equity in 2006, net of the impact of the sale bonus and the profit from the sale of the trust
funds operation, amounted to 10.06%.
The change in net profit in 2007, compared with the net profit in 2006, net of the impact of the said
extraordinary items, reflects:
- an increase in profit from financing operations, due to an increase in the volume of business and the sale
of financial assets.
- a decrease in the specific provision and in the supplementary provision for doubtful debts.
- an increase in operating income, due in part to capital market activity and in part to an increase in the
income from credit card activity.
- an increase in operating expenses: payroll expenses and other operating expenses.
Profit from financing operations before provision for doubtful debts amounted to NIS 374.7 million in
2007, compared with NIS 338.0 million in 2006, a 10.9% increase.
Presented below is the operating contribution, by linkage segments, to the profit from financing operations
before provision for doubtful debts:
Average
financial
capital(1)(2)
Unlinked shekel
segment
CPI-linked shekel
segment
Foreign currency
and foreign currencylinked segment
(1)
(2)
(3)
2007
Average
volume of
Contribution
to profit
activity (3)
NIS millions
Financial
margins
Average
financial
capital(1)(2)
2006
Average
volume of
activity (3)
NIS millions
Contribution
to profit
Financial
margins
438.7
7,931.4
265.7
3.22%
335.2
7,165.2
248.8
3.32%
152.2
2,400.2
31.0
0.86%
165.6
2,429.2
26.4
0.80%
40.9
2,101.5
29.8
1.49%
59.8
2,061.3
31.2
1.54%
In the unlinked shekel segment and in the foreign currency and foreign currency-linked segment – based on average daily balances;
in the CPI-linked segment – based on monthly opening balances.
Including the effect of ALM derivative financial instruments.
Total assets of the segment.
Other financing income amounted to NIS 49.0 million in 2007, compared with NIS 36.2 million in 2006, a
35.4% increase.
The income from the sale of deposits, from the sale of available-for-sale securities and from marketable
debentures in 2007 amounted to NIS 12.8 million, compared with NIS 3.2 million in 2006, an increase of 300%.
Interest income collected on problematic debts amounted in 2007 to NIS 18.0 million, compared with NIS 17.6
million in 2006, an increase of 2.3%.
Income from options and other financial instruments amounted to NIS 8.1 million in 2007, compared with
NIS 5.3 million in 2006, an increase of 52.8%.
Other financing expenses decreased from NIS 4.6 million in 2006 to NIS 0.8 million in 2007. Of this change,
approximately NIS 4 million is due to an anticipated loss recorded in 2006 in respect of loans granted within the
framework of an agreement with the defense establishment.
The provision for doubtful debts was made, as in the past, conservatively and amounted to NIS 19.3 million in
2007, compared with NIS 30.1 million in 2006, a decrease of 35.9%.
The specific provision for doubtful debts in 2007 amounted to NIS 19.0 million, compared with NIS 28.4
million in 2006, a decrease of 33.1%.
An analysis of the operations by sector shows that most of the specific provision is attributable to corporate
activity, as in 2006.
6
The provisions for doubtful debts decreased in 2007 and amounted to NIS 55.2 million, compared with
NIS 70.2 million in 2006, a decrease of 21.4%. The total decrease in the provisions and the collection of debts
defined as doubtful in the past was NIS 36.2 million, compared with NIS 41.8 million in 2006, a decrease of
13.4%.
The following table presents the ratio of the specific provision to the portfolio of credit extended under the
Bank’s responsibility:
Expense
Ratio to balance sheet credit risk
Ratio to total credit risk*
Cumulative Provision
Ratio to balance sheet credit risk
Ratio to total credit risk*
2007
2006
%
%
0.30
0.15
0.34
0.24
2.62
1.94
3.05
2.35
* Balance sheet credit risk and the credit risk on off-balance-sheet financial instruments as calculated for borrower debt restrictions.
The supplementary provision for risk components defined in the directives of the Supervisor of Banks and in the
rates defined therein amounted in 2007 to NIS 0.3 million, compared with a decrease of NIS 1.7 million in
2006. The majority of the provision in 2007 was recorded in respect of non-income bearing debts. In 2006,
most of the provision was due to the lack of financial information about a borrower.
The general and supplementary provision determined in accordance with the directives of the Supervisor of
Banks amounted at December 31, 2007 to NIS 24.6 million, compared with NIS 24.3 million in at
December 31, 2006, of which approximately NIS 16.3 million is a general provision determined in accordance
with the directives of the Supervisor of Banks that were valid until 1991 (in real values as of 2004).
Total problematic debts amounted to NIS 254.2 million at December 31, 2007, compared with NIS 218.9
million at December 31, 2006, an increase of 16.1 %.
For additional details of the composition of problematic debts, see "Credit Risks" below.
Profit from financing operations after provision for doubtful debts in 2007 amounted to NIS 355.4 million,
compared with NIS 307.9 million in 2006, an increase of 15.4%.
Operating and other income amounted to NIS 202.1 million in 2007, compared with NIS 199.4 million in
2006, an increase of 1.4%. The income from operating commissions amounted to NIS 186.2 million in 2007,
Most of the income from capital market activity amounted as follows:
2007
2006
NIS millions
Change
%
Income from securities
Income from mutual fund management fees and
mutual fund distribution commissions
Income from provident fund management fees
52.5
45.3
15.9
5.6
*8.1
5.5
14.3
1.8
(43.4)
Total capital market activity income
66.2
65.1
1.7
* Including income until June 2007, from provident fund operations that were sold.
Income from credit card commissions amounted to NIS 34.7 million in 2007, compared with NIS 33.9 million
in 2006, an increase of 2.4%.
7
The average credit due to credit card transactions amounted to NIS 108.8 million in 2007, compared with
NIS 117.1 million in 2006, a decrease of 7.1%. The total income from this financing activity amounted to
NIS 7.7 million in 2007, compared with NIS 8.5 million in 2006, a decrease of 9.4%.
Income from credit handling and contract preparation amounted to NIS 23.2 million in 2007, compared with
NIS 25.2 million in 2006, a decrease of 7.9% that is due in part to income from preparations for implementation
of Directive 325, which was recorded in 2006.
Income from foreign trade and foreign currency services amounted to NIS 4.7 million in 2007, compared with
NIS 2.3 million in 2006. The increase is due primarily to factoring activity.
Income from operations in checking accounts recorded a moderate 0.6% increase, from NIS 70.6 million in
2006 to NIS 71.0 million in 2007.
Operating expenses amounted to NIS 432.9 million in 2007, compared with NIS 437.0 million in 2006, a
decrease of 0.9%.
Operating expenses had a 46.7% coverage rate of operating and other income in 2007, compared with 45.6% in
2006.
Net of the effect of the sale bonus in 2006, the operating expenses coverage rate was 51.3% of operating and
other income that year.
Payroll expenses amounted to NIS 242.2 million in 2007, compared with NIS 264.1 million in 2006, a decrease
of 8.3%.
Payroll expenses in 2006 include extraordinary expenses in respect of a bonus in the amount of NIS 48.3 million
paid to the employees in September 2006, in accordance with the collective agreement entered into following
transfer of control in the Bank. In 2007, payroll expenses include a provision for early retirement in the amount
of NIS 5 million.
The increase in payroll expenses net of the effect of extraordinary payroll expenses, as specified above,
amounted to NIS 21.4 million, a 9.9% increase. This increase in expenses is due to an increase in the provision
for profitability bonus, the Bank's salary agreements and an increase in the number of employees, reflecting the
increase in the number of branches, new operations and preparations for new operations in 2008.
Building and equipment maintenance expenses and depreciation amounted to NIS 77.0 million in 2007,
The increase is reflected in depreciation, rental fees and municipal tax expenses, and maintenance expenses at
similar rates. The increase reflects in part the operation cost of new branches.
Other operating expenses amounted to NIS 113.7 million in 2007, compared with NIS 104.2 million in 2006,
an increase of 9.1%.
Approximately half of the increase in this expense was in the data processing and computer services expenses
that increased from NIS 60.6 million in 2006 to NIS 65.2 million in 2007, an increase of 7.6%.
Other operating expenses (which are not data processing expenses) recorded an increase of 11.2%, amounting to
NIS 48.5 million in 2007, compared with NIS 43.6 million in 2006. Approximately 95% of the increase is due
to media and advertising expenses.
Operating profit before taxes amounted to NIS 124.6 million, compared with NIS 70.3 million in 2006, an
increase of 77.2 %.
Operating return before taxes on average shareholders' equity was 18.66%, compared with 11.70% in 2006.
The operating return before taxes on average shareholders' equity in 2006, net of the effect of the
aforementioned sale bonus was 19.88%.
The provision for taxes on operating profit in 2007 amounted to NIS 49.3 million, compared with NIS 38.4
million in 2006.
The rate of provision for taxes on operating profit in 2007 was 39.6%, compared with 54.6% in 2006.
8
The statutory tax rate in 2007 was 38.53%, compared with 40.65% in 2006.
The difference between the statutory tax rate and the actual tax rate mainly reflects differences arising from the
effect of the Inflationary Adjustments Law and the effect of non-deductible expenses. For full details of the
differences between the statutory tax rate and the actual tax, see Note 24B to the financial statements.
On January 29, 2008, the Knesset Finance Committee approved the Income Tax (Adjustments for Inflation)
(Curtailment of Period of Application) Bill – 2007, which voids the Inflationary Adjustments Law with effect
from the 2008 tax year.
According to the Bill, most of the articles of the Law will be voided, while certain articles will remain in force
for transition purposes, to prevent distortions in the calculation of tax.
According to the Bill, with effect from 2008, inflationary deductions or supplements, depreciation linkage and
carry forward losses will no longer be calculated, and various changes and adjustments will be applied in the
calculation of capital losses, financing expense deductions, the definition of assets in Income Tax Ordinances,
etc.
Voidance of the Inflationary Adjustments Law is expected to increase the effective tax rate of the Bank and to
have an adverse impact on its future operating results; however, the extent of the impact is largely contingent on
the rate of the future increase in the CPI, which cannot be forecasted accurately.
In July 2005, the Knesset passed the Amendment to the Income Tax Ordinance Law (Amendment No. 147 and
Temporary Order) – 2005.
The Amendment stipulates a gradual reduction in the corporate tax rate from the current rate of 29% to 25%, as
follows:
- In 2008, the tax rate will be 27%.
- In 2009, the tax rate will be 26%.
- In 2010 and thereafter, the tax rate will be 25%.
In June 2006, the Value Added Tax Order (Tax Rate for Non-Profit Organizations and Financial Institutions) –
2006 ("the Amendment") was published in the Official Gazette. As a result of the Amendment, the wage tax
and profit tax rates applicable to a financial institution were reduced from 17% to 15.5% effective from July 1,
2006. The provision for taxes on the Bank's profit includes profit tax applied to income, under the Value Added
Tax Law. In light of this, the statutory tax rates applicable to the Bank are as follows: in 2006 – 40.65%., in
2007 – 38.53%, in 2008 – 36.80%, in 2009 – 35.93%, and in 2010 and thereafter – 35.06%. Current taxes and
balances of deferred taxes as at December 31, 2007 were computed according to the tax rates, as stipulated in
the Amendment.
Operating profit after taxes amounted to NIS 75.3 million in 2007, compared with NIS 31.9 million in 2006,
Operating return before taxes on average shareholders' equity was 11.27% in 2007, compared with 5.30% in
2006. The operating return before taxes on average shareholders' equity in 2006, net of the effect of the sale
bonus was 10.06%.
Net after-tax income from extraordinary items amounted to NIS 39.4 million in 2007and arose from the sale
of the provident funds operation as described in the “Activity in the Capital Market” Section. In 2006, the aftertax income from extraordinary items amounted to NIS 14.5 million and arose primarily from the sale of mutual
funds by the Bank.
9
Developments in Principal Balance Sheet Items:
Total assets
Credit to the public
Cash and deposits in banks
Investment in securities
Investments in buildings and equipment
Deposits from the public
Shareholders’ equity
Ratio of shareholders’ equity to total assets
Ratio of credit to total assets
As at December 31
2007
2006
NIS millions
NIS millions
Rate of change
%
12,256.2
8,473.5
2,191.8
1,360.1
158.7
9,925.8
720.6
11,176.5
7,897.6
2,143.4
924.2
156.7
9,029.7
611.1
9.7
7.3
2.3
47.2
1.3
9.9
17.9
5.9%
69.1%
5.5%
70.7%
Credit to the public amounted to NIS 8,473.5 million as at December 31, 2007, compared with NIS 7,897.6
million as at December 31, 2006, an increase of 7.3%.
Credit to the public as at December 31, 2007 includes debt balances deriving from credit card transactions in the
amount of NIS 875.7 million, compared with NIS 808.9 million on December 31, 2006, an increase of 8.3%.
The balance of the Bank's liabilities to creditors for credit card transactions in similar amounts was included in
the line item “Other liabilities”.
The composition of credit to the public by linkage segments is as follows:
As at December 31
2007
2006
NIS millions
NIS millions
Unlinked shekel
segment
CPI-linked shekel
segment
Foreign currency
(including foreign
currency-linked)
segment
Total
Change
%
Ratio of segment credit to total
credit as at December 31
2007
2006
%
%
6,457.0
5,776.7
11.8
76.2
73.0
1,712.6
1,781.3
(3.9)
20.2
22.8
303.9
339.6
(10.5)
3.6
4.2
8,473.5
7,897.6
100.0
100.0
7.3
In the breakdown by economic sectors, credit to individuals constitutes the majority of the Bank’s balance sheet
credit. This credit constituted approximately 62.2% of the Bank’s credit as at December 31, 2007, compared
with 62.8% as at December 31, 2006.
For full details of the breakdown of the balance-sheet and off-balance-sheet credit risk by economic sectors, see
Supplement E to the Management Review.
In the credit breakdown by the volume of credit granted to the borrower, the majority of the balance sheet credit
as at December 31, 2007 is in brackets of up to NIS 300 thousand, similar to the credit dispersal as at December
31, 2006. The credit in credit brackets of up to NIS 300 thousand represents approximately 59.3% of the total
balance sheet credit.
10
Mortgage activity – the volume of mortgage-secured credit provided for housing purposes as at December 31,
2007 totaled NIS 256.4 million, compared with NIS 262.9 million as at December 31, 2006, a decline of 2.5%.
The said credit volume constitutes approximately 2.9% of the balance sheet credit risk.
Credit risk to the public in corporate debentures - within the framework of the policy prescribing expansion
of the investment in securities, as described in the “Securities” Section below, the Bank invests in the
marketable and non-marketable securities of rated corporations in Israel. This investment amounts to NIS 238.4
million as at December 31, 2007, compared with NIS 170.0 million as at December 31, 2006.
For further details of the credit risks management policy and problematic debts, see the “Credit risk” Section
below.
Securities
In light of the liquidity surplus that the Bank has, especially in the unlinked shekel sector, and considering the
margins in the shekel credit and the risk potential inherent therein, in 2007 the Bank expanded its investment
activity in securities on its own behalf, in the available-for-sale portfolio and in the trade portfolio. The Bank
operates subject to restrictions set by the Board of Directors that prescribe the average duration limit for the
trade portfolio and its daily Value at Risk (VAR) limit.
A. Composition of the investments portfolio at market values:
As at December 31
2007
2006
NIS millions
Change
%
Available-for-sale portfolio
Trade portfolio
1,270.0
90.1
704.1
220.1
80.4
(59.1)
Total portfolio
1,360.1
924.2
47.2
B.
Below is a breakdown of the trading and available-for-sale securities portfolio, by issuer and linkage
segment and presented at market values:
As at December 31
2007
2006
NIS millions
Government
Other marketable
Other non-marketable
1,066.1
128.8
165.2
735.2
117.0
72.0
Total portfolio
1,360.1
924.2
11
C. Breakdown of the investment in securities by rating:
The securities in the Bank's portfolio are rated in Israel, and their value is determined taking this rating into
consideration.
Below is a breakdown of the securities by rating at fair values as at December 31:
2007
AAA rating
AA+ to AA- rating
A+ to A- rating
Shares at cost
2006
1,123.8
180.5
52.8
3.0
782.8
113.2
25.2
3.0
1,360.1
924.2
Fixed assets include buildings and equipment used by the Bank in its operations. Fixed assets are stated in
reported amounts: equipment purchased up to and including December 31, 2003 was stated at depreciated cost
adjusted to the CPI of December 2003; equipment purchased after that date was recorded at depreciated cost in
nominal amounts. The depreciation period fits Management's estimate of the useful life of these assets.
On December 31, 2006, the lease agreement for buildings used by the Bank's branches on IDF military bases
expired. The rental fees paid in 2007 were paid with the lessor's agreement. Amortization of the Bank's
investments in these rented buildings was adjusted over their usage period as assessed by Management.
In accordance with Israel Accounting Standard No. 15, the Bank has assessed the need to present other assets at
their recoverable value and no impairment was recorded.
A.
Deposits from the public are composed as follows:
As at December 31
2007
2006
NIS millions
NIS millions
Demand deposits
Time deposits*
Designated deposits
Savings plans
*
B.
Change
%
Segment share out of total public
deposits as at December 31
2007
2006
%
%
1,321.1
7,487.7
15.2
1,101.8
1,223.3
6,669.8
17.7
1,118.9
8.0
12.3
(14.2)
(1.5)
13.3
75.4
0.2
11.1
13.5
73.9
0.2
12.4
9,925.8
9,029.7
9.9
100.0
100.0
Including deposits that include a structured financial instrument, as at December 31, 2007, in the
amount of NIS 46.8 million (as at December 31, 2006 – NIS 36.0 million).
Composition of deposits from the public by linkage segments:
As at December 31
2007
2006
NIS millions
NIS millions
Unlinked
CPI-linked
Foreign currency
Total
Change
%
Segment share out of total public
deposits as at December 31
2007
2006
%
%
6,875.4
1,795.4
1,255.0
5,891.2
1,834.3
1,304.2
16.7
(2.1)
(3.8)
69.3
18.1
12.6
65.3
20.3
14.4
9,925.8
9,029.7
9.9
100.0
100.0
12
The deferred subordinated notes are linked to the CPI and are not convertible into shares. Their holders are
institutional investors such as provident funds and further study funds. The total of the deferred subordinated
notes as at December 31, 2007 amounted to NIS 389.3 million, compared with NIS 376.5 million as at
December 31, 2006, an increase of 3.4%. The Bank's subordinated notes were rated by Midroog as Aa3.
In 2007, the Bank issued deferred subordinated notes in an amount of NIS 13.8 million that bear interest at a
rate of 4.9% and are for a period of up to 10 years.
The amount of the deferred subordinated notes included as Tier II capital in the minimum capital ratio
calculation as at December 31, 2007, weighted to take into consideration the period to their maturity, in
accordance with the directive of the Bank of Israel, is NIS 196.0 million (December 31, 2006 – NIS 232.3
million).
For details of an agreement for the issue of deferred subordinated notes through First International Issues Ltd.,
see the "Capital Position and Fundraising Policy – Tier II Capital" Section.
Shareholders’ equity, amounted to NIS 720.6 million as at December 31, 2007, compared with NIS 611.1
million as at December 31, 2006, an increase of 17.9 %. As at December 31, 2007, the shareholders' equity of
the Bank includes issued and paid-up capital in the amount of NIS 377.8 million, capital funds from
undistributed accumulated profits in the amount of NIS 345.9 million, and a loss in respect of capital funds from
the adjustment to market price of available-for-sale securities in the amount of NIS 3.1 million.
As at December 31, 2006, the shareholders' equity of the Bank includes issued and paid-up capital in the amount
of NIS 377.8 million, capital funds from accumulated undistributed profits in the amount of NIS 231.2 million,
and capital funds from the adjustment to market price of available-for-sale securities in the amount of NIS 2.1
million.
The shareholders' equity includes cumulative and participating preferred shares, which are unredeemable, in the
amount of approximately NIS 8 thousand. According to their terms, these preferred shares accrue a dividend at
a rate of 30% of their par value, which is paid on them whenever dividend is paid, and participate in a dividend
distribution pro rata to their total par value.
Full details of the equity's development are provided in the Statement of Changes in Shareholders’ Equity in the
financial statements.
As at December 31, 2007, the ratio of capital to risk assets was 10.66%, compared with 10.38% as at
December 31, 2006 and compared with the minimum ratio of capital to risk assets of 9% set by the Supervisor
of Banks.
In accordance with the resolution adopted by the Bank's Board of Directors, the ratio of capital to risk assets
will be 10%.
See Note 12A to the financial statements for details of capital and risk components.
Accounting Policy with Respect to Critical Matters
The accounting principles that are applied in the financial statements are described in Note 1A. to the financial
statements.
The implementation of some of these principles requires the Bank's Management to apply criteria and use
estimates that have an effect on the asset and liability values presented in the financial statements, including
contingent liabilities. Some of the assessments involve uncertainty, and could be affected by changes in the
future. Such estimates and assessments, changes to which could materially affect the results presented in the
financial statements, are considered by the Bank, insofar as they relate to accounting policy, to be estimates and
assessments with respect to critical matters. The Bank’s Management believes that the estimates and
assessments applied at the time of preparing the financial statements are reasonable and were made using the
best information available to it and according to its professional judgment.
13
The provision for doubtful debts is calculated specifically, and a general provision and a supplementary
provision are also included, in accordance with the directives of the Supervisor of Banks. The specific
provision for doubtful debts is intended to reflect in the financial statements the Bank’s evaluation regarding the
loss inherent in the credit portfolio, including in off-balance-sheet items. Determination of the amount of the
provision constitutes an estimate, at which Management arrives by relying on a large number of hypotheses and
assumptions that are based on the information available proximate to the date of publishing the financial
statements. After the Bank has determined the collectible amount of each such debt, a provision is recorded in
the financial statements in the amount of the difference between the amount of the debt and the collectible
amount as at balance sheet date. The process of determining the collectible amount is based on various
parameters, such as the realizable value of the borrower’s assets, guarantees and deposits to secure the loan,
anticipated business cash flows, etc.
In some cases, the Bank is assisted by external experts, who estimate the collectible amount or part of it. This
data is based on estimates and evaluations which rely, inter alia, on economic variables which are beyond the
Bank's control, such as the condition of the Israeli economy, the operating markets of companies and their
products, interest rates and the condition of the capital market, real estate prices, demand in local industry, etc.
In determining the collectible amount, safety coefficients are calculated in order to resolve situations of
uncertainty regarding credit repayment ability, but the dependency on those economic parameters cannot
guarantee that the collectible amount will not change if the economic parameters change.
As at December 31, 2007, the amount determined to be the collectible amount of the debts defined as doubtful
and which is based on the estimates described above, amounted to NIS 83.1 million, compared with NIS 113.2
million as at December 31, 2006.
The supplementary provision for doubtful debts is based on the quality of the customer debt portfolio, according
to the risk characteristics defined in the directives of the Supervisor of Banks. Various rates of provision have
been determined in respect of each of the risk characteristics, and include debts classified as problematic
according to the classification categories defined by the Supervisor of Banks, the absence of financial
information on the borrower, credit to related parties of the Bank, concentration of industry credit and credit
to a borrower or group of borrowers which deviates from the “individual borrower” debt limits. Since some of
the components of the supplementary provision – mainly the provision for problematic debts – rely on the debt
actually being classified as problematic and on the timing of the classification, the Bank, in calculating the
supplementary provision, relies on those estimates that relate to the financial stability of the borrower and to his
repayment ability when it determines whether and when the debt should be classified as problematic.
As at December 31, 2007, the aggregate ratio of the general and supplementary provisions to the total credit risk
is 0.19% (December 31, 2006 – 0.21%).
Fair value of financial instruments
Some of the financial instruments that the Bank uses, including most of the securities in the available-for-sale
portfolio and in the for-trade portfolio, as well as derivative financial instruments, are measured in the balance
sheet according to their fair value. The fair value of a financial instrument is defined as the value at which it can
be sold to a willing buyer who is not a related party or as the value which can close a position in a derivative
financial instrument within a reasonable period of time under existing market conditions. In most cases, fair
value is determined on the basis of price quotations from stock markets or brokers; in the absence of an
organized market for the instrument, fair value is determined on the basis of internal models that were
developed and that are based on various parameters such as interest curves, currency rates and standard
deviations of options. The fair value valuation methods in the said models take into account, inter alia, factors
such as liquidity, concentration of transactions with various parties and the credit risk of the other party to the
transaction. Changes in the fair value of available-for-sale securities are included in shareholders’ equity net of
the tax effect, except in the presence of a non-temporary impairment. In such a case the impairment loss is
included in the statement of profit and loss. The Bank regularly examines whether an impairment is nontemporary, while taking into consideration the issuer's financial position, using the same criteria used to
examine the repayment ability of a borrower, as described in the previous paragraph.
As at December 31, 2007, the amount of financial instruments that are measured at their fair value is
approximately NIS 1,371.4 million, of which NIS 1,184.6 million are financial instruments, the fair value of
which is determined according to their price on stock markets, and NIS 186.8 million are determined using fair
value calculation models. The Bank uses estimates and assumptions in respect of most of the parameters in the
fair value models and these may change following possible changes, mainly in interest rates and standard
deviations in the various markets, as well as where only limited information is available regarding certain
14
market variables, such as for variables in long-term interest or currency swap transactions. According to the
Bank's calculations, a 1% change in the interest rate used by the Bank in discounting the expected cash flow
from the said instruments will have the following effect: a 1% increase in the interest rate will reduce the value
of the financial instruments measured using models by approximately NIS 9.1 million, while a 1% decrease in
the interest rate will increase the value of the measured financial instruments by a similar amount.
With respect to securities whose fair value is determined according to stock market prices, the realizable value
upon the sale of a large amount of such securities might not necessarily reflect the market price. Furthermore,
for securities whose price is determined by a broker’s quotation because of the absence of an organized market
and low marketability of the securities, it is possible that the realizable value will be different.
Contingent liabilities
The Bank is a party to legal proceedings instituted by its customers, former customers and third parties who
consider themselves to have been harmed or to have incurred damages in the ordinary course of the Bank’s
business. The Bank's Management, relying on legal opinions, has included in the financial statements
appropriate provisions to cover any possible damages in respect of such legal proceedings. With respect to
some of the legal proceedings, opinions are received from external legal advisors, which are then examined by
the legal counsel employed by the Bank.
The evaluations of the legal advisors are based on their best judgment considering the stage of the proceedings,
and on legal experience accumulated in the various issues. Estimates as to the level of exposure exist for all
pending claims, as legally required. However, it should be taken into account that in the legal arena one cannot
make a "certain" estimate, and this is the case not just at the initial stages of the action but rather until and
immediately before the ruling. It is therefore possible that the results of any of the proceedings may differ from
the relevant evaluation.
This is true in particular where class action lawsuits are concerned, and also in light of there being an absence of
accumulated legal experience pertaining to the manner of realization of such actions in Israel.
Organizational Structure and Branches
The bank operates on several levels of financial activity: personal and private banking, commercial and
corporate banking, capital markets activity for its customers and for itself, credit card activity and so on.
The Bank's primary operation is retail banking. The employees of the defense establishment are prominent
among the customers of the retail banking operations, which are conducted through 46 branches and offices.
The management structure of the Bank is designed to support an approach that deems product customization and
customer service as the center of its operations.
The fields of engagement and responsibility of the various divisions of the Bank are as follows:
Retail Banking Division – coordinates the personal, private and small businesses banking operations of the
Bank's branches, and is responsible for setting strategy, marketing and advertising.
Corporate Banking Division – manages the Bank's corporate customers operation and is responsible for setting
credit for private customers beyond the authority of the Retail Division. The Division is responsible for
managing trial-related debt collection.
Customer Asset Management Division – coordinates capital market activity and, in the past, coordinated the
provident fund and further study fund operations until the sale thereof. The Division coordinates the investment
portfolio management activity through the subsidiary "Otsarot Investment Management Company", and is
responsible for operating foreign currency and foreign trade systems.
Resources Division – is responsible for human resources management, training activity and operational and
logistics activity.
Financial Division – is responsible for financial risk management, foreign currency dealing rooms
management, inter-banking activity, nostro activity and the operations of the pricing unit. The Division is also
responsible for arranging payment to service providers and for the activity of the Management Information
Department.
Legal Consultancy – provides legal consultancy services to the Bank's Management and to its branches, and
represents the Bank in some of the legal claims filed against it.
15
Accounting and Reporting Department – is responsible for bookkeeping and reporting to the public.
In addition to these units, the Bank has a central control unit that answers to the Managing Director and that is
responsible for market risks control, credit risks control, prevention of money laundering, and the activity of the
compliance officer.
The Internal Audit Unit operates through an Audit Manager who is responsible to the Internal Auditor of the
First International Group and to the Chairman of the Board of Directors.
Description of the Bank's Business by Operating Segment
The Bank provides a range of banking and financial services for its customers through its branches and offices
and through subsidiaries operating in the capital market.
The Bank's activities are divided into five main operations, based on the types of customers in each segment.
This division has existed in the Bank since 2004. Information on income by operating segment is presented to
the Bank's Management and is used in its decision-making.
Details of the Bank’s operating segments:
Personal Banking segment – banking services and financial products for households.
Private Banking segment – banking services and financial products for private customers having medium to
large financial resources, including investment advice services.
Small Businesses segment – banking services and financial products for small businesses with a credit facility
of up to NIS 2.25 million.
Corporate segment – banking services and financial products for businesses with a credit facility of more than
NIS 2.25 million.
Financial Management segment – coordinates the Bank's exposure management and supports the development
and pricing of financial products. This segment also coordinates Bank’s nostro and insurance activities.
Others and Adjustments – mainly any activity that does not constitute a segment.
The results of the segments' operations, sorted by the primary activity segments, are described in Note 26 to the
financial statements.
The data of the segment results were prepared in accordance with the directives of the Supervisor of Banks,
"Principal Segments of Operations".
The accounting principles applied in the presentation of the results of operations of the Bank's operating
segments are described in Note 26 to the financial statements.
The main principles applied in dividing the results of operations among the segments of operations are as
follows:
Financing income – the profit centers that focus on activities involving the customers of the Bank's branches
and its subsidiaries in Israel are credited with the financial margin on loans extended to the customers and for
deposits made by the customers. The profit from financing income includes the financial margin, both creditrelated and deposits-related, that is calculated as the differential between the interest received or paid and the
Bank's money prices at the time the transaction is made, deriving from the lifetime according to the credit or
deposit terms in the relevant linkage segments. The results of operations deriving from currency exposure are
included in the financial activity segment. The activity segments are credited with interest on the shareholders'
equity attributed to the segment (the attributed shareholders' equity is calculated based on the risk assets
attributed to each segment) and charged with the surplus financing costs (beyond the cost involved in raising
resources), of the capital notes assigned to the segment.
The provision for doubtful debts is charged specifically to the segment in which it was generated.
Operating income is measured based on the actual income.
Operating expenses are measured as follows:
Salary – attributed according to the actual cost of the position.
Other operating expenses – recorded according to the actual expense, or with the equivalent value of the
expense.
16
Indirect costs – the segment’s activity includes attributing the cost of units that render direct and identified
service to the division being measured. The cost of units that render indirect services is charged according to an
agreed allocation table.
Income tax – the provision for taxes on the profits of each segment is computed at the effective tax rate for each
segment.
The other activity includes activity that was not attributed in full to the units' activity.
A summary of the results of operations of the segments is presented below, for 2007, net of the effect of
profit from extraordinary items that was recorded following the sale of the provident funds operation,
and, for 2006, net of the effect of the sale bonus and the profit from the sale of the mutual funds
operation.
The results of operations that include the effect of the said extraordinary items are disclosed in Note 26 to
the financial statements.
Condensed presentation of net profit and total assets, by segment of operations:
A. Net profit for the year ended December 31:
Net profit for the years
2007
2006
2005
NIS millions
Personal banking segment
Private banking segment
Small businesses segment
Corporate segment
Financial management segment
Other
Total
37.9
16.3
13.2
14.6
32.7
114.7
17.5
13.6
(0.5)
4.7
11.1
46.4
Change
Profit net of the effect
Change
between
the
of the aforesaid
between
the
years
2006-2007
%
27.2
9.3
1.3
11.8
14.3
0.6
64.5
116.6
19.9
210.6
194.6
147.2
extraordinary items
as at December 31
2007
2006
2005
NIS millions
13.8
4.5
9.7
14.6
32.7
75.3
28.4
8.6
3.5
7.3
12.6
60.4
B. Total assets (average balance)
For the year ended December 31
2007
2006
2005
NIS millions
Personal banking segment
Private banking segment
Small businesses segment
Corporate segment
Financial management segment
Total
Change
between the
years
2006-2007
%
4,068.0
807.7
1,193.6
2,014.2
3,330.6
3,985.0
679.6
1,058.6
1,942.1
3,157.9
3,574.3
426.6
939.3
1,660.7
3,190.0
2.0
18.8
12.7
3.7
5.5
11,414.1
10,823.2
9,790.9
5.5
17
27.2
9.3
1.3
11.8
14.3
0.6
64.5
years
2006-2007
%
(51.4)
(47.7)
177.1
100.0
159.5
24.7
Retail Operations
General
The retail operations are conducted through 46 branches and offices nationwide, from Rosh Pina in the north to
Eilat in the south. In 2007, branches were opened in Gadera and Carmiel, and the operation of the Kfar Ganim
office was extended and it became a branch.
The Retail Division encompasses the activities of the branches and offices and telecommunications banking. Its
income accounts for approximately 80% of the Bank's total income. The Division, through the branches for
which it is responsible, provides banking services also for the customers of the Corporate Division. The
Division provides banking services, which include, inter alia credit, deposits, credit cards, securities
consultancy, etc.
Until July 2007, the services to the Division's customers also included provident fund management, and until
August 2006 they included mutual funds operation.
The division into operating segments is based on the types of customers and on the products and services suited
to their needs. In general, the Division's operation is targeted, as in the past, at preserving the dominant position
of the Bank's retail operation, both credit-related and other.
In addition, the Division is operating in the Small Businesses segment, for the purpose of expanding the
customer base and the activity of existing customers.
The operating segments of the Retail Division are as follows:
Personal Banking segment – a range of banking services and financial products for households.
Private Banking segment – a range of banking services and financial products for private customers having
medium to large financial resources, including investment consultancy services.
Small Businesses segment – banking services and financial products for small businesses with a credit facility
of up to NIS 2.25 million.
The Personal Banking segment
The structure of the segment and the changes occurring therein
The Personal Banking segment provides a range of banking services and financial products for households.
Activity opposite the customer is conducted also by direct means, including through the Internet and by
telephone ("Otsar Yashir").
The segment also provides services for customers belonging to other segments, and for occasional customers.
The principal banking products provided by the segment include: checking account management, credit,
deposits, savings plans, credit card activities and capital market products, which include: investment in
securities and in financial instruments.
The segment's customers are divided into three main groups:
• Defense establishment employees and retirees – including standing army servicemen, civilian IDF
employees, Ministry of Defense employees, employees of support units of the Ministry of Defense and
other Defense establishment employees.
• Groups of employees.
• Other retail customers.
Legislative limitations, standards and special constraints applicable to the segment
The Bank operates within the framework of laws and regulations and according to regulatory guidelines
applicable to the banking system in Israel, as issued by the Supervisor of Banks, the Commissioner for the
Capital Market, Insurance and Savings, the Antitrust Commissioner, the Securities Authority and others.
• For details about the regulatory involvement in banking commissions, see the "Other Matters" Section.
• For additional details about developments in the capital market and in pension consultancy, see the
"Capital Market Reform" Section.
18
Proper Conduct of Banking Business Directive No. 325 – on July 1, 2007 Proper Conduct of Banking
Business Directive No. 325 came into force; the Directive prescribes that the Bank may grant credit facilities
only to customers that have signed a credit facility agreement, that shall be determined based on a documented
analysis of the customer's credit needs, and in accordance with the Bank's policy in this matter, including
authorities and credit facility periods.
Temporary deviations from the facilities in amounts that do not exceed NIS 1,000 are exempted from the said
Directive. As at December 31, 2007, over 95% of the customers who are required to arrange and sign facilities
have done so.
Proper Conduct of Banking Business Directive No. 442, concerning withdrawal of cash from ATMs, came
into force on January 1, 2007.
This directive prescribes that a bank is obligated to install an ATM in the external wall of every branch (or
within a radius of no more than 500 meters from the branch). The directive also states that a bank that believes
that it is unable to comply with the directive with respect to certain branches may submit a reasoned request in
writing to the Supervisor of Banks.
In his letter dated December 18, 2006, the Supervisor of Banks specified criteria for exemption from the
installation of an ATM in a bank branch wall. In January 2007 the Bank applied for an exemption from
implementation of the directive with regard to several branches and offices.
Changes in the volume of activity of the segment and in its net profit
The net profit of the Personal Banking segment amounted to NIS 37.9 million in 2007, compared with NIS 17.5
million in 2006, an increase of 116.6%.
Net return on equity computed on the basis of the risk components was 11.0%, compared with 4.8% in 2006.
The net profit of the segment in 2007 includes profit in the amount of NIS 24.1 million from the sale of the
provident funds operation. In 2006, the net profit in this segment included profit in the amount of NIS 3.0
million from the sale of the mutual funds operation, as well as salary expenses and a contribution in the amount
of NIS 24.2 million paid as a bonus to employees within the framework of a collective agreement entered into
following transfer of the control in the Bank. The effect of these factors on the net profit in 2006 amounts to a
decrease in the amount of NIS 10.9 million.
Net of the said effects, the Personal Banking segment's net profit amounted to NIS 13.8 million in 2007,
compared with the 2006 profit, net of the said effects, in the amount of approximately NIS 28.4 million, a
decrease of 51.4%.
The said net return on equity computed based on the risk components was 4.0% in 2007, compared with 7.7% in
2006.
The change in net profit, net of the said extraordinary items, reflects the rising trend in the expenses of the Bank,
that is explained in the "Income and Expenses Development" Section. In addition, the falling trend in income
reflects the movement of customers from personal banking to private banking, a move that constitutes part of
the improved service.
The segment's income in 2007 amounted to NIS 245.8 million in 2007, compared with NIS 255.5 million in
2006, a decrease of 3.8%.
The provision for doubtful debts in the segment amounted to NIS 5.7 million in 2007, compared with NIS 0.4
million in 2006. The ratio of the provision for doubtful debts to the average credit volume amounts to 1.4% in
2007, compared with zero in 2006.
Expenses in the segment amounted to NIS 218.3 million in 2007, compared with NIS 199.7 million in 2006, an
increase of 9.3%.
The average volume of the public assets managed in the segment amounted to approximately NIS 5.7 billion,
compared with NIS 5.5 billion in 2006.
19
Condensed results of operations of the Personal Banking segment (in NIS millions):
Personal Banking
For the year ended
Banking and
Financial
Profit from financing operations before provision
for doubtful debts: (A)
From outside parties
Inter-segment
Other operating income:
Total income
Provision for doubtful debts
Total operating and other expenses
(including depreciation)
To outside parties
Operating profit (loss) before taxes
Provision for taxes on operating profit
Net profit
Return on equity
Average assets balance
Average liabilities balance
Average risk assets balance
Provident fund and mutual fund assets
Average balance of securities
Average balance of other managed assets
(A) Profit from financing operations before provision
for
doubtful debts:
Margin from credit facilities
Margin from deposit activities
Other
Total profit from financing operations before
provision for doubtful debts from outside parties
and inter- segment transactions
(1)
*
As at December 31, 2007
Capital
Credit
Market
Cards
Total
Banking and
Financial
Capital
Credit
Market
Cards
Total
174.4
(25.9)
1.3
-
5.7
(3.2)
181.4
(29.1)
183.1
(33.0)
1.5
-
3.0
(1.2)
187.6
(34.2)
55.6
204.1
5.7
17.4
18.7
-
20.5
23.0
-
93.5
245.8
5.7
58.5
208.6
0.4
22.6
24.1
-
21.0
22.8
-
*102.1
255.5
0.4
204.2
(5.8)
(2.1)
9.2
9.5
3.4
4.9
18.1
6.7
218.3
21.8
8.0
185.4
22.8
11.1
8.9
15.2
7.3
5.4
17.4
8.6
(3.7)
6.1
11.4
13.8
11.7
7.9
8.8
28.4
3,985.0
3,687.9
3,673.9
17.7
1,028.0
760.0
-
-
7.7%
3,985.0
3,687.9
3,673.9
1,028.0
760.0
17.7
(1)
*199.7
55.4
27.0
4,068.0
3,654.4
3,442.7
-
1,056.3
943.5
19.8
-
4.0%
4,068.0
3,654.4
3,442.7
1,056.3
943.5
19.8
79.7
53.4
15.4
1.3
2.5
-
82.2
53.4
16.7
74.0
60.1
16.0
1.5
1.8
-
75.8
60.1
17.5
148.5
1.3
2.5
152.3
150.1
1.5
1.8
153.4
Not including a bonus paid to employees within the framework of a collective agreement following the transfer of control in the Bank in the amount of NIS 24.2 million.
Reclassified.
20
Market developments, technological changes and changes in customer characteristics
Operations in the segment are characterized by an ongoing trend of transition to banking activity though
direct means (ATMs, Otsar Yashir and Internet). Nevertheless, there were no material changes in customer
characteristics and in the said trend in the past year.
In 2007, the Bank's Internet services and the customers' use of them continued to expand. Until the end of
2007, over 140 thousand customers were added to service via the Internet, of whom approximately 90,000
are active customers who effect banking operations and queries for information on a monthly basis.
The segment's activities are aided by systems and technologies that are present in the operating systems of
Bank Hapoalim, which provides the computerization services used to manage customer situation analysis
processes, control and marketing. The improvement of the Bank's systems leads to improved customer
service in the segment.
Critical success factors in the operating segment and changes occurring therein
♦ Identification of and response to customer needs – correct identification of the banking needs of the
customer, correct adaptation of the banking products to those needs, and making them available when
needed (see the "Products and Services" Section below).
♦ Risk management and control – credit risk is the most significant risk factor in the Division's operation.
To manage and minimize credit risks, the Division maintains a system of controls, including a monthly
discussion with the participation of the credit headquarters, the collection headquarters and the credit
supervision and monitoring unit, in which issues and information pertaining to the risk characteristics of
customers are discussed. Concurrently, the development of a risk-adapted pricing model continues.
♦ Customer retention – In 2007, the Bank focused on customer retention within the framework of several
offers designed to create a service package for a period of several years. Within the framework of this
activity, the Bank offered a plan that comprises several benefit tracks to customers who will commit to
maintaining their salary accounts in the Bank for a period of 4 years.
In July 2007, the Bank entered into an agreement with "Hever", designed to preserve and enhance the
relations between the Bank and its clientele of IDF servicemen and veterans. For details see the "Material
Agreements" Section above.
According to the agreement for transfer of control in the Bank from Bank Hapoalim to First International,
Bank Hapoalim's branches ceased providing services to the Bank's customers in January 2007, and First
International's branches began rendering these services.
In order to prevent reduced service levels, the Bank identified customers who used Bank Hapoalim's
services. These customers were offered solutions in accordance with their activity characteristics and on
an individual basis.
Concurrently, and in order to focus the efforts designed to prevent customer attrition, the development of
a model designed to warn about and locate indications of customer attrition continued.
Principal entry and exit barriers of the segment
♦ Branch deployment – during 2007, the Bank expanded the deployment of its branches and offices, and
opened new branches in Gadera and Carmiel. The deployment of branches and offices is expected to
change and expand in 2008.
♦ Training of skilled personnel to support the Bank's range of products and operations.
♦ Creation and maintenance of an advanced technology environment and preservation of its high standard.
Products and services
Most of the banking products have alternatives in other banks and financial institutions. The Bank acts to
improve and increase the efficiency of processes and to introduce technological improvements, in order to
improve service and expand the banking products basket.
Some of the Bank's products are adapted for customers of the Personal Banking segment, especially
customers from the defense establishment.
21
Among such products are: bridge loans, training plans and advice for people about to retire, rehabilitation
loans, etc. Some of the terms of activity involving defense establishment customers were regulated in an
agreement, the terms of which were decided in a tender that was won by the Bank in October 2002, and that
was extended in October 2005 until the end of 2008.
The terms of the tender determine, inter alia, the prices of a number of products, including: account
management fees, credit facilities, budgetary loans, bridging loans, and other types of credit granted to this
group.
During the year the Bank offered several activity frameworks extending over several years, which provided
various benefits, such as grants, loans bearing preferred interest, fee discounts, etc. The grant of benefits
within this framework was made contingent on the customer maintaining his banking activity in the Bank for
several years.
According to the data at the Bank's disposal, these special offers have led to an increase of approximately 4%
in the number of salary accounts managed by the Bank.
As of January 2007, the Bank operates in some of its branches a program that grants a loan secured by a
mortgage from First International, at mortgage booths of First International that are located in the Bank's
branches. The Bank deems these loans as a complementary product to the existing services package.
As to the Bank’s preparations for the sale of pension products, see the "Activity in the Capital Market "
Section.
The structure of competition in the segment and the changes occurring therein
The Personal Banking segment has been subject to intense competition among all the banks for the past
several years. This competition is expected to intensify even further in 2008, due to the apparent trend
toward creating – through legislation – a uniform commissions’ basket, removing the barriers that hinder
account transfers between banks, and other banks expanding their operations in the household segment.
The terms of the activity of customers from the defense establishment are regulated in agreements the terms
of which apply to the entire said population. Among the said agreements: an agreement for the provision of
services in military camps, an agreement for the grant of loans and for the setting of account management
terms for defense establishment employees as specified in "products and services", and a service agreement
for 'Hever" members.
In 2008, the Ministry of Defense is scheduled to hold a tender that will set the terms for preferred loans, the
terms for the management of accounts of defense establishment employees, and the terms for the provision
of services in military camps ("the Tender").
Concurrently, "Hever" is negotiating with the credit card companies for the issue of a special non-bank credit
card for members of the organization.
The said Tender and the said issue of a special non-bank credit card , if and when the same are effected,
could have a significant adverse impact on the revenues from these clientele groups, which represent a
considerable part of the segment's revenues. Nonetheless, the Bank has taken retention steps as specified in
the "Critical Success Factors" Section, aimed at preventing the effect of the competition factors described.
Marketing and distribution
Marketing and distribution are conducted by means of advertising campaigns in the media and on billboards.
In addition, the Bank markets its products and services in the branches, face to face and by telephone, both
by initiating the contact and in response to customers' approach. Marketing messages and marketing offers
are transmitted on the Bank's website, by direct mailing to the customer (together with the bank statement or
dedicated direct mail), through self-service means (ATM and Adkan), on signs and by information leaflets,
and through cards distributed in the branches. At the end of 2007, the Bank carried out a marketing
campaign aimed at increasing exposure to the Bank's products and recruiting new customers.
Human capital
In 2007, the average number of positions in the segment was 431, of which 345 positions are direct
employees and 86 are head office staff, whose employment cost is allocated to the segment.
The number of managerial positions in the segment was approximately 101, of which approximately 71 are
direct managers and approximately 29 are allocated to the segment.
22
In 2006, the average number of positions in the segment was 418, of which 374 positions were direct
employees and 84 were head office staff, whose employment cost was allocated to the segment.
The number of managerial positions in the segment was approximately 100, of which approximately 70 were
direct managers and approximately 30 were allocated to the segment.
The branches employ permanent and temporary employees, who were trained for their various functions
according to banking needs. In addition, workforce companies are employed for basic tasks (Bankol –
general teller) after suitable training.
Material agreements
The Bank deems its defense establishment clientele as the core of its personal banking business. The
agreement with the Ministry of Defense, which regulates some of the management terms for the accounts of
the defense establishment clientele, is a material agreement, the terms of which were set during the regular
course of business.
In October 2002, the Bank won a tender that set some of the terms of the activity involving defense
establishment customers. In October 2005, the validity of the tender terms was extended until the end of
2008.
The terms of the tender determine, inter alia, the prices of a number of products, including: account
management fees, credit facilities, budgetary loans, bridge loans, and other types of credit granted to this
group.
In July 2007 the Bank entered into an agreement with "Hever", within the framework of which the Bank
grants special terms to IDF servicemen and veterans. The agreement is part of the strategic cooperation with
"Hever", that is expected to enhance relations between the Bank and its clientele of IDF servicemen and
veterans.
Business goals and strategy
The Bank endeavors to increase its profits in the segment by bolstering activity with customers and
improving the efficiency of its support processes. Among its plans for implementing this strategy are the
following steps:
- Improving customer service.
- Maintaining the Bank's standing with the defense establishment clientele.
- Improving the quality of its credit portfolio.
- Expanding its package of services to include supplementary products, such as mortgages, special deposits
(structured products), etc.
- Expanding into the pension consultancy sector (see the "Activity in the Capital Market" Section).
- Expanding its branch and office coverage by opening new branches and offices.
23
Private Banking
The Private Banking segment covers a range of banking services provided through a number of advanced
channels. The segment operates through private banking units that operate in 22 of the Bank's branches
across the country and through direct means: the Internet and the call center "Otsar Yashir".
Private Banking customers receive service in separate, private banking units within the branches, which
provide them with all banking services.
Private Banking customers are offered a "service package" that includes contact with a service officer or
advisor, who is responsible for all services for that customer and for tailoring products to the customer’s
needs.
Private Banking is intended for customers having financial wealth and/or customers whom the Bank assesses
as customers with potential.
In addition, the segment runs the "Titanium Club", for customers whose asset balance at the Bank exceeds
NIS 1 million. Club customers are granted personal service and a range of benefits intended to distinguish
them and create a sense of belonging.
The Bank is considering the establishment of a central consultancy unit for selected customers in 2008,
which will be aided by the parent company's existing information and consultancy arrangements.
• For details about regulatory involvement in banking commissions, see the "Other Matters" Section.
• For details about Proper Conduct of Banking Business Directive No. 325 concerning deviation from
credit facilities on checking accounts, see the corresponding Section in the Personal Banking segment.
• For additional details about the Bank's preparations for the provision of pension consultancy services, see
the "Activity in the Capital Market " Section.
The net profit of the Private Banking segment amounted to NIS 16.3 million in 2007, compared with
NIS 13.6 million n 2006, an increase of 19.9%.
Net return on equity computed based on the risk components was 14.8% in 2007, compared with 20.7% in
2006.
The net profit of the segment in 2007 included profit in the amount of NIS 11.8 million from the sale of the
provident funds operation.
In 2006, the net profit in this segment included profit in the amount of NIS 10.9 million from the sale of the
mutual funds operations, as well as salary expenses in the amount of NIS 11.0 paid as a bonus to employees
within the framework of a collective agreement entered into following transfer of the control in the Bank.
The effect of these factors on the net profit in 2006 amounted to an increase in the amount of NIS 5.0
million.
The net profit of the segment, net of the said extraordinary items, amounted to NIS 4.5 million in 2007,
compared with NIS 8.6 million in 2006, a decrease of 47.7%.
The net return on equity, net of the said extraordinary items, calculated based on the risk components was
4.1% in 2007, compared with 13.1% in 2006.
The segment's income in 2007 amounted to NIS 118.4 million in 2007, compared with NIS 113.5 million in
2006, an increase of 4.3%. Most of the increase in income is reflected in the income from capital market
activity, which amounted to approximately NIS 43.5 million, compared with NIS 36.5 million in 2006.
The increase in income reflects the increase in the volume of operations involving securities in 2007,
compared with 2006, and the movement of customers from the Personal Banking segment to the Private
Banking segment – see the corresponding Section in the description of the Personal Banking segment.
24
Expenses in the segment amounted to NIS 111.3 million in 2007, compared with NIS 96.6 million in 2006,
The average volume of the public assets managed in the segment amounted to approximately NIS 10.5
billion in 2007, compared with NIS 9.1 billion in 2006. Most of the increase reflects an increase in the
volume of the investment in securities, due to the appreciation of the value of the securities and an increase
in the investment volume.
25
Condensed results of operations of the Private Banking segment (in NIS millions):
Private Banking
For the year ended
Banking and
Financial
Profit from financing operations before
provision for doubtful debts: (A)
Inter-segment
Total income
(including depreciation):
To outside parties
Provision for taxes (tax savings) on
operating profit (loss)
Net profit (loss)
Capital
Credit
Market
Cards
Total
Capital
Credit
Market
Cards
Total
(65.3)
114.0
3.1
-
1.4
(0.8)
(60.8)
113.2
(82.2)
131.8
3.1
-
0.7
(0.2)
(78.4)
131.6
12.1
60.8
0.5
43.5
46.6
-
10.4
11.0
-
66.0
118.4
0.5
13.0
62.6
0.2
*37.9
41.0
-
9.4
9.9
-
*60.3
113.5
0.2
73.5
(13.2)
32.6
14.0
5.2
5.8
111.3
6.6
*58.1
4.3
*33.9
7.1
*4.6
5.3
(4.2)
(9.0)
4.4
9.6
1.9
3.9
2.1
2.2
3.5
3.6
2.5
2.8
807.7
4,604.8
1,099.9
-
452.6
5,450.2
-
2.1
4.5
4.1%
807.7
4,604.8
1,099.9
452.6
5,450.2
679.6
4,297.8
659.3
-
628.0
4,171.0
-
8.1
8.6
13.1%
679.6
4,297.8
659.3
628.0
4,171.0
9.8
36.6
2.3
3.1
0.6
-
10.4
36.6
5.4
7.6
41.0
1.0
3.1
0.5
-
8.1
41.0
4.1
48.7
3.1
0.6
52.4
49.6
3.1
0.5
53.2
Return on equity
Average balance of other managed assets –
Risk assets
(A) Profit from financing operations before
provision for doubtful debts:
Other
provision for doubtful debts from outside
parties and inter-segment transactions
Banking and
Financial
(1)
* Reclassified.
26
(1)
*96.6
16.7
Market developments and changes in customer characteristics
Most of the customers in the Private Banking segment are characterized by a large volume of assets or the
potential for a large volume of assets, the use of several accounts for managing financial assets, demand for
advice on securities and investment in complex products, and demand for personal service.
No material changes occurred in 2007 in the segment's customer characteristics.
Technological changes that could have a material influence on the segment
Following the transfer of control in the Bank in 2006, and as part of the process of converting the Bank's
operating systems from those of Bank Hapoalim to those of First International, the Bank converted its
consultancy systems to First International's consultancy and information systems in 2007. The transition
involved the activation of various consultancy and operations systems. The conversion of the system did not
have a significant effect on service quality, and no adverse impact was recorded as a result on its income
from this activity.
Critical success factors in the segment and changes occurring therein
The success factors are focused mainly on service, and include:
- Professional and expert service in the banking and capital market fields.
- Customer-focused personal service, with emphasis on personal treatment and adaptation to needs.
- Highly flexible service according to varying market conditions in Israel and worldwide.
- A system of advanced direct banking services (Internet, "Otsar Yashir", ATMs).
Principal entry and exit barriers of the segment and changes occurring therein
In parallel with the success factors in the segment's operations, service quality elements comprise the main
barrier to its development, including:
- Training of skilled personnel to provide customers with financial advice, in accordance with the
provisions of the Counseling Law.
- Nationwide deployment of the private banking system for increased access.
- Creation and maintenance of an advanced technology environment and preservation of its high standards.
Substitutes for the products and services of the segment and changes occurring therein
Most of the banking products have substitutes in other banking and financial institutions. On the
improvement of processes relating also to this segment, see the corresponding Section in the description of
the Personal Banking Segment.
Competition in the Private Banking segment is intense, and is reflected in the tendency of customers to
maintain accounts with several banks. Following the increase in capital market activity, competition is also
intensifying from insurance companies, investment houses and private brokers. The competition between
banks for customers of the segment is expressed in benefits in the terms of account management, in price
levels, in advertising campaigns, in emphasis on personal service (or, in other words, a service package that
is tailored to the customer' needs), and in personal advice as a part of this service package, in the constant
innovation of products and in technology for the provision of leading services. Some of the private banking
customers maintain accounts with more than one bank, and are therefore more exposed to the influence of
competitors. The competitors in this segment are all banks and investment houses operating in Israel.
The segment's clientele includes customers from among employees of the defense establishment, that is
affected, as are the customers of the Personal Banking customers, by unique agreements and from other
effects expected in 2008, as described under the heading "the structure of competition in the segment and the
changes occurring therein" in the Personal Banking segment.
27
New products
The Private Banking segment is characterized by extensive activity in the capital market. The products and
services in the segment include the following:
- Ordinary banking deposits and special deposits (foreign currency, structured deposits, etc.).
- Securities and other marketable products.
- Financial derivatives.
- The Bank is preparing to provide pension consultancy services using the infrastructure systems being set
up by First International, which also serve the subsidiaries.
The marketing and distribution tools that are unique to this segment are:
- Customer conferences at which the attachment to the Bank is strengthened.
- Advice at the branches, offering products that only the advisor can offer.
- Advertising, direct mailing and all the means mentioned in the corresponding Section in the description of
the Personal Banking segment.
Human capital
employees and 45 are head office staff, whose employment cost is allocated to the segment. The number of
managerial positions in the segment is approximately 57, of which 41 are direct managers and approximately
16 are allocated to the segment.
employees and 50 are head office staff, whose employment cost is allocated to the segment.
The number of managerial positions in the segment was approximately 55 in 2006, of which 39 were direct
managers and approximately 30 were allocated to the segment.
Of the total number of direct employees in the segment in 2007, 45 are investment consultants trained by the
Bank and certified by the Securities Authority.
These employees have participated in a course for consultants, passed the examinations of the Securities
Authority and interned with a veteran consultant. In addition, the segment employs in basic positions
(tellers) personnel who are not consultants, but who have undergone appropriate training to provide service
suited to the segment customers’ needs.
28
The Small Businesses segment
The Small Businesses segment provides a range of banking services and financial products for business
customers, and operates through being deployed at 20 of the Bank's branches around the country and by
means of direct channels – the Internet and Otsar Yashir.
The Small Business segment's customers are from various sectors of the economy with small volumes of
business activity and low to medium levels of business complexity, and whose credit facility is up to
NIS 2.25 million.
Part of the segment's activity is conducted through financing funds, in cooperation with various public
entities. This activity assists the Bank in mitigating the risk entailed in financing small businesses at the start
of their operations, thus serving the operational goals of the financing funds.
Approximately 40% of the credit in the small business segment as at December 31, 2007 is provided by
financing funds.
The main banking products of this segment include: checking account management, various services for
capital market activity, loans and credit cards.
− For details about the regulatory involvement in banking commissions, see the "Other Matters"
Section.
− For details about Proper Conduct of Banking Business Directive No. 325 concerning deviation from
credit facilities in checking accounts, see the corresponding Section in the Personal Banking
segment.
The net profit in the Small Businesses segment amounted to NIS 13.2 million in 2007, compared with a loss
in the amount of NIS (0.5) million in 2006.
Net return on equity calculated on the basis of the risk components in the segment was 12.4% in 2007,
compared with (0.5%) in 2006.
The net profit in 2007 includes profit from the sale of the provident funds operation, in the amounts of
NIS 3.5 million. The loss in 2006 includes the effect of the bonus paid to employees following transfer of
the control in the Bank, in the amount of NIS 9.1 million, as well as the profit from the sale of the mutual
funds operation, in the amount of NIS 0.6 million. The effect of these factors on the net profit in 2006
amounted to a decrease in the amount of NIS 4.0 million.
The net profit of the segment, net of the said profit from extraordinary items, amounted to NIS 9.7 million in
2007, compared with a net profit in the amount of NIS 3.5 million in 2006, an increase of 177.1%.
The net return on equity, net of the said extraordinary items, calculated based on the risk components was
9.1% in 2007, compared with 3.5% in 2006.
The segment's income amounted to NIS 94.1 million in 2007, compared with NIS 86.5 million in 2006, an
increase of 8.8%. The provision for doubtful debts in the Small Businesses segment amounted to NIS 12.3
million in 2007, compared with NIS 18.7 million in 2006, a decreased of 34.2%.
The ratio of the provision for doubtful debts to average credit amounted to approximately 1.0% in 2007,
compared with 1.8% in 2006. The decrease in the provision rate reflects the improvement in the economy
and in the control means. For details of the control structure and delegation of powers see the “Risk
Management – Credit Risks” Section.
Expenses in the segment amounted to NIS 65.9 million in 2007, compared with NIS 61.2 million in 2006, an
increase of 7.7%.
The average volume of the public assets managed in the segment amounted to NIS 1.1 billion in 2007,
compared with NIS 1.0 billion in 2006.
29
Condensed results of operations of the Small Businesses segment (in NIS millions):
Small Businesses
For the year ended
Banking and
Financial
Inter-segment
Inter-segment
Total income
To outside parties
Provision for taxes (tax savings) on
operating profit (loss)
Net profit (loss)
Return on equity
Average balance of other managed assets Risk assets
Other
(1)
Capital
Credit
Market
Cards
Total
Banking and
Financial
Capital
Credit
Market
Cards
Total
83.1
(23.3)
0.3
-
0.6
(0.3)
84.0
(23.6)
79.2
(25.8)
0.3
-
0.3
(0.1)
79.8
(25.9)
21.6
6.5
87.9
12.3
2.4
2.7
-
3.2
3.5
-
27.2
6.5
94.1
12.3
20.4
5.7
79.5
18.7
3.5
3.8
-
3.0
3.2
-
26.9
5.7
86.5
18.7
63.8
11.8
1.8
0.9
0.3
3.2
65.9
15.9
59.2
1.6
1.6
2.2
0.4
2.8
4.6
7.2
0.4
0.5
1.2
2.0
0.6
1.0
1.1
1.1
1.4
1.4
1,193.6
800.4
1,067.7
-
149.7
205.3
-
6.2
9.7
9.1%
1,193.6
800.4
1,067.7
149.7
205.3
1,058.6
678.4
999.9
-
143.0
144.0
-
3.1
3.5
3.5%
1,058.6
678.4
999.9
143.0
144.0
43.2
10.6
6.0
0.3
0.3
-
43.5
10.6
6.3
35.7
10.8
6.9
0.3
0.2
-
35.9
10.8
7.2
59.8
0.3
0.3
60.4
53.4
0.3
0.2
53.9
Not including a sale bonus paid to employees within the framework of a collective agreement following the transfer of control in the Bank, in the amount of NIS 9.1 million.
30
(1)
61.2
6.6
Developments in the segment's markets and changes in customer characteristics
No material changes occurred in 2007 in the segment's customer characteristics.
- Development of unique business tools.
- Development of expertise and professionalism.
- Nationwide deployment of the banking array for increased access.
- Creation of an advanced technological service environment and regular investment in systems maintenance
and upgrade.
Principal entry and exit barriers of the segment and changes occurring therein
- Training of skilled personnel to provide customers with financial tools and services.
- Nationwide deployment of the private banking array for increased access.
- Creation of an advanced technological service environment and regular investment in systems maintenance
and upgrade.
Most of the banking products are available in other banks and financial institutions. Some of the segment's
operations are conducted through a variety of financing funds, some of which are unique to the Bank.
The Bank operates financing funds which provide credit for setting up, expanding and consolidating small and
medium businesses by cooperation with various entities such as the Ministry of Finance, the Ministry of Trade
and Industry, contributory funds and others.
Characteristics of the operations of these funds are:
− Significant benefit to the customer who needs to provide collateral in order to provide guarantees to the
partner entities in the fund. A decision to finance is based on examination of the business plan and
assessment of the business potential.
− Preferred interest terms, and guidance by the business units in the branches.
− The funds can be combined to create a financing package suited to the needs of the business.
The principal funds that are operated by the Bank are:
Aid for Small Businesses, Korat Fund, Jewish Agency funds and the Fund for Development of Marketing in the
Global Market. Thousands of businesses have been financed by these funds, some of which have been in
operation for many years.
The volume of credit provided through the funds as at December 31, 2007 amounted to approximately NIS 513
million, compared with approximately NIS 426 million as at December 31, 2006, an increase of 20.4%.
See the corresponding Section in the description of the Personal Banking segment.
Competition
Competition in the Small and Medium Businesses segment has increased greatly in recent years among all the
banks operating in Israel.
The banks compete in emphasizing swift quality service and preventing customers transferring their accounts to
other banks, while emphasizing the creation of practical solutions. Its specialization in funds for small
businesses aids the Bank in developing competitive advantages in the segment.
Human capital
In 2007, the average number of positions in the segment was 142, of which 101 positions are direct employees
and 41 are head office staff, whose employment cost is allocated to the segment. The number of managerial
positions in the segment was approximately 44, of which approximately 28 are direct managers and
approximately 15 are allocated to the segment.
In 2006, the average number of positions in the segment was 140, of which 105 positions are direct employees
and 35 are head office staff, whose employment cost is allocated to the segment.
The number of managerial positions in the segment was 43, of which approximately 14 are direct managers and
approximately 30 are allocated to the segment.
31
Material agreements
Approximately 40% of the credit activity in the Small Businesses segment takes place within the framework of
the funds' operation. These agreements are material to the segment's operations. Most of the agreements are
limited in amount and their operation is expected to continue in upcoming years.
Business goals and strategy
− Continued specialization as a niche bank for small- and medium-size business customers.
− Further expansion of the activities of business customers by bolstering activities with existing customers
and recruiting new customers.
− Credit portfolio management and monitoring the risk profile.
− Bolstering activity with the various funds.
− Further improvement of technology infrastructure that assists in analysis, control and marketing
processes.
The Corporate segment
The segment's structure
The Corporate segment provides a range of banking services for the Bank's medium and large business
customers. The segment's customers typically have a credit facility in excess of NIS 2.25 million. Products and
services in the segment are adapted to the business needs of the customers and include a range of credit products
– loans, guarantees and documentary credits, along with investment services in various foreign currency and
shekel channels and in securities, etc. The accounts of the Division's customers are managed in the various
branches of the Bank that provide all the necessary banking and operation services.
The Corporate Division has administrative responsibility for the customers of the Corporate Banking segment,
and it operates through a number of work teams, who are responsible for management of the business relations
with the customers. Each team has a customer relations manager ("CRM"), whose banking specialization is
usually in business loans, but there are some who specialize in other areas (such as real estate, car hire and
leasing, and local authorities).
The Division also has an investment consultant who provides investment consultancy to the segment's
customers and a legal consultant who accompanies the business activity.
The Corporate segment is responsible, inter alia, for the activity of:
The Corporate segment headquarters – responsible for marketing management and business development in
the Small Business segment and in the Corporate Banking segment, especially through designated credit funds
(Korat Fund, Jewish Agency funds, and State funds). The headquarters is also responsible for managing
borrower-related business information, for credit-related decision-making with regard to borrowings outside the
authority of the branch managers, and for the management of special financing plans and business ventures.
The collection headquarters – responsible for handling and collecting problematic debts with the assistance of
external lawyers.
The operations and credit control department – responsible for maintaining and improving the quality of the
Bank’s credit portfolio through training, professional support (knowledge and decision-making), pricing
(management of the Bank's tariff list and publication of interest rates), credit supervision and control,
preparation of credit-related reports and financial statements analysis.
Customers
The main criteria for allocating a customer to the Corporate segment are the amount of the credit facility
approved for the customer (from NIS 2.25 million up to the individual borrower/group of borrowers limit), the
potential for expansion of activity, and his business.
In certain cases and where relevant, the CRMs will handle customers with a smaller credit facility than the
abovementioned, if warranted by the nature of the customer’s business activities or his potential future
activities.
32
A Proper Conduct of Banking Business directive limits the permitted liability of an individual borrower, a group
of borrowers, the total indebtedness for the six largest groups of borrowers at the Bank and of customers defined
as "related persons" of the Bank. In addition, the Board of Directors has set limits on loan-granting activities in
certain sectors. No deviations from these directives and limitations were recorded in 2007.
For details about Proper Conduct of Banking Business Directive No. 325 concerning deviation from credit
facilities in checking accounts, see the corresponding Section in the description of the Personal Banking
segment.
In January 2008, the Knesset Finance Committee approved the Law for Increase of the Rate of Participation in
the Workforce and Narrowing of Social Gaps (Negative Income Tax, Mandatory Pension, Reduced Income Tax
and Legislation Amendments) – 2007.
The Law includes several measures that support equal distribution of the tax burden, including increasing the
benefit value for the use of a car, concurrent to reducing tax rates for individuals. The said increase of benefit
value will be implemented in stages over 4 years, such that after the 4 years it will reflect the value of the
benefit with objective proximity.
Implementation of the resolution could have an adverse impact on the leasing and rental car sector; however, at
this stage, Management has neither the tools nor the ability to estimate this effect, if at all.
As at December 31, 2007, the volume of corporate credit in this activity amounts to NIS 378.6 million,
compared with NIS 353.1 million as at December 31, 2006.
Following the collapse of companies in the Heftsiba Group, several bills were submitted for amendment of the
Sales Law (Apartments)(Securing the Investments of Apartment Buyers) – 1974.
The bills propose, inter alia, the imposition of greater accountability on the bank accompanying the construction
project and on the bank granting a loan to the apartment buyer, the expansion of the range of situations in which
a buyer may realize the bank guarantee provided to him, and granting apartment buyers priority in the
distribution of assets in the event of a bankruptcy of the seller of the apartment or when a company that sells
apartments is in default.
These bills are at the advanced legislation stage; therefore, their effect on the Bank's business cannot be assessed
at this stage.
In addition, on February 4, 2008 the Supervisor of Banks published a Proper Conduct of Banking Business
Directive on "closed" financial support, aimed mainly at preventing the flow of money outside the project and
securing the money of apartment buyers who deposit their money in the project account. For this purpose, it is
suggested that the project will be financed by issuing a book of payment vouchers for every apartment in the
project. This will be used for each of the payments that the buyer will pay on the apartment, and once payment
is made using the said voucher, the buyer will be granted a bank guarantee.
A bank will be required to confirm to a buyer, who will give the name and number of the project, that the details
provided match the details he has.
The Directive comes into force as of June 1, 2008 and will apply to financial support agreements entered into as
of that date.
The net profit of the segment amounted to NIS 14.6 million, compared with NIS 4.7 million in 2006, an increase
of 210.6%.
Net return on equity calculated on the basis of risk components in the segment was 7.0%, compared with 2.3%
in 2006.
The net profit in 2006 includes the effect of the bonus paid to employees following transfer of the control in the
Bank, in the amount of NIS 4.0 million. The effect of the bonus on the net profit in 2006 amounted to a
decrease in the amount of NIS 2.6 million
33
The net profit of the segment, net of the effect of the said sale bonus, amounted in 2006 to NIS 7.3 million.
The net return on equity, net of the said extraordinary items, calculated based on the risk components was 7.0%
in 2007, compared with 3.6% in 2006.
The segment's income amounted to NIS 54.1 million, compared with NIS 48.2 million in 2006, an increase of
12.2%. A significant part of the increase in income derives from the activity of customers in factoring credit
transactions and other activity of these customers, which commenced in the second quarter of 2007.
The provision for doubtful debts amounted to NIS 0.8 million, compared with NIS 10.8 million in 2006.
The decrease in the provision for doubtful debts reflects both a decline in the classification of customers as
doubtful during the year and a decline in the supplementary provision that, in 2006, included a provision due to
lack of information about a borrower, in the amount of approximately NIS 1.8 million.
Expenses in the segment amounted to NIS 28.9 million in 2007, compared with NIS 27.0 million in 2006.
The average volume of the public assets managed in the segment amounted to approximately NIS 3.6 billion in
2007, compared with approximately NIS 0.8 billion in 2006, an increase of approximately 350%.
34
Condensed results of operations of the Corporate segment (in NIS millions):
Corporate Banking
For the year ended
Banking and
Financial
Inter-segment
Inter-segment
Total income
To outside parties
Operating profit before taxes
Net profit
Return on equity
Average balance of other managed assets Risk assets
Other
(1)
(2)
Capital
Credit
Market
Cards
Total
Banking and
Financial
Capital
Credit
Market
Cards
Total
116.1
(70.0)
-
-
116.1
(70.0)
92.9
(48.7)
0.2
-
-
93.1
(48.7)
11.0
(6.5)
50.6
0.8
2.9
2.9
-
0.6
0.6
-
14.5
(6.5)
54.1
0.8
7.9
(5.7)
46.4
10.8
1.1
1.3
-
0.5
0.5
-
9.5
(5.7)
48.2
10.8
26.4
23.4
9.4
14.0
2.5
0.4
0.2
0.2
0.6
0.2
0.4
22.5
13.1
6.5
6.6
0.5
0.8
0.4
0.4
0.5
0.2
0.3
2,014.2
724.7
2,088.4
-
17.8
(2)
2.886.4
-
28.9
24.4
9.8
14.6
7.0%
2,014.2
724.7
2,088.4
17.8
(2)
2.886.4
1,942.1
556.3
2,036.0
-
19.0
227.0
-
23.0
14.4
7.1
7.3
3.6%
1,942.1
556.3
2,036.0
19.0
227.0
34.9
2.8
8.4
-
-
34.9
2.8
8.4
31.7
3.3
9.2
0.2
-
31.7
3.3
9.4
46.1
-
-
46.1
44.2
0.2
-
44.4
Including securities of provident funds clustered under the Customer Relations Manager in the segment of operations.
35
(1)
Developments in the segment's markets and changes in customer characteristics
Most customer activities in the Corporate segment are in the local market, some involve importing and
exporting. The main sectors of the economy in which the segment operates are real estate, car hire and leasing,
local authorities, trade and industry. Macro-economic processes relating to these sectors influence the activities
of the customers in the segment, as do global changes such as foreign currency exchange rates, the prices of
imported raw materials and so on. Overall, customer activity is characterized by continuity, which can be
defined as traditional economic activity.
The segment is aided by technological systems developed by Bank Hapoalim for managing customer situation
analysis, control and marketing. The quality and sophistication of the systems at the Bank are an important
factor in raising the standard of service to customers and creating additional options for expanding activities
with them.
− Identification of and adaptation to customer needs – correct identification of all the banking needs of
the customer and correct adaptation of banking products to the needs of their businesses.
− The ability to create good working relations with customers despite the geographical distance from
some of them.
− The ability to manage and maintain risk control (mainly credit risks).
Principal entry and exit barriers of the segment
− Training of skilled personnel in operating the financial tools and services.
− Nationwide deployment of the banking array for increased access.
− Creation of an advanced technology environment, and regular investment in its maintenance and
upgrading.
Most of the banking products are available in other banking and financial institutions. As a substitute for bank
credit, alternative financing resources have developed and are offered by non-banking institutional entities.
The main products in the segment are credit and collaterals, in addition to deposits, financial instruments and
foreign trade.
The factoring activity – the factoring activity and special financing activities serve as a platform for extending
complementary foreign trade and foreign currency activities, as well as a basis for expanding credit activity
among absorbed customers.
This activity commenced in 2007 in the assignment of customer activity to the Bank under an agreement with
U-Bank (a fellow subsidiary), and continued with the expansion of the activity of these customers in the Bank.
Banking activity in the segment is characterized by intense competition among a relatively large number of
entities, which compete for all the activities conducted in the segment.
In loans/credit – competition is reflected in both the interest and the commission rates offered to customers by
competing banks, and the level of exposure (loan amounts versus collateral required).
In investments – competition is reflected in the quality of the service and the advice and also in tariff levels.
In addition to the banks, competitors in this field include public and private entities, such as investment houses
and advisors.
The marketing and distribution of the banking products and services are by means of the CRM teams and the
branches where the customers' accounts are managed.
Customers have at their disposal the standard communications channels in local banking, such as branches,
Gold Stripe, Otsar Yashir, the Internet, etc.
36
Human capital
In 2007, the average number of positions in the segment was 51, of which 34 positions are direct employees and
17 are head office/branch staff, whose employment cost is allocated to the segment.
11 are head office/branch staff, whose employment cost is allocated to the segment.
Most of these employees are required to have a high level of professional skill in business, and particularly in
credit and investments.
Goals and expected changes in segment activity
− The establishment of a business customer recruitment and marketing unit is planned for 2008. The
purpose of the unit's establishment is to concentrate marketing efforts in a designated unit and to
separate marketing activity from management activity and the current monitoring of the activities of
customers who are clustered under CRMs.
− Continued expansion of the activities of Corporate customers by means of bolstering activities with
existing customers and recruiting new customers, who are clustered under CRMs.
− Expansion of the Corporate credit portfolio managed in the branches through the funds (Korat, Jewish
Agency and State).
− Ongoing service and response to customer needs.
− Credit portfolio management and monitoring the risk profile, including development of a pricing model
for credit-related decision-making.
− Further improvement of the technology infrastructure which assists in the analysis, control and
marketing processes.
Financial Management segment
General
The segment's activities cover the management of the bank's investments for itself ("Nostro"), mainly
investments in securities, deposits in banks, transactions in financial derivatives, and the like. The segment also
deals with liquidity management, basis exposure management, market exposure management, and assists in the
pricing and development of products.
The segment provides customers from other segments with foreign currency dealing room services.
Structure of the segment
Activities in the segment are subordinated to the manager of the Finance Division who is responsible for asset
and liability management. The performance units for which the Division Manager is responsible are the dealing
room, Nostro management activity, liquidity management activity, and the pricing unit.
In addition, the Board of Directors of the Bank has set limits on exposures permitted in connection with market
risk management, basis exposures and liquidity risks. For details concerning these limits, see the "Risk
Management" Section.
The net profit of the Financial Management segment amounted to NIS 32.7 million in 2007, compared with
NIS 11.1 million in 2006, an increase of 194.6%. The income of the segment increased in the amount of
approximately NIS 30.7 million, an increase of approximately 91.0%.
The increase derives from the sale of deposits and securities and from other financing income in the amount of
approximately NIS 16.7 million, as well as from an increase in the scope of operations, an increase in the
contribution of the investment in securities, and change in the financial capital investment in the various linkage
segments.
37
In 2007, a real time gross settlements (RTGS) system was integrated into the operations layout in the Division.
For full details of the functions of the system, see the “Market Risks and Liquidity Management – Liquidity
Risk” Section.
The technologies used in the dealing room, the back office, and the trade system used by the nostro management
unit, were developed mostly in Bank Hapoalim, and are planned to serve the Bank until the computerization
systems are transferred to those of First International.
Critical success factors in the segment
The success factors in the segment are the quality of the human resource, the quality of the computerization
system, the level of control and cooperation within the organization and the quality of control.
Principal entry and exit barriers
The main entry and exit barriers are reflected in the large volume of investments required for automation and the
long duration of the staff training period due to the considerable expertise required. The Bank's reliance on
Bank Hapoalim's automation services enabled the activity margin required for the Bank despite the limitations
deriving from the Bank's size.
The competition in dealing room activities and other activities concerned with liquidity and Nostro, is mainly
between the banks involved in their marketing.
New products
Over the past few years, increasing use can be seen of structured products, usually deposits the terms of which
include an embedded derivative of sorts.
The majority of the segment's activity in this area is directed at complete coverage of exposures created as a
result of the marketing of an embedded instrument to the customer, which involves the purchase of instruments
under terms identical to the customer's.
Most of the development in the segment operations is reflected in the scope of the investment portfolio and in its
composition. For details of the activities in securities, see the "Securities" Section above.
Customers
Dealing room customers are customers in all the segments of the Bank's operation. Transactions relating to
liquidity management are mainly inter-bank transactions, and Nostro activities are undertaken mainly through
the stock exchange.
Human capital
3 are head office staff, whose employment cost is charged to the segment.
3 are head office staff, whose employment cost is charged to the segment.
Most of these employees have a high level of professional skill in financing, business finances and foreign
currency.
38
Following is a breakdown of the results of credit card operations by operating segments:
For the year ended December 31, 2007
Small
Personal
Private
Businesses
Corporate
Banking
Banking
Banking
Banking
Total
provision for doubtful debts
Operating and other income
Operating and other expenses
2.5
20.5
4.9
18.1
6.7
0.6
10.4
5.2
5.8
1.9
0.3
3.2
0.3
3.2
1.2
0.6
0.6
0.2
3.4
34.7
10.4
27.7
10.0
Net profit
11.4
3.9
2.0
0.4
17.7
Personal
Banking
Net profit
Small
Private
Businesses
Corporate
Banking
Banking
Banking
Total
1.8
21.0
5.4
17.4
8.6
0.5
9.4
4.6
5.3
2.5
0.2
3.0
0.4
2.8
1.4
0.5
0.5
0.2
2.5
33.9
10.4
26.0
12.7
8.8
2.8
1.4
0.3
13.3
39
Following is a breakdown of the results of capital market operations by operating segments:
Small
Personal
Private
Businesses
Corporate
Banking
Banking
Banking
Banking
Net profit
Net profit
Total
1.3
17.4
9.2
9.5
3.4
3.1
43.5
32.6
14.0
4.4
0.3
2.4
1.8
0.9
0.4
2.9
2.5
0.4
0.2
4.7
66.2
46.1
24.8
8.4
6.1
9.6
0.5
0.2
16.4
Small
Personal
Private
Businesses
Corporate
Banking
Banking
Banking
Banking
Total
1.5
22.6
8.9
15.2
7.3
3.1
37.9
33.9
7.1
3.5
0.3
3.5
1.6
2.2
1.1
0.2
1.1
0.5
0.8
0.4
5.1
65.1
44.9
25.3
12.3
7.9
3.6
1.1
0.4
13.0
Investee companies
For complete details about "Otsarot" that is active in the capital market, see the "Capital Market" Section.
Other companies serve as auxiliary corporations and their operations are not material.
In 2007, the voluntary liquidation of Otsarit - Mutual Funds Management Co. Ltd., that managed the Bank's
mutual funds, was completed; also in 2007, the voluntary liquidation was begun of a trustee company of Bank
Otsar Hahayal Ltd. and of the provident funds, the operation of which was sold in 2007.
For details about investments in investee companies, see Note 5 to the financial statements.
40
Capital Position and Fundraising Policy
The Bank’s total capital resources as at December 31, 2007, excluding minority interests, amounted to
NIS 720.6 million, compared with NIS 611.7 million as at December 31, 2006, an increase of 17.8%.
The change in shareholders’ equity results from the net profit and from a change in the value of available-forsale securities, as described in the statement of changes in shareholders' equity in the financial statements
The composition of the Tier I capital is as follows:
As at December 31
2007
2006
NIS millions
NIS millions
Issued and paid-up capital
Share premium
Capital funds from presentation of available-for-sale
securities at fair value
Retained earnings
19.1
358.7
19.1
358.7
(3.1)
345.9
2.1
231.2
Total capital
720.6
611.1
The amounts of preferred shares, the amounts of adjustments in respect of available-for-sale securities and
minority interests, in an aggregate amount of NIS 2.7 million, have been deducted from the amount of the
capital as at December 31, 2007 (as at December 31, 2007 – NIS 7.9 million).
Tier II capital includes CPI-linked subordinated notes that are not convertible into shares, the general provision
for doubtful debts, and preferred shares not included in Tier I capital. Details of the composition of the Tier II
capital are as follows:
As at December 31
2007
2006
NIS millions
NIS millions
Subordinated notes
General provision for doubtful debts and preferred shares
196.0
21.4
232.3
21.4
Total Tier II capital
217.4
253.7
The total amount of subordinated notes as at December 31, 2007 was NIS 389.3 million, compared with
NIS 376.5 million as at December 31, 2006, an increase of 3.4%.
In 2007, the Bank issued non-marketable subordinated notes in the amount of NIS 13.8 million.
Agreement for the issue of deferred subordinated notes
On May 15, 2007 the Bank entered into an agreement with First International Issues Ltd. ("First International
Issues"), a wholly owned subsidiary of First International, under which the Bank undertook to bear all payments
to holders of the commitment certificates issued by First International Issues to the public, and all expenses
entailed in such issue. In addition, the Bank undertook that the consideration for the issue will be deposited
according to the terms set out in the agreement.
On May 16, 2007, First International Issues published a shelf prospectus for the issue of up to 12 series of
commitment certificates that could consist of debenture series, or deferred subordinated notes, the proceeds of
which will be deposited with the Bank or with First International. Each of the commitment certificate series
will have a nominal value of up to NIS 500 million.
41
The Bank provided a commitment in respect of certificates that will be issued in accordance with the said shelf
prospectus, and the proceeds of which will be deposited with the Bank, in an amount of up to NIS 140 million.
First International provided a commitment in respect of certificates that will be issued in accordance with the
said shelf prospectus, and the proceeds of which will be deposited with First International, in an amount of up to
NIS 381.4 million.
Other sources
Deposits from the public are the main source for the Bank’s activities. The total deposits from the public
increased by an average of 3.8% in 2007, from an average of NIS 8,851 million in 2006 to an average of
NIS 9,180 million in 2007. Most of the increase occurred in unlinked deposits.
The change in the average annual amount of the other sources, that include deposits from banks and deposits
from the government, amounts to approximately NIS 64.6 million, an increase of approximately 10.9%.
The average nominal interest rate on monetary tender loans was 3.9% in 2007, compared with 5.12% in 2006
(for more information on resources for operations, see the "Deposits of the Public" and "Subordinated Notes"
Sections above).
Risk Management
In its activities, the Bank is exposed to various risks, including market risks, credit risks, liquidity risks, and
operational and legal risks. The risk management policy is designed to achieve the business targets, while
limiting the exposure to economic and accounting risks.
The risk management policy and control of these risks are conducted within the framework set out in the
directives of the Bank of Israel, and, within this framework, the Supervisor of Banks has issued Proper Conduct
of Banking Business Directives Nos. 319 and 339, which prescribe instructions on risk management. The
instructions address the various risks to which a banking corporation is exposed and the basic principles for their
management and control. Among these are appropriate involvement and a thorough understanding of risk
management by the banking corporation's board of directors, risk management by a risk manager who is a
member of the management, available tools for risk assessment and measurement, and arrangement for means
of supervising those risks.
The shareholder's equity is adapted to the identified risks in accordance with the instructions of Proper Conduct
of Banking Business Directives No. 311 and is subject to the restriction set by the Board of Directors,
prescribing that the ratio of equity to risk assets will not fall below 10%.
Mr. Baruch Granot, Senior VP and CFO, is responsible for risk management in the Bank, concurrent with the
responsibility of other members of Management for risks in their areas of activity:
The member of Management responsible for market risks is Mr. Baruch Granot.
The member of Management responsible for credit risks is Mr. Doron Calif
The member of Management responsible for operating risks is Mr. Dan Traub.
Legal risk is managed by the Chief Legal Counsel, Adv. Gila Yehezkely.
In 2007, a central unit for the control of risk management was established, that answers to the Managing
Director. The unit includes the market risk management controller, the credit risk controller, the compliance
officer and the person responsible for implementing the Money Laundering and Terror Financing Directive.
The supervision and control of the adequacy of risk management in the Bank are conducted, inter alia, by the
Board of Directors and its committees and by Management committees in the various risk segments. The
activity of the supervision and control bodies includes, inter alia:
- Quarterly discussion in the Board of Directors plenum of the exposures document that includes a report on
credit exposures and exposures to financial risks. In addition, a discussion of the market exposures and
credit risks control document also takes place.
- Discussion of the exposures document and of the market risks control document by the Board of Directors'
Operating, Nostro and Risk Management Committee.
- Monthly discussion by the assets and liabilities management team headed by the Managing Director.
- Daily discussion of liquidity and basis risk issues by the team headed by the Market Risks Manager.
42
The risks are controlled, identified and estimated by an independent unit, as aforesaid, which is responsible to
the Bank's Managing Director. The unit submits to the Bank's Board of Directors monthly control reports that
include a report on the state of exposures. No material deviation from the set exposure policy was reported in
2007.
Market risk and liquidity management
Financial risks include a liquidity risk, defined as a risk of availability of resources and risk stemming from
changes in prices in the markets in which the Bank operates, such as changes in interest rates, exchange rates,
etc.
Resolutions of the Board of Directors and its committees concerning exposure to currency and interest risks and
the directives of the Supervisor of Banks concerning foreign currency delineate the framework within which the
Bank's Management operates.
The asset and liability management policy is outlined and controlled by an asset and liability management
group, headed by the General Manager, and a financial assets management team, headed by the CFO.
The tools available to the market risks manager are costing tools, investment portfolio (Nostro) management,
and execution of transactions for the Bank itself through its own dealing room.
A market risks and liquidity control unit, which operates within the risks control unit, monitors and controls the
operation of the various units that engage in financial activity in accordance with the policy and restrictions set
by the Board of Directors.
The unit operates using statistical tools and advanced models, as referred to above.
Liquidity risk is managed on a day-to-day basis to ensure the ability to respond to exceptional supply and
demand situations in the financial markets.
In accordance with the directive of the Supervisor of Banks on liquidity risk management (Proper Conduct of
Banking Business Directive No. 342), the Bank has set an overall policy, procedures and limitations, as well as
a mechanism for dealing with deviations.
The Bank operates aided by an internal model, which estimates the volume of its liquid assets and of its
liabilities due for settlement, assuming worst-case scenarios.
The model estimates the ratio of the liquid assets and the liabilities due for settlement during a period of up to
one month. The Board of Directors has decided that the liquidity ratio (defined as the ratio of the margin,
between the accounts receivable and the accounts payable in a worst-case scenario, to the Bank's non-capital
liabilities) shall be positive.
The model serves as a management tool, to examine the liquidity of the Bank and to manage liquidity risks.
The results of the model are tested regularly by the relevant parties, including the market risks unit. No
deviations from the restrictions set by the Board of Directors for the liquidity model were recorded in 2007.
In July 2007, a reform came into force in the payment and clearance systems, through a real time gross
settlement (RTGS) system. The purpose of the reform is to develop a payment and clearance system in real
time and to reduce the risks in the payments system and the inter-bank credit risks.
During 2005 and 2006, some of the changes needed for the full implementation of the reform were put in place,
including the cancellation of the option of amending balances to the previous day and extension of the work
day. At a later stage, the inter-bank clearance dates were changed and global liquidity management (GLM)
systems and interface systems for collateral management (ICS) were activated.
The new system coordinates the operation of the existing clearance systems, including the checks, Stock
Exchange and Banking Clearing Center clearing systems. Clearing of the payments in the new system is final
and in real time. The real time operation reduces risks in the payments system and inter-bank credit risks.
43
In July 2007, a contract was signed between the Bank of Israel and the Bank for the latter’s participation in
clearances using the Israeli RTGS system.
In order to secure the credit that the Bank will receive from the Bank of Israel for the purpose of its participation
in the RTGS system, in July 2007, the Bank registered a first-ranking floating charge in favor of the Bank of
Israel on debentures that have been or that shall be issued pursuant to the State Loans Law – 1979 or debentures
that have been or that shall be issued pursuant to the Treasury Bills Law – 1984, which are listed on the TelAviv Stock Exchange, and all the rights arising therefrom or related thereto, including the proceeds from their
sale, which shall be registered or deposited from time to time in a collateral account that is maintained with the
Stock Exchange Clearing House in the name of and for the Bank of Israel. This charge is not dependent on
other collateral or guarantees that the Bank of Israel receives or shall receive from the Bank.
In November 2007, a bill was submitted on payment systems. The bill was designed to regulate the payment
systems in general and the inter-bank transfers system in particular. The purpose of regulating the payment
systems is to ensure the stability of the system and to minimize the risks in its operation.
The amount of the aforesaid pledged securities amounted to approximately NIS 0.4 billion as at December 31,
2007.
Basis risk – the exposure to basis risk reflects the loss that may be incurred as a result of the effect of changes
in the consumer price index and in the exchange rates on the difference between the total assets and the total
liabilities (including the effect of future transactions and embedded options) in each of the linkage segments.
The composition of the available shareholders' equity in the various linkage segments was set based on
assessments and forecasts of expected developments in the financial and capital markets in Israel and abroad,
and subject to restrictions set by the Board of Directors. In accordance with the Board of Directors' resolution,
the capital is defined as an unlinked shekel source.
The exposure framework permitted by the guidelines of the Board of Directors provides that:
- The excess of the assets in the CPI-linked shekel segment shall not fall below (100%) and shall not exceed
100% of the active capital, where the Bank's active capital is defined, as aforesaid, as an unlinked source.
- The excess of the assets in the non-linked shekel segment shall not exceed 150% of the available capital and
shall not fall below (150%) of it.
- The excess of the assets in t he foreign currency and foreign currency-linked segment shall not exceed 25%
of the active capital and shall not fall below (25%) of the active capital.
Details of the exposure of the Bank’s active capital to exchange rates and inflation are as follows:
Balance as at December 31
2007
2006
NIS millions
Unlinked shekel segment
CPI-linked shekel segment
Foreign currency and foreign
currency -linked segment
Percentage of available
capital
2007
2006
%
Maximum
approved limits
as a percentage of
available capital
as at December 31, 2007
340.8
198.4
287.5
99.5
61.2
35.6
62.8
21.7
+/- 150%
+/- 100%
18.1
71.1
3.2
15.5
+/- 25%
The sensitivity of the Bank’s capital to changes in the principal currency exchange rates (the theoretical change
in the economic value as a result of the scenario) is as follows:
Strengthening by 5%
Currency:
Dollar
Euro
0.9
Marginal
Strengthening by 10%
Weakening by 5%
NIS millions
1.9
Marginal
44
(0.9)
Marginal
Weakening by 10%
(1.9)
Marginal
Interest risk is defined as the possibility that future changes in interest rates will cause a decrease in the present
value of the assets, less the liabilities, and will have an adverse effect on the Bank's profits and its capital.
The interest risks for the entire portfolio are the dominant risks to which the Bank is exposed in terms of the
effect on the fair value of the assets and liabilities, and on the profit. The principal exposure to interest risks in
the Bank is attributed to the financing activity in the CPI-linked segment and in the unlinked shekel segment,
and stems from the investment characteristics that derive from the range of sources and applications in this
segment.
The interest exposure in the CPI-linked segment stems from the activity in this segment being characterized by a
longer asset life than the life of the liabilities, and is denominated in fixed interest.
The interest exposure in the unlinked shekel segment also stems from the activity in this segment being
characterized by a longer asset life than the life of the liabilities, and is denominated in fixed interest, mainly in
respect of the investment in government debentures bearing fixed interest.
In the foreign currency and foreign currency-linked segment, the exposure is low relative to the index and
shekel segment. This, inter alia, is due to the considerable activity involving various financial instruments,
mainly interest swap transactions that contribute to reducing the exposure to interest fluctuations in this
segment. The exposure to interest risks is managed by suitably spreading the free capital investments over the
different time ranges, and reducing the exposure to the erosion in the fair value as a result of changes in the
interest rates.
In order to create a reasonable spread of investments over different time ranges, the Board of Directors has
determined that the accounting duration gap shall not exceed one year in the unlinked shekel and foreign
currency denominated segments, and shall not exceed a year and a half in the CPI-linked segment. The
economic duration gap shall not exceed half a year in the unlinked shekel and foreign currency denominated
segments, and one year in the CPI-linked segment.
The limitations on the Bank's interest exposure, which relate to the effect of a 1% change in interest in each
linkage segment on the erosion of the fair value of the shareholders' capital in each segment, as set during the
fourth quarter of 2006, are: erosion of up to 5.0% in the CPI-linked shekel segment, up to 4.0% in the unlinked
shekel segment, and up to 1.0% in foreign currency activity. The interest risk is measured on a monthly basis.
The effect of interest fluctuations on the fair value of the excess assets in the segment is as follows:
Decrease
Increase
By 1%
Unlinked shekel segment
CPI-linked shekel segment
Foreign currency and foreign
currency-linked segment
Decrease
Increase
By 1%
(15.7)
(3.4)
15.6
4.6
(18.9)
(15.1)
18.3
14.5
0.2
(0.2)
0.5
(0.5)
Principal assumptions:
Early repayments – customers who repay CPI-linked loans early are charged a fee which generally covers the
Bank's expected loss. Based on past experience, the volume of such early repayments and the aforesaid fee
minimize the Bank's expected loss from this activity.
Deposits that do not have a maturity date – interest exposure in the unlinked shekel segment includes the
scheduling of current account over an average duration of two years.
Estimate of the total exposure to market risks
The Bank manages the exposure to market risks using various means and tools as specified above, as well as
using the VaR model.
Value at risk (VaR):
45
The VAR method estimates the maximum loss anticipated by a corporation following the realization of a market
risk for a fixed time period and at a fixed level of statistical significance.
The Bank operates a VaR model as part of its risk management system, including the determination of VaR
limits for dealing room and trading securities portfolio activities.
As at December 31, 2007, the VaR value for 10 business days, according to the historical simulation method
and at a significance level of 99%, was NIS 9.2 million for the Bank’s entire portfolio (December 31, 2006 –
NIS 12.0 million).
Exposures in the trading portfolio
The trading portfolio includes only government securities. The Board of Directors' guideline prescribes that the
VaR in a calculated trading portfolio (for 10 business days and at a significance level of 99%) will not exceed
approximately 1% of the Bank's equity. As at December 31, 2007, the VaR of the trading portfolio stood at
approximately 0.01% of the shareholders' equity.
Dealing room activity
The dealing room provides the Bank's customers with service in all foreign currency and shekel financial
instruments. Customer transactions in derivatives are subject to the credit limit allocated to the customer by the
relevant credit authority.
The dealing room acts as a market maker in:
- Shekel/foreign currency transactions and foreign currency/foreign currency transactions.
- Trading in an interest rates portfolio in shekels and dollars.
The dealing room also transacts options, while taking care not to take a position in the options.
During 2007, no deviations were recorded in connection with the exposure policies defined for this activity.
Capital requirement in respect of market risks
The Bank is required to maintain a minimum capital ratio also in respect of market risks, in accordance with a
standard model defined by the Bank of Israel. The capital adequacy is calculated for interest risks only in the
trading portfolio and for currency and inflation risks for the entire Bank.
The composition of the capital required due to market risks, as calculated in accordance with the relevant
directives of the Bank of Israel, is as follows:
As at December 31
2007
2006
NIS millions
Capital requirement in respect of interest risks
Capital requirement in respect of exchange rate
and inflation risks
Capital requirement in respect of options
Total required capital
0.5
0.8
1.7
0.1
5.9
0.1
2.3
6.8
Credit risks
Credit policy is based on a dispersal of the risk inherent in the credit portfolio and controlled risk management,
while maintaining the dominance of the retail credit portfolio. Dispersal of the risk is reflected in the large
number of borrowers, an absence of sectoral concentration and distribution over linkage segments.
The Bank’s Board of Directors has set credit limits for individual borrowers and for certain industries
(construction, motor vehicles and local authorities), as well as limitations and authority to grant credit for
financing the purchase of means of control in corporations without recourse to the borrower.
The collateral provided for credit, the guidelines for stipulating the value of the collateral, the allocation of the
collateral to the types of credit, and monitoring and management, are all carried out through a computerized
system, in respect of most types of collateral. The collateral requirement derives from the permitted level of
exposure, with special emphasis being placed on the customer's repayment capability. The Bank tends to
validate the value of the collateral for some of the assets by obtaining objective valuations. Procedures
46
stipulate, according to the type of asset and by additional characteristics, the maximum safety coefficient at
which the collateral can be presented when credit decisions are made.
Beginning in 2006, the Bank uses an objective credit risk model for rating Retail Banking customers, additional
to the large account rating system that has been used by the Bank for some time. The model assists in setting
credit facilities according to the risk level and activity characteristics of the customer. Together with a customer
profitability measurement system that is being set-up, the relationship between risk level and yield can be
coordinated.
The Credit Operating, Supervision and Monitoring Unit
The Unit is responsible to the Credit Risks Manager, and its work is aimed, inter alia, at locating exposure
focuses, minimizing risk and increasing collectibility, and ensuring compliance with instructions and
procedures. The Unit is assisted in its work by automated systems for the identification of debts that are
potentially problematic and engages in the planning and initiation of examinations, the setting of monitoring
guidelines for the branches and the various credit units, and monitoring implementation of the guidelines. The
Unit is responsible for providing support to credit units in the branches, as well as to the credit reporting
segment and to the interface with various parties within the Bank.
The Credit Risks Control Unit
The Credit Risks Control Unit constitutes part of the Risks Control Unit that is responsible to the Managing
Director, and regularly assesses the risk level of customers and customer groups.
The annual work plan of the Unit is approved by the Board of Directors, and is reported on in semi-annual
reports. Among the examined and reported issues: development of the volume of problematic debts by
operating segments, examination of the provisions for doubtful debts according to a sectoral breakdown,
examination of amounts determined to be collectible through the collection process and the provision for
doubtful debts, individual and sample examination of borrower files, etc.
The risk of granting credit to the public includes: credit to the public, debentures of the public, and balance sheet
credit risk deriving from derivative instruments, as well as off-balance-sheet credit risk composed of unutilized
credit facilities and commitments, guarantees and derivative financial instruments. As at December 31, 2007,
the overall credit risk amounted to NIS 12.8 billion, compared with NIS 11.7 billion as at December 31, 2006, an
increase of 9.4%.
Sectoral credit risk
Most of the Bank’s credit risk, approximately 61.7%, is to households and private persons.
Construction and real estate sector – the total credit risk of the construction sector as at December 31, 2007
amounts to approximately NIS 897.3 million, compared with NIS 923.4 million as at December 31, 2006, which
constitutes approximately 7.0% of the total credit risk and approximately 6.0% of the balance sheet credit risk
(December 31, 2006 – 7.9% and 6.6%, respectively). Most of the credit in this sector is for the financing of
projects, with the focus being on residential projects. A major part of this financing is of closed projects, and is
characterized by periodic review and close monitoring, with reliance on and assistance from external
management supervisors.
For details of legislation pertaining to financial support operations in the sector see "legislative limitations,
standards and special constraints applicable to the segment" in the Corporate Banking segment description. No
deviation was recorded from the instructions of the Bank of Israel and the guidelines of the Board of Directors
in respect of sectoral credit concentration.
Leasing and car rental sector – the credit risk in this sector as at December 31, 2007 amounted to NIS 378.6
million, compared with NIS 353.1 million as at December 31, 2006.
The credit risk in the sector constitutes approximately 2.9% of the total credit risk on December 31, 2007 and
approximately 3.0% of the total credit risk on December 31, 2006.
In January 2008, the Knesset Finance Committee approved the Law for Increase of the Rate of Participation in
the Workforce and Narrowing of Social Gaps (Negative Income Tax, Mandatory Pension, Reduced Income Tax
and Legislation Amendments) – 2007.
47
The Law includes several measures that support equal distribution of the tax burden, including increasing the
benefit value for the use of a car, concurrent to reducing tax rates for individuals. The said increase of benefit
value will be implemented in stages over 4 years, such that after the 4 years it will reflect the value of the
benefit with objective proximity.
Implementation of the resolution could have an adverse impact on the leasing and rental car sector; however, at
this stage, Management has neither the tools nor the ability to estimate this effect, if at all.
In light of the anticipated legislation, the Bank's Board of Directors has instructed that a selective review be
conducted of the exposure to risk and the collateral of all borrowers in this sector.
Mortgage activity - the volume of balance sheet mortgage-secured credit granted for residential purposes as at
December 31, 2007 is approximately NIS 256.3million (approximately 2.9% of the balance-sheet credit risk), of
which approximately NIS 53.6 million is credit through other banks and under the responsibility of the Bank.
The Bank does not provide mortgage loans to people entitled to benefits from the Ministry of Housing.
Local authorities – As at December 31, 2007, the total credit risk relating to local authorities is NIS 498.3
million, which accounts for approximately 3.9% of the total credit risk.
As at December 31, 2006 the total credit risk to the local authorities amounted to NIS 438.1 million,
approximately 3.7% of the total credit risk.
Individual borrower limits
The liability of a borrower and of the six largest groups of borrowers at the Bank, are in compliance with the
limitations set by the Bank of Israel for these liabilities.
Mitigating credit risk
Within the framework of the collateral policy, principles and rules were set for reliance on collateral in the
credit provision process, in terms of the collateral type and the type of credit that it secures. The value of the
collaterals is determined according to the expected realization price and is based, inter alia, on the liquidity of
the collateral, the linkage segment and the exposure to volatility in its realization value. The procedures set
rules for handling collateral, maintaining it, ensuring the Bank's rights and monitoring their value. The
collateral policy specifies the type of assets, the types of legal entities that own the assets, the manner in which
the lien was created and the manner in which the asset is managed in the automated systems (the collateral
system). In addition, maximum safety coefficients were specified at which an asset can be presented as
collateral when credit decisions are made.
The collateral management system assists in management and monitoring, and inter alia:
(a) Specifies the documents required to record the lien (including accompanying documents).
(b) Defines the maximum safety coefficient at which the asset can be presented when credit decisions are
made.
(c) Conducts queries for the customer, including historical queries.
(d) Conducts monitoring and monthly reporting in respect of documents required for the reasonableness of the
lien.
The amounts of credit to the public, which is secured by collateral of the type that can be deducted from
borrower debt as defined in Proper Conduct of Banking Business Directive No. 313, are as follows:
2006
2007
NIS millions
Credit secured by deposits
Credit secured by State guarantee
Credit secured by banking guarantee
Credit secured by government debentures
376.5
193.3
43.9
27.0
48
349.9
220.7
4.3
21.4
Maintaining capital in relation to credit risks
The adequacy of the capital in respect of credit risks is maintained in accordance with the Proper Conduct of
Banking Business Directives addressing the minimum capital ratio.
The credit risk as calculated for capital adequacy includes the outstanding credit amounts and guarantees as
included in the Bank's balance sheets and the balances of off-balance-sheet line items, multiplied by a credit
conversion coefficient and weighted for credit risk ratings.
The credit risk rating is based on the type of customer or the counter-party to the transaction.
The credit risk is specified below by rating groups in accordance with Proper Conduct of Banking Business
Directive No. 311:
Balance as at December 31, 2007
Credit to the
public
Weighted 100%
Weighted 50%
Weighted 20%
Weighted 0%
Total
7,349.8
499.3
43.9
596.8
8,489.8
Other balance
sheet balances
Off-balance-sheet
credit risk
NIS millions
445.9
2,050.4
1,286.4
3,782.7
254.8
254.8
Capital
requirements
Total
8,050.5
499.3
2,094.3
1,883.2
12,527.3
724.5
22.5
37.7
784.7
Balance as at December 31, 2006
Credit to the
public
Weighted 100%
Weighted 50%
Weighted 20%
Weighted 0%
Total
7,028.6
288.9
4.4
592.0
7,913.9
Other balance
sheet balances
Off-balance-sheet
credit risk
NIS millions
366.5
1,652.1
1,260.3
3,278.9
265.4
265.4
Capital
requirements
Total
7,660.5
288.9
1,656.5
1,852.3
11,458.2
689.4
13.0
29.8
732.2
The derivative financial instruments are detailed below – by counter-party to the transaction, rated by rating
classes in accordance with Proper Conduct of Banking Business Directive No. 311 (in NIS million):
2007
2006
Capital requirement
2007
2006
NIS millions
Weighted 100%
Weighted 50%
Weighted 20%
Weighted 0%
Total
18.8
122.8
141.6
22.5
96.4
118.9
1.7
2.2
3.9
2.0
1.7
3.7
Problematic debts:
The Bank takes steps for the early identification of borrowers at risk. The percentage of the supplementary and
general provisions relating to problematic borrowers out of the total balance of borrowers as at December 31,
2007, is 9.0%, compared with 10.0% as at December 31, 2006.
49
The collection headquarters - a special unit handles the collecting of problematic debts through legal and other
means.
The unit, assisted by external lawyers, is responsible for debt payoffs, foreclosure on collateral and
implementation of collection means.
Concurrently, computerized monitoring of debts enables, through criteria defined therein, detection of defined
debts and monitoring of their handling.
The details of the volume of problematic debts and their composition are presented below:
2007
2006
NIS millions
NIS millions
Problematic debts (1):
Non-income bearing
Restructured (2)
Designated for restructuring
Temporarily in arrears
Under special supervision
Of which: debts for which there is a specific provision
Housing loans for which there is a provision based
on the duration of the arrears
(1)
Total balance-sheet credit to problematic borrowers
Off-balance-sheet credit risk in respect of
problematic borrowers (1,3)
Total credit risk in respect of problematic borrowers (1)
(1)
(2)
(3)
Rate of change
%
122.8
5.6
26.5
88.3
-
107.3
10.6
0.6
10.1
63.7
-
14.4
(47.2)
162.4
38.6
-
1.5
2.0
(25.0)
243.2
192.3
26.5
11.0
254.2
26.6
218.9
(58.6)
16.1
Not including problematic debts covered by collateral which is deductible for the purpose of the liability limits of a borrower and a
group of borrowers (Proper Conduct of Banking Business Directive No. 313).
Credit that was restructured during the current year.
As calculated for purposes of the liability limits of a borrower and a group of borrowers, except in respect of guarantees provided by
a borrower as security for the debt of a third party.
The increase in the volume of non-income bearing debts and in the volume of debts temporarily in arrears
reflects the indebtedness on a small number of debts with greater credit volume that were classified as
problematic. The increase in the volume of debts under special supervision reflects the tightening of the
supervision and the effect of additional control means implemented by the Bank, mainly on the activity in the
branches.
The authority to classify debts and determine the provision for doubtful debts is determined based on an
authorities hierarchy set by the Board of Directors.
The provision for doubtful debts includes a specific provision, a supplementary provision and a general
provision. For details of the factors that affect the estimate of the specific provision for doubtful debts, see the
"Critical Accounting Estimates" Section.
The supplementary provision was prepared in accordance with Proper Conduct of Banking Business Directive
No. 315, and a supplementary provision rate was set for each risk factor in accordance therewith.
50
Details are provided below concerning the components of the supplementary provision in respect of:
Balances as at December 31
2007
2006
NIS millions
Non-income bearing debts
Restructuring of problematic debts
Debts in temporary arrears
Debts under special supervision
Lack of financial information about a borrower
Total supplementary provision
5.0
0.2
0.5
0.9
1.8
8.4
4.7
0.3
0.2
0.7
2.2
8.1
The general provision that amounts to NIS 16.3 million as at December 31, 2007 reflects the balance of the
provision accrued through December 31, 1991, in accordance with rules in force until that date and has been
adjusted to the CPI until December 31, 2004.
Basel II
Background
The Basel Committee operates within the framework of the Bank for International Settlements (BIS), and has
been publishing directives since 1988 pertaining to the need for allocating a minimum capital for banks. The
goal of the committee is to create uniform banking standards, in order to improve the stability of the global
banking system. The Committee's guidelines are being adopted by regulators in many countries, including by
the Bank of Israel in its supervision of the banks in Israel.
In June 2006, the Committee for International Convergence for the Measurement of Capital and Capital
Standards ("Basel 2") published its recommendations, which are to be implemented in accordance with the
guidelines of the central banks in each country.
The guidelines pertain to credit risks, market risks and operational risks, and include 3 pillars in respect of each
of the risk types:
First pillar – minimal capital requirements, in accordance with the various approaches.
Second pillar – the supervisory review process and compliance with internal processes in the Bank for the
implementation of corporate governance, control and audit, for the establishment of a risk management and
assessment framework, as well as for the assessment of adequacy in respect of the Bank's risk profile and its
control environment.
Third pillar – market discipline – the requirements in respect of disclosure and reporting to the public.
The main change that the banks are required to implement in accordance with the provisions of Basel 2,
compared with previous guidelines ("Basel 1"), is reflected in the manner in which the required minimum
capital is calculated. To date, the minimum capital in respect of credit risks was calculated using rigid formulas
dictated by the regulator and based only on general characteristics of the credit portfolio (division into countries,
banks, credit granted to the public and housing credit). The guidelines of Basel 2 that pertain to advance
approaches (see details below) require the banks to estimate in detail the credit risk they are exposed to, using
risk rating models, and to allocate capital accordingly.
Another major change in the guidelines of Basel 2 is reflected in the application of the requirement that the
banks allocate capital also in respect of the operational risk that they face.
Advance approaches for the rating of borrowers (internal rating) and to the calculation of capital
requirements (IRB):
In addition to the alternative pertaining to the implementation of the standardized approach, the "full" guidelines
of Basel 2 allow banks that are able to estimate the risk in a more accurate manner to quantify credit risk using
internal models. This approach is called the internal ratings based (IRB) approach and is divided into two:
-
The basic IRB method – in this method the bank is required to calculate the probability of default (PD) by
the borrowers, where the values for all other risk components (namely: LGD – loss in percentages given
51
-
default, EAD – exposure at default, M – the effective period to maturity) in respect of the risk assets of
corporate borrowers, banks and countries are determined by the local regulator. Hence, this approach
cannot be applied to the risk assets of retail borrowers.
The advanced IRB method – using this approach, the bank itself calculates the four risk components (EAD,
LGD, PD and M).
Implementation of the said approach requires the Bank to prepare extensively, and, inter alia, to set up a time
series providing an history of at least 5-7 years of rating data (of LGD, PD, etc.) for customers and/or credit
transactions, and to estimate the probability of their reaching a state of default within one year. In addition, in
order for the Bank to use the IRB method, it is required to obtain the Bank of Israel's confirmation of the fact
that it has a reliable process for the measurement and management of credit risks.
With respect to operational risks – a bank will allocate capital for operational risks in accordance with the
standardized approach. Nonetheless, banks whose shareholders' equity is lower than a specific amount (NIS 4
billion) or that are not active on the international level will be permitted to make use of the basic indicator
approach, that is simple to apply but that may be more expensive in terms of the capital requirement. A bank
that does not comply with these conditions will be allowed to apply the basic indicator approach for a period of
up to 3 years from the initial application date, and will not be able to allocate capital for credit risks using
advanced approaches during that period.
From the perspective of operational risks management – the Supervisor of Banks intends to adopt the guidelines
published by the Basel Committee, among them compliance with the series of principles: Sound Practices for
the Management and Supervision of Operational Risk (February 2003), that comprises 10 principles, divided
into 4 issues:
Development of an adequate corporate governance environment, risk management, the supervision function and
the full disclosure function.
Guidelines of the Bank of Israel:
On April 16, 2007, the Bank of Israel published a draft of the provisions of Basel 2 in respect of minimum
capital requirements, that refers to the standardized approaches to credit risks, market risks and operational risks
(first pillar), and made clear that its present approach is to first apply the provisions to the banks in Israel in
accordance with the standardized approach, at the end of 2009; thereafter, it encourages the banks to apply the
advanced approaches.
On May 27, 2007, the Supervisor of Banks announced his intention to attain the target of applying the
guidelines of Basel 2 to the banks in 2009, while upgrading the risk management, control and corporate
governance layout in the banks, and adapting the manner in which the banks are supervised to a risk-oriented
supervision format.
For this purpose, the Supervisor of Banks set up six work teams that will formulate the requirements from the
banks in the various areas, in addition to the team previously formed, which is addressing market discipline and
reporting (third pillar), and commenced regular discussions with the banks on the various issues according to the
seven teams it had formed, concurrent with the publication of consultation drafts on these issues. Within the
framework of these publications, consultation drafts have been published on the following issues: the
standardized approach for the first pillar, the internal rating approach for the first pillar, operational risk
management for the second pillar, the second pillar – principles for implementation of the supervisory review
process, the internal process in the banks, a temporary order for the implementation of certain disclosure
requirements in accordance with the third pillar of Basel 2 in the 2007 financial statements of banking
corporations and credit card companies, and a second consultation draft on the first pillar – application and the
standardized approach.
On June 30, 2007, the Bank of Israel published a draft of the full translations of the Basel 2 directive, that
includes, inter alia, the second pillar of the directive (pertaining to control and supervision) and the third pillar
(market discipline and reporting), and that includes also the parts referring to the internal ratings based (IRB)
approach.
On August 9, 2007, the Supervisor of Banks published two letters to the managing directors of the banks, in
which it is stated that he expects the banks to act in a manner that will ensure their compliance with the
52
requirements of the standardized approaches of the first and second pillars of the Basel 2 recommendations in
the course of 2009.
Concurrently, the Bank of Israel is encouraging the banks to make the necessary preparations that will enable
them to adopt in the next stage, at an appropriate date in the future, the internal ratings based (IRB) approaches.
These approaches constitute global best practice in this area, and gradually striving for their implementation is
important to improving the quality of credit risks management in Israel.
In addition, the Bank of Israel expects the banks to implement the Basel 2 recommendations in accordance with
a comprehensive multi-year work plan, which will refer to all aspects affected by the implementation of the
recommendations, and which will be based on the results of an organized and individual gap analysis review, in
relation to the first and second pillars, including for various, related guidelines that were published in previous
publications of the Basel Committee.
Preparations of the Bank
The Bank is preparing to implement the directive using the standardized approach by the end of 2009, while
placing an emphasis on credit risks: planning of timetables for the projects, selection of a software system for
credit risks management and regulatory capital calculation, allocation of resources and workforce, including
defining requirements deriving from the provisions of Basel 2 for existing and new automated systems.
The CFO, who is also responsible for the overall risks management, heads the team responsible for the
application of Basel 2. In addition, an operative committee and a project steering committee have been
established. The Bank is being advised and aided by a company domiciled in the United States. The company
will serve as the software provider and model developer for the retail banking and the small and medium-size
businesses segment, with the help of another Israeli company that will assist with data mining.
The Bank has begun making preparations for the implementation of the directive using the standardized
approach, with the assistance of the aforesaid companies.
In August 2007, the Bank of Israel published a requirement that a study be conducted to examine the
quantitative effect (QIS5) that the implementation of the standardized approach of the Basel 2 instructions will
have on the banking corporations, covering: market risks, credit risks and operational risks.
The Bank has begun the study, and pursuant to an extension it has obtained, it is required to complete it by the
end of April 2008.
In August 2007 the Bank was required to prepare a work plan that includes a suitable multi-year budgetary
allocation, that will be based on a gap analysis survey of the gap between the existing state and the requirements
of the first pillar in the provisions of Basel 2 that refer to the implementation of the standardized approach to
credit risks, market risks and operational risks.
In addition, the Bank is required to conduct another study of the implementation of the second pillar provisions
of the Basel 2 directive, which includes guidelines pertaining to the supervision review process. The Bank is in
the process of examining the alternatives to this study.
Concurrently, the Bank applied to the Bank of Israel requesting deferment of the implementation of a part of
this stage, until the conversion of the operating systems to those of the First International is complete. Its
application has not yet been answered.
The Bank participates in the project steering committees of the parent company, and the possibilities of
cooperation on the group level are being examined.
Operational risk
In accordance with Proper Conduct of Banking Business Practice Directive No. 339, operational risk is defined
as the risk liable to be caused by the use of faulty data-processing methods, human errors and the lack of proper
internal checking and control procedures.
The expanding use of online direct banking systems, using electronic means and Internet banking, and computer
communication, call center services and other means increases the level of operational risk.
Within the framework of steps taken to reduce the exposure to operational risks, in 2002, the Bank commenced
collecting information about operating loss events that had actually occurred, to be used for the analysis of
trends and patterns of operational risk factors at the Bank.
53
Application of the recommendations of the embezzlement and fraud review, conducted at the Bank in 2004, and
updating of new risk centers, in order to respond to the varying business and technology conditions in which the
Bank operates, continues.
In 2007, the Bank updated the data of the operational risks survey conducted in 2004. Within the framework of
this update, work methods and processes were examined and proper checking and control procedures were
established. The review was conducted by the accounting firm, Somekh Chaikin, in coordination with First
International, as part of risk management at the group level.
During the year, the process began of converting the computer systems from those of Bank Hapoalim to those of
First International. The process began with the mapping of gaps, with the aim of checking the readiness of First
International's existing systems to absorb the types of products and services available in the Bank. The
conversion, which is a complex process that involves many parties, will continue for several years. The Bank's
Management assesses that the set control and approval processes will reduce the possibility that malfunctions, if
discovered, will impede the Bank's operations.
Compliance and prevention of money laundering and the financing of terrorism
Following the change in ownership of the Bank during 2006, and in accordance with the Supervisor of Banks'
demands that the banking corporation's policy and procedures, concerning the prevention of money laundering
and the financing of terrorism, be managed uniformly in all the banks within a group, an updated policy
document was drafted at the end of 2006. This document notes, as in the past, the Bank's obligation to adhere
strictly to all laws concerning the prevention of money laundering and the financing of terrorism, and to the
directives of the Supervisor of Banks. In addition, further emphasis has been given to control measures, the
operation of an automatic system, and overseas operations.
The updated document was approved by Management and the Board of Directors in the first quarter of 2007.
Nevertheless, operational support is being provided, with respect to the prevention of money laundering, until
the computerized systems are converted, by Bank Hapoalim’s computerized systems and in accordance with the
rules and procedures customary in Bank Hapoalim.
In the first half of 2007, a risk control department was established that coordinates the Bank's activities in the
areas of prevention of money laundering, compliance, credit control and market risks control.
Following this change, the department's manager was appointed Compliance Officer.
The activity of the Compliance Officer, whose role is to assist the Management and the Board of Directors in
complying with the provisions relevant to bank-customer relations and in minimizing the Bank's exposure to
related claims, is conducted with the help of additional "compliance trustees" in the branches, in the Retail
Division and in the Corporate Division, who conduct ongoing control measures to ensure implementation of the
requirements of law and regulation and who assist in assimilating consumer provisions.
Regulatory risk
Changes in legislation, which involve the imposition of limitations on the Bank's activities, could affect its
operating results.
The Bank's activities are delineated by a system of laws, orders and regulations, as well as the rules of the
Governor of the Bank of Israel and directives, guidelines and positions of the Supervisor of Banks. Pursuant to
the banking laws, the Bank comes under the supervision of the Bank of Israel and of other authorities in
Government ministries, particularly the Ministry of Finance. The laws relate to the capital and management of
the Bank, areas of operation, control and influence on controlled companies, the use of assets, and other matters.
For further details about bills and other provisions, whose enactment has not yet been completed, see the “Other
Matters” Section.
54
Following is the ranking of the risk factors by the total risk effect inherent therein:
Risk factors
Total effect of credit risk
Borrowers and collateral
quality risk
Risk due to sectoral
concentration
Borrowers/group of
borrowers concentration risk
Total effect of market risks
Interest risk
Inflation risk
Exchange rate risk
Share prices risk
Liquidity risk
Operational risk
Legal risk
Regulatory risk
Goodwill risk
Customer group
concentration risk
Risk description
Risk of decline in the Bank's profits and its capital, due
to the inability of debtors to fulfill their commitments.
Risk due to impairment of the current repayment
capability and value of collateral, and the ability to
realize collateral within a reasonable period, with
minimal loss of value and at minimal cost.
Effects of shared risk factors on an economic sector of
similar characteristics, on the possibility of decline in the
Bank's profits and its capital.
Effects of risk factors that are shared by borrowers with
shared ownership on the possibility of decline of the
Bank's profits and capital.
Risk of decline in the Bank's profits and capital due to
changes in the markets the Bank operates in.
Risk of decline in the Bank's profits and capital due to
changes in the market interest rate.
Exposure to decline in profits and capital due to changes
in the inflation rate.
Risk of decline in profits and capital due to changes in
the exchange rates of various currencies in which the
Bank's capital is invested.
Risk of loss due to decline in the value of shares.
Risk of decline in the Bank's profits and its capital due to
inability to fulfill obligations as they fall due.
Risk of decline in profits and capital due to failures in
processes, the functioning of the workforce, or an
external event.
Risk of loss due to a legal inability to enforce an
agreement.
Risk of decline in profits and capital due to adverse
legislation.
Risk of decline in profits and capital due to impairment
of the Bank's image in the eyes of its customers and
bodies affiliated with it.
Risk of decline in profit as a result of the organized
conduct of a customer group in the determination of
banking service prices.
55
Total risk effect
Low
Medium
Low
Low
Low
Low
Low
Low
Low
Low
Medium
Low
Medium
Low
Medium
Activity in the Capital Market
In 2007, the Bank’s turnover from its customers’ activities in securities on the stock market, including provident
funds and mutual funds, amounted to approximately NIS 16.5 billion, compared with a turnover of NIS 16.2
billion in 2006, an increase of 1.9%.
As at December 31, 2007, the portfolio of securities in custodianship totaled approximately NIS 9.3 billion
compared with approximately NIS 9.1 billion as at December 31, 2006.
As of January 2008, the capital market products were supplemented by financial mutual funds, which may
constitute a significant competitor to shekel deposits in the Bank. According to their prospectuses, the financial
funds may invest in unlinked assets or in foreign currency-linked assets (according to the type of the fund), rated
AA and above, for an investment period of up to one year. The fund's average duration will not exceed 90 days,
in accordance with the Joint Investment Trust Regulations (Assets That May be Bought and. Held by a Fund
and the Maximum Amounts Thereof). The extent of the effect on the Bank's business of the expected
competition between these funds and other deposit products of the Bank cannot be estimated at this stage.
Otsarot Investment Management Co. Ltd.
The company manages investment portfolios for private and institutional customers in accordance with a license
from the Israel Securities Authority.
In 2007, the total value of the assets in the investment portfolios of its customers increased by 22%. The
company's revenues from management fees and commissions amounted to NIS 2.9 million in 2007.
The company's contribution in revenues from commissions to the Bank's profits in 2007 amounted to NIS 1.6
million, compared with NIS 1.4 million in 2006. The Bank's investment in the company as at December 31,
2007 amounted to NIS 9.2 million.
The capital market reform and its effect on the Bank's operations
In July 2005, the Knesset enacted three laws intended to bring about comprehensive reform in the capital
market:
Increased Competition and Reduced Centralization and Conflict of Interests in the Israeli Capital Market
(Legislative Amendments) Law – 2005 ("the Increased Competition Law");
Supervision of Financial Services (Pension Consultancy and Pension Marketing) Law – 2005 ("the Pension
Consultancy Law");
Supervision of Financial Services (Provident Funds) Law – 2005 ("the Provident Funds Law").
This legislation has far-reaching implications for various other laws. The provisions of these three laws ("the
Laws") are complex, and require study and interpretation. Proper interpretation will be possible only when the
Laws are applied practically, and taking into consideration the position of the various competent authorities and
of the courts.
Within the framework of related legislation, regulations were published on February 26, 2006 that regulate the
payment of distribution commissions to distributors of trust funds, and fix the maximum rate of these
commissions by fund type. On the same date, regulations were published that regulate the payment of
distribution commissions made by a managing company to a consultant in return for the distribution of
provident funds, and the maximum rate of these commissions, provided the consultant undertakes that when
entering into a distribution agreement with any other managing company, said agreement will set identical rates
and terms of payment for an identical service. All said regulations came into force on April 1, 2006.
Within the framework of related legislation, on September 10, 2006, the Commissioner for the Capital Market,
Insurance and Savings published a circular letter concerning the provision of operational services by a pension
consultant to institutional bodies. The circular letter sets, inter alia, limitations on the operational services that a
pension consultant may render to an institutional body. It also states that the maximum operations commission
that the institutional body may pay for these operational services shall not exceed 0.1% of the value of the
assets. In addition, the circular letter stipulates that a pension consultant may not collect operational
commissions from the managing company of a pension fund that did not require external operational services on
February 8, 2006. The circular letter states that a managing company that had purchased provident funds from a
bank may continue providing customers, through the bank, with various services that are part of the usual
56
service provided by a pension consultant to his customers, provided that the customers do not already receive
such services within the framework of pension consultancy provided to them. The managing company may pay
the bank for such services, until December 31, 2007, commission at the maximum rate of 0.25% from the value
of the customer's assets, provided the managing company does not pay the said commission for a service that is
provided to a customer to whom the bank does not intend to provide pension consultancy until December 31,
2007, or that no pension consultancy was actually provided to him until that date.
Sale of the provident funds and mutual funds operation
On August 14, 2006, "Otsarit" sold all its rights and obligations with respect to the management of its mutual
funds to Gaon Mutual Fund Management Ltd., in consideration for approximately NIS 23.0 million. After
deducting costs and taxes, the company recorded a profit from extraordinary items in the amount of NIS 14.5
million.
In March 2007, an agreement was entered into for the sale of the provident funds operation owned by the Bank
(Bitachon, Shiryon, Bitzaron, the Central Compensation Fund and the further study fund Smadar) to Ayalon
Provident Funds Management Ltd and Ayalon Insurance Company Ltd.
On July 1, 2007, following fulfillment of the suspending conditions, the transaction was closed. The
consideration from the sale of these operations, net of the related tax effect, amounted to approximately
NIS 39.4 million.
Among the matters it covers, the agreement prescribes that the Bank shall continue to provide brokerage
services under the existing agreements; distribution agreements and operating agreements are also specified.
In parallel, with regard to some of the provident funds managed by the Bank, the management of such funds
was transferred to other bodies.
As of January 2008, the Bank manages the assets of one further study fund.
The total assets of the further study fund managed by the Bank amounted to approximately NIS 3.1 billion as at
December 31, 2007. As at December 31, 2006, the total assets of the provident funds managed by the Bank
amounted to NIS 5.3 billion.
The Bank’s revenues from management fees from provident funds and further study funds amounted to NIS 7.1
million in 2007, compared with NIS 14.3 million in 2006. The Bank’s revenues from the said operating fees
paid as at July 2007, amounted to NIS 1.0 million.
Preparations for pension consultancy
Following the legislation resulting from the reform in the capital market and with the completion of the sale of
the provident funds that it owned, the Bank is making preparations to provide its customers with a pension
consultancy service. The Bank’s preparations to provide a pension consultancy service include the recruitment
of experienced pension consultants, the training of pension consultants who are licensed for pension consultancy
and the assimilation of systems for pension consultancy. As at December 31, 2007, the Bank employs
approximately 30 pension consultants.
At the same time, First International (the parent company) is implementing measures to develop support
systems, both for consultancy and for the operation of the pension structure for itself and for the companies in
the Group.
In December 2007, the Bank applied for a pension consultancy license.
57
Human Resources
The Bank’s employees include permanent employees, temporary employees, employees in subsidiaries and
employees of manpower agencies.
Details of the Bank’s personnel are presented below:
Number of job positions as at December 31
Average annual number of positions
2007
2006
886
843
798
792
The increase in the number of positions is due to new branches opened, change in activity due to the
discontinuing of services rendered by Bank Hapoalim, and preparation for projects required under statutory
requirements.
The average age of the Bank’s employees is approximately 39.2, and the average seniority of the Bank’s
employees is approximately 11.8 years. Approximately 48% of the employees have academic degrees.
Approximately 30% of the Bank’s employees are temporary workers and employees of manpower agencies.
Professional training and development of manpower resources
The Bank deems as its principal target the expansion of professional banking and finances and use of knowledge
acquired in the provision of service to the customer.
The goal of the Bank’s training programs is to develop and train employees and managers in their professional
fields and appropriate behavior, and to furnish them with the expertise required to meet the business goals of the
Bank.
Training is mainly carried out at the Bank’s independent training center. In 2007, the Bank held approximately
7,500 instruction days, compared with 5,400 instruction days in 2006. The increase in instruction days was
required mainly to train new employees, improve credit knowledge, train employees in new activities, assimilate
new systems of First International and open new branches.
In addition, human resources development activities took place, comprising:
- Credit training activity. The activity included professional courses as well as the project "the quality of
credit sale" in which professional and behavioral contents were integrated for the purpose of improving
credit sale, with an emphasis on a broad and comprehensive view of credit. All clerks of all branches were
trained within the framework of the project.
- As part of the process of opening branches in the Bank, a series of workshops was conducted, aimed at
locating knowledge gaps, molding the senior management of the new branch into team, and building a
vision and a routine for sale processes in the setting up stage of the branch.
- Candidates for management roles from the unit manager level up were located and screened. Employees
who will enter the potential management pool will undergo a training process that will prepare them for
future management roles.
Employee mobility
During the course of the year, the Bank set out a program for rotation of employees and managers. The goal of
the program is to refresh employees, and to develop and advance their careers, as well as serving as a means of
additional risk control and prevention. The limited size and deployment of the Bank makes immediate
implementation of such a program difficult, and for this reason it was originally compiled in a multi-year
format. During 2007, approximately 28 employees in the “mobility required” category changed jobs, and
another 74 employees changed jobs for reasons of refreshment, advancement and career development.
Differential compensation
The Bank operates a method of differential compensation, which reflects the contribution of the employee and
the unit (department, branch) to the overall achievement of the Bank. Allocation of the compensation from the
basket approved for distribution is supported by an employee evaluation system, a profit measurement system,
and a target planning and performance system.
58
Conduct book
In October 2007, a special collective agreement was entered into on the "Conduct Book" for the employees of
Bank Otsar Hahayal.
The Conduct Book defines the list of functions, the salary ranges for the functions and the conditions for
promotion.
Contribution to the community
The Bank encourages its employees to be involved within the wider community. The Bank maintains two
regular contribution tracks with two not-for-profit organizations: “Matan – Your Way to Give”, through which
employees and the Bank contribute in an organized manner to various community and national needs, and
“Pitchon Lev”, through which employees collect foodstuffs for the needy in the period leading up to the
Passover and Rosh Hashana holidays.
The Bank has adopted an artillery regiment within the framework of the "Adopt a Warrior" project. The
adoption is expressed in financial contributions and participation in events.
In addition, the Bank provides financial support to various community and social endeavors. Units (branches,
divisions) of the Bank assist different community needs.
In 2007, the Bank and the employees contributed NIS 280 thousand to various causes.
Operating Services
Within the framework of the agreement for the sale of control in the Bank from Bank Hapoalim to First
International (see the “Control of the Bank” Section above), arrangements had been made for a period of six
years, during which time, Bank Hapoalim will continue to provide the Bank with services in accordance with an
agreement from 1997, which remains in force until 2011. The purpose of this is to ensure that the Bank will be
able to provide all banking services for its customers in the way in which it does today and for the consideration
that was agreed between the Bank and Bank Hapoalim.
According to the terms of a permit to control and to hold means of control, obtained by First International and
"Hever", the time period during which the Bank receives operational services will be the minimum period
required to arrange suitable alternatives. Any extension of this period beyond three years from the completion
date (August 17, 2006) will be subject to obtaining written approval from the Supervisor of Banks.
According to the agreement, the Bank will pay Bank Hapoalim NIS 20 million per year even if it ceases to
receive the operating services. First International is liable for these liabilities
In 2007, the Bank continued to receive operating services in accordance with and within the framework of the
said agreements. A service level agreement has not been entered into. Concurrently, the process of converting
the Bank's operating system began. For additional details on this matter, see the "Material Agreements" and
"Operational Risks" Sections.
Other operating services
To ensure the continued orderly operation of the Bank, the Supervisor has permitted the continued provision of
services previously rendered by Bank Hapoalim for a limited period. As of January 2007, depositing and cash
and checks withdrawal services are provided at all First International branches.
As at the reporting date, security services are still being provided by Bank Hapoalim, which is expected to
continue providing these services until the end of February 2008.
Call center services
The Supervisor has permitted the continued rendering of call center services to Bank Otsar Hahayal's customers
through a call center operated by Bank Hapoalim, until August 31, 2009. The Supervisor has given notice of his
intention to recommend to the Governor of the Bank of Israel that this permit be extended up to a maximum of 3
years from the date of transfer of ownership, or alternatively until First International is granted a permit to
provide call center services to Bank Otsar Hahayal's customers before the 3 years are over, should it be ready to
do so.
59
Material Agreements
The Bank considers the arrangement for the provision of computer services by Bank Hapoalim within the
framework of the agreement for the sale of control in the Bank (see the "Computerization Services" Section
above) to be a material agreement.
Since the sale, the Bank has been taking steps to arrange the provision of the said services and their definition
within the framework of a service level agreement (SLA) that will be entered into by the Bank and Bank
Hapoalim Ltd.; however the agreement has yet to be entered into as of the reporting date.
The absence of an agreement of principles on operating issues, including the current updating of procedures,
circulars and forms and making the adjustments required as a result of regulatory changes, constitutes an
operational risk that could impede the function of some of the operating systems; however, Management has
neither the information nor the tools to estimate this risk.
Work plan
It is reiterated that the information set out in this Section is forward-looking information, in accordance with the
explanation of that term in the "Forward-Looking Information” Section.
In January 2008, the Board of Directors of the Bank approved the work plan for 2008. The plan encompasses
all the business activities of the Bank and sets targets for expansion of operations in the Retail segment.
The Bank will aspire to obtain a high return on capital, high financial stability and high empathy and loyalty of
its employees and customers.
The targets set for 2008 are, inter alia:
- Increasing the number of salary accounts in the Bank, especially of account holders with an above average
salary.
- Increasing the number of household accounts and business accounts of persons engaged in liberal
professions and small businesses.
- Expanding the activity of small and medium businesses.
- Differentiation of customer service through the creation of an adaptive multi-channel service envelope and
of products and services that are tailored to the specific needs of the customer, in order to expand existing
customer activity and the recruitment of new customers.
- Retaining and bolstering the unique relations with the defense establishment clientele.
- Enhancement of the spread of urban branches, in order to position the Bank as a retail bank with a
nationwide deployment.
The Bank's activity in 2008 is expected to include, inter alia, marketing of First International mortgages,
factoring operations, and pension consultancy, upon receipt of the required permits that have been applied for.
The success of the work plan depends, inter alia, on macro-economic factors, various factors that could affect its
implementation within the Bank itself and regulatory factors, which could result in it not being implemented. It
is emphasized that the non-realization of all or some of the above assumptions and/or plans could have an
adverse effect on the Bank's work plans, which might, in turn, impair attainment of the yield target.
Other Matters
For details of litigation, see Note 17C.D. to the financial statements.
Legislation relating to commissions
On July 5, 2007, the Banking (Customer Service) Law (Amendment No. 12) – 2007 was passed. This law deals
mainly with giving the Bank of Israel the authority to control the prices of banking services that are provided to
the customer public, as well as the authority to determine – with regard to certain customers (individuals and
corporations that are small businesses as defined in the rules to be prescribed by the Governor of the Bank of
60
Israel) - a binding list of tariffs, which is to include a list of the only services for which banks will be permitted
to charge a commission, and also how such commission is to be calculated and presented. On January 8, 2008,
the Governor issued the Banking (Customer Service) (Commissions) Rules, – 2008 that includes the
aforementioned binding list of tariffs.
Within the context of his powers to control tariffs, the Governor is authorized to declare certain services to be
price-controlled services by virtue of causes prescribed in the above law. Once a certain service has been
declared a price-controlled service, as stated, the Governor is authorized to determine – by order – the price of
the service, or its maximal price, and can also prohibit the collection of commission for the service;
alternatively, the Governor may supervise increases in the commission tariffs in force with the various banks
immediately prior to the declaration.
Within the framework of the amendment, it has been decided that the summary report of commissions collected
from a customer for the principal services received in the quarter shall be expanded so as to apply to all
commissions , but it will only be sent to the customer once every half year.
With the publication of the rules, the banks were given a grace period of three months in order to make the
necessary preparations (which may be extended for a further three months).
The Bank is currently making arrangements to implement the rules prescribed by the law. At this stage,
following an initial review of the prescribed rules, it appears that – without any other changes – the loss in
revenues from operating commissions that are to be cancelled will amount to approximately NIS 50 million.
In the Bank’s estimation, the aforesaid change will result in a change in the structure of commission revenues in
such a way as to reduce the loss of revenue referred to above. At present, Management is unable to estimate the
mitigating effect, if any, of all the factors noted on the anticipated revenue loss.
Amendment to the Supervision of Financial Services (Pension Consultancy and Pension Marketing) Law
On January 1, 2008 an amendment to the Supervision of Financial Services (Pension Consultancy and Pension
Marketing) Law – 2005, pertaining to the date when the banks may consult on insurance products and charge a
distribution fee in respect thereof, was passed. In addition, the Finance Ministry announced that it has reached
an agreement with the large banks on the date on which they will enter the pension consulting field. The
amendment to the law and the Finance Ministry's announcement provide as follows:
The large banks may provide pension consultancy as follows. (a) on provident and pension products only: (1) to
the self-employed across the country and to salaried workers in the periphery settlements (as defined in the
amendment to the Law) – commencing on the date on which the same shall meet the terms set in the Law for
receiving a pension consultant license, (2) to the rest of the population – not prior to August 1, 2010; (b) also on
insurance products: (1) to the self-employed and to salaried workers in the periphery settlements – not prior to
January 1, 2009, (2) to the self employed across the country - not prior to April 1, 2009, and (3) to the rest of
the population – not prior to August 1, 2010.
The medium-size banks may provide pension consultancy as follows: (a) on provident and pension products
only: (1) to the entire population – commencing on the date on which they meet the terms set in the Law for
receiving a pension consultant’s license; (b) also on insurance products: not prior to January 1, 2009.
Joint Investment Trust Regulations
On December 31, 2007, the Joint Investment Trust Regulations, which regulate the activity of the trusts funds,
came into force, among them Joint Investment Trust (Distribution Commission) Regulations – 2006
("Distribution Commission Regulations"). An amendment to the Distribution Commission Regulations adapts
the definitions and fund classifications in the said Regulations to the definitions found in the Joint Investment
Trust (Classification of Funds for Advertisement Purposes) Regulations – 2007 ("Classification Regulations"),
and inter alia a financial fund was added to the types of funds in the Distribution Commission Regulations, as it
is defined in the Joint Investment Trust Regulations (Assets That May be Bought and Held by a Fund and the
Maximum Amounts Thereof) – 1994, in respect of which a different (lower) distribution commission will be
charged. The Distribution Regulations further set that no distribution commission will be charged for fund units
held in the fund, for units of a tracking fund (as the same is defined in the Classification Regulations), the
investment policy of which dictates that its maximum exposure to shares exceeds 50%, and for fund units held
in a provident fund under personal management.
61
Ruling of the Standard Contracts Court
In September 2004, the Standard Contracts Court's ruling cancelled 29 articles in Bank Leumi's contract
concerning the conditions for opening a checking account.
The checking account is the primary account in the banking system, and the contract that regulates the bank's
relations with its customers in all matters pertaining to this account is of significant importance.
Bank Leumi appealed to the Supreme Court on most of the cancelled articles. The Attorney General has also
filed an appeal on certain matters where his positions had not been accepted, fully or in part.
The Supreme Court decided to stay execution of the ruling that is being appealed, until it hands down its ruling.
The Bank's Management is unable to assess the implications of the Court's ruling on this matter on the Bank's
operations.
Services provided over electronic communication channels
The Bank is preparing to amend the contracts for the provision of banking services over electronic
communication channels in accordance with the Supervisor of Banks' circular letter on this matter (Circular
Letter No. 06-2187-H dated May 29, 2006). The main amendments pertain to the striking off of provisions that
exempt the bank from responsibility for unauthorized operations conducted on a customer's account and limiting
the bank's exemption from responsibility for mistakes and errors only to cases in which the disruption or
malfunction are not under the bank's control, and the bank is making a reasonable effort to prevent them. On
completion of the amendment of all relevant agreements in accordance with the circular letter's requirements,
the customers will be notified of the amendments made.
The Supervisor of Banks' Public Reporting Directives and new accounting principles in the period prior
to their implementation
For details about the Supervisor of Banks' public reporting directives and new accounting principles in the
period prior to their implementation, see Note 1A.U. to the financial statements.
Disclosure with respect to an Internal Auditor in the corporation
The Chief Internal Auditor of the Bank has been Mr. Nir Abel since November 2000. The Internal Auditor has
been an employee of the parent corporation (First International) since August 2006, and serves as the Internal
Auditor of the Group companies.
The Internal Auditor and his employees serve in audit functions only, with no conflict of interest, and act in
accordance with the Internal Auditor's instructions, as prescribed in Section 146 (b) of the Companies Law, the
provisions of Section 8 of the Internal Audit Law and the provisions of Section 8 of the Banking Rules.
The Internal Auditor's appointment was approved by the Audit Committee on August 15, 2000 and by the Board
of Directors on August 27, 2000.
The appointment was approved based on the auditor's education, which is appropriate for the position (he is an
accountant and economist and a graduate of the Hebrew University of Jerusalem), as well as on his professional
internal accounting experience. The Internal Auditor has engaged in a variety of management roles in the
internal auditing departments of Bank Hapoalim for approximately 13 years.
The Internal Auditor's supervisor in the organization is the Chairman of the Board.
Both an annual work plan and a five-year work plan exist.
In building the multi-year audit plan, the Internal Auditor relies on a number of parameters, inter alia: mapping
the various units and business lines of the organization, including charts of their organizational structures;
mapping the risks in the various units of the organization (credit, market and operational risks); the operational
risks survey conducted in the Bank (including embezzlement and fraud risks); the provisions of any law and the
guidelines of the Supervisor of Banks; failure events that occurred in the past in the organization and/or in
parallel organizations in the system.
In building the multi-year work plan, the audit was assisted by an external professional party.
The audit work plan for 2007 was derived from a series of various parameters that underlie the building of the
work plan. The main parameters are: an updated multi-year work plan, Proper Conduct of Banking Business
Directives, risk surveys conducted in the Bank, guidelines of the Audit Committee, new areas of activity and
changes in the organizational structures of the organization's units, recommendations of the external auditors
62
and the findings of the LFR report, findings of the audit reports of the Bank of Israel, the audit resources,
recommendations of officers in the Bank and previous findings.
The multi-year and the annual work plans were approved by the Audit Committee and by the Chairman of the
Board of Directors, and were presented to the Board of Directors.
Changes (material) in the approved work plan are brought before the Audit Committee for discussion.
The audit examined material transactions that were conducted in the corporation, including their approval
processes.
The Internal Auditor holds a full time position in the Group, and personnel representing an average of 10
positions were engaged in the internal audit in 2007 (including in subsidiaries, to a marginal extent). This scope
of positions is derived from the multi-year work plan, and includes workforce enhancement through
outsourcing.
The audit is conducted while relying, inter alia, on accepted professional principles as follows: "Standards for
Professional Internal Auditing" of the Israel Internal Auditors Organization, for any issue related to examination
of the appropriateness of the organization's actions in terms of compliance with rules, proper management,
integrity, savings and efficiency, and non-dependence on the audited body; the directives and guidelines of the
Supervisor of Banks, and the guidelines of other regulatory bodies and the provisions of the law, including the
Internal Audit Law – 1992.
The Internal Auditor is responsible to the Audit Committee on all issues pertaining to work processes, required
standards, compliance with the guidelines of the Bank of Israel and the provisions of any law. This is also
reflected in the audit reports discussed by the Committee, in which expression is given to the implementation of
the required standards and regulatory provisions. The Chairman of the Board of Directors receives the periodic
activity summaries, as well as reports and reviews of the audit work, in meetings with the Internal Auditor. All
members of the Board of Directors receive the minutes of all Audit Committee meetings. In addition, the work
plan and the basis for its preparation are presented before the Board of Directors by the Internal Auditor.
The Internal Auditor is given free and direct access, as prescribed in Section 9 of the Internal Audit Law – 1992,
to all systems of the Bank and of the subsidiaries, including to the information systems and the financial data.
The Internal Auditor reports in writing as follows:
The Internal Auditor reports regularly to the Chairman of the Audit Committee. The report includes a copy of
all audit reports, and is accompanied by summaries of the periodic audit activity (semi-annual and annual
activity summaries).
The Internal Auditor submits to the Chairman of the Board of Directors and to the Bank's Managing Director all
audit reports as well as semi-annual and annual reports.
In addition, the Internal Auditor reviews every quarter the main findings of the audit before the Bank's
Management, headed by the Managing Director. In addition, selected reports are discussed in meetings with
Managing Director, in the presence of the relevant audited parties.
Members of the Board of Directors receive copies of the Audit Committee minutes, so that members of the
Board of Directors who are not members of the Audit Committee will be aware of the content of the
discussions.
In the case of reports with particularly severe findings, a more frequent report is given to the said officers.
On February 15, 2007, the Audit Committee discussed a summary of the 2006 audit activity and, on September
11, 2007, the Audit Committee discussed a summary of the audit activity for the first half of 2007.
In the opinion of the Board of Directors and of the Audit Committee, the scope, nature and continuity of the
Internal Auditor's activity and the work plan are reasonable under the circumstances, and are suitable for
achieving the objectives of the internal audit in the corporation.
The Internal Auditor's fee is paid by First International.
Disclosure in respect of the financial statements approval process
In October 2007, the Supervisor of Banks announced his intention of adopting the Israel Security Authority's
guidelines from July 2007 in respect of the financial statements approval process in a reporting corporation.
In accordance with the Authority's guidelines, the organs in the corporation that are entrusted with supervision
will be defined and the processes implemented by the parties entrusted with supervision will be specified, prior
to approval of the financial statements.
The Bank's Board of Directors is responsible for supervision in the Bank. Five of the directors have accounting
and financial expertise, and 4 of them are members of the Balance Sheet Committee that discusses issues related
63
to the Bank's financial statements, including the opinion of the external auditors, adequacy of the reporting,
accounting policy, integrity of the disclosure, etc.
Within the framework of the financial statements’ approval, the directors who are members of the Balance Sheet
Committee receive the financial statements before the Committee meeting, and are given an opportunity to
direct questions, discuss material issues and make comments before the Board of Directors convenes to discuss
their recommendation to approve the financial statements.
Authorized signatories
On February 11, 2008, the Supervisor of Banks adopted the Israel the Security Authority's guideline dated
January 3, 2008, according to which a corporation is required to disclose its policy pertaining to the appointment
of authorized signatories and to the possibility that a single party will bind the corporation with his signature
without requiring the signature of another party (sole authorized signatory).
The signing rights in the Bank are anchored in procedures and in accordance with an authorities’ hierarchy.
According to the procedures, with the exception of certain cases in insignificant amounts that are specified in
the procedure, no one party is granted authorization to bind the Bank. The Bank does not have a sole authorized
signatory as the same is defined in the Authority's guideline.
Work of the Board of Directors
During 2007, the Bank's Board of Directors continued its activity with respect to establishing the Bank's policies
and the overall framework for its activities, and setting down guidelines for the supervision and control of the
Bank's current activities. The plenum and its committees held detailed discussions on the various aspects of the
Bank’s operations. The plenary Board of Directors convened 20 times during the year, and its committees met
62 times.
The Credit Committee receives comprehensive reviews with respect to borrowers with debts in excess of
certain financial amounts, approves credit lines or new credit for customers, deliberates on substantial debt
arrangements and problematic collections of significant amounts, receives reviews of different activity sectors
and discusses the annual and multi-year work plan of the credit control unit.
The Credit Committee held 22 meetings during the year.
The Audit and Related Persons Committee discusses and approves the work plan of the Bank's Internal
Auditor and monitors its execution. The Committee discusses the Bank of Israel's audit report, which is
forwarded to it during the year, and the material and/or exceptional reports of the Internal Audit Department,
and monitors their handling. The Committee receives reports on periodic summaries of audit findings. In its
meetings as the Transactions with Related Parties Committee, the Committee discusses transactions with
interested parties and related parties, as defined by the Bank of Israel, approves the grant of credit to such
entities and determines the manner of their handling.
During the year, the Audit Committee held 16 meetings, and in convening as the Transactions with Related
Persons Committee it held 13 meetings.
The Remuneration Committee discusses all matters relating to the terms of employment and retirement of the
Bank’s employees.
The Committee discusses and makes recommendations to the Audit Committee and the Board of Directors
regarding the employment and retirement terms of the Bank's officers.
The Committee discusses and makes recommendations regarding the employment and retirement terms of the
employees of the Bank and its subsidiaries who are not officers, in accordance with the policy of the Board of
Directors.
The Committee sets out a remuneration policy prior to any salary negotiations with the Employees Committee
and it discusses any material change in the structure and terms of the salary and in the employment terms of
employees. In addition, the Committee approves positions and salaries of officer-holders from the level of
division managers and up, and of external service providers of a similar level.
During the year, the Remuneration Committee held 8 meetings.
64
The Balance Sheet and Subsidiaries Committee discusses the Bank's financial statements and policies. It
discusses accounting policy and the quarterly and annual financial statements, receives reviews from the
external auditors regarding audit procedures and findings with respect to the review of the quarterly financial
statements and the audit of the annual financial statements, and monitors budgetary performance.
The Committee also discusses matters relating to the subsidiaries of the Bank, such as their quarterly and annual
financial statements, the financial policy of the companies and any material change in structure or policy of one
or more of the subsidiaries.
The Balance Sheet and Subsidiaries Committee held 4 meetings.
The Board of Directors' Operations Committee discusses in its meetings the Bank's operational risk
management policy and the manner of its implementation, and the Bank's annual investment and expense
budget. In addition, the Committee supervises the manner of delivery/receipt of the Bank's operational and
computerization services.
The Operations Committee held 3 meetings during the year.
On March 29, 2007, a decision was taken to establish a Nostro Committee. The Nostro Committee discusses in
its meetings the preparation of the nostro procedure and the nostro policy.
The Nostro Committee held 2 meetings during the year.
On August 13, 2007, a decision was taken to combine the Operating Committee with the Nostro Committee,
and to call it the Operating, Nostro and Risk Management Committee. The Committee discusses in its meetings
the Bank's operational risk management policy and its manner of implementation, the information technology
policy, the manner in which operating and computerization services are received from Bank Hapoalim, the
manner in which the operating and computerization services are transferred from Bank Hapoalim to First
International, and the Bank's annual investment and expenses budget.
In addition, the Committee discusses the nostro management policy, the annual work plan of the nostro unit,
examination of compliance with the plan targets and approval of new financial products or new nostro activity.
In addition, the Committee discusses the policy on exposure to the various risks, monitoring and control of the
scope of financial restrictions in the Bank, monitoring and control of the Bank's compliance with the exposure
restrictions, monitoring the adequacy of the risks management system and control of the Bank's overall
exposure to the various risks, monitoring and control of the preparations for implementation of Basel 2 and
approval of the controls and risks management system for new financial products or new nostro activity.
The Operating, Nostro and Risk Management held 3 meetings during the year.
The Factoring Committee discusses the transfer of the factoring activity from U-Bank to the Bank.
The Factoring Committee held one meeting during the year.
The Hever Committee – An ad-hoc committee that was established on March 29, 2007 and discussed the
approval of the agreement for benefits to Hever.
The Hever Committee held one meeting during the year.
Report on directors having accounting and financial expertise
In accordance with the directives of the Bank of Israel, published in a circular letter dated December 11, 2004,
the Bank is required to implement the directive of the Israel Securities Authority pertaining to the “Report on
Directors having Accounting and Financial Expertise” (“the Directive”).
According to the Directive, every company must determine the minimum number of directors having
“accounting and financial expertise”, based, among other things, on the size, type and degree of complexity of
the company's activities, in a manner that will enable the board of directors to fulfill its duties, taking into
special consideration its responsibility to examine the financial situation of the company and to prepare and
approve its financial statements.
The Directive defines a “director having accounting and financial expertise” as a director who does not hold any
other position in the company and who, due to his education, experience or qualifications, as detailed in the
report, has a high degree of expertise and understanding in matters of business, accounting, internal auditing and
65
financial statements, in a manner that enables him to have an in-depth understanding of the company’s financial
statements and to raise issues and questions relating to them at board meetings, with the goal of approving and
publishing financial statements presented in a fair manner.
The Directive emphasizes that it has no intention of granting special status to these directors, nor does it change
the responsibility of those and the other directors under any law. The Directive further stipulates that the
Directors' Report will name all those directors having “accounting and financial expertise”, even if their number
exceeds the minimum number determined by the company.
At its meeting on March 29, 2005, the Board of Directors decided that the minimum number of directors having
“accounting and financial expertise” shall be two, similar to the number of outside directors that a public
company must appoint under the Companies Law – 1999.
66
Based on their education and experience, the members of the Board of Directors having accounting and
financial expertise, as the same is defined in the Directive of the Bank of Israel, are as follows:
Zeev Gutman
Master of Business Administration from the HERIOT-WATT Edinburgh
University, accounting studies in the College of Management (without a
CPA degree).
Deputy Managing Director, Risk Manager and Head of the Financial
Management and Risk Management Department in First International Bank
of Israel Ltd.
Served in the First International Bank of Israel Ltd. as Head of the Customer
Assets and International Banking Department, Head of the Capital Market
and Foreign Currency Department in First International Bank of Israel Ltd.
Member of the Board of Directors of: First International Issues Ltd., Stocofin
(Israel) Ltd. , Panca Ltd., The Tel Aviv Stock Exchange, Maof Clearing
House, Maalot, FIBI Bank (Switzerland) Ltd., Hightrade.
Served as the chairman and member of the board of directors of various
provident funds owned by First International Bank of Israel Ltd., and retired
from these positions on February 9, 2006. Served as a director in U-Bank
until August 8, 2007.
David Levinson
B.A. in Economics and Statistics from the Hebrew University of Jerusalem.
M.A. in Business Management from the Tel Aviv University.
External director of Yashir Mutual Funds Ltd. and Gav-Yam BaySide Land
Corporation Ltd.
Serves as a financing and banking consultant to various bodies.
Served in senior positions in Bank Hapoalim Ltd., served as Managing
Director of Granit Hacarmel Holdings Ltd., Managing Director of The
Maritime Bank of Israel Ltd and Managing Director of FIBI (UK) London.
Shimon Cohen
CPA, with a B.A. in Economics from the Ben Gurion University in Beer
Sheva.
Serves as the Chairman of the Board of Directors of Spark Enterprise
Finance and Investments Ltd.
Owns an accounting and financial consultancy firm.
Served as Managing Director of Mishan Ltd., Managing Director of Haargaz
Ltd., Managing Director of the Economy and Finance Department of the
New Histadrut - the General Federation of Labor in Israel and member of the
Industrial Local Council Ramat Hovev. Served as Chairman of the Boards
of Directors of Reut Study Fund Ltd., Haverim and Marvichim Capital
Markets Ltd., Meitav-Mishan Provident Funds Management Ltd.
Prof. Reuven
Gronau
Ph.D. in Economics from Columbia University, New York.
Economics Professor (Emeritus) at the Hebrew University of Jerusalem.
Served as a director in First International Bank of Israel Ltd., in Discount
Bank and in the Migdal Insurance Company.
Michal Abady
Boyanj
B.A. in Economics and Accounting from the Hebrew University of
Jerusalem.
LL.B. from Tel Aviv University.
Holder of a CPA license and an attorney license.
VP, Head of the Main Accounting Department of First International Bank of
Israel Ltd. Served as a senior economic advisor to the Minister of Health,
Deputy Director General of Health Services and Additional Health Services
in the Ministry of Health, member of the plenum and Chairperson of the
Audit Committee of the Securities Authority, and Chairperson of M.I.
Holdings Ltd. .
67
Members of the Bank's Board of Directors
Gutman Zeev, Chairman of the Board of Directors (1)
ID No.: 50467513
Date of Birth: 4.3.1951
Began to serve on: 13.8.2007
Citizenship: Israeli
Address for serving processes of court: 37 Dinovich St., Petah Tikva
Membership of Board of Directors’ Committees: Remuneration, Operating, Nostro and Risk Management
Serves as external director: No
Employee of the Bank, of its subsidiary, of an affiliated company or of an interested party in it: Yes.
Deputy Managing Director, Risk Manager and Head of the Financial Management and Risk Management in
First International Bank of Israel Ltd.
Education: MBA from the HERIOT-WATT Edinburgh University
Accounting studies in the College of Management (without a degree)
Family member of another interested party in the Bank: No
Accounting and financial expertise: Yes
Occupation in the past 5 years and details of the corporations in which he serves as a director:
Deputy Managing Director, Risk Manager and Head of the Financial Management and Risk Management in
First International Bank of Israel Ltd.
Served as Head of the Customer Assets and International Banking Department, Head of Capital Market and
Foreign Currency Department in First International Bank of Israel Ltd.
Member of the Board of Directors of the following companies: First International Issues Ltd., Stocofin (Israel)
Ltd., Panca Ltd., The Tel Aviv Stock Exchange, Maof Clearing House, Maalot, FIBI Bank (Switzerland) Ltd.,
Hightrade
Member of the Governing Body of Friends of Rabin Medical Center, Member of the Friends of Tel Aviv
University
Served as the chairman and member of the board of directors of various provident funds owned by First
International Bank of Israel Ltd., and retired from these positions on February 9, 2006. Served as a director in
U-Bank until August 8, 2007.
Hessel Yoram
ID No.: 06800908
Began to serve on: 1.4.2003 (first term), 1.4.2006 (second term)
Address for serving processes of court: 7 Hashoftim St., Neve Amirim, Herzliya 46447
Membership of Board of Directors’ Committees: Audit and Transactions with Related Parties, Credit,
Remuneration, Balance Sheet and Subsidiaries, Operating, Nostro and Risk Management
Serves as external director: Yes
Employee of the Bank, of its subsidiary, of an affiliated company or of an interested party in it: No.
Education: B.Sc. in Economics, M.Sc. in International Relations
London School of Economics and Political Science, University of London
Accounting and financial expertise: No
The Prime Minister's Office in Tel Aviv (until 1.2.2003), private businessman (since 2003).
Managing Director of Vintage Crown Ltd. (Israel), President of IntelTech International LLC (USA), joint
Chairman and member of the Board of Directors of DynaTrage Inc. (USA), member of the Board of Directors
of Crystal Consumer Products Ltd., member of the strategic advisory committee of Elul Group Ltd., member of
the strategic advisory committee of Simlat Ltd., "Agmon" council member, member of the Governing Body of
Friends of Rabin Medical Center
68
Cohen Shimon
ID No.: 59593798
Address for serving processes of court: 70 Basmat St., Beitar
Remuneration, Balance Sheet and Subsidiaries, Operating, Nostro and Risk Management
Employee of the Bank, of its subsidiary, of an affiliated company or of an interested party in it: No
Education: Accountant, B.A. Economy and Accounting, Ben Gurion University
Serves as the Chairman of the Board of Directors of Spark Enterprise Finance and Investments Ltd. (since 1.07).
Owns an accounting and financial consultancy firm. Director of Armament Development Authority (Rafael).
Served in the past as: Managing Director of Mishan Ltd., Managing Director of Haargaz Ltd., Managing
Director of the Economy and Finance Department of the New Histadrut - the General Federation of Labor in
Israel and member of Industrial Local Council Ramat Hovev.
Served as Chairman of the Boards of Directors of Reut Study Fund Ltd., Haverim and Marvichim Capital
Markets Ltd., Meitav-Mishan Provident Funds Management Ltd.
Prof. Gronau Reuven (2)
ID No.: 8176083
Address for serving processes of court: 7 Carmia St., Jerusalem
Membership of Board of Directors’ Committees: Audit and Transactions with Related Parties, Balance Sheet
and Subsidiaries, Operating, Nostro and Risk Management
Education: Ph.D. Economics from Columbia University, New York.
Economics Professor at the Hebrew University of Jerusalem (2002-6/2005)
Director of First International Bank of Israel Ltd. (until 2005)
Tal (Gottfried) Ronny (4)
ID No.: 009679796
Address for serving processes of court: 13 Sold St., Raanana
Remuneration
Education: B.A. in Economics and Business Administration from the Hebrew University of Jerusalem
Owner and Managing Director of "Sig" group of companies, Chairman of the Board of Directors and Managing
Director of "Sig Industries Ltd.", Managing Director and Chairman of the Board of Directors of "Sig Lifting
69
Technologies Ltd.", serves as a member of the Board of Directors of the following companies: "Sig Cranes
Ltd.", "Rotem Computerized Controllers (1994) Ltd.", Adi and Oz Ltd., "Meital R.M. Investments Ltd.".
Pelli Dafna
ID No.: 01093905
Date of Birth: 1948
Address for serving processes of court: 30 Namal Yafo, Tel Aviv
Membership of Board of Directors’ Committees: Credit, Remuneration, Balance Sheet and Subsidiaries,
Operating, Nostro and Risk Management
Education: B.A. in Economics and International Relations from the Hebrew University of Jerusalem
Occupation in the past 5 years and details of the corporations in which she serves as a director:
Member of the Board of Directors of the following companies: Isracard Ltd., Europay (Eurocard) Israel Ltd.,
member of the Board of Trustees and Chairperson of the Finance Committee of the Jerusalem College of
Engineering, member of the Gabriel Sherover Foundation.
Served as Chairperson of the Board of Directors of Bank Otsar Hahayal (9/2002–8/2006).
Irit Shlomi
ID No.: 53992913
Date of Birth: 1956
Address for serving processes of court: 6 Hess St., Ramat Hasharon
Membership of Board of Directors’ Committees: Audit and Transactions with Related Parties, Credit
Employee of the Bank, of its subsidiary, of an affiliated company or of an interested party in it: Yes. VP,
member of Management and Head of the Banking Department of First International Bank of Israel Ltd.
Education: B.A. in Economics from Haifa University
VP, member of Management and Head of the Banking Department of First International Bank of Israel Ltd.
Served as a director in Visa Cal on behalf of First International Bank of Israel Ltd.
Levinson David
ID No.: 07994361
Address for serving processes of court: 29 Nachshon St., Ramat Hasharon 47301
Balance Sheet and Subsidiaries
Employee of the Bank, of its subsidiary, of an affiliated company or of an interested party in it: Yes
Education: B.A. in Economics and Statistics from Hebrew University of Jerusalem, M.A. in Business
Administration from Tel Aviv University
External director of Yashir Mutual Funds Ltd. and of Gav-Yam BaySide Land Corporation Ltd. Serves as a
finance and banking consultant for various bodies. Served in senior positions in Bank Hapoalim Ltd., served as
70
the Managing Director of Granit Hacarmel Holdings Ltd., as the Managing Director of The Maritime Bank of
Israel Ltd and as the Managing Director of FIBI (UK) London.
Malka Amos
ID No.: 051760007
Address for serving processes of court: 18 Nahal Sorek St., Modiin 71707
Membership of Board of Directors’ Committees: Credit, Operating, Nostro and Risk Management
Education: B.A. in Humanities from Tel Aviv University
Managing Directors of Elul Technologies Ltd. (2002-2005), Managing Director and shareholder of Am-Desk
Ltd., Chairman of the Board of Directors of Logic Industries Ltd., Chairman of the Board of Directors of Plasan
Sasa Ltd., Chairman of the Board of Directors of Nyotron Net Technologies
Member of the Board of Directors of the following companies: IDB Development Ltd., ODF Optronics Ltd.
Abady-Boyanj Michal (3)
ID No.: 022708218
Address for serving processes of court: 8 Hanotrim St., Holon
Membership of Board of Directors’ Committees: Remuneration, Balance Sheet and Subsidiaries
Employee of the Bank, of its subsidiary, of an affiliated company or of an interested party in it: Yes. VP,
Head of the Accounting Department of First International Bank of Israel Ltd.
Education: B.A. in Economics and Accounting from Hebrew University of Jerusalem, LL.B. from Tel Aviv
University, CPA and attorney
VP, Head of the Accounting Department of First International Bank of Israel Ltd. Serves as Chairperson of the
Board of Directors of First International Issues Ltd. and in Magal Issues Company of First International. Serves
as directors of Israel Credit Cards Ltd.
In the past served as a senior economic advisor to the Minister of Health, Deputy Director General of Health
Services and Additional Health Services in the Ministry of Health (1/1996-1/2006), and Chairperson of the
Board of Directors of M.I. Holdings Ltd. (10/2003–3/2005), member of the plenum and Chairperson of the
Audit Committee of the Israel Securities Authority (1/1998-1/2006)
Beery Yaron
ID No.: 57985699
Address for serving processes of court: 4 Hayovel St., Binyamina
Membership of Board of Directors’ Committees: Remuneration
Education: B.A. in Political Sciences from Haifa University, M.A. in Business Administration from Derby
University
71
IDF Colonel, Head of Individual Department and Chairman of Hever, The Association of IDF Servicemen and
Veterans Ltd. Member of the Board of Directors of the following companies: Chairman – Standing Army
Savings Fund Ltd., Chairman – Hever, The Association of IDF Servicemen and Veterans Ltd., Chairman –
Consumer Members Club Ltd., the Governing Body of Friends of the IDF Ltd., E.Sh.L.H. 2000 founded by
Friends of the IDF Ltd., Tagmulim Ltd., Sh.I.R.N. (2002) Ltd.
Lev Ronit
ID No.: 22341358
Address for serving processes of court: 109, David Hamalech St, Ramat Hadar, Givaat Shmuel
Membership of Board of Directors’ Committees: Audit and Transactions with Related Parties
Education: B.A. in Political Sciences from Bar Ilan University, capital market course – Israeli Center of
Management, directors course – Israeli Center of Management, senior service managers course – Israeli Center
of Management
IDF Colonel, head of Individual, Retirement and Payments Centers and commander of the Individual and
Payments Services Department
Member of the Board of Directors of the following companies: Standing Army Savings Fund Ltd., Hever, The
Association of IDF Servicemen and Veterans Ltd., Standing and Retired Army Group Ltd., Hever Consumers
Club Ltd., Chairwoman of the Audit and Salaries Committee of Hever, The Association of IDF Servicemen and
Veterans Ltd.
Torjeman Shachar
ID No.: 227405755
Address for serving processes of court: 16 Haogen St. Rishon Le-Zion
Membership of Board of Directors’ Committees: Balance Sheet and Subsidiaries
Employee of the Bank, of its subsidiary, of an affiliated company or of an interested party in it: No*
Education: B.A. in Economics and Business Administration from Bar Ilan University, MBA in Economics and
Business Administrations from Beer-Sheva University
Lieutenant Colonel, IDF, Head of Military Service Terms, Managing Director of Hever, The Association of IDF
Servicemen and Veterans Ltd.
Managing Director and director of Standing Army Savings Fund Ltd., E.Sh.L.H. 2000 founded by Friends of
the IDF Ltd., Sh.I.R.N. (2002) Ltd.
* Serves in the standing army, Managing Director of Hever, The Association of IDF Servicemen and Veterans
Ltd. – interested party in the Bank
72
Gonen Joel
ID No.: 008846800
Address for serving processes of court: 4 Hayarden, St., Rishon Le-Zion 75236
Membership of Board of Directors’ Committees: Operating, Nostro and Risk Management
Education: partial university education
Col. (Res.), graduate of the IDF National Security College, Chairman of the Judea District of Tzevet – IDF
Standing Army Retirees Association, member of management of IDF Retirees Association, member of
Management of the Beer Yaakov Hospital Association
David Granot (5)
Professor Avraham (Rami) Friedman (6)
Yossi Levi (7)
Baram Uzi (8)
Ygal Yanai (9)
Changes in the Board of Directors
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Mr. Zeev Gutman was appointed on 13.8.2007
Mr. Gronau Reuven was appointed on 20.6.2007
Ms. Abady-Boyanj Michal was appointed on 10.7.2007
Mr. Tal (Gottfried) Ronny was appointed on 27.11.2007
Mr. David Granot ended his term of office on 21.5.2007
Prof. Avraham (Rami) Friedman ended his term of office on 25.2.2007
Mr. Yossi Levi ended his term of office on 10.7.2007
Mr. Uzi Baram ended his term of office as external director on 17.10.2007
Mr. Igal Yanai ended his term of office as external director on 20.12.2007
73
Details of Senior Officers
Trau Israel
ID No.: 53641775
The position that the officer holds in the Bank, in a subsidiary, in an affiliated company or in an
interested party in it: Managing Director of the Bank.
Education: B.A. in Humanities from Tel Aviv University
Occupation in the past 5 years:
Managing Director of the Bank since 20.8.2006, VP, Head of the Banking and Marketing Department in First
International Bank of Israel Ltd. (1.4.2005-20.8.2006), Manager of the Main Branch of First International Bank
of Israel Ltd. in Tel Aviv (1.2.2002-1.4.2005)
Kutai Noam
ID No.: 054267430
interested party in it: Deputy Managing Director of the Bank, Head of Retail Division of the Bank
Education: Attorney, LL.B. from Shaarei Mishpat College, Hod Hasharon
Manager of the Sales Department in the Retail Division of the Bank, Head of the Retail Division of the Bank.
Granot Baruch
ID No.: 008943540
Began to serve in: 1985
interested party in it: Senior Vice President, Chief Financial Officer, director in subsidiaries of the Bank
Education: B.A. in Economics in the Accounting Department of Tel Aviv University
Bank Comptroller, Senior Vice President, Chief Financial Officer
Calif Doron
ID No.: 059689380
interested party in it: Senior Vice President, Head of the Corporate Division of the Bank
Education: Accounting and Economics studies, – Tel Aviv University
Senior Vice President, Head of the Corporate Division of the Bank
74
Traub Dan
ID No.: 51638724
interested party in it: Senior Vice President, Head of the Resources Division of the Bank, director of
subsidiaries of the Bank
Education: B.A. in Sociology and Political Sciences from Haifa University
Senior Vice President, Head of the Resources Division of the Bank
Yehezkely Gila
ID No.: 50542786
interested party in it: Vice President, Chief Legal Advisor and Corporate Secretary
Education: Attorney, LL.B. from Tel Aviv University
Vice President, Chief Legal Advisor and Corporate Secretary
Horesh Orit
ID No.: 52905700
interested party in it: Vice President, Manager of the Customer Assets Management Division of the Bank,
director in subsidiaries of the Bank
Education: B.A. in Political Sciences from Tel Aviv University, M.A. – Business Administration, Manchester
University
Vice President, Manager of the Customer Assets Management Division of the Bank
Salpeter Ofer
ID No.: 54533039
interested party in it: Vice President, Chief Accountant of the Bank
Education: CPA, B.A. in Accounting and Economics from Hebrew University of Jerusalem
Chief Accountant of the Bank
75
Abel Nir
ID No.: 56220106
interested party in it: Chief Internal Auditor of the Bank, Auditor of First International Bank Group since
August 2006
Education: CPA, B.A. in Accounting and Economics from Hebrew University of Jerusalem
Chief Internal Auditor of the Bank since November 2006, Internal Auditor of First International Bank Group
since August 2006
External auditors – KPMG - Somekh Chaikin, CPAs
76
Assessment of Controls and Procedures in respect of Disclosure in the Financial
Statements
The directives of the Supervisor of Banks for reporting to the public require that commencing with the interim
financial statements to June 30, 2005, the Bank’s Managing Director and its Chief Accountant, who is in charge
of the controllership, must each separately sign a certification concerning "Evaluation of controls and
procedures regarding disclosure", as required by the provisions of Section 302 of the Sarbanes-Oxley Act
legislated in the U.S.A. ("the Disclosure Certification").
The directive is part of the overall policy which is intended, according to the notice of the Supervisor of Banks
in December 2005, to apply the provisions of Section 404 of the Sarbanes Oxley Act, which deal with the
responsibility of Management for internal control over financial reporting and the opinion of the external
auditors regarding the audit of the internal control over financial reporting.
The Disclosure Certification relates to controls and procedures for disclosure which were laid down for the
purpose of ensuring that information which the Bank is required to disclose in its reports is recorded, processed,
summarized and reported in accordance with the directives for reporting to the public issued by the Supervisor
of Banks, and in accordance with other reporting directives. "Controls and procedures for disclosure" are
intended, inter alia, to ensure that such information is properly collated and processed for the management of the
corporation, to enable decisions to be made at the appropriate time in relation to the disclosure requirements.
At present, the Disclosure Certification is not intended to cover the broad aspects of assessing "the effectiveness
of the internal control over financial reporting" which appears in Section 404 and which includes, among other
things, planning the process so as to provide a measure of certainty as to the assessment of the policy and
procedures relating to the accuracy and integrity of records, correct authorizations for recording receipts and
payments, and prevention and identification of unauthorized transactions, which could have a material effect on
the Bank's financial reporting.
The Bank's Management, in cooperation with the Managing Director and the Chief Accountant – who is the
Bank's Controller, has evaluated the effectiveness of the controls and procedures pertaining to the Bank's
disclosure, as at December 31, 2007. Based on the said evaluation, the Bank's Managing Director and the Chief
Accountant, who is the Controller, concluded that as at the end of the said period the controls and procedures
pertaining to the Bank's disclosure are sufficiently effective to record, process, sum and report the information
that the Bank is required to disclose in its quarterly report in accordance with the Public Reporting Directives of
the Supervisor of Banks and at the date set in these Directives.
In December 2005, the Supervisor of Banks published a directive entitled "Management's responsibility for
internal control over financial reporting (SOX Act 404)". The directive requires banks to include in reports, as
from the year ended December 31, 2008, a certification by management as to its responsibility for the internal
control of financial reporting, and the financial statements will include an opinion of the external auditors
concerning the audit of the internal control over the financial reporting.
The directive sets out the stages and interim targets of the process that the Bank must apply, and a timetable for
the implementation of the directive.
This is an extensive project that will be launched by the end of 2008. Following transfer of control and the
expected change in the various operations, recording and control systems, the Bank is preparing to conduct this
process in coordination and concurrent to the systems conversion process.
During the fourth quarter of 2007, no changes occurred in the internal control over the financial reporting of the
Bank that materially affected or might reasonably be expected to affect its financial reporting.
Gutman Zeev
Chairman of the Board of Directors
Ramat Gan, February 28, 2008
77
Trau Israel
Managing Director
Remuneration of the Chairman of the Board of Directors and senior executives
A. The Chairman of the Board serves without pay.
B. The remuneration of the internal auditor of the Group and of the Bank is paid by the parent company. For
details, see its report.
C. Below are details of the salary, the value of benefits and employer's payments for the Bank's five highestpaid senior officers in 2007 and 2006, in reported amounts:
Salary
Supplementation
Employers
of reserves
Payments and
for salary changes
provisions
in the accounting year
N I S t h o u s a n d s
Total
In 2007
Trau, Israel
Kutai, Noam
Calif, Doron
Granot, Baruch
Ofer Salpeter (3)
349
211
204
234
143
1,382
1,168
1,044
1,012
853
Salary
Benefit in
respect of
phantom
units
1,695
Employers
Payments and
provisions
N I S t
1,731
1,379
1,248
1,246
2,691
Supplementation
of reserves
for salary changes
in the accounting year
h o u s a n d s
Total
Bonus in
respect of
transfer of
control
In 2006
Trau, Israel (2)
Tal, Matti (1)
Granot, Baruch
Kutai, Noam
Yeheskely, Gila
Calif, Doron
578
743
1,375
1,280
1,172
1,188
587
-
80
214
147
248
184
177
(1) Served as Managing Director until August 17, 2006.
(2) Has been serving as Managing Director since August 17, 2006.
(3) Appointed on January 17, 2008.
78
2,168
-
658
1,544
1,522
3,696
1,356
1,365
180
275
245
243
243
Remuneration of the External Auditors (1) (2) (3)
2007
NIS thousands
For auditing activities (4):
External auditors, Somekh Chaikin, CPAs
2006
NIS thousands
881
868
97
102
Total
978
970
For other services:
External auditors, Somekh Chaikin, CPAs
106
87
-
-
Other external auditors
Other accountants
(1) Board of Directors report to the Annual General Meeting on the external auditors’ remuneration for auditing
activities and for additional services, as per sections 165 and 167 of the Companies Law – 1999.
(2) External auditors’ remuneration includes payments in accordance with the VAT Law.
(3) Includes remuneration paid and accrued.
(4) Auditing of the annual financial statements, auditing of tax returns and review of interim financial
statements.
79
Management Review of the Bank’s Financial Position and Results of Operations*
The management review was prepared in accordance with the guidelines and directives of the Supervisor of
Banks and includes the following statements:
Appendix A
Consolidated Balance Sheets – Multi-Period Information.
Appendix B
Consolidated Statements of Profit and Loss – Multi-Period Information.
Appendix C
Rates of Income and Expenses – Consolidated.
Appendix D
Analysis of the Bank’s Exposure to Interest Rate Fluctuations – Consolidated.
Appendix E
Risk involving Credit to the Public, by Economic Sector – Consolidated.
Appendix F
Consolidated Quarter-End Balance Sheets for the Years 2007 and 2006 – Multi-Quarter
Information.
Appendix G
Consolidated Quarterly Statements of Profit and Loss for the Years 2007 and 2006 – MultiQuarter Information.
*All operations are solely in Israel.
80
Appendix A – Consolidated Balance Sheets –
Multi-Period Information
December 31
2006
2005
Reported amounts (1)
N I S m i l l i o n s
2007
Assets
Cash and deposits
with banks
Securities
Credit to
the government
Buildings and
equipment
Other assets
2,191.8
1,360.1
8,473.5
(3)
2,143.4
924.2
(3)
7,897.6
(3)
2,641.6
552.7
(3)
7,643.8
2004
2003
(2)
(3)
2,291.6
261.6
(3)
7,220.4
(3)
2,002.3
550.7
(3)
6,990.5
0.9
-
0.2
0.3
0.1
158.7
71.2
156.7
54.6
156.8
60.5
148.9
68.4
149.8
63.2
12,256.2
11,176.5
11,055.6
9,991.2
9,756.6
9,925.8
76.0
9,029.7
98.1
8,937.0
139.0
8,053.1
153.0
8,009.0
42.5
115.5
115.0
118.8
86.4
36.4
389.3
1,028.4
376.5
945.5
355.2
859.0
334.5
783.1
413.5
714.4
11,535.0
10,564.8
10,409.0
9,410.1
9,215.8
0.6
0.6
0.6
0.5
0.5
720.6
611.1
646.0
580.6
540.3
Total liabilities and
shareholders’ equity
12,256.2
11,176.5
11,055.6
9,991.2
9,756.6
Total assets
Liabilities and
Shareholders’
Equity
Deposits from
the public
Deposits from banks
Deposits from
the government
Subordinated notes
and debentures
Other liabilities
Total liabilities
Minority interest
(1)
(2)
(3)
Cessation of the adjustment for the effects of inflation based on December 2003 CPI.
Amounts adjusted for the effects of inflation based on December 2003 CPI.
Reclassified.
81
Appendix B – Consolidated Statements of Profit and Loss –
Multi-Period Information – in reported amounts (1)
2007
Profit from financing operations after
Operating commissions
Profits sale of securities, net
Other income
2006
December 31
2005
2004
N I S m i l l i o n s
2003
374.7
19.3
338.0
30.1
315.1
22.6
318.6
35.3
298.5
38.3
355.4
307.9
292.5
283.3
260.2
(4)
186.2
15.9
177.3
0.3
21.8
(4)
169.8
23.8
(4)
157.8
22.4
(4)
147.2
18.8
Total operating and other income
Operating and other expenses:
Salaries and related expenses
Maintenance and depreciation of buildings
and equipment
Other expenses
202.1
199.4
193.6
180.2
166.0
242.2
264.1
213.1
203.2
184.6
Operating profit in reported amounts
before taxes
Erosion and adjustments
432.9
437.0
371.8
351.6
327.9
124.6
124.6
49.3
70.3
70.3
38.4
114.3
114.3
50.4
111.9
111.9
52.3
98.3
5.8
(2)
104.1
(2)
52.0
75.3
31.9
63.9
59.6
(2)
75.3
39.4
31.9
14.5
(0.1)
63.8
0.7
59.6
(0.9)
(2)
114.7
46.4
64.5
58.7
(2)
77.0
113.7
Operating profit after taxes
Equity of minority interest in the net, after-tax
operating profits of subsidiaries
Net operating profit
After-tax profit (loss) from extraordinary items
Net profit
68.7
104.2
(4)
2006
2007
64.7
94.0
(4)
2005
(4)
59.3
89.1
2004
59.8
83.5
(4)
(3)
52.1
52.1
(2)
52.1
2003
Earnings per share in NIS
Earnings per ordinary share of NIS 0.0001:
Operating profit
Profit (loss) from extraordinary items
0.59
0.31
0.25
0.11
0.52
0.01
0.48
(0.01)
0.42
-
Net profit
0.90
0.36
0.53
0.47
0.42
Earnings per preferred share of NIS 0.001:
Operating profit
5.94
3.11
2.52
1.14
5.16
0.06
4.82
(0.07)
4.21
-
Net profit
9.05
3.66
5.22
4.75
4.21
Earnings per founder’s share of NIS 0.05:
Operating profit
29.70
15.56
12.59
5.73
25.81
0.28
24.09
(0.36)
21.05
-
Net profit
45.26
18.32
26.09
23.73
21.05
(1)
(2)
(3)
(4)
For the years ended December 31, 2007, 2006, 2005 and 2004 - Discontinuance of the adjustment for the effects of inflation based on
December 2003 CPI.
For the year ended December 31, 2003 - Discontinuance of the adjustment for the effect of inflation based on December 2002 CPI.
Amounts adjusted for the effects of inflation based on December 2003 CPI.
Erosion and adjustments for the effects of inflation on income and expenses are included in the pre-tax operating income before tax at
reported values based on December 2003 CPI.
Reclassified.
82
Appendix C – Rates of Income and Expenses –
Consolidated (1) – in reported amounts
Average
monthly
balance (2)
Financing
income
(expenses)
Rate of income
(expenses)
without effect
of derivatives
NIS millions
Percentage
Israeli Currency – Unlinked:
Assets (4,4A)(8)
Effect of ALM derivatives
7,306.5
624.9
410.7
34.9
Total assets
7,931.4
445.6
Liabilities (4A)(8)
7,158.8
333.8
(158.3)
(21.6)
Total liabilities
7,492.6
(179.9)
2,166.6
233.6
(2.21%)
(2.40%)
166.5
16.2
Total assets
2,400.2
182.7
Liabilities (4A)(8)
2,200.2
47.9
(148.2)
(3.5)
Total liabilities
2,248.1
(151.7)
7.61%
(6.74%)
(6.75%)
0.94%
1,827.4
107.8
274.1
(46.1)
5.5
(2.3)
Total assets
2,209.3
(42.9)
Liabilities (4A)(8)
Hedging derivatives
1,312.4
111.2
750.9
39.0
(3.4)
37.1
Total liabilities
2,174.5
72.7
(1.94%)
2.97%
3.34%
0.45%
See page 86 for the notes to the tables on pages 83-86.
83
1.40%
Rate of income
(expenses)
without effect
of derivatives
Rate of income
(expenses)
including
effect of
derivatives (3)
Percentage
(9)
442.8
20.3
7,165.2
463.1
6,541.7
288.4
(195.6)
(18.7)
6,830.1
(214.3)
6.44%
6.46%
(2.99%)
(3.14%)
3.45%
2,218.4
210.8
114.6
5.9
2,429.2
120.5
2,206.4
57.1
(92.7)
(1.4)
2,263.5
(94.1)
0.86%
(2.52%)
Interest margin
Financing
income
(expenses)
3.22%
7.68%
Interest margin
Foreign Currency – Domestic Activity (5):
Assets (4, 4A)(8)
Hedging derivatives
6.870.9
294.3
5.62%
3.41%
Average
monthly
balance (2)
NIS millions
5.62%
Interest margin
Israeli Currency – CPI-Linked:
Assets (4, 4A)(8)
Rate of income
(expenses)
including
effect of
derivatives (3)
5.17%
4.96%
(4.20%)
(4.16%)
0.97%
1,657.3
58.7
345.3
(22.5)
4.4
(2.0)
2,061.3
(20.1)
1,468.8
61.9
504.9
39.7
(2.7)
14.3
2,035.6
51.3
3.32%
0.80%
(1.36%)
(0.98%)
2.70%
2.52%
1.34%
1.54%
Appendix C (cont’d 1) – Rates of Income and Expenses –
Average
monthly
balance (2)
Financing
income
(expenses)
Rate of income
(expenses)
without effect
of derivatives
NIS millions
Rate of income
(expenses)
including
effect of
derivatives (3)
Percentage
Average
monthly
balance (2)
NIS millions
Total
Assets (4, 4A)(8)
Hedging derivatives
11,300.5
107.8
1,132.6
531.1
5.5
48.8
Total assets
12,540.9
585.4
Liabilities (4A) )(8)
Hedging derivatives
10,671.4
111.2
1,132.5
(267.5)
(3.4)
12.0
Total liabilities
11,915.2
(258.9)
4.70%
Income from options
Income from other derivative instruments
(excluding options, hedging, ALM and
embedded derivatives that were bifurcated)
Commissions from financing transactions
and other financing income (6)
Other financing expenses
Provision for doubtful debts including
general and supplementary provisions
10,746.6
58.7
850.4
4.67%
(2.51%)
(2.17%)
Interest margin
2.19%
Financing
income
(expenses)
(9)
534.9
4.4
24.2
11,655.7
563.5
10,216.9
61.9
850.4
(248.6)
(2.7)
(5.8)
11,129.2
(257.1)
2.50%
3.5
(9)
30.9
(4.6)
374.7
338.0
19.3
30.1
355.4
307.9
84
4.98%
4.83%
(2.43%)
(2.31%)
2.55%
5.3
Rate of income
(expenses)
including
effect of
derivatives (3)
Percentage
4.6
40.9
(0.8)
Rate of income
(expenses)
without effect
of derivatives
2.52%
2007
2006
Average
Average
monthly
monthly
balance (2)
balance (2)
NIS millions
Total
Monetary assets generating financing
income (4, 4A)(8)
Assets deriving from derivative
instruments (7)
Other monetary assets (4A)
General and supplementary provisions
for doubtful debts
Total monetary assets
Monetary liabilities generating
financing expenses (4A)(8)
Liabilities deriving from derivative
instruments
Other monetary liabilities (4A)
Total monetary liabilities
Excess of monetary assets over
monetary liabilities
Non-monetary assets
Non-monetary liabilities
Total capital resources
85
11,300.5
10,746.6
24.1
112.5
18.2
80.9
(23.0)
11,414.1
(22.5)
10,823.2
10,671.4
10,216.9
16.5
208.7
10,896.6
17.0
136.2
10,370.1
517.5
164.7
10.7
671.5
453.1
162.5
12.5
603.1
Consolidated - in US$
Rate of income(expenses)
without
including
Average Financing
effect of
effect of
monthly
income derivatives derivatives
balance (2) (expenses)
(3)
US$ millions
Percentage
Assets (4, 4A)
Hedging derivatives
Total assets
444.7
26.5
66.4
537.6
23.2
0.3
6.8
30.3
5.22%
Liabilities (4A)
Hedging derivatives
Total liabilities
Interest margin
318.9
27.0
182.7
528.6
(9.6)
0.1
(12.9)
(22.4)
(3.01%)
Rate of income(expenses)
without
including
Average Financing
effect of
effect of
monthly
income derivatives derivatives
balance (2) (expenses)
(3)
US$ millions
Percentage
5.64%
2.21%
(4.24%)
1.40%
371.0
13.1
77.3
461.4
19.5
(0.7)
6.8
25.6
5.26%
328.3
13.8
113.8
455.9
(9.2)
(0.1)
(7.7)
(17.0)
(2.80%)
5.55%
2.46%
(3.73%)
1.82%
Notes to the tables on pages 83-86:
(1)
(2)
(3)
(4)
The data in these tables is before and after the effects of derivatives (including off-balance-sheet effects of derivative
instruments).
On the basis of monthly opening balances, except for the unlinked Israeli currency segment, in which the average balance is
computed on the basis of daily data and after deducting the average balance-sheet balance of specific provisions for doubtful
debts.
Hedging derivative instruments (excluding options), embedded derivatives that were bifurcated and ALM derivatives which
constitute a part of the Bank’s asset and liability management system.
The average balance of unrealized profits/(losses) on adjustment to fair value of trading debentures and of profits/(losses) on
available-for-sale debentures, which are included in the shareholders’ equity under accumulated comprehensive income in the
item of “adjustments to present available-for-sale securities at fair value”, has been added to or deducted from the average
balance of the assets.
2007
2006
5.8
(4A)
(5)
(6)
(7)
(8)
5.8
Excluding derivative instruments.
Including NIS linked to foreign currency.
Including profits and losses arising from sales of investments in debentures and from adjustments to fair value of trading
debentures.
Average balance-sheet balances of derivative instruments (excluding average off-balance-sheet balances of derivative
instruments).
Receivables and payables deriving from credit card transactions have been included in the calculations of the income and
expenses rates.
2007
2006
826.0
(9)
Reclassified.
86
775.2
Appendix D – Analysis of the Bank’s Exposure to Interest Rate Fluctuations –
Consolidated – in reported amounts
On demand
to 1 month
From 1 to 3
months
From 3
months to 1
year
From 1 to 3
years
From 3 to 5
years
December 31, 2007
From 5 to 10
From 10 to
years
20 years
Over 20
years
Without
fixed
maturity (a)
Total
NIS Millions
Israeli currency – unlinked:
Total assets
Total liabilities
Difference
Effect of forward transactions and
special commitments
Exposure to interest rate
fluctuations within the segment
Accumulated exposure within the
segment
Israeli currency – CPI-linked:
Total assets
Total liabilities
Difference
special commitments
segment
Foreign currency (b):
Total assets
Total liabilities
Difference
special commitments
segment
6,351.7
6,534.5
(182.8)
512.7
126.5
386.2
107.8
333.0
(225.2)
167.3
88.6
78.7
74.1
6.7
67.4
16.9
0.6
16.3
0.7
3.1
(2.4)
-
100.0
50.7
49.3
7,331.2
7,143.7
187.5
179.2
162.3
(185.0)
(2.7)
(0.5)
-
-
-
-
153.3
340.8
(3.6)
548.5
(410.2)
76.0
66.9
16.3
(2.4)
-
49.3
(3.6)
544.9
134.7
210.7
277.6
293.9
291.5
291.5
340.8
70.1
41.1
29.0
111.3
45.4
65.9
391.1
264.4
126.7
615.7
455.2
160.5
329.5
571.1
(241.6)
559.5
772.5
(213.0)
94.8
36.2
58.6
19.0
19.0
6.1
8.1
(2.0)
2,197.1
2,194.0
3.1
-
-
195.3
-
-
-
-
-
-
195.3
198.4
29.0
65.9
322.0
160.5
(241.6)
(213.0)
58.6
19.0
(2.0)
29.0
94.9
416.9
577.4
335.8
122.8
181.4
200.4
198.4
471.3
947.7
(476.4)
1,166.2
247.1
919.1
39.2
106.0
(66.8)
1.3
6.4
(5.1)
0.5
1.5
(1.0)
0.2
3.6
(3.4)
-
-
1.0
0.8
0.2
1,679.7
1,313.1
366.6
(179.2)
(162.3)
(10.2)
2.6
0.5
-
-
-
-
(348.6)
(655.6)
756.8
(77.0)
(2.5)
(0.5)
(3.4)
-
-
0.2
18.0
(655.6)
101.2
24.2
21.7
21.2
17.8
17.8
17.8
18.0
See page 88 for the notes to the tables on pages 87 and 87.
87
December 31, 2006
Internal
Average
rate of
duration
return
%
Years
Internal
rate of
return
%
Average
duration
5.50%
2.81%
2.69%
0.18
0.12
0.06
6.79%
2.46%
4.33%
0.10
0.12
(0.02)
5.19%
4.54%
0.65%
3.82
4.10
(0.28)
5.57%
4.74%
0.83%
3.84
4.49
(0.65)
5.11%
2.92%
2.19%
0.14
0.13
0.01
5.18%
2.73%
2.45%
0.15
0.12
0.03
Years
Appendix D(cont’d 1) – Analysis of the Bank’s Exposure to Interest Rate Fluctuations –
On demand
to 1 month
From 1 to 3
months
From 3
months to 1
year
From 1 to 3
years
From 3 to 5
years
December 31, 2007
From 5 to 10
years
From 10 to
20 years
Over 20
years
Without
fixed
maturity (a)
Total
NIS Millions
Non-monetary items:
Total assets
Total liabilities
Difference
Average
duration
December 31,
2006
Average
duration
Years
years
-
-
-
-
-
-
-
-
172.5
8.5
164.0
172.5
8.5
164.0
-
-
6,893.1
1,790.2
538.1
784.3
404.1
576.6
95.5
19.0
279.6
0.87
0.89
7,523.3
419.0
703.4
550.2
579.3
776.7
39.3
-
68.1
0.96
1.12
(630.2)
1,371.2
(165.3)
234.0
(175.2)
(200.1)
56.2
19.0
211.5
11,380.5
875.7
12,256.2
10,659.3
875.7
11,535.0
721.2
(0.09)
(0.23)
-
-
0.1
(0.1)
-
-
-
-
-
-
Total exposure to interest rate fluctuations within the segment
(630.2)
1,371.2
(165.2)
234.0
(175.2)
(200.1)
56.2
19.0
211.5
721.2
Total accumulated exposure
(630.2)
741.0
575.8
809.8
634.6
434.5
490.7
509.7
721.2
Overall exposure to interest rate fluctuations
Total assets (c)
Receivables deriving from credit card transactions (d)
Total balance-sheet assets
Total liabilities (c)
Payables deriving from credit card transactions (d)
Total balance-sheet liabilities
Difference
special commitments
a.
b.
c.
d.
The “without fixed maturity” column presents non-capitalized balance-sheet balances.
Domestic activity, including Israeli currency linked to foreign currency.
Including non-monetary items presented in the “without fixed maturity” column.
Assets and liabilities deriving from credit cards, to which customers have committed.
Notes to the tables on pages 87 and 88:
1.
Full data as to the interest rate exposure for each segment, by the various balance sheet categories, are available on request.
2.
The maturity distribution presented above represents the present value of future cash flows, capitalized at the internal rate of return for each balance-sheet item. Such capitalized future cash flows
include interest accrued until the earlier of the repayment date or the date of change in the interest rate.
3.
The effect of hedge transactions is included in total assets or total liabilities, as the case may be.
88
Appendix E – Risk Involving Credit to the Public, by Economic Sector –
Operations solely in Israel
December 31, 2007
Credit risk
in balance
sheet (1)
Agriculture
Industry
Construction and
real estate
Electricity and water
Commerce
Restaurants, hotels and
catering services
Transport and storage
Communications and
computer services
Financial services
Other business
services
Public and community
services
Households (1)
Total
Settlement
Movements (4)
Local authorities (5)
Off-balance
sheet credit
risk (2)
Total credit
to public
NIS millions
Annual expense
in respect of
specific
provision for
doubtful debts
Problematic
debt
balances (3)
205.0
652.1
16.5
330.5
221.5
982.6
0.1
3.4
7.9
68.6
522.5
53.0
378.2
374.7
58.8
141.3
897.2
111.8
519.5
0.2
2.7
56.8
0.2
11.5
97.1
117.2
18.4
201.6
115.5
318.8
2.5
2.3
5.3
25.5
52.9
50.5
81.9
108.6
134.8
159.1
0.2
(0.1)
1.6
0.3
661.0
215.1
876.1
3.4
17.2
514.7
5,435.6
72.2
2,485.7
586.9
7,921.3
(1.2)
5.5
8.3
51.0
8,739.8
4,105.3
12,845.1
19.0
254.2
14.1
27.1
41.2
-
3.0
397.7
100.6
498.3
-
0.4
(1) Credit to the public in an amount of NIS 8,498.1 million, investment of the public in debentures in an
amount of NIS 238.4 million, and other assets in respect of derivative instruments of the public in an
amount of NIS 3.3 million.
(2) Off-balance sheet credit risk on financial instruments, as computed for purposes of borrower credit limits.
(3) Balances of problematic accounts, net of credit covered by collateral that is deductible for purposes of
individual and group borrower limits, including off-balance sheet risk components.
(4) Kibbutzim, Moshavim, national and regional organizations and entities controlled by the Settlement
Movements.
(5) Including companies under their control.
Credit risk and the balance of problematic debts are presented net of the specific provisions for doubtful debts.
89
Appendix E (cont’d 1) – Risk Involving Credit to the Public, by Economic Sector –
Operations solely in Israel
December 31, 2006
Credit risk
in balance
sheet (1)
Agriculture
Industry
Construction and
real estate
Electricity and water
Commerce
Restaurants, hotels and
catering services
Transport and storage
Communications and
computer services
Financial services
Other business
services
Public and community
services
Households (1)
Total
Settlement
Movements (4)
Local authorities (5)
Off-balance
sheet credit
risk (2)
Total credit
to public
NIS millions
Annual expense
in respect of
specific
provision for
doubtful debts
Problematic
debt
balances (3)
130.2
458.4
67.9
190.6
198.1
649.0
0.4
(0.4)
6.1
58.0
538.0
45.5
298.3
385.4
35.3
93.7
923.4
80.8
392.0
6.5
4.1
55.7
0.1
12.8
77.2
126.6
16.0
107.2
93.2
233.8
2.2
0.3
4.4
1.0
87.3
* 39.6
82.9
44.4
170.2
84.0
0.8
(0.1)
1.2
2.0
722.0
156.3
878.3
5.4
21.5
490.0
5,085.9
43.7
2,385.9
533.7
7.471.8
3.1
6.1
9.3
46.8
8,099.0
3,609.3
11,708.3
28.4
218.9
16.8
3.2
20.0
-
5.0
387.7
50.3
438.0
-
1.7
(1) Credit to the public in an amount of NIS 7,921.9 million, investment of the public in debentures in an
amount of NIS 170.0 million, and other assets in respect of derivative instruments of the public in an
amount of NIS 7.1 million.
(2) Off-balance sheet credit risk on financial instruments, as computed for purposes of borrower credit limits.
(3) Balances of problematic accounts, net of credit covered by collateral that is deductible for purposes of
individual and group borrower limits, including off-balance sheet risk components.
(4) Kibbutzim, Moshavim, national and regional organizations and entities controlled by the Settlement
Movements.
(5) Including companies under their control.
Credit risk and the balance of problematic debts are presented net of the specific provisions for doubtful debts.
*
Reclassified.
90
Appendix F – Consolidated Quarter-End Balance Sheets for the Years 2007 and 2006 –
Multi-Quarter Information – in reported amounts
4th Quarter
Assets
Cash and deposits with banks
Securities
Credit to the government
Buildings and equipment
Other assets
Total assets
2,191.8
1,360.1
8,473.5
0.9
158.7
71.2
2007
3rd Quarter
2nd Quarter
NIS millions
(1)
2,331.6
1,003.3
(1)
8,367.7
0.5
153.8
74.0
1st Quarter
(1)
(1)
2,166.9
956.7
(1)
8,176.7
153.6
54.5
1,879.9
1,228.7
(1)
7,930.7
155.1
57.7
4th Quarter
(1)
2,143.4
924.2
(1)
7,897.6
156.7
54.6
2006
3rd Quarter
2nd Quarter
NIS millions
(1)
2,074.3
852.9
(1)
7,880.5
154.1
69.4
(1)
2,239.1
698.2
(1)
7,794.3
155.4
51.6
1st Quarter
(1)
2,389.1
587.5
(1)
7,793.6
0.2
155.6
51.0
12,256.2
11,930.9
11,508.4
11,252.1
11,176.5
11,031.2
10,938.6
10,977.0
9,925.8
76.0
115.5
389.3
1,028.4
9,584.0
129.1
104.1
407.4
988.3
9,242.5
138.0
110.0
393.4
958.6
9,073.6
77.0
110.3
388.5
966.0
9,029.7
98.1
115.0
376.5
945.5
8,880.2
113.9
90.1
362.8
978.5
8,845.2
153.9
91.1
358.5
881.9
8,924.4
138.1
95.5
351.7
882.2
Total liabilities
Minority interest
11,535.0
0.6
720.6
11,212.9
0.6
717.4
10,842.5
0.6
665.3
10,615.4
0.6
636.1
10,564.8
0.6
611.1
10,425.5
0.6
605.1
10,330.6
0.6
607.4
10,391.9
0.6
584.5
Total liabilities and
shareholders’ equity
12,256.2
11,930.9
11,508.4
11,252.1
11,176.5
11,031.2
10,938.6
10,977.0
Liabilities and Shareholders’ Equity
Deposits from banks
Deposits from the government
Subordinated notes
Other liabilities
(1) Reclassified.
91
Appendix G – Consolidated Quarterly Statements of Profit and Loss for the Years 2007 and 2006 –
4th Quarter
Profit from financing operations, before
2007
3rd Quarter
2nd Quarter
NIS millions
1st Quarter
4th Quarter
2006
3rd Quarter
2nd Quarter
NIS millions
1st Quarter
92.5
13.2
92.3
2.1
97.8
2.5
92.1
1.5
85.7
15.2
80.1
9.4
87.4
3.6
84.8
1.9
79.3
90.2
95.3
90.6
70.5
70.7
83.8
82.9
Profits from investments in shares, net
Other income
46.7
2.4
48.4
2.5
49.1
50.9
53.3
48.8
49.9
47.1
51.7
50.7
61.9
63.4
60.0
56.9
53.1
100.3
53.2
57.5
21.0
32.2
20.2
29.0
115.1
112.6
104.3
100.9
97.9
143.6
96.1
99.4
13.3
28.5
44.3
38.5
22.5
(25.8)
39.4
34.2
8.9
6.5
17.0
16.9
16.4
(8.8)
15.3
15.5
22.0
39.4
27.3
-
21.6
-
6.1
-
(17.0)
14.5
24.1
-
18.7
-
61.4
27.3
21.6
6.1
(2.5)
24.1
18.7
Maintenance and depreciation of building and
equipment
Other expenses
Provision for taxes (tax savings)
on operating profit (loss)
Operating profit (loss) after taxes
After-tax profit from extraordinary items
4.4
-
Net profit (loss)
4.4
(1)
(1)
(1)
(1)
(1)
47.4
5.9
18.3
26.0
(1)
92
43.7
5.1
17.5
26.5
(1)
(1)
45.1
0.1
4.7
19.0
25.8
(1)
(1)
41.8
5.3
16.5
26.8
(1)
(1)
45.8
0.2
5.7
17.1
25.8
(1)
(1)
44.6
6.1
16.1
25.8
Appendix G (cont’d 1) – Consolidated Quarterly Statements of Profit and Loss for the Years 2006 and 2005 –
2007
4th Quarter
3rd Quarter
2006
2nd Quarter
1st Quarter
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
Earnings per ordinary share of NIS 0.0001
Operating profit (loss)
Profit from extraordinary items
0.03
-
0.17
0.31
0.22
-
0.17
-
0.04
-
(0.13)
0.11
0.19
-
0.15
-
Net profit (loss)
0.03
0.48
0.22
0.17
0.04
(0.02)
0.19
0.15
Earnings per preferred share of NIS 0.001
0.35
-
1.74
3.11
2.15
-
1.71
-
0.48
-
(1.34)
1.14
1.90
-
1.48
-
Net profit (loss)
0.35
4.85
2.15
1.71
0.48
(0.20)
1.90
1.48
Earnings per founder’s share of NIS 0.005
1.77
-
8.66
15.56
10.75
-
8.53
-
2.39
-
(6.72)
5.72
9.51
-
7.41
0.01
Net profit (loss)
1.77
24.22
10.75
8.53
2.39
(1.00)
9.51
7.42
(1)
(1)
(1)
(1)
(1) Reclassified.
93
Certification
I, Israel Trau, hereby certify as follows:
1.
I have reviewed the 2007 annual report (hereinafter – the report) of Bank Otsar Hahayal Ltd.
(hereinafter – the Bank).
2.
Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by the report.
3.
Based on my knowledge, the financial statements and other financial information included in the report
fairly present, in all material respects, the Bank’s financial position, results of operations, changes in the
shareholders’ equity and cash flows as of the dates and for the periods presented in the report.
4.
The Bank’s other certifying officers and I are responsible for establishing and maintaining controls and
procedures necessary for the required disclosure in the Bank’s report. Furthermore:
5.
A.
We have established such controls and procedures, or caused such controls and procedures to be
established under our supervision, with the intention of ensuring that material information
relating to the Bank, including its subsidiaries, is made known to us by others in the Bank and
in said subsidiaries, particularly during the period of preparing the report;
B.
We have evaluated the effectiveness of the Bank’s disclosure controls and procedures and we
have presented our conclusions regarding the effectiveness of the disclosure controls and
procedures as at the end of the period covered by the report based on such evaluation; and
C.
We have disclosed in the report any change in the internal control of the Bank over financial
reporting that occurred in the fourth quarter and that has materially affected, or is reasonably
likely to materially affect, the internal control of the Bank over financial reporting.
The Bank’s other certifying officers and I have disclosed to the Bank’s external auditors, Board of
Directors and the Audit Committee of the Board of Directors, based on our most recent evaluation of
the internal control over financial reporting, as follows:
A.
All significant deficiencies and material weaknesses relating to the establishment or operation
of internal control over financial reporting that are reasonably likely to adversely affect the
ability of the Bank to record, process, summarize and report financial information; and
B.
Any fraud, whether or not material, which involves Management or other employees who have
a significant role in the Bank’s internal control over financial reporting.
The aforementioned does not derogate from my responsibility or from the responsibility of any other person
according to the law.
Israel Trau – Managing Director
February 28, 2008
94
Certification
I, Ofer Salpeter, hereby certify as follows:
1.
I have reviewed the 2007 annual report (hereinafter – the report) of Bank Otsar Hahayal Ltd.
(hereinafter – the Bank).
2.
Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by the report.
3.
Based on my knowledge, the financial statements and other financial information included in the report
fairly present in all material respects, the Bank’s financial position, results of operations, changes in the
shareholders’ equity and cash flows as of the dates and for the periods presented in the report.
4.
The Bank’s other certifying officers and I are responsible for establishing and maintaining controls and
procedures necessary for the required disclosure in the Bank’s report. Furthermore:
5.
A.
We have established such controls and procedures, or caused such controls and procedures to be
established under our supervision, with the intention of ensuring that material information
relating to the Bank, including its subsidiaries, is made known to us by others in the Bank and
in said subsidiaries, particularly during the period of preparing the report;
B.
We have evaluated the effectiveness of the Bank’s disclosure controls and procedures and we
have presented our conclusions regarding the effectiveness of the disclosure controls and
procedures as at the end of the period covered by the report based on such evaluation; and
C.
We have disclosed in the report any change in the internal control of the Bank over financial
reporting that occurred in the fourth quarter and that has materially affected, or is reasonably
likely to materially affect, the internal control of the Bank over financial reporting.
The Bank’s other certifying officers and I have disclosed to the Bank’s external auditors, Board of
Directors and the Audit Committee of the Board of Directors, based on our most recent evaluation of
the internal control over financial reporting, as follows:
A.
All significant deficiencies and material weaknesses relating to the establishment or operation
of internal control over financial reporting that are reasonably likely to adversely affect the
ability of the Bank to record, process, summarize and report financial information; and
B.
Any fraud, whether or not material, which involves Management or other employees who have
a significant role in the Bank’s internal control over financial reporting.
The aforementioned does not derogate from my responsibility or from the responsibility of any other person
according to the law.
Ofer Salpeter – Chief Accountant
February 28, 2008
95
Report of the Board of Directors and Management on their Responsibility for the Annual Report
The annual report was prepared by Bank Management, which is responsible for its fairness. This report includes financial
statements prepared in accordance with generally accepted accounting principles and the reporting rules determined in
directives and guidelines of the Supervisor of Banks, additional information prepared in accordance therewith, and other
data.
The preparation of periodic financial statements also requires the making of estimates for purposes of determining certain
amounts and items in the statements. Such estimates were made by Management in accordance with its best judgment.
In order to ensure proper standards of financial reporting in the Bank, the Bank’s Management maintains a comprehensive
internal control system, the purpose of which is to ensure that all transactions are properly authorized, that the assets of the
Bank are protected and their integrity assured, and that the financial records form a reliable basis for preparing the financial
statements. The internal control system is, by its nature, limited in that it does not provide absolute certainty but rather
reasonable assurance as to its ability to reveal and prevent errors and irregularities. The principle of reasonable assurance is
based on the recognition that, in deciding on the amount of resources to invest in operating control systems, the benefit to
be derived from the operation of such systems must be taken into account.
The Bank’s Board of Directors, which is responsible for preparation and approval of the financial statements in accordance
with Section 92 Companies Law, sets the accounting policy and supervises its application and also determines the structure
of the internal control system and supervises its functioning. The Managing Director is responsible for the routine
management of Bank matters within the framework determined by the Board of Directors and in accordance with its
instructions. The Bank’s Management operates within the framework of the policies laid down by the Board of Directors.
The Board of Directors, through its committees, holds regular meetings with the Bank’s Management, as well as with its
internal auditor and the Bank’s external auditors, in order to review the scope and results of their work.
The Bank’s external auditors, Messrs. Somekh Chaikin, have audited the Bank’s annual financial statements in accordance with
generally accepted auditing standards, including standards that are determined in the Auditors Regulations (Manner of Auditor’s
Performance) – 1973 and certain auditing standards that have been published by the American Institute of Certified Public
Accountants, the application of which is required by the directives of the Supervisor of Banks. The purpose of the audit is to
enable the external auditors to express an opinion regarding the extent to which these statements reflect the financial
position of the Bank, the results of its operations, the changes in its shareholders’ equity and its cash flows, in accordance
with generally accepted accounting principles and with reporting rules prescribed in directives and guidelines issued by the
Supervisor of Banks. Pursuant to Section 170 of the Companies Law, the external auditors are responsible to the Bank and
its shareholders for that stated in their opinion with respect to the financial statements. The auditors’ report is appended to
the annual financial statements.
Furthermore, the information contained in the Directors’ Report and the Management Review (hereinafter – the ancillary
data) has been given to the external auditors for their review, so that they might indicate whether there is any material
inconsistency between the information contained in the financial statements and the ancillary data, or whether the ancillary
data contains information which is materially inconsistent with evidence or other information brought to the attention of the
external auditors in the course of their audit. No such indication has been received from the external auditors. The external
auditors did not perform audit procedures for this purpose, in addition to those which they were required to employ for the
purpose of auditing the financial statements.
_______________________________________________
Zeev Gutman – Chairman of the Board of Directors
_______________________________________________
Israel Trau –Managing Director
_______________________________________________
Ofer Salpeter – Chief Accountant
96
Financial Statements as at December 31, 2007
Contents
Page
Auditors’ Report
98
Consolidated Balance Sheets
99
Consolidated Statements of Profit and Loss
100
Statement of Changes in Shareholders’ Equity
101
Consolidated Statements of Cash Flows
102
Notes to the Financial Statements
103
97
Auditors’ Report to the Shareholders of
We have audited the accompanying consolidated balance sheets of Bank Otsar Hahayal Ltd.
(“the Bank”) and its subsidiaries, as at December 31, 2007 and 2006, and the related
consolidated statements of profit and loss, changes in shareholders’ equity and cash flows for
each of the three years, the last of which ended December 31, 2007. These financial statements
are the responsibility of the Bank’s Board of Directors and its Management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose assets constitute 0.7% of
the total consolidated assets as at December 31, 2007 and 2006, and whose income constitutes
0.7%, 0.8% and 0.7% of the total consolidated income for the years ended on December 31,
2007, 2006 and 2005, respectively. The financial statements of those subsidiaries were audited
by other auditors whose reports thereon have been furnished to us. Our opinion, insofar as it
relates to amounts emanating from the financial statements of such subsidiaries, is based solely
on the said reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards, including
standards prescribed by the Auditors Regulations (Manner of Auditor’s Performance) – 1973.
Such standards require that we plan and perform the audit to obtain reasonable assurance that the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by the Board of
Directors and by Management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and on the reports of the abovementioned other auditors, the
financial statements referred to above present fairly, in all material respects, the consolidated
financial position of the Bank and its subsidiaries as at December 31, 2007 and 2006, and the
results of operations, the changes in shareholders’ equity and the cash flows for each of the three
years, the last of which ended December 31, 2007, in conformity with generally accepted
accounting principles. Furthermore, these financial statements have, in our opinion, been
prepared in accordance with the directives and guidelines of the Supervisor of Banks.
As explained in Note 1A.B, the aforementioned financial statements are stated in reported
amounts, in accordance with the accounting standards of the Israel Accounting Standards Board.
Somekh Chaikin
Certified Public Accountants (Isr.)
February 28, 2008
98
Consolidated Balance Sheets
Note
Assets
Securities
Other assets
2
3
4
6
7
Total assets
Deposits from banks
Subordinated notes and debentures
Other liabilities
8
9
10
11
Total liabilities
Minority interest
12
Total liabilities and shareholders’ equity
As at December 31
2007
2006
Reported amounts
NIS millions
NIS millions
2,191.8
1,360.1
8,473.5
0.9
158.7
71.2
*2,143.4
924.2
*7,897.6
156.7
54.6
12,256.2
11,176.5
9,925.8
76.0
115.5
389.3
1,028.4
9,029.7
98.1
115.0
376.5
945.5
11,535.0
10,564.8
0.6
0.6
720.6
611.1
12,256.2
11,176.5
* Reclassified.
Zeev Gutman
Chairman of the Board of Directors
Israel Trau
Managing Director
The accompanying notes are an integral part of the financial statements.
99
Ofer Salpeter
Chief Accountant
Consolidated Statements of Profit and Loss
Note
19
4C
2007
2006
2005
Reported amounts
NIS millions
NIS millions
NIS millions
374.7
19.3
338.0
30.1
315.1
22.6
355.4
307.9
292.5
186.2
15.9
*177.3
0.3
21.8
*169.8
23.8
202.1
199.4
193.6
22
242.2
264.1
213.1
23
77.0
113.7
68.7
*104.2
64.7
*94.0
432.9
437.0
371.8
124.6
49.3
75.3
70.3
38.4
31.9
114.3
50.4
63.9
-
-
(0.1)
75.3
31.9
63.8
39.4
14.5
0.7
114.7
46.4
64.5
NIS
NIS
NIS
Net profit
0.59
0.31
0.90
0.25
0.11
0.36
0.52
0.01
0.53
Net profit
5.94
3.11
9.05
2.52
1.14
3.66
5.16
0.06
5.22
Earnings per founders’ share of NIS 0.005
Net profit
29.70
15.56
45.26
12.59
5.73
18.32
25.81
0.28
26.09
No. of shares
46,297,066
8,040,000
300
No. of shares
46,047,066
8,040,000
300
No. of shares
43,297,066
8,040,000
300
Profits from investments in shares
Other income
20
21
Maintenance and depreciation of buildings and
equipment
Other expenses
Equity of minority interest in the net, after-tax
operating profits of subsidiaries
24
25
Net profit for the year
Earnings per share
Weighted average number of shares used in computing earnings per share:
Number of ordinary shares of NIS 0.0001
Number of preferred shares of NIS 0.001
Number of founders’ shares of NIS 0.005
* Reclassified.
100
Statement of Changes in Shareholders’ Equity
Share
capital
NIS millions
Balance as at
January 1, 2005
Share
premium
NIS millions
Total share
capital and
premium
NIS millions
Adjustments
to present
available-forsale securities
at fair value
NIS millions
Dividend
proposed
after the
balance
sheet date
NIS millions
Retained
earnings
NIS millions
Total
NIS millions
19.1
8.7
27.8
2.5
-
550.3
580.6
Net profit for 2005
-
-
-
-
-
64.5
64.5
Dividend proposed after
the balance-sheet date
-
-
-
-
430.0
(430.0)
-
Adjustments to present
available-for-sale
-
-
-
(0.7)
-
-
(0.7)
Presentation adjustments
for securities sold
-
-
-
2.3
-
-
2.3
Related tax effect
-
-
-
(0.7)
-
-
(0.7)
Balance as at
January 1, 2006
19.1
8.7
27.8
3.4
430.0
184.8
646.0
Net profit for 2006
-
-
-
-
-
46.4
46.4
Issuance of shares
*-
350.0
350.0
-
-
-
350.0
Dividend paid
-
-
-
-
(430.0)
-
(430.0)
available-for-sale
-
-
-
(3.8)
-
-
(3.8)
for securities sold
-
-
-
1.6
-
-
1.6
Related tax effect
-
-
-
0.9
-
-
0.9
Balance as at
January 1, 2007
19.1
358.7
377.8
2.1
-
231.2
611.1
Net profit for 2007
-
-
-
-
-
114.7
114.7
available-for-sale
-
-
-
(12.6)
-
-
(12.6)
for securities sold
-
-
-
3.5
-
-
3.5
-
-
-
3.9
-
-
3.9
19.1
358.7
377.8
(3.1)
-
345.9
720.6
Related tax effect
Balance as at
December 31, 2007
*
Less than NIS 1,000.
101
Consolidated Statements of Cash Flows
2007
2006
Reported amounts
NIS millions
NIS millions
Cash flows generated by operating activities:
Adjustments to reconcile net profit to net cash flows generated
by operating activities:
Gain on sale and adjustment of available for-sale securities
Unrealized gain from adjustment to fair value of trading securities
Gain on sale of fixed assets, net
Depreciation of buildings and equipment
Deferred taxes, net
Change in excess of the provision for severance pay over fundings
Equity of minority interest in the net, after-tax operating
profits of subsidiaries
Net cash inflow generated by operating activities
Cash flows used for activities in assets:
Deposits with banks, net
Acquisition of available-for-sale securities
Proceeds from redemption of available-for-sale securities
Proceeds from sale of available-for-sale securities
Trading securities , net
Credit to the public, net
Credit to the government, net
Acquisition of buildings and equipment
Proceeds from sale of buildings and equipment
Other assets, net
Net cash outflow used for activities in assets
Cash flows generated by activities in liabilities and capital
Deposits from the public, net
Deposits from banks, net
Deposits from the government, net
Issuance of subordinated notes
Redemption of subordinated notes
Dividend paid
Issuance of share capital
Other liabilities, net
Net cash inflow generated by activities in liabilities and capital
Increase (decrease) in cash
Balance of cash at beginning of the year
Balance of cash at end of the year
Transactions in assets and liabilities not involving cash flows fixed assets acquired on credit from suppliers
* Reclassified.
102
2005
NIS millions
114.7
46.4
64.5
23.9
(53.8)
(7.5)
23.9
(3.3)
6.2
34.2
(22.3)
(9.6)
20.7
(1.5)
1.4
26.1
(1.6)
(1.8)
(1.0)
18.4
(1.2)
1.3
104.1
69.3
0.1
104.8
113.2
(968.1)
307.4
144.8
137.4
(599.8)
(0.9)
(22.0)
(9.4)
(897.4)
*14.0
(623.2)
274.2
91.5
(85.9)
*(288.0)
0.2
(16.1)
8.3
(625.0)
*3.6
(269.0)
24.8
67.0
(110.8)
*(449.7)
0.1
(29.4)
4.1
8.4
(750.9)
896.1
(22.1)
0.5
23.6
(10.8)
67.6
954.9
161.6
1,878.0
2,039.6
92.7
(40.9)
(3.8)
39.9
(18.6)
(430.0)
350.0
82.2
71.5
(484.2)
2,362.2
1,878.0
883.9
(14.0)
32.4
21.6
(0.9)
*76.6
999.6
353.5
2,008.7
2,362.2
3.9
4.5
-
Notes to the Financial Statements as at December 2007
Note 1 - General
A.
The Financial Statements
1)
The financial statements have been prepared in accordance with the directives and guidelines of
the Supervisor of Banks (regarding preparation of the financial statements of a banking
institution) and in accordance with Opinions of the Institute of Certified Public Accountants in
Israel.
2)
Since the scope of activity and assets of the subsidiaries is marginal and there is no significant
difference between the unconsolidated financial statements of the Bank and its consolidated
financial statements, the financial statements are presented to the public on a consolidated basis
only.
In Note 27, the Bank’s separate-company balance sheets and statements of income are
presented. In addition, that Note presents separate data for the Bank in nominal historical
values.
3)
The amounts in the financial statements are stated in millions of New Israeli Shekels, except
where expressly indicated otherwise.
B.
Means of Control of the Bank
Pursuant to an agreement signed on January 24, 2006, Bank Hapoalim Ltd. (“Bank Hapoalim”)
transferred, on August 17, 2006, its entire holdings in the Bank to First International Bank of Israel Ltd.
(“First International”).
As at the date of publishing the financial statements, the Bank’s controlling shareholder is First
International, which holds 68% of the rights to receive profits and 66% of the voting rights and the rights
to appoint directors.
Other shareholders in the Bank are Hever, The Association of IDF Servicemen and Veterans Ltd.
(“Hever”), with approximately 24% of the rights to share in profits, the voting rights and the rights to
appoint directors, The Workers' Compensation Fund of Israel Aircraft Industries Cooperative Association
Ltd., with approximately 8% of the rights to share in profits and approximately 10% of the voting rights
and the rights to appoint directors, and others, who hold approximately 0.01% of the rights to share in
profits.
According to the control permit that First International and Hever received from the Bank of Israel, First
International and Hever have been permitted, inter alia, to have joint control of the Bank. In addition,
First International has also been permitted to directly own means of control at a rate of up to 100% of
each type of means of control, so long as its holding at any time is not less than 67.99% of capital, 66% of
the voting rights and 66.67% of the rights to appoint directors of the Bank. Hever has been permitted to
directly hold up to 24% of the capital and voting rights and 33.3% of the rights to appoint directors of the
Bank. Cooperation between First International and Hever, under certain restricted conditions, has also
been permitted. The agreement also prescribes additional terms with regard to control, competition and
the services that the Bank will receive.
For further details see the section regarding principal contracts and commitments in Note 17C(7).
103
Note 1A - Significant Accounting Policies
A.
Definitions
The Bank
–
The Bank itself and its wholly owned subsidiary, whose business is the rental
of properties and which deals solely with the Bank.
Subsidiary
–
A company whose financial statements are fully consolidated with those of the
Bank.
Affiliated company –
A company which meets the conditions for the application of the equity
method, as prescribed in the pronouncements of the Institute of Certified
Public Accountants in Israel.
Investee company –
A subsidiary or affiliated company.
Related party
–
As defined in Opinion 29 of the Institute of Certified Public Accountants in
Israel.
Interested party
–
As stated in paragraph (1) of the definition of an “interested party” of a
company in Section 1 of the Securities Law – 1968.
Controlling share- –
holder
As defined in the Securities Regulations (Financial Statement Presentation of
Transactions between a Company and its Controlling Shareholder) – 1996.
CPI
–
The consumer price index published by the Israeli Central Bureau of Statistics.
Adjusted amount
–
A nominal historical amount that was adjusted for inflation in respect of the
index for December 2003, in accordance with Opinions 23 and 36 of the
Institute of Certified Public Accountants in Israel.
Reported amounts –
An adjusted amount as at the transition date (December 31, 2003), plus
amounts in nominal values that were added subsequent to the transition date,
less amounts deducted subsequent to the transition date.
Nominal financial –
reporting
Financial reporting based on reported amounts.
B.
1)
Financial statements in reported amounts
In October 2001, the Israel Accounting Standards Board issued Accounting Standard No. 12 –
“Discontinuance of Adjustment of Financial Statements”. According to this standard, and
according to Accounting Standard No. 17 that was issued in December 2002, adjustment of
financial statements for inflation was discontinued as of January 1, 2004. Until December 31,
2003, the Bank presented its financial statements adjusted for inflation, in accordance with
Opinion No. 36 of the Institute of Certified Public Accountants in Israel. The Bank is
implementing the directives of the standard, and the adjustment was therefore discontinued as of
January 1, 2004.
104
Note 1A - Significant Accounting Policies (cont’d)
2)
3)
4)
C.
In the past, the Bank based its financial statements on historical costs adjusted to the Consumer
Price Index. The said adjusted amounts, that were included in the financial statements as at
December 31, 2003, served as the starting point for nominal financial reporting commencing on
January 1, 2004. Additions made during the reporting period were included at their nominal
amounts. Therefore, the financial statements for dates and reporting periods subsequent to
December 31, 2003 are stated in reported amounts in accordance with the accounting standards of
the Israel Accounting Standards Board.
The amounts of non-monetary assets do not necessarily represent their realizable or economic
value, rather only the reported amounts of those assets.
The term “cost” as used in the financial statements refers to cost in reported amounts.
Reporting principles
1)
2)
3)
Balance sheets:
a)
Monetary items are presented in the balance sheet at their nominal historical values as
at the balance-sheet date.
b)
Non-monetary items (e.g., buildings and equipment, investments presented at cost, and
capital items) are presented in reported amounts.
c)
The equity value of the investments in investee companies and the minority interest in
subsidiaries are determined based on the reported financial statements of those
companies.
Statement of profit and loss:
a)
Income and expenses deriving from non-monetary items (e.g., depreciation and
amortization and capital gains or losses) or from certain provisions included in the
balance sheet (e.g., vacation, deferred taxes, and liabilities for employee severance pay)
are derived from the change between the opening balance in reported amounts and the
closing balance in reported amounts.
b)
The share of the Bank in the results of operations of investee companies and the rights
of external shareholders in the results of subsidiaries, are determined on the basis of the
reported financial statements of those companies.
c)
The rest of the statement of profit and loss items are presented at their nominal values.
Statement of changes in shareholders’ equity:
A dividend declared or actually paid during the year of the report is presented in nominal
amounts.
4)
Data of the Bank in nominal historical values are presented in Note 27.
105
D.
Principles of consolidation and application of the equity method
1)
Principles of consolidation
The consolidated financial statements include the financial statements of the Bank, as well as
the financial statements of companies controlled by the Bank. The financial statements of
provident funds managed by the Bank were not consolidated, since the Bank has no share in
their assets and income.
Note 5A(1) provides a list of companies, the financial statements of which were included in the
consolidated financial statements, holding rates in shares bestowing voting rights and holding
rates in shares bestowing a share in profits.
The financial statements of the Bank include the assets, liabilities and operating results of a
property company that is wholly-owned by the Bank, whose only activity is the holding of fixed
assets and the leasing thereof to the Bank (see Note 5A(2)).
For consolidation purposes, the amounts included in the financial statements of companies that
were consolidated are taken into account after making adjustments deriving from
implementation of uniform accounting principles followed by the Group.
2)
Principles of application of the equity method
Investments in investee companies are presented by the equity method, on the basis of their
latest audited financial statements.
E.
Interest, linkage and foreign currency
1)
Assets (other than securities) and liabilities, which are denominated in or are linked to foreign
currency, or which are linked to the CPI, are stated as follows:
-
Balances linked to the CPI – according to their contractual linkage terms.
-
Balances denominated in or linked to foreign currency – according to the representative
rate of exchange published by the Bank of Israel for the balance-sheet date or some
other appropriate date, in accordance with the terms of the contract.
-
Balances with a linkage choice – according to whichever calculation is higher, (except
for credit, which is included according to the preferred calculation for the borrower) in
accordance with the terms of the contract. With regard to choice tracks which have the
characteristics of embedded options (as defined in the directives of the Supervisor of
Banks concerning derivative instruments and hedging activities), see Note 17
2)
Income and expenses in foreign currency are included in the statement of profit and loss based
on representative and current exchange rates on the transaction dates, plus exchange differences
on the assets and liabilities from which the said income and expenses are derived.
3)
Interest and linkage accrued in respect of assets and liabilities are included in the balance sheet
together with the items to which they relate.
106
4)
Data on the Consumer Price Index (“the CPI”) and the representative rates of exchange, along
with the rates of change therein are presented below:
2007
Consumer Price Index
(on the average basis
of 2002 in points):
November
December
Rate of exchange in NIS
of the:
US dollar
Euro
F.
December 31
2006
2005
2007
%
Rate of change in
2006
%
2005
%
101.9
102.5
99.1
99.1
99.4
99.2
2.8
3.4
(0.3)
(0.1)
2.7
2.4
3.846
5.659
4.225
5.564
4.603
5.446
(9.0)
1.7
(8.2)
2.2
6.8
(7.3)
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires the Bank’s Management to make estimates and assumptions regarding transactions or matters,
the final effect of which on the financial statements cannot be accurately determined at the time of their
preparation. Even though the estimates and assumptions are based on Management’s best judgment, the
final effect of such transactions or matters may be different from the estimates and assumptions made
regarding them.
G.
Securities
1)
In accordance with directives of the Supervisor of Banks, securities are classified into three
groups with measurement rules being prescribed for each group, as follows:
a)
Debentures held to maturity
Stated in the balance sheet at their adjusted cost (adjusted cost – the par value plus
accrued interest and linkage or exchange rate differences, and less a proportionate part
of the discount or with the addition of a proportionate part of the premium). Interest,
linkage or exchange rate differences, and the amortization of the premium or discount,
are recognized in the statement of profit and loss.
b)
Available-for-sale securities
Stated in the balance sheet at their fair value, except for non-marketable shares in
respect of which the fair value is not readily determinable, in which case they are stated
at cost. Unrealized gains or losses from adjustments to fair value, net of the related tax
effect, are carried directly to a “capital surplus from adjustments to present availablefor-sale securities at fair value”, within the framework of shareholders’ equity, and are
transferred to the statement of profit and loss upon sale or redemption. Impairments in
the value of available-for-sale securities which, in Management’s opinion, are not of a
temporary nature are charged in full to the statement of profit and loss.
107
c)
Trading securities
Stated in the balance sheet at their fair value. Gains or losses arising from the
adjustment to fair value are carried directly in the statement of profit and loss.
2)
From time to time, the Bank examines whether there has been an impairment in the value of its
investments in other companies, shares and debentures. This examination is performed when
there are signs that may indicate that there has been an impairment in value of investments,
including a drop in their prices on the stock exchange, business difficulties of the investee
and/or the industry in which the investee operates, and additional parameters. Write-downs in
respect of the impairment in value of these investments, which, in accordance with the opinion
of Management, is based on an examination of the overall relevant aspects and the significance
of each, and which is not of a temporary nature, are charged to the statement of profit and loss.
Once a provision for impairment has been made, no subsequent appreciation in the value of the
investment may be recognized until such time as it is realized.
H.
Credit and deposits earmarked for the provision of credit
1)
Activities based on the extent of collection
In accordance with directives of the Supervisor of Banks, the amounts of the earmarked
deposits, whose repayment to the depositor is contingent on the extent of collection of the credit
granted from such deposits, were offset and are, therefore, not expressed in the balance sheet.
In addition, pursuant to these directives, the income deriving from activities based on the extent
of collection, as stated, was presented in the “operating commissions” category.
2)
Earmarked credit and deposits for which the Bank is responsible
The scope of the activities in earmarked credit and deposits for which the Bank is responsible is
not material and, therefore, they are not separately disclosed in the financial statements.
108
I.
1)
Specific provision for doubtful debts
2)
a)
The specific provision has been made in respect of those debts, the collection of which
is in doubt. The amounts of the provision adequately reflect, according to the
evaluation of the Bank’s Management, the loss inherent in the loan portfolio, including
debts in off-balance-sheet items. Among the considerations that Management takes
into account in determining the adequacy of the provisions are the risks involved in the
financial strength of the borrower, the scope and quality of the information available to
the Bank regarding the borrower, its compliance with its undertakings, the value of the
collateral held by the Bank, its repayment ability, and sources of anticipated income.
Interest income from a debt determined as being doubtful is not recorded, with effect
from the beginning of the quarter in which the debt was determined to be doubtful.
Once interest is collected, the interest income is recorded in the “other financing
income” line item.
b)
A specific provision with respect to residential housing loans in arrears is made, based
on the extent of the arrears and in accordance with the provision rates set by the
Supervisor of Banks.
Write-off of bad debts
The write-off of bad debts is effected only after it has become clear that they are not collectible
(each debt being evaluated on its own merits), by legal procedures and by other legal means
available to the Bank.
3)
“General” and “supplementary” provisions pursuant to directives of the Supervisor of Banks.
The supplementary provision for doubtful debts is based on a review of the quality of the
customer liability portfolio, according to the risk characteristics defined in the directives of the
Supervisor of Banks. The supplementary provision for doubtful debts is calculated based on the
rates set for the various characteristics.
The general provision is in the amount, in real terms (adjustment for the CPI was discontinued
from January 1, 2005), as accumulated and that constituted up to 1% of the debts that were
under responsibility of the Bank as at December 31, 1991.
The rate of the supplementary provision included in the statement of profit and loss for 2007
represented a percentage of zero of the total balance-sheet loans to the public, while
representing 0.02% as at December 31, 2006.
As at the balance-sheet date the accumulated rate of the general and supplementary provisions
constituted 0.19% of the total balance-sheet credit risk (December 31, 2006 – 0.21%).
J.
Sale of debts
The sale of monetary assets is recognized as a sale when the control of the asset passes in its entirety to
an independent third party. See also T(3) below with regard to the first time adoption of the Supervisor
of Banks’ circular letter, “Transfers and Service of Financial Assets and the Settlement of Liabilities”.
109
K.
1)
Fixed assets are presented at cost less accumulated depreciation and less the write down to the
estimated market value in cases where the buildings or equipment are intended for sale.
Improvements and enhancements are attributed to the cost of the assets, while expenses on
maintenance and repairs are attributed to the statement of profit and loss as incurred.
Depreciation is calculated by the straight-line method on the basis of the estimated useful lives
of the assets. The annual depreciation rates are presented below:
2)
3)
Buildings
Machines and equipment
Vehicles
Computers
Software
Office furniture and equipment
- 4%
- 5%-15%
- 15%
- 33%
- 20%
- 6%-10%
Leasehold improvements are depreciated over the period of the lease, which does not exceed
the economic life of the asset.
Costs of internally developed computer software for the Bank’s own use are accounted for in
accordance with the Israel Accounting Standard Board’s Standard No. 30, “Intangible Assets”.
The cost of developing software for the Bank’s own use are capitalized once the preliminary
programming is finalized and it is anticipated that the project will be completed and that the
software will be used for the purposes for which it was intended. Capitalization ceases at the
time that the software is substantively completed and is ready for its intended use. The
capitalized development costs are depreciated over a period of five years commencing from
when the software is first used. See also T(2) below with regard to the first-time
implementation of Israel Accounting Standard No. 30, “Intangible Assets”.
L.
Impairment of assets
The Bank applies Israel Accounting Standard No. 15 – Impairment of Assets (“the Standard”).
The Standard provides procedures which the Bank must apply in order to ensure that the assets (to
which the Standard applies) in its consolidated balance sheet are not presented at an amount which is in
excess of their recoverable value, which is the higher of the net selling price and the value in use (the
present value of the estimated future cash flows expected to be derived from use and disposal of the
asset). The Standard applies to all assets in the consolidated balance sheet other than tax assets and
monetary assets.
The Standard also provides rules for presentation and disclosure with respect to assets whose value has
been impaired. When the value of an asset in the consolidated balance sheet is higher than its
recoverable value, the Bank recognizes an impairment loss in the amount of the difference between the
book value of the asset and its recoverable value. The loss thus recognized will be cancelled only in the
event of changes occurring in the estimates, used to determine the recoverable value of the asset, since
the date on which the most recent impairment loss was recognized.
110
M.
Derivative financial instruments and hedging
Within the framework of its assets and liabilities management policy, the Bank carries out, inter alia,
transactions in derivative financial instruments for the purpose of reducing its exposure to financial
risks. The Bank’s activities in derivative financial instruments are performed as a broker, as a trader or
as part of the management of the Bank’s assets and liabilities.
The Bank recognizes all financial instruments, including certain financial instruments that are
embedded in other contracts, as assets and liabilities in the balance sheet and measures them at their fair
value. The change in the fair value of the derivative instrument is carried to the statement of profit and
loss or is included in shareholders’ equity as another component of comprehensive income, according to
the manner of the instrument’s intended use.
The Bank is exposed to changes in the fair value of available-for-sale debentures. As part of the Bank’s
strategy for managing the level of exposure to fair value risk, the Bank has entered into several interest
rate swap transactions that are designated and qualify as fair value hedging transactions. The fair value
hedge is highly effective when the gain or loss from the hedging instrument is identical to the gain or
loss from the hedged instrument in respect of the hedged risk.
The change in the fair value of debentures that are not hedged is carried to the statement of profit and
loss or to capital surplus, according to the classification of the debenture and as stated in G above of the
accounting policies.
The Bank documents the hedging relationships between the specifically defined hedging instrument and
the hedged item, as well as its strategic purpose, and it evaluates the effectiveness of the hedging
relationship, both at the beginning of the hedge and on an ongoing basis in accordance with the risk
management policy.
Other derivatives, which are not intended for hedging purposes, are recorded in the balance sheet at fair
value, with changes in their fair value being recorded in the statement of profit and loss on a current
basis.
The Bank has contracts which do not in themselves constitute a derivative instrument, but which contain
an embedded derivative. In cases in which it was determined that the embedded derivative has
characteristics that are not clearly and closely connected to the economic characteristics of the host
contract, and when the derivative meets the conditions qualifying it as a derivative instrument, the
embedded derivative is separated from the host contract and is treated as a separate derivative. An
embedded derivative that was separated is stated in the balance sheet together with the host contract.
The value of embedded instruments is measured according to their fair value. The change in the fair
value of an embedded instrument is recorded in the statement of profit and loss.
111
N.
Recognition of revenue and expenses
1)
Revenue and expenses are included on an accrual basis, other than financing income deriving
from problematic debts that were classified as non-income-bearing debts.
2)
As to revenue and expenses of off-balance-sheet financial instruments – see L. above.
3)
Revenue from commissions on early repayment of loans is credited to income in equal
installments over three years, except for the portion attributable to the financial capital, which is
recognized upon receipt.
4)
Securities – see G above.
5)
Provision for doubtful debts – see I above.
6)
Advertising expenses are charged to the statement of profit and loss as incurred.
O.
Income tax
1)
The Bank and its subsidiaries create deferred taxes in respect of temporary differences.
Temporary differences are differences between the value of assets and liabilities for tax
purposes and their book value. Accordingly, deferred tax balances (assets and/or liabilities) are
calculated according to the tax rates expected to be in force when the deferred tax liability is
utilized, or when the deferred tax asset is realized, on the basis of tax rates and tax laws, which
have been enacted or substantively enacted through balance-sheet date. Realization of deferred
tax assets depends on the existence of adequate taxable income in the future. In Management’s
opinion, such deferred tax assets will be realized in the future.
The main factors, in respect of which deferred taxes have not been created, are as follows:
-
In accordance with directives of the Supervisor of Banks, no deferred tax asset has been
recognized in respect of the general and supplementary provisions for doubtful debts
that were made as directed by the Supervisor (see H above).
-
Investments in investee companies, since it is the intention of the Bank to hold such
investments and not to sell them.
2)
Profits of certain investee companies may become subject to additional taxes if they are
distributed by those companies as dividends. When it is not likely that such profits will be
distributed as dividends in the foreseeable future, no provision for taxes is recorded.
3)
The provision for income tax includes VAT on profits levied on a “financial institution”, as
defined in the Value Added Tax Law. The VAT levied on the payroll of financial institutions is
included within the line item, “salaries and related expenses”.
4)
With effect from December 31, 2004, the Bank applies Israel Accounting Standard No. 19 –
Taxes on Income (“the Standard”). The adoption of the Standard was implemented by means of
a cumulative effect of an accounting change.
112
P.
Employee rights
The Bank’s liability for payment of severance benefits to its employees is covered by regular monthly
deposits in provident and severance pay funds. With respect to liabilities not covered as stated, a
provision is included in the financial statements. See also Note 14.
Q.
Contingent liabilities
The financial statements include adequate provisions for claims, in accordance with Management’s
assessments and based on the evaluations of its legal advisors.
The disclosure format is based on the directives of the Supervisor of Banks in such a manner that the
claims filed against the Bank Group are classified into three risk categories:
1)
2)
3)
Probable risk – the probability of a loss from the claim is more than 70%.
Reasonably possible risk – the probability of a loss from the claim is between 20%-70%.
Remote risk – the probability of a loss from the claim is less than or equals 20%.
In addition, there may be rare cases where, in Management’s opinion, based on its legal advisors, the
probability of realization of the exposure to risk cannot be estimated in respect of a claim, and this being
in the four financial statements published following filing of a claim accompanied by a petition to
certify it as a class action.
The financial statements include suitable provisions for claims that, in the opinion of the Bank’s
Management, will not be rejected or withdrawn.
The Bank has disclosed the material legal proceedings being brought against it.
The Bank has determined that proceedings are material if the claim to which they relate exceeds NIS 4
million.
R.
Statement of cash flows
1)
Cash flows from activities in assets and from activities in liabilities are included at their net
amounts, except for the movement in non-monetary items, securities which are not for trading
purposes, subordinated notes and debentures.
2)
Cash includes deposits with the Bank of Israel and commercial banks, for original periods not
exceeding three months.
S.
Earnings per share
The Bank implements Accounting Standard No. 21, “Earnings per Share” (“the Standard”), of the Israel
Accounting Standards Board, with the required adjustments as prescribed for the purpose of
implementing the Public Reporting Directives of the Supervisor of Banks. In accordance with the
provisions of the Standard, the Bank calculates basic earnings per share for each class of share with
respect to profit or loss, and basic earnings per share with respect to profit or loss from continuing
operations, attributable to the shareholders of each class. Basic earnings per share are calculated by
dividing the profit or loss attributable to the shareholders of each class with the weighted average
number of ordinary shares outstanding during the period. The Bank’s share in the profits of investee
companies was calculated according to its portion in the earnings per share of such investee companies
multiplied by the number of shares held by the Bank.
113
T.
Disclosure regarding first-time implementation of new accounting standards
1)
Accounting Standard No. 27 – Property, Plant and Equipment
As from January 1, 2007, the Bank implements Accounting Standard No. 27, “Property, Plant
and Equipment” (“Standard 27”) of the Israel Accounting Standards Board. Standard 27
prescribes rules for the presentation, measurement and derecognition of items of property, plant
and equipment and for the disclosure required in respect thereto.
Standard 27 provides that an item of property, plant and equipment that qualifies for recognition
as an asset shall be measured at cost upon its initial recognition. Standard 27 states that the cost
of an item of property, plant and equipment includes its cost of acquisition (including import
taxes and purchase taxes that are not refunded, net of trade discounts), costs that can be directly
attributed to bringing the asset to the location and condition necessary for it to begin operating
in the manner intended by management, and an initial estimate of the present value of costs
required in order to dismantle and remove the item and restore the site on which it was located
(when the entity has an obligation to do so). The cost of an item of property, plant and
equipment is equivalent to the cash price on the date of recognition. Accordingly, if the
payment for the asset is deferred beyond ordinary terms of credit, the difference between the
amount equivalent to the cash price and the total amount paid is recognized as an interest
expense over the period of the credit.
After initial recognition, a bank that applies the rules of Standard 27 with the adjustments
prescribed in the directives of the Supervisor of Banks may only measure the items of property,
plant and equipment according to the cost method. According to the cost method, an item of
property, plant and equipment is to be stated at cost net of accumulated depreciation and net of
accumulated impairment losses.
Standard 27 provides that in order to depreciate the property, plant and equipment, the amount
that was initially recognized in respect of the item of property, plant and equipment shall be
allocated between its significant components and each component shall be depreciated
separately, although combination of different components of the item of property, plant and
equipment that have the same useful life and method of depreciation is permitted. According to
the provisions of Standard 27, the residual value, useful life and depreciation method of the
asset are to be examined at least once every fiscal year.
In August 2007, the Supervisor of Banks published a guideline, which prescribed specific
provisions as to how Standard 27 is to be implemented. Pursuant to the Supervisor’s guideline,
even though Standard 27 does not apply to items of software, under the guideline of the
Supervisor of Banks, the costs of developing and/or acquiring software shall be presented
within the framework of “buildings and equipment” and not within the framework of “other
assets”. Moreover, in cases where Standard 27 refers to other standards and/or uses the
definitions of terms that have not yet been included in the Public Reporting Directives, the rules
and definitions prescribed by the Public Reporting Directives shall continue to apply.
Furthermore, in situations where the wording of the Standard differs from International
Accounting Standard No. 16, “Property, Plant and Equipment”, the provisions as they appear in
the International Accounting Standard shall apply.
Other than the treatment whereby, upon the initial recognition of an item of property, plant and
equipment, an entity is to include an estimate of the costs it will incur in respect of a liability to
dismantle and remove the item and to restore the site on which it was located, Standard 27 will
be applied on a retroactive basis.
The first-time implementation of Standard 27 has not had a material effect on the operating
results of the Bank or on its financial position.
114
2)
Accounting Standard No. 30 – Intangible Assets
As from January 1, 2007 the Bank implements Accounting Standard No. 30, “Intangible
Assets” (“the Standard”) of the Israel Accounting Standards Board, with the required
adjustments as prescribed in a circular letter of the Supervisor of Banks. The Standard explains
the accounting treatment of intangible assets and defines how to measure the book value of
these assets, as well as the disclosures that are required.
The Standard discusses the different cases in which the entity may recognize an intangible
asset, including the following: upon a separate acquisition, upon an acquisition as part of a
business combination, upon an acquisition through a government grant, upon an exchange of
assets and upon the creation of an internal intangible asset. As regards the last, the Standard
provides that an intangible asset deriving from research shall not be recognized as an asset,
whereas an intangible asset deriving from development shall be recognized as an asset only if
the entity can prove compliance with a number of cumulative conditions, as follows: technical
feasibility of completing it so that it will be available for use or sale, the entity intends to
complete it, to use or to sell it and is able to do so, it has been proven how the entity anticipates
to generate future economic benefits, that there exist technical, financial and other resources for
completion of the development and the use or sale of the intangible asset, and the entity is able
to reliably measure the outflow that can be attributed to the intangible asset during its
development.
In August 2007, the Supervisor of Banks published a guideline, which prescribed specific
provisions as to how the Standard is to be implemented. In particular, pursuant to the
provisions, banks may only measure intangible assets at cost net of accumulated depreciation
and less impairment losses. Banks shall not apply the rules prescribed in the Standard with
regard to the recognition of intangible assets acquired in a business combination, this being the
case until such time as International Financial Reporting Standard No. 3, “Business
Combinations”, is adopted by the banks in Israel, or until US Standard FAS 141, “Business
Combinations” is voluntarily adopted in full, with the approval of the Supervisor of Banks.
Moreover, despite the contents of the Standard, software costs that have been recognized as an
intangible asset shall be presented in the bank’s balance sheet as part of the line item,
“Buildings and equipment”.
Moreover, in cases where the Standard refers to other standards and/or uses the definitions of
terms that have not yet been included in the Public Reporting Directives, the rules and
definitions prescribed by the Public Reporting Directives shall continue to apply. Furthermore,
in situations where the wording of the Standard differs from International Accounting Standard
No. 38, “Intangible Assets”, the provisions as they appear in the International Accounting
Standard shall apply.
The Standard will be applied for the first time on a retroactive basis.
The implementation of the new Standard does not have a material effect on the operating results
of the Bank or on its financial position.
115
3)
Circular letter of the Supervisor of Banks regarding “Transfers and servicing of financial
assets and the settlement of liabilities”
With effect from January 1, 2007, the Bank implements the circular letter of the Supervisor of
Banks, which sets forth an amendment to the Public Reporting Directives regarding “Transfers
and servicing of financial assets and the settlement of liabilities”. The provisions set out in the
circular letter adopt the measurement and disclosure principles contained in US Standard
FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, distinguishing between transfers of financial assets recognized as a sale and other
transfers. In view of this, a principle was adopted whereby a financial asset that has been
transferred shall be presented in the balance sheet of the party controlling it, whether he is the
transferor or the transferee of the asset. For this purpose, the provisions set out control tests
relating to repurchase transactions, the lending of securities, the securitization of loans, and the
sale of and participation in loans. The amendments to the Public Reporting Directives apply to
all banking corporations with regard to all lending of securities transactions, the repurchase of
securities, the securitization of financial assets, other transfers of financial assets, the provision
of financial asset servicing and the extinguishment of liabilities, which take place subsequent to
December 31, 2006 and which are performed in accordance with the Proper Conduct rules,
including the management of margin deposits as prescribed with regard to this topic in the
United States and as published in the draft of the Proper Conduct of Banking Business Directive
of the Supervisor of Banks. Transactions that do not comply with the aforementioned Proper
Conduct rules will be accounted for in accordance with the Public Reporting Directives as were
effective prior to the adoption of the rules of FAS 140.
U.
Disclosure of effect of new accounting standards in the period prior to their
implementation
1)
Accounting Standard No. 23 - The Accounting Treatment of Transactions between an
Entity and its Controlling Shareholder
In December 2006, the Israel Accounting Standards Board published Accounting Standard
No. 23, “The Accounting Treatment of Transactions between an Entity and its Controlling
Shareholder” (“the Standard”). The Standard replaces the Securities Regulations (Financial
Statement Presentation of Transactions between a Company and its Controlling Shareholder) –
1996, as adopted in the Public Reporting Directives of the Supervisor of Banks. The Standard
provides that assets and liabilities included in a transaction between the entity and its controlling
shareholder shall be measured on the date of the transaction at fair value and that the difference
between the fair value and the consideration from the transaction shall be included in
shareholders’ equity. A debit difference essentially constitutes a dividend and accordingly
reduces the retained earnings. A credit difference essentially constitutes an investment of the
shareholder and shall therefore be presented under a separate item of shareholders’ equity called
“capital reserve from transaction between an entity and its controlling shareholder”.
The Standard discusses three issues relating to transactions between an entity and its controlling
shareholder, as follows: the transfer of an asset to the entity by the controlling shareholder, or
conversely, transfer of an asset from the entity to the controlling shareholder; the controlling
shareholder assuming upon itself a liability of the entity to a third party, wholly or partly,
indemnification of the entity by the controlling shareholder in respect of an expense, and the
controlling shareholder waiving the entity’s debt to it, wholly or partly; and loans that were
granted to the controlling shareholder or loans that were received from the controlling
shareholder. The Standard also prescribes the disclosure that is to be made in the financial
statements regarding transactions between the entity and its controlling shareholder during the
period.
116
The Standard shall apply to transactions between an entity and its controlling shareholder that
are executed after January 1, 2007 and to a loan that was granted to a controlling shareholder or
that was received from it before the date this Standard came into effect, as from the date of it
coming into effect.
The Supervisor of Banks intends that the Standard shall apply to banking corporations and
credit card companies, with effect from January 1, 2008 and thereafter, with the necessary
adjustments.
At the date of publication of the financial statements, the Supervisor of Banks has yet to publish
directives pertaining to the manner of adoption of the Standard by banking corporations.
2)
Accounting Standard No. 29 – Adoption of International Financial Reporting Standards
(IFRS)
In July 2006, the Israel Accounting Standards Board published Accounting Standard No. 29,
“Adoption of International Financial Reporting Standards (“IFRS”)” (“the Standard”). The
Standard provides that entities which are subject to the Securities Law – 1968, which are
required to report according to the regulations of this law, are to prepare their financial
statements for periods beginning as from January 1, 2008 according to IFRS. The
aforementioned does not apply to banking corporations whose financial statements are drawn up
in accordance with the directives and guidelines of the Supervisor of Banks. Regarding the
manner in which the Standard is to be implemented by banking corporations, the Supervisor of
Banks informed the banking corporations that:
It is his intention to issue, on a current basis, directives for the implementation of Israeli
standards issued by the Israel Accounting Standards Board based on IFRS, which do not relate
to the core banking business.
He will publish, in the second half of 2009, his decision as to the date of implementation of
IFRS applying to the core banking business. This, while taking into consideration the results of
the adoption process of these standards in Israel on the one hand, and the progress of the
convergence process between IFRS and US standards on the other hand.
Accordingly, as regards the core banking business, financial statements of a banking
corporation prepared in accordance with the directives and guidelines of the Supervisor of
Banks shall continue to be prepared on the basis of US standards determined in the Public
Reporting Directives.
3)
Measurement and disclosure of impaired debts, credit risk and allowance for credit losses
On December 31, 2007, the Supervisor of Banks issued a circular letter on the subject
“Measurement and Disclosure of Impaired Debts, Credit Risk and Allowance for Credit Losses”
(“the Circular Letter” or “the Directive”). This Circular Letter is based, inter alia, on US
financial accounting standards and on relevant regulatory provisions of the US banking
oversight institutions and of the US Securities Exchange Commission. The guiding principles
at the core of the Circular Letter constitute a major departure from the current provisions
regarding the classification of problematic debts and the measurement of provisions for credit
losses in respect of such debts.
117
Pursuant to the Circular Letter, the bank is required to create an allowance for credit losses at an
appropriate level in order to cover estimated credit losses in relation to its credit portfolio. In
addition to the aforesaid, the bank is also required, pursuant to the Circular Letter, to review and
create, as a separate liability account, an allowance at an appropriate level in order to cover
estimated credit losses in relation to off-balance-sheet credit instruments, such as commitments
to provide credit and guarantees. The allowance required to cover the estimated credit losses in
relation to the credit portfolio will be made using one of the two following tracks: the
“individual allowance” track or the “group allowance” track. In this connection, an “individual
allowance for credit losses” will be implemented for every debt whose contractual balance
(without deducting accounting write-offs that are not subject to an accounting waiver, interest
that has not been recognized, allowances for credit losses and collateral) is NIS 1 million or
more and also with regard to other debts that are identified by the bank as requiring individual
assessment and in respect of which the impairment allowance is not included in the “specific
allowance for credit losses assessed on a group basis”. The individual allowance for credit
losses will be made based on the anticipated future cash flows discounted at the effective
interest rate of the debt, or, when the debt is conditioned on collateral or the bank determines
that asset seizure is expected, according to the fair value of the collateral pledged to secure that
credit. A “specific allowance for credit losses assessed on a group basis” will be implemented
for impairment allowances on large groups of small, homogeneous debts (such as: credit card
debts, housing loans, and consumer debts settled in installments) and also in respect of debts
that have been classified as being “individual” and are found not to be impaired. The specific
allowance for credit losses in respect of debts assessed on a group basis, except for housing
loans with regard to which a minimal specific allowance has been calculated according to the
extent to which they are overdue, will be calculated in accordance with the rules prescribed in
US Accounting Standard FAS 5, “Accounting for Contingencies” (“FAS 5”), based on an up-todate estimate of the percentage of past losses for each of the homogeneous groups of debts with
similar risk characteristics. The provision that is required in relation to off-balance-sheet credit
instruments will be made in accordance with rules prescribed in US Accounting Standard
FAS 5.
In addition to the aforesaid, the Directive sets out various definitions and classifications of
balance-sheet and off-balance-sheet credit risk, rules for the recognition of interest income from
impaired debts and also rules for accounting write-offs of problematic debts. Inter alia, the
Circular Letter prescribes that accounting write-offs be made for every debt that is assessed, on
an individual basis, as being uncollectible and having a low value, to the extent that there would
be no justification for leaving it as an asset, or a debt regarding which the bank is conducting
long-tem collection measures. With regard to the debts that are assessed on a group basis,
write-off rules are prescribed on the basis of their overdue period, with the whole matter
depending on the debts being secured by a residence, except for housing loans with regard to
which a minimal allowance is made according to the extent to which they are overdue, debts
that are secured by collateral that is not a residence, debts that are not secured, debts of
insolvent borrowers and debts resulting from fraud.
118
This Directive will be implemented in the financial statements of banking corporations and
credit card companies with effect from January 1, 2010 (“the first-time implementation date”)
and thereafter. The Directive will not be implemented retroactively in the financial statements
for prior periods. Alternatively, on the first-time implementation date, banking corporations and
credit card companies will be required, inter alia:
To make an accounting write-off of every debt that, at that date, meets the conditions for
accounting write-offs;
To classify according to various categories (“under supervision”, “subordinated” or
“impaired”) every debt that meets the conditions for the aforesaid categories;
To cancel all interest income that has accrued but has not been paid in respect of every debt
that, at that date, meets the relevant conditions; and
To examine the need to make an adjustment to the balance of current taxes and deferred
taxes receivable and payable. Adjustments of the balance of the allowance for credit losses
in respect of credit to the public and in respect of off-balance-sheet credit instruments at
January 1, 2010, in order to align these with the requirements of the Directive, including
the requirements for the determination of the allowance and the documentation
requirements, will be carried directly to the retained earnings item in shareholders’ equity.
In this context, it is clarified that – despite the definition pursuant to which a problematic
debt that is restructured is deemed to be an impaired debt – a banking corporation and
credit card company are not required to include under the “impaired” classification a debt
that was restructured prior to January 1, 2010, so long as the debt is not impaired in relation
to the terms specified in the restructuring agreement.
Implementation of the Directive is expected to impact on the future relationship between the
Bank and its customers, as a result of the requirement to implement principles that are
appropriate to the business environment in the United States – to the business environment that
exists in Israel. The stringency of the documentation requirements and the requirements to
assess and make allowances for estimated credit losses in respect of debts that are classified
according to categories that differ from those currently prescribed in the Public Reporting
Directives and in Proper Conduct of Banking Business Directive No. 314, regarding the
treatment of problematic debts, and in respect of the off-balance-sheet credit exposures, could
have a detrimental effect on the reported results of the Bank and on its financial position. An
assessment of the effect on the balance of credit on the group track cannot be carried out
without first building an IT system to determine the leading parameters for constructing
homogeneous groups with similar risk characteristics.
Implementing the requirements of the Directive necessitates upgrading and/or creating a
computerized infrastructure system – in order to establish a process for assessing and making
the allowance for credit losses – and internal control systems – to check the proper
implementation of the Directive and to validate the effectiveness of the method for calculating
the allowance. The Bank has submitted a request to the Supervisor of Banks to defer
implementation of the Directive until after the completion of the process of converting the IT
systems. However, this request was rejected.
Due to the aforementioned reasons, the Bank’s Management is currently unable to estimate the
implications of implementing the Directive, upon its first-time implementation, on the Bank’s
future financial results.
119
Note 2 - Cash and Deposits with Banks
Composition:
December 31
2007
2006
NIS millions
NIS millions
Cash and deposits with the Bank of Israel
Deposits with commercial banks
Deposits with special banking corporations
220.2
1,902.1
69.5
523.3
*1,435.4
*184.7
Total cash and bank deposits
2,191.8
2,143.4
Includes: cash and deposits with an original maturity
not exceeding three months
2,039.6
1,878.0
* Reclassified.
Note 3 - Securities
A. Securities
available-forsale
Debentures
- Of the Israeli
Government
- Of others
Total debentures
Shares
- Of others
Total securities
available for sale
B. Securities held
for trading
Debentures and
loans
- Of the Israeli
Government
Total securities
December 31, 2007
Unrealized
gains from
adjustment to
fair value
NIS millions
Unrealized
losses from
adjustment to
fair value
NIS millions
Fair value(1)
NIS millions
976.0
291.0
1,267.0
Book value
NIS millions
Amortized cost
(for shares –
historical cost)
NIS millions
976.0
291.0
1,267.0
973.7
295.1
1,268.8
4.9
4.9
(2.6)
(4.1)
(6.7)
3.0
3.0
-
-
1,270.0
1,271.8
90.1
89.9
1,360.1
1,361.7
120
(2)
4.9
(2)
(3)
3.0
(6.7)
1,270.0
0.3
(0.1)
90.1
5.2
(6.8)
1,360.1
Note 3 - Securities (cont'd)
December 31, 2006
Unrealized
gains from
adjustment to
fair value
NIS millions
Unrealized
losses from
adjustment to
fair value
NIS millions
Fair value(1)
NIS millions
515.1
186.0
701.1
Book value
NIS millions
Amortized cost
(for shares –
historical cost)
NIS millions
515.1
186.0
701.1
513,9
185.1
699.0
1.2
1.3
2.5
(0.4)
(0.4)
3.0
3.0
-
-
704.1
702.0
B. Securities held
for trading
Debentures and
loans
- Of the Israeli
Government
220.1
219.6
Total securities
924.2
921.6
A. Securities
available-forsale
Debentures
- Of the Israeli
Government
- Of others
Total debentures
Shares
- Of others
Total securities
available for sale
(1)
(2)
(3)
(4)
(2)
2.5
(2)
(3)
3.0
(0.4)
704.1
0.5
-
220.1
3.0
(0.4)
924.2
Fair value data are, for the most part, based on market prices and do not necessarily reflect the
price that can be obtained when selling large volumes of securities.
Included in shareholders’ equity as “adjustments to present available-for-sale-securities at fair
value”.
Shares with no readily available fair value and which are stated at cost.
Regarding liens on securities see Note 13A and 13B.
121
Note 4 - Credit to the Public
A.
Composition:
December 31
2007
2006
NIS millions
NIS millions
Credit on the responsibility of the Bank
Credit
Customers’ liabilities for acceptances
8,479.8
18.3
*7,911.8
10.1
Total credit on the responsibility of the Bank
Less - general and supplementary provisions for doubtful debts
8,498.1
24.6
7,921.9
24.3
Total credit to the public
8,473.5
7,897.6
The specific provision for doubtful debts was set off against the relevant credit items.
The provisions for off-balance-sheet balances are included in “other liabilities”.
* Reclassified.
B.
Credit to the public under the Bank’s responsibility includes:
December 31
2007
2006
NIS millions
NIS millions
1)
Loans to problematic borrowers, other than in the
local authority sectors a)
b)
c)
d)
Non-income bearing credit
- In Israeli currency – unlinked
- In Israeli currency – CPI-linked
- In or linked to foreign currency
Restructured during the year, with no waiver of
income
- In Israeli currency – unlinked
- In Israeli currency – CPI-linked
Credit to borrowers in respect of which there is a
Management decision to restructure that has not
yet been implemented
Credit, the repayment of which is temporarily in
arrears As at balance-sheet date
Interest recognized in the statement of profit and loss
in respect of such credit
Credit under special supervision
as at balance-sheet date
122
93.8
20.0
9.0
66.2
28.6
11.2
5.2
0.4
7.9
2.7
-
0.6
26.5
10.1
-
2.6
87.9
63.3
Note 4 - Credit to the Public (cont’d)
B.
Credit to the public on the Bank’s responsibility includes (cont’d):
December 31
2007
2006
NIS millions
NIS millions
2)
Loans to local authorities as at balance-sheet date
388.5
387.7
-
1.3
0.4
0.4
388.1
386.0
Loans to local authorities includes:
a)
b)
c)
CPI-linked, non-income bearing credit
Credit under special supervision as at balance
sheet date
Loans to local authorities not included in the
loans to problematic borrowers, as above, as at
balance-sheet date
123
C.
Composition:
Specific
provision (1)(3)
2007
Supplementary
provision (2)
Total
NIS millions
NIS millions
NIS millions
2006
Specific
Supplementary
provision (1)(3)
provision (2)
Total
R e p o r t e d a m o u n t s
NIS millions
NIS millions
NIS millions
Specific
provision (1)(3)
2005
Supplementary
provision (2)
Total
NIS millions
NIS millions
NIS millions
Balance of provision at beginning of year
263.3
24.3
287.6
260.5
22.6
283.1
259.5
24.4
283.9
Provisions for current year
Reduction of provisions
Collection of debts written-off in prior years
55.2
(31.6)
(4.6)
1.2
(0.9)
-
56.4
(32.5)
(4.6)
70.2
(37.7)
(4.1)
2.5
(0.8)
-
72.7
(38.5)
(4.1)
59.7
(31.6)
(3.5)
(2.0)
-
59.7
(33.6)
(3.5)
Provisions charged to statement of profit and
loss
19.0
0.3
19.3
28.4
1.7
30.1
24.6
(2.0)
22.6
(42.1)
-
(42.1)
(25.6)
-
(25.6)
4.5
(28.1)
0.2
-
4.7
(28.1)
(42.1)
-
(42.1)
(25.6)
-
(25.6)
(23.6)
0.2
(23.4)
240.2
24.6
264.8
263.3
24.3
287.6
260.5
22.6
283.1
20.1
-
20.1
27.0
-
27.0
26.4
-
26.4
Provision for doubtful debts in respect of
credit purchased
Write-offs
Balance of provision at end of year
Includes: balance of provision not deducted
from the item “credit to the public”
(1)
The specific provision does not include a provision in respect of interest on doubtful debts from the date the provision was recorded.
(2)
Includes a general provision for doubtful debts in accordance with the directives of the Bank of Israel, in an amount of NIS 16.3 million.
(3)
Includes a specific provision for doubtful debts in the amount of NIS 1.4 million with respect to residential housing loans in arrears (December 31, 2006 – NIS 1.1
million; December 31, 2005 – None), based on the extent of the arrears.
124
D.
Classification of balances of credit to the public (1) on the Bank’s responsibility and loan risk in off-balance-sheet items (2), by amount of debt per
borrower.
December 31, 2006
December 31, 2007
Credit per Borrower
In NIS thousands
From
10
From
20
From
40
From
80
From
150
From
300
From
600
From 1,200
From 2,000
From 4,000
From 8,000
From 20,000
From 40,000
From 200,000
Up to
10
to
20
to
40
to
80
to
150
to
300
to
600
to
1,200
to
2,000
to
4,000
to
8,000
to 20,000
to 40,000
to 200,000
to 400,000
Number of
borrowers(3)
Credit (1)
NIS millions
Credit
risk(2)
NIS millions
Number of
borrowers(3)
Credit (1)
NIS millions
Credit
risk(2)
NIS millions
49,126
22,564
28,727
32,075
21,155
10,440
2,494
484
132
90
64
65
26
21
1
98.7
198.0
505.9
1,158.6
1,593.3
1,630.9
833.4
325.8
158.6
204.3
263.6
475.2
411.5
679.3
202.7
72.5
145.1
348.4
690.2
693.8
485.3
153.1
59.6
39.3
51.5
99.8
317.2
310.7
638.8
-
51,758
23,582
29,008
31,522
20,205
9,315
2,329
427
113
67
50
46
26
19
1
94.9
208.1
511.4
1,135,1
1,484.5
1,426.5
765.4
288.5
147.8
152.1
202.5
327.9
388.0
755.7
210.6
62.6
137.5
338.8
667.1
688.0
449.6
145.3
50.7
26.5
62.9
75.5
157.9
277.9
469.0
-
167,464
8,739.8
4,105.3
168,468
8,099.0
3,609.3
(1)
Credit, debentures and the balance of other assets in respect of derivative instruments, net of the specific provisions for doubtful debts.
(2)
Credit risk in off-balance-sheet items, as calculated for the purpose of per borrower debt limitations.
(3)
Number of borrowers by total credit and credit risk.
125
Note 5 - Investments in Investee Companies
Details of investments in companies:
Business
Share in equity rights
2007
2006
%
A.
Subsidiaries
1)
Consolidated subsidiaries
Investment Company of
Otsar Hahayal Ltd.
Investments in real
estate and securities
Otsarit Mutual Fund
Management Ltd.(1))
Share in voting rights
2007
2006
%
%
Investment in shares stated on equity basis as at December 31
2007
2006
Original
Postinvestment
acquisition
(including in
earnings
Total
Total
capital notes)
(losses)
investment
investment
NIS millions
NIS millions
NIS millions
NIS millions
%
53
53
88
88
0.7
-
0.7
0.7
Management of
mutual funds
100
100
100
100
-
-
-
1.8
Otsarot Investment
Management Ltd.
Management of
investment portfolios
100
100
100
100
9.2
3.8
13.0
12.2
Trust Company of Otsar
Hahayal Ltd. (in voluntary
liquidation) (2)
Trustee services
95
95
95
95
0.2
(0.2)
-
-
100
100
100
100
45.4
8.0
55.5
11.6
2)
Subsidiary consolidated in the financial statements
of the Bank
The Property Company of
Investments in
Otsar Hahayal Ltd.
properties and lease
thereof to the Bank
(3)
53.4
67.1
(3)
55.8
70.5
(1)
(2)
(3)
Liquidation of this company has been completed.
This company is in the process of voluntary liquidation.
Including investment in capital notes in the amount of NIS 39.0 million (December 31, 2006 – NIS 43.5 million)
B.
Provident funds: For information about the sale of the Bank's provident fund operations and its mutual fund operations, see Note 17.C(18). The provident funds whose operations were
sold are currently in the process of voluntary liquidation.
126
Note 6 - Buildings and Equipment
A.
Composition:
Depreciation
Cost
Average
depreciation
rate
As at
beginning
of year
Additions
Disposals
%
NIS millions
NIS millions
NIS millions
Accumulated
as at
beginning
Current
of year
year
Reported amounts*
NIS millions
NIS millions
NIS millions
As at
end
of year
During reporting year
Net book value
Accumulated
in respect of
disposals
Accumulated
as at
end
of year
As at
beginning
of year
As at
end
of year
NIS millions
NIS millions
NIS millions
NIS millions
Land and buildings
(including fittings and
leasehold improvements)
9
225.6
11.5
-
237.1
99.5
13.8
-
113.3
126.1
123.8
Equipment, furniture and
vehicles
17
112.6
14.4
(1.0)
126.0
82.0
10.1
(1.0)
91.1
30.6
34.9
338.2
25.9
(1.0)
363.1
181.5
23.9
(1.0)
204.4
156.7
158.7
Total
B.
The Bank has additional liabilities with respect to leases for assets expiring after 2007 (see Note 17C).
C.
Real estate rights, the net book value of which is NIS 57.9 million (December 31, 2006 – NIS 60.6 million) have not yet been registered in the name of the
Bank at the land registry offices, as a result of a delay in defining the areas involved, or because the registration process has not yet been finalized. In each
case, caveats have been registered in favor of the Bank.
127
Note 7 - Other Assets
Composition:
December 31
2007
2006
NIS millions
NIS millions
Deferred tax assets, net (see Note 24E)
Excess of advance income tax deposits over current provision
Receivables in respect of derivative financial
instruments (see Note 17B)
Prepaid expenses
Accrued income
Others
14.5
1.5
11.2
3.1
27.7
10.8
15.9
0.8
18.1
3.9
16.2
2.1
Total other assets
71.2
54.6
Note 8 - Deposits from the Public
Composition:
December 31
2007
2006
NIS millions
NIS millions
Demand deposits
Term deposits
Deposits in savings plans
1,321.1
7,502.9
1,101.8
1,223.3
6,687.5
1,118.9
Total deposits from the public
9,925.8
9,029.7
Note 9 - Deposits from Banks
Composition:
December 31
2007
2006
NIS millions
NIS millions
Commercial banks
Demand deposits
Term deposits
Acceptances
29.5
28.2
18.3
21.9
66.1
10.1
Total deposits from banks
76.0
98.1
128
Note 10 - Subordinated Notes and Debentures
Average
duration
in years(2)
Subordinated notes (1)
(1)
(2)
(3)
3.08
Internal
rate of
return(3)
5.58%
December 31
2007
2006
NIS millions
NIS millions
389.3
376.5
The subordinated notes are CPI-linked, non-convertible and do not grant any rights to acquire
shares. Their rights upon liquidation are subordinate to other liabilities.
The average duration is the average of the payment periods, weighted by the payment flow,
discounted at the internal rate of return.
The internal rate of return is the interest rate that discounts the anticipated future payment flow
to the balance appearing in the financial statements.
Note 11 - Other Liabilities
Composition:
December 31
2006
2007
NIS millions
NIS millions
Provision for salaries and related expenses
Salary related institutions
Excess of provision for severance pay over fundings (Note 14C)
Payables in respect of derivative financial instruments
Deferred income
Provision for doubtful debts in respect of off-balance-sheets items
Payables deriving from credit card transactions
Other accounts payable and credit balances
Total other liabilities
129
54.8
6.5
11.7
14.5
8.5
20.1
875.7
36.6
42.3
7.3
5.5
17.0
10.0
27.0
808.9
27.5
1,028.4
945.5
Note 12 - Shareholders’ Equity
A.
Share capital
The share capital as at December 31, 2007 and 2006 is as follows:
Par value
per share
NIS
Casting share
Deferred shares
Founders’ shares
Ordinary shares
30% cumulative and
participating preferred shares
Authorized
NIS
Issued and
paid-up
NIS
0.0002
0.0001
0.0050
0.0001
0.0002
0.0002
1.5000
4,641.7398
0.0002
0.0002
1.5000
4,629.7066
0.0010
8,040.0000
8,040.0000
12,683.2402
12,671.2070
Total share capital
B.
Rights conferred by each class of shares
Casting share
This share is held by the Minister of Defense. It is non-transferable and grants 240 votes at
shareholders’ (founders’) meetings in respect of significant matters on which there is disagreement.
Upon liquidation of the Bank, the holder is entitled to receive the par value of the share.
Deferred share
This share entitles the holder to receive the par value thereof upon liquidation. No other rights are
conferred by this share.
Founders’ share
This share confers the right to vote at shareholders’ meetings, appoint members to the Board of
Directors, receive dividends proportionately to the amounts paid in on account of the share and
participate in the distribution of asset surpluses upon liquidation proportionately to its share in the
Bank’s total paid-up share capital.
Ordinary share
This share confers the right to receive current and liquidation dividends in proportion to its share in the
Bank’s paid-up share capital.
30% cumulative and participating preferred shares
This share is not redeemable and confers the right to receive cumulative preferred dividends at the rate
of 30% per annum before distribution of any other dividend on the ordinary shares. Aside from the
matter of the preferred dividend, this share is the same as an ordinary share in all matters.
130
Note 12 - Shareholders’ Equity (cont’d)
C.
Issuance of Capital and Distribution of Dividend
In 2007, no change occurred in the issued and paid-up capital and no dividend was declared or
distributed.
In January 2006, the Board of Directors of the Bank and the general meeting resolved to distribute a
dividend in the amount of NIS 430 million.
In addition, the Board of Directors and the general meeting resolved, in January 2006, to invest NIS 350
million in the Bank’s capital by way of an issuance of 3.0 million ordinary shares of NIS 0.0001 each to
the existing shareholders. The shares were issued at a price per share of NIS 116.67.
The dividend distribution and the capital issue were approved by the Supervisor of Banks and took
place on January 26, 2006.
Note 12A - Capital Adequacy in accordance with Directives of the Supervisor of Banks
Calculated in accordance with Directives No. 311 and No. 341 of the Supervisor of Banks, regarding
“Minimum Capital Ratio” and “Issuance of Capital with respect to Exposure to Market Risks”.
A.
Capital for purposes of calculation of capital ratio
December 31
2007
2006
NIS millions
NIS millions
Tier I capital
Tier II capital (1)
Less – investments in subordinated
notes of other banking entities
719.2
217.4
604.4
253.8
-
(1.6)
Total capital
936.6
856.6
131
Note 12A - Capital Adequacy in accordance with Directives of the Supervisor of
Banks (cont’d)
B.
Weighted-balances of credit risk
December 31, 2007
Assets
Securities
Credit to the public(1)
Other assets
Total assets
December 31, 2006
Balances(2)
NIS millions
Risk
balances
NIS millions
2,191.8
1,360.1
8,489.8
0.9
158.7
71.2
394.3
254.5
7,608.2
158.7
50.3
12,272.5
8,466.0
11,192.8
Balances(2)
NIS millions
(3)
2,143.4
924.2
(3)
7,913.9
156.7
54.6
Risk
balances
NIS millions
(3)
324.0
173.5
(3)
7,174.0
156.7
40.6
(3)
7,868.8
Off-balance-sheet financial
instruments:
Transactions representing credit risk
Other derivative financial
instruments
254.8
254.8
265.4
265.4
141.6
43.4
118.9
41.7
Total off-balance-sheet financial
instruments
396.4
298.2
384.3
307.1
Total credit risk assets
Market risk
12,668.9
-
8,764.2
24.8
11,577.1
-
8,175.9
74.7
Total risks assets
12,668.9
8,789.0
11,577.1
8,250.6
C.
Ratio of capital to risk assets
Ratio of Tier I capital to total risk assets
Ratio of total capital to credit risk assets
Ratio of total minimal capital as required by the
Supervisor of Banks
(1)
(2)
(3)
8.18%
10.66%
9.00%
(3)
(3)
7.33%
10.38%
9.00%
Includes a general provision for doubtful debts in the amount of NIS 16.3 million, which
constitutes part of the Tier II capital and is not deducted from the credit to the public.
Assets – balance-sheet balances, off-balance-sheet instruments – nominal balances weighted by
credit conversion coefficients.
Reclassified.
132
Note 13 – Liens
A.
To guarantee the monetary credit provided to the Bank from time to time by the Bank of Israel,
and intraday credit that the Bank will receive from the Bank of Israel in order to participate in
the real time gross settlement (“RTGS”) system (as described in B. below), the Bank has
registered a floating charge on a portion of the government debentures that it holds, in favor of
the Bank of Israel.
Details of the pledged debentures and the credit received are as follows:
Pledged
debentures
NIS millions
2007
Credit from
the Bank of
Israel*
NIS millions
Deposits with
the Bank of
Israel
NIS millions
Balance as at
December 31
447.4
-
Average annual
balance
464.6
Highest balance
during the year
726.7
*
Pledged
debentures
NIS millions
2006
Credit from
the Bank of
Israel*
NIS millions
Deposits with
the Bank of
Israel
NIS millions
110.4
340.2
-
427.2
62.1
194.1
242.5
14.1
249.8
417.4
976.6
396.2
300.0
926.7
Credit for a single day.
B.
In July 2007, a contract was signed between the Bank of Israel and the Bank for the latter’s
participation in clearances using the Israeli RTGS system.
In order to secure the credit that the Bank will receive from the Bank of Israel for the purpose of
its participation in the RTGS system, in July 2007, the Bank registered a first-ranking floating
charge in favor of the Bank of Israel on debentures that have been or that shall be issued
pursuant to the State Loans Law – 1979 or debentures that have been or that shall be issued
pursuant to the Treasury Bills Law – 1984, which are listed on the Tel-Aviv Stock Exchange,
and all the rights arising therefrom or related thereto, including the proceeds from their sale,
which shall be registered or deposited from time to time in a collateral account that is
maintained with the Stock Exchange Clearing House in the name of and for the Bank of Israel.
This charge is not dependent on other collateral or guarantees that the Bank of Israel receives or
shall receive from the Bank.
C.
For purposes of securing the Bank’s liabilities to the Stock Exchange Clearing House, liens
were placed on government debentures. As at December 31, 2007, the value of the debentures
amounted to NIS 9.5 million (2006 - NIS 7.7 million).
133
Note 14 - Employee Rights
A.
Pensions
Since 1994, the Bank, in conjunction with recognized pension funds, has plans which cover
comprehensive pension rights for its employees, through regular deposits in the employees’ name. The
pension rights are dependent upon the age of the employee at the time he joins the pension plan.
Regarding the period before the Bank and its employees joined the pension plan and regarding
employees who are not eligible for pension benefits, the Bank is liable for severance pay according to
the Severance Pay Law (see B(1) below). In January 2004, the Knesset (the Israeli parliament) passed
the Retirement Age Law – 2004 (“the Law”), whereby the retirement ages of men and women were
raised. As a result, there was a change in the liability for employees’ pension rights. The actuarial
reserves of the Bank do not reflect the employees’ pension rights and the aforementioned change has no
effect thereon.
B.
Severance pay
1)
The liability of the Bank for severance pay to its employees is covered by regular monthly
deposits in the employees’ names in provident funds (one of which is owned by the employees
of the Bank), for annuities and severance benefits, by deposits in the name of the Bank in
provident funds, for cases where the Bank is required to make additional payments, and by the
provision for severance pay included in the balance sheet. The amounts deposited in the names
of the employees are not included in the financial statements, since they are not controlled by
the Bank.
2)
The relationship between the Bank and several of its employees, including the members of its
Management are grounded on personal employment contracts. The main terms included in the
personal employment contracts with the members of the Bank’s Management are as follows:
a)
At the time of voluntary retirement, the said employees are eligible for severance pay
based on 100% of their latest salary.
b)
(1)
In case of dismissal, these employees are entitled to severance pay based on 200%
of their latest salary.
(2)
At the time of dismissal, these employees are entitled to an adaptation grant of six
months’ salary.
(3)
The status of these employees, as a result of a change in their status stemming from
a change in the Bank’s organizational structure, or retirement owing to serious
health problems or in the case of death, is the status of a dismissed employee.
c)
The employment conditions of the Bank’s Managing Director were approved by the
Board of Directors in September 2006.
The terms approved include salary and benefits, and, in the case of dismissal,
compensation in the amount of six monthly salaries in addition to severance pay of 100%
of salary or 200% of a salary of NIS 45 thousand, whichever is the higher of these two
alternatives.
134
Note 14 - Employee Rights (cont’d)
d)
C.
The amount required pursuant to the aforesaid contracts for supplementing severance
benefits for the senior employees and the Managing Director (in excess of the amounts
accumulated for them in the pension and annuity funds), in the case of dismissal, is
included in full in the provision for severance pay.
Following is data on the excess of the provision for severance pay over fundings (included
in “Other liabilities” – Note 11).
December 31
2007
2006
NIS millions
NIS millions
Provision for severance pay
Provision for voluntary retirement plan
Less - fundings
Excess of provision over fundings
D.
14.6
5.0
(7.9)
11.7
12.9
(7.4)
5.5
Provision for long-service bonuses and unutilized sick leave
Employees are entitled to a bonus in the amount of one month’s salary, upon completion of 20 years
work at the Bank. The Bank also, as a matter of course, pays its employees, upon their retirement,
compensation in respect of unutilized sick leave.
The Bank included in its financial statements in the line item, “Provision for salaries and related
expenses” (that appears within the framework of “Other liabilities” (see Note 11 above)), provisions
which are appropriate for these obligations based on an actuarial opinion. In 2007, the Bank revised the
calculation for the provisions in respect of the 20-year-service bonus and the compensation in respect of
sick leave unutilized at the time of retirement. As a result, the actuarial computation is now based on
forecasts of retirements and length-of-service-dependent salary increases, which are based on historical,
statistical information, and also on the February 2007 directives of the Treasury’s Chief Actuary with
regard to mortality rates, which have been set for insurance companies by the Commissioner for the
Capital Market, Insurance and Savings.
The effect of the change on the provision balances as at January 1, 2007 is to reduce the provision by
NIS 2.9 million.
The amounts of the provisions are shown below:
December 31
2007
2006
NIS millions
NIS millions
Compensation for unutilized sick leave
Long-service bonus
E.
7.4
3.1
10.5
8.7
3.2
11.9
Provision for vacation pay
The line item “Provision for salaries and related expenses” (that appears within the framework of
“Other liabilities” (see Note 11 above)) includes a provision for unutilized vacation pay totaling NIS 5.2
million (December 31, 2006 – NIS 5.0 million). The unutilized vacation pay was calculated on the
basis of the latest salary plus related expenses.
135
Note 15 - Assets and Liabilities by Linkage Basis
Israeli currency
Unlinked
CPI-linked
NIS millions
NIS millions
December 31, 2007
Foreign currency(1)
U.S. dollar
Other
NIS millions
NIS millions
Non-monetary
items
NIS millions
Total
NIS millions
Assets
Cash and deposits with
banks
Securities
Other assets
903.7
787.1
6,457.0
0.9
49.2
131.6
351.2
1,712.6
6.3
958.3
176.8
195.7
0.8
198.2
42.0
108.2
4.1
3.0
158.7
10.8
2,191.8
1,360.1
8,473.5
0.9
158.7
71.2
Total assets
8,197.9
2,201.7
1,331.6
352.5
172.5
12,256.2
6,875.4
25.1
1,795.4
-
900.1
31.0
354.9
19.9
-
9,925.8
76.0
Liabilities
Deposits from
the public
Deposits from banks
Deposits from
the government
Subordinated notes
and debentures
Other liabilities
107.4
8.1
-
-
-
115.5
1,002.5
389.3
5.8
8.9
2.7
8.5
389.3
1,028.4
Total liabilities
8,010.4
2,198.6
940.0
377.5
8.5
11,535.0
Difference
187.5
3.1
391.6
(25.0)
164.0
721.2
Forward contracts
Options in the money, net
(in terms of underlying
asset)
Options out of the money,
net (in terms of
underlying asset)
156.6
195.3
(376.2)
24.3
-
-
(3.3)
-
3.3
-
-
-
-
-
-
-
-
-
340.8
198.4
18.7
(0.7)
164.0
721.2
(5.2)
-
5.2
-
-
-
3.0
0.8
(1.8)
(2.0)
-
-
Option in the money, net
(present value of nominal
amount)
net (present value of
nominal amount)
(1)
Includes amounts linked to foreign currency.
136
Note 15 - Assets and Liabilities by Linkage Basis (cont'd)
Israeli currency
Unlinked
CPI-linked
NIS millions
NIS millions
December 31, 2006
Foreign currency(1)
U.S. dollar
Other
NIS millions
NIS millions
Non-monetary
items
NIS millions
Total
NIS millions
Assets
banks
Securities
Other assets
502.6
632.8
5,776.7
42.2
*216.3
192.0
*1,781.3
1.7
1,146.8
38.5
227.5
0.9
277.7
57.9
112.1
5.9
3.0
156.7
3.9
*2,143.4
924.2
*7,897.6
156.7
54.6
Total assets
6,954.3
2,191.3
1,413.7
453.6
163.6
11,176.5
5,891.2
13.8
1,834.3
-
921.0
63.4
383.2
20.9
-
9,029.7
98.1
107.8
7.2
-
-
-
115.0
917.3
376.5
4.6
6.7
6.9
10.0
376.5
945.5
6,930.1
2,222.6
991.1
411.0
10.0
10,564.8
24.2
(31.3)
422.6
42.6
153.6
611.7
278.9
130.7
(394.3)
(15.3)
-
-
(1.5)
0.1
1.4
-
-
-
(14.1)
-
14.1
-
-
-
287.5
99.5
43.8
27.3
153.6
611.7
1.7
0.3
(2.0)
-
-
-
(6.4)
0.3
6.1
-
-
-
Liabilities
Deposits from
the public
Deposits from banks
Deposits from
the government
Subordinated notes
and debentures
Other liabilities
Total liabilities
Difference
Forward contracts
(in terms of underlying
asset)
net (in terms of
underlying asset)
(present value of nominal
amount)
net (present value of
nominal amount)
(1)
Includes amounts linked to foreign currency.
*
Reclassified.
137
Note 16 - Assets and Liabilities by Linkage Basis and Maturity date (1)
Israeli currency –
unlinked
Assets (5)
Liabilities (5)
Difference
Derivative
instruments
(excluding
options)
Options (in terms
of underlying
asset)
Israeli currencyCPI-linked
Assets (5)
Liabilities (5)
Difference
Derivative
instruments
(excluding
options)
Options (in terms
of underlying
asset)
Foreign currency
– domestic
activity (3)
Assets (5)
Liabilities (5)
Difference
Derivative
instruments
(excluding options)
Options (in terms of
underlying asset)
December 31, 2007
Anticipated future contractual cash flows
2
3
4
to
to
to
3 years
4 years
5 years
NIS millions
NIS millions
NIS millions
On demand
and up to
1 month
NIS millions
1 month
to
3 months
NIS millions
3 months
to
1 year
NIS millions
1
to
2 years
NIS millions
2,000.7
3,649.1
(1,648.4)
493.1
145.4
347.7
1,320.2
439.5
880.7
1,227.0
322.4
904.6
930.0
561.5
368.5
1,033.6
2,087.2
(1,053.6)
179.2
162.4
(185.0)
-
-
-
(0.1)
-
(1.9)
47.4
31.8
15.6
113.4
46.1
67.3
408.9
279.6
129.3
-
-
-
Balance-sheet value
Without
fixed
maturity(2)
Total(4)
NIS millions
NIS millions
5
to
10 years
NIS millions
10
to
20 years
NIS millions
Over
20
years
NIS millions
Total
NIS millions
393.5
182.8
210.7
443.0
1.8
441.2
103.4
3.1
100.3
1.9
3.1
(1.2)
7,946.4
7,395.9
550.5
100.0
50.7
49.3
7,331.2
7,143.7
187.5
-
-
-
-
-
156.6
-
156.6
(0.8)
(0.1)
(0.4)
-
-
-
(3.3)
-
(3.3)
389.9
347.6
42.3
295.7
142.1
153.6
220.2
309.4
(89.2)
188.0
377.7
(189.7)
825.3
1,036.7
(211.4)
164.2
49.5
114.7
48.3
9.1
39.2
2,701.3
2,629.6
71.7
6.1
8.1
(2.0)
2,197.1
2,194.0
3.1
195.3
-
-
-
-
-
-
-
195.3
-
195.3
-
-
-
-
-
-
-
-
-
-
-
-
902.1
950.4
(48.3)
453.1
240.6
212.5
76.2
113.6
(37.4)
30.8
5.7
25.1
26.1
1.3
24.8
21.0
0.2
20.8
32.1
1.6
30.5
241.2
3.6
237.6
7.7
7.7
-
1,790.3
1,317.0
473.3
1.0
0.8
0.2
1,679.7
1,313.1
366.6
(179.2)
(162.4)
(10.3)
-
-
-
-
-
-
-
(351.9)
-
(351.9)
-
0.1
0.1
1.8
0.8
0.1
0.4
-
-
-
3.3
-
3.3
138
Note 16 – Assets and Liabilities by Linkage Basis and Maturity date (1) (cont’d)
On demand
and up to
1 month
NIS millions
Non-monetary
Items
Assets
Liabilities
Difference
Total
Assets
Receivables derived
from credit card
transactions
Total balance-sheet
assets
Liabilities
Payables derived
from credit card
transactions
Total liabilities
Difference
Derivative
instruments
(excluding
options)
Options (in terms
of underlying
asset)
1 month
to
3 months
NIS millions
3 months
to
1 year
NIS millions
1
to
2 years
NIS millions
December 31, 2007
2
3
4
to
to
to
3 years
4 years
5 years
NIS millions
NIS millions
NIS millions
5
to
10 years
NIS millions
10
to
20 years
NIS millions
Over
20
years
NIS millions
Total
NIS millions
Balance-sheet value
Without
fixed
maturity(2)
Total(4)
NIS millions
NIS millions
-
-
-
-
-
-
-
-
-
-
-
172.5
8.5
164.0
172.5
8.5
164.0
2,950.2
1,059.6
1,805.3
1,647.7
1,251.8
1,274.8
613.6
1,509.5
275.3
50.2
12,438.0
279.6
11,380.5
875.7
12,256.2
4,631.3
432.1
832.7
675.7
704.9
2,396.8
562.1
1,042.1
52.6
12.2
11,342.5
68.1
10,659.3
(1,681.1)
627.5
972.6
972.0
546.9
(1,122.0)
51.5
467.4
222.7
38.0
1,095.5
211.5
875.7
11,535.0
721.2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0.1
(0.1)
-
-
-
-
-
-
-
-
-
139
Note 16 – Assets and Liabilities by Linkage Basis and Maturity date (1) (cont’d)
On demand
and up to
1 month
NIS millions
Total
Assets
Receivables
derived from credit
card transactions
Total balance-sheet
assets
Liabilities
Payables derived
from credit card
transactions
Total liabilities
Difference
(1)
(2)
(3)
(4)
(5)
2,996.6
1 month
to
3 months
NIS millions
659.9
3 months
to
1 year
NIS millions
1
to
2 years
NIS millions
1,820.4
1,514.1
December 31, 2006
2
3
4
to
to
to
3 years
4 years
5 years
NIS millions
NIS millions
NIS millions
1,120.6
742.3
846.9
5
to
10 years
NIS millions
10
to
20 years
NIS millions
Over
20
years
NIS millions
Total
NIS millions
1,122.8
341.8
10.9
11,176.3
Balance-sheet value
Without
fixed
maturity(2)
Total(4)
NIS millions
NIS millions
315.5
10,367.6
808.9
11,176.5
3,846.8
(850.2)
459.7
200.2
862.7
957.7
619.5
894.6
700.5
420.1
2,118.2
(1,375.9)
523.3
323.6
1,361.9
(239.1)
60.7
281.1
5.7
5.2
10,559.0
617.3
59.1
9,755.9
256.4
808.9
10,564.8
611.7
This note presents anticipated future contractual cash flows in respect of assets and liabilities according to linkage basis and the forecasted maturity period of each cash flow. The data are net of provisions
for doubtful debts.
Assets without fixed maturity include assets in the amount of NIS 91 million that are overdue.
Including linked to foreign currency.
As included in Note 15 “Assets and liabilities by linkage basis”, including off-balance-sheet amounts in respect of derivatives.
Does not include receivables and payables derived from credit card transactions in identical amounts and for identical maturity periods.
The balance of the assets and liabilities from these transactions is presented only in the column “Balance sheet value – Total”.
140
Note 17 - Contingent Liabilities and Special Commitments
A.
Off-balance-sheet financial instruments:
December 31
2007
2006
NIS millions
NIS millions
Balances or stated values of contracts as at the end of the year
Transactions in which the balance reflects credit risk:
Documentary credits
Credit guarantees
Guarantees to purchasers of apartments
Other guarantees and undertakings
Unutilized credit card limits
Unutilized revolving credit limits and other demand accounts
Irrevocable credit commitments approved but not yet granted
Commitments to issue guarantees
6.8
88.8
42.3
143.5
1,661.9
1,359.7
640.5
227.8
3.1
60.9
61.8
*152.8
1,565.9
1,175.3
406.7
311.2
* Restated.
B.
Off-balance-sheet commitments at the end of the year in respect of activity by extent of
collection.
December 31
2007
2006
NIS millions
NIS millions
Balance of credit granted from deposits repayable by the extent of
collection:
Israeli currency - unlinked
Israeli currency - CPI-linked
16.7
0.7
22.0
0.8
Total
17.4
22.8
Future flows with respect to collection commissions and interest margin regarding activity based on
collections in the unlinked shekel sector.
From 1 to 3
From 3 to 5
years
years
Up to
one year
Cash flows from
futures contracts
-
0.2
141
As at
December 31,
2006
Total
-
0.2
0.5
Note 17 - Contingent Liabilities and Special Commitments (cont’d)
C.
Other contingent liabilities and special commitments
The contingent liabilities and special commitments as at the end of the year are as follows:
December 31
2007
2006
NIS millions
NIS millions
1)
Long-term leases*
84.2
65.4
Schedule of rent payments (NIS millions):
2008
2009
2010
2011
2012 and
thereafter
Total
11.3
9.7
9.4
8.7
45.1
84.2
* Includes rent payments for branches on military bases and at military facilities, for periods
and in amounts estimated by Management.
On December 31, 2006, the lease agreement expired for buildings used by the Bank’s
branches on military bases. The rental terms under which the Bank makes use of these
properties has been determined in negotiations between the parties, although a new lease has
not yet been signed.
2)
Legal proceedings and petitions to certify a class action against the Bank
The Bank is party to legal proceedings with respect to claims filed against it by its customers,
its former customers and various third parties who considered its activities in the ordinary
course of business harmful or damaging to them. The grounds underlying these claims are
varied. In the estimation of the Bank’s Management, based on an opinion of its legal advisors
regarding the chances of the outstanding claims, the financial statements include adequate
provisions, in accordance with generally accepted accounting principles, to cover all possible
damages resulting from such claims, where such provision is called for.
On July 3, 2006, a claim was filed with the Tel-Aviv District Court, accompanied by a petition
to recognize it as a class action, against several banks, insurance companies and provident funds
(“the respondents”).
The claim was filed by the parties who were the judgment creditors in execution proceedings.
Within the framework of execution measures taken against debtors, the judgment creditors
issued – over electronic media – attachment orders against the debtor's rights held by third
parties – the respondents.
In the petition, the petitioners allege that the answers provided by the respondents to the
attachment orders, which were transmitted through electronic media, were
misleading/incomplete.
The petitioners are requesting, therefore, that the respondents reimburse them for fees paid for
executing the attachment orders and related inquiries. The Bank’s share in the claim is
estimated at approximately NIS 3 million.
142
C.
Other contingent liabilities and special commitments (cont’d)
On February 11, 2008, the Court rejected the petition of the banks and the provident funds to
summarily dismiss the claim; however, the Court accepted the petition of the insurance
companies and rejected the petition to certify the claim as a class action against them.
In the estimation of the Bank, based on an opinion of its legal advisors, the chances are remote
that the claim will be accepted in such a manner as to make the Bank liable for significant
amounts.
3)
There is a contingent liability, as a result of an agreement between the Clearing House of the
Tel-Aviv Stock Exchange and the members of the Tel-Aviv Stock Exchange Ltd. (including the
Bank), in respect of the mutual indemnity by the members of the Clearing House for any loss
which it may incur, if any member fails to pay its debt to the Clearing House, in whole or in
part, or fails to remit to the Clearing House all or part of the securities being cleared, which it is
required to remit, and if the Clearing House disbursed the money which was not paid as
aforementioned, or purchased the securities to be cleared, which were not remitted, and
forwarded them to the designated recipients who were entitled to receive them.
The share of each member in the indemnity is the ratio of that member’s financial turnover to
the overall financial turnover of all the members liable to compensate the Clearing House for
the loss, for the 12-month period ending on the last day of the month preceding the month in
which the event causing the loss occurred.
For purposes of securing the Bank’s liabilities in respect of its share in the risks fund, liens were
placed on government debentures having a value as at December 31, 2007 of NIS 9.5 million.
As at December 31, 2007, the amount of the liability, as described above, was NIS 7.8 million
(as at December 31, 2006 - NIS 7.7 million and NIS 6.0 million, respectively).
4)
The Bank has made a commitment to Bank Hapoalim Ltd., unlimited as to amount, regarding
its liability to the Ma’of Clearing House for the payment of any monetary obligation deriving
from its transactions for its customers with respect to derivatives on the Ma’of market.
5)
The Bank has made a commitment to indemnify Bank officers, within the meaning thereof in
the Companies Law – 1999. The cumulative amount of the indemnification the Bank will
provide to each officer based on said commitment for one or more indemnification events may
not exceed 33% of the Bank’s shareholders’ equity based on its last financial statements
published prior to the actual indemnification date.
6)
Subordinated notes
On May 15, 2007, the Bank signed an agreement with First International Issues Ltd.
(“International Issues”), a wholly owned subsidiary of First International, pursuant to which the
Bank has undertaken to bear all the payments to the holders of the commitment certificates that
are to be issued by International Issues to the public, together with all the expenses involved in
the aforesaid issue, and with the proceeds from the issue being deposited with the Bank in
accordance with the terms set out in the agreement.
On May 16, 2007, International Issues published a shelf prospectus for the issue of up to 12
series of commitment certificates, which could include debentures or subordinated notes, the
proceeds from which will be deposited with the Bank or with First International.
Each of the series of commitment certificates will have a nominal value of NIS 500 million.
143
C.
The Bank has given an undertaking with regard to the certificates that will be issued pursuant to
this shelf prospectus and whose proceeds – in an amount of up to NIS 140 million – will be
deposited with the Bank. First International has given an undertaking with regard to the
certificates that will be issued pursuant to this shelf prospectus and whose proceeds – in an
amount of up to NIS 381.4 million – will be deposited with First International.
7)
Operating services
Computerization services
Within the framework of the agreement for the sale of control in the Bank from Bank Hapoalim
to First International (see the section regarding control of the Bank above), arrangements have
been made for a period of six years, during which Bank Hapoalim will continue to provide the
Bank with services in accordance with an agreement from 1997, which remains in force until
2011. The purpose of this is to ensure that the Bank will be able to provide all banking services
for its customers in the way in which it does today and for a consideration which was agreed
between the Bank and Bank Hapoalim.
According to the terms of a permit to control and to hold means of control, granted to First
International and Hever, the time period during which the Bank receives operational services
will be the minimum period required to arrange suitable alternatives. Any extension of this
period beyond three years from the closing date (August 17, 2006) will be subject to obtaining
written approval from the Supervisor of Banks.
Pursuant to the agreement, even if it ceases to receive the operating services from Bank
Hapoalim, the Bank will pay NIS 20 million per year. These commitments are backed by
undertakings given by First International.
In 2007, the Bank continued to receive operating services in accordance with and within the
framework of the aforesaid agreements. A service agreement (SLA) has yet to be signed. At
the same time, the process of converting the Bank’s operating system has commenced.
Other operating services
In order to ensure the continued orderly operation of the Bank’s services, the Supervisor has
permitted – for a limited period – the continued rendering of services previously provided by
Bank Hapoalim. With effect from January 2007, certain services (deposits, cash withdrawals
and check cashing) are being provided by all First International’s branches.
As at the reporting date, security services continue to be provided and this is expected to
continue until the end of February 2008.
Call center services
The Supervisor permitted the continued rendering of call center services to Bank Otsar
Hahayal's customers through a call center operated by Bank Hapoalim, until August 31, 2009
The Supervisor has given notice of his intention to recommend to the Governor of the Bank of
Israel that this permit be extended up to a maximum of 3 years from the date of transfer of
ownership, or alternatively until First International is granted a permit to provide call center
services to Bank Otsar Hahayal’s customers before the 3 years expire, should it be ready to do
so.
144
C.
8)
Reform of the capital market
In July 2005, the Knesset, passed three laws that are intended to bring about a comprehensive
reform of the capital market:
-
The Increased Competition and Reduced Centralization in the Israeli Capital Market
Law (Legislative Amendments) – 2005 (“the Increased Competition Law”).
-
The Supervision of Financial Services (Pension Counseling and Pension Marketing)
Law – 2005 (“the Pension Counseling Law”).
-
The Supervision of Financial Services (Provident Funds) Law – 2005 (“the Provident
Funds Law”).
This legislation has far-reaching implications for various other laws. The provisions of these
three laws (“the Laws”) are complex, and require study and interpretation. Proper interpretation
will be possible only when the Laws are applied practically, and taking into consideration the
position of the various competent authorities and of the courts.
Within the framework of related legislation, regulations were published on February 26, 2006
that regulate the payment of distribution commissions to distributors of mutual funds, and in
which the maximum rate of these commissions is fixed by fund type. On the same date,
regulations were published that regulate the payment of distribution commissions made by a
managing company to a consultant in return for the distribution of provident funds, and the
maximum rate of these commissions, provided the consultant undertakes that when entering
into a distribution agreement with any other managing company, said agreement will set
identical rates and terms of payment for an identical service. All said regulations came into
force on April 1, 2006.
145
C.
Within the legislative framework on this topic, the Commissioner for the Capital Market,
Insurance and Savings published the circular letter, Provision of Operating Services by a
Pension Consultant to Institutional Bodies, on September 10, 2006. The circular letter sets,
inter alia, limitations on the operational services that a pension consultant may render to an
institutional body. It also states that the maximum operating commission that the institutional
body may pay for these operating services shall not exceed 0.1% of the value of the assets. In
addition, the circular letter states that a pension consultant may not collect operating
commission from the managing company of a pension fund that did not require external
operating services on February 8, 2006. The circular letter states that a managing company that
had purchased provident funds from a bank may continue providing members, through the
bank, with various services that are part of the usual service provided by a pension consultant to
his customers, provided that the members do not already receive such services within the
framework of pension consultancy provided to them. The managing company may pay the
bank for such services, until December 31, 2007, commission at the maximum rate of 0.25% of
the value of the member’s assets, provided the managing company does not pay the said
commission for a service that is provided to a member to whom the bank does not intend to
provide pension consultancy until December 31, 2007, or that no pension consultancy was
actually provided to him in practice until that date.
Sale of provident funds and mutual funds
On August 14, 2006, Otsarit sold all its rights and obligations with respect to the management
of its mutual funds to Gaon Mutual Fund Management Ltd. in consideration for approximately
NIS 23 million. After deducting costs and taxes, the company recorded a profit from
extraordinary items in the amount of NIS 14.5 million.
In March 2007, an agreement was signed for the sale of the provident fund operations owned by
the Bank (Bitahon, Shiriyon, Bizaron, the Central Severance Pay Fund, and the Smadar Further
Training Fund) to Ayalon Provident Fund Management Company Ltd. and Ayalon Insurance
Company Ltd.
On July 1, 2007, following fulfillment of the suspending conditions, the transaction was closed.
The consideration from the sale of these operations, net of the related tax effect, amounted to
approximately NIS 39.4 million.
Among the matters it covers, the agreement prescribes that the Bank shall continue to provide
brokerage services under the existing agreements; distribution agreements and operating
agreements are also specified.
In parallel, with regard to some of the provident funds managed by the Bank, the management
of such funds was transferred to other bodies.
The Bank’s revenues from management fees from provident funds and further training funds in
2007 amounted to NIS 7.1 million, compared to NIS 14.3 million in 2006. The Bank’s
revenues from operating commission, which have been collected since July as referred to
above, amounted to NIS 1.0 million in 2007.
146
C.
Preparations for pension consulting
Following the legislation resulting from the reform of the capital market and with the
completion of the sale of the provident funds that it owned, the Bank is making preparations to
provide its customers with a pension consulting service. The Bank’s preparations to provide a
pension consulting service include the recruitment of experienced pension consultants, the
training of pension consultants who are licensed for pension consulting and the assimilation of
systems for pension consulting. As at December 31, 2007, the Bank employs 27 pension
consultants.
At the same time, First International (the parent company) is implementing measures to develop
support systems, both for consulting and also for the operation of the pension structure for itself
and for the companies in the Group.
In December 2007, the Bank submitted an application to be granted a pension consulting
license.
9)
Legislation with regard to commissions
On July 5, 2007, the Banking (Customer Service) Law (Amendment No. 12) – 2007 was
passed. This law deals mainly with giving the Bank of Israel the authority to control the prices
of banking services that are provided to the customer public, as well as the authority to
determine – with regard to certain customers (individuals and corporations that are small
businesses as defined in the rules to be prescribed by the Governor of the Bank of Israel) - a
binding list of tariffs, which is to include a list of the only services for which banks will be
permitted to charge a commission, and also how such commission is to be calculated and
presented. On January 8, 2008, the Governor issued the Banking (Customer Service)
(Commissions) Rules, 2008 that includes the aforementioned binding list of tariffs.
Within the context of his powers to control tariffs, the Governor is authorized to declare certain
services to be price-controlled services by virtue of causes prescribed in the above law. Once a
certain service has been declared a price-controlled service, as stated, the Governor is
authorized to determine – by order – the price of the service, or its maximal price, and can also
prohibit the collection of commission for the service; alternatively, the Governor may supervise
increases in the commission tariffs in force with the various banks immediately prior to the
declaration.
Within the framework of the amendment, it has been decided that the summary report of
commissions collected from a customer for the principal services received in the quarter shall
be expanded so as to apply to all commissions , but it will only be sent to the customer once
every half year.
With the publication of the rules, the banks were given a grace period of three months in order
to make the necessary preparations (which may be extended for a further three months).
The Bank is currently making arrangements to implement the rules prescribed by the law. At
this stage, following an initial review of the prescribed rules, it appears that – without any other
changes, the loss in revenues from operating commissions that are to be cancelled will amount
to approximately NIS 50 million.
In the Bank’s estimation, the aforesaid change will result in a change in the structure of
commission revenues in such a way as to reduce the loss of revenue referred to above. At
present, Management is unable to estimate the mitigating effect, if any, of all the factors noted
on the anticipated revenue loss.
147
Note 17A - Derivative Financial Instruments - Year-End Balances
A.
The Bank is exposed to changes in the fair value of financial instruments and to liquidity risks
deriving from changes in interest rates and exchange rates.
As part of the Bank’s overall strategy for managing the level of exposure to changes in the fair
value of financial instruments, the Bank has a designated financial instrument that qualifies for
hedge accounting and various derivative instruments that are not designated with regard to
qualifying for hedge accounting.
B.
A derivative that is not designated to be a qualifying hedge is stated at its fair value, and
changes in the fair value are recorded in the statement of profit and loss on a current basis.
These instruments include forward currency transactions, currency options and interest swap
transactions.
C.
The Bank may have a contract that does not in itself constitute a derivative instrument but
includes an embedded derivative. In respect of each such a contract, the Bank evaluates
whether the economic characteristics of the embedded derivative are clearly and closely
connected to those of the host contract, and determines whether a separate instrument with the
same conditions as the embedded instrument would have met the definition of a derivative
instrument. When the embedded derivative has economic characteristics that are not clearly
and closely connected to the economic characteristics of the host contract, and a separate
derivative with the same terms would qualify as a derivative instrument, the embedded
derivative is separated from the host contract and is treated as a separate derivative. An
embedded derivative that was separated is stated in the balance sheet together with the host
contract. When the host contract is measured according to fair value and the changes in its fair
value are recorded on a current basis in the statement of profit and loss, or when the Bank is
unable to reliably identify and measure an embedded derivative in order to separate it from the
host contract, the entire contract is presented in the balance sheet at its fair value.
D.
The Bank has designated a certain derivative to be a fair value hedge. The change in the fair
value of the derivative hedging the exposure for changes in the fair value of the hedged asset is
recorded on a current basis in the statement of profit and loss, as is the change in the fair value
of the hedged item that can be attributed to the hedged risk.
The Bank formally documents all relationships between hedging instruments and hedged items,
as well as its risk-management objective by means of creating a hedging relationship. The
documentation includes specific identification of the asset, the liability and the transaction
which was designated as a hedged item and an indication of the manner by which the hedging
instrument is anticipated to hedge the risks relating to the hedged item. The Bank evaluates the
effectiveness of the hedging relations at the beginning of the hedge and on an ongoing basis
according to its risk management policy.
E.
The Bank will cease hedge accounting prospectively, when:
1)
It is determined that the hedge is no longer effective after offsetting the changes in the
fair value or the cash flows of the hedged item;
2)
The derivative lapses, or is sold, cancelled or realized;
3)
Management cancels the designation of the derivative as a hedging instrument.
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies
as an effective fair value hedge, the derivative will continue to be recorded on the balance sheet at its
fair value, but the hedged asset or liability will no longer be adjusted in respect of changes in the fair
value.
148
Note 17B -
Transactions in Derivative Instruments – Volume, Credit Risks and Maturity
Dates
A.
Volume of activity
1)
Nominal value of derivative financial instruments
December 31, 2007
Foreign
Contracts in
currency
respect of
Interest contracts
NIS/CPI
Other
contracts
shares
NIS millions NIS millions NIS millions NIS millions
a)
Hedging derivatives (1)
Swaps
-
191.4
-
-
191.4
-
191.4
-
-
191.4
-
191.4
-
-
191.4
ALM derivatives (1, 2)
Forward contracts
321.6
-
788.7
-
1,110.3
Total
321.6
-
788.7
-
1,110.3
Total
Including interest rate swaps
in which the Bank agreed
to pay a fixed rate of interest
b)
c)
d)
Other derivatives (1)
Forward contracts
Other option contracts
Options written
Options purchased
-
-
-
-
-
-
-
70.5
50.4
28.4
28.4
98.9
78.8
Total
-
-
120.9
56.8
177.7
Spot currency swap
contracts
-
-
38.6
-
38.6
321.6
191.4
948.2
56.8
1,518.0
Total
(1)
(2)
Total
NIS millions
Excluding spot foreign currency swap contracts.
Derivatives constituting part of the asset and liability management system of the Bank that were
not designated as hedges.
149
Note 17B -
Transactions in Derivative Instruments – Volume, Credit Risks and
Maturity Dates (cont’d)
As at December 31, 2007 (cont’d)
A.
Volume of activity (cont’d)
2)
Gross fair value of derivative instruments
December 31, 2007
Foreign
Contracts in
currency
respect of
Interest contracts
NIS/CPI
Other
contracts
shares
Total
NIS millions NIS millions NIS millions NIS millions NIS millions
a)
b)
c)
(1)
Hedging derivatives
Positive gross fair value
Negative gross fair value
-
0.2
3.6
-
-
0.2
3.6
ALM derivatives (1)
4.9
1.1
-
17.7
6.3
-
22.6
7.4
Other derivatives
-
-
1.6
2.2
3.3
3.2
4.9
5.4
Total positive gross fair value
4.9
0.2
19.3
3.3
27.7
Total negative gross fair value
1.1
3.6
8.5
3.2
16.4
Derivatives constituting part of the asset and liability management system of the Bank that were not
designated as hedges.
150
Note 17B -
B.
Credit risk in respect of derivative instruments classified according to counter-party
Stock
Market
NIS millions
Positive gross fair
value of derivative
instruments (1)
Balance-sheet values
of assets deriving
from derivative
instruments
Off-balance-sheet
credit risk in respect
of derivatives (2)
Total credit risk in
respect of derivative
instruments
Banks
NIS millions
December 31, 2007
Governments and
central banks
NIS millions
Other
NIS millions
Total
NIS millions
2.5
21.9
-
3.3
27.7
2.5
21.9
-
3.3
27.7
-
122.8
-
18.8
141.6
2.5
144.7
-
22.1
169.3
In 2007, no credit losses were recognized in respect of derivative instruments.
(1)
(2)
Including balance-sheet value of stand-alone derivative instruments in the amount of NIS 18.1 million,
which is included in the item “Other assets”.
Off-balance-sheet credit risk in respect of derivative instruments (including in respect of derivative
instruments with a negative fair value), as calculated for the purpose of determining individual borrower
limitations.
C.
Maturity dates – nominal value amounts: year-end consolidated balances
December 31, 2007
Up to
Three
three
months
One year
Over five
months
to one year to five years
years
Total
Interest contracts
- NIS/CPI
- Other
Foreign currency contracts
Contracts in respect of shares
Total
41.1
722.4
7.3
770.8
151
280.5
220.4
17.4
518.3
5.4
32.1
37.5
191.4
191.4
321.6
191.4
948.2
56.8
1,518.0
Note 17B -
A.
Volume of activity
1)
Nominal value of derivative financial instruments
December 31, 2006
Foreign
Contracts in
currency
respect of
Interest contracts
NIS/CPI
Other
contracts
shares
NIS millions NIS millions NIS millions NIS millions
a)
b)
c)
d)
Hedging derivatives (1)
Swaps
Total
Including interest rate swaps
in which the Bank agreed
to pay a fixed rate of interest
ALM derivatives (1, 2)
Forward contracts
Total
-
55.6
55.6
-
-
55.6
55.6
-
55.6
-
-
55.6
321.4
321.4
-
640.5
640.5
-
961.9
961.9
Other derivatives (1)
Forward contracts
Other option contracts
Options written
Options purchased
Total
-
12.7
-
-
12.7
-
12.7
214.6
139.8
354.4
7.4
7.4
14.8
222.0
147.2
381.9
Spot currency swap
contracts
-
-
14.8
-
14.8
321.4
68.3
1,009.7
14.8
1,414.2
Total
(1)
(2)
Total
NIS millions
Excluding spot foreign currency swap contracts.
152
Note 17B -
A.
Volume of activity (cont’d)
2)
Gross fair value of derivative instruments
December 31, 2006
Foreign
Contracts in
currency
respect of
Interest contracts
NIS/CPI
Other
contracts
shares
Total
a)
Hedging derivatives
-
1.6
-
-
1.6
b)
ALM derivatives (1)
1.8
6.1
-
12.1
5.3
-
13.9
11.4
Other derivatives
-
-
1.4
3.3
2.8
2.7
4.2
6.0
Total positive gross fair value
1.8
-
13.5
2.8
18.1
Total negative gross fair value
6.1
1.6
8.6
2.7
19.0
c)
(1)
B.
Credit risk in respect of derivative instruments classified according to counter party
Stock
Market
NIS millions
Positive gross fair
value of derivative
instruments (1)
Balance-sheet values
of assets deriving
from derivative
instruments
Off-balance-sheet
credit risk in respect
of derivatives (2)
Total credit risk in
respect of derivative
instruments
Banks
NIS millions
December 31, 2006
Governments and
central banks
NIS millions
Other
NIS millions
Total
NIS millions
2.6
11.0
-
4.5
18.1
2.6
11.0
-
4.5
18.1
-
96.5
-
22.4
118.9
2.6
107.5
-
26.9
137.0
In 2006, no credit losses were recognized in respect of derivative instruments.
(1)
(2)
Including balance-sheet balance of stand-alone derivative instruments in the amount of
NIS 18.1 million, which is included in the item “Other assets”.
Off-balance-sheet credit risk in respect of derivative instruments (including in respect of
derivative instruments with a negative fair value), as calculated for the purpose of determining
individual borrower limitations.
153
Note 17B -
C.
Maturity dates – nominal value amounts: year-end consolidated balances
December 31, 2006
Up to
Three
three
months
One year
Over five
months
to one year to five years
years
Total
Interest contracts
- NIS/CPI
- Other
Foreign currency contracts
Contracts in respect of shares
Total
20.4
12.7
629.6
5.7
668.4
301.0
55.6
354.7
3.8
715.1
25.4
5.3
30.7
-
321.4
68.3
1,009.7
14.8
1,414.2
Note 17C - Balances and Estimates of Fair Value of Financial Instruments
A.
Information regarding estimate of the fair value of financial instruments
Most of the Bank’s financial instruments do not have a market value since there is no market in which
they are actively traded. Therefore, fair value is determined using accepted pricing models, such as, the
present value of future cash flows, discounted at an interest rate that reflects the risk inherent in the
financial instrument. The fair value so computed is valid for the balance-sheet date only.
The determination of fair value by means of estimating future cash flows and determination of a
discount rate is subjective. Therefore in respect of most financial instruments, the stated fair value does
not necessarily indicate the realizable value of the financial instrument on the balance-sheet date. The
determination of fair value is made on the basis of interest rates in effect on the balance-sheet date and
does not take into account interest rate fluctuations.
Under different interest rate assumptions, the fair values calculated may differ significantly. This is true
especially in respect of financial instruments with interest at fixed rates or those not bearing interest.
Furthermore, the determination of fair value does not take into account commissions that will be
received or paid in the course of business and does not include tax effects. Moreover, the difference
between the balance-sheet value and the fair value may not be realized because, in most cases, the Bank
will hold the financial instrument until maturity.
Due to these reasons it should be noted, that the data included in this note does not purport to reflect the
value of the Bank. Furthermore, because of a wide range of valuation techniques and estimates that can
be applied in the calculation of fair value and in the absence of binding objective rules, caution must be
exercised when comparing fair values presented by different banks.
154
Note 17C - Balances and Estimates of Fair Value of Financial Instruments (cont’d)
B.
The principal methods and assumptions used in estimating the fair value of financial
instruments
1)
Credit to the public – the fair value of credit to the public is determined on the basis of the
present value of future cash flows discounted at an appropriate discount rate as follows:
Future cash flows were divided into annual cumulative consecutive receipts beginning from the
ensuing financial year, and these receipts were segmented into groups with similar
characteristics such as type of customer, type of interest, linkage basis, etc. These groups have
been segmented into different risk levels.
The receipts were discounted for each year included in the group, on the basis of the average
interest rate the Bank used in similar transactions on the balance-sheet date. Credit to high-risk
borrowers (such as loans under arrangements for the rescheduling of payments, amounts that
will be waived when certain payment terms are fulfilled, etc.) was discounted according to the
highest interest rate the Bank used in similar transactions on the balance-sheet date. The
specific provisions for doubtful debts have been deducted from the future cash flows. The
supplementary and general provisions have not been deducted from the balance of the credit for
the purpose of calculating the cash flows in the valuation.
The fair value calculation does not include discounts given in respect of early repayment, as the
anticipated effect of such repayment on fair value is not unequivocal.
2)
Marketable securities – at fair value.
3)
Deposits with banks – by discounting future cumulative cash flows according to interest rates
used by the Bank in similar transactions at the balance-sheet date.
4)
Deposits, debentures and subordinated notes – by the method of discounting cumulative future
cash flows at the rate of interest at which the Bank raises similar deposits or at the rate it uses in
an issue of similar debentures and subordinated notes.
5)
Financial instruments (excluding derivative financial instruments and marketable financial
instruments) having an initial maturity period not exceeding three months and those at variable
market interest – the balance-sheet value approximates the fair value, subject to changes in
credit risks and the Bank’s margin.
6)
Off-balance-sheet financial instruments, the balance of which reflects a credit risk, contingent
liabilities and special commitments – the fair value is estimated based on the commissions in
similar transactions at the balance-sheet date.
7)
Derivative financial instruments not traded on an active market – estimated based on models
used by the Bank in its current operations and which take into account the risk inherent in the
financial instrument.
155
Note 17C - Balances and Estimates of Fair Value of Financial Instruments (cont’d)
C.
Balances and estimates of fair value of financial instruments
December 31, 2007
Balance-sheet value
(1)
(2)
Total
NIS millions
NIS millions
NIS millions
Financial assets
banks
Securities
Credit to the
government
Other financial assets
Total financial assets
Fair
value
NIS millions
December 31, 2006
Balance-sheet value
(1)
(2)
Total
NIS millions
NIS millions
NIS millions
Fair
value
NIS millions
2,060.1
1,357.0
6,778.5
131.7
3.1
1,695.0
2,191.8
1,360.1
8,473.5
2,193.1
1,360.1
8,509.2
*1,947.8
921.1
*6,100.7
195.6
3.1
1,796.9
*2,143.4
924.2
*7,897.6
*2,151.6
924.2
*7,924.0
0.9
59.3
-
0.9
59.3
0.9
59.3
50.7
-
50.7
50.7
10,255.8
1,829.8
12,085.6
12,122.6
9,020.3
1,995.6
11,015.9
11,050.5
8,130.4
76.0
1,795.4
-
9,925.8
76.0
9,971.8
76.0
7,195.4
98.1
1,834.3
-
9,029.7
98.1
9,060.8
98.1
Financial liabilities
Deposits from banks
Deposits from the
government
Subordinated notes and
debentures
Other financial liabilities
115.5
-
115.5
115.5
115.0
-
115.0
115.0
1,028.4
389.3
-
389.3
1,028.4
400.8
1,028.4
935.5
376.5
-
376.5
935.5
384.6
935.5
Total financial liabilities
9,350.3
2,184.7
11,535.0
11,592.5
8,344.0
2,210.8
10,554.8
10,594.0
* Reclassified.
Notes:
(1)
Financial instruments in respect of which the balance-sheet value is an estimate of fair value – instruments that are stated in the balance sheet at their
market value or financial instruments with an original term not exceeding three months or based on variable market interest that changes at frequencies of
up to three months.
(2)
Other financial instruments.
156
Notes to the Financial Statements as at December 31, 2007
Note 18 - Related Parties
A.
Balances
December 31, 2007
Shareholders
Controlling shareholder (2)
(8)
(7)
Interested parties (1)
Directors and General
Manager(4)
Others(3)
(7)
(8)
(7)
One who was an
interested party at
the time the transaction
Related parties held
was executed
by the Bank
Others(6)
Others(5)
(8)
(7)
(8)
(7)
(8)
(7)
(8)
NIS millions
Assets
Cash and deposits
with banks
Other assets
Liabilities
Deposits from the
public
Deposits from banks
Subordinated notes
Other liabilities
Shares (included in
shareholders’
equity) (9)
Credit risk in offbalance-sheet
items (10)
1.5
480.0
1.6
-
0.2
-
1.0
-
1.1
-
43.6
10.0
1.0
283.5
10.0
6.0
32.9
-
32.9
22.2
0.4
-
-
3.9
0.1
4.1
11.4
150.0
4.3
15.9
0.8
-
31.3
1.6
-
0.4
-
0.7
-
23.3
14.3
0.4
37.1
100.0
14.3
4.5
-
-
-
-
347.6
347.6
30.2
30.2
-
-
-
-
-
-
-
-
-
-
-
-
0.6
0.6
10.5
10.5
-
-
-
-
157
Note 18 - Related Parties (cont'd)
A.
Balances
December 31, 2006
Shareholders
Controlling shareholder (2)
(8)
(7)
Directors and General
Manager(4)
Others(3)
(7)
(8)
(7)
One who was an
interested party at
the time the transaction
Related parties held
was executed
by the Bank
Others(6)
Others(5)
(8)
(7)
(8)
(7)
(8)
(7)
(8)
NIS millions
Assets
Cash and deposits
with banks
Other assets
Liabilities
Deposits from the
public
Subordinated notes
Other liabilities
Shares (included in
shareholders’
equity) (9)
Credit risk in offbalance-sheet
items (10)
84.6
-
640.0
-
-
-
0.1
-
0.1
-
62.7
2.2
0.5
63.2
42.2
1.5
70.4
23.3
0.9
631.0
32.2
3.4
-
0.1
-
5.1
4.0
28.9
4.0
23.2
1.8
-
24.1
2.5
-
0.5
-
0.6
-
31.6
37.2
2.5
32.2
41.2
2.5
-
101.5
-
5.1
-
236.8
5.2
-
*347.6
*347.6
*30.2
*30.2
-
-
-
-
-
-
-
-
-
-
-
-
0.5
0.5
8.0
8.0
-
-
-
-
* Restated.
158
Note 18 - Related Parties (cont’d)
B.
Condensed results of transactions with interested and related parties
Directors and
Managing
Director (4)
NIS millions
Shareholders
Controlling
shareholder (2)
Others (3)
NIS millions
NIS millions
Others (5)
NIS millions
Related parties
held by the
Bank
Others (6)
NIS millions
Income from
financing
operations
before
provision for
doubtful debts
(A)
Operating and
other income
Operating and
other expenses
3.8
(0.8)
-
3.7
-
-
-
-
(0.2)
-
(0.7)
-
-
-
-
Shareholders
Controlling
shareholder (2)
Others (3)
NIS millions
NIS millions
Directors and
Managing
Director (4)
NIS millions
Others (5)
NIS millions
Related parties
held by the
Bank
Others (6)
NIS millions
Income from
financing
operations
before
provision for
doubtful debts
(A)
Operating and
other income
Operating and
other expenses
3.7
(0.7)
-
0.7
0.7
-
-
-
-
14.4
-
-
(3.2)
-
-
(A) Details in section D. below.
159
Note 18 – Related Parties (cont’d)
C.
Benefits to interested parties
Directors and Managing Director (4)
2007
2006
Salary to interested party employed by the Bank
Total benefits (in NIS millions)
Number of benefit recipients
1.6
1
2.2
2
Fees to directors not employed by the Bank
Total benefits (in NIS millions)
Number of benefit recipients
1.4
13
1.0
19
D.
Results of financing operations (before provision for doubtful debts) in transactions of the
Bank and its investee companies with interested and related parties
2007
2006
2005
NIS millions
NIS millions
NIS millions
In respect of assets:
From deposits with banks
From credit to the public
5.4
(0.1)
7.2
0.4
29.9
1.3
(1.4)
-
(0.6)
-
(5.3)
(1.8)
(0.5)
(2.6)
(1.0)
Others:
Financing and
other income
3.3
-
-
Total results of financing
activity (before provision
for doubtful debts)
6.7
4.4
23.1
In respect of liabilities:
On deposits from the public
On deposits from banks
On subordinated notes
and debentures
160
Note 18 – Related Parties (cont’d)
E.
Financing income and expenses
Financing income and expenses with interested and related parties were made on the same terms as
would have been employed had such transactions been made with an unrelated party.
Footnotes to Note 18
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Interested party – as stated in Paragraph (1) of the definition of an “interested party” of a
corporation in Section 1 of the Securities Law – 1968.
Related party – as defined in Opinion 29 of the Institute of Certified Public Accountants in
Israel (who is not an interested party).
Controlling shareholder – as defined in the Securities Law.
A person who holds 5% or more of the issued share capital or voting rights of the Bank, or the
right to appoint one or more of its directors, or to appoint the Managing Director.
Including spouses and their minor children.
Including a corporation in which the interested party holds 25% or more of the issued share
capital or voting rights, or the right to appoint 25% or more of its directors.
a.
A corporation in which the Bank holds 10% or more of the issued share capital or voting
rights, or the right to appoint 10% or more of its directors or the Managing Director.
b.
A corporation in which a related party holds 25% or more of the issued share capital or
voting rights, or the right to appoint directors.
Balance as at balance-sheet date.
Highest balance during the year – calculated on the basis of month-end balances adjusted on the
basis of the CPI at the balance-sheet date.
The holdings of interested and related parties in the Bank’s equity.
Credit risk of off-balance-sheet financial instruments, as calculated for the purpose of
determining individual borrower limitations.
161
Note 19 - Profit from Financing Operations (Before Provision for Doubtful Debts)
Composition:
2007
2006
2005
NIS millions
NIS millions
NIS millions
A.
In respect of assets (1)
From credit to the public
From deposits with the Bank of Israel and from cash
From deposits with banks
From debentures
B.
In respect of liabilities
On deposits from the public
On deposits from the government
On deposits from the Bank of Israel
On deposits from banks
On subordinated notes and debentures
From derivative financial instruments
and hedging transactions
Net income (loss) from ALM derivatives (2)
Financing income from other derivative instruments, net
505.7
(0.5)
(29.0)
57.0
*482.1
3.1
15.0
36.4
*477.5
7.7
134.8
13.7
(227.1)
(1.8)
(2.5)
(2.7)
(33.4)
(227.7)
(1.7)
(0.7)
1.2
(19.7)
(305.4)
(1.7)
(0.3)
(7.8)
(28.5)
60.8
8.1
18.4
5.3
(12.8)
9.0
3.9
14.7
3.5
0.8
18.0
(0.8)
*3.8
6.3
1.6
1.6
17.6
(4.6)
*3.6
4.9
2.3
0.3
17.8
-
374.7
338.0
315.1
(3.3)
(2.8)
(15.3)
C.
D.
Other
Commissions from financing operations
Other financing income
Gain on sale of available-for-sale securities, net
Adjustment to market value of securities held for trading
Interest collected on doubtful and problematic debts
Other financing expenses
Total profit from financing operations
before provision for doubtful debts
Including: exchange rate differences, net
E.
Details of results of investments in debentures
Financing income on accrual basis:
From available-for-sale debentures
From debentures held for trading
Total, included in profit from financing
operations in respect of assets
Gains on sale of available-for-sale debentures
Adjustment to market value of securities held for trading
Total, included in other financing income
50.0
7.0
27.8
8.6
11.7
2.0
57.0
3.5
0.8
4.3
36.4
1.6
1.6
3.2
13.7
2.3
0.3
2.6
Total from investments in debentures
61.3
39.6
16.3
2.1
1.7
(4.3)
F.
Details of net effect of hedging instruments on
the profit from financing operations
Financing expenses in respect of assets (section A)
* Reclassified.
(1) Including the effective component of the hedging relations.
(2) Derivatives constituting part of the asset and liability management system of the Bank that were not
designated as hedges.
162
Note 20 - Operating Commissions
Composition:
2007
2006
2005
NIS millions
NIS millions
NIS millions
Account management fees
Payment order system services
Income from credit cards
Credit handling and contract preparation
Income from securities transactions
Interest margin and collection commissions
respect of credit and deposits from deposits, based
on collections
Management of investment portfolios of others
Computerized services, information and
confirmations
Foreign trade transactions and special
services in foreign currency
Other commissions
Total operating commissions
31.1
35.2
34.7
22.9
49.6
31.5
34.1
33.9
24.7
*42.3
31.9
32.9
32.5
21.3
*37.3
0.3
2.9
0.5
2.9
3.5
3.0
4.7
5.0
5.0
4.7
0.1
2.3
0.1
2.3
0.1
186.2
177.3
169.8
* Reclassified.
Note 21 - Other Income
Composition:
2007
2006
2005
NIS millions
NIS millions
NIS millions
Management and operating fees
from provident funds
Distribution fees from mutual funds
(includes management fees in 2006 and 2005)
Others
Total other income
163
8.1
5.6
14.3
5.5
14.0
7.5
2.2
2.0
2.3
15.9
21.8
23.8
Note 22 - Salaries and Related Expenses
Composition:
2007
2006
2005
NIS millions
NIS millions
NIS millions
Salaries
National insurance and VAT on salaries
Severance, provident, pension, further
training and vacation pay
Voluntary retirement expenses
Other salary-related expenses
Total salaries and related expenses
167.9
190.3
151.0
38.6
45.5
39.4
25.8
5.0
4.9
23.7
4.6
18.1
4.6
242.2
264.1
213.1
Note 23 - Other Expenses
Composition:
2007
2006
2005
NIS millions
NIS millions
NIS millions
Data processing
Communications
Marketing and advertising
Office expenses
Compensation for customer losses
Professional services
Employee training and courses
Insurance
Commissions
Directors’ fees
Others
Total other expenses
* Reclassified.
164
65.2
15.7
8.7
2.8
1.3
3.3
2.5
1.8
4.6
1.7
6.1
*60.6
13.8
6.4
2.6
1.3
3.0
1.9
2.7
3.9
1.5
6.5
*52.3
13.4
6.0
3.3
1.5
2.8
1.8
3.7
3.4
1.5
4.3
113.7
104.2
94.0
Note 24 - Provision for Taxes on Operating Profit
2007
2006
2005
NIS millions
NIS millions
NIS millions
A.
Composition:
Provision for current taxes
Taxes in respect of prior years
Decrease in deferred tax assets
Decrease in deferred taxes in respect of prior years
Total provision for taxes on operating profit
B.
38.7
0.3
(1.1)
0.5
38.4
50.6
1.0
(2.0)
0.8
50.4
Reconciliation between the theoretical tax on the operating profit at the statutory tax rate
applying to a bank in Israel, and the adjusted provision for taxes on operating profit appearing
in the statement of profit and loss:
2007
NIS
millions
Statutory tax rate applying to a bank in Israel
Tax at the statutory tax rate
Tax (tax savings) resulting from:
Change in deferred tax balances due to change in
tax rates
Taxes in respect of prior years
Differences from adjustment of monetary
assets, net
General provision and supplementary
Non-deductible expenses
Deferred taxes in respect non-monetary items
Others
Total taxes on income
C.
49.3
(0.6)
0.6
49.3
2006
2005
NIS
NIS
%
millions
%
millions
38.53
40.65
%
43.59
48.0
38.53
28.6
40.65
49.8
43.59
0.6
(0.6)
0.48
(0.48)
0.5
0.3
0.71
0.43
0.8
1.0
0.70
0.87
(4.9)
(3.93)
0.4
0.57
(5.0)
(4.37)
0.1
7.3
(1.5)
0.3
49.3
0.08
5.86
(1.20)
0.24
39.58
0.7
7.8
0.2
(0.1)
38.4
1.00
11.10
0.28
(0.14)
54.60
(0.9)
5.7
(1.5)
0.5
50.4
(0.79)
4.99
(1.31)
0.44
44.12
Tax assessments that were issued or that are considered final:
For the Bank – assessments up to and including the 2003 tax year.
For subsidiaries – self-assessments that are considered final up to and including the 2003 tax
year.
D.
The depreciated cost of depreciable buildings, the depreciation of which is not allowable as an
expense for tax purposes or as a cost at the time of sale of the buildings, is considered to be a
permanent difference in respect of which no provision for deferred taxes is to be made:
December 31
2007
2006
NIS millions
NIS millions
Balance at end of year
0.4
165
0.4
Note 24 - Provision for Taxes on Operating Profit (cont’d)
E.
Net balances of deferred tax assets and provision for deferred taxes (Note 7), in respect of:
December 31
2007
2006
NIS millions
NIS millions
Provision for vacation pay and for
salary-related expenses not yet paid
Provision for unfunded severance pay
and voluntary retirement
Adjustment of depreciable non-monetary assets
8.3
7.9
4.2
2.0
1.9
1.4
14.5
11.2
The deferred taxes are calculated on the basis of the tax rate anticipated to be in effect on the date of
their realization.
F.
Legislation regarding taxes on income
In July 2005, the Knesset passed the Amendment to the Israel Income Tax Ordinance (No. 147
and Temporary Order) – 2005.
The Amendment provides for a gradual reduction in the corporate tax rate, from a rate of 29% at
present to a rate of 25%, in the following manner:
- In 2008 the applicable tax rate will be 27%
- In 2009 the applicable tax rate will be 26%
- From 2010 onwards the applicable tax rate will be 25%
In June 2006, the Value Added Tax Order (Tax Rate for Non-Profit Organizations and
Financial Institutions) – 2006 (“the Amendment”) was published in the Official Gazette.
Following the Amendment, the salary tax and profit tax rates applying to financial institutions
were reduced from 17% to 15.5% with effect from July 1, 2006. Provision for tax on the Bank's
income includes profit tax in accordance with the Value Added Tax Law applying to the
income.
In light of this, the statutory tax applying to the Bank in 2006 is 40.65%., in 2007 – 38.53%, in
2008 – 36.80%, in 2009 – 35.93%, and in 2010 and thereafter – 35.06%. Current taxes and
deferred taxes as at December 31, 2006 are computed in accordance with the tax rates as
stipulated in the Amendment to the Law.
The effect of the change was included in the consolidated financial statements for 2006 and
amounted to an increase of NIS 0.5 million in the income tax expense.
On January 29, 2008, the Finance Committee of the Knesset approved the proposed Income Tax
Law (Inflationary Adjustments) (Curtailment of Period of Application) – 2007, whereby the
Inflationary Adjustments Law will be revoked with effect from the 2008 tax year.
Under the proposed law, most of the clauses of the law will in practice be revoked with only
certain clauses (dealing with transition provisions and the prevention of distortions in
calculating the tax) remaining in effect.
Pursuant to the proposed law, with effect from 2008, no calculation will be made for the
deduction or addition because of inflation and the linkage of depreciation and carryforward
losses. In addition, the calculation of capital losses, the deduction of financing expenses, the
definition of assets in the Income Tax Ordinance, etc., will be subject to various changes and
adjustments.
166
Note 25 - After-Tax Profit from Extraordinary Items
Composition:
2007
NIS millions
Profit from sale of provident funds and
mutual funds operations
Capital gain from sale of buildings and
equipment
Less – related tax
Total after-tax profit from extraordinary items
December 31
2006
NIS millions
2005
NIS millions
60.7
22.5
-
(21.3)
(8.0)
1.0
(0.3)
39.4
14.5
0.7
Note 26 - Condensed Financial Statements Classified by Organizational Structure and
Main Business Segments
General
The Bank’s activities were classified into six main business segments, as detailed below. The
breakdown into activity segments is based on the types of customers or the types of products in
each segment.
Personal Banking Segment – provides a wide range of banking services and financial products to
households.
Private Banking Segment – provides a range of multi-channel and advanced banking services
along with financial products to private customers of medium to high net worth, including
investment consultation.
Small Business Segment – provides a wide range of banking services and financial products to
small businesses that utilize credit lines of up to NIS 2,250 thousand.
Corporate Segment – provides banking services and financial products to businesses that utilize
credit in excess of NIS 2,250 thousand.
Financial Management Segment – responsible for management of the Bank’s exposures and
supports the development and pricing of financial products, and also manages the Bank’s nostro
activities.
Other and Adjustments – this includes, mainly, activity units that do not constitute a segment and
unallocated activities.
167
Main Business Segments (cont’d)
The following are the main principles applied in allocating the operating results between the
different segments:
Financing income - the profit centers that focus on activities involving the customers in the Bank’s
branches and its subsidiaries in Israel are credited with the financial margin on loans extended to
the customers and for deposits made by the customers.
The profit from financing income includes the financial margin, both credit-related and depositrelated, that is calculated as the differential between the interest received or paid and the Bank’s
cost of money at the time the transaction is performed and is derived from the duration that matches
the credit or deposit terms in the relevant linkage segments. The results of operations deriving from
currency exposure are included in the financial activity segment.
The activity segments are credited with interest on the shareholders’ equity attributed to the
segment (the attributed shareholders’ equity was calculated based on the risk assets attributed to
each segment) and charged with the surplus financing costs (beyond the cost involved in raising
resources) of the capital notes assigned to the segment.
The provision for doubtful debts is charged specifically to the segment in which it was generated.
Operating income is measured based on the actual income.
Operating expenses are measured as follows:
Salary – attributed according to the actual cost of the position.
Other operating expenses – recorded according to the actual expense, or with the equivalent value
of the expense.
Indirect costs – the segments activity includes attributing the cost of units that render direct and
identified service to the measured division. The cost of units that render indirect services is charged
according to an agreed allocation table.
Income tax – the provision for taxes on the profits of each segment is computed at the effective tax
rate for each segment.
The other activity includes activity that was not attributed in full to the units’ activity.
168
Main Business Segments
Condensed Information Regarding Main Business Segments
Statements of profit and loss for the year ended December 31, 2007
Profit from financing
operations before provision
for doubtful debts
Inter-segment
Inter-segment
-Total income
Total operating and other
expenses (including
depreciation)
To outside parties
Operating profit
before taxes
Provision for taxes on operating
profit
Operating profit after
taxes
After-tax profit from
extraordinary items
Net profit
Rate of return on capital (% of
net profit to gross weighted
capital)
Average balance of assets
Average balance of liabilities
Average balance of risk assets
Assets of provident funds
and mutual funds
Average balance of other
managed assets
A. Profit from financing
for doubtful debts:
Margin from credit
granting activities
Margin from deposit
receipt activities
Other
Total profit from financing
operations before provision for
doubtful debts from outside
parties and inter-segment
Personal
segment
Private
Banking
Segment
Small
Business
segment
Corporate
segment
Financial
Management
segment
Other
Total
consolidated
181.4
(29.1)
(60.8)
113.2
84.0
(23.6)
116.1
(70.0)
54.0
9.5
-
374.7
-
93.5
245.8
5.7
66.0
118.4
0.5
27.2
6.5
94.1
12.3
14.5
(6.5)
54.1
0.8
0.9
64.4
-
-
202.1
576.8
19.3
218.3
111.3
65.9
28.9
8.5
-
432.9
21.8
6.6
15.9
24.4
55.9
-
124.6
8.0
2.1
6.2
9.8
23.2
-
49.3
13.8
4.5
9.7
14.6
32.7
-
75.3
24.1
37.9
11.8
16.3
3.5
13.2
14.6
32.7
-
39.4
114.7
11.0%
14.8%
12.4%
7.0%
40.7%
-
13.5%
4,068.0
3,654.4
3,442.7
807.7
4,604.8
1,099.9
1,193.6
800.4
1,067.7
2,014.2
724.7
2,088.4
3,330.6
1,112.3
800.2
-
11,414.1
10,896.6
8,498.9
1,056.3
943.5
452.6
5,450.2
149.7
205.3
17.8
2,886.4
-
-
1,676.4
9,485.4
19.8
-
-
-
-
-
19.8
82.2
10.4
43.5
34.9
53.4
16.7
36.6
5.4
10.6
6.3
2.8
8.4
152.3
52.4
60.4
46.1
169
Main Business Segments (cont’d)
Condensed Information Regarding Main Business Segments (cont’d)
for doubtful debts
Inter-segment
Inter-segment
Total income
expenses (including
depreciation)
To outside parties
before taxes
Provision for taxes (tax savings)
on operating profit
Operating profit (loss) after
taxes
extraordinary items
Net profit (loss)
capital)
Average balance of assets*
Average balance of liabilities*
Assets of provident funds
and mutual funds
managed assets
for doubtful debts:
Margin from credit
granting activities
Margin from deposit
receipt activities
Other
Personal
segment
Private
Banking
Segment
Small
Business
segment
Corporate
segment
Financial
Management
segment
Other
Total
consolidated
187.6
(34.2)
(78.4)
131.6
79..8
(25.9)
93.1
(48.7)
55.9
(22.8)
-
338.0
-
*102.1
255.5
0.4
*60.3
113.5
0.2
26.9
5.7
86.5
18.7
9.5
(5.7)
48.2
10.8
0.6
33.7
-
-
*199.4
537.4
30.1
*223.9
*107.6
70.3
27.0
8.2
-
*437.0
31.2
5.7
(2.5)
10.4
25.5
-
70.3
16.7
3.0
(1.4)
5.7
14.4
-
38.4
14.5
2.7
(1.1)
4.7
11.1
-
31.9
3.0
17.5
10.9
13.6
0.6
(0.5)
4.7
11.1
-
14.5
46.4
4.8%
20.6%
(0.5%)
2.3%
14.7%
-
5.7%
3,985.0
3,687.9
3,673.9
679.6
4,297.8
659.3
1,058.6
678.4
999.9
1,942.1
556.3
2,036.0
3,157.9
1,149.6
754.3
-
10,823.2
10,370.0
8,123.4
1,028.0
760.0
628.0
4,171.0
143.0
144.0
19.0
227.0
-
*2,444.5
1,818.0
*7,746.5
17.7
-
-
-
-
-
17.7
75.8
8.1
35.9
31.7
60.1
17.5
41.0
4.1
10.8
7.2
3.3
9.4
153.4
53.2
53.9
44.4
* Reclassified.
170
Main Sectors of Activity (cont’d)
Condensed Information Regarding Main Business Segments (cont’d)
for doubtful debts
Inter-segment
Inter-segment
Total income
expenses (including
depreciation)
To outside parties
Provision for taxes on operating
profit
Equity of minority interest in
profit of subsidiaries
Net operating profit (loss)
extraordinary items
Net profit
capital)
Average balance of assets
Average balance of liabilities
Assets of provident funds,
mutual funds and further
training funds
managed assets
for doubtful debts:
Margin from credit
granting activities
Margin from deposit
receipt activities
Other
Personal
segment
Private
Banking
segment
Small
Business
segment
Corporate
segment
Financial
Management
segment
Other
Total
consolidated
172.0
(26.0)
(104.9)
152.6
68.1
(20.0)
97.0
(53.4)
82.9
(53.2)
-
315.1
-
99.2
245.2
6.1
*58.6
106.3
-
25.1
5.7
78.9
15.5
6.9
(5.7)
44.8
1.0
3.8
33.5
-
-
*193.6
508.7
22.6
191.2
47.9
*90.0
16.3
61.1
2.3
23.1
20.7
6.4
27.1
-
*371.8
114.3
20.7
27.2
7.0
9.3
1.0
1.3
8.9
11.8
12.8
14.3
-
50.4
63.9
27.2
9.3
1.3
11.8
14.3
(0.1)
(0.1)
(0.1)
63.8
27.2
9.3
1.3
11.8
14.3
0.7
0.6
0.7
64.5
7.3%
15.7%
1.4%
7.0%
18.0%
-
8.4%
3,574.3
3,203.2
3,700.7
426.6
3,930.0
591.3
939.3
575.5
919.9
1,660.7
546.1
1,681.9
3,190.0
1,076.2
795.6
-
9,790.9
9,331.0
7,689.4
1,026.8
573.2
*790.9
3,382.8
147.6
97.8
19.4
161.4
-
2,155.8
*1,984.7
6,371.0
27.0
-
-
-
-
-
27.0
75.6
8.1
33.4
28.1
53.0
17.4
34.6
5.0
8.7
6.0
5.8
9.7
146.0
47.7
48.1
43.6
* Reclassified.
171
Note 27 – Condensed Financial Statements of the Bank
A.
Balance sheets
December 31
2007
2006
Reported Amounts
NIS millions
NIS millions
Assets
Securities
Investments in investee companies
Other assets
Total assets
Deposits from banks
Subordinated notes
Other liabilities
Total liabilities
Total liabilities and shareholders’ equity
* Reclassified.
172
2,191.8
1,347.1
8,473.5
0.9
13.7
158.4
71.1
*2,143.4
912.6
*7,898.1
14.8
156.5
53.0
12,256.5
11,178.4
9,927.3
76.1
115.5
389.3
1,027.7
9,032.9
98.1
115.0
376.5
944.8
11,535.9
10,567.3
720.6
611.1
12,256.5
11,178.4
Note 27 - Condensed Financial Statements of the Bank (cont’d)
B.
Statements of profit and loss
2007
2006
Reported amounts
NIS millions
NIS millions
Profit from financing operations, before
Operating and other income:
Profits from investments in shares
Other income
2005
NIS millions
373.9
19.3
336.7
30.1
314.4
22.6
354.6
306.6
291.8
183.3
16.0
199.3
*174.4
0.3
18.1
192.8
*166.8
16.5
183.3
Operating and other expenses:
Maintenance and depreciation of
buildings and equipment
Other expenses
240.5
260.1
208.4
76.8
113.1
430.4
68.1
*102.2
430.4
64.0
*91.3
363.7
123.5
49.0
69.0
37.8
111.4
49.1
Bank’s equity in the after-tax operating
profits of affiliated companies
74.5
31.2
62.3
0.8
15.2
1.9
75.3
39.4
46.4
-
64.2
0.3
114.7
46.4
64.5
* Reclassified.
173
Note 27 - Condensed Financial Statements of the Bank (cont’d)
B.
Statements of profit and loss (cont’d)
2007
2006
2005
Operating profit
Net profit
0.59
0.31
0.90
0.25
0.11
0.36
0.52
0.01
0.53
Operating profit
Net profit
5.94
3.11
9.05
2.52
1.14
3.66
5.16
0.06
5.22
29.70
15.56
45.26
12.59
5.73
18.32
25.81
0.28
26.09
Profit per founders’ share of NIS 0.005
Operating profit
Net profit
C.
Information on the basis of nominal-historical data (without The Property Company of
Otsar Hahayal Ltd.)
1)
Condensed balance sheets
December 31
2007
2006
NIS millions
NIS millions
Total assets
12,248.1
11,168.4
Total liabilities
11,541.3
10,571.5
706.8
596.9
2007
2006
NIS millions
NIS millions
2)
Net nominal profit
115.1
174
47.4

Bank Otsar Hahayal Ltd. and its subsidiaries 2007 Annual Report

Transcription

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