Bank Otsar Hahayal Ltd. and its subsidiaries (Part of the Beinleumi

Transcription

Bank Otsar Hahayal Ltd.
and its subsidiaries
(Part of the Beinleumi Group)
2008Annual Report
This is a translation from the Hebrew version of the 2008 Annual Report and has
been prepared for convenience only.
In the case of any discrepancy, the Hebrew version will prevail.
2008 Annual Report
Contents
Page
Board of Directors’ Report
5
Management Review of the Bank’s Financial Position and the Results of its Operations
88
Certification of the General Manager and the Chief Accountant
102
Report of the Board of Directors and Management on Internal Control over
Financial Reporting
104
Financial Statements
105
2
Members of the Board of Directors
Zeev Gutman, Chairman of the Board of Directors
Yoram Hessel
Prof. Reuven Gronau
Roni Tal (Gottfried)
Dafna Pelli
Irit Shlomi
David Levinson
Amos Malka
Michal Abadi-Boiangiu
Shahar Turjeman
Joel Gonen
Atalya Arad
Itzhaq (Zachi) Ein-Gal
Eyal Hankin
Galit (Sigalit) Abargil
3
Members of Management
Israel Trau – Managing Director
Noam Kutai – Deputy General Manager of the Bank, Head of Retail Banking
Baruch Granot – Senior Vice President, Chief Financial Officer
Doron Calif – Senior Vice President, Head of Corporate Banking
Dan Traub – Senior Vice President, Head of Human Resources and Logistics
Gila Yeheskely – Vice President, Chief Legal Counsel and Corporate Secretary
Orit Horesh – Vice President, Head of Capital Markets
Ofer Salpeter – Vice President, Chief Accountant
___________________________
Nir Abel, CPA – Chief Internal Auditor
Somekh Chaikin, CPAs – External Auditors of the Bank
4
Board of Directors’ Report for 2008
5
BOARD OF DIRECTORS’ REPORT FOR 2008
At the Board of Directors’ meeting held on February 26, 2009, it was resolved to approve and publish the
consolidated financial statements of Bank Otsar Hahayal Ltd. for the year ended December 31, 2008. The
financial statements are prepared in accordance with the format set by the Supervisor of Banks, and the data are
presented in reported amounts.
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”, “supposed to”, 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.
Detailed below are the principal developments and changes that occurred during 2008.
Economic activity
General
2008 was characterized by a slowdown in most sectors of the Israeli economy. This slowdown followed the
global financial crisis and the collapse of international financial entities. It is reflected in the moderation of
inflationary pressure, and in declines in local and foreign demand, private consumption, investments,
turnover in the trade and services sectors, and the growth rate of exports and imports of raw materials.
The total deficit in the government’s budget amounted in 2008 to NIS 15.2 billion, which represents 2.1% of
GDP, compared to an annual target deficit of NIS 11.5 billion, which represents 1.6% of GDP. The target
deficit being exceeded reflects a sharp decline in the State’s revenues from taxes, resulting from reduced
collection of income tax, a sharp decline in taxation of the capital market due to the financial crisis, and the
expediting of government expenses in an attempt to accelerate economic activity.
The trade deficit increased sharply by 35% in 2008, amounting to USD 13.7 billion. The trade deficit
reflects a 15% increase in imports and a 10.6% increase in exports.
Unemployment remained at 5.9% in November 2008. It is estimated that due to the financial crisis, the
unemployment rate will increase starting in December 2008, and will reach 7.6% in 2009.
Consumer price index (CPI)
The CPI increased in 2008 by 3.8%, 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% to 3% increase. In the fourth quarter of the year, the
CPI decreased by 0.6%, and was affected by a decrease in energy prices and in the prices of food and goods
in the worldwide markets, the same factors that had contributed to the increase in the CPI in the first three
quarters of the year.
6
Exchange rate
In 2008, the foreign currency market was characterized by high volatility.
Over the year, the shekel appreciated against the US dollar by 1.14%, against the euro by 6.39%, and against
the currency basket by 2.8%. In the fourth quarter of the year the shekel depreciated against the US dollar by
11.14%, against the euro by 5.95%, and against the currency basket by 9.65%.
Monetary policy
The average monetary interest rate in 2008 stood at 3.65%, compared to 3.94% in 2007.
The monetary policy of the Bank of Israel, which is designed to attain stability in the local financial markets
and to mitigate the affect of the global financial crisis on the local real activity, and the sharp decrease in the
inflation environment have led to an aggregate decrease of 1.75% in monetary interest in the fourth quarter
of 2008, to 2.5% at the end of December 2008. The monetary interest rate reflects a real interest rate of
3.5%, and is 2.25% higher than the dollar interest rate in the U.S. At the end of January 2009, the monetary
interest was reduced to 1%. The rate decrease was designed, inter alia, to ease the credit crunch in the
business sector. The money supply in the economy increased by 17% over the year, and amounts to
NIS 71.9 billion. The increase in the money supply is higher than that required in order to meet the growth
and inflation target.
Capital market
The capital market was characterized over the year by considerable withdrawals from the provident funds
and mutual funds, and by sharp declines in the leading indices, and was affected by the worsening of the
financial crisis in the U.S. as well as in the rest of the world. The crisis in the capital market reflects the
expectation of declines in companies’ profitability following the slowdown in activity and the increased risk
and uncertainty. Over the year, the General Shares Index declined by a nominal rate of 46.5%, the Tel Aviv
25 Index declined by a nominal rate of 46.2%, the Tel-Tech Index declined by a nominal rate of 60.9%, the
Real Estate Index declined by a nominal rate of 79.7%, the Banks Index declined by a nominal rate of
55.1%, and the Insurance Index declined by a nominal rate of 61.2%.
Following the worsening of the global economic crisis and the uncertainty in the financial markets, the
tendency to prefer investing in government debentures has increased, since these have maintained relative
stability. The corporate debenture market recorded declines reflecting investor concern that companies may
find it difficult to repay their debts. The Government CPI-Linked Debentures Index rose by a nominal rate
of 9.6%, the Non-Linked Debentures Index rose by a nominal rate of 9.77%, the Currency-Linked
Debentures Index rose by a nominal rate of 3.4%, the Corporate Debentures General Index declined by a
nominal rate of 14.0%, and the Corporate CPI-Linked Debentures Index declined by a nominal rate of
16.6%.
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 62 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, 2008, the Bank’s share of the banking
sector, based on the criteria of credit volume and deposits from the public, is 1.3%.
7
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. The provisions of the Antitrust
Commissioner dated April 10, 2006, abrogated the agreements and arrangements under which the Bank
was required to market a certain percentage of credit cards issued by Isracard Ltd. and American Express
Ltd., so that the Bank will not be restricted in marketing a debit card.
b. Investment portfolio management – provided by Otsarot Investment Management Co. Ltd., a company
wholly owned by the Bank.
c. Management and operation of provident funds – 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.
(“Ayalon”). Additionally, in 2007 and 2008, some of the other funds managed by the Bank but not
owned by it, transferred their management operation to other entities. The operation of one further study
fund that is not owned by the Bank was transferred to Harel in July 2008, although operating services
were provided to it until October 2008. During 2008, the Bank provided operating services to the
provident funds sold to Ayalon.
Principal holdings:
Otsar Hahayal
FIBI Group
88.3%
(53.1)1))
Investment
Company of Bank
Otsar Hahayal Ltd.
(1)
100%
100%
Property Company
of Otsar Hahayal
Ltd.
Otsarot Investment
Management Co.
Ltd.
Where the rights to share in profits differ from the rights to appoint directors, the rights to share in profits
appears in parentheses.
8
Control of the Bank
The controlling shareholder of the Bank is the First International Bank of Israel Ltd. (“First International”),
which holds 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 8% of the
rights to share in profits and 10% of the rights to appoint directors.
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.
Investments in the Bank’s capital and transactions in its shares:
In 2008, no transactions were effected that involved the Bank’s shares, no capital was issued, and no
dividend was declared or distributed.
Profit and Profitability
Net profit amounted to NIS 52.2 million in 2008, compared to a net profit of NIS 114.7 million in 2007, a
54.5% decrease.
Net profit in 2007 includes profit from the sale of the provident fund operation that amounted to NIS 39.4
million.
Operating profit before taxes amounted to NIS 87.2 million in 2008, compared to NIS 124.6 million in
2007, a 30.0% decrease.
Operating return before taxes on equity was 11.52% in 2008, compared to 18.66% in 2007.
Operating profit after taxes amounted to NIS 52.3 million in 2008, compared to NIS 75.3 million in 2007,
a 30.5% decrease.
Operating return after taxes on equity was 6.90% in 2008, compared to 11.27% in 2007.
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.
Net return on average equity:
2008
6.90%
2007
17.17%
2006
7.73%
2005
10.64%
2004
10.40%
2005
10.53%
2004
10.56%
Operating return after taxes on average equity:
2008
6.90%
2007
11.27%
2006*
10.06%
* Net of a bonus paid to employees of the Bank, following the transfer of control in it.
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The change in net profit in 2008, compared to the net profit in 2007, reflects mainly:
- an increase in profit from financing operations, due to an increase in the volume of business.
- an increase in the specific provision for doubtful debts.
- an increase in operating income, due in part to an increase in the income from credit card activity
and in part to credit and foreign trade activity.
- an increase in operating expenses: payroll expenses and other operating expenses.
Profit from financing operations before provision for doubtful debts amounted to NIS 376.7 million in
2008, compared to NIS 374.7 million in 2007, a 0.5% increase. The increase in profit from financing
operations reflects an increase in the volume of operations, which has in turn lead to an increase of NIS 31.1
million in income, net of the effect of a decrease in the amount of NIS 13.6 million in the financial margin.
The change in income and other financing expenses amounted to a decrease in the amount of NIS 15.5
million – as detailed below.
Presented below is the operating contribution, by linkage segments, to the profit from financing operations
before provision for doubtful debts:
2008
Average
financial
capital(1)(2)
Unlinked shekel
segment
CPI-linked shekel
segment
Foreign currency
and foreign currencylinked segment
(1)
(2)
(3)
Average
volume of
activity (3)
NIS millions
2007
Contribution
to profit
Financial
margins
Average
financial
capital(1)(2)
Average
volume of
activity (3)
NIS millions
Contribution
to profit
Financial
margins
718.3
9,149.3
310.6
3.23%
466.0
7,958.6
265.7
3.20%
(23.2)
2,411.0
11.8
0.57%
124.9
2,400.2
31.0
0.94%
3.6
2,427.3
21.6
0.90%
40.9
2,101.5
29.8
1.49%
Including the effect of ALM derivative financial instruments.
In the shekel segment and in the foreign currency segment, the average is calculated on a daily basis; in the CPI-linked segment
it is based on opening balances.
Total assets of the segment.
Other financing income amounted to NIS 37.0 million in 2008, compared to NIS 49.0 million in 2007, a
24.5% decrease.
The income from the redemption of deposits, from the sale of available-for-sale securities, net and from
marketable debentures amounted to NIS 3.1 million in 2008, compared to NIS 12.8 million in 2007, a
decrease of 75.8%. The income from the sale of available-for-sale securities, net, including provisions for
impairment of available-for-sale securities, amounted in 2008 to NIS 8.4 million.
Interest income collected on problematic debts amounted in 2008 to NIS 16.0 million, compared to NIS 18.0
million in 2007, a decrease of 11.1%.
Income from fees and commissions, options and other financial instruments amounted to NIS 17.9 million in
2008, compared to NIS 18.2 million in 2007, a decrease of 2.7%.
Other financing expenses increased from NIS 0.8 million in 2007 to NIS 4.2 million in 2008. The increase
in financing expenses is due mainly to an anticipated loss with respect to loans, interest payable to the
Income Tax Authorities and to institutions with respect to assessments of deductions and financing
operations insurance expenses.
The provision for doubtful debts was made, as in the past, conservatively and amounted to
NIS 34.6 million in 2008, compared to NIS 19.3 million in 2007, an increase of 79.3%.
The specific provision for doubtful debts in 2008 amounted to NIS 34.5 million, compared to
NIS 19.0 million in 2007, an increase of 81.6%. Most of the specific provision is attributable to corporate
activity, as in 2007.
10
The provisions for doubtful debts increased in 2008 and amounted to NIS 75.9 million, compared to
NIS 55.2 million in 2007, an increase of 37.5%. The total decrease in the provisions and the collection of
debts defined as doubtful in the past was NIS 41.4 million, compared to NIS 36.2 million in 2007, an
increase of 14.4%.
The following table presents the ratio of the specific provision for doubtful debts to the portfolio of credit
extended under the Bank’s responsibility:
2008
2007
%
%
Ratio of the specific provision with respect to balancesheet values to balance-sheet credit risk
0.43
0.30
Ratio of the specific provision to total credit risk*
0.25
0.15
Ratio of the cumulative provision with respect to
balance-sheet values to balance sheet credit risk
2.50
2.62
Ratio of the total cumulative provision to total credit
risk*
1.84
1.94
* Balance sheet credit risk and the off-balance-sheet credit risk, 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 to a supplement of NIS 0.1 million in 2008, compared to NIS 0.3 million
in 2007. The majority of the provision in 2008 was recorded with respect to non-income bearing debts.
The general and supplementary provision determined in accordance with the directives of the Supervisor of
Banks amounted to NIS 24.7 million at December 31, 2008, compared to NIS 24.6 million at December 31,
2007, of which 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 2004 real values).
Total problematic debts amounted to NIS 331.2 million at December 31, 2008, compared to
NIS 254.2 million at December 31, 2007, an increase of 30.3%.
For additional details of the composition of problematic debts, see “Developments in Principal Balance Sheet
Items” below.
Profit from financing operations after provision for doubtful debts amounted to NIS 342.1 million in
2008, compared to NIS 355.4 million in 2007, a decrease of 3.7%.
Operating and other income amounted to NIS 211.3 million in 2008, compared to NIS 202.1 million in
2007, an increase of 4.6%. The income from operating commissions amounted to NIS 202.5 million in
2008, compared to NIS 186.2 million in 2007, an increase of 8.8%.
Most of the income from capital market activity amounted as follows:
2008
NIS millions
2007
Change
%
Income from operations in securities
Income from mutual fund distribution fees
59.9
4.1
52.5
5.6
14.1
(26.8)
Income from provident fund operation fees
2.8
*8.1
(65.4)
66.8
66.2
0.9
Total operating income from capital market activity
* Including income attributed until June 2007 from management fees with respect to provident fund
operations that were sold.
11
Income from credit card commissions amounted to NIS 39.6 million in 2008, compared to NIS 34.7 million
in 2007, an increase of 14.1%.
Income from credit handling, credit spread for which the Bank is not accountable, and contract preparation
amounted to NIS 25.2 million in 2008, compared to NIS 23.2 million in 2007, an increase of 8.6%.
Income from foreign trade and foreign currency services amounted to NIS 5.6 million in 2008, compared to
NIS 4.7 million in 2007, an increase of 19.1%. The increase is due primarily to factoring activity.
Income from operations in checking accounts (including account management fees, payment services and
computerized services) recorded an increase of 1.4%, from NIS 71.0 million in 2007 to NIS 72.0 million in
2008.
On July 1, 2008, the last part of Amendment 12 to the Banking (Service to Customers) Law (“the
Commissions Law”) came into effect. The Bank has implemented the provisions set forth in the Law and
has established a new list of tariffs. The Bank believes that the change resulting from the implementation of
the provisions of the Law could affect public behavior with respect to use of the Bank’s operating services,
in a manner that the income from these services will decrease in the future at a rate that cannot be estimated
at this stage.
Operating expenses amounted to NIS 466.2 million in 2008, compared to NIS 432.9 million in 2007, an
increase of 7.7%.
Operating expenses had a 45.3% coverage rate of operating and other income in 2008, compared to 46.7% in
2007.
Payroll expenses amounted to NIS 253.9 million in 2008, compared to NIS 242.2 million in 2007, an
increase of 4.8%.
The increase in payroll expenses in 2008 results from an increase in the provisions for severance pay, inter
alia, due to a decline in the severance pay funds, the effect of salary agreements for the years 2007-2008, an
increase in the number of employees and the effect of assessments of deductions. Part of the increase was
offset by the cancellation of bonuses for the year 2008.
Building and equipment maintenance expenses and depreciation amounted to NIS 84.5 million in 2008,
compared to NIS 77.0 million in 2007, an increase of 9.7%.
The increase is reflected in depreciation, rental fees and municipal tax expenses, maintenance expenses and
depreciation expenses at similar rates. The increase reflects in part the operating cost of new branches
opened in 2007 and 2008.
Other operating expenses amounted to NIS 127.8 million in 2008, compared to NIS 113.7 million in 2007,
an increase of 12.4%.
Approximately half of the increase in this expense was in the data processing and computer services
expenses that increased from NIS 65.2 million in 2007 to NIS 71.9 million in 2008, an increase of 10.3% that
reflects an increase in the volume of operations, as well as an increase resulting from the implementation of
regulatory provisions.
Other operating expenses (which are not data processing expenses) recorded an increase of 15.3%,
amounting to NIS 55.9 million in 2008, compared to NIS 48.5 million in 2007. Most of the increase is due
to advertising expenses and expenses resulting from professional consultancy services that amounted to
NIS 4.1 million and NIS 2.2 million, respectively.
The provision for taxes on operating profit in 2008 amounted to NIS 34.9 million, compared to NIS 49.3
million in 2007.
The rate of provision for taxes on operating profit in 2008 was 40.0%, compared to 39.6% in 2007.
The statutory tax rate in 2008 was 36.80%, compared to 38.53% in 2007.
12
The increase in the effective tax rate, despite a decrease of 1.7% in the statutory tax rate in 2008, compared
to the same period last year, resulted mainly from the effect of the cancellation of the Inflationary
Adjustments Law, as specified below, that led to a 5.3% increase in the effective tax rate.
On February 26, 2008 the Knesset enacted the Income Tax Law (Adjustments for Inflation) (Amendment
No. 20) (Restriction of Effective Period) – 2008 (“the Amendment”). In accordance with the Amendment,
the effective period of the Inflationary Adjustments Law will cease at the end of the 2007 tax year and as
from the 2008 tax year the provisions of the law shall no longer apply, other than the transitional provisions
intended at preventing distortions in the tax calculations.
In accordance with the Amendment, as from the 2008 tax year, income for tax purposes will no longer be
adjusted to a real (net of inflation) measurement basis. Furthermore, the depreciation of inflation immune
assets and carried forward tax losses will no longer be linked to the CPI, so that these amounts will be
adjusted until the end of the 2007 tax year after which they will cease to be linked to the CPI.
In addition, within the framework of the aforementioned Amendment, the definition of “profit” and “salary”
in the VAT Law was amended. Pursuant to the new definitions, profit tax will be calculated after deducting
salary tax, and the definition of “salary”, for salary tax calculation purposes, will also include the payment of
the employer’s contribution with respect to National Insurance fees. The effect of the Amendment on the
results of the Bank is to increase the tax expense by NIS 5.2 million.
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 to a rate of 25%, as follows:
- In 2008, the tax rate was 27%.
- In 2009, the tax rate will be 26%.
- In 2010 and thereafter, the tax rate will be 25%.
The provision for taxes on the Bank’s income includes profit tax of 15.5%, applied under the Value Added
Tax Law. In light of this, the tax rate applicable to the Bank was 36.80% in 2008, and will be 35.93% in
2009. In 2010 and thereafter the tax rate will be 35.06%. Current taxes and balances of deferred taxes as at
December 31, 2008 were computed according to the tax rates stipulated in the Amendment.
For additional data on the provision for tax, final tax assessments, and the difference between the statutory
tax rate and the effective tax rate, see Note 24 to the financial statements.
After-tax income from extraordinary items amounted to NIS 39.4 million in 2007, and reflects the profit
from the sale of the provident fund operations owned by the Bank.
Organizational Structure and Branches
The Bank operates on several levels of financial activity: personal and private banking, commercial and
corporate banking, capital market activity for its customers and for itself, credit card activity and so forth.
The Bank’s primary operation is retail banking, conducted through 48 branches and offices.
The management structure of the Bank is designed to support an approach that places product customization
and customer service at the center of its operations.
The employees of the defense establishment are prominent among the customers of the retail banking
operations, and, accordingly, the Bank operates 14 branches and offices in military camps or in proximity to
them. The organizational structure of the Bank’s headquarters is also adapted to customer-oriented activity,
and is organized in a way that allows the provision of services to divisions that operate vis-à-vis customers.
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 the marketing and advertising strategy.
13
Corporate Banking Division – manages the Bank’s corporate customers operation and is responsible for
setting credit policy, approving credit to customers in amounts beyond the authority of the Retail Division,
and managing debt collection.
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.
Customer Asset Management Division – coordinates capital market consultancy and operations and the
pension consultancy activity. The Division coordinates the investment portfolio management activity
through the subsidiary Otsarot Investment Management Co. Ltd, and is responsible for operating the foreign
currency and foreign trade systems.
Resources Division – is responsible for human resources management, training activity and operational and
logistics activity.
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.
Accounting and Reporting Department – is responsible for bookkeeping and reporting to the public.
In addition to these units, the Bank has control units that answer to the Managing Director and to the
Chairman of the Board of Directors; these include market risks and liquidity control, credit risks control, and
prevention of money laundering and compliance assurance.
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.
The Bank provides a range of banking and financial services for its customers through its branches and
offices and through a subsidiary operating in the capital market.
The Bank’s activities are divided into five main operations, based on the types of customers in each segment.
The assignment of customers to a segment determines their management and supervision, and is done by the
computer and management systems in the business units.
Details of the Bank’s operating segments:
Personal Banking segment – banking services and financial products for households.
Private Banking segment – banking services and investment advice for private customers having medium
to large financial resources.
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.
The results of the segments’ operations, sorted by the primary operating 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
on “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.
14
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 of the Bank’s branches
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 management 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 subordinated notes and debentures 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 – include attributing the cost of units that render direct and identified service to the division
being measured, and the cost of indirect services that 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.
Condensed presentation of net profit and total assets, by segment of operations:
A. Net profit
Change
between
the
Net profit for the years
2007
2006
2008
NIS millions
Personal banking segment
Private banking segment
Small businesses segment
Corporate segment
Financial management segment
Total
7.1
6.9
4.0
13.6
20.6
52.2
37.9
16.3
13.2
14.6
32.7
114.7
years
2007-2008
%
17.5
13.6
(0.5)
4.7
11.1
46.4
Operating profit after tax
2008
2007
2006*
NIS millions
(81.3)
(57.7)
(69.7)
(6.8)
(37.0)
(54.5)
7.1
6.9
4.0
13.6
20.7
52.3
13.8
4.5
9.7
14.6
32.7
75.3
* Net of a bonus paid to employees of the Bank following transfer of control over it.
B. Total income
For the year ended December 31
2008
2007
2006
NIS millions
Change
between the
years
2007-2008
%
Corporate segment
255.2
126.1
98.8
60.3
47.6
245.8
118.4
94.1
54.1
64.4
255.5
113.5
86.5
48.2
33.7
3.8
6.5
5.0
11.5
(26.1)
Total
588.0
576.8
537.4
1.9
15
28.4
8.6
3.5
7.3
12.6
60.4
Change
between
the
years
2007-2008
%
(48.5)
53.3
(58.8)
(6.8)
(36.7)
(30.5)
C. Total assets (average balance)
2007
2006
2008
NIS millions
Corporate segment
Total
Change
between the
years
2007-2008
%
4,383.0
942.0
1,228.9
2,221.7
3,851.7
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
7.7
16.6
3.0
10.3
15.6
12,627.3
11,414.1
10,823.2
10.6
Retail Operations
General
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, also provides banking services to the customers of the Corporate Division. The
Division provides banking services, which include, inter alia credit, deposits, credit cards, securities
consultancy, etc.
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 activity 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.
Small Businesses segment – banking services and financial products for small businesses.
The retail operations include the Personal Banking segment and the Private Banking segment. These
operations are carried out through 39 Personal Banking units and 22 Private Banking units, within a layout
comprising 48 branches and offices. In 2008 two branches were opened, two offices were defined as
branches and the activity of one office was discontinued.
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 vis-à-vis the customer is conducted also by direct means, including over 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.
The segment’s customers are divided into 3 main groups:
• Defense establishment employees and retirees – including standing army servicemen, civilian Israel
Defense Forces (“IDF”) employees, Ministry of Defense employees, employees of support units of
the Ministry of Defense and other Defense establishment employees.
• Groups of employees that are unionized in workers committees.
• Other retail customers.
16
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.
During 2008, an amendment to the Commissions Law came into effect. For details of the nature of the
amendment and its effect, see the “Other Matters” Section.
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 the Internet). In 2008, the trend of customers’ use of the Bank’s
Internet services continued to expand. As at the end of 2008, over 149 thousand customers have subscribed
for service via the Internet, of whom approximately 99 thousand are active.
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).
-
Customer retention – In 2008, the Bank focused on customer retention by creating 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, following which in 2008 the Bank
continued recruiting clientele from among IDF servicemen and veterans, under the account management
terms set forth in the agreement.
-
In 2008, the Bank expanded its defense establishment population-oriented activity, and signed an
agreement for a period of 4 years with the Civilian IDF Employees Organization.
Principal entry and exit barriers of the segment
Branch deployment – during 2008, the Bank expanded the deployment of its branches and offices, and
opened new branches in West Rishon LeZion and in Rehovot. The Kfar Ganim and Rosh Pina offices were
expanded and defined as branches, and the Modiin branch was relocated and defined as a branch. The
opening of these branches involved training skilled employees to support the Bank’s range of products and
operations, and preparing an advanced technology environment.
Products and services
The Bank acts to improve and increase the efficiency of processes and to introduce technological
improvements, in order to improve service and expand the range of banking products.
Some of the Bank’s products are adapted for customers of the Personal Banking segment, especially
customers from the defense establishment. Among such products: bridge loans, training plans and advice for
people about to retire, rehabilitation loans, etc.
Until December 31, 2008, 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. 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.
At the end of December 2008, the Bank won a Ministry of Defense tender for the provision of credit and
bank services to employees of the defense establishment, ex-servicemen and those eligible for rehabilitation.
For additional details, see the “Material Agreements” Section below.
The award of the tender allows the Bank to maintain its relations with its core customers (the defense
establishment clientele).
17
During 2008, as in 2007, 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 an active account with the
Bank for several years.
In 2008, the Bank continued to operate a program that grants a loan secured by a mortgage from First
International. The program is implemented through mortgage booths of First International that are located at
some of the Bank’s branches. The Bank considers these loans to be a complementary product to the existing
services package. The mortgages provided through these mortgage booths amounted to NIS 240 million in
2008.
In April 2008, the Bank received a license to engage in pension consultancy. For details on the Pension
Consultancy Unit and the consultancy services, see the “Private Banking – Products and services” Section.
The structure of competition in the segment
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 2009, due to the creation of a uniform
commission basket in compliance with the Commissions Law, the removal – through legislation – of 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 clientele. 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 the “Products and services” Section, and a service
agreement for Hever members.
In February 2009, an agreement was entered into by Hever and Isracard for the issue of a non-bank credit
card. The issue of this credit card could have an adverse impact on the Bank’s revenues from the credit card
operations of this clientele. The Bank is taking steps to formulate agreements that will guarantee the income
to be received for the services it will grant to the cardholders and that will reduce the expected decline in
income, the extent of which the Bank’s Management is unable to estimate at this stage.
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 (bank statement, dedicated direct
mail), through self-service means (ATM and Adkan), on signs and by information leaflets, and through cards
distributed in the branches.
During the year, the Bank’s marketing means focused mainly on the establishment of a commitment to
receive service and benefits for periods of several years. At the end of 2008, the majority of the marketing
efforts in the Personal Banking segment were focused on the branches’ immediate surroundings.
Human capital
In 2008, the average number of positions in the segment was 474, of which 365 positions are direct
employees and 109 are head office staff, whose employment cost is allocated to the segment.
The number of managerial positions in the segment was 104, of which 72 are direct managers and 32 are
allocated to the segment.
In 2007, the average number of positions in the segment was 431, of which 345 positions were direct
employees and 86 were head office staff, whose employment cost was allocated to the segment.
The number of managerial positions in the segment was 101, of which 71 were direct managers and 30 were
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 (Bankols –
general tellers) after suitable training.
18
Material agreements
The Bank deems its defense establishment clientele as the core of its Personal Banking business. For details
of a tender for the provision of services to the defense establishment population, see the “Material
Agreements” Section below.
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, which is expected to enhance relations between the Bank and its clientele of IDF servicemen and
veterans.
Business goals and strategy
Maintaining the dominant position held by retail operations within the Bank’s operations continues to be the
focus of the Bank’s business policy.
In 2009, the Bank will continue its efforts of extensive recruitment of customers from among the core
population and retention of existing customers of the same population, inter alia by:
-
Improving customer service.
Enhancing the loyalty of the defense establishment clientele through long-term agreements.
Improving the quality of its credit portfolio.
Expanding its range of services to include supplementary products, such as mortgages, pension
consultancy, etc.
- In addition, efforts will be invested in recruiting civilian customers outside the defense establishment.
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 7.1 million in 2008, compared to NIS 37.9
Net return on equity computed on the basis of the risk components was 1.6% in 2008, compared to 11.0% in
2007.
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.
Net of the said effects, the Personal Banking segment’s net profit amounted to NIS 13.8 million in 2007,
compared to NIS 7.1 million in 2008, a decrease of 48.6%.
Net operating return on equity computed on the basis of the risk components was 1.6% in 2008, compared
to 4.0% in 2007.
The decrease in net operating profit is due mainly to an increase in expenses, as explained in the “Profit and
Profitability” Section.
The increase in expenses includes the operating expenses of new branches, the costs of new activities such as
pension consultancy, and the implementation costs of regulatory provisions attributed to the segment.
The segment’s income amounted to NIS 255.2 million in 2008, compared to NIS 245.8 million in 2007, an
increase of 3.8%.
The provision for doubtful debts of the segment amounted to NIS 8.3 million in 2008, compared to
NIS 5.7 million in 2007. The ratio of the provision for doubtful debts to the average credit volume is 1.9%
in 2008, compared to 1.4% in 2007.
Expenses of the segment amounted to NIS 236.5 million in 2008, compared to NIS 218.3 million in 2007, an
increase of 8.3%. The increase in expenses reflects an increase in salary, maintenance and other expenses,
due to the increase in the number of branches and due to the attribution of the Bank’s overall operating
expenses.
The average volume of the public assets managed in the segment amounted to NIS 6.9 billion in 2008,
compared to NIS 5.7 billion in 2007.
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
Operating and other 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
Operating profit (loss) after taxes
Profit from extraordinary items
Net profit
Return on attributed equity
Average balance of assets
Average balance of liabilities
Average balance of risk assets
Assets of provident funds and mutual funds
Average balance of securities
Average balance of other managed assets
(A) Profit from financing operations before provision
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
*
December 31, 2008
Capital
Credit
Market
Cards
Total
Banking and
Financial
December 31, 2007
Capital
Credit
Market
Cards
Total
171.2
(11.7)
1.5
-
5.5
(3.0)
178.2
(14.7)
174.4
(25.9)
1.3
-
5.7
(3.2)
181.4
(29.1)
55.7
215.2
8.3
12.2
13.7
-
23.8
26.3
-
91.7
255.2
8.3
55.6
204.1
5.7
17.4
18.7
-
20.5
23.0
-
93.5
245.8
5.7
219.6
(12.7)
(4.1)
(8.6)
(8.6)
10.3
3.4
1.1
2.3
2.3
6.6
19.7
6.3
13.4
13.4
236.5
10.4
3.3
7.1
7.1
204.2
(5.8)
(2.1)
(3.7)
(3.7)
9.2
9.5
3.4
6.1
24.1
30.2
4.9
18.1
6.7
11.4
11.4
218.3
21.8
8.0
13.8
24.1
37.9
4,383.0
4,156.6
3,988.3
15.3
1,993.2
-
-
1.6%
4,383.0
4,156.6
3,988.3
1,993.2
15.3
4,068.0
3,654.4
*3,699.0
19.8
1,056.3
943.5
-
-
11.0%
4,068.0
3,654.4
*3,699.0
1,056.3
943.5
19.8
85.8
60.4
13.3
1.5
2.5
-
88.3
60.4
14.8
79.7
53.4
15.4
1.3
2.5
-
82.2
53.4
16.7
159.5
1.5
2.5
163.5
148.5
1.3
2.5
152.3
Reclassified.
20
Private Banking
The structure of the operating segment
The Private Banking segment covers a range of banking services provided through a number of 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”. The administrative
responsibility for the Private Banking customers was given to the Retail Division, which is assisted in issues
pertaining to investment and consultancy by the Customer Asset Management Division.
Private Banking is intended for customers having financial wealth and/or customers whom the Bank assesses
to be customers with potential.
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.
In addition, the segment runs the “Titanium Club”, for customers whose asset balance at the Bank, not
including provident funds and further education funds, 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.
For details about regulatory involvement in banking commissions, see the “Other Matters” Section.
Market developments and changes in customer characteristics
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.
Following the crisis in the capital market, the volume of assets in the securities portfolio of customers of the
segment has declined, due to erosion of the portfolio as well as due to the transfer of assets to nonmarketable channels involving lower risk. A trend has also been seen of redemption of assets from provident
funds and their deposit in solid channels. In addition, a decline was seen in the profitability of security
portfolios, due to an increase in the weight of the monetary and shekel funds, which pay lower distribution
fees.
Technological changes that could influence the segment
The Bank uses First International’s consultancy system, which is an advanced consultancy system that uses a
computerized characterization model to come up with a recommended investment portfolio based on the
needs and preferences of every customer.
Critical success factors in the operating segment
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.
Principal entry and exit barriers of the operating 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 of an advanced technology environment and regular investment in systems maintenance and
upgrade.
21
The structure of competition in the 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 financial crisis in the second half of 2008, a trend is
being seen among customers, especially households, of returning to asset management through the banking
system, at the expense of insurance companies, investment companies and private brokers. The competition
between banks is expressed in benefits in the terms of account management, in price levels, in advertising
campaigns, in emphasis on personal service; in other words, a service package that is tailored to the
customer’s needs, and in providing personal advice as a part of this service package, in the constant
innovation of products and in technology. 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, who are
affected, as are the Personal Banking customers, by unique agreements as described in the “The structure of
competition in the segment” Section in the Personal Banking segment.
The Private Banking segment is characterized by extensive activity in the capital market. The main products
and services in the segment are as follows:
- Ordinary banking deposits and special deposits (foreign currency, structured deposits, etc.).
- Securities and other marketable products.
- Derivative financial instruments.
New services
- In April 2008, the Bank began providing pension consultancy services based on infrastructure set up by
First International, that serves also the subsidiaries (see the “Activity in the Capital Market” Section).
- During 2008, a central unit was established that provides consultancy to selected customers. The unit,
that uses the parent company’s existing information and consultancy system, provides consultancy
services to customers with an investment volume exceeding NIS 1 million. The unit’s activity is aimed at
improving the consultancy services provided to customers and making resources available for the
consultancy services provided to customers at the branches.
- The Bank markets to its customers some structured deposits similar to those marketed by the parent
company.
The Bank uses various data mining applications to focus the marketing of products and services to the
Private Banking clientele.
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 consultant 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 53 are head office staff, whose employment cost is allocated to the segment. The number of
managerial positions in the segment is 55, of which 39 are direct managers and 16 are allocated to the
segment.
employees and 45 were head office staff, whose employment cost is allocated to the segment.
The number of managerial positions in the segment in 2007 was 57, of which 41 were direct managers and
16 were allocated to the segment.
Of the total number of direct employees in the segment in 2008, 65 are investment consultants trained by the
Bank and certified by the Securities Authority (45 positions in 2007).
22
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.
The net profit of the Private Banking segment amounted to NIS 6.9 million in 2008, compared to NIS 16.3
Net return on equity computed based on the risk components was 7.2% in 2008, compared to 14.8% in
2007.
The net profit of the segment in 2007 included profit in the amount of NIS 11.8 million from the sale of the
The net profit of the segment, net of the said extraordinary items, amounted to NIS 4.5 million in 2007,
Net operating return on equity computed based on the risk components was 7.2% in 2008, compared to
4.1% in 2007.
The income of the segment in 2008 amounted to NIS 126.1 million, compared to NIS 118.4 million in 2007,
an increase of 6.5%. Most of the increase in income is reflected in the commission income from capital
market activity, which amounted to NIS 47.6 million, compared to NIS 43.5 million in 2007.
The increase in income reflects the increase in the volume of operations involving securities in 2008,
compared to the previous year, and the movement of customers from the Personal Banking segment to the
Private Banking segment, as well as the changes in the list of tariffs and the changes that followed the
amendment of the Commissions Law.
increase of 2.9%.
compared to NIS 10.5 billion in 2007. 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, as
well as an increase in the volume of short-term unlinked deposits.
23
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
To outside parties
Operating profit (loss) before taxes
Operating profit (loss) after taxes
Profit (loss) from extraordinary items
Net profit (loss)
December 31, 2008
Capital
Credit
Market
Cards
Total
December 31, 2007
Capital
Credit
Market
Cards
Total
(82.8)
133.9
3.0
-
1.2
(0.6)
(78.6)
133.3
(65.3)
114.0
3.1
-
1.4
(0.8)
(60.8)
113.2
12.1
63.2
0.8
47.6
50.6
-
11.7
12.3
-
71.4
126.1
0.8
12.1
60.8
0.5
43.5
46.6
-
10.4
11.0
-
66.0
118.4
0.5
76.6
(14.2)
(5.1)
(9.1)
(9.1)
33.0
17.6
6.3
11.3
11.3
5.0
7.3
2.6
4.7
4.7
114.6
10.7
3.8
6.9
6.9
73.5
(13.2)
(4.2)
(9.0)
(9.0)
32.6
14.0
4.4
9.6
11.8
21.4
5.2
5.8
1.9
3.9
3.9
111.3
6.6
2.1
4.5
11.8
16.3
942.0
5,063.1
871.6
-
5,922.0
-
7.2%
942.0
5,063.1
871.6
5,922.0
807.7
4,604.8
*620.6
-
452.6
5,450.2
-
14.8%
807.7
4,604.8
*620.6
452.6
5,450.2
10.7
39.7
0.7
3.0
0.6
-
11.3
39.7
3.7
9.8
36.6
2.3
3.1
0.6
-
10.4
36.6
5.4
51.1
3.0
0.6
54.7
48.7
3.1
0.6
52.4
(A) Profit from financing operations before
provision for doubtful debts:
Other
provision for doubtful debts from outside
parties and inter-segment
* Reclassified.
Banking and
Financial
24
The Small Businesses segment
The structure of the operating segment
The Small Businesses segment provides a range of banking services and financial products for business
customers, and operates through being deployed at 19 of the Bank’s branches around the country and by
means of direct channels: customer service on the Internet and phone services through “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 who have been granted a credit
facility of 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, thus
serving the operational goals of the 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.
Developments in the operating segment’s markets or changes in customer characteristics
Most of the segment’s customers are active in the local market, and their activity volumes are contingent on
the state of the economy.
At the end of 2008, the business risk of the businesses in the segment increased significantly, due to the
impact of the global economic crisis on the Israeli economy. In 2009, a slowdown is expected that will
increase the credit risk for the segment. However, government activity reflected in the activity of the funds
(see the “Products and services” Section below) might help these businesses during the crisis.
Critical success factors in the operating segment
- Development of unique business tools.
- Development of expertise and professionalism.
- Nationwide deployment of the banking system 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 operating segment
- Nationwide deployment of the banking array, mainly in industrial areas, for increased access.
- Training of skilled personnel to provide customers with financial tools and services.
- Creation of an advanced technological service environment and regular investment in systems
maintenance and upgrade.
Competition
Competition in the small and medium businesses segment has increased considerably 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.
The products and services in the Small Businesses segment are credit, guarantees, factoring activity service,
foreign trade services and other banking services. Some of the segment’s operations are conducted through a
variety of financing funds, some of which are unique to the Bank.
25
The Bank operates financing funds which provide credit for setting up, expanding and consolidating small
and medium businesses through 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, because of guarantees provided
by 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 from 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:
Small Businesses Aid Fund, guaranteed by the State, Koret Fund, Jewish Agency funds and the Exporters
Fund. 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, 2008 amounted to NIS 523 million,
compared to NIS 513 million as at December 31, 2007, an increase of 1.9%.
In December 2008, the Bank won a Ministry of Finance tender for the financing of credit for small
businesses, with a State guarantee. Under the tender, the Bank will grant up to NIS 187 million in financing
to small businesses. The State will provide an inclusive guarantee for this credit, at up to 16% of the total
loans extended by the Bank, and up to 70% per single loan.
See the corresponding Section in the description of the Personal Banking segment.
Human capital
employees and 44 are head office staff, whose employment cost is allocated to the segment. The number of
managerial positions in the segment was 49, of which 31 are direct managers and 18 are allocated to the
segment.
employees and 41 were head office staff, whose employment cost is allocated to the segment.
The number of managerial positions in the segment was 44, of which 28 were direct managers and 16 were
Business goals and strategy
The activity in the segment is aimed at expanding the activity of small and medium business customers with
growth potential, while mitigating risks through the activity of joint funds that provide guarantees and
improvement of the control means.
Changes in the volume of activity of the segment and in its profitability
The net profit in the segment amounted to NIS 4.0 million in 2008, compared to NIS 13.2 million in 2007, a
decrease of 69.7%.
Net return on equity calculated on the basis of the risk components of the segment was 3.1% in 2008,
compared to 12.4% in 2007.
The net profit of the segment in 2007 includes profit in the amount of NIS 3.5 million from the sale of the
The operating profit in 2007 amounted to NIS 9.7 million, compared to NIS 4.0 million in 2008, a decrease
of 58.8%.
Net operating return on equity calculated on the basis of the risk components of the segment was 3.1% in
2008, compared to 9.1% in 2007.
26
The income of the segment amounted to NIS 98.8 million in 2008, compared to NIS 94.1 million in 2007, an
increase of 5.0%.
The provision for doubtful debts of the Small Businesses segment amounted to NIS 22.6 million in 2008,
The ratio of the provision for doubtful debts to average credit amounted to 1.8% in 2008, compared to 1.0%
in 2007. The increase in the provision rate reflects the deterioration in the economy. For details of the
control structure and delegation of powers see the “Exposure to Risks and their Management – Credit Risks”
Section.
increase of 6.4%.
27
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
Operating profit before taxes
Operating profit after taxes
Net profit
Other
December 31, 2008
Capital
Credit
Market
Cards
Total
Banking and
Financial
December 31, 2007
Capital
Credit
Market
Cards
Total
80.4
(19.0)
0.2
-
0.9
(0.6)
81.5
(19.6)
83.1
(23.3)
0.3
-
0.6
(0.3)
84.0
(23.6)
24.5
6.6
92.5
22.6
2.3
2.5
-
3.5
3.8
-
30.3
6.6
98.8
22.6
21.6
6.5
87.9
12.3
2.4
2.7
-
3.2
3.5
-
27.2
6.5
94.1
12.3
68.1
1.8
0.6
1.2
1.2
1.5
1.0
0.3
0.7
0.7
0.5
3.3
1.2
2.1
2.1
70.1
6.1
2.1
4.0
4.0
63.8
11.8
4.6
7.2
7.2
1.8
0.9
0.4
0.5
3.5
4.0
0.3
3.2
1.2
2.0
2.0
65.9
15.9
6.2
9.7
3.5
13.2
1,228.9
911.7
1,170.4
-
211.5
-
3.1%
1,228.9
911.7
1,170.4
211.5
1,193.6
800.4
*1,147.8
-
149.7
205.3
-
12.4%
1,193.6
800.4
*1,147.8
149.7
205.3
45.7
11.0
4.7
0.2
0.3
-
46.0
11.0
4.9
43.2
10.6
6.0
0.3
0.3
-
43.5
10.6
6.3
61.4
0.2
0.3
61.9
59.8
0.3
0.3
60.4
* Reclassified.
28
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 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 is headed by 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 accounts of the Division’s customers are
managed in the various branches of the Bank, that provide all the necessary banking and operating services.
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 headquarters, the collection
headquarters, and the credit operations, monitoring and control department (see the “Organizational
Structure” Section).
Customers
The main criteria for allocating a customer to the Corporate segment are the amount of the credit facility
approved for the customer, the potential for expansion of activity, and his business type.
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.
The corporate activity is restricted under the provisions pertaining to the permitted liability of an individual
borrower or a group of borrowers, the total indebtedness for the six largest groups of borrowers at the Bank,
and credit to customers defined as “related persons” of the Bank. In addition, the Board of Directors has set
limits on loan-granting activities in certain sectors, such as the real estate sector, the local authorities, and the
leasing sector. No deviations from these directives and restrictions were recorded in 2008.
Amendment to the provisions of the law following the collapse of the Hefsiba group of construction
companies
Sales (Apartments) (Securing the Investments of Apartment Buyers) Law
On April 6, 2008, Amendments No. 4 and No. 5 to the Sales (Apartments) (Securing the Investments of
Apartment Buyers) Law – 1974, were published. The Amendments came into effect on October 6, 2008.
Amendment No. 4, adds, inter alia, sections discussing the accountability of a bank that provides financial
support to a construction project, and states that it is obligated to act in accordance with the payment
vouchers arrangement prescribed by the Bank of Israel within the framework of Proper Conduct of Banking
Business Directive No. 326. It further states that the bank is obligated to provide a buyer with a bank
guarantee for payments made, under the said voucher arrangement.
It was further provided that a bank extending a loan for the purchase of an apartment will transfer the money
to the seller only after ensuring that the buyer of the apartment has been given collateral as required in the
Law, or that the seller has provided written assurance of such collateral.
29
According to the Amendment, financial sanctions will be imposed on the bank for any violation of the
provisions. In addition, the Construction and Housing Minister has appointed a supervisor who may, within
the framework of the powers conferred on him, transfer to the Supervisor of Banks for his attention public
complaints concerning the bank.
Amendment No. 5 prescribes a mechanism for linkage of the amounts detailed in the collateral given to a
buyer who has paid the seller money for an apartment. It also states that tax payable to the authorities by the
seller of the apartment under the Tax Ordinance (Collection) will not constitute a first pledge on the
apartment with regard to the money paid by the buyer, including linkage differences, provided that the buyer
did not receive a sale guarantee.
This provision of the law has no effect on the results of operation in the segment.
Proper Conduct of Banking Business Directive 326
On April 2, 2008, the Supervisor of Banks published Proper Conduct of Banking Business Directive No. 326
on “closed” financial support, aimed mainly at providing mechanisms designed to ensure that the money
paid by apartment buyers in a project that is supported by a bank, will be deposited directly into the bank
account earmarked for the project. For this purpose, the Directive states that payments by buyers of units in
the projects will be made using a book of payment vouchers that will be issued by the bank for every
apartment in the project, and that will be used for every payment the buyer is required to pay for that
apartment. The bank is required to provide the apartment buyer with a bank guarantee for the amount paid
using the said voucher, within 14 days of the payment date.
The banks are required to include in the financial support agreement the details and arrangements set forth in
this Directive.
The Directive came into force on June 1, 2008 and applies to financial support agreements entered into from
that date.
Proper Conduct of Banking Business Directive 456
On April 2, 2008, the Supervisor of Banks published Proper Conduct of Banking Business Directive
No. 456, according to which a Sale Law guarantee provided to an apartment buyer will be phrased as set
forth in the Directive, and should not be changed. This phrasing supplemented the grounds for calling on the
guarantee, and states that the guarantee money may also be called on in the case of suspension of
proceedings, as well as if, for any reason, the buyer cannot be given the apartment (and not only due to
cancellation of the sale agreement), provided that the buyer was not reimbursed due to the inability to give
him the apartment.
The Directive came into force on June 1, 2008.
Developments in the segment’s markets or changes in customer characteristics
Most customer activities in the Corporate segment are in the local market and 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, etc. Overall, customer activity is characterized by continuity and can
be characterized as traditional economic activity.
Technological changes that could have a material influence on the segment
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.
Critical success factors in the segment
− Identification of and adaptation to customer needs – correct identification of all the banking needs
of the customer and correct adaptation of banking products to his business needs.
− 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).
30
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 systems 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
bodies.
The main products in the segment are credit and collateral, 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.
In January 2009, the Bank won, together with two other banks, a Ministry of Finance tender, for the
establishment of a fund for the encouragement of small businesses by providing credit with a State
guarantee. The credit facility allotted to the fund is NIS 200 million, which may be increased to NIS 400
million. The State will provide an inclusive guarantee for this credit, at up to 19.9% of the total loans
extended by the Bank, and up to 70% per single loan.
The structure of competition in the segment and the changes occurring therein
Banking activity in the segment is characterized by intense competition among a relatively large number of
entities, which compete for all the activities conducted by the customers in this segment.
In credit – competition is reflected in the service level, the interest rates and commission offered to
customers by competing banks and non-bank entities, and the level of exposure (credit amount versus
collateral required).
In investments – competition is reflected in the quality of service and advice, and in tariff levels.
In addition to the banks, competitors in this field include public and private entities, such as investment
houses and consultants.
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 communication channels in local banking, such as branches,
“Gold Stripe”, “Otsar Yashir”, the Internet, etc.
Human capital
In 2008, the average number of positions in the segment was 56, of which 33 positions are direct employees
and 23 are head office/branch staff, whose employment cost is allocated to the segment.
employees and 17 were 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.
31
Goals and expected changes in segment activity
The establishment of a commercial customer recruitment and marketing unit is planned for 2009. The
purpose of the unit is to increase the customer base of the CRM teams in the Corporate Division, by focusing
marketing efforts and expanding the activities of customers included in the Division’s corporate focus.
− Expansion of the corporate credit portfolio managed in the branches through the funds (Koret,
Jewish Agency and State).
− Ongoing service and response to customer needs.
− Credit portfolio management and monitoring of 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.
The net profit of the segment amounted to NIS 13.6 million in 2008, compared to NIS 14.6 million in 2007,
a decrease of 6.8%.
Net return on equity calculated on the basis of risk components of the segment was 5.3% in 2008,
The income of the segment amounted to NIS 60.3 million in 2008, compared to NIS 54.1 million in 2007, an
increase of 11.5%.
The provision for doubtful debts amounted to NIS 2.9 million in 2008, compared to NIS 0.8 million in
2007.
increase of 19.0%, about half of which is due to the transfer of the responsibility for managing the provident
fund accounts, as customers, to this segment.
32
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
Net profit
Average balance of other managed assets risk assets
Other
December 31, 2008
Capital
Credit
Market
Cards
Total
Banking and
Financial
December 31, 2007
Capital
Credit
Market
Cards
Total
135.0
(86.2)
0.2
-
-
135.2
(86.2)
116.1
(70.0)
-
-
116.1
(70.0)
12.6
(6.6)
54.8
2.9
4.7
4.9
-
0.6
0.6
-
17.9
(6.6)
60.3
2.9
11.0
(6.5)
50.6
0.8
2.9
2.9
-
0.6
0.6
-
14.5
(6.5)
54.1
0.8
29.7
22.2
9.1
13.1
4.7
0.2
0.1
0.1
0.6
0.2
0.4
34.4
23.0
9.4
13.6
26.4
23.4
9.4
14.0
2.5
0.4
0.2
0.2
0.6
0.2
0.4
28.9
24.4
9.8
14.6
2,221.7
810.1
2,328.3
-
2.371.2
-
5.3%
2,221.7
810.1
2,328.3
2.371.2
2,014.2
724.7
2,088.4
-
17.8
2.886.4
-
7.0%
2,014.2
724.7
2,088.4
17.8
2.886.4
36.8
3.3
8.7
0.2
-
36.8
3.3
8.9
34.9
2.8
8.4
-
-
34.9
2.8
8.4
48.8
0.2
-
49.0
46.1
-
-
46.1
33
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 all 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 foreign currency dealing room, Nostro management activity, liquidity management activity, and the
pricing unit.
In addition, the Board of Directors of the Bank has set guidelines on exposures permitted in connection with
the management of market exposures, basis exposures and liquidity risks.
For details concerning these limits, see the “Exposure to Risks and their Management” Section.
The net profit of the Financial Management segment amounted to NIS 20.6 million in 2008, compared to
NIS 32.7 million in 2007, a decrease of 37.0%.
Net return on equity calculated on the basis of the risk components of the segment was 20.4% in 2008,
The income of the segment amounted to NIS 47.6 million in 2008, compared to NIS 64.4 million in 2007, a
decrease of 26.1%. The decrease derives from a NIS 9.7 million decrease in income from the sale of
deposits and securities, a change in the assets surplus by linkage segments, and a decrease in the financial
activity margins.
Most of the development in the segment’s activity was reflected in the volume and composition of the
investment portfolio. For details about the operations in these securities, see the “Investment in securities”
Section below.
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 controls. The
technologies used in the dealing room, the back office, and the trade system used by the Nostro Management
Unit, were mostly developed within Bank Hapoalim, and are expected to serve the Bank until the
computerization systems are converted to those of First International.
Human capital
In 2008, the average number of positions in the segment was 15, of which 11 positions are direct employees
and 4 are head office staff, whose employment cost is charged to the segment.
employees and 3 were 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.
34
Following is a breakdown of the results of credit card operations by operating segment:
For the year ended December 31, 2008
Small
Personal
Private
Businesses
Corporate
Banking
Banking
Banking
Banking
Total
provision for doubtful debts
Operating and other income
Operating and other expenses
2.5
23.8
6.6
19.7
6.3
0.6
11.7
5.0
7.3
2.6
0.3
3.5
0.5
3.3
1.2
0.6
0.6
0.2
3.4
39.6
12.1
30.9
10.3
Net profit
13.4
4.7
2.1
0.4
20.6
Small
Personal
Private
Businesses
Corporate
Banking
Banking
Banking
Banking
Total
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
35
Following is a breakdown of the results of capital market operations by operating segment:
Small
Personal
Private
Businesses
Corporate
Banking
Banking
Banking
Banking
Net profit
After-tax profit from extraordinary items
Net profit
Total
1.5
12.2
10.3
3.4
1.1
3.0
47.6
33.0
17.6
6.3
0.2
2.3
1.5
1.0
0.3
0.2
4.7
4.7
0.2
0.1
4.9
66.8
49.5
22.2
7.8
2.3
11.3
0.7
0.1
14.4
Small
Personal
Private
Businesses
Corporate
Banking
Banking
Banking
Banking
Total
1.3
17.4
9.2
9.5
3.4
6.1
24.1
30.2
3.1
43.5
32.6
14.0
4.4
9.6
11.8
21.4
0.3
2.4
1.8
0.9
0.4
0.5
3.5
4.0
2.9
2.5
0.4
0.2
0.2
0.2
4.7
66.2
46.1
24.8
8.4
16.4
39.4
55.8
Investee companies
For complete details about “Otsarot”, which is active in the capital market, see the “Activity in the Capital
Market” Section.
Other companies serve as auxiliary corporations and their operations are not material.
In 2007, the voluntary liquidation process was completed of Otsarit Mutual Fund Management Ltd., which
was engaged in the management of the Bank’s mutual funds. In 2008, the voluntary liquidation process was
completed of Trust Company of Otsar Hahayal Ltd. and of the provident funds whose activities were sold in
2007.
For details about investments in investee companies, see Note 5 to the financial statements.
36
Developments in Principal Balance Sheet Items:
As at December 31
2008
NIS millions
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
2007
Rate of change
%
13,638.9
9,037.2
1,862.8
2,485.4
164.0
11,035.8
759.4
12,256.2
8,473.5
2,191.8
1,360.1
158.7
9,925.8
720.6
11.3
6.7
(15.0)
82.7
3.3
11.2
5.4
5.6%
66.3%
5.9%
69.1%
Credit to the public amounted to NIS 9,037.2 million as at December 31, 2008, compared to
NIS 8,473.5 million as at December 31, 2007, an increase of 6.7%.
Credit to the public as at December 31, 2008 includes debt balances deriving from credit card transactions in
the amount of NIS 941.4 million, compared to NIS 875.7 million as at December 31, 2007, an increase of
7.5%.
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
2008
2007
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
2008
2007
%
%
7,157.9
6,457.0
10.9
79.2
76.2
1,562.4
1,712.6
(8.8)
17.3
20.2
316.9
303.9
4.3
3.5
3.6
9,037.2
8,473.5
6.7
100.0
100.0
The total credit risk to the public comprises balance-sheet credit risk, which includes credit to the public, the
public’s investment in debentures, assets deriving from derivative instruments purchased by the public and
off-balance-sheet credit risk, which includes transactions in off-balance-sheet financial instruments,
unutilized credit facilities and commitments to provide credit.
The total credit risk to the public amounted to NIS 13,597.1 million as at December 31, 2008, compared to
NIS 12,845.1 million as at December 31, 2007, a 5.9% increase.
In the breakdown by economic sector, credit to individuals constitutes the majority of the Bank’s balancesheet credit. This credit constituted 63.7% of the Bank’s total credit as at December 31, 2008, compared to
61.7% as at December 31, 2007.
37
For full details of the breakdown of the balance-sheet and off-balance-sheet credit risk by economic sector,
see Appendix E of 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, 2008 is in the brackets of up to NIS 300 thousand, similar to the credit breakdown
as at December 31, 2007. The credit in the credit brackets of up to NIS 300 thousand represents
approximately 60% of the total balance-sheet credit.
Mortgage activity – the volume of credit provided as home loans totaled NIS 226.4 million as at
December 31, 2008, compared to NIS 256.4 million as at December 31, 2007, a decline of 11.7%. The said
credit volume constitutes 2.4% of the balance-sheet credit risk.
Credit risk to the public in corporate debentures – the Bank invests in the marketable and non-marketable
securities of rated corporations in Israel, and in the debentures of Israeli companies listed abroad.
This investment (not including banks) amounts to NIS 317.4 million as at December 31, 2008, compared to
NIS 238.4 million as at December 31, 2007.
The credit risk in corporate debentures constitutes 3.4% of the balance-sheet credit risk, compared to 2.7% in
2007 (for further details about their credit rating, determination of their fair value, and their marketability,
see the “Investment in securities” Section below). This investment is included in the credit risk, in the
breakdown by economic sector presented in the Management Review, and in the credit breakdown by size in
Note 4 to the financial statements.
The Bank takes steps for the early identification of borrowers at risk. Following the deterioration in the
economy and the increased supervision over credit risk, a sharp increase was recorded in the volume of
problematic debt, especially those defined as debts under special supervision. The ratio of the supplementary
and general provisions with respect to problematic borrowers to the total balance of borrowers as at
December 31, 2008, is 7.3%, compared to 9.0% as at December 31, 2007.
The details of the volume of problematic debts and their composition are presented below:
Balance as at December 31
2008
2007
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
Home 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 with respect to
problematic borrowers (1, 3)
Total credit risk with respect to problematic borrowers (1)
(1)
(2)
(3)
change
%
131.3
7.5
3.1
6.0
152.4
-
122.8
5.6
26.5
88.3
-
6.9
33.9
(77.4)
72.6
-
0.7
1.5
(53.3)
300.3
243.2
23.5
30.9
331.2
11.0
254.2
180.9
30.3
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 with respect to guarantees
provided by a borrower as security for the debt of a third party.
38
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.
Most of the increase in the volume of debts under special supervision is seen in the corporate activity sectors
and represents about 65% of the increase.
Following are several indicators of the ratio of problematic debts to the credit risk in principal economic
sectors as at the end of 2008, as well as the ratio of the provision for doubtful debts to the total credit risk.
Ratio of problematic
credit to sector credit
risk
%
Industry and agriculture
Construction and real estate
Trade, hotels and food services
Corporate and financial services
Public services
Private individuals
6.6
8.0
5.0
3.7
0.5
0.9
Compared to
2007
NIS millions
Compared to
2007
%
Ratio of specific
provision for doubtful
debts to sector credit risk
%
6.5
18.6
17.6
9.8
(5.6)
30.0
0.5
32.8
105.2
21.9
(66.8)
58.8
0.6
0.3
0.8
0.3
(0.1)
0.2
For further details of the credit risks management policy, see the “Exposure to Risks and their Management –
Credit Risks” Section below.
Investment in securities amounted to NIS 2,485.4 million as at December 31, 2008, compared to
NIS 1,360.1 million as at December 31, 2007, an increase of 82.7%.
A. Composition of the investments portfolio at fair values:
As at December 31
2007
2008
NIS millions
Change
%
Available-for-sale portfolio
Held-for-trading portfolio
2,485.4
-
1,270.0
90.1
95.7
-
Total portfolio
2,485.4
1,360.1
82.7
B. Below is a breakdown of the held-for-trading and available-for-sale securities portfolio by issuer,
presented at fair values:
As at December 31
2008
2007
NIS millions
Government
Other marketable
Other non-marketable
2,129.9
160.8
194.7
1,055.8
128.8
175.5
Total
2,485.4
1,360.1
For full details of the determination of the fair value of securities, see the “Accounting Estimates” Section
below.
39
C. Securities grouped by rating at fair values:
As at December 31, 2008
Rated in Israel* Rated globally*
Rated in Israel*
Rated globally*
NIS millions
AAA rating
AA+ to AA- rating
A+ to A- rating
BBB+ to BBB- rating
BB+ rating
CCC rating
Other investments at cost
1,942.5
184.1
42.4
10.9
8.6
3.0
**257.8
36.1
-
966.1
145.7
52.8
3.0
**157.7
34.8
-
2,191.5
293.9
1,167.6
192.5
* External rating
** Debentures of the State of Israel
At December 31, 2008, the fair value of the available-for-sale securities is NIS 26.6 million less than their
adjusted cost.
Adjusted cost*
Fair value
Difference
NIS millions
Government debentures
Corporate debentures
Shares
Total
2,117.2
391.8
3.0
2,129.9
352.5
3.0
12.7
(39.3)
-
2,512.0
2,485.4
(26.6)
* Including hedging financial instruments.
Following is the negative difference, before tax effect, between the fair value of available-for-sale securities
and their adjusted cost as at December 31, 2008, by the duration of the negative difference:
Up to 6 months
Duration of value decline, since the decline began
6-9 months
9-12 months
NIS millions
Over 12 months
Percentage decline
Up to 20%
20%-40%
Over 40%
11.7
11.1
-
0.5
3.4
-
4.5
-
3.6
3.8
-
Total
22.8
3.9
4.5
7.4
The decline in the value of the companies’ debenture portfolio is of a temporary nature. Declines that are not
of a temporary nature were written off to the statement of income. The estimate of the companies’
repayment ability was found to be in order. Most of the companies have a relatively high investment rating.
The Bank intends and is able to hold the debentures until the expected recovery of their value to their
original cost.
The difference, before tax effect, between the fair value of available-for-sale securities and their adjusted
cost as at February 12, 2009 amounted to NIS (41.7) million. The profit before tax from the sale of
available-for-sale securities in the period commencing from the end of 2008 until February 12, 2009,
amounted to NIS 25.7 million.
40
Investment in buildings and equipments includes buildings and equipment used by the Bank in its
operations. The investment is 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
matches Management’s estimate of the useful life of these assets.
The investment in buildings and equipment as at December 31, 2008 includes investment in buildings in the
amount of NIS 123.9 million and investment in equipment in the amount of NIS 40.1 million.
As at December 31, 2008, the Bank owns constructed premises with an area of approximately nine thousand
square meters, in 7 different properties in Israel. In addition, the Bank rents approximately eighteen
thousand square meters in various properties across the country.
The lease agreements for the leased premises are for various periods, mostly with an option for extension of
the lease period.
For additional information about the investment in buildings and equipment, see Note 6 to the financial
statements.
In accordance with Israel Accounting Standard No. 15, the Bank has assessed the need to present other assets
at their recoverable value, but no indicators were found of impairment.
Public deposits amounted to NIS 11,035.8 million as at December 31, 2008, compared to NIS 9,925.8
million as at December 31, 2007, an increase of 11.2%.
A. The composition of deposits from the public is as follows:
As at December 31
2008
2007
NIS millions
NIS millions
Demand deposits
Time deposits
Designated deposits
Savings plans
Change
%
Segment share of total public
deposits as at December 31
2008
2007
%
%
1,908.9
7,952.9
14.6
1,159.4
1,321.1
7,487.7
15.2
1,101.8
44.5
6.2
(3.9)
5.2
17.3
72.1
0.1
10.5
13.3
75.4
0.2
11.1
11,035.8
9,925.8
11.2
100.0
100.0
B. Composition of deposits from the public by linkage segments:
As at December 31
2008
2007
NIS millions
NIS millions
Unlinked
CPI-linked
Foreign currency
Total
Change
%
Segment share of total public
deposits as at December 31
2008
2007
%
%
7,786.7
1,907.2
1,341.9
6,875.4
1,795.4
1,255.0
13.3
6.2
6.9
70.6
17.3
12.1
69.3
18.1
12.6
11,035.8
9,925.8
11.2
100.0
100.0
Capital resources
Shareholders’ equity, amounted to NIS 759.4 million as at December 31, 2008, compared to NIS 720.6
million as at December 31, 2007, an increase of 5.4%. As at December 31, 2008, the shareholders’ equity of
the Bank includes issued and paid-up capital in the amount of NIS 377.8 million, capital funds from retained
earnings in the amount of NIS 398.1 million, and a loss on capital reserves due to the adjustment to market
price of available-for-sale securities in the amount of NIS 16.5 million.
41
As at December 31, 2007, the shareholders’ equity of the Bank included issued and paid-up capital in the
amount of NIS 377.8 million, a capital reserve from retained earnings in the amount of NIS 345.9 million,
and a loss on capital reserves due to the adjustment to market price of available-for-sale securities in the
amount of NIS 3.1 million.
The shareholders’ equity includes cumulative and participating preferred shares, which are unredeemable, in
the amount of NIS 5.38 million. According to their terms, these preferred shares accrue dividends at a rate
of 30% of their par value (NIS 8 thousand), which is paid, whenever a dividend is distributed, before any
dividend is paid to the holders of ordinary shares. In addition, the preferred shares participate in dividend
distributions pro rata to their total par value. No dividend was announced or paid in 2007 and 2008.
The ratio of capital to risk assets was 11.52% as at December 31, 2008, compared to 10.66% as at
December 31, 2007 and compared to the minimum ratio of capital to risk assets of 9% set by the Supervisor
of Banks.
As resolved by the Bank’s Board of Directors in December 2008, and in accordance with regulatory
expectations, the minimum ratio of capital to risk assets will stand at 12% at the end of 2009.
See Note 12A to the financial statements for additional details of capital and risk components.
The deferred subordinated notes issued by the Bank are linked to the CPI and are not convertible into
shares. Their holders are mostly institutional investors such as provident funds and further study funds. The
total of the deferred subordinated notes as at December 31, 2008 amounted to NIS 520.1 million, compared
to NIS 389.3 million as at December 31, 2007, an increase of 33.6%. NIS 147.2 million of the subordinated
notes are marketable (for details of the issue of deferred subordinated notes in the amount of NIS 140 million
in the second quarter of 2008, through First International Issues Ltd., see the “Liquidity and Fundraising
Policy” Section).
The Bank’s subordinated notes have been rated by Midroog as Aa3.
During October 2008, Midroog announced that it was transferring the subordinated notes of banks rated by it
to the Watch List, in light of the possibility of their being downgraded. This development follows the rise in
the level of uncertainty in the financial markets and in the risk level in the business environment in which the
local banking system operates. Consequently, Midroog has transferred the Bank’s subordinated notes to the
Watch List.
The amount of the deferred subordinated notes included as Tier II capital in the minimum capital ratio
calculation as at December 31, 2008, weighted to take into account the period to their maturity, in
accordance with the directive of the Bank of Israel, is NIS 300.9 million (December 31, 2007 – NIS 196.0
million). As at December 31, 2008, the capital raising potential of the deferred subordinated notes is NIS 65
million. If the full potential is realized, the ratio of capital to risk assets will rise to 0.69%.
In order to allow the banks to issue subordinated notes on the capital market, which would enable them to
increase their capital adequacy ratio while continuing to extend credit, the Treasury has announced that it
intends to provide a State guarantee for such issues, in an amount of NIS 6 billion. The guarantee will be
granted on part of the amount issued, for part of the obligation period, with respect to subordinated notes,
and under the terms stated in the announcement. The notes will be recognized as Upper Tier II capital, as
defined in the directives of the Bank of Israel. The Bank is required to notify the Accountant General of the
Treasury, by March 1, 2009, if it intends to issue notes before the end of September 2009. The amount of the
guarantee granted to the Bank totals NIS 70 million.
The Bank is examining the various possibilities available to it to make issuances of subordinated notes,
including the possibility described above, as well as other possibilities of making an issuance to the public
through First International Issues Ltd.
42
Accounting Policy and Critical Accounting Estimates
General
The Bank’s financial statements are prepared in accordance with generally accepted accounting principles,
the directives and guidelines of the Supervisor of Banks on the preparation of the financial statements of a
Bank, and the pronouncements of the Institute of Certified Public Accountants in Israel. The accounting
principles that are applied are described in Note 1A to the financial statements.
The financial statements include the results of calculations, assessments and estimates with regard to
activities, events and developments that affect the profitability of the Bank. The Bank’s Management relies
in its assessments on subjective assumptions and assessments of employees and external professionals with
skills and expertise in the fields in which the various estimates are required.
The external professionals and employees engaged in the supervision, control and preparation of the
estimates and assessments concerning issues defined as having critical impact on the Bank’s financial results
do not have, as far as possible, any involvement or regular business contact with the function or issue to
which the estimate applies.
The Bank’s Management and Board of Directors believe that the estimates and assessments in critical
accounting policy issues were prepared to the best of the knowledge and judgment of the professionals who
had prepared them, and were properly applied in the Bank’s financial statements.
Presented is a summary review of the fields in which the Bank’s Management is required to prepare
accounting assessments and estimates with regard to issues the impact of which on its statement of income
could be critical and material. Changes in the assessments and estimates in the issues described below,
including the occurrence of an event an estimate was prepared for in a manner that differs from that
originally speculated, could materially affect the Bank’s business results, and the structure of its assets and
liabilities (including contingent liabilities).
a. The provision for doubtful debts and classification of problematic debts
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 considerations and assumptions that are based on the information available
close to the date of publishing the financial statements. Within the framework of the examinations and
assessments, several characteristics are regularly examined, that affect the customer’s ability to repay debts,
including: the borrower’s business activity, its cash flow and assets and liabilities structure, the nature of the
collateral it placed in favor of the Bank, the business sector it operates in, and other matters, such as high
dependence on customers and suppliers, and its management, control and supervision systems for its
business activity and management of the risks it is exposed to.
The examination process comprises two stages:
1. Identifying the customers who are not meeting their liabilities toward the Bank and classifying them as
problematic debts, according to the guidelines of the Bank of Israel. Here the Bank also uses any
external information that indicates deterioration in the customer’s position, which could reduce its ability
to repay its debt, even if this debt is not yet due.
2. Making provisions for doubtful debts, which reflects the estimated loss the Bank expects to incur due to
the problematic debts. The provisions are determined based on the customer’s liability net of collateral
and/or the estimated monetary loss, arising from the customer’s inability to repay the debt.
To assess the collateral at the Bank’s disposal with respect to the credit given to the customer, the Bank’s
Management relies on the assessment of the debt repayment ability and a recent check of the value of
collateral for quick call, or on other estimates prepared by the Bank’s employees and/or other external
functions with the relevant professional skills, including economists, accountants, lawyers, engineers and
assessors.
43
The recommendations of the collection unit in the Corporate Division are discussed in the various
committees that engage in the classification of problematic debts, according to an authorities hierarchy based
on the amount of the debts.
As at December 31, 2008, 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 114.8 million, compared to
NIS 83.1 million as at December 31, 2007.
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 with respect to each of the risk characteristics, that 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 deviate 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, also 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, 2008, the ratio of the accumulated general and supplementary provisions to the total
credit risk is 0.18% (December 31, 2007 – 0.19%).
The process of assessing the loss embodied in the credit portfolio, as aforesaid, is based on estimates
entailing, to a great extent, considerable uncertainty and subjective assessments, with respect to classification
of the debt as problematic (e.g., distinction between temporary delay and a non-income bearing debt) and the
factors used in calculating the provision (e.g., assessment of the value of collateral that may be called on,
anticipated trends of the borrower’s financial position, and the risk inherent in the industry it operates in).
b. Legal claims and contingent liabilities
The Bank assesses the risk and gives accounting expression to legal claims and contingent liabilities while
relying on the legal opinion of the attorneys handling these matters, based on their proficiency and
knowledge of the law and judgment, their legal experience, knowledge of the banking activity, and, in
matters involving extreme uncertainty – also “the attorney’s expert intuition”. The assessment of the risk is
supported and supervised by the Bank’s Legal Department.
To achieve this goal, the Legal Department operates on several levels:
1. Knowledge of general law
The Legal Department strictly observes the regular updating of legislation and judgments, and this
practice is anchored in its internal procedures. Special attention is given to issues that have implications
on all segments and the entire range of the Bank’s operations, and conclusions and recommendations are
reached about preparation-related issues, following events that have occurred in other banks.
2. Handling of claims and complaints against the Bank
Several legal claims are pending against the Bank (including petitions to recognize some of these as class
actions), in various issues.
All claims against the Bank are forwarded to the Legal Department, in which a senior legal counsel with the
relevant expertise handles them. Some of the claims are handled by the Legal Department and some are
transferred to external lawyers, all under the supervision of a senior legal counsel and with the approval of
the Chief Legal Counsel. Each legal claim (with no minimum amount set) undergoes a risk assessment by
the handling attorney, which is then approved by the senior legal counsel. The Bank’s Chief Legal Counsel
supervises cases involving substantial amounts. Estimates of the Bank’s exposures in claims and contingent
liabilities that require making a provision or disclosure about the level of exposure inherent therein are
prepared in cooperation with the relevant professionals in the Bank. The Managing Director, members of
Management and the auditors receive a quarterly report about updates and material changes in claims and
complaints against the Bank.
44
The opinions received every quarter about the risk inherent in the complaints and claims against the Bank,
are subjective and rely in part on past experience in similar claims, and in part on issues the experience and
knowledge accumulated in which to date are insufficient to allow providing an opinion thereof, such as
certain requests for the approval of class actions.
Nevertheless, estimates of the Bank’s exposure are made for all claims and contingent liabilities, and
provisions are made accordingly for contingent liabilities, the probability of the realization thereof exceeds
70%. In contingent liabilities the realization of which is remote (less than 20%), disclosure is made if the
exposure inherent in them is material to the shareholders’ equity of the Bank.
In addition, disclosure is made for class actions or requests for recognition as such, with respect to which the
legal counsels are unable to provide their opinion about the Bank’s level of exposure.
c. Estimate of the fair value of derivative financial instruments
The Bank, in its operations, makes use of derivative financial instruments, which are presented in the
financial statements at their fair value, and not at their value according to the accrual principle. The fair
value calculations of the derivative financial instruments are based on the interest rates that are set by the
Bank’s Risk Manager, taking into account market prices, liquidity and marketability in the local market
(wholesale interest rates), and prices in the global market, as reflected in the trading and control systems.
The fair value of most derivative financial instruments (such as forward transactions, IRS transactions) is
calculated using a model based on the discounted cash flows expected to be generated by them. The
calculation is mostly done using computerized systems, and samples of the results of these calculations are
checked by an independent function.
In principle, the Bank has no material exposure with respect to options. Nevertheless, in the vast majority of
cases, the fair value of options, including those that are back-to-back, are based on the Black and Scholes
model and is affected by the inherent volatility in the relevant exchange rates, interest rates and indexes for
the option that the Bank has purchased or written. Volatility data with regard to the shekel-foreign currency
exchange rates and volatility data with regard to the foreign currency-foreign currency exchange rates are
determined on the basis of data taken from the international financial markets. The fair value calculation is
mostly done using computerized systems, and samples of the results of these calculations are checked by an
independent function. The remaining derivative financial instruments, i.e., options embedded in deposits for
which there is no active market, are not material.
The interest rates for Israeli currency and for foreign currency, for the different time periods, are also the
basis for calculating the fair value of balance-sheet items, as specified in Note 17C to the financial
statements.
As at December 31, 2008, the nominal amount of financial instruments that are measured at their fair value is
NIS 1,559.8 million
The balance-sheet value as at December 31, 2008, of the assets and liabilities with respect to derivative
financial instruments, the fair value of which is determined using a model, is NIS 22.1 million and
NIS 75.6 million, respectively.
The balance-sheet value as at December 31, 2007, of the assets and liabilities with respect to derivative
financial instruments, the fair value of which is determined using a model, is NIS 27.7 million and
NIS 16.4 million, respectively.
According to the Bank’s calculations, a 1% change in the interest rate used by the Bank in discounting the
anticipated cash flows 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 NIS 2.4 million, while a 1%
decrease in the interest rate will increase the value of the measured financial instruments by a similar
amount.
45
d. Fair value and decline in the value of securities
The Bank’s operations involving securities in the available-for-sale portfolio and in the held-for-trading
portfolio are measured in the balance sheet at fair value. The fair value of a security is defined as the amount
for which an asset could be bought or sold (to take or repay a liability) in a current transaction between
willing parties, i.e., a transaction that is neither a forced sale nor a sale due to liquidation.
Market prices quoted on active markets are the best evidence of fair value. In the absence of a market price,
the fair value estimate should take into account the prices of similar assets and the results of valuation
methods.
In general, the fair value of the securities used by the Bank in its operations is determined based on market
prices quoted on active markets. With regard to securities, the fair value of which is determined based on
stock market prices, the quoted prices do not necessarily reflect the price received in the sale of large
volumes of securities.
In those instances where no quoted prices are available for the Bank’s securities, the bank relies on internal
valuation methods, which include the use of various parameters which are received from independent,
external parties, such as interest curves and exchange rates, while taking into account the published credit
rating.
These parameters may be affected by possible changes, mainly in the interest rates in the various markets.
Calculation of the fair value using a model is done by an independent party not involved in the trading
operations, and is examined by another independent party. The results of the calculation using a model are
presented to a team comprising the trade functions, the control functions and the controlling representatives.
From time to time, the Bank examines whether there has been impairment of an other-than-temporary nature
in the value of its investments in securities. This examination, which is done by the same team that, as
aforesaid, examines the parameters used to calculate the fair value, is performed when there are signs that
may indicate that there has been impairment in the value of the investments, including:
- The length of time for which the fair value of the security is lower than its cost.
- The rate of the decline in the fair value of the security relative to its total cost.
- The value of collateral backing the security and the credit strengthening that supports it.
- The Bank’s intention and ability to hold the security until the anticipated recovery of the fair value of the
security to its cost.
- The rating of the security, including a change in the rating subsequent to balance-sheet date.
Write-downs with respect to 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 attribution of an
appropriate weighting to 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, the Bank does not recognize a subsequent appreciation in
the value of the investment until such time as the investment is realized.
As at December 31, 2008, the balance-sheet value of securities in the available-for-sale portfolio, the value
of which was determined based on their price on the stock market, is NIS 2,290.7 million. As at
December 31, 2008, the balance-sheet value of securities in the available-for-sale portfolio, the value of
which was determined based on a model, is NIS 194.7 million.
As at December 31, 2007, the balance-sheet value of securities in the available-for-sale portfolio, the value
of which was determined based on their price on the stock market, is NIS 1,184.6 million. As at
December 31, 2007, the balance-sheet value of securities in the available-for-sale portfolio, the value of
which was determined based on a model, is NIS 175.5 million.
According to the Bank’s calculations, a 1% increase (decrease) in the interest margin, with respect to the
credit risk of debenture issuers, will lead to a decrease (increase) in the fair value of the debentures, the fair
value of which was measured using a model, in the amount of NIS 10.9 million.
46
Liquidity and Fundraising Policy
During 2008, the Bank maintained liquid assets at a larger volume than the total liquid liabilities, as required
by the internal model implemented by the Bank. For further details of the management of the exposure to
liquidity risk in the reviewed period, see the “Exposure to Risks and their Management” Section below.
The main resources used by the Bank for its operations are deposits from the public. The total deposits from
the public increased by 10.8% on average in 2008, from an average balance of NIS 9,190 million in 2007 to
NIS 10,180 million in 2008. Most of the increase was in the volume of unlinked deposits.
The average of the other resources, including bank deposits and government deposits, amounts to NIS 230
million in 2008, compared to NIS 263 million in 2007.
The average nominal interest on a loan in the monetary tender was 3.65% in 2008, compared to 3.9% in
2007 (for additional details on the sources used for the operations, see the “Public Deposits” Section above.
The Bank’s total capital resources as at December 31, 2008, excluding minority interests, amounted to
NIS 759.4 million, compared to NIS 720.6 million as at December 31, 2007, an increase of 5.4%.
The change in shareholders’ equity resulted from the net profit and from a change in the value of availablefor-sale securities, as described in the statement of changes in shareholders’ equity in the financial statements
The total amount of deferred subordinated notes as at December 31, 2008 was NIS 520.1 million, compared
to NIS 389.3 million as at December 31, 2007, an increase of 33.6%.
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.
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.
At the beginning of April 2008, the Bank issued, in accordance with the above agreements, index-linked
subordinated notes in an amount of NIS 140 million, bearing interest at a rate of 4.3% and with an average
duration of 6.8 years.
On December 31, 2008, the Bank issued (in a private placement) CPI-linked subordinated notes, in the
amount of NIS 10 million, bearing interest at a rate of 6.8% and with an average duration of 6.4 years.
Exposure to Risks and their Management
In its activities, the Bank is exposed to various risks, including credit risks, market and liquidity risks,
operational risks and legal risks. The risk management policy is designed to achieve the business targets,
while limiting the exposure to 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. 342 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.
47
The shareholders’ equity is adjusted for 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, which was in effect over the year, prescribing that the ratio of equity to risk assets will not fall
below 10%. In December 2008, the Board of Directors set a development outline according to which at the
end of 2009 the ratio of capital to risk assets will be 12%.
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 and liquidity risks is Mr. Granot Baruch.
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 Yeheskely.
The additional risks to which the Bank is exposed, reputation risk, competition risk, and regulatory risks, are
also managed and supervised as part of the overall business management, by each of the members of
Management in his area of responsibility.
The risk control units answer to the Managing Director, and include the market and liquidity risk controller,
and the person responsible for implementing the Money Laundering and Terror Financing Directive, who
also acts as the Compliance Officer. The credit risks and operational risks controller answers to the
Chairman of the Board of Directors.
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 functions includes, inter alia:
-
Quarterly discussion and approval, once a year, of the overall exposure policy with respect to the various
risks, and setting of standards for the management, measurement and control of the exposure to risks,
reporting mechanisms, and the allowed exposure limits for the different segments of operations and for
the different instruments. Mr. Zeev Gutman, Chairman of the Board of Directors, Deputy Managing
Director of First International and Head of the Financial Management and Risk Management Department
is the Chief Risk Manager of the First International Group. Within this framework, Mr. Gutman is
responsible for deploying an overall group risk management policy and for anchoring standards and
measurement tools. The Board of Directors discusses once a quarter the overall exposures document,
which includes a report on credit exposures and on exposures to financial risks and operational risks.
Discussions are also held on market exposures control and credit exposures control.
-
Discussion of the Bank’s overall exposures document and of the market risks control and credit risks
control documents, 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 of,
inter alia: the main developments in the financial exposures in the Bank in view of macro developments
and forecasts, the limits to the exposure to financial risks when entering new activities, the market
exposures control document and the development of the Nostro portfolio.
-
Daily discussion of liquidity and market risk issues, headed by the CFO.
-
Convening, at least once a month, of the Board of Directors’ Credit Committee, that discusses credit
requests on a current basis, as well as the Bank’s credit policy, the required credit exposure limits based
on various parameters, the collateral and credit margins policy, and the procedure with respect to credit
provision and the current management thereof.
-
Convening, once a month, of the Board of Directors’ Audit Committee, that discusses on a current basis
material audit reports of the Internal Auditor and the internal audit work plan, while monitoring the
implementation of this work plan.
-
Convening, once a week, of a credit team headed by the Managing Directors.
48
-
Convening, once a quarter, of the Management forum for operational and legal risks, embezzlement and
fraud.
-
The market and liquidity risks controller and the credit risks controller conduct independent risk control
of the exposures to market and liquidity risks and credit risks, respectively.
The Bank participates in a group risk management forum organized by the Group Risk Management Unit
that operates on behalf of the Chief Risk Manager of the Group, Mr. Zeev Gutman. The forum convenes
once a month and discusses ways and options for advancing risk management at the Group level, while
coordinating the measurement methods, risk management methodologies, and control mechanisms of the
Group.
Market Risk and Liquidity Management
Financial risks include liquidity risk, defined as a risk with respect to the 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 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
team, headed by the Managing Director, and a financial assets management team, headed by the CFO.
The tools available to the market and liquidity risks manager are costing tools, investment portfolio (Nostro)
management, and execution of transactions in various financial instruments through the Bank’s dealing
room.
A market and liquidity risks control unit carries out monitoring and control functions 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.
To manage day-to-day liquidity, the Bank uses a system developed in Bank Hapoalim within the framework
of the reform in the payment and clearance system (Real Time Gross Settlement – RTGS). The system
allows real time clearing and allows the banks to identify the cash flow in accounts. Due to its use of the
system, the Bank is required to maintain sufficient liquidity during all operating hours and for every
processing operation that reaches the system.
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 periods of up to
one week and 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 and liquidity risks
unit. Due to the financial crisis, the Bank has taken several steps to maintain liquidity that is adequate for the
uncertain conditions, among which is the increase in the volume of deposits with banks in Israel and with the
Bank of Israel and the reduction in the volume of deposits with foreign financial institutions, as well as
shortening their duration.
No deviation from the rules prescribed by the Board of Directors was recorded in 2008.
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
49
segments. The composition of the available shareholders’ equity in the various linkage segments was
decided 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% and shall not fall below
(150%) of the available capital.
The excess of the assets in the foreign currency and foreign currency-linked segment shall not exceed 25%
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:
Percentage of active capital
as at December 31
2008
2007
%
%
Unlinked shekel segment
CPI-linked shekel segment
Foreign currency and foreign
currency-linked segment
Total
145.1
(39.8)
61.2
35.6
(5.3)
3.2
100.0
100.0
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 stated scenario) is as follows:
Strengthening by 5%
Currency
Dollar
Euro
(0.4)
0.2
Strengthening by 10%
Weakening by 5%
NIS millions
(0.8)
0.4
0.4
(0.2)
Weakening by 10%
0.8
(0.4)
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 applications and
sources in this segment.
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’ equity in each segment, 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 operations. 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:
50
A. The fair value of the financial instruments of the Bank and its subsidiaries, other than nonmonetary items (before the effect of theoretical changes in interest rates)
Israeli currency
CPI-linked
Unlinked
Financial assets*
Amounts receivable with respect to derivative
and off-balance-sheet financial instruments***
Financial liabilities*
Amounts payable with respect to derivative and
off-balance-sheet financial instruments
Net fair value of financial instruments
Foreign currency**
Dollar
Other
In NIS millions
Total
9,544.4
2,326.4
1,145.4
459.4
13,475.6
436.0
8,993.3
3.3
2,518.1
362.7
946.2
247.4
431.5
1,049.4
12,889.1
586.7
(24.8)
282.0
(6.7)
1,102.9
533.0
142.8
844.3
91.4
(279.8)
B. The effect of theoretical changes in interest rates on the net fair value of the financial instruments
of the Bank and its subsidiaries, other than non-monetary items:
Net fair value of financial instruments, after the effect of
changes in interest rates ****
NIS millions
Foreign
Offsetting
Israeli currency
currency**
Unlinked Linked Dollar Other
effect
Total
Interest rate changes
Instant simultaneous increase of
one percent
Instant simultaneous increase of
0.1 percent
Instant simultaneous decrease of
one percent
*
**
***
****
Change in fair value
NIS millions
%
Total
Total
821.6
(264.7)
(23.7)
(6.4)
(0.8)
526.0
(7.0)
(1.29)
842.0
(278.3)
(23.9)
(6.7)
(0.8)
532.3
(0.7)
(0.14)
868.4
(295.3)
(24.2)
(7.0)
(0.8)
541.1
8.1
1.52
Including compound financial instruments. Not including balance-sheet values of off-balance-sheet financial instruments.
Including Israeli currency that is linked to foreign currency.
Amounts receivable (payable) with respect to derivative and off-balance-sheet financial instruments, discounted using
interest rates used to calculate the fair value in the rest of the currencies (that are not the US dollar or principal currencies
given separate disclosure).
The net fair value of financial instruments presented in each linkage segment is the net fair value in this segment, assuming
that the change noted occurred in all interest rates in the linkage segment. The total net fair value of financial instruments is
the net fair value of all financial instruments (other than non-monetary items), assuming that the change noted occurred in all
the interest rates in all linkage segments.
For additional details of the assumptions used to calculate the fair value of the financial instruments, see
Note 17C to the financial statements.
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 accounts over an average duration of two years.
The exposure to market risks is estimated using the value at risk (VAR) model.
This 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 Nostro securities portfolio.
As at December 31, 2008, the VAR value for 10 business days, according to the historical simulation method
and at a significance level of 99%, was NIS 14.3 million for the Bank’s entire portfolio, compared to NIS 9.2
million as at December 31, 2007.
Worst-case scenarios
51
The Bank has worst-case scenarios designed to examine position risk in extreme market situations that are
not reflected in the accepted VAR calculation methods, where scenarios are required under the provisions of
Proper Conduct of Banking Business Directive No. 339.
The worst-case scenario tests warn about losses resulting from market situations the realization likelihood of
which is low, such as a sharp increase or decrease in exchange rates, inflation rates and interest rates.
Market risk management is supervised by dedicated functions, including:
- An assets and liabilities team headed by the Managing Director.
- A forum on liquidity and basis risks, headed by the CFO.
- Market risks are controlled by a market and liquidity risks control unit. In compliance with Proper
Conduct of Banking Business Directives Nos. 339 and 342, the unit examines the actual exposures with
respect to the restrictions set, and reports on a current basis about the results of its examinations and
deviations found.
The Middle Office is a unit that operates in the Financial Division and is responsible to the CFO. The unit is
involved only in inter-bank activity, and is designed to act as a supplementary professional function in
control-related issues.
The report on exposures to market risks compared to the frameworks and authorities set by the Board of
Directors is contained in a document submitted every quarter to the Managing Director, the Management and
the Board of Directors, as required in Proper Conduct of Banking Business Directive No. 339, and serves as
the basis for a discussion on the matter.
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 to avoid taking a position in the options.
During 2008, no deviations were recorded in connection with the exposure policies defined for this activity.
Credit Risks
General
The credit risks management policy is based on diversification of the risk inherent in the credit portfolio and
controlled risk management, while maintaining the dominance of the retail credit portfolio. Diversification
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, car hire and local authorities), as well as restrictions and authorities with respect to the grant of
credit for financing the purchase of means of control in corporations without recourse to the borrower.
Following are details about the economic sectors in which a liability limit was set by the Board of Directors:
Construction and real estate sector – the total credit risk of the construction sector amounts to NIS 946.3
million as at December 31, 2008, compared to NIS 906.9 million as at December 31, 2007, which constitutes
7.0% of the total credit risk and 5.4% of the balance-sheet credit risk (December 31, 2007 – 7.1% and 6.2%,
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 these projects receive closed financial support, characterized by periodic
review and close monitoring, with reliance on and assistance from external management supervisors.
52
For details of legislation pertaining to financial support operations in this sector see the “Limitations,
legislation, standards and special constraints applicable to the segment” Section in the Corporate Banking
segment description. No deviation was recorded from the directives of the Bank of Israel and the guidelines
of the Board of Directors with respect to sectoral credit concentration.
Leasing and car rental sector – the total credit risk in this sector amounts to NIS 252.9 million as at
December 31, 2008, compared to NIS 378.6 million as at December 31, 2007.
The credit risk in the sector constitutes 1.9% of the total credit risk as at December 31, 2008 and 2.9% of the
total credit risk as at December 31, 2007.
Local authorities – the total credit risk relating to local authorities amounts to NIS 513.9 million as at
December 31, 2008, which accounts for 3.8% of the total credit risk.
The total credit risk relating to local authorities amounted to NIS 498.3 million as at December 31, 2007,
which accounts for 3.9% of the total credit risk.
The Bank has acted, and is acting, to improve the margins and the total profitability from customers, to
reflect the risk level inherent in their activity, while using focused processes and controls, that take into
account the total income from customers (margins as well as commissions and fees), in relation to the total
credit portfolio.
Systems for the measurement, estimation and management of credit risks
The Bank has an internal model it had developed for the objective rating of the credit risk inherent in the
activity of the Retail Banking customers, in addition to systems for the subjective rating of large-scale
customers.
The model assists in setting credit facilities according to risk level and the customer’s activity characteristics.
Together with a customer profitability measurement system that is under construction, the Bank will be able
to match risk and return.
Automated systems provide credit risk managers, both in the field and in headquarter positions, with a dayto-day tracking mechanism for customer activity as a whole and in a variety of sections: activity levels and
mix, credit facility utilization, collateral level and updated information about the customer’s financial
position.
In addition, the Bank implements an automated credit requests system that improves and increases the
efficiency of the decision making process and its control.
The Bank’s Management has continued to refine and improve the measurement, reporting and control tools it
requires in order to receive a current picture of the various risk characteristics in the business environment of
credit receivers. For this purpose, Management is assisted by credit control supervision units.
The Bank operates a collection system that handles debts transferred to the Legal Department. The Bank
also applies its supervision and control measures to credit activities with relatively low volumes, which
allows the various management levels to be delegated credit-granting authorities. At the same time, the
control and management functions are able to respond quickly to developments that could affect the credit
risks, on the individual customer, borrower group or specific corporate sector level.
Collateral management
The credit collateral, the rules for determining its value, its attribution to the type of credit, and its
monitoring and management are all done using a computerized system, for most types of collateral. The
collateral requirement derives from the allowed level of exposure, with special emphasis on the customer’s
repayment ability. The Bank customarily validates the value of the collateral for some of the assets by
obtaining objective valuations. Procedures determine, by asset type and additional characteristics, the
maximum safety coefficient for presenting the value of the collateral when making credit decisions.
53
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 type of collateral and the type of credit that it secures. The value of
the collateral 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 prescribe rules for handling collateral, maintaining it, ensuring the Bank’s rights and monitoring
its 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 have been 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 with respect to documents required for the reasonableness
of the lien.
Problematic debts and provision for doubtful debts
The Bank has organized structured processes for the early identification of problematic borrowers.
In addition, the Bank has a methodology for determining the provision for doubtful debts that reflects a
conservative estimate of the credit loss the Bank should anticipate.
The process of estimating the loss the Bank should anticipate from the credit portfolio is based on an
examination of the customer’s repayment ability on the individual level, as well as analysis and assessment
of additional parameters indicating the borrower’s financial stability and the collateral given by him to the
Bank. The process is based on a conservative and careful methodology, in order to reflect the debt amount
that the customer can repay within a reasonable amount of time. The provision for credit losses reflects the
estimate of the amounts that are likely to be uncollectible if the circumstances on the reporting date do not
change.
Locating and addressing problematic debts
The monitoring and supervision unit in the Corporate Division is a control function that takes steps for the
early location and examination of the classification of problematic customers and control over their banking
activity, based on extensive data received from the computerized systems and from the branches. The unit
conducts regular financial and qualitative checks to examine the financial stability of customers, the effect of
the conditions in the economic sector the customer operates in on its financial position, the valuation of the
collaterals it provided, etc.
The unit is independent of credit decisions and is not involved in business activity.
A computerized system used by the Bank to locate problematic debts requires those responsible for handling
debt in the various units to take collection steps at a preset time for every stage, in an escalating order of
severity, at the end of which the debt is transferred for collection using legal and other means by the
collection department.
The collection headquarters – the unit, assisted by external lawyers, is responsible for debt payoffs,
foreclosure on collateral and implementation of collection means.
The unit is responsible for operating the systems for the computerized classification of debts as doubtful and
for operating the collateral systems that assist in determining the collectible amount from debts deemed to be
doubtful.
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.
54
The provision for doubtful debts consists of 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.
The general provision, which amounts to NIS 16.3 million as at December 31, 2008, 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.
Supervision and control
The Bank has a credit operating, supervision and monitoring unit that answers to the credit risks manager
and whose 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
computerized systems for the identification of debts that are potentially problematic and engages in planning
and initiating examinations, setting 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 for the credit reporting function and for the interface with various parties within the
Bank.
In addition, the Bank has a credit risks control unit that answers to the Chairman of the Board of Directors
and assesses the risk level of customers and customer groups on a current basis.
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 segment, examination of the provisions for doubtful debts by 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 report on the actual exposures to market risks compared to the limits set by the Board of Directors is
contained in a document submitted to the Bank’s Management and Board of Directors, as required in Proper
Conduct of Banking Business Directive No. 339, and serves as the basis for a discussion on the exposure
limits and policy.
Measurement and Disclosure of Impaired Debts, Credit Risk and Provision 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 with respect to such debts.
Pursuant to the Circular Letter, the banking corporation 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 banking corporation 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 banking corporation as requiring individual
assessment and with respect to 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 banking corporation determines that asset seizure is expected, according to
55
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, home loans, and consumer debts settled in installments) and also with
respect to debts that have been classified as being “individual” and are found not to be impaired. The
specific allowance for credit losses with respect to debts assessed on a group basis, except for home loans
with regard to which a minimum 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-to-date 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 banking corporation 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 home loans with regard to which a
minimum 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.
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 with respect to 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 with respect to credit to the
public and with respect to 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 debt that was restructured prior to January 1, 2010 is not
required to be included under the “impaired” classification, 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 banking
corporation 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.
Implementation of the Directive requires substantial preparations and changes to existing information
systems, which are currently not adapted to reporting according to the proposed principles. Accordingly, at
this stage, it is not possible to analyze and estimate the expected effect of the first-time implementation of the
Directive on the shareholders’ equity as at January 1, 2010 and the expected effects of implementing the
Directive in the financial statements for 2010 and thereafter on the operating results, the financial position,
the cash flows, the major ratios that indicate the quality of the credit portfolio, as well as the expected effects
on credit risk management and on fluctuations in the net profit and the shareholders’ equity. Moreover, no
assessment of the effect on the balance of credit on the group track can be made without first constructing an
information system that will determine the leading parameters for constructing homogeneous groups with
56
similar risk characteristics. 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.
Implementing the requirements of the Directive necessitates upgrading and/or creating a computerized
infrastructure system in order to ensure a process for assessing and making the allowance for credit losses,
including 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 is acting to implement the Directive
with the assistance of external consultants. The aforementioned implementation will be done on the
computerized IT systems of Bank Hapoalim and, consequently, Bank Hapoalim has instructed the Bank with
regard to the information that it needs to provide within the framework of the project. A detailed timetable
for the performance of the tasks set and to be set for the Bank within this framework has been fixed by Bank
Hapoalim in coordination with the Bank.
The Bank estimates that it will have initial estimates of the effect of the Directive’s implementation toward
the second half of 2009.
Until the publication of the Report, the writing of the statistical models that will be used to calculate the
specific provision for credit losses that is estimated on a group basis was mostly completed, and it is intended
that they will be tested in 2009.
Writing of the work procedures, training of the various units and deployment of the system are scheduled for
2009.
Credit risk management by counterparty – the credit policy for foreign banks and financial
institutions
Within the framework of its regular activity with other banks and investment houses, the Bank allots credit
facilities for various activities, including: deposits, future transactions, structured products, Nostro foreign
currency and daily liquidation.
Credit lines for activity with banks abroad are allotted in cooperation with the parent company, and after the
lines allotted were examined by the parent company for compliance with its credit policy, with respect to the
nature and scope of exposures vis-à-vis counter-parties, based on several parameters that reflect the counterparty’s stability, including: the credit rating assigned to it by leading international rating agencies, the
volume of its shareholders’ equity, its ownership structure, the country it operates in, etc., and subject to
restrictions prescribed by the Bank’s Board of Directors with respect to these credit lines.
The counter-party risk is mitigated using ISDA agreements that allow netting of liabilities if one of the
parties announces bankruptcy. Such agreements were entered into with some of the banks with which
transactions are made.
As part of the day-to-day counter-party risks, the Bank conducts daily control of compliance with the
restrictions prescribed for the credit lines allotted to activity with banks and investment houses, and regularly
examines changes in the ratings of the counterparties to whom credit lines are allotted, as well as changes in
the credit margin they operate within. Where significant changes are seen, inter alia in the aforesaid
parameters, the affected institutions are re-examined and handled accordingly.
Following is the Bank’s current credit exposure to foreign financial institutions:
A. The Bank’s current credit exposure to foreign financial institutions (1) by rating:
Long-term rating
AAA+
A
Unrated
Total
In NIS millions
Balance sheet
Current off-balancesheet credit risk (3)
credit risk (2)
114
74
74
3
265
-
57
Current credit
exposure
114
74
74
3
265
B. The Bank’s current credit exposure to financial institutions in countries where the exposure exceeds 15%
of the Bank’s capital base (as defined in Proper Conduct of Banking Business Directive No. 311 on
“Minimum Capital Ratio”), that amounted to NIS 1,096.6 million:
Country of incorporation
Britain
(1)
(2)
(3)
Balance sheet
credit risk 2)
In NIS millions
Current off-balancesheet credit risk (3)
187.0
-
Current credit
exposure
187.0
Foreign financial institutions include: banks, investment banks, brokers/dealers, insurance companies,
institutional bodies and bodies owned by them.
Bank deposits, investments in debentures and other assets with respect to derivative instruments.
Guarantees and credit obligations, including guarantees to secure third party liability.
Notes:
For additional information about the composition of the credit exposures deriving from derivative
instruments vis-à-vis banks and brokers/dealers (local and foreign), see Note 17B to the financial statements.
Basel 2
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 Basel 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 with respect to
each of the risk types:
First pillar – minimum 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 with respect to the Bank’s risk profile and
its control environment.
Third pillar – market discipline – the requirements 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 to previous guidelines (“Basel 1”), is reflected in the manner in which the required minimum
capital is calculated. To date, the minimum capital with respect to 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 require the
banks to estimate in detail the credit risk they are exposed to, according to external ratings or using risk
rating models, and to allocate capital accordingly.
Another major change in the guidelines of Basel 2 is the application of the requirement that the banks
allocate capital also with respect to the operational risk that they face.
Directives of the Bank of Israel
On January 5, 2009, the Bank of Israel published a temporary order on “A Work Framework for Capital
Measurement and Adequacy” that is based on the recommendations of the Basel Committee for International
Convergence for the Measurement of Capital and Capital Standards, published in June 2006.
The Basel Committee’s recommendations allow supervisors in the various countries to use discretion when
implementing some of the Committee’s recommendations (national discretion).
58
The temporary order reflects the Supervisor’s position on each of the issues he was given discretion in. The
Supervisor’s position on each issue was formed while referring to the manner in which it was addressed in
other supervisory authorities worldwide, and examining its fit to directives, laws and data of the Israeli
economy, where needed.
The temporary order concludes a process that began in 2007, within the framework of which the banking
system was issued drafts on various issues discussed in regular meetings with representatives of the banking
system, as well as in joint work teams established for specific issues. The Order comes into effect from
December 31, 2009.
The Supervisor of Banks has clarified that he expects the banks to act in a manner that will ensure their
compliance with the standardized approach requirements of the first pillar and with the requirements of the
second and third pillars of the Basel 2 recommendations, by the end of 2009. Nevertheless, the Supervisor of
Banks encourages the banks to prepare in a manner that will allow them to adopt, at an appropriate date in
the future, the approaches that are based on the internal rating of borrowers in credit risk measurement.
These approaches constitute the global best practice in this field, and gradually striving to implement them is
important for enhancing the quality of credit risk management in Israel.
The Supervisor of Banks has emphasized the relationship that should exist between the total capital the bank
is required to maintain against its risks and the stability and efficiency of the risk management processes and
the internal controls in the bank. The banks are expected to develop and upgrade their risk management,
controls and corporate governance systems. In addition, the banks are required to conduct a proper internal
evaluation process that combines all the principal components of capital planning and management, and that
leads to the maintenance of proper capital against these risks.
The International Convergence for the Measurement of Capital and Capital Standards is a continuous,
ongoing process. The Basel Committee examines and publishes, from time to time, and especially
considering the present economic crisis, corrections and clarifications with regard to risk management and
the manner in which capital is measured. These updates are expected to be reflected, if necessary, in the
Bank Supervision Directives. Concurrent with the temporary order, the Bank of Israel published another
temporary order on “Reporting on Capital Measurement and Adequacy”, according to which banks are
required to report to the Supervisor of Banks about capital measurement and adequacy, starting with the
reporting that relates to December 31, 2008.
In addition, the Supervisor of Banks has published a document that summarizes questions received from the
banks and the Supervisor’s answers thereto with regard to the implementation of the Basel 2 Directive using
the standardized approach and using the internal models approach.
With regard to the second pillar, the Bank of Israel has published a proposed format for reporting on the
internal capital adequacy assessment process (ICAAP).
Preparations of the Bank
The Bank is preparing to implement the Directive independently, and has established for this purpose a
management and execution system, using external software and with the assistance of external consultants.
The Bank has appointed Mr. Baruch Granot, the Bank’s Senior VP, CFO and Risk Manager, as the member
of Management in charge of carrying out the project. Alongside him operates a unit comprising 5
employees, including experts in the various banking fields. In addition, the Bank has hired the services of
external companies proficient mainly in data mining and project management. The software that serves as a
basis for processing the data is also used abroad, and its representatives in Israel and abroad are assisting in
customizing its use to the Supervision Directives in Israel. The project is supervised through:
-
-
-
A top steering committee, headed by the Bank’s Managing Director, which convenes ones a month.
A steering committee headed by the CFO, which convenes once every two weeks. These committees
include representatives from the Bank’s various divisions, the Control and Audit Departments, and
external consultants accompanying the project.
A steering committee of the parent company – the Bank’s Managing Director and the project
administration participate in steering committees that convene once a month, intermittently, at the parent
company, and submit a monthly report on the project’s progress.
Quarterly reporting to the Bank’s Board of Directors on the project’s progress, as required in the Bank of
Israel’s Directives.
59
Progress of the project
First pillar – the software for credit risks management and calculation of regulatory capital requirements has
been installed on the Bank’s computer. The Bank is conducting testing preparatory to submission of the
first report to the Bank of Israel during the first quarter of 2009.
Second pillar – the gap survey with respect to the 14 BIS principles has been completed. Analysis of the
gaps discovered and the ways to close them is currently being conducted with the assistance of the parent
company. Closing some of the gaps requires developing new operating systems. The Bank, which is in the
process of transferring its computer systems from those of Bank Hapoalim to those of First International, is
considering ways to combine the gap closing date at the end of the conversion project and the transfer to the
parent company’s operating systems.
According to the directive of the Bank of Israel, the parent company is required to submit a first draft of the
ICAAP document on a group basis by June 30, 2009, based on the data as at December 31, 2008. The Bank
is preparing to implement this directive at the Group level.
Third pillar – the requirements deriving from the reporting directives are part of the automated system being
deployed at the Bank. Its adaptation to the reporting directives of the Supervisor of Banks is part of the
project.
Operational risk
A. Operational risks of the Bank are defined as risks liable to be caused by the use of faulty data-processing
methods (including risks entailed in computer systems and their operation), risks arising from human
errors (including as a result of mistakes in capital market trading activity), risks arising from the lack of
proper checking and control procedures – in accordance with Proper Conduct of Banking Business
Directive No. 339, risks arising from activities deviating from the Bank’s procedures and risks arising
from possible omissions and from embezzlement and fraud by the Bank’s employees and customers, or
third parties.
B. The Bank’s Management and parties responsible for the various fields of activity, in coordination and
cooperation with the various divisions and external experts, are investing considerable efforts in
improving the Bank’s existing measurement, supervision and control means, in order to mitigate the
number of operational risks in the various fields, and their impact.
C. The exposure to operational risks in the Bank is managed as follows:
- Mapping, identification and ranking of the risks
Mapping, identification and ranking of the impact of operational risks is one of the main tools for
controlling and supervising them. The Bank has a structured process of mapping the operational
risks of the various bank units. This survey is done in cooperation with expert external parties, and
involves ranking risk levels and recommending courses of action for their mitigation.
The Bank conducts regular risk surveys for new activities and units.
- Operational risk management forum
The Bank operates a forum, headed by the Managing Director and attended by the members of
Management. The forum monitors the exposures to operational risks, as revealed by the various risk
surveys, as well as the actions taken by the various units to mitigate these exposures.
- Improvement and upgrading of the control mechanisms and work processes
Following the findings of risk surveys, internal audit findings and lessons learned from failure
events, the Bank has integrated automated and other controls into its various activities, and has
improved and upgraded work procedures and work processes.
D. Business continuity planning
In compliance with the Bank of Israel’s relevant directives, the Bank is preparing for business continuity
in various emergency situations.
60
E. Embezzlement and fraud risks
In compliance with the directives of the Supervisor of Banks at the Bank of Israel, the Bank has
established a team headed by the Managing Director and comprising members of the Bank’s
Management and the Audit Manager. The team discusses exposures to embezzlement and fraud risks,
revealed, inter alia, by the various risk surveys, and ways to mitigate them, while establishing preventive
and compensating controls.
F. Reporting on the exposure to operational risks
The exposure to operational risks are accumulated and reported in the quarterly “exposures document” as
required in Proper Conduct of Banking Business Directive No. 339. The document is prepared at least
once a quarter, is distributed to the members of the Management and Board of Directors, and is
discussed by the Financial Management and Risk Management Committees and by the Board of
Directors.
Legal risk
General – legal risk is defined as risk arising from the violation of legal provisions, including regulatory
provisions, risk of loss as a result of an inability to legally enforce an agreement, risks arising from activity
conducted without legal support/legal consultation vis-à-vis customers, suppliers and/or additional parties,
risks entailed in legal proceedings and any other risk that could expose the Bank to a legal demand or claim.
Exposure policy and management – the Bank operates according to a group legal risk management policy,
that was approved by its Board of Directors, and that is aimed at locating, mapping and mitigating, as far as
possible, the exposure to legal risks. Inter alia, the Bank is taking steps to locate in advance the legal risks
entailed in the various processes, at all stages thereof. Under this format, the Bank’s Legal Department
examines new products/services or new activity, and assists in preparing all documents and procedures
entailed in the said product/service or activity, with the aim of mitigating the legal risk as far as possible.
The legal handling places emphasis on the following issues, in cooperation with the Legal Department of the
Parent Company:
-
Identifying the material legal risk centers and addressing them, by appointing a party to be
responsible for implementing the relevant guidelines.
Examining relevant agreements, guidelines and procedures, to ensure that steps are taken to avoid
the identified legal risks.
Monitoring legislative provisions (including judgments) and directives issues by authorities,
examining their implications on the Bank’s work and taking steps to mitigate risks.
Drawing conclusions from changes in legislation (including judgments), and implementing lessons
learned in work processes, procedures and forms used in the Bank, inter alia through lectures in
various forums, survey tours of branches, issue of learning sheets, issue of a legal journal, updates
through the Legal Department’s portal, and transfer of opinions on various issues to relevant units of
the Bank.
The legal risks are inherently combined with the operational risks. The parent company is currently creating
a risk survey, which is intended to result in the creation of an assessable legal risks map, to which risk
avoidance or mitigation models may be applied. The assessment involves the identification and location of
legal risks inherent in the Bank’s main processes, as defined in the general operational risk survey. It further
involves assessing risks located, in order to create a risk scale. In addition the steps required to prevent or
mitigate these risks will be determined, including by improving the existing controls and/or implementing
new ones. The Bank will adopt the findings of the survey, and will conduct a separate legal survey of unique
activities, such as the factoring activity.
61
Compliance risk management
A. Proper Conduct of Banking Business Directive No. 308 requires the banks to take steps to comply with
the consumer provisions applying to the Bank’s relations with its customers, as well as with the
prevention of money laundering provisions, as part of the Bank’s risk management. To comply with the
Directive, the Bank established a compliance unit that answers to the central Risk Control Department.
The unit is headed by a Compliance Officer, who is also responsible for implementing the legislation
pertaining to prevention of money laundering and terror financing.
B. Alongside the unit operate:
- Compliance trustees in each of the Bank’s branches, who are responsible, inter alia, for identifying
and locating events that should be reported or that require special handling by the unit.
- A coordination committee for enforcing compliance, which assists the Compliance Officer and
convenes at least once a quarter.
- In addition, the unit is assisted by the Bank’s Internal Audit Department, the Public Complaints
Department, the Organization and Methods Department, the Legal Department, MATAF – Industrial
& Financial Computing Ltd., and the Training Department.
C. As part of its responsibility, the unit examines circulars, procedures and new activities, from the Bankcustomer relations aspects.
D. Once a quarter the Compliance Officer reports to the Bank’s Management about his activity in the
previous quarter, and about any violations of consumer provisions. In addition, once a year, he reports to
the Bank’s Board of Directors.
E. In compliance with the directive, an infrastructure survey has been carried out, involving mapping the
consumer provisions, and controls were defined to prevent the risk arising from violation thereof.
During 2008, the infrastructure survey underwent comprehensive updating. The unit ensures compliance
with consumer provisions, and monitors, with the assistance of the Legal Department, changes in
relevant legislation and regulatory provisions, on a current basis.
F. The Bank is carrying out ongoing deployment processes for compliance with consumer provisions, using
educational software, study days and training.
Management of risks pertaining to the prevention of money laundering and financing of terrorism
A. The Bank operates a unit for prevention of money laundering and financing of terrorism, which is
responsible for the implementation and assimilation of the legislative provisions on this matter. The unit
is headed, as aforesaid, by the Supervisor for the Prevention of Money Laundering, who is also the
Bank’s Compliance Officer.
B. The Department’s ongoing activity includes various control activities that are carried out at different
frequencies. The controls are aimed at locating and preventing violations of prevention of money
laundering provisions, as well as of various consumer provisions. Some of the controls are implemented
by the unit, and some by trustees at the branches.
C. In order to implement the law and deploy its provisions, the Bank conducts, from time to time, study
days for the prevention of money laundering trustees, conventions for its managers, lectures at the
branches themselves and further study days and training for all employees within the framework of
courses of the Bank’s Training Department. In addition, the Bank has examined the assimilation of the
provisions of the law among its employees. The training sessions conducted have raised awareness
concerning this issue.
62
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 position papers 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, its 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.
Following is the ranking of the risk factors by the total risk effect inherent therein:
Risk factors
Total effect of credit
risk
Risk description
Risk of decline in the Bank’s profits and its capital, due
to the inability of debtors to fulfill their commitments.
Borrowers and
collateral quality
risk
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.
Risk due to sectoral
concentration
Effects of risk factors that are shared by an
economic sector of similar characteristics, on the
possibility of decline in the Bank’s profits and its
capital.
Total risk effect
Medium
Medium
Low
Borrowers/group of
borrowers
concentration risk
Effects of risk factors that are shared by borrowers
with shared ownership on the possibility of decline
of the Bank’s profits and capital.
Low
Total effect of
market risks
Risk of decline in the Bank’s profits and capital due to
changes in the markets the Bank operates in.
Low
Interest risk
Risk of decline in the Bank’s profits and capital due
to changes in the market interest rate.
Low
Exposure to decline in profits and capital due to
changes in the inflation rate.
Low
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.
Low
Share prices risk
Risk of loss due to decline in the value of shares.
Low
Liquidity risk
Risk of decline in the Bank’s profits and its capital due
to inability to fulfill obligations as they become due.
Low
Inflation risk
Exchange rate risk
Operational risk
Risk of decline in profits and capital due to failures in
processes, the functioning of the workforce, or an
external event.
63
Medium
Risk factors
Legal risk
Regulatory risk
Reputation risk
Customer group
concentration risk
Risk description
Risk of loss due to a legal inability to enforce an
agreement.
Low
Risk of decline in profits and capital due to adverse
legislation.
Medium
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.
Total risk effect
Low
Medium
The Bank’s business results and its performance are directly affected by the state of the Israeli economy.
The apparent worsening of the economic conditions in Israel, the slowdown in the business activity and the
decline in the standard of living could affect the Bank’s results. Inter alia, the volume of problematic debts
and the demand for bank services could be affected.
Due to the possible effect of the state of the economy on the situation of borrowers, the total risk effect of the
credit risks, estimated in the past as low, has now been upgraded to medium.
The total effect of market risks, each of whose components was estimated as low, has accordingly been
assessed as low. In 2007, the total effect of the market risks was assessed as medium.
Activity in the Capital Market
The Bank’s income from the capital market is derived from its customers’ activities in securities on the Tel
Aviv Stock Exchange, foreign securities, listed financial instruments and mutual fund distribution fees.
In 2008, the Bank’s turnover from its customers’ activities in securities on the stock market (including
provident funds and further study funds) amounted to NIS 17.0 billion, compared to a turnover of
NIS 16.5 billion in 2007.
As at December 31, 2008, the portfolio of securities in custodianship totaled NIS 9.5 billion, compared to
NIS 10.7 billion as at December 31, 2007.
Selected customers
In August 2008, the Bank established a central unit for consultancy to selected customers.
The selected customers unit provides consultancy services to selected customers of substantial financial
wealth, who are interested in dynamic capital market activity. The unit has professional consultants who
provide the customers with personal and professional investment service.
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 2008, the total value of the assets in the investment portfolios of its customers decreased by 2.8%. The
company’s contribution to the Bank’s profits in 2008 amounted to NIS 2.1 million, compared to NIS 1.6
million in 2007.
The Bank’s investment in the company as at December 31, 2008 amounted to NIS 9.2 million.
Sale of provident funds and further study funds
In March 2007, the Bank sold the provident funds that it owned to Ayalon Provident Funds Management
Ltd. and Ayalon Insurance Company Ltd.
Among the matters covered, the agreement prescribes that the Bank shall continue to provide brokerage
services under the existing agreements; distribution agreements and operating agreements are also specified.
64
In 2008, the Bank managed the assets of one further study fund owned by Hever, The Association of IDF
Servicemen and Veterans Ltd. On July 28, 2008 the management of the further study fund’s assets was
transferred to Harel Insurance.
The Bank continued to provide operating services to the fund until October 1, 2008, and brokerage services
throughout the year.
The Bank’s revenues from operating fees from provident funds and further study funds amounted to NIS 2.8
million in 2008, compared to NIS 8.1 million from management fees and operating fees in 2007.
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.
In April 2008, the Bank received a pension consultancy license, and started providing such service to its
customers and to the customers of other banks.
The Bank has experienced pension consultants and licensed pension consultants. It uses pension consultancy
systems developed by First International (its parent company).
The systems that have been developed support the pension consultancy services, and the operating services
are provided by MATAF – Industrial & Financial Computing Ltd. (a wholly owned subsidiary of First
International). The Bank’s income from distribution fees deriving from pension consultancy were not
material in 2008.
Human Resources
The Bank’s employees include permanent employees, temporary employees, employees in subsidiaries and
employees of manpower agencies.
Details of the Bank’s workforce are presented below:
Number of positions as at December 31
Average annual number of positions
2008
2007
914
916
886
843
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, integration in First International Group, and
preparation for projects required under regulatory requirements.
The average age of the Bank’s employees is 38.5, and the average seniority of the Bank’s employees is 10.6
years. 48% of employees have academic degrees. 40.8% of the Bank’s employees are temporary staff.
Professional training and development of human resources
The expansion of professional banking and financial knowledge and the use of the knowledge acquired in the
provision of service to the customer is one of the Bank’s principal aims.
The goal of the Bank’s training programs is to develop and train employees and managers in the
professional, managerial and behavioral fields, 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 2008, the Bank held
approximately 6,900 instruction days, compared to approximately 7,500 instruction days in 2007. These
days were used 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:
- As part of the process of opening branches of the Bank, a series of workshops was conducted, aimed at
locating knowledge gaps, molding the senior management of the new branch into a 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.
65
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 reinvigorate employees and to develop and advance their careers, as well as to serve 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 2008, 26 employees in the “mobility required” program changed jobs, and
another 135 employees changed jobs for reasons of reinvigoration, 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.
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 non-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 (Jewish New Year) 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 and sponsors various community and social endeavors, and
its employees contribute by assisting different community needs.
In 2008, the Bank and the employees donated NIS 360 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 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 operating 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 until the end of the original agreement term. These commitments are
backed by undertakings given by First International.
In 2008, the Bank continued to receive operating services in accordance with and within the framework of
the aforesaid agreements. A service agreement (SLA) has not been signed. At the same time, the process of
transferring the Bank’s operating systems has commenced. For additional details on this matter, see in this
Section below.
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Call center services
The Supervisor of Banks has permitted the continued rendering of call center services to the Bank’s
customers through a call center operated by Bank Hapoalim, until August 31, 2009. The Supervisor of
Banks 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 the Bank’s customers prior to the expiry of
the 3 years, should it be ready to do so.
Bank Hapoalim has informed the Bank of its intention to stop the call center services with effect from
August 31, 2009. The banks are negotiating for a proper arrangement that will allow the service to continue.
Transfer of operating systems
The transfer is designed to result in the Bank’s operating systems being disconnected from Bank Hapoalim’s
systems, and in the provision of banking services to the Bank’s customers using First International Group’s
information systems. The project management scheduled the transfer deadline for the first quarter of 2010.
The process is aimed at maintaining the continuity of services provided to the Bank’s customers, as well as
the service level, and to prevent damage to the customers and to the information used by the Bank’s
Management. The transfer of the operating systems entails the risk of the transferred information being
corrupted.
The project is managed by MATAF – Industrial & Financial Computing Ltd., a subsidiary of First
International. The Bank has appointed Mr. Dan Traub, Manager of the Resources Division, as the person
responsible for the project on the Bank’s behalf, and he is supported by the transfer project manager, several
employees and managers who serve as managers of secondary processes in the transfer, and several
employees who serve as content experts, responsible for maintaining the knowledge and transferring it
between the computerized systems.
Several committees supervise the management of the project:
- A steering committee headed by the Managing Director of First International, and comprising also the
Bank’s Managing Director, MATAF – Industrial & Financial Computing Ltd.’s Managing Director, the
project manager for MATAF, the Bank’s Resources Division Manager, the transfer project manager of
the Bank, and additional participants who are involved in the project.
- A top steering committee headed by the Bank’s Managing Director and MATAF’s Managing Director,
with the participation of the project manager for MATAF, the Bank’s Resources Division Manager, the
project manager of the Bank, and additional managers who are involved in the project.
- A current steering committee headed by MATAF’s Managing Director, the Bank’s Resources Division
Manager, the project manager of the Bank, and additional managers.
- An integration administration that operates in the Bank and is headed by the Resources Division
Manager, representatives of the Bank’s divisions and content experts.
As at December 31, 2008, the mapping of gaps between the operating systems in the branches was
completed, and a development process is taking place designed to close the gaps found and which the Bank
decided to close. At the same time, the headquarters’ work processes are being mapped and updated
according to the systems to be transferred.
In addition, data transfer trials are being conducted, that will be followed by adaptation processes.
Furthermore, a training program has been formulated with the aim of assisting the Bank’s employees; the
program comprises courses, training software and assimilation processes.
The Bank’s Management believes that the controls integrated in the transfer process and the steps taken to
prevent damage reduce the aforesaid risk.
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 “Operating Services” section above)
to be a material agreement.
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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. As at the Report date, the agreement has yet to be signed, and the parties are operating
according to the existing agreements.
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 functioning of some of the operating systems; however, Management
has neither the information nor the tools to estimate this risk.
In December 2008, the Bank won a Ministry of Defense tender. The tender set out the credit terms for
defense establishment employees, clientele that includes standing army servicemen, IDF veterans, civilian
IDF employees, Ministry of Defense employees and retirees, support units of the Ministry of Defense and
their retirees, and those entitled to rehabilitation benefits.
The tender also set out, without pricing but as part of the award terms, the right to operate the Bank’s
branches in military camps and the rental fees to be paid for use of these facilities. The tender period is 7
years, starting in May 2009.
The award of the tender enhances the Bank’s relations with its defense establishment clientele and provides
it with additional business opportunities.
Work Plan
The information set out in this Section is forward-looking information, in accordance with the explanation of
the term “forward-looking information” above.
In January 2009, the Board of Directors of the Bank approved the work plan for 2009. The plan
encompasses all the business activities of the Bank and sets targets for expansion of the retail, corporate and
asset management operations.
The assumption underlying the targets for the year 2009 is that the economic crisis worldwide, as well as in
Israel, will continue in 2009, and perhaps thereafter.
In addition, 2009 will see investments and expenses originating in the preparation for the deployment of
material regulatory provisions (Basel 2, SOX 404, impaired debts, etc.) on the once hand, and the natural
business expansion of the Bank on the other hand.
The targets set for 2009 are, inter alia:
- Leveraging the Bank’s award of the Ministry of Defense tender.
- Developing and increasing marketing in the civilian niche (retail and corporate).
- Increasing the control and improving the quality of the credit portfolios.
- Cautiously increasing credit activity, while reducing activity in high risk sectors.
The targets set for 2009 also include:
- Differentiating customer service through the creation of an adaptive multi-channel service envelope and
the creation 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.
- Establishing pension consultancy as a shelf product for Bank customers, and reaching out to various
target clientele.
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 underlying
the work plan could have an adverse effect on the Bank’s work plans.
Other Matters
For details of litigation, see Note 17.C(2) to the financial statements.
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Legislation relating to commissions
On July 5, 2007, the Banking Law (Customer Service) (Amendment No. 12) – 2007 (“the Commissions
Law”) 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
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 (“Banking Rules”) that includes the aforementioned binding list of tariffs.
On July 1, 2008, the last part of the said Amendment No. 12 came into effect. The Bank has implemented
the rules set forth in the Law.
Following the said commissions reform, two private bills were submitted pertaining mainly to the setting of
various restrictions on charging fees and commissions on the checking accounts of individuals and small
businesses.
The Bank is following the development of the legislation process of the two bills, which is in the preliminary
stages.
In addition, on August 26, 2008, Amendment No. 2 of the Banking Rules was published. The Amendment
sets guidelines for the fees and commissions that may be charged from the representation of an apartment
building, senior citizens and physically handicapped customers, as well as the commission collectible for the
depositing of checks in the service box.
The change in the Amendment of the Commissions Law that is already in effect has changed the structure of
the income from commissions deriving from the provisions of the Law, and could also lead to a change in
the behavior of customers with regard to services they will use and commissions they will pay following the
Amendment. However, due to the uncertainty entailed in this change, Management is unable to estimate
with reasonable certainty the effect it will have, if at all. The Amendment of the Banking Rules and the said
bills, if passed, will have an adverse effect on the Bank’s income from operating fees and commissions;
however, at this stage, the Bank cannot estimate its extent.
Other legislation in matter pertaining to the Bank’s operations
Prohibition on Investment in Corporations Engaging in Business Relations with Iran – 2008
The Prohibition on Investment in Corporations Engaging in Business Relations with Iran – 2008 was passed
on April 8, 2008. The Law prohibits the investment, including by way of holding securities in or granting
certain loans to a corporation that engages in material business relations with Iran, as the Law defines such
relations.
It was further stated that a prohibited investment in a corporation, as defined in the Law, as well as failure to
sell previous holdings therein, constitute offenses. The regulations prescribing the implementation of the
Law have not yet been prescribed, and a list of the corporations considered as engaged in business relations
with Iran has not yet been published.
Draft Proper Conduct of Banking Business Directive on Environmental Risks
Recently the Supervisor of Banks distributed an advanced draft of the Proper Conduct of Banking Business
Directive on Environmental Risks, in order to receive comments thereto from the banks. The draft imposes
on the banks, inter alia, the following duties: holding discussions at the Board of Directors to prepare for
exposure to environmental risk, appointing a senior manager to supervise the matter, determining
mechanisms for the monitoring and control of exposure to environmental risk, and establishing means and
tools that will support the employees appointed to handle this issue. As at the publication date of the Report,
the Bank of Israel has not yet set a date for applying the rules for assimilating environmental risks in the
provision of credit.
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Bill for Amendment of the Execution Law – Alternative Residence
On November 16, 2008, an Amendment to the Execution Law was published, that also discusses alternative
residence. According to the Amendment, a debtor’s right to alternative residence cannot be contested,
although it may be determined that the alternative residence placed at the debtor’s disposal will be subject to
the arrangement described below, provided that its meaning was explained to the debtor in a language
understood by him.
According to the aforesaid Amendment, the value of the alternative residence will be an amount that will
allow the debtor to rent a residential apartment in the area in which he currently resides, and that suits his
needs and the needs of family members residing with him, for a period that shall not exceed 18 months
(other than in special circumstances, in which case the Execution Director may extend this period). The
value of the alternative residence will be considered part of the receivership expenses. As for pledge or
mortgage agreements signed before the Amendment comes into effect, the Amendment states that the
debtor’s right to alternative residence may be contested, unless the Execution Registrar has been provided
with proof that the debtor’s right to alternative residence and the meaning of his waiver of this right were not
made clear to the debtor, in which case the Amendment will apply. The Amendment comes into effect 6
months from its publication date.
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.V. to the financial statements.
Disclosure with respect to an Internal Auditor in the Corporation
The Chief Internal Auditor of the Bank has been Mr. Abel Nir, CPA, 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 auditing experience. The Internal Auditor has engaged in a variety of management
roles in the internal auditing departments of Bank Hapoalim for 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.
The process of building the multi-year work plan for the audit was assisted by an external professional party.
The audit work plan for 2008 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 within 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 and the findings of the LFR report, findings of the audit reports of the Bank of Israel, the
audit resources, recommendations of officers of 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.
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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 11.2
positions were engaged in the internal audit in 2008 (including in subsidiaries and a fellow subsidiary, at a
total scope of 70%). 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 the Professional Practice of Internal Auditing” of the Institute of Internal Auditors Israel, 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 independence from 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, every quarter, the Internal Auditor reviews 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
the 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 21, 2008, the Audit Committee discussed a summary of the 2007 audit activity and, on
August 31, 2008, the Audit Committee discussed a summary of the audit activity for the first half of 2008.
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.
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Disclosure with respect to the Financial Statements Approval Process
The officers engaged in preparing the financial statements are the Bank’s Managing Director, Mr. Israel
Trau, and the Chief Accountant, Mr. Ofer Salpeter, who is responsible for the Accounting Division.
In compliance with the directives of the Supervisor of Banks that apply the provisions of SOX 302, a
Disclosure Committee is convened, that is headed by the Managing Director and in which all division
managers of the Bank are members, as well as its external auditors. The Committee discusses material issues
that could have an impact on the data in the financial statements, as well as flaws found in the control over
financial reporting, and monitors their correction. The financial statements are presented to the members of
the Disclosure Committee in full, and a discussion takes place on material issues and on the accounting
policy that should be applied.
The Bank’s Board of Directors is responsible for supervision of the Bank and approves its financial
statements.
In September 2008, the Bank’s Board of Directors decided that the Audit Committee will examine the
financial statements and will bring before it its recommendation for approval thereof. The Audit Committee
has been merged with the Balance Sheet Committee of the Bank’s Board of Directors, its name and
composition have been changed and it is now called the Audit and Transactions with Related Persons,
Balance Sheet and Subsidiaries Committee (“the Audit Committee”). It comprises 8 members, of which 4
have accounting and financial expertise. The Committee’s discussions are attended, in addition to its
members, by the Bank’s external auditors, Somekh Chaikin, CPAs, and the Managing Director, the CFO and
the Chief Accountant appear before it.
The Audit Committee discusses issues related to the Bank’s financial statements, including the volume of
provisions for doubtful debts, opinion of the external auditors, accounting policy, integrity of the disclosure,
adequacy of the reporting, etc.
Within the framework of the financial statements’ approval, the directors who are members of the Audit
Committee receive the draft financial statements and Directors’ Report before the Committee meeting, as
well as any material that may assist them, presentations, and additional information. When the meeting is
held, they receive an opportunity to direct questions to the members of Management appearing before the
Committee and the Bank’s external auditors, and to comment on the statements and report, before they
recommend the approval of the financial statements to the Board of Directors.
Inter alia, the Audit Committee is reported to and discusses any material flaws and weaknesses in the internal
control over the financial statements. In addition, the Committee receives a report on any fraud found
involving the Management or any other employees involved in the internal control over financial reporting.
This information is also submitted to the Chairman of the Board of Directors, as required by Public
Reporting Directive No. 645 (Disclosure Statement) of the Supervisor of Banks.
The members of the Board of Directors are given the draft financial statement before the meeting that
discusses them.
This meeting is attended by all members of the Bank’s Management and the external auditors. In the
discussion in this plenum, the Managing Director presents the results of operations presented in the financial
statements, as well as detailed information and additional aiding data. The Bank’s officers answer any
questions that the directors might have. At the end of the discussion, the Board of Directors decides on the
approval of the financial statements and authorizes the Chairman of the Board of Directors, the Managing
Director and the Chief Accountant, to sign them.
Work of the Board of Directors
During 2008, the Bank’s Board of Directors continued its activity with respect to establishing the Bank’s
policy and the overall framework for its activities, and setting out 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 held 16 meetings during the year, 2 of
which without convening, and its committees met 50 times.
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The Credit Committee received comprehensive reviews with respect to borrowers with debts in excess of
certain financial amounts, approved credit lines or new credit for customers, deliberated on substantial debt
arrangements and problematic collections of significant amounts, received reviews of different activity
sectors and discussed the annual work plan of the credit control unit.
The Credit Committee held 19 meetings during the year, one of which without convening.
The Audit and Related Persons Committee * (“the Audit Committee”) discussed and approved the work
plan of the Bank’s Internal Auditor and monitored its execution.
The Committee discussed the Bank of Israel’s audit reports, which were forwarded to it during the year, and
the material and/or exceptional reports of the Internal Audit Department, and monitored their handling. The
Committee received reports on periodic summaries of audit findings. In its meetings as the Transactions
with Related Parties Committee, the Committee discussed transactions with interested parties and related
parties, as defined by the Bank of Israel, approved the grant of credit to such entities and determined the
manner of their handling. During the year, the Audit Committee held 11 meetings in this format, in 9 of
which it discussed transactions with related persons.
The Balance Sheet and Subsidiaries Committee discusses at its meetings the Bank’s accounting policy
and its quarterly and annual financial statements, and receives reports from the external auditors regarding
audit activity and findings, with respect to the review of the quarterly financial statements and the audit of
the annual financial statements.
In addition, the Committee discusses the quarterly and annual financial statements of subsidiaries of the
Bank, and any material change in structure or policy of one or more of the subsidiaries.
The Balance Sheet and Subsidiaries Committee held 3 meetings in this format during the year.
On September 25, 2008, it was decided that the Audit and Related Persons Committee will be merged with
the Balance Sheet and Subsidiaries Committee, and would be called the Audit and Transactions with Related
Persons, Balance Sheet and Subsidiaries Committee (“the Audit and Balance Sheet Committee”).
The Committee discusses all issues discussed, prior to its establishment, in the Audit and Related Persons
Committee and in the Balance Sheet and Subsidiaries Committee.
The Audit and Balance Sheet Committee held 4 meetings in its new format during the year, of which it
discussed the balance sheets of the Bank and of the subsidiaries in one meeting, and audit reports and
transactions with related persons in 3 meetings.
The Remuneration 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
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 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 3 meetings.
The Operating, Nostro and Risk Management Committee discusses at its meetings the Bank’s
operational risk management policy and the manner of its 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 operating investments and operating expenses budget.
In addition, the Committee discussed the Nostro management policy, the annual work plan of the Nostro unit
and examines compliance with the plan’s targets, and the approval of new financial products or new Nostro
activity.
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In addition, the Committee discusses the policy on exposure to the various risks, monitoring and control of
the scope of the Bank’s financial restrictions, 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 Committee held 10 meetings during the year.
The Ministry of Defense Tender Committee – an ad hoc committee, that was established on
December 21, 2008 and that discussed the Bank’s bid in the tender for the provision of loans and banking
services to defense establishment employees.
The Ministry of Defense Tender Committee held one meeting during the year.
* During the year the Committee’s composition, format and name were changed as aforesaid.
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, inter alia, 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, and especially its
responsibility for examining the financial position of the company, as well as preparing and approving 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 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 directors defined as “having
accounting and financial expertise”, 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 external directors that a
public company must appoint under the Companies Law – 1999.
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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 aforesaid Directive of the Bank of Israel, are as
follows:
Zeev Gutman
Chairman of the
Board of Directors
Master of Business Administration from the HERIOT-WATT University
Edinburgh.
Accounting studies at the College of Management (without a CPA degree).
Deputy Managing Director, Head of the Financial Management and Risk
Management Department, Chief Risk Officer of First International.
Served in First International as Head of the Customer Assets and
International Banking Department, and as Head of the Capital Market and
Foreign Currency Department.
Member of the Board of Directors of: First International Issues Ltd., Stocofin
(Israel) Ltd., Panca Ltd., FIBI Bank (Switzerland) Ltd., Hightrade.
Served as the Chairman and member of the Board of Directors of various
provident funds owned by First International, and retired from these
positions on February 9, 2006.
Served as a director of U-Bank until August 8, 2007.
Served as a director of the Tel Aviv Stock Exchange and Maof Clearing
House until January 20, 2009.
David Levinson
B.A. in Economics and Statistics from the Hebrew University of Jerusalem.
M.A. in Business Management from the Tel Aviv University.
Managing Director of D.L. Nachshon Ltd.
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., Managing Director of FIBI (UK) London and
Managing Director of Israel Continental Bank 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 of First International, Discount Bank and Migdal
Insurance Company.
Michal AbadiBoiangiu
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.
Served as a senior economic advisor to the Minister of Health, Deputy
Director General of Health Services and Supplementary Health Services at
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.
Eyal Hankin
B.A. in Computer and Management Sciences from the Tel Aviv University.
MBA – finance expertise, from the Tel Aviv University and Northwestern
University, the Kellogg Recanati track.
Serves as Managing Director of Shachar Group.
Served as VP Marketing and Sales of Electra Consumer Products Ltd.
Served as VP Marketing and Business Development of NAMS.
75
Members of the Bank’s Board of Directors
Zeev Gutman, Chairman of the Board of Directors
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 a related company or of an interested party in it: Yes.
Deputy Managing Director, Risk Manager and Head of the Financial Management and Risk Management of
First International Bank of Israel Ltd.
Education: MBA from the HERIOT-WATT University Edinburgh
Accounting studies at 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 of
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 of 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
of U-Bank until August 8, 2007
Served as a director in the Tel Aviv Stock Exchange and in Maof Clearing House until January 20, 2009
Yoram Hessel
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 Balance Sheet, Credit, Remuneration,
Operating, Nostro and Risk Management
Serves as external director: Yes
Employee of the Bank, of its subsidiary, of a related company or of an interested party in it: No.
Education: B.Sc. in Economics, M.Sc. in International Relations from the London School of Economics,
and Political Science from the 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., Managing Director of Colbert Crown Ltd. (2003-2005), President of
IntelliTech International LLC (USA), joint Chairman and member of the Board of Directors of DynaTrage
Inc. (USA) (2003-2008), member of the Board of Directors of Crystal Consumer Products Ltd., member of
the strategic advisory committee of Elul Group Ltd. (2004-2008), member of the strategic advisory
committee of Simlat Ltd., “Agmon” council member, member of the Governing Body – Friends of Rabin
Medical Center, member of the Governing Body – “Ein MiTzion” .
76
Prof. Reuven Gronau
ID No.: 8176083
Address for serving processes of court: 7 Carmia St., Jerusalem
Membership of Board of Directors’ Committees: Audit and Balance Sheet, Operating, Nostro and Risk
Management
Employee of the Bank, of its subsidiary, of a related company or of an interested party in it: No
Education: Ph.D. Economics from Columbia University, New York
Economics Professor at the Hebrew University of Jerusalem (2003-8.2005)
Director of First International (until 2005)
Roni Tal (Gottfried)
ID No.: 009679796
Address for serving processes of court: 13 Sold St., Raanana
Membership of Board of Directors’ Committees: Audit and Balance Sheet, Credit, 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 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..
Dafna Pelli
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, Audit and Balance Sheet, 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 Governing Board 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)
77
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: Credit
Employee of the Bank, of its subsidiary, of a related company or of an interested party in it: Yes. VP,
member of Management and Head of the Banking Department of First International.
Education: B.A. in Economics from Haifa University
VP, member of Management and Head of the Banking Department of First International.
Served as a director in Visa Cal on behalf of First International, observer to the Board of Directors of Bank
Masad on behalf of First International
David Levinson
ID No.: 07994361
Address for serving processes of court: 29 Nachshon St., Ramat Hasharon 47301
Membership of Board of Directors’ Committees: Audit and Balance Sheet, Credit
Education: B.A. in Economics and Statistics from Hebrew University of Jerusalem, M.A. in Business
Administration from Tel Aviv University
Managing Director of D.L. Nachshon Ltd., 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., as the Managing Director of Granit Hacarmel Holdings Ltd., as the
Managing Director of The Maritime Bank of Israel Ltd, as the Managing Director of FIBI (UK) London and
as the Managing Director of Israel Continental Bank, Ltd.
Amos Malka
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.
78
Michal Abadi-Boiangiu
ID No.: 022708218
Address for serving processes of court: 8 Hanotrim St., Holon
Membership of Board of Directors’ Committees: Audit and Balance Sheet
Employee of the Bank, of its subsidiary, of a related company or of an interested party in it: Yes. VP,
Head of the Accounting Department of First International
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. Serves as Chairperson of the Board of
Directors of First International Issues Ltd. and of Magal Issues Company of First International. Serves as
director of Israel Credit Cards Ltd., MATAF – Industrial & Financial Computing Ltd., and Stocofin (Israel)
Ltd.
In the past served as a senior economic advisor to the Minister of Health, Deputy Director General of Health
Services and Supplementary Health Services at the Ministry of Health (1.1998-1.2006), 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)
Shachar Turjeman
ID No.: 227405755
Address for serving processes of court: 16 Haogen St., Rishon Le-Zion
Membership of Board of Directors’ Committees: Remuneration
Employee of the Bank, of its subsidiary, of a related company or of an interested party in it: No*
Education: B.A. in Middle East studies 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.
Director of 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.
79
Joel Gonen
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
Atalya Arad (4)
ID No.: 053486767
Address for serving processes of court: 36 Bernstein St., Ramat Gan
Membership of Board of Directors’ Committees: Audit and Balance Sheet, Remuneration, Operating,
Nostro and Risk Management
Education: M.A. in Sociology from Hebrew University of Jerusalem
Manager of the Investigations Department of the Israel Securities Authority, Head of the Investigations
Division as Chief Superintendent, the National Fraud Investigations Unit, Israel Police.
Serves as director of American Israeli Paper Mills Ltd.
Itzhaq (Zachi) Ein-Gal (5)
ID No.: 022555494
Address for serving processes of court: Moshav Kfar Vitkin 40200
Employee of the Bank, of its subsidiary, of a related company or of an interested party in it: No *
Education: M.A. in Public Administration from Tel Aviv University, M.A. from the National Security
College in Haifa University
Head of the Individual Affairs Department in IDF’s Human Resources Division and Chairman of the Board
of Directors of Hever, The Association of IDF Servicemen and Veterans Ltd.. Serves as director in Hever
Consumer Club Ltd., Friends of the IDF, Sh.I.R.N. (2002) Ltd. founded by Friends of the IDF, E.Sh.L.H.
founded by Friends of the IDF Ltd., Organization and Management of Comprehensive Unique Standing
Army Pension Co. Ltd.
* Serves as Chairman of the Board of Directors of Hever, The Association of IDF Servicemen and Veterans
Ltd. – interested party in the Bank.
Eyal Hankin (6)
80
ID No.: 024604332
Address for serving processes of court: 45 Bustanai St., Ramat Hasharon
Membership of Board of Directors’ Committees: Audit and Balance Sheet, Credit
Education: B.A. in Computer and Management Sciences from the Tel Aviv University, MBA – finance
expertise, from the Tel Aviv University and Northwestern University, the Kellogg Recanati track
Managing Director of Shachar Group, VP Marketing and Sales of Electra Consumer Products Ltd.
Galit (Sigalit) Abergil (7)
ID No.: 023074404
Address for serving processes of court: 59 Yaara St., Yavne
Employee of the Bank, of its subsidiary, of a related company or of an interested party in it: No *.
Education: M.A. in Public Administration from Bar-Ilan University and B.A. in Middle East History from
Bar-Ilan University
Lieutenant Colonel, IDF, Secretary in High Command, human resources positions in Intelligence.
* Serves in the standing army, Managing Director of Hever, The Association of IDF Servicemen and
Veterans Ltd. – interested party in the Bank.
Changes in the Board of Directors
Shimon Cohen (1)
Yaron Beery (2)
Ronit Lev (3)
Atalya Arad (4)
Itzhaq (Zachi) Ein-Gal (5)
Eyal Hankin (6)
Galit (Sigalit) Abergil (7)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Mr. Shimon Cohen ended his term of office as external director on April 12, 2008.
Mr. Yaron Beery ended his term of office as director on July 15, 2008.
Ms. Ronit Lev ended her term of office as director on November 18, 2008.
Ms. Atalya Arad was appointed external director on June 2, 2008
Mr. Itzhaq (Zachi) Ein-Gal was appointed director on July 15, 2008.
Mr. Eyal Hankin was appointed external director on September 17, 2008.
Ms. Galit (Sigalit) Abergil was appointed director on December 24, 2008.
81
Details of Senior Officers
Israel Trau
ID No.: 53641775
The position that the officer holds in the Bank, in a subsidiary, in a related 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 17.8.2006. VP, Head of the Banking and Marketing Department of
First International (1.4.2005-17.8.2006), Manager of the Main Branch of First International in Tel Aviv
(1.2.2002-1.4.2005)
Noam Kutai
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, Deputy Managing Director, Head of the
Retail Division of the Bank
Baruch Granot
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
Senior Vice President, Chief Financial Officer
Doron Calif
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
82
Dan Traub
ID No.: 51638724
interested party in it: Senior Vice President, Head of the Resources Division of the Bank, Chairman of the
Property Company, a subsidiary 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
Gila Yeheskely
ID No.: 50542786
interested party in it: Vice President, Chief Legal Counsel and Corporate Secretary of the Bank
Education: Attorney, LL.B. from Tel Aviv University
Vice President, Chief Legal Counsel and Corporate Secretary of the Bank.
Orit Horesh
ID No.: 52905700
interested party in it: Vice President, Manager of the Customer Assets Management Division of the Bank,
director of subsidiaries of the Bank
Education: B.A. in Political Sciences from Tel Aviv University, M.A. – Business Administration from
Manchester University
Vice President, Manager of the Customer Assets Management Division of the Bank
Ofer Salpeter
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
Occupation in the past 5 years: VP (since 2008), Chief Accountant of the Bank
83
Nir Abel
ID No.: 56220106
interested party in it: Chief Internal Auditor of the Bank, Auditor of First International 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 2000. Internal Auditor of First International Group since
August 2006
External auditors – KPMG Somekh Chaikin, CPAs
84
Assessment of Controls and Procedures with respect to Disclosure in the
In compliance with the Public Reporting Directives of the Supervisor of Banks and with Proper Conduct of
Banking Business Directive No. 309, the Bank has established a system for internal control over financial
reporting. The Directives, that address 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, were prepared in accordance with the provisions of Sections 302 and 404 of the Sarbanes-Oxley
Act, legislated in the U.S.A.
The financial statements are accompanied by the report of the Board of Directors and Management on
internal control over financial reporting, as well as separate statements by the Bank’s Managing Director and
its Chief Accountant - who is the Bank’s Controller, on the assessment of controls and procedures with
respect to disclosures.
The Bank’s Management has evaluated, in cooperation with the Managing Director and the Chief
Accountant – who is the Bank’s Controller, the effectiveness of the controls and procedures pertaining to the
Bank’s disclosure, as at December 31, 2008. Based on the said evaluation, the Bank’s Managing Director
and the Chief Accountant, who is the Bank’s Controller, have concluded that at the end of the said period the
controls and procedures pertaining to the Bank’s disclosure are sufficiently effective to record, process,
summarize and report the information that the Bank is required to disclose in its report in accordance with
the Public Reporting Directives of the Supervisor of Banks and at the date prescribed in these Directives.
During the fourth quarter of 2008, 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.
Zeev Gutman
Chairman of the Board of Directors
Ramat Gan, February 26, 2009
85
Israel Trau
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, value of benefits and employer’s payments for the Bank’s five highestpaid senior officers in 2008 and 2007, in reported amounts:
Salaries
Supplementation
Employer’s
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 2008
Israel Trau
Noam Kutai
Doron Calif
Baruch Granot
Dan Traub
1,171
813
775
741
750
Salaries
359
201
215
225
196
-
Supplementation
Employer's
of reserves
Payments and
for salary changes
provisions
in the accounting year
N I S t h o u s a n d s
1,530
1,014
990
966
946
Total
In 2007
Israel Trau
Noam Kutai
Doron Calif
Baruch Granot
Ofer Salpeter (1)
1,382
1,168
1,044
1,012
853
349
211
204
234
143
1,695
(1) Appointed on January 17, 2008.
86
1,731
1,379
1,248
1,246
2,691
Remuneration of the external auditors (1) (2) (3)
2008
NIS thousands
2007
For auditing activities(4):
External auditors Somekh Chaikin, CPAs
For audit-related services
Other external auditors
Total
1,284
140
61
1,485
881
97
978
For other services:
External auditors Somekh Chaikin, CPAs
23
106
-
-
Other external auditors
(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) The external auditors’ remuneration includes payments in accordance with the VAT Law.
(3) Includes remuneration paid and accrued.
(4) Auditing of the annual financial statements, in 2008, including the audit of the internal control over the
financial statements, auditing of tax returns and review of interim financial statements.
87
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
Analysis of the Bank’s Exposure to Foreign Countries – Consolidated.
Appendix G
Consolidated Quarter-End Balance Sheets for the Years 2008 and 2007 – Multi-Quarter
Information.
Appendix H
Consolidated Quarterly Statements of Profit and Loss for the Years 2008 and 2007 – MultiQuarter Information.
*All operations are solely in Israel.
88
Appendix A – Consolidated Balance Sheets –
Multi-Period Information – in reported amounts
2008
Assets
Cash and deposits
with banks
Securities
Credit to
the government
Buildings and
equipment
Other assets
December 31
2006
N I S m i l l i o n s
2007
2005
2004
1,862.8
2,485.4
9,037.2
2,191.8
1,360.1
8,473.5
2,143.4
924.2
7,897.6
2,641.6
552.7
7,643.8
2,291.6
261.6
7,220.4
0.1
0.9
-
0.2
0.3
164.0
89.4
158.7
71.2
156.7
54.6
156.8
60.5
148.9
68.4
13,638.9
12,256.2
11,176.5
11,055.6
9,991.2
11,035.8
49.6
9,925.8
76.0
9,029.7
98.1
8,937.0
139.0
8,053.1
153.0
129.4
115.5
115.0
118.8
86.4
520.1
1,143.9
389.3
1,028.4
376.5
945.5
355.2
859.0
334.5
783.1
12,878.8
11,535.0
10,564.8
10,409.0
9,410.1
0.7
0.6
0.6
0.6
0.5
759.4
720.6
611.1
646.0
580.6
Total liabilities and
shareholders’ equity
13,638.9
12,256.2
11,176.5
11,055.6
9,991.2
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
89
Appendix B – Consolidated Statements of Profit and Loss –
Multi-Period Information – in reported amounts
2008
Profit from financing operations after
Operating commissions
Profits from investments in shares
Other income
2007
December 31
2006
2005
N I S m i l l i o n s
2004
376.7
34.6
374.7
19.3
338.0
30.1
315.1
22.6
318.6
35.3
342.1
355.4
307.9
292.5
283.3
202.5
8.8
186.2
15.9
177.3
0.3
21.8
169.8
23.8
157.8
22.4
Total operating and other income
Operating and other expenses:
Salaries and related expenses
Maintenance and depreciation of buildings
and equipment
Other expenses
211.3
202.1
199.4
193.6
180.2
253.9
242.2
264.1
213.1
203.2
84.5
127.8
77.0
113.7
68.7
104.2
64.7
94.0
59.3
89.1
Equity of minority interest in the after-tax
operating profits of subsidiaries
Net operating profit
After-tax profit (loss) from extraordinary items
466.2
87.2
34.9
52.3
432.9
124.6
49.3
75.3
437.0
70.3
38.4
31.9
371.8
114.3
50.4
63.9
351.6
111.9
52.3
59.6
(0.1)
52.2
-
75.3
39.4
31.9
14.5
(0.1)
63.8
0.7
59.6
(0.9)
52.2
114.7
46.4
64.5
58.7
Net profit
2008
2007
2006
2005
2004
Earnings per share in NIS
Earnings per ordinary share of NIS 0.0001:
Operating profit
0.41
-
0.59
0.31
0.25
0.11
0.52
0.01
0.48
(0.01)
Net profit
0.41
0.90
0.36
0.53
0.47
Earnings per preferred share of NIS 0.001:
Operating profit
4.12
-
5.94
3.11
2.52
1.14
5.16
0.06
4.82
(0.07)
Net profit
4.12
9.05
3.66
5.22
4.75
Earnings per founder’s share of NIS 0.005:
Operating profit
20.61
-
29.70
15.56
12.59
5.73
25.81
0.28
24.09
(0.36)
Net profit
20.61
45.26
18.32
26.09
23.73
90
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
8,526.4
15.1
607.8
458.2
(3.7)
36.4
Total assets
9,149.3
490.9
Liabilities
Hedging derivatives
Effect of ALM derivatives
8,182.7
15.0
233.3
(159.6)
(1.4)
(19.3)
Total liabilities
8,431.0
(180.3)
Israeli Currency – CPI-Linked:
Assets (4, 4A)
2,281.5
129.5
209.1
8.3
Total assets
2,411.0
217.4
Liabilities
2,322.2
112.0
(198.0)
(7.6)
Total liabilities
2,434.2
(205.6)
(2.14%)
9.02%
(8.53%)
(8.45%)
33.0
(26.8)
34.1
Total assets
2,415.4
40.3
Liabilities
Hedging derivatives
1,316.7
295.0
813.3
18.5
(11.2)
(26.0)
Total liabilities
2,425.0
(18.7)
(4A)(8)
1.67%
1.41%
3.34%
See page 94 for the explanations to the tables on pages 91-94.
91
410.7
7,958.6
445.6
7,158.8
333.8
(158.3)
7,492.6
(179.9)
0.90%
34.9
5.60%
(2.21%)
(21.6)
2,166.6
233.6
166.5
16.2
2,400.2
182.7
2,200.2
(9)
75.1
(148.2)
(3.5)
2,275.3
(151.7)
(2.40%)
1,827.4
107.8
274.1
(48.6)
(9)
5.2
(2.3)
2,209.3
(45.7)
39.0
(0.6)
37.1
3.20%
7.68%
7.61%
(6.74%)
(6.67%)
0.94%
2,174.5
Rate of income
(expenses)
including
effect of
derivatives (3)
5.62%
3.41%
1,312.4
111.2
750.9
(0.77%)
Interest margin
7,306.5
(9)
652.1
0.57%
1.93%
Rate of income
(expenses)
without effect
of derivatives
Percentage
3.23%
9.17%
0.64%
1,709.1
285.2
421.1
(8)
(1.95%)
Interest margin
Foreign Currency – Domestic Activity (5):
Assets (4, 4A)(8)
Hedging derivatives
(8)
5.37%
3.42%
Financing
income
(expenses)
NIS millions
5.37%
Interest margin
(4A)
Average
monthly
balance (2)
Percentage
Israeli Currency – Unlinked:
Assets (4,4A)
Hedging derivatives
(4A)
Rate of income
(expenses)
including
effect of
derivatives (3)
0.94%
(2.66%)
(2.07%)
2.97%
(9)
75.5
3.47%
0.31%
1.40%
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)
Average
monthly
balance (2)
Percentage
Financing
income
(expenses)
NIS millions
Rate of income
(expenses)
without effect
of derivatives
Rate of income
(expenses)
including
effect of
derivatives (3)
Percentage
Total
Assets (4, 4A)(8)
Hedging derivatives
12,517.0
300.3
1,158.4
700.3
(30.5)
78.8
Total assets
13,975.7
748.6
(4A) )(8)
Liabilities
Hedging derivatives
11,821.6
310.0
1,158.6
(339.1)
(12.6)
(52.9)
Total liabilities
13,290.2
(404.6)
11,300.5
107.8
(9)
1,159.8
528.6
(9)
5.2
48.8
12,568.1
582.6
10,671.4
111.2
(9)
1,159.8
(267.5)
(9)
(0.6)
12.0
11,942.4
(256.1)
5.36%
(8)
(2.87%)
(3.04%)
Interest margin
Income from options
Income from other derivative instruments
(excluding options, hedging, ALM and
embedded derivatives that were separated)
Commissions from financing transactions
and other financing income (6)
Other financing expenses
Provision for doubtful debts including
general and supplementary provisions
(8)
5.59%
2.72%
2.32%
4.6
3.3
3.5
30.8
(4.3)
40.9
(0.8)
376.7
374.7
34.6
19.3
342.1
355.4
92
4.64%
(2.51%)
(2.14%)
2.17%
2.9
4.68%
2.50%
2008
2007
Average
Average
monthly
monthly
balance (2)
balance (2)
NIS millions
Total
Monetary assets generating financing
income (4, 4A)
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)
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
93
12,517.0
11,300.5
30.3
104.2
24.1
112.5
(24.3)
12,627.2
(23.0)
11,414.1
11,821.6
10,671.4
32.5
203.0
12,057.1
16.5
208.7
10,896.6
570.1
181.4
9.3
742.2
517.5
164.7
10.7
671.5
Consolidated – in USD
Rate of income(expenses)
without
including
Average Financing
effect of
effect of
monthly
income derivatives derivatives
(3)
(2)
balance
(expenses)
USD millions
Percentage
Assets (4, 4A)
Hedging derivatives
Total assets
481.5
79.9
116.0
677.4
26.3
(8.4)
3.9
21.8
5.46%
Liabilities (4A)
Hedging derivatives
Total liabilities
Interest margin
369.6
82.6
227.4
679.6
(6.6)
(1.2)
(8.0)
(15.8)
(1.79%)
Rate of income(expenses)
without
including
Average Financing
effect of
effect of
monthly
income derivatives derivatives
(3)
(2)
balance
(expenses)
USD millions
Percentage
444.7
26.5
66.4
537.6
3.22%
3.67%
318.9
27.0
182.7
528.6
(2.32%)
0.90%
24.7
1.5
6.8
33.0
5.55%
(9.6)
(2.6)
(12.9)
(25.1)
(3.01%)
(9)
6.14%
(9)
2.54%
(4.75%)
1.39%
Explanations to the tables on pages 91-94:
(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 separated 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.
2008
2007
(11.3)
(4A)
(5)
(6)
(7)
(8)
(9)
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.
Reclassified.
94
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, 2008
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
7,471.9
7,395.3
76.6
188.0
175.4
12.6
70.7
346.7
(276.0)
415.5
88.5
327.0
174.7
10.0
164.7
185.6
185.6
11.4
3.0
8.4
-
93.0
46.6
46.4
8,610.8
8,065.5
545.3
212.2
84.1
(2.1)
4.1
(0.7)
-
-
-
-
297.6
842.9
288.8
96.7
(278.1)
331.1
164.0
185.6
8.4
-
46.4
288.8
385.5
107.4
438.5
602.5
788.1
796.5
796.5
842.9
46.8
102.9
(56.1)
79.0
83.7
(4.7)
369.8
240.5
129.3
793.1
594.0
199.1
360.0
633.2
(273.2)
545.3
746.7
(201.4)
75.5
27.9
47.6
8.1
8.1
6.6
6.6
(12.0)
(71.6)
(1.6)
(1.6)
-
-
-
-
-
(86.8)
(68.1)
(76.3)
127.7
197.5
(273.2)
(201.4)
47.6
8.1
6.6
(231.5)
(68.1)
(144.4)
(16.7)
180.8
(92.4)
(293.8)
(246.2)
(238.1)
(231.5)
1,246.1
1,113.1
133.0
338.1
213.5
124.6
23.4
101.5
(78.1)
3.9
2.6
1.3
1.6
(1.6)
-
-
-
3.2
2.2
1.0
1,614.7
1,434.5
180.2
(200.2)
(12.5)
3.7
(2.5)
0.7
-
-
-
-
(210.8)
(67.2)
112.1
(74.4)
(1.2)
(0.9)
-
-
-
1.0
(30.6)
(67.2)
44.9
(29.5)
(30.7)
(31.6)
(31.6)
(31.6)
(31.6)
(30.6)
See page 96 for the explanations to the tables on pages 95 and 96.
95
2,284.2
2,428.9
(144.7)
December 31, 2007
Internal
Average
rate of
duration
return
%
Years
Internal
rate of
return
%
Average
duration
3.71%
1.70%
2.01%
0.34
0.10
0.24
5.50%
2.81%
2.69%
0.18
0.12
0.06
5.31%
4.21%
1.10%
3.62
3.82
(0.20)
5.19%
4.54%
0.65%
3.82
4.10
(0.28)
2.95%
1.28%
1.67%
0.06
0.10
(0.04)
5.11%
2.92%
2.19%
0.14%
0.13%
0.01%
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, 2008
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,
2007
Average
duration
Years
Years
-
-
-
-
-
-
-
-
187.8
8.5
179.3
187.8
8.5
179.3
-
-
8,764.8
605.1
463.9
1,212.5
534.7
730.9
86.9
8.1
290.6
0.86
0.87
8,611.3
472.6
688.7
685.1
644.8
746.7
30.9
-
57.3
0.81
0.96
153.5
132.5
(224.8)
527.4
(110.1)
(15.8)
56.0
8.1
233.3
12,697.5
941.4
13,638.9
11,937.4
941.4
12,878.8
760.1
0.05
(0.09)
-
-
-
-
-
-
-
-
-
-
Total exposure to interest rate fluctuations within the segment
153.5
132.5
(224.8)
527.4
(110.1)
(15.8)
56.0
8.1
233.3
760.1
Total accumulated exposure
153.5
286.0
61.2
588.6
478.5
462.7
518.7
526.8
760.1
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 already committed.
Explanations to the tables on pages 95 and 96:
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.
96
Appendix E – Risk Involving Credit to the Public, by Economic Sector –
Operations solely in Israel
December 31, 2008
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
Local authorities(5)
Off-balance
sheet credit
risk(2)
Total credit
to the public
NIS millions
Annual expense
with respect to
specific
provision for
doubtful debts
Problematic
debt
balances(3)
195.1
718.2
41.0
313.1
236.1
1,031.3
3.1
4.0
6.5
76.4
503.4
140.5
434.0
442.9
2.7
140.4
946.3
143.2
574.4
2.6
0.3
4.7
75.5
0.4
23.6
99.3
154.8
17.6
130.1
116.9
284.9
1.0
0.2
10.8
30.2
69.4
62.1
80.5
160.2
149.9
222.3
0.6
0.3
6.4
1.1
521.2
136.2
657.4
3.6
16.5
534.1
5,957.2
37.9
2,705.2
572.0
8,662.4
(0.5)
14.6
2.8
81.0
9,389.3
4,207.8
13,597.1
34.5
331.2
490.6
23.3
513.9
-
0.5
(1) Credit to the public in an amount of NIS 9,061.9 million, investment of the public in debentures in an
amount of NIS 317.4 million, and other assets with respect to derivative instruments of the public in an
(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.
97
Appendix E (cont’d 1) – Risk Involving Credit to the Public, by Economic Sector –
Operations solely in Israel
December 31, 2007
Credit risk
in balance
sheet(1)(6)
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
Local authorities(5)
Off-balance
sheet credit
risk(2)(6)
Total credit
to the public
NIS millions
Annual expense
with respect to
specific
provision for
doubtful debts
Problematic
debt
balances(3)
214.0
635.7
16.5
333.3
230.5
969.0
0.1
3.4
7.9
68.6
542.6
52.5
420.3
364.3
53.5
144.6
906.9
106.0
564.9
0.2
2.7
56.8
0.2
11.5
98.5
121.6
18.7
203.9
117.2
325.5
2.5
2.3
5.3
25.5
56.8
53.7
84.4
108.7
141.2
162.4
0.2
(0.1)
1.6
0.3
588.3
203.8
792.1
3.4
17.2
521.6
5,434.2
77.8
2,495.8
599.4
7,930.0
(1.2)
5.5
8.3
51.0
8,739.8
4,105.3
12,845.1
19.0
254.2
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 with respect to derivative instruments of the public in an
(2) Off-balance sheet credit risk on financial instruments, as computed for purposes of borrower credit limits.
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.
(6) Reclassified.
Credit risk and the balance of problematic debts are presented net of the specific provisions for doubtful debts.
98
Appendix F– Analysis of the Bank’s Exposure to Foreign Countries (1) –
Information regarding the total exposures to foreign countries and regarding exposures to countries, each
of whose exposure amounts to more than 1% of the total consolidated assets or to more than 20% of
capital, whichever is the lower
December 31, 2008
Britain
To banks
To others
Total balancesheet exposure
187.0
-
187.0
Problematic
debt balance(3)
Total off-balancesheet exposure(2)
NIS Millions
-
-
Including offbalance-sheet
problematic debt
Maturing
within
one year
Maturing
after
one year
-
187.0
-
Balance-sheet exposure to a foreign country includes cross-border balance-sheet exposure. Cross-border
balance-sheet exposure includes balance-sheet exposure of the Bank’s offices in Israel to residents of the foreign
country.
(1) On a final-risk basis, taking into account the effect of guarantees, collateral and credit derivatives.
(2) Off-balance-sheet credit risk on financial instruments, as computed for purposes of borrower credit limits.
individual and group borrower limits, excluding off-balance-sheet risk components.
99
Appendix G – Consolidated Quarter-End Balance Sheets for the Years 2008 and 2007 –
Multi-Quarter Information – in reported amounts
4th Quarter
Assets
Cash and deposits with banks
Securities
Credit to the government
Buildings and equipment
Other assets
2008
3rd Quarter
2nd Quarter
NIS millions
1st Quarter
4th Quarter
2007
3rd Quarter
2nd Quarter
NIS millions
1st Quarter
1,862.8
2,485.4
9,037.2
0.1
164.0
89.4
2,183.9
1,576.0
9,204.8
161.4
112.0
2,206.8
1,672.9
8,779.0
158.9
75.8
1,951.8
1,571.2
8,647.5
0.2
157.5
80.3
2,191.8
1,360.1
8,473.5
0.9
158.7
71.2
2,331.6
1,003.3
8,367.7
0.5
153.8
74.0
2,166.9
956.7
8,176.7
153.6
54.5
1,879.9
1,228.7
7,930.7
155.1
57.7
Total assets
13,638.9
13,238.1
12,893.4
12,408.5
12,256.2
11,930.9
11,508.4
11,252.1
Liabilities and Shareholders’ Equity
Deposits from banks
Deposits from the government
Subordinated notes
Other liabilities
11,035.8
49.6
129.4
520.1
1,143.9
10,566.8
79.2
112.3
543.2
1,190.2
10,283.9
138.3
133.3
526.7
1,054.9
10,029.8
88.8
113.9
384.3
1,049.0
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
Total liabilities
Minority interest
12,878.8
0.7
759.4
12,491.7
0.6
745.8
12,137.1
0.6
755.7
11,665.8
0.6
742.1
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
Total liabilities and
shareholders’ equity
13,638.9
13,238.1
12,893.4
12,408.5
12,256.2
11,930.9
11,508.4
11,252.1
100
Appendix H – Consolidated Quarterly Statements of Profit and Loss for the Years 2008 and 2007 –
Multi-Quarter Information – in reported amounts
4th Quarter
Profit from financing operations, before
Other income
Maintenance and depreciation of buildings and
equipment
Other expenses
Provision for taxes (tax savings)
on operating profit
2008
3rd Quarter
2nd Quarter
NIS millions
1st Quarter
2007
3rd Quarter
2nd Quarter
NIS millions
4th Quarter
1st Quarter
92.3
24.2
100.5
9.1
89.2
0.7
94.7
0.6
92.5
13.2
92.3
2.1
97.8
2.5
92.1
1.5
68.1
91.4
88.5
94.1
79.3
90.2
95.3
90.6
54.2
1.8
56.0
55.2
2.7
57.9
46.0
2.1
48.1
47.1
2.2
49.3
46.7
2.4
49.1
48.4
2.5
50.9
47.4
5.9
53.3
43.7
5.1
48.8
63.9
65.9
62.9
61.2
61.9
63.4
60.0
56.9
22.8
33.9
120.6
3.5
22.7
32.9
121.5
27.8
20.4
31.0
114.3
22.3
18.6
30.0
109.8
33.6
21.0
32.2
115.1
13.3
20.2
29.0
112.6
28.5
18.3
26.0
104.3
44.3
17.5
26.5
100.9
38.5
(0.1)
11.6
9.6
13.8
8.9
6.5
17.0
16.9
3.6
16.2
12.7
19.8
4.4
22.0
27.3
21.6
(0.1)
-
-
-
-
-
-
-
Operating profit
Net profit
3.5
3.5
16.2
16.2
12.7
12.7
19.8
19.8
4.4
4.4
22.0
39.4
61.4
27.3
27.3
21.6
21.6
2008
Earnings per ordinary share of NIS 0.0001
Operating profit
Net profit
Earnings per preferred share of NIS 0.001
Operating profit
Net profit
Earnings per founder’s share of NIS 0.005
Operating profit
Net profit
4th Quarter
3rd Quarter
2007
2nd Quarter
1st Quarter
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
0.02
0.02
0.13
0.13
0.10
0.10
0.16
0.16
0.03
0.03
0.17
0.31
0.48
0.22
0.22
0.17
0.17
0.32
0.32
1.28
1.28
0.96
0.96
1.56
1.56
0.35
0.35
1.74
3.11
4.85
2.15
2.15
1.71
1.71
1.62
1.62
6.38
6.38
4.82
4.82
7.79
7.79
1.77
1.77
8.66
15.56
24.22
10.75
10.75
8.53
8.53
101
Certification
I, Israel Trau, hereby certify as follows:
1.
I have reviewed the 2008 annual report (“the Report”) of Bank Otsar Hahayal Ltd. (“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 with regard to the Bank’s disclosure and internal control over financial reporting.
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 established such internal control over financial reporting, or caused such internal
control over financial reporting to be established under our supervision, with the intention of
providing reasonable assurance with regard to the reliability of the financial reporting and that
the financial statements for external purposes are prepared in accordance with generally
accepted accounting principles and with the directives and guidelines of the Supervisor of
Banks.
C.
We have evaluated the effectiveness of the Bank’s disclosure controls and procedures and we
have presented in the Report 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
D.
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 26, 2009
102
Certification
I, Ofer Salpeter, hereby certify as follows:
1.
I have reviewed the 2008 annual report (“the Report”) of Bank Otsar Hahayal Ltd. (“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 with regard to the Bank’s disclosure and internal control over financial reporting.
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 established such internal control over financial reporting, or caused such internal
control over financial reporting to be established under our supervision, with the intention of
providing reasonable assurance with regard to the reliability of the financial reporting and that
the financial statements for external purposes are prepared in accordance with generally
accepted accounting principles and with the directives and guidelines of the Supervisor of
Banks.
C.
We have evaluated the effectiveness of the Bank’s disclosure controls and procedures and we
have presented in the Report 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
D.
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 26, 2009
103
Management Certification
Report of the Board of Directors and Management on Internal Control over Financial Reporting
The Board of Directors and the Board of Management of Bank Otsar Hahayal Ltd. are responsible for the
establishment and application of adequate internal control over financial reporting (as defined in the Public
Reporting Directives concerning the “Board of Directors’ Report”). The system of internal control at the Bank
was designed to provide reasonable assurance to the Bank’s Board of Directors and Management with regard to
the adequate preparation and presentation of the financial statements, which are published in accordance with
generally accepted accounting principles and the directives and guidelines of the Supervisor of Banks.
Regardless of the quality of the design of the internal control systems, any such system has inherent limitations.
Thus, even if we determine that these systems are effective, such systems can provide only reasonable assurance
with regard to the preparation and presentation of the financial reports.
Management, under the supervision of the Board of Directors, maintains a comprehensive system of controls
aimed at ensuring that transactions are executed in accordance with Management’s authorizations, that assets
are protected, and that accounting records are reliable. In addition, Management, under the supervision of the
Board of Directors, applies measures to ensure that information and communication channels are effective and
to monitor performance, including the performance of internal control procedures.
The Bank’s Management, under the supervision of the Board of Directors, has assessed the effectiveness of the
Bank’s internal control over financial reporting as at December 31, 2008, based on the criteria established in the
internal control model of the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Based on this assessment, Management believes that as at December 31, 2008 the Bank’s internal control over
financial reporting is effective.
The effectiveness of the Bank’s internal control over financial reporting as at December 31, 2008 was audited
by the Bank’s external auditors, Somekh Chaikin, Certified Public Accountants (Isr.), as noted in their report on
page 106. The auditors’ report includes an unqualified opinion with regard to the effectiveness of the Bank’s
internal control over financial reporting as at December 31, 2008.
__________________
Zeev Gutman
Chairman of the Board
of Directors
__________________
Israel Trau
Managing Director
Ramat Gan, February 26, 2009.
104
__________________
Ofer Salpeter
Chief Accountant
Contents
Page
Auditors’ Reports
106
Consolidated Balance Sheets
108
Consolidated Statements of Profit and Loss
109
Statement of Changes in Shareholders’ Equity
110
Consolidated Statements of Cash Flows
111
Notes to the Financial Statements
112
105
Auditors’ Report to the Shareholders of
Bank Otsar Hahayal Ltd. – Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Bank Otsar Hahayal Ltd. (“the Bank”) as
at December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank’s Board of
Directors and Management are responsible for maintaining effective internal control over financial
reporting and for their assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Directors’ and Management’s reports on internal control over financial reporting.
Our responsibility is to express an opinion on the Bank’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States), as adopted by the Supervisor of Banks. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
The internal control of a bank over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in Israel (Israeli GAAP)
and directives and guidelines of the Supervisor of Banks. The internal control of a bank over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the bank;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with Israeli GAAP and the directives and guidelines of the Supervisor
of Banks, and that receipts and expenditures of the bank are being made only in accordance with
authorizations of management and directors of the bank; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the bank’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the Bank maintained, in all material respects, effective material control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with accepted auditing standards, including those prescribed under
the Israeli Auditors’ Regulations (Auditor’s Mode of Performance) – 1973, and auditing standards applied
in the audit of banking corporations as determined by guidelines of the Supervisor of Banks, the
accompanying consolidated balance sheets of the Bank as at December 31, 2008 and 2007 and the related
consolidated statements of profit and loss, statement of changes in shareholders’ equity and statements of
cash flows for each of the years, the last of which ended on December 31, 2008, and our report dated
February 26, 2009, expressed an unqualified opinion on the said consolidated financial statements.
Somekh Chaikin
Certified Public Accountants (Isr.)
February 26, 2009
106
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, 2008 and 2007, and the related
consolidated statements of profit and loss, statement of changes in shareholders’ equity and
statements of cash flows for each of the three years, the last of which ended December 31, 2008.
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 0.5%
and 0.7% of the total consolidated assets as at December 31, 2008 and 2007, respectively, and
whose profit from financing operations before provision for doubtful debts constitutes 0.8%,
0.7% and 0.8% of the total consolidated profit from financing operations before provision for
doubtful debts for the years ended on December 31, 2008, 2007 and 2006, 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 in Israel,
including standards prescribed by the Auditors Regulations (Auditor’s Mode of Performance) –
1973, and auditing standards applied in the audit of banking corporations as determined by
guidelines of the Supervisor of Banks. 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 the
Management of the Bank, 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 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, 2008 and 2007, 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, 2008, in conformity with generally accepted accounting principles in Israel.
Furthermore, these financial statements have, in our opinion, been prepared in accordance with
the directives and guidelines of the Supervisor of Banks.
We have also audited in accordance with standards prescribed by the Public Company
Accounting Oversight Board (United States) (PCAOB), as adopted by the Supervisor of Banks,
the internal control of the Bank over financial reporting as at December 31, 2008, based on
criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
February 26, 2009, expressed an unqualified opinion on the effectiveness of the internal control
over the financial reporting.
Somekh Chaikin
Certified Public Accountants (Isr.)
February 26, 2009
107
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
Zeev Gutman
Chairman of the Board of Directors
Israel Trau
Managing Director
Ramat Gan, February 26, 2009
The accompanying notes are an integral part of the financial statements.
108
As at December 31
2007
2008
Reported amounts
NIS millions
NIS millions
1,862.8
2,485.4
9,037.2
0.1
164.0
89.4
2,191.8
1,360.1
8,473.5
0.9
158.7
71.2
13,638.9
12,256.2
11,035.8
49.6
129.4
520.1
1,143.9
9,925.8
76.0
115.5
389.3
1,028.4
12,878.8
11,535.0
0.7
0.6
759.4
720.6
13,638.9
12,256.2
Ofer Salpeter
Chief Accountant
Consolidated Statements of Profit and Loss
Note
19
4.C
2008
2007
2006
Reported amounts
NIS millions
NIS millions
NIS millions
376.7
34.6
374.7
19.3
338.0
30.1
342.1
355.4
307.9
202.5
8.8
186.2
15.9
177.3
0.3
21.8
211.3
202.1
199.4
22
253.9
242.2
264.1
23
84.5
127.8
77.0
113.7
68.7
104.2
466.2
432.9
437.0
87.2
34.9
52.3
124.6
49.3
75.3
70.3
38.4
31.9
(0.1)
-
-
52.2
75.3
31.9
-
39.4
14.5
52.2
114.7
46.4
NIS
NIS
NIS
Net profit
0.41
0.41
0.59
0.31
0.90
0.25
0.11
0.36
Net profit
4.12
4.12
5.94
3.11
9.05
2.52
1.14
3.66
Earnings per founders’ share of NIS 0.005
Net profit
20.61
20.61
29.70
15.56
45.26
12.59
5.73
18.32
No. of shares
46,297,066
8,040,000
300
No. of shares
46,297,066
8,040,000
300
No. of shares
43,047,066
8,040,000
300
Other income
20
21
Maintenance and depreciation of buildings and
equipment
Other expenses
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
109
Statement of Changes in Shareholders’ Equity
Share
capital
NIS millions
Balance as at
January 1, 2006
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
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)
Adjustments to present
available-for-sale
securities at fair value
-
-
-
(1)
(0.6)
-
-
(1)
(0.6)
Presentation adjustments
for securities
reclassified through
profit or loss
-
-
-
(1)
(1.6)
-
-
(1)
(1.6)
-
-
-
0.9
-
-
0.9
19.1
358.7
377.8
2.1
-
231.2
611.1
Net profit for 2007
-
-
-
-
-
114.7
114.7
available-for-sale
-
-
-
(1)
(5.6)
-
-
(1)
(5.6)
for securities
profit or loss
-
-
-
(1)
(3.5)
-
-
(1)
(3.5)
-
-
-
3.9
-
-
3.9
19.1
358.7
377.8
(3.1)
-
345.9
720.6
Net profit for 2008
-
-
-
-
-
52.2
52.2
available-for-sale
-
-
-
(18.9)
-
-
(18.9)
for securities
profit or loss
-
-
-
(2.7)
-
-
(2.7)
-
-
-
8.2
-
-
8.2
19.1
358.7
377.8
(16.5)
-
398.1
759.4
Related tax effect
Balance as at
January 1, 2007
Related tax effect
Balance as at
December 31, 2007
Related tax effect
Balance as at
December 31, 2008
*
(1)
Less than NIS 1,000.
Reclassified.
110
Consolidated Statements of Cash Flows
2008
2007
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
Realized and unrealized gain (loss) from adjustment to fair value
of held-for-trading securities
Revaluation of subordinated notes
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
2006
NIS millions
52.2
114.7
46.4
39.9
(99.6)
23.9
(53.8)
34.2
(22.3)
0.9
17.4
25.3
(4.4)
9.7
(7.5)
*9.8
23.9
(3.3)
6.2
(9.6)
*3.9
20.7
(1.5)
1.4
0.1
-
-
41.5
113.9
73.2
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
Held-for-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
33.5
(2,227.1)
135.5
993.5
89.2
(603.6)
0.8
(27.3)
0.2
(5.6)
113.2
(968.1)
307.4
144.8
137.4
(599.8)
(0.9)
(22.0)
(9.4)
14.0
(623.2)
274.2
91.5
(85.9)
(288.0)
0.2
(16.1)
8.3
Net cash outflow used for activities in assets
(1,610.9)
(897.4)
(625.0)
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
1,110.0
(26.4)
13.9
150.0
(36.6)
63.0
896.1
(22.1)
0.5
*13.8
(10.8)
67.6
92.7
(40.9)
(3.8)
*36.0
(18.6)
(430.0)
350.0
82.2
Net cash inflow generated by activities in liabilities and capital
1,273.9
945.1
67.6
(295.5)
161.6
(484.2)
Balance of cash and cash equivalents at beginning of the year
2,039.6
1,878.0
2,362.2
Balance of cash and cash equivalents at end of the year
1,744.1
2,039.6
1,878.0
3.5
3.9
4.5
Net cash inflow generated by operating activities
Increase (decrease) in cash and cash equivalents
Transactions in assets and liabilities not involving cash flows fixed assets acquired on credit from suppliers
* Reclassified.
111
Notes to the Financial Statements as at December 2008
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 material
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.
The balance sheet and statement of profit and loss of the Bank alone are presented in Note 27.
In addition, data for the Bank alone in nominal historical values is presented in that note.
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 controlling shareholder of the Bank 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 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
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.
112
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 with respect to 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 implements
the directives of the standard, and the adjustment was therefore discontinued as of January 1,
2004.
113
Note 1A - Significant Accounting Policies (cont’d)
B.
C.
Financial statements in reported amounts (cont’d)
2)
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 have been 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.
3)
The amounts of non-monetary assets do not necessarily represent their realizable or economic
value, rather only the reported amounts of those assets.
4)
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 minority interests 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.
114
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
subsidiaries are included in the consolidated financial statements from the date that control
commences until the date that control ceases. 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 5(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 5(2)).
Intra-group balances and transactions are eliminated in preparing the consolidated financial
statements.
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)
CPI-linked assets and liabilities, which are not measured at fair value:
Assets and liabilities, which are linked to the CPI, have been included according to the linkage
terms prescribed for each balance.
2)
Transactions in foreign currency:
Transactions in foreign currency are translated into the functional currency at the exchange rate
published by the Bank of Israel in effect at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currency at the reporting date are translated into the functional
currency at the exchange rates in effect at that date. Exchange-rate differences with respect to
monetary items are calculated as the difference between the depreciated cost in the functional
currency at the beginning of the period, adjusted for the effective interest rate and payments
during the period, and the depreciated cost in foreign currency translated at the exchange rate at
the end of the period. Non-monetary assets and liabilities denominated in foreign currency and
measured at fair value are translated into the functional currency at the exchange rate in effect
on the date on which the fair value is determined. Exchange-rate differences arising from the
retranslation are recognized in profit and loss, with the exception of differences arising from the
retranslation of non-monetary equity instruments classified as available for sale, financial
liabilities hedging investments in a foreign operation, or cash flow hedges, which are
recognized directly in shareholders’ equity.
115
E.
Interest, linkage and foreign currency (cont’d)
3)
Interest and linkage accrued with respect to assets and liabilities are included in the balance
sheet together with the items to which they relate.
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:
2008
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
2007
2006
2008
%
Rate of change in
2007
%
2006
%
106.5
106.4
101.9
102.5
99.1
99.1
4.5
3.8
2.8
3.4
(0.3)
(0.1)
3.802
5.297
3.846
5.659
4.225
5.564
(1.1)
(6.4)
(9.0)
1.7
(8.2)
2.2
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 amortized cost (amortized 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.
116
G.
Securities (cont’d)
b)
Available-for-sale securities
Stated in the balance sheet at their fair value, except for non-marketable shares with
respect to 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 reserve 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.
c)
Held-for-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.
Generally, the fair value of the securities traded by the Bank is determined on the basis
of market prices quoted on active markets.
In those instances where no quoted prices are available for the Bank’s securities, the
bank relies on internal valuation methods, which include the use of various parameters
which are received from independent, external parties, such as interest curves and
exchange rates, while taking into account the published credit rating.
2)
Impairment of investments
From time to time, the Bank examines whether there has been impairment of an other-thantemporary nature in the value of its investments in securities. This examination is performed
when there are signs that may indicate that there has been impairment in the value of the
investments, including:
The length of time for which the fair value of the security is lower than its cost.
The rate of the decline in the fair value of the security relative to its total cost.
The value of collateral backing the security and the credit strengthening that supports it.
The Bank’s intention and ability to hold the security until the anticipated recovery of
the fair value of the security to its cost.
The rating of the security, including a change in the rating subsequent to balance-sheet
date.
Write-downs with respect to 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 attribution of an appropriate weighting to 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, the Bank does not recognize a subsequent
appreciation in the value of the investment until such time as the investment is realized.
117
H.
Transfers and servicing of financial assets and extinguishments of liabilities
The Bank implements the circular letter of the Supervisor of Banks that prescribes an amendment to the
Public Reporting Directives concerning “Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities”. The provisions set forth in the circular letter adopt the measurement
and disclosure rules set forth in the American accounting standard FAS 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,” to differentiate between transfers
of financial assets to be recorded as sales and other transfers. Accordingly, the principle is implemented
under which a financial asset that has been transferred shall be presented in the balance sheet of the
party controlling the asset, whether it is transferring or receiving the asset. For this purpose, the
directives specify tests of control that refer to repurchase transactions, securities lending, securitization
of loans, and the sale of and participation in loans.
The amendments to the Public Reporting Directives apply to securities lending, repurchasing of
securities, securitization of financial assets, other transfers of financial assets, provision of servicing for
financial assets and extinguishments of liabilities that are carried out after December 31, 2006.
In light of the aforesaid, securities sold under repurchase agreements in which the Bank has not lost
control over the transferred asset are treated as a secured debt. In addition, pursuant to the guidelines of
the Supervisor of Banks, certain securities sold to the Bank of Israel under repurchase agreements are
treated as a secured debt. In other words, the securities sold are not derecognized in the balance sheet,
in accordance with the abovementioned rules, and a deposit is included against them, for the return of
which the securities were pledged. The deposit is presented under the item “securities lent or sold in
repurchase agreements.”
I.
Set-off of financial instruments
In accordance with the directives of the Supervisor of Banks, the set-off of assets and liabilities are only
from financial instruments with the same counter-party and the presentation of the net balance in the
balance sheet is permitted when the following cumulative conditions are fulfilled:
(1)
With respect to those liabilities for which the Bank has a legally enforceable right to set off the
liabilities against the assets.
(2)
The Bank intends to settle the liability and realize the asset on a net basis or simultaneously.
J.
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.
118
K.
1)
Specific provision for doubtful debts
2)
a)
The specific provision has been made with respect to 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 home 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, in the year
of account, represented zero percent of the total balance-sheet loans to the public, similar to that
as at December 31, 2007.
As at balance-sheet date, the accumulated rate of the general and supplementary provisions
constituted 0.18% of the total balance-sheet credit risk, compared to 0.19% as at December 31,
2007.
4)
For details concerning a draft directive, “Measurement and Disclosure of Impaired Debts,
Credit Risk and Provision for Credit Losses”, see Note 1A.V(3) below.
119
L.
1)
Recognition and measurement
Fixed asset items are measured at cost, net of accumulated depreciation and impairment losses.
Cost includes expenditure that can be directly attributed to the acquisition of the asset, as well
as an estimate of the costs to be incurred with respect to an obligation to dismantle and remove
the item and to restore the site on which it was located. The cost of self-constructed assets
includes the cost of materials and direct labor, as well as any other cost directly attributable to
bringing the asset to the location and condition required in order for it to be able to operate in
the manner intended by Management, as well as the costs of dismantling and removing the
items and restoring the site on which the item was located.
A fixed asset item that was purchased in exchange for another non-monetary item, within the
framework of a transaction having commercial substance, is measured at fair value.
When major parts of a fixed asset item (including costs of major periodic inspections) have
different useful lives, they are accounted for as separate items (major components) of fixed
assets.
Gains and losses on disposal of a fixed asset item are determined by comparing the proceeds
from the asset’s disposal with its carrying amount, and are recognized net within “other
income” in the statement of profit and loss.
2)
Indirect costs
The cost of replacing part of a fixed asset item is recognized in the carrying amount of the item
if it is probable that the future economic benefits embodied within the part will flow to the
Group and its cost can be measured reliably. The carrying amount of the replaced part is
derecognized. The costs of day-to-day servicing are recognized in profit or loss as incurred.
3)
Depreciation
Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful
lives of each part of a fixed asset item. Leased assets are depreciated over the shorter of the
lease term and their useful lives. Land is not depreciated. The estimates with regard to the
depreciation method, the length of the useful lives and the residual value are reviewed at the
end of each reporting year, at the least.
The annual depreciation rates are presented below:
Buildings
4%
Machinery and equipment
5%-15%
Office furniture and equipment
6%-10%
Leasehold improvements are depreciated over the period of the lease, which does not exceed
the economic life of the asset.
120
M.
Deferred costs
Deferred costs are amortized as follows:
(1)
Issuance costs of debentures and subordinated notes are amortized according to the constant
yield method over the period until redemption.
(2)
Software usage rights are amortized over a period of between 3-5 years.
(3)
Direct costs of developing computer software for the Bank’s own use that were incurred at the
development stage are capitalized as an asset and are amortized from the date that the software
is deployed, according to the length of its economic life that is not more than five years. Costs
at the research stage of the software development project and ongoing maintenance costs are
charged to the statement of profit and loss as incurred. Self-development costs are capitalized
and amortized over a period of five years from the date that the software is deployed.
N.
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 with respect to the hedged risk.
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.
121
O.
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 securities and off-balance-sheet financial instruments – see G
and N above, respectively.
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
included in income upon receipt of the commission.
P.
Income tax
1)
The Bank and its subsidiaries create deferred taxes with respect to 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, with respect to 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 with respect to the general and supplementary provisions for doubtful debts
that were made as directed by the Supervisor (see K(3) 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 profit tax levied on the income of 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”.
Q.
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.
122
R.
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 likelihood of a loss from the claim is more than 70%.
Reasonably possible risk – the likelihood of a loss from the claim is more than 20%, but less
than or equal to 70%.
Remote risk – the likelihood 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 with respect to 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, and the likelihood of their realization is probable.
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 2.5
million.
S.
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 held for
trading, subordinated notes and debentures.
2)
Cash includes deposits with the Bank of Israel and commercial banks, for original periods not
exceeding three months.
T.
Earnings per share
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 by the weighted average number of ordinary shares
outstanding during the period. The Bank’s share in the profits of investee companies is calculated
according to its portion in the earnings per share of such investee companies multiplied by the number
of shares held by the Bank.
123
U.
Disclosure regarding first-time implementation of new accounting standards
Accounting Standard No. 13 (Amended), “The Effect of Changes in Exchange Rates of Foreign
Currencies”
In May 2007, the Israel Accounting Standards Board issued Accounting Standard No. 13 (Amended),
“The Effect of Changes in Exchange Rates of Foreign Currencies” (“the Standard”). The Standard
deals with the determination of the functional currency of a company or of its foreign operations, the
translation of transactions in foreign currency, the translation of financial statements of a foreign
operation, and the translation of financial statements from the functional currency to the presentation
currency. The Standard applies to financial statements for a period that commences on January 1, 2008
or thereafter.
Pursuant to the Standard, the term “reporting currency” has been replaced by two terms: “functional
currency” and “presentation currency”
The “functional currency” has been defined as the currency that best reflects the economic environment
in which the company operates and the company’s transactions. The functional currency is determined
separately for each investee company, including an affiliated company that is presented according to the
equity method, and that currency is used to measure the company’s financial position and its operating
results. The “presentation currency” has been defined as the currency in which the company generally
presents its financial statements.
The Standard prescribes rules for the translation of transactions in foreign currency in the following
manner: transactions in foreign currency will be translated into the functional currency of the Bank at
the exchange rate in effect on the dates of the transactions. Monetary assets and liabilities denominated
in foreign currency at the reporting date are retranslated into the functional currency at the exchange
rate in effect on that date. The foreign currency gain or loss on monetary items is the difference
between amortized cost in the functional currency at the beginning of the period, adjusted for effective
interest and payments during the period, and the amortized cost in foreign currency translated at the
exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign
currencies that are measured at fair value are retranslated into the functional currency at the exchange
rate in effect on the date that the fair value was determined. Foreign currency differences arising on
retranslation are recognized in the statement of profit and loss, except for differences arising on the
retranslation of non-monetary equity instruments classified as available for sale, financial liabilities that
hedge investments in a foreign operation, or cash flow hedges, which are recognized directly in
shareholders’ equity. In addition, the Standard prescribes rules for the translation of foreign operations,
how to account for foreign currency differences arising from the retranslation and realization of a
foreign currency translation reserve, as well as the treatment of the gains and losses from translation
differences arising from loans received from or extended to foreign operations, whose repayment is not
planned or anticipated in the foreseeable future.
Standard 13 (Amended), which was issued in May 2007, applies to banking corporations from
January 1, 2008 and thereafter. The provisions of the Standard are to be applied retroactively by means
of restatement of the comparative data relating to the prior periods, except in certain situations.
124
U.
Disclosure regarding first-time implementation of new accounting standards (cont’d)
Accounting Standard No. 13 (Amended), “The Effect of Changes in Exchange Rates of Foreign
Currencies” (cont’d)
On the subject of the accounting treatment of the banking corporations’ overseas banking offices,
including how to classify the aforesaid offices, specific provisions have been prescribed in the directives
of the Supervisor of Banks. With regard to these matters, the Bank is subject to the directives of the
Supervisor of Banks. Pursuant to these directives, an overseas office of a banking corporation, which
was classified as a “long arm” under the previous rules, will be classified as a foreign operation under
Standard 13 (Amended), whose functional currency is the same as the functional currency of the
banking corporation. In light of this, the initial implementation of the Standard has had no effect on the
financial statements of the Bank.
V.
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 with respect to 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.
125
V.
implementation (cont’d)
1)
Accounting Standard No. 23, “The Accounting Treatment of Transactions between an
Entity and its Controlling Shareholder” (cont’d)
Recently, the Supervisor of Banks issued a letter stating that the rules that are to apply to
banking corporations and credit-card companies with regard to the treatment of transactions
between an entity and its controlling party are being reexamined. According to the letter, the
Supervisor of Banks intends to apply the following rules to transactions between banking
corporations or credit-card companies and their controlling parties, and to transactions between
banking corporations and companies under their control:
International financial reporting standards.
In the absence of a specific reference in the international reporting standards, generally
accepted accounting principles in the United States applicable to banking corporations
in the U.S. shall be applied, provided that they do not conflict with international
reporting standards.
In the absence of references in U.S. generally accepted accounting principles, parts of
Standard 23 shall be applied, provided that they do not conflict with international
reporting standards or with U.S. generally accepted accounting principles, as noted
above.
As at the date of publication of the financial statements, the Supervisor of Banks has not yet
issued a final directive with regard to the manner in which the Standard is to be adopted 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 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, and that 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.
126
V.
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 with respect to such debts.
Pursuant to the Circular Letter, the banking corporation 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 banking corporation 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
banking corporation as requiring individual assessment and with respect to 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 banking corporation 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, home loans, and
consumer debts settled in installments) and also with respect to debts that have been classified
as being “individual” and are found not to be impaired. The specific allowance for credit losses
with respect to debts assessed on a group basis, except for home loans with regard to which a
minimum 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-to-date 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.
127
V.
3)
(cont’d)
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 banking corporation
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 home loans with regard
to which a minimum 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.
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 with respect to
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 with respect to credit to the public and with respect to 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
banking corporation 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.
128
V.
3)
(cont’d)
Implementation of the Directive requires substantial preparations and changes to existing
information systems, which are currently not adapted to reporting according to the proposed
principles. Accordingly, at this stage, it is not possible to analyze and estimate the expected
effect of the first-time implementation of the Directive on the shareholders’ equity as at
January 1, 2010 and the expected effects of implementing the Directive in the financial
statements for 2010 and thereafter on the operating results, the financial position, the cash
flows, the major ratios that indicate the quality of the credit portfolio, as well as the expected
effects on credit risk management and on fluctuations in the net profit and the shareholders’
equity. Moreover, no assessment of the effect on the balance of credit on the group track can be
made without first constructing an information system that will determine the leading
parameters for constructing homogeneous groups with similar risk characteristics. 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.
Implementing the requirements of the Directive necessitates upgrading and/or creating a
computerized infrastructure system in order to ensure a process for assessing and making the
allowance for credit losses, including 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 is acting to implement the Directive with the assistance of external
consultants. The aforementioned implementation will be done on the computerized IT systems
of Bank Hapoalim and, consequently, Bank Hapoalim has instructed the Bank with regard to the
information that it needs to provide within the framework of the project. A detailed timetable
for the performance of the tasks set and to be set for the Bank within this framework has been
fixed in coordination with Bank Hapoalim.
129
Note 2 - Cash and Deposits with Banks
Composition:
December 31
2008
2007
NIS millions
NIS millions
Cash and deposits with the Bank of Israel
Deposits with commercial banks
Deposits with special banking corporations
1,407.5
387.8
67.5
220.2
1,902.1
69.5
Total cash and bank deposits
1,862.8
2,191.8
Includes: cash and deposits with an original maturity
not exceeding three months
1,744.1
2,039.6
Note 3 - Securities
A.
Composition:
A. Securities
(only available
for sale)
Debentures
- Of the Israeli
government
- Of others(5)
Total debentures
Shares
- Of others
Total securities
December 31, 2008
Unrealized
gains from
adjustment to
fair value
NIS millions
Unrealized
losses from
adjustment to
fair value
NIS millions
Fair value(1)
NIS millions
2,129.9
352.5
2,482.4
Book value
NIS millions
Amortized cost
(for shares –
historical cost)
NIS millions
2,129.9
352.5
2,482.4
2,080.3
386.2
2,466.5
52.4
2.1
54.5
(2.8)
(35.8)
(2)
(38.6)
3.0
3.0
-
-
2,485.4
2,469.5
54.5
130
(2)
(38.6)
(3)
3.0
2,485.4
Note 3 – Securities (cont’d)
A. Securities
available-forsale
Debentures
- Of the Israeli
government(6)
- Of others(6)
Total debentures
Shares
- Of others
Total availablefor-sale securities
B. Securities held
for trading
Debentures and
loans
- Of the Israeli
government
Total securities
(1)
(2)
(3)
(4)
(5)
(6)
B.
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
965.7
301.3
1,267.0
Book value
NIS millions
Amortized cost
(for shares –
historical cost)
NIS millions
965.7
301.3
1,267.0
963.4
305.4
1,268.8
5.4
2.0
7.4
(3.1)
(6.1)
(9.2)
3.0
3.0
-
-
1,270.0
1,271.8
90.1
89.9
1,360.1
1,361.7
(2)
7.4
(2)
(3)
3.0
(9.2)
1,270.0
0.3
(0.1)
90.1
7.7
(9.3)
1,360.1
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 13.A and 13.B.
Includes debentures of others under special supervision amounting to NIS 10.9 million.
Reclassified.
Development subsequent to balance-sheet date
As at February 12, 2009, the market value of the whole securities portfolio was NIS 41.7 million less
that its cost on the same date. The pre-tax profit from the sale of available-for-sale securities in the
period from the end of 2008 through February 12, 2009 amounted to NIS 25.7 million.
Note:
For details of the operating results from investments in debentures – see Note 19.
131
Note 4 - Credit to the Public
A.
Composition:
December 31
2008
2008
NIS millions
NIS millions
Credit on the responsibility of the Bank
Credit
Customers’ liabilities for acceptances
9,048.9
13.0
8,479.8
18.3
Total credit on the responsibility of the Bank
Less - general and supplementary provisions for doubtful debts
9,061.9
24.7
8,498.1
24.6
Total credit to the public
9,037.2
8,473.5
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”.
B.
Credit to the public under the Bank’s responsibility includes:
December 31
2008
2007
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 with respect to which there is a
Management decision to restructure, which 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
with respect to such credit
Credit under special supervision
as at balance-sheet date
132
97.5
15.4
18.4
93.8
20.0
9.0
7.5
-
5.2
0.4
3.1
-
6.0
26.5
-
-
141.0
87.9
Note 4 - Credit to the Public (cont’d)
B.
Credit to the public on the Bank’s responsibility includes (cont’d):
December 31
2007
2008
NIS millions
NIS millions
2)
Loans to local authorities as at balance-sheet date
490.6
*397.7
-
-
0.5
0.4
490.1
397.3
Loans to local authorities include:
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
Reclassified.
133
C.
Composition:
Specific
provision (1)(3)
2008
Supplementary
provision (2)
Total
NIS millions
NIS millions
NIS millions
2007
Specific
Supplementary
(1)(3)
provision
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)
2006
Supplementary
provision (2)
Total
NIS millions
NIS millions
NIS millions
Balance of provision at beginning of year
240.2
24.6
264.8
263.3
24.3
287.6
260.5
22.6
283.1
Provisions for current year
Reduction of provisions
Collection of debts written-off in prior years
75.9
(36.1)
(5.3)
1.3
(1.2)
-
77.2
(37.3)
(5.3)
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)
Provisions charged to statement of profit and
loss
34.5
0.1
34.6
19.0
0.3
19.3
28.4
1.7
30.1
Write-offs, net (4)
(31.3)
-
(31.3)
(42.1)
-
(42.1)
(25.6)
-
(25.6)
Balance of provision at end of year
Includes: balance of provision not deducted
from the item “credit to the public”
243.4
24.7
268.1
240.2
24.6
264.8
263.3
24.3
287.6
14.5
-
14.5
20.1
-
20.1
27.0
-
27.0
(1)
The specific provision does not include a provision with respect to 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 1.6 million with respect to home loans in arrears as at December 31, 2008 (December 31, 2007 –
NIS 1.0 million; December 31, 2006 – NIS 1.1 million), based on the extent of the arrears.
(4)
Net of the collection of debts written off in prior years.
134
D.
Classification of balances of credit to the public
borrower.
(1)
on the Bank’s responsibility and loan risk in off-balance-sheet items
December 31, 2008
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)
, by amount of debt per
December 31, 2007
Credit (1)
NIS millions
Credit
risk(2)
NIS millions
Number of
borrowers(3)
50,759
22,519
29,376
33,357
22,816
11,490
2,903
478
127
79
74
71
36
16
-
91.6
185.9
506.8
1,192.2
1,722.6
1,799.1
956.4
329.4
153.3
173.4
289.2
623.7
660.1
705.6
-
74.4
154.7
371.9
721.7
762.0
538.9
182.6
53.1
36.8
47.1
122.4
270.2
391.2
480.8
-
174,101
9,389.3
4,207.8
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
-
167,464
8,739.8
4,105.3
(1)
Credit, debentures and the balance of other assets with respect to 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.
135
(2)
Note 5 - Investments in Investee Companies
Details of investments in companies:
Business
Share in equity rights
2008
2007
%
1)
%
Share in voting rights
2008
2007
%
%
Investment in shares stated on equity basis as at December 31
2008
2007
Original
Postinvestment
acquisition
(including in
earnings
Total
Total
capital notes)
(losses)
investment
investment
NIS millions
NIS millions
NIS millions
NIS millions
Consolidated subsidiaries
Investment Company of
Otsar Hahayal Ltd.
Investments in real
estate and securities
53
53
88
88
0.7
-
0.7
0.7
Otsarot Investment
Management Co. Ltd.
Management of
investment portfolios
100
100
100
100
9.2
4.8
14.0
13.0
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
100
100
100
100
40.9
9.8
50.7
50.8
14.6
65.4
2)
(2)
(2)
53.4
67.1
(1)
In 2007, the voluntary liquidation process was completed of Otsarit Mutual Fund Management Ltd., which was engaged in the management of the Bank’s
mutual funds. In 2008, the voluntary liquidation process was completed of Trust Company of Otsar Hahayal Ltd. and of the provident funds whose
activities were sold in 2007.
(2)
Including investment in capital notes in the amount of NIS 14.5 million (December 31, 2007 – NIS 39.0 million)
136
Note 6 - Buildings and Equipment
A.
Composition:
Cost
Disposals
NIS millions
As at
end
of year
NIS millions
Accumulated
as at
beginning
of year
NIS millions
15.0
-
252.1
113.3
126.0
15.8
(0.8)
141.0
363.1
30.8
(0.8)
393.1
Average
depreciation
rate
%
As at
beginning
of year
NIS millions
Additions
NIS millions
Land and buildings
(including fittings and
leasehold improvements)
8
237.1
Equipment, furniture and
vehicles
15
Total
Depreciation
During reporting year
Net book value
Accumulated
with respect
to disposals
NIS millions
Accumulated
as at
end
of year
NIS millions
As at
beginning
of year
NIS millions
As at
end
of year
NIS millions
14.9
-
128.2
123.8
123.9
91.1
10.4
(0.6)
100.9
34.9
40.1
204.4
25.3
(0.6)
229.1
158.7
164.0
Current
year
NIS millions
B.
The Bank has additional liabilities with respect to leases for assets expiring after 2008 (see Note 17.C).
C.
Real estate rights, the net book value of which is NIS 55.8 million (December 31, 2007 – NIS 57.9 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.
137
Note 7 - Other Assets
Composition:
December 31
2008
2007
NIS millions
NIS millions
Deferred tax assets, net (see Note 24.E)
Excess of advance income tax deposits over current provision
Receivables with respect to derivative financial
instruments (see Note 17B)
Prepaid expenses
Accrued income
Others
18.9
6.2
14.5
1.5
22.1
20.8
20.0
1.4
27.7
10.8
15.9
0.8
Total other assets
89.4
71.2
Note 8 - Deposits from the Public
Composition:
December 31
2007
2008
NIS millions
NIS millions
Demand deposits
Term deposits
Deposits in savings plans
Total deposits from the public
1,908.9
7,967.5
1,159.4
1,321.1
7,502.9
1,101.8
11,035.8
9,925.8
Note 9 - Deposits from Banks
Composition:
December 31
2008
2007
NIS millions
NIS millions
Commercial banks
Demand deposits
Term deposits
Acceptances
25.2
11.4
13.0
29.5
28.2
18.3
Total deposits from banks
49.6
76.0
138
Note 10 - Subordinated Notes and Debentures
Composition:
Average
duration
in years(2)
Subordinated notes (1)
(1)
(2)
(3)
3.65
Internal
rate of
return(3)
4.97%
December 31
2008
2007
NIS millions
NIS millions
520.1
389.3
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.
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.
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 commitment 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.
At the beginning of April 2008, the Bank issued, in accordance with the above agreements, index-linked
subordinated notes in an amount of NIS 140 million, bearing interest at a rate of 4.3% and with an
average duration of 6.8 years.
The Bank’s subordinated notes have been rated by Midroog as Aa3.
During October 2008, Midroog announced that it was transferring the subordinated notes of banks rated
by it to the Watch List, in light of the possibility of their being downgraded. This development follows
the rise in the level of uncertainty in the financial markets and in the risk level in the business
environment in which the local banking system operates. Consequently, Midroog has transferred the
Bank’s subordinated notes to the Watch List.
In December 2008, the Bank made – not through First International – issuances of subordinated notes in
an amount of NIS 10 million, bearing interest at a rate of 6.8% and with an average duration of 6.39
years.
The amount of the deferred subordinated notes included as Tier II capital in the minimum capital ratio
calculation as at December 31, 2008, weighted to take into account the period to their maturity, in
accordance with the directive of the Bank of Israel, is NIS 300.9 million (December 31, 2007 –
NIS 196.0 million). As at December 31, 2008, the capital raising potential of the deferred subordinated
notes is NIS 65 million. If the full potential is realized, the ratio of capital to risk assets will rise to
0.69%.
139
Note 10 - Subordinated Notes and Debentures (cont’d)
In order to allow the banks to issue subordinated notes on the capital market, which would enable them
to increase their capital adequacy ratio while continuing to extend credit, the Treasury has announced
that it intends to provide a State guarantee for such issues, in an amount of approximately NIS 6 billion.
The guarantee will be granted on part of the amount issued, for part of the obligation period, with
respect to subordinated notes, and under the terms stated in the announcement. The notes will be
recognized as Upper Tier II capital, as defined in the directives of the Bank of Israel. The Bank is
required to notify the Accountant General of the Treasury, by March 1, 2009, if it intends to issue notes
before the end of September 2009. The amount of the guarantee granted to the Bank totals NIS 70
million.
The Bank is examining the various possibilities available to it to make issuances of subordinated notes,
including the possibility described above, as well as other possibilities of making an issuance to the
public through International Issues.
Note 11 - Other Liabilities
Composition:
December 31
2008
2007
NIS millions
NIS millions
Provision for salaries and related expenses
Salary related institutions
Excess of provision for severance pay over fundings (Note 14.C)
Payables with respect to derivative financial instruments
(other than embedded derivatives)
Deferred income
Provision for doubtful debts with respect to off-balance-sheets items
Payables deriving from credit card transactions
Other accounts payable and credit balances
Total other liabilities
140
35.1
6.9
21.4
54.8
6.5
11.7
74.6
8.5
14.5
941.4
41.5
14.5
8.5
20.1
875.7
36.6
1,143.9
1,028.4
Note 12 - Shareholders’ Equity
A.
Share capital
The share capital as at December 31, 2008 and 2007 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 with respect to 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 in proportion 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 share
This share is not redeemable and confers the right to receive cumulative preferred dividends at the rate
of 30% of its par value per annum (before distribution of any other dividend). Aside from the matter of
the preferred dividend, this share is the same as an ordinary share in all matters.
141
Note 12 - Shareholders’ Equity (cont’d)
C.
Issuance of Capital and Distribution of Dividend
In 2008, no change occurred in the issued and paid-up capital and no dividend was declared or
distributed.
Note 12A - Capital Adequacy in accordance with Directives of the Supervisor of Banks
The minimum capital ratio is 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
2008
2007
NIS millions
NIS millions
Tier I capital:
Paid up share capital
Capital reserves and retained earnings
Minority interest in shareholders’ equity of subsidiaries
Amounts returned to capital (deducted from capital)
377.8
381.6
0.7
11.6
377.8
342.8
0.6
(2.0)
Total Tier I capital
771.7
719.2
Tier II capital:
General provision for doubtful debts that constitutes part of the
Tier II capital and is not deducted from the credit to the public
Other deductions
16.3
5.1
16.3
5.1
Total Upper Tier II capital
21.4
21.4
Subordinated notes
300.9
196.0
Total Tier II capital
322.3
217.4
1,094.0
936.6
Total capital
142
Note 12A - Capital Adequacy in accordance with Directives of the Supervisor of
Banks (cont’d)
B.
Weighted risk balances
December 31, 2008
Total assets
deducted
Weighted credit risk balances at a rate of
from
Balances(2)
0%
20% 50%
100%
capital
NIS millions
Total
weighted
credit risk
balances
Capital
requirements
with respect
to credit risk
Credit risk
Assets
Cash and deposits
with banks
Securities
Credit to the public(1)
Credit to the
government
Buildings and
equipment
Other assets
Total assets
Off-balance-sheet
financial instruments
Transactions representing
credit risk
Derivative financial
instruments
Total off-balance-sheet
Total credit risk assets
1,862.8
2,485.4
9,053.5
1,407.5
2,080.3
(3)
510.7
455.3
36.9
(4)
41.1
459.1
352.3
8,042.6
15.9
-
91.1
359.7
8,280.4
8.2
32.4
745.2
0.1
0.1
-
-
-
-
-
-
164.0
89.4
13,655.2
6.2
4,004.8
12.1
545.4
459.1
164.0
71.1
8,630.0
15.9
164.0
73.6
8,968.8
14.8
6.6
807.2
412.6
35.0
8.1
-
369.5
-
371.1
33.4
147.6
-
88.3
-
59.3
-
77.0
6.9
560.2
35.0
96.4
-
428.8
-
448.1
40.3
14,215.4
4,039.8
641.8
459.1
9,058.8
15.9
9,416.9
847.5
-
-
75.7
6.8
0.4
76.1
6.8
9,493.0
854.3
Market risk
Interest risk
Foreign currency exchange
rate risk and inflation risk
Risk with respect to
options
Total market risk assets
Total risk assets
(1)
(2)
(3)
(4)
14,215.4
4,039.8
641.8
459.1
9,058.8
15.9
A general provision for doubtful debts in the amount of NIS 16.3 million constitutes part of the
Upper Tier II capital and is not deducted from credit to the public.
Assets – balance-sheet balances, off-balance-sheet instruments – nominal value balances
weighted with conversion coefficients set by the Supervisor of Banks with regard to credit risk.
NIS 317.2 million is secured by pledged deposits, NIS 164.0 million is secured by State
guarantee and NIS 29.5 million is secured by government debentures.
The whole amount is secured by bank guarantees.
143
Banks (cont’d)
B.
Weighted risk balances (cont’d)
December 31, 2007
Total
assets
deducted
from
Weighted credit risk balances at a rate of
Balances(2)
100%
NIS millions
capital
Total
weighted
credit
risk
balances
Capital
requirements
with
respect
to credit risk
0%
20%
50%
220.2
1,063.9
596.8
1,971.6
54.4
(4)
43.9
499.3
243.6
7,349.8
(1.8)
-
394.3
254.5
7,608.2
35.5
22.9
684.6
0.9
0.9
-
-
-
-
-
-
158.7
71.2
12,272.5
1.3
1,883.1
24.4
2,094.3
499.3
158.7
45.5
7,797.6
(1.8)
158.7
50.3
8,466.0
14.3
4.5
761.8
254.8
-
-
-
254.8
-
254.8
22.9
141.6
-
122.8
-
18.8
-
43.4
3.9
396.4
-
122.8
-
273.6
-
298.2
26.8
12,668.9
1,883.1
2,217.1
499.3
8,071.2
(1.8)
8,764.2
788.6
5.4
0.5
18.8
1.6
0.6
24.8
0.1
2.2
8,789.0
790.8
Credit Risk
Assets
Cash and deposits
with banks
Securities
Credit to the public(1)
Credit to the
government
Buildings and
equipment
Other assets
Total assets
Off-balance-sheet
Transactions representing
credit risk
Derivative financial
instruments
Total off-balance-sheet
Total credit risk assets
2,191.8
1,360.1
8,489.8
(3)
Market risk
Interest risk
Foreign currency
exchange
rate risk and inflation risk
Risk with respect to
options
Total market risk assets
Total risk assets
(1)
(2)
(3)
(4)
12,668.9
1,883.1
2,217.1
499.3
8,071.2
(1.8)
A general provision for doubtful debts in the amount of NIS 16.3 million constitutes part of the
Upper Tier II capital and is not deducted from credit to the public.
Assets – balance-sheet balances, off-balance-sheet instruments – nominal value balances
weighted with conversion coefficients set by the Supervisor of Banks with regard to credit risk.
NIS 376.6 million is secured by pledged deposits, NIS 193.2 million is secured by State
guarantee and NIS 27.0 million is secured by government debentures.
The whole amount is secured by a bank guarantee.
144
Banks (cont’d)
C.
Ratio of capital to risk assets
December 31
2007
2008
NIS millions
NIS millions
Ratio of capital to risk components
Ratio of Tier I capital to risk components
8.13%
8.18%
Ratio of total capital to risk components
11.52%
10.66%
Minimal capital ratio required by the Supervisor of Banks – 9%.
Note 13 – Liens
A.
To guarantee the monetary credit provided to the Bank from time to time by the Bank of Israel
and the intra-day 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
2008
Credit from
the Bank of
Israel*
NIS millions
Deposits with
the Bank of
Israel
NIS millions
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
529.6
-
1,299.2
447.4
-
110.4
Average annual
balance
480.6
6.7
304.8
464.6
62.1
194.1
Highest balance
during the year
655.5
419.6
1,299.2
726.7
417.4
976.6
* Credit for a single day.
145
Note 13 – Liens (cont’d)
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 Risks Fund of the TASE Clearing House
(see Note 17), liens were placed on government debentures and amounts were placed on deposit
with the Bank. As at December 31, 2008, the value of the debentures and the amount of the
deposits amounted to NIS 11.1 million and NIS 2.0 million, respectively (2007 - NIS 9.5
million). The average balance of the pledged debentures during 2008 amounted to NIS 11.0
million, and the highest balance was NIS 11.4 million.
D.
For purposes of securing the Bank’s activities as a member of the Maof Clearing House, the
Bank has pledged as collateral government debentures, whose value as at December 31, 2008
amounted to NIS 27.3 million and has placed amounts totaling NIS 2.0 million on deposit with
the Bank. The average balance of the pledged debentures during 2008 amounted to NIS 19.9
million, and the highest balance was NIS 44.7 million.
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.
146
Note 14 - Employee Rights (cont’d)
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:
C.
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.
d)
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
2008
2007
NIS millions
NIS millions
Provision for severance pay
Provision for voluntary retirement plan
Less - fundings
Excess of provision over fundings
23.3
5.0
(6.9)
21.4
147
14.6
5.0
(7.9)
11.7
Note 14 - Employee Rights (cont’d)
D.
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 with respect to unutilized sick leave.
The Bank has 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 with respect to the 20-year-service bonus and the compensation with
respect to 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 amounts of the provisions are shown below:
December 31
2008
2007
NIS millions
NIS millions
Compensation for unutilized sick leave
Long-service bonus
E.
8.9
3.0
7.4
3.1
11.9
10.5
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 6.2
million (December 31, 2007 – NIS 5.2 million). The unutilized vacation pay was calculated on the
basis of the latest salary plus related expenses.
148
Note 15 - Assets and Liabilities by Linkage Basis
Israeli currency
CPI-linked
Unlinked
NIS millions
NIS millions
December 31, 2008
Foreign currency(1)
US dollar
Other
NIS millions
NIS millions
Non-monetary
items
NIS millions
Total
NIS millions
Assets
Cash and deposits with
banks
Securities
Other assets
771.4
1,567.4
7,157.9
0.1
47.5
116.7
603.5
1,562.4
6.2
682.9
246.5
214.3
9.6
291.8
65.0
102.6
5.3
3.0
164.0
20.8
1,862.8
2,485.4
9,037.2
0.1
164.0
89.4
Total assets
9,544.3
2,288.8
1,153.3
464.7
187.8
13,638.9
7,786.7
18.0
1,907.2
-
922.6
19.5
419.3
12.1
-
11,035.8
49.6
Liabilities
Deposits from
the public
Deposits from banks
Deposits from
the government
Subordinated notes
and debentures
Other liabilities
129.4
-
-
-
-
129.4
1,064.9
520.1
6.2
53.3
11.0
8.5
520.1
1,143.9
Total liabilities
8,999.0
2,433.5
995.4
442.4
8.5
12,878.8
Difference
545.3
(144.7)
157.9
22.3
179.3
760.1
Forward contracts
Options in the money, net
(in terms of underlying
asset)
Options out of the money,
net (in terms of
underlying asset)
301.2
(86.8)
(185.5)
(28.9)
-
-
(3.6)
-
3.6
-
-
-
-
-
-
-
-
-
842.9
(231.5)
(24.0)
(6.6)
179.3
760.1
(5.1)
-
5.1
-
-
-
4.3
0.4
(2.8)
(1.9)
-
-
(present value of nominal
amount)
net (present value of
nominal amount)
(1)
Includes amounts linked to foreign currency.
149
Note 15 - Assets and Liabilities by Linkage Basis (cont’d)
Israeli currency
CPI-linked
Unlinked
NIS millions
NIS millions
December 31, 2007
Foreign currency(1)
US dollar
Other
NIS millions
NIS millions
Non-monetary
items
NIS millions
Total
NIS millions
Assets
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
(in terms of underlying
asset)
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)
-
-
(present value of nominal
amount)
net (present value of
nominal amount)
(1)
Includes amounts linked to foreign currency.
150
Note 16 - Assets and Liabilities by Linkage Basis and Maturity date (1)
Israeli currency –
unlinked
Assets
Liabilities
Difference
Derivative
instruments
(excluding
options)
Options (in terms
of underlying
asset)
Israeli currencyCPI-linked
Assets
Liabilities
Difference
Derivative
instruments
(excluding
options)
Options (in terms
of underlying
asset)
Foreign currency
– domestic
activity (3)
Assets
Liabilities
Difference
Derivative
instruments
(excluding options)
Options (in terms of
underlying asset)
December 31, 2008
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
2,402.5
4,354.8
(1,952.3)
689.4
394.1
295.3
1,654.5
657.2
997.3
1,458.2
397.4
1,060.8
1,374.0
603.6
770.4
800.2
2,513.2
(1,713.0)
214.4
84.0
(0.9)
3.7
-
(0.1)
-
(2.1)
(0.8)
19.7
89.4
(69.7)
79.6
92.2
(12.6)
379.2
249.3
129.9
(15.4)
(71.4)
-
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
513.0
141.2
371.8
1,305.9
2.2
1,303.7
153.9
3.0
150.9
3.9
2.9
1.0
10,355.5
9,069.6
1,285.9
93.0
46.6
46.4
9,544.3
8,999.0
545.3
-
-
-
-
-
301.2
-
301.2
(0.1)
(0.5)
-
-
-
-
(3.6)
-
(3.6)
569.5
276.7
292.8
287.6
367.5
(79.9)
229.6
400.8
(171.2)
206.2
346.0
(139.8)
817.1
986.0
(168.9)
159.6
35.5
124.1
34.5
12.0
22.5
2,782.6
2,855.4
(72.8)
6.6
6.6
2,288.8
2,433.5
(144.7)
-
-
-
-
-
-
-
-
(86.8)
-
(86.8)
-
-
-
-
-
-
-
-
-
-
-
-
1,130.7
1,076.4
54.3
51.8
220.9
(169.1)
57.3
103.5
(46.2)
31.6
8.8
22.8
46.7
5.4
41.3
30.1
7.4
22.7
36.4
4.1
32.3
307.0
9.9
297.1
3.9
3.9
-
1,695.5
1,436.4
259.1
3.2
2.2
1.0
1,618.0
1,437.8
180.2
(199.1)
(12.5)
0.9
(3.7)
-
-
-
-
-
-
(214.4)
-
(214.4)
0.1
-
2.1
0.8
0.1
0.5
-
-
-
-
3.6
-
3.6
151
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
1 month
to
3 months
NIS millions
3 months
to
1 year
NIS millions
1
to
2 years
NIS millions
December 31, 2008
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
-
-
-
-
-
-
-
-
-
-
-
187.8
8.5
179.3
187.8
8.5
179.3
Total
Assets
3,552.9
820.8
2,091.0
2,059.3
1,708.3
1,059.9
755.6
2,430.0
317.4
38.4
14,833.6
290.6
13,638.9
Liabilities
5,520.6
707.2
1,010.0
682.9
976.5
2,921.4
491.3
998.1
38.5
14.9
13,361.4
57.3
12,878.8
Difference
(1,967.7)
113.6
1,081.0
1,376.4
731.8
(1,861.5)
264.3
1,431.9
278.9
23.5
1,472.2
233.3
760.1
(0.1)
0.1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Derivative
instruments
(excluding
options)
Options (in terms
of underlying
asset)
152
Note 16 – Assets and Liabilities by Linkage Basis and Maturity date (1) (cont’d)
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
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
Total balance-sheet
assets
3,403.4
1,256.8
1,990.6
1,681.1
1,257.5
1,274.8
614.5
1,509.5
275.3
50.2
13,313.7
279.6
12,256.2
Total balance-sheet
liabilities
5,084.5
629.3
1,018.0
709.1
710.6
2,396.8
563.0
1,042.1
52.6
12.2
12,218.2
68.1
11,535.0
(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
721.2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0.1
(0.1)
-
-
-
-
-
-
-
-
-
Difference
Derivative
instruments
(excluding
options)
Options (in terms
of underlying
asset)
Explanations to the tables on pages 151-153:
(1)
(2)
(3)
(4)
This note presents anticipated future contractual cash flows with respect to 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 84.5 million that are overdue (2007 – NIS 91 million).
Including linked to foreign currency.
As included in Note 15 “Assets and liabilities by linkage basis”, including off-balance-sheet amounts with respect to derivatives.
153
Note 17 - Contingent Liabilities and Special Commitments
A.
Off-balance-sheet financial instruments
December 31
2008
2007
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
Credit facilities:
- Unutilized facilities on credit cards
- Unutilized facilities on demand accounts
- Irrevocable credit commitments approved but not yet granted
Commitments to issue guarantees
B.
3.8
125.0
209.1
163.9
6.8
88.8
42.3
143.5
1,734.9
1,304.2
624.3
141.9
1,661.9
1,359.7
640.5
227.8
Off-balance-sheet commitments at the end of the year with respect to activity by extent of
collection
December 31
2007
2008
NIS millions
NIS millions
Balance of credit granted from deposits repayable by the extent of
collection:
Israeli currency - unlinked
Israeli currency - CPI-linked
12.6
0.7
16.7
0.7
Total
13.3
17.4
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
2008
2007
NIS millions
NIS millions
1)
129.2
Long-term leases
84.2
Schedule of rent payments (NIS millions):
2009
2010
2011
2012
2013 and
thereafter
Total
15.7
14.2
13.8
13.6
71.9
129.2
154
Note 17 - Contingent Liabilities and Special Commitments (cont’d)
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.
Presented below are details of the actions against the Bank in which the damages being sought
are material.
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 amount of the class action is NIS 233 million.
The petition 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 debtors’ 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 and/or
incomplete. At the same time, a charge was made for the electronic media service, which,
according to the claimants/petitioners, the respondents are not entitled to collect. In the
estimation of the Bank, based on an opinion of its legal advisors, the chances are remote that the
claim will be accepted.
On October 12, 2008, the Bank received a claim and a petition to recognize the claim as a class
action. The claim was filed against Bank Leumi LeIsrael Ltd., Bank Hapoalim Ltd., Israel
Discount Bank Ltd., the Bank and Effective Investment Portfolio Management Ltd., as a formal
respondent. According to the claimants, the banks unlawfully collect commission from
customers who trade in the market in “options on the TA-25 index” through independent
portfolio managers such as the formal respondent. According to the claimants, the banks collect
an options realization commission, without making proper disclosure, contrary to the agreement
with their customers. The total amount of the claim is NIS 672 million. The amount of this
commission collected by the Bank from the aforesaid activity during the last four years is
insignificant. In the estimation of the Bank, based on an opinion of its legal advisors, the
chances are remote that the claim will be accepted.
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), with respect to 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.
155
C.
Other contingent liabilities and special commitments (cont’d)
3)
(cont’d)
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 prior to the month in
which the event causing the loss occurred.
For purposes of securing the Bank’s liabilities with respect to its share in the risks fund, liens
were placed on government debentures having a value as at December 31, 2008 of NIS 11.1
million. As at December 31, 2008, the amount of the liability, as described above, was NIS 8.3
million (as at December 31, 2007 – NIS 9.5 million and NIS 7.8 million, respectively).
4)
During June 2008, the Bank was accepted as a member of the Maof Clearing House. With
effect from its acceptance, the transactions of the Bank’s customers are cleared directly with the
Stock Exchange.
As security for this activity, the Bank has registered a pledge on government debentures as
collateral in favor of the Maof Clearing House, and has also placed deposits with the Bank. As
at December 31, 2008, the value of these government debentures totaled NIS 27.3 million and
the amounts on deposit totaled NIS 2.0 million. As at December 31, 2008, the amount of the
liability, as described above, was NIS 8.0 million. The Bank’s commitment in an unlimited
amount to Bank Hapoalim with respect to the Maof Clearing House activity has been cancelled.
5)
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, the Bank registered a first-ranking floating charge on
debentures that are traded on the Tel-Aviv Stock Exchange Ltd., and on all the rights arising
from and/or pertaining to them, including the monetary proceeds from their sale. As at
December 31, 2008, the balance of the debentures amounted to NIS 529.6 million. This pledge
is not dependent on any other collateral or guarantee that the Bank of Israel has received or will
receive from the Bank. As at December 31, 2008, the Bank does not have any credit from the
Bank of Israel.
6)
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.
7)
Operating services
Within the framework of the agreement for the sale of control in the Bank from Bank Hapoalim
to First International, 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.
156
7)
Operating services (cont’d)
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 operating 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 until the end of the original agreement
term. These commitments are backed by undertakings given by First International.
In 2008, the Bank continued to receive operating services in accordance with and within the
framework of the aforesaid agreements. A service agreement (SLA) has not been signed. At
the same time, the process of transferring the Bank’s operating systems has commenced.
Transfer of operating systems
The transfer is designed to result in the Bank’s operating systems being disconnected from
Bank Hapoalim’s systems, and in the provision of banking services to the Bank’s customers
using First International Group’s information systems. The project management scheduled the
transfer deadline for the first quarter of 2010. The process is aimed at maintaining the
continuity of services provided to the Bank’s customers, as well as the service level, and to
prevent damage to the customers and to the information used by the Bank’s Management. The
transfer of the operating systems entails the risk of the transferred information being corrupted.
The project is managed by MATAF – Industrial & Financial Computing Ltd., a subsidiary of
First International. The Bank has appointed Mr. Dan Traub, Manager of the Resources
Division, as the person responsible for the project on the Bank’s behalf, and he is supported by
the transfer project manager, several employees and managers who serve as managers of
secondary processes in the transfer, and several employees who serve as content experts,
responsible for maintaining the knowledge and transferring it between the computerized
systems.
Several committees supervise the management of the project:
A steering committee headed by the Managing Director of First International, and
comprising also the Bank’s Managing Director, MATAF – Industrial & Financial
Computing Ltd.’s Managing Director, the project manager for MATAF, the Bank’s
Resources Division Manager, the transfer project manager of the Bank, and additional
participants who are involved in the project.
A top steering committee headed by the Bank’s Managing Director and MATAF’s
Managing Director, with the participation of the project manager for MATAF, the
Bank’s Resources Division Manager, the project manager of the Bank, and additional
managers who are involved in the project.
A current steering committee headed by MATAF’s Managing Director, the Bank's
Resources Division Manager, the project manager of the Bank, and additional
managers.
An integration administration that operates in the Bank and is headed by the Resources
Division Manager, representatives of the Bank’s divisions and content experts.
157
C.
7)
Operating services (cont’d)
Conversion of operating systems (cont’d)
As at December 31, 2008, the mapping of gaps between the operating systems in the branches
was completed, and a development process is taking place designed to close the gaps found and
which the Bank decided to close. At the same time, the headquarters’ work processes are being
mapped and updated according to the systems to be transferred.
In addition, data transfer trials are being conducted, that will be followed by adaptation
processes.
Furthermore, a training program has been formulated with the aim of assisting the Bank’s
employees; the program comprises courses, training software and assimilation processes.
The Bank’s Management believes that the controls integrated in the transfer process and the
steps taken to prevent damage reduce the aforesaid risk.
Legislation relating to commissions
On July 5, 2007, the Banking Law (Customer Service) (Amendment No. 12) – 2007 (“the
Commissions Law”) 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 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 (“Banking Rules”) that includes the aforementioned
binding list of tariffs.
On July 1, 2008, the last part of the said Amendment No. 12 came into effect. The Bank has
implemented the rules set forth in the Law.
Following the said commissions reform, two private bills were submitted pertaining mainly to
the setting of various restrictions on charging fees and commissions on the checking accounts of
individuals and small businesses.
The Bank is following the development of the legislation process of the two bills, which is in
the preliminary stages.
In addition, on August 26, 2008, Amendment No. 2 of the Banking Rules was published. The
Amendment sets guidelines for the fees and commissions that may be charged from the
representation of an apartment building, senior citizens and physically handicapped customers,
as well as the commission collectible for the depositing of checks in the service box.
The change in the Amendment of the Commissions Law that is already in effect has changed
the structure of the income from commissions deriving from the provisions of the Law, and
could also lead to a change in the behavior of customers with regard to services they will use
and commissions they will pay following the Amendment. However, due to the uncertainty
entailed in this change, Management is unable to estimate with reasonable certainty the effect it
will have, if at all. The Amendment of the Banking Rules and the said bills, if passed, will have
an adverse effect on the Bank’s income from operating fees and commissions; however, at this
stage, the Bank cannot estimate its extent.
158
C.
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 “Operating
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. As at the Report date, the agreement has yet to be
signed, and the parties are operating according to the existing agreements.
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 functioning of some of the
operating systems; however, Management has neither the information nor the tools to estimate
this risk.
In December 2008, the Bank won a Ministry of Defense tender. The tender set out the credit
terms for defense establishment employees, clientele that includes standing army servicemen,
IDF veterans, civilian IDF employees, Ministry of Defense employees and retirees, support
units of the Ministry of Defense and their retirees, and those entitled to rehabilitation benefits.
The tender also set out, without pricing but as part of the award terms, the right to operate the
Bank’s branches in military camps and the rental fees to be paid for use of these facilities. The
tender period is 7 years, starting in May 2009.
The award of the tender enhances the Bank’s relations with its defense establishment clientele
and provides it with additional business opportunities.
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. With respect to each such 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.
159
Note 17A - Derivative Financial Instruments - Year-End Balances (cont’d)
C.
(cont’d)
An embedded derivative that was separated is presented 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 presented in the balance sheet at its
fair value, but the hedged asset or liability will no longer be adjusted with respect to changes in the fair
value.
The fair value calculations of the derivative financial instruments are based on the interest rates that are
set by the Bank’s Risk Manager, taking into account market prices, liquidity and marketability in the
local market (wholesale interest rates), and prices in the global market, as reflected in the trading and
control systems. The fair value of most derivative financial instruments (such as forward transactions,
IRS transactions) is calculated using a model based on the discounted cash flows expected to be
generated by them. The calculation is mostly done using computerized systems, and samples of the
results of these calculations are checked by an independent function.
In principle, the Bank has no material exposure with respect to options. Nevertheless, in the vast
majority of cases, the fair value of options, including those that are back-to-back, are based on the Black
and Scholes model and is affected by the inherent volatility in the relevant exchange rates, interest rates
and indexes for the option that the Bank has purchased or written. Volatility data with regard to the
shekel-foreign currency exchange rates and volatility data with regard to the foreign currency-foreign
currency exchange rates are determined on the basis of data taken from the international financial
markets. The fair value calculation is mostly done using computerized systems, and samples of the
results of these calculations are checked by an independent function. The remaining compound
derivative financial instruments, for which there is no active market, all of which are option-type
instruments with embedded deposits, are not material.
160
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, 2008
Foreign
Contracts
currency
with respect
Interest contracts
NIS/CPI
Other
contracts
to shares
NIS millions NIS millions NIS millions NIS millions
a)
Hedging derivatives (1)
Swaps
-
331.8
-
-
331.8
-
331.8
-
-
331.8
-
331.8
-
-
331.8
ALM derivatives (1, 2)
Forward contracts
88.4
-
938.2
-
1,026.6
Total
88.4
-
938.2
-
1,026.6
Other derivatives (1)
Other option contracts
Options written
Options purchased
-
-
48.9
42.9
32.4
32.4
81.3
75.3
Total
-
-
91.8
64.8
156.6
Spot currency swap
contracts
-
-
44.8
-
44.8
88.4
331.8
1,074.8
64.8
1,559.8
Total
Including interest rate swaps
in which the Bank agreed
to pay a fixed rate of interest
b)
c)
d)
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.
161
Note 17B -
Transactions in Derivative Instruments – Volume, Credit Risks and
Maturity Dates (cont’d)
As at December 31, 2008 (cont’d)
A.
Volume of activity (cont’d)
2)
Gross fair value of derivative instruments
December 31, 2008
Foreign
Contracts
Interest contracts
currency
with respect
NIS/CPI
Other
to shares
to shares
Total
NIS millions NIS millions NIS millions NIS millions NIS millions
a)
b)
c)
Hedging derivatives
Negative gross fair value
-
44.3
-
-
44.3
ALM derivatives (1)
Positive gross fair value
1.3
-
14.7
22.0
-
14.7
23.3
Other derivatives
-
-
2.3
2.9
5.1
5.1
7.4
8.0
Total positive gross fair value
-
-
17.0
5.1
22.1
1.3
44.3
24.9
5.1
75.6
Total negative gross fair value
(1)
Derivatives constituting part of the asset and liability management system of the Bank that were not
designated as hedges.
162
Note 17B -
B.
Credit risk with respect to derivative instruments classified according to counter-party
December 31, 2008
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
with respect to derivatives (2)
Total credit risk with respect to
derivative instruments
Banks
NIS millions
Other
NIS millions
Total
NIS millions
5.4
6.7
10.0
22.1
5.4
6.7
10.0
22.1
-
88.3
59.3
147.6
5.4
95.0
69.3
169.7
In 2008, no credit losses were recognized with respect to derivative instruments.
(1)
(2)
Including balance-sheet value of stand-alone derivative instruments in the amount of NIS 22.1 million,
which is included in the item “Other assets”.
Off-balance-sheet credit risk with respect to derivative instruments (including with respect to derivative
instruments with a negative fair value), as calculated for the purpose of determining individual borrower
limits.
C.
Maturity dates – nominal value amounts: year-end consolidated balances
December 31, 2008
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 with respect to shares
Total
88.4
633.6
12.0
734.0
163
434.9
28.2
463.1
6.3
24.6
30.9
331.8
331.8
88.4
331.8
1,074.8
64.8
1,559.8
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
currency
with respect
Interest contracts
NIS/CPI
Other
to shares
to 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
Other derivatives (1)
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
Including interest rate swaps
in which the Bank agreed
to pay a fixed rate of interest
b)
c)
d)
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.
164
Note 17B -
A.
Volume of activity (cont’d)
2)
Gross fair value of derivative instruments
December 31, 2007
Foreign
Contracts
Interest contracts
currency
with respect
NIS/CPI
Other
contracts
to shares
Total
a)
b)
c)
(1)
Hedging derivatives
-
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
165
Note 17B -
B.
Credit risk with respect to derivative instruments classified according to counter-party
December 31, 2007
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
with respect to derivatives (2)
Total credit risk with respect to
derivative instruments
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 with respect to derivative instruments.
(1)
(2)
Including balance-sheet value of stand-alone derivative instruments in the amount of NIS 27.7 million,
which is included in the item “Other assets”.
Off-balance-sheet credit risk with respect to derivative instruments (including with respect to derivative
instruments with a negative fair value), as calculated for the purpose of determining individual borrower
limits.
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 with respect to shares
Total
41.1
722.4
7.3
770.8
166
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 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, with respect to 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 with respect to 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.
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 are divided into annual cumulative consecutive receipts beginning from the
ensuing financial year, and these receipts are segmented into groups with similar characteristics
such as type of customer, type of interest, linkage basis, etc. These groups are segmented into
different risk levels.
The receipts are 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.) is discounted according to the
highest interest rate the Bank used in similar transactions on the balance-sheet date. The
specific provisions for doubtful debts are deducted from the future cash flows. The
supplementary and general provisions are not 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 with respect to 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.
167
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 (cont’d)
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.
168
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, 2008
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, 2007
Balance-sheet value
(1)
(2)
Total
NIS millions
NIS millions
NIS millions
Fair
value
NIS millions
1,746.0
2,482.4
2,889.2
116.8
6,148.0
1,862.8
2,482.4
9,037.2
1,862.8
2,482.4
9,075.6
2,060.1
1,357.1
6,778.5
131.7
*1,695.0
2,191.8
*1,357.1
8,473.5
2,193.1
*1,357.1
8,509.2
0.1
68.6
-
0.1
68.6
0.1
68.6
0.9
*60.4
-
0.9
*60.4
0.9
*60.4
7,186.3
6,264.8
13,451.1
13,489.5
10,257.0
1,826.7
12,083.7
12,120.7
7,648.0
38.4
3,387.8
11.2
11,035.8
49.6
11,136.6
49.6
8,130.4
76.0
1,795.4
-
9,925.8
76.0
9,971.8
76.0
Financial liabilities
Deposits from banks
Deposits from the
government
Subordinated notes and
debentures
Other financial liabilities
129.4
-
129.4
129.4
115.5
-
115.5
115.5
3.7
1,135.4
516.4
-
520.1
1,135.4
505.5
1,135.4
*1,019.9
389.3
-
389.3
*1,019.9
400.8
*1,019.9
Total financial liabilities
8,954.9
3,915.4
12,870.3
12,956.5
9,341.8
2,184.7
11,526.5
11,584.0
Notes:
(1)
Financial instruments with respect to 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.
*
Reclassified.
169
Note 18 - Related Parties
A.
Balances
December 31, 2008
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
Securities
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)
0.2
500.0
1.9
-
6.2
-
0.5
-
0.6
-
45.6
2.3
2.8
0.2
246.2
2.3
17.0
2.9
33.5
0.8
-
33.5
0.8
-
-
-
4.3
4.2
1.4
14.3
150.0
6.6
10.1
-
48.7
0.6
-
-
0.5
-
172.8
11.4
150.6
0.8
215.9
275.5
152.9
0.9
-
-
-
-
347.6
347.6
30.2
30.2
-
-
-
-
-
-
-
-
-
-
-
-
0.7
0.9
89.4
93.0
-
-
-
-
170
Note 18 - Related Parties (cont'd)
A.
Balances
December 31, 2007
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
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
-
*34.3
1.6
-
0.4
-
0.7
-
*52.5
14.3
0.4
*177.5
100.0
14.3
4.5
-
-
-
-
347.6
347.6
30.2
30.2
-
-
-
-
-
-
-
-
-
-
-
-
0.6
0.6
10.5
10.5
-
-
-
-
* Restated.
171
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
Related parties
held by the
Bank
Others (6)
NIS millions
Others (5)
NIS millions
Income from
financing
operations
before
provision for
doubtful debts
(A)
Operating and
other income
Operating and
other expenses
(12.9)
(0.3)
-
(10.5)
-
0.1
-
-
(0.8)
-
(1.6)
-
3.1
-
-
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)
-
3.4
-
-
(A) Details in section D. below.
172
Note 18 – Related Parties (cont’d)
C.
Benefits to interested parties
Directors and Managing Director (4)
2008
2007
Salary to interested party employed by the Bank
Total benefits (in NIS millions)
Number of benefit recipients
1.5
1
1.7
1
Fees to directors not employed by the Bank
Total benefits (in NIS millions)
Number of benefit recipients
1.6
15
1.7
13
D.
Results of financing operations (before provision for doubtful debts) in transactions of the
Bank and its investee companies with interested and related parties
2008
2007
2006
NIS millions
NIS millions
NIS millions
With respect to assets:
From deposits with banks
From credit to the public
6.8
0.2
5.4
(0.1)
7.2
0.4
With respect to liabilities:
On deposits from the public
On deposits from banks
On subordinated notes
and debentures
(4.5)
(1.8)
(1.4)
-
(0.6)
-
(10.5)
(0.5)
(2.6)
Others:
Financing and
other income
(13.9)
3.3
-
Total results of financing
activity (before provision
for doubtful debts)
(23.7)
6.7
4.4
173
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.
Explanations to the tables on pages 170-173
(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 limits.
174
Note 19 - Profit from Financing Operations (Before Provision for Doubtful Debts)
Composition:
2008
2007
2006
NIS millions
NIS millions
NIS millions
A.
With respect to assets: (1)
From credit to the public
From deposits with the Bank of Israel and from cash
From deposits with banks
From debentures
Total with respect to assets
B.
With respect to 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
Total with respect to assets
C.
With respect to derivative financial
instruments and hedging transactions
Net income from ALM derivatives (2)
Financing income from other derivative instruments, net
Total with respect to derivative instruments
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 other
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:
With respect to available-for-sale debentures (3)
With respect to held-for-trading debentures
Total, included in profit from financing
operations with respect to assets
Gains on sale of available-for-sale debentures
Adjustment to market value of securities held for trading
Total, included in other financing income
Total from investments in debentures
Details of net effect of hedging instruments on
the profit from financing operations
Financing expenses with respect to assets (section A)
554.6
44.8
(38.3)
96.1
657.2
505.7
(0.5)
(29.0)
57.0
533.2
482.1
3.1
15.0
36.4
536.6
(287.9)
(1.6)
(0.2)
(0.2)
(49.2)
(339.1)
(227.1)
(1.8)
(2.5)
(2.7)
(33.4)
(267.5)
(227.7)
(1.7)
(0.7)
1.2
(19.7)
(248.6)
25.9
6.2
32.1
60.8
8.1
68.9
18.4
5.3
23.7
5.1
6.6
2.7
0.4
16.0
(4.3)
26.5
3.9
14.7
3.5
0.8
18.0
(0.8)
40.1
3.8
6.3
1.6
1.6
17.6
(4.6)
26.3
376.7
374.7
338.0
(2.5)
(3.3)
(2.8)
95.6
0.5
50.0
7.0
27.8
8.6
96.1
2.7
0.4
3.1
57.0
3.5
0.8
4.3
36.4
1.6
1.6
3.2
99.2
61.3
39.6
(43.1)
4.6
1.7
F.
(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
(3) Including impairment allowance in the amount of NIS 8.4 million (2007 – none).
175
Note 20 - Operating Commissions
Composition:
2008
2007
2006
NIS millions
NIS millions
NIS millions
Account management fees
Payment order system services
Computerized services, information and
confirmations
Income from credit cards
Credit handling and contract preparation
Interest margin and collection commissions
with respect to credit and deposits from deposits,
based on collections
Income from securities transactions
Management of investment portfolios of others
Foreign trade transactions and special
services in foreign currency
Other commissions
Total operating commissions
34.7
35.2
31.1
35.2
31.5
34.1
2.1
39.6
24.5
4.7
34.7
22.9
5.0
33.9
24.7
0.7
57.1
2.8
0.3
49.6
2.9
0.5
42.3
2.9
5.6
0.2
4.7
0.1
2.3
0.1
202.5
186.2
177.3
Note 21 - Other Income
Composition:
2008
2007
2006
NIS millions
NIS millions
NIS millions
Management and operating fees
from provident funds
Distribution fees from mutual funds
(includes management fees in 2006)
Others
Total other income
176
2.8
4.1
8.1
5.6
14.3
5.5
1.9
2.2
2.0
8.8
15.9
21.8
Note 22 - Salaries and Related Expenses
Composition:
2008
2007
2006
NIS millions
NIS millions
NIS millions
Salaries
National insurance and salary tax
Severance, provident, pension, further
training and vacation pay
Voluntary retirement expenses
Other salary-related expenses
167.3
41.7
167.9
38.6
190.3
45.5
32.8
6.1
6.0
25.8
5.0
4.9
23.7
4.6
Total salaries and related expenses
253.9
242.2
264.1
Note 23 - Other Expenses
Composition:
2007
2006
2008
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
177
71.9
15.2
12.8
2.9
3.0
5.5
2.2
1.5
4.9
1.6
6.3
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
127.8
113.7
104.2
Note 24 - Provision for Taxes on Operating Profit
2008
2007
2006
NIS millions
NIS millions
NIS millions
A.
Composition:
Provision for current taxes
Taxes with respect to prior years
Decrease in deferred tax assets
Decrease in deferred taxes with respect to
prior years
Total provision for taxes on operating profit
B.
49.3
(0.6)
-
38.7
0.3
(1.1)
0.2
34.9
0.6
49.3
0.5
38.4
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:
2008
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 with respect to prior years
Differences from adjustment of monetary
assets, net
General provision and supplementary
Non-deductible expenses
Deferred taxes with respect to non-monetary items
Others
Total taxes on income
C.
35.2
(3.7)
3.2
2007
2006
NIS
NIS
millions
millions
%
%
36.80
38.53
%
40.65
32.0
36.80
48.0
38.53
28.6
40.65
0.2
(3.7)
0.22
(4.10)
0.6
(0.6)
0.48
(0.48)
0.5
0.3
0.71
0.43
-
-
(4.9)
(3.93)
0.4
0.57
0.1
6.5
(0.5)
0.3
34.9
0.11
7.12
(0.55)
0.33
39.93
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
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 with respect to which no provision for deferred taxes is to be made:
December 31
2008
2007
NIS millions
NIS millions
Balance at end of year
0.4
178
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), with respect
to:
December 31
2007
2008
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
9.7
8.3
7.5
1.7
4.2
2.0
18.9
14.5
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 27% at
present to a rate of 25%, as follows:
- In 2009, the tax rate will be 26%.
- From 2010 onwards, 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.
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 2007 is 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
inflationary deduction or addition or for 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.
179
Note 24 - Provision for Taxes on Operating Profit (cont’d)
Cancellation of the provisions of the Income Tax Law (Inflationary Adjustments) – 1985 (“the
Inflationary Adjustments Law”)
On February 26, 2008 the Knesset enacted the Income Tax Law (Adjustments for Inflation)
(Amendment No. 20) (Restriction of Effective Period) – 2008 (“the Amendment”). In accordance with
the Amendment, the effective period of the Inflationary Adjustments Law will cease at the end of the
2007 tax year and as from the 2008 tax year the provisions of the law shall no longer apply, other than
the transitional provisions intended to prevent distortions in the tax calculations.
In accordance with the Amendment, as from the 2008 tax year, income for tax purposes will no longer
be adjusted to a real (net of inflation) measurement basis. Furthermore, the depreciation of inflation
immune assets and carried forward tax losses will no longer be linked to the CPI, so that these amounts
will be adjusted until the end of the 2007 tax year, after which they will cease to be linked to the CPI.
In addition, within the framework of the aforementioned Amendment, the definition of “profit” and
“salary” in the VAT Law was amended. Pursuant to the new definitions, profit tax will be calculated
after deducting salary tax, and the definition of “salary”, for salary tax calculation purposes, will also
include the payment of the employer’s contribution with respect to National Insurance fees. The effect
of the Amendment on the results of the Bank for the year ended December 31, 2008 is to increase the
tax expense by NIS 9.2 million.
Note 25 - After-Tax Profit from Extraordinary Items
Composition:
2008
NIS millions
December 31
2007
NIS millions
2006
NIS millions
Profit from sale of provident funds and
mutual funds operations
Less – related tax
-
60.7
(21.3)
22.5
(8.0)
Total after-tax profit from extraordinary items
-
39.4
14.5
Note 26 - Condensed Information Regarding Business Segments
General
The Bank’s activities have been 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.
180
Note 26 - Condensed Financial Statements Classified by Organizational Structure and
Main Business Segments (cont’d)
Small Businesses 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.
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 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 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 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.
Indirect costs – segment 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.
Other activity includes activity that was not attributed in full to the units’ activity.
181
Note 26 - Condensed Information Regarding Business Segments (cont’d)
Statements of profit and loss for the year ended December 31, 2008
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
Equity of minority interests in
the profits of subsidiaries
Net profit
Return on equity (% of net profit
to gross weighted capital)
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
Personal
segment
Private
Banking
Segment
Small
Businesses
segment
Corporate
segment
Financial
Management
segment
Total
consolidated
178.2
(14.7)
(78.6)
133.3
81.5
(19.6)
135.2
(86.2)
60.4
(12.8)
376.7
-
91.7
255.2
8.3
71.4
126.1
0.8
30.3
6.6
98.8
22.6
17.9
(6.6)
60.3
2.9
47.6
-
211.3
588.0
34.6
236.5
114.6
70.1
34.4
10.6
466.2
10.4
10.7
6.1
23.0
37.0
87.2
3.3
3.8
2.1
9.4
16.3
34.9
7.1
6.9
4.0
13.6
20.7
52.3
7.1
6.9
4.0
13.6
(0.1)
20.6
(0.1)
52.2
1.6%
7.2%
3.1%
5.3%
20.4%
6.9%
4,383.0
4,156.6
3,988.3
1,993.2
942.0
5,063.1
871.6
5,922.0
1,228.9
911.7
1,170.4
211.5
2,221.7
810.1
2,328.3
2,371.2
3,851.7
1,115.7
919.5
-
12,627.3
12,057.2
9,278.1
10,497.9
15.3
-
-
-
-
15.3
88.3
11.3
46.0
36.8
60.4
14.8
39.7
3.7
11.0
4.9
3.3
8.9
163.5
54.7
61.9
49.0
182
for doubtful debts:
Inter-segment
Inter-segment
Total income
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
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
Businesses
segment
Corporate
segment
Financial
Management
segment
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%
17.2%
4,068.0
3,654.4
*3,699.0
807.7
4,604.8
*620.6
1,193.6
800.4
*1,147.8
2,014.2
724.7
2,088.4
3,330.6
1,112.3
800.2
11,414.1
10,896.6
*8,356.0
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
* Reclassified.
183
for doubtful debts:
Inter-segment
Inter-segment
Total income
expenses (including
depreciation)
To outside parties
Operating profit (loss)
before taxes
Provision for taxes (tax savings)
on operating profit
Operating profit (loss) after
taxes
After-tax profit from
extraordinary items
Net profit (loss)
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
Businesses
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%
-
7.7%
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
184
Note 27 – Condensed Financial Statements of the Bank
A.
Balance sheets
December 31
2008
2007
Reported Amounts
NIS millions
NIS millions
Assets
Securities
Investments in investee companies
Other assets
1,862.8
2,485.4
9,037.2
0.1
14.7
163.8
89.1
2,191.8
1,347.1
8,473.5
0.9
13.7
158.4
71.1
Total assets
13,653.1
12,256.5
Deposits from banks
Subordinated notes and debentures
Other liabilities
11,051.3
49.6
129.4
520.1
1,143.3
9,927.3
76.1
115.5
389.3
1,027.7
Total liabilities
12,893.7
11,535.9
759.4
720.6
13,653.1
12,256.5
Total liabilities and shareholders’ equity
185
Note 27 - Condensed Financial Statements of the Bank (cont’d)
B.
Statements of profit and loss
2008
2007
Reported amounts
NIS millions
NIS millions
Profit from financing operations, before
2006
NIS millions
375.6
34.6
373.9
19.3
336.7
30.1
341.0
354.6
306.6
199.0
8.9
207.9
183.3
16.0
199.3
174.4
0.3
18.1
192.8
251.8
240.5
260.1
84.3
127.2
463.3
76.8
113.1
430.4
68.1
102.2
430.4
85.6
34.4
123.5
49.0
69.0
37.8
Bank’s equity in the after-tax operating
profits of investee companies
51.2
74.5
31.2
1.0
0.8
15.2
52.2
-
75.3
39.4
46.4
-
52.2
114.7
46.4
Other income
Operating and other expenses:
Maintenance and depreciation of
buildings and equipment
Other expenses
186
Note 27 - Condensed Financial Statements of the Bank (cont’d)
B.
Statements of profit and loss (cont’d)
2008
2007
2006
Operating profit
Net profit
0.43
0.43
0.59
0.31
0.90
0.25
0.11
0.36
Operating profit
Net profit
4.33
4.33
5.94
3.11
9.05
2.52
1.14
3.66
21.64
21.64
29.70
15.56
45.26
12.59
5.73
18.32
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
2008
2007
NIS millions
NIS millions
Total assets
13,646.3
12,248.1
Total liabilities
12,900.3
11,541.3
746.0
706.8
2008
2007
NIS millions
NIS millions
2)
Net nominal profit
53.0
187
115.1

Bank Otsar Hahayal Ltd. and its subsidiaries (Part of the Beinleumi

Transcription

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