Bank Hapoalim Annual Report 2010 - RNS Submit

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2010
Bank Hapoalim
Annual Report 2010
The Bank Hapoalim Group Major Subsidiaries & Affiliates
Commercial Banks
Asset Management
Bank Hapoalim B.M.
Bank Hapoalim (Switzerland) Ltd.
Bank Hapoalim (Luxembourg) S.A.
Hapoalim (Latin America) S.A.
Bank Hapoalim (Cayman) Ltd.
Bank Pozitif Kredi Ve Kalkinma Bankasi a.s.
JSC Bank Pozitiv Kazakhstan(1)
Poalim Sahar Ltd.
PAM - Poalim Asset Management (UK) Ltd.
Poalim Asset Management (Ireland) Ltd.
Financial Companies
Isracard Ltd.
Poalim Express Ltd.
(1) 100% owned by Bank Pozitif
Investment House
Poalim Capital Markets - Investment House Ltd.
Trust Companies
Poalim Trust Services Ltd.
Underwriting Companies
Poalim I.B.I. Managing and Underwriting Ltd.
Portfolio Management
Peilim – Portfolio Management Company Ltd.
Hapoalim Securities USA, Inc.
Consolidated Financial Highlights
2010
2009
NIS Millions
2010
2009
USD Millions*
320,876
309,555
90,413
87,223
2,228
1,316
628
371
Credit to the Public
225,288
215,788
63,479
60,802
Deposits from the Public
233,965
231,993
65,924
65,369
23,089
20,598
6,506
5,804
Total Assets
Net Profit
Shareholders' Equity
* US dollar figures have been converted at the representative exchange rate prevailing on
December 31, 2010, NIS 3.549 = USD 1.00
Group Profile
Israel’s leading financial institution
Since its founding in 1921, Bank Hapoalim has played
a pivotal role in the rapid growth of Israel’s economy.
Today Hapoalim continues to be the leading financial
institution in Israel. The bank maintains a global presence,
operating in 20 countries throughout the world.
Bank Hapoalim is a universal bank in structure
and operations.
The bank boasts a very strong retail banking business
with the largest distribution network in the country.
Through a wide range of banking offerings it caters to
consumers, SMEs and corporations across Israel.
Bank Hapoalim is the lender of choice to Israel’s
largest corporations and is active in financing industrial
and commercial enterprises, as well as major
infrastructure projects.
The bank runs a thriving foreign trade, foreign
exchange, and brokerage & custody business and
maintains a global private banking arm serving private
clients across the globe.
In Israel, Bank Hapoalim operates over 270 full-service
branches, focusing on households, private (affluent)
banking & small businesses.
The bank offers a deep shelf of banking and payments
products, capital market and foreign trade facilities and a
full gamut of financial planning advisory services including
pension and retirement planning.
Bank Hapoalim is currently strengthening its domestic
presence through “express branches” for retail banking
in high traffic areas, and “boutique” branches in affluent
neighborhoods. Through its celebrated direct banking
platform and state-of-the-art 24/7 call centers; the
Bank promotes convenient, interpersonal interaction,
providing customers the ability to bank through whichever
technological channel they choose.
Internationally, Bank Hapoalim operates through a
network of subsidiaries, branches and representative
offices in the United States, Europe, South America
and Asia. The Bank’s thriving Global Private Banking
services, led by Bank Hapoalim (Switzerland), serves
high net-worth clients from around the world, with
offices in Zurich, Geneva, Luxembourg, Tel Aviv, Miami,
Singapore and Hong Kong. In this competitive market,
clients are attracted to the Bank’s very extensive wealth
management expertise, stellar reputation and global
spread. Global Private Banking activities are supported
by PAM, a fully-owned subsidiary in London, which
provides investment products through the world’s
leading investment firms.
Building on its experience in structuring complex
trade packages, the Bank is promoting its overseas
corporate services, primarily targeting Israeli companies
establishing or strengthening their presence in established
and growth markets.
The Bank Hapoalim Group includes Isracard Ltd,
Israel's leading credit card company, as well as financial
companies involved in investment banking, trust services
and portfolio management.
The Bank plays an active role in the community,
contributing generously to educational, social and cultural
projects, and encouraging personal volunteering among
its employees.
Bank Hapoalim is one of the most actively traded stocks
on the Tel Aviv Stock Exchange. In addition, a Level-1
ADR is traded "over-the -counter" in New York, under
ticker BKHYY.
The Bank is rated by Moody's, S&P and Fitch.
Commercial and corporate clients are professionally
served through eight regional business centers, business
branches and specialized industry desks for major
corporate clients. The Bank, which has long been the
favored financial address for Israel’s leading corporations, is
now strengthening its middle market activities.
A growing network of business branches will make
services more convenient and diversified, as this sector
plays an expanding role in the domestic economy.
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Bank Hapoalim B.M. and its Consolidated Subsidiaries
Letter from the Chairman of the Board and the CEO
Dear Stakeholders,
On behalf of the Board of Directors
and the Board of Management,
we are proud to present the
annual financial statements of
the Bank Hapoalim Group for
2010 – a year of achievements and
business momentum, during which
the Bank achieved double-digit
returns, in line with the trajectory
outlined in the multi-year strategic
plan we presented last year.
A Year of Enhanced Focus and Strength
The past year was a time of great renewal and growth at
Bank Hapoalim. During 2010, we took a leap forward from
both a managerial and financial standpoint. Determined and
precise execution of our strategic plan put the Bank back
on the path of sustainable double-digit return on equity
and profitability. For the Board of Directors and the Board
of Management, it was a year of heightened focus, as we
worked to implement the Bank’s multi-year strategic plan,
bolstering growth engines and increasing synergies among
the business divisions.
The Bank ended 2010 with a net profit of NIS 2.2 billion,
up almost 70% year-over-year. Profit from financing activity
after provisions for doubtful debts reached NIS 6.7 billion,
a 44% increase year-over-year. The 10.3% return on
equity reflects Bank Hapoalim’s deep commitment to its
shareholders to produce returns commensurate with the
Bank’s risk appetite and the macro-economic conditions in
Israel and in the global markets.
The Bank’s capacity to generate a double-digit return
on equity while maintaining a substantial capital cushion,
above regulatory requirements, demonstrates the quality
of earnings of Bank Hapoalim based on the strength of its
core banking activity.
Leading Bank in a Growing Economy
In 2010, the Israeli economy continued to display a high
degree of resilience, providing fertile ground for Bank
Hapoalim’s business activities. Most sectors of the Israeli
economy have recovered from the effects of the financial
4
crisis. Gross domestic product grew by 4.6%, imports and
exports of goods and services expanded, and foreign
investments in Israel increased. Employment returned to
pre-crisis levels, while the workforce participation rate
and the employment rate showed continual gains. The
Bank of Israel interest rate rose gradually, reaching 2% in
December 2010. Early in the year, the Israeli economy
won international recognition as a developed economy
and was invited to join the prestigious OECD club,
along with European countries and the United States.
Israel was also recognized as a developed market by the
MSCI indices, which are used by investors worldwide to
allocate investments.
Global Economy: Growth Amidst Uncertainty
The global macro-economic environment improved
in 2010, and corporate profitability rose from the low
point of the crisis. Activity in the capital markets gained
force, both in capital raising and in securities trading.
Concurrently, the volume of global trade expanded and
foreign direct investments between world markets grew.
Despite the rebound, uncertainty has persisted in the
global markets due to the effects of the debt crisis that
began in the corporate sphere and evolved into an
increase in sovereign debt risk in the Euro-zone. Global
economic and financial uncertainty has also increased
as a result of the geopolitical turmoil in the Middle East,
the rise in energy and food prices, and the earthquake
in Japan. These events have heightened the risks to the
global growth process and highlighted the importance
of managing risks based on an understanding of the
developments in the global arena.
Solid Performance and Stability
Bank Hapoalim’s performance in 2010 reflects the
commitment of the Board of Directors and the Board of
Management to grow the Bank's business while increasing
and strengthening its capital.
During the year, our profitable core banking activity served
to enlarge the Bank's capital base.The total capital adequacy
ratio of the Bank was 14.1% at the end of 2010, significantly
higher than the 12.5% target set by the Board of Directors.
In 2010, we maintained our lead in providing financing
for our clients as they continued to grow and prosper,
including leadership of key infrastructure and financing
projects in the Israeli economy. Bank Hapoalim
continues to be a leading force in the economy
and serves a key role in boosting the competitive
power of the Israeli economy.
During the year, the quality of Bank Hapoalim’s credit
portfolio continued to improve, contributing to a
decrease in the Bank’s provisions for doubtful debts.
The rate of specific provisions for doubtful debts was
0.49% of total credit to the public at the end of 2010,
compared to 0.9% in 2009.
When necessary, we acted resolutely and expertly
to lead debt (restructuring) arrangements, reflecting
our responsibility to our shareholders, our clients,
and all creditors.
2010: A Year of Initiatives
During the year, we implemented internal processes to
strengthen the Bank in several areas:
• Growth in corporate credit: In 2010, we
continued to lead the Israeli banking system in the
area of credit, by financing the country’s largest deals
while maintaining spreads and strictly managing risks.
We also continued to lead syndications in the local
market, an area in which the Bank’s expertise has
earned it a top-ranking position in the industry.
• Retention and recruitment of retail clients:
During the year, the Bank worked to retain as well
as expand its share in the retail banking market.
We brought to market a diverse range of products,
increased the sophistication of our direct channels,
bolstered our branches' competitive ability, and
reinforced client-centered service processes. The
service culture at Bank Hapoalim remains a key
differentiator within the Israeli banking system.
• Strengthening savings and investments:
This year, we focused significant strategic activity in
the area of savings and investments, with an emphasis
on deposits. The Bank introduced an extensive series
of products and plans designed to encourage savings,
under the “Dan the Saver” savings plan brand. This
activity is consistent with the Bank’s philosophy of
fostering a culture of savings and financial planning
among our clients. These efforts resulted in an
increase in total core retail deposits.
• Expansion of Israel's largest banking
distribution network: During the year, we
continued to broaden our network of branches.
Branches of various types were opened based on
geographical and segmental planning, consistent with
the Bank’s strategy of enhancing its standing in growth
segments within the Israeli economy.
• Increasing Bank Hapoalim’s market share
in housing loans: In 2010, the Bank significantly
5
Yair Seroussi
Chairman of the Board of Directors
•
•
•
enlarged its share in the mortgage market. We
worked to strengthen the Bank’s position as the
preferred mortgage provider for our retail clients,
under the slogan “Take your mortgage at home”. As
our share of this industry grows, we continue to lead
the banking system in the quality of our housing loan
credit portfolio, a policy reflected in all housing credit
risk parameters.
Reorganization of International Activities:
During 2010, the Board of Directors and the Board
of Management worked to review and reorganize
the international operations of the Bank. We view
the international business as an essential long-term
growth driver, with a special focus on two aspects of
international activity: global private banking, centered
in Switzerland; and corporate banking, focused in New
York and London.
Upgrade of global treasury infrastructures:
The Board of Directors and the Board of
Management allocated resources to form one of
the leading professional management teams in the
industry. During 2010, we re-examined and optimized
the composition of the Bank’s investment portfolio
with a view of attaining adequate risk-adjusted
profitability.
Strengthening risk management: This year, we
continued to devote extensive resources and efforts
to strengthening the risk management system of the
Bank Group, with the help of supporting systems
and processes. We established the Chief Compliance
Officer position, reporting directly to the Chief
Risk Officer, and reinforced compliance processes
as part of the Bank’s corporate culture. A notable
development has been the integration of the ICAAP
(Internal Capital Allocation Assessment Process), a
key risk management process, into the strategy and
business planning processes of the Bank.
• Technological leadership: During the year, Bank
Hapoalim led an effort to adapt to the needs of the
“new consumer”, who expects to receive services
from the Bank through a wide range of technological
platforms.The upgrade of our technological
infrastructure is consistent with Bank Hapoalim’s
philosophy of innovation, which for years has been the
basis for groundbreaking initiatives that offer true value
to our clients while adjusting to their changing needs.
• Innovation: The aspiration to excellence and
innovation at Bank Hapoalim was powerfully
expressed this year in a series of initiatives aimed
at developing and instilling a culture of innovation
and experimentation throughout the Bank. We
placed emphasis on and devoted resources to the
establishment of excellence centers that promote
innovation in the development of products
and processes.
• Cultivation of human resources and labor
relations: Bank Hapoalim continued to promote and
develop the quality of its largest and most important
asset – its human resources. We formulated a detailed
plan for the cultivation of the Bank’s human capital,
which includes several key elements:
• Development of employees’ capabilities and
management of career tracks.
• Increased training at the Poalim Campus to
enhance employees’ professional knowledge.
• Establishment of an internal human capital
development center, in order to allow the
realization of strategic initiatives without
increasing manpower.
In addition, the Bank continued to cultivate its strong
employee relations, a strategic asset of the Bank for
years.The Employees’ Union is a true partner in leading
the Bank to its impressive achievements of 2010, and
will continue to contribute to the success of the Bank in
the future.
• Development of CSR infrastructure: The Bank
led an organized and systemic initiative designed to
instill corporate social responsibility throughout the
organization, giving practical expression to the Bank’s
deep commitment to the promotion of sustainability
and CSR values.
6
2011: A Look Forward
The strategic plan of the Bank encompasses several key
pillars which will be our focus in the coming years:
• Solidifying the Bank’s position as Israel’s
leading financial institution: The strategic plan
is aimed at solidifying Bank Hapoalim’s standing as
the nation’s leading financial and banking institution.
The Bank will continue to focus on serving Israel’s
leading corporations, strengthening its standing with
commercial clients, and expanding its activity in the
household sector.
• Maintaining leadership in Corporate Banking:
Reinforcing the status of the Corporate Division
as the largest credit provider in Israel; improving
customer service by growing the network of business
branches tailored to corporate clients’ needs; increasing
non-credit revenues from corporate and commercial
clients by offering advanced services through direct
channels; enhancing leadership and expanding activity in
the area of syndications and debt sales.
• Increasing the Bank’s market share in the
middle-market sector: The Bank will continue to
expand its specialized network of branches dedicated
to providing services to corporate and commercial
clients. The completion of this deployment will enable
the Bank to provide top-tier banking services to
commercial and corporate clients, and will strengthen
the Bank’s standing in this important segment.
• Maintaining leadership in Retail Banking:
Continued expansion of the largest branch network
in Israel. Opening branches based on innovative
concepts, located in competitive geographical
locations, in order to provide efficient service to
growth-oriented customer segments. Development of
platforms designed to strengthen the direct offer to
clients and transition to multi-channel service, based
on the Bank’s technological leadership.
• Strengthening the Bank’s standing in the
mortgage sector: Continued Expansion in
this area, especially with existing customers, while
maintaining the quality of the credit portfolio and
strictly managing risks. Strengthening the Bank’s leading
position in the area of real estate and construction
financing, with a reliance on the expertise of the
mortgage advisors and our broad product offering.
• Emphasis on operational excellence:
Continued measures to improve customer service,
while redirecting resources from routine operations
to the realization of strategic initiatives without
increasing the number of employees. Expansion of
activity at the Central Back Office, which is the first
of its kind in the Israeli banking system; improve
productivity of the branches; and streamline processes
within the Head Office units. These steps are aimed at
bringing about a gradual improvement in the Bank’s
operating efficiency ratios.
Continued Focus on the Strategic Plan
Moving into 2011, the Bank is pushing ahead with its
multi-year work plan and the continued realization of
the strategic plan that has positioned Bank Hapoalim on
a course of sustainable growth and profitability. We are
confident in our ability to generate for our shareholders
a return on equity in the low to mid-teens over the long
term. This target reflects the Bank’s risk appetite in view
of the current economic realities and the fundamental
long-term processes shaping the banking industry.
Our region is currently experiencing major geopolitical
shifts. It is our hope that the political changes in this area
will ultimately foster the growth of open societies, which
will stabilize their political relationships with Israel. We are
confident that the dynamic Israeli economy will continue
to provide an excellent, stable business environment for
Bank Hapoalim.
We are intent on further improving the financial
performance that marked the Bank’s activity last year.The
Board of Directors and Board of Management of the Bank
recognize that the foundation of the business momentum
displayed by Bank Hapoalim is its cohesive management
team, in collaboration with the Bank's dedicated employees.
We intend to continue to focus on the implementation
of the Bank's strategic plan and on the achievement of its
objectives.
As Israel's leading bank, with extensive activity around the
world, we place great importance on our dialogue with
all stakeholders in the markets in which we operate. We
place special emphasis on our relationship with the capital
markets and the investor community, and we are proud
to be the leading bank in Israel in the area of investor
relations. We will continue to develop and deepen this
dialogue in the future.
Zion Kenan
President and CEO
We are committed to wide circles of stakeholders:
our shareholders; our customers, from households to
the largest corporations in the Israeli economy; the
employees of Bank Hapoalim; and our domestic Israeli
community, from which we draw our strength, and to
which we continue to contribute by promoting social and
environmental causes.
We would like to take this opportunity to express our
heartfelt gratitude to our colleagues on the Board of
Management of the Bank, to our Board of Directors, and
to our customers, who continue to express confidence
in us each day. And of course, immense thanks to all of
the Bank's employees, our most valuable asset, whose
professional expertise and dedication are the cornerstone
of the outstanding results we are presenting today.
Sincerely yours,
Yair Seroussi
Chairman of the Board of Directors 7
Zion Kenan
President and CEO
Board of Management
Zion Kenan
Dan Koller
Ofer Levy
President and Chief Executive Officer
Zion Kenan was named President and
CEO in August 2009. Mr. Kenan has
been with Bank Hapoalim since 1979
and joined the Board of Management
in 2001. Before his appointment, he was
Deputy CEO and Head of Corporate
Banking since (2007-2009); Head of Retail
Banking (2003-2007), and Head of Human
Resources and Logistics (2001-2003). Prior
to that, Mr. Kenan fulfilled many senior
executive positions in the Retail and Human
Resources and Logistics Areas including
Southern Regional Manager (1998-2000).
Mr. Kenan has a BA in Social Sciences from
the Open University and a Masters degree
in Social Sciences from Tel Aviv University.
Chief Risk Officer
Mr. Koller joined Bank Hapoalim in
1999 and was appointed to his current
position in the Board of Management on
January 1, 2008. He served as Manager of
the ALM Division from April 2003 and prior
to that, was Manager of Financial Planning.
Mr. Koller has a BA and a Masters degree
in Economics and Business Administration
from the Hebrew University of Jerusalem.
Chief Accountant
Mr. Levy joined Bank Hapoalim in 1981 and
was appointed to the Board of Management
In 2006. Prior to that, he served as Manager
of the Comptrolling Division for ten years.
Mr. Levy is a Certified Public Accountant
and has a BA in Accounting and
Economics from Tel Aviv University.
Lilach Asher-Topilsky
Head of Retail Banking
Ms. Asher-Topilsky joined Bank Hapoalim in
1998 and was appointed to the Board of
Management in December 2007 as Head
of Corporate Strategy. She assumed her
current position on October 1, 2009. Prior
to joining the Board, she served as Marketing
and Planning Division Manager in Retail
Banking (9/2006-12/2007), Central Regional
Manager (3/2005-9/2006) and Head of
the E-Banking Division (3/2001-3/2005)
Ms. Asher-Topilsky has a BA in Economics
& Management from Tel Aviv University
and a Masters degree in Management
from Kellogg Business School in
Northwestern University, Chicago.
Shimon Gal
Head of Corporate Banking
Mr. Gal joined Bank Hapoalim in November
2009 upon his appointment to the
Board of Management of the Bank.
Before joining the Bank, he served as
Head of Corporate Banking (2008-2009)
and as Head of the Comptroller, Planning
and Operations Division (2004-2007)
at Mizrahi-Tefahot Bank Ltd.
Mr. Gal has a BA in Economics and Statistics
8
Orit Lerer
Head of International Banking
Ms. Lerer joined Bank Hapoalim
in 1977 and was appointed Chief
Internal Auditor in February 2004.
On January 1, 2010 she was appointed
to the Board of Management as Head
of International Banking. She also serves
as Chairman of the Board of Bank
Hapoalim Switzerland and PAM-Poalim
Asset Management, based in London.
Previously, she fulfilled several
senior positions in the bank.
Ms. Lerer has a BA in Economics
from Tel Aviv University.
Anath Levin
Head of Global Treasury
Ms. Levin joined Bank Hapoalim upon her
appointment to the Board of Management
of the Bank on May 16th, 2010.
Before joining the Bank, she served as a
Member of the Board of Management
and Chief Investment Officer at Migdal
Insurance Holdings (2002-2010).
Ms. Levin has a BA and a Masters degree
in Economics and Business Administration
David Luzon
Head of Information Technology
Mr. Luzon has been with the Bank Hapoalim
Group since 1998. He joined the Board
of Management in 2000 when he was
appointed to his current position. Prior
to that, he was Head of Information
Systems at Isracard. Before joining the
Bank, Mr. Luzon had years of experience
working in different technologies, and held
various positions, including developing
and managing computer centers.
Mr. Luzon has a BSc. in Mathematics and
Computer Science from Bar-Ilan University.
Ilan Mazur
Chief Legal Advisor
Mr. Mazur joined Bank Hapoalim in 1981
and was appointed to his current position
in 2003. From 1995-2003 he served as
General Counsel to the Corporate Area.
Prior to that, he was General Counsel for
the International Activity. Before joining
the Bank, he worked in private law firms.
Mr. Mazur has a degree in Law from the
Hebrew University of Jerusalem. He is a
member of the Israeli Bar Association.
Board of Directors
Jacob Orbach
Hanna Pri-Zan
Chief Internal Auditor
Mr. Orbach joined Bank Hapoalim
in 1980 and was appointed to his
current position on January 1, 2010.
Prior to that, he fulfilled several senior
positions including Manager of the
Corporate Banking Division (2006-2009)
and Manager of the Commercial
Banking Division (2002-2006).
Mr. Orbach has a BA in Economics
from Tel Aviv University.
Head of Client Asset Management
Ms. Pri-Zan joined Bank Hapoalim in
Management on February 2004. Before her
current appointment on January 1, 2008,
Ms. Pri-Zan served as Head of Human
Resources, Logistics & Procurement
(3/07-12/07), and Head of Banking
Subsidiaries and Head of Risk Management
(2/2004-3/2007). Prior to her appointment
to the Board, Ms. Pri-Zan fulfilled many senior
executive positions including Head of the
Securities and Financial Assets Division.
Ms. Pri-Zan is a member of the Board
of Directors in several subsidiaries
of Bank Hapoalim and in the TASE
(Tel Aviv Stock Exchange).
Ms. Pri-Zan has a BA in Economics
and Statistics from the Hebrew
University of Jerusalem.
Ran Oz
Chief Financial Officer
Mr. Oz joined Bank Hapoalim in April
2009 upon his appointment to the Board
of Management as CFO of the Bank.
Before joining the Bank, he served as
Deputy CEO & CFO of Bezeq - Israel
Telecom (2007-2008) and as Corporate
VP & CFO of Nice Systems (2004-2007).
Mr. Oz is a Certified Public Accountant and
has a BA in Accounting and Economics
and a Masters degree in Economics
and Business Administration from the
Hebrew University of Jerusalem.
Ari Pinto
Head of Corporate Strategy
Mr. Pinto has been with Bank Hapoalim since
Management in September 2009. Before
his current appointment, he served as Retail
Credit and Mortgages Division Manager
(11/2007-9/2009), and as Human Resources
Division Manager (12/2002-8/2007).
Mr. Pinto has a BA in Business
Administration and a Masters
degree in Public Administration.
9
Efrat Yavetz
Head of Human Resources, Logistics
and Procurement
Ms.Yavetz has been with Bank Hapoalim
since 1988 and was appointed to the
Board of Management in October
2009. Before her current appointment,
she served as Securities and Financial
Assets Division Manager (10/200610/2009), and as Retail Sales Management
Department Manager (2/2004-10/2006).
Ms.Yavetz has a BA in Biochemistry from
the Hebrew University of Jerusalem
and a Masters degree in Business
Management from Tel Aviv University.
Yair Seroussi
Mali Baron
Amnon Dick(1)
Nira Dror
Pnina Dvorin
Irit Izakson
Moshe Koren
Yacov Peer(2)
Efrat Peled
Nehama Ronen(3)
Imri Tov
Meir Wietchner
Yosef Yarom(4)
Nir Zichlinskey
Ronen Israel(5)
Leslie Littner(6)
(1) Serves as a director as of March 24, 2010
(2) Serves as a director as of October 6, 2010
(3) Serves as a director as of February 3, 2010
(4) Serves as a director as of March 21, 2011
(5) Served as a director until October 10, 2010
(6) Served as a director until September 9, 2010
Information for Shareholders
Listing Information
Bank Hapoalim’s ordinary shares are listed on the Tel Aviv
Stock Exchange and trade under the ticker symbol POLI.
As of December 31, 2010 1,324,290,957 ordinary shares were
outstanding.
2000
Bank Hapoalim’s dividend policy is to distribute at least 50%
of annual net operating profit to shareholders on a quarterly
basis.
The dividends paid over the last five years were:
Dividend
Per Share
Total Paid
NIS Millions
2010
-
-
2009
-
-
2008
-
-
2007
1.27
1,600
2006
1.44
1,815
POLI IL
1500
1000
400m
Dividend Policy
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
200m
The dividend distribution is subject to the provisions of the
law, including limitations specified in the directives of the
Supervisor of Banks.
100m
0
POLI IL Volume
2010
The following table presents, the highest and lowest prices
for Bank Hapoalim’s ordinary shares. The prices are those
recorded at the close of business on the Tel Aviv Stock
Exchange.
Furthermore, according to Directive 331, no dividends shall be
distributed when one or more of the last three calendar years
ended in a loss, unless the Supervisor of Banks has approved
the distribution in advance.
Since the year 2008 ended in a loss, the Bank will require such
approval in order to distribute dividends until 2012.
Credit Ratings
Tel Aviv
High
Low
(NIS)
(NIS)
2010
1848
1404
2009
1660
645
2008
1955
713
Bank Hapoalim is rated by the three major credit rating
agencies: Moody’s, Standard and Poors and Fitch.
Rating
Moody’s
Long-Term Deposits
A1
Short-Term Deposits
P-1
Past share price performance should not be regarded as a
guide to future performance.
In mid-2006, Bank Hapoalim Level-1 ADR shares were
launched on the OTC market in New York under the following
information:
Standard & Poor’s
Symbol: BKHYY
CUSIP: 062510300
Ratio: 1:5
Country: Israel Industry: Banks
Depositary: Bank of NY (Sponsored)
Underlying SEDOL: 6075808
Underlying ISIN: IL0006625771
U.S. ISIN: US0625103009
Long-Term
A-
Short-Term
F2
Public
77.4%
GDR's for Bank Hapoalim’s ordinary shares are also listed
on the London Stock Exchange and trade under the ticker
symbol BKHD.
Controlling stake
22.6% of which:
Long-Term
BBB+
Short-Term
A2
Fitch
Shareholder Structure:
Shareholders as of December 31, 2010 were:
Earnings per Share (EPS) in NIS
Arison Holdings (1998) 20.2%
Salt Industries
2.4%
Institutional Investors Information
EPS
2010
1.68
2009
1.00
2008
(0.69)
For additional copies of this report, other investor materials or
questions, please visit our website at: www.bankhapoalim .com
or contact us at :
Bank Hapoalim
Investor Relations Dept
Yehuda Halevy 63, Tel Aviv
Tel. 972-3-5673440
Fax. 972-3-5673470
Bank Hapoalim Worldwide
Israel
Switzerland
Turkey
The Bank is a recognized leader
in Israel's capital markets.
Bank Hapoalim (Switzerland) Ltd, is a
wholly owned subsidiary headquarted
in Zurich, with branches in Zurich,
Geneva, Luxembourg and Singapore and
representative offices in Moscow, Hong
Kong and Tel Aviv.The Swiss bank is engaged
primarily in private banking services,
including global portfolio management.
Bank Pozitif is headquartered in
Istanbul, with a network of 6 offices
in Istanbul, Ankara and Izmir.
Luxembourg
Uruguay
Bank Hapoalim (Switzerland) Ltd maintains
a branch in Luxembourg for private
banking. In addition, the Bank operates in
Luxembourg through a banking subsidiary.
Focused on private banking, Hapoalim
(Latin America) S.A. is a wholly owned
subsidiary in Montevideo, and has
branches in Colonia and Punta del Este.
Hong Kong
Representative Offices
Bank Hapoalim (Switzerland), following
its merger in 2005 with Bank of New
York Inter-Maritime Bank, Geneva, has a
highly active representative office in Hong
Kong, specializing in private banking.
Bank Hapoalim has representative offices
in major financial centers worldwide.
They serve as liaisons for a variety of trade
services, and, in select markets, to Global
Private Banking of the highest professional
level. Representative offices play a key role
in the bank's commitment to convenient
access to professional services and staff.
In Israel, Bank Hapoalim has hundreds
of full-service branches organized into
customer lines, such as retail, private
banking, small businesses and mortgages;
business centers for the mid-market; and
industry desks for large corporate clients.
Direct banking channels play an
increasingly important role in serving
both retail and corporate customers.
A trading room, now part of a global trading
network, offers advanced services. A Global
Private Banking Center provides personalized
service and portfolio management.
United States
The Miami branch is headquarters for private
banking services to local residents and
non-US citizens, serving Latin America clients.
BHI Investment Advisors
(Asia) Limited
The New York branch is focused on
corporate credit activity, treasury activity, and
the provision of credit and comprehensive
banking services to Israeli companies
operating in the United States. In addition,
the branch offers investment services to
private and corporate clients, including
trading in derivatives and brokerage services.
A wholly owned subsidiary of Bank
Hapoalim (Switzerland) Ltd.The company
aims to deliver advisory services to high net
worth individuals.The Company, through
experienced, professional advisors offering
innovative and proactive investments, will
be focusing primarily on the local Asian
markets while keeping a global perspective,
supported by the international presence
and stability of the Bank Hapoalim Group.
The Bank operates an advanced
trading room in New York.
Singapore
United Kingdom
Bank Hapoalim branch in the West End
of London offers a range of corporate
and private banking services as well
as a sophisticated trading room.
11
In 2007, Bank Hapoalim (Switzerland)
inaugurated a full-service private banking
branch in Singapore, the fast growing
financial center of Southeast Asia.
Kazakhstan
Bank Pozitiv is a wholly owned subsidiary of
Bank Pozitif, with headquarters in Almaty and
branches in 2 major cities in Kazakhstan.
Main Locations of
Representative Offices
•
•
•
•
•
•
•
•
•
Toronto
Montreal
Paris
Frankfurt
Budapest
Sydney
Mexico City
Panama City
Santiago
2010
Bank Hapoalim
Annual Report 2010
Contents
Letter from the Chairman of the Board and the CEO
Board of Directors' Report for 2010 Description of the General Development of the Bank Group's Business
Activities of the Bank Group and Description of the Development of its Business
Principal Data of the Bank Hapoalim Group Forward-Looking Information
Chart of Holdings Control of the Bank Investments in the Capital of the Bank and Transactions in its Shares Dividend Distribution Capital Adequacy
Economic and Financial Review Accounting Policies on Critical Matters and Critical Accounting Estimates
Disclosure Regarding the Procedure for Approval of the Financial Statements Profit and Profitability
Composition and Development of the Bank Group's Assets and Liabilities
Description of the Bank Group's Business by Segments of Activity General – The Segments and Customer Assignment Criteria Condensed Financial Information on the Segments of Activity The Households Segment The Private Banking Segment
The Small Business Segment The Commercial Segment The Corporate Segment
The Financial Management Segment
Others and Adjustments Additional Information Concerning Activity in Certain Products Principal Subsidiary and Affiliated Companies
Activity of the Bank Group Abroad General information and Additional Matters Fixed Assets and Facilities Human Capital Liquidity and Raising of Sources of Funds at the Bank
Ratings of the Bank Taxation Status Restrictions and Supervision of the Activity of the Banking Corporation Legal Proceedings Business Strategy and Objectives Risk Management Basel II Disclosure Regarding the Internal Auditor Poalim in the Community – Social Involvement and Contribution to the Community
Sustainability and Corporate Social Responsibility
The Board of Directors and the Discharge of its Functions
Report on Directors with Accounting and Financial Expertise and Professional Qualification Board of Directors of the Bank Board of Management of the Bank
Other Matters
Salaries and Benefits of Office Holders Remuneration of the Auditors
Controls and Procedures 14
4
16
16
16
18
20
21
22
22
23
24
26
28
33
35
42
61
61
64
67
77
85
90
96
105
110
110
119
120
129
129
133
137
141
142
144
146
148
150
182
201
203
206
207
212
222
224
225
233
260
260
Board of Management's Review
Appendix I: Consolidated Balance Sheet for the years 2006-2010 - Multi-Period Data
Appendix 2: Consolidated Statement of Profit and Loss for the years 2006-2010 - Multi-Period Data
Appendix 3: Rates of Financing Income and Expenses - Consolidated
Appendix 4: Exposure of the Bank and Subsidiaries to Changes in Interest Rates - Consolidated
Appendix 5: Total Credit Risk to the Public by Economic Sectors - Consolidated
Appendix 6: Exposures to Foreign Countries - Consolidated
Appendix 7:Consolidated Balance Sheet as of the end of every quarter for the years 2009-2010
Multi-Quarter Data
Appendix 8: Quarterly consolidated Statement of Profit and Loss for the years 2009-2010 - Multi-Quarter Data
263
265
266
267
272
280
286
CEO Certification
293
Chief Accountant Certification
294
Report of the Board of Directors and the Board of Management
on the Internal Control of Financial Reporting 295
Financial Statements
Auditors' Report – Internal Control over Financial Reporting
Auditors' Report Consolidated Balance Sheet
Consolidated Statements of Profit and Loss
Statement of Changes in Shareholders Equity
Consolidated Statement of Cash Flows
Notes to the Financial Statements 297
298
299
300
301
302
304
307
Condensed Financial Statements of the Bank’s Offices Abroad
431
Periodic Report for 2010 437
290
292
The Bank has received approval from the Supervisor of Banks to publish its annual financial statements on a consolidated basis
only. Note 34 to the Financial Statements contains the condensed financial statements of the Bank alone. Data conerning the Bank
alone is available in hard copy upon request, or at the Bank's website at www.bankhapoalim.co.il
This is a translation of the Hebrew report and has been prepared for convenience only. In the case of any discrepancy, the Hebrew
will prevail.
15
Board of Directors' Report for 2010
At the meeting of the Board of Directors held on March 30, 2011, it was resolved to approve and publish the
consolidated financial statements of Bank Hapoalim B.M. and its consolidated subsidiaries for the year ended on
December 31, 2010.
The following are details of the principal developments and changes that occurred during 2010.
Description of the General Development of the Bank Group's Business
Activities of the Bank Group and Description of the Development of its Business
General
•The Bank was founded in 1921 by the central institutions of the Jewish Settlement (the Yishuv) at the time, the
Zionist Histadrut and the Histadrut General Federation of Hebrew Workers in Eretz Yisrael, and incorporated
as a limited company under the Companies Ordinance. The Bank is a “banking corporation” and holds a “bank”
license under the directives of the Banking Law. In 1983, within an arrangement formulated between the Israeli
government and the banks, the shares of the Bank were brought under the control of the state. The Bank was
privatized in 1997, with the controlling interest transferred to the current controlling shareholders and others.
•The Bank Group operates in Israel in all of the various areas of banking through two main units: the Corporate
Area and the Retail Area.The Corporate Area provides service to most of the Bank's business customers; activities
with large corporate clients are conducted through sectors specializing in specific industries, which operate within
the Head Office, while middle-market clients are served through eight Business Centers located throughout Israel.
The various banking services are provided to all customers of this Area through the Bank's branches. A network
of business branches was created in response to customers' business needs, consisting of 13 branches as of the
end of 2010; additional branches are planned to open during 2011. The Retail Area, through the network of
branches, serves customers including households, private banking clients, and small businesses; is responsible for
operating direct-channel services: Internet services, Poalim by Telephone, and mobile services; and also oversees
consumer credit and mortgage activities. The Retail Area operates through 276 branches, which provide the full
range of banking services.
•In addition to its banking business, the Bank Group also engages in related activities, mainly in the areas of credit
cards and the capital market. In the credit-card sector, the Bank Group, through a subsidiary (the "Isracard
Group"), issues, operates, and markets credit cards, within and outside the Bank, for use in Israel and overseas,
and clears transactions executed using its credit cards as well as credit cards issued by others.The Bank Group's
capital-market activity includes the provision of services for the execution of trading transactions in securities
(brokerage), securities custody services, research and consulting, services for financial asset managers, investment
portfolio management, and issuance underwriting and management.
16
•Alongside its activities in Israel, the Bank Group also operates overseas, in the private banking sector and in the
corporate sector.This activity encompasses Israel, Europe, the United States, Canada, Latin America, Australia, Hong
Kong, and Singapore, by means of branches, representative offices, banking subsidiaries, and asset-management
subsidiaries. The Bank Group also operates in the households sector and in the commercial sector in Turkey
and Kazakhstan. In its private-banking activity, the Bank Group provides its high-net-worth customers abroad
with advanced professional products and services, including investment products and global asset management.
Corporate sector activity abroad includes the provision of credit to local and foreign borrowers, mainly through
the acquisition of participation in credit organized by leading banks abroad; the provision of credit to borrowers
with an affinity to Israel; and investments in bonds. As part of its international activity, the Bank Group maintains
ties with over 2,400 foreign banks around the world (hereinafter: "correspondent banks"). The Bank's strategy is
currently aimed at the development and expansion of its international activity, both in the area of Global Private
Banking and in the business activities of its London and New York branches.The Bank aims to continue to expand
its service package and improve its capabilities in the areas of products, marketing, and customer service.
Development of the Bank Group’s Business
Net profit of the Bank Group totaled approximately NIS 2,228 million in 2010, compared with profit in the amount
of approximately NIS 1,316 million in 2009.
Net return on equity was 10.3% in 2010, compared with a net return on equity of 6.7% in 2009.
Basic net profit per share of par value NIS 1 amounted to NIS 1.68 in 2010, compared with NIS 1.00 in 2009.
Total assets of the Bank Group as of December 31, 2010 amounted to approximately NIS 320.9 billion, compared
with approximately NIS 309.6 billion at the end of 2009, an increase of 3.7%.
Total credit to the public amounted to NIS 225.3 billion as of December 31, 2010, compared with NIS 215.8 billion
at the end of 2009, an increase of 4.4%.
Total deposits from the public amounted to NIS 234.0 billion as of December 31, 2010, compared with NIS 232.0 billion
Total shareholders’ equity amounted to NIS 23.1 billion as of December 31, 2010, compared with NIS 20.6 billion
The total capital adequacy ratio according to Basel II amounted to 14.12% as of December 31, 2010, compared with
13.67% at the end of 2009.
17
Principal Data of the Bank Hapoalim Group
For the year ended December 31
2010
2009
Change from
2008
2009
2008
15.7%
138.8%
NIS millions
Profit and Profitability
Profit from financing activity before provision
for doubtful debts
7,775
6,718
3,256
5,109
5,107
4,532
12,884
11,825
7,788
9.0%
65.4%
Provision for doubtful debts
1,030
2,017
1,520
)48.9%(
)32.2%(
Operating and other expenses
8,310
7,503
8,024
10.8%
3.6%
Net operating profit (loss)
2,212
1,288
)1,469(
71.7%
16
28
2,228
1,316
Operating and other income
Total income
Net profit from extraordinary transactions, after taxes
Net profit (loss)
574
)42.9%(
)895(
69.3%
As of December 31
2010
2009
Balance Sheet – Principal Data
12.7%
)97.2%(
Change from
2008
2009
2008
3.7%
4.6%
NIS millions
Total balance sheet
320,876
309,555
306,847
Credit to the public
225,288
215,788
222,100
4.4%
1.4%
31,604
28,055
26,657
12.7%
18.6%
233,965
231,993
226,953
0.9%
3.1%
Bonds and subordinated notes
27,608
23,112
20,818
19.5%
32.6%
Shareholders' equity
23,089
20,598
18,795
12.1%
22.8%
Total problematic debts
14,895
16,636
16,085
)10.5%(
)7.4%(
3,632
3,976
4,108
)8.7%(
)11.6%(
2010
2009
2008
Loan to deposit ratio
96.3%
93.0%
97.9%
Loan to deposit ratio including bonds & notes
86.1%
84.6%
89.6%
Shareholders' equity to total assets
7.2%
6.7%
6.1%
Core Tier I capital to risk-adjusted assets, according to Basel II
8.2%
7.7%
-
Tier I capital to risk-adjusted assets, according to Basel II
9.1%
8.5%
-
Total capital to risk-adjusted assets, according to Basel II
14.1%
13.7%
-
Tier I capital to risk-adjusted assets, according to Basel I
-
8.6%
7.4%
Total capital to risk-adjusted assets, according to Basel I
-
13.7%
10.9%
Financing margin from regular activity(a)
2.59%
2.36%
2.54%
Cost-income ratio
64.5%
63.5%
103.0%
Rate of specific provision for the period, of total credit to the public
0.49%
0.90%
0.69%
Securities
Deposits from the public
Of which: non-income bearing credit
Main Financial Ratios
Net return of operating profit (loss) on equity
10.2%
6.6%
)7.8%(
Net return of profit (loss) on equity
10.3%
6.7%
)4.8%(
Basic net profit (loss) per share in NIS
1.68
1.00
)0.69(
Diluted net profit (loss) per share in NIS
1.67
0.99
)0.69(
(a) Calculation: Financing profit from regular activity is divided by monetary assets generating financing income.
18
Principal Data of the Bank Hapoalim Group (continued)
For the three months ended
31.12.2010 30.09.2010 30.06.2010 31.03.2010 31.12.2009
NIS millions
for doubtful debts
2,133
2,053
1,837
1,752
2,012
1,341
1,217
1,334
1,217
1,460
Total income
3,474
3,270
3,171
2,969
3,472
100
290
341
299
536
2,334
2,064
1,984
1,928
2,095
701
538
512
461
465
12
2
1
1
2
713
540
513
462
467
Net operating profit
Net profit
31.12.2010 30.09.2010 30.06.2010 31.03.2010 31.12.2009
NIS millions
Balance Sheet – Principal Data
Total balance sheet
320,876
302,615
307,317
299,845
309,555
225,288
220,665
217,749
213,203
215,788
31,604
28,935
26,680
26,516
28,055
233,965
217,554
225,237
223,216
231,993
27,608
25,920
22,555
21,395
23,112
23,089
22,307
21,667
21,195
20,598
Total problematic debts
14,895
16,145
16,755
15,458
16,636
3,632
3,719
3,730
4,052
3,976
Securities
Of which: non-income bearing credit
For the three months ended
31.12.2010 30.09.2010 30.06.2010 31.03.2010 31.12.2009
NIS millions
Main Financial Ratios
Loan to deposit ratio
96.3%
101.4%
96.7%
95.5%
93.0%
Loan to deposit ratio including bonds & notes
86.1%
90.6%
87.9%
87.2%
84.6%
Shareholders' equity to total assets
7.2%
7.4%
7.1%
7.1%
6.7%
Core Tier I capital to risk-adjusted assets, according to Basel II
8.2%
8.1%
7.9%
7.9%
7.7%
Tier I capital to risk-adjusted assets, according to Basel II
9.1%
8.9%
8.8%
8.8%
8.5%
Total capital to risk-adjusted assets, according to Basel II
14.1%
13.9%
13.6%
13.9%
13.7%
Financing margin from regular activity(a)(b)
2.61%
2.65%
2.67%
2.54%
2.43%
Cost-income ratio
67.2%
63.1%
62.6%
64.9%
60.3%
Rate of specific provision for the period, of total credit
to the public(a)
0.45%
0.47%
0.52%
0.57%
1.12%
Net return of operating profit on equity
13.0%
10.2%
9.9%
9.2%
9.4%
Net return of profit on equity(a)
13.2%
10.2%
9.9%
9.2%
9.4%
Basic net profit per share in NIS
0.54
0.41
0.39
0.35
0.35
Diluted net profit per share in NIS
0.54
0.40
0.38
0.35
0.35
(a)
(a) Calculated on an annualized basis.
(b) Calculation: Financing profit from regular activity is divided by monetary assets generating financing income.
19
Forward-Looking Information
Some of the information in this report that does not refer to historical facts constitutes forward-looking information,
as defined in the Securities Law.The Bank's actual results may differ materially from those included in forward-looking
information, as a result of a large number of factors, including changes in capital markets in Israel and globally,
macro-economic changes, changes in geopolitical conditions, regulatory changes, and other changes not under the
Bank's control, which may lead to the failure of estimates to materialize and/or changes in the Bank's business plans.
Forward-looking information is marked by words or phrases such as "we believe”, “expect”, "forecast", "estimate",
"intend", "plan", "aim", "may change", and similar expressions, as well as words such as "plan", "target", "wish", "should",
"can", or "will". Such forward-looking information and expressions involve risk and uncertainty, because they are based
on management's estimates regarding future events, which include changes in the following parameters, among others:
economic conditions, public tastes, interest rates in Israel and overseas, inflation rates, new legislation and regulation in
the area of banking and the capital market, exposure to financial risks, the financial stability of borrowers, the behavior
of competitors, aspects related to the Bank's image, technological developments, and manpower-related matters,
and other areas that affect the activity of the Bank and the environment in which it operates, the materialization of
which is uncertain by nature.
The information presented below is based, among other things, on information known to the Bank and based, among
other things, on publications by various entities, such as the Central Bureau of Statistics, the Ministry of Finance, the
Bank of Israel, the Ministry of Housing, and other entities that publish data and estimates regarding the capital markets
in Israel and globally.
This information reflects the Bank’s current viewpoint with regard to future events, which is based on estimates, and
is therefore subject to risks and uncertainty, as well as to the possibility that expected events or developments may
not materialize at all or may only partially materialize.
20
Chart of Holdings
Set out below is a chart of the Bank’s main holdings*:
The Bank
Banks Abroad
Other Financial
Services
Credit Cards
Bank Hapoalim
(Switzerland)
100%
Isracard
98.2%
Poalim Capital
Markets
100%
Bank Hapoalim
(Cayman)
100%
Poalim Express
100%
Poalim Sahar Ltd.
100%
Bank Pozitif
Turkey
69.8%
100%
Bank Pozitiv
Kazakhstan
* The chart includes the principal companies held directly by the Bank or indirectly through private subsidiaries under the full
ownership of the Bank.The wholly-owned subsidiaries through which the companies in the above chart are held do not appear
in the chart. For the purposes of this chart, a principal company is a company engaged in business operations which in the
opinion of the Board of Management of the Bank is a principal company in the Group, and in which the Bank's investment is
at least 1% of the shareholders' equity of the Bank, or the Bank's share of whose net operating profit (loss) exceeds 5% of
the net operating profit (or loss) of the Bank (similar to the criterion established in Public Reporting Directive No. 662 of the
Supervisor of Banks regarding the statement of data on principal subsidiaries in financial statements of banking corporations).
21
Control of the Bank
The holders of the permit for control of the Bank, near the date of publication of the financial statements, are
Ms. Shari Arison and Mr. Micky Arison.Their stake in the Bank is held through several trusts that have holdings in the
Israeli companies noted below, which own shares of the Bank.
Arison Holdings holds shares comprising approximately 20.18% of the Bank’s share capital near the date of publication
of the financial statements, which constitute the “controlling interest” (as defined in the control permit issued by the
Governor of the Bank of Israel).
Arison Investments Ltd. (a sister company of Arison Holdings; hereinafter : “Arison Investments”), through
a wholly-owned subsidiary, holds the entire share capital of Salt Industries Ltd., which holds shares comprising
approximately 2.39% of the share capital of the Bank.
Near the date of publication of the financial statements, the Arison Group (through Arison Holdings and Arison
Investments) holds a total of approximately 22.57% (22.37% fully diluted) of the share capital of the Bank.
Investments in the Capital of the Bank and Transactions in its Shares
The issued and paid-up share capital of the Bank, as of December 31, 2010, is NIS 1,324,290,957 par value, composed
of 1,324,290,957 ordinary shares of par value NIS 1 each.This is the issued capital following the subtraction of 653,853
ordinary shares purchased by the Bank, as detailed below.
The issued and paid-up capital of the Bank near the date of publication of the financial statements is NIS 1,325,830,652
par value, composed of 1,325,830,652 ordinary shares of NIS 1 par value each.This is the issued capital following the
subtraction of 653,853 ordinary shares purchased by the Bank.
The principal developments related to the capital of the Bank, including investments in the capital of the Bank and
transactions in the shares of the Bank, are detailed below.
Interested Parties
The Delek Group Ltd., which includes The Phoenix Insurance Company Ltd. and Excellence Investments Ltd., is an
interested party of the Bank. Its stake is held through a proprietary account, and through and together with holdings
in profit-participatory life insurance accounts, holdings of mutual fund management companies, provident funds, or
provident fund management companies under its control or management, directly or indirectly.
Near the date of publication of the financial statements, the rate of holdings of the Delek Group Ltd. is 6.32%.
Investments in the Share Capital of the Bank
The investments in the capital of the Bank from January 1, 2009 up to near the date of publication of the financial
statements are described below.
On April 7, 2008, the Bank allocated 52,500,000 ordinary shares of the Bank and 7,500,000 options exercisable
into shares of the Bank to York Capital Management, for a total consideration of NIS 735 million. The options were
convertible in two portions of 3,750,000 options each. The first portion expired on April 1, 2009, and the second
portion expired on April 1, 2010, without being exercised into shares.
On November 30, 2009, the Bank purchased 700,000 ordinary shares of par value NIS 1 each of the Bank, through
an external entity, in consideration for a total of NIS 10 million.The purchase was performed pursuant to an approval
by the Supervisor of Banks for the purchase of shares from the issued capital of the Bank, with the aim of using these
shares as a pool from which shares will be transferred in the event that Mr. Dankner and Mr. Ziv exercise the options
which they have been granted into shares, as detailed in Note 16A(4) to the Financial Statements.
22
On December 30, 2010, Mr. Dankner exercised 410,000 options, of the 825,000 which he had been granted. In
consideration for the options, Mr. Dankner received 46,147 shares, from the pool of shares purchased by the Bank for
that purpose. Following the exercise of these options, the Bank has a remaining quantity of 653,853 ordinary shares.
On November 11, 2010, the Supervisor of Banks approved a buyback of shares of the Bank. For further details, see
Notes 15 and 16 to the Financial Statements.
Changes in Capital Resulting from Securities-Based Compensation Plans
In 2010, and up to the date of publication of the financial statements, an increase of approximately 5,509,187 ordinary
shares occurred in the issued and paid-up capital of the Bank, as a result of the conversion of 5,509,187 options
allocated to employees of the Bank under the plan from May 2004. A total of 23,756,353 options remain which were
allocated to employees of the Bank, within this plan and the subsequent plan of September 30, 2009, but had not yet
been exercised near the date of publication of the financial statements.
For further details regarding the issuance of stock options to the Chairman of the Board of Directors, the CEO, senior
executives, and employees of the Bank, see Note 16 to the financial statements.
Transactions of Interested Parties
According to reports provided to the Bank, Salt Industries Ltd. sold 40,000,000 ordinary shares of the Bank, in an
off-exchange transaction on October 6, 2010, for a total consideration of NIS 653.4 million.
Dividend Distribution
Pursuant to the policy established by the Board of Directors regarding dividend distribution, at least half of net
operating profits are distributed as dividends each year, on a quarterly basis. Dividends from nonrecurring profits are
distributed pursuant to ad-hoc decisions made by the Board of Directors.
In addition to restrictions under the Companies Law, dividend distribution by banking corporations is subject to
regulation applicable to banking corporations in Israel, pursuant to which no dividends shall be distributed: (A) If the
cumulative balance of retained earnings of the bank according to its last published financial statements is not positive,
or if the payout would lead to a negative balance; (B) when one or more of the last three calendar years ended in
a loss; (C) when the cumulative result of the three quarters ended at the end of the interim period for which the
last financial statement has been released indicates a loss; (D) if the payout would cause the bank's ratio of capital
to risk-adjusted assets to fall below the required rate; (E) from capital reserves or positive differences resulting from
the translation of financial statements of autonomous units abroad; (F) if after the payout the bank's non-monetary
assets would exceed its shareholders' equity; or (G) if the bank does not comply with the requirements of Section
23A of the Banking Law, which establishes a limit on the percentage of capital which a banking corporation may
invest in non-financial corporations. Notwithstanding the above, in certain cases the Bank can distribute dividends
even if the aforesaid circumstances apply, provided that it obtains prior written approval of the Supervisor of Banks
for such distribution, up to the amount thus approved. Since the year 2008 ended in a loss, the Bank is prohibited
from distributing dividends until 2012 unless it receives the approval of the Supervisor of Banks.
According to the circular of the Supervisor of Banks of June 2010, a banking corporation shall not distribute dividends
unless it has a core Tier I capital ratio of at least 7.5%, or if such distribution would cause a failure to comply with
the aforesaid ratio.
23
In addition, pursuant to the terms of the subordinated notes (Series A), no dividends shall be distributed in the
following cases: (A) If interest payments in respect of these notes are suspended, the Bank shall not pay dividends
to its shareholders until all of the suspended interest payments are paid in full, whether such dividends are declared
prior to the Bank's announcement regarding the formation of circumstances for suspension, or whether the dividends
are declared after such an announcement; and (B) If the payout would cause the Bank's ratio of core Tier I capital
to risk-adjusted assets to fall below 6.5%. For further details regarding the required ratio of the Bank's capital to its
risk-adjusted assets, and the manner of calculation of this ratio, see the section "Capital Adequacy".
Furthermore, the permission granted by the Governor of the Bank of Israel to the Arison Group to acquire a
controlling interest in Bank Hapoalim states that no dividend shall be distributed from profits accrued at the Bank
up to June 30, 1997 (the day prior to the acquisition of the controlling interest), unless the Supervisor of Banks has
consented in advance and in writing.
The Supervisor of Banks approved a buyback of the Bank's shares on November 11, 2010. For further details, see
Notes 15 and 16 to the financial statements.
The balance of retained earnings at the Bank as of December 31, 2010 totaled NIS 14,327 million, of which a total
of approximately NIS 2,734 million cannot be distributed as dividends.
Capital Adequacy
The capital target of the Bank is the appropriate level of capital required in respect of the various risks to which the
Bank is exposed, as identified, assessed, and estimated by the Bank. This target total capital ratio is higher than the
regulatory minimum capital requirement, and includes the capital requirement in respect of Pillar I risks, plus capital
in respect of Pillar II risks, with the aim of allowing the Bank to comply with capital requirements in cases of external
crisis events (extreme scenarios) while complying with regulatory minimum capital requirements. This target takes
into consideration actions of the Board of Management of the Bank aimed at reducing the risk level and/or increasing
the capital base.
A resolution of the Board of Directors of the Bank of December 30, 2010 established minimum targets of 7.5% for
the Bank's core Tier I capital ratio and 12.5% for the Bank's total capital ratio.
Starting on December 31, 2009, the Bank has implemented the Proper Conduct of Banking Business Directives on
“Capital Measurement and Adequacy,” which are based on the Basel 2 directives. For further details, see the section
"Basel 2", below.
24
Dec. 31, 2010
Dec. 31, 2009
NIS millions
1. Capital for the calculation of the capital ratio
Core Tier 1 capital
22,779
20,285
Tier I capital, after deductions
25,107
22,562
Tier II capital, after deductions
13,968
13,631
Total overall capital
39,075
36,193
252,064
240,402
5,483
4,460
2. Weighted balances of risk-adjusted assets
Credit risk
Market risks
Operational risk
Total weighted balances of risk-adjusted assets
19,154
19,835
276,701
264,697
3. Ratio of capital to risk-adjusted assets
%
Ratio of core Tier I capital to risk-adjusted assets
8.23%
7.66%
Ratio of Tier I capital to risk-adjusted assets
9.07%
8.52%
14.12%
13.67%
9.00%
9.00%
Ratio of overall capital to risk-adjusted assets
Minimum ratio of overall capital required by the Supervisor of Banks
The ratio of total capital to risk-adjusted assets as of December 31, 2010 was 14.12%, compared with a capital ratio
of 13.67% on December 31, 2009.
The core Tier I capital ratio as of December 31, 2010 was 8.23%, compared with a core Tier I capital ratio of 7.66%
on December 31, 2009.
In 2010, overall capital for the purpose of the calculation of the capital ratio increased mainly as a result of net profits
in the amount of approximately NIS 2.2 billion.
Risk-adjusted assets increased by a total of NIS 12 billion in 2010, mainly as a result of an increase in credit to the public.
The implementation of the directives of the Supervisor of Banks regarding the measurement and disclosure of
impaired debts, credit risk, and credit loss provisions starting on January 1, 2011 will cause a decrease of approximately
0.35% in the core Tier I capital ratio and in the ratio of total capital to risk-adjusted assets, based on the data as of
December 31, 2010.
25
Economic and Financial Review
Economic Activity
2010 was marked by rapid growth of the Israeli economy, encompassing all sectors. According to estimates by the
Central Bureau of Statistics, gross domestic product grew by 4.6%, while the business product grew by 5.3%. Industrial
production increased by 7.6%; activity in the commerce sector and the food and hospitality services sector increased
by 6.3%; the transportation, storage, and communications sectors showed 5.4% growth; and the business and financial
services sectors posted 4.4% growth. Activity in the construction sector increased by 7.1%. The global tailwinds
increased demand for exports, with an impressive expansion in exports to the Asian countries. The labor market
continued to show surprisingly positive results, with the unemployment rate down to an average level of 6.6% and
a 3.4% increase in the number of employed persons. Consumer confidence was influenced by the good condition
of the labor market and by the gains in the capital market, and remained high throughout the year.These conditions,
along with the expansive monetary policy, increased the demand for consumption and investments. Israel's strong
fiscal position permitted a 3.4% increase in public consumption expenditures, which also contributed to increased
demand and economic growth. Going into 2011, the economic data remain robust.The main risk factors stem from
the global arena: the geopolitical changes in the Arab countries, North Africa, and the Middle East, which began in
Tunisia and spread to Egypt and later Libya, have increased uncertainty. The price of oil has risen significantly; there is
possibility that cannot be disregarded that these developments may have implications, both globally and for Israel in
particular. In addition, the developed countries are only beginning to cope with their sovereign debts, a process likely
to have a moderating effect in the future.
Developments in the Global Economy
The process of recovery from the crisis continued in 2010, although there have been setbacks as well as progress,
and the consequences of the downturn are still a risk factor. Looking at the entire year, global growth was higher than
earlier forecasts, with current estimates at about 5%. The main contribution to this growth came from the emerging
economies, primarily China and India, which experienced growth rates of approximately 10%. Growth rates varied
widely among the developed countries, with a high rate of 2.9% in the United States, 4.3% in Japan, and 3.6% in
Germany, whereas some Eurozone countries (mainly Greece and Ireland) encountered a severe debt crisis and had
to adopt strict austerity plans. The impressive growth in Japan and Germany is largely attributed to strong growth in
exports, due to the expanding demand in the emerging markets.
The signs of the crisis are still apparent in two areas: the fiscal situation and the labor market. Some countries have
amassed large debts, either due to support for the financial sector during the crisis or due to the deep recession and
stimulus plans. Different countries have coped with the debt problem in differing ways: in Europe, where the problem
of debt was more severe, austerity plans were adopted, in some countries as a condition for access to money from
the European fund established to help refinance debt. So far this fund has granted aid to Greece and Ireland only, but
additional countries may choose to receive assistance from the fund in refinancing their debt. Note that despite the
establishment of the fund and the support from the European Bank and the leaders of the European Union for the
countries in distress, insurance premiums for the debts of the crisis countries remain high. By contrast, in the United
States the emphasis has been on continued stimulation of the economy and on the attempt to improve conditions
in the labor market. Fiscal policy has remained expansive, tax breaks have been extended, and new plans have been
launched to boost the economy.
As noted above, the labor market is the second area that has yet to recover. Unemployment rates in the United
States and in the eurozone were close to 10% during 2010. Although the American economy began to create jobs
in the second half of the year, the pace was insufficient to lower the unemployment rate for long.
26
The rapid growth of the global economy led to a sharp increase of approximately 37% in prices of agricultural
commodities in 2010, as well as an increase of 16% in the price of oil.The effects of these increases raised inflation in
the developing countries and have started to trickle into the developed countries as well. The mounting inflationary
pressures globally led to increases in interest rates in developed countries such as Canada, Australia, and Norway
and in most of the emerging markets.
Monetary policy in the United States and in the eurozone remained expansive; the interest rates of the central banks
remained unchanged and quantitative expansion continued.
Inflation and Exchange Rates
The consumer price index rose by 2.7% in 2010, within the boundaries of the target range, following three years
of above-target inflation. The main contributing factor to the increase in the CPI over the last year was the housing
item, which rose by 4.9%. Prices of fruits and vegetables increased at an exceptionally high rate of 16.0%, mainly
due to damage caused by weather. Excluding these two items, the CPI rose by only 1.3%. The CBS survey of prices
of homes (which is not factored into the CPI) showed a steep price increase again this year, at 17.3%. In order to
temper the price increases in the real-estate market, the Bank of Israel applied regulatory measures designed to
cool the mortgage market, especially in the area of variable-interest loans.The steep increase in prices of agricultural
commodities and energy began to have an impact in the final quarter of the year, and is expected to affect inflation
in 2011 as well. The consumer price index rose by 0.2% in January 2011, and the rate of annual inflation increased
to 3.6%. As of the last week of February, inflation expectations derived from the capital market had risen to a high
level of approximately 3.8%.
The shekel appreciated by 7.0% against the effective currency basket and by 6.0% against the US dollar in 2010.
Shekel trading against the dollar and the currency basket showed a depreciation trend until July 2010, but then moved
to a trend of appreciation. The current account of the balance of payments continued to show a large surplus in
2010, at approximately USD 7 billion.The Bank of Israel continued to intervene in trading in 2010, though at a lower
rate than in 2009; the Bank of Israel purchased foreign currency in an amount of approximately USD 12 billion, and
foreign-currency reserves reached a volume of USD 70.9 billion at the end of 2010. In January 2011, the Bank of
Israel imposed a reporting requirement on the activity of foreign investors in the market for derivatives on foreign
currency, short-term notes, and short-term government bonds. In addition, a 10% liquidity requirement was set for
foreign investors' swap transactions. The Minister of Finance has announced a plan to tax foreigners' investments in
T-bills and in short-term government bonds; this proposal has not yet been legislated.
Fiscal and Monetary Policy
The budget deficit in 2010 amounted to 3.7% of GDP, below the deficit target of 5.5% established by the government.
The main explanation for the low deficit is the surplus revenues of approximately NIS 11 billion, relative to the original
planning. The ratio of government debt to GDP fell from 79.2% to 76.3%. The deficit target for 2011 is 3% of GDP.
During 2010, the Bank of Israel's interest rate rose by one percentage point, to 2.0% in December.The rate was raised
to 2.25% at the end of January 2011, and to 2.5% at the end of February 2011. The interest-rate hikes were very
moderate, considering the growth rate of the economy and inflation. At the beginning of 2011, the interest rate was still
significantly lower than the inflation expectations. In the United States and Europe, interest rates remained unchanged,
at very low levels, during the year; this had a strong influence on the Bank of Israel's policy. The decisions were also
affected by the desire to prevent appreciation of the shekel. The Bank of Israel chose to apply macro-prudential
measures in order to contend with the effect of the low interest rate on the demand for mortgages and on housing
prices, and avoid accelerating the increase in the interest rate.
27
Financial and Capital Markets
The upward trend on global markets continued in 2010, and exerted a positive effect on markets in Israel. The
increases in prices, both globally and in Israel, were more muted than in 2009: the TA-100 index rose by 13%, and the
Tel-Bond 60 index gained 10.9%. The increase in the stock index was influenced by a steep 49% rise in prices of oil
and gas exploration shares. The government bond index rose by 6.0%. The business sector raised NIS 23.3 billion in
bonds on the capital market, similar to the volume of issues in the preceding year. Spreads of corporate bonds over
government bonds continued to contract; the average spread of the Tel-Bond 60 index over government bonds fell
to 1.62%. Bank credit grew by 5.9% in 2010.
Data regarding representative exchange rates, the consumer price index, and their rates of change:
Rate of change
2010
Consumer price index:
November ("known CPI")
2009
2008
2010
101.3
2.3%
3.8%
Points
107.6
Exchange rate as of Dec. 31:
105.2
2009
%
NIS
USD
3.549
3.775
3.802
)6.0%(
)0.7%(
EUR
4.738
5.442
5.297
)12.9%(
2.7%
CHF
3.788
3.667
3.565
GBP
5.493
6.111
5.548
)10.1%(
10.2%
TRY
2.296
2.518
2.445
)8.8%(
3.0%
3.3%
2.9%
Accounting Policies on Critical Matters and Critical Accounting Estimates
The financial statements of the Bank are prepared in accordance with accounting principles and rules, the main points
of which are described in Note 1 to the Financial Statements as of December 31, 2010. In implementing the accounting
principles, when preparing the financial statements, the Board of Management of the Bank uses assumptions, estimates,
and evaluations that affect the reported amounts of assets and liabilities (including contingent liabilities) and the results
reported by the Bank. All estimates, assumptions, and evaluations are, by essence, forward-looking information. Actual
future results may differ from such estimates and evaluations made when preparing the financial statements.
Some of these estimates and evaluations involve a considerable degree of uncertainty, and can be affected by possible
future changes. Such estimates and evaluations in which changes may have a material effect on the financial results
presented in the financial statements are considered by the Bank, in all matters connected with accounting policy, as
estimates and evaluations on “critical” matters.The Bank’s Board of Management is of the opinion that the estimates
and evaluations used during the preparation of the financial statements are fair, and were made to the best of its
knowledge and professional judgment, as of the date of preparation of the financial statements.
Provision for Doubtful Debts
The provision for doubtful debts is determined on a specific basis, and in addition a general provision and a
supplementary provision are included, in accordance with directives of the Supervisor of Banks.
The specific provision for doubtful debts is made on the basis of the Board of Management’s estimate of the losses
inherent in the credit portfolio, including debts in off-balance sheet items. The Board of Management bases the
evaluation process on numerous considerations and estimates.
28
For all borrowers in the various banking sectors for which indications exist of a possible problem in their ability to
repay credit granted, the Bank prepares an estimate of the amount that can be collected from the borrower, according
to the relevant sources of repayment, which include sources of repayment from the borrower’s business activities,
sources of repayment from the borrower’s private resources, the expected realizable value of collateral provided to
the Bank, and the expected realizable value of external guarantees which were given to support repayment of the
credit. The fairness of the classification of the debt and the collectible amount are approved by an officer one level
above the officer authorized to grant the credit to the customer, with the necessary adjustments. After determining
the collectible amount, a specific provision for doubtful debts is recorded, in every reporting period, representing the
difference between the amount of credit given to the borrower and the total amount that can be collected. After
determining the collectible amount, the Bank considers whether to accrue financing income for this amount, or to
freeze the recording of such income until the actual time of collection.
The collectible amount is determined in nominal amounts, based on various parameters, which include expected
cash flows from the borrower’s business activities; the realizable value of real-estate assets, production equipment,
and other of the borrower’s assets; the realizable value of third-party guarantees; and the realization dates of such
amounts.This information, which is based on estimates and evaluations, is naturally dependent upon economic variables
that are not under the Bank’s control, such as the condition of the Israeli economy and global markets, markets for
companies’ operations and products, interest rates, conditions in the capital market, prices of real estate and other
assets, demand in this industry in Israel and worldwide, the state of tourism in Israel and worldwide, etc.
In determining the collectible amount, safety margins are taken into account for cases of uncertainty regarding the
ability to repay the debt. However, as economic variables are involved, there is no certainty that the collectible
amount will not be lower than estimated in the case of a change for the worse in the economic parameters, or for
any other reason.
For borrowers in the housing finance sector, a specific provision is also calculated, in accordance with the directives
of the Supervisor of Banks, taking into account the extent of arrears, so that the rate of the provision out of total
credit increases as the extent of arrears increases.
The supplementary provision for doubtful debts is based on the quality of the customer indebtedness portfolio,
according to risk attributes, as defined in the directives of the Supervisor of Banks.The Supervisor of Bank’s directives
stipulate different provision rates for each risk attribute. Risk attributes include debts classified as problematic according
to the classification categories defined by the Supervisor of Banks, an absence of financial information about the
borrower, credit to persons related to the Bank, the concentration of credit according to economic sector, and credit
to a borrower or group of borrowers in excess of the restrictions that apply to the indebtedness of a “sole borrower".
Given that some of the components of the supplementary provision, especially the provision for problematic debts,
are dependent upon the classification of the debt as problematic and the timing of its classification, when determining
the amount of the supplementary provision the Bank also relies on the same evaluations of the financial stability
and estimated repayment ability of the borrower which were used to determine the need to classify the debt as
problematic and the timing of the classification.
In view of the expected implementation of the Bank of Israel's directive on the measurement and disclosure of impaired
debts, credit risk, and credit loss provisions, the Bank has included proforma data regarding the implementation of the
directive in 2011. In preparing the proforma data, the Board of Management relied on additional estimates, beyond
the estimates noted above, such as the timing of the determination of the collectible amounts and the rate of the
group provision for the various economic sectors. For details, see Note 1A to the financial statements.
29
Fair Value of Financial Instruments
Some of the financial instruments in which the Bank conducts activity, including most of the securities in the availablefor-sale portfolio, securities in the held-for-trading portfolio, and financial derivatives, are measured in the balance
sheet and/or in the statement of profit and loss at their fair value. The fair value of a financial instrument is defined
as the amount at which the asset could be bought or sold (or the liability could be undertaken or redeemed) in a
transaction in the ordinary course of business between willing parties, i.e. in a transaction where the sale is not forced
or made during liquidation. Market prices quoted in active markets are the best evidence of fair value. If there is no
quoted market price, an estimate of fair value must take into account the prices of similar assets or liabilities and the
results of valuation methods.
The fair value of financial instruments in which the Bank conducts activity is determined based on market prices
quoted in active markets. In cases of financial instruments for which quoted prices in active markets are not available,
fair value is determined based on a system purchased or developed by the Bank, or based on estimates obtained
from experts in the valuation of financial instruments. The systems purchased or developed by the Bank include the
use of various parameters, such as interest-rate curves, currency exchange rates, and standard deviations, and take
certain assumptions into consideration.
Set out below are data regarding the process of determining the fair value of financial instruments measured at fair
value in the financial statements:
December 31, 2010
December 31, 2009
NIS millions
Prices quoted in an active market
Acquired systems or internal model
Financial
assets
Financial
liabilities
Financial
assets
Financial
liabilities
28,315
222
*24,658
*276
6,697
9,520
5,063
6,677
Other
1,761
577
2,764
577
Total
36,773
10,319
*32,485
*7,530
* Balances in respect of a certain financial instrument were reclassified from positive/negative balances in respect of derivatives
to other receivable/payable balances.
The Bank exercises the appropriate professional judgment in determining fair value. For that purpose, the Bank
has formulated a plan to define a structured, regular procedure for the determination of fair value, in which four
independent roles are involved:
(1)Business role – Responsible for the management of the financial instrument.
(2)Validation role – Responsible for validating the models for the calculation of fair value and validating the data and
assumptions used in the calculation.
(3)Control role – Responsible for conducting routine control of the fair value determination process.
(4)Monitoring role – Responsible for monitoring the implementation of the process of determining fair value at an
appropriate level.
The Bank also routinely conducts evaluations and tests of the risks involved in the process of determining fair value.
As part of the same plan, the Bank has defined a limit according to which it shall not enter into a new type of
financial instrument in a material amount or enlarge the amount of an existing type unless a structured procedure
for determining fair value at a reasonable level of confidence is in place for that instrument (hereinafter: “exceptional
instruments”). It was further established that in cases in which the volume of the exceptional instruments reaches
75% of the limit, the Board of Directors and the Risk Management Committee of the Board of Management will be
notified and will formulate a plan to reduce the volume of the exceptional instruments.
30
As part of the formulation of the plan, an examination was performed of the existing inventory of instruments
measured in the financial statements at fair value. At the end of the examination process, the Bank concluded that
the volume of exceptional instruments does not exceed the limit established.
In establishing the estimates and assumptions used by the Bank in the process of determining fair value, and in validating
the fair values, the Bank uses many parameters that can change because of possible changes, mainly in interest rates
and standard deviations in various markets, as well as when there is limited information regarding certain market
variables, such as variables in long-term interest-rate or currency swaps.
Regarding financial instruments whose fair value is determined by stock-market prices, selling large positions of the
securities may lower their market price. With regard to financial instruments for which the price is determined based
on a quote received from a broker or from the counterparty to the transaction, in the absence of an organized market
and because of low trading volumes in the security, the realization value may differ from the value originally established.
Obligations in Connection with Employee Rights
Part of the provisions for the Bank's obligations in connection with employee-employer relationships are based,
among other considerations, on actuarial calculations. These obligations include a 25-year service grant which each
employee is entitled to receive at the end of 25 years of employment at the Bank, compensation for unutilized sick
leave, post-retirement benefits for employees, obligatory pension payments to employees who retire before legal
retirement age and obligations for severance pay for (senior) employees under personal contracts.
Total obligations, calculated based on actuarial estimates, amounted to approximately NIS 1,477 million on
December 31, 2010. The obligations are discounted at a factor of 4% per year, as stipulated by the Supervisor of
Banks, net of the real rate of increase of wages.
Most of the actuarial calculations are based on assumptions and estimates, which are based on past experience
and various statistics such as mortality rates, employee departure rates, and the real rate of change in salaries over
time, etc. Changes in the various actuarial parameters would lead to results different from those obtained today.
Thus, for example, an increase of 1% in the discount rate would result in a reduction of the obligations by a total of
approximately NIS 115 million, and a reduction of 1% in the discount rate would increase the aforesaid obligations by
a total of approximately NIS 139 million. An increase of 0.5% in the estimated annual rate of increase in wages would
cause these obligations to grow by a total of approximately NIS 18 million. An increase of 0.5% in the estimated annual
employee departure rate would cause the aforesaid obligations to decrease by approximately NIS 42 million, while
a decrease of 0.5% in the estimated annual departure rate would cause the obligations to increase by approximately
NIS 23 million.
The actuarial assessment of the obligations for employee rights is available at the Magna website of the Israel Securities
Authority, at www.magna.isa.gov.il.
Deferred Taxes
Deferred taxes are recorded for temporary differences between the value of assets and liabilities in the balance
sheet and their value for tax purposes.
Deferred taxes receivable are recorded for timing differences only if there is near certainty that there will be a tax
saving when the differences are reversed; deferred taxes receivable for losses carried forward for tax purposes are
recorded only if the realization of the tax asset in the foreseeable future is not in doubt. Accordingly, at the time
of recording deferred taxes receivable, the Bank is required to carry out evaluations and estimates regarding their
possible realization in the future.
31
As of December 31, 2010, the amount of temporary differences for which deferred taxes receivable were recorded
amounted to NIS 3,395 million; the amount of losses carried forward for which no deferred taxes receivable were
recorded amounted to NIS 405 million; and the amount of losses carried forward for which deferred taxes receivable
were recorded amounted to NIS 225 million.
Contingent Liabilities
The Bank Group is a party to legal proceedings taken against it by customers, by former customers, and by various
third parties who believe they have suffered harm or damages resulting from the Bank Group’s activity.
The Bank’s Board of Management has included sufficient provisions in the financial statements to cover possible
damages resulting from all such claims, based on legal opinions. In most legal proceedings, opinions are obtained from
legal advisors external to the Bank Group, and reviewed by legal counsels employed by the Bank.
These evaluations are based on the best judgment of the legal counsels, taking into consideration the stage at which
the proceedings are at present and the legal experience accumulated on these matters in Israel and worldwide.
However, it should be taken into account that no “certain” or “near certain” assessments can be made with regard
to legal matters – not only in the initial stages of a claim, but until the verdict is handed down; the outcome of the
proceedings may therefore differ from prior estimates. This is especially true in the case of class-action suits, due to
factors including the lack of accumulated legal experience regarding the outcome of such suits in Israel. The Bank
and its legal advisors therefore face greater difficulty than usual when estimating the outcome of legal proceedings
involving class-action suits, most notably during the stage in which the court has not yet decided whether to accept
or deny the petition to recognize the claim as a class action.
Provision for the Impairment of Non-Financial Assets
The Board of Management of the Bank reviews, from time to time, whether an event has occurred requiring a provision
for impairment of assets owned by the Bank which are not financial assets. The test and the measurement method
for impairment consist of a comparison of the book value of the asset to its recoverable value.The recoverable value
of the asset is the higher of the selling price of the asset and its use value (defined as the present value of estimated
future cash flows expected to derive from the use of the asset and from its realization at the end of its useful life).
The Board of Management of the Bank has allotted its fixed assets among the cash-generating units operating within
the Bank, in order to determine the recoverable value of each cash-generating unit. In this procedure, the Board of
Management relies on estimates and evaluations of the expected cash flows from each cash-generating unit, according
to internal models developed by the Bank, which are used to measure the profitability of banking units, and regarding
the discount factor for said cash flows.
Impairment of Securities Available for Sale and of Securities Held to Maturity
Each reporting period, the Board of Management of the Bank examines whether declines in the fair value of securities
classified into the available-for-sale portfolio and the held-to-maturity portfolio are of an other-than-temporary
nature.This examination includes several stages and principles, in accordance with the policy established at the Bank,
primarily the following:
(1)Formulation of a watch list – A quantitative and qualitative examination is performed in order to identify and
evaluate securities whose value has declined, where the impairment may be of an other-than-temporary nature.
(2)Individual examination – Each security in the watch list is examined individually. This examination is based on
considerations including the following:
•The Bank's ability and intention to hold the security for a sufficient period to allow the value of the security to
return to the level of its cost.
•The value of collateral and safety cushions backing the security.
32
•The rating of the security by international rating agencies, including developments in these ratings after the
balance-sheet date.
•The rate of the impairment of the security relative to its total cost.
•The amount of time for which the fair value of the security is lower than its cost.
•The financial condition of the issuer and changes in its business environment, including an examination of whether
the impairment reflects circumstances unique to the issuer or general market conditions.
•Events after the balance-sheet date.
(3)Documentation of the results of the examination, as required pursuant to the rules established at the Bank.
The Bank has established several principles in order to determine whether impairment is other than temporary, and
the amount of such impairment, as follows:
•Securities which at the balance-sheet date the Bank does not intend to hold, or securities sold after the
balance-sheet date, constitute securities in which other-than-temporary impairment has occurred.
•Securities whose value has declined by 40% or more of the cost of the security, at or after the balance-sheet
date, constitute securities in which other-than-temporary impairment has occurred, unless it can be proven that
special circumstances existed.
•Debt instruments which have sustained a significant downgrade of ratings, or have been classified as problematic
by the Bank, or in which a default on payments has occurred after the purchase, are considered to be securities
in which other-than-temporary impairment has occurred.
•When other-than-temporary impairment occurs in a security, the cost of the security is written down to its fair
value at the balance-sheet date and used as the new cost base.The amount of the write-down is charged to the
statement of profit and loss.
Disclosure Regarding the Procedure for Approval of the Financial Statements
The Board of Directors of the Bank is the organ charged with overarching control at the Bank, pursuant to the
resolution of the Board of Directors of June 29, 2006, and with the approval of its financial statements.
The Audit Committee of the Board of Directors is responsible for examining the draft of the financial statements
presented to it and making a recommendation to the Board of Directors with regard to the approval of the financial
statements.
The financial statements are also discussed by the Finance and Prospectus Committee of the Board of Directors,
which mainly examines the business and economic aspects of the financial statements, including an examination of
the reported results in comparison to the budget and work plans of the Bank.
Note that until 2011, the financial statements of the Bank were examined by the Balance Sheet Committee of the
Board of Directors.This committee made the recommendation to the Board of Directors regarding the approval of
the financial statements, while the Audit Committee discussed only the doubtful debts of the Bank, as reported in
the draft of the financial statements.
On February 6, 2011, the Board of Directors resolved that starting in 2011, the Audit Committee would discuss the
financial statements and would be authorized to make recommendations to the Board of Directors regarding the
approval of the financial statements, in place of the Balance Sheet Committee, which was dissolved. This resolution
was passed in accordance with the provisions of the Companies Regulations (Directives and Terms Regarding the
Procedure for the Approval of Financial Statements), 5770-2010, and with the new version of Proper Conduct of
Banking Business Directive No. 301, "The Board of Directors".
The names and qualifications of the members of the committees are detailed in the section “The Board of Directors
and the Discharge of its Functions” and in the section “Report on Directors with Accounting and Financial Expertise.”
33
The Bank’s external auditors, Ziv Haft CPA (Isr.) and Somekh Chaikin CPA (Isr.) (the “Auditors”), were invited to the
meetings of the Audit Committee and of the Board of Directors in which the Financial Statements were discussed
and approved, and they attended all such meetings.The Bank’s Internal Auditor also participated in the discussions of
the Audit Committee and the Board of Directors in which the Financial Statements were approved.
Through detailed presentations by officers and others at the Bank, including the Chief Executive Officer, the Head of
Finance (Chief Financial Officer), and the Chief Accountant, the Audit Committee examined the material issues and
critical estimates applied in the Financial Statements; the reasonableness of the data; the accounting policies applied
and the changes thereto, if any; and the implementation of the due disclosure principle in the Financial Statements
and in the accompanying information.
As part of the discussion of the Financial Statements, the Audit Committee also discussed the Bank’s provisions for
impairment of securities and its doubtful debts in Israel and at branches abroad, and examined the value of the Bank's
holdings in securities.The Committee made recommendations to the plenum of the Board of Directors with regard to
the approval of provisions for doubtful debts in Israel and at branches abroad, and provisions in respect of other-thantemporary impairment of securities. During the discussion of the Financial Statements, the Audit Committee also
received reports on the Bank’s problematic borrowers in Israel and at branches abroad, and on securities owned by
the Bank. In addition, the Audit Committee discussed and examined the Bank’s exposure to risks, and the reflection
and impact of such risks on the Financial Statements.
As noted above, during the year ended on December 31, 2010, the Audit Committee also discussed the status of
problematic debts at the Bank and the provisions for doubtful debts required in respect of such debts. In addition, it
discussed other-than-temporary impairment of securities owned by the Bank.
The Audit Committee also received reports and held discussions regarding deficiencies and material weaknesses in
the internal control of the Financial Statements, if and as found, and received reports of any fraud, whether material
or immaterial, in which the Board of Management was involved, or in which other employees were involved who
take part in the Bank’s internal control of financial reporting, if and as found, as required under Directive 645 of the
Public Reporting Directives of the Supervisor of Banks – Disclosure Declaration.
The Auditors, Bank officers, and the Internal Auditor are invited to and attend the meeting of the Audit Committee
in which the required disclosures in the Financial Statements are discussed, as noted above.
During the year ended on December 31, 2010, the Balance Sheet Committee and the Audit Committee held several
meetings on these matters, as necessary, and presented their recommendations to the plenum of the Board of
Directors prior to the discussion of the Board of Directors on the Financial Statements.
34
Net profit of the Bank Group totaled NIS 2,228 million in 2010, compared with profit in the amount of NIS 1,316 million
in 2009.
Net return on equity was approximately 10.3% in 2010, compared with approximately 6.7% in 2009.
Set out below is the condensed statement of profit and loss for the years 2010 and 2009:
For the year ended Dec. 31
2010
2009
Change
NIS millions
%
Profit from financing activity before provision for doubtful debts
7,775
6,718
15.7%
1,030
2,017
)48.9%(
Profit from financing activity after provision for doubtful debts
6,745
4,701
43.5%
Total operating and other income
5,109
*5,107
-
Total operating and other expenses
8,310
*7,503
10.8%
Operating profit before taxes
3,544
2,305
53.8%
Provision for taxes on operating profit
1,353
996
35.8%
Share in net operating profits (losses) of equity-basis investees, after taxes
Minority interests' share in net operating (profits) losses after tax of
consolidated companies
3
18
2,212
)15(
)6(
1,288
16
28
Net profit
2,228
1,316
Return of net operating profit on equity
10.2%
6.6%
Return of net profit on equity
10.3%
6.7%
Net profit from extraordinary transactions after taxes
71.7%
)42.9%(
69.3%
* Fees to issuers of other credit cards were reclassified and presented as a deduction from income from operating fees.
Developments in Income and Expenses
Profit from financing activity before provision for doubtful debts in 2010 totaled NIS 7,775 million,
compared with NIS 6,718 million in 2009, an increase of approximately 15.7%.
The increase in reported profit in comparison to the preceding year mainly resulted from an increase in profit from
regular financing activity, as a result of an increase in financial spreads. In addition, increases occurred in income from
realization and adjustments to fair value of non-asset-backed bonds, and in previously unrecorded interest income
on problematic debts. Also, the loss recorded from the adjustment of derivatives to fair value decreased. In 2009,
high income was recorded in respect of credit-derivatives, which was offset by losses in respect of investments in
asset-backed securities.
35
Set out below are the developments in financing profit before the provision for doubtful debts in 2010:
2010
2009
Change
NIS millions
Profit from regular financing activity
(1)
%
7,492
6,861
9.2%
Net profits (losses) in respect of investments in asset-backed securities
32
)101(
Profits in respect of the credit-derivative portfolio
30
295
Income from realization and adjustments to fair value of non-asset-backed bonds
Adjustments to fair value of derivative instruments(2)
Previously unrecorded interest income on problematic debts
Effects of hedging of foreign-currency exposures in respect of overseas subsidiaries
358
188
90.4%
)636(
)846(
)24.8%(
428
321
33.3%
(3)
Reported financing profit
)89.8%(
71
-
7,775
6,718
15.7%
Set out below are the quarterly developments in financing profit:
2010
Q4
Q3
2009
Q2
Q1
Q4
Q3
Q2
Q1
1,716
1,686
1,698
NIS millions
Profit from regular financing activity(1)
1,890
1,899
1,876
1,827
1,761
Net profits (losses) in respect of investments
in asset-backed securities
-
22
1
9
87
)1(
)77(
Profits in respect of the
credit-derivative portfolio
)110(
4
4
-
22
30
22
235
8
Income from realization and adjustments to
fair value of non-asset-backed bonds
69
70
126
93
14
4
38
132
Adjustments to fair value of
derivative instruments(2)
31
)92(
)295(
24
)31(
16
)855(
116
102
129
96
69
57
99
Previously unrecorded interest income
on problematic debts
Effects of hedging of foreign-currency
exposures in respect of overseas
subsidiaries(3)
Reported financing profit
)280(
81
23
48
-
-
-
-
-
-
2,133
2,053
1,837
1,752
2,012
1,779
1,955
972
(1) Profit from financing activity excluding exceptional effects, and excluding effects arising mainly from the timing of recording in
accounting.
(2) The effect of the measurement of profit and loss in derivative instruments constituting part of the Bank's asset and liability
management strategy, and used primarily as an economic hedge, on a fair-value basis, versus the measurement of results of
balance-sheet financial activity on an accrual basis. The volatility in this item mainly resulted from changes in interest rates in
the CPI-linked segment.
(3) The effect of hedging of foreign-currency exposures in respect of subsidiaries overseas includes the effect of hedging the
asymmetry in the tax liability in respect of exchange-rate differences in investments overseas, versus exchange-rate differences
in sources of financing. This effect is offset in the tax item. For further details, see the section "Risk Management". This item
also includes the effect of foreign-currency exposures in respect of overseas subsidiaries, which are partially offset by minority
interests' share of the income in overseas subsidiaries.
36
The overall interest spread (balance-sheet and off-balance-sheet) in 2010 stood at 1.10%, compared with an overall
interest spread of 0.90% in 2009.
The interest spread (including derivatives) in the unlinked segment reached 1.72% in 2010, compared with 1.57% in
2009.The increase in the interest spread mainly resulted from an increase in financial spreads, and from the increase
in the interest rate in the Israeli economy.
The increase in the overall interest spread in 2010 mainly resulted from an increase in the interest spread in the
CPI-linked segment (including derivatives), which was positive at 0.02% in 2010, versus a negative rate of 0.49% in
2009. This increase mainly resulted from a decrease in losses in this segment from the adjustment to fair value of
derivative instruments, due to a more moderate decrease in the CPI-linked interest rate in 2010 compared to 2009.
The overall interest spread in the foreign-currency segment was 0.62%, compared with 0.73% in 2009.
Set out below are the developments in financing profit, before the provision for doubtful debts, by principal segments
of activity:
2010
Segment
2009*
Change
%
NIS millions
Households Segment
Private Banking Segment
Small Business Segment
Commercial Segment
Corporate Segment
Financial Management Segment
Total
2,019
1,737
16.2%
997
932
7.0%
1,018
868
17.3%
689
646
6.7%
2,668
2,500
6.7%
384
35
7,775
6,718
15.7%
* Reclassified. For further details, see the section "General – The Segments and Customer Assignment Criteria".
The increase in financing profit before the provision for doubtful debts in the Retail Area in Israel mainly resulted
from an increase in interest spreads, due to an increase in financial spreads on credit and deposits, and increases in
the interest rate in the Israeli economy.The increase in financing profit before the provision for doubtful debts in the
Corporate Segment mainly resulted from an increase in financial spreads, as well as increased collection of debts in
respect of which financing income was not previously recorded. The increase in financing profit before the provision
for doubtful debts in the Financial Management Segment resulted from a decrease in losses from the adjustment to
fair value of derivative instruments, and from an increase in profits from bonds.
The provision for doubtful debts totaled NIS 1,030 million in 2010, compared with NIS 2,017 million in 2009.
The specific provision for doubtful debts totaled NIS 1,107 million in 2010, compared with NIS 1,961 million in
2009. Most of the decrease resulted, on the one hand, from the reduction of the specific provision, which was mainly
influenced by the improvement in economic conditions in Israel in comparison to 2009, which led to improved
repayment capability and an increase in the value of collateral of many customers, and on the other hand, from an
increase in the reduction of provisions and in the collection of debts written off in previous years. Most of the provision
in 2010 stemmed from the construction and real-estate sector, the industry sector, and credit to private individuals.
The supplementary provision for doubtful debts, which is performed for unidentified risks in customer indebtedness
portfolios, decreased by NIS 77 million in 2010, compared with an increase of NIS 56 million in 2009. The decrease
mainly resulted from a decrease in the credit balances of borrowers who have not yet submitted current financial
statements, and from a decrease in restructured credit (including credit designated for restructuring).
The balance of the supplementary provision for doubtful debts totaled NIS 358 million on December 31, 2010.
37
The balance of the general provision totaled NIS 674 million on December 31, 2010. The aggregate total of the
general and supplementary provisions for doubtful debts amounted to NIS 1,032 million.
As the cumulative balance of the general and supplementary provisions for doubtful debts is not recognized as
an expense for tax purposes, taking into consideration the rates of tax on income, the balance of the general and
supplementary provisions is equivalent to a specific provision in the amount of approximately NIS 1.6 billion.
With regard to the components of the specific and supplementary provisions for doubtful debts, see Note 4 to the
Financial Statements.
In view of the expected implementation of the Bank of Israel's directive concerning the measurement and disclosure
of impaired debts, credit risk, and provisions for credit losses, the Bank included pro-forma data with regard to the
implementation of the directive in 2011. For further details, see Note 1A to the Financial Statements.
Set out below are details of the annual provision for doubtful debts:
2010
2009
Change
NIS millions
1,825
Specific provision during the period
)718(
Reduction of specific provision and collection of debts written off in the past
1,107
Change in specific provision
%
2,430
)469(
1,030
Total
53.1%
1,961
)77(
Change in supplementary provision
)24.9%(
)43.5%(
56
2,017
)48.9%(
Rate of specific provision out of total credit to the public:
0.81%
1.12%
)0.32%(
)0.22%(
0.49%
0.90%
Reduction of specific provision and collection of debts written off in the past
Total specific provision
Set out below are the quarterly developments of the provision for doubtful debts:
2010
Q4
Q3
2009
Q2
Q1
Q4
Q3
Q2
Q1
747
561
388
NIS millions
Reduction of specific provision and collection
of debts written off in the past
Change in specific provision
Change in supplementary provision
Total
524
419
421
461
734
)268(
)159(
)134(
)157(
)127(
)97(
)127(
)118(
256
260
287
304
607
650
434
270
)156(
30
54
)71(
)21(
104
44
100
290
341
299
)5(
536
629
538
314
0.93%
0.76%
0.77%
0.86%
1.36%
1.39%
1.04%
0.70%
Rate of specific provision out of total credit
to the public*:
Specific provision
Reduction of specific provision and collection
of debts written off in the past
)0.48%( )0.29%( )0.25%( )0.29%( )0.24%( )0.18%( )0.24%( )0.21%(
Total specific provision
0.45%
0.47%
0.52%
*Annualized.
38
0.57%
1.12%
1.21%
0.80%
0.49%
Set out below are details of the provision for doubtful debts and the rate of the provision out of total credit to the
public, including the supplementary provision, by principal segments of activity:
For the year
ended Dec. 31, 2010
Households Segment
For the year
ended Dec. 31, 2009*
Change
NIS millions
%
NIS millions
%
%
309
0.53%
334
0.63%
)7.5%(
29
0.12%
33
0.16%
)12.1%(
139
0.65%
240
1.24%
)42.1%(
Commercial Segment
118
0.54%
167
0.79%
)29.3%(
Corporate Segment
435
0.45%
1,243
1.24%
)65.0%(
1,030
0.46%
2,017
0.93%
)48.9%(
Total
Operating and other income totaled NIS 5,109 million in 2010, compared with NIS 5,107 million in 2009.
Set out below are details of operating and other income:
2010
2009
NIS millions
Change
%
Operating fees:
953
*933
2.1%
1,461
*1,337
9.3%
1,199
1,167
2.7%
174
*129
34.9%
82
72
13.9%
Credit handling
391
290
34.8%
Conversion differences
264
*263
0.4%
Foreign trade activity
112
*90
24.4%
Account management fees
Credit cards
Activity in securities
Financial product distribution fees
(1)
Management, operations, and trust for institutional entities(2)
Net income from credit portfolio services
49
54
)9.3%(
Management fees and commissions from life insurance and home insurance
52
*57
)8.8%(
Other fees
74
*97
)23.7%(
4,811
4,489
77
392
)80.4%(
221
226
)2.2%(
5,109
5,107
Total operating fees
Net profits from investments in shares
Other income
Total operating and other fees
7.2%
* Reclassified, mainly under the item of income from credit cards, which is presented net of fees paid to issuers of other credit
cards, and of insurance fees previously presented under financial product distribution fees.
(1) Mainly mutual funds.
(2) Mainly in respect of management and operational services provided to provident funds.
39
Set out below are quarterly details of operating and other income:
2010
Q4
Q3
2009
Q2
Q1
Q4
Q3
Q2
Q1
NIS millions
Operating fees:
Account management fees
245
238
236
234
248
228
224
233
Credit cards
384
383
352
342
350
352
328
307
Activity in securities
315
275
295
314
300
290
299
278
Financial product distribution fees(1)
46
44
43
41
38
32
31
28
Management, operations, and trust for institutional
entities(2)
21
20
21
20
20
13
21
18
100
62
154
75
103
60
64
63
Conversion differences
65
65
74
60
73
65
65
60
Foreign trade activity
28
26
28
30
24
15
25
26
Net income from credit portfolio services
12
12
12
13
13
13
14
14
Life insurance and home insurance management
fees and commissions
14
13
11
14
14
15
14
14
Other fees
14
21
20
19
27
24
17
29
1,070
Credit handling
Total operating fees
1,244
1,159
1,246
1,162
1,210
1,107
1,102
Net profits from investments in shares
40
6
16
15
181
160
47
4
Other income
57
52
72
40
69
53
47
57
1,341
1,217
1,334
1,217
1,460
1,320
1,196
1,131
Total operating and other fees
(1) Mainly mutual funds.
(2) Mainly in respect of management and operational services provided to provident funds.
Income from operating fees totaled NIS 4,811 million in 2010, compared with NIS 4,489 million in 2009, an increase
of 7.2%. The increase mainly resulted from an increase in income from credit cards, income from credit handling
due to nonrecurring fees for the coordination of syndications, and income from financial product distribution fees.
Profit from investments in shares totaled NIS 77 million in 2010, compared with NIS 392 million in 2009. The profit
in 2009 mainly resulted from the sale of shares of Bezeq and from the sale of shares of HOT, as well as income from
dividends distributed by these companies.
Other income totaled NIS 221 million in 2010, compared with NIS 226 million in 2009.
Operating and other expenses totaled NIS 8,310 million in 2010, compared with NIS 7,503 million in 2009, an
increase of approximately 10.8%. The increase mainly resulted from an increase in salary expenses, as a result of the
improvement in profitability, as detailed below.
Details of operating and other expenses are set out below:
2010
2009
NIS millions
Change
%
Salary expenses:
4,076
3,767
Bonuses
376
90
Share-based compensation
198
205
Total salary expenses
4,650
4,062
14.5%
Maintenance and depreciation of buildings and equipment
1,518
1,432
6.0%
Other expenses
2,142
*2,009
6.6%
8,310
*7,503
10.8%
Wages
* Fees to other credit-card issuers were reclassified and presented net of income from operating fees.
40
8.2%
)3.4%(
Set out below are quarterly details of operating and other expenses:
2010
Q4
Q3
2009
Q2
Q1
Q4
Q3
Q2
Q1
NIS millions
Salary expenses:
Wages
Bonuses
1,086
983
979
1,028
1,017
691
961
1,098
176
70
82
48
33
35
11
11
65
119
27
93
61
38
13
1,327
1,172
1,048
1,103
1,143
787
1,010
1,122
Maintenance and depreciation
of buildings and equipment
401
383
365
369
372
374
345
341
Other expenses
606
509
571
456
580
483
500
446
2,334
2,064
1,984
1,928
2,095
1,644
1,855
1,909
Share-based compensation
Total salary expenses
Total operating and
other expenses
)13(
Salary expenses totaled NIS 4,650 million in 2010, compared with NIS 4,062 million in 2009. The increase of
14.5% mainly resulted from an increase in the annual bonus, following the improvement in the Bank's profits; from
a one-time grant to employees in the amount of one-quarter salary, an increase in expenses related to employees'
retirement and from the decrease in salary expenses in 2009, due to an agreement signed with the employees' union,
as detailed in Note 15 to the Financial Statements.
Expenses for maintenance and depreciation of buildings and equipment totaled NIS 1,518 million in
2010, compared with NIS 1,432 million in 2009, an increase of 6.0%. The increase mainly resulted from an increase
in municipal taxes paid, and an increase in software depreciation.
Other expenses totaled NIS 2,142 million in 2010, compared with NIS 2,009 million in 2009, an increase of
6.6%, which mainly resulted from a provision recorded for goodwill impairment at Bank Pozitif and its subsidiary
in Kazakhstan, in the amount of NIS 108 million, compared with a total of NIS 57 million in 2009; from a one-time
provision in the credit card companies with respect to their "membership rewards" (stars) program and operating
fees, mainly in the area of credit cards, due to the increase in the volume of activity. This increase was offset by a
decrease in expenses for legal claims and professional services.
The provision for taxes on operating profit amounted to NIS 1,353 million in 2010, compared with
NIS 996 million.
The effective tax rate in 2010 reached 38.2%, compared with a statutory tax rate of 35.3%. The difference resulted
from the recording of expenses not included in the tax base (a provision for goodwill impairment and other
unrecognized expenses). For further details, see Note 29 to the Financial Statements.
Operating profit after taxes totaled NIS 2,191 million in 2010, compared with NIS 1,309 million in 2009.
The share in net operating results of equity-basis investees after taxes amounted to profit in the amount
of NIS 3 million in 2010, compared with a loss in the amount of NIS 15 million in 2009.
Minority interests’ share in net results of consolidated companies totaled a share in losses of NIS 18 million
in 2010, compared with a share in profit in the amount of NIS 6 million in 2009.
Net operating profit totaled NIS 2,212 million in 2010, compared with NIS 1,288 million in 2009.
Net profit from extraordinary transactions after taxes totaled NIS 16 million in 2010, compared with
approximately NIS 28 million in 2009.
Net profit of the Bank Group totaled NIS 2,228 million in 2010, compared with NIS 1,316 million in 2009.
Net basic profit per share of par value NIS 1 amounted to NIS 1.68 in 2010, compared with NIS 1.00 in 2009.
41
Composition and Development of the Bank Group's Assets and Liabilities
The consolidated balance sheet as of December 31, 2010 totaled NIS 320.9 billion, compared with NIS 309.6 billion
at the end of 2009.
A. Set out below are the developments in the main balance-sheet items:
Balance as of December 31
2010
2009
Change
NIS millions
%
Total assets
320,876
309,555
3.7%
225,288
215,788
4.4%
Cash on hand and deposits with banks
50,331
53,115
)5.2%(
Securities
31,604
28,055
12.7%
233,965
231,993
0.9%
27,608
23,112
19.5%
23,089
20,598
12.1%
B. Set out below are the developments in the principal off-balance-sheet items:
2010
2009
NIS millions
Change
%
1. Off-balance-sheet financial instruments, excluding derivatives:
1,417
1,613
)12.2%(
Guarantees and other commitments
33,181
32,534
2.0%
Unutilized credit-card credit facilities***
29,688
30,899
)3.9%(
Unutilized revolving overdraft and other credit facilities in
on-demand accounts
36,561
*33,095
10.5%
Irrevocable obligations to grant credit approved but not yet provided,
and commitments to provide guarantees
41,907
36,787
13.9%
Interest contracts
217,627
197,030
10.5%
Currency contracts
251,842
**207,082
21.6%
23,324
**25,315
)7.9%(
4,246
7,303
)41.9%(
497,039
**436,730
Documentary credit
2. Derivative instruments (notional value amounts):
Contracts in respect of shares
Commodity and service contracts (including credit derivatives)
Total notional value of derivatives
13.8%
* Restated. Balances of unutilized credit facilities in housing loans were restated to include an amount of approximately
NIS 2.8 billion not included in the previous period.
** Balances in respect of a certain financial instrument were reclassified from positive/negative balances in respect of derivatives
to other receivable/payable balances.
***Not including unutilized credit-card credit facilities under the responsibility of other banks, in the amount of approximately
NIS 9,744 million (Dec. 31, 2009: NIS 15,544 million).
42
C.
Set out below are the developments in the balance of off-balance-sheet monetary assets held by the Bank Group’s
customers for which the Bank Group provides operational management and/or custody services:
2010
2009
Change
NIS millions
(1)(2)
%
675,346
596,662
13.2%
In mutual funds
44,311
39,430
12.4%
Total assets of provident funds receiving operational services(3)
85,962
78,250
9.9%
805,619
714,342
12.8%
In securities portfolios
(3)
Total
(1) Including securities balances of provident funds and mutual funds for which the Bank Group provides operational services.
(2) Excluding mutual funds held by customers of the Bank.
(3) The Bank Group in Israel does not own management rights of provident funds and mutual funds.
D.
Set out below are the developments in the balances of study funds and pension products for which advice is
provided ("advisory balances"):
2010
2009
Change
NIS millions
8,026
Advisory balances with distribution agreement
%
4,266
88.1%
Advisory balances are balances of pension products and study funds (also considered a financial product) in respect
of which customers received pension advice, or financial advice on study funds, from advisors at the Bank who hold
a pension advisor's license and/or an investment advisor's license, as relevant, and for which the Bank is entitled to
distribution fees. Note that the advisory balances are the total balances for which advice is provided, and some of
the advised investments may not be executed.The increase resulted from the expansion of pension advising and the
increase in balances.
Credit to the Public
Credit to the public as of December 31, 2010 amounted to NIS 225.3 billion, compared with NIS 215.8 billion at
the end of 2009, an increase of approximately 4.4%. The growth resulted from an increase in consumer credit and
in housing loans
Set out below are data regarding the volume of credit to the public, by linkage segment:
The segment's share of total credit
to the public as of December 31
2010
2009
NIS millions
2010
Change
2009
NIS millions
%
%
%
14,479
12.4%
58.4%
54.2%
131,527
117,048
Israeli currency CPI-linked
52,901
52,987
)86(
)0.2%(
23.5%
24.6%
Foreign currency
(including foreign currency linked)
40,655
45,600
)4,945(
)10.8%(
18.0%
21.1%
205
153
52
34.0%
0.1%
0.1%
225,288
215,788
9,500
4.4%
100.0%
100.0%
Israeli currency unlinked
Non-monetary items
Total
43
Credit in the unlinked shekel segment increased by NIS 14.5 billion in 2010, an increase of approximately
12.4%, mainly resulting from the continued low interest-rate environment in the Israeli economy.
Credit in the CPI-linked shekel segment decreased by NIS 0.1 billion in 2010, a decrease of approximately 0.2%.
Credit in the foreign currency (including foreign currency-linked) segment decreased by NIS 4.9 billion
in 2010, a decrease of approximately 10.8%, partly accounted for by the appreciation of the NIS against the major
currencies.
Credit to the public by segment of activity:
2010
2009*
Change
NIS millions
Change
%
Households Segment
57,666
52,754
4,912
9.3%
23,932
20,077
3,855
19.2%
21,384
19,043
2,341
12.3%
Commercial Segment
21,575
20,894
Corporate Segment
96,760
99,173
3,971
3,847
124
3.2%
225,288
215,788
9,500
4.4%
Households Segment
25,301
22,791
2,510
11.0%
10,166
9,090
1,076
11.8%
18,592
17,232
1,360
7.9%
Total
54,059
49,113
4,946
10.1%
31,764
29,257
2,507
8.6%
8,373
5,381
2,992
55.6%
2,792
1,811
981
54.2%
42,929
36,449
6,480
17.8%
Others and Adjustments
Total
681
)2,413(
3.3%
)2.4%(
Of which, retail credit in Israel excluding housing loans:
Housing loans in Israel:
Households Segment
Total
44
Set out below are data regarding the balance of housing loans and the volumes of execution (including refinanced
loans), divided into loans from Bank funds and loans from Finance Ministry funds, all with regard to activity in Israel,
in each of the years 2009 and 2010.
2010
2009
NIS millions
Credit balances
Loans from Bank funds
Loans from Finance Ministry funds
Grants from Finance Ministry funds
Total
*42,929
36,449
5,768
6,698
564
663
49,261
43,810
Execution
Loans from Finance Ministry funds:
Loans
43
90
Grants
10
9
Total from Finance Ministry funds
53
99
Total loans from Bank funds
11,860
7,601
Total new loans
11,913
7,700
1,992
2,717
13,905
10,417
Old loans refinanced from Bank funds
Total loans extended
* Not including balance with respect to purchasing groups in the amount of NIS 99 million.
45
Overall Risk of Credit to the Public
Overall credit risk to the public consists of balance-sheet credit risk, which is comprised of credit to the public,
investments in bonds by the public, and assets arising from derivative instruments transacted with the public as the
counterparty; and off-balance-sheet credit risk, which includes guarantees, transactions in off-balance-sheet financial
instruments, unutilized credit facilities, and commitments to grant credit. For further details, see Appendix 5 to the
Board of Management's Review.
Overall credit risk to the public as of December 31, 2010 totaled NIS 379.4 billion, compared with NIS 365.2 billion
at the end of 2009, an increase of approximately 3.9%. Most of the increase was in housing loans to private individuals
(an increase in overall credit risk in the amount of approximately NIS 6.9 billion), other loans to private individuals (an
increase in overall credit risk in the amount of approximately NIS 2.8 billion), and the construction and real-estate
industry (an increase in overall credit risk in the amount of approximately NIS 4.8 billion).
Set out below is the development of overall credit risk to the public, by principal sectors of the economy:
Dec. 31, 2010
Economic sector:
Agriculture
Dec. 31, 2009
Overall credit
risk to the
public****
Percent of
total
Overall credit
risk to the
public*,****
Percent of
total
Rate of
change
NIS millions
%
NIS millions
%
%
2,584
0.7%
2,542
0.7%
1.7%
Industry
45,949
12.1%
43,486
11.9%
5.7%
Construction & real estate***
75,311
19.9%
**70,561
19.3%
6.7%
Electricity & water
Commerce
Hotels, hospitality & food services
6,466
1.7%
6,843
1.9%
)5.5%(
25,422
6.7%
23,650
6.4%
7.5%
8,895
2.3%
10,168
2.8%
)12.5%(
8,945
2.4%
8,428
2.3%
6.1%
11,057
2.9%
12,369
3.4%
)10.6%(
Financial services
47,633
12.6%
50,953
14.0%
)6.5%(
Other business services
13,617
3.6%
12,294
3.4%
10.8%
9,629
2.5%
9,819
2.7%
)1.9%(
Transportation & storage
Communications & computer services
Public & community services
Private individuals – housing loans
45,117
11.9%
**38,206
10.5%
18.1%
Private individuals – other
78,732
20.7%
75,927
20.7%
3.7%
379,357
100.0%
**365,246
100.0%
3.9%
Total
*Data on overall credit risk to the public by economic sector were restated, as part of the Bank's preparations for the
implementation of the Bank of Israel's directive on impaired debts and the reliance on such data for the establishment of
the group provision. As part of this preparation, the Bank reexamined the classification of borrowers by economic sector.
The following are data on overall credit risk to the public, as published on December 31, 2009, with regard to the main
economic sectors that were restated: Other business services – approximately NIS 17.9 billion; construction and real estate –
approximately NIS 65.1 billion; commerce – approximately NIS 19.3 billion; industry – approximately NIS 46.5 billion.
**Data on off-balance-sheet credit risk in respect of unutilized credit facilities in housing loans were restated to include an
amount of approximately NIS 2.8 billion not included in the previous period.
***Includes balance-sheet credit risk in the amount of approximately NIS 363 million and off-balance-sheet credit risk in
the amount of NIS 1,690 million in respect of loans extended to specific purchasing groups which are currently in the
process of construction (December 31, 2009: balance-sheet credit risk in the amount of approximately NIS 253 million
and off-balance-sheet credit risk in the amount of approximately NIS 407 million).
****Excluding unutilized credit-card facilities under other banks' responsibility totaling approximately NIS 9,744 million
(December 31, 2009: NIS 15,544 million).
46
Set out below are details regarding the material changes in the various economic sectors:
Construction and Real Estate
Overall credit risk in this sector totaled approximately NIS 75.3 billion on December 31, 2010, compared with
approximately NIS 70.6 billion at the end of 2009, an increase of approximately 6.7%. The increase mainly resulted
from an increase in off-balance-sheet credit risk, in the amount of approximately NIS 6.7 billion, mainly due to an
increase in unutilized credit facilities of borrowers in Israel; this increase was offset by a decrease in balance-sheet
credit risk, in the amount of approximately NIS 1.9 billion.
Set out below is a breakdown of credit risk of the Bank group in the construction and real-estate sector, by principal
areas of activity:
Balance as of December 31, 2010
Balance-sheet Off-balance-sheet
credit risk
credit risk
Overall credit
risk
NIS millions
Construction for commerce and services
Construction for industry
Housing construction
Yield-generating properties
Other
Total construction and real-estate sector
2,865
1,398
4,263
699
123
822
8,585
18,920
27,505
27,461
5,823
33,284
5,908
3,529
9,437
45,518
29,793
75,311
Balance as of December 31, 2009*
credit risk
credit risk
Overall credit
risk
NIS millions
Construction for commerce and services
3,005
1,010
4,015
Construction for industry
723
171
894
Construction for housing
8,812
13,134
21,946
28,314
4,915
33,229
6,580
3,897
10,477
47,434
23,127
70,561
Yield-generating properties
Other
Total construction and real-estate sector
* Restated. In previous years, the distribution of credit risk in this sector was reported according to the data of the Bank alone.
Starting in 2010, the data are reported on a consolidated basis. In addition, as part of the process of reexamination of the
classification of borrowers by economic sectors, as described above, the distribution of credit risk in the construction and
real-estate sector was also restated.
Industry
Overall credit risk in this sector totaled approximately NIS 45.9 billion at the end of 2010, compared with approximately
NIS 43.5 billion at the end of 2009, an increase of approximately 5.7%.The increase mainly resulted from an increase
in the amount of approximately NIS 4.0 billion in off-balance-sheet credit risk in respect of the activity of borrowers
in Israel, which was offset by a decrease in balance-sheet credit risk in the amount of approximately NIS 1.7 billion,
mainly in respect of the activity of borrowers overseas.
47
Commerce
Overall credit risk in this sector increased in 2010, to approximately NIS 25.4 billion, compared with approximately
NIS 23.7 billion at the end of 2009, an increase of approximately 7.5%. The increase resulted from an increase of
approximately NIS 1.0 billion in balance-sheet credit risk in respect of the activity of borrowers in Israel, and from an
increase in off-balance-sheet credit risk in respect of the activity of borrowers in Israel in the amount of approximately
NIS 0.7 billion.
Financial Services
Overall credit risk in the financial services sector decreased to approximately NIS 47.6 billion, compared with
approximately NIS 51.0 billion at the end of 2009, a decrease of approximately 6.5%. The decrease in overall credit
risk mainly resulted from a decrease in off-balance-sheet credit risk in the amount of approximately NIS 3.7 billion,
mostly in respect of the activity of borrowers in Israel, which was offset by an increase in the amount of approximately
NIS 0.4 billion in balance-sheet credit risk.
Business Services
Overall credit risk in the business services sector increased to approximately NIS 13.6 billion, compared with
approximately NIS 12.3 billion at the end of 2009, an increase of about 10.8%.The increase mainly resulted from an
increase in balance-sheet credit risk in respect of the activity of borrowers in Israel.
Communications and Computer Services
Overall credit risk in the communications and computer services sector decreased to approximately NIS 11.1 billion,
compared with approximately NIS 12.4 billion at the end of 2009, a decrease of approximately 10.6%.The decrease
resulted from a decrease in off-balance-sheet credit risk.
Private Individuals – Housing Loans
NIS 38.2 billion at the end of 2009, an increase of about 18.1%. The increase mainly resulted from an increase in
balance-sheet credit risk, in the amount of approximately NIS 5.7 billion, mainly in respect of the activity of borrowers
in Israel, and from an increase in off-balance-sheet credit risk in the amount of approximately NIS 1.2 billion due to
an increase in unutilized credit facilities. The increase in overall credit risk in this sector resulted from an increase in
the volume of mortgages granted.
Private Individuals – Other
NIS 75.9 billion at the end of 2009, an increase of about 3.7%. The increase mainly resulted from an increase in
balance-sheet credit risk of approximately NIS 4.0 billion, mainly in respect of the activity of borrowers in Israel, which
was offset by a decrease of approximately NIS 1.1 billion in off-balance-sheet credit risk.
48
Set out below are the details of balances of credit to the public and off-balance-sheet credit risk to borrowers whose
balance of debt exceeds NIS 1,200 million, by sectors of the economy, as of December 31, 2010:
Number of
borrowers
Balance-sheet
Off-balancecredit risk sheet credit risk
Economic sector
Total
NIS millions
Industry
5
1,149
9,259
10,408
Construction & real estate
1
895
708
1,603
Electricity & water
1
894
770
1,664
Transportation & storage
1
1,095
176
1,271
Communications & computer services
2
2,352
1,246
3,598
6
5,205
5,083
10,288
16
11,590
17,242
28,832
Financial services
Total
Set out below are the developments in problematic debts(1), according to the classifications established by the
Supervisor of Banks:
Balance as of
Dec. 31,
2010
Sept. 30,
2010
June 30,
2010
March 31,
2010
Dec. 31,
2009
NIS millions
Problematic debts:
Non-income bearing
3,632
3,719
3,730
4,052
3,976
Restructured(2)(b)
1,493
1,600
541
429
767
1,028
916
1,977
2,018
2,419
Designated for restructuring
(3)(b)
499
745
646
621
765
5,418
6,229
6,664
5,800
*5,924
Total balance-sheet credit to problematic borrowers(1)
12,070
13,209
13,558
12,920
*13,851
Off-balance-sheet credit risk in respect of problematic
borrowers(1)(5)
2,653
2,711
3,041
2,345
2,591
102
140
111
144
144
70
71
8
9
9
-
14
37
40
41
14,895
16,145
16,755
15,458
*16,636
147
138
135
130
123
407
431
426
423
*453
3,857
3,386
3,707
3,764
4,206
In temporary arrears
Under special supervision(a)(b)
Bonds of problematic borrowers
Other assets in respect of derivative instruments of
problematic borrowers
Deposits with foreign banks
Total problematic debts(1)
Assets received in respect of discharged credit
(a) Of which: Credit for housing in respect of which a provision
according to the extent of arrears exists
(b) Of which: Debts for which a specific provision exists
(4)
*Restated.
(1) Not including debts covered by collateral deductible for the purpose of limits to the indebtedness of borrowers and of groups
of borrowers.
(2) Credit restructured in the course of the current year, and credit restructured in previous years with waiver of income.
(3) Credit to borrowers for which a restructuring decision has been made but not yet implemented.
(4) Excluding housing credit for which a provision according to the extent of arrears exists.
(5) As calculated for the purpose of limits to the indebtedness of borrowers and of groups of borrowers, except in respect of
guarantees provided by a borrower to secure the indebtedness of a third party.
49
The portfolio of problematic debts in the various categories as of December 31, 2010 includes debts of approximately
56,000 customers.The aforesaid debts include no debts exceeding the amount of NIS 500 million, with the exception
of three clients, one in the real-estate sector and two in the financial services sector.
Most of the overall credit risk in respect of problematic debts as of December 31, 2010 is in the construction and
real-estate sector and in the various industrial sectors, similar to the situation on December 31, 2009.
Effect of the Directive on the Measurement and Disclosure of Impaired Debts, Credit Risk, and
Credit Loss Provisions on Problematic Credit Risk Balances as of December 31, 2010
Pursuant to the directive of the Supervisor of Banks on the measurement and disclosure of impaired debts, credit risk,
and credit loss provisions, starting January 1, 2011, the Bank is required to implement the American accounting standards
(ASC310) and positions of the banking supervision agencies and the Securities and Exchange Commission in the United
States, as adopted in the Public Reporting Directives (see further details in Note 1A to the Financial Statements). The
guiding principles of the new directive represent a substantial change relative to the current directives, which are detailed
in Note 1(G) to the Financial Statements, on the classification and measurement of problematic debts.
The directive sets forth various definitions and classifications of balance-sheet and off-balance-sheet credit risk, rules
for the recognition of interest income from impaired debts, and rules for accounting write-offs of problematic debts.
Among other things, the directive states that a debt should be marked as impaired when the debt is identified for
individual examination and the banking corporation estimates that it will be unable to collect the full amount owed to
it according to the contractual terms of the debt agreement, including any debt identified for individual examination
which is more than 90 days in arrears, and any restructuring of problematic debt, unless a minimum provision for
credit losses was set in respect of the debt before and after the restructuring, based on the method of the extent of
the arrears, in accordance with the appendix to Proper Conduct of Banking Business Directive No. 314 concerning
problematic debts in housing loans.
The Bank shall not accrue interest income in respect of a debt classified as impaired, except as stipulated below with
regard to certain restructured debts; and in any event, no financing income shall be recognized on a debt balance
which has been written off for accounting purposes. In addition, upon classification of a debt as impaired, the Bank
shall cancel all uncollected accrued interest income that has been recognized as income in the statement of profit
and loss. Such debts are defined by the Bank as not-accruing income debt. The debt will continue to be classified
as not-accruing income debt, as long as its classification as an impaired debt is not cancelled. Nevertheless, when
an impaired debt has been formally restructured, and following the restructuring there is a reasonable degree of
confidence that the debt will be repaid and will perform in accordance with its new terms, it shall be treated as an
impaired debt accruing interest income.
Among other matters, the directive establishes additional definitions and classifications of problematic credit risk,
as follows:
Substandard credit risk – Includes balance-sheet and off-balance-sheet credit risk insufficiently protected by the
current sound value and repayment capability of the debtor or of the collateral pledged, if any. Credit risk under
this classification is required to have well-defined weaknesses that jeopardize the realization of the debt, such that
there is a clear possibility that the banking corporation may absorb some loss, if the deficiencies are not corrected.
Off-balance-sheet credit risk is classified as substandard if there is at least a reasonable possibility that the contingent
liability in respect of the off-balance-sheet item will be realized, and, in addition, the debts that may be acquired as a
result of the realization of the contingent liability fit the classification of substandard debts.
50
Credit risk under special supervision – Includes balance-sheet and off-balance-sheet credit risk with potential
weaknesses that should be given special attention by management. If unresolved, the outcome of these potential
weaknesses may be deterioration of the probability of repayment of the credit, or of the credit position of the banking
corporation at some future date. Off-balance-sheet credit risk is classified as under special supervision if there is at
least a reasonable possibility that the contingent liability in respect of the off-balance-sheet item will be realized, and,
in addition, the debts that may be acquired as a result of the realization of the contingent liability fit the classification
of debts under special supervision.
The directive is to be implemented in financial statements for periods beginning January 1, 2011, or later. The directive
is not to be implemented retroactively in financial statements for previous periods. At the initial implementation date,
the Bank will, among other things:
•Perform accounting write-offs of all debts meeting the conditions for accounting write-offs on that date;
•Classify all debts meeting the conditions for such classification as under special supervision, substandard, or
impaired. In this context, it is clarified that despite the definition according to which restructured problematic
debt is impaired debt, the Bank shall not classify as impaired debts restructured before January 1, 2007, provided
that the debt is not impaired based on the terms established in the restructuring agreement;
•Cancel all accrued unpaid interest income in respect of all debts meeting the relevant conditions on that date;
•Adjust the balance of the provision for credit losses in respect of balance-sheet credit risk and in respect of
off-balance-sheet credit instruments as of January 1, 2011 to the requirements of the directive; and
•Examine the need to adjust the balance of current and deferred taxes receivable and payable as of January 1, 2011.
Adjustments arising from the aforesaid actions as of the initial implementation date amount to NIS 964 million (net
of tax) and will be included directly in shareholders' equity, as a reduction of the capital reserves item. The effect on
the capital adequacy ratio is estimated at a decrease of approximately 0.35%.
In determining the anticipated effect on data included in the financial statements as of December 31, 2010, due to
the adoption of the new directives, estimates and assumptions were used, based on the directives and guidelines
published by the Supervisor of Banks (for details of the significant accounting policies applied by the Bank, see Note
1A to the financial statements). The aforesaid estimates and assumptions have a material effect on the pro-forma
data presented in the financial statements. The Board of Management of the Bank believes that these data fairly
reflect the effect of the implementation of the directive on the financial statements, but finds it necessary to note
that, in view of the complexity of the directive and of the processes involved in its implementation, the effect may
differ from the description below.
At the date of implementation of the directive, the manner of presentation of the balance of problematic debts
will change, so that the data presented below are not comparable to the data included in the financial statements
up to and including 2010. Until the date of implementation of the directive, data regarding problematic debts were
presented according to the various items of problematic debt established in the directives of the Supervisor of Banks.
Such balances were presented net, following deduction of the specific provision for doubtful debts (including provision
according to extent of arrears) recorded against each debt.
In the financial statements as of December 31, 2010, the Bank has included information regarding impaired and/or
problematic debts, in accordance with the new directives. Within this information, a recorded balance of problematic
debts is presented, after accounting write-offs of principal and interest and before the deduction of the provision
for credit losses.
51
Information regarding problematic debts according to the new directives:
All balances in the following table are presented in accordance with the new directives on the measurement and
disclosure of impaired debts, credit risk, and credit loss provisions, provided that the directives were implemented
for the first time on December 31, 2010.
December
31, 2010
NIS millions
(1)
Total Problematic Credit Risk :
15,154
Problematic commercial credit risk under the new directives
2,560
Problematic credit risk in respect of private individuals under the new directives
17,714
Total problematic credit risk under the new directives
The breakdown of problematic debts pursuant to the new directive is set out below(1):
December 31, 2010
Balance sheet
Off-balance
sheet
Total
NIS millions
10,715
Impaired credit risk
1,264
11,979
Substandard credit risk
1,942
123
2,065
Credit Risk under special supervision
2,304
1,366
3,670
14,961
2,753
17,714
(1) Presented after the deduction of accounting write-offs and before deduction of the provision for credit losses.
Adjustment between Problematic Debts as included in the Financial Statements as of
December 31, 2010 and Problematic Credit Risk under the new directives:
NIS millions
(1)
17,714
)3,432(
Individual provision for credit losses
)310(
Provision according to extent of arrears
Total problematic credit risk under the new directives net of the individual provision for credit losses Adjustments arising from the implementation of the new directives*
(2)
Total problematic debts as reported as of December 31, 2010 13,972
923 14,895
(1) Presented after the deduction of accounting write-offs and before deduction of the provision for credit losses.
(2) Presented after the deduction of the specific provision for doubtful debts (including provision according to extent
of arrears).
*Composition:
Increase in individual provision in respect of discounted expected cash flows
386
Changes in problematic credit risk balances, net
(mainly accounting write-offs of problematic credit for which no individual provision was made)
293
Increase in individual provision for credit losses 195
Increase in provision according to extent of arrears 52
49
Additional information on the balance of problematic debts, according to the new directives, is presented below:
Non-Performing Assets
Includes assets of the Bank that do not accrue interest income. This information is similar to the balance of
non-performing assets presented in the financial statements of banking corporations in the United States. This data
is provided in order to disclose the part of the assets of the Bank included in the financial statements that does not
accrue interest income.
Balances of non-performing assets as of December 31, 2010:
All balances in the following table are presented in accordance with the new directives on the measurement and
disclosure of impaired debts, credit risk, and credit loss provisions, provided that the directives were implemented
for the first time on December 31, 2010.
December 31,
2010
NIS millions
Non-performing assets:
Impaired credit to the public not accruing interest income:
Examined on an individual basis
Examined on a group basis
Impaired bonds not accruing interest income
Total impaired debts not accruing interest income
Assets received in respect of discharged credit
Total non-performing assets
Impaired debts in restructuring of problematic credit, accruing interest income
Unimpaired debts in arrears of 90 days or more
10,418
26
10,444
147
10,591
271
1,301
Of which:
Housing loans for which a provision according to the extent of arrears exists
870
Housing loans for which a provision according to the extent of arrears does not exist*
299
* Housing loans for which the minimum provision is calculated according to the extent of the arrears, which are in arrears by
more than 3 months and up to 6 months.
Note:
Balance-sheet and off-balance sheet credit risk are presented prior to the effect of the provision for credit losses and prior to the
effect of collateral deductible for the purposes of the indebtedness of borrowers and borrower groups.
Problematic Credit Risk
Pursuant to the instructions of the Supervisor of Banks regarding the implementation of the directive, banking
corporations are required to disclose commercial problematic credit risk only. Non-commercial problematic credit
risk is not expressed in the table presented below.The balance of this credit risk, at the balance-sheet date, amounts to
NIS 2,560 million. Accordingly, total problematic credit risk as of the balance-sheet date amounts to NIS 17,714 million.
It is emphasized that these balances include, among other things, balances in respect of non-performing assets which
are included in the table above.
53
December 31,
2010
NIS millions
Problematic commercial credit risk(1):
12,222
Balance-sheet credit risk in respect of the public
Off-balance-sheet credit risk in respect of the public
(2)
2,747
14,969
Total problematic commercial credit risk in respect of the public
185
Balance-sheet credit risk in respect of others
185
Total problematic commercial credit risk in respect of others
15,154
Total problematic commercial credit risk
(1) Balance-sheet credit risk (credit, bonds, other debts recognized in the balance sheet, and assets in respect of derivatives)
and off-balance-sheet credit risk that is impaired, substandard, or under special supervision, excluding balance-sheet and
off-balance-sheet credit risk in respect of private individuals.
(2) As calculated for the purposes of the limits on indebtedness of borrowers and borrower groups, except in respect of guarantees
provided by a borrower to secure the indebtedness of a third party, prior to the effect of deductible collateral.
Note:
Balance-sheet and off-balance sheet credit risk are presented prior to the effect of the provision for credit losses and prior to the
effect of collateral deductible for the purposes of the indebtedness of borrowers and borrower groups.
Risk indices under the new directives:
Ratio of balance of impaired credit to the public not accruing interest income, to balance of credit to the public*
4.55%
Ratio of balance of unimpaired credit to the public in arrears of 90 days or more, to balance of credit to the public*
0.57%
Ratio of balance of provision for credit losses in respect of credit to the public, to balance of credit to the public*
2.26%
Ratio of balance of provision for credit losses in respect of credit to the public, to balance of impaired credit to the
public not accruing interest income*
Ratio of problematic commercial credit risk in respect of the public, to total credit risk in respect of the public*
49.72%
3.92%
* Before deduction of provisions for credit losses.
Cash on Hand and Deposits with Banks
At the end of 2010, cash on hand and deposits with banks totaled NIS 50.3 billion, compared with NIS 53.1 billion
at the end of 2009, a decrease of approximately 5.2%.
Set out below are details of the balance of cash and deposits with banks:
Balance as of Dec. 31
2010
2009
NIS millions
Cash
Deposits with the Bank of Israel
Change
%
3,230
2,236
44.5%
36,845
31,358
17.5%
5,501
13,095
)58.0%(
Deposits with banks in Israel
334
649
)48.5%(
Deposits with banks abroad
4,421
5,777
)23.5%(
50,331
53,115
)5.2%(
Deposits with central banks abroad
Total
54
Securities
Securities totaled NIS 31.6 billion on December 31, 2010, compared with NIS 28.1 billion at the end of 2009, an
increase of approximately 12.7%, which mainly resulted from an increase in holdings of government bonds.
For further details, see Note 3 to the Financial Statements.
For details regarding liens, see Note 14 to the Financial Statements.
Details of the securities of the Bank Group by balance-sheet classification are set out below:
December 31, 2010
Depreciated
cost
Unrealized
Unrealized
profits from
losses from
adjustments to adjustments to
fair value
fair value
Fair value
Balance-sheet
value
NIS millions
Bonds:
Held to maturity
793
72
Available for sale
25,882
341
For trade
Total bonds
)53(
865
793
26,170
26,170
2,352
*5
*)1(
2,356
2,356
29,027
418
)54(
29,391
29,319
1,724
499
)2(
2,221
2,221
72
*1
*(9)
64
64
1,796
500
)11(
2,285
2,285
30,823
918
)65(
31,676
31,604
Fair value
Balance-sheet
value
Shares:
Available for sale
For trade
Total shares
Total securities
* Charged to the statement of profit and loss.
December 31, 2009
Depreciated
cost
Unrealized
Unrealized
profits from
losses from
adjustments to adjustments to
fair value
fair value
NIS millions
Bonds:
Held to maturity
793
63
)1(
855
793
Available for sale
22,178
450
)114(
22,514
22,514
For trade
Total bonds
3,221
*10
*)3(
3,228
3,228
26,192
523
)118(
26,597
26,535
1,168
309
)1(
1,476
1,476
54
*1
*)11(
44
44
1,222
310
)12(
1,520
1,520
27,414
833
)130(
28,117
28,055
Shares:
Available for sale
For trade
Total shares
Total securities
* Charged to the statement of profit and loss.
55
Set out below are details of the unrealized loss from adjustments to fair value in respect of securities in the availablefor-sale portfolio, as of December 31, 2010:
With respect to non-asset-backed bonds:
Time elapsed since beginning of decline in value
Up to 6
months
6-9
months
9-12
months
Over 12
months
Total
NIS millions
Rate of decrease
Up to 20%
16
15
4
3
38
Over 20%
-
-
-
-
-
Over 30%
-
-
-
-
-
16
15
4
3
38
Total
With respect to asset-backed securities:
Up to 6
months
6-9
months
9-12
months
Over 12
months
Total
NIS millions
Rate of decrease
Up to 20%
-
-
-
15
15
Over 20%
-
-
-
-
-
Over 30%
-
-
-
-
-
Total
-
-
-
15
15
With respect to shares:
Up to 6
months
6-9
months
9-12
months
Over 12
months
Total
NIS millions
Up to 20%
2
-
-
-
2
Over 20%
-
-
-
-
-
Over 30%
-
-
-
-
-
Total
2
-
-
-
2
56
Investments in Bonds in the Available-for-Sale Portfolio and in the Trading Portfolio
The following table provides additional details regarding the Bank Group's investments in bonds, as of
December 31, 2010 (in NIS millions):
Balance-sheet
value
Total balancesheet value
Government bonds:
Israeli government
21,248
285
US government
Governments of developed countries
1,729
Governments of developing countries
278
23,540
Bonds of banks and financial institutions:
Banks in developed countries:
US
595
Switzerland
143
Netherlands
151
Spain
109
Germany
196
UK
85
France
67
Italy
49
100
Other*
1,495
49
Banks in developing countries
Financial institutions other than banks:
975
US**
UK
44
Switzerland
40
Japan
37
France
32
Sweden
20
1,148
2,692
* Includes six countries, with the highest balance at approximately NIS 38 million.
** Includes twelve issuers, with the highest balance of a single issuer at a total of approximately NIS 327 million.
57
Bonds of corporations, other than banks and financial institutions, non-asset-backed, by economic sector:
Industry
415
Real-estate activities
125
Electricity and water
485
Commerce
580
Transportation
42
Communications and computer services
22
Financial services
57
Public services
109
197
2,032
262
Asset-backed securities (ABS)
28,526
Total bonds
The following table lists the sources of price quotes used to determine the fair value of bonds stated in the financial
statements at fair value:
December 31, 2010
Active Internal model or
market system purchased
by the Bank
Indicative
price*
Counterparty
price**
Total balancesheet value
NIS millions
Government bonds
Bonds of banks and financial institutions
Bonds of corporations other than financial
institutions, non-asset-backed
Asset-backed securities (ABS)
Total
23,540
-
-
-
23,540
1,820
-
712
160
2,692
981
580
442
29
2,032
-
-
262
-
262
26,341
580
1,416
189
28,526
* Indicative price – An indication established by the Bank, usually based on price quotes obtained from a specialist external entity
or entities.
** Counterparty price – A price quote obtained from the counterparty to the transaction.
Investments in Shares
The Bank has investments in mutual funds, tradable shares, and nontradable shares, broadly diversified, at a total amount
of NIS 2,285 million as of December 31, 2010, compared with NIS 1,520 million at the end of 2009.
Activity of the Bank Group in Asset-Backed Securities
The Bank, mainly through its New York branch, has invested in ABS transactions, underlying assets of which are mainly
precious metals.The Bank determines the fair value of ABS based on the indicative price received from organizations
that specialize in quotes.
The Bank also has investments in unfunded CDO or synthetic CDO transactions.These are transactions in which risk
transfers are executed through credit derivatives, without a purchase of the CDO itself. Accordingly, these transactions
are treated as derivatives, with changes in fair value charged to profit and loss. The Bank determines the fair value of
unfunded CDO credit derivatives based on a price received from the counterparty to the transaction.
The total notional value of these transactions as of December 31, 2010 amounts to NIS 47 million.The fair value of
the transactions is negative, in the amount of NIS 0.2 million. At the end of 2009, the total notional value of these
transactions amounted to NIS 205 million, and the fair value was negative, in the amount of NIS 9 million. The
remaining transactions mature in the second quarter of 2011.
58
Set out below are data regarding the Bank Group’s holdings in asset-backed securities as of December 31, 2010:
Depreciated cost
(in cost shares)
Unrealized
profits*
Unrealized
losses*
Fair value
NIS millions
277
Commercial and industrial loans**
-
)15(
262
** Mainly includes securities backed by precious metals, held by the New York branch of the Bank.
Set out below are data regarding the Bank Group’s holdings in asset-backed securities as of December 31, 2009:
Depreciated
cost
Unrealized
profits*
Unrealized
losses*
Fair value and
balance-sheet
value
-
32
NIS millions
Mortgage-backed securities (MBS)
(1)
32
-
Asset-backed securities (ABS):
Commercial and industrial loans
303
-
8
23
Total ABS
311
23
)31(
303
Total
343
23
)31(
335
Collateralized debt obligations (CDO)(2)
)31(
-
272
31
* Included in shareholders' equity under the item "adjustments in respect of the statement of securities available for sale at
fair value".
(1) Sold during the first quarter of 2010.
(2) Redeemed in full, at full value, during 2010.
Deposits
Deposits include deposits from the public, government deposits, and deposits from the Bank of Israel and other banks.
2010
2009
Change
233,965
231,993
0.9%
4,834
6,455
)25.1%(
1,335
1,551
)13.9%(
240,134
239,999
NIS millions
Deposits from banks
Government deposits
Total
%
0.1%
Deposits from the public as of December 31, 2010 totaled NIS 234.0 billion, compared with NIS 232.0 billion
at the end of 2009, an increase of approximately 0.9%. This increase resulted from an increase in shekel deposits in
the amount of approximately NIS 9.9 billion and an increase in callable CD deposits in the amount of approximately
NIS 3.2 billion, offset by a decrease of approximately NIS 7.2 billion in CPI-linked deposits and in foreign-currency
deposits, mainly resulting from depreciation of foreign currencies against the shekel and from a decrease in deposits
at the Bank's overseas offices, in the amount of approximately NIS 3.9 billion.
59
Set out below is the distribution of the portfolio of deposits from the public, by linkage segment:
Share of segment in total
deposits from the public as
of December 31
Balance as of
December 31
2010
2010
2009
NIS millions
%
%
%
58.4%
54.6%
2009
Change
NIS millions
136,702
126,783
9,919
7.8%
19,421
21,238
)1,817(
)8.6%(
8.3%
9.2%
Foreign currency (including f.c. linked)
77,637
83,819
)6,182(
)7.4%(
33.2%
36.1%
205
153
52
34.0%
0.1%
0.1%
233,965
231,993
1,972
0.9%
100.0%
100.0%
Non-monetary items
Total
Unlinked shekel deposits from the public totaled NIS 136.7 billion as of December 31, 2010, compared with
NIS 126.8 billion on December 31, 2009, an increase of approximately 7.8%.This increase reflects the ongoing trend
of the public moving from the CPI-linked segment to the unlinked shekel segment, as well as the inflow from the
Bank of Israel.
Deposits from the public in foreign currency (including linked to foreign currency) totaled
NIS 77.6 billion as of December 31, 2010, compared with NIS 83.8 billion on December 31, 2009, a decrease of
approximately 7.4%. This decrease resulted from a decrease in the exchange rates of foreign currencies against the
NIS, and from a decrease in deposits at the Bank's overseas offices.
Deposits from the public by segment of activity:
2010
2009
Change
NIS millions
Change
%
31,250
29,608
1,642
5.5%
107,266
109,857
)2,591(
)2.4%(
20,216
18,928
1,288
6.8%
Commercial Segment
11,113
10,741
372
3.5%
Corporate Segment
55,109
55,942
9,011
6,917
2,094
30.3%
233,965
231,993
1,972
0.9%
Households Segment
Total
)833(
)1.5%(
Bonds and subordinated notes totaled NIS 27.6 billion as of December 31, 2010, compared with NIS 23.1 billion
at the end of 2009, an increase of approximately 19.5%. The increase mainly resulted from the issuance of bonds in
the amount of approximately NIS 4.9 billion and subordinated notes constituting Lower Tier II capital in the amount
of approximately NIS 1.2 billion.The increase in this item was offset by maturities of bonds and notes in the amount
of approximately NIS 1.6 billion during 2010.
60
Description of the Bank Group's Business by Segments of Activity
General – The Segments and Customer Assignment Criteria
The Bank Group operates in Israel and abroad in all areas of banking through the Bank, subsidiaries, branches, and
representative offices, and provides a wide range of banking and financial services to its customers.The Bank also has
investments in equity-basis investee companies.
The activity of the Bank Group is conducted via six principal segments of activity.The division into segments of activity
is based on the types of products and services or on the types of customers included in each of the segments with
which they operate. The Board of Management of the Bank uses this division to make decisions and to analyze
the Group's business results. The segments of activity are presented according to characteristics stipulated by the
Supervisor of Banks.
Criteria for Assignment of Customers to the Segments
Households Segment – Provides a range of banking services and financial products to households. Customers
assigned to this segment are customers with a monthly income of up to NIS 9,000.
Private Banking Segment – Provides a range of advanced banking services, through various channels, and financial
products, including investment advisory services, to private customers of medium to high net worth in Israel and
abroad. Customers assigned to this segment are young customers with a monthly income higher than NIS 7,000, or
who hold investments at the Bank in an amount greater than NIS 75,000, as well as other customers with a monthly
income higher than NIS 9,000 and/or who hold investments at the Bank in an amount greater than NIS 100,000.
Small Business Segment – Customers included in this segment are those with a revenue turnover of less than
NIS 30 million, who use credit facilities (from the Bank or from other lenders) of up to NIS 6 million.
Commercial Segment – Customers included in this segment are customers with a revenue turnover of over
NIS 30 million and up to NIS 400 million annually, or with indebtedness to the Bank of more than NIS 6 million
and up to NIS 100 million, or customers whose total indebtedness (to the Bank or to other lenders) is more
than NIS 6 million, up to a total of NIS 250 million. For customers in the construction and real-estate sector, total
indebtedness is over NIS 6 million and up to NIS 200 million to the Bank, or total indebtedness (to the Bank or to
other lenders) is over NIS 6 million and up to NIS 400 million.
Corporate Segment – Customers included in this segment are customers with a revenue turnover (sales) of over
NIS 400 million, with indebtedness to the Bank of more than NIS 100 million, or customers with total indebtedness
(to the Bank or to other lenders) of more than NIS 250 million. For customers in the construction and real-estate
sector, total indebtedness is over NIS 200 million to the Bank, or total indebtedness (to the Bank or to other lenders)
is over NIS 400 million.
Financial Management Segment – Responsible for the management of the Bank’s assets and liabilities –
management of overall market and liquidity risks, including the management of the Bank's proprietary portfolio, and
support for the development and pricing of financial products in order to market them to customers of the various
segments. The activity of the Bank’s dealing rooms is also included in this segment. Sources of financing are raised
through issues of securities within the segment’s activity. Also attributed to this segment are the results of operations
from investments in shares and investments in equity-basis investees.
Others and Adjustments – Includes all other activities of the Bank Group, each of which does not form a
reportable sector, and adjustments of inter-segmental activity resulting from proceeds of transactions, service, and
product development. This segment also includes activity in credit cards under the responsibility of other banks.
61
It should be clarified that the assignment of the results of operations in the manner described above is occasionally
performed based on criteria in addition to those listed above. For example, a private customer or a company with
a profile and potential for future activity that justify an assignment to the Private Banking Segment or the Corporate
Segment, as relevant, may be assigned to that segment despite the fact that when joining the Bank they do not meet
the criteria established for the segment.
Overseas operations include the results of operations of the banking subsidiaries and the Bank's main overseas
offices, and were assigned to the segments of activity as follows: Customers of Bank Hapoalim (Switzerland) Ltd. and
of Banque Hapoalim (Luxembourg) S.A. – Private Banking; customers of the US and UK branches – Private Banking
and Corporate Segment; Bank Pozitif and its subsidiary JSC Bank Pozitiv – Households Segment and Commercial
Banking Segment.
The results of operations of the Bank Group presented within the segments of activity are divided, as relevant, into the
following product groups: banking and financial services; credit cards; capital market; housing loans; and construction
and real estate.
Rules for the Distribution of Results of Operations among the Segments
The following are the main rules applied in dividing the results of operations among the different segments:
Profit from financing activity – Includes: (1) the spread between the interest received from the segment's
customers and the wholesale interest which the segment is charged in respect of the resource used to provide the
loan to the customer; (2) the spread between the wholesale interest at which the segment is credited in respect of
resources which it makes available to the Bank, and the interest rate paid to the segment's customers in respect of
such resources; and (3) the unindexed wholesale interest on the weighted capital calculated for the return on equity
attributed to the segment, calculated based on the risk-adjusted assets allocated to each segment.
Provision for doubtful debts – A provision for doubtful debts is charged to the segment to which the borrower
against whose debt the provision is recorded belongs.
Operating and other income – Attributed to the segment to which the customer belongs. Income in respect of
computer services provided by the Bank to external entities is attributed to the Others and Adjustments Segment.
Intersegmental operating income – The assigned segment of a customer receiving services from another
segment transfers part of the income to the segment providing the service, according to a transfer price for the
service provided to the customer. Transfer prices are set by the Bank based, among other factors, on market prices
for the service, internal cost estimates, and participation in income derived directly or indirectly from the said service.
Operating and other expenses – Expenses are attributed to each segment of activity, according to predetermined
rules and standard prices, either as an expense identified directly with the activity of the segment, or according to
charging formulas. Standard prices are determined similarly to the establishment of transfer prices, as described above.
Differences formed in calculations between the actual expense calculation of units which are not profit units and
the income attributed to these units based on standard prices are allocated as income or expenses, as relevant, to
the Others and Adjustments Segment. Attribution rules are based on the volumes of activity relevant to the types
of costs in each segment.
Debiting for inter-segmental services – The assigned segment of a customer who receives services from
another segment is debited based on standard prices for services supplied by other segments to its customers. The
costs of the segment providing the service are reduced accordingly, and the costs are concurrently charged to the
segment to which the customer belongs.
Taxes on income – The provision for tax on the results of operation of each segment was calculated according
to the annual effective tax rate.
Return on equity – Indicates the ratio of the net profit of each segment to the shareholders’ equity allocated to
that segment. Shareholders’ equity allocated to the segment includes the sum of two components:
62
A. Shareholders’ equity required in respect of risk-adjusted assets – The balance of risk-adjusted assets
in each segment, multiplied by the ratio of weighted capital, (as calculated for the purposes of calculating return on
equity), to the total balance of risk-adjusted assets.
B. Shareholders’ equity required in respect of operational risk – As calculated for the purpose of capital
adequacy.
Reclassification of Segmental Data
Comparison figures for 2009 were reclassified, as follows:
1.Data on profit from financing activity before provision for doubtful debts, referring to the activity of the segments
overseas, were reclassified, by approval of the Supervisor of Banks, to reflect the attribution of hedges of exchange
rate effects overseas on investments in subsidiaries overseas to the segments in which the companies operate.
In the past, the effects of hedges were attributed to the Financial Management Segment only.
2.The results of credit-card activity were reclassified, due to a change in the model for the allocation of income
and costs of credit cards among the segments. This classification had no effect on the total results of credit-card
activity, but only to the classification of income and expenses among the various segments. In addition, following
a reexamination of the components of financing profit in credit-card activity, financing income in the amount of
NIS 60 million was reclassified, from the Financial Management Segment to the credit card sub-segment of the
various segments.
3.Fees to issuers of other credit cards were reclassified and presented net of operating income, due to a transition
from gross presentation to net presentation of the fees of other clearers.
4.Balances of credit to the public as of December 31, 2009 were reclassified such that credit to customers of other
banks that are not part of the Bank Group, with which Isracard entered into an arrangement, is presented in
the Others and Adjustments Segment, and the average balances of assets and average balances of risk-adjusted
assets were reclassified accordingly. This credit was attributed to other segments in the past. In addition, average
balances of liabilites in credit cards were reclassified.
5.Data on the provision for doubtful debts were reclassified following an amendment of the distribution of the
supplementary provision between the Areas.
6.The results of operations of the distribution of life and home insurance were classified into the housing loans
sub-segment. In the past, the company's results were classified into the banking and financial services sub-segment.
63
Condensed Financial Information on the Segments of Activity
Set out below are the condensed developments in the results of operations of the Bank Group and the principal
balance-sheet items, by segment of activity.
A. Net Operating Profit (Loss)
2010
2009*
NIS millions
Change
%
Households Segment
201
143
40.6%
169
197
)14.2%(
314
206
52.4%
178
160
11.3%
1,267
861
47.2%
)339(
)96.2%(
96
60
60.0%
2,212
1,288
71.7%
Commercial Segment
Corporate Segment
Total
)13(
* Reclassified - For further details, see the section "General – The Segments and Customer Assignment Criteria".
B. Net Profit (Loss)
2010
2009*
Change
NIS millions
%
Households Segment
201
156
28.8%
169
204
)17.2%(
314
208
51.0%
Commercial Segment
178
160
11.3%
Corporate Segment
1,267
862
47.0%
)13(
)340(
)96.2%(
112
66
69.7%
2,228
1,316
69.3%
Total
64
C. Credit to the Public by Segment of Activity
2010
2009*
Change
NIS millions
Change
%
Households Segment
57,666
52,754
4,912
9.3%
23,932
20,077
3,855
19.2%
21,384
19,043
2,341
12.3%
Commercial Segment
21,575
20,894
Corporate Segment
96,760
99,173
3,971
3,847
124
3.2%
225,288
215,788
9,500
4.4%
Households Segment
25,301
22,791
2,510
11.0%
10,166
9,090
1,076
11.8%
18,592
17,232
1,360
7.9%
Total
54,059
49,113
4,946
10.1%
31,764
29,257
2,507
8.6%
8,373
5,381
2,992
55.6%
2,792
1,811
981
54.2%
42,929
36,449
6,480
17.8%
Total
681
)2,413(
3.3%
)2.4%(
Of which, retail credit in Israel excluding housing loans:
Housing loans in Israel:
Households Segment
Total
D. Deposits from the Public by Segment of Activity
2010
2009
Change
NIS millions
Change
%
31.250
29,608
1,642
5.5%
107,266
109,857
)2,591(
)2.4%(
20,216
18,928
1,288
6.8%
Commercial Segment
11,113
10,741
372
3.5%
Corporate Segment
55,109
55,942
9,011
6,917
2,094
30.3%
233,965
231,993
1,972
0.9%
Households Segment
Total
65
)833(
)1.5%(
Set out below are details of the capital allocated to each segment of activity for the purpose of the calculation of
return on equity(1):
2010
2009*
NIS millions
Change
%
Households Segment
3,150
3,017
4.4%
1,138
1,245
)8.6%(
1,651
1,172
40.9%
Commercial Segment
1,850
1,321
40.0%
Corporate Segment
8,488
6,495
30.7%
2,489
4,911
)49.3%(
Others and Adjustments Segment
2,940
1,473
99.6%
21,706
19,634
10.6%
Total
(1) With the adoption of the Basel 2 rules, the capital allocation based on risk-adjusted assets in each segment was calculated for
2010 based on risk-adjusted assets according to Basel 2. The capital allocation for the year ended December 31, 2009 was
calculated based on risk-adjusted assets according to Basel 1.
Off-Balance-Sheet Activity
Set out below is the development in balances of holdings in off-balance-sheet monetary assets of customers of the
Bank Group(1):
2010
2009
Change
NIS millions
Change
%
6,119
5,945
174
2.9%
142,973
126,824
16,149
12.7%
12,731
9,969
2,762
27.7%
Commercial Segment
11,081
7,391
3,690
49.9%
Corporate Segment
546,753
479,256
67,497
14.1%
85,962
84,957
1,005
1.2%
805,619
714,342
91,277
12.8%
Households Segment
Total
(1) Includes customers' holdings in securities portfolios, mutual funds, and assets of provident funds receiving operational services.
66
The Households Segment
General and Segment Structure
The Households Segment provides a range of services to private customers who mostly operate at relatively low
financial volumes. Services are provided to customers of the segment through 276 branches located throughout
Israel, from Kiryat Shmona to Eilat, organized by geographical location into eight regional administrations. These
services are also delivered through direct channels: automated teller machines adjacent to branches and in “Customer
Courts”, “Poalim Online”, “Poalim by Cell Phone”, and “Poalim by Telephone”. These services are also provided to
Bank customers belonging to other segments, as well as to walk-in customers.
The Bank’s activity in the Households Segment abroad also includes the households activity of Bank Pozitif in Turkey
and Bank Pozitiv in Kazakhstan, at immaterial volumes.
In 2010, the Bank opened seven new retail branches tailored to customers' needs, of which three branches under
the Poalim Express brand, offering advanced, quick, accessible banking services to a broad group of households; three
neighborhood branches; and a boutique branch targeted to customers of the Private Banking Segment. In addition,
the Preferred Center was opened to serve this customer segment.
Activities
The principal activities in this segment are banking and financial services, credit cards, the capital market, and
housing loans. Services offered to customers of the segment in the area of "banking and financial services" include
current-account management services, granting of credit for various purposes, deposits, and savings plans. For details
regarding the services provided by the Bank within "credit card" and "capital market" activities, see the section
"Additional Information Concerning Activity in Certain Products", below.
Legislative Restrictions, Regulations, and Special Constraints Applicable to the Segment
The Bank operates within the framework of laws, regulations, and regulatory directives that apply to the banking
system in Israel, under the authority of entities such as the Supervisor of Banks; the Supervisor of the Capital Market,
Insurance, and Savings at the Ministry of Finance; the Antitrust Commissioner; the Israel Securities Authority; and others.
Regulatory Changes in the Area of Housing Loans
Credit classifications for purchasing groups – Due to the unique nature of financing transactions for purchasing
groups, the Supervisor of Banks issued a clarification, on March 25, 2010, regarding the classification and capital allocation
of credit (balance sheet and off-balance sheet) for purchasing groups. Pursuant to the clarification, debts of purchasing
groups shall be classified during construction as debts of corporations in the construction sector, and weighted at 100%
for the purpose of the capital ratio. Upon completion of construction and delivery of keys, the debt shall be classified as a
housing loan, according to the classification of the party taking the credit, such that loans taken by individuals are weighted
at 35% for the purpose of the capital ratio, subject to compliance with additional requirements specified in the directive.
The Bank has implemented this directive beginning with the financial statements as of June 30, 2010. The
implementation of the directive had a negligible effect on the capital adequacy ratio.
Housing credit risk management – In light of the macro-economic developments and the increase in housing
prices, the Supervisor of Banks issued guidelines on July 11, 2010 requiring reexamination of risks in the existing credit
portfolio and of policies in the area of mortgages, to ensure that such policies do not lead to excessive risk-taking.
Among other matters, the guidelines state that banking corporations shall examine the need to increase provisions
for doubtful debts due to the increased risk in housing loans, and shall maintain a supplementary provision of no less
than 0.75% in respect of the balances of housing loans granted from July 1, 2010 forward in which the financing rate
at the date of provision of the credit was greater than 60% of the value of the financed asset.
67
The Bank has implemented these directives beginning with the financial statements as of September 30, 2010. The
implementation of the directives had no material effect.
Floating-rate leveraged housing loans – On October 28, 2010, the Supervisor of Banks issued instructions
regarding floating-rate leveraged housing loans. Under the instructions, the capital allocation for floating-rate housing
loans meeting certain criteria is 100%, instead of the previous rates of 35% or 75%. This directive applies to loans
approved as of October 26, 2010 in which the financing rate at the date on which the credit is granted is higher
than 60%, and the part of the housing loan with a floating rate of interest constitutes 25% or more of the total loan.
These directives shall not apply to housing loans which, on the date granted, totaled less than NIS 800,000, or to
housing loans granted to borrowers meeting the Ministry of Housing's criteria for an eligibility certificate. The Bank
has implemented this directive starting with the financial statements as of December 31, 2010.
Developments in the Segment’s Markets or Changes in the Profile of its Customers
There were no changes in the profile of the segment’s customers in 2010 and until near the date of the financial
statements. For further details, see the subheading "General - The Segments and Customer Assignment Criteria"
above. However, there is an ongoing trend of an increase in banking activity through direct channels (automatic teller
machines, “Poalim by Telephone”, and “Poalim Online”).
Increase in risk/risk policy in the area of mortgages:
According to the Bank's estimates, the risk level in the housing market has increased in the last two years, for the
following reasons:
•The low interest rates in the financial markets since the finacial crisis in the second half of 2008.
•The increase in real-estate prices over the last two years.
Accordingly, the following steps have been taken by the Bank:
•When granting a loan, the Bank presents the customer with a simulation describing a scenario of an increase in
the interest rate, showing the effects of the increase on the borrower's monthly payments.
•The Bank strictly selects mortgage takers who are financially robust.
Technological Changes that May Have a Material Impact on the Segment
As noted above, customers' use of direct channels continued to expand in 2010. Hundreds of thousands of accounts
are active on the “Poalim Online” service, near the date of the financial statements, accessing it millions of times each
month, with over tens of millions of data queries performed each month.
In 2010, the website was expanded and upgraded in several areas:
•This year, a new capital-market area was launched within the Bank's website, at http://finance.bankhapoalim.co.il.
This area provides a solution for customers of the Bank interested in obtaining updates on the capital market
without logging in to their accounts, and for customers of other banks, who can use the wealth of information
on the site as an aid in making decisions in the capital market and experience the range of unique tools and
applications offered by Bank Hapoalim.
The site contains extensive, detailed, current information regarding the Israeli and global capital markets, and offers
customers the use of advanced tools in the online trading arena without the need to enter identifying information.
•The savings management tool – a unique application exclusive to "Poalim Online", allowing customers to manage
their savings in a customized environment with maximum flexibility.
•The deposits and savings wizard – An application that presents the relevant deposits and savings, according to
the customer's settings.The customer chooses the type of savings, necessary amount, and estimated period, and
the wizard presents the most suitable plan.
68
•Multi-channel loans – Loan applications can be submitted through any of the Bank's channels, and the loan can
be executed through any channel, according to the customer's choice. Updates on the status of the loan can be
obtained via cell phone or the Bank's website.
•Setting goals using the budget management tool – With 200,000 customers of the Bank registered to use the
budget management application, this tool continued to develop and increase in sophistication this year. Options
were added allowing customers to set monthly personal goals in each area of their choice, and receive a text
message through the On Time service when they approach their targets.
•Dan the Saver website – As part of the return of the Dan the Saver brand, a website for children was created,
providing accessible, clear financial information for children.
Significant changes occurred during the year in the area of mobile banking, leading the number of users of these
services to soar by hundreds of percent:
A banking application for the iPhone was launched, offering extensive account information and the execution of a
range of transactions, including deposits or withdrawals from daily deposits, fund transfers, instant credit applications,
searching for branches and ATMs based on the customer's location, and exclusive options such as the ability to view
copies of checks (a scanned image of the check with the information of the depositor and the payee), transfer funds
by "bumping" two iPhones together, and order an immediate call from a banker, free of charge, at the push of a button.
An informational application was launched for a range of additional smartphones, including the Blackberry and
Android-based devices. In order to provide easier access to the service, a download server was added to the Bank's
website, allowing customers to enter a telephone number and receive a link to download the application matching
their device.
Another application launched for the iPhone is the Cellular Wallet. This application includes an exclusive feature for
paying electricity and Bezeq bills (users can snap a picture of Bezeq bills and the information is read automatically,
eliminating the need to enter the data manually). In addition, funds can be transferred by "bumping" two iPhones
together. This application is an initial step towards the replacement of wallets by mobile devices and the use of these
devices as means of payment.
Critical Success Factors in the Segment
•Management and development of an available and accessible retail system, tailored to customers' needs, in
branches and direct channels.
•Development of credit solutions, including new loan and mortgage products, suited to market conditions and
customers’ needs, as well as all-purpose loans against liens of homes and multi-channel loans.
•Development of long-term savings products and short-term investment products that address customers' needs,
such as the group of "Dan the Saver" products, the Product of the Month, and additional products according to
changing market conditions.
•Flexibility and sensitivity to changes in the market, including changes required under regulatory directives.
•Service and continual, proactive contact with customers, while ensuring the provision of a comprehensive financial
solution differentially matched to the customer's needs.
•Maintaining operational efficiency while continuing to provide optimal service to customers.
•Skilled professional personnel.
69
Main Barriers to Entry and Exit in the Segment
•Establishment and maintenance of a wide-ranging system of branches deployed throughout the country, or joining
with an entity that has an existing network.
•Training skilled personnel in the various banking products and activities, including housing loans.
•Maintaining personal, continuous relationships with customers.
•A large allocation of regulatory capital for the provision of the various types of credit.
•Continuous information management allowing customers' risk level to be determined.
•Investments in setup, maintenance, and upgrades of advanced technological means.
•Building a strong, leading, credible retail brand.
Alternatives to the Segment’s Products and Services, and Changes Therein
Current accounts can be maintained only with banks; other products and services can also be purchased from banking
institutions elsewhere in the world, other financial institutions, and retail chains.
Current-account offsetting – In June 2010, the Bank announced the launch of the current-account offsetting
service, starting in January 2011.This service applies automatically to all retail customers of the Bank, and is provided
at no added cost. The service will allow positive balances in current accounts to be offset against negative balances,
under certain restrictions, so that interest payments on negative balances in the accounts will decrease, while the
effective interest rate on positive balances will be significantly higher. This is one of the tools offered by the Bank to
its customers to contribute to prudent financial conduct.
Competition
The majority of the segment’s customers maintain one account, at only one bank. These customers are consumers
of credit, and mainly invest in basic investment products (shekel deposits and saving plans). However, the number
of customers maintaining accounts with an additional bank is rising, as the segment has been subject to intense
competition from other banks for several years, with some of these banks focusing on specific sub-sectors within the
segment (e.g. housing loans, public-sector employees, employee groups, and consumer clubs).
Competition intensified further during 2010, centered on salary earning customers, so that banks introduced special
value offers for this target audience. Competition continued to gain momentum as a result of the changes in the market
in the previous year, such as the lowering of barriers to transfers between banks; the entry of insurance companies
and private brokers into the mutual- and provident-fund market (with regard to the capital market reform, see the
section "Additional Information Concerning Activity in Certain Products" below); increased activity in the households
area by other banks; and the entry of money-market funds into competition in early 2008.
Due to the economic crisis in the second half of 2008, competition over resources for the banking system increased;
most attention is focused on long-term deposits and savings plans. In this context, note that the far-reaching amendments
to mutual-fund regulations that took effect in December 2007 to permit the establishment of money-market funds
created a partial alternative to bank deposits, with more and more of the public's funds flowing into this channel.
The effect of this product on competition is likely to increase with any rise in the interest rate in the Israeli economy,
from the current relatively low rates.
In the area of credit cards, competition is high in the various customer segments: card-holding customers
(including competition over contracts with customer clubs), banks that distribute credit cards, and businesses that
accept credit cards. This competition is expressed in the development of new, unique products and services and in
marketing offers aimed at recruiting new customers and expanding or maintaining a share in the activity of existing
customers. In the credit-card market, competition is reflected in initiatives established with leading retail chains to
distribute joint credit cards, including the granting of consumer credit. For further details, see the section "Additional
Information Concerning Activity in Certain Products" below.
70
In the area of housing loans, the main competitors are banking corporations: Mizrahi-Tefahot Bank Ltd.
(hereinafter: "Mizrahi-Tefahot Bank"), Bank Leumi LeIsrael Ltd. (hereinafter: "Bank Leumi"), and Israel Discount Bank
Ltd. (hereinafter: "Discount Bank"). Credit policy in the area of housing loans is adjusted and updated according to
developments and trends in markets globally and in Israel, and their effect on the real-estate sector, on households in
Israel, and on customers' needs. From customers' perspective mortgages are a "price seekers' product", characterized
by a lack of borrower loyalty to a "home bank", whereas banks view mortgages as an "anchor product" used in the
effort to recruit and retain customers.The Bank therefore applies a policy of creating unique value for customers of
the Bank, based on the strategy " take your mortgage at home". In view of the mounting competition in the area of
housing credit in recent years, the Bank has continued to maintain a conservative policy, strictly maintaining the profit
margins that are appropriate in housing credit transactions, according to its understanding, and compromising on
margins only in a highly selective manner.The Bank's share in total housing credit extended to customers (executed)
in 2008, 2009, and 2010 stood at approximately 21%, 18%, and 22%, respectively. The increase in the Bank's market
share for this product resulted from factors including the aforesaid policy of the Bank, despite the intense competition
in this area.
Main Methods of Coping with Competition
•Carefully considered expansion of the network of branches according to the needs of the various population
segments in areas with potential, while selecting the most suitable concept, such as Boutique Branches and Poalim
Express.
•Maintaining a comprehensive view of the customer: risk management and repayment-capability analysis, integration
of mortgages with other banking products, and the creation of product baskets, with an emphasis on offers suited
to the customer’s needs, such as “Zakaut Poalim” and others.
•Reinforcing personal contacts and relationships with customers; use and implementation of DWH tools and CRM
systems allowing the development and absorption of advanced work processes aimed at customer retention and
expanding activity with customers.
•Improving work processes, including the multi-channel perspective, and managing and investing in new systems.
•Reinforcement and development of the supplementary services - "Poalim by Telephone", "Poalim Online", and
advanced mobile applications - in order to improve the value-added services offered to customers.This includes
the introduction and upgrade of the online budget management tool, which is well matched to the needs of
this segment, as well as the new capital market website, the desktop and iPhone capital market applications, the
launch of a Maof simulator designed for a segment with greater interest and activity in the capital market, and the
launch of the Cellular Wallet application.
•Launch of value-added services granting a competitive advantage to the Bank's customers, such as the
foreign-currency service at the airport, which allows customers to order foreign currency in advance over the
Internet or telephone and receive it at the Bank's counter before boarding their flights.
•Launch of a Bank customers' club on bank credit cards – launch of the largest retail club in Israel, under the
concept "enjoy the moment, think of the future", for all Bank customers who have bank credit cards from the
Isracard Group or American Express. Club members enjoy special benefits changed each month and exclusive
advanced tools for better financial management and better savings for the future.
•Leveraging the Bank's technological power to provide a multi-channel service package to customers; launch of the
"With You in the Moment" service, which allows customers using the Bank's website to place an online request
for a telephone call from a banker, and informs the customer of the estimated wait time (usually a few seconds).
71
New Products
Poalim Connect – In March 2011, the Bank will launch an innovative service under the heading "Poalim Connect".
This service will provide a comprehensive solution to the unique needs of direct-channel customers:
•A personal, easily available response from a banker at the Poalim Connect call center, with long opening hours,
through a range of communication channels – chat, incoming and outgoing text messages, telephone, or e-mail –
without giving up the familiar branch.
•An advanced interface presenting all of the important data on the customer's account on one central screen,
with an innovative design suited to new mobile screens and tablet computers, which are becoming a common
platform for mobile Internet use globally and in Israel.
•Poalim Like Me – For the first time in Israel, customers of the Bank will be able to examine their financial conduct
in comparison to a peer group of similar customers.
This solution is designed to strengthen the Bank's competitive positioning, while adopting the values of innovation
and leadership and increasing the potential for retention and expansion of activity with existing customers.
Dan the Saver – In late 2009, the Bank relaunched the familiar and well-loved brand from the 1950s, Dan the Saver.
The brand and the related activities were given a new look and adapted to the 2000s and the current generation of
children, and the Bank is working to encourage savings for children by parents and to increase children's awareness
of prudent financial conduct and savings. As part of this effort, the Bank created a website for children that teaches
the values of savings and banking terminology through games; held workshops for children at community centers
and summer camps; and distributed over half a million coin banks for children.The Bank recently launched automated
machines in which children can deposit their savings, in coins and bills, to a special fee-exempt Dan the Saver account,
and continued to expand the Dan the Saver group of savings products for parents.
Customers
The segment’s customers mainly include households with low to medium financial wealth. Customers are divided
into sub-segments based on parameters of age, financial wealth, and income level. Segment customers also include
customers who take out a loan that involves mortgaging a home as their only activity at the Bank.
Marketing and Distribution
The segment’s marketing and distribution are conducted through advertising campaigns in newspapers, on television,
on the Internet, on the radio, and on billboards. The Bank identifies itself publicly as a professional provider in the
financial field, leading its customers towards financial freedom through guidance and through the continual development
of innovative tools for prudent financial conduct and the encouragement of savings. Customers also receive marketing
messages through the various channels they use at the Bank, both reactively and proactively – face to face or over
the telephone at the branches, at Poalim by Telephone, and on the Poalim Online website. Marketing messages are
also delivered through direct mailings to customers (account-status reports, designated direct mail); self-service
stations (ATMs and Adcan machines); and information presented on plasma screens, informational pamphlets, and
postcards at the branches.
72
Human Capital
The following are details of the distribution of the average number of employee positions within the segment:
Total employee
positions
Of which, positions
charged to the segment
Direct managerial
positions
2010
2009
2010
2009
2010
2009
In Israel
5,195
5,167
870
887
545
545
Abroad
186
166
12
15
41
48
5,381
5,333
882
902
586
593
Total
The number of managerial positions calculated for the segment refers to direct managers in the segment, and includes
branch managers and department heads at branches. The number of positions does not include managers at the
Head Office whose positions were included in the number of indirect positions of the segment and whose cost was
charged to the segment.
Permanent workers trained for various roles, according to the Bank’s needs, are employed at the branches. In addition,
external workers are employed in basic positions (tellers), after receiving appropriate training.
The Bank’s policy is to hire academic degree holding employees as necessary, and there is an ongoing upward trend
in the percentage of degree holders. The Bank also encourages employees to study towards undergraduate and
graduate level degrees, both through assistance in financing their studies and through added vacation days for exams.
The “Poalim by Telephone” call centers employ Bank employees and external employees who have undergone
designated training, including admission examinations for call-center service providers.
Collaboration Agreements
Collaboration agreements with insurance companies: In order to sell building insurance and life insurance in the course
of granting housing loans, as described above, the Bank Group has contracted with several leading insurance companies;
customers are offered the option of buying policies from the said insurance companies through presentation of the
insurance offers of each of the companies. Customers are free to select the most suitable proposal or purchase
insurance elsewhere.
Taxation
With regard to taxation, see the section "Taxation Status" below.
Legal Proceedings
See Note 19 to the Financial Statements.
Objectives and Business Strategy
The Bank aims to improve its profitability by expanding activities with the segment’s customers, recruiting new
customers, and streamlining and improving supporting processes. The following measures are planned in order to
realize this strategy:
•Expansion and management of the retail network based on a multi-channel approach and potential, with the
construction of advanced solutions based both on the branch network and on the accessibility of transactions
and information through a variety of direct channels.
•Continued development of advanced infrastructures for understanding of customers' needs, as a basis for the
development of tailored, differentiated value offers for the different segments.
73
•Preserving the Bank's leadership and competitive advantage through the continued development of its advanced
service philosophy and increase of customer satisfaction.
•Development of activities in the area of housing loans as an anchor product, with a focus on Bank customers,
alongside improvements in sales and marketing processes.
•"Poalim the Right Way" – Implementation of new resource management methods and work processes at the
Bank's branches, aimed at creating conditions leading to operational excellence while improving branch workers'
professional skills in sales and service processes. As part of this process, operational core processes that do not
require direct contact with customers are being transferred from the branches to Back Office Centers, which
specialize and are professionally skilled in operational processes, to separate these processes from customer
service and sales processes in the branches' activity. The first center opened in July 2008. As of the date of the
financial statements, four centers (in Beit Dagan, Nesher, Givat Olga, and Beer Sheba) handle a broad range of
core processes, including currency transfers in foreign and Israeli currency, handling guarantees in general and
the Sale Law in particular, addressing deviations from credit facilities in customers' accounts and collection, check
discounting, subtraction of checks submitted for deferred deposit and check cancellation, check deposits by
machine, check truncation, debit authorizations, foreclosures, various services provided to provident funds, and
more. The centers also provide operational support for the Express Branches and Business Branches. The Bank
estimates that the cultivation of operational expertise and skill at the centers alongside the implementation of
advanced control processes, some of which are automated, will allow a reduction of the level of operational risk
associated with these processes (including survivability and disaster recovery) to which the Bank was exposed
in the work structure prior to the transfer of these activities to the centers.
•The Bank is completing preparations for the provision of pension advisory services at its branches. These
preparations include training dozens of financial and pension advisors who specialize in a comprehensive view of
customers' needs and in the provision of comprehensive, objective advice, and the implementation of an advanced,
unique advisory system allowing convenient processing and presentation of information through all channels.
Outlook for Development in the Coming Year
Network deployment – The Bank will continue the prudent deployment of its branches in areas with regional
potential and populations with potential, matching the format of the branch to the needs of the target population.
The pace of this deployment during the coming years is expected to maintain the Bank's share of total branches.
Business Branches – Within the deployment of the Business Branches for customers of the Bank's Corporate
Area, the potential for conversion of existing branches in the Bank's retail branch network will be examined.
Pension advising – Starting in November 2007, the Bank has provided advice to its customers regarding study funds,
in the financial trajectory. On January 28, 2009, the Bank received a license to provide pension advice to self-employed
customers, which was expanded on March 29, 2009 to include company employees. In 2011, a new advisory system
will be launched, allowing the provision of pension advice to the customers of the Bank.
Upon receiving the pension advisor's license, the Bank was permitted to engage in pension advising, subject to the
provisions of the legal arrangement and the derived permits and directives. In the first stage, this service is only
offered at some branches, to some customers. The number of branches offering pension advising services and the
groups of customers who can receive this service will be expanded gradually.The expansion of this activity depends
on factors some of which do not depend on the Bank, including the establishment of a central system for cataloging
of informational messages and monetary settlement in the area of pension savings, and the enactment of regulations
establishing the rates of distribution fees for the distribution of insurance products. For further details, see the section
"Additional Information Concerning Activity in Certain Products" below.
For further details regarding the receipt of the aforesaid license and the Bank Group's preparations for the provision
of advisory services, see the section "Additional Information Concerning Activity in Certain Products".
74
Set out below are the condensed operating results and principal data of the Households Segment.
For the year ended December 31, 2010
Activity in Israel
Banking
and
financial
services
Activity abroad
Credit
Capital
cards market(1)
Housing
loans
Banking
Capital
and market(1)
financial
services
Housing
loans
Total
19
3,354
NIS millions
for doubtful debts:
- From externals
1,590
87
4
1,575
79
-
-Inter-segmental
82
-
-
)1,360(
)42(
-
1,672
87
4
215
37
-
4
2,019
573
518
69
114
1
2
-
1,277
Total
)15( )1,335(
Operating and other income:
- From externals
-Inter-segmental
Total income
)17(
30
-
-
-
2,174
)71(
605
-
56
359
38
2
4
3,238
)58(
264
23
-
19
2
-
1
309
1,791
426
66
217
89
-
16
2,605
Operating and other expenses:
- From externals
5
-
114
156
)10(
123
)53(
2
)13(
319
Provision for taxes (tax benefit)
on operating profit (loss)
44
60
)4(
47
)15(
1
)4(
129
Operating profit (loss) after taxes
70
96
)6(
76
)38(
1
)9(
190
)3(
-
11
-
3
11
70
93
)6(
)27(
1
)6(
201
5.6%
25.8%
-
5.0%
-
-
-
6.4%
Average balance of assets
18,747
5,162
- 30,362
419
-
183 54,873
Average balance of liabilities
31,022
-
-
22
-
- 31,044
Average balance of risk-adjusted assets
(according to Basel II)
- 18,864
106 41,638
-Inter-segmental
Operating profit (loss) before taxes
Minority interests’ share in (profits) losses
of consolidated companies
Net profit (loss)
Return on equity(2)
-
-
-
-
76
-
-
-
5
17,273
5,011
384
-
Average balance of mutual funds
-
-
2,736
-
-
-
-
2,736
Average balance of securities
-
-
3,155
-
-
23
-
3,178
3,619
801
234
541
150
-
36
5,381
Balance of credit to the public
19,783
5,518
- 31,764
Balance of deposits from the public
31,227
-
Spread from credit granting activity
1,230
Spread from deposit taking activity
313
Other
Average number of employee positions
Total profit from financing activity
before provision for doubtful debt
465
-
136 57,666
-
-
23
-
- 31,250
87
-
215
38
-
4
1,574
-
-
-
)1(
-
-
312
129
-
4
-
-
-
-
133
1,672
87
4
215
37
-
4
2,019
(1) Management, operations, and trust for institutional entities; distribution fees for financial products; and securities activity.
(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.
75
Condensed operating results and principal data of the Households Segment (continued):
For the year ended December 31, 2009*
Activity in Israel
Banking
and
financial
services
for doubtful debts:
- From externals
-Inter-segmental
Total
- From externals
-Inter-segmental
Total income
- From externals
-Inter-segmental
Minority interests’ share in (profits)
losses of consolidated companies
Profit from extraordinary transactions,
after taxes(2)
Net profit (loss)
Activity abroad
Credit
Capital
cards market(1)
65
65
4
4
553
)45(
1,944
296
449
514
17
69
)19(
54
-
1,641
)15(
22
327
170
9
13
Banking
Capital
and market(1)
financial
services
NIS millions
1,906
)1,713(
193
Housing
loans
Total
82
)49(
33
-
43
)37(
6
3,052
)1,315(
1,737
124
8
325
9
2
35
10
2
2
-
6
2
1,199
)56(
2,880
334
62
)8(
186
130
71
)46(
2
28
)24(
2,315
)15(
246
71
99
)3(
)5(
54
76
)13(
)33(
1
1
)7(
)17(
112
134
)3(
10
)2(
97
)5(
76
9
)24(
1
5
)12(
9
143
10
97
13
8
76
)24(
1
)12(
13
156
0.9%
0.9%
29.8%
29.8%
-
4.8%
4.8%
-
-
-
4.7%
5.2%
(according to Basel I)
17,438
29,421
4,604
-
-
28,843
-
382
33
-
296
-
51,563
29,454
16,154
-
4,595
-
2,585
2,846
19,964
-
344
-
1
27
266
-
41,323
2,586
2,873
3,661
771
242
493
121
-
45
5,333
Other
Total profit from financing activity before
provision for doubtful debts
18,145
29,574
1,108
213
115
4,646
65
-
4
29,257
193
-
447
34
33
)1(
1
-
259
6
-
52,754
29,608
1,405
212
120
1,436
65
4
193
33
-
6
1,737
Return of operating profit on equity(3)
Return on equity(3)
952
484
1,436
Housing
loans
(2) In accordance with Bank of Israel’s directives, the segment’s results under this item include the results of the sale of companies and other
assets attributed to the segment’s customers.This item includes the segment's profit from the sale of provident fund management rights.
76
Principal Changes in Net Profit and Balance-Sheet Balances
Net operating profit in the Households Segment totaled NIS 201 million in 2010, compared with NIS 143 million in
the previous year. The increase in profit mainly resulted from an increase in financing profit and in operating income
in Israel; by contrast, the operating expenses attributed to this segment increased, as noted below.
Financing income in 2010 totaled NIS 2,019 million, compared with NIS 1,737 million in the previous year.The 16.2%
increase mainly resulted from an increase in interest spreads, due to an increase in financial spreads on credit and
deposits, as a result of the increase in interest rates in the market; as well as an increase in non-bank credit granted
by the Isracard Group.
Operating income in 2010 totaled NIS 1,219 million, compared with NIS 1,143 million in the previous year. The
increase of 6.6% mainly resulted from an increase in income from credit cards, as a result of an increase in the volume
of transactions.
The provision for doubtful debts totaled NIS 309 million in 2010, compared with NIS 334 million in the previous year,
a decrease of 7.5%, mainly influenced by the improvement in economic conditions in Israel in comparison to 2009.
The segment’s expenses totaled NIS 2,610 million in 2010, compared with NIS 2,300 million in the previous year, an
increase of 13.5%.The increase mainly resulted from an increase in salary expenses, due to a provision for bonuses, as
a result of the improvement in the Bank's profits; and the decrease in salary expenses in the previous year, as a result
of the agreement signed with the employees' union, as detailed in Note 15 to the Financial Statements.The provision
for impairment of goodwill, in the amount of NIS 21 million, recorded at Bank Pozitif and its subsidiary in Kazakhstan
in 2010, which was attributed to this segment, also contributed to the increase in expenses in activity overseas.
Credit to the public totaled approximately NIS 57.7 billion on December 31, 2010, compared with approximately
NIS 52.8 billion on December 31, 2009. The increase of 9.3% mainly resulted from an increase in consumer credit
and housing loans.
Housing loans in Israel totaled approximately NIS 31.8 billion on December 31, 2010, compared with approximately
NIS 29.3 billion on December 31, 2009.
Deposits from the public totaled approximately NIS 31.3 billion on December 31, 2010, compared with approximately
NIS 29.6 billion on December 31, 2009.The increase of 5.5%, mainly resulted from an increase in the volume of savings
plans, as part of the Bank's strategic focus on deposits, mainly through the promotion of the Dan the Saver plan.
The balance of off-balance-sheet monetary assets of the customers of the Bank Group attributed to this segment
as of December 31, 2010 totaled approximately NIS 6.1 billion, compared with approximately NIS 5.9 billion on
December 31, 2009. This balance includes customers' holdings in securities portfolios and mutual funds.
The Private Banking Segment
The Private Banking Segment serves mid-range to high-net-worth customers in Israel and abroad. The Bank offers
services to customers in this segment with complex financial needs, financial services, and solutions, through advanced
products, global asset management, and a special professional service package, which includes meetings and telephones
initiated by the bankers and an advanced advisory system aided by decision support tools. In providing service to
customers in this segment, special emphasis is placed on the formation of close long-term customer relationships.
77
The segment's activity in Israel for customers who keep accounts with the Bank's branches in Israel (with the
exception of one branch, which is assigned to international activity, as detailed below) is conducted through the
Bank's nationwide chain of branches, at differentiated Private Banking Units within the branches (note that in 2009,
the Bank began the deployment of Boutique Branches, which are designed for the segment's customers in Israel), as
well as through the direct channels (see the section "The Households Segment" above). Global Private Banking (GPB)
services are provided both in Israel, at the GPB Center in Tel Aviv, and in a wide range of locations overseas, including
in Europe, the United States, Latin America, Canada, Australia, Hong Kong, and Singapore.These services are provided
through 40 activity centers, including banking subsidiaries, branches, representative offices, and asset-management
subsidiaries (for further details regarding the activity of the Bank Group abroad, see the section "Activity of the Bank
Group Abroad" below).
Activities
The principal activities in this segment are banking and financial services, credit cards, the capital market, and housing
loans. Services offered to customers of the segment in Israel and to GPB customers in the area of "banking and financial
services" include current-account management services, granting of credit for various purposes (in this context, note
that the Retail Area and the International Area are authorized to grant credit in larger amounts to customers of the
Private Banking Segment, taking into consideration the customer's needs and net worth), deposits, and savings plans.
For details regarding the services provided by the Bank in the "credit card" and "capital market" activities, see the
section "Additional Information Concerning Activity in Certain Products," below.
In Israel:
In 2010, the increase in investors' risk appetite of 2009 continued.This increase was expressed in purchases of shares
in Israel and abroad, as well as of corporate bonds, both directly and through mutual funds and index certificates;
conversely, deposits and government bonds decreased, due to the low returns. Another reflection of this trend was
found in the increase in the risk level requested by customers. The negative real interest rate throughout the year
created a need for professional investment solutions matched to each customer's needs. In 2010, customers used
the services of advisors more than in the preceding years.
Overseas:
The Bank has emphasized increasing the assets of GPB customers held at the Bank Group, defining a strategic objective
of increasing the percentage of customers with an asset portfolio of over one million dollars.
In Israel:
Use of the “Poalim Advisor” consulting system expanded in recent years. The system was upgraded and expanded
during this period, including in the area of a new, comprehensive clarification of customers' needs (as required by law),
and mapping of customers' present and future needs, investment objectives, and personal preferences as precisely as
possible.The system provides a customer-oriented advisory process that adds significant value for the advice recipient,
in a professional and high-quality advisory experience. In 2010, a calculator providing an indication of the customer's
expected income flow during retirement was added as an aid to the financial advisory process.
Services in the direct channels were expanded in recent years, including the launch of a designated zone within the
Bank's website which aggregates all information necessary to customers, including details regarding the investment
advisory system, the service system, special benefits, professional information from the Bank's research departments,
and more.
78
For details regarding the CRM (customer relationship management) system at the branches, which began operation
in 2009, see the section "Fixed Assets and Facilities" below.
Overseas:
In 2010, computer systems in Switzerland and Luxembourg were upgraded; the process of selecting a new computer
system for the London branch was completed; and a decision was made to replace the existing system at the branch.
In Israel:
•High professional quality of employees.
•Customer-focused personal service, with a strong emphasis on personal relationships, high-quality service, and
tailoring to customers’ needs.
•A proactive service package tailored to the customer, including meetings with the banker and/or advisor according
to the customer's needs.
•Highly flexible service, according to changing market conditions in Israel and worldwide.
•An advanced, available, accessible branch network suited to customers' needs.
•An advanced system of direct banking services (Internet, “Poalim by Telephone”, the “On Time” service for
information and alerts delivered by cell phone, advanced mobile applications, and ATMs).
•Investment advising at a high professional level, with the aid of advanced decision-making support systems.
•This year, a new capital-market area was launched within the Bank's website, at http://finance.bankhapoalim.co.il.
This area provides a solution for customers of the Bank interested in obtaining updates on the capital market
without logging in to their accounts, and for customers of other banks, who can use the wealth of information
on the site as an aid in making decisions in the capital market and experience the range of unique tools and
applications offered by Bank Hapoalim.
Overseas:
•High professional quality of employees.
•Personal service, focused on customers’ needs.
•A wide variety of products, carefully selected from the world’s best producers in accordance with the
open-architecture policy (i.e., offering banking products produced by others), implemented through PAM
Companies (see the section "Activity of the Bank Group Abroad" below), while tailoring the supply of products
to customers’ tastes and to prevalent international standards in the industry.
In Israel:
•Establishment of a broadly deployed nationwide system of branches, while differentiating service to these
customers.
•Training skilled personnel to provide financial advice to customers, in accordance with the provisions of the
Advising Law.
•A diverse product range suited to customers’ needs.
•High investment in the construction of a strong, leading, credible brand.
79
Overseas:
The activity of the Private Banking Segment involves long-term relationships with its customers. In order to be a
significant competitor in this segment, financial institutions must meet several criteria:
•Wide geographical deployment, including offices and branches around the world.
•Employment of professional, skilled personnel.
•Investments in setup, maintenance, and upgrades of infrastructures.
•A system of product initiation and distribution.
•Compliance with regulatory restrictions.
There are no alternatives for the majority of the segment’s products and services, although there is competition
between banking and financial institutions, in Israel and internationally.The Bank and the Bank Group principally work
to improve processes and introduce technological improvements, with the aim of improving service and expanding
the offering of banking products.
Customers
Private Banking customers in Israel have proven and/or future potential for financial wealth. Customers are divided
into eight segments (including foreign residents) based on parameters of age, financial wealth, and/or income level.
Global Private Banking customers are high-net-worth private customers who are foreign residents, usually with a
Jewish/Israeli affinity.
In Israel, marketing and distribution are performed through private-banking units at branches, face to face and by telephone,
and via “Poalim by Telephone”, both through initiated contacts and in response to customers’ calls. Marketing and
distribution activities are also conducted through “Poalim Online”. Marketing and distribution to private-banking customers
in Israel are also carried out through advertising campaigns in newspapers, on television, on the radio, and on billboards.
Marketing messages are also communicated through direct mailings to customers (account status reports, enclosures,
designated direct mail); self-service stations (ATMs and “Adcan” self-service machines); the “Poalim Online” website;
and signs, videos, informational pamphlets, and postcards at the branches. In addition, mass marketing channels such as
television, newspapers, radio, and the Internet are occasionally used to market value offers of the Bank to customers.
Marketing to customers abroad is conducted via the Bank’s various representative offices, subject to the relevant laws
in Israel and in the countries where the activity is conducted.
Another marketing means is the Platinum and Preferred clubs, which are targeted to high-net-worth customers.These
customers receive one-on-one service individually tailored to each client according to the client's needs. Customers
receive a unique marketing and professional service package adapted to their needs and preferences.
•The clubs emphasizes open architecture and individually tailored products.
•Special centers where services can be provided in privacy and in a relaxed and pleasant environment.
•Customers are offered international investment portfolio management services based on globally prevalent
models through the international desk at Peilim.
•As a special service for Platinum Club members only, meetings with customers are held at the customer’s preferred
location, using secure mobile banking that allows transactions to be executed outside the Bank’s offices.
Platinum customers are offered the Centurion card – the world’s most prestigious credit card, which allows members
•
to enjoy international concierge services and provides benefits and upgrades in various areas of travel and tourism.
•The Platinum Club supports leading cultural and artistic institutions, and customers benefit from unique cultural
events and experiences.
80
Competition
Some 40% of Private Banking customers in Israel maintain accounts with more than one bank.The entrance of insurance
companies and private brokers into the mutual and provident-fund market, specifically, and into sales of financial
products in general, as well as the removal of barriers to switching from bank to bank, have increased competition
over customers in this segment. As a result, competition over these customers within the banking system is highly
aggressive, as expressed in benefits in account management terms, price levels, advertising campaigns, an emphasis
on personalized service and service packages tailored to customers, investment advisement at an exceptionally high
level, and innovation in products and technology in order to provide leading services.The competitors in this segment
are the four other major banking groups, as well as other banks operating in Israel, foreign banks, and investment
houses. However, following the outbreak of the financial crisis, a decrease in the pace of competition was apparent,
as some non-bank financial institutions and foreign banks outside Israel were perceived as less stable. With regard to
competition in the area of housing loans, see the section "The Households Segment" above.
Overseas, Global Private Banking is characterized by a high level of competition, which is increasing over time, as the
high-net-worth customer segment is attractive to many financial institutions. The main competitors in this area are
Swiss banks specializing in private banking, and Israeli banks operating overseas. Competition is primarily focused
on providing a high level of personalized, professional service; a range of products and services not inferior to those
offered by competitors; and the ability to respond rapidly to changes in the market and in customers’ tastes.
Human Capital
The following are details of the distribution of the average number of employee positions in the segment:
Total employee
positions
Of which, positions
charged to the segment
Direct managerial
positions
2010
2009
2010
2009
2010
2009
In Israel
3,015
2,931
732
729
351
338
Abroad
548
528
51
36
208
199
3,563
3,459
783
765
559
537
Total
The average number of employee positions in the segment in 2010 was 3,563 positions, compared with 3,459 positions
in 2009.The increase mainly resulted from employees hired for investment advisors' training and management courses
in the branch network.
The Bank’s employees abroad are experts in private banking or in international credit products. Many of them hold
academic degrees. In order to comply with the standards dictated by the global market, employees receive training
and enrichment in the areas of their work as well as in local regulatory requirements. These employees are also
familiar with customers' needs and preferences, and speak their language.
Legal Proceedings
See the Households Segment section, above.
Material Agreements
For details regarding the sale of the rights of the Bank Group to provident funds and mutual funds which were under
its management, see the section "Additional Information Concerning Activity in Certain Products" below.
81
The Bank has collaboration agreements with international financial entities that are leaders in the area of global
investments. Under these agreements, the Bank Group offers Global Private Banking customers a range of funds
managed based on an analytical portfolio manager selection model, designed to select the best portfolio managers
operating in each sector and market.
The Bank aims to improve its profitability by expanding its activity with the customers of this segment, recruiting new
customers, and streamlining and improving the supporting processes.
In Israel:
•Strengthening personal relationships with and knowledge of customers, in order to retain and extend activities
with existing customers and recruit potential customers.
•Continued deployment of the retail system in areas with potential, matched to the customer segment.
•Creation of a unique value offer suited to customer's differentiated needs.
•Improvement of the quality of customer service and enhancement of customer satisfaction and loyalty.
Overseas:
Growth while developing the capabilities of customer relationship managers, and expanding the volume of activity
and assets of foreign resident customers and Israeli customers operating abroad, including through the expansion of
the service package and the range of products offered to customers, and expansion of the customer base.
Outlook for Development in the Coming Year
Over the last few years, a new approach was formulated and implemented in the Private Banking Segment, in view of
the changing competitive environment in which the Bank operates, where competition for private-banking customers
is intensifying. The goal of the new approach is to create an innovative experience for customers, solidifying the
Bank’s competitive advantage and preserving its status as the leader in this market. This approach is based on key
change catalysts such as providing differential service packages tailored to customers’ different needs, formulating a
service philosophy, defining an organizational structure compatible with customers’ needs, transitioning to planned
and proactive service, improving the appearance of branches, improving response in the direct channels, including
the telephone call center, and empowering the unit’s bankers and advisors.
Note that it is possible that the Bank may not succeed in realizing the plans described above, due to causes including
legislative and/or regulatory directives, especially including all matters related to the training of a sufficient number of
pension advisors and/or the intense competition over customers in this segment.
82
Condensed operating results and principal data of the Private Banking Segment are set out below:
Activity in Israel
Banking
and
financia
services
Credit
cards
Activity abroad
Capital
market(1)
Housing
loans
Banking
and
financial
services
Capital
market(1)
Total
NIS millions
Profit from financing activity
before provision for doubtful debts:
- From externals
-Inter-segmental
Total
1,414
20
20
-
-
785
20
20
267
293
696
)629(
241
427
-
2,122
)207(
)289(
-
)1,125(
34
138
-
997
7
155
181
1,599
- From externals
)178(
3
-
1,025
313
538
44
293
176
2,389
10
13
-
2
4
-
29
- From externals
989
210
310
19
320
216
2,064
-Inter-segmental
18
-
-
-
-
-
18
8
90
228
23
)31(
)40(
278
3
34
87
9
)11(
)15(
107
Minority interests' share in (profits)
5
56
141
14
)20(
)25(
171
-
)2(
-
-
Net profit (loss)
5
54
141
14
)20(
1.1%
26.6%
-
4.1%
)12.4%(
-
14.9%
-
22,301
-Inter-segmental
Total income
)27(
-
)5(
)207(
Return on equity(2)
-
)25(
)2(
169
6,625
2,910
-
6,819
5,947
87,245
-
-
-
21,270
6,071
2,825
-
4,189
5,450
-
18,535
Average balance of other assets
under management
-
-
31,185
-
-
1,524
32,709
-
-
268
-
-
938
1,206
-
-
70,627
-
-
1,887
353
730
45
350
198
3,563
7,056
3,110
-
8,373
5,393
-
23,932
- 108,515
30,235 100,862
86,439
-
-
-
20,827
224
20
-
34
62
-
- 107,266
340
539
-
-
-
71
-
610
Other
22
20
5
47
Total profit from financing activity before
785
20
20
34
138
997
(2)In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.
83
Condensed operating results and principal data of the Private Banking Segment (continued):
Activity in Israel
Banking
and
financial
services
Activity abroad
Credit Capital Housing
loans
cards market(1)
Banking Capital
and market(1)
financial
services
Total
NIS millions
Profit (loss) from financing activity before provision
for doubtful debts:
- From externals
-Inter-segmental
Total
- From externals
-Inter-segmental
Total income
- From externals
-Inter-segmental
Minority interests’ share in profits of consolidated companies
Net profit from extraordinary transactions, after taxes(2)
Net profit (loss)
)1,305(
2,024
719
17
17
23
23
195
)175(
20
449
)296(
153
272
)24(
967
14
254
271
10
685
)172(
536
-
5
1
26
1
134
287
8
155
)7(
148
-
1,505
)202(
2,235
33
874
21
58
157
104
278
258
16
9
348
)69(
162
)14(
1,835
21
346
107
151
151
7
158
4
5
5
5
)25(
)44(
)44(
)44(
)5(
)9(
)9(
)9(
24
34
34
34
43
61
)1(
60
60
-
)621(
1,553
932
148
198
)1(
197
7
204
Return on equity(3)
10.1%
10.1%
20.4%
20.4%
-
1.2%
1.2%
)20.6%(
)20.6%(
-
Average balance of assets of mutual funds
Average balance of other assets under management
5,997
88,307
2,595
-
-
4,346
-
6,046
25,762
- 18,984
- 114,069
5,110
-
2,582
-
26,949
308
60,980
4,055
-
2,950
-
1,476
1,500
29,151
14,697
28,425
1,808
90,131
1,819
328
743
41
357
171
3,459
6,471
85,173
201
518
-
2,619
17
-
23
5,381
20
-
719
17
23
20
Other
Total profit from financing activity before provision
for doubtful debts
5,606
24,684
79
80
)6(
153
15.8%
16.4%
- 20,077
- 109,857
317
598
17
-
932
(2) In accordance with the Bank of Israel’s directives, the segment’s results under this item include the results of the sale of companies
and other assets attributed to the segment’s customers. This item includes the segment’s profit from the sale of management
rights of provident funds.
84
Net profit of the Private Banking Segment totaled NIS 169 million in 2010, compared with NIS 204 million in the
previous year, a decrease of 17.2%. The decrease mainly resulted from an increase in operating expenses, as noted
below. This decrease was offset by an increase in financing and operating income in Israel.
Financing income in 2010 totaled NIS 997 million, compared with NIS 932 million in the previous year. The 7.0%
increase mainly resulted from an increase in interest spreads, as a result of an increase in financial spreads on credit
and deposits, due to the increase in interest rates in the market.
The segment’s operating income totaled NIS 1,392 million in 2010, compared with NIS 1,303 million in the previous
year, an increase of 6.8%. The increase mainly resulted from an increase in income from credit cards in Israel, due to
an increase in the volume of transactions; and an increase in operating income overseas, as a result of an increase in
income from customers’ activity in securities.
The provision for doubtful debts totaled NIS 29 million in 2010, compared with NIS 33 million in the previous year.
The decrease resulted from the segment's activity overseas.
The segment’s expenses totaled NIS 2,082 million in 2010, compared with NIS 1,856 million in the previous year,
an increase of 12.2%, mainly due to a provision for bonuses, as a result of the improvement in the Bank's profits, as
well as the decrease in salary expenses in the previous year, as a result of the agreement signed with the employees'
union, as detailed in Note 15 to the Financial Statements.
NIS 20.1 billion on December 31, 2009. The 19.2% increase mainly resulted from an increase in housing loans, which
totaled approximately NIS 8.4 billion, compared with approximately NIS 5.4 billion on December 31, 2009.
NIS 109.9 billion at the end of 2009, a decrease of 2.4%. The decrease mainly resulted from a decrease in deposits at
the overseas offices, and in deposits in foreign currency.This decrease was offset by an increase in the volume of savings
plans, as part of the Bank's strategic focus on deposits, mainly through the promotion of the Dan the Saver plan.
The balance of off-balance-sheet monetary assets of the customers of the Bank Group attributed to this segment as
of December 31, 2010 totaled approximately NIS 143.0 billion, compared with approximately NIS 126.8 billion on
The Small Business Segment
The Bank provides a range of banking services and financial products to small businesses. The segment's activity is
conducted through the Bank's nationwide branch network and through the direct channels (see the section "The
Households Segment" above). The segment also provides services to business customers of the Corporate and
Commercial Segments.
Activities
The principal activities in this segment are banking and financial services, credit cards, the capital market, and
housing loans. Services offered to customers of the segment in the area of "banking and financial services" include
current-account management services, granting of credit for various purposes (the maximum credit which the
segment’s employees may authorize, taking into account customers’ needs, financial condition, and financial wealth,
is up to a total of NIS 6 million), deposits, and savings plans. Services provided to the segment's customers include
basic transactions similar to those offered to private customers in the Households Segment, as well as more complex
transactions such as check discounting, foreign currency, foreign trade, and other financing transactions. For details
regarding the services provided in the areas of "credit card" and "capital market" activities, see the section "Additional
Information Concerning Activity in Certain Products", below.
85
There were no material changes in the profile of the segment’s customers in 2010. However, the trend of transition
to direct banking channels, such as the Business Online service and check-deposit machines, continues.
A new marketing-oriented business website was launched for retail customers in 2010, encompassing the range
of services provided to customers who use Poalim Business Online. Over 42,000 business clients use the business
website each month, and 90% of the customers registered for the business website use it at least once a month.
•Establishment of a broadly deployed nationwide system of branches.
•A diverse product range suited to customers' needs.
•Training skilled personnel in the various banking products and activities.
•High investment in the construction of a strong, leading, credible brand.
There are no alternatives for the majority of banking products, although there is competition between other financial
institutions in some products and services, and from other banks over all services to customers.The Bank principally
works to improve processes and introduce technological improvements, with the aim of improving service and
expanding the offering of banking products.
New Products
Check deposit by transmission – The Bank's business customers can clear checks online, 24 hours a day, seven
days a week, from the business' computer directly to the customer's account.The Bank provides its business customers
with a check reader and a secure, encrypted virtual safe, free of charge.These ensure quick, efficient intake and deposit
of the checks in the bank account without the need to input the magnetic strip of each check.The customer transmits
the files directly from the business to the Bank without the need to use physical media, and within an hour of the
receipt of the checks by the branch and approval via the branch's system, receives confirmation of the deposit of
the checks in the account. This allows the customer to perform immediate monitoring of the number and amount
of checks deposited in the account.
Customers
The Small Business Segment serves customers from a wide range of economic sectors with a low volume of business
activity, with a low to medium level of complexity.
Marketing and distribution in Israel are conducted face to face or over the telephone at the Bank's branches, and at
Poalim by Telephone, both proactively and in response to customers' calls. Marketing and distribution activities are
also carried out through the Poalim Online website.
86
Competition
Competitors in this segment are the four other major banking groups as well as medium-sized banks in the banking
system. Activity in this segment requires expertise and in-depth knowledge of the customer in order to manage
credit risks; competition in this segment is therefore primarily among banks only, for overall activity with customers.
Human Capital
Total employee positions
2010
2009
1,892
1,891
Of which: positions charged to the segment
449
439
Of which: direct managerial positions
275
273
The number of managerial positions calculated for the segment refers to direct managers in the segment, and includes
branch managers and department heads at branches. The number of positions does not include managers at the
Head Office whose positions were included in the number of indirect positions of the segment and whose cost was
charged to the segment.
The business units employ specially trained corporate-credit professionals, according to the banking needs of business
customers.The Bank’s policy is to recruit mainly academic degree holding employees, and there is an ongoing upward
trend in the rate of degree holders. The Bank also encourages employees to advance their education, and provides
assistance for undergraduate and graduate level studies.
Legal Proceedings
See the Households Segment section, above.
•Expand the customer base and increase activity with existing customers.
•Provide financial solutions personally tailored to customers.
•Strengthen relationships with and knowledge of customers.
•An optimal mix of personal service and technological means.
87
Condensed operating results and principal data of the Small Business Segment are set out below:
Activity in Israel
Banking and
financial
services
Credit
cards
Capital
market(1)
Housing
loans
Total
1,457
NIS millions
Profit from financing activity before
provision for doubtful debts:
- From externals
-Inter-segmental
Total
1,314
38
3
102
-
-
)82(
957
38
3
20
1,018
406
103
58
3
570
)357(
)439(
- From externals
-Inter-segmental
Total income
)16(
1
1,320
)43(
141
-
45
24
1,530
)58(
134
4
-
1
139
828
70
40
6
944
- From externals
-Inter-segmental
)57(
415
67
5
17
504
156
26
2
6
190
Net profit
259
41
3
11
314
19.8%
37.7%
-
4.7%
19.0%
16,711
1,032
-
2,319
20,062
19,745
1,928
-
-
21,673
Return on equity(2)
)57(
18,251
1,514
2,881
22,646
-
-
2,796
-
2,796
-
-
19
-
19
-
-
8,174
-
8,174
1,664
123
91
14
1,892
17,489
1,103
-
2,792
21,384
20,216
-
-
-
20,216
731
38
-
20
789
128
-
-
-
128
98
-
3
-
101
957
38
3
20
1,018
Other
88
Condensed operating results and principal data of the Small Business Segment (continued):
Activity in Israel
Banking and
financial
services
Credit
cards
Housing
loans
Total
3
67
877
Capital
market(1)
NIS millions
- From externals
-Inter-segmental
791
16
47
-
-
)56(
838
16
3
11
868
- From externals
394
88
56
3
541
-Inter-segmental
)37(
)16(
-
)53(
Total
)9(
Total income
-
1,195
104
43
14
1,356
237
3
-
-
240
52
36
4
849
- From externals
757
-Inter-segmental
)85(
286
49
7
10
352
119
20
3
4
146
167
29
4
6
206
-
-
2
-
2
167
29
6
6
208
16.8%
32.7%
-
6.8%
17.6%
Return on equity
16.8%
32.7%
-
6.8%
17.7%
15,469
921
-
1,479
17,869
19,108
1,834
-
Profit from extraordinary transactions, after taxes(2)
Net profit
(3)
)85(
20,942
15,210
917
-
1,081
17,208
-
-
2,211
-
2,211
-
-
22
-
22
Average balance of securities in custody
-
-
6,189
-
6,189
1,665
118
98
10
1,891
16,303
929
-
1,811
19,043
18,928
-
-
-
18,928
662
16
-
11
689
85
-
-
-
85
Other
91
-
3
-
94
838
16
3
11
868
(2) In accordance with Bank of Israel’s directives, the segment’s results under this item include the results of the sale of companies
and other assets attributed to the segment’s customers. This item includes the segment’s profit from the sale of management
rights of provident funds.
89
Net profit in the Small Business Segment in 2010 totaled NIS 314 million, compared with NIS 208 million in the
previous year. The increase in profit mainly resulted from an increase in financing income and a decrease in the
provision for doubtful debts attributed to this segment, as noted below. An increase in operating expenses offset
this trend.
Profit from financing activity in 2010 totaled NIS 1,018 million, compared with NIS 868 million in the previous year.
The 17.3% increase resulted from an increase in financial spreads on credit attributed to this segment, as a result of
the increase in interest rates in the market, as well as an increase in non-bank credit in the area of factoring, provided
by the Isracard Group.
The segment’s operating income in 2010 totaled NIS 512 million, compared with NIS 488 million in the previous
year. Most of the 4.9% increase is accounted for by an increase in income from credit cards, as a result of an increase
in the volume of transactions.
The decrease mainly resulted from a decrease in the specific provision and in the supplementary provision attributed
to this segment, mainly influenced by the improvement in economic conditions in Israel in comparison to 2009, which
led to improved repayment capability and an increase in the value of collateral of many customers.
The segment’s expenses totaled NIS 887 million in 2010, compared with NIS 764 million in the previous year, an
increase of 16.1%. The increase mainly resulted from a provision for bonuses, as a result of the improvement in the
Bank's profits, as well as the decrease in salary expenses in the previous year, as a result of the agreement signed with
the employees' union, as detailed in Note 15 to the Financial Statements.
Credit to the public as of December 31, 2010 totaled approximately NIS 21.4 billion, compared with approximately
NIS 19.0 billion on December 31, 2009, an increase of 12.3%.The increase mainly resulted from an increase in housing
loans and credit cards.
Deposits from the public as of December 31, 2010 totaled approximately NIS 20.2 billion, compared with
approximately NIS 18.9 billion on December 31, 2009, an increase of 6.8%.
The Commercial Segment
The Commercial Segment provides a range of banking services to middle-market business customers. The main
sectors of the economy in which the segment operates are industry, commerce, and construction and real estate.
Most of the segment’s customers operate in the local market, while some are engaged in imports and exports. The
segment operates through eight Business Centers deployed throughout Israel. Several work teams operate within
each Business Center, and are responsible for managing routine business relationships with customers. Each team is
headed by a Customer Relationship Manager whose main banking specialization is in the area of business credit. In
addition, each Business Center has a certified investment manager and a legal advisor to supplement the activity of
the Business Center. Segment customers’ accounts are managed at the Bank’s branches, which provide the full range
of required operational banking services. A network of Business Branches was established in response to the business
needs of Commercial Segment and Corporate Segment clients.The network consisted of 13 branches at the end of
2010; additional branches are planned to open during 2011.
The Bank’s activity in the Commercial Segment abroad also includes the activity in this area of Bank Pozitif in Turkey,
which provides credit and banking services.
A unit within the headquarters of the Corporate Area analyzes credit applications of the segment’s customers and
provides independent recommendations regarding the terms for approval of the applications. This unit operates
outside the Commercial Division and is not dependent on the Business Centers.
90
Activities
The principal activities in this segment are banking and financial services, and construction and real estate. Services
offered to customers of the segment in the area of "banking and financial services" include credit for routine operations
and investment financing, guarantees, letters of credit, foreign trade, and transactions in financial and derivative
instruments, in accordance with a credit policy which is validated annually. Investment services are also provided, in
the various channels: foreign currency, shekels, securities, etc.
In January 2009, the Bank signed a two-year agreement with the Accountant General of the Ministry of Finance,
which was later extended for an additional year. Under this agreement, the Bank provides loans to customers of the
segment who meet the criteria established.The Bank also signed an agreement with the Manufacturers' Association
of Israel, under which the Employers' Reciprocal Fund of the Manufacturers' Association provides a deposit serving
as collateral for medium-sized businesses that are members of the Manufacturers' Association, as a substitute for the
collateral required of the customer.
The Commercial Segment also provides banking services to clients who operate in the construction and real-estate
sector. These banking services include the granting of credit to customers, as well as the issuance of guarantees of
various types, including guarantees to buyers of homes pursuant to the Sale Law.
2010 was marked by growth, and the Israeli economy, including the segment's customers, showed resilience in
confronting the global financial crisis. The segment's customers benefited from an increase in private consumption,
an increase in GDP, and the demand in the construction and real-estate sector. By contrast, the high exchange rate of
the shekel against the US dollar and the other major currencies detracted from the profitability of some exporters.
Despite the positive data, there are still numerous risks to continued growth in Israel, primarily influenced by the
economic developments globally and by the geopolitical situation in the region.
The activity of Bank Pozitif in Turkey is affected by the growth and improvement in the condition of the Turkish
economy, on one hand, and by the geopolitical conditions and Israel-Turkey relations, on the other hand.
The segment makes use of technological systems to manage processes of analysis of customers’ condition, control,
and marketing. The Bank applies an ongoing process of improvement in these systems. This process also includes
components relevant to handling the segment’s customers.The enhancement of the quality and sophistication of the
Bank’s systems is an important factor in improving the level of service to the segment’s customers and in creating
additional possibilities for expanding activities with them.
•Identification of customers’ needs and adaptation of banking services to such needs – correctly identifying the
customer’s full range of banking needs, correctly matching banking products to customer's business needs, and
providing them in real time.
•The ability to provide comprehensive service suited to each customer – reducing the gap between the customer’s
expectations of the service provided and the actual quality of service (response time, professionalism, etc.), based,
among other things, on technological capabilities for service delivery.
•The ability to manage and control risks (primarily credit risks) in real time – credit risk is the most significant risk
factor in the segment’s operations. Management of these risks and an appropriate control system are essential to
the minimization of risks, to the extent possible, and to attaining adequate profitability in the segment’s operations.
•Establishment of a credit policy congruent with the Bank’s risk approach and customers’ financing means, while
monitoring performance.
91
•Establishment of a broadly deployed nationwide system of branches.
•Training skilled personnel in the various banking products and activities.
•The segment's activity, wherein risk-adjusted assets are a significant part of the mix, requires capital to be locked
in on a substantial scale.
Alternatives to bank credit for some of the segment's customers are public and private offerings, and credit granted
by non-bank financial institutions. The positive trend in bond offerings that began in early 2009 continued in 2010,
following a freeze in late 2008. In October 2010, the Supervisor of the Capital Market at the Ministry of Finance
established rules, in accordance with the recommendations of the Hodek Committee, regarding investments in
corporate bonds by institutional entities. This led to a decrease in offerings in the fourth quarter.
Customers
For details regarding the manner of assignment of customers to this segment, see the section “General – The Segments
and Customer Assignment Criteria” above.
Marketing of banking products and services and distribution to customers are conducted through the Marketing
Strategy and Business Development Unit within the Corporate Area, the Sales Management Department in the
headquarters of the Commercial Division, the Business Centers, and the network of branches at which customers’
accounts are maintained.
The communication channels commonly used in local banking are available to customers, such as branches, “Poalim
by Telephone”, Internet, etc. Marketing activities are conducted via unmediated contact between Bank employees
and customers, without material dependence on entities external to the Bank.
Competition
The level of competition in the segment is high, encompassing the four major banking groups as well as medium-sized
banks. In the area of credit, competition is reflected both in interest rates and fees offered to customers by the
competing banks, and in related terms such as the financing rates which the competitors are willing to approve.
92
Human Capital
Total employee
positions
Of which, positions charged
to the segment
Direct managerial
positions
2010
2009
2010
2009
2010
2009
In Israel
511
445
93
85
104
96
Abroad
72
112
4
15
40
57
583
557
97
100
144
153
Total
The average number of employee positions in the segment in 2010 was 583, compared with 557 positions in 2009.
The increase in the number of positions resulted from the opening of business branches, in response to the business
needs of customers in the Commercial Segment and the Corporate Segment.
The number of managerial positions calculated for the segment refers to direct managers in the segment, and
managers from the rank of section head at the Head Office. The number of positions does not include managers at
the Head Office whose positions were included in the number of indirect positions of the segment and whose cost
was charged to the segment.
Employees of the Bank trained for various roles, according to the Bank’s needs, are employed at the branches.
In addition, external workers are employed in basic positions (tellers), after receiving appropriate training. High
professional skill in the area of business, particularly credit and investments, is required of most employees.
Legal Proceedings
93
Condensed operating results and principal data of the Commercial Segment:
Activity in Israel
Activity abroad
Banking and Construction
financial
and
services(1)
real estate
financial
and real
services(1)
estate
Total
NIS millions
- From externals
752
281
121
26
-Inter-segmental
)330(
)94(
)53(
)14(
)491(
422
187
68
12
689
137
29
6
1
173
Total
1,180
- From externals
-Inter-segmental
)25(
-
-
-
Total income
534
216
74
13
837
78
19
16
5
118
275
43
81
5
404
)25(
- From externals
28
4
-
32
153
150
)23(
3
283
56
53
)3(
2
108
97
97
)20(
1
175
-Inter-segmental
-
4
97
97
)16(
8.4%
16.8%
)16.3%(
12,548
6,564
10,755
(according to Basel 2)
Net profit (loss)
Return on equity(2)
)1(
3
178
-
9.6%
1,961
463
21,536
1,345
115
22
12,237
16,056
7,186
2,351
565
26,158
1,221
-
-
-
1,221
15
-
-
-
15
7,898
-
-
-
7,898
409
102
61
11
583
12,852
6,702
1,515
506
21,575
9,351
1,570
169
23
11,113
304
140
65
13
522
35
3
)1(
-
37
Other
83
44
4
)1(
130
422
187
68
12
689
before provision for doubtful debts
(1) Includes activity in the area of credit cards and the capital market.
94
Condensed operating results and principal data of the Commercial Segment (continued):
Activity in Israel
Activity abroad
financial
and
services(1)
real estate
financial
and
services(1)
real estate
Total
NIS millions
- From externals
536
244
206
59
-Inter-segmental
)179(
)69(
)121(
)30(
)399(
357
175
85
29
646
126
21
8
3
158
Total
1,045
- From externals
-Inter-segmental
)24(
-
-
-
Total income
459
196
93
32
780
89
45
28
5
167
177
28
65
10
280
)24(
- From externals
-Inter-segmental
52
-
-
-
52
141
123
-
17
281
58
50
2
9
119
83
73
)2(
8
162
-
-
1
)3(
83
73
)1(
5
160
Return on equity(2)
10.9%
18.9%
)0.6%(
22.7%
12.1%
11,737
6,433
2,254
537
20,961
10,561
1,216
139
23
11,939
11,762
5,016
2,000
502
19,280
721
-
-
-
721
Net profit (loss)
)2(
16
-
-
-
16
5,249
-
-
-
5,249
377
68
85
27
557
11,675
6,700
2,078
441
20,894
9,160
1,240
302
39
10,741
283
125
83
30
521
22
4
)2(
-
24
Other
52
46
4
)1(
101
357
175
85
29
646
* Reclassified - For further details, see the section "General – The Segments and Customer Assignment Criteria" .
(1) Includes activity in the area of credit cards and the capital market.
95
Net profit in the Commercial Segment totaled NIS 178 million in 2010, compared with NIS 160 million in the previous
year. The 11.3% increase mainly resulted from an increase in financing income and a decrease in the provision for
doubtful debts, as noted below. This trend was offset by an increase in operating expenses.
Net profit of the segment’s activity in Israel totaled NIS 194 million in 2010, compared with NIS 156 million in the
previous year.The increase resulted from an increase in financing profit, and a decrease in expenses for doubtful debts
attributed to this segment, as noted above.
The segment’s net loss overseas in 2010 amounted to NIS 16 million, compared with profit in the amount of
NIS 4 million in the previous year.The decrease mainly resulted from an increase in operating expenses and a decrease
in financing profit, as explained below.
Profit from financing activity of the segment in 2010 totaled NIS 689 million, compared with NIS 646 million in the
previous year. The 6.7% increase mainly resulted from an increase in interest spreads, as a result of an increase in
financial spreads on credit associated with this segment, due to an increase in interest rates in the market.This increase
was offset by a decrease in financing income overseas.
The segment’s operating income totaled NIS 148 million in 2010, compared with NIS 134 million in the previous year.
The 29.3% decrease mainly resulted from a decrease in the specific provision attributed to this segment, influenced
by the improvement in economic conditions in Israel in comparison to 2009, which led to improved repayment
capability and an increase in the value of collateral of many customers.
The segment’s operating and other expenses totaled NIS 436 million in 2010, compared with NIS 332 million in the
previous year. The 31.3% increase mainly resulted from an increase in salary expenses, due to a provision for bonuses,
as a result of the improvement in the Bank's profits, an increase in the number of employees in the segment as a
result of the opening of business branches, as well as the decrease in salary expenses in the previous year, as a result
of the agreement signed with the employees' union, as detailed in Note 15 to the Financial Statements. In addition,
expenses overseas increased due to a provision for goodwill impairment recorded at Bank Pozitif and its subsidiary in
Kazakhstan, attributed to this segment, in the amount of NIS 40 million in 2010, compared with NIS 26 million in 2009.
NIS 20.9 billion on December 31, 2009, an increase of 3.3%.
NIS 10.7 billion on December 31, 2009, an increase of 3.5%.
The Corporate Segment
The Corporate Segment specializes in the provision of financial services to large corporations in Israel and abroad,
with the granting of credit constituting the principal area of activity. The Bank’s Corporate Segment mainly operates
through the Corporate Division within the Corporate Area, and through the Bank’s branches in New York and London,
which report to the International Area.The segment also includes activity with foreign banks and financial institutions.
The Corporate Division is divided into four sectors, in each of which Customer Relations Managers (CRMs) specialize
in specific areas. A Credit Management Operations Unit for each sector provides services to all customers in that
sector. Also operating within the Corporate Division is a department specializing in foreign-trade transactions, which
provides services to all customers of the Bank engaged in these activities.
96
The Corporate Division contains the Credit Control Unit, which includes three units responsible for analyzing and assessing
customers' credit risks, one for customers of this segment, one for customers of the Commercial Segment, and one for
international clients.The Credit Control Unit also contains a unit responsible for financing and monitoring infrastructure
projects; a unit that handles debt restructuring, syndication, and risk sales; and a unit responsible for formulating credit
policy for the segment's customers in Israel and overseas, and for customers of the Commercial Segment.
The Corporate Area also contains the Special Credit Division, which coordinates the handling of customers in
financial difficulties in the Corporate and Commercial Segments and endeavors to assist them in restructuring by
providing business support.The Area also handles the collection of debts from customers in financial difficulties when
restructuring is not possible.
Activities
The principal activities in this segment are banking and financial services, and construction and real estate. Services
offered to customers of the segment in the area of "banking and financial services" include financing of routine
operations, financing of investments, financing of infrastructure projects based on the PFI/BOT method, financial
services, foreign trade transactions, and transactions in financial derivatives. In addition, through the branch network,
the segment provides various banking services such as foreign trade, investments, and dealing-room services. The
segment’s activity overseas is conducted through the branches in the US and UK.
The Corporate Segment also provides banking services to customers operating in the construction and real-estate
sector. Among other things, these banking services include financing of construction projects, granting credit to
customers, and issuing various types of guarantees, including guarantees to buyers of homes pursuant to the Sale Law.
The various banking services are also provided to all customers of this segment through the network of branches.
A network of Business Branches was established in response to the business needs of Commercial Segment and
Corporate Segment clients. The network consisted of 13 branches at the end of 2010; additional branches are
planned to open during 2011.
For further details regarding “construction and real estate” activity, see the section “Composition and Development
of the Assets and Liabilities of the Bank Group” above.
Legal Proceedings
Legislative Restrictions, Regulations, and Special Constraints Applicable to the Segment
The Bank operates within the framework of laws, regulations, and regulatory directives that apply to the banking
system in Israel, under the authority of entities such as the Supervisor of Banks; the Supervisor of the Capital Market,
Insurance, and Savings at the Ministry of Finance; the Antitrust Commissioner; the Israel Securities Authority, and others.
Set out below is a description of several such directives that have, or had at the time of their publication, material
implications for the segment.
Limit on Credit to Certain Customers
Under the Proper Conduct of Banking Business Directives, the following limits apply to volumes of credit:
Transactions with related parties – Proper Conduct of Banking Business Directive No. 312, “Business of a
Banking Corporation with Related Parties”, imposes a limit on the Bank, among other matters, according to which
total “debts to the banking corporation”, as this term is defined in the aforesaid directive, excluding certain amounts,
to all “related parties” of the Bank, as defined in the directive, shall not exceed a total amount equal to 10% of the
capital of the Bank (as defined in Proper Conduct of Banking Business No. 311).
97
Limits on debt of a borrower and a group of borrowers – Proper Conduct of Banking Business Directive
No. 313, “Limits on Indebtedness of a Borrower and of a Group of Borrowers”, imposes a limit on the Bank, among
other things, under which the rate of “indebtedness” of a “borrower” and of a “group of borrowers”, as defined in
the directive, after subtracting certain permitted amounts as specified in the directive, shall not exceed 15% and 30%,
respectively, of the shareholders’ equity of the Bank, calculated according to Proper Conduct of Banking Business
Directive No. 311, “Minimum Capital Ratio” (for details, see the section “Capital Adequacy”, above). The directive
further states that the total indebtedness (after subtracting certain amounts) of the six largest borrowers and
borrower groups of the Bank shall not exceed 135% of its capital. In November 2010, the Bank of Israel issued a draft
amendment of Directive 313, which contains changes to the definitions of borrower groups, among other matters.
Financing the acquisition of means of control – Proper Conduct of Banking Business No. 323, “Financing of the
Acquisition of Means of Control of Corporations”, limits the balance of credit extended for the acquisition of means
of control of corporations, in cases in which the rate of financing for the acquisition of the means of control of the
corporation is greater than 50% of the cost of the acquisition, to 70% of the capital of the banking corporation. The
directive also sets a limit on the rate of financing for the acquisition of means of control of other banking corporations.
In July 2010, the Bank of Israel issued a draft amendment of Directive 323, which contains changes to the definition
of a transaction for the financing of acquisition of means of control, among other matters.
Sectoral limit – Proper Conduct of Banking Business Directive No. 315, “Supplementary Provision for Doubtful
Debts”, states, among other matters, that when the total indebtedness (“indebtedness” as defined in the directive,
after subtracting the amounts permitted in the directive) of a particular sector to the banking corporation exceeds
20% of the total indebtedness of the public to the banking corporation, the surplus shall be considered exceptional
indebtedness in respect of which the bank must record a provision within the supplementary provision for doubtful
debts. Note that this limit is examined on a non-consolidated basis.
In addition to the limits described above, pursuant to the Proper Conduct of Banking Business Directives, the Board
of Directors of the Bank establishes limits, from time to time, on the concentration of credit in certain economic
sectors, as well as limits on the maximum exposure to a single borrower, according to the credit risk of the borrower
based on the internal rating system.
As of the reporting date, the Bank is not in violation of any of the aforesaid limits.
Type Exemption – Borrower Consortium
On February 28, 2011, the Antitrust Commissioner announced a change in the terms established by her in the
past with regard to consortium arrangements. The current terms for consortium arrangements acceptable to the
Commissioner primarily include the following:
A. The formation of the credit consortium is consented to by the client, in advance and in writing, on a separate form;
B. The client is given the opportunity to negotiate the terms of the credit with any of the members of the consortium,
including through another person acting on the client’s behalf;
C. When both Bank Hapoalim B.M. and Bank Leumi LeIsrael Ltd. are members of the consortium, the formation
of the consortium shall be permitted only if the aggregate amount of credit which both banks are required to grant
exceeds NIS 300 million. The limit established in this section shall not apply to consortium arrangements involving
the repayment of a debt arising from credit granted by Bank Hapoalim B.M. and Bank Leumi LeIsrael Ltd. prior to
August 18, 2002, to the same person;
D. No information shall be transferred among the parties that is not necessary for the formation of the specific
consortium under discussion. Without prejudice to the foregoing, any such transfer of information shall be performed
in a manner that minimizes any threat of damage to competition between the parties.
E. According to the requirements of the Commissioner, meetings or talks of the participants in the consortium must
be documented, in accordance with the details required in the Commissioner’s letter.
These terms are in effect for a period of two years, until February 28, 2013.
98
2010 was marked by growth, and the Israeli economy, including the segment's customers, showed resilience in
confronting the global financial crisis. The segment's customers benefited from an increase in private consumption,
an increase in GDP, and the demand in the construction and real-estate sector. By contrast, the high exchange rate of
the shekel against the US dollar and the other major currencies detracted from the profitability of some exporters.
Despite the positive data, there are still numerous risks to continued growth in Israel, primarily influenced by the
economic developments globally and by the geopolitical situation in the region.
The information systems used by the Corporate Segment are designed to assist analysis, control, and marketing
processes. The Corporate Segment continually works to improve and update the technological systems it uses. In
addition, the use of the “Matbea” system has been expanded, with the aim of improving work processes, information
management, and monitoring of segment customers’ activity.
•Correctly identifying customers’ overall banking needs, and suitably adapting banking products to their business
needs.
•The ability to provide comprehensive service suited to customers – tailoring banking services and improving
service quality (response time, professionalism, etc.), based, among other things, on technological capabilities for
service delivery.
•Ability to conduct risk management and control in real time (primarily credit risks) – credit risk is the most
significant risk factor in the segment’s activity. Management of risks and maintenance of an adequate control
system are essential in order to minimize the risks inherent in the segment’s activity to the extent possible, and
attain adequate profitability in its activity.
•Establishment of credit policies in line with the Bank's risk perception and methods of financing customers while
monitoring performance.
Activity in the Corporate Segment involves long-term relationships with its customers, including familiarity with their
financial information and the collateral they have provided to the Bank, monitoring and control of the different risks
and exposures, as well as appropriate capital allocation and compliance with the regulatory restrictions that apply to
the segment.This requires training high-quality, skilled personnel and acquiring a high level of technological capability
in order to cope with the complexity of the segment.
The positive trend in bond offerings that began in early 2009 continued in 2010, following a freeze in late 2008. In
October 2010, the Supervisor of the Capital Market at the Ministry of Finance established rules, in accordance with
the recommendations of the Hodek Committee, regarding investments in corporate bonds by institutional entities.
This led to a decrease in offerings in the fourth quarter. Some clients of the Corporate Segment use bond issuance
or credit from non-bank sources as a partial or full substitute for bank credit.
Customers
For details regarding the manner of assignment of customers to this segment, see the section “General – The Segments
and Customer Assignment Criteria” above.
99
The Marketing and Strategy Unit within the Corporate Area focuses on marketing banking products and services and
on distribution methods, while ensuring an understanding of customers' needs and matching of financial solutions to
these needs. Within the Corporate Division, the Sales and Business Development Department focuses on support
for CRMs. As a key element of this sales platform, product experts, working closely with the CRMs, are at the disposal
of the segment’s customers, in the areas of the dealing room, investment advising, foreign trade, and more. CRMs are
in continuous contact with the customers served by them in order to respond to their banking needs, market the
Bank's products, and tailor financing solutions to various transactions. In the area of business development, the unit
focuses on the development of new products and services matched to customers' needs. In the area of strategy, the
unit is responsible for the development and management of the division's business strategy.
Competition
There is a high level of competition in this area from banking entities (with regard to non-bank financing options, see
above). Competition is reflected in service, prices, financing terms, and rapid response. The Bank Group competes
in this area mainly against the four other major banking groups in Israel, as well as foreign banks with representative
offices in Israel.The Bank's activity through its branches in New York and London is conducted in a highly competitive
environment dominated by global financial institutions.
100
Human Capital
Set out below are details of the distribution of the average number of employee positions in the segment:
Total positions
Of which, positions charged
to the segment
Direct managerial
positions
2010
2009
2010
2009
2010
2009
In Israel
772
746
240
226
129
125
Abroad
72
75
18
22
33
26
844
821
258
248
162
151
Total
The average number of employee positions in the segment in 2010, in Israel and abroad, was 844, compared with
821 positions in 2009. The increase in employee positions resulted from the business branches opened in response
to the business needs of clients in the Commercial Segment and the Corporate Segment.
The Bank’s emissaries abroad who manage business units are experts in credit products and hold academic degrees.
In order to comply with the standards dictated by the global market, employees receive training and enrichment in
the areas of their work as well as in the local regulatory requirements. The Bank recruits employees who have the
requisite knowledge in order to enter new areas of activity, in accordance with its strategic plan.
The Corporate Segment’s business objectives are focused in several areas:
•Increase profitability and risk-adjusted return on equity from the segment’s banking activity.
•Strengthen the Bank’s leadership with the segment’s customers.
•Organize and lead complex financing arrangements, including financing of infrastructure projects and collaboration
with other financers through syndication.
•Continue to provide service and respond to customers’ needs while tailoring new products suited to their activity.
•Prudently manage the credit portfolio and monitor the risk profile, including through the sale of credit assets.
•Continue to improve the technological infrastructure supporting analysis, control, and marketing processes.
•Provide full banking services to Israeli companies and Israeli institutional investors operating abroad.
•Develop products that offer alternatives and supplements to traditional credit.
Legal Proceedings
101
Condensed operating results and principal data of the Corporate Segment:
Activity in Israel
Banking and
financial
services(1)
Activity abroad
Construction
and
real estate
Banking and
financial
services
Construction
and
real estate
Total
2,808
NIS millions
Profit from financing activity before provision for
doubtful debts:
- From externals
1,459
-Inter-segmental
112
Total
991
255
103
)124(
)81(
)47(
1,571
867
174
56
2,668
424
49
159
1
633
)140(
- From externals
-Inter-segmental
Total income
-
-
-
1,979
2
914
)2(
333
57
3,301
129
304
2
-
435
396
86
232
31
745
- From externals
65
17
-
-
82
1,407
507
99
26
2,039
534
194
35
9
772
Net profit
873
313
64
17
1,267
17.4%
10.2%
23.1%
13.6%
14.9%
50,465
35,932
7,497
2,742
96,636
49,342
5,493
3,442
54
58,331
69,864
38,079
9,494
3,031
120,468
4,489
-
-
-
4,489
41
-
-
-
41
509,168
-
-
-
509,168
609
163
57
15
844
52,043
35,440
6,636
2,641
96,760
45,372
6,373
3,338
26
55,109
929
573
114
42
1,657
59
12
3
3
77
583
283
57
11
934
1,571
867
174
56
2,668
-Inter-segmental
Return on equity(2)
Other
Total profit from financing activity before provision
for doubtful debt
(1) Includes activity in the areas of credit cards and the capital market.
102
Condensed operating results and principal data of the Corporate Segment (continued):
Activity in Israel
Banking and
financial
services(1)
Activity abroad
Construction
and
real estate
financial and real estate
services(1)
Total
NIS millions
- From externals
-Inter-segmental
Total
343
55
6,395
)2,813(
4,256
1,741
)972(
)107(
)3(
)3,895(
1,443
769
236
52
2,500
735
31
177
1
944
- From externals
-Inter-segmental
Total income
-
-
5
2,185
7
798
)2(
413
53
3,449
630
547
65
1
1,243
334
71
248
19
672
- From externals
-Inter-segmental
64
16
-
-
80
1,157
164
100
33
1,454
477
68
36
12
593
Operating profit after taxes
680
96
64
21
861
1
-
-
-
1
681
96
64
21
862
20.0%
4.0%
11.9%
15.0%
13.3%
20.0%
4.0%
11.9%
15.0%
13.3%
53,377
37,934
12,073
2,760
106,144
51,631
5,550
3,711
157
61,049
53,245
31,505
7,415
1,929
94,094
2,225
-
-
-
2,225
Profit from extraordinary transactions, after taxes(2)
Net profit
Return on equity
(3)
6,110
-
-
-
6,110
412,432
-
-
-
412,432
607
139
59
16
821
50,261
37,104
8,934
2,874
99,173
46,234
5,650
3,931
127
55,942
919
582
130
35
1,666
32
7
492
180
1,443
769
Other
3
42
106
14
792
236
52
2,500
(1) Includes activity in the areas of credit cards and the capital market.
(2) In accordance with the Bank of Israel’s directives, the segment’s results under this item include the results of the sale of companies
and other assets attributed to the segment’s customers.This item includes the segment’s profit from the sale of provident-fund
management rights.
103
Net profit of the Corporate Segment in 2010 totaled NIS 1,267 million, compared with NIS 862 million in the
previous year.The increase resulted from a decrease in expenses for doubtful debts and from an increase in financing
profit. The increase was offset by a decrease in operating income in Israel and by an increase in operating expenses.
Profit from financing activity totaled NIS 2,668 million in 2010, compared with NIS 2,500 million in the previous year.
The 6.7% increase mainly resulted from an increase in interest spreads, as a result of an increase in financial spreads
on credit and deposits, due to an increase in interest rates in the market. This increase was offset by a decrease in
the volume of activity at the New York branch.
Operating and other income in Israel totaled NIS 473 million in 2010, compared with NIS 771 million in the previous
year. The 38.7% decrease mainly resulted from profit from the sale of shares of Bezeq and Hot recorded in the
previous year. The decrease was offset by an increase in income from credit handling, as a result of fees recorded
for the organization of syndicated loans.
The provision for doubtful debts totaled NIS 435 million in 2010, compared with NIS 1,243 million in the previous year.
The decrease resulted from both a decrease in the specific provision and a decrease in the supplementary provision
attributed to this segment, mainly due to the improvement in economic conditions in Israel in comparison to 2009,
which led to improved repayment capability and an increase in the value of collateral of the majority of customers.
Operating expenses totaled NIS 827 million in 2010, compared with NIS 752 million in the previous year. The
10.0% increase mainly resulted from an increase in salary expenses due to a provision for bonuses, as a result of
the improvement in the Bank's profits, and the decrease in salary expenses in the previous year, as a result of the
agreement signed with the employees' union, as detailed in Note 15 to the Financial Statements.
NIS 99.2 billion on December 31, 2009, a decrease of 2.4%, which mainly resulted from the segment's activity overseas,
and is accounted for by the decrease in activity at the New York branch.
The balance of off-balance-sheet monetary assets of the customers of the Bank Group attributed to this segment as
of December 31, 2010 totaled approximately NIS 546.8 billion, compared with approximately NIS 479.3 billion on
104
The Financial Management Segment
General and Structure
The activity of this segment includes activity in the banking portfolio and trading activity. Activity in the banking portfolio
primarily includes the management of resources and applications, alongside management of market and liquidity risks
(for details regarding these risks, see the section “Risk Management”, below), through the establishment of internal
transfer prices (see below), investment portfolio management, bank deposits, bond issuance, and the execution of
transactions in derivative financial instruments. The segment's activity in the banking portfolio is mostly conducted
through the Asset and Liability Management (ALM) units in Israel and abroad, and through a unit responsible for
management of the proprietary investment portfolio. In the last two years, the Bank's proprietary investments in
the banking portfolio have been concentrated in government bonds. The Bank has decided to diversify its asset
portfolio and include investments in corporate bonds and in shares in the banking portfolio. A specialized unit for the
management of the banking investments portfolio has been established for this purpose. This unit is responsible for
overseeing and coordinating proprietary activities at the level of the Group.Trading activity and position management
are mainly conducted through the dealing rooms, which offer services for the Bank's customers for the execution of
transactions in financial instruments in foreign currency and in New Israeli Shekels, as well as support for the pricing
and development of sophisticated financial products.
Most of the income of the segment derives from exposure management in the banking portfolio and in the trading
portfolio, and from spreads on the dealing rooms' activity with customers. In addition, the segment includes the results
of investments in shares and investments in equity-basis investee companies in calculating its income.
The segment’s business activity (with the exception of investments in equity-basis investee companies; in this context,
note the under Section 23A of the Banking Law, the Bank is subject to limits on its rate of holding in non-financial
corporations, and on the volume of capital which it is permitted to invest in such corporations) is centralized under the
authority of the Member of the Board of Management and Head of the Global Treasury Area.Treasury activities include
the Asset and Liability Management Division in Israel, as well as units responsible for asset and liability management
at the Bank's branches overseas.Treasury activity also encompasses the coordination of management of the financial
assets and liabilities of the Bank Group (including foreign subsidiaries) in foreign currency on a global level. Dealing
rooms in Israel and at the Bank's overseas branches also operate within this framework.The Dealing Room Division
in Israel is responsible for coordinating trading activity in foreign currency and derivatives at the overseas branches.
Trading Activity – Dealing Rooms
The Bank provides comprehensive services to its customers through its dealing rooms, for hedging against risks
involved in fluctuations in exchange rates and interest rates, on one hand, and for investment and profiting from such
fluctuations, on the other hand.The dealing room in Tel Aviv provides customers with services related to the various
financial instruments (spots, forwards, options, exotic options, swaps, and structured products) and various underlying
assets (foreign-currency/foreign-currency and foreign-currency/shekel exchange rates, shekel and foreign currency
interest rates, consumer price index, stock and commodity indices, etc.).
Transactions with the Bank's customers are conducted in accordance with the credit limits allocated to them by the
credit authorities at the Bank, and on the basis of the Bank's internal models that define credit exposures in transactions
executed in the dealing room. Awareness of the activities offered by the dealing room has grown steadily in recent
years, leading to demand for a broader range of products at a higher level of sophistication. In response to these
needs, and in order to preserve the Bank’s standing as a leader and innovator, complex products have been added to
the product range in Israel, including derivatives which include interest-rate options in shekels, exotic options, credit
derivatives, and sophisticated interest-rate products. In addition, in recent years customers have increasingly used
structured products, which include deposits or bonds whose interest terms are determined according to the terms
of a particular derivative embedded in the debt instrument.
105
The Bank serves as one of the primary market makers in unlinked government bonds. In early 2011, market making
activity was also expanded to a number of series of CPI-linked government bonds. The dealing room is a market
maker in most of the products in which it has activity; in other words, the Bank acts as a party to the transaction with
the customer, rather than as an intermediary between the customer and a third party.
The Banking Portfolio – Management of Resources and Applications
The Financial Management Segment, through the Asset and Liability Division of the Bank, is responsible for managing
the resources and applications of the Bank, over the range of activities of the various segments.The segment receives
and allocates resources for the use of the various segments and establishes the internal transfer prices for such
resources (“wholesale rates” – for further details, see below). Wholesale prices constitute the basis for the activity of
the various segments with the Bank’s customers and also serve as a means for market and liquidity risk management.
The Bank has varied sources of financing, primarily fixed-term deposits from the public.The deposits are raised from
a very large number of depositors, with no reliance on any single depositor or group of depositors. Most of the
Bank’s resources are raised from the public in Israel, particularly private customers. Resources in unlinked shekels
mainly derive from these customers, though also to some extent from institutional clients and large business clients.
Resources in linked shekels are raised both from the general public and from institutional clients who invest in deposits
with the Bank and in bonds issued by the Bank Group. In recent years, the importance of shekel resources raised
through issues of bonds, subordinated notes, and capital notes has increased. Resources in foreign currency include
deposits of private customers and business customers in Israel, non-residents, Global Private Banking customers, Israeli
companies abroad, issues of CDs secured by the FDIC in the United States, and issues of bonds abroad (through the
subsidiary Poalim International). In addition, as part of market and liquidity risk management, the Global Treasury Area
maintains a bond portfolio, currently mainly consisting of government bonds. As noted, the intention is to diversify
the investments in this portfolio in the future.
These resources are “transferred” from the segment to which the customer belongs to the Financial Management
Segment, and in return, the Financial Management Segment credits the relevant segment at the wholesale interest
rate determined by the ALM Division for that resource, according to the characteristics of the resource (i.e. according
to the duration and linkage segment; for further details regarding the manner of setting the wholesale interest rate,
see below; hereinafter: the “wholesale rate”). The aforesaid resources, as well as resources raised by the segment, as
described above, are allocated by the Financial Management Segment for the use of the various segments. In return, the
segment is debited at the wholesale rate (according to the linkage segment and duration of usage) determined by the
ALM Division, which is paid to the Financial Management Segment. Note that in certain cases the ALM Division sets
a different wholesale rate for resources and applications with identical characteristics (duration and linkage segment)
in order to price specific market risks and conditions for raising resources in the markets.
Wholesale rates are set by the ALM Division, and reported and discussed routinely on a weekly basis by the ALM
Committee. In addition to routine discussion and analysis by ALM Division committees, the Board of Management
and Board of Directors of the Bank receive a report on this matter each quarter.
Wholesale rates are set taking the following factors into consideration: market prices of comparable resources (by
linkage segment and duration); cost of raising the capital (in setting long-term wholesale rates); government bond yields;
yields of bonds of the Bank and of similar banking corporations; the Bank of Israel interest rate; and macro-economic
data. In addition, ALM committees examining information concerning principal and interest flows (gap reports) of the
Bank by dates of interest-rate changes and by maturity dates; interest-rate exposures of the Bank (sensitivity, income
value); overall VaR of the Bank; expected transactions; daily balances and performance; and more. The committees
also discuss limits and the desired position, in line with the Bank’s policy.
106
The wholesale rate is set in a uniform manner according to duration and linkage segment for all transactions executed
at the Bank. In other words, the rate is not set for a specific resource or application, other than in exceptional cases
in which a specific cost is established for a particular transaction (mainly for large-scale transactions). The wholesale
interest rate is used, among other things, as one of the important tools for asset and liability management in the
banking portfolio.
In order to improve analysis, planning, and management capabilities of the Bank’s assets and liabilities, the Bank uses an
automated ALM system. Analysis performed on this system is based on the capture of data on financial transactions
at the Bank and processing that provides users with the ability to perform broad and in-depth analysis of the market
risks in the Bank’s balance sheet, especially interest-rate risk and liquidity risk.
The Financial Management Segment is technology-intensive. Accordingly, technological changes influencing the segment
occur routinely. In recent years, several such processes may be noted, such as the widespread distribution of financial
information in real time and the ability to execute transactions instantly, regardless of geographical location.
The principal investments carried out by the segment are in information systems. In recent years, the principal
investment has been in two main areas: projects aimed at advanced management in the dealing room, and the asset
and liability management system project (see above).
In 2007, a designated system was acquired for the management of interest-rate products (including derivatives) at the
Tel Aviv dealing room. Implementation of the system in the front office was completed in 2010.The system improves
the Area's capabilities in handling complex products in these areas.
The most important success factor in the area of financial management is the quality of human resources; employees
in this area must have excellent professional knowledge and analytical skills.
Another critical success factor is high-quality computerized systems, both in the area of transaction execution and
in the area of information and analytics.
Financial management interacts extensively with most of the areas of the Bank’s business activity. Naturally, therefore,
the success of this activity depends on the level of inter-segmental cooperation within the Bank.
The main entry barriers in the Financial Management Segment stem from the need for large investments in information
systems and the ability to recruit high-quality professional personnel.
In addition, the ability to provide services to large-scale customers is also derived from the Bank’s relative size and
its ability to supply liquidity in the various areas of activity. Accordingly, size is an advantage in certain areas of activity
and in certain types of transactions.
In recent years, Israel’s financial markets have grown progressively more sophisticated. This is particularly notable in
the broader range of products available to investors and market players.Various types of tradable instruments as well
as derivative instruments are becoming more accessible. Examples of these instruments include index certificates,
structured deposits, exotic options, and more. Naturally, alongside the expanded opportunity inherent in a larger,
more advanced product range, these instruments also serve as alternatives to existing products and services.
107
Competition
Intense, extensive competition exists in all areas of dealing-room activity.The principal competitors are the four major
banking groups in Israel, and in recent years also foreign banks, as well as other financial companies specializing in
this area.
Customers
The segment provides diverse services to all customers of the other segments at the Bank, both through the Bank’s
branches and CRMs, and through direct contact with large customers.The dealing room conducts marketing activity
with foreign financial institutions, which has led to substantial expansion of the volume of activity with these customers
(in the range of products for which the Bank serves as a market maker).
Human Capital
The following are details of the distribution of employee positions in the segment:
Total employee positions
Of which: positions charged to the segment
Of which: direct managerial positions
2010
2009
818
837
98
106
319
314
The Financial Management Segment is oriented towards professional personnel. Accordingly, there is considerable
competition for the services of high-quality employees, from local banks, foreign banks, other financial entities, and
business concerns. This is particularly apparent in the area of dealing rooms. The Bank has therefore formulated a
unique employment and compensation model for profit centers in the Global Treasury Area, which ensures suitable
compensation for their achievements.
During the routine course of business, the Bank, and within it the Financial Management Segment, maintain extensive
ties with the world’s leading financial institutions. Business relations between the Bank and these entities in the different
capital markets are based, among other things, on standard international arrangements, such as: framework agreements
supporting the activity of dealing rooms, special agreements to minimize credit risks aimed at limiting credit risk in
derivatives (Credit Support Annex), or activity via an international clearinghouse (CLS) to minimize clearing risks in
foreign-currency swap transactions.
The segment’s key objectives are the development of financial activity in the local and international markets, based
on the existing London and New York branches, as well as continued growth of local activity. The strategic plan for
2011 includes work plans, infrastructures, and quantitative objectives. The plan is based on expanding the range of
products, enlarging the customer base, and developing global activity.
A specialized unit has been established to run an investment portfolio which will manage the liquidity surpluses in
the banking portfolio.The unit's work will be subject to objectives in the management of the banking portfolio in the
area of linkage-base and interest exposures.
The strategic plan is based on estimates and reflects the Bank’s current viewpoint; it therefore constitutes
forward-looking information. There is a possibility that the plan may not materialize, or may not materialize in full.
108
Set out below are the condensed results of operations of the Financial Management Segment:
2010
2009*
NIS millions
Change
%
Profit (loss) from financing activity before
- From externals
)3,146(
)4,030(
)21.9%(
-Inter-segmental
3,530
4,065
)13.2%(
384
35
72
18
456
53
- From externals
494
514
)3.9%(
Operating loss before taxes
)38(
)461(
)91.8%(
Tax benefit on operating loss
)18(
)154(
)88.3%(
Operating loss after taxes
)20(
)307(
)93.5%(
Total
- From externals
Total income
Share in net operating profits (losses) of equity-basis investees
3
)15(
)120.0%(
Minority interests’ share in (profits) losses of consolidated companies
4
)17(
)123.5%(
)339(
)96.2%(
)13(
Operating loss
-
Loss from extraordinary transactions, after taxes
)13(
Loss
)1(
)340(
)96.2%(
The loss of the Financial Management Segment in 2010 totaled NIS 13 million, compared with a loss in the amount
of NIS 340 million in the previous year.
Profit from financing activity in the Financial Management Segment totaled NIS 384 million in 2010, compared with
profit in the amount of NIS 35 million in the previous year.The increase in profit mainly resulted from adjustments to
fair value of derivative instruments, which amounted to an expense in the amount of NIS 636 million, compared with
an expense in the amount of NIS 846 million in 2009. In addition, profit from bonds in the amount of NIS 324 million
was recorded in 2010, compared with profit in the amount of NIS 159 million in 2009.
Operating and other income totaled NIS 72 million in 2010, compared with NIS 18 million in the previous year.The
increase resulted from an increase in profit from investments in shares attributed to this segment.
In the bank's share of the operating results of equity-basis investees, profit in the amount of NIS 3 million was recorded
in 2010, compared with a loss in the amount of NIS 15 million in the previous year.
109
This section includes all other activities of the Bank Group, each of which does not form a reportable segment under
the Supervisor of Banks’ directives. These activities mainly include investment banking, services for financial asset
managers, trust activity, capital market activity not attributed to the banking segments, and activity in credit cards
guaranteed by other banks. This segment also includes income from computer services for companies which were
consolidated in the past. In addition, adjustments of intersegmental activities are allocated to this section.
The net operating profit of this section totaled NIS 96 million in 2010, compared with NIS 60 million in the previous
year. Most of the increase resulted from activity attributed to the capital market sector. Profit from credit cards in
respect of activity of customers of banks outside the group and from incoming tourism totaled NIS 26 million in
2010, compared with NIS 22 million in 2009.
Income from computer services rendered to Bank Massad, Bank Yahav, and Bank Otsar Hahayal totaled NIS 91 million
in 2010, compared with income in the amount of NIS 100 million recorded in 2009. Profit from extraordinary
transactions attributed to this section totaled approximately NIS 16 million in 2010, compared with approximately
NIS 6 million in 2009.
Credit to customers of other banks, which are not part of the Bank Group and with which Isracard entered into
an arrangement, as of December 31, 2010, totaled approximately NIS 4.0 billion, compared with approximately
Additional Information Concerning Activity in Certain Products
Credit Cards
The Bank Group’s principal activities in the area of credit cards are conducted through companies operating in the
area of means of payment under a single managerial and operational umbrella, referred to hereinafter as the “Isracard
Group". The core activity of the Isracard Group is the issuance, clearing and financing of Isracard credit cards, a private
brand under its ownership, as well as of MasterCard, Visa, and American Express cards under licensing agreements.
Credit Card Issuance
The Isracard Group issues credit cards to customers of banks which have entered into arrangements with the
Isracard Group, including the Bank, Mizrahi Tefahot Bank, First International Bank, Bank Yahav, Bank Otsar Hahayal,
Bank Massad, Bank Poaley Agudat Israel Ltd., and Bank of Jerusalem Ltd.The Isracard Group also issues cards directly
to customers (“non-bank cards”), primarily members of various consumer clubs and groups with which the Isracard
Group has contracted.
Customers of the Isracard Group in the area of issuance are private customers, employees of corporations, and
corporations (as well as corporate purchasing, including B2B – Business to Business payments).
As part of its issuance activity, the Isracard Group issues and operates a range of additional products and services, such
as cards providing revolving credit, fuel cards and fuel devices, gift cards, and gift certificates. In addition the Isracard
Group grants general-purpose credit and loans based on credit facilities of credit cards.
In addition to the Bank Group, two credit-card companies controlled by banks currently operate in Israel in the
area of issuance: Cartisei Ashrai LeIsrael Ltd. (hereinafter: “CAL”), controlled by Discount Bank, and Leumi Card Ltd.
(hereinafter: “Leumi Card”), controlled by Bank Leumi.
The number of cards issued by the Isracard Group as of December 31, 2010 is 3.2 million, compared with 3.1 million
at the end of 2009.
In 2010, the volume of activity in Isracard Group cards reached NIS 89.9 billion, compared to NIS 81.3 billion in 2009.
110
Credit Card Clearing
In agreements signed for the purpose of providing clearing services, the clearing credit-card company undertakes a
commitment to the merchant, subject to fulfillment of the terms of the agreement, to settle the debits to the merchant
incurred towards it by holders of the cards which it clears when purchasing goods or services from the merchant.The
Isracard Group also offers merchants a range of additional financial services, and marketing and operational services.
Customers of the Isracard Group in the area of credit-card clearing are numerous diverse merchants who have
entered into agreements with it, including various government agencies.
The credit-card clearing sector is characterized by a very high level of competition, due to factors including the
operation as of June 2007 of the local interface for cross-clearing of transactions in MasterCard and Visa credit cards
(subsequent to which CAL and Leumi Card began to clear MasterCard cards, and MasterCard and the Isracard
Group began to clear Visa cards), which led to a reduction in fees and an escalation in competition. As of the date
of the financial statements, the Isracard Group is the only clearer of transactions in Isracard cards, a private brand
under its ownership, and in American Express cards. In April 2010, the Isracard Group signed an agreement extending
the contractual engagement between the companies by a period of seven additional years, until March 31, 2017.
Competition in the area of clearing is focused on recruiting new merchants for clearing agreements and retaining
existing merchants as customers in the area of clearing. Another aspect of the competition is reflected in the
development of financial and operational products and services for merchants, to increase the volume of transactions
and/or the amounts of transactions executed with each merchant.
In addition to the Bank Group, the two credit-card companies controlled by banks listed above operate in the area
of clearing in Israel.
Financing Segment
In recent years, the Isracard Group launched activity in the area of financing. The financing segment serves the
customers of the Isracard Group, focusing on the provision of financial services and solutions through products tailored
to customers’ needs, with a high quality of service. The Isracard Group offers its customers unique credit products
suited to their needs, taking into account the category of the client (consumer or corporate) as well as the client’s
financial condition and repayment capability.
The financing segment consists of two sub-groups, divided according to the nature of the customers’ activity: consumer
credit for private customers, who usually operate at a relatively low monetary volume; and corporate credit, where
credit is usually needed in order to finance business activity. Naturally, different credit products are offered to these
two groups.
The Isracard Group offers financial services to merchants, including loans, credit-card sales slip discounting, advance
payments and prepayments, credit facilities in business cards, purchasing and B2B cards, and factoring services. In addition,
Isracard offers credit to private customers, including revolving credit, under the More brand, which allows cardholders to
determine the payment terms; special-purpose loans; various types of credit based on Isracredit plans; all-purpose loans
based on credit facilities in credit cards; and loans that do not require a card, all at a high quality of service.
Additional Activities
In addition to activities related to the issuance and clearing of credit cards, as described above, the Isracard Group
has the following additional activities: check settlement guaranteeing and check discounting; provision of consumer
credit other than through credit cards; direct sales-slip discounting; and factoring (receivables discounting).
Contribution of Income from Credit Cards
The contribution of income from credit cards to income from fees, included within operating income (before
deducting related expenses), totaled NIS 1,461 million in 2010, compared with NIS 1,337 million in 2009, an increase
of approximately 9.3%, which mainly resulted from an increase in the volume of transactions.
111
Set out below is the distribution of the results of credit-card operations by segments of activity:
Households
Segment
Private
Banking
Segment
Small Commercial
Business
Segment
Segment
Corporate Activity under
Segment responsibility
of other banks
and incoming
tourism
Total
NIS millions
- From externals
87
20
38
11
-
6
162
103
1,461
518
293
11
8
528
)23(
)13(
)4(
-
-
-
426
210
70
7
3
484
)40(
1,200
156
90
67
15
5
50
383
60
34
26
6
2
19
147
41
9
3
31
236
-
-
-
-
9
3
31
96
56
Minority interests’ share in profits of
)3(
)2(
Net profit
93
54
41
5,162
2,910
1,032
188
94
3.909 13,295
-
-
1,928
1,808
8,315
158 12,209
5,011
2,825
1,514
190
90
9,630
801
353
123
12
7
)5(
231
Average balances:
Average balance of risk-adjusted
assets (according to Basel II)
Average number of employee
positions
112
611
1,907
Set out below is the distribution of the results of credit-card operations by segments of activity (continued):
Households
Segment
Private
Banking
Segment
Small Commercial
Business
Segment
Segment
Corporate Activity under
Segment responsibility
of other banks
and incoming
tourism
Total
NIS millions
- From externals
65
17
16
4
-
14
116
1,337
449
254
88
9
7
530
)17(
)10(
)3(
-
-
-
327
157
52
5
3
493
)30(
1,037
170
104
49
8
4
51
386
71
43
20
3
2
21
160
29
5
2
30
226
-
-
-
-
29
5
2
30
99
61
Minority interests’ share in profits of
)2(
)1(
Net profit
97
60
4,604
2,595
921
167
84
3,721 12,092
-
-
1,834
1,719
7,909
113 11,575
4,595
2,582
917
73
147
8,314
771
328
118
17
8
)3(
223
Average balances:
positions
601
113
1,843
Capital Market Activity
General
The Bank Group’s capital-market activity includes a range of financial activities and services in various areas: executing
trading transactions in securities and financial assets, including in “Maof ” (the Bank and a wholly-owned subsidiary
are members of the Tel Aviv Stock Exchange and the TASE Clearing House).The Bank is also a member of the Maof
Clearing House (for details regarding a lien placed on the assets of the Bank as a condition of its membership in
various clearing houses, see Note 14 to the Financial Statements) and in foreign securities (the Bank is a member of
the Euroclear clearing house); custody services in securities; research and consulting services for customers on the
capital market; provision of services to financial-asset managers; issuance management; management of investment
portfolios in securities and financial assets for private customers, corporations, non-profit organizations, and institutions;
and trust services (an equity-basis investee company of the Bank also operates in the area of underwriting). Some
of the aforesaid financial activities and services are performed directly by the Bank, while others are performed by
subsidiaries, each of which specializes and engages in a specified field.
The Bachar Reform
On July 25, 2005, the Knesset enacted three laws that set forth material structural changes in the capital market and
in banking activity, known as the Bachar Reform. Under these laws, the Bank was prohibited from managing provident
funds and joint investment trust funds, and was required to sell its full holdings in such funds within timeframes
stipulated in the legislation (the "Required Asset Sales"). In addition, as a condition for receiving a pension-advising
license, the Bank was required to reduce its holdings in Clal Insurance to 10% or less of any type of means of control,
because that company controls an insurer. As detailed in this section, the Bank completed the Required Asset Sales
and its stake in Clal Insurance was reduced to below the aforesaid level. On January 28, 2009, the Supervisor of the
Capital Market, Insurance, and Savings at the Ministry of Finance approved the Bank's request and granted the Bank
a pension advisor's license, under certain restrictions, which were lifted on March 29, 2009; see below.
Sale of Provident Funds, Study Funds, Severance-Pay Funds, and Paid Sick-Leave Funds
In 2007 and 2008, the Bank Group completed the sale of all management rights of provident funds under its ownership.
The Bank is a guarantor towards some of the members of the provident funds formerly under its management for
the payment at the entitlement date of at least the nominal amount of the proceeds of the fund in the member's
account, net of certain amounts. For further details, including details concerning arrangements between the Bank
and the buyers of the management rights concerning the aforesaid guarantees of the Bank, see Note 19C(4) to the
Pension Advising
Upon receiving its pension advisor's license, the Bank was permitted to engage in pension advising, in accordance with
the stipulations of the legal arrangement and of the derived permits and directives.The Bank subsequently began to
provide pension-advising services to its customers, at Bank branches. In the first stage, this service is provided only
at certain branches and only to some customers.The number and geographical distribution of the branches offering
pension-advising services through trained pension advisors is planned to expand gradually. To date, the Bank has
signed distribution agreements with approximately 25 management companies of provident funds and pension funds.
Despite the aforementioned preparations by the Bank, difficulties have arisen in the provision of pension-advising
services to customers, mainly as a result of the absence of regularization of the relationships between the parties
operating in the market (advisors, institutional entities offering products, and employers) with regard to the transfer
of information from these entities directly to pension advisors in a routine and efficient manner.
114
Another difficulty on the operational level concerns the settlement of monetary transactions between the aforesaid
parties, due to the lack of a central clearing system for these transactions. In July 2009, the Supervisor of the Capital
Market, Insurance, and Savings at the Ministry of Finance announced that a central system would be established for
cataloging of informational messages and monetary settlement in the area of pension savings, in order to address some
of the difficulties described above. Pursuant to the announcement, a format for a memorandum of understanding
was proposed to the members of this clearing house. In accordance with the memorandum, a limited company was
established, with the mission of establishing a clearing house for pension savings products.The company is owned by the
institutional entities and distributors that have granted their consent. Representatives of the owners of the company,
including a representative of the Bank, serve on the board of directors of this company. In late 2010, the Supervisor
of the Capital Market, Insurance, and Savings (the "Supervisor") submitted a bill amending the Supervision of Financial
Services Law (Engaging in Pension Advising and Pension Marketing), 5765-2005 (the "Advising Law") to include a
section concerning supervision by the Supervisor of the operation of a central pension clearing system. Pursuant to
the bill, the operation of the central clearing system will be contingent upon a license from the Supervisor, and will
be subject to supervision by the Supervisor. This supervision will apply to the central clearing system only, not to the
administrators of the arrangements in place today. The central pension clearing system will be required to provide
services to fund members as well as clearing house members. Under the bill, the clearing house will be permitted
to clear money only after it has cleared information for a period of twelve months. In addition, clearing house users,
including the Bank, will not be permitted to hold more than one-seventh of a particular type of means of control of
the clearing house. As of the date of preparation of this report, it is not yet possible to estimate when the clearing
house will commence operations, or what its contribution will be to the banks in their capacity as pension advisors.
Another obstacle to the delivery of pension-advising services to customers concerns the distribution of insurance
products. As of the date of preparation of this report, regulations have not yet been enacted to establish the rate of
the distribution fees to be received by banks for the distribution of insurance products; only a draft of these regulations
exists. Consequently, distribution agreements have not been signed between the Bank and the insurance companies,
and arrangements have not been established concerning matters including the transfer of information (in addition to
the problem of information in the area of pension advising, as described above, a more acute problem has emerged
in the area of insurance products due to the lack of a fixed parameter for rating and standardization of the various
products in a manner allowing comparisons between products and matching of products to customers) and services
required for the provision of pension advice regarding insurance products. In addition, there are problems with
the examination and identification of insurance products, due to the wide variety of insurance plans in the various
years. All of these factors may lead to delays in the Bank's readiness and ability to provide pension advice regarding
insurance products.
In November 2010, the Capital Markets, Insurance, and Savings Division of the Ministry of Finance announced a
plan aimed at increasing competition in the pension savings market. The plan was published in a presentation and a
press release. The measures involved in the implementation of the plan and the relevant directives have not been
announced; the necessary legislative amendments and regulations have not been enacted.
According to the aforesaid announcement, the plan includes the following elements, among others:
A uniform distribution fee for pension advisors in respect of pension saving products: the maximum distribution
fee to a bank for advisory services will be just 0.2% of accrual and 2% of routine deposits. This replaces the current
version of the distribution fee regulations, in which the maximum rate is 0.25% of accrual, as detailed therein. In
addition, institutional entities will not pay fees to more than one distributor at a particular date, including following the
transition of a client among different distributors. Distribution fees will be paid only to the last distributor appointed
by the client. If the last distributor is an insurance agent or a pension marketer, the advising bank will be denied the
distribution fee owed to it for the advisory service, starting at the transition date.
115
The plan further establishes a uniform model of a management fee ceiling for pension savings products, and their
reduction. Management companies will have the option of marketing insurance products as a complement to pension
savings. Transparency will be increased in changes of management fees, such that advance notice of any change is
provided both to the client and to the advisor in contact with the client. Increases of the management fee agreed upon
with the client will be prohibited for at least two years. Employees will be entitled to select an agent, in addition to
the selection of the pension product. An integrated document presenting reasons, illustration, and due disclosures to
the customer will be formulated. Forms used in the pension advising process will be automated and unified, including
the establishment of a unified abridged format.
The announcement indicated that the Supervisor intends to implement this plan during the course of 2011. However,
because the implementation of the plan depends in part on legislative processes and on the enactment of regulations,
at this stage it is not possible to estimate when the plan may be implemented, whether it will be implemented in full,
or what its impact will be on the Bank in its capacity as a pension advisor.
Set out below is a description of the principal services provided by the Bank Group within its capital-market activity,
and of some of the companies in the Bank Group that operate in this area.
Distribution of Mutual Funds
The Bank has reached agreements with the decisive majority of mutual-fund managers in Israel with regard to the
distribution of mutual-fund units to its customers. The Bank is entitled to collect distribution fees from the fund
managers in respect of this activity, as stipulated in the regulations.
Distribution of Study Funds
The Bank has entered into agreements with management companies of study funds with regard to the distribution of
study funds to its customers, and is entitled to collect distribution fees for the distribution of study funds, as stipulated
in the regulations.
Distribution of Provident Funds and Pension Funds
Having received its pension advisor's license, as described above, the Bank has entered into agreements with
management companies of provident funds and pension funds with regard to the distribution of provident funds
and pension funds to its customers, and is entitled to collect distribution fees for the distribution of provident funds
and pension funds, as stipulated in the regulations.
Poalim Sahar Ltd.
Poalim Sahar Ltd. (hereinafter: "Poalim Sahar"), a wholly owned subsidiary of the Bank, is a member of the TASE and
of the TASE Clearing House.The company specializes in services for institutional entities: new and established pension
funds, bank provident funds, segmental provident funds, study funds, insurance companies, and public companies and
entities. The company provides brokerage services to customers in Israel and abroad, as well as research services,
custody services, and other related services, including operational services.
Poalim Sahar sold its advisory service on proxy votes in general assemblies on October 14, 2010, and ceased
providing this service as of December 1, 2010. For further details, see the section “Principal Subsidiary and Affiliated
Companies,” below.
Peilim Portfolio Management Company Ltd.
Peilim Portfolio Management Company Ltd., a wholly-owned subsidiary of the Bank, manages investment portfolios
for private customers, business organizations, non-profit entities, and others. Investments are managed for local and
foreign customers in the Israeli capital market and in capital markets worldwide.
As of December 31, 2010, the company manages portfolios at a monetary value of NIS 10.1 billion, compared with
NIS 8 billion at the end of 2009.
116
Services for Financial Asset Managers
The activity of the Client Asset Management Area includes various services for financial-asset managers: provident-fund
managers, study-fund and pension-fund managers, mutual-fund managers, and investment-portfolio managers.
Within the activity of the Area, the knowledge, experience, and human and IT capabilities accumulated at the Bank
in the operation of the financial assets noted above, and in the provision of banking services to entities that manage
these assets, are collected under one roof. Services include asset revaluation, production of control reports, production
of reports to government agencies, bookkeeping, management of accounts and rights of provident-fund members,
calculation of daily and monthly returns of provident funds, and calculation of daily rates in mutual funds.
The Bank has signed agreements for the provision of operational services in the area of provident funds to
provident-fund management companies, some incidental to the sale of provident funds formerly owned by the
Bank. In the area of mutual funds, service agreements have been signed with mutual-fund management companies.
At the end of 2010, the volume of assets of provident funds, study funds, and pension funds for which the Bank
provides operational services totaled approximately NIS 93.2 billion.The value of the assets of mutual funds for which
the division provides services related to account management, at various volumes, totaled NIS 31.1 billion.
Set out below is the distribution of results of operations and principal data in the capital market, by segments of activity:
Households
Segment
Private
Banking
Segment
Small Commercial Corporate
Business
Segment
Segment
Segment
Others
Total
NIS millions
4
20
3
-
37
-
64
1,455
- From externals
71
877
58
19
316
114
-Inter-segmental
)17(
)183(
)16(
)6(
)32(
254
Total income
58
714
45
13
321
368
1,519
66
526
40
1
206
358
1,197
)8(
188
5
12
115
10
322
)3(
72
2
5
43
4
123
Net profit (loss)
)5(
116
3
7
72
6
199
2,736
32,709
2,796
1,221
4,489
81,813
125,764
-
1,206
19
15
41
-
1,281
3,178
100,862
8,174
7,898
509,168
-
629,280
234
928
91
-
61
-
1,314
Average balances:
Average balance of other assets
under management
117
Set out below is the distribution of results of operations and principal data in the capital market, by segments of
activity (continued):
Households
Segment
Private
Banking
Segment
Small Commercial Corporate
Business
Segment
Segment
Segment
Others
Total
-
58
1,368
NIS millions
4
23
3
-
28
- From externals
71
840
56
18
304
79
-Inter-segmental
)19(
)179(
)16(
)5(
)27(
246
Total income
56
684
43
13
305
325
1,426
62
440
36
1
215
356
1,110
)6(
244
7
12
90
)31(
316
Provision for taxes (tax benefit) on
operating profit (loss)
)2(
102
3
5
36
)13(
131
)4(
142
4
7
54
)18(
185
Profit from extraordinary transactions,
after taxes
13
7
2
-
1
9
149
6
7
55
2,586
28,425
2,211
721
2,225
67,998
Net profit (loss)
)18(
23
208
Average balances:
Average balance of other assets under
management
118
104,166
-
1,808
22
16
6,110
-
7,956
2,873
90,131
6,189
5,249
412,432
-
516,874
242
914
98
-
68
-
1,322
Principal Subsidiary and Affiliated Companies
General
The Bank Group operates through banking and non-banking subsidiary companies in Israel and abroad. The
non-banking subsidiaries operate in the areas of finances, marketing and operation of credit-card systems, trust
activity, issuance and financing, and investment banking services.
The contribution of subsidiary and affiliated companies to the Bank’s results of operations in 2010, excluding
exchange-rate differences of the subsidiaries overseas, totaled NIS 432 million, compared with NIS 532 million in
2009. Most of the decrease resulted from a goodwill impairment in respect of Bank Pozitif and its subsidiary in
Kazakhstan in the amount of NIS 100 million compared with NIS 40 million in 2009.
The Bank’s investment in subsidiary and affiliated companies totaled NIS 14.9 billion on December 31, 2010, compared
with NIS 14.1 billion at the end of 2009.
Subsidiaries in Israel
The principal companies are reviewed below.
The Isracard Group
The Group includes the following companies: Isracard Ltd., Poalim Express Ltd., Aminit Ltd., Europay (Eurocard) Israel
Ltd., Isracard Mimun Ltd., Isracard (Nechasim) 1994 Ltd., Tzameret Mimunim Ltd., and Global Factoring Ltd. These
companies constitute the Bank's credit-card business. The core activity of the Isracard Group is issuance, clearing,
and financing in Isracard credit cards, a private brand under its ownership, as well as MasterCard, Visa, and American
Express credit cards under licensing agreements.The Group also has activities in the following areas: granting consumer
credit other than through credit cards, check payment guarantees and check discounting, direct sales slip discounting,
and factoring (receivables discounting).
Net profit of the Isracard Group totaled NIS 208 million in 2010, compared with NIS 173 million in 2009.
The contribution of the Isracard Group to the Bank's operating results after taxes amounted to NIS 186 million in
2010, compared with NIS 176 million in 2009.
The Bank’s investment in the Isracard Group totaled NIS 1,429 million on December 31, 2010, compared with
NIS 1,215 million in 2009.
For details regarding various regulatory issues, see Note 19C to the Financial Statements.
Poalim Capital Markets – Investment House Ltd.
Poalim Capital Markets Ltd. (hereinafter: "Poalim Capital Markets") operates in two main areas: investment-banking
activity in Israel and abroad; and investments in private-equity funds and direct investments, including technology
sector investment funds.
In the area of investment banking, Poalim Capital Markets provides a range of services, including financial and strategic
consulting for mergers and acquisitions in Israel and abroad, consulting for privatization processes and for public and
private offerings abroad, and guidance of companies in Israel and abroad in investments of various kinds. The Poalim
Capital Markets Group also provides, through its equity-basis investee (19.97%) Poalim I.B.I., consulting, underwriting,
and management services for public offerings in Israel and capital raising through private offerings.
In the area of investment in private equity funds and direct investments, Poalim Capital Markets invests in funds
operating in various sectors, including venture capital, alternative energy, and others; invests in management corporations
of private-equity funds; and provides services to these corporations. In addition, Poalim Capital Markets continues to
manage venture-capital funds, in accordance with a permit from the Bank of Israel.
The contribution of Poalim Capital Markets to the results of operations of the Bank in 2010 amounted to NIS 30 million,
compared with a contribution in the amount of NIS 23 million in 2009.
The Bank's investment in Poalim Capital Markets totaled NIS 629 million on December 31, 2010, compared with
NIS 600 million in 2009.
119
Poalim Sahar Ltd.
Poalim Sahar Ltd. (hereinafter: "Poalim Sahar"), a wholly owned subsidiary of the Bank, is a member of the TASE and
of the TASE Clearing House.The company specializes in services for institutional entities: new and established pension
funds, bank provident funds, segmental provident funds, study funds, insurance companies, and public companies and
entities. The company provides brokerage services to customers in Israel and abroad, as well as research services,
custody services, and other related services, including operational services. Poalim Sahar sold its advisory service on
proxy votes in general assemblies on October 14, 2010, and ceased providing this service as of December 1, 2010.
The net profit of Poalim Sahar and its contribution to the operating results of the Bank totaled NIS 32 million in 2010,
compared with NIS 32 million in 2009.
The Bank’s investment in Poalim Sahar totaled NIS 227 million on December 31, 2010, compared with NIS 195 million
in 2009.
Activity of the Bank Group Abroad
General
The international activity of the Bank Group is conducted through banking subsidiaries, financial companies, and the
Bank's branches and representative offices abroad.The Bank's activity overseas is focused on the private banking and
corporate sectors. The Bank also has activities in the households and commercial sectors in Turkey and Kazakhstan.
Within its international activity, the Bank maintains relationships with over 2,400 correspondent banks around the
world. Its activity with these correspondent banks includes trading through dealing rooms, cooperation in foreign
trade and international trade financing, project financing, clearing of payments, and capital-market services (see the
section "Credit Exposure to Foreign Financial Institutions").
In its Global Private Banking business, the Bank provides high-net-worth customers abroad with advanced professional
services and products, including investment products and global asset management. Activity in the corporate segment
abroad includes credit granting to local and foreign borrowers, mainly through the acquisition of participation in credit
organized by leading banks overseas; credit granting to borrowers with an affinity to Israel; and investments in bonds.
Activity in the households and commercial segments in emerging markets is focused on the activity of Bank Pozitif
in Turkey and Bank Pozitiv in Kazakhstan.
The Bank's strategy is currently targeted to the development and expansion of its international activity, in the area of
Global Private Banking and in the business activities of its London and New York branches. In addition, the potential for
business activities in Asia is currently being examined, with a focus on banking services for Israeli companies operating
in the region, based on existing platforms. The Bank aims to continue to expand its service offering and improve its
capabilities in the areas of products, marketing, and customer service.
120
Legislative Restrictions, Regulation, and Special Constraints Applicable to International Activity
The following is a brief description of the main limits applicable to international activity.
Regulatory Supervision Abroad
In addition to the rules and limits imposed by the Bank of Israel on the international activity of the Bank Group,
pursuant to legislation and procedures as well as the provisions of permits granted by the Bank of Israel for the
acquisition of subsidiaries and/or opening of branches abroad, the activity of the international sector in the various
countries is subject to regulatory supervision by various government agencies in the relevant countries, which includes
requirements concerning shareholders’ equity, holdings of liquid assets, etc.
Regulatory Supervision – Miami Branch
An agreement (called a "Written Agreement") between the Bank and the Miami branch of the Bank, on one side, and
the Federal Reserve of New York, the Federal Reserve of Atlanta, and the Office of Financial Regulation of the State of
Florida (hereinafter: the "US Regulatory Agencies"), on the other side, took effect on July 8, 2009. A Written Agreement
is a formal enforcement procedure available to the US Regulatory Agencies, which has been used more extensively
since the outbreak of the economic crisis in 2008. The agreement signed essentially concerns the reinforcement of
the compliance, risk management, and audit functions of the Bank and the increased involvement of the Board of
Directors and Board of Management of the Bank in the supervision of the Miami branch, with the aim of correcting
flaws discovered in compliance with the provisions of US law in the area of the prevention of money laundering and
Know Your Customer regulations. In addition, under the agreement the Bank undertook a commitment to adopt
work plans for the correction of the flaws, as approved by the regulatory agencies, and to submit periodic progress
reports on the implementation of the work plans.
The agreement does not create or impose any limitations on the Bank's business activity, in the US or in general; it
is not expected to have a material impact on the financial results of the Bank.
The Bank is working to meet its obligations under the agreement in full and on time. A subcommittee of the Board
of Directors' Risk Management Committee is monitoring and supervising the correction of the flaws at the Miami
branch. An external consulting company specializing in advising banks on enforcement procedures has been engaged,
supervisory procedures have been tightened, and the compliance officers of the Miami branch now report to the
Risk Management Area. Failure to fulfill the obligations in the Written Agreement could lead to the application of
more severe enforcement procedures by the US Supervisory Agencies.
Condensed Aggregate Financial Statements of International Operations
The condensed financial statements of international operations presented below include the Bank's overseas offices
with activity in one or more of the following areas: granting credit, taking deposits, issuing bonds or notes, and managing
client assets. The activity of the Global Private Banking Center in Israel is also included.
121
A. Balance Sheet*
2010
2009**
USD millions
Assets
6,264
7,413
Securities
2,341
2,354
Securities borrowed or bought under agreements to resell
Investments in equity-basis investee companies
5
-
4,872
5,467
1
-
32
36
371
343
13,886
15,613
9,412
9,551
Deposits from banks
2,331
4,139
109
210
Buildings and equipment
Other assets
Total assets
Liabilities and capital
Securities lent or sold under agreements to repurchase
402
353
Other liabilities
627
432
12,881
14,685
Total liabilities
Minority interests’ rights
Capital means***
Total liabilities and capital
81
81
924
847
13,886
15,613
* The balance sheet of international operations is based on the data of the offices, translated into US dollars, after adjustment to
the accounting principles applied by the Bank, with adjustments in respect of the balance of the surplus acquisition cost over
the shareholders' equity of the offices, and the attribution of the share of minority interests.
** Restated due to a change in tax benefits overseas in respect of losses from previous years, and due to the adjustment of
companies defined as having international operations.
***Includes positive calculated capital in the amount of USD 158 million (December 31, 2009: USD 116 million) for the Bank's
branches that are not companies.The calculated capital includes the amounts of the original deposits deposited with the Bank’s
branches, with the addition of profits or deduction of losses recorded up to the balance-sheet date, including adjustments in
respect of the statement of securities available for sale at fair value.
122
B. Client Assets
2010
2009
USD millions
Deposits from the public, bonds, and subordinated notes
Client assets (off-balance sheet)
Total
9,814
9,904
9,050
9,250
18,864
19,154
C. Profit and Loss and Contribution of the Bank's Overseas Offices*
2010
2009
USD millions
Profit from financing activity before provision for doubtful debts
225
242
7
31
Profit from financing activity after provision for doubtful debts
218
211
148
129
Operating and other expenses**
321
291
45
49
Tax expenses
35
24
10
25
Minority interests’ share in profits (losses) of consolidated companies
)5(
1
Net profit
15
24
* Based on the data of the overseas offices, translated into US dollars, after adjustment to the accounting principles applied
by the Bank, deduction of the surplus acquisition cost over the shareholders' equity of the offices, attribution of the share of
minority interests in the results of consolidated companies, and a supplement for the additional tax applicable to the Bank in
Israel. Comparative data for 2009 were reclassified accordingly.
** Includes a provision for impairment of goodwill at Bank Pozitif and its subsidiary in Kazakhstan in the amount of USD 30 million
(2009: a total of USD 16 million).
123
Set out below are data regarding the investment in the principal overseas offices, and their contribution to the net
profit of the Bank:
2010
Investment
balance(1)
Company
Contribution
excluding
exchange-rate
differences(2)
NIS millions
%
-
US branches
London branch
36
Contribution
including
exchange-rate
differences*
NIS millions
-
36
-
40
-
-
40
79
6.1%
37
116
)52(
)146(
712
Hapoalim Securities U.S.A. Inc.
102
)94(
5
52
Total
)12.0%(
)6(
)1(
)4(
)18(
-
)30(
)30(
52
)55(
)3(
)14(
376
Other offices
-
Exchange-rate
differences on
the investment
1,374
Pozitif Group**
Banque Hapoalim (Luxembourg) S.A.
Return(3)
4.9%
)23.0%(
2009
Investment
balance(1)
Company
Contribution
excluding
exchange-rate
differences(2)
NIS millions
Return(3)
%
Exchange-rate
differences on
the investment
Contribution
including
exchange-rate
differences*
NIS millions
US branches
-
48
-
-
48
London branch
-
21
-
-
21
54
4.8%
26
80
Pozitif Group
847
)29(
)3.3%(
20
)9(
Hapoalim Securities U.S.A. Inc.
103
13
13.4%
)1(
12
70
)15(
)31.3%(
-
)15(
417
)2(
Banque Hapoalim (Luxembourg) S.A.
Other offices
1,218
Total
90
-
14
12
59
149
* The functional currency of the consolidated companies overseas is defined as New Israeli Shekels (NIS) pursuant to a directive
of the Supervisor of Banks. Exchange-rate differentials in respect of the investment are therefore allocated to the statement of
profit and loss.The Bank performs economic hedges of foreign-currency exposures arising from its investments in subsidiaries
overseas by raising resources in those currencies.This hedge does not constitute an accounting hedge; exchange-rate differentials
in respect of these resources are therefore not attributed to the results of operations of the subsidiaries.
** Includes a provision for goodwill impairment at Bank Pozitif and its subsidiary in Kazakhstan, in the amount of NIS 100 million,
and a current write-down of NIS 14 million (2009: a provision for impairment in the amount of NIS 40 million, and a current
write-down in the amount of NIS 19 million).
(1) The balance of the investment in the subsidiaries as of December 31 is presented after adjustment to the accounting principles
applied at the Bank. The balance of the investment in the Bank's branches in the US and London represents capital means
including the original amounts of deposits deposited with the branches by the Bank in Israel when the branches were founded,
plus profits or less losses recorded up to the balance-sheet date, including adjustments from the presentation of securities
available for sale at fair value.
(2) The contribution of the overseas offices consists of net profit, translated into NIS, with adjustments for the deduction of the
surplus costs in respect of these offices, and the attribution of minority interests' share of the profits of consolidated companies
overseas, excluding the supplement for the statutory tax rate applicable in Israel, in the amount of NIS 36 million (2009:
NIS 35 million).
(3) The return of the companies is calculated by dividing the contribution of the subsidiaries, excluding exchange-rate differences,
by the average investment. The return of the branches is calculated by dividing their contribution by their total capital means.
The calculation of the return does not take into account the capital means of the Global Private Banking Center in Tel Aviv.
124
Set out below are details of the net profit of the principal offices overseas, after adjustment to the accounting principles
applied at the Bank (in local currencies):
2009(1)
2010
Change
In millions
US branches – USD
*15.0
18.0
)3.0(
London branch – GBP
*12.0
5.0
7.0
27.9
20.8
7.1
Bank Pozitif Group – TRY**
1.9
4.5
)2.6(
Hapoalim Securities U.S.A. Inc. – USD
0.7
4.1
)3.4(
)3.9(
)2.9(
)1.0(
2.4
2.3
0.1
Bank Hapoalim (Switzerland) Ltd. – CHF
Banque Hapoalim Luxembourg S.A. – USD
Other offices – USD
* The Bank's branches in the US and London have a balance of losses carried forward, in respect of which deferred taxes were
not recorded in their financial statements; as a result, the local effective tax rate is low. The calculation of tax in Israel includes
a supplement in respect of these branches.
** Includes a provision for goodwill impairment at the subsidiary in Kazakhstan in the amount of TRY 14 million (2009: TRY 23 million).
(1) Net profit in the comparative data for 2009 was restated following adjustments to accounting standards which are used in the
Bank.
Global Private Banking Activity of the Bank Group
Within this framework, the Bank Group provides private customers with accounts at the Bank Group's overseas
branches and at the Private Banking Center in Tel Aviv with advanced professional services and products, including
investment products and global asset management. This activity currently encompasses Israel, Europe, the United
States, Latin America, Canada, Australia, Hong Kong, and Singapore, by means of 40 sites including banking subsidiaries,
branches, representative offices, and asset-management subsidiaries.
Set out below are details of the Bank's branches and principal subsidiaries overseas operating in the area of private
banking:
Bank Hapoalim (Switzerland) Ltd. (hereinafter: "Hapoalim Switzerland")
A wholly-owned banking subsidiary mainly engaged in the provision of private-banking services, through four
branches – two in Switzerland, in Zurich and Geneva; one in Luxembourg; and one in Singapore – as well as through
its representative offices in Tel Aviv, Hong Kong and Moscow.
Net profit of Hapoalim Switzerland totaled CHF 28 million in 2010, compared with CHF 21 million in 2009. The
appreciation of the Swiss franc against the various currencies, together with the narrowing of spreads, led to erosion
of profit from financing activity.This erosion was partially tempered by an increase in operating fees, due to customers'
return to the capital market. In addition, nonrecurring proceeds from a security fully written down in the past led to
an increase in profit relative to the previous year.
Hapoalim Switzerland’s contribution to the Bank’s operating results, excluding exchange-rate differences, amounted
to NIS 79 million in 2010, compared with NIS 54 million in 2009.
The total capital of Hapoalim Switzerland amounted to approximately CHF 365 million on December 31, 2010,
compared with approximately CHF 334 million at the end of 2009. The increase resulted from net profit, as well as
an increase in the total balance of the capital reserve in respect of securities available for sale.
The total balance sheet of Hapoalim Switzerland amounted to approximately CHF 2,891 million on December 31, 2010,
compared with CHF 3,556 million at the end of 2009. The decrease in the total balance sheet resulted from a
transition of customers' money from deposits with the Bank to the capital market, due to the low interest rate in the
market. In addition, the appreciation of the Swiss franc against the various currencies led to the erosion of balances
denominated in these currencies.
125
Global Private Banking Center in Tel Aviv
A center providing private-banking services and products to foreign residents from all over the world; an integral
part of the GPB network.
Private Banking in the United States
The Miami branch and the Private Banking Department at the New York branch offer private-banking services to
GPB customers. For further details regarding the activity of the New York branch, see below. Private banking in the
United States primarily focuses on customers from Latin America.
Poalim Asset Management (UK) Ltd. And Poalim Asset Management (Ireland) Ltd., held by PAM
Holdings Ltd. (hereinafter: "PAM Companies")
PAM Companies (wholly owned subsidiaries of the Bank) are responsible for selecting, marketing, and providing
professional support for investment products offered to Global Private Banking customers worldwide, in cooperation
with leading international financial companies in these fields. The Group is a key element in the implementation of
the Bank’s growth strategy abroad.
As of December 31, 2010, the Bank Group’s customers have holdings in funds of international financial entities with
which PAM collaborates totaling approximately USD 2.2 billion, compared with USD 1.6 billion on December 31, 2009.
PAM Companies also develop, plan, and provide professional support for other investment products, such as structured
products, in accordance with international standards, including through collaboration with leading global financial entities.
In addition, PAM Companies offer consulting and research services to the Bank’s subsidiaries and branches abroad.
BHI Jersey Ltd. (hereinafter: "Hapoalim Jersey")
As part of the effort to rationalize the Bank's overseas operations, the banking activity of Hapoalim Jersey was
terminated on December 31, 2010. Clients of Hapoalim Jersey were transferred to the branches of Bank Hapoalim
Switzerland in Luxembourg, Geneva, and Singapore.
Banque Hapoalim (Luxembourg) S.A. (hereinafter: "Hapoalim Luxembourg")
A banking subsidiary, wholly owned by the Bank, engaged in financial and banking activity in and outside of Luxembourg.
Hapoalim Luxembourg grants credit to private and institutional customers.
Bank Hapoalim (Cayman) Ltd. (hereinafter: "Cayman")
A commercial bank, wholly owned by the Bank, which under the terms of its license is permitted to operate in all
types of banking activity except for activity with local residents in the Cayman Islands. Cayman's assets include an
investment in a wholly-owned subsidiary in Uruguay, Hapoalim (Latin America) S.A.
Hapoalim (Latin America) S.A. (hereinafter: "Hapoalim Latin America")
Provides private-banking services to the Bank's customers in South America. Hapoalim Latin America operates in
Uruguay through three branches, in Montevideo, Punta del Este, and Colonia.
126
International Activity in the Corporate Segment
The New York Branch
Most of the Bank Group's international corporate activity is conducted through the New York branch.The New York
branch is focused on three areas of activity:
-Providing comprehensive banking services to large Israeli companies operating in the United States, including
credit, foreign trade, investments, and dealing-room services.The Bank allows Israeli companies as well as American
companies with assets in Israel to use collateral held in Israel in order to open credit lines at the New York branch.
The New York branch also offers its customers FDIC deposit insurance, similar to American banks.
-Granting corporate credit to large companies in the US economy by purchasing participation in credit lines
organized by leading banks (some 92% of the credit is provided to companies rated Investment Grade or secured
by entities rated Investment Grade by the international rating agencies Standard & Poor’s or Moody’s).
-Providing dealing-room services, including during hours in which dealing rooms in Israel are closed, as part of the
global activity of the Bank's dealing rooms.
The net profit of the New York branch totaled USD 29 million in 2010, compared with USD 23 million in 2009.
The branch’s credit portfolio totaled approximately USD 1.9 billion as of December 31, 2010, compared with
approximately USD 2.3 billion on December 31, 2009. The decrease resulted from credit repayments. The branch
also provided unutilized credit facilities and backup lines in the amount of approximately USD 2.0 billion as of
December 31, 2010, compared with approximately USD 2.3 billion at the end of 2009.
Total capital means of the New York branch amounted to approximately USD 90 million on December 31, 2010,
compared with USD 49 million on December 31, 2009.
The total balance sheet of the New York branch amounted to USD 5.5 billion on December 31, 2010, compared
with USD 6.6 billion on December 31, 2009.
Hapoalim Securities U.S.A. Inc. (hereinafter: "Hapoalim Securities")
A broker-dealer (wholly owned by the Bank) registered and operating in the United States. The broker-dealer is
under the supervision of the Securities and Exchange Commission (SEC) in the United States, the New York Stock
Exchange (NYSE), the National Association of Securities Dealers (NASD), and additional stock markets in which it
is a member, and operates in accordance with the rules established by these entities. The company’s activity is also
subject to supervision by the Supervisor of Banks in Israel.The company supports the expansion of the Bank’s activity
in securities trading on behalf of its customers.
The London Branch
The London branch focuses on three areas of activity:
-Corporate credit activity, within which the branch provides comprehensive banking services to large Israeli
companies operating in Europe and to local companies, including credit, foreign trade, investments, and
dealing-room services. The Bank allows Israeli companies as well as local companies with assets in Israel to use
collateral held in Israel in order to open credit lines at the London branch.
-Dealing room services, in which the branch provides its customers with trading in futures and options, as part of
the global dealing room activity of the Bank.
-The Private Banking Department of the branch provides services to high-net-worth clients and the companies
under their ownership, including corporate credit, routine account management, and investment products.
The profit of the London branch totaled GBP 12 million in 2010, compared with GBP 5 million in 2009.The increase
in profit mainly resulted from the maturation of asset-backed bonds written down in the past.
Total capital means of the London branch as of December 31, 2010 amounted to approximately GBP 34 million,
compared with GBP 25 million on December 31, 2009.
127
The total balance sheet of the London branch amounted to approximately GBP 1,037 million on December 31, 2010,
compared with approximately GBP 1,181 million on December 31, 2009.
Activity in Emerging Markets
The Bank Group currently operates in Turkey and Kazakhstan through the Bank's holdings in the shares of Bank Pozitif
Kredi Ve Kalkinma Bankasi Anonim Sirketi in Turkey, and its stake in JSC Bank Pozitiv in Kazakhstan.
Bank Pozitif Kredi Ve Kalkinma Bankasi Anonim Sirketi (hereinafter: "Bank Pozitif")
A bank incorporated and operating in Turkey, specializing in corporate and investment banking and in the households
segment. Bank Pozitif plans to expand its activities in the areas of both corporate and retail banking.The Bank's stake
in Bank Pozitif stands at 69.8%. Bank Pozitif does not have a permit from the Turkish regulator to manage deposits;
it is working to obtain such a permit.
JSC Bank Pozitiv
A bank incorporated and operating in Kazakhstan, wholly owned by Bank Pozitif.The bank provides banking services to
business and private customers. During 2009, in light of the economic crisis and the damage it caused to the Kazakhstan
economy, JSC Bank Pozitiv implemented streamlining measures and reduced its volume of credit. JSC Bank Pozitiv
intends to expand its credit portfolio and business capabilities gradually and in accordance with economic developments.
Set out below are details regarding the balance sheet and results of the Bank Pozitif Group:
Profit of the Bank Pozitif Group totaled approximately TRY 1.9 million (approximately USD 1.2 million) in 2010,
compared with a profit of TRY 4.5 million (approximately USD 3.0 million) in 2009. Excluding the write-down of
goodwill in respect of Bank Pozitif ’s subsidiary in Kazakhstan, profit in 2010 totaled approximately TRY 18.5 million,
compared with approximately TRY 31.9 million in 2009, as a result of a decrease in financing income, which was offset
by a decrease in the provision for doubtful debts.
The Bank Pozitif Group’s contribution to the Bank’s operating results, excluding exchange-rate differences, was
negative in the amount of NIS 94 million in 2010, compared with a negative contribution of NIS 29 million in 2009.
This change mainly resulted from goodwill impairment in respect of Bank Pozitif and its subsidiary in Kazakhstan, in
the amount of NIS 100 million, compared with NIS 40 million in 2009.
Total shareholders' equity of the Bank Pozitif Group amounted to TRY 413 million (approximately USD 267 million) on
December 31, 2010, compared with approximately TRY 402 million (approximately USD 268 million) at the end of 2009.
Total assets of the Bank Pozitif Group amounted to approximately TRY 1.68 billion (approximately USD 1.08 billion) on
December 31, 2010, compared with approximately TRY 1.61 billion (approximately USD 1.08 billion) at the end of 2009.
The Bank's investment in the Bank Pozitif Group totaled NIS 712 million on December 31, 2010, compared with
approximately NIS 847 million at the end of 2009.
128
General information and Additional Matters
Fixed Assets and Facilities
December 31
2010
Cost
2009
Accrued
depreciation
Balance
Balance
1,945
2,003
NIS millions
Buildings and land, including installations and improvements to
rented properties
3,541
1,596
Equipment, including computers and software, furniture, and
vehicles
2,742
1,895
847
873
Discounted costs of software developed in house
1,955
944
1,011
969
Total
8,238
4,435
3,803
3,845
The buildings in which the Bank's business is conducted in Israel are under its ownership or under the ownership of
its asset companies, or rented for various rental periods. Most of the properties in which the Bank Group's business
is conducted overseas are rented.
The Bank owns 196 properties with an area of 204,000 sq. meters, of which 166 buildings with an area of 106,000
sq. meters used as branches and call centers, and 30 buildings with an area of 98,000 sq. meters used as management
offices (some also used by the branch network), which include an area of approximately 6,000 sq. meters used as
auxiliary and storage space, etc. In addition to the buildings under its ownership, the Bank rents 177 buildings with an
area of 91,000 sq. meters, of which 139 buildings are used by the branch network, call centers, and the central back
office. The remaining properties house management offices, archives, storage facilities, and more. Data referring to
the area of Head Office buildings also include parking lots and storage facilities.
As part of the work plan for 2011, the Board of Directors passed a resolution to work to consolidate Head Office
offices and units at a future central site to be built outside central Tel Aviv. Among other matters, a decision was made
to buy suitable land with an area of approximately 100,000 sq. meters, and to transfer the units in stages. In the first
stage, one of the Bank's computer sites (the production site or the backup site) will be relocated, along with other
banking support units. In the subsequent stages, the relocation of additional Head Office units will be considered.
It was further resolved that the central site would be planned based on green construction principles. The planning
and construction of the first stage of the central site are expected to take several years.
For further data regarding buildings and equipment, see Note 7 to the Financial Statements.
IT Infrastructures
General
The Bank has two central IT sites: a main production site and a backup and development site, to ensure maximum
survivability. The Bank’s core system, located at the production site, is installed on an IBM mainframe computer. As
part of the process of improving the availability and survivability of the system of mainframe computers, in 2010 the
Bank purchased an additional mainframe computer for the production site, which will be linked in a cluster formation
to the existing computer at that site, with data sharing and full mutual backup (PSDS). The two computers have
aggregate power of more than 14,000 MIPS (million instructions per second). A mainframe computer will operate
at the backup site in a minimal format. When necessary, this computer will be expanded to the required power.
129
Additional systems operate alongside the core system (Linux, Unix, and Windows-based systems – hereinafter:
the "Open Systems"), for specific needs, using a platform that allows dynamic distribution and optimal utilization of
resources.The Bank uses advanced methodologies and systems to streamline development and production processes,
including via SOA architecture and automated process management (BPM).
The Bank Group's branches, regional administrations, business centers, and Head Office units are computerized
and connected online to the computer centers of the Information Technology Area. A total of approximately 2,250
servers and 14,800 work stations are installed within the Group, including 1,100 stock-market information stations
at branches, for use by customers and clerks. Some 538 automated teller machines and 756 information and check
deposit machines are available to customers (486 are inside branches and 270 are on the external walls of branches).
Information Backup and Storage
As noted above, the Bank has two central IT sites, a main production site and a backup and development site. The
storage volume on the central computer is approximately 150 TB at both sites. The total storage volume on the
Open Systems at both sites is approximately 800 TB. In addition, there are two automated robotic systems for the
central computer and four automated robotic systems for the Open Systems, made by IBM and Quantum. These
systems are located at the production and backup sites, and maintain two identical copies of an additional duplicate
backup of all of the information and systems, at a total volume of approximately 2,130 TB. In addition, the Bank has
databases which store copies of paper documents, mortgage documents, etc., for everyday use in data retrieval and
in order to retain an accessible historical copy of these data.
Every action executed on the Bank's computers is simultaneously updated at the production site and the backup site,
so that in case of disaster or physical malfunction, a backup exists for the Bank's critical systems, and damage to the
hardware at one of the sites would not cause information loss. In the event of an emergency switch to the backup
site, the Bank has the capability to immediately increase in the power of the backup computer (MF) to the power
level of the production computer, by operating dormant engines; in other words, the backup site has the capacity
for the computer power required for all of the Bank’s routine business activity. In case of damage to both sites (the
production site and the backup site), duplication to an additional (third) copy of the data from the central computer
at a remote location (MED1) was added in 2010.
Communications
The Bank has an advanced data and voice communications network, with high data transmission speeds. The
communications network has high survivability and includes backups that allow work with both of the Bank’s IT
centers.The Bank's communication network also connects the Bank's branches and its offices worldwide and transmits
data services, speech, and video conferences.
Subsidiaries
The IT and operational systems of subsidiaries abroad and of the activity of the Bank Group not conducted through
the subsidiaries are based on independent systems. Administrative responsibility for these systems rests with the
management of the subsidiaries and their boards of directors, or with the member of the Board of Management
responsible for the activity, as relevant. Professional responsibility for this system belongs to the Head of the Information
Technology Area. The system is connected through a communications network to the Bank's systems in Israel, used
for encrypted, secure voice and data communications.
Further to a resolution of the Isracard Group in late 2008, an immediate backup site for critical systems of Isracard
was established during 2010 at the Bank's backup site.The Isracard Group has signed an agreement with IBM for the
setup of a backup site for its computer systems. The site is located on the basement floor of a facility managed by
IBM in Netanya. The move to the new site is planned for completion by the end of June 2011.
130
The estimate of the Bank and the Isracard Group concerning the completion date of the establishment of the backup
site constitutes forward-looking information, as defined in the Securities Law.This estimate is based on factors including
accumulated experience in the establishment of backup systems and knowledge in the management and establishment
of projects of similar scope. This estimate may not materialize, including in the event of a change in the availability of
equipment or manpower necessary in order to complete the process.
The credit-card companies in the Isracard Group carry out daily backups of critical systems not processed on their
central computer, saved at the Bank's backup site.
Recovery values of the information of the Isracard Group are as follows:
Central computer – no information loss, within 6 hours.
Critical open systems – no information loss, within 12 hours.
Other open systems – no information loss up to 48 hours, otherwise gradual operation within 3 months.
Suppliers
From time to time the Bank enters into contractual engagements with suppliers from Israel and elsewhere to
receive the various services it requires in the area of information systems, including agreements for the purchase
and maintenance of equipment, implementation of information systems, and purchase of software; the majority of
development, with the exception of special systems such as trading systems, is performed in house. Note that there
are services based on technologies regarding which knowledge is concentrated with a small number of service
providers, and sometimes with a service provider with exclusive expertise and knowledge in the specific technology,
such as Microsoft, IBM, Oracle, and others.
Information Security
Investment in information security in data systems is an integral, inseparable part of the development of modern
information systems. In the Bank’s systems, information security is implemented on several levels and circuits, in order
to ensure that the Bank’s systems are well protected against penetration, unauthorized access, or damage.The internal
communication network is separated from external networks by various means of protection, including advanced
firewalls, data crypt services (Cyberark), and other methods. All external e-mail traffic is examined by antivirus software
at a server external to the network, and is filtered and monitored before entering the internal e-mail system through
several layers of protection. All workstations and servers at the Bank are protected at all times by up-to-date antivirus
software and monitored online. All users identify themselves using strong identification to log in to the computer
network, using a smart card and biometric identification. Information-related projects at the Bank are accompanied
from their inception by an information-security team that ensures strict compliance with information-security rules,
preservation of the privacy of information, and the restriction of access to information to authorized personnel only.
Security events in IT systems are referred in real time to an expert center of information security personnel, and
addressed and documented from the initial stage of the event to its completion. Relevant events are also referred
to the Audit Department. Material incidents are reported to the Board of Management and the Board of Directors.
The Bank routinely conducts resilience tests and information-security surveys of its systems, in order to ensure that
information security is maintained at all times and complies with the strict rules established in this area.
131
Main Projects in Progress
CRM – The CRM project centralizes all communications with customers, focusing on marketing, sales, customer
recruitment, and identification and prevention of customer desertion, with support for multi-channel processes and
management of the relationship with the customer, and uniformity in communications among different units and
divisions within the organization. In 2010, support for multi-channel processes was developed; for example, transfers
of requests between channels, coordination of advisory sessions at branches through Poalim by Telephone, support
for multi-channel retention processes, service package management, support for processes at business branches, and
a transition to process and result management.
Central Back Office – Centralization of operational activities through the transfer of these activities from the branch
network and the Head Office to several centers. For further details, see the section "The Households Segment" above.
ERP Shiluvim – Establishment of a business and technological infrastructure for effective management of the Bank's
resources. This infrastructure includes business processes, organizational estimates, and an integrative information
system to address all areas of resource management, operational excellence, service, and expense management
at the Bank (human resources, the comptroller, purchasing and logistics, budget control, cost management, project
management, real estate management, payment and supplier management, and more).The system helps to streamline
organizational processes and achieve operational excellence.
This system has been gradually implemented at the Bank since 2007. In 2009, an additional system was introduced
in the area of human resources, replacing many computer systems and upgrading the Bank's capabilities in handling
human capital. In Phase II of the project, advanced processes will be implemented in the human resources system,
including hiring processes, planning, talent management, service centers, performance evaluations, compensation, and
more. The main project was completed during 2010.
Meser – Establishment of an advanced accounting information system, based on a uniform financial infrastructure
for the Bank, which among other things will improve analytical capabilities for management.
Basel II – Project for implementation of the Basel II directives in Israel. For details regarding the Bank's preparations
for the implementation of the directives, see the section "Restrictions and Supervision of the Activity of the Banking
Corporation" below.
Yahalom – Implementation of the Bank of Israel's directive regarding the measurement and disclosure of impaired
debts, credit risks, and provision for credit losses. The directive is based on US accounting standards and reporting
directives, and sets forth new rules for the definition of problematic debts and for provisions for credit losses.
Upgrade of securities trading system – The goal of the project is to upgrade the trading systems and provide
support for future growth of this activity. Implementation of the project will generate the following benefits: improved
survivability of systems, upgraded infrastructures, improved processes, minimization of malfunctions, and setup of
controls in the various processes.
Business branches – As part of the strategic plan to provide high-quality service and create genuine value offers
for customers of the Corporate Area, a decision was made in 2009 to open 25 business branches nationwide. As
part of this plan, retail branches are being repurposed for the Corporate Area, and new business branches are being
set up at sites vacated by retail branches, or in new strategically located premises. Twelve branches were opened in
2009-2010.The establishment of these branches entailed operational preparations aimed at formulating specifications
for and implementing an optimal operational and service process for the transfer of Corporate Area customers to
the business branches, and adapting existing systems and developing support systems for the work of the business
branches, in order to support the achievement of business objectives.
Express branches – Expansion of the deployment of the network of branches.
132
Pension advising – The goal is to offer full, high-quality pension advice to the entire population of Israel, and to
make Bank Hapoalim the leader in this field, as in the area of financial advice. As part of this project, an advanced
pension-advising system is being developed to recommend the optimal portfolio for each customer, based on
information regarding the customer and the discussion of the customer's needs.The project will support preparatory
processes and simulations in advance of the advisory session.
Direct value offer – A package of direct-channel products and services targeted to "direct customers" (Bank
customers oriented towards the use of the direct channels). This package is part of the overall concept of a new
value offer ("Poalim Connect") at the Bank, designed for this group of customers. The unique concept combines an
accessible personal response with a customer experience of a substantial enhancement of the interaction with the
bank, through a personal banker who maintains a relationship with the customer, assists him or her, and proactively
initiates contact. Key points of the project:
•Personal banker – High availability (08:00-18:30); backed by a team at a specialized call center. The banker will
support the customer's routine financial interactions with the Bank with both responsive and proactive activities.
•New communications channels – Two-way e-mails, chats, two-way text messaging.
•New online experience – Creation of a personal homepage showing a summary of the customer's financial data,
concentrated in one location, along with information regarding the communications between the customer and
the Bank, in order to create a personal experience on the website.
•Link to a package of new services – Budget management, "Doar Net" (online mailings), two-way e-mails, two-way
text messaging.
Volume of Investment
The volume of the investment in hardware and software (including capitalized salary costs) totaled approximately
NIS 531 million in 2010 (2009: approximately NIS 544 million).
Human Capital
Human Resources Strategy
Human resources strategy is formulated in congruence with the Bank's strategy, the derived business needs, and trends
in the area of human resources. Accordingly, the Human Resources Area has set itself the mission of serving as a
strategic partner supporting the achievement of the Bank’s business objectives, with an emphasis on the development
and cultivation of human resources, while continually striving for excellence and making optimal use of resources.
The strategic plan encompasses four main areas of activity:
Human resources planning – Formulating and implementing plans and processes according to the work
•
plans of the divisions of the Bank, in all areas related to human capital, including mix, education, and training, while
adjusting to labor-market trends and changing regulation.
Cultivating and preserving human capital – Cultivating managerial excellence among Bank employees;
•
cultivating and developing unique populations; matching the professional training of Bank employees to the Bank's
strategic plan, as a key element of its fulfillment; cultivating pride, belonging, and a family atmosphere; motivation
and encouragement of employees; improvement of intra-organizational communication; absorption of values and
the ethical code.
•
Operational excellence – Managing resources and designing advanced work processes through the
implementation of the ERP system; examination of cost generators in order to achieve optimal resource utilization.
Excellence in service – Setting standards for a high level of service; proactively providing service to Bank units;
•
matching the service package to the unique needs of internal clients.
133
Set out below are data regarding the manpower of the Bank Group, in terms of positions(1):
2010
2009
Annual
average
Year-end
balance
Annual
average
Year-end
balance
In Israel
10,846
10,643
10,707
10,709
Abroad
383
371
367
383
11,229
11,014
11,074
11,092
In Israel
1,766
1,718
*1,701
*1,858
Abroad
880
873
908
841
The Bank:
Bank total
Subsidiaries:
Subsidiaries total
2,646
2,591
*2,609
*2,699
Bank Group total
13,875
13,605
*13,683
*13,791
*Restated.
(1) The number of positions also includes equivalents of overtime costs in terms of positions, plus positions of external personnel
who are not Bank employees but provide work services to the Bank as required for the adjustment of manpower needs in
the course of routine operations and for the introduction of projects, less positions of employees whose wages are capitalized
as fixed assets.
Principal changes in the manpower of the Bank Group in 2010 are set out below.
As of December 31, 2010, the number of employee positions decreased by 186 in comparison to December 31, 2009,
as follows.
•The decrease in the number of positions in Israel mainly resulted from a decrease in the number of positions at
Isracard, due to streamlining measures carried out in late 2010, as a well as a decrease in the number of positions
of employees of the Bank in Israel.
•The number of positions of employees of the Bank at its overseas branches decreased by 12, as a result of a
decrease in the employment of temporary workers, mainly in the last quarter of 2010.
•The number of positions of employees of subsidiaries abroad increased by 32, mainly as a result of employees
hired at Bank Pozitif due to the expansion of its activity.
The average number of positions in the Bank Group increased by 192 in 2010, in comparison to the average number
of positions in 2009. Most of the increase resulted from employees hired for management training and investment
advisors' courses for the branch network, and the timing of the reduction of positions at the end of the year.
Set out below is the distribution of the average number of employee positions in the Bank Group by segments of
activity(1):
2010
2009*
Households
5,381
5,333
Private Banking
3,563
3,459
Small Businesses
1,892
1,891
Commercial
583
557
Corporate
844
821
Financial Management
818
837
794
785
13,875
13,683
Total
*Restated.
(1) Includes positions of Head Office employees whose cost of employment was charged to the segments.
134
Human Resource Characteristics
The policy of the Bank is to employ, promote, and make decisions concerning employees based on material
considerations such as skills and performance, without discrimination on the basis of religion, race, sex, age, views,
sexual orientation, disability, etc.The Bank encourages the hiring of minorities and of employees belonging to segments
underrepresented in the labor market, a part of its hiring policy, in recognition of the advantages inherent in a diverse
workforce in terms of the understanding of various segments of customers, effective problem solving, and the
encouragement of innovation and creativity in an open and diverse work environment.
The average seniority of the Bank’s employees was 16.9 years in 2010, compared with 16.6 years in 2009.The average
age of employees was 42.4 in 2010, compared with 41.9 in 2009.
In 2010, approximately 66% of all employees of the Bank were women, similar to the rate in 2009. In the Bank's
senior management (department heads at the Head Office, branch managers, and above), the percentage of women
increased from approximately 29% in 2006 to approximately 36% in 2010.
The Bank’s policy is to hire employees holding academic degrees, as necessary; accordingly, the percentage of these
employees out of total employees of the Bank is rising steadily. In 2010, the number of employees of the Bank holding
academic degrees increased by approximately 2%. This increase resulted from degree-holding employees hired, and
from the completion of academic studies by employees of the Bank. Over the past years, the percentage of employees
of the Bank holding academic degrees has continually increased, from 28.1% in 1998 to approximately 53% in 2010.
The Bank’s Remuneration System
The Bank's policy is to link the Bank's performance to the remuneration of its employees, in accordance with the
agreement with the Employees' Union. Wage and remuneration systems are based on congruence between the level
of remuneration and the employee's role and contribution to the organization. Employees' remuneration is usually
based on three components: routine wages, annual bonuses, and long-term remuneration derived from the increase
in value of the Bank's shares.
Employees of the Bank are entitled to various benefits, including participation in health insurance, participation in
tuition fees, participation in costs of membership of sports centers and cultural institutions, gifts on holidays and
personal occasions, and a bonus after 25 years of work.
For further details, see Notes 15 and 16 to the Financial Statements.
Cost and Wages per Employee Position
Set out below are details of cost per employee position and wages per employee position at the Bank
(in NIS thousands):
Cost per employee post, excluding bonuses
2010
2009
308
286
Cost per employee post, including bonuses
356
310
Salary* per employee post, excluding bonuses
192
190
Salary* per employee post, including bonuses
237
212
* Salary – calculated according to gross salary as paid to the employee.
135
Cultivation and Development of Human Capital
The Bank routinely cultivates a culture of learning among its employees, and invests substantial resources in professional
and managerial training, in recognition of the importance of continual improvement in employees’ abilities for the
achievement of the Bank’s strategic objectives.The Bank is hiring employees with academic degrees, and encouraging
its employees to obtain undergraduate and graduate degrees by providing tuition aid and adding vacation days for
examinations.
In 2010, the Poalim Campus held approximately 64,000 training days in 360 courses. In addition, four academic
preparatory courses were held for 103 bankers who lacked necessary academic training.
Banking training – The Banking School is responsible for training the bankers and executives of the Bank by providing
knowledge and skills in the content areas relevant to banking, and by retaining and reinforcing the competence of
all bankers in discharging their duties, according to the elements of the various positions and the strategic changes
in the organization. In 2010, training programs were created in adjustment with the various positions, the business
objectives of the Bank, and the needs of the various units. Within the school's goal of retaining bankers' knowledge
and expanding it in the course of their work, professional coaching days were developed for experienced bankers
on critical issues that commonly arise in their work. In addition, brief, topic-focused training kits were developed for
shared learning within the units, as part of the creation of a culture of a learning organization. Among other activities,
two sessions of banking management training courses and nine sessions of senior executives' courses in various
areas were held in 2010, and approximately 500 bankers participated in coaching days relevant to their positions.
Executive training and development – The School of Management and Leadership at the Poalim Campus
serves as a base for the building and operation of development tracks for Bank executives, in order to empower
and cultivate a core group of managers, in line with the Bank’s strategic goals, objectives, and values. The School of
Management and Leadership currently conducts basic and advanced training programs in management for all ranks
of managers within the Bank. For the first time this year, "management coaching rooms" were added to strengthen
specific management skills and improve executives' professional capabilities. In 2010, the School of Management and
Leadership established a business skills unit and an online learning development unit. A range of executive development
programs were operated during 2010, in which approximately 450 executives received training in development
programs and approximately 300 executives participated in management coaching rooms.
In 2010, approximately 1,400 employees and executives participated in knowledge-gap mapping processes, focused on
the following areas: consumer-protection directives and the prohibition of money laundering, shekel deposits, savings
plans, and investment advising. In accordance with the findings of the knowledge-gap mapping processes, targeted
training activities were conducted in order to close the gaps.
Organizational Culture and Climate
Ethical Code
The Bank considers the ethical code to be a foundation of its organizational culture.The ethical and behavioral code of
the Bank encompasses standards, morals, relationships among colleagues, relationships with customers and suppliers,
contribution to the community, and social and environmental responsibility. The ethical code serves as a compass
guiding proper behavior, and is known as the ethical and behavioral code.The ethical code has been in place at the Bank
since 2004. Due to the importance accorded to the code by the Bank, the Head of Human Resources, Procurement,
and Logistics has been assigned responsibility for ethics at the Bank and for the promotion of this area at the Bank.
The code was overhauled in 2008-2009, with a renewed emphasis on employees' commitment to responsible conduct
and on action in compliance with the law and with the values of professionalism, personal integrity, excellence, and
loyalty to the Bank. The ethical code of the Bank considers employees to be partners in the activity of the Bank, in a
relationship based on mutual trust and respect.
136
A comprehensive absorption plan designed to instill the new ethical code in all employees of the Bank was
implemented in 2010. The plan stressed studying the ethical code, developing the ability to make ethical judgments,
adopting ethical rules of conduct, and guiding managers towards ethical leadership within their units. The process
included distribution of the ethical code to all employees of the Bank, training sessions in all Bank units held by the
unit managers, a tutorial on the ethical code completed by approximately 10,000 employees, and integration of this
topic into the various courses held at the Bank, from bank teller courses to courses for senior executives.The ethical
code was discussed on the Bank's portal in Israel and abroad and on its external website, communication channels
were formed for consultation and reporting, procedures were issued for inquiries on the topic of ethics, and a banking
ethics team was established.
The continuing absorption process is focused on communication and awareness, through emphasis, guidelines, and
reminders of the procedures at relevant points in the organization's calendar, and through periodically addressing
this topic in the leading forums, continuing the development of tools to enable executives to achieve internalization
and commitment, and continually improving and updating the code.
Intra-Organizational Communication
The Board of Management of the Bank strives to promote the values of openness and transparency, as part of
the organizational and managerial culture of the Bank. In order to maintain employees' sense of identification and
high commitment, many initiatives are conducted with the aim of strengthening connections and dialogue between
management and employees, such as: visits to units, breakfast meetings with the CEO, round tables led by members
of the Board of Management, appreciation events for outstanding and long-serving employees, conferences for senior
executives, and more.
The organizational portal serves as a central, advanced communications channel and supports the sharing of
information with employees and the absorption of intra-organizational change processes.
Liquidity and Raising of Sources of Funds at the Bank
Monetary Tools of the Central Bank
There are several means available to the Bank of Israel in order to establish the liquidity level of the banking system.
The monetary activity of the Bank of Israel is divided into two types:
•Activity during a liquidity month – A liquidity month is defined by the Bank of Israel as a period of 4-5 weeks,
ending on the last Wednesday of the calendar month. Activity is conducted through loan and/or deposit auctions
for the commercial banks, including weekly and daily auctions, as well as through monetary loans and/or deposits
at interest rates different by ±0.5% from the Bank of Israel interest rate.
•Activity over periods longer than a liquidity month – According to economic conditions in Israel and globally,
the Bank of Israel determines the desired liquidity position for the banking system. The Bank of Israel can apply
expansive monetary policies leading the system to high liquidity surpluses, or restrictive monetary policies that
lead the system to liquidity deficits.
The monetary interest rate of the Bank of Israel, which stood at an annual rate of 1.25% at the beginning of 2010,
rose to 1.50% at the beginning of April, to 1.75% at the end of July, to 2.0% at the end of September, to 2.25% at the
end of January 2011, and to 2.5% at the end of February 2011.
The following are the means used by the central bank:
•Makam auctions – The Bank of Israel maintains balances of Makams (short-term notes) of approximately
NIS 136 billion. By decreasing or increasing this balance it changes the liquidity position of the banking system.
•Intervention in the foreign-currency market – The Bank of Israel buys or sells foreign currency from or to the
banking system.
137
•Intervention in the government bond market – The Bank of Israel buys or sells government bonds.
•Operation of repo auctions – Activity of the Bank of Israel with the banks and institutional entities.
At the end of January 2011, the Bank of Israel added new directives for the financial markets:
1.A reporting requirement on transactions in foreign-currency derivatives of more than USD 10 million, and a
reporting requirement on transactions in Israeli government bonds (up to one year) and short-term notes by
non-residents and financial intermediaries of more than NIS 10 million.
2.A 10% liquidity requirement imposed on swap transactions and NIS/foreign-currency future conversion
transactions by non-residents.
At the end of 2010, the liquidity surpluses of the banking system totaled approximately NIS 84 billion, compared with
approximately NIS 89 billion at the end of 2009. The main changes during the year were an increase of net Makam
offerings by approximately NIS 51 billion by the Bank of Israel, and its purchase of approximately USD 13 billion
(approximately NIS 50 billion), due to its continued occasional intervention in the foreign-currency market, and the
injection of additional shekels into the banking system.
For reasons of caution, the Bank continues to deposit a large part of its liquidity balances with the central bank in
the United States, at low returns, and is considering investing some of its liquidity balances in bonds of high-rated
countries and financial institutions.
The Bank monitors its overall liquidity position daily, as well as its liquidity position in shekels and in foreign currency
(including overseas branches) separately. In addition to the monitoring of its current liquidity position, the Bank
estimates liquidity risk using an internal model. The risk estimate is performed under various assumptions referring
to different market conditions for the Israeli banking system and for the Bank.
Settlement Systems in the Banking Industry
Until September 2007, the banking industry operated electronic funds transfer, mainly through the Masav (Bank
Clearing Center) system, in addition to a check clearing system. In addition, as of September 2007, the banking
industry began to operate the RTGS (real-time gross settlement) system to clear monetary transactions in real time.
The Bank of Israel determined that transactions from the amount of NIS 3 million must be transferred using RTGS.
Following the launch of the RTGS system, the NIS was added as a currency settled through the worldwide CLS
(continuous linked settlement) system, which is designed to eliminate settlement risk in exchange transactions. This
system has been used for exchange transactions in which the NIS is one of the currencies since May 2008.The Bank
is a clearinghouse member and shareholder of CLS, and a supplier of liquidity in NIS for CLS. On July 1, 2010, the
Bank of Israel lowered the transaction amount requiring transfer through RTGS to NIS 1 million.
138
Resources of the Bank
The resources available to the Bank are deposits from the public, deposits from the government, and resources from
the Bank of Israel and other banks, as well as capital and debt raised from the public.
Set out below are details of deposits with the Bank Group:
2010
2009
NIS millions
233,965
231,993
Deposits from banks
4,834
6,455
Deposits from the government
1,335
1,551
240,134
239,999
Total
Deposits from the Public
Set out below are details of the components of deposits from the public with the Bank Group:
2010
2009
NIS millions
Demand deposits
Fixed-term deposits
Deposits in savings plans
Total
139
43,806
45,410
185,453
181,603
4,706
4,980
233,965
231,993
Set out below is the distribution of the portfolio of deposits from the public, by linkage segments:
Balance as of
December 31
2010
The segment's share of total
deposits from the public as
of December 31
2009
NIS millions
2010
Change
NIS millions
%
2009
%
136,702
126,783
9,919
7.8%
19,421
21,238
)1,817(
)8.6%(
8.3%
9.2%
Foreign currency (including f. c. linked)
77,637
83,819
)6,182(
)7.4%(
33.2%
36.1%
Non-monetary items
Total
58.4%
54.6%
205
153
52
34.0%
0.1%
0.1%
233,965
231,993
1,972
0.9%
100.0%
100.0%
Deposits from Banks
Set out below are details of the composition of deposits from banks (including the Bank of Israel):
2010
2009
NIS millions
Banks
Demand deposits
1,383
1,160
Fixed-term deposits
3,069
4,823
380
470
Acceptances
Fixed-term deposits with special banking corporations:
Total
2
2
4,834
6,455
Set out below are details of deposits from banks (including the Bank of Israel), by linkage segments:
2010
2009
NIS millions
1,390
1,503
631
996
2,813
3,956
Total
4,834
6,455
Deposits from the Government
Set out below are details of deposits from the government, by linkage segments:
2010
2009
NIS millions
322
206
881
1,199
Total
140
132
146
1,335
1,551
Capital and Debt Raised from the Public
The Bank Group raises resources through both public and private offerings of bonds and subordinated notes,
which serve as part of the regulatory capital of the Bank. In addition, the Bank has wholly owned subsidiaries,
Hapoalim Hanpakot and Hapoalim International, engaged primarily in raising monetary resources in Israel and
overseas, respectively, through offerings of bonds and subordinated notes of various types (which constitute part of
the regulatory capital of the Bank), and deposit the proceeds of these offerings with the Bank.
The balance of bonds and notes totaled NIS 27.6 billion as of December 31, 2010, compared with NIS 23.1 billion
at the end of 2009. For further details regarding bonds and subordinated notes issued by the aforesaid entities, see
Note 11 to the Financial Statements.
The balance of amounts raised by the Bank as of December 31, 2010 includes subordinated notes in the amount of
NIS 6.5 billion, of which tradable notes in the amount of NIS 3.2 billion.
In addition, the Bank has performed offerings through its wholly owned subsidiaries, Hapoalim Hanpakot and Hapoalim
International, which are primarily engaged in raising monetary resources in Israel and overseas, respectively, through
offerings of bonds and notes of various types (which constitute part of the regulatory capital of the Bank), and
depositing the proceeds of the issuance with the Bank. As of December 31, 2010, the balance of notes raised by these
companies is approximately NIS 12.5 billion, and the balance of bonds is approximately NIS 8.6 billion.
During 2010, the Bank raised approximately NIS 4.9 billion in bonds, and approximately NIS 1.2 million in subordinated
notes constituting Lower Tier II capital. The increase in this item was offset by maturities of bonds and notes during
2010, in the amount of approximately NIS 1.6 billion.
Ratings of the Bank
The following ratings have been assigned to the Bank by rating agencies in Israel and abroad:
In Israel, the Bank is rated AA+ by S&P Maalot Ltd.
Ratings of the Bank and of Israel by the international rating agencies:
Rating agency
Long-term
Short-term
Rating outlook
foreign currency foreign currency
Last update
Moody’s
A1
P-1
Stable
November 2010
S&P
A
A-1
Stable
March 2010
Fitch Ratings
A
F1
Stable
November 2009
Moody’s
A1
P-1
Negative
September 2010
S&P
BBB+
A-2
Stable
December 2010
Fitch Ratings
A-
F2
Stable
May 2010
Israel – sovereign rating:
Bank Hapoalim:
In May 2010, the rating agency S&P reaffirmed the Bank’s rating, with no change.
In May 2010, the rating agency Fitch reaffirmed the Bank’s rating, with no change.
In September 2010, the rating agency Moody's reaffirmed the Bank’s rating, with no change.
In December 2010, the rating agency S&P changed the Bank's rating outlook from Negative to Stable.
141
Taxation Status
A. Tax Laws Applicable to Group Companies
Reform in the Israeli Taxation System
The Knesset passed the Income Tax Ordinance Amendment (No. 147) Law, 5765-2005 on June 25, 2005, and the
Economic Streamlining Law (Legislative Amendments for the Implementation of the Economic Plan for 2009 and
2010), 5769-2009 on July 14, 2009. These legislative amendments establish, among other things, a gradual reduction
of the corporate tax rate, to 18% from the tax year 2016 forward. See details of corporate tax rates over the years
in the section on combined tax rates. The Bank recorded tax expenses in the amount of NIS 61 million in 2009 as
a result of this change.
Value Added Tax Law, 5736-1975
The Bank is defined as a financial institution for the purposes of the Value Added Tax Law, which imposes a payroll
tax and a profit tax on such institutions. Profit is defined as taxable income, as defined in the Income Tax Ordinance,
before offsetting losses from tax years preceding the tax year in which the income was received, and after deducting
payroll tax, excluding income from dividends received from a financial institution, and including income from interest
or dividends or the sale or redemption of a unit or profit distribution to a unit owner for which an exemption from
income tax has been granted under any law.
On February 26, 2008, the Knesset approved amendments to the Value Added Tax Law, as follows:
•Payroll tax paid by a banking corporation and not recognized as an expense for the purposes of profit tax by the
date of the amendment shall be recognized as an expense. It was stipulated that in 2008, only half of the payroll
tax paid would be recognized as an expense in the aforesaid manner.
•National Insurance fees paid by a banking corporation will be charged with payroll tax. It was stipulated that in
2008, only half of the National Insurance fees would be charged with payroll tax.
The Value Added Tax Order (Tax Rate for Non-Profit Organizations and Financial Institutions), 5753-1992 was
amended several times, and rates of payroll and profit taxes to be paid for the activity in Israel of financial institutions
were established. See details of profit tax rates over the years in the section on combined tax rates.
142
Combined Tax Rates
Taxes on profits of banking corporations include a corporate tax imposed pursuant to the Income Tax Ordinance,
and a profit tax imposed pursuant to the Value Added Tax Law, as explained above. Accordingly, the combined tax
rates are as follows:
Year
2008
Profit
tax rate
Income
tax rate
Combined
tax rate
15.50%
27.00%
36.80%
2009
)1(
16.00%
26.00%
36.21%
2010
)1(
16.00%
25.00%
35.34%
2011
)2(
16.00%
24.00%
34.48%
2012
)2(
16.00%
23.00%
33.62%
2013
15.50%
22.00%
32.47%
2014
15.50%
21.00%
31.60%
2015
15.50%
20.00%
30.74%
2016 forward
15.50%
18.00%
29.00%
(1) The Value Added Tax Order (Tax Rate for Non-Profit Organizations and Financial Institutions) (Temporary Order), 5759-2009,
was published in the Official Gazette of the Israeli Government on July 1, 2009 and amended on December 31, 2009. Pursuant
to these amendments, during the period from July 1, 2009 to December 31, 2009, the rate of payroll tax and profit tax imposed
on financial institutions was 16.5%, and during the period from January 1, 2010 to December 31, 2010, the rate of payroll and
profit tax imposed on financial institutions was 16%.The new profit tax rate applies to half of the profit in 2009; consequently,
the profit tax rate in 2009 is 16%.
(2) On December 29, 2010, the Knesset plenum affirmed that the payroll and profit tax rate would remain 16% in 2011 and 2012
as well.
Income Tax (Adjustments for Inflation) Law, 5745-1985
In addition to the existing provisions of the Income Tax Ordinance and the accompanying regulations, the provisions
of the Income Tax (Adjustments for Inflation) Law, 5745-1985 also apply to the Bank.
On February 26, 2008, the Knesset approved changes to the Income Tax (Adjustments for Inflation) Law, 5745-1985,
as a result of the decrease in the rate of inflation in Israel in recent years. The law mainly states that the effects of
changes in the consumer price index as of January 1, 2008 shall not be included in the calculation of taxable income
for income-tax purposes.
Specific Provision for Doubtful Debts
In accordance with agreements between the Bank and the Assessment Officer, rules were established with regard
to the manner of recognition of specific provisions for doubtful debts for tax purposes, including the treatment of
cancelled provisions for doubtful debts.
B. Consolidated Companies Outside Israel
Set out below are the statutory tax rates applicable to the principal subsidiaries abroad:
United States:
35.0%
Switzerland:
21.4%
United Kingdom:
28.0%
Turkey:
20.0%
Consolidated companies incorporated outside Israel are taxed according to the tax laws in the countries in which
they are located.
143
On May 13, 1986, an agreement was signed between the Bank and the Assessment Officer for Large Enterprises
regulating tax payments in Israel in respect of profits of the Bank’s subsidiaries abroad. Under the terms of the
agreement, as of 1978, the Bank’s share of the profits of its subsidiaries abroad is included in the Bank’s tax assessment.
The agreement stipulates that this does not indicate that these companies are liable for taxes in Israel or that the laws
of the State of Israel apply to them, and that the agreement does not create a precedent.The agreement signed was
in effect until 1988. However, based on an understanding between the Bank and the Assessment Officer for Large
Enterprises, the agreement remains in effect until either of the parties gives notification of its cancellation.
C. Additional Information
For additional data concerning the provision for taxes in the Bank Group, final tax assessments, losses accrued for
tax purposes, and the difference between statutory tax rates and effective tax rates, see Note 29 to the Financial
Statements.
Restrictions and Supervision of the Activity of the Banking Corporation
General
The Bank operates under laws, regulations, and directives, some of which are unique to the banking system, and some
of which, even if not unique, affect material parts of its activity.The Banking Ordinance, the various banking laws, and
the Proper Conduct of Banking Business Directives issued from time to time by the Supervisor of Banks constitute
the central legal foundation for the Bank Group's activity. Among other matters, they define the boundaries of the
activities permitted to the Bank, the activities permitted to the subsidiaries and related companies of the Bank Group,
the terms of control and ownership of such companies, the relationships between the Bank and its customers, the
usage of the Bank's assets, and the manner of reporting such activity to the Supervisor of Banks and to the public.
In addition, the Bank is subject to extensive legislation regulating its activity in the capital market, both on behalf of
its customers and on its own behalf (e.g. in the areas of investment advising and customer portfolio management,
pension advising, securities laws, and restrictions on insurance activity).
Other laws on unique topics impose specific duties and rules on banks, including the Bank. Examples include the
legislation related to the prohibition of money laundering and terrorism financing, the Credit Data Law, legislation
related to housing loans, guarantee laws, etc.
Additional legislation related to the Bank's activity has a strong influence on its conduct. Noteworthy in this area
are execution laws, liquidation and receivership laws, laws referring to specific segments (local authorities, mortgage
takers, home buyers, the agricultural sector), and various tax laws.
The Bank's activity is subject to supervision and auditing by the Supervisor of Banks as well as other supervisory
agencies in specific areas of activity, such as the Israel Securities Authority; the Supervisor of the Capital Market,
Insurance, and Savings at the Ministry of Finance; and the Antitrust Commissioner. These agencies carry out audits
at the Bank, from time to time, concerning the various areas of activity.The Bank and its subsidiaries work to comply
with the duties imposed upon them under the said legal provisions.
The legislation passed following the recommendations of an Interministerial Committee headed by the Finance
Ministry Deputy General (the Bachar Committee) establishes the possibility, for most of the laws applicable to the
activity of the Bank, to impose monetary sanctions for violations of the provisions of the laws and the secondary
legislation (including circulars and guidelines) issued in the past or future under such laws.
The following is a concise list of the changes in legislation relevant to the reported period, which have or may have
a significant effect on the activity of the Bank:
144
Prohibition of Money Laundering and Terrorism Financing
The Prohibition of Money Laundering Law, 5760-2000 (hereinafter: the "Prohibition of Money Laundering Law"),
which took effect on August 17, 2000, states among other things that anyone performing a transaction in prohibited
property (i.e. property originating directly or indirectly in a crime, property used to commit a crime, or property
enabling the commission of a crime) in the knowledge that it is prohibited property or with the aim of preventing
reporting or causing false reporting is committing a criminal offense. The law stipulates, among other things, that
anyone reporting such transactions shall be absolved of responsibility.
Further to this law, regulations were enacted, orders were issued, and Proper Conduct of Banking Business Directives
(No. 411) were established, which are applicable to banking corporations and to other parties, including subsidiaries
of the Bank. Rules were established within this framework, among other matters, for identification, reporting,
record-keeping, establishment of policy, monitoring of certain accounts, treatment of such accounts, and more. In
accordance with this Proper Conduct of Banking Business Directive, the Bank has prepared and, among other matters,
established a group policy on these matters and established a unit to supervise its implementation. In addition, the
Bank established a computerized system to manage and help monitor and discover unusual activities in customers'
accounts. Banking corporations can incur monetary sanctions for the violation of the provisions of the law and of
the regulations and orders.
As detailed in the section "Risk Management" below, the Bank and its relevant subsidiaries have appointed persons
responsible for compliance with the duties under the law, and have prepared and are implementing the aforesaid
directives, including the amendments published from time to time. These activities include updating customers'
information, verifying their identity, establishing procedures, and carrying out supporting IT preparations.
Prohibition of Terrorism Financing – On December 29, 2004, the Knesset passed the Prohibition of Terrorism
Financing Law, 5765-2005 (hereinafter: the "Prohibition of Terrorism Financing Law"). Pursuant to the Prohibition of
Terrorism Financing Law, anyone performing a transaction in the property of a person, while being aware that that person
is a terrorist operative or has been declared as such (in the procedure stipulated by law), or performing a transaction
in property while being aware that it may allow, promote, or finance terrorist acts, or compensate for the performance
of terrorist acts, is committing a criminal offense. It was also established that banks must report any attempt to perform
and/or performance of such transactions, and that failure to do so also constitutes a criminal offense.
The implementation of the Prohibition of Terrorism Financing Law, which is handled by the Anti-Money Laundering
and Prevention of Terrorism Financing Unit, has required the Bank to make further preparations in the area of IT,
conduct training with regard to such activity (which is not similar to money laundering activity), and establish additional
working procedures.
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Banks in the Palestinian Authority – The Bank's activity with banks located in the Palestinian Authority created
uncertainty with regard to the Bank's compliance with regulatory requirements concerning money laundering and
the prevention of terrorism financing, with an emphasis on the Bank's ability to monitor and prevent money transfers
to and from residents of the Palestinian Authority that could be used to encourage and/or finance terrorist activity.
Consequently, in June 2006 the Bank decided to terminate services to banks operating within the Palestinian Authority.
Following this decision and similar decisions by other banks, the Governor of the Bank of Israel and representatives
of the Ministry of Finance asked for a postponement of the date of termination of services to the Palestinian banks,
and the continued provision of certain services under certain restrictions established by the Bank of Israel and by the
Bank. In November 2006, the Minister of Finance granted the Bank a permit under Section 9(B) of the Prohibition of
Terrorism Financing Law, pursuant to which the provisions of the Prohibition of Terrorism Financing Law concerning
the "prohibition of transactions in terrorism property" shall not apply to the transactions listed in the permit. Among
other things, the permit allows the Bank to continue to conduct activity with banks in the Palestinian Authority without
violating the provisions of the Prohibition of Terrorism Financing Law.
On January 1, 2009, the Bank ceased banking activity with banks and branches located in the Gaza strip, after the
government declared Gaza a hostile entity.
Conditional Exemption for Restrictive Arrangement Regarding Joint Holdings of Banks in
ABS and BSC
ABS – Automatic Bank Services Ltd. (hereinafter: "ABS") and BSC – Bank Settlement Center Ltd. (hereinafter: "BSC")
are companies owned by the five major banks: Bank Leumi, Discount Bank, Mizrahi Tefahot Bank, First International
Bank, and the Bank. ABS collects credit-card transactions, provides clearer-issuer interface services, and operates
automatic teller machines. In addition, ABS intends to establish a backup site outside Israel's borders for data of the
Israeli banking system. BSC is mainly engaged in the settlement of electronic credits and debits between banks. The
system allows money to be transferred from bank to bank, and essentially ensures connectivity between the banks.
On November 5, 2008, the Antitrust Commissioner decided to grant an exemption, with conditions, to the
arrangement concerning joint holdings of the banks in ABS and in BSC.This exemption is the third exemption granted
to ABS and BSC. When it was found that under the conditions imposed upon ABS and BSC, the said arrangement
does not create a reasonable threat of significant damage to competition, it was granted an exemption from approval
by the Antitrust Tribunal for the next three years.
The Antitrust Commissioner made the exemption contingent on the condition that the representatives of the banks
on the boards of directors of ABS and BSC are not one of the following: interested parties of the Bank, members
of the Board of Management of the Bank, or officers of the Bank in the areas of retail, commerce, or comptrolling.
Furthermore, the Antitrust Commissioner made the terms of the exemption stricter, by requiring open access of
competitors to the systems operated by ABS and BSC, under terms not inferior to the terms enjoyed by the five banks.
Legal Proceedings
For material legal proceedings to which the Bank is a party, see Note 19D to the Financial Statements.
146
Restrictive Arrangement Concerning Fees
On November 29, 2004, investigators from the Antitrust Authority arrived at the Bank’s Head Office and seized
various documents.The Antitrust Authority did not disclose to the Bank the reason for the seizure of the documents
or the subject of its investigation. As published in the press, investigators from the Antitrust Authority also seized
documents at the headquarters of Bank Leumi on the same day. Soon after, similar operations were carried out at
the headquarters of Discount Bank and Mizrahi-Tefahot Bank. In July 2005, and subsequently, the Bank was asked to
provide the Authority with additional materials. Several Bank employees were also called into the Authority’s offices
for questioning.
On March 19, 2008, the Bank received notification from the Antitrust Authority that the Antitrust Commissioner was
considering the possibility of exercising her authority under Section 43(A)(1) of the Restrictive Trade Practices Law,
5748-1988 (hereinafter: the "Restrictive Trade Practices Law") to determine that restrictive arrangements existed
between the Bank and Bank Leumi, Discount Bank, Mizrahi Tefahot Bank, and First International Bank, with regard to the
transfer of information concerning fees.The Bank submitted its position to the Commissioner, backed by an economic
opinion, in which it stressed that there is no cause to ascribe restrictive arrangements with other banks to the Bank.
After the Bank submitted its arguments in writing, a discussion was held between the representatives of all of the
banks referenced in the aforesaid letter and the Commissioner, during which the Commissioner proposed that the
banks pay an aggregate sum of NIS 290 million (of which NIS 80 million by the Bank), and that future rules of conduct
be anchored in a consensual order pursuant to Article 50A or 50B of the Restrictive Trade Practices Law. The Bank
rejected this proposal, and to the best of its knowledge, the other banks responded in the same manner.
On April 26, 2009, the Antitrust Commissioner issued a declaration, within her authority under Section 43(A)(1) of
the Restrictive Trade Practices Law, stating that restrictive arrangements existed between the Bank and Bank Leumi,
Discount Bank, Mizrahi Tefahot Bank, and First International Bank until 2004. The Commissioner's declaration states
that information transferred among the banks, as detailed in the declaration, constitute a restrictive arrangement.The
Bank intends to file an appeal of this declaration with the Antitrust Tribunal. Pursuant to the provisions of Section 43
of the Restrictive Trade Practices Law, this declaration may serve as alleged evidence in any other legal proceeding.
Investigation of the Violation of the Provisions of the Prohibition of Money Laundering Law
at a Branch of the Bank
On March 6, 2005, the Israel Police opened an overt investigation of suspicions of violations of the Money Laundering
Prohibition Law. In the course of the investigation, the police seized documents and records from various Bank offices
and from the offices of Poalim Trust Services Ltd. (hereinafter: the "Trust Company").The police summoned employees
of the Bank and of the Trust Company, including officers, for questioning. In addition, certain customers’ accounts were
frozen, some of which served as collateral for credit.
Further to this investigation, indictments were filed regarding offenses under the Prohibition of Money Laundering
Law, as follows:Two mid-level employees at one of the Bank’s branches were indicted in February 2006; in December
2009, the District Court cleared these two employees of all charges; the State’s Attorney filed an appeal with the
Supreme Court regarding the acquittal of one of the two employees. Two additional mid-level employees from the
same branch were indicted in December 2008; on August 22, 2010, the District Court cleared these two employees
of all essential charges, and ruled to dismiss the indictment due to abuse of process. In October 2009, an indictment
was filed against the Trust Company and against the former chairman of the board of directors and CEO of the Trust
Company, its attorney, and an employee of the Bank.
In the Bank’s opinion, based on the information available to it at this stage, the exposure in respect of the matters
known to be under investigation is not material to the Bank's business. However, at this stage the Bank cannot estimate
the outcome and consequences of the charges.
147
Business Strategy and Objectives
The Bank operates under a long-term strategic plan, which is examined and updated each year. In early 2010, the
Board of Management and Board of Directors of the Bank approved the Bank’s work plans and business objectives
for 2010, based on its three-year strategic plan, while making adjustments to the plan derived from the severe crisis
that affected global capital markets and economies from the second half of 2007 to the second half of 2009, and the
turnaround beginning in the second half of 2009.
The Bank expects the trend of improvement in global economic activity and in the Israeli economy to continue during
2011. However, the Bank is aware of the risks remaining in the financial system in the United States and in most of the
European economies, and realizes that there is still a long distance to travel before the developed markets return to
full employment and the uncertainty risks in the financial markets recede back to the level that prevailed prior to the
crisis. The Bank's multi-year strategic plan, taking into consideration the caution necessitated by the risks still present
in the global economy and the Israeli market, and balancing risk and return considerations, will allow the Bank to
maintain the trajectory of revenue growth and improving profitability that began in 2010, stabilizing the Bank in the
long term at a return on equity in the low to mid teens.
The multi-year strategic plan is focused on five main axes:
• Expanding relationships and activity with the Bank's customers, based on professional skill and optimal familiarity
with customers' needs, with the aim of reinforcing the Bank's market leadership in Israel.
•Creating a platform for future growth in international activity based on customer relationships.
•Development and expansion of income sources from investment activity, based on specialization in the management
of the Bank's relationships with its customers.
•Operational excellence in the performance of existing activities and in the realization of the Bank's growth plans,
while streamlining and curbing expenses.
•Strengthening global risk management and capital management capabilities.
The Bank will work to progress on these axes while emphasizing the cultivation of its human capital and excellence
within the organization, based on the core values of the Bank and in alignment with the values of sustainability, as
defined in the Bank's vision. In this context, the Bank will work to continue to lead the financial industry in the areas
of corporate social responsibility and contribution to the community, as it has in recent years.
In the Retail Area, the Bank will make focused, resolute efforts to solidify and strengthen its leadership.The Bank will
focus on improving the value offered to its customers, providing a comprehensive solution for customers' needs
through prudent expansion of credit and housing finance, with an emphasis on the Bank's existing customers, while
strengthening risk-management capabilities. Among other means, the Bank will work to solidify its standing in the
various customer segments, and plans to invest efforts towards that end, including by optimizing the deployment of its
branches, opening branches in various formats, and strengthening the multi-channel value offer, in order to reinforce its
leadership in the direct channels and create a multi-channel customer experience.The Bank accords high importance
to customer service and continually strives to significantly improve service while making use of technological means
and adapting service to customers’ needs.
In the Corporate Area, the Bank will continue to work to preserve its leading position with customers in the corporate
segment, including the largest companies and businesses in the Israeli economy. The Bank aims and is working to
extend and develop its activity with these customers, with an emphasis on the expansion of the service and product
offering and the creation of a comprehensive package of specially tailored services providing the optimal solution to
the needs of clients in this sector. The Bank also expects this activity to enable it to increase its non-credit revenues
in this sector. Concurrently, the Bank will work to achieve a step up in its activity in the mid-sized business sector,
which is an important element of the backbone of the Israeli economy, through means including the infrastructure of
Business Branches which the Bank will continue to deploy in the coming year, and an improved and expanded value
offer for customers in this sector.
148
In treasury activity, centralized under the Global Treasury Area, the Bank will continue to implement a strategic plan
based on global treasury management, encompassing the dealing rooms in Tel Aviv, New York, and London, while
continuing to reinforce the infrastructures of the operational systems serving the dealing rooms and the area of
asset and liability management at the Bank. In this respect, it is important to note that in light of the changes in global
financial markets, the Bank has devoted an exceptionally high degree of attention and emphasis to concentrating the
work of global treasury on activity with and for customers.The Bank will also work to strengthen the management of
its proprietary ("nostro") portfolio, with an emphasis on prudent management of the mix in the portfolio alongside
risk management.
In overseas operations, led by the International Area, the Bank will work to continue the development of Global
Private Banking. In this area of activity, the Bank aims to continue to improve its abilities in products and expand the
service package offered to its customers, in order to strengthen the platform for the organic growth of its asset
portfolio, with a focus on high-net-worth clients. The Bank will work to strengthen the connections between its
international operations and the activity of its customers in Israel, in order to maximize possible synergies from the
provision of banking services overseas to customers of the Bank.The Bank will offer Global Private Banking services
to its customers at its specialized centers, as well as business services, primarily in the financial centers of New York
and London. At the same time, due to the fluctuations in the financial markets and in the economies of the developing
countries, the Bank has decided to maintain the suspension of its continued expansion into new developing markets.
Striving for operational excellence and improving expense management will continue to be key principles for the Bank.
The Bank will work to improve its operational efficiency ratio throughout the period of the strategic plan. The push
towards operational excellence will allow the Bank to make optimal use of its existing resources in order to realize
new initiatives. The Bank will work to continue to streamline and improve work processes at its Head Office and
administrative units, with an emphasis on expansion and development of the central back office, where activities not
involving direct contact with customers will be channeled, thereby improving service to customers while strengthening
operational excellence.
It should be noted that the strategic plan sets ambitious goals for each of the Bank’s activities, yet in any planning,
especially in planning several years ahead, and all the more so during a period of changes and turmoil in the global
economy and in the world financial system, a considerable degree of uncertainty must be taken into consideration.
Various diverse factors may prevent the assumptions on which the strategic plan is based from materializing, or may
prevent them from materializing in full, and may prevent the realization or full realization of future plans. Among
these factors, it should be noted that the success of a plan of this kind depends on the Bank’s internal ability to carry
out its objectives, as well as on the business environment in Israel and globally and on macro conditions. Special
importance should be accorded to the condition of the global economy, and to the economic, political, and security
situation in Israel and in the region. It should be taken into consideration that despite the indications of recovery in
the real economy and the gains in the capital markets during 2010, in Israel and globally, a high level of uncertainty
remains with regard to the growth rates that will accompany the recovery of the real economy in Israel and globally
in the coming years.
It is emphasized that the Bank’s approved work plans and the working assumptions on which they are based refer
to the Bank’s future activities; therefore, all of the above information in this section with regard to the Bank's action
plans and intentions is "forward-looking information".
149
Risk Management
General
The Bank’s activity is accompanied by financial risks: credit risks, which represent the risk that a borrower or debtor will
default on scheduled payments to the Bank as defined in the credit agreement; market risks deriving from exposure
to changes in rates in the financial markets, such as exchange rates, interest rates, and inflation; an additional financial
risk is liquidity risk, which is the risk to the profit and capital of a banking corporation resulting from uncertainty with
regard to the availability of resources.These risks are managed by designated members of the Board of Management
and under their responsibility. The member of the Board of Management responsible for managing credit risks is Mr.
S. Gal. The member of the Board of Management responsible for managing market and liquidity risks is Ms. Anath
Levin. A regulatory requirement of capital adequacy applies to credit risk and market risks.
Other non-financial risks are mainly legal risk and operational risks. Legal risk is managed by the Chief Legal Advisor,
Attorney I. Mazur. Operational risk, excluding legal risk, is managed by each member of the Board of Management
in the area of activity for which he or she is responsible. Operational risk is defined as the risk of losses that may be
caused by failed or faulty internal processes, human actions, system malfunctions, or external events. A regulatory
requirement of capital adequacy applies to operational risk as of the end of 2009.
Other risks to which the Bank is exposed are handled directly as part of the management of its business: reputation
risk, competitive risk, regulatory and legislative risk, economic risk, and political/security-related risk.
The Supervisor of Banks has set forth guidelines concerning risk management in the Proper Conduct of Banking
Business Directives.The directives detail the risks to which a banking corporation is exposed and stipulate various basic
principles for the management and control of risks, including suitable involvement in and thorough understanding of
risk management by the board of directors of the banking corporation, the management of risks by a risk manager
who is a member of the board of management, the employment of tools for the assessment and measurement of
risks, and the creation of means for supervision and control, including the existence of an independent risk-control
function. The Bank operates in accordance with the guidelines of the Supervisor of Banks concerning the chief risk
officer and the risk-management function. In addition, the Bank is preparing to implement the directives of the letter
of the Supervisor of Banks concerning exposure to and management of environmental risks, of June 11, 2009.
Risk management is performed based on a global view of the Bank’s activity in Israel and of activity at the Bank’s
branches abroad, with due attention to the activity of banking subsidiaries. Risks are managed separately by each
banking subsidiary in the Bank Group, according to policy formulated by each company’s board of directors and
presented to the Board of Directors of the Bank. The Bank manages the various risks, using hedges for some risks,
as detailed in the relevant sections below. Risk control and the assessment of financial risks and operational risks are
performed based on a uniform methodology at the Group level, under the direction of the Risk Management Area,
taking into account the unique characteristics of the activity of each subsidiary. Risk appetite and capital management
are discussed in the section "Basel II" below.
Structure and Organization of the Risk Management System
The Board of Directors’ Committee on Risk Management and Control and Basel II Implementation –
A Board of Directors’ Committee on Risk Management and Basel II Implementation is in operation at the Bank.The
committee’s mission is to formulate the Bank’s risk-management policy, including establishing risk limits in the various
areas of activity, examining the Bank’s risk profile, monitoring the implementation of the established risk-management
policy, and examining the processes and actions to be implemented by the Bank in order to comply with all regulatory
directives concerning risk management.
The Board of Directors’ Committee on Risk Management and Basel II Implementation and the plenum of the Board
of Directors receive reports on risks and on the execution of approved policies, at least once each quarter.
150
The Board of Management's Committee on Risk Management and Basel II Implementation Headed
by the CEO – The Board of Management's Committee on Risk Management, headed by the CEO of the Bank, is
responsible for planning the Bank's risk-management policy, risk limits, and reporting and control procedures, and for
examining the Bank's overall risk profile and the interactions among the various risk types and factors.
The Risk Management Area – The member of the Board of Management responsible for the Risk Management
Area is Mr. D. Koller, Chief Risk Officer.The Area’s primary objective is to instill an advanced culture of risk management
and monitoring at the Bank Group, while formulating risk-management policies compatible with the goals of the
Group and with the directives of Basel II and of the Supervisor of Banks. The Risk Management Area is comprised
of four units: (1) the Credit Risk Management Unit, which consists of two departments: the Credit Risk Analysis and
Management Department, and the Credit Control Department; (2) the Operational and Market Risk Management
Unit, which consists of two departments: the Operational Risk Management Department, and the Market and
Liquidity Risk Management Department; (3) the Chief Compliance Officer Unit, which consists of three main units:
the Compliance Department, the Anti-Money Laundering and Prevention of Terrorism Financing Department, and
the International Compliance and Anti-Money Laundering Unit; and (4) the Basel II Plan Administration.The approach
taken with regard to control of all financial and operational risks involves identification and assessment of the risks, and
control of compliance with the limits stipulated in the various regulations, at three levels of control: the first level is
comprised of those responsible for risk taking and exposure management; the second level consists of internal control
units at the Areas and at subsidiaries; and the third level is the external control units within the Risk Management
Area. This level is also responsible for presenting an overview of risks.
Financial Risks
A. Credit Risks
General
Credit risk is the risk that a borrower or debtor may default on agreed obligations to the Bank. The credit portfolio
is a major component of the asset portfolio of the Bank Group; therefore, deterioration in the stability of the various
borrowers can have an adverse effect on the Group's asset value and profitability. In order to manage credit risk,
credit risk management policies, credit policies, and exposure limits for borrowers and/or sectors and/or products
have been defined within the Group, in the various segments of activity.
Management of Credit Risks
The goal of credit risk management is to allow and ensure that the Group operates in accordance with the policies
and strategic objectives established, and within the risk appetite defined in the area of credit, from the level of the
single transaction to the overview of the credit portfolio.
The Bank’s policy on the management of credit risks is based on diversification of the credit portfolio and controlled
management of risks. Risk diversification is reflected by the distribution of the Bank’s credit portfolio among a large
number of borrowers in different sectors of the economy, among the different linkage segments, and among different
geographical regions overseas. The policy of distributing risks among economic sectors is based on an estimate of
anticipated developments in the different sectors. For this purpose, the Bank conducts industry-level surveys and
economic feasibility studies to evaluate the risk and business potential related to activity in the various economic
sectors. The Bank’s business objectives are determined in accordance with these surveys and studies.
The credit risk management system monitors and reports to the responsible function and the managers on negative
signs regarding borrowers.
As part of its credit risk management policy, the Bank applies principles including the following:
151
1.Independence
The principle of independence is an essential element of proper corporate governance, in order to prevent conflicts
of interest and ensure that the information regarding risks reported to managers, and in particular to the senior
management and the Board of Directors, is objective and is not influenced by other considerations, in particular
considerations of business success and remuneration for such success.
2. Hierarchy of authority
The Bank has a hierarchy of authority which outlines a sequence of credit authorizations, according to the level of
the debt of the borrower or group, the risk rating, and problematic classifications, allowing control over the process
of approving new credit transactions. The hierarchy of authority provides a definition of individual credit approval
thresholds and thresholds for transfer to approval committees, and the composition of such committees.
3. Comprehensive view of the customer/group
Management of risk groups encompassing several borrowers who are related in terms of risk, such as a company and
its subsidiaries, a married couple, etc.The activity of customers and groups is overseen by a customer manager who is
responsible for all activities of that borrower/group. Information systems continuously provide the customer manager
and his or her staff with a comprehensive view of the activity of the customer/group, including the level of credit risk.
4. Credit policies and procedures
The Bank's credit policies and procedures are binding for everyone involved in the area of credit at the Bank. The
policies and procedures specify all of the principles and considerations related to credit granting, the authority to grant
credit, and the prohibitions and limitations applied to credit granting. The procedures are a key means of managing
credit risks, as they define the Bank's practices and principles in the areas of credit and collateral, including references
to customer types, economic sectors, types of credit, etc.
5. Uniform instruction and training
Employees involved in the area of credit undergo training and instruction on credit, foreign trade, and mortgages.
These sessions provide uniform training to all those involved in this area, imparting professional tools and teaching
the Bank's policies and principles in the area of credit.
Credit risk management policy at the Bank’s subsidiaries, offices, and branches abroad is based on similar principles to
those of credit risk management policy in Israel, adapted to regulatory requirements in each country.The Credit Risk
Management Unit at the Bank functions as the authoritative unit of the Group in the area of credit risks, with the aim
of allowing uniform, centralized risk management, reporting, and control at the level of the Group. Credit-risk policy
at the Bank’s overseas subsidiaries and offices is approved by the local board of directors following consultation with
credit-risk management officials at the Bank, and presented to the Board of Directors of the Bank.
Levels of Control
The Bank's approach to the control of all financial risks is to identify and assess risks and control compliance with
the limits established in the various procedures, based on three levels of controls.These levels are listed below in the
order of the degree of their non-dependence on the professional function responsible for taking the risk:
1. The first level – those responsible for creating the risk and managing exposures;
2. The second level – the internal control units at the divisions and subsidiaries;
3. The third level – external control units in the Risk Management Area and the Financial Area. This level is also
responsible for presenting an overview of risks and for establishing methodology.
In addition to these three levels, Internal Audit also operates in an independent and objective manner.
Risk at the level of the overall portfolio of the Group is monitored by the Credit Risk Management Unit, which reports
to the Board of Management and the Board of Directors of the Bank on credit exposures, risk in the portfolio, trends
and changes in the portfolio, special events, extreme scenarios, and general risk indices in Israel and globally.
The portfolio is also examined through an analysis of concentration risk and through the use of extreme scenarios.
152
Credit Risk Identification
The identification of credit risk in existing products is based on risk management, measurement, and control processes
at the various levels.The identification of risk in new products relies on the procedure for new products, which specifies
the policies and procedures to be followed for each new product at the Bank in order to identify all risks involved in
the product, assess the extent and materiality of such risk, and provide solutions for the measurement, control, and
hedging of the risk. A quarterly and annual process has been designed in order to identify concentration risk and
examine the potential implications of various shocks (financial, political, and others) on the financial robustness of the
Bank. This process includes definition, examination, and reporting of the results of extreme scenarios, and mapping
of the effects on profit and on capital adequacy.
Risk Quantification and Measurement
Credit risk is quantified and measured on several levels: the level of the individual borrower, borrower groups by
area of activity, sectors of the economy, borrower sectors, products, and the overall portfolio of the Bank and of the
Group. Procedures for risk quantification and measurement and for the ranking of borrowers and of credit have been
established for each area of activity and type of credit.These processes combine assessments by credit experts with
decision-making processes and advanced statistical models.
In the area of financing of Bank customers’ transactions involving derivative financial instruments, the Bank has
developed computerized models for measuring and controlling the level of counterparty risk at the transaction level
and the customer level.These models allow the Bank to regularly monitor customers’ financial situation. In this activity,
credit risk at a particular date is defined as the total of the value of the present position plus potential risk of future
losses arising from volatility of the underlying assets in the position of the counterparty, taking into account offsets
and correlation between the transactions; this represents the Bank’s loss in the event of default by the client. Rules
and working procedures have been defined to determine the level of collateral required for these transactions. Rules
have also been defined for the closing of exposures in respect to transactions and to customers. Limits on exposure
to counterparties are set by the appropriate credit authorities at the Bank.
Risk Alignment
The mix and risk profile of the credit portfolio are managed through several mechanisms:
1. The credit policies defined for the various areas of activity and economic sectors.
2.A system of limits, including concentration limits for various parameters such as economic sectors, borrowers,
borrower groups, and products.
3. Price policies, which take risk into account, with a comprehensive view of the customer.
4. Active management of the risk profile of the portfolio.
The Board of Directors of the Bank establishes credit policies, which are routinely examined and updated according
to the changes in the financial markets and in the economy. This policy includes various restrictions of the credit
portfolio, which include exposure limits by economic sector, country, and financial institution, as a function of the risk
level estimated by the Bank. Limits are also imposed on the maximum exposure to a single borrower, based on the
credit rating assigned to the customer, which reflects the customer’s risk level; and on maximum exposure to a group
of borrowers. Procedures are in place for the monitoring and control of compliance with such limits. The Board of
Directors receives quarterly reports on limit control.
Within collateral policy, principles and rules have been set forth to determine the value of collateral with respect to
its type and the type of credit that it secures, such as: the estimated time range and expenses necessary for realization
of the collateral, type of indexation, volatility in the value of the collateral, etc. Procedures have also been defined
for the processing of collateral and for monitoring changes in collateral and its value. A computerized collateralmanagement system is operational with respect to most types of collateral. Collateral received by the Bank to secure
credit includes financial assets, real-estate assets, and other assets. Against credit granted to companies, the Bank also
receives collateral in the form of general floating liens on the companies’ assets.
153
Leveraged Financing
From time to time the Bank provides leveraged financing to its customers. Leveraged financing is financing granted
for the purpose of acquiring means of control of corporations, at a rate of financing that is higher, at the date of
the transaction, than the customary rates in the industry (Proper Conduct of Banking Business Directive No. 323
includes certain limits on transactions providing financing for the acquisition of means of control that meet the criteria
established in the said directive).Transactions of this type are approved following individual analysis. In addition, once
each quarter the Board of Management and the Board of Directors receive reports on the development of the credit
and the analysis of the aforesaid transactions, in order to assess the risks inherent in the transactions.
The following table lists the Bank's exposures to leveraged financing as of December 31, 2010, by economic sector
of the acquired company:
Number of
borrowers
Balance of
balance-sheet
credit
Balance of
off-balancesheet credit
Total*
NIS millions
Economic sector of acquired company
Construction and real estate
11
2,934
-
2,934
Financial services
14
1,795
-
1,795
5
590
-
590
Commerce
7
1,559
151
1,710
Industry
9
932
-
932
3
201
-
201
1
603
-
603
50
8,614
151
8,765
Total
* Excluding the balance of provisions for doubtful debts in the amount of approximately NIS 1,857 million.
The following table lists the Bank's exposures to leveraged financing as of December 31, 2009, by economic sector
of the acquired company**:
Number of
borrowers
Economic sector of acquired company
Balance of
balance-sheet
credit
Balance of
off-balancesheet credit
Total*
NIS millions
10
3,144
-
3,144
Financial services
14
1,625
-
1,625
2
449
-
449
Commerce
Industry
7
1,617
148
1,765
10
1,035
-
1,035
6
130
-
130
Public services
1
39
-
39
1
598
-
598
51
8,637
148
8,785
Total
* Excluding the balance of provisions for doubtful debts in the amount of approximately NIS 1,494 million.
** Restated - as part of the process of reexamination of the classification of borrowers by economic sectors.
The Bank's exposures in respect of leveraged financing are to customers in Israel, for the purpose of the acquisition
of means of control in corporations in and outside Israel.
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Credit Exposure to Foreign Financial Institutions
In the course of its routine business operations, the Bank Group is exposed to risk arising from credit exposures to
foreign financial institutions. This risk is evident in a variety of activities with financial institutions, such as transactions
carried out at the Bank's dealing rooms (deposits, foreign-currency balances, and derivatives), purchases of bonds issued
by such institutions, financing of the various types of foreign trade, capital-market activity, and account management.
The foreign financial institutions include banks, investment banks, insurance companies, broker-dealers, and institutional
entities, mainly pension funds.
The exposure to foreign financial institutions is influenced both by the specific condition of each institution and by
the risk level of the countries in which it operates, and may be affected by events in foreign countries that can cause
a decrease in the value of the Bank’s assets or impair the foreign institutions’ ability to meet their obligations, including
obligations to the Bank Group. Such events include financial or economic crises, the effects of changes in political
conditions in various countries, social instability, and more. It should be emphasized that the majority of the Bank
Group's credit exposures to foreign financial institutions are to banks, and most of these exposures are to the banking
system in Western Europe and North America; exposure to other financial institutions is relatively low.
Due to the financial crisis, which peaked in 2008, the Bank acted to minimize risk by channeling activity in derivative
financial instruments to institutions with which Credit Support Annex (CSA) agreements have been signed (offsetting
agreements that limit and minimize the credit risks in this activity, through daily or periodic account settlement between
the Bank and the counterparty, pursuant to the agreement). Settlement risks were also neutralized by conducting
currency settlement activities through the international clearinghouse known as CLS (Continuous Linked Settlement).
In view of the signs of emergence from the crisis that began to appear during 2009, globally and in Israel, the Bank
gradually and cautiously changed the strict exposure policy which it had applied to banks due to the crisis. Credit
facilities were increased, and the duration of exposures were extended, for a select group of banks. Credit policy is
continually examined and adjusted to the developments in the global and Israeli markets. Due to the economic crisis
in Greece and the worrying macro-economic data in Ireland, Portugal, Spain, and Italy, the Bank decided to reduce
its exposure to Spain and Italy; activity in Ireland, Greece, and Portugal was suspended, and the Bank has minimal
exposure to these countries. As a result of the decision to reduce its exposure to these countries, the exposure to
financial institutions in these countries decreased significantly in the fourth quarter of 2010.
155
The following table details the Bank Group’s exposure to foreign financial institutions as of December 31, 2010(1):
credit risk(2)
credit risk(3)
External credit rating(5)
Total credit risk
NIS millions
AAA to AA-
4,212
1,382
5,594
A+ to A-
6,188
312
6,500
BBB+ to BBB-
202
503
705
BB+ to B-***
129
12
141
Lower than B-
21
-
21
284
33
317
11,036
2,242
13,278
49
-
49
Unrated**
Total credit exposures to foreign financial institutions*
Balance of problematic debts(4)
Details of expenses charged to the statement of profit and loss in 2010 in respect of exposure to foreign financial
institutions:
Deposits with foreign financial institutions
6
6
* The balances include the exposure of the Bank Group to financial institutions in the following countries:
Spain – Total exposure of approximately NIS 129 million, rated AA- or higher. (The total exposure in 2009 was NIS 558 million,
of which NIS 521 million rated AA- or higher, and the remaining amount of NIS 37 million rated A).
Ireland – A balance in the amount of approximately NIS 16 million, of which an amount of approximately 8 million rated AA,
NIS 5 million rated A-, NIS 2 million rated BBB, and the remaining NIS 1 million unrated. (The total exposure in 2009 was
NIS 79 million, of which NIS 8 million rated AA- or higher, NIS 6 million rated A, NIS 41 million rated A-, and the remaining
amount of NIS 24 million unrated).
Italy – A balance in the amount of approximately NIS 75 million, of which approximately NIS 2 million rated AA-, NIS 53 million
rated A+, and NIS 20 million rated A. (The total exposure in 2009 was NIS 493 million, of which NIS 478 million rated AA- or
higher, and the remaining amount of NIS 15 million rated A).
In Greece and Portugal exposure to financial institutions is minimal, in the amount of less than NIS 1 million.
** Mainly includes clearinghouses overseas, which constitute 24% of the balance. The remaining amount is distributed among a
long list of banks and financial institutions. (December 31, 2009: 44% of the balance).
***Credit granted to the group of institutions rated BB+ to B- mainly consists of participation in syndications organized by
top-tier international banks to raise resources, usually for the short term, for leading banks in emerging markets; and support
for foreign-trade transactions of the Bank's customers in these markets.
(1) Foreign financial institutions include banks, investment banks, broker-dealers, insurance companies, institutional entities, and
entities controlled by such entities.
(2) Deposits with banks, credit to the public, investments in bonds, securities borrowed or bought in resale agreements, and other
assets in respect of derivative instruments.
(3) Mainly guarantees and commitments to grant credit.
(4) Balances of problematic debts, less debts covered by collateral permitted for deduction for the purpose of the limit on
indebtedness of borrowers and groups of borrowers, including off-balance-sheet risk-adjusted assets.
(5) According to the lowest of the long-term foreign currency credit ratings assigned by any of the major rating agencies: S&P,
Moody’s, and Fitch. Ratings are current as of March 1, 2011. (December 31, 2009: Ratings as of March 4, 2010).
156
The following table details the Bank Group’s exposure to foreign financial institutions as of December 31, 2009(1):
Balance-sheet
Off-balancecredit risk(2) sheet credit risk(3)
External credit rating(5)
Total credit risk
NIS millions
AAA to AA-
3,678
1,464
5,142
A+ to A-
6,856
700
7,556
178
663
841
BBB+ to BBBBB+ to B-***
231
11
242
Lower than B-
129
1
130
Unrated**
247
202
449
11,319
3,041
14,360
181
199
380
Total credit exposures to foreign financial institutions*
Balance of problematic debts(4)
Details of expenses charged to the statement of profit and loss in 2009 in respect of exposure to foreign financial
institutions:
Bonds of foreign financial institutions
4
4
CDS credit derivatives
54
54
Total
58
58
* The balances include the exposure of the Bank Group to financial institutions in the following countries:
Spain – Total exposure of approximately NIS 129 million, rated AA- or higher. (The total exposure in 2009 was NIS 558 million,
of which NIS 521 million rated AA- or higher, and the remaining amount of NIS 37 million rated A).
Ireland – A balance in the amount of approximately NIS 16 million, of which an amount of approximately 8 million rated AA,
NIS 5 million rated A-, NIS 2 million rated BBB, and the remaining NIS 1 million unrated. (The total exposure in 2009 was
NIS 79 million, of which NIS 8 million rated AA- or higher, NIS 6 million rated A, NIS 41 million rated A-, and the remaining
amount of NIS 24 million unrated).
Italy – A balance in the amount of approximately NIS 75 million, of which approximately NIS 2 million rated AA-, NIS 53 million
rated A+, and NIS 20 million rated A. (The total exposure in 2009 was NIS 493 million, of which NIS 478 million rated AA- or
higher, and the remaining amount of NIS 15 million rated A).
In Greece and Portugal exposure to financial institutions is minimal, in the amount of less than NIS 1 million.
** Mainly includes clearinghouses overseas, which constitute 24% of the balance. The remaining amount is distributed among a
long list of banks and financial institutions. (December 31, 2009: 44% of the balance).
***Credit granted to the group of institutions rated BB+ to B- mainly consists of participation in syndications organized by
top-tier international banks to raise resources, usually for the short term, for leading banks in emerging markets; and support
for foreign-trade transactions of the Bank's customers in these markets.
(1) Foreign financial institutions include banks, investment banks, broker-dealers, insurance companies, institutional entities, and
entities controlled by such entities.
(2) Deposits with banks, credit to the public, investments in bonds, securities borrowed or bought in resale agreements, and other
assets in respect of derivative instruments.
(3) Mainly guarantees and commitments to grant credit.
(4) Balances of problematic debts, less debts covered by collateral permitted for deduction for the purpose of the limit on
indebtedness of borrowers and groups of borrowers, including off-balance-sheet risk-adjusted assets.
(5) According to the lowest of the long-term foreign currency credit ratings assigned by any of the major rating agencies: S&P,
Moody’s, and Fitch. Ratings are current as of March 1, 2011. (December 31, 2009: Ratings as of March 4, 2010).
157
The overall exposure of the Bank Group to foreign financial institutions totaled approximately NIS 13.3 billion on
December 31, 2010, compared with approximately NIS 14.4 billion at the end of 2009.The decrease in comparison
to 2009 mainly resulted from a decrease in the volume of deposits, and from a reduction in the off balance sheet
exposure that resulted mainly from the non-renewal of credit lines, expired to by financial institutions.
Approximately 91% of the exposure to foreign financial institutions is to financial institutions rated A- or higher. The
Bank Group’s exposure to foreign financial institutions is distributed as follows: 70% in banks, 13% in investment houses
that have become banking holding companies or have been bought by banking groups, 4% in pension funds, 11% in
other financial institutions, and 2% in insurance companies. Most of the Bank Group’s exposure is to foreign financial
institutions operating in the U.S. (44%) and in Western European countries (46%).
Some of the exposures presented in the table above are presented in Appendix 5 to the Management Review,
"Total Credit Risk to the Public by Economic Sectors," under the "Financial Services" sector, in respect of the activity
of borrowers abroad. The section "Balance Sheet Credit Risk" in Appendix 5 contains the balances of credit to the
public, investments in bonds by the public, securities borrowed or bought from the public under resale agreements,
and other assets in respect of derivative instruments where the public is the counterparty. However, Appendix 5 does
not include balances of deposits with banks, which are included in the above table. In addition, the section "Off Balance
Sheet Credit Risk" in Appendix 5 presents credit risk as calculated for the purposes of the limit on indebtedness of
borrowers, which includes, among other things, 10% of the balances of future transactions, which are not included in
the above table. For further details, see the section "Composition and Development of the Assets and Liabilities of
the Bank Group". Note that the credit exposures in the above table do not include exposures to financial institutions
that have full, explicit government guarantees, and do not include investments in asset-backed securities. For further
details regarding asset-backed securities, see the section "Composition and Development of the Assets and Liabilities
of the Bank Group".
Credit Exposure in Respect of Derivative Financial Instruments
The Bank executes transactions in derivative financial instruments as part of the management of market risks (linkage
base, currency, and interest rate exposures; see the section "Management of Market and Liquidity Risks"), and as a
service to its customers. The activity in derivative financial instruments involves a number of risks, as detailed below:
•Credit risk – The maximum amount of loss to the Bank in the event that the counterparty fails to comply with
the terms of the contract.
•Market risk – Risk arising from fluctuations in the value of the derivative financial instrument as a result of changes
in market prices, such as exchange rates, interest rates, inflation, etc.
•Illiquidity – Risk arising from an inability to close an exposure rapidly through settlement in cash or through the
creation of an opposite exposure.
•Operational risk – Risk arising from errors in the operation of the transactions, from formation to the completion
of account settlement, due to human errors or mechanical malfunctions or as a result of the realization of another
operational risk.
This activity is routinely administered and measured using specialized automated systems commonly used in the
international markets for these purposes, such as Opics, Summit, and Derivatech, as well as automated systems
developed by the Bank. Market risks arising from this activity are measured using the Algorithmics system. For details
regarding market risk measurement methodology, see the "Risk Assessment and Control" section below.
158
Credit risks arising from transactions in derivative financial instruments related to the counterparty to the transactions
are measured by applying conservative coefficients to the nominal amounts of the transactions, or using the scenarios
approach, in which the maximum potential exposure of the customer is calculated in a range of different market
situations, or using an internal model developed at the Bank, as detailed above.The measurement method is matched to
the customer according to the nature of activity in the customer's derivatives portfolio. Rules and working procedures
have been established in order to determine the required level of collateral for such transactions, as well as rules
regarding the actions necessary in order to close exposures, with regard to transactions and customers. Limits on
exposure to counterparties are established by the appropriate credit authorities at the Bank. Operational aspects
arising from this activity are examined and controlled routinely by a specialized unit.
The following table details credit exposures in respect of the positive fair value of derivative financial instruments, by
counterparty to the contract, as of December 31, 2010 (in NIS millions):
Credit rating
AAA to AA-
A+ to A-
BBB+
Total
United States(1)
817
140
-
957
England
388
234
11
633
-
495
-
495
247
269
-
516
Banks outside Israel:
Germany
France
8
309
-
317
Other
24
31
-
55
Eurozone – other
29
32
-
61
1,513
1,510
11
3,034
Switzerland
Total banks outside Israel
Banks in Israel
459
Stock exchanges and governments
222
Brokers/dealers(2)
474
Corporate clients by economic sector:
Financial services
954
Transportation and storage
130
297
34
891
Other
Total corporate clients by economic sector
2,306
Total
6,495
(1) Of which, JP Morgan Chase – balance in the amount of NIS 798 million.
(2) Of which, Goldman Sachs – balance in the amount of NIS 312 million.
159
Exposure of the Bank to securitization – A policy of reducing this portfolio was implemented due to the crisis;
the current volume of the exposure is approximately NIS 439 million, of which approximately NIS 262 million as
an investor in securitization instruments and approximately NIS 177 million in credit lines to corporations engaged
in securitization.
Credit Exposure to Foreign Countries
The risk of credit exposure to foreign countries is the risk that an economic, political, or other event in a foreign
country may impair the value of assets of the Bank Group or negatively affect the ability of debtors in that country to
meet their obligations to the Bank Group.The risk of exposure to foreign countries includes cross-border balance-sheet
exposure (total balance-sheet exposure of the Bank in Israel to residents of foreign countries, plus total balance-sheet
exposures of the Bank's overseas offices to non-residents of the country in which the office is located) as well as
balance-sheet exposure of the Bank's overseas offices to local residents in those countries. Cross-border balance-sheet
exposure risk is the risk that actions taken by foreign governments may eliminate the possibility of converting currency
and/or transferring currency outside of the country's borders (transfer risk), thereby affecting the ability of companies
and customers to execute cross-border transactions.
The risk of exposure to foreign countries is managed at the Bank by individually examining the risks arising from the
various countries, taking into consideration the countries' ratings by the international rating agencies S&P, Moody’s, and
Fitch. Appendix 6 of the Management Review contains details of the total balance-sheet exposure by country risk, and
divided into sectors (governments, banks, and others).The total exposure to foreign countries includes balance-sheet
exposures in respect of balance-sheet debt balances, net of local liabilities, securities, and other investments attributed
to countries other than Israel. The balance-sheet exposure was adjusted based on the final risk, taking into account
credit reinforcements, which include guarantees, tangible and liquid collateral, insurance contracts, participations in
risk, and credit derivatives. For further details, see the section "Composition and Development of the Assets and
Liabilities of the Bank Group," above.
Balance-sheet exposure to foreign countries as of December 31, 2010 amounted to NIS 28.8 billion, compared
with NIS 41.3 billion at the end of 2009. The majority of the exposure arises from the United States, Switzerland,
and England.
160
Total principal exposures to foreign countries as of December 31, 2010 (in NIS millions):
Total
Total
balance-sheet
off-balanceexposure(1) sheet exposure
Total
exposure
Percentage
of total
balance-sheet
exposure
16,245
16%
Country
United States
4,762
11,483
Switzerland
4,479
3,746
8,225
15%
England
4,303
8,565
12,868
15%
Germany
2,189
3,432
5,621
8%
France
1,628
4,377
6,005
6%
Ireland*
215
178
393
1%
Spain**
186
115
301
1%
2
1
3
0%
Other developed countries(2)
7,536
1,766
9,302
25%
Turkey
2,757
1,197
3,954
10%
743
668
1,411
3%
28,800
35,528
64,328
100%
Total
exposure
Percentage
of total
balance-sheet
exposure
27,541
37%
Greece
Other less developed countries (LDCs)(3)
Total exposures to foreign countries
Total principal exposures to foreign countries as of December 31, 2009 (in NIS millions):
Total
Total
balance-sheet
off-balanceexposure(1) sheet exposure
Country
United States
15,067
12,474
Switzerland
4,877
2,228
7,105
12%
England
4,073
7,690
11,763
10%
Germany
2,259
2,959
5,218
5%
France
1,150
2,954
4,104
3%
Ireland
331
351
682
1%
Spain
618
264
882
1%
Portugal
5
-
5
0%
Greece
1
1
2
0%
Other developed countries
(2)
Turkey
Other less developed countries (LDCs)
Total exposures to foreign countries
(3)
8,525
1,951
10,476
21%
3,434
1,020
4,454
8%
935
384
1,319
2%
41,275
32,276
73,551
100%
* Exposure to Ireland includes NIS 2 million to the Government of Ireland and NIS 16 million to banks.
** Exposure to Spain includes NIS 25 million to the Government of Spain, NIS 240 million to banks and NIS 36 million to customers.
(1) After deducting liabilities of the Bank's overseas offices to local residents.
(2) Principal exposures arise from Canada, Luxembourg, and the Netherlands.
(3) Other less developed countries (LDCs) – according to definitions of the World Bank, based on national per-capita income.
Principal exposures arise from Kazakhstan and Russia.
161
Identification and Treatment of Borrowers in Distress
The Bank has established procedures for the identification and handling of borrowers who, according to the Bank’s
evaluation, may default on their obligations to the Bank.These borrowers are supervised and monitored more closely,
and the Bank endeavors to reduce its exposure to them by redeeming credit from the borrowers’ resources and/or
by obtaining additional collateral from them. In certain cases, customers are transferred to a division specializing in
monitoring and restructuring of customers’ debt, or to debt collection units. In addition, the Bank regularly reviews the
level of credit risk in borrower portfolios on the basis of conservative assumptions, and records a sufficient provision
for doubtful debts in respect of borrowers whose capability to fully repay their debts to the Bank is in doubt. The
provision for doubtful debts is determined on a specific basis.The collectible amount is determined with the inclusion
of safety margins aimed at addressing situations of uncertainty regarding the ability to repay the debt. However, because
economic variables are involved, there is no certainty that the collectible amount will not be lower than the estimate
established, due to changes for the worse in economic parameters or for any other reason.
The fairness of the classification of the debt and of the collectible amount is approved by an officer one authorization
level above the level of the authorization to grant the credit to the customer, with the necessary adjustments. For this
purpose, a process is in place in which a discussion regarding the fairness of the classification and of the collectible
amount for each such customer is held each quarter. With regard to borrowers in the housing finance sector, a specific
provision is also calculated, according to the directives of the Supervisor of Banks, taking into account the extent of the
arrears of the borrower, such that the deeper the arrears, the greater the rate of the provision out of the total credit.
The supplementary provision for doubtful debts is based on the quality of the customer indebtedness portfolio,
according to risk attributes as defined in the directives of the Supervisor of Banks. Different provision rates are
established for each risk attribute. Risk attributes established include: debts classified as problematic based on the
categories defined by the Supervisor of Banks, lack of financial information regarding the borrower, credit to related
parties of the Bank, sectoral concentration of credit, and credit to a borrower or group of borrowers exceeding the
limits on indebtedness of a "single borrower". In addition, the Bank performs a general provision, in accordance with
the directives of the Supervisor of Banks.
The Credit Risk Management Unit
The Credit Risk Management Unit serves as an independent administrative unit for the management and analysis
of credit risks. The unit reports to the Chief Risk Officer and is independent of underwriting and credit approval
processes.The role of the unit is to formulate credit risk management methodologies in line with the strategic goals of
the Bank Group; to instill an organizational culture of rational risk-taking within limits – in other words, the execution
of transactions that do not exceed the limits, at a price congruent with the risk; and to apply control to ensure the
Bank's compliance with the established policy. The unit serves as the administrative unit responsible for the control
of credit risk management processes and methodologies at the subsidiaries in the Bank Group. Two departments
operate within the Credit Risk Management Unit:
The Credit Risk Analysis and Management Department is responsible for the development of methodologies
for the identification, control, and management of credit risks; the development of models for credit risk rating
measurement and pricing at the level of the individual borrower and at the portfolio level; the development of models
for the allocation of economic capital in respect of credit risk to the various segments; the advancement of preparations
for the measurement of credit risks in accordance with the advanced approach under Basel II; the development of
methodologies for the calculation of group provisions, for the implementation of the directive on impaired debts;
monitoring credit exposures, the level of credit risk, and compliance with credit limits within the Group, and reporting
the results to the Board of Management and Board of Directors; applying extreme scenarios at the level of the Bank
and of the Group; and monitoring, measuring, and managing credit concentration risk.
162
The Credit Control Department performs independent assessments of the level of credit risk of all of the Bank’s
major corporate clients, in a three-year cycle, or at a higher frequency for borrowers identified as having potential
risks. Tests of the reliability of the credit ratings of the borrowers examined are also performed. The department is
responsible for credit control activities at the branches of the Bank and at the subsidiaries overseas, and monitors
both control processes and the volume of control and execution of work plans.
B. Market and Liquidity Risks
General
Market risk – The risk of loss as a result of changes in the economic value of a financial instrument, or of a particular
portfolio or group of portfolios, and at the general level a change in the economic value of the Bank due to changes
in prices, rates, spreads, and other parameters detailed below.
Interest-rate risk – The risk of loss as a result of changes in credit-risk-free interest rates in the various currencies.
Inflation risk and/or exchange-rate risk – The risk of loss as a result of changes in exchange rates or as a result
of changes in the consumer price index.
Changes in exchange rates affect the effective tax rate, because exchange-rate differences in respect of investments
overseas are not taken into account in the income base for the purpose of the calculation of the provision for taxes, in
contrast to exchange-rate differences in respect of financing sources; this leads to a lack of symmetry in exchange-rate
differences. The Bank hedges against tax exposure in respect of investments overseas by providing surplus financing
sources against such investments.
Share price risk – The risk of loss as a result of changes in stock prices or in stock indices.The Group holds shares
primarily for investment purposes (not for trading), and declines in the value of these shares may impair the profitability
of the Bank.The volume of holdings of the Group in shares available for sale stands at approximately NIS 2,221 million,
and approximately NIS 64 million in shares for trading.
Liquidity risk – Defined as the existing or future risk to the income and capital of the Group arising from an inability
to supply liquidity needs. In exceptional demand and supply situations in the financial markets, unplanned costs may
be incurred in connection with raising resources.
At the Bank, liquidity risk is defined as the ability of the Bank to finance an increase in assets and to discharge its
liabilities on time. The main goal of the Bank in managing liquidity risk is to ensure that the Bank is able to discharge
liabilities on time without damaging its ability to continue to finance new business, as necessary and in accordance
with its work plan.
Management of Market and Liquidity Risks
Market and liquidity risks are managed based on a global view of the Bank’s activity in Israel and at its branches abroad,
taking into account the activity of the banking subsidiaries. The Board of Management and the Board of Directors
approve areas of activity and risk limits. Risk management policy is aimed at increasing expected profits on an economic
basis, while maintaining approved, controlled risk levels.
Global asset and liability management (ALM) in the banking portfolio and trading management (in the dealing rooms
and in the proprietary bond portfolios) are performed under the responsibility and direction of the Global Treasurer.
Routine management and supervision of asset and liability management and trading management are under the
responsibility of managers in the Asset and Liability Management Division and in the Dealing Room Division at the
Global Treasury Area in Tel Aviv, and in asset and liability management units and dealing rooms at the Bank's branches
in New York and London, which report on the professional level to the Head of Global Treasury, as relevant. Routine
control and monitoring of activity at the branches abroad is performed by local units, in full coordination and with
regular reports to the corresponding Head Office units: the Exposure Management Department in the Global Treasury
Area and the Market and Liquidity Risk Management Department in the Risk Management Area.
163
In addition to the assessment of risks, examination of outcomes, and routine control of compliance with limits, the
Execution and Control Unit in the Global Treasury Area performs control activities. This control is operational and
is aimed at checking for correctness, completeness, and congruence among the different databases in the various
reporting systems, and identifying operational errors.
Risk limits reflect the Bank’s risk appetite – the level of risk which the Board of Management and the Board of
Directors are willing to bear in the course of business activities, in order to achieve returns or value. The limits are
approved by the Board of Directors and fixed in regulations, including, among other things, limits on the sensitivity of
the Bank’s economic value to changes in the principal risk factors and specific limits for the various trading activities.
The main risk factors to which the Bank is exposed are shekel interest rates in the linked and unlinked segments,
inflation, and the shekel/dollar exchange rate. The Bank's market risk appetite is determined in terms of VaR and/or
sensitivities and/or scenarios.
The Board of Directors and the Risk Management and Control and Basel II Implementation Committee receive
reports on activity, exposures, results of operations, and execution of approved policy, at least once each quarter.These
reports include: a review of topics discussed and reported in committees, including main resolutions; exposures and
risk levels utilized out of approved limits; results of operations; reporting events (losses, exceptions from procedures,
exceptional events); expansion of activities and authorizations for the various dealing rooms, in line with approved
authorizations; overview of risk at the Bank and banking subsidiaries in the Group; and a quarterly report on the
control of market risks.
ALM and market and liquidity risk management policy are defined and controlled by the Global Asset and Liability
Management Committee, which consists of members of the Bank's Board of Management, headed by the Bank’s Chief
Executive Officer. Policies, including the limits established, are submitted for discussion and approval to the Global
Asset and Liability Management Committee of the Bank’s Board of Management, the committees of the Board of
Directors, or the plenum of the Board of Directors, as relevant.
Ongoing activity is conducted by secondary committees, with the participation of senior officers of the Bank. One
committee is headed by the Head of Global Treasury, while another is headed by the ALM Division Manager. Local
committees also operate in New York and London.The committees operate on the basis of resolutions adopted by
the Board of Directors or by its committees regarding exposure to market and liquidity risks, subject to the directives
issued by the Supervisor of Banks or by the local regulator, as relevant.
Market and liquidity risks are managed separately by each banking subsidiary in the Bank Group, according to policy
established by each company’s board of directors. Market and liquidity risks are assessed and controlled based on a
uniform methodology at the Group level, under the direction of the Risk Management Area, taking into account the
size of capital and the unique characteristics of the activity of each banking subsidiary. Subsidiaries’ exposures to market
and liquidity risks are examined by the Market and Liquidity Risk Management Department in the Risk Management
Area, and reported to the Board of Management and the Board of Directors of the Bank at an appropriate frequency
based on the risk level.
Market Risks
Market risk management at the Bank differentiates between exposures that arise in the course of the Bank’s routine
asset and liability management (ALM – the banking book, "non-trade") and exposures in the trading book ("trade").
164
A. Market Risks in the Banking Book
Exposures in the banking book – Mainly arise in the course of routine banking activity as a result of the provision
of services to the private and corporate sector, usually based on wholesale prices.These exposures are generally of a
relatively stable nature and changes in positions are gradual and slow, as a result of slow response to changes in prices
or in expectations.Tools for the management of the exposures in the banking book include pricing policy, proprietary
portfolio management, issuance of debt instruments, and hedging through off-balance-sheet transactions.The Bank’s
management of non-trade exposures is based, among other things, on forecasts and working assumptions regarding
expected developments in financial and capital markets in Israel and worldwide, and is under the responsibility of
the ALM Division and the asset and liability management units in New York and in London. The use of derivative
instruments as part of the management of the Bank’s assets and liabilities (non-trade) is aimed at achieving objectives
and complying with limits as approved by the Board of Directors (linkage-base, currency, and interest-rate exposures).
Linkage-base exposure – Defined as the exposure of active financial capital to three linkage segments: unlinked
shekel; CPI-linked shekel; and foreign currency, including foreign-currency-linked shekel.This refers to global exposure,
balance sheet and off-balance sheet, arising from activity at all of the Bank's units, at its branches, and at its Head
Office, in Israel and abroad.The "active financial capital" of the Bank has been defined as shareholders' equity plus the
general and supplementary provisions for doubtful debts, less investments in subsidiary and affiliated companies (with
the exception of subsidiaries abroad under the full control of the Bank and subsidiaries whose financial management
is handled by the Bank), and less fixed assets and other non-monetary assets, net. For the purposes of exposure
management, the Bank treats active financial capital as a short-term unlinked shekel resource.
Overall interest-rate exposure of the Bank – Interest-rate exposure is measured and managed in terms of the
change in the theoretical value of capital as a result of changes in interest-rate curves. As mentioned above, the Bank
treats active financial capital as a short-term unlinked shekel resource, for the purposes of exposure management.
Limits apply to the sensitivity of the capital of the Bank (including financial subsidiaries under its management) to
scenarios of change in the shekel, CPI-linked, and dollar interest-rate curves. In order to calculate the exposure to
changes in interest rates in the unlinked shekel segment, the Bank treats part of the balances of current-account
deposits of the public as a long-term liability (up to three years), in accordance with the results of an examination
of the development of current-account balances of the public at the Bank in the past. In the CPI-linked segment,
assumptions regarding early settlement of mortgages are used. Interest-rate exposure management policy is aimed
at achieving the desired structure of exposures in each segment (unlinked shekel; CPI-linked shekel; foreign currency
and foreign-currency-linked), in accordance with estimates concerning market variables, and subject to limits. In
addition, the sensitivity of annual income to changes in interest-rate curves is measured. Sensitivity to interest rates
is measured at least once each month.
B. Market Risks in the Trading Book
Market risks in the trading book arise from the Bank’s activity as a market maker, trader, and manager of proprietary
positions.This activity is based on dynamic management of positions by means of tradable, liquid financial instruments.
Changes in the size of exposures are rapid, based on the liquidity and tradability of instruments in the markets, the
nature of customers’ activity, and the desired position.Trading exposures are carried out under the responsibility of the
dealing rooms in Israel and abroad. This activity is routinely administered and measured using specialized automated
systems commonly used in the international markets for these purposes, such as Opics, Summit, and Derivatech, as
well as automated systems developed by the Bank. Market risks arising from this activity are also measured using the
Algorithmics system.
165
Liquidity Risk
Liquidity risk at the Bank, in foreign currency and in shekels, is managed and controlled routinely with the aim of
ensuring the Bank's ability to cope competitively even in exceptional supply and demand situations in the financial
markets. Routine liquidity risk management is under the responsibility of the ALM Division, and is performed through
shekel and foreign-currency liquidity units. A daily liquidity risk report is generated by the ALM system, a comprehensive
system for asset and liability management.
In accordance with Proper Conduct of Banking Business Directive No. 342, "Liquidity Risk Management", the Bank
operates an internal model for the assessment of liquidity risk.This model is based on the proven stability of deposits
at the Bank over long periods, and includes different scenarios with respect to rollover and maturity rates of assets
and liabilities. A liquidity ratio is calculated for each scenario, which is not to fall below a minimum level defined in the
directive.The scenarios applied in the internal model refer to different market conditions: ordinary business conditions
and extraordinary conditions for the banking system in general and specifically for the Bank. In each scenario, the
liquidity gap is examined, for a period of up to one month, against liquid assets. The scenarios mainly differ in the
assumptions with regard to the rollover of deposits. Periods exceeding one month are examined routinely against
the business plan.
The Bank has implemented a plan to address liquidity crises, on various levels.The plan includes a system for monitoring
measures that may indicate a crisis situation, and the steps necessary upon materialization of defined scenarios.
These steps include committee meetings, a reporting system, and a series of actions to cope with a possible crisis.
In addition, scenarios were set up to examine the effect of changes in the pace of execution of the business plan on
liquidity needs in a one-year range.
Risk Assessment and Control
Identification and assessment of risks, control of limits on the level of risks, and reporting of findings are carried out
or controlled by the Risk Management Area, independent of the routine analyses and reports performed as part of
the operation of the Global Treasury Area.
The Market and Liquidity Risk Management Department in the Risk Management Area is responsible for the
formulation of market and liquidity risk assessment methodology, in line with the strategic goals of the Bank Group,
and for the control of market and liquidity risks in the Group.
The Bank’s risk level is measured and controlled according to procedures that include, among other things, limits
on the sensitivity of the Bank’s economic value to changes in the primary risk factors. In addition, a risk estimate is
calculated using the VaR (value at risk) method.The VaR method is used to estimate the maximum potential loss to a
corporation resulting from the materialization of market risks within a given period of time and at a level of statistical
significance predefined by the Bank and approved by the Board of Directors. The principal limits are detailed in the
section "Procedures for Exposure to Market and Liquidity Risks" below. Risk assessments as well as limit control of
trading positions are performed at least once daily.
Market Risk Assessment Methodology
The estimate of the risk in trading activity is calculated for a horizon of ten business days and at a significance level of
99%.The higher of the risk-level outcomes of two commonly accepted risk-assessment methods (historical simulation
and Monte Carlo simulation) is taken into account.This methodology is compatible with the relevant recommendations
of the Basel Committee following the crisis in U.S. markets. The estimate provides a relatively prompt alert of the
market-risk level during periods of rising volatility. A full revaluation of the trading book is performed at least once
daily, under various scenarios, in order to produce an estimate. An assessment of the risk level of the Bank’s overall
activity is executed once a month, using a historical simulation with a one-month horizon.
166
In addition, a backtest procedure is performed routinely, based on the criteria recommended by the Basel Committee,
in order to examine the validity of the risk-assessment model. The results of these tests are reported annually to
the Board of Management and to the Board of Directors. According to the results of the test, the model meets the
criteria defined by the Basel Committee for acceptance of a model.
Limitations of the Methodology for Risk Assessment of Trading Activity at the Bank
•The Monte Carlo simulation assumes a normal distribution of risk factors.This assumption does not always apply
in reality.
•The historical simulation assumes that the historical behavior of the risk factors will recur in the future, which may
not be the case.
•It is not possible to forecast a sudden change in a risk factor using either of the two methods.
•With the use of a 99% significance level, losses that could occur beyond that level are ignored.
•The use of a horizon of ten business days assumes that it is possible to hedge and sell positions within ten business
days. During crisis periods, liquidity problems in the market may make it impossible to close or fully hedge positions
within this timeframe.
•The risk estimate is calculated on positions only a few times in the course of the business day.
To mitigate the effect of the said limitations, in addition, stress scenarios are applied in order to examine the potential
loss in extreme cases, for all areas of trading activity, as detailed below.
Limitations of the Methodology for Assessment of Total Risk to the Bank
•In general, the credit risk inherent in assets does not represent a parameter in the calculations made, as their
purpose was to focus on quantifying the market risks alone.
•The information used for the risk estimates is assembled from various automated systems.
•A small part of the options embedded in various deposits and saving plans offered to the public were only partially
taken into account, on a "delta" basis. Under this method, there may be a deviation from the sensitivity estimates
noted above, especially in sharp movements in risk factors. Nevertheless, virtually all options are fully revalued
under various scenarios on the market risk management system.
To mitigate the effect of the said limitations, in addition, stress scenarios are applied in order to examine the potential
loss in extreme cases, as detailed below.
Methodology for Application of Stress Tests
The market risk assessment methodology of the Bank includes the application of stress tests to trading portfolios
and to the Bank overall, in addition to the VaR calculations.
The Market Risk Management Department applies three types of scenarios, in accordance with common practice worldwide:
(A)Sensitivity analysis – The sensitivity of the portfolio to the various risk factors is tested by running scenarios
involving one risk factor while the other risk factors are held constant.This allows an examination of the effect of the
major risk factors on the portfolio.
(B)Worst historical scenario – Based on the history of the last five years.The calculation is performed with a horizon
of ten business days for the trading portfolio and one month for the Bank in general.
(C)Macro-economic scenarios – Subjective scenarios developed in collaboration with the Economic Division of the Bank.
The principles guiding the establishment and application of the scenarios have been approved by the Board of
Management Committee on Risk Management and Basel II Implementation.
167
Overall Activity of the Bank
Set out below are data regarding the sensitivity of the capital of the Bank to changes in the CPI (the theoretical change
in economic value as a result of each scenario), as of December 31, 2010.
December 31, Maximum in
2010
2010
Scenario
Minimum in
2010
NIS millions
)42(
1% decrease in CPI
)42(
)2(
The Bank operates in currency markets through spot and forward transactions, as well as through options, both on
its own behalf and on behalf of its customers. Consequently, the Bank has activity in most of the world’s tradable
currencies, in developed markets as well as emerging markets. Due to the limits imposed on currency exposure, key
points of which are noted in the summary of limits below, net currency exposure is relatively low.
Set out below are data regarding the sensitivity of the capital of the Bank to changes in the major currency exchange
rates (theoretical change in economic value as a result of each scenario, where an appreciation scenario indicates
strengthening of the currency in question against all of the other currencies), as of December 31, 2010.
10%
appreciation
5%
appreciation
Currency
5%
depreciation
10%
depreciation
NIS millions
53
USD
32
)30(
)67(
JPY
13
4
)6(
14
EUR
)38(
)8(
13
24
GBP
9
4
)1(
)3(
CHF
13
6
)6(
)15(
Limits are imposed on the sensitivity of the capital of the Bank (including financial subsidiaries managed by the Bank)
to a scenario of change in the shekel, CPI-linked, and dollar interest-rate curves.
Set out below are data regarding the sensitivity of the capital of the Bank to parallel shifts in interest-rate curves
(theoretical change in economic value as a result of each scenario) as of December 31, 2010.
December 31, 2010
1%
increase
1%
decrease
Maximum in 2010
0.1%
increase
Scenario
1%
increase
1%
decrease
Minimum in 2010
1%
increase
1%
decrease
NIS millions
Shift in CPI-linked interest rate:
Bank
145
)149(
15
381
)424(
145
)149(
Banking book
143
)147(
15
380
)422(
143
)147(
Trading book
2
)2(
-
2
)2(
Bank
317
)335(
32
363
)370(
236
)249(
Banking book
326
)334(
33
357
)365(
241
)250(
)1(
)1(
)14(
)19(
12
3
)2(
2
Shift in unlinked interest rate:
)9(
Trading book
Shift in foreign-currency interest rates:
Bank
)15(
31
)2(
)25(
35
14
)2(
Banking book
)18(
34
)2(
)20(
34
12
1
)3(
-
)8(
)7(
7
Trading book
168
3
8
Set out below are data regarding the sensitivity of the capital of the Bank to parallel shifts in interest-rate curves
(theoretical change in economic value as a result of each scenario) as of December 31, 2009.
December 31, 2009
1%
increase
1%
decrease
Maximum in 2009
0.1%
increase
Scenario
1%
increase
Minimum in 2009
1%
decrease
1%
increase
1%
decrease
NIS millions
Shift in CPI-linked interest rate:
Bank
351
)391(
37
425
)219(
191
)469(
Banking book
350
)389(
37
423
)220(
192
)468(
Trading book
1
)2(
-
3
Bank
226
)236(
23
307
)220(
210
)331(
Banking book
234
)243(
24
340
)365(
1
)1(
)4(
Shift in unlinked interest rate:
)228(
217
)8(
7
)1(
)2(
50
)48(
)1(
Bank
)12(
18
)1(
51
40
)31(
)55(
Banking book
)10(
16
)1(
59
31
)22(
)37(
Trading book
)2(
2
-
3
10
)10(
)18(
Trading book
Shift in foreign-currency interest rates:
The above table presents an analysis of the sensitivity of the Bank's economic value to changes in interest-rate curves,
based, among other factors, on the capitalization of expected cash flows in the interest-rate curve without taking into
account the credit risk spread of the counterparty.This differs from a fair-value calculation, which is based on factors
including the capitalization of expected cash flows at interest rates reflecting the risk levels.
The examination of extreme scenarios includes a test of the sensitivity of the Bank's economic value to the worst
historical scenario of the last five years, including changes in the various risk factors in a one-month range. Note that
during 2010, this sensitivity did not exceed NIS 899 million.
Set out below are details of the fair value of the Bank and its consolidated companies as of December 31, 2010, by
linkage segment.
Israeli currency
Unlinked CPI-linked
Foreign currency**
USD
EUR
Other
Total
NIS millions
Financial assets*
190,144
Amounts receivable in respect of derivative and
off-balance-sheet financial instruments***
115,263
Financial liabilities*
158,707
45,375
Amounts payable in respect of derivative and
130,522
Net fair value of financial instruments
16,178
*
58,727
40,842
10,017
10,964 310,694
6,787 186,724
30,603
28,646 368,023
62,897
13,776
7,290 288,045
16,219 165,469
26,883
32,761 371,854
3,920
)800(
)39(
)441( 18,818
Includes hybrid financial instruments. Does not include balance-sheet balances of derivative financial instruments and fair
value of off-balance-sheet financial instruments.
** Includes foreign-currency-linked Israeli currency.
*** Amounts receivable (payable) in respect of derivative financial instruments and in respect of off-balance-sheet financial
instruments, capitalized by the interest rates used to calculate the fair value presented in Note 21 to the Financial Statements.
169
Set out below are details of the fair value of the Bank and its consolidated companies as of December 31, 2009, by
linkage segment.
Israeli currency
Unlinked(1) CPI-linked
Foreign currency**
USD(1)
EUR
Other
Total(1)
11,230
11,405
300,661
NIS millions
Financial assets*
165,822
Amounts receivable in respect of derivative and
Amounts payable in respect of derivative and
Net fair value of financial instruments
59,317
52,887
105,278
4,731
149,198
25,627
32,871
317,705
143,400
45,984
66,122
16,657
8,224
280,387
111,500
16,758
136,024
20,008
35,680
319,970
16,200
1,306
192
372
18,009
)61(
Set out below are data regarding the influence of theoretical changes in interest-rates on the net fair value of financial
instruments of the Bank and its consolidated companies, excluding non-monetary items, as of December 31, 2010:
Net fair value of financial instruments, including
the effect of changes in interest rates****
Israeli currency
Unlinked CPI-linked
Change in fair Value
Foreign currency**
USD
Change in interest rates
EUR
Other
Total
Total
NIS millions
Total
%
Immediate parallel increase of 1%
16,466
4,170
)767(
)43(
)443( 19,383
565
3.0%
Immediate parallel increase of 0.1%
16,205
3,945
)797(
)39(
)442( 18,872
54
0.3%
Immediate parallel decrease of 1%
15,866
3,707
)848(
)30(
)440( 18,255
)563(
)3.0%(
Set out below are data regarding the influence of theoretical changes in interest-rates on the net fair value of financial
instruments of the Bank and its consolidated companies, excluding non-monetary items, as of December 31, 2009:
Net fair value of financial instruments, including
the effect of changes in interest rates****
Israeli currency
Unlinked CPI-linked
Change in fair Value
Foreign currency**
USD
EUR
Other
Total
NIS millions
Change in interest rates
Total
Total
NIS
millions
%
510
2.8%
Immediate parallel increase of 1%
16,390
1,676
)79(
174
358
18,519
Immediate parallel increase of 0.1%
16,219
1,347
)63(
191
371
18,065
56
0.3%
Immediate parallel decrease of 1%
15,997
904
)44(
211
386
17,454
)555(
)3.1%(
*
Includes hybrid financial instruments. Does not include balance-sheet balances of derivative financial instruments and fair
value of off-balance-sheet financial instruments.
** Includes foreign-currency-linked Israeli currency.
*** Amounts receivable (payable) in respect of derivative financial instruments and in respect of off-balance-sheet financial
instruments, capitalized by the interest rates used to calculate the fair value presented in Note 21 to the Financial Statements.
**** The net fair value of financial instruments presented in each linkage segment is the net fair value in that segment, assuming
that the noted change occurred in all interest rates in that linkage segment. The total net fair value of financial instruments
is the net fair value of all financial instruments (excluding non-monetary items) assuming that the noted change occurred in
all interest rates in all linkage segments.
(1) Balances in respect of a certain financial instrument were reclassified, from amounts receivable/payable in respect of derivative
and off-balance-sheet financial instruments, to financial assets/financial liabilities.
For further details regarding the assumptions used in the calculation of the fair value of financial instruments, see
170
Trading Activity
Trade exposures result from the Bank’s activity as a market maker and from dynamic management of a portfolio of
liquid financial assets. The authorizations for activities and the risk inherent in activities are measured, as relevant, in
terms of the value at risk (VaR); theoretical loss under various scenarios, including extreme scenarios; sensitivity to
risk factors; and volume of activity. Risk assessments as well as limit control of trading activity are carried out at least
once daily. In addition to the specific authorizations for each activity separately, an overall authorization in terms of
VaR has been established for the Bank’s trading activity, in the dealing rooms and the securities trading portfolio.
Currency Exposures – Market Making and Trading
Spot/forward desks in foreign currency and in shekels operate in each of the Bank’s three dealing rooms.The Tel Aviv
dealing room also has a desk for options in foreign currency and in shekels. Trading and market-making activity in
currencies and options is conducted subject to various limits on risk and under an overall authorization for exposure
in shekels/foreign currency allocated to this activity, out of the total limit on the exposure of the Bank’s financial capital
to foreign currency.
Interest-Rate Exposure – Market Making and Trading
The Bank's dealing rooms are also active in interest-rate trading exposures, under authorizations from the Board of
Management and the Board of Directors, with the objective of maximizing the profit expectation while maintaining
an approved, controlled level of risk.
The dealing room in Tel Aviv manages a trading desk in shekel interest-rate instruments, including market making in
interest-rate options; a bond trading desk; and a desk for foreign-currency interest-rate exposures.The desks' activity
is subject to risk estimate limits and other restrictions.
Initiated Exposures in Proprietary Activity
The Tel Aviv dealing room conducted activity in initiated exposures of the Bank on its own behalf. This activity was
suspended during the third quarter of 2010.
Bond Trading Activity
The activity of the Bank as a market maker in government bonds is part of the activity of the interest-rate trading desk.
In addition, part of the portfolio of government bonds under the management of the Asset and Liability Management
Division is classified as a portfolio for trading.
Set out below are risk estimates of trading activity (VaR) as of December 31, 2010.
December 31,
2010
Average
in 2010
Maximum
in 2010
Minimum
in 2010
NIS millions
1.6
3.2
27.4
1.0
Trading in the dealing rooms
26.2
34.0
68.6
10.9
Total trading
27.8
37.2
-
-
Bond trading
171
Procedures for Exposure to Market and Liquidity Risks
In early 2011, the Board of Directors approved a document on exposures to market and liquidity risks.The approved
limits include a general limit for the overall risk estimate of the Bank, limits on the overall sensitivity of the Bank to
risk factors, and risk limits in the various areas of trading activity.The exposures document for 2011 reflects the work
plan of the Global Treasury Area, including the expansion of investment activity in the proprietary portfolio, as part
of the management of the banking book. Utilization of the approved limits is subject to approval by the Global ALM
Committee of the Bank.
Set out below are the principal limits on exposures to market risks, in the overall activity of the Bank and separately
for trading activity, as of December 31, 2010:
Limit
Overall Bank
Overall risk estimate (VaR)
NIS millions
% of active
financial capital
*1,000
Sensitivity of economic value to parallel changes
of 1% and non-parallel change of up to 1% in
interest-rate curves:
CPI-linked shekel
500
Unlinked shekel
620
Foreign currency
370
Sensitivity of annual revenue in the banking book to
parallel change of 1% in interest-rate curves:
CPI-linked shekel
**800
Unlinked shekel
**500
Linkage-base exposures by segment:
CPI-linked shekel
Foreign currency, including foreign-currency linked
Sensitivity to 3% change in NIS/USD exchange rate
Trade (included in the Bank's
books)
Overall risk estimate (VaR)
+/-100
+/-30
150
*250
NIS/foreign-currency exposure
Sensitivity to 3% change in NIS/USD exchange rate
Foreign-currency / foreign-currency exposure in
trading and currencies
+/-10
60
800
* After updates performed in 2011, total estimated VaR data are: NIS 950 million for the overall activity of the Bank, and
NIS 200 million in trading activity.
** Replaced in 2011 by a limit on the sensitivity of derivatives in the banking book.
The Bank is required to maintain a minimum capital ratio in respect of market risks on the basis of a standard model
defined by the Bank of Israel. The regulatory rate of capital adequacy is calculated for interest-rate risks in the areas
of trading alone, as defined above, and for currency risks at the Bank Group.
172
Market and Liquidity Risk Management Department
In accordance with Proper Conduct of Banking Business Directive No. 339, "Risk Management", the Bank has a unit
engaged in operational and market risk management.This unit reports to the Chief Risk Officer. Market and liquidity risk
assessment and control are performed by the Market and Liquidity Risk Management Department, independently and
in addition to the monitoring and analysis performed as part of the activity of the Global Treasury Area.
Operational and Legal Risks
A. Operational Risks
General
Operational risk is defined as the risk of loss resulting from failed or faulty internal processes, human actions, system
malfunctions, or external events. The definition includes legal risk, but does not include strategic risk or reputation
risk. Failures related to one of the aforesaid factors may cause damage to profitability. The Bank operates control
units, including the Compliance Officer Unit and the Anti-Money Laundering and Terrorism Financing Prevention Unit,
as well as procedures and systems in the area of human resources, information security, security, process control,
survivability and recovery, and more.
Management of Operational Risks
Operational risk management policy is aimed at supporting the achievement of the Group’s strategic objectives and
maximizing business value, while taking into consideration the costs in terms of risk, by all responsible parties at all
levels of the organization. The managerial process is oriented towards execution based on the designation of risk
ownership. The goal is for communication and prudent treatment with regard to operational risks to contribute to
managerial decision-making, based on considerations of business value versus cost in terms of risk, both on the level
of the management of the organization and on the level of the various units.
The responsibility for routine operational risk management and for activities aimed at mitigating the risk lies with the
Area managers and the managers of subsidiaries in the Bank Group.These activities are overseen by the Operational
Risk Management Department at the Risk Management Area. Routine activity is conducted at the Bank’s units and in
the Group by a network of operational risk controllers, based on the matrix management principle; controllers report
organizationally to Area managers or CEOs of subsidiaries, and receive methodology guidance from the Operational
Risk Management Department.
Operational risk management activity is supervised and directed by three forums:
•the Board of Directors’ Committee on Risk Management and Control and Basel II Implementation;
•the Board of Management Committee on Risk Management and Basel II Implementation, headed by the CEO;
•the Sub-Committee on Operational Risk Management, headed by the Head of the Risk Management Area.
The operational risk management policy was approved by the Board of Directors of the Bank.The policy document
serves as a framework for operational risk management within the Group, in accordance with uniform principles
and reporting duties aimed at complying with Basel II standards on Sound Practices. The Bank’s activity in this area
is conducted according to the rules of the Proper Banking Business Directive concerning capital measurement and
adequacy, which refers among other matters to capital allocation in respect of operational risks. In addition, the Bank
of Israel has published regulations concerning "Sound Practices for Management and Supervision of Operational Risk"
and an internal control framework in line with the Basel Committee's recommendations. The guidelines contained
in the aforesaid documents are in effect in Israel as of January 1, 2010.
173
The following projects are underway at the Bank for the purpose of complying with the Sound Practice directives
according to Basel II standards:
•Monitoring of compliance with Sound Practice requirements under the Basel II standard approach, in relation to
the existing situation in operational risk management.The process of closing gaps in this area has been carried out
gradually over recent years, with periodic monitoring by the Board of Management and the Board of Directors.
In 2009, the Bank essentially completed its preparations for compliance with all of the requirements of the Basel
II standard approach.The strategic plan for the coming years includes extension and expansion of some of these
activities.
•Quarterly reports submitted to the Subcommittee on Operational Risk Management, the Board of Management
Committee on Risk Management and Basel II Implementation, the Board of Directors Committee on Risk
Management and Control and Basel II Implementation, and the plenum of the Board of Directors. The reports
include updates on the implementation of the standard approach in the Group, work plans, the status of projects
in progress, and information about operational events.
•Collection of information regarding actual events of operational damage. A database for this purpose was
established in late 2002, and is used, among other things, to analyze events, trends, and patterns and to support
the mapping and assessment of operational risks to which the Bank is exposed.
•Routine procedures performed to identify, map, and assess operational risks and controls at the Bank’s units and
the Group, including mapping of the risk of embezzlement and fraud.This activity is conducted based on a uniform
methodology in line with the requirements of the Basel Committee and the directives of the Bank of Israel on
this matter, including monitoring of the implementation of the recommendations. Comprehensive mapping of
operational risks was carried out at all units of the Group during 2009. Subsequently, the findings have been
maintained, updated, and expanded through additional analyses, depth analyses, and risk analyses regarding new
products and activities.
•Projects aimed at identifying material risk areas, defining risk ownership, assessing risks, and adding controls if
necessary, while applying cost/benefit considerations.
•An automated operational risk management system has been implemented at the Bank’s units. In the first stage, the
system was used to collect data on operational damage. In the second stage, the system used to map and assess
risks. Additional applications are planned in the future, to support operational risk management in the Bank Group.
•In the area of information security, activity is being conducted as required under the directives of the Bank of Israel,
the Protection of Privacy Law, 5741-1981, and other laws, as relevant, with the aim of protecting the informationtechnology system and minimizing information-security risks.
Emergency preparedness – In order to preserve business continuity, survivability, and the continuous activity of
the Bank following a disaster or malfunction, in accordance with the Bank of Israel’s Directive No. 357 concerning
information technology management, the Bank has continuous preparedness based on detailed action plans, working
procedures, and periodic drills, defined in a system of emergency procedures. As part of its emergency preparedness,
the Bank conducted a lateral procedure to update policies, define reference scenarios, map critical processes, and
update its plans based on the prevalent methodologies in this area. Several emergency drills were also held, with the
participation of the various units of the Bank, including the Board of Management of the Bank.
174
Insurance – The Bank has a banking insurance policy to hedge risks, which includes: (1) banking insurance to cover
damages that may arise from embezzlement by employees; (2) professional liability insurance, to protect against
damage to customers as a result of negligent banking actions; (3) computer crimes insurance, to cover damages to the
Bank and to customers of the Bank as a result of intentional penetration of the Bank’s computer systems.The banking
insurance policies are subject to exceptions common in insurance policies of banking corporations in Israel (including
an exception for damage arising from violation of the directives related to money laundering and terrorism financing).
In addition, the insurance structure of the Bank also includes property insurance, third-party insurance, employers’
liability, directors’ and officers’ insurance, and additional insurance policies.
The liability limits in the policies were established by the Bank according to its needs, as part of its overall
risk-management policy. Within the fulfillment of the Sound Practice requirements under the Basel guidelines,
cooperation and exchanges of information are maintained between the Operational Risk Management Department
and the unit that handles banking insurance.
B. The Chief Compliance Officer Unit
In late 2010, the Bank appointed a Chief Compliance Officer, whose areas of responsibility include the areas of
responsibility of the Compliance Officer of the Bank and of the Supervisor of the Prohibition of Money Laundering.
As part of this process, the Bank established the Chief Compliance Officer Unit, which encompasses the Bank's
existing Compliance Unit and Prohibition of Money Laundering Unit. The Chief Compliance Officer Unit includes
two additional units, which will work alongside the Compliance Unit and the Anti-Money Laundering Unit. The first
is the International Unit, which is responsible for ensuring compliance and the prohibition of money laundering at
the Bank's offices outside Israel. Compliance staff at the Bank's overseas branches now report directly to this unit,
on both the professional and the managerial level. The second unit is the Coordination, Operations, and Monitoring
Unit, which will assist the Chief Compliance Officer with the execution of systemic and operational assignments.
Along with the establishment of the Chief Compliance Officer Unit, the Board of Directors of the Bank also established
a new group-level compliance policy for the Bank. The new policy sets forth rules regarding all of the areas that
comprise the prohibition of money laundering and compliance with consumer-protection directives. The policy
emphasizes corporate control and the interaction with subsidiaries and branches outside Israel.
The main actions taken during 2010 by the Supervisor of the Prohibition of Money Laundering and by the Compliance
Officer are described below.
C. The Supervisor of the Prohibition of Money Laundering and Prevention of Terrorism Financing
The areas of responsibility for the Supervisor of the Prohibition of Money Laundering and Prevention of Terrorism
Financing are anchored in the Prohibition of Money Laundering Law, the Prohibition of Terrorism Financing Law, and
Proper Conduct of Banking Business Directive 411. The Supervisor is responsible for employee training, compliance
with the duties imposed upon the banking corporation, and supervision of the execution of such duties.The Supervisor
is also responsible for ensuring that the Bank's policy and procedures are implemented at the Group level. The
Prohibition of Money Laundering and Prevention of Terrorism Financing Unit closely monitors banking activity in
accounts with the aim of identifying activities that appear to be unusual and reporting such activities to the Israel
Money Laundering Prohibition Authority. The strict monitoring, the improvement of computerized control systems,
and the training and absorption activities have led, among other effects, to an increase in the number of reports to
the IMLPA in the last two years.
175
As part of the improvement of the control systems, processes have been automated, barriers have been established,
and alerts have been added in order to prevent erroneous records and prevent the execution of transactions that
appear to be prohibited. These measures include:
•The system used to scan names against international alert lists of entities and individuals representing a risk with
regard to money laundering and terrorism financing was updated, and the alert list of the European Union was
added to the system.
•Processes for reporting unusual activities by the business system to the Supervisor of the Prevention of Money
Laundering, and the system of records, control, and reporting to the IMLPA, were improved and automated.
•A computerized control system for opening accounts and recording changes in the Bank’s administrative database
was launched and operated in the branch network.
Training and implementation activities regarding legal directives are conducted regularly for groups of employees
according to professional and managerial areas of activity, adjusting the type and extent of topics covered. Special
emphasis has been placed on risk areas in international banking activity, accounts of non-residents, and transactions
with risky countries and territories, including banks in the Palestinian Authority.
Routine training and implementation activities contribute to improved knowledge on compliance and improved
quality of reports handled by the Unit.
The development of new tutorials on the prohibition of money laundering and prevention of terrorism financing
has been completed. The tutorials are adapted to changing legal and business conditions, and are designed for all
employees of the Bank.
The Prohibition of Money Laundering and Prevention of Terrorism Financing Unit actively participates in content
management on the website for the Bank's compliance officers. The website provides employees with general and
specific information on subjects related to compliance, originating in Israel and elsewhere; serves as a real-time help
center; and is an important tool for the absorption of regulations, making use of lessons learned from events arising
from banking activity.
As part of the responsibility for the implementation of the Bank's policy on the Group level, the Supervisor of the
Prohibition of Money Laundering and the Prevention of Terrorism Financing continued to monitor and control the
activity of branches and subsidiaries abroad in all matters related to the prohibition of money laundering and the
prevention of terrorism financing.
Within this framework, a change was made such that the officer responsible for compliance and the prohibition of
money laundering at the Miami branch reports to the Supervisor of the Prohibition of Money Laundering in Israel,
instead of the International Banking Area.
The board of directors and management of each subsidiary and the management of each branch overseas establish
policies and procedures in the area of the prohibition of money laundering and the prevention of terrorism financing.
These policies and procedures are established based on the policy declared by the Board of Directors of the Bank
and the guidelines of the Supervisor of the Prohibition of Money Laundering, subject to local regulatory directives.
The Prohibition of Money Laundering and Prevention of Terrorism Financing Unit is an independent unit within the
Risk Management Area. Its activity is reported routinely to the responsible member of the Board of Management,
and periodically to the Board of Directors Committee on Risk Management and Control and Basel II Implementation
and the Board of Management Committee on Risk Management and Basel II Implementation headed by the CEO.
On December 30, 2010, the Committee on the Imposition of Monetary Sanctions on Banking Corporations
(hereinafter : the "Committee") resolved to impose a monetary sanction on the Bank, in a total amount of
NIS 6.9 million, in respect of two petitions to impose such a sanction.
176
The first petition refers to an examination by the Supervisor of Banks, conducted during 2004, of actions taken at the
Global Private Banking Center at the Hayarkon branch in 2002-2003. A monetary sanction of NIS 5.4 million was
imposed on the Bank in respect of this examination.The violations for which the sanction was imposed concern the
reporting of unusual activity under Section 9 of the Money Laundering Prohibition Order (Identification, Reporting, and
Record-Keeping Duties of Banking Corporations for the Prevention of Money Laundering and Terrorism Financing),
5761-2001 (hereinafter: the "Order").
The second petition refers to an audit report by the Supervisor of Banks, prepared during 2007-2008, primarily
concerning violations of an essentially technical nature, such as failure to receive or retain declarations of beneficiaries
in accounts; management of accounts for community purposes and accounts of attorneys on behalf of all of their
clients in a manner not congruent with the provisions of the Order; failure to report unusual transactions; failure to
block accounts in which the owners' identifying information has not yet been optimized; and late reporting to the
IMLPA. A monetary sanction in the amount of NIS 1.5 million was imposed on the Bank in respect of these violations.
In its resolution, the Committee noted that it had taken into consideration the actions taken by the Bank in general
and the Hayarkon branch in particular to correct the deficiencies.
With regard to the petition concerning the examination conducted in 2004, the Committee stated that it had taken
into consideration, among other matters, the time elapsed since the violations occurred, and the fact that the violations
occurred in the first years following the enactment of the Order, as well as the actions taken by the Bank to correct
the deficiencies and prevent a recurrence. With regard to the petition concerning the audit report from 2007-2008,
the Committee stated that it had taken into consideration the Bank's cooperation during the audit in discovering
the violations and the outcomes thereof, and the effective action taken by the Bank to correct the deficiencies and
prevent a recurrence, soon after receiving a draft of the audit report.
D. Activity of the Compliance Officer Unit
Proper Conduct of Banking Business Directive No. 308, "Compliance Officers", represents an important element in
adherence to and compliance with consumer-protection directives relevant to the Bank’s operations, in regard to the
relationship between the Bank and its customers, and requires the appointment and activity of a Compliance Officer
at the Bank. The appointment and activity of a Compliance Officer are also required under the general framework
of risk management in a banking corporation. The Compliance Officer assists the Board of Management and the
Board of Directors in fulfilling requirements in these areas, reducing the corporation’s exposure to legal claims, and
protecting the corporation’s reputation.
The Compliance Officer Unit monitors gaps and violations (if any) in the area of consumer-protection directives. In
addition, changes in legislation and in the directives of the Bank of Israel are monitored, as they pertain to consumerprotection directives and their implementation at the Bank. A new infrastructure survey is performed at the Bank
every five years, as required by Proper Conduct of Banking Business Directive No. 308.
The Compliance Officer Unit performed the following activities during the third quarter of 2010: Work sessions
were held with professional units supporting the execution of the compliance plan, which was updated. In the
area of training and implementation of consumer-protection directives, visits were made to branches and regional
administrations in order to provide instructions and raise awareness of the importance of this subject, and seminars
were held for Compliance Officers. In addition, branch Compliance Officers performed control processes in areas
related to consumer-protection directives, focusing on improving data on accounts opened for non-residents and
improving data on encoded accounts.
The Compliance Officer Unit continues to provide support and monitoring in the area of training and authorizations
for opening accounts, so that all employees who handle account opening will have the appropriate training.
177
A tutorial on confidentiality in banking, targeted to Head Office employees, was prepared during 2010, and continues
to be implemented. In addition, implementation of a tutorial on confidentiality in banking for branches continued.The
Unit, in collaboration with the Poalim Campus, prepared to create a new map of knowledge gaps on the subject of
consumer-protection directives; this process was carried out in late 2010.The Compliance Officer Unit continues the
gradual implementation of a lessons-learned process within the organization.
In the area of computerization, the Unit continues to operate and improve two systems:
•The Consumer Protection Directives Compliance Control System, which is used to transmit deficiencies identified
in relation to consumer-protection directives directly to branch Compliance Officers’ desktops.
•The Infrastructure Survey System, designed to ensure that the Bank is prepared to implement and fulfill its duties,
as derived from consumer-protection directives, in the prevention of exposures and in the resolution of gaps and
risk areas, in accordance with Proper Conduct of Banking Business Directive 308.
The Compliance Officers’ website and forum are a significant aid to the routine activity of Compliance Officers
and to increasing their knowledge and professional expertise. The website serves all employees of the Bank. The
site contains professional content, which is updated continually, and serves as an efficient tool for the benefit of all
members of this community.
E. Legal Risk
Risk to the Group's income and capital resulting from unexpected events such as legal claims, including class-action
suits, inability to enforce contracts, or rulings against the Group, which may cause damage to the Group's profitability.
The Group is aided by internal and external legal counsel.
According to the Bank of Israel’s definition, legal risk is "the risk of a loss due to the inability to enforce an agreement
by legal actions". Risks of this kind in the Bank's work may arise from a wide range of diverse circumstances. Thus,
for example, risks may arise from the absence of written documentation of contractual engagements between the
Bank and its customers, or between the Bank and its suppliers or others, deficient signatures, and/or a lack of details
in written agreements; from improperly phrased agreements and/or agreements open to interpretation that does
not reflect the Bank's intentions; or from agreements that are subject to cancellation (in full or in part) and/or that
include unenforceable provisions or other legal flaws.
The Bank takes a broad approach to legal risks, encompassing risks arising from primary and secondary legislative
directives, regulatory directives, rulings of courts, tribunals, and other entities with quasi-judicial authority, risks arising
from activity not backed by legal counsel or from flawed legal counsel, and risks arising from legal proceedings.
Legal risks are naturally intertwined with operational risks, as for example in the case of the possible absence of a
full, written, legally signed agreement in a particular transaction, despite the fact that an agreement of the same type
exists at the Bank and is used in the ordinary course of its business.
Legal handling of these issues emphasizes the following points:
•Identifying and addressing areas of material legal risk, with the appointment of an officer responsible for
implementing the directives.
•Preparing suitable agreements, guidelines, and procedures in order to ensure that risk-prevention measures are
implemented.
•Examining the implications of legislative directives (including court rulings) and directives of government agencies,
and their consequences for the Bank’s work.
•Drawing conclusions from legislative changes (including court rulings) and applying those conclusions in the legal
documents customarily used at the Bank; delivering opinions on such matters to the relevant Bank units.
With regard to subsidiaries in Israel and abroad, the plan delineates a general risk-management policy which each
subsidiary must adapt to its circumstances and operations; mechanisms for reporting to the Head of Legal Risk are
also required of these subsidiaries.
178
Other Risks
Reputation Risk
Damage to the Group's reputation as a stable, credible financial institution in the eyes of customers, shareholders,
investors, business partners, and regulatory agencies may lead to the transfer of customers' activity to other providers
of financial services, causing damage to the Group's activity and profitability. The risk is estimated in comparison to
various reference groups in the financial sector in Israel and abroad.
Competition Risk
Competitive risks arise from the banking system in Israel and from various financial institutions such as insurance
companies, investment-portfolio managers, foreign banks, etc., that may cause customers to transfer to these entities
by transferring all of their activities or by selectively acquiring services from different suppliers; and a risk of erosion of
profitability arising from competitive pressure to reduce fees and interest spreads. As a result, damage may be caused
to the Group's market share and profitability. Measures aimed at coping with competitive pressure are an important
element of the strategic plan and work plans; we therefore do not expect a material impact in the short-medium
term beyond the existing effect in the current planning.
Regulation and Legislation Risk
Risk to the Group's income and capital arising from legislation and/or directives of various regulatory agencies that
cause changes to the Group's business environment. Such changes may occasionally influence the Group's ability to
offer certain services and/or may obligate the Group to carry out technological and other investments at considerable
cost, while disrupting schedules for development of other planned services.
Changes in legislation as well as various regulatory developments, which result, among other things, in the imposition
of limits on holdings of shares of the Bank and on holdings by the Bank in shares of entities related to the Bank,
influence the Bank’s operations and may influence its business results.
As a "bank" and as a "banking corporation", the Bank’s activities are guided and bound by a system of laws, orders, and
regulations, including, among others, the Banking Ordinance, 1941; the Bank of Israel Law, 5714-1954; the Banking Law;
and the Banking (Service to Customers) Law, 5741-1981; as well as other laws with implications for its activity, such as
the Securities Law, 5728-1968; the Supervision of Financial Services (Profession of Pension Advising) Law, 5765-2005;
the Regulation of Engaging in Investment Advising, Investment Marketing, and Investment Portfolio Management Law,
5755-1995; and regulations and rules including the rules of the Governor of the Bank of Israel and the directives,
guidelines, and position statements of the Supervisor of Banks.
Banking laws include directives that apply to numerous areas of the Bank’s activity, to the point that there is no area,
or almost no area, of its activity that is not influenced by them to some degree. Banking laws also influence the Bank’s
subsidiaries, including those not considered "banking corporations", and to a lesser extent, companies related to the Bank.
Under the banking laws, the Bank is subject to supervision by the Bank of Israel, and in particular, supervision by the
Governor of the Bank of Israel and by the Supervisor of Banks. In addition, the Bank is subject to supervision by
agencies within government ministries, particularly the Ministry of Finance.
Banking laws refer to the Bank’s capital and to the manner of its management, including the imposition of external
and internal auditing and internal controls; they also determine the areas of activity in which the Bank is permitted
to engage, and the other legal entities in which the Bank is permitted to hold control or to hold means of control
at specified rates; and they restrict the extent of the Bank’s influence on controlled, related, and other companies in
which it holds means of control.
These laws restrict the Bank’s freedom of investment, particularly in "non-financial corporations," as defined in the
Banking Law.The banking laws impose certain usages of assets on the Bank, and they impose restrictions and conditions
for other usages of its assets.
The Bank monitors proposed legislation, regulations, and directives of the regulatory agencies to whose supervision
it is subject and/or which may affect the activity of the Bank Group and/or its business results.
179
Economic Risk – Condition of the Israeli Economy
Risk to the Group's income and capital arising from a slowdown in economic activity, which may have an adverse
effect on the condition of some businesses, on income levels, and on unemployment in the Israeli economy. Such a
process may cause deterioration in the condition of some of the Group's borrowers, leading to an adverse effect on
the probability of collecting credit. Furthermore, a slowdown in economic activity may cause a decline in non-credit
income, such as income from capital-market activity and foreign-trade activity, or cause a change for the worse in
the composition of financial resources, such as an increase in the cost of resources and a decrease in their availability.
Economic Risk – Condition of the Global Economy
Risk to the Group's income and capital arising from a significant slowdown in economic activity in the global market,
which may have an adverse effect on the condition of some businesses in Israel and on the volume of business activity.
This could have a negative impact on the probability of collecting credit and/or reduce income from fees and/or
from capital market activity and/or from the Group's activity abroad and/or from the provision of services related
to foreign trade activity and/or from the activity of foreign investors and/or from the provision of services to Israeli
customers with activity abroad.
In light of the recent economic events in the eurozone, the Bank is conducting frequent analyses of the situation and
its effects on the Bank, including scenarios of escalation of this situation. As a result, the Bank is updating its exposure
policies and has increased control over sectors that may be affected by these events.
Political/Security Risk
Risk to the Group's income and capital arising from a lack of security/political stability in Israel. Deterioration in the
security situation may cause a slowdown throughout the economy, and an adverse effect on particular industries
such as tourism and hotels, aviation, commerce, construction, and foreign-trade activity. In addition, there is a risk of
damage to commercial relations between Israel and other countries. Such situations may cause an adverse effect on
the ability to raise resources in foreign currency, on various investors, and on the condition of some of the Group's
borrowers and the probability of collecting credit from these borrowers.
Following the events of the last year, the Bank analyzed the possible effects of a crisis in relations between Israel and
Turkey, including severe scenarios.
Environmental Risk
Environmental risk to the Bank is the risk of loss as a result of directives related to the protection of the environment
and the enforcement thereof, which may occur if the Bank bears direct responsibility for an environmental hazard,
including the possibility that the Bank may be required to remove an environmental hazard, or may be liable to a third
party in respect of an environmental hazard, or as a result of the impairment of realized collateral. This risk may also
materialize indirectly as a result of the deterioration of the financial condition of another entity due to environmental
costs stemming from directives related to the protection of the environment. Reputation risk may also materialize as
a result of the attribution to the Bank of an association with the cause of an environmental hazard.
On June 11, 2009, the Supervisor of Banks issued a letter to banking corporations concerning the exposure to
and management of environmental risks. The letter refers to aspects of the Bank’s exposure to environmental risks.
Environmental risks may be included in other risks, such as operational risks, market risks, credit risks, and more. The
letter emphasizes that the identification and assessment of environmental risks are an inseparable part of a proper
process of risk assessment at the Bank; the Bank is therefore required to work to implement environmental risk
management as part of its overall risk management, including through the implementation of procedures for the
identification of material environmental risk when granting credit, and through the integration of environmental risk
assessment in the evaluation of the quality of credit extended to customers by the Bank.
Further to the letter from the Supervisor of Banks, the Board of Management and the Board of Directors of the Bank
approved principles and timeframes for the establishment of an environmental risk management system.
180
Risk Factor Table
Pursuant to the directive of the Bank of Israel, the principal risk factors to which the Group is exposed in respect of
its banking activity have been mapped. The risk factors and the Board of Management’s estimates regarding the risk
level of each factor are listed in the following table. The severity of the risk factors is determined with reference to
the risk appetite defined by the Bank, and is rated on a scale of low, medium, and high.
In order to quantify the various risk factors that may affect the Bank, different possible risk scenarios were examined for
most of the risk factors, and the extent of the potential effect of each scenario on the Bank’s stability and profitability
was estimated.The risk scenarios noted above are identical to the scenarios used by the Bank to examine the required
capital under the directives of the Supervisor of Banks for the implementation of the Basel II approach.
Each risk factor listed in the table below was tested in its own right, under an assumption of independence of each
risk factor relative to the other risk factors listed in the table. However, for several risk factors in the table, scenarios
were tested to estimate the effect of the combination of a number of risk factors.
Note that the risk scenarios simulate a situation in which unexpected damages materialize beyond the expected level
of damage events in the course of the Group’s business.
Number
Risk factor
Risk effect
Low
Medium
Financial risks
1.
Credit risk
X
1.1.
Risk in respect of the quality of borrowers and/or collateral
X
1.2.
Risk in respect of sectoral concentration
X
1.3.
Risk in respect of concentration of borrowers/borrower groups
2.
Market risks
X
X
2.1.
Interest-rate risk
X
2.2.
Inflation risk/exchange-rate risk
X
3.
Share price risk
X
4.
Liquidity risk
X
Operational and legal risks
5.
Operational risk
X
6.
Legal risk
X
Other risks
7.
Reputation risk
X
8.
Competition risk
X
9.
Regulation and legislation risk
X
10.
Economic risk – condition of the Israeli economy
X
11.
Economic risk – condition of the global economy
X
12.
Political/security risk
X
181
High
Basel II
On December 31, 2009, the Bank adopted the working framework for capital measurement and adequacy published
by the Supervisor of Banks, which is based on the Basel II directives. Proper Conduct of Banking Business Directives
201-211, "Capital Measurement and Adequacy", published in June 2010, integrated the temporary order into the
Proper Conduct of Banking Business Directives. These directives change the method of calculation of regulatory
capital. The following are the main changes:
•Capital allocation for operational risk;
•Change of the method of calculation of required capital with respect to credit facilities for an original period of
up to one year;
•Change of the method of calculation of required capital with respect to credit exposures from financial derivative
instruments;
•Consideration of the counterparty in calculation of risk-adjusted assets using a lower capital allocation with respect
to consumer credit and housing loans.
•Use of external ratings by approved rating agencies.
These directives replace Proper Conduct of Banking Business No. 311 concerning the minimum capital ratio, and
Proper Conduct of Banking Business Directive No. 341 concerning capital allocation in respect of exposure to market
risks, which are based on the Basel I directives. Note that according to the directives of the Supervisor of Banks,
until the completion of the supervisory review and evaluation process, banking corporations must also comply with
the capital objectives defined in terms of Basel I. On February 14, 2011, the Supervisor of Banks issued a circular
concerning the minimum capital ratio and the allocation of capital in respect of the exposure to market risks, which
cancelled the requirements of Proper Conduct of Banking Business Directives No. 311 and 341.
Implementation and Effect of New Regulatory Directives Regarding Capital Measurement and
Adequacy
1. On March 25, 2010, the Bank of Israel issued a letter of instructions concerning purchasing groups, which was
implemented starting with the financial statements as of June 30, 2010. Pursuant to the letter, credit (balance-sheet
and off-balance-sheet) extended to purchasing groups is to be weighted at a rate of 100% in the calculation of capital
adequacy.The implementation of this directive had a negligible effect on the calculation of the capital adequacy ratio.
2. On June 20, 2010, the Supervisor of Banks published a circular entitled “Capital Measurement and Adequacy”.
Among other matters, the circular states that starting with the report dated September 30, 2010, debts of banks
incorporated in a particular country should be assigned a risk weighting one notch lower than the risk weighting
derived from the rating of that country. However, debts of banks in countries rated BB+ to B- or in unrated countries
are to be assigned a risk weighting of 100%. The Bank has implemented the aforesaid directives in this report. The
implementation of the directive had no material effect on the calculation of the capital ratio.
3. Due to the continued developments in the housing market, with the increase in prices of homes and expansion
of the housing credit portfolio, the Supervisor of Banks issued instructions regarding floating-rate leveraged housing
loans, on October 28, 2010. Under the instructions, the capital allocation for floating-rate housing loans meeting
certain criteria is 100%, instead of the previous rates of 35% or 75%. This directive applies to loans approved as of
October 26, 2010 in which the financing rate at the date on which the credit is granted is higher than 60%, and the
part of the housing loan with a floating rate of interest constitutes 25% or more of the total loan.
These directives shall not apply to housing loans which, on the date granted, totaled less than NIS 800,000, or
to housing loans granted to borrowers meeting the Ministry of Housing's criteria for an eligibility certificate. The
implementation of this directive had a negligible effect on the calculation of the capital adequacy ratio.
182
4. On December 27, 2010, the Supervisor of Banks issued a circular entitled, "Capital Measurement and Adequacy –
the Standard Approach – Credit Risk". Among other matters, the circular states that sovereign debts denominated in
foreign currency, where the country has the possibility of repaying the debt in NIS if it has difficulty raising the foreign
currency, provided that the rate of conversion to NIS is the current rate, shall be considered as exposures denominated
in Israeli currency, and can be assigned a risk weight of zero. In the same circular, a clarification was added regarding
the criterion under which aggregate retail exposure to the same counterparty shall not exceed NIS 5 million, in the
criteria for debts included in the supervisory retail portfolios. The implementation of the directive had a negligible
effect on the calculation of the capital adequacy ratio.
Pillar III Disclosure
The objective of Pillar III is to encourage market discipline by allowing market participants to publish key information
concerning the capital adequacy of banks, through a mechanism of disclosure requirements.
The following table summarizes the disclosure requirements according to Pillar III:
Qualitative
disclosure
Subject
Quantitative
disclosure
Page number
Implementation of Basel II
184
-
Implementation of Pillar I
184
-
Implementation of Pillar II and the Bank's approach to assessing its capital adequacy
185
-
Applicability of implementation
188
-
Structure and composition of regulatory capital
188
190
Capital adequacy
190
191
Credit risk
151
192
Credit risk mitigation
Credit risk in respect of derivative financial instruments
Securitization exposures
194
195-196
158+198
199
160
200
Market risk
163
200
Operational risk
173
-
Positions in shares in the banking book
306
201
Interest risk in the banking book
165
168
183
Implementation of Basel II
Background
The Basel II framework is a set of guidelines and basic procedures published during 2004-2006 by the Basel Committee,
which coordinates the activity of the central banks in the industrialized countries with respect to numerous matters.
The objectives of these directives are, among other things, to define capital-adequacy requirements, with reference
to the risk appetite and actual risk level to which the banking corporation is exposed, and its ability to implement a
comprehensive system of rational treatment of risk identification, evaluation, management, and control, while expanding
the disclosure requirements in this area.
The Basel II directives consist of three pillars:
•Pillar I – Includes the manner of calculation of the supervisory minimum capital requirements in respect of credit
risks, operational risk, and market risk.
•Pillar II – Sets forth internal processes (ICAAP – Internal Capital Adequacy Assessment Process) to be used by
banks to assess the required capital in respect of risks in aggregate, including those not covered by Pillar I (such
as credit concentration, interest-rate risk in the banking book, liquidity risks, settlement risks, and strategic risks),
as well as a review process to be performed by the Supervisor of Banks.
•Pillar III – Market discipline; establishes the type and extent of information to be presented in reporting to the
public on the risks to which banks are exposed. Under this pillar, the disclosure should include both quantitative and
qualitative information, in order to enable the market to estimate the extent of the bank’s exposure to risk factors.
Basel III Directives
International guidelines for the implementation of Basel III were published during December 2010. The Bank will
examine the effects of these guidelines and begin implementation subject to the adoption of the guidelines by the
Supervisor of Banks. At this stage, it is not possible to assess the effect on the Bank of the implementation of these
directives.
Implementation of Pillar I
The implementation of the directives of Pillar I includes measurement of the risk exposures used to calculate the
required allocation of regulatory capital for these risks.
The following table lists the methods used by the Bank to calculate regulatory capital for each of the major risk
categories.
Category
Method used by the Bank
Credit risks
Standard method
Market risks
Standard method
Operational risk
Standard method
Counterparty credit risk
Current exposure method
Securitization exposures
Standard method
Other assets
Based on risk weighting set forth in the Proper Conduct
of Banking Business Directives
184
Implementation of Pillar II and the Bank’s Approach to the Assessment of its Capital Adequacy
Under the second pillar of Basel II, the Bank is required to carry out an internal process to assess capital adequacy
and establish strategy for ensuring capital adequacy: the Internal Capital Adequacy Assessment Process (hereinafter:
"ICAAP"). This process is aimed at ensuring an adequate level of capital in order to support all risks inherent in
the Bank’s activity and in its future plans for development and growth, while developing and applying appropriate
risk-management processes. Elements of the process include establishing risk appetite, capital objectives, and capital
planning and management processes under a variety of scenarios, including extreme scenarios.
Concurrently, the Supervisor of Banks is required to review and evaluate the ICAAP of the banking corporations,
within the SREP (Supervisory Review and Evaluation Process), in order to determine whether the capital and
capital objectives are adequate and require corrective measures where necessary, including through strengthening of
corporate governance, risk management, and internal controls. Within this review, the Supervisor may also require
corporations to add capital. The regulatory minimum capital ratio required of the bank is established as part of the
SREP. The examination of the ICAAP by the Supervisor of Banks constitutes part of the Risk Based Supervision (RBS)
working framework, in which the risk profile and quality of risk management at banking corporations are assessed,
among other matters.
In June 2010, the Bank submitted its ICAAP document for 2009 to the Bank of Israel. In this document, the Bank defined
its risk appetite, evaluated risks and the potential effect of its asset mix on its risk profile, and set capital objectives
based on these evaluations. The ICAAP document for 2010 will be submitted during April 2011.
Risk Appetite
The Board of Directors of the Bank defines risk appetite as well as risk capacity, in line with the strategy and future
business plans of the Bank. Risk appetite reflects the risk level to which the Bank is willing to be exposed, or which
it is willing to undertake or sustain, during the ordinary course of business. Risk appetite serves as the basis for the
allocation of resources and capital.
Risk capacity reflects the risk level which the Bank will not exceed even in the event of the materialization of extreme
scenarios. In light of the above, the maximum risk level undertaken by the Bank during the ordinary course of business
(its risk appetite) is lower than its risk capacity.
The Board of Management of the Bank is responsible for daily actions, and ensures through the definition and
enforcement of appropriate risk limits that the Bank operates within its declaration regarding risk appetite and risk
capacity, as defined, through the use of risk limits, among other means.
Capital Adequacy Target
Capital target of the Bank – The appropriate level of capital required in respect of the various risks to which
the Bank is exposed, as identified, estimated, and evaluated by the Bank. The total capital target is higher than the
required minimum regulatory capital, and includes the capital requirements with respect to Pillar I risks, in addition
to capital with respect to Pillar II risks and a capital "cushion" enabling the Bank to withstand losses in the event of
external crisis events (extreme scenarios), while complying with the minimum regulatory capital requirement. This
target takes into account actions by the Board of Management of the Bank aimed at reducing the risk level and/or
increasing the capital base.
The following are the Bank's capital adequacy targets, as approved by the Board of Directors of the Bank on
December 30, 2010:
The core Tier 1 capital ratio of the Bank shall be no less than 7.5%.
The total capital ratio of the Bank shall be no less than 12.5%.
185
Capital Management
The objective of capital management is to optimize return on equity while complying with the detailed risk appetite
definitions established by the Board of Directors of the Bank, subject to regulatory directives. Accordingly, effective
capital management ensures:
•Efficient allocation of capital during the ordinary course of business of the Bank.
•A robust, effectively priced, stable capital base serving as protection against unexpected risks to which the Bank is
exposed, supporting business strategy, and allowing compliance at all times with the regulatory minimum capital
requirement (refers to the mix and amount of capital backing the strategy and risks of the Bank).
•Optimization of capital ratios at all times – for this purpose, the Bank takes into account not only the current
status of capital but also future developments in the capital base and capital requirements.
Guiding Principles in Capital Management
Capital management is an annual process with a rolling planning horizon of three years.
Capital management is considered an integral part of the Bank's strategic and financial plan. Capital management is
based on the growth plans of the various business units, with the aim of assessing capital requirements during the
period of the plan, and is used in the strategic planning process, in connection with feasibility and capital allocation
to units.
Capital Management Committee
In order to create a thorough and effective capital-management process at the Bank, a specialized department was
established for management of the Bank’s capital, reporting to the CFO. In addition, a decision was made to establish
a senior management committee headed by the CFO, with the participation of the heads of the Global Treasury,
Strategy, Comptrolling, and Risk Management Areas, and other senior officers.
Objectives of the committee:
1)To supervise the definition of methodology and construction of infrastructure for advanced capital management
at the Bank. The committee will formulate methodology and methods of action, and will serve as a steering
committee for the various initiatives involved in the Bank’s transition to advanced capital management. The
committee will receive routine updates on the progress of these initiatives and will resolve decisions regarding
the manner of implementation of advanced capital management concepts at the Bank. Pursuant to the advanced
capital management approach, the Bank will:
•Plan for the long term and make decisions regarding the quantity of capital, structure of capital, and manner of
capital allocation and usage.
•Strive to maximize economic profit and return on equity over time, subject to its strategy, business needs, and
risk appetite, taking into consideration the requirements of the various interested parties.
2)To routinely monitor the capital adequacy status of the Bank and formulate recommendations for action as
necessary.
The committee will hold regular discussions of the capital adequacy status and the outlook for the coming months.
Periodically, the committee will also discuss long-term forecasts. In view of current and long-term needs, the committee
will formulate recommendations for courses of action for the Board of Management and the Board of Directors in
the area of capital raising, optimization of capital usage, and adjustment of the quantity of risk-adjusted assets due
to capital limits.
186
Set out below is the calculation of the capital ratio according to the Basel II directives:
December 31,
2010
December 31,
2009
NIS millions
1. Capital for the calculation of the capital ratio
Core capital
22,779
20,285
Tier I capital, after deductions
25,107
22,562
Tier II capital, after deductions
13,968
13,631
Total overall capital
39,075
36,193
252,064
240,402
2. Weighted balances of risk-adjusted assets
Credit risk
Market risks
Operational risk
Total weighted balances of risk-adjusted assets
5,483
4,460
19,154
19,835
276,701
264,697
December 31,
2010
December 31,
2009
%
3. Ratio of capital to risk-adjusted assets
Ratio of core capital to risk-adjusted assets
8.23%
7.66%
9.07%
8.52%
14.12%
13.67%
9.00%
9.00%
13.90%
*12.60%
13.90%
*12.60%
9.00%
9.00%
22.08%
16.21%
22.08%
16.21%
8.00%
8.00%
27.49%
**27.57%
24.35%
**24.44%
Minimum overall capital ratio required by local regulation
12.00%
12.00%
Minimum overall capital ratio required by the Supervisor of Banks
4. Significant subsidiaries
Isracard
Minimum overall capital ratio required by the Supervisor of Banks
Bank Hapoalim Switzerland
Minimum overall capital ratio required by local regulation
Bank Pozitif
*Restated.
** Restated. Previously reported on the basis of the parent company alone; reported on a consolidated basis starting with the
2010 financial statements.
187
Applicability of Implementation
In general, the capital requirements of the Bank are based on its consolidated financial statements, which are prepared
according to Israeli GAAP and the directives and guidelines of the Supervisor of Banks. According to Israeli GAAP,
subsidiaries controlled directly or indirectly by the Bank are consolidated in the financial statements, but different
consolidation rules sometimes apply for the purposes of the supervision of capital. However, as of December 31, 2010,
there are no differences between the consolidation base according to GAAP and the supervisory consolidation base
for the purposes of capital adequacy.
There are no significant prohibitions or restrictions on the transfer of funds or supervisory capital within the Group.
With regard to the limits established in the Bank of Israel’s permit for the acquisition of control of the Bank in
connection with the distribution of surpluses, see the section "Dividend Distribution" above.
For further details regarding the principal subsidiary and affiliated companies of the Bank, see Note 6C to the Financial
Statements.
Structure of Regulatory Capital and Composition of Capital
Pursuant to the Basel II directives, banking corporations must maintain a ratio of capital to risk-adjusted assets of no
less than 9% of the weighted total of risk-adjusted assets in their balance-sheet assets and off-balance-sheet items.
Capital measurement for the purposes of this directive is based on the division of capital into Tier I,Tier II, and Tier III
capital (held against market risks), deducting the corporation’s investments in equity-basis investee companies other
than non-financial corporations and in subsidiary companies whose financial statements are not consolidated in the
consolidated financial statements of the banking corporation, certain securitization exposures, and the goodwill in
the Bank’s books.
Tier I capital includes shareholders’ equity (not including unrealized profits in respect of the statement of securities
available for sale at fair value), hybrid Tier I capital, and minority interests’ rights to the capital of consolidated companies,
deducting unrealized losses from adjustments to fair value of shares available for sale, deducting the effect of related
taxes, and deducting goodwill. Hybrid Tier I capital is divided into two types: non-innovative financial instruments, and
innovative financial instruments. Non-innovative financial instruments include characteristics such as a maturity date
not less than 49 years; not secured by any form of collateral; rights under the instruments are subordinated relative
to all creditors of the Bank; the instruments include mechanisms for the absorption of losses on a current basis
(suspension of interest and principal payments, and forced conversion into shares under circumstances established
for those instruments); and they do not accrue interest and principal not paid on time in any way (except in the
case of payment in the form of shares), including in cases in which interest and principal payments are suspended.
Innovative capital instruments are those that meet the definition of non-innovative capital instruments but also include
an incentive for the Bank to carry out redemptions, such as a mechanism for an increase in the interest rate after a
certain number of years.
188
Tier II capital of the Bank includes Upper Tier II capital, which consists of hybrid capital instruments, as well as 45% of
the total unrealized net profits before the effect of related taxes in respect of adjustments to fair value of securities
available for sale, and the general provision for doubtful debts. Hybrid capital instruments recognized as Upper Tier
II capital are instruments that fulfill the characteristics of non-innovative capital instruments, but in contrast to the
non-innovative capital instruments, capital instruments recognized as Upper Tier II capital are those than can be
accretive; there is no requirement to convert them into shares; and in the order of creditors, they precede holders of
non-innovative hybrid capital instruments. Lower Tier II capital consists of subordinated notes with the following main
characteristics: a term to maturity of no less than five years; issued without collateral; rights under the instruments
are subordinated to the claims of other creditors of the Bank; and of the amount thereof recognized as Tier II capital,
as noted, 20% shall be deducted at the beginning of each year in the last five years before their maturity date (in the
event of a subordinated note settled in installments, such a deduction should be made from each installment). Hybrid
capital instruments issued before the implementation of the directive were approved by the Supervisor of Banks for
inclusion in capital, including the various tiers.
Tier III capital includes subordinated notes that fulfill the characteristics established in the directives of the Supervisor
of Banks. Requirements include: the notes must include an explicit condition whereby the payment of the debt shall
not be executed if as a result of such payment, the minimum capital ratio would fall below the minimum requirements
of the Supervisor of Banks; and the term to maturity shall be no less than two years. At this stage, the Bank has no
subordinated notes classified as Tier III capital.
Limits on the Capital Mix
The directive establishes limits on the capital mix in the various tiers, primarily the following:
•Total core capital shall constitute at least 70% of Tier I capital, after the required deductions from the capital in
this tier only.
•Total innovative hybrid capital instruments, as detailed above, shall not exceed 15% of the total Tier I capital, after
the required deductions for the capital in this tier only.
•Total Tier II capital and Tier lll capital shall not exceed 100% of Tier I capital, after the required deductions for the
capital in this tier only.
•Lower Tier II capital, as detailed above, shall not exceed 50% of the Tier I capital not allocated against market risks
(with regard to capital allocated against market risk, see below).
•Tier III capital held against market risks shall not exceed 250% of the Tier l capital held against this risk.
Hybrid capital instruments recognized as Tier I capital are raised by the Bank, and capital instruments recognized as
Tier II capital are raised by the Bank and through its wholly-owned subsidiaries (Hapoalim Hanpakot and Hapoalim
International N.V.). For details regarding subordinated notes, see Note 11 to the Financial Statements.
189
Set out below is the composition of capital for the purpose of calculating the capital ratio.
December
31, 2010
December
31, 2009
NIS millions
Tier I capital
Paid-up common share capital
Retained earnings
Minority interests’ rights to shareholders’ equity of consolidated companies
Other capital instruments
Amounts deducted from Tier I capital
Total core capital
Innovative hybrid instruments
Total Tier I capital
8,147
8,078
14,327
12,099
337
350
86
25
)118(
)267(
22,779
20,285
2,328
2,277
25,107
22,562
Tier II capital
Upper Tier II capital
3,662
3,555
Lower Tier II capital
10,359
10,136
Amounts deducted from Tier II capital
)53(
)60(
Total Tier II capital
13,968
13,631
Total eligible capital
39,075
36,193
For further details, see Note 13 to the Financial Statements.
Capital Adequacy
Measurement of Risk Exposures and Capital Requirements
The measurement of the exposures to the various risks may change depending on the definition of the exposure:
financial reporting according to GAAP, establishment of regulatory (supervisory) capital, or the Bank’s internal
exposure management needs. Risk exposures presented below are based on the rules defined for the calculation
of the regulatory capital required in order to support these risks.
According to the external rating-based standard approach implemented at the Bank, credit risk weightings are
determined by methods including the attribution of exposure to a counterparty/transaction, as stated in the
directive, taking into account the external credit rating of the counterparty to the transaction. The allocation of
capital in respect of assets with no counterparty, such as buildings and equipment, is performed according to fixed
regulatory risk weightings. For this purpose, the Bank uses data from two rating agencies: Moody’s Investor Service
and Standard & Poor’s Rating Group. In accordance with the methodology established at the Bank, the lower of
the credit ratings assigned by these agencies is selected. The relevant risk weightings are assigned to the different
ratings according to the standard approach established in the Basel II directives. Pursuant to the directive, certain
assets were deducted from regulatory capital, such as goodwill, intangible assets (excluding software), and certain
positions in securitization exposures.
190
Set out below are risk-adjusted assets and capital requirements in respect of credit risk, market risk, and operational
risk as of December 31, 2010.
December 31, 2010
Risk-adjusted
assets
December 31, 2009
Capital
requirements
Risk-adjusted
assets
Capital
requirements
NIS millions
Credit risk
Sovereign debt
1,575
142
1,304
117
Debts of public-sector entities
3,006
271
3,031
273
Debts of banking corporations
6,154
554
7,530
678
Debts of corporations
112,294
10,106
121,084
10,898
Debts secured by commercial real estate
55,426
4,988
42,091
3,788
Retail exposures to individuals
34,603
3,114
31,381
2,824
Loans to small businesses
5,834
525
6,032
543
Housing loans
23,999
2,160
20,291
1,826
Securitization
91
8
190
17
Other assets
Total in respect of credit risk
Market risks
Operational risk
Total risk-adjusted assets in respect of the various risks
9,082
817
7,468
672
252,064
22,685
240,402
21,636
5,483
493
4,460
402
19,154
1,724
19,835
1,785
276,701
24,902
264,697
23,823
39,075
36,193
Capital ratio required by the Supervisor of Banks
9.00%
9.00%
Ratio of core capital to risk-adjusted assets
8.23%
7.66%
Total capital
Ratio of capital to risk-adjusted assets
9.07%
8.52%
14.12%
13.67%
Credit Risk
Credit risk is the risk that a borrower or debtor may default on obligations to the Bank under an agreement.The credit
portfolio is a major component of the Bank’s asset portfolio; deterioration in the stability of the various borrowers
may therefore have an adverse effect on the value of assets and on the profitability of the Bank. Within credit risk
management, credit policies and exposure limits for borrowers and sectors in the various segments of activity are
defined at the Bank.The Group has credit policies and exposure limits for different types of borrowers in the various
activity segments and products, and compliance with these limits is monitored routinely.
For details regarding the management of credit risks and the manner of establishing the provision for doubtful debts,
the general provision, and the supplementary provision, see the section "Risk Management".
191
Credit Risk Exposures
Set out below is the segmentation of credit risk exposures by counterparty and by main types of credit exposures, after deducting the provision for
doubtful debts(1):
December 31, 2010
Sovereign
Public
Banking Corporations Secured by
sector corporations
commercial
real estate
Retail to
individuals
Small
businesses
Housing Securitization
loans
Others Gross credit
exposure(2)
Average
gross credit
exposure
NIS millions
Loans(3)
(4)
Bonds
42,573
4,041
5,911
83,982
43,461
43,724
7,946
41,757
-
-
273,395
263,502
21,075
1,307
1,673
2,533
111
-
-
-
262
-
26,961
22,796
1
513
6,249
4,794
298
3
-
25
-
-
11,883
11,988
562
708
1,531
60,510
35,366
45,119
3,501
5,125
177
-
152,599
146,052
-
-
-
-
-
-
-
-
-
12,295
12,295
11,211
64,211
6,569
15,364
151,819
79,236
88,846
11,447
46,907
439
12,295
477,133
455,576
(5)
Derivatives
Other
off-balancesheet
exposures
Other
assets(6)
Total
December 31, 2009
Sovereign
Public
Banking Corporations Secured by
sector corporations
commercial
real estate
Retail to
individuals
Small
businesses
Housing Securitization
loans
Others Gross credit
exposure(2)
NIS millions
(3)
Loans
44,671
4,148
6,657
92,442
35,592
38,816
8,065
Bonds(4)
15,871
1,427
2,305
3,292
51
-
-
-
200
4,029
5,193
324
-
-
379
986
2,090
65,055
21,409
51,613
-
-
-
-
-
-
60,921
6,761
15,081
165,982
57,376
90,429
Derivatives
(5)
Other off-balancesheet
exposures
Other assets(6)
Total
37,151
-
-
267,542
361
-
23,307
24
-
-
9,770
4,402
979
339
-
147,252
-
-
-
9,862
9,862
12,467
38,154
700
9,862
457,733
(1) Without deducting the general provision for doubtful debts.
(2) Before conversion to credit of off-balance-sheet components, as required in the Basel II directives (e.g. weighting of unutilized credit facilities as credit), and before
credit risk mitigation as a result of the execution of certain actions (e.g. use of guarantees).
(3) Including credit to the public, credit to the government, and deposits with central banks.
(4) Excluding bonds included in the tradable portfolio.
(5) Positive fair value of derivatives, including the add-on established in the Basel II directive reflecting the amount of the future potential exposure to credit in respect
of the balance of the face value of derivative instruments.
(6) Including cash, advance payments to the Tax Authority, shares, and other assets with no counterparty such as buildings and equipment.
The main gross credit exposures derive from loans extended by the Bank to its customers and from off-balance-sheet exposures, which mainly
include credit facilities, guarantees, and commitments to extend credit.
192
Gross credit exposures as of December 31, 2010 totaled approximately NIS 477.1 billion, compared with
NIS 457.7 billion on December 31, 2009, an increase of approximately NIS 19.4 billion. This increase resulted from
an increase in government bonds in the amount of approximately NIS 5.2 billion, which was offset by a decrease in
deposits with central banks, in the amount of approximately NIS 1.6 billion. In addition, the exposure to the sector
secured by commercial real estate increased by a total of approximately NIS 21.9 billion, housing loans by a total of
approximately NIS 8.8 billion, and other assets by a total of NIS 2.4 billion.This increase was offset by a decrease in
exposure to corporations, in the amount of approximately NIS 14.1 billion; a decrease in retail exposures to individuals,
in the amount of approximately NIS 1.6 billion; and a decrease in the exposure to small businesses, in the amount
of approximately NIS 1 billion.
Approximately 32% of the gross credit exposure of the Bank derives from exposure to corporations handled by the
Corporate Area, or other clients each of whose total balance of credit, calculated in accordance with the directives,
exceeds NIS 5 million. Risk-adjusted assets in respect of such customers are weighted according to ratings by
international rating agencies, or at 100% in the absence of such ratings.
Approximately 19% of the gross credit exposure of the Bank derives from retail exposure (including small businesses)
to customers each of whose total balance of credit, calculated in accordance with the directives, does not exceed
NIS 5 million. Subject to compliance with certain conditions, the directives permit weighting of risk-adjusted assets
in respect of such exposures at 75%.
Sovereign credit exposures constitute approximately 13% of the gross credit exposure of the Bank, and primarily
include deposits with central banks in Israel and in the United States, and investments in bonds issued by the Israeli
government and the US government.
Credit exposure in respect of housing loans constitutes approximately 10% of the gross credit exposure of the Bank.
This exposure includes credit granted for the purchase of homes where the ratio of the loan to the value of the asset
at the date of granting of the loan (LTV) does not exceed 75%. Subject to compliance with certain conditions, the
directives permit weighting of risk-adjusted assets in respect of such exposures at 35%.
193
Set out below is the segmentation of gross credit exposure (after deducting the provision for doubtful debts (1) by
contractual term to maturity (the last period), according to the principal types of financial instruments.
December 31, 2010
Up to 1 year
1 year to 5
years
Over 5 years
Other
Gross credit
exposure(2)
NIS millions
Loans
(3)
Bonds
(4)
Derivatives(5)
Other off-balance-sheet exposures
Other assets
(6)
Total
132,312
60,524
80,559
-
273,395
10,774
5,636
10,551
-
26,961
5,172
2,022
4,689
-
11,883
20,262
126,077
6,260
-
152,599
3,230
-
-
9,065
12,295
171,750
194,259
102,059
9,065
477,133
Other
Gross credit
exposure(2)
December 31, 2009
Up to 1 year
1 year to 5
years
Over 5 years
NIS millions
Loans
141,413
57,474
68,655
-
267,542
Bonds
3,522
8,220
11,565
-
23,307
Derivatives(5)
5,092
1,711
2,967
-
9,770
21,044
120,543
5,665
-
147,252
2,236
-
-
7,626
9,862
173,307
187,948
88,852
7,626
457,733
(3)
(4)
Other off-balance-sheet exposures
Other assets(6)
Total
(1) Excluding the general provision for doubtful debts.
(2) Before conversion to credit of off-balance-sheet components, as required in the Basel II directives (e.g. weighting of unutilized
credit facilities as credit), and before credit risk mitigation as a result of the execution of certain actions (e.g. use of guarantees).
(3) Including credit to the public, credit to the government, and deposits with central banks.
(4) Excluding bonds included in the tradable portfolio.
(5) Positive fair value of derivatives, including the add-on reflecting the amount of the future potential exposure to credit in respect
of the balance of the face value of derivative instruments.
(6) Including cash, advance payments to the Tax Authority, shares, and other assets with no counterparty such as buildings and
equipment.
For the distribution of the balance of problematic debts by economic sector, see Appendix 5 to the Management
Review regarding total credit risk to the public by economic sectors.
For the distribution of credit exposures by geographical region, see Appendix 6 to the Board of Management Review
regarding exposure to foreign countries.
Credit Risk Mitigation
The Bank applies the comprehensive standard approach in order to determine risk weightings to apply to the
counterparty.The standard approach requires the use of independent ratings prepared by international rating agencies.
The following tables present details of gross credit exposure (after deducting the provision for doubtful debts) by risk
weightings, with segmentation of the exposure by counterparty (segments), before and after credit risk mitigation in
respect of recognized collateral.
194
Before credit risk mitigation:
December 31, 2010
0%
20%
35%
50%
75%
100%
150% Deduction
Gross
from
credit
capital exposure(1)
NIS millions
59,465
Sovereign
3,604
-
261
-
881
-
-
64,211
Public sector
-
96
-
6,436
-
37
-
-
6,569
Banking corporations
-
11,368
-
3,396
-
598
2
-
15,364
Corporations
-
575
-
3,440
- 146,785
1,019
Secured by commercial
real estate
-
-
-
-
-
78,245
991
-
79,236
Retail to individuals
-
-
-
-
88,439
178
229
-
88,371
Small businesses
-
-
-
-
11,392
31
24
-
11,447
- 152,294
Housing loans
-
-
23,595
-
13,961
8,955
396
-
46,907
Securitization
-
429
-
10
-
-
-
-
439
3,288
-
-
-
-
8,607
400
-
12,295
62,753
16,072
23,595
13,543 113,792 244,317
3,061
0%
20%
35%
Others
Total
- 477,133
December 31, 2009
50%
75%
100%
150% Deduction
Gross
from
credit
capital exposure(1)
NIS millions
57,060
3,063
-
213
-
585
-
-
60,921
Public sector
-
60
-
6,629
-
72
-
-
6,761
-
7,082
-
7,335
-
539
125
-
15,081
-
159,659
2,871
-
165,982
Sovereign
Corporations
-
944
-
2,508
real estate
-
-
-
-
-
56,820
556
-
57,376
-
-
-
-
89,875
160
394
-
90,429
Small businesses
-
-
-
-
12,406
32
29
-
12,467
Housing loans
-
-
23,122
-
9,944
4,222
866
-
38,154
Securitization
-
594
-
17
-
63
-
26
700
Others
Total
2,527
-
-
-
-
7,069
266
-
9,862
59,587
11,743
23,122
16,702
112,225
229,221
5,107
26
457,733
credit facilities as credit), and before credit risk mitigation as a result of the execution of certain actions (e.g. use of guarantees).
195
After credit risk mitigation:
December 31, 2010
0%
20%
35%
50%
75%
100%
150% Deduction
Gross
from
credit
capital exposure(1)
NIS millions
59,465
Sovereign
3,623
-
261
-
881
-
-
64,230
Public sector
-
96
-
6,435
-
37
-
-
6,568
-
13,465
-
15,224
-
598
2
-
29,289
Corporations
-
575
-
3,440
-
144,731
1,017
real estate
-
-
-
-
-
75,549
989
-
76,538
-
-
-
-
74,323
178
227
-
74,253
Small businesses
-
-
-
-
9,623
31
24
-
9,678
Housing loans
-
-
23,595
-
13,959
8,955
396
-
46,905
Securitization
-
429
-
10
-
-
-
-
439
3,288
-
-
-
-
8,607
400
-
12,295
62,753
18,188
23,595
25,370
97,905 239,567
3,055
0%
20%
35%
50%
Others
Total
- 150,238
- 470,433
December 31, 2009
75%
100%
150% Deduction
Gross
from
credit
capital exposure(1)
NIS millions
57,060
3,063
-
213
-
585
-
-
60,921
Public sector
Sovereign
-
60
-
6,628
-
71
-
-
6,759
-
9,101
-
25,100
-
539
125
-
34,865
Corporations
-
944
-
2,508
-
156,051
2,870
-
162,373
real estate
-
-
-
-
-
54,014
537
-
54,551
-
-
-
-
70,604
159
392
-
71,155
Small businesses
-
-
-
-
10,060
32
29
-
10,121
Housing loans
-
-
23,122
-
9,943
4,221
866
-
38,152
Securitization
-
594
-
17
-
63
-
26
700
2,527
-
-
-
-
7,069
266
-
9,862
59,587
13,762
23,122
34,466
90,607
222,804
5,085
26
449,459
Others
Total
credit facilities as credit), and after credit risk mitigation.
196
Use of Eligible Collateral for Credit Risk Mitigation
As part of its credit-risk management, the Bank receives collateral from its customers to secure credit.This collateral
includes financial assets, real-estate assets, and other assets. Against credit granted to companies, the Bank also receives
collateral in the form of a general floating lien on the company’s assets. Under the Basel II directives, under certain
conditions, certain collateral such as guarantees, credit derivatives, and financial instruments held as collateral can be
deducted from risk-adjusted assets for the purpose of calculating the capital adequacy ratio.
The deduction of collateral for the calculation of the capital ratio is performed after using safety coefficients established
in the directive. These coefficients take into account factors including the term to maturity of the collateral, any lack
of congruity between the linkage terms of the collateral and of the credit which it secures, and volatility in the value
of the collateral.
The eligible financial collateral used by the Bank to calculate capital adequacy and mitigate risk includes deposits that
constitute collateral by way of liens, as well as bonds of banking corporations and governments under permanent
liens. In addition, the Bank uses guarantees of banking corporations, which transfer the exposure from the segment
of the guaranteed party to exposure to banking corporations.
The following table lists the types of collateral used, and presents the exposures covered by guarantees, exposures
covered by credit derivatives, and exposures covered by eligible financial collateral, by counterparty:
December 31, 2010
Gross credit
exposure(1)
Exposure
covered by
guarantees
Exposure
covered by
derivatives
64,211
-
-
-
19
6,569
-
-
-
-
-
13,925
Total
amounts
subtracted
Total
amounts
added
Exposure Net credit
covered exposures(3)
by financial
collateral(2)
NIS millions
Sovereign
Public sector
15,364
151,819
Corporations
)225(
-
)225(
-
-
64,230
)1(
6,568
)1,831(
29,289
149,763
Secured by commercial real estate
79,236
)72(
-
)72(
-
)2,626(
76,538
88,846
)12,708(
-
)12,708(
-
)1,410(
74,728
Small businesses
11,447
)939(
-
)939(
-
)830(
9,678
Housing loans
46,907
-
-
-
-
)2(
46,905
Securitization
439
-
-
-
-
-
439
12,295
-
-
-
-
-
12,295
Others
Total
197
477,133
)13,944(
-
)13,944(
)13,944(
)6,700(
470,433
December 31, 2009
Gross credit
exposure(1)
Exposure
covered by
guarantees
Exposure
covered by
derivatives
Total
amounts
subtracted
Total
amounts
added
Exposure Net credit
covered exposures(3)
by financial
collateral(2)
NIS millions
Sovereign
60,921
Public sector
Corporations
-
-
-
-
)2(
6,759
-
34,865
6,761
-
-
-
-
15,081
-
-
-
19,784
165,982
)337(
-
)337(
-
)3,272(
60,921
162,373
Secured by commercial real estate
57,376
)73(
-
)73(
-
)2,752(
54,551
90,429
)17,905(
-
)17,905(
-
)1,369(
71,155
)1,469(
-
)1,469(
Small businesses
12,467
-
)877(
10,121
Housing loans
38,154
-
-
-
-
)2(
38,152
Securitization
700
-
-
-
-
-
-
-
Others
9,862
Total
457,733
)19,784(
-
)19,784(
19,784
)8,274(
700
9,862
449,459
(1)Before conversion to credit of off-balance-sheet components, as required in the Basel II directives (e.g. weighting of unutilized credit
facilities as credit), and before credit risk mitigation.
(2) After taking safety coefficients into account.
credit facilities as credit), and after credit risk mitigation.
The use of eligible collateral led to a decrease in the amount of approximately NIS 20.6 billion in credit exposures
weighted by risk weights of 75% and 100%. This decrease was made possible by the use of guarantees of banking
corporations with a risk weight of 20% and 50% in the amount of approximately NIS 13.9 billion, and the use of eligible
financial collateral, which mainly includes deposits under lien and government bonds, in the amount of NIS 6.7 billion,
which led to a reduction of the overall credit exposure.
Credit Risk in Respect of Derivative Financial Instruments
Credit risk arising from transactions in derivative financial instruments in respect of the counterparty to the transaction
is measured by applying conservative coefficients to the face value of the transactions, according to the risk weight
of the counterparty.
In order to calculate credit risk exposure in respect of derivative financial instruments, the Bank implements the
present exposure method, as established in the directive. In this method, credit risk in respect of derivative financial
instruments includes the amounts of the positive fair value of derivatives in the balance sheet, plus add-on values in
respect of potential credit risk, calculated by multiplying the face values of the derivatives by the coefficients stated
in the directive, taking into account the underlying asset and term to maturity of the instrument. The following table
lists credit exposures of the Bank as of December 31, 2010 arising from derivatives.
198
December 31, 2010
Interest-rate Foreign-currency
derivatives
and gold
derivatives
Share
derivatives
Precious
metals
Commodity
derivatives
Total(1)
NIS millions
Positive gross fair value
3,259
2,959
239
30
8
6,495
Add-on values
1,305
3,812
245
12
14
5,388
Net credit exposure
4,564
6,771
484
42
22
11,883
Precious
metals
Commodity
derivatives
Total(1)
58
37
5,949
December 31, 2009
Interest-rate Foreign-currency
derivatives
and gold
derivatives
Share
derivatives
NIS millions
Positive gross fair value
2,757
2,113
984
Add-on values
1,043
2,528
158
62
30
3,821
Net credit exposure
3,800
4,641
1,142
120
67
9,770
(1) Not including fair value of credit derivatives (CDS).
The following table details the face value of the Bank’s credit-derivatives portfolio, used for risk management in the
Bank’s credit portfolio (the Bank is not a party to CDS transactions originating in mediation activities).
December 31, 2010
Face value in NIS millions
Banking book
Credit derivatives
Protection
acquired
Protection
sold
Total face
value of credit
derivatives
30
579
609
December 31, 2009
Face value in NIS millions
Banking book
Credit derivatives
199
Protection
acquired
Protection
sold
Total face
value of credit
derivatives
189
885
1,074
Securitization Exposures
Securitization exposures of the Bank arise from holdings of bonds of various securitization entities. The Bank uses
the lower of the ratings assigned by two international credit rating agencies, Standard and Poor’s Rating Group and
Moody’s Investor Service, to assign the relevant risk weights to these exposures.
The following table details securitization exposures acquired by the Bank and the relevant capital requirements:
December 31, 2010
Risk weight
Amount of
exposure
December 31, 2009
Capital
requirement
%
AAA to AA-
Amount of
exposure
Capital
requirement
NIS millions
20%
429
8
594
11
50%
10
-
17
1
BBB+ to BBB-
100%
-
-
63
5
BB+ to BB-
350%
-
-
-
-
A+ to A-
B+ or lower or unrated
Deducted from capital
-
-
26
26
Total
439
8
700
43
Capital Requirements in Respect of Market Risks
December 31, 2010
Specific risk
General risk
December 31, 2009
Total
Specific risk
General risk
Total
NIS millions
Interest-rate risk
Share risk
Foreign currency
exchange-rate risk
Total
50
126
176
12
148
160
6
6
12
5
15
20
-
305
305
-
222
222
56
437
493
17
385
402
Under the Basel II directives, market risk includes specific market risk in respect of securities in the trading book, and
general risk in respect of interest rate risk, share risk, and foreign currency exchange rate risk.
The required capital in respect of market risk on December 31, 2010 was approximately NIS 493 million. Of that
amount: NIS 56 million for specific risk and NIS 437 million for general risk.
200
Positions in Shares in the Banking Book
The following are details of the Bank’s investments in shares in the banking book.
December 31, 2010
Balance-sheet
value and fair
value
December 31, 2009
Capital
requirements
Balance-sheet
value and fair
value
Capital
requirements
NIS millions
64
Investments classified into the trading portfolio
)1(
12
44
)1(
9
Investments classified into the available-for-sale portfolio
2,221
200
1,476
133
Total investments in shares
2,285
212
1,520
142
Of which: Traded on the stock exchange
1,752
1,004
Privately held
533
516
Unrealized profits included in Tier II capital
224
139
(1) Including capital allocation with respect to specific market risk and general market risk.
Disclosure Regarding the Internal Auditor
Information regarding the Internal Auditor – Mr. Jacob Orbach has served as Chief Internal Auditor of the
Bank as of January 1, 2010. Mr. Orbach has worked at the Bank Hapoalim Group since 1980, and is employed full-time,
with the rank of a Member of the Board of Management. He holds a B.A. degree in Economics from Tel Aviv University
and has experience in the areas of banking and auditing. Mr. Orbach meets the conditions stipulated in Section 3(A)
of the Internal Audit Law, 5752-1992 (hereinafter: the "Internal Audit Law").The Internal Auditor is not an interested
party in the Bank or its subsidiaries, and holds no other office in addition to his position as Chief Internal Auditor
of the Bank and Internal Auditor of some of the subsidiaries in the Group, as required under Section 146(B) of the
Companies Law and Section 8 of the Internal Audit Law.The appointment and termination of internal audit employees
are subject to approval by the Chief Internal Auditor; audit employees receive instructions on audit-related matters
only from the Chief Internal Auditor or from internal audit executives authorized by him; in general, internal audit
employees do not hold other positions in addition to internal auditing; employees of the Internal Auditor Bureau are
authorized to sign on behalf of the Bank only documents related to audit work, as required under the directives of
Section 8 of the Banking Rules (Internal Audit), 5753-1992 (hereinafter: the "Audit Rules").
Appointment method – The appointment of the Internal Auditor was approved by the Board of Directors
of the Bank on November 18, 2009, following the recommendation and approval of the Audit Committee on
November 18, 2009, which cited considerations including Mr. Orbach's extensive professional experience in the
area of business and his familiarity with the Bank and with its managerial and organizational culture, as well as his
professional skills and personal qualities.
Superior officer of the Internal Auditor – The Chief Internal Auditor reports organizationally to the Chairman
of the Board of Directors.
Work plan – Internal auditing is conducted in accordance with an annual work plan and a three-year long-term
work plan.The work plan for 2010 was derived from the multi-year plan, which is based on the following, among other
matters: risk assessment at audited units; embezzlement and fraud survey; updated organizational structure of the Bank;
audit rounds at various units; and findings discovered in previous audits. In order to formulate the work plan, the audit
team held discussions and consultations with the Bank’s CEO, senior managers, and other management functionaries,
as well as the external auditors.The audit work plan at the Bank’s subsidiaries was established in a similar manner; the
Bank’s Internal Audit unit provides auditing services to most subsidiaries.The audit work plan also includes examination
of the approval processes of material transactions, all based on a comprehensive perspective with a focus on risks.
201
Following the formulation of the audit work plan by Internal Audit, the plan was submitted for discussion by the Audit
Committee; subsequently, taking the committee's recommendations into consideration, the plan was discussed and
approved by the Board of Directors.
The Internal Auditor has the discretion to diverge from the work plan in response to changing, unexpected needs.The
work plan includes resource allocation for audits of special events and unplanned audits, including audits by demand of
authorized parties, such as the Board of Directors, the Audit Committee, Bank management officials, and regulators.
Material changes to the work plan are discussed and approved by the Audit Committee and by the Board of Directors.
The Internal Audit work plan also addresses the Bank’s activity overseas through branches and representative offices,
and the Bank’s subsidiaries in Israel and abroad.The principal subsidiaries abroad have local internal auditors. Internal
Audit in Israel performs controls to ensure that the internal auditing is performed at an adequate professional level,
as required under Section 1(A)(3) of the Audit Rules. In general, subsidiaries in Israel receive internal audit services
from Internal Audit at the Bank.
Manpower – The number of positions in Internal Audit was determined in accordance with the multi-year work
plan, based on a risk survey.The internal audit team at the Bank, its subsidiaries, and its overseas offices numbered an
average of approximately 136 employee positions in 2010, as detailed below:
positions in 2010
The Bank
Subsidiaries
Total
Activity in Israel
96
7
103
Activity abroad
13
20
33
109
27
136
Total
In addition, approximately 1.25 positions were invested in outsourcing.
Performing audits – Internal Audit at the Bank operates under laws, regulations, Audit Rules, directives and
guidelines of the Supervisor of Banks, professional standards, professional guidelines of the Institute of Internal Auditors
in Israel, and guidelines of the Audit Committee and of the Board of Directors.
Having examined the Internal Audit work plan and the actual execution of said plan, the Board of Directors and
the Audit Committee believe that the Bank’s internal auditing complies with the requirements established in the
professional standards and in the directives of the Supervisor of Banks.
Access to information – Internal Audit has unrestricted access to all information at the Bank, including constant
unmediated access to the Bank’s information systems, including financial data, as necessary to perform its duties.This
authority is anchored in the audit charter and procedures. This policy is in place in the Bank’s activity in Israel and
abroad and at its subsidiaries.
Internal Auditor’s report – Internal audit reports, including periodic reports, are submitted in writing. A list of all
audit reports published during the preceding month is presented to the Board of Directors’ Audit Committee each
month, after being submitted to the Chairman of the Audit Committee.
Briefs of audit reports are presented to the Chairman of the Board of Directors, the Chairman of the Audit
Committee, and the CEO of the Bank. Most of the briefs are also distributed to members of the Audit Committee.
Substantial audit reports are discussed at the monthly Audit Committee meetings.
202
In 2010, semiannual and annual summaries were presented to the Board of Directors’ Audit Committee and discussed
by the committee, reviewing internal audit activities during the reported period. A summary of audit activities for 2009
was submitted on February 15, 2010, and discussed by the Audit Committee on February 23, 2010. A summary of
audit activities in the first half of 2010 was submitted on August 8, 2010, and discussed by the Audit Committee on
September 1, 2010. A summary of audit activities in 2010 was submitted to the Audit Committee on March 8, 2011
and discussed by the Audit Committee on March 14, 2011.
Evaluation of the activity of the Internal Auditor by the Board of Directors – In the opinion of the
Board of Directors and of the Audit Committee, the volume, nature, continuity of activity, and work plan of Internal
Audit are reasonable under the circumstances, and are sufficient to realize the Bank’s internal auditing objectives.
Remuneration – The following are details of the salary, compensation, value of benefits, employer contributions,
and provisions paid or provisions recorded in respect of the Chief Internal Auditor in 2010: Wages in the amount of
NIS 1,343 thousand; a bonus in the amount of NIS 703 thousand; benefit due to share-based payment in the amount
of NIS 1,393 thousand; value of additional benefits in the amount of NIS 282 thousand; employer contributions in
the amount of NIS 257 thousand; and supplementary reserves in respect of related expenses in the accounting year
in the amount of NIS 1,595 thousand, resulting from the change in status and increase in salary of Mr. Orbach during
the year. Total wages and benefits amounted to NIS 5,573 thousand.
As of the end of 2010, the balance of loans granted under benefit terms totaled NIS 62 thousand.The average term
to maturity of the loans is 3.6 years.The implied benefit in the loans amounted to NIS 1 thousand in 2010.The balance
of loans granted under ordinary terms totaled NIS 65 thousand.
The salary and terms of employment of the Internal Auditor are approved by the Board of Directors, based on the
recommendations of the Audit Committee. The remuneration of the Auditor is appropriate to his office and based
on the prevalent principles also used for the remuneration of Members of the Board of Management (defined as a
control function). In the opinion of the Board of Directors, the remuneration of the Internal Auditor is not such that
would bias his professional judgment.
Poalim in the Community – Social Involvement and Contribution to the Community
Strategy and Vision
As part of the Bank Hapoalim Group’s vision, strategy, and corporate values, the Bank is committed to an active,
leading role in the community, alongside its business leadership and economic initiatives.This involvement, implemented
through "Poalim for the Community", is part of an advanced managerial approach stating that an organization that
operates within the community, and draws both its employees and customers from it, is an integral part of that
community, and as a business leader, should strengthen the community and take a leading role in the advancement
and improvement of conditions for all members of the community, especially those who are underprivileged.
In the spirit of this business philosophy, the Bank conducts a varied and extensive range of community-oriented
activities that take the form of social involvement, monetary donations, and large-scale volunteer activities in which
both members of management and employees participate. Activity on behalf of the community is an important
factor in cultivating employees’ sense of pride and cohesion.
Ongoing Activities
All of the Bank’s community-oriented activity is organized within the framework of "Poalim for the Community"; part
of the activity is conducted through the "Poalim for the Community Foundation (Registered Non-Profit Organization)",
and the rest is conducted through other channels, described below.
203
Poalim for the Community devotes special attention to work with children and adolescents, with the aim of advancing
the generation of the future. However, the activity of "Poalim for the Community" is extensive and varied, and includes
other target groups as well.
In 2010, Poalim for the Community focused on projects in the area of education, aimed at children, adolescents, and
specific population groups, with special emphasis on teaching smart financial behavior. Poalim for the Community
devotes approximately half of its budget to the area of education.
Through the areas of activity described below, and through the various projects promoted by the Bank Group,
the Group’s involvement in the community in 2010 was expressed in a financial expenditure of approximately
NIS 44 million. The budget for this activity is determined each year by a committee headed by the Chairman of the
Board of Directors. This decision is made separately for each specific year, and approved within the overall budget
of the Bank.
Details of the various channels and projects follow.
"Poalim Volunteers" employee volunteer project – Several Bank units collaborate on this project, aimed
at assisting employees interested in volunteering for community activities. The Bank units involved are the Human
Resources, Logistics and Procurement Area, the Employees’ Union, the Head of Community Relations, regional
administrations in the Retail Banking Area, and the "Ruach Tova" and "Matan" foundations. Within this collaboration,
employees are offered a wide variety of volunteering possibilities, for groups, branches, or individuals. Other Bank
employees also volunteer individually with the Bank’s assistance.
"Poalim for the Community Foundation" – Monetary donations to the numerous organizations supported
by the Bank Group are made via the "Poalim for the Community" Foundation. Donations are given to organizations
that fulfill the criteria defined under the Foundation’s donation policy.
In 2010, as in previous years, the "Poalim for the Community" Foundation contributed to a large number of causes,
including assistance for children and youth, strengthening disadvantaged population groups, and support for educational,
culture, welfare, health care, and science institutions.Through the Foundation, the Bank contributes to higher-education
institutions, to scholarships for university students and underprivileged schoolchildren, and to the realization of
educational initiatives and enrichment programs for children and youth, as well as for children who are hospitalized
and need special assistance in order to progress in their studies.
The "Poalim for the Community" Foundation contributes to the advancement of culture and the arts, and makes
donations to various activities throughout Israel, focusing on enrichment programs for children and youth via innovative
educational projects. The Foundation helps to run workshops in Jewish and Arab schools throughout Israel in order
to promote understanding and coexistence among the peoples and encourage tolerance and democracy.
Another important area in which the "Poalim for the Community" Foundation is a regular donor is health care. The
"Poalim for the Community" Foundation supports several medical centers, with donations intended mainly to improve
conditions of patients’ treatment and hospitalization. The Foundation also promotes projects aimed at integrating
persons with disabilities into community life. In addition, the Foundation contributes to organizations that help realize
wishes of children suffering from cancer.
"Read & Succeed" community project – "Poalim for the Community" is committed to changing the reading
habits of Israeli children and youth. In addition to its ongoing community activities, the Foundation decided in 2004
to initiate a focused effort to bring about fundamental changes in the reading habits of Israeli children and youth.
The project continued in 2005-2010. The aim of the project is to raise public awareness of the encouragement of
reading.The project includes a public informational campaign, funding of story hours throughout Israel, activities during
National Book Week, and collaboration with the Children’s Channel and other media outlets.
204
Community-oriented sponsorships – "Poalim for the Community" is involved in various community activities
through community-oriented sponsorships, primarily encouraging excellence in sports, funding cultural events, and
assisting health-care institutions.
Donations of computers and accompanying equipment – The Bank is aware of the paramount importance
of investment in technology for the education and advancement of children and youth, and accordingly donates
computers and accompanying equipment each year. In 2010, the Bank donated approximately 1,455 computer
systems as well as additional accompanying equipment.
"Poalim for Culture and Nature in Israel" – The Bank believes that closeness to our heritage and culture is
of the utmost importance, and has therefore resolved to make it possible for parents and children throughout Israel
to travel during holidays and enjoy a variety of sites all over the country, without causing a heavy financial burden for
the families. During Passover 2005, the Bank launched a special project in which all Israelis were invited to visit sites
throughout Israel free of charge during Chol Hamoed (the holiday week). This project has become a tradition, and
continued during Passover in 2010.
Support for culture and arts – Each year, the Bank contributes to the promotion of culture and the arts through
donations and sponsorships; for example, the Bank provides support to museums throughout Israel. Likewise, the
Bank accompanies and supports several internationally recognized cultural institutions committed to leadership and
excellence in their field, through multi-year agreements: the Bank supports the activity of the Batsheva Dance Company
through three-year scholarships for dancers, and supports the Israel Philharmonic Orchestra and the Cameri Theater
under a three-year and five-year agreement, respectively. The Bank also holds art exhibits at its Head Office building,
with revenues devoted to the various foundations that participate in this initiative.
"Poalim from Three to Five" Project – The Bank, together with the Technion, through the Technion Alumni
Association and the Israel Technion Society, and in cooperation with the ORT organization, participates in the effort
to help students from geographically remote communities with lower socio-economic backgrounds improve their
academic achievements in mathematics. The aim is to increase the number of applicants for the five credit point
matriculation exam in mathematics by about 5%.The Bank’s involvement enabled approximately 2,000 students from
22 towns to participate in the project during the 2009/2010 academic year.
"Matan – Investing in the Community" (hereinafter: "Matan") – Since 1999, the Bank has engaged in activity
on behalf of the community in cooperation with the "Matan" Foundation.Through the "Matan Campaign," employees
engaged in volunteer work gain awareness of community needs and the importance of giving, and bring this message
to their colleagues. The model is based on partnership between management and employees in the workplace. All
donations to "Matan" by employees and management are intended for a wide variety of community causes, aimed
at supporting and strengthening disadvantaged groups in society. Donations are distributed in a special procedure
that involves an examination of needs and effectiveness. Bank employees participate as volunteers on the "Matan"
fund-designation committee, which decides on the distribution of the funds in the community, and as "Matan
Observers", assisting in the monitoring process of use of the funds donated. "Matan" is committed to transferring
donations to organizations or community causes chosen by the employee.
205
Sustainability and Corporate Social Responsibility
The Report on Sustainability and Corporate Social, Environmental, and Economic Responsibility of the Bank for 2009
was issued in December 2010. This report also covers activities carried out in the first half of 2010.
The report reveals achievements such as financing of over 50% of the solar-energy market, an increase in the
percentage of women in management positions, an almost 12% improvement in energy efficiency, an 11,000 ton
decrease at source of greenhouse gases, and contributions to community causes in the amount of NIS 39.6 million,
aimed at promoting education and empowering Israeli society.
This was the third consecutive year in which the Bank published a report on sustainability and CSR. Like the
previous reports, the current report earned the Global Reporting Initiative’s highest grade of A+. The Bank is the
first organization in Israel to attain the highest score for all three of its reports. The Bank's CSR activities have also
placed it in the top Platinum category of ratings by Maala, in each of these years.
A complex, thorough process of controls was applied to the report. The report reflects the progress of the Bank in
implementing a structured, comprehensive sustainability and CSR plan, at the highest level of transparency, and presents
extensive information, metrics, and trend analyses.The report is unique in that it combines personal first-hand accounts
of employees involved in various aspects of the Bank's activity in this area, providing an inside look at the way in which
these actions were performed, rather than only presenting outcomes. The report also contains articles by external
stakeholders, who provide professional, innovative, timely views of selected issues in the area of sustainability. A full
presentation of the Bank's carbon footprint is provided (the total cumulative annual impact on the environment, in
terms of emissions of carbon dioxide), consisting of all actions by the Bank that affect global warming, as well as a
description of the Bank's efforts to reduce this impact.
The Bank's CSR plan concerns all levels of its activity, in the following areas: environmental conduct, partnership with
employees, customers, products, services, and involvement in society and in the community.
The report is presented in addition to the publication of the financial statements, with the aim of providing a more
complete picture of the overall impact of the activity of the Bank, including on the social and environmental dimensions.
The report describes the Bank's progress in this area, summarizes its main achievements over the last year, and presents
its plans for the future. The report reflects an extensive ongoing process of change management and instilment of
the CSR philosophy throughout all levels of activity, with the following key areas:
•Developing and improving a specialized infrastructure for CSR management;
•Expansion of existing activities from previous years;
•Initiating new activities in this area;
•Dialogue and increased activity with the social network of those involved in the area of sustainability and CSR in Israel.
The publication of this report is a significant event highlighting the Bank’s commitment to leadership and to action
based on an awareness of sustainability issues and of its responsibility to its employees, its customers, its shareholders,
its suppliers, its community, the general public, the environment, and the preservation of the planet Earth, alongside
its aspiration to financial and professional excellence.
206
The following are examples of the Bank's achievements in the area of sustainability and CSR: cumulative savings of
1,578 tons of paper since 2008 in internal use by the Bank, representing a reduction of approximately 30% (equivalent
to 24,000 trees); improved energy efficiency of 11.6% per square meter during 2008-2009; over 300,000 subscribers
to Doar-Net online mailings, saving 13 million pages of printed notifications annually; hiring of 1,837 manpower
agency workers as employees of the Bank in 2008-2010; update and absorption of a global behavioral ethical code;
education on savings for children through the return of the "Dan the Saver" program, with 135,000 savings plans
opened by the end of 2010, and a total of approximately NIS 560 million accrued in the plans; 111 branches made
accessible to disabled persons, and 64 additional branches nearing completion of accessibility processes; 50% or more
of the financing of the solar-energy systems market; 6,000 students from more than twenty peripheral communities
participating in the "From Three to Five" program for the improvement of academic achievement in mathematics;
volunteering in a range of community projects by employees in all units of the Bank.
The Board of Directors and the Discharge of its Functions
During 2010, the Board of Directors of the Bank continued its activity in formulating the Bank's policy and the principles
of its activity, while establishing guidelines on various matters. As part of this process, the Board of Directors set forth
policy for the activities of subsidiaries in Israel and abroad, limits for exposure to various risks, bond issuance, share
capital issuance, execution and realization of fixed investments, and the execution of buyout offers and mergers.The
Board of Directors addressed the approval of the quarterly and annual financial statements; dividend distribution
policy; establishment of policy on salaries, retirement terms, and the remuneration system for employees and senior
executives; and supervision and control over ongoing business operations.
The Board in plenary session and its committees – the Credit Committee, the Transactions with Interested and
Related Parties Committee, the Balance Sheet Committee, the Audit Committee, the Salaries and Human Resources
Committee, the Prospectus Committee, the Expense Control and Streamlining Committee, the Senior Executives
Remuneration Committee, the Risk Management and Control and Basel II Implementation Committee, the Overseas
Banking and International Activity Committee, the New Products Committee, the Corporate Governance Committee,
the Investment Approval Committee, and the Information Technology Committee – held detailed discussions on
various aspects of the Bank's activities.
On February 6, 2011, the Board of Directors resolved to dissolve the Expense Control and Streamlining Committee;
to merge the Senior Executives Remuneration Committee with the Salaries and Human Resources Committee;
to dissolve the Balance Sheet Committee; to dissolve the Prospectus Committee; and to establish the Finance and
Prospectus Committee (whose functions and areas of authority are detailed below).
In the course of 2010, the Board of Directors held 42 meetings in plenary session and 236 meetings of its committees,
as detailed in this section.
The Credit Committee held discussions on matters of principle and the Bank's policy in the area of credit in
Israel and abroad. The Committee received comprehensive reviews of borrowers whose indebtedness exceeds a
certain monetary volume, approved credit limits or new credit to customers in amounts established by the Board
of Directors, discussed significant debt-rescheduling arrangements and substantial debts that are difficult to collect,
heard reviews on the sectors of the economy, discussed the policy on collateral and safety margins, discussed the
levels of authority on credit in Israel and abroad, and discussed the annual and multi-year work plans for credit control
in Israel and abroad.
The Credit Committee held 43 meetings in the course of the year.
Members of the Committee are:Y. Seroussi – Chairperson, I. Izakson, M. Baron, P. Dvorin, N. Dror, I.Tov, and M. Koren.
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The Transactions with Interested and Related Parties Committee discussed transactions with interested
parties and with "related parties", as defined by the Supervisor of Banks.The Committee also discussed transactions
with others in which an officer of the Bank has a "personal interest", as defined in the Companies Law, 5659-1999,
at amounts determined in the Supervisor of Banks’ Proper Conduct of Banking Business Directives.The Committee
also received routine reviews of the economic and financial condition of these entities.
The Transactions with Interested and Related Parties Committee held 42 meetings in the course of the year.
Members of the Committee are: M. Baron – Chairperson, N. Dror, I. Tov, and M. Koren.
The Balance Sheet Committee held discussions every quarter on the subject of doubtful debts of the Bank’s
customers in Israel and abroad, and discussed the quarterly and annual financial statements.The Committee received
quarterly reports on problematic credit of the Bank in Israel and abroad. In addition, the Committee discussed the
classifications of securities defined as problematic and examined the need for provisions for other-than-temporary
impairment of securities held by the Bank.The Committee also carried out ongoing monitoring of budget performance.
The Balance Sheet Committee held 5 meetings in the course of the year.
On February 6, 2011, the Board of Directors resolved to dissolve the Balance Sheet Committee.
Members of the Committee, until February 6, 2011, were: I. Izakson – Chairperson, M. Baron, P. Dvorin, N. Dror,
N. Zichlinskey, I. Tov,Y. Seroussi, E. Peled, and M. Koren.
The Audit Committee discussed the work plan of the Bank's Internal Auditor, made recommendations regarding
the approval of the work plan to the plenum of the Board of Directors, and monitored its implementation, including
setting the desired outline for audits at subsidiaries in Israel and abroad.
The Committee received semiannual reports regarding audits performed at the subsidiaries in Israel and abroad and
ascertained the existence of an adequate audit system at these companies. Material audit findings or findings posing
a material risk in relation to a subsidiary discovered in reports on audits performed at the Bank's subsidiaries were
reported by the internal auditors of the subsidiaries, following discussion by the audit committee of the subsidiary.
The Committee discussed Bank of Israel audit reports received during the year, the audit report by the external
auditors, and material and/or prominent Internal Audit reports, and monitored the processing of these reports. In
addition, the Committee received reports of periodic summaries of audit findings, including reports related to audit
mechanisms at corporations under the Bank's control.
Through the Internal Auditor, the Committee carried out control of the Board of Directors' working procedures
and the execution of the resolutions of the Board of Directors and its Committees.The Committee also carried out
control of compliance with the procedure regarding required utilization of continuous vacation time. Semiannual
summaries of internal audit activity and of the activity of the Audit Committee were presented to the Committee.
The Committee also addressed the authorization of operations and transactions related to officers and/or interested
parties (as defined in the Companies Law) and/or related parties (as defined in the Bank of Israel’s Proper Conduct
of Banking Business Directives) and the approval of material and/or "extraordinary" transactions, as required under
the provisions of the Companies Law, 5659-1999 (the "Companies Law").
The Audit Committee discussed problematic debts at the Bank and the provisions for doubtful debts required in
respect of such debts, and discussed the classification of securities defined as problematic and the examination of the
need for provisions for other-than-temporary impairment of securities held by the Bank.
The Committee also held discussions on various subjects, as required by the Bank of Israel's Proper Conduct of
Banking Business Directives, including a discussion of the appointment of the external auditors; held discussions with the
external auditors regarding the auditors’ preliminary and supplementary reports on the financial statements; received
reports on internal control of the financial statements; and held discussions with the Chief Internal Auditor alone.
The Audit Committee held 35 meetings in the course of the year.
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Members of the Committee are: N. Dror – Chairperson, M. Baron, P. Dvorin, N. Zichlinskey, and I. Tov.
On February 6, 2011, the Board of Directors affirmed that in addition to the roles detailed above, the Audit Committee
would also discuss the interim and annual financial statements and present its recommendations regarding the approval
thereof to the Board of Directors. Within this process, the Audit Committee will discuss estimates and evaluations
performed in connection with the financial statements, including with regard to doubtful debts; the internal controls
related to financial reporting; the completeness and fairness of the disclosure in the financial statements; and the
accounting policies adopted and the accounting treatment implemented on material matters and valuations, including
the assumptions and estimates on which the financial statements are based. In addition, the Committee will examine
the effectiveness of the Bank's main internal controls over financial reporting.The resolution of the Board of Directors
was passed pursuant to the directives set forth in the Companies Regulations (Directives and Conditions Regarding
the Procedure for the Approval of Financial Statements), 5770-2010, and the updates to Proper Conduct of Banking
Business Directive No. 301 concerning the board of directors.
The Salaries and Human Resources Committee discussed and submitted recommendations to the Audit
Committee and the Board of Directors on salary terms, retirement terms, and remuneration for the Bank's officers
and senior executives.The Committee also discussed and submitted recommendations to the Board of Directors on
salary terms, retirement terms, and remuneration for employees of the Bank who are not officers, including employees
at the branches and at the Bank’s offices and subsidiaries abroad, and made recommendations on policy regarding
the terms of employment and retirement of officers, managers, and employees of the Bank’s subsidiaries in Israel,
including the terms of the personal contracts offered to managers of subsidiaries in Israel.
The Salaries and Human Resources Committee held 9 meetings in the course of the year.
On February 6, 2011, the Board of Directors resolved to merge the Salaries and Human Resources Committee with the
Senior Executives Remuneration Committee, forming the "Salaries, Remuneration, and Human Resources Committee".
The members of this Committee are:Y. Seroussi – Chairperson, P. Dvorin, A. Dick, N. Dror, I.Tov, E. Peled, and M. Koren.
Until February 6, 2011, the members of the Committee were:Y. Seroussi – Chairperson, P. Dvorin, N. Dror, and I.Tov.
The Prospectus Committee meets on an ad hoc basis for the purpose of discussing and approving draft
prospectuses.
The Prospectus Committee held 1 meeting in the course of the year.
On February 6, 2011, the Board of Directors resolved to dissolve the Prospectus Committee.The areas of authority
of this Committee were transferred to the Finance and Prospectus Committee, which was established by a resolution
on that date (the functions and areas of authority of the Finance and Prospectus Committee are detailed below).
Until February 6, 2011, the members of the Committee were:Y. Seroussi – Chairperson, N. Dror, I.Tov, and M. Koren.
The Expense Control and Streamlining Committee conducted routine control of the expense structure
of the various Areas of the Bank; discussed streamlining proposals and the formulation of measures for increasing the
Bank’s efficiency, reducing personnel, and saving on manpower and logistics expenses; and submitted recommendations
for approval by the Board of Directors.
The Committee also carried out control of the implementation of streamlining plans and of the utilization of expense
budgets by the principal Areas, as well as control of the improvement of processes at the Areas of the Bank. The
Committee received routine reports on the matters discussed by the Streamlining and Logistics Committee of the
Board of Management of the Bank and discussed the material issues.
The Expense Control and Streamlining Committee held 1 meeting in the course of the year.
On February 6, 2011, the Board of Directors resolved to dissolve the Expense Control and Streamlining Committee.
Until February 6, 2011, the members of the Committee were:Y. Seroussi – Chairperson, I. Izakson, M. Baron, P. Dvorin,
N. Dror, and I. Tov.
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The Investment Approval Committee meets on an ad hoc basis to discuss the recommendations of the Board
of Management with regard to investments, acquisitions, and/or realizations of non-financial investments in Israel and
abroad, and to discuss the recommendations of the Board of Management with regard to the execution and/or
realization of fixed assets in Israel and abroad, to be made by the Bank itself or by its wholly-owned subsidiaries, in
amounts greater than USD 5 million and up to USD 10 million.The resolutions of the Committee are reported to the
Board of Directors. Investment decisions in amounts greater than USD 10 million are also submitted for the approval
of the Board of Directors, following approval by the Board of Management of the Bank and by this Committee.
On November 29, 2010, the Board of Directors approved a change in the hierarchy of investment authorizations,
pursuant to which investment decisions in amounts greater than USD 25 million and up to USD 60 million shall be
submitted for approval by the Committee, following discussion and an approval recommendation by the Board of
Management of the Bank. The resolutions of the Committee are reported to the Board of Directors. Investment
decisions in amounts exceeding USD 60 million shall be approved by the Board of Directors, following discussion
and recommendation by the Board of Management of the Bank and by this Committee.
The Investment Approval Committee held 5 meetings in the course of the year.
Members of the Committee are:Y. Seroussi – Chairperson, P. Dvorin, A. Dick, and I. Tov.
The Senior Executives Remuneration Committee was authorized by the Board of Directors to reexamine
the remuneration system for senior executives and officers at the Bank. In its meeting of August 19, 2010, the
Committee approved the remuneration plan for senior executives of the Bank, including the remuneration of the
Chairman of the Board of Directors and of the CEO of the Bank. The recommendations of the Committee were
approved by the Audit Committee and the Board of Directors.The remuneration plan of the Chairman of the Board
of Directors was also approved by the general meeting of shareholders of the Bank.
The Senior Executives Remuneration Committee held 39 meetings in the course of the year.
On February 6, 2011, the Board of Directors resolved to merge the Senior Executives Remuneration Committee
with the Salaries and Human Resources Committee. The composition of the committee is detailed above, in the
description of the activity of the Salaries and Human Resources Committee.
Until February 6, 2011, the members of the Committee were: I. Tov, E. Peled, and M. Koren.
The Risk Management and Control and Basel II Implementation Committee discussed the totality
of risks to which the Bank is exposed; the development of exposures; the Bank’s organizational preparations for the
management, control and assessment of risks; and the quality and adequacy of the tools and means used by the
Bank to manage and control risks and to manage and control the Bank’s overall exposure to the various risks. The
Committee received appropriate annual and quarterly reports in order to monitor, control, and assess risks.
The Committee also established the methodology for the assessment of the different risks, and discussed the Bank’s
preparations and progress towards implementation of plans to adopt Basel II directives.The Committee also discussed
and recommended approval by the Board of Directors of the ICAAP (Internal Capital Adequacy Assessment Process)
report of the Bank for 2010. In addition, the Committee received annual reports on the subjects of the prohibition of
money laundering, the prohibition of terrorism financing, and compliance with regulatory directives, and annual reports
on risk management in the various areas by the Bank’s subsidiaries in Israel and abroad and on the implementation
of risk-management policy in the Bank Group.
The Committee discussed the findings of the Embezzlement and Fraud Survey.The Committee discussed new activities
of the Bank and examined the risks involved in these activities and the tools to be used to manage, assess, and control
such risks. The Committee also received routine reports on material events in the Bank’s activity with an impact on
the Bank’s risk management in the various areas, and on events that led to a notable exception from exposure ceilings
or various limits in the Bank’s activity. The Committee presented its recommendations to the Board of Directors.
210
The Risk Management and Control and Basel II Implementation Committee held 17 meetings during the course of
the year.
Members of the Committee are: I. Izakson – Chairperson, N. Dror, I. Tov,Y. Seroussi, E. Peled, and M. Koren.
The Overseas Banking and International Activity Committee discussed the Bank's activity abroad and its
global international activity, including through the Bank's offices, branches, and subsidiaries abroad.
The Committee discussed periodic reports on the Bank's activity abroad, in the following areas: periodic reviews of
the environment of these operations (business, economic, regulatory, legal, political, etc.) in countries in which the Bank
operates through branches and offices; periodic developments at the overseas branches and offices, on the level of
individual branches and offices and on the aggregate level – activities, exposure to risks, and business results; periodic
reviews of internal audit, control, and supervision units in relation to overseas offices and branches; compliance with
exposure limits at overseas offices and branches; periodic examination of the adequacy of human resources at all
units of the Bank engaged in supervision, control, and auditing, and in the system of reporting and accounting records
related to overseas offices; and reports of special events at overseas offices.The Committee also discussed the status
of processing of findings of audits conducted at subsidiaries and branches (this review is presented to the plenum of
the Board of Directors following presentation to the Committee).
The Overseas Banking and International Activity Committee held 7 meetings during the course of the year.
Members of the Committee are:Y. Seroussi – Chairperson, A. Dick, I. Tov, E. Peled, and N. Ronen.
The New Products Committee discusses all new products and/or derivative financial instruments that are
significantly different from existing instruments at the Bank, and/or that lead to the creation of exposures of a new
type, and/or market making.
The New Products Committee held 5 meetings during the course of the year.
Members of the Committee are:Y. Seroussi – Chairperson, I. Izakson, M. Baron, N. Dror, and M. Koren.
The Corporate Governance Committee discussed and made recommendations to the Board of Directors
regarding policies, procedures, and guidelines for the Bank’s compliance with the principles of proper corporate
governance, and the adjustment thereof to legal directives.
The Corporate Governance Committee held 14 meetings during the course of the year.
Members of the Committee are:Y. Seroussi – Chairperson, N. Dror, N. Zichlinskey, I. Tov, and N. Ronen.
The Information Technology Committee discussed and made recommendations to the Board of Directors
regarding technology and computer-related matters at the Bank, including backup and survivability of the Bank’s
technological systems and management of information technology, as required under Directive 357 of the Bank of
Israel. Within this role, the Committee discussed the recommendations of the Board of Management to acquire a
third computer for the Bank and to relocate the backup site.
The Information Technology Committee held 13 meetings during the course of the year.
Members of the Committee are: M. Weitchner – Chairperson, A. Dick, and N. Zichlinskey.
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The Finance and Prospectus Committee – On February 6, 2011, the Board of Directors resolved to establish
the Finance and Prospectus Committee (following its resolution to dissolve the Balance Sheet Committee and the
Prospectus Committee).
The functions of the Finance and Prospectus Committee are: to review the business performance of the Bank, as
indicated by drafts of the financial statements, and to discuss the economic implications thereof; to discuss accounting
policies adopted on material matters in the financial statements, and the implications thereof; to discuss the evaluation
of estimates regarding doubtful debts and material valuations in the financial statements, while examining implications
and courses of action on the business level. In its discussions, the Committee will receive reports on problematic
borrowers in Israel and at the overseas branches.The Committee will also discuss dividend distribution, according to
the policy established by the Board of Directors, and make recommendations for approval by the Board of Directors;
and discuss prospectuses of the Bank, including shelf prospectuses and shelf prospectus reports, and present its
recommendations regarding the approval thereof to the Board of Directors.
Members of the Committee are: I. Izakson – Chairperson, N. Dror, I. Tov,Y. Seroussi,Y. Peer, E. Peled, and M. Koren.
The description of the activity, composition, and authority of the plenum of the Board of Directors and its committees
is current as of the date of publication of the annual financial statements for 2010, with an emphasis on the changes
executed on February 6, 2011.
Report on Directors with Accounting and Financial Expertise and Professional
Qualification
The Companies Law, 5759-1999 (hereinafter: the "Companies Law") states that the board of directors of a public
company must determine the minimum required number of directors on the board of directors who must be
"accounting and financial experts", taking into account factors including the type and size of the company and the
scope and complexity of its activity. This directive applies to the Bank, as a public company.
The Companies Law further states that an external director appointed to a public company must have "professional
qualification" or "accounting and financial expertise".
The Companies Regulations (Conditions and Tests for a Director with Accounting and Financial Expertise and for a
Director with Professional Qualification), 5766-2005, stipulate the conditions required in order for a director to be
considered a director with "accounting and financial expertise" or a director with "professional qualification".
Pursuant to the Companies Regulations, a "director with accounting and financial expertise" is "a director who due to
education, experience, and skills has a high level of proficiency and understanding of business and accounting matters
and of financial statements, such that he or she is able to understand the company’s financial statements in depth and
prompt discussion regarding the manner of presentation of financial data". It is further stipulated that the accounting
and financial proficiency of directors is to be assessed by the board of directors, taking into account considerations
including the director’s education, experience, and knowledge on the following subjects:
A.Accounting issues and accounting control issues characteristic of the industry in which the company operates
and of companies of the size and complexity of the company;
B. The responsibilities and duties of auditors;
C.The preparation and approval of financial statements in accordance with the law and the Securities Law.
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A "director with professional qualification" is a director who meets one of the following conditions:
A. Holds an academic degree in one of the following subjects: economics, business, accounting, law, public
administration;
B. Holds another academic degree or has completed other higher-education studies in the company’s main area of
activity or in an area relevant to the position;
C.Has at least five years of experience in one of the following, or cumulative experience of at least five years in two
or more of the following:
1. A senior position in business management of a corporation with a significant volume of business;
2. Senior public office or a senior position in the public service;
3. A senior position in the area of the company’s main activities.
The Regulations state that professional qualification of a candidate for service as a professionally qualified director is
to be assessed by the board of directors.
The Board of Directors of the Bank has determined that the minimum adequate number of directors having
"accounting and financial proficiency" is two, like the number of external directors appointed to a public company
under the Companies Law.
In addition, the Supervisor of Banks determined in Public Reporting Directive No. 630 (hereinafter: "Directive 630")
that a banking corporation must specify in its periodic report, as part of the board of directors’ report, the minimum
number of directors with "accounting and financial expertise" which the banking corporation has determined should
be members of the board of directors’ audit committee and of any other board of directors' committees which are
authorized to discuss the banking corporation’s financial statements.
Directive 630 also stipulates that the board of directors’ report should specify the number of directors at the reporting
date who have "accounting and financial expertise", noting the number of such directors who are members of the
board of directors’ audit committee, as well as of any other board of directors' committees which are authorized to
discuss the banking corporation’s financial statements.
The Board of Directors of the Bank has determined that the minimum adequate number of directors with "accounting
and financial expertise" who should be members of the Board of Directors’ Audit Committee is two, and that the
minimum adequate number of directors with "accounting and financial expertise" who should be members of the
Board of Directors’ Balance Sheet Committee, which is authorized to discuss the Bank’s financial statements, is two,
based on the considerations used by the Board of Directors in determining the minimum adequate number of
directors with "accounting and financial expertise" to serve on the Bank’s Board of Directors.
Note that at the reporting date, there are thirteen directors with "accounting and financial expertise" and "professional
qualification", based on their education, skills, and experience, in accordance with the requirements of the Companies
Regulations; and one director with "professional qualification", based on her education, skills and experience, in
accordance with the requirements of the Companies Regulations.
Three directors having "accounting and financial expertise" and one director with "professional qualification" are
members of the Board of Directors’ Audit Committee.
Members of the Board of Directors who have "accounting and financial expertise" and/or "professional qualification"
based on their education, skills, and experience, in accordance with the requirements of the Companies Regulations,
as of the date of publication of the Financial Statements for 2010, are the following:
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1. Yair Seroussi – B.A., Economics and Political Science, Hebrew University of Jerusalem.
Chairman of the Board of Directors of the Bank as of August 1, 2009. Chairman of the following Board Committees
at the Bank: the Credit Committee; the Salaries, Remuneration, and Human Resources Committee; the Investment
Approval Committee; the Overseas Banking and International Activity Committee; the New Products Committee; and
the Corporate Governance Committee. Member of the following Board Committees: the Finance and Prospectus
Committee; and the Risk Management and Control and Basel II Implementation Committee.
Served as Vice Chairman of the Board of Directors of the Bank from June 4, 2009 to July 31, 2009.
Serves as a director of the Bank as of June 4, 2009.
Chairman of the board of the following companies: Poalim Capital Markets and Investment Holdings Ltd., Poalim
Capital Markets Ltd., Poalim Capital Markets - Investment House Ltd.; Chairman of the Administrative Committee of
the Poalim in the Community Foundation.
Member of the Board of Trustees of the Hebrew University; member of the Advisory Board of the Caesarea Center.
Member of the board of directors of the following companies: DSP Group Ltd., Amdeal Y.S. Ltd., and Amdeal Holdings
(1999) Ltd.
In the past five years or during part of that period, served as senior advisor at the investment bank Morgan Stanley
(Israel) Ltd., chairman of the board of Eyal Microgal Ltd., Diur B.P. Ltd., Diur B.P. Investments (1992) Ltd., and Diur
B.P. Assets (1993) Ltd., and director at the following companies: Israel Corp. Ltd. (external director), Vintegra Ltd.
(external director), City Investment, Aspen Construction and Development Ltd. (external director), Mustang Mezzanine
Investments Ltd., Mustang Fund Management Ltd., and Frutarom Industries Ltd.; however, he no longer serves at
these companies.
Also served as chairman of the investment committee of Mivtachim – Established Pension Fund, and as a member of
the asset investment committee of the Hebrew University; however, he no longer serves in these positions.
Also served as chairman of the fund Mustang Mezzanine Investments Ltd. and as a member of the investment
committee of the fund Sky 1 (private equity); however, he no longer serves in these positions.
The Board of Directors has determined that the director has "accounting and financial expertise" and "professional
qualification", based on his declaration.
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2. Irit Izakson – B.A. in Economics,Tel Aviv University; MSc. in Operational Research, School of Business Administration,
Tel Aviv University.
Member of the Board of Directors of the Bank as of December 27, 1999. Chairperson of the following Board
Committees: the Finance and Prospectus Committee, and the Risk Management and Control and Basel II
Implementation Committee. Member of the following Board Committees: the Credit Committee and the New
Products Committee.
Chairperson of the board of directors of the following companies: Isracard Ltd., Europay (Eurocard) Israel Ltd., Aminit
Ltd., and Poalim Express Ltd.
Director in the following companies: Arison Holdings (1998) Ltd., Arison Investments Ltd., Housing and Construction
Ltd., and I.D.B. Development Ltd. Member of the Board of Trustees of Ben-Gurion University, and of the Van Leer
Jerusalem Institute.
In the past five years or during part of that period, served as a director in the following companies: Koor Industries
Ltd., Mehadrin Ltd., Meshulem Levinstein Ltd., Eurocom Communications Ltd., Nisko Industries Ltd., Israel Corp.
Ltd., Israel Chemicals Ltd., Dead Sea Bromine Company Ltd., and Bromine Compounds Ltd.; however, she no longer
serves at these companies.,
Previously held a number of positions in the course of her 17-year employment at Bank Leumi Le-Israel Ltd. These
positions included Manager of Shekel Assets and Liabilities. In her last position at Bank Leumi Le-Israel Ltd., served as
Head of the Industrial Sector in the Corporate Area.
qualification", based on her declaration.
3. Mali Baron – B.A. in Economics and Developing Nations,Tel Aviv University; M.B.A. (Specialized in Finance), Hebrew
University of Jerusalem.
Serves as an external director of the Bank under Proper Conduct of Banking Business Directive No. 301 of the
Bank of Israel as of September 10, 2007. Also serves as Chairperson of the Transactions with Interested and Related
Parties Committee and as a member of the following Board Committees: the Credit Committee, the New Products
Committee, and the Audit Committee.
Member of the board of directors of Maliba Ltd.
Member of the Investment Committee of Tel Aviv University.
Chairperson of the Peace Child Israel foundation.
In the past five years or during part of that period, served as a director at ECTel Ltd. (external director) and as a
member (internal) of the Profit-Participatory Investment Committee at The Phoenix Investment and Finance Ltd.;
however, she no longer serves at these companies.,
Served as chairperson of the board of directors of Marbit Insurance Agency, a subsidiary of Mercantile Discount Bank
(a banking auxiliary corporation), until December 31, 2006.
In 1975-1985, served in various positions at the Budget Division of the Ministry of Finance, of which five years as
Deputy Head of Budgets.
In 1986-2006, served in various positions in the banking system. Most recently served as Senior Deputy General
Manager at Mercantile Discount Bank Ltd., Head of the Branches Administration, and Head of Mortgages.
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4. Pnina Dvorin – LL.B., Tel Aviv Branch of the Hebrew University of Jerusalem; M.A., Law, Tel Aviv University.
Member of the Board of Directors of the Bank as of March 8, 2006. Member of the following Board Committees:
the Credit Committee; the Audit Committee; the Salaries, Remuneration, and Human Resources Committee, and
the Investment Approval Committee.
Member of the board of directors of the following companies: Reved Ltd., Cialo Technology Israel Ltd., FibroLAN
Ltd., and Investec Central Hotels Ltd.
In the past five years or during part of that period, served as a director at the following companies: Aspen Properties
Ltd., Shaniv Paper Industries Ltd., Clal - Mutual Fund Management Ltd., Wiscom Technologies Ltd., Bank Massad Ltd.,
Edmond de Rothschild - Mutual Funds Management Ltd., Ytong Industries Ltd. (external director), Israel Electric
Corporation Ltd., and Netvision Ltd.; however, she no longer serves at these companies.
During 1971-1989 served as an attorney at the District Attorney’s Office of Tel Aviv.
Worked as an attorney in private practice in 1989-2004.
The Board of Directors has determined that the director has "professional qualification", based on her declaration.
5. Amnon Dick – B.A. in Economics, Tel Aviv University; M.B.A., Tel Aviv University.
Serves as an external director of the Bank under Proper Conduct of Banking Business Directive No. 301 of the Bank
of Israel as of March 24, 2010. Member of the following Board Committees: the Investment Approval Committee;
the Information Technology Committee; the Salaries, Remuneration, and Human Resources Committee; and the
Overseas Banking and International Activity Committee.
Businessman and consultant to companies.
Member of the board of directors of the following companies: Non Stop Radio Ltd., The Northern Radio Holdings
Ltd., Radio Eco 99 Ltd., and MIRS Communications Ltd.
In the past five years or during part of that period, served as a director at the following companies: Pelephone Ltd.,
Yes (D.B.S.) Ltd.; however, he no longer serves at these companies.
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6. Nira Dror – B.A. in Economics and Business Administration,Tel Aviv University; M.B.A.,Tel Aviv University; graduate
of the Israeli Insurance Institute.
Serves as an external director of the Bank as of March 8, 2006. Chairperson of the Audit Committee, and member
of the following Board Committees: the Credit Committee; the Transactions with Interested and Related Parties
Committee; the Salaries, Remuneration, and Human Resources Committee; the Finance and Prospectus Committee;
the Risk Management and Control and Basel II Implementation Committee; the New Products Committee; and the
Corporate Governance Committee.
Owner of "Nira Dror Ltd"., which represents companies in the aviation and tourism industries and provides financial
consulting services.
Serves as a director on the board of directors and on the audit committee of the board of directors at the
following companies: Dikla Insurance Company Ltd.,Tzur Shamir Holdings Ltd., S. Shlomo Holdings Ltd., Clicksoftware
Technologies Ltd., and Sharonim – Water and Sewage Plants Ltd.
In the past five years or during part of that period, served as a director at the following companies: H&O Ltd., Hamey
Yoav Tourism Ltd.; however, she no longer serves at these companies.
From 1978 to 1985, served as an economist at the Economics Department of the Workers’ Company, and as referent
for issues related to tourism, insurance, industrialization of Development Areas, labor, and welfare. From 1984 to
1985, served as Head Economist of the Teus Concern. From 1985 to 1989, served as Head of Outgoing and Internal
Tourism at Histour. From 1989 to 1999, served as Head of British Airways in Israel.
Also served from March 1999 to June 2003 as Regional Manager of Eastern Europe and the Mediterranean at British
Airways, and from June 2003 to March 2005 as Deputy General Manager and Head of North America at El Al. Until
1999, served as a director at Bank Otsar Hahayal, American Israel Bank, Kitan, and Tadiran.
7. Meir Wietchner – B.A. in Political Science and Computer Science, Bar Ilan University, Ramat Gan; M.B.A.,
Northwestern University, Chicago.
Member of the Board of Directors of the Bank as of November 24, 2009. Chairman of the Information Technology
Committee of the Board of Directors.
Consultant and investment manager.
Member of the board of directors of the following companies: Miya S.a.r.L., Miya Bahamas Ltd., Miya Lux Holdings
S.a.r.L., Miya Water Holdings Ltd., Miya Water Projects Ltd., Dorot Management Ltd., Control Valves Ltd., Veritec
Consulting Inc., Miya Water (Proprietary) SA, Miya Water Mexico,V.DEC S.A., Miya NL Holdings BV, Miya NL Projects
BV, Miya Manila Water Projects Inc., Four Integrity Group Ltd., WRP Consulting Engineers (Proprietary) Ltd., Miya
Brasil Soluções em Engenharia Hidráulica Ltda, Miya Lux Holdings S.a.r.L., IP BranchSwiss.
CEO of the water company Miya. Member of the Advisory Council of Miya, of the Arison Group.
From 1989 to 1998, self-employed in the areas of consulting, management, and investments (fund raising, locating
investments and leverages for high-tech companies, management and membership of boards of directors, consulting
for organizations on strategy and technology management).
From 1998 to 2003, served as Vice President and President of the Messaging Division at Comverse.
In the past five years or during part of that period, served as a director at Eyal Microgal Ltd.; however, he no longer serves
there. Also served as a director at Storwize Ltd. and Storwize Inc. (Delaware-US); however, he no longer serves there.
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8. Nir Zichlinskey – B.A. in Business Administration (Specialized in Accounting and Finance), Management College,
Rishon Lezion; M.B.A. (Specialized in Finance), Ben Gurion University; CPA.
Member of the Board of Directors of the Bank as of September 10, 2007. Member of the following Board Committees:
the Audit Committee, the Corporate Governance Committee, and the Information Technology Committee.
President and CEO of the SRI Global Group, a business group in Israel leading the area of investments based on
the SRI (Socially Responsible Investment) model.The group operates through four main sectors: SRI Investment, SRI
Funds, SRI Consulting, and SRI Training.
CEO of the following companies: Socially Responsible Investments (SRI) Ltd., and Zichlinskey Ltd.
Member of the board of directors at the following companies: Housing and Construction Ltd., Housing and
Construction - SBI Infrastructures Ltd., Housing and Construction Real Estate Ventures Ltd., Housing and Construction
Environment Ltd., Housing and Construction Solel Boneh Construction and Infrastructure Ltd., Housing and
Construction - Solel Boneh - Infrastructures Ltd., SRI Consulting Ltd., Migdalor Investments (SRI) 2009 Ltd., and Paz
Training Ltd.
Professor at Business Administration and Accounting Departments for undergraduate and graduate studies at Tel
Aviv, Hebrew, and Bar Ilan Universities, the College of Management, the Academic College, Ruppin Academic Center,
and the Lander Institute, for fifteen years.
Served for ten years as Senior Partner and Head of the Professional Department, Head of Business Development
and the Social Reporting Department, and Head of Training at BDO Ziv Haft Certified Public Accountants.
Served as Deputy General Manager, Finance Manager and Head of Business Development at Arison Investments
Ltd., Arison Holdings (1998) Ltd., Arison Sustainability Ltd., Arzaf Ltd., Arzaf B (97) Ltd., Arzaf C Ltd., Arzaf D Ltd., and
Arshav Holdings Ltd.
In the past five years or during part of that period, served as a director at the following companies: Stone and Limestone
Industries Ltd., Israel Salt Industries Ltd., and Gaon Holdings Ltd.; however, he no longer serves at these companies.
Has comprehensive financial understanding both in practice and in methodologies passed on to the general public,
as evidenced by authorship and editing of dozens of books (including two encyclopedias), articles, and studies in the
areas of economics, business, accounting, control, auditing, law, and corporate social responsibility.
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9. Imri Tov – B.A. in Economics and Political Science, Hebrew University of Jerusalem; M.A. in Economics and
Business Administration, Hebrew University of Jerusalem.
Serves as an external director of the Bank as of February 5, 2009. Member of the following Board Committees: the
Credit Committee; the Transactions with Interested and Related Parties Committee; the Audit Committee; the Salaries,
Remuneration, and Human Resources Committee; the Finance and Prospectus Committee; the Investment Approval
Committee; the Risk Management and Control and Basel II Implementation Committee; the Overseas Banking and
International Activity Committee; and the Corporate Governance Committee.
Director of companies; business consultant; consultant and researcher in defense economics (INSS fellow).
Member of the board of directors of the following companies: MTA Holdings Ltd., Shufersal Ltd. (external director),
IC Green Energy (ICG) Ltd., Amanet Management and Systems Ltd. (external director), Plasan Sasa Ltd., and Granit
Hacarmel Investments Ltd. (external director).
In 2000-2006 served as an external director on the Board of Directors of Bank Hapoalim B.M., Chairman of the Audit
Committee, and member of the following Board Committees: the Credit Committee, the Transactions with Interested
and Related Parties Committee, the Business and Budget Committee, the Salaries and Human Resources Committee,
the Prospectus Committee, the Balance Sheet Committee, the Expense Control and Streamlining Committee, the
Investment Approval Committee, and the Repricing Committee.
Served in the past as a researcher at the Research Department of the Bank of Israel, as a manager at the Credit and
Foreign Currency Supervision Department, and as a consultant to the Governor of the Bank of Israel. Also served
as Chief Economist of the Defense System until June 2000.
In the past five years or during part of that period, served as a director at the following companies: Golden Wings
Ltd., Elisra Electronic Systems Ltd., Opterisity Ltd., and Plasan Sasa Ltd., as an external director of the Provident Fund
of State Employee Physicians (Aram), and as a member of the provident fund's investment committee; however, he
no longer serves in these positions. Also served as a research fellow at the Center for Strategic Studies at Tel Aviv
University and at the Institute for National Security Studies (INSS).
10. Yosef Yarom – M.A. in Law and Social Sciences, National University of Cordoba, Argentina.
Licensed to practice as an attorney in Israel.
Serves as an external director of the Bank, under Proper Conduct of Banking Business Directive No. 301 of the Bank
of Israel, as of March 21, 2011.
Lecturer on auditing in the business sector at Haifa University.
Member of the board of directors of the ORT Hermelin Netanya Academic College of Engineering and Technology.
Member of the credit committee of Dash Provident Funds Management Ltd. and of the audit committee of the
Movement for Quality Government in Israel.
In 1994-2004, served as Chief Internal Auditor of the Bank and as Head of Internal Audit in Israel and overseas
and internal auditors of companies in the Bank Group with the rank of a Member of the Board of Management. In
2004-2006, served as Head of Risk Management of the Bank. In 2006-2008, served as Chairman of the Board of
Directors of Bank Massad Ltd.
Served as a director at the following companies: Bank Massad Ltd., UBank Ltd., and Clarity Family Office; however,
he no longer serves at these companies.
The Board of Directors has determined that the director has “accounting and financial expertise” and “professional
qualification”, based on his declaration.
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11. Yacov Peer – B.A. in Economics, Ben-Gurion University; M.B.A., Industrial Engineering and Management,
Ben-Gurion University.
Serves as an external director of the Bank under Proper Conduct of Banking Business Directive No. 301 of the
Bank of Israel as of October 6, 2010. Member of the Finance and Prospectus Committee of the Board of Directors.
Financial and management consultant for small businesses.
Does not serve on boards of directors of other companies.
From 1996 to 2002, CEO of Shargad Orchanim Ltd.; from 2003 to the present, owner of a business providing financial
and managerial consulting for small businesses.
From 1988 to 1995, Head of the Economic Department at Nitsba.
12. Efrat Peled – B.A. in Economics and Accounting,Tel Aviv University; M.B.A., EMBA Kellogg Recanati International
Program, Tel Aviv University; Certificate in Land Assessment, Tel Aviv University.
Member of the Board of Directors of the Bank as of January 24, 2007. Member of the following Board Committees:
the Salaries, Remuneration, and Human Resources Committee; the Overseas Banking and International Activity
Committee; the Finance and Prospectus Committee; and the Risk Management and Control and Basel II Implementation
Committee.
As of September 2009, serves as chairperson of the board of directors of the following companies: Arison Holdings
(1998) Ltd., Arison Investments Ltd., Arison Sustainability Ltd., Arzaf Ltd., Arzaf B (97) Ltd., and Arzaf D.
As of September 2004, serves as CEO of SAFO LLC, Arzaf C Ltd., and Arshav Holdings Ltd.
Serves as a director at the following companies: Housing and Construction Holdings Ltd., Israel Salt Industries Ltd.,
Av-Ar Capital Investments 1997 Ltd., Biomedical Investments (1997) Ltd., Arison Investments SA LLC, and Miya S.a.r.L.
From March 2006 to September 2009, served as CEO of the following companies: Arison Holdings (1998) Ltd.,
Arison Investments Ltd., Arison Sustainability Ltd., Arzaf Ltd., Arzaf B (97) Ltd., and Arzaf D Ltd.
Extensive managerial experience accumulated in recent years at the Arison Group, in the areas of business in
philanthropy in the Israeli and international markets, including management in various financial and operational sectors
and specialization in the management of global financial fund systems, investment portfolios, financial and operational
holdings, Israeli and international taxation, real estate, and extensive work with top-tier international investment banks
and financial institutions.
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13. Moshe Koren – B.A. in Economics and Statistics, Hebrew University; graduate of courses on financial statement
analysis.
Member of the Board of Directors of the Bank as of August 3, 1992. Member of the following Board Committees:
the Credit Committee; the Transactions with Interested and Related Parties Committee; the Finance and Prospectus
Committee; the Risk Management and Control and Basel II Implementation Committee; the New Products Committee;
and the Salaries, Remuneration, and Human Resources Committee.
From 1959, served in a number of capacities at Israel Mortgage and Development Bank Ltd.
From 1961, served in a number of capacities at Foreign Trade Bank Ltd., which merged into the First International
Bank of Israel Ltd.
At the First International Bank of Israel served in a number of senior management positions, including management
of the Credit Division, the last of which was Acting Managing Director of the bank and Head of the Credit Division
and the Foreign Currency Division.
In the past five years or during part of that period, served as a director at the following companies: Psagot Investment
House Ltd., and Psagot Securities Ltd.; and as a director and member of the audit committee of Ilanot Batucha
Investment House Ltd. and Ilanot Batucha Asset Management Ltd.
14. Nehama Ronen – B.A. in Education and History, Tel Aviv University and Beit Berl; M.A. in Public Administration,
Haifa University.
Member of the Board of Directors of the Bank as of February 3, 2010. Member of the following Board Committees:
the Overseas Banking and International Activity Committee, and the Corporate Governance Committee.
Chairperson of the board of directors of the following companies: Maman Cargo Terminals Ltd., and Recycling
Corporation (ELA).
Member of the board of directors of Shachal Telemedicine Ltd. (external director).
Member of the board of directors and chairperson of the Environment Committee of the board of directors of Oil
Refineries Ltd.
In the past five years or during part of that period, served as a director at the following companies: Israel Salt Industries
Ltd., Kaman Holdings Ltd., and Kamur Ltd.; however, she no longer serves at these companies.
Also served as Director-General of the Ministry of the Environment in 1996-1999, and as a Member of Knesset in
2001-2003. Served as a member of the Board of Trustees of Ruppin College and of the Academic College of Tel Aviv.
On February 6, 2011, the Board of Directors determined that the director has "accounting and financial expertise"
and "professional qualification", based on her declaration.
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Board of Directors of the Bank
Yair Seroussi Chairman of the Board of Directors of the Bank as of August 1, 2009.
Also serves as chairman of the boards of directors of subsidiaries in the Bank Group.
Serves as a director of the Bank as of June 4, 2009.
Mali Baron
Director of companies.
Serves as an external director (as defined in the Bank of Israel’s Proper Conduct of
Banking Business Directive No. 301) as of September 10, 2007.
Amnon Dick
Businessman and consultant to companies.
Banking Business Directive No. 301) as of March 24, 2010.
Nira Dror
Serves as an external director (as defined in Section 240 of the Companies Law) as of
March 8, 2006.
Pnina Dvorin
Attorney and director of companies.
Serves as a director of the Bank as of March 8, 2006.
Irit Izakson
Chairperson of the boards of directors of the credit-card companies in the Bank Group.
Serves as a director of the Bank as of December 27, 1999.
Moshe Koren
Banking and financial consultant.
Serves as a director of the Bank as of August 3, 1992.
Yacov Peer
Financial and managerial consultant for small businesses.
Banking Business Directive No. 301) as of October 6, 2010.
Efrat PeledChairperson of the boards of directors and CEO of the following companies: Arison
Holdings (1998) Ltd., Arison Investments Ltd., Arison Sustainability Ltd., Arzaf Ltd., Arzaf B
(97) Ltd., and Arzaf D Ltd.; and CEO of the following companies: SAFO LLC., Arzaf C
Ltd., and Arshav Holdings Ltd.
Serves as a director of the Bank as of January 24, 2007.
Nehama RonenChairperson of the board of directors of Maman Cargo Terminals Ltd., and Recycling
Corporation (ELA).
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Serves as a director of the Bank as of February 3, 2010.
Imri TovDirector of companies; business consultant; consultant and researcher in defense
economics (INSS fellow).
Serves as an external director (as defined in Section 240 of the Companies Law) as of
February 5, 2009.
Meir Weitchner
Consulting, management, and investments.
CEO of the water company Miya and member of the advisory board of Miya, of the
Arison Group.
Serves as a director of the Bank as of November 24, 2009.
Yosef YaromLecturer on auditing in the business sector at Haifa University.
Banking Business Directive No. 301) as of March 21, 2011.
Nir Zichlinskey
President and CEO of SRI Global Group.
Serves as a director of the Bank as of September 10, 2007.
Leslie LittnerServed as an external director (as defined in the Bank of Israel’s Proper Conduct of
Banking Business Directive No. 301) from September 10, 2007 to September 9, 2010.
Ronen IsraelServed as an external director (as defined in the Bank of Israel’s Proper Conduct of
Banking Business Directive No. 301) from October 29, 2007 to October 29, 2010.
* Additional details regarding the Members of the Board of Directors of the Bank are presented in the Periodic Report of the
Bank for 2010, and on the Magna website of the Israel Securities Authority at http://www.magna.isa.gov.il.
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Board of Management of the Bank
Zion Kenan
President and Chief Executive Officer
Lilach Asher-Topilsky
Head of Retail Banking
Shimon Gal Head of Corporate Banking
Dan Koller
Chief Risk Officer
Orit Lerer Head of International Banking
Anath Levin Head of Global Treasury(1)
Ofer Levy Chief Accountant
David Luzon
Head of Information Technology(2)
Ilan Mazur
Chief Legal Advisor
Ran Oz
Chief Financial Officer (CFO)
Ari Pinto
Head of Corporate Strategy
Hanna Pri-Zan
Head of Client Asset Management
Efrat Yavetz
Head of Human Resources, Logistics, and Procurement
Chief Internal Auditor Jacob Orbach – Head of Internal Audit in Israel and Abroad
Mario Szuszan
Head of Global Treasury(3)
Corporate Secretary
Yoram Weissbrem
Bank Spokesperson Ofra Preuss
External Auditors
Ziv Haft, Certified Public Accountants (Isr.)
Somekh Chaikin, Certified Public Accountants (Isr.)
(1) As of May 16, 2010.
(2) See the section "Other Matters" with regard to his resignation at the end of March 2011.
(3) Ceased to serve as a Member of the Board of Management as of May 15, 2010.
Additional details regarding the Members of the Board of Management of the Bank are presented in the Periodic Report of the
Bank for 2010, and on the Magna website of the Israel Securities Authority at http://www.magna.isa.gov.il.
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Other Matters
The annual general meeting of the shareholders of the Bank for 2009 convened on January 6, 2010.The shareholders
approved the appointment of the accountants, the terms of service and employment of Mr. Yair Seroussi as Acting
Chairman of the Board of Directors of the Bank, and the terms of service and employment of the director Ms. Irit
Izakson as Acting Chairperson of the credit-card companies in the Bank Group.
The annual general meeting of the shareholders of the Bank for 2010 convened on October 26, 2010.The shareholders
approved the appointment of the accountants; approved the compensation plan for Mr. Yair Seroussi, Chairman of
the Board of Directors of the Bank; ratified and approved the indemnification letters granted to directors; and ratified
and approved the execution of the insurance policies for officers.
On January 6, 2010, the Board of Directors of the Bank approved the terms of service and employment of Mr. Zion
Kenan as CEO of the Bank, and approved the contractual engagement with him.
The three-year term of Mr. Yair Orgler as an external director (as defined in Proper Conduct of Banking Business
Directive No. 301 of the Bank of Israel) ended on January 24, 2010.
The Board of Directors of the Bank approved the appointment of Ms. Nehama Ronen as a director of the Bank on
February 3, 2010.
On March 23, 2010, the Board of Directors of the Bank approved the appointment of Mr. Amnon Dick as an external
director of the Bank (under Proper Conduct of Banking Business Directive No. 301 of the Supervisor of Banks),
effective March 24, 2010.
Mr. Mario Szuszan resigned from his position as Member of the Board of Management of the Bank and Head of
Global Treasury on May 15, 2010. Ms. Anath Levin took office in this position on May 16, 2010.
On August 8, 2010, Mr. David Luzon, Member of the Board of Management of the Bank and Head of Information
Technology, gave notice to the Board of Management of his intention to resign from his position at the end of his
current employment contract, at the end of March 2011, after serving in this capacity for eleven years. The Bank
established a committee to find a candidate to replace Mr. Luzon upon his retirement. On January 10, 2011, the Board
of Directors approved the appointment of Mr. Zvi Naggan to this position, effective April 1, 2011.
On August 31, 2010, the Board of Directors of the Bank approved a new compensation plan for senior executives
of the Bank, including the Chairman of the Board of Directors and the Chief Executive Officer of the Bank.
On September 2, 2010, the Board of Directors of the Bank approved the extension of the term of service of Ms.
Mali Baron as an external director of the Bank (under Proper Conduct of Banking Business Directive No. 301 of the
Supervisor of Banks), for a period of three additional years, including the extension of her term as chairperson of
the Transactions with Interested and Related Parties Committee and as a member of additional board committees.
The three-year term of service of Mr. Leslie Littner as an external director of the Bank (as defined in Proper Conduct
of Banking Business Directive No. 301 of the Bank of Israel) ended on September 9, 2010.
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On October 6, 2010, the Board of Directors of the Bank approved the appointment of Mr.Yacov Peer as an external
effective October 6, 2010.
The three-year term of service of Mr. Ronen Israel as an external director of the Bank (as defined in Proper Conduct
of Banking Business Directive No. 301 of the Bank of Israel) ended on October 29, 2010.
On November 23, 2010, the Board of Directors accepted the resolution of the Audit Committee of November 22, 2010
to continue to engage the two accounting firms, Somech Chaikin and Ziv Haft, for the next three years.
On December 23, 2010, the Board of Directors approved the appointment of Mr. Eli Cohen to the position of
Head of Marketing Strategy, Service, and Corporate Social Responsibility, reporting directly to the CEO of the Bank,
effective January 15, 2011.
On March 21, 2011, the Board of Directors of the Bank approved the appointment of Mr. Yosef Yarom as an external
effective March 21, 2011.
On January 31, 2011, the CEO of the Bank, Mr. Zion Kenan, was summoned for questioning "under warning" by the
police, in connection with the approval of a loan granted by the Bank in the past to Mr. Dan Dankner, during his
service as Chairman of the Board of Directors of the Bank.
On February 17, 2011, the Bank issued the following statement: "Following the publication of the statement by the
Israel Police spokesperson regarding the transfer of materials to the State's Attorney concerning the CEO of the
Bank, the Board of Directors of the Bank held a discussion and heard a review by the Chairman of the Board, Yair
Seroussi, regarding talks held during the day, subsequent to the statement from the Israel Police".
Upon conclusion of the review, the Board of Directors issued the following statement: "Having heard the review
by the Chairman of the Board and the opinions of the legal advisors, and based on the information published and
available to it, the Board of Directors has adopted the recommendation of the Chairman to continue to work in full
coordination with the Bank of Israel, in a manner that will ensure the continued routine business operation of Bank
Hapoalim.The Board of Directors expresses its confidence in the CEO of the Bank, Zion Kenan, and hopes that the
investigation by the State's Attorney will be concluded as promptly as possible and will indicate that there is no cause
for legal action against him".
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On March 3, 2010, the Police Spokesperson issued the following statement: "The police are investigating Dan Dankner
in connection with his position as director and chairman of the board of directors of Bank Hapoalim in 2005-2009,
in light of alleged suspicions of criminal offenses in the area of moral conduct. The investigation is being monitored
by the Economic Division of the State Attorney's Office".
Following this announcement, the Spokesperson of the Bank issued the following statement: "The investigation in
question is not being conducted against the Bank.The Bank is continuing to pursue its plans as usual; the investigation
has caused no disruption to its activity and the Bank hopes that it will be concluded promptly".
The Spokesperson of the Bank of Israel also published a statement, stating: "The Supervisor of Banks wishes to clarify
that he has faith in Bank Hapoalim, and that he is monitoring the developments in this matter".
The Bank has received two letters of demand pursuant to Section 194 of the Companies Law, 5769-1999 (hereinafter:
the "Demands"), in connection with the contractual engagement of Tarshish Holdings and Investments Hapoalim Ltd.
(hereinafter: "Tarshish"), a wholly owned subsidiary of the Bank, in 2005, in an agreement (hereinafter: the "Acquisition
Agreement") to acquire control of the Turkish bank currently known as Bank Pozitif Kredi Ve Kalkinma Bankasi A.S.
(hereinafter: "Bank Pozitif"). Pursuant to the Acquisition Agreement, the foreign investment fund RP Explorer Master
Fund (hereinafter: "RP") was also entitled to invest in the capital of Bank Pozitif, at a price identical to the price of
the investment by Tarshish, and to receive an allocation of 7.45% of its allocated share capital. Under an additional
agreement between the Bank and RP, RP received an option from the Bank to purchase additional shares of Bank
Pozitif from the Bank, at agreed terms and dates, up to a ceiling of approximately an additional 7.45% of the capital
of Bank Pozitif, provided that the holdings of Tarshish in Bank Pozitif would not fall below 50.1% of its issued capital.
The RP fund did not execute any investment in Bank Pozitif, also taking into account later understandings reached
with RP. Further to these understandings, in 2008 the Board of Directors approved a payment in the amount of
USD 25 million to RP settle all of its claims.
According to the parties filing the Demands, the aforesaid payment to RP was inappropriate and tainted with
personal interests of Mr. Dan Dankner, who served on all of the relevant dates as a director of the Bank, was part
of the controlling group of the Bank in 2005, and served as Chairman of the Board of Directors of the Bank in
2008. According to the first argument, the personal interest of Mr. Dankner fundamentally invalidates the Acquisition
Agreement; according to the second argument, the personal interest of Mr. Dankner invalidates the payment decided
upon in 2008.
In the Demands, the Bank is required to claim reimbursement of the aforesaid sum of USD 25 million, plus interest,
from RP, Mr. Dan Dankner, and additional directors of the Bank (some of whom have resigned from the Board of
Directors in the interim).
The Board of Directors of the Bank held discussions of the two Demands and resolved to deny them, after determining,
among other matters, that conceding to each of the Demands would not be in the best interests of the Bank, also
taking into account that it is doubtful whether there is a strong probability of winning such a claim.
After the first Demand was denied, the shareholder who had filed the Demand filed with the court for permission
to file a derived claim on behalf of the Bank against Mr. Dan Dankner, against those serving as members of the Board
of Directors of the Bank in December 2005, and against RP (hereinafter, jointly, the "Defendants").
In the petition to approve the derived claim, the applicant claims that the Defendants, jointly and separately, caused the
Bank to incur damage in the amount of NIS 88 million, and that they should compensate the Bank for this amount.
Against Mr. Dan Dankner, the claimant claims that the amount of the acquisition and the aforesaid payment to RP
were tainted by his personal interest and were not approved lawfully. Against RP, the claimant claims that it knew of
the personal interest of Mr. Dankner and the lack of approval. Against the other directors, the claim is that they failed
to fulfill their duty of care towards the Bank.
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On July 11, 2010, a derived claim was filed with the District Court of Tel-Aviv-Jaffa, with a petition to certify the claim as
an additional derived claim against Mr. Dan Dankner; members of the Board of Directors of the Bank who served as
directors in February 2008;Tarshish Holdings and Investments Hapoalim Ltd. (hereinafter: "Tarshish"), which is a subsidiary
of the Bank; and RP (hereinafter, jointly, the "Respondents"), and against the Bank as a formal respondent, in which the
claimant petitions the court for permission to file a derived claim on behalf of the Bank against the Respondents, and
to obligate them, jointly and separately, to pay the Bank the sum of approximately NIS 72 million. This claim and the
petition to certify it as a derived claim concern the aforesaid Acquisition Agreement and the compensation granted to
RP, which according to the claimant was higher by USD 20 million than the compensation agreed upon in the Acquisition
Agreement. The claimant claims that the payment to RP was performed by the Bank in violation of the duty of loyalty
of some of the Respondents, and in violation of the duty of care of the other Respondents. On October 19, 2010, the
President of the Supreme Court ruled to unify the proceedings in the two Demands.
Transactions with Controlling Parties
Pursuant to the Securities Regulations (Periodic and Immediate Reports), 5730-1970 (hereinafter: the "Regulations"),
corporations required to report according to the Regulations must also include in their immediate and periodic
reports details regarding transactions with controlling parties, or transactions in the approval of which the controlling
party has a personal interest, including the main points of the transaction or the contractual engagement, the details
of the organ that approved the transaction, and a summary of its reasons for such approval, with the exception of
transactions of a type declared "negligible" in the most recent financial statements, as defined in Regulation 64(3)(D)(1)
of the Securities Regulations (Preparation of Financial Statements), 5753-1993 (hereinafter: the "Financial Statements
Regulations"). Because the Financial Statements Regulations do not apply to banks, the Association of Banks asked
the Israel Securities Authority to establish the reporting format applicable to banks in this regard.
Following the request by the Association of Banks and the subsequent discussions, the following principles were
established with regard to the manner of reporting of transactions of the Bank with its controlling party, or transactions
with another person in which the controlling party has a personal interest:
A.The Bank shall establish criteria for the classification of exceptional banking transactions, regarding which the Bank
shall submit immediate reports upon occurrence, as required by law. However, notwithstanding the provisions of
the Regulations on this matter (i.e. the submission of immediate reports on non-exceptional transactions as well),
non-exceptional banking transactions shall be detailed in the prospectus and in the annual reports, cumulatively,
in the format presented in the tables below;
B.The Bank shall establish criteria for the classification of negligible non-banking transactions, to which the provisions
set forth in the Regulations regarding the reporting of transactions with controlling parties shall apply, as they
apply to reported corporations that are not banks.
C.With regard to indebtedness transactions in which the controlling party has a personal interest, and to which
Proper Conduct of Banking Business No. 312 does not apply because they are not executed with a "related
person" as defined in the Proper Conduct of Banking Business Directives: If the Bank becomes aware of the
existence of such a transaction, the Bank undertakes a commitment to submit the transaction for approval,
pursuant to the aforesaid Directive 312, and the transactions shall be detailed in the annual reports, cumulatively,
in the format presented in the tables below (with separate tables for these transactions and for the transactions
described in subsection A).The criterion for an "exceptional transaction" to be established by the Bank pursuant
to subsection A above shall also apply to these transactions.
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Set out below are the details of the types of transactions and the criteria in connection with reporting and approval
of transactions of the Bank with its controlling party, or transactions with another person in which the controlling
party has a personal interest:
Any transaction, of any type and of any volume, between the Bank and the controlling party of the Bank, and/or
where the controlling party of the Bank has a personal interest in the approval of the transaction, shall be executed
according to market conditions, and in a manner such that the Bank grants no preference or improved terms to the
transaction relative to the terms at which it executes similar transactions with others who are not considered "related
persons" of the Bank (as this term is defined in Proper Conduct of Banking Business Directive 312 of the Supervisor
of Banks). Naturally, given the aforesaid general policy, the said condition shall also apply to transactions to be defined
hereafter as "negligible transactions".
"Exceptional" Banking Transactions
Banking transactions meeting the following criteria shall be considered to be exceptional transactions:
A.Any transaction involving the granting of credit by the Bank, as a result of the execution of which the total
indebtedness of the controlling party exceeds 10% of the regulatory capital, or as a result of which the increase
in the indebtedness of the controlling party exceeds 2% of the regulatory capital at the date of execution of
the transaction. In this subsection (A), several transactions executed consecutively with the same person shall
be considered as one transaction, such that for the purpose of classifying the said transactions, the cumulative
amount of the said transactions shall be examined.
B.Transactions of the deposit of funds in any type of deposit, if as a result of the transaction the total deposits of
the controlling shareholder exceed 2% of total deposits from the public, as reported in the consolidated balance
sheet of the Bank at the date of the deposit of the funds;
C.Transactions of deposit and/or purchase and/or sale of securities, participatory units in mutual funds and/or other
funds, provident funds, and any other investment held by the Bank as an asset of the customer (rather than as a
balance-sheet liability), where the amount of the transaction exceeds 0.5% of the total balance of off-balance-sheet
monetary assets of customers in the Bank Group, as reported in the consolidated balance sheet of the Bank
Group at the date of execution of the transaction;
D.Any other banking transaction of the type of transactions which the Bank usually performs with the public, which
does not involve the granting of credit by the Bank, where the amount of the transaction exceeds 0.5% of the
total consolidated balance sheet of the Bank at the date of execution of the transaction.
"Negligible" Transactions
The following transactions shall be considered to be negligible transactions:
(1)A transaction for the acquisition of services from a controlling party, or in which a controlling party has a personal
interest, provided that it is not a contractual engagement with the controlling party or with a relative thereof
with regard to terms of service and employment, and that it is in the ordinary course of business and at market
terms, and the volume of which does not exceed a total of NIS 2.5 million, and provided that total transactions
of its type in one calendar year do not exceed 0.1% of the regulatory capital. This total shall not include single
transactions the volume of each of which is less than NIS 25,000.
(2)Transactions for the rental of land from a controlling party, or in which a controlling party has a personal interest,
approved in one calendar year, in the ordinary course of business and at market terms, the total volume of which
does not exceed 0.1% of the regulatory capital.
(3)Any other transaction in the ordinary course of business and at market terms, the volume of which is up to a
total of NIS 250,000, provided that total transactions of its type in one calendar year do not exceed 0.1% of the
regulatory capital.This total shall not include single transactions the volume of each of which is less than NIS 25,000.
229
Definitions
For the purposes of the foregoing resolutions, including all items, the following terms shall have the meanings listed
below:
(1)"Credit" – As defined in the Banking Law (Licensing), 5741-1981.
(2)"Indebtedness" – As defined in Proper Conduct of Banking Business Directive No. 312 of the Supervisor of
Banks.
(3)"Market terms" – Terms that are not preferable to the terms at which the Bank executes similar transactions
of the same type with persons or corporations that are not controlling parties of the Bank, or with persons in
whose transactions a controlling party has no personal interest. Market terms with respect to banking transactions
are examined in comparison to the terms of transactions of the same type, at similar volumes, as is customary
in examining transactions with related persons, pursuant to Proper Conduct of Banking Business Directive No.
312, with customers of the Bank who are not related persons or parties in whose transactions the controlling
parties do not have a personal interest. Market terms in respect of non-banking transactions are examined in
comparison to transactions of the same type which the Bank executes with suppliers and/or proposals of other
suppliers examined prior to the decision concerning the contractual engagement. In cases in which the Bank has
no transactions of the same type, market terms shall be examined in relation to transactions of the same type in
the economy, provided that the transaction is in the ordinary course of business and that there is a market for
transactions of its type in which similar transactions are executed.
(4)"Controlling party" – Together with her related private and public companies, as the term "related person" is
defined in Proper Conduct of Banking Business Directive No. 312, and together with her relatives and their related
private companies, including family members residing with her or supported financially by her; the definition of a
"relative" under the provisions of the Banking (Licensing) Law includes siblings, parents, offspring, spouse’s offspring,
and spouses of each of the foregoing.
230
Set out below are details of the balances of the controlling party of the Bank and of others in whose transactions
with the Bank the controlling party has a personal interest, as of December 31, 2010 (in NIS thousands):
Balance as of
December 31,
2010
Highest
balance
in 2010
749,088
927,784
Housing and Construction Ltd. Group(1):
Balance-sheet credit
Commitments to grant credit
564,088
758,505
Sale guarantees, guarantees to secure credit, and others
245,065
351,379
Balance-sheet and off-balance-sheet credit in respect of transactions in derivatives(2)
38,156
41,526
Guarantees to third parties
38,008
38,552
)34,190(
Deductions
Deposits from the public (balance sheet)
Expenses on non-banking activity (rent, air conditioning services, electricity, parking)
191,967
313,223
532
Derech Eretz Highways Ltd. Group(3):
Deductions
735,932
751,265
19,791
24,277
155,984
155,984
)122,552(
)142,075(
278,408
393,332
54,310
58,171
3,159
11,733
Miya Holdings:
3,966
3,966
1,850
5,836
6,370
6,370
1,936
8,703
42
42
18,397
20,081
25,062
25,062
Shari Arison:
Arison Holdings Ltd.:
(1) Ms. Shari Arison is the controlling shareholder of Housing and Construction Ltd.(hereinafter: "Housing and Construction"), and
is considered to be the controlling shareholder of the companies in this group.The information presented regarding the Bank’s
business (balance-sheet credit, off-balance-sheet credit, and monetary deposits) with the Housing and Construction Group
refers to the accounts of Housing and Construction itself, as well as to all of the corporations under its control, excluding
the accounts of Derech Eretz Highways (1997) Ltd. (see footnote 3 below) and of a corporation under its control, which
are reported separately. Note that because the information refers to the group as a whole, it includes data which would be
considered negligible for each company in its own right, and which would not be reported at all if the report referred to each
corporation individually.
(2) Off-balance-sheet credit was calculated based on 10% of the face value of the transactions in derivatives. The balance
as of December 31, 2010 includes a balance of balance-sheet fair value of derivatives in the amount of approximately
NIS 2,195 thousand, and an off-balance-sheet balance in the amount of approximately NIS 35,961 thousand.
(3) This company is an affiliate (50%) of Housing and Construction, and consequently is considered to be a company in whose business
Ms. Shari Arison has a personal interest. Due to the relatively large volume of this company’s business with the Bank, its business
relationships with the Bank are presented separately from the aggregate business of the Housing and Construction Group.
(4) Off-balance-sheet credit was calculated based on 10% of the face value of the transactions in derivatives. The balance as of
December 31, 2010 includes a balance of balance-sheet fair value of derivatives in the amount of approximately NIS 21 thousand,
and an off-balance-sheet balance in the amount of approximately NIS 1,829 thousand.
Set out below are details of the balances of the controlling party and of others in whose transactions with the Bank
231
the controlling party has a personal interest, as of December 31, 2009 (in NIS thousands).
Balance as of
December 31, 2009
Highest balance
in 2009
927,784
1,114,232
654,914
654,914
328,982
328,982
41,526
42,934
Housing and Construction Ltd. Group(1):
Balance-sheet and off-balance-sheet credit in respect of transactions in derivatives
(2)
38,482
38,854
Deductions
)34,190(
)35,018(
257,625
498,017
1,276
-
708,014
713,336
6,977
31,037
Expenses on non-banking activity (rent, air conditioning services, electricity, parking)
Derech Eretz Highways Ltd. Group(3):
152,505
152,505
)122,290(
)136,799(
254,984
413,308
58,171
59,388
10
4,891
2,418
2,418
5,836
5,836
-
3,340
7,495
32,118
Deductions
Miya Holdings:
Shari Arison:
-
2
42
42
19,558
21,680
Ofer Glazer(5):
13,390
43,205
91,027
101,212
14,388
15,211
Deductions
476
490
)12,398(
)12,398(
13,676
18,250
(1) Ms. Shari Arison is the controlling shareholder of Housing and Construction Ltd. (hereinafter: "Housing and Construction"),
and is considered to be the controlling shareholder of the companies in this group. The information presented regarding the
Bank’s business (balance-sheet credit, off-balance-sheet credit, and monetary deposits) with the Housing and Construction
Group refers to the accounts of Housing and Construction itself, as well as to all of the corporations under its control, excluding
the accounts of Derech Eretz Highways (1997) Ltd. (see footnote 3 below) and of a corporation under its control, which
are reported separately. Note that because the information refers to the group as a whole, it includes data which would be
considered negligible for each company in its own right, and which would not be reported at all if the report referred to each
corporation individually.
(3) This company is an equity-basis investee (38%) of Housing and Construction, and consequently is considered to be a company
in whose business Ms. Shari Arison has a personal interest. Due to the relatively large volume of this company’s business with
the Bank, its business relationships with the Bank are presented separately from the aggregate business of the Housing and
Construction Group.
(5) Mr. Ofer Glazer was the spouse of Ms. Shari Arison, controlling shareholder of the Bank, until May 2009. The information
presented regarding the Bank’s business with Mr. Ofer Glazer refers to his private accounts, the accounts of his relatives (not
including his ex-wife Ms. Shari Arison), and the accounts of corporations under his control.The data for 2009 refer to transactions
executed up to that date, and are correct as of December 31, 2009.
232
Salaries and Benefits of Office Holders
Set out below are the salaries, compensation, value of benefits, and employer payments and provisions for the senior office-holders of the Bank
Group, as well as for Ms. Irit Izakson, who is an interested party receiving remuneration in connection with her service as a director of the Bank and
as active Chairperson of the Board of all of the companies in the Isracard Group, for 2010 (in NIS thousands).
Loans granted with
preferred terms(4)
Name
Title
Rate of
holdings
in the
capital of
the Bank
Yair Seroussi Chairman of the Board
of the Bank
Salary Bonuses Benefits for
share-based
payments(1)
Value of
additional
benefits(2)
Employer Supplement of
payments benefit- related
and reserves due
provisions(3) to changes in
wages in the
accounting
year
Total(4) Balance
Balance
Benefit
Average
of loans
granted
term to
maturity during the granted at
regular
year
(in years)
terms(5)
-
1,770
)6(
2,900
6,725
463
994
- 12,852
-
-
-
28
President and CEO
of the Bank
-
2,007
)6(
2,894
5,579
506
428
- 11,414
-
-
-
79
of the Bank
-
1,334
815
3,391
203
453
-
6,196
-
-
-
51
David Luzon Head of Information
Technology of the Bank
-
1,353
750
557
264
567
2,489
5,980
-
-
-
17
Dov Kotler
-
1,263
1,722
2,515
96
427
-
6,023
-
-
-
34
-
1,343
703
1,393
282
257
1,595
5,573
62
3.59
1
65
-
1,342
875
2,302
223
409
-
5,151
-
-
-
40
-
1,406
1,326
1,609
105
211
-
4,657
-
-
-
52
Zion Kenan
Ran Oz
(7)
CEO of Isracard
Jacob Orbach Chief Internal Auditor
Shimon Gal
Head of Corporate
Banking
Irit Izakson(7) Chairman of the Board
of the Isracard Group
and a director of the
Bank
233
Salaries and Benefits of Office Holders (continued)
General Notes:
The recipients of the remuneration are employed in full-time (100%) positions.
All employees of the Bank, including officers of the Bank, enjoy various benefits in the management of their bank
accounts. The benefits mainly refer to an exemption from fixed account-management fees, fees for recording
transactions in accounts, information printouts, checkbooks, securities custody, cash withdrawals, money transfers to
other accounts, and credit-card membership fees. In addition, there are benefits in the form of reduced commission
rates for buying and selling securities and foreign currency, standing instructions for payments executed through the
account, and safe-deposit box rentals. Further, like all other employees of the Bank, the officers enjoy preferred interest
rates on credit and debit balances in current accounts. The entire range of benefits given to officers totals negligible
amounts, which do not exceed a total of NIS 50 thousand per year for each officer.
For further details regarding lateral remuneration components (including share-based payment) to which all members
of the Board of Management of the Bank and the Chairman of the Board of Directors of the Bank are entitled,
including retirement terms, bonuses, etc., see Notes 15 and 16 to the Financial Statements.
As detailed in Section G(A)1.4 and G(C)1.4 of Note 15 to the Financial Statements, pursuant to the terms of
the remuneration plan for 2010, and as detailed in the Immediate Report dated August 31, 2010, reference no.
2010-01-608787 ("Remuneration Plan Report (2010)" and "Remuneration Plan (2010)"), the amount of the annual
bonus will be added to or subtracted from the bonus account of each executive, each year. The bonus account is a
notional personal bank account reflecting the positive or negative bonus balance of the executive at any time. Each
year, subject to the fulfillment of certain conditions established in the Remuneration Plan (2010), a relative payment
out of the balance in the bonus account will be executed, and the unpaid balance will remain in the bonus account.
In addition, restricted phantom shares and contingent restricted phantom shares will be granted, at no cost, in a
quantity to be established based on the difference between the return on equity of the Bank and its cost of capital,
as detailed in the Remuneration Plan (2010).
Notes to the Table for 2010:
(1)The value of the benefit in respect of share-based payment for the members of the Board of Management of the
Bank and for the Chairman of the Board of Directors of the Bank includes a benefit in respect of the restricted
phantom shares granted, and contingent restricted phantom shares to be granted, under the Remuneration Plan
(2010). In addition, a benefit is included in respect of phantom units granted under previous remuneration plans.
The value of the benefit in respect of the restricted phantom shares and the contingent restricted phantom shares,
under the Remuneration Plan (2010), is measured at the date of the grant of the shares, and the fair value of
phantom units granted under the previous plans is measured at each reporting date, based on the Black-Scholes
model.
234
The remuneration in respect of the restricted phantom shares granted according to the terms of the Remuneration
Plan (2010) will vest in three equal installments, in accordance with the period of the agreement.The value of the
benefit listed in the table above includes the non-linear spreading of the accounting expenses in respect thereof,
according to the installments method, under which the full expense for the first packet, half of the expense for the
second packet, and one-third of the expense for the third packet are charged in the first year, such that the total
expense in the first year amounts to approximately 60% of the overall expense for the plan, the expense in the
second year amounts to approximately 30% of the overall expense, and the expense in the third year amounts
to approximately 10% of the overall expense.
(2)Amounts listed in the column of the table with the heading "additional benefits" include net payments for vehicle
expenses, daily allowances, and gross-up.
(3)The payments in the column with the heading "employer payments and provisions" include provisions for severance
pay, compensation, pensions, study funds, vacation, National Insurance, sick leave, and 25-year service grants.
(4)Excluding wage tax.
(5)Loans granted under terms similar to those granted to all employees of the Bank, amounts of which were
determined based on uniform criteria.
(6)In 2010, the Chairman of the Board of Directors of the Bank, Mr. Seroussi, and the CEO of the Bank, Mr. Kenan, each
waived NIS 1.5 million of the amounts of the bonuses to which they were entitled based on the Remuneration
Plan (2010), which was approved by the Board of Directors on August 31, 2010, and with regard to the Chairman
of the Board also by the general meeting of shareholders on October 26, 2010, as detailed below. The amount
listed in the bonuses column in the table for 2010 is the amount following these waivers.
(7)The remuneration of Ms. Izakson and Mr. Kotler is paid by the companies in the Isracard Group, with the exception
of directors' pay in the amount of NIS 158 thousand (annual remuneration) paid to Ms. Izakson by the Bank for her
service as a member of the Board of Directors of the Bank.
Additional information regarding the salary and benefits of the senior officers and interested parties listed in the table
above for 2010 is set out below.
Mr.Yair Seroussi
Mr. Seroussi is employed full-time by the Bank in the position of active Chairman of the Bank, as of August 1, 2009
(served as Vice Chairman of the Bank starting June 4, 2009). With regard to the period of his employment, the terms
for termination of the contractual engagement, the advance notice period, and the adjustment period, see Section 3.2
of the Immediate Report of the Bank dated November 25, 2009 (reference no. 2009-01-295869), included herein
by reference ("Seroussi Remuneration Report"). With regard to Mr. Seroussi’s salary, see Section 3.3 of the Seroussi
Remuneration Report. This salary currently stands at a total of NIS 156,995. In addition, Mr. Seroussi is entitled to
related terms such as a personal vehicle and driver, telephone, newspapers, recuperation pay, employer contributions
to provident funds, severance pay, and pensions, and a study fund. For further details regarding the terms of service
of Mr. Seroussi, see Section 3 of the Seroussi Remuneration Report.
235
The amount noted in the bonuses column of the table includes the following components:
(1) A risk-adjusted, performance-dependent annual bonus – The terms of this bonus are as detailed in Section G(C)1
of Note 15 to the Financial Statements. Accordingly, given that the ROE difference of the Bank for 2010 was 2.46%,
the bonus budget for Mr. Seroussi was set as described in Section G(C)1.1 of Note 15 to the Financial Statements. As
described in Section G(C)1.2 of Note 15 to the Financial Statements, the criteria examined in connection with the
approval of the 35% of the bonus budget of Mr. Seroussi which is at the discretion of the Board of Directors includes
the performance targets detailed below (under the heading "The connection between the remuneration granted to the
senior officers listed in the above table for 2010 and the contribution of the recipients to the corporation"). Following
an examination of Mr. Seroussi's achievement of the aforesaid criteria and based on the evaluation of Mr. Seroussi's
performance, the annual bonus was set at an amount of NIS 2,400 thousand. In accordance with the terms of the
Remuneration Plan (2010), NIS 1,080 thousand of the aforesaid bonus will actually be paid to Mr. Seroussi in 2011.
The remaining amount of NIS 1,320 thousand will be deposited in his "notional" bonus account, as described above.
Actual payment of this amount is contingent upon the future performance of the Bank, as detailed in Section G(C)1.4
of Note 15 to the Financial Statements. Mr. Seroussi notified the Bank that he waived a total of NIS 500 thousand of
the amount approved for transfer in respect of this bonus to his notional bonus account; therefore, NIS 820 thousand
was deposited in the notional bonus account.
(2)A grant for the purchase of shares – Since the return of operating profit on equity of the Bank in 2010 was higher
than 9.5%, Mr. Seroussi was entitled to a grant for the purchase of shares in the amount of NIS 2 million, as detailed
in Section G(C)2 of Note 15 to the Financial Statements. Mr. Seroussi notified the Bank that he waived NIS 1 million;
constituting 50% of this grant. Accordingly, the grant given to Mr. Seroussi for the purchase of shares was in the amount
of only NIS 1 million.The shares to be purchased shall be restricted during the restriction period, as detailed therein.With
regard to the effect of the end of service on remuneration, see Section G(C)2b of Note 15 to the Financial Statements.
(3)A grant in respect of profits from extraordinary transactions – Pursuant to the terms of the Remuneration Plan
(2010), as detailed in Section G(C)1.5 of Note 15 to the Financial Statements, this grant was not given in 2010.
The amount noted in the share-based payment column of the table includes the following components:
(1)Restricted phantom shares in respect of 2009 – Mr. Seroussi was granted 250,000 phantom shares in respect of
2009, which had a vesting date of June 30, 2010.The fair value of the aforesaid phantom shares as of December 31, 2010
was NIS 4,618 thousand. 55% of the benefit in respect of the aforesaid phantom shares (NIS 2,732 thousand) was
allocated to 2010, and 45% of the benefit was allocated to 2009. Using the total consideration to be received from
the exercise of the phantom shares, after deduction of the applicable tax, shares of the Bank will be purchased on the
stock exchange for Mr. Seroussi. For full details of the terms of the phantom shares, see Section 3.7 of the Seroussi
Remuneration Report.
(2)Restricted phantom shares – As detailed in Section G(C)3.1 of Note 15 to the Financial Statements, on
October 26, 2010, Mr. Seroussi was granted 400,000 restricted phantom shares. One-third of these vested
on January 1, 2011. The fair value of the restricted phantom shares, as established on the date of the grant, is
NIS 6,540 thousand. As detailed in footnote (1) above, of the general notes to the salary and benefits table for 2010,
this value is not spread in a linear manner. Of this amount, a total of approximately NIS 3,993 thousand was recorded in
2010, a total of NIS 1,817 thousand will be recorded in 2011, and a total of NIS 726 thousand will be recorded in 2012.
236
(3)Contingent restricted phantom shares – Because the conditions listed in Section G(C)3.2 of Note 15 to the
Financial Statements were not fulfilled, Mr. Seroussi will not receive contingent restricted phantom shares in respect
of 2010.
With regard to the effect of the end of service on share-based payments, see Section G(C)3.4 and Section G(A)2.5
of the aforesaid Note 15.
For further details regarding share-based payment and bonuses for Mr. Seroussi, see the Remuneration Plan Report (2010).
Mr. Zion Kenan
Mr. Kenan is employed full-time by the Bank in the position of Chief Executive Officer of the Bank, as of August 27, 2009
(served as Acting CEO of the Bank starting June 11, 2009). With regard to the period of his employment, the terms
for termination of the contractual engagement, the advance notice period, and the adjustment period, see Section
1.2 of the Immediate Report of the Bank dated January 6, 2010 (reference no. 2010-01-345696), included herein
by reference ("Kenan Remuneration Report"). Mr. Kenan is entitled to a monthly salary, as described in Section 1.3
of the Kenan Remuneration Report. This salary currently stands at a total of NIS 165,698. In addition, Mr. Kenan is
entitled to related terms such as a personal vehicle and driver, telephone, newspapers, recuperation pay, employer
contributions to provident funds, severance pay, and pensions, and a study fund. For further details regarding the
terms of service of Mr. Kenan, see Section 1 of the Kenan Remuneration Report.
The amount noted in the bonuses column of the table includes the following components:
(1) A risk-adjusted, performance-dependent annual bonus – The terms of this bonus are as detailed in Section G(C)1
of Note 15 to the Financial Statements. Accordingly, given that the ROE difference of the Bank for 2010 was 2.46%,
the bonus budget for Mr. Kenan was set as described in Section G(C)1.1 of Note 15 to the Financial Statements. As
described in Section G(C)1.2 of Note 15 to the Financial Statements, the criteria examined in connection with the
approval of the 35% of the bonus budget of Mr. Kenan which is at the discretion of the Board of Directors include the
performance targets detailed below (under the heading "The connection between the remuneration granted to the
senior officers listed in the above table for 2010 and the contribution of the recipients to the corporation"). Following
an examination of Mr. Kenan's achievement of the aforesaid criteria and based on the evaluation of Mr. Kenan's
performance, the annual bonus was set at an amount of NIS 2,394 thousand. In accordance with the terms of the
Remuneration Plan (2010), NIS 1,078 thousand of the aforesaid bonus will actually be paid to Mr. Kenan in 2011.
The remaining amount of approximately NIS 1,316 thousand will be deposited in his "notional" bonus account, as
described above. Actual payment of this amount is contingent upon the future performance of the Bank, as detailed
in Section G(C)1.4 of Note 15 to the Financial Statements. Mr. Kenan notified the Bank that he waived a total of
NIS 500 thousand of the amount approved for transfer in respect of this bonus to his notional bonus account;
therefore, NIS 816 thousand was deposited in the notional bonus account.
237
(2)A grant for the purchase of shares – Because the return of operating profit on equity of the Bank in 2010 was
higher than 9.5%, Mr. Kenan was entitled to a grant for the purchase of shares in the amount of NIS 2 million, as detailed
in Section G(C)2 of Note 15 to the Financial Statements. Mr. Kenan notified the Bank that he waived NIS 1 million,
constituting 50% of this grant. Accordingly, the grant given to Mr. Kenan for the purchase of shares was in the amount
of only NIS 1 million.The shares to be purchased shall be restricted during the restriction period, as detailed therein.
With regard to the effect of the end of service on remuneration, see Section G(C)2b of Note 15 to the Financial
Statements.
(3)A grant in respect of profits from extraordinary transactions – Pursuant to the terms of the Remuneration Plan
(2010), as detailed in Section G(C)1.5 of Note 15 to the Financial Statements, this grant was not given in 2010.
(1)Phantom units – 1,200,000 phantom units allocated to Mr. Kenan on October 1, 2006, at an exercise price of NIS
18.37 for each phantom unit (the price of the Bank's share on December 30, 2010 was NIS 18.47), with an expiration
date of December 31, 2010, were exercised in 2010, for a total amount of NIS 132 thousand. The fair value of the
phantom units at the end of 2009 was NIS 1,551 thousand.
(2) Restricted phantom shares in respect of 2009 – Mr. Kenan was granted 270,000 phantom shares in respect of 2009,
which had a vesting date of June 30, 2010. The fair value of the aforesaid phantom shares as of December 31, 2010
was NIS 4,987 thousand. 60% of the benefit in respect of the aforesaid phantom shares (NIS 3,195 thousand) was
allocated to 2010, and 40% of the benefit was allocated to 2009. Using the total consideration to be received from
the exercise of the phantom shares, after deduction of the applicable tax, shares of the Bank will be purchased on
the stock exchange for Mr. Kenan. For full details of the terms of the phantom shares, see Section 1.7 of the Kenan
(3)Restricted phantom shares – As detailed in Section G(C)3.1 of Note 15 to the Financial Statements,
on August 31, 2010, Mr. Kenan was granted 400,000 restricted phantom shares. One-third of these vested on
January 1, 2011.The fair value of the restricted phantom shares, as established on the date of the grant, is NIS 6,228
thousand. As detailed in footnote (1) above, of the general notes to the salary and benefits table for 2010, this value
is not spread in a linear manner. Of this amount, a total of approximately NIS 3,803 thousand was recorded in 2010,
a total of NIS 1,730 thousand will be recorded in 2011, and a total of NIS 692 thousand will be recorded in 2012.
(4)Contingent restricted phantom shares – Because the conditions listed in Section G(C)3.2 of Note 15 to the
Financial Statements were not fulfilled, Mr. Kenan will not receive contingent restricted phantom shares in respect of 2010.
With regard to the effect of the end of service on share-based payments, see Section G(C)3.4 and Section G(A)2.5
of the aforesaid Note 15.
For further details regarding share-based payment and bonuses for Mr. Kenan, see the Remuneration Plan Report (2010).
238
Mr. Ran Oz
Mr. Oz serves as Chief Financial Officer of the Bank (CFO).The current employment agreement of Mr. Oz covers the
period of three years from April 1, 2009 to March 31, 2012. Notwithstanding the aforesaid, the contractual engagement
may be terminated earlier by either of the parties, with 90 days' advance notice. Pursuant to Mr. Oz's employment
agreement, he is subject to a cooling-off period of 6 months. Mr. Oz is entitled to a monthly salary in the amount
of NIS 65,415. The salary is linked to increases in the consumer price index. As of today, this salary stands at a total
of NIS 69,785. Mr. Oz is entitled to a yearly signing bonus in the amount of NIS 300 thousand, linked to the CPI for
November 1997 (currently approximately NIS 44 thousand).This bonus is paid once annually, and is contingent upon
the continued work of Mr. Oz at the Bank during that year. In the event of resignation from the Bank by Mr. Oz, at his
initiative, he shall be entitled to a proportional signing bonus according to the part of the year in which he actually
worked at the Bank. In such a case, the bonus shall be reduced by 5% relative to the signing bonus that would have
been paid in respect of the remaining term of the agreement if he had not resigned from the Bank. In the event of
dismissal prior to the end of the period of the agreement, Mr. Oz shall be entitled to the full signing bonus up to the
end of the period of the agreement with him. Mr. Oz is also entitled to the payment of a thirteenth monthly salary.
In addition, Mr. Oz is entitled to related terms such as a vehicle, telephone, a clothing allowance, recuperation pay,
employer contributions to provident funds, severance pay, and pensions, a daily allowance, and a study fund. Mr. Oz
is entitled to retirement terms in accordance with the common practice for members of the Board of Management
of the Bank, as detailed in Section E(2) of Note 15 to the Financial Statements of the Bank.
The amount noted in the bonuses column of the table includes:
A risk-adjusted, performance-dependent annual bonus – The terms of this bonus are as detailed in Section G(A)1 of
Note 15 to the Financial Statements. Given that the ROE difference of the Bank for 2010 was 2.46%, in accordance
with the mechanism described in the Remuneration Plan Report (2010), a positive bonus budget was established for
the members of the Board of Management. As described in Section G(A)1.2 of Note 15 to the Financial Statements,
the budget is distributed proportionally according to the evaluation of each member of the Board of Management.
Accordingly, a bonus was approved for Mr. Oz, in respect of 2010, in the amount of NIS 815 thousand. In accordance
with the terms of the Remuneration Plan (2010), NIS 407 thousand of the aforesaid bonus will actually be paid to
Mr. Oz in 2011. The remaining amount of approximately NIS 408 thousand will be deposited in his "notional" bonus
account, as described above. Actual payment of this amount is contingent upon the future performance of the Bank,
as detailed in Section G(A)1.4 of Note 15 to the Financial Statements.
Note that the aforesaid bonus, established in the remuneration plan for 2010, replaced the individual bonus established
in the employment agreement with Mr. Oz (the "Replaced Bonus Formula"). Briefly, under the Replaced Bonus
Formula, a bonus in an amount ranging, as a rule, from 7 to 13 monthly salaries would be paid only if the net return
on equity of the Bank was 12% or more.
239
The amount noted in the share-based payment column of the table includes:
Phantom units – As detailed in Section A(3) of Note 16 to the Financial Statements, senior executives participating
in the Remuneration Plan (2010) were permitted to choose whether to convert some of their phantom units into
restricted phantom shares under the Remuneration Plan (2010). Mr. Oz chose not to exchange phantom units which
were granted to him on April 1, 2009 under the terms of his employment for phantom shares under the Remuneration
Plan (2010). In 2010, a total of NIS 2,490 thousand was paid to Mr. Oz for the exercise of the first of three installments,
constituting one-third of the quantity of phantom units allocated to Mr. Oz, i.e. 266,667 phantom shares, at an exercise
price of NIS 7.24 per phantom unit (the price of the Bank's share on December 30, 2010 was NIS 18.47). If the
aforesaid phantom units had not been exercised, their expiration date would have been April 1, 2013.The fair value
of these phantom shares as of December 31, 2009 was NIS 3,539 thousand. As of December 31, 2010, the fair value
of the second and third installments of phantom units, which remain in the possession of Mr. Oz and have not yet
been exercised or expired, is NIS 4,440 thousand.The Bank's accounting expense in respect of the phantom units of
Mr. Oz for 2010 was recorded under the share-based payment column in reference to Mr. Oz.
For further details regarding bonuses for Mr. Oz, see the Remuneration Plan Report (2010).
Mr. David Luzon
Mr. Luzon serves as Head of Information Technology of the Bank. The current employment agreement of Mr. Luzon
covers the period of three years from April 1, 2008 to March 31, 2011. Mr. Luzon's service at the Bank will end on that
date. Pursuant to Mr. Luzon's employment agreement, he is subject to a cooling-off period of 6 months. Mr. Luzon is
entitled to a monthly salary in the amount of NIS 66,812.The salary is linked to increases in the consumer price index.
As of today, this salary stands at a total of NIS 69,785. The amount listed in the salary column in the above table for
2010 in reference to Mr. Luzon also includes a signing bonus and a thirteenth monthly salary, as detailed above with
regard to Mr. Oz. In addition, Mr. Luzon is entitled to related terms such as a vehicle, telephone, a clothing allowance,
recuperation pay, employer contributions to provident funds, severance pay, and pensions, a daily allowance, and a
study fund. Mr. Luzon is entitled to retirement terms in accordance with the common practice for members of the
Board of Management of the Bank, as detailed in Section E(2) of Note 15 to the Financial Statements of the Bank.
The cost of employment of Mr. Luzon in 2010, as noted in the above table for 2010, also includes supplementary
reserves in respect of payments owed to Mr. Luzon for the terms of his retirement.
Note 15 to the Financial Statements. Given that the ROE difference of the Bank for 2010 was 2.46%, a positive bonus
budget was established for the members of the Board of Management. As described in Section G(A)1.2 of Note 15 to the
Financial Statements, the budget is distributed proportionally according to the evaluation of each member of the Board of
Management. Accordingly, a bonus was approved for Mr. Luzon, in respect of 2010, in the amount of NIS 750 thousand.
In accordance with the terms of the Remuneration Plan (2010), only approximately NIS 375 thousand of the aforesaid
bonus will actually be paid to Mr. Luzon in 2011. The remaining amount of approximately NIS 375 thousand will be
deposited in his "notional" bonus account. Actual payment of this amount is contingent upon the future performance of
the Bank, as detailed in Section G(A)1.4 of Note 15 to the Financial Statements.
240
in the employment agreement with Mr. Luzon (the "Replaced Bonus Formula"). Briefly, under the Replaced Bonus
(1) Phantom units – As detailed in Section A(3) of Note 16 to the Financial Statements, senior executives participating
restricted phantom shares under the Remuneration Plan (2010). Mr. Luzon chose to exchange all of the phantom
units granted to him under the terms of his employment, which vested on dates from January 1, 2010 forward,
comprising 332,421 phantom units, for restricted phantom shares under the Remuneration Plan (2010), as detailed
below. Accordingly, the remaining 467,579 phantom units, which were allocated to Mr. Luzon on April 1, 2008, and
were not exchanged in the aforesaid manner, were exercised by Mr. Luzon at an exercise price of NIS 14.01 per
phantom unit, such that in 2010, a total of approximately NIS 1,365 thousand was paid to Mr. Luzon in respect of the
phantom units. If the aforesaid phantom units had not been exercised, their expiration date would have been July 1,
2011. The fair value of the phantom units as of December 31, 2009 was NIS 2,336 thousand.
(2)Restricted phantom shares – On August 31, 2010, 83,105 restricted phantom shares were granted to Mr. Luzon,
in exchange for phantom units which were cancelled, as noted above, and as detailed in Section G(A)2.9 of Note 15
to the Financial Statements.The fair value of the phantom shares, as of the date of the grant, was NIS 1,294 thousand.
The expense recorded in the financial statements of the Bank in 2010 in respect of the aforesaid restricted phantom
shares is in the amount of NIS 1,209 thousand.
(3)Contingent restricted phantom shares - Because the conditions specified in Section G(A)2.2 of Note 15 to the
Financial Statements were fulfilled, i.e. an ROE difference of 2.46% was achieved, Mr. Luzon will be granted 16,600
contingent restricted phantom shares in respect of 2010. As of the date of the adoption of the Remuneration Plan
(2010), the fair value of the maximum quantity of contingent restricted phantom shares that may be granted to him
until the end of the period of his employment is NIS 335 thousand.The expense recorded in 2010 in respect of the
aforesaid phantom shares is in the amount of NIS 320 thousand.
The restricted phantom shares will be restricted for a period of 12 months from the vesting date of the relevant
packet. The contingent restricted phantom shares will be restricted until the end of 2011. When the conditions for
exercising these shares are fulfilled, the Bank will purchase shares of the Bank for Mr. Luzon with the consideration
from the exercise, after deducting the applicable tax.
With regard to the effect of the end of service on the contingent restricted phantom shares and other terms, see
Section G(A)2 of the aforesaid Note 15.
For further details regarding share-based payment and bonuses for Mr. Luzon, see the Remuneration Plan Report (2010).
241
Mr. Dov Kotler
Mr. Kotler serves as Chief Executive Officer of Isracard Ltd. (and of the companies in the Isracard Group: Europay
(Eurocard) Israel Ltd., Aminit Ltd., and Poalim Express Ltd.) ("Isracard") as of February 1, 2009 (his employment
agreement with Isracard is in effect until January 31, 2012). (The companies in the Isracard Group bear the full cost
of the wages of Mr. Kotler.) Notwithstanding the aforesaid, the parties may terminate the contractual engagement
pursuant to the agreement at any time, including prior than the end of the period of the agreement, with 3 months'
advance notice in writing in the case of termination at the initiative of Mr. Kotler, and 6 months' advance notice in
writing in the case of termination other than at his initiative. In the event of the termination of Mr. Kotler's employment
at Isracard, he shall be obligated to a cooling-off period of 12 months (unpaid). If he is dismissed by Isracard, at the
end of the cooling period Mr. Kotler will be entitled to an adjustment bonus with the value of 6 monthly salaries.The
basic wage package of Mr. Kotler, under his agreement with Isracard, includes a monthly salary in a total amount of
NIS 100,000, linked to the CPI for December 2008 (currently NIS 104,606), and related terms such as a personal
vehicle and vehicle maintenance, telephone, and a daily allowance, and social benefits such as recuperation pay,
employer contributions to provident funds and severance pay, and a study fund.
With regard to the amount noted in the bonuses column of the table, pursuant to his agreement with Isracard,
Mr. Kotler is entitled to an annual bonus calculated based on the rate of change in the net profit of Isracard, of the
companies in the Isracard Group which are not included in Isracard’s statement of profit and loss, and of other
non-consolidated companies included in Isracard’s statement of profit and loss (excluding nonrecurring events which
are not part of the ordinary course of business of Isracard), relative to a “baseline profit” which is the average annual
profit in 2007-2008 (NIS 171 million). Mr. Kotler’s entitlement to the aforesaid bonus is contingent upon the profit in
that year reaching a rate of 85% or more of the baseline profit. The amount of the bonus will range from 8 monthly
salaries to 18 monthly salaries in a year in which the profit exceeds the baseline profit by a rate of more than 25%.
Mr. Kotler received a bonus in the amount of 16 monthly salaries in respect of 2010.
242
With regard to the amount noted in the share-based payment column of the table, Mr. Kotler was granted 7,404
option notes (nontradable) exercisable into 7,404 common shares of Isracard (based on the net exercise method, as
detailed below), constituting 1% of the share capital of Isracard at the date of the grant, assuming the exercise of all of
the options into 7,404 shares of Isracard, at an exercise price of NIS 3,410 per option note (subject to adjustments).
The vesting period of the option notes is as follows: one-third of the option notes vest on March 1 of each of the
years 2010, 2011, and 2012. The exercise period of the option notes is up to four years from the allocation date.
The options were allocated to Mr. Kotler on March 1, 2009. The value of the benefit in respect of the option notes,
according to the Black-Scholes model, as measured at the date of the grant, is NIS 7,545 thousand; this value will
be allocated as an expense by Isracard over the vesting period of the option notes. As a rule, Mr. Kotler shall not be
permitted to sell shares of Isracard until one of the following events occurs: the termination of his employment at
Isracard; the listing of Isracard shares for trading on the stock exchange; or a change in the control of Isracard. The
options shall be exercised based on a net exercise mechanism, where at the time of exercise of the options, shares
will be allocated reflecting only the value of the benefit in respect of the options exercised at that date. Isracard has
the right of first offer and the right of first refusal with regard to all transfers of shares by Mr. Kotler. Mr. Kotler has the
right to join in sales of shares of the company by the Bank, under certain conditions. The employment agreement of
Mr. Kotler at Isracard also includes provisions regarding the options in the event of the end of his term of service. In
addition, in the event of the termination of his term of service as CEO prior to the listing of Isracard shares on the
stock exchange, Isracard shall have the right, under certain conditions, to buy the shares arising from the exercise of
the options.The options were allocated according to the capital gains track established in Section 102 of the Income
Tax Ordinance [New Version], 1961.
Mr. Jacob Orbach
Mr. Orbach serves as Chief Internal Auditor.The current employment agreement of Mr. Orbach covers the period of
three years from January 1, 2010 to December 31, 2012. Notwithstanding the aforesaid, the contractual engagement
may be terminated earlier by either of the parties, with 90 days' advance notice. Pursuant to Mr. Orbach's employment
agreement, he is subject to a cooling-off period of 6 months. Mr. Orbach is entitled to a monthly salary in the amount
of NIS 59,313.The salary is linked to increases in the consumer price index. As of today, this salary stands at a total of
NIS 61,952.The amount listed in the salary column in the above table for 2010 in reference to Mr. Orbach also includes
a signing bonus and a thirteenth monthly salary, as detailed above with regard to Mr. Oz. In addition, Mr. Orbach is
entitled to related terms such as a vehicle, telephone, a clothing allowance, recuperation pay, employer contributions to
provident funds, severance pay, and pensions, a daily allowance, and a study fund. Mr. Orbach is entitled to retirement
terms in accordance with the common practice for members of the Board of Management of the Bank, as detailed
in Section E(2) of Note 15 to the Financial Statements of the Bank.
243
A risk-adjusted, performance-dependent annual bonus – The terms of this bonus are as detailed in Section G(A)1
of Note 15 to the Financial Statements. Given that the ROE difference of the Bank for 2010 was 2.46%, a positive
bonus budget was established for the members of the Board of Management. As described in Section G(A)1.2 of
Note 15 to the Financial Statements, the budget is distributed proportionally according to the evaluation of each
member of the Board of Management. Accordingly, a bonus was approved for Mr. Orbach, in respect of 2010, in the
amount of approximately NIS 703 thousand. In accordance with the terms of the Remuneration Plan (2010), only
approximately NIS 352 thousand of the aforesaid bonus will actually be paid to Mr. Orbach in 2011. The remaining
amount of approximately NIS 351 thousand will be deposited in his "notional" bonus account. Actual payment of
this amount is contingent upon the future performance of the Bank, as detailed in Section G(A)1.4 of Note 15 to
the Financial Statements.
in the employment agreement with Mr. Orbach (the "Replaced Bonus Formula"). Briefly, under the Replaced Bonus
restricted phantom shares under the Remuneration Plan (2010). Mr. Orbach chose to exchange all of the phantom
units granted to him under the terms of his employment, which vested on dates from January 1, 2010 forward,
comprising 599,943 phantom units, for restricted phantom shares under the Remuneration Plan (2010), as detailed
below. Accordingly, of the remaining 200,057 phantom units, which were allocated to Mr. Orbach on October 1, 2008,
and were not exchanged, 31,507 phantom units were exercised by Mr. Orbach at an exercise price of NIS 11.39
per phantom unit, such that in 2010, a total of approximately NIS 191 thousand was paid to Mr. Orbach in respect
of the phantom units. If the aforesaid phantom units had not been exercised, their expiration date would have been
January 1, 2013.The fair value of the 200,057 phantom units that were not exchanged as of December 31, 2009 was
NIS 821 thousand.
(2) Restricted phantom shares – On August 31, 2010, 149,988 restricted phantom shares were granted to Mr. Orbach,
in exchange for phantom units which were cancelled, as noted above, and as detailed in Section G(A)2.9 of Note 15
to the Financial Statements.The fair value of the phantom shares, as of the date of the grant, was NIS 2,335 thousand.
(3)Contingent restricted phantom shares - Because the conditions specified in Section G(A)2.2 of Note 15 to the
Financial Statements were fulfilled, i.e. an ROE difference of 2.46% was achieved, Mr. Orbach will be granted 12,450
(2010), the fair value of the maximum quantity of contingent restricted phantom shares was NIS 661 thousand.The
expense recorded in 2010 in respect of the aforesaid phantom shares is in the amount of NIS 388 thousand.
244
exercising these shares are fulfilled, the Bank will purchase shares of the Bank for Mr. Orbach with the consideration
from the exercise, after deducting the applicable tax.
For further details regarding share-based payment and bonuses for Mr. Orbach, see the Remuneration Plan Report (2010).
Mr. Shimon Gal
Mr. Gal serves as Head of Corporate Banking. The current employment agreement of Mr. Gal covers the period of
three years from November 8, 2009 to November 6, 2012. Notwithstanding the aforesaid, the contractual engagement
may be terminated earlier by either of the parties, with 90 days' advance notice. Pursuant to Mr. Gal's employment
agreement, he is subject to a cooling-off period of 6 months. Mr. Gal is entitled to a monthly salary in the amount of
NIS 66,812. The salary is linked to increases in the consumer price index. As of today, this salary stands at a total of
NIS 69,785.The amount listed in the salary column in the above table for 2010 in reference to Mr. Gal also includes a
signing bonus and a thirteenth monthly salary, as detailed above with regard to Mr. Oz. In addition, Mr. Gal is entitled
to related terms such as a vehicle, telephone, a clothing allowance, recuperation pay, employer contributions to
provident funds, severance pay, and pensions, a daily allowance, and a study fund. Mr. Gal is entitled to retirement
terms in accordance with the common practice for members of the Board of Management of the Bank, as detailed
in Section E(2) of Note 15 to the Financial Statements of the Bank.
Note 15 to the Financial Statements. Given that the ROE difference of the Bank for 2010 was 2.46%, a positive bonus
budget was established for the members of the Board of Management. As described in Section G(A)1.2 of Note 15
to the Financial Statements, the budget is distributed proportionally according to the evaluation of each member
of the Board of Management. Accordingly, a bonus was approved for Mr. Gal, in respect of 2010, in the amount of
NIS 875 thousand. In accordance with the terms of the Remuneration Plan (2010), only NIS 437 thousand of the
aforesaid bonus will actually be paid to Mr. Gal in 2011. The remaining amount of approximately NIS 438 thousand
will be deposited in his "notional" bonus account. Actual payment of this amount is contingent upon the future
performance of the Bank, as detailed in Section G(A)1.4 of Note 15 to the Financial Statements.
in the employment agreement with Mr. Gal (the "Replaced Bonus Formula"). Briefly, under the Replaced Bonus
245
restricted phantom shares under the Remuneration Plan (2010). Mr. Gal chose to exchange all of the phantom units
granted to him under the terms of his employment, which vested on dates from January 1, 2010 forward, comprising
760,549 phantom units, for restricted phantom shares under the Remuneration Plan (2010), as detailed below. The
remaining 39,451 phantom units, which were allocated to Mr. Gal on November 8, 2009, and were not exchanged in
the aforesaid manner, have not yet been exercised, and expire on November 8, 2013.The fair value of these phantom
units as of December 31, 2010 is NIS 81 thousand.
(2)Restricted phantom shares – On August 31, 2010, 190,137 restricted phantom shares were granted to Mr. Gal, in
exchange for phantom units which were cancelled, as noted above, and as detailed in Section G(A)2.9 of Note 15 to
the Financial Statements. The fair value of the phantom shares, as of the date of the grant, was NIS 2,960 thousand.
(3)Contingent restricted phantom shares - Because the conditions specified in Section G(A)2.2 of Note 15 to
the Financial Statements were fulfilled, i.e. an ROE difference of 2.46% was achieved, Mr. Gal will be granted 16,600
(2010), the fair value of the maximum quantity of contingent restricted phantom shares was NIS 835 thousand.The
expense recorded in 2010 in respect of the aforesaid phantom shares is in the amount of NIS 507 thousand.
exercising these shares are fulfilled, the Bank will purchase shares of the Bank for Mr. Gal with the consideration from
the exercise, after deducting the applicable tax.
For further details regarding share-based payment and bonuses for Mr. Gal, see the Remuneration Plan Report (2010).
246
Ms. Irit Izakson
Ms. Irit Izakson serves as a director of the Bank. As of October 1, 2008, Ms. Izakson serves as active Chairperson of the
Board of Isracard and Europay; and as of January 1, 2009, she also serves as Chairperson of the Board of Aminit and
Poalim Express. Ms. Izakson's employment agreement with Isracard with respect to her position as Chairperson of Isracard
ends on December 31, 2011 (the companies in the Isracard Group bear the full cost of the wages of Ms. Izakson).With
regard to the term of employment of Ms. Izakson, the terms of the termination of the contractual engagement, and the
advance notice period, see Section 6.2 of the Immediate Report of the Bank dated November 25, 2009 (reference
no. 2009-01-295869), included herein by reference (the "Izakson Remuneration Report"). Ms. Izakson is entitled to
a salary as detailed in Section 6.3 of the Izakson Remuneration Report. As of today, the monthly salary of Ms. Izakson
is NIS 88,417. In addition, Ms. Izakson is entitled to related terms such as a vehicle and vehicle maintenance, telephone,
and a daily allowance, and social benefits such as recuperation pay, employer contributions to provident funds and
severance pay, and a study fund. For further details regarding Ms. Izakson's wage package, see Section 6 of the Izakson
With regard to the amount noted in the bonuses column of the table, regarding the components of the annual bonus
to which Ms. Izakson is entitled, see Section 6.8 of the Izakson Remuneration Report. Ms. Izakson received a bonus
in the amount of 15 monthly salaries in respect of 2010.
With regard to the amount noted in the share-based payment column of the table, Ms. Izakson was granted 6,293
option notes (nontradable) to buy 6,293 common shares of Isracard (based on the net exercise method, as detailed
below), constituting 0.85% of the share capital of Isracard at the date of the grant, assuming the exercise of all of the
options into 6,293 shares of Isracard, at an exercise price of NIS 3,410 per option note (subject to adjustments).
The vesting period of the option notes is as follows: one-third of the option notes vest on January 1 of each of the
years 2010, 2011, and 2012. Ms. Izakson will be entitled to exercise the option notes into shares (after the vesting date)
until January 1, 2013.The options were allocated to Ms. Izakson on January 6, 2010.The value of the benefit in respect
of the option notes, according to the Black-Scholes model, as measured at the date of the grant, is NIS 6,588 thousand;
this value will be allocated as an expense by Isracard over the vesting period of the option notes. With regard to the
mechanism for the exercise of the options, the transferability of the options, and the exercise shares, as well as other
terms related to the options of Ms. Izakson, see Appendix B to the Izakson Remuneration Report.
In addition, Ms. Izakson receives annual remuneration only, from the Bank, in respect of her position as a director of
the Bank (in the amount of NIS 158 thousand at this time), without participation remuneration.
For further details regarding the terms of service of Ms. Izakson, see the Izakson Remuneration Report, included
herein by reference.
Members of the Board of Directors
The directors of the Bank are entitled to annual remuneration and participation remuneration, which does not
deviate from the common practice, and which is paid in accordance with the Companies Regulations (Rules
Regarding Remuneration and Expenses for External Directors), 2000.The cost of the remuneration of the directors
for 2010 totaled approximately NIS 11,456 thousand. Note that the Chairman of the Board is not entitled to annual
remuneration or participation remuneration, and that Ms. Izakson is entitled to annual remuneration only.
247
Set out below are the salaries, remuneration, value of benefits, and employer payments and provisions for the highest salary recipients among the
senior office-holders of the Bank Group for 2009 (in NIS thousands).
Loans granted with preferred terms(4)
Value of
additional
benefits
Employer Supplement
payments of benefitand
related
reserves
provisions(2)
due to
changes in
wages in the
accounting
year
Balance
Total
Balance
Benefit
Average
of loans
granted
term to
maturity during the granted at
regular
year
(in years)
terms
Name
Title
Salary
Yair Seroussi
Chairman of the
Board of Directors of
the Bank
1,396
-
1,886
107
1,724
-
5,113
-
-
-
12
Zion Kenan
President & CEO of
the Bank
1,777
-
3,025
315
1,536
*5,070
11,723
-
-
1
120
Irit Izakson
Chairman of the
Board of Directors
of the Isracard Group
and a Director of
the Bank
1,424
1,036
4,151
166
537
-
7,314
-
-
-
33
Dov Kotler
CEO of the Isracard
Group
1,118
1,216
3,842
78
382
-
6,636
-
-
-
35
Dennis Louden Deputy CEO, Head of
Fixed Income Division,
Hapoalim Securities
USA Inc.
Bonuses Benefits for
share-based
payments(1)
(3)
944
5,043
-
-
-
-
5,987
378
-
-
-
Ofer Levy
Chief Accountant of
the Bank
1,217
-
3,375
222
358
337
5,509
127
5.03
1
46
Ran Oz
of the Bank
1,034
-
3,540
130
298
-
5,002
-
-
-
16
Alberto
Garfunkel
Head of International
Banking of the Bank
1,185
-
1,109
205
2,004
-
4,503
66
3.42
2
36
Mario Szuszan
Head of Global
Treasury of the Bank
1,382
-
1,714
227
295
281
3,899
-
-
-
12
Dan Dankner
Former Chairman
of the Board of
Directors of the Bank
566
-
-
323
2,265
-
3,154
-
-
-
2,037
1,351
-
483
244
1,726
-
3,804
9
0.50
-
3,118
Zvi Ziv
Former President &
CEO of the Bank
* The CEO of the Bank began working at the bank 32 years ago. This figure had a material effect on the revision of the amounts funded for compensation as a
result of the change in his status during the year and the increase in his wages.
248
General Notes:
The Directors of the Bank, with the exception of the Chairman of the Board and the Director Irit Izakson, are entitled
to remuneration that does not exceed customary levels, and is paid in accordance with the Companies Regulations
(Rules Concerning Remuneration and Expenses for External Directors), 2000. The cost of remuneration of the
Directors in respect of 2009 amounted to approximately NIS 10,431 thousand.
In light of the severe economic crisis, the Chairman of the Board, the CEO, the former Chairman of the Board, the
former CEO of the Bank, and the members of the Board of Directors decided to waive 10% of the remuneration
and wages paid to them for their service by the Bank in 2009. The members of the Board of Management of the
Bank decided to waive 7.5% of their wages in 2009.The wage data listed for 2009 and the data regarding the cost of
the remuneration of directors in respect of the aforesaid period, as detailed above, reflect these waivers.
The recipients of the remuneration are employed in full-time (100%) positions.
All employees of the Bank, including officers, enjoy various benefits in the management of their bank accounts.
The benefits mainly refer to an exemption from fixed account-management fees, fees for recording transactions in
accounts, information printouts, checkbooks, securities custody, cash withdrawals, money transfers to other accounts,
and credit-card membership fees. In addition, there are benefits in the form of reduced commission rates for buying
and selling securities and foreign currency, standing instructions for payments executed through the account, and
safe-deposit-box rentals. Further, like all other employees of the Bank, the officers enjoy preferred interest rates on
credit and debit balances in current accounts. The entire range of benefits given to office holders totals negligible
amounts, which do not exceed a total of NIS 50 thousand per year for each officer.
For details regarding lateral remuneration components (including the terms of phantom units) to which all members
of the Board of Management are entitled, including those listed above, and including retirement terms, bonuses, etc.,
see Notes 15 and 16 to the Financial Statements.
Notes to the Table:
(1)The value of the benefit in respect of share-based payment includes a benefit in respect of the phantom units
to which the listed members of the Board of Management are entitled, and is measured at fair value at the date
of the grant and at each reporting date, based on the Black-Scholes model. The value of the benefit listed in the
table above reflects the relative share accumulated in respect of the entitlement period and not yet exercised,
until the expiration of the phantom options. For further details regarding the manner of calculation of the benefit
in respect of share-based payments, see Note 1N to the Financial Statements. Note that the share price was
NIS 16.6 per share on December 31, 2009, and NIS 16.4 per share near the date of publication of the report.
(2)Employer payments and provisions include provisions for severance pay, compensation, pensions, study funds,
vacation, National Insurance, sick leave, and 25-year service grants.
(3)Excluding wage tax.
(4)Loans granted to employees of the Bank under benefit terms are loans granted under terms similar to those
granted to all employees of the Bank, amounts of which were determined based on uniform criteria.
249
Mr.Yair Seroussi
Served as Vice Chairman of the Bank from June 4, 2009 to August 1, 2009, when he was appointed Chairman of the
Board of Directors of the Bank, for a period ending on December 31, 2012. The benefit in respect of share-based
payment refers to phantom shares.
For further details regarding the phantom shares and other terms of employment of the Chairman of the Bank, see
Note 15 and Note 16 to the Financial Statements, and the Immediate Report dated November 25, 2009 (reference
no. 2009-01-295869).
Mr. Zion Kenan
Served as Head of Corporate Banking until November 8, 2009. Following the end of the term of service of Mr. Ziv, as
noted below, Mr. Kenan served as Acting CEO of the Bank. As of August 27, 2009, Mr. Kenan serves as Chief Executive
Officer of the Bank, for a period ending on December 31, 2012.The benefit in respect of share-based payments includes
phantom shares as well as phantom units: 1,200,000 phantom units allocated to Mr. Kenan on October 1, 2006, at an
exercise price of NIS 18.37 per phantom unit (price of the Bank’s share as of December 31, 2009 – NIS 16.6), expiring
on December 31, 2010. As of December 31, 2009, 1,200,000 phantom units granted to Mr. Kenan had not yet been
exercised.The fair value of the phantom units as of December 31, 2009 is NIS 1,550 thousand.
For further details regarding the terms of service of Mr. Kenan in the period starting June 4, 2009 (and ending on December
31, 2012), including the terms of the phantom shares allocated to him due to his service as CEO, see the Immediate
Report dated January 6, 2010 (reference no. 2010-01-345696) and Note 15 and 16 to the Financial Statements.
Ms. Irit Izakson
Serves as a director of the Bank, and as of October 2008, as Chairperson of the Board of Directors of Isracard Ltd.
(above and hereinafter: “Isracard”), and of additional credit-card companies controlled by the Bank (hereinafter: the
“Isracard Group”), for a period ending on December 31, 2011. The remuneration data in the table above include
annual remuneration for her service as a director of the Bank, in the amount of approximately NIS 121 thousand.
The benefit for share-based payment refers to 6,293 option notes (nontradable) for the purchase of 6,293 common
shares of Isracard, constituting 0.85% of the share capital of Isracard, at an exercise price of NIS 3,410 per option note
(subject to adjustments). The vesting period of the option notes is as follows: one-third of the option notes vest on
January 1 of each of the years 2010, 2011, and 2012. Ms. Izakson shall be entitled to exercise the option notes into
shares (after vesting) until January 1, 2013. The value of the benefit in respect of the option notes, according to the
Black-Scholes model, is NIS 6,588 thousand; this value will be allocated as an expense over the vesting period of the
option notes. In addition, Ms. Izakson is entitled to an annual bonus, calculated based on the change in the net profit
of Isracard, and of the companies in the Isracard Group which are not included in Isracard’s statement of profit and
loss, and of other companies included in Isracard’s statement of profit and loss which are not consolidated (excluding
nonrecurring events which are not part of the ordinary course of business of Isracard), relative to a “baseline profit” of
NIS 160 million. Ms. Izakson’s entitlement to the aforesaid bonus is contingent upon the profit for the year exceeding
the baseline profit. The bonus will range from 8 to 16 monthly salaries per year.
For further details regarding the terms of service of Ms. Izakson as Chairperson of Isracard Ltd. and the aforesaid
companies, see the Immediate Report dated November 25, 2009 (reference no. 2009-01-295869).
250
Mr. Dov Kotler
Serves as Chief Executive Officer of Isracard and of the other companies in the Isracard Group as of February 1, 2009
(his employment agreement is in effect until February 1, 2012).The benefit in respect of share-based payment refers
to 7,404 option notes (nontradable) exercisable into 7,404 common shares of Isracard (constituting 1% of the share
capital of Isracard at the signing date of the agreement), at an exercise price of NIS 3,410 per share. The vesting
period of the option notes is as follows: one-third of the option notes vest on March 1 of each of the years 2010,
2011, and 2012. The exercise period of the option notes is up to four years from the allocation date. The options
were allocated to Mr. Kotler on March 1, 2009. The value of the benefit in respect of the option notes, according to
the Black-Scholes model, is NIS 7,545 thousand; this value will be allocated as an expense over the vesting period of
the option notes. In addition, Mr. Kotler is entitled to an annual bonus at varying rates, calculated based on the rate
of change in the net profit of Isracard, of the companies in the Isracard Group which are not included in Isracard’s
statement of profit and loss, and of other non-consolidated companies included in Isracard’s statement of profit and
loss, relative to a “baseline profit” which is the average annual profit in 2007-2008 (excluding nonrecurring events
which are not part of the ordinary course of business of Isracard). Mr. Kotler’s entitlement to the aforesaid bonus
is contingent upon the profit in that year reaching a rate of 85% or more of the baseline profit. The amount of the
bonus will range from 8 monthly salaries to 18 monthly salaries in a year in which the profit exceeds the baseline
profit by a rate of more than 25%.
Mr. Dennis Loudon
Serves as Deputy CEO and Head of the Fixed Income Division at Hapoalim Securities U.S.A. Inc. (hereinafter:
“Securities”). Under his employment agreement, which is in effect until December 31, 2010 (or until December 31, 2011
if the Fixed Income Division meets the profit objectives set in the agreement), Mr. Loudon is entitled to an annual
bonus based on the annual net profit of the Fixed Income Division (in amounts of USD 150-200 thousand per year),
and to participation in the annual net profit of the Division at a rate of 15%. In February 2009, a loan was extended
to Mr. Loudon in the amount of USD 200 thousand, to be repaid in two equal annual payments on December 31 of
each of the years 2009 and 2010.The loan bears annual interest at a rate of 4%. If Mr. Loudon is employed at Securities
at the end of a particular calendar year, as relevant, or if his employment is terminated at the initiative of Securities
or at his own initiative under special circumstances listed in the agreement, Mr. Loudon will not be required to repay
the loan to Securities. Accordingly, because Mr. Loudon was in office on December 31, 2009, he was not required to
repay the amount of USD 100 thousand, and this amount was included in the cost of wages of Mr. Loudon in 2009.
251
Mr. Ofer Levy
Serves as Chief Accountant of the Bank. Mr. Levy’s current employment agreement is for a period of three years,
starting May 1, 2009. The benefit for share-based payment refers to phantom units allocated to Mr. Levy, as follows:
(1) 375,000 phantom units allocated on January 1, 2006, at an exercise price of NIS 17.80 per phantom unit, expiring
April 1, 2010. As of December 31, 2009, 325,000 phantom units granted to Mr. Levy had not yet been exercised.
The fair value of these phantom units as of December 31, 2009 is NIS 291 thousand. (2) 266,138 phantom units
allocated to Mr. Levy on May 1, 2006, at an exercise price of NIS 20.61 per phantom unit, expiring August 1, 2010.
As of December 31, 2009, 266,138 phantom units granted to Mr. Levy had not yet been exercised. The fair value of
these phantom units as of December 31, 2009 is NIS 230 thousand. (3) 800,000 phantom units allocated to Mr. Levy
on May 1, 2009, at an exercise price of NIS 8.21 per phantom unit, expiring May 1, 2013. As of December 31, 2009,
800,000 phantom units granted to Mr. Levy had not yet been exercised. The fair value of these phantom units as of
December 31, 2009 is NIS 2,872 thousand.
Mr. Ran Oz
Serves as Chief Financial Officer of the Bank (CFO). The current employment agreement of Mr. Oz is for a period
of three years, starting on April 1, 2009. The benefit for share-based payment refers to 800,000 phantom units
allocated to Mr. Oz on April 1, 2009, at an exercise price of NIS 7.24 per phantom unit, expiring April 1, 2013. As
of December 31, 2009, 800,000 phantom units granted to Mr. Oz had not yet been exercised. The fair value of the
phantom units as of December 31, 2009 is NIS 3,540 thousand.
Mr. Mario Szuszan
Serves as Head of Global Treasury of the Bank. Mr. Szuszan’s current employment agreement is for a period of three
years, starting April 1, 2008. The benefit for share-based payment refers to 800,000 phantom units allocated to
Mr. Szuszan on April 1, 2008, at an exercise price of NIS 14.01 per phantom unit, expiring July 1, 2012 (the expiration
date is assuming that Mr. Szuszan extends his contract at the end of the term of his current contract, as noted above,
pursuant to his employment agreement. In the event that Mr. Szuszan does not renew his employment agreement,
the units shall expire on July 1, 2011). As of December 31, 2009, 533,333 phantom units granted to Mr. Szuszan had
not yet been exercised. The fair value of the phantom units (calculated according to the aforesaid expiration date)
as of December 31, 2009 is NIS 1,534 thousand.
Mr. Alberto Garfunkel
Served until January 1, 2010 as Head of International Banking of the Bank.The benefit for share-based payment refers
to phantom units allocated to Mr. Garfunkel, as follows: (1) 502,598 phantom units allocated on August 30, 2006, at
an exercise price of NIS 17.64 per phantom unit, expiring November 30, 2010. As of December 31, 2009, 502,598
phantom units granted to Mr. Garfunkel had not yet been exercised. The fair value of these phantom units as of
December 31, 2009 is NIS 727 thousand. (2) 89,760 phantom units allocated on August 30, 2009, at an exercise price
of NIS 12.37 per phantom unit, expiring December 31, 2010 (in light of the end of his term of service, as noted). As
of December 31, 2009, 89,760 phantom units granted to Mr. Garfunkel had not yet been exercised.The fair value of
these phantom units as of December 31, 2009 is NIS 392 thousand.
252
Mr. Dan Dankner
Served as Chairman of the Board of Directors of the Bank from June 24, 2007 to August 1, 2009, and as a director
of the Bank until December 31, 2009. For details regarding the terms of the remuneration approved for Mr. Dankner,
see the Immediate Report dated February 13, 2008 (reference no. 2008-01-043920). The amount listed in the
“employer payments and provisions” column includes payment for a twelve-month advance notice period, to which
the Bank determined that Mr. Dankner was entitled under the circumstances of the termination of his service, as
detailed in the Immediate Report dated June 1, 2009 (reference no. 2009-01-130656). The amount listed in the
column “balance of loans granted without benefit terms” refers to loans extended to Mr. Dankner from time to time
at terms similar to those given to all customers of the Bank, which were approved by the Board of Directors of the
Bank. The benefit for share-based payment in 2009 refers to option notes allocated to Mr. Dankner; for details, see
Mr. Zvi Ziv
Served as Chief Executive Officer of the Bank from August 31, 2003 to June 11, 2009. To the best of the knowledge
of the Bank, near the end of his term of service at the Bank, Mr. Ziv held shares constituting 0.0013% of the issued
and paid-up share capital of the Bank at that time. For details regarding the terms of the remuneration approved for
Mr. Ziv, see the Immediate Report dated March 31, 2008 (reference no. 2008-01-090429).The benefit for share-based
payment refers to phantom units held by Mr. Ziv (277,778 phantom units allocated to Mr. Ziv on August 31, 2006, at
an exercise price of NIS 17.69 per phantom unit, expiring May 31, 2011. As of December 31, 2009, 277,778 phantom
units granted to Mr. Ziv had not yet been exercised. The fair value of the phantom units is NIS 592 thousand as of
December 31, 2009), and to the allocation of 1,140,000 option notes (nontradable); for details, see Note 16 to the
253
The connection between the remuneration granted to the senior officers listed in the above table
for 2010 and the contribution of the recipients to the corporation:
As part of the approval process of the annual Financial Statements of the Bank for 2010, on March 30, 2011, the
Board of Directors held an extensive discussion of the terms of service and employment of the officers and interested
parties of the Bank, which are detailed above, in accordance with Regulation 21 of the Securities Regulations (Periodic
and Immediate Reports), 1970 (the "Periodic and Immediate Reports Regulations"), separately for each officer and
interested party, after receiving full information in advance regarding their terms of service and employment.
The discussion held on March 30, 2011 was preceded by preliminary discussions of this topic by the Remuneration
Committee, the Audit Committee, and the Board of Directors. In these preliminary discussions, a separate examination
was performed for each officer and interested party of the specific criteria established for each officer and interested
party, their fulfillment of the criteria established for them, as detailed below, and the relationship between the
remuneration they receive and their contribution to the Bank. In order to examine the remuneration and the
fulfillment of the aforesaid criteria, data were presented to the members of the various committees and to the Board
of Directors regarding the remuneration approved in the past for each officer, a survey of the terms of remuneration
at similar companies in the industry, the Remuneration Plan (2010) and the criteria established in relation thereto, and
the Bank's performance in 2010, as well as data regarding the fulfillment or non-fulfillment of the aforesaid criteria,
including the activity and contribution of each officer to the Bank in 2010, and the relationship between such activity
and contribution and the total remuneration proposed for approval for the officer, as noted. The recommendations
of the Remuneration Committee and the Audit Committee were submitted to the Board of Directors in advance
of its meeting on March 30, 2011, together with the relevant materials presented to them.
In view of the remuneration criteria established in advance by the Board of Directors (on this matter, see the
Immediate Report dated August 30, 2010, reference no. 2010-01-608787 concerning the remuneration plan for
2010 – the "Remuneration Plan Report (2010)" and the "Remuneration Plan (2010)", respectively), and in view of
additional criteria, including: (1) the contribution of the officer to the business and financial results of the Bank; (2) the
Bank's need to retain an officer with unique skills, knowledge, or expertise; (3) the degree of responsibility borne by
the officer; (4) special challenges of importance to the Bank contended with by the officer during the year; (5) the
satisfaction of the CEO and/or Chairman, as relevant, with the performance of the officer; (6) the total remuneration
received by the officer over the years; (7) the officer's professional and managerial skills, education, and experience;
(8) the existing market conditions with regard to corresponding officers at similar banks companies, and based on the
recommendations of the Remuneration Committee and the Audit Committee from their discussions as described
above, the Board of Directors separately examined the compliance of each officer and interested party with the
criteria established as noted above, and the connection between the remuneration each officer or interested party
receives and their contribution to the Bank. The specific criteria established for each officer and interested party
correspond to each officer's position, as detailed below. In order to examine the remuneration and the fulfillment of
the aforesaid criteria, data were presented to the directors in advance regarding the remuneration approved in the
past for each officer, a survey of the terms of remuneration at similar companies in the industry, the Remuneration Plan
(2010) and the criteria established in relation thereto, the Bank's performance in 2010, and data regarding fulfillment
or non-fulfillment of the aforesaid criteria, including the actions and contributions of each officer to the Bank in 2010,
and the connection between these factors and the total remuneration proposed for approval, as noted.
254
Following the discussion of the remuneration of officers and interested parties detailed above, in accordance with
Regulation 21 of the Immediate Report Regulations, and in light of the materials presented to the Board of Directors
of the Bank, the members of the Board of Directors expressed their position that the remuneration in question
is fair and reasonable, and that the remuneration of each officer and interested party is congruent with his or her
contribution to the Bank.
For further details regarding the Remuneration Plan (2010) and the remuneration of officers and interested parties,
see Notes 15 and 16 to the Financial Statements.
Mr.Yair Seroussi, Chairman of the Board of the Bank – In examining the remuneration for Mr. Seroussi in
respect of 2010, the Board of Directors considered Mr. Seroussi's contribution to the Bank and performance, with
respect to the following criteria, among other matters: (1) leadership of the Bank in the improvement of its business
performance; (2) adaptation of the activity of the Bank to the change in regulation; (3) formulation of strategy for the
Bank, and leadership and implementation of such strategy, including with regard to risk management; (4) effectiveness
and efficiency of the work of the Board of Directors and its committees; (5) adoption of orderly working procedures;
(6) reinforcement of control systems at the Bank; and (7) promotion and strengthening of corporate governance
processes at the Bank. Following the discussion, the Board of Directors noted that Mr. Seroussi had excelled in leading
the Bank to improvement of its business performance, and had led the Bank to a leap in its core banking activity, while
adapting to the change in regulation. In addition, the Board of Directors noted that Mr. Seroussi had succeeded in
formulating, leading, and implementing strategy for the Bank, including with respect to risk management; promoted
and ensured the effectiveness and efficiency of the work of the Board of Directors and its committees; and adopted
orderly working procedures, while strengthening control systems at the Bank, which contributed to the promotion and
strengthening of corporate governance processes at the Bank. Mr. Seroussi represented the Bank in key international
forums and developed effective relationships with the supervision and regulation officers in Israel and globally.
The Board of Directors found that the remuneration received by Mr. Seroussi in respect of 2010 was within the range
found in the survey presented to the Board of Directors regarding the remuneration of officers in similar positions at
similar companies, and in view of the aforesaid performance of Mr. Seroussi, determined that the remuneration is fair and
reasonable under the circumstances, and that the remuneration is congruent with his contribution to the Bank.
255
Mr. Zion Kenan, President and CEO of the Bank – In examining the remuneration for Mr. Kenan in respect of
2010, the Board of Directors considered Mr. Kenan's contribution to the Bank and performance, with respect to the
following criteria, among other matters: (1) leadership of the Bank in the improvement of its business performance
while executing its work plans; (2) adaptation of the activity of the Bank to the change in regulation; (3) leadership and
implementation of the Bank's strategy, including with regard to risk management; (4) promotion and strengthening of
control systems and corporate governance processes at the Bank; (5) leadership of the Board of Management, while
constructing a high-quality management team; (6) nurturing working relationships and promoting synergy among
members of the Board of Management. Following the discussion, the Board of Directors noted that Mr. Kenan had
excelled in leading the Bank to improvement of its business performance, and had achieved a significant leap in all areas
of activity, while adapting to the change in regulation. In addition, the Board of Directors noted that Mr. Kenan had
succeeded in leading and implementing the Bank's strategy, including with respect to risk management.The Board of
Directors further noted that Mr. Kenan had extensively promoted and ensured the strengthening of control systems
at the Bank, while promoting and improving corporate governance processes. In addition, the Board of Directors
noted that Mr. Kenan had succeeded in building a high-quality leading management team and promoting synergies
among the members of the Board of Management, while nurturing working relationships throughout the Bank.
The Board of Directors found that the remuneration received by Mr. Kenan in respect of 2010 was within the range
found in the survey presented to the Board of Directors regarding the remuneration of officers in similar positions
at similar companies, and in view of the aforesaid performance of Mr. Kenan, determined that the remuneration is fair
and reasonable under the circumstances, and that the remuneration is congruent with his contribution to the Bank.
Mr. Ran Oz, Chief Financial Officer – In examining the remuneration for Mr. Oz in respect of 2010, the Board
of Directors considered Mr. Oz's contribution to the Bank and performance, with respect to the following criteria,
among other matters: (1) reinforcement of financial planning and control processes at the Bank; (2) management of
the Bank's systems in order to comply with the required capital adequacy targets; (3) improvement of the planning
process of the Bank's strategic plans and work plans; (4) strengthening of the investor relations activity of the Bank;
(5) preparation for the transition to MSCI World indices; (6) development of special measurement tools designed
to promote synergy among the divisions of the Bank; (7) preparation for changes in regulation and in accounting
standards; and (8) management and control of the Bank's expenses. Following the discussion, the Board of Directors
noted that Mr. Oz had promoted the reinforcement of financial planning and control processes at the Bank and the
management of the Bank's systems, among other matters, in order to comply with the required capital adequacy
targets.The Board of Directors further noted that Mr. Oz had contributed greatly to improvement and introduction
of a new planning process for multi-year strategic plans and the work plan of the Bank, in combination with controls
and measurement of actual implementation and execution. In addition, the Board of Directors noted that Mr. Oz
led a strategic plan to position in the Bank as a leader in the eyes of the capital market, and to strengthen the Bank's
investor relations, as part of the Bank's preparations for Israel's transition to the MSCI World index. In addition, Mr.
Oz successfully led the processes of management and control of the Bank's expenses, preparation for changes in
regulation and accounting standards, establishment of a unit and an orderly process for capital management at the
Bank, and successful development of special measurement tools for the promotion of synergies among the divisions
of the Bank.
256
The Board of Directors found that the remuneration received by Mr. Oz in respect of 2010 was within the range
at similar companies, and in view of the aforesaid performance of Mr. Oz, determined that the remuneration is fair
Mr. David Luzon, Head of Information Technology – In examining the remuneration for Mr. Luzon in respect
of 2010, the Board of Directors considered Mr. Luzon's contribution to the Bank and performance, with respect to the
following criteria, among other matters: (1) development and maintenance of the computer systems and technologies
of the Bank; (2) reduction of expenses and effective utilization of resources; (3) emergency preparedness of the Bank;
(4) managing human resources in the area of technologies and hiring excellent workers from manpower agencies as
employees of the Bank; and (5) satisfaction of internal clients with the service provided. Following the discussion, the
Board of Directors noted that Mr. Luzon had a key role in the leadership of development of the Bank's computer
systems and technologies, while meeting extremely high standards of service. Mr. Luzon brought about a significant
improvement in the availability of systems and avoidance of malfunctions, and in projects meeting schedules and
budgets, while improving the satisfaction of internal clients and reducing expenses.The Board of Directors also noted
that Mr. Luzon achieved progress in the process of preparation of the Bank for emergencies and in hiring manpower
agency workers as employees of the Bank.
The Board of Directors found that the remuneration received by Mr. Luzon in respect of 2010 was within the range
at similar companies, and in view of the aforesaid performance of Mr. Luzon, determined that the remuneration is
fair and reasonable under the circumstances, and that the remuneration is congruent with his contribution to the
Bank. Note that approximately one-third of the remuneration of Mr. Luzon is in respect of his expected retirement
from the Bank in March.
Mr. Jacob Orbach, Chief Internal Auditor – In examining the remuneration for Mr. Orbach in respect of
2010, the Board of Directors considered Mr. Orbach's contribution to the Bank and performance, with respect to
the following criteria, among other matters: (1) improvement of control and monitoring of findings of audit reports
through the adoption of computerized systems; (2) completion of an independent review of the ICAAP; (3) increased
exposure of audit work through courses and training for employees; and (4) improved efficiency and cost reduction
in the Internal Audit Division. Following the discussion, the Board of Directors noted that Mr. Orbach has improved
control and monitoring processes for findings of audit reports, making it possible to ensure the implementation of
the conclusions of the reports. The Board of Directors also noted that Mr. Orbach had successfully completed the
review of the ICAAP and promoted the exposure of the work of the Audit Department to the employees of the
Bank. In addition, the Board of Directors noted that Mr. Orbach had succeeded in increasing efficiency and cutting
costs in the Internal Audit Division and met the targets that had been set.
The Board of Directors found that the remuneration received by Mr. Orbach in respect of 2010 was within the range
similar companies, and in view of the aforesaid performance of Mr. Orbach, determined that the remuneration is fair
257
Mr. Shimon Gal, Head of Corporate Banking – In examining the remuneration for Mr. Gal in respect of 2010,
the Board of Directors considered Mr. Gal's contribution to the Bank and performance, with respect to the following
criteria, among other matters: (1) growth in the area of commercial banking; (2) promotion of synergies among the
different divisions of the Bank; (3) expanding the deployment of business branches; (4) maintaining the Bank's market
share in the area of credit; and (5) meeting quantitative targets, including with regard to return on equity, profit,
expenses of the Corporate Division, non-credit income, and more. Following the discussion, the Board of Directors
noted that Mr. Gal had led the Corporate Division to outstandingly high achievements, beyond the planning and
the targets that had been set, and had a decisive contribution to the results of the Bank for 2010. In addition, Mr.
Gal succeeded in promoting synergies between the Corporate Division and other divisions of the Bank, including
divisions operating overseas.The Board of Directors further noted that Mr. Gal had led and promoted the continued
process of deployment of the business branches of the Bank, and had met the targets set for the Corporate Division
in the area of commercial banking, with great success, especially with regard to the recruitment of new customers. In
addition, as a result of Mr. Gal's management, the Bank succeeded in maintaining its status as the leader in the area
of corporate credit.
The Board of Directors found that the remuneration received by Mr. Gal in respect of 2010 was within the range
at similar companies, and in view of the aforesaid performance of Mr. Gal, determined that the remuneration is fair
Mr. Dov Kotler, CEO of Isracard Ltd. – In examining the remuneration for Mr. Kotler in respect of 2010, the
Board of Directors considered Mr. Kotler's contribution to the Isracard Group and performance, with respect to
the following criteria, among other matters: (1) growth of the Isracard Group (and an increase in financial metrics);
(2) improvement of customer service; (3) implementation of a new strategy for the promotion of these objectives.
Following the discussion, the Board of Directors noted that Mr. Kotler had excelled in, among other things, finding
new growth areas for the Isracard Group, despite the decline in the credit-card clearing market, and leading Isracard
to become the leading player in the non-bank credit-card market despite the difficult market conditions. In addition,
Mr. Kotler led the company to first place in customer service and in the formulation of a new strategy concerning
benefits associated with credit cards. As a result, the net profit of Isracard grew by approximately 10%, along with an
increase in the volume of purchases by the customers of the Group, and an increase in revenues.
The Board of Directors found that the remuneration received by Mr. Kotler in respect of 2010 was within the range
at similar companies, and in view of the aforesaid performance of Mr. Kotler, determined that the remuneration is fair
258
Ms. Irit Izakson, Chairperson of the Board of Isracard Ltd. – In examining the remuneration for Ms.
Izakson in respect of 2010, the Board of Directors considered Ms. Izakson's contribution to the Isracard Group
and performance, with respect to the following criteria, among other matters: (1) improvement of the business
performance of the Isracard Group and an increase in the financial metrics; (2) formulation of strategy for the Isracard
Group, and leadership and implementation of such strategy; (3) effectiveness and efficiency of the work of the Board
of Directors and its committees; and (4) a focus on new growth areas for the Isracard Group. Following the discussion,
the Board of Directors noted that Ms. Izakson had excelled in leading the Isracard Group to improvement of its
business performance. The Board of Directors also noted that Ms. Izakson had succeeded in formulating, leading,
and implementing strategy for the Isracard Group, and in promoting the effectiveness and efficiency of the work
of the Board of Directors and its committees. Ms. Izakson led the Isracard Group in finding new areas of growth,
despite the decline in the credit-card clearing market, and promoting Isracard to become the leading player in the
non-bank credit-card market despite the difficult market conditions. Under the leadership of Ms. Izakson, the net
profit of Isracard grew by approximately 10%, along with an increase in the volume of purchases by the customers
of the Group, and an increase in revenues.
The Board of Directors found that the remuneration received by Ms. Izakson in respect of 2010 was within the range
similar companies, and in view of the aforesaid performance of Ms. Izakson, determined that the remuneration is fair
and reasonable under the circumstances, and that the remuneration is congruent with her contribution to the Bank.
Directors' Remuneration
With regard to the annual remuneration and the participation remuneration received by the directors of the Bank(1),
(which was in a total amount of NIS 11,456 thousand in 2010), the directors noted that this amount does not exceed
the maximum amount according to the grade of the Bank pursuant to the Companies Regulations (Rules Regarding
Remuneration and Expenses for External Directors), 2000, and therefore, in the opinion of the Board of Directors,
this amount is fair and reasonable, and reflects the contribution of the directors to the Bank.
(1) Mr. Seroussi is not entitled to annual remuneration and participation remuneration; Ms. Izakson is entitled to annual remuneration
only.
259
Board of Directors’ Report
to the Annual General Meeting
on the Remuneration of the Auditors(1)(2)(3)
Consolidated
The Bank
2010
2009
2010
2009
NIS thousands
(4)
For auditing activity :
21,374
21,355
9,889
9,522
1,558
1,593
1,029
1,034
22,932
22,948
10,918
10,556
7,859
5,372
6,904
4,114
433
460
433
460
Joint auditors
2,475
1,869
1,557
1,085
Other auditors
1,320
1,801
1,075
1,499
Joint auditors
Other auditors
Total
For audit-related services(5):
Joint auditors
Other auditors
(6)
For tax services :
(7)
For other services :
1,007
705
897
446
Total
13,094
10,207
10,866
7,604
Total remuneration of auditors
36,026
33,155
21,784
18,160
Joint auditors
(1) Report of the Board of Directors to the annual general meeting on the remuneration of the external auditors for audit activity
and for services in addition to the audit, under Paragraphs 165 and 167 of the Companies Law, 5759-1999.
(2) The remuneration of the external auditors includes payments to partnerships and corporations under their control, as well
as payments in accordance with the Value Added Tax Law.
(3) Including remuneration paid and accrued remuneration.
(4) Audit of the annual financial statements, review of interim reports, including an audit of the internal control of financial reporting
(SOX 404), and a review of the Bank’s overseas branches.
(5) Audit-related fees mainly include prospectuses, special authorizations, comfort letters, and guidance of the SOX process.
(6) Audit activities related to compliance with money laundering prohibition directives.
(7) Mainly includes assistance with the preparation of the Corporate Social Responsibility Report.
Controls and Procedures
In accordance with the Public Reporting Directives of the Supervisor of Banks, the Chief Executive Officer and
the Chief Accountant of the Bank must each separately sign a declaration regarding their responsibility for the
establishment and application of controls and procedures concerning disclosure and the Bank's internal control of
financial reporting, including an assessment of the effectiveness of these controls, pursuant to the provisions of Sections
302 and 404 of the law known as the "Sarbanes-Oxley Act", enacted in the United States.
The provisions of these two sections of the law were consolidated by the Supervisor of Banks in a Proper Conduct
of Banking Business Directive (Directive 309) in September 2008, and integrated into the Public Reporting Directives
in June 2009.
These directives have been implemented at the Bank since their inception dates:
•The directive in Section 302 regarding the responsibility for the establishment and application of controls and
procedures concerning disclosure has been implemented quarterly as of the financial statements for June 30, 2005.
•The directive in Section 404 regarding the responsibility for the Bank's internal control of financial reporting has
been implemented at year end, as of the financial statements for December 31, 2008.
260
As part of the implementation of the directives of Section 404, the Bank, with the assistance of a consulting firm,
mapped and documented all material control processes, based on the directives of the SEC (the Securities and
Exchange Commission in the United States), using the prevalent methodologies and the control model of the
COSO (Committee of Sponsoring Organizations) of the Treadway Commission. In addition, in accordance with
the requirements, the Bank carried out an annual test of the effectiveness of the procedures for internal control of
financial reporting, through an examination of the main controls in practice.
In 2010, the Bank, with the assistance of the consulting firm, according to the prevalent methodologies, updated the
documentation of the material control processes and tested the effectiveness of procedures for the internal control
of financial reporting, through a renewed examination of the main controls for 2010. This process was carried out
while adjusting testing samples to the results of the risk mapping updated each year.
Evaluations of Controls and Procedures Concerning Disclosure
The Board of Management of the Bank, in cooperation with the Chief Executive Officer and the Chief Accountant
of the Bank, has assessed the effectiveness of the controls and procedures concerning disclosure at the Bank as of
December 31, 2010. Based on this assessment, the Chief Executive Officer and the Chief Accountant of the Bank
have concluded that, as at the end of this period, the controls and procedures concerning disclosure at the Bank are
effective in order to record, process, summarize, and report the information which the Bank is required to disclose
in its financial report, in accordance with the Public Reporting Directives of the Supervisor of Banks, on the date
stipulated in these directives.
Changes in Internal Control
On February 6, 2011, following changes in legislation, the Board of Directors resolved on changes in the process of
approval of the financial statements. Within this change, the Board of Directors dissolved the Balance Sheet Committee
and established the Finance and Prospectus Committee, which among other matters discusses the drafts of the interim
and annual financial statements.The Audit Committee, in addition to its other duties, which are detailed in the section
"The Board of Directors and the Discharge of its Functions," discusses and makes approval recommendations to the
Board of Directors regarding the interim and annual financial statements. See further details in the section "Disclosure
Regarding the Procedure for the Approval of the Financial Statements" and in the section "The Board of Directors
and the Discharge of its Functions".
Other than this resolution, during the quarter ended on December 31, 2010, there was no change in the Bank’s
internal control of financial reporting that had a material impact, or could reasonably be expected to have a material
impact, on the Bank's internal control of financial reporting.
Yair Seroussi
Zion Kenan
President & Chief Executive Officer
Tel-Aviv, March 30, 2011
261
2010
Bank Hapoalim
Management’s Review 2010
Appendix I: Consolidated Balance Sheet for the years 2006-2010 - Multi-Period Data
265
Appendix 2:Consolidated Statement of Profit and Loss for the years 2006-2010
Multi-Period Data
266
Appendix 3: Rates of Financing Income and Expenses - Consolidated
267
Appendix 4: Exposure of the Bank and Subsidiaries to Changes in Interest Rates 272
Appendix 5: Total Credit Risk to the Public by Economic Sectors - Consolidated
280
Appendix 6: Exposures to Foreign Countries - Consolidated 286
Appendix 7:Consolidated Balance Sheet as of the end of every quarter for the years 2009-2010
Multi-Quarter Data
290
Appendix 8:Quarterly consolidated Statement of Profit and Loss for the years 2009-2010
Multi-Quarter Data
292
Consolidated Balance Sheet for the years 2006-2010
Multi-Period Data
(NIS millions)
Appendix I
December 31
2010
2009
2008
2007
2006
50,331
53,115
38,590
35,695
39,750
Securities
31,604
28,055
26,657
48,406
44,520
16
-
-
471
-
Assets
Securities which were borrowed or bought
under agreements to resell
225,288
215,788
222,100
204,725
186,399
Credit to governments
339
218
270
404
743
Investment in equity-basis investees
132
114
480
766
821
Bulidings and equipment
3,803
3,845
3,905
3,941
3,767
Other assets
9,363
8,420
14,845
8,583
6,864
320,876
309,555
306,847
302,991
282,864
Total assets
Liabilities and Shareholders' Equity
233,965
231,993
226,953
231,750
217,004
Deposits from banks
4,834
6,455
8,198
9,043
7,662
1,335
1,551
1,657
2,210
2,659
386
794
237
1,388
-
Debentures and subordinated notes
27,608
23,112
20,818
18,812
18,384
Other liabilities
29,322
24,702
29,759
20,068
18,229
Total liabilities
297,450
288,607
287,622
283,271
263,938
337
350
430
942
693
23,089
20,598
18,795
18,778
18,233
320,876
309,555
306,847
302,991
282,864
Securities which were lent or sold under
agreements to repurchase
Minority interests
Total liabilities and shareholders' equity
265
Consolidated Statement of Profit and Loss
for the years 2006-2010 - Multi-Period Data
(NIS millions)
Appendix 2
For the year ended on December 31
2010
2009
2008
2007
2006
Profit from financing activities before
7,775
6,718
3,256
6,933
7,579
1,030
2,017
1,520
513
986
Profit from financing activities after
6,745
4,701
1,736
6,420
6,593
4,811
*4,489
*4,531
*4,797
*4,851
Operating and other Income
Operating commissions
77
392
)113(
251
360
221
226
114
119
98
5,109
*5,107
*4,532
*5,167
*5,309
Salaries and related expenses
4,650
4,062
4,762
4,769
4,687
1,518
1,432
1,355
1,300
1,239
Other expenses
2,142
*2,009
*1,907
*1,788
*1,644
8,310
*7,503
*8,024
*7,857
*7,570
3,544
2,305
)1,756(
3,730
4,332
1,353
996
)397(
1,458
1,897
2,191
1,309
)1,359(
2,272
2,435
Profits (losses) from investment in shares, net
Other income
Share in net after-tax operating
profits (losses) of equity-basis investees
Minority interest in net after-tax operating
(profits) losses of subsidiary companies
3
)15(
)195(
189
116
18
)6(
85
)133(
)55(
2,212
1,288
)1,469(
2,328
2,496
16
28
351
863
2,228
1,316
)895(
2,679
3,359
1.67
0.98
)1.13(
1.85
1.98
Profit from extraordinary transactions, after taxes
0.01
0.02
0.44
0.28
0.68
Net profit (loss) per share
1.68
1.00
)0.69(
2.13
2.66
1.66
0.97
)1.13(
1.83
1.97
0.01
0.02
0.44
0.28
0.68
Net profit (loss) per share
1.67
0.99
)0.69(
2.11
2.65
Net profit (loss)
574
Net profit (loss) per share (in NIS):
Basic profit (loss):
Diluted profit (loss):
* Fees to other issuers of credit cards were reclassified and presented net of income from operating fees.
266
Rates of Financing Income and Expenses Consolidated
Appendix 3
2010
2009
Rate of income (expenses)
Average
Financing
Annual
income
balance(1)(2) (expenses)(1)
NIS millions
Without
Including
Average
Financing
effect of
effect of
Annual
income
derivatives derivatives(3) balance(1)(2) (expenses)(1)
%
%
NIS millions
Without
Including
effect of
effect of
derivatives derivatives(3)
%
%
Israeli currency Unlinked
Assets(4)(5)
165,429
6,677
86,985
2,120
4.04
146,630
4,968
83,700
1,894
230,330
6,862
3.39
Effect of derivatives(3)
Embedded
derivatives and ALM
Total Assets
252,414
8,797
Liabilities(5)
)139,930(
)1,547(
)94,747(
)2,597(
)234,677(
)4,144(
3.49
)1.11(
)135,918(
)931(
)78,949(
)2,089(
)1.77( )214,867(
)3,020(
2.98
)0.68(
Embedded
derivatives and ALM
Total liabilities
2.93
Interest spread
1.72
)1.41(
2.71
1.57
Israeli Currency Linked to the CPI
Assets(4)(5)
54,483
3,647
6.69
58,896
4,969
8.44
Embedded
derivatives and ALM
6,054
213
60,537
3,860
)41,728(
)2,657(
Embedded
derivatives and ALM
)17,123(
)1,086(
Total liabilities
)58,851(
)3,743(
Total Assets
(5)
Liabilities
6.38
)6.37(
4,648
356
63,544
5,325
)43,103(
)3,439(
)19,228(
)2,090(
)62,331(
)5,529(
8.38
)7.98(
Interest spread
)6.36(
0.32
0.02
)8.87(
0.46
)0.49(
(1) The data is given before and after the effect of derivative instruments (including off balance sheet effects of derivative instruments).
(2) On the basis of balances at the beginning of the months (in unlinked Israeli currency, on the basis of daily balances) net of the
average balance-sheet balance on the specific provision for doubtful debts.
(3) Hedging derivative instruments (excluding options), embedded derivatives that have been detached and ALM derivatives that
form part of the Bank's ALM network.
(4) The average balance of the profits (losses) not yet realized from the adjustment to fair value, was deducted/added from the
average balance of bonds available for sale and bonds held for trading at December 31, 2010 in the amount of NIS 120 million
(December 31, 2009: NIS 108 million) in the unlinked segment, NIS 72 million (December 31, 2009: NIS 64 million) in the
CPI-linked segment, NIS 174 million (December 31, 2009: NIS (91) million) in the foreign currency segment (including Israeli
currency linked to foreign currency).
(5) Excluding derivative instruments.
Note: Full details regarding rates of financing income and expenses in each segment, according to balance sheet items, are available
upon request.
267
Appendix 3 (continued)
2010
2009
Average
Financing
Annual
income
NIS millions
Without
Including
Average
Financing
effect of
effect of
Annual
income
%
%
NIS millions
Without
Including
effect of
effect of
%
%
Foreign currency (Including Israeli
currency linked to
foreign currency)
Assets(4)(5)
69,586
)1,663(
)2.39(
**85,409
4,334
9,654
213
5.07
Hedging derivatives
11,712
241
Embedded
derivatives and ALM
175,692
)3,469(
154,004
8,006
Total Assets
256,990
)4,891(
)1.90( **249,067
12,553
)86,087(
5,012
(5)
Liabilities
Effect of derivatives
5.82
**)92,178(
)2,356(
)2.56(
(3)
Hedging derivatives
)11,729(
)311(
*)9,627(
3
Embedded
derivatives and ALM
)158,876(
1,774
)145,987(
)8,332(
Total liabilities
)256,692(
6,475
2.52 *)247,792(
)10,685(
Interest spread
5.04
3.43
0.62
*)4.31(
2.51
*0.73
*Restated.
**Reclassified.
upon request.
268
2010
2009
Average
Financing
Annual
income
NIS millions
Without
Including
Average
Financing
effect of
effect of
Annual
income
%
%
NIS millions
Without
Including
effect of
effect of
%
%
Total
Monetary assets
generating financing
income(4)(5)
289,498
8,661
11,712
241
2.99
**290,935
14,271
9,654
213
242,352
10,256
1.36 **542,941
24,740
4.91
Hedging derivatives
Embedded
derivatives and ALM
268,731
)1,136(
Total Assets
569,941
7,766
Monetary liabilities
expenses(5)
)267,745(
808
0.30
**)271,199(
)6,726(
)11,729(
)311(
)270,746(
)1,909(
)244,164(
)12,511(
Total liabilities
)550,220(
)1,412(
)0.26( *)524,990(
)19,234(
Hedging derivatives
Interest spread
)2.48(
(3)
Embedded
derivatives and ALM
4.56
*)9,627(
3.29
1.10
3
*)3.66(
2.43
*0.90
*Restated.
**Reclassified.
upon request.
269
(NIS millions)
2010
2009
Average Financing
Annual
income
balance(1) (expenses)
Average Financing
Annual
income
balance(1) (expenses)
133
36
In respect of options
In respect of other derivative instruments (not including options, hedging
derivatives, ALM derivatives and embedded derivatives that have been detached)(2)
)33(
Commissions from financing transactions and other financing income(5)
325
1,332
876
)11(
Other financing expenses
Profit from financing activities before provision for doubtful debts
Provision for doubtful debts (including general and supplementary provision)
Profit from financing activities after provision for doubtful debts
)25(
7,775
6,718
)1,030(
)2,017(
6,745
4,701
Total
Monetary assets that generated financing income(3)(4)
Assets deriving from derivative instruments(6)
Other monetary assets
(4)
General provision and supplementary provision for doubtful debts
Total monetary assets
289,498
*290,935
6,931
*6,620
3,233
1,976
)1,153(
)1,129(
298,509
*298,402
)267,745(
*)271,199(
)9,707(
*)9,477(
)4,450(
)3,355(
)281,902(
*)284,031(
Total
Monetary liabilities that generated financing expenses(4)
Liabilities deriving from derivative instruments
(6)
Other monetary liabilities(4)
Total monetary liabilities
Total excess of monetary assets over monetary liabilities
Non-monetary assets
Non-monetary liabilities
Total capital resources
16,607
14,371
5,809
*6,314
)729(
21,687
*)757(
19,928
*Reclassified.
(1) The data is given before and after the effect of derivative instruments (including off balance sheet effects of derivative
instruments).
(5) Including profits and losses from sale of investments in bonds and from adjustment to fair value of bonds held for trading.
(6) Average balance-sheet balances of derivative instruments (not including average off balance sheet balances of derivative instruments)
upon request.
270
2010
2009
Average
Financing
Without
Including
Average
Financing
Without
Including
Annual
income
effect of
effect of
Annual
income
effect of
effect of
balance(1)(2) (expenses)(1) derivatives derivatives(3) balance(1)(2) (expenses)(1) derivatives derivatives(3)
in nominal
amounts of US$
%
%
in nominal
%
%
amounts of US$
Foreign currency(including Israeli
currency linked to
foreign currency)
Monetary assets
in foreign currency
income(4)(5)
18,585
440
2.37
*21,726
761
3,118
63
2,502
53
Embedded
derivatives and ALM
47,171
1,265
39,518
2,028
Total Assets
68,874
1,768
*63,746
2,842
3.50
(3)
Hedging derivatives
Monetary liabilities in
foreign currency generating
financing expenses(5)
)22,704(
109
2.57
0.48
*)23,404(
)547(
4.46
)2.34(
)3,122(
)58(
)2,494(
Embedded
derivatives and ALM
)42,622(
)1,500(
)37,373(
)1,890(
Total liabilities
)68,448(
)1,449(
)2.12( *)63,271(
)2,437(
Hedging derivatives
Interest spread
2.85
0.45
-
)3.85(
1.16
0.61
*Reclassified.
(1) The data is given before and after the effect of derivative instruments (including off balance sheet effects of derivative
instruments).
upon request.
271
Exposure of the Bank and Subsidiaries
to Changes in Interest Rates
As at December 31, 2010
Appendix 4
On demand
and up to
1 month
From 1 to
3 months
From
3 months
to 1 year
From 1 to
3 years
NIS millions
Israeli currency - unlinked
Financial assets and amounts receivable in respect of
derivative instruments and in respect of off-balance-sheet
financial instruments and complex financial assets
152,042
7,534
13,240
5,925
31,554
33,002
23,971
11,226
1,549
2,123
1,693
3
185,145
42,659
38,904
17,154
125,554
7,885
11,397
5,306
35,859
40,395
23,366
12,612
1,706
1,405
2,755
34
163,119
49,685
37,518
17,952
Exposure to changes in interest rates in the segment
22,026
)7,026(
1,386
Cumulative exposure in the segment
22,026
15,000
16,386
Financial assets*
Derivative financial instruments (except options)
Options (In terms of the underlying asset)
Total Fair value
Financial liabilities and amounts payable in respect of
financial instruments and complex financial liabilities
Total Fair value
Financial instruments, net
)798(
15,588
* With the exception of balance-sheet balances of derivative financial instruments.
** Average weighted by fair value of effective average duration.
(1) Balances in respect of a certain financial instrument were reclassified, from balances in respect of options to balances in respect
of financial assets and liabilities.
General Notes:
(1) Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities,
according to the different balance-sheet items, will be provided upon request.
(2) In this table, data by periods reflect the current value of future cash flows of each financial instrument, capitalized by the interest
rate used for deductiont to the fair value included in respect of the financial instrument in Note 21 to the Financial Statements,
in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the
assumptions used in the calculation of the fair value of the financial instruments, see Note 21 to the Financial Statements.
(3) The internal return rate is the interest rate for the deduction of the expected cash flows from the financial instrument to the
fair value included in respect thereof in Note 21 to the Financial Statements.
(4) The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the
fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal
return rate of each of the financial instruments.
(5) Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting
by terms to maturity.
272
December 31, 2009
From 3
to 5 years
From 5
to 10 years
From 10
to 20 years
Over
20 years
With no
repayment
period
Total
Fair value
NIS millions
2,902
4,630
931
172
2,768
190,144
3,702
6,084
310
31
13
109,893
Internal
yield rate
Effective
average life
%
in years
5.12
0.36
1
-
-
-
5,370
0.18
6,605
10,715
1,241
203
2,781
305,407
**0.53
4,628
3,559
177
-
201
158,707
4,265
7,836
289
-
-
124,622
0.87
-
-
-
-
-
5,900
0.28
8,893
11,395
466
-
201
289,229
**0.63
775
203
2,580
16,178
13,395
13,598
16,178
13,300
)680(
12,620
273
)1(
0.83
1
)2,288(
Total
Fair value
3.99
0.46
165,822
Internal
yield rate
Average
life
%
in years
5.51
0.41
100,836
)1(
)1(
0.54
4,442
0.34
271,100
**0.46
143,400
107,715
)1(
4.23
0.24
0.72
3,785
0.25
254,900
**0.44
16,200
On demand
and up to
1 month
From 1 to
3 months
From
3 months
to 1 year
From 1 to
3 years
NIS millions
Israeli currency - Linked to the CPI
2,354
1,841
9,329
20,543
677
291
1,314
1,387
3,031
2,132
10,643
21,930
1,772
1,144
4,983
11,374
426
660
2,426
4,744
2,198
1,804
7,409
16,118
833
328
3,234
5,812
833
1,161
4,395
10,207
Financial assets*
Total Fair value
Total Fair value
General Notes:
274
December 31, 2009
From 3
to 5 years
From 5
to 10 years
From 10
to 20 years
Over
20 years
With no
repayment
period
Total
Fair value
NIS millions
Internal
yield rate
Effective
average life
%
in years
Total
Fair value
Internal
yield rate
Average
life
%
in years
3.72
3.19
10,622
11,163
2,395
472
8
58,727
3.12
3.40
59,317
351
2,767
-
-
-
6,787
-
4.07
4,731
0.81
10,973
13,930
2,395
472
8
65,514
-
**3.47
64,048
**3.01
10,200
13,387
2,474
41
-
45,375
2.19
4.25
45,984
2,098
5,495
370
-
16,219
-
3.92
16,758
3.10
12,298
18,882
2,844
41
-
61,594
-
**4.02
62,742
**3.65
)1,325(
)4,952(
431
8
3,920
8,882
3,930
3,912
3,920
)449(
3,481
275
1,306
3.20
4.18
On demand
and up to
1 month
From 1 to
3 months
From
3 months
to 1 year
From 1 to
3 years
NIS millions
Foreign Currency***
Financial assets*
32,391
9,251
7,289
5,208
62,207
80,092
43,687
14,728
6,221
4,028
6,511
83
100,819
93,371
57,487
20,019
44,296
13,936
14,884
3,841
59,676
64,412
41,692
15,657
6,091
4,720
5,433
50
110,063
83,068
62,009
19,548
Total Fair value
Total Fair value
)9,244(
10,303
)4,522(
)9,244(
1,059
)3,463(
471
)2,992(
***Including israeli currency linked to foreign currency.
General Notes:
276
December 31, 2009
From 3
to 5 years
From 5
to 10 years
From 10
to 20 years
Over
20 years
With no
repayment
period
Total
Fair value
NIS millions
2,505
4,521
560
20
6,746
17,595
2,649
1200
68
70
88
9,319
22,186
3,297
1,220
1,724
1,353
2,571
7,029
19,485
581
34
66
88
8,787
20,904
3,240
532
1,282
57
)2,460(
)1,178(
)1,121(
277
78
61,823
Internal
yield rate
Effective
average life
%
in years
3.94
1.05
228,904
1.15
17,069
0.24
78
307,796
**1.08
1,201
157
83,963
89
10
208,631
1.01
16,482
0.22
309,076
**1.12
1,290
167
)70(
)89(
)1,191(
)1,280(
1.88
)1,280(
1.58
Total
Fair value
)1(
75,522
Internal
yield rate
Average
life
%
in years
4.20
0.78
191,435
)1(
1.70
16,261
0.33
283,218
**1.38
)1(
91,003
175,001
)1(
1.61
1.18
1.29
16,711
0.35
282,715
**1.19
503
On demand
and up to
1 month
From 1 to
3 months
From
3 months
to 1 year
From 1 to
3 years
NIS millions
Total exposure to changes in interest rates
Financial assets*,***
186,787
18,626
29,858
31,676
94,438
113,385
68,972
27,341
7,770
6,151
8,204
86
288,995
138,162
107,034
59,103
171,622
22,965
31,264
20,521
95,961
105,467
67,484
33,013
7,797
6,125
8,188
84
275,380
134,557
106,936
53,618
13,615
3,605
98
5,485
13,615
17,220
17,318
22,803
Total Fair value
Total Fair value
***Includes shares presented in the “with on repayment period" column.
General Notes:
278
December 31, 2009
From 3
to 5 years
From 5
to 10 years
From 10
to 20 years
Over
20 years
With no
repayment
period
Total
Fair value
NIS millions
16,029
20,314
3,886
664
5,139
312,979
10,799
26,446
2,959
1,231
13
345,584
Internal
yield rate
Effective
average life
%
in years
4.67
1.05
)1(
1.11
69
71
88
-
-
22,439
0.23
26,897
46,831
6,933
1,895
5,152
681,002
**1.05
16,552
18,299
5,222
1,242
358
288,045
13,392
32,816
1,240
89
10
349,472
1.09
34
66
88
-
-
22,382
0.23
29,978
51,181
6,550
1,331
368
659,899
**1.19
)3,081(
)4,350(
383
564
4,784
21,103
19,722
15,372
15,755
16,319
21,103
279
Total
Fair value
2.96
1.38
302,057
Internal
yield rate
Average
life
%
in years
4.90
1.05
297,002
)1(
)1(
1.29
20,703
0.33
619,762
**1.14
280,387
299,474
)1(
3.41
1.20
1.18
20,496
0.33
600,357
**1.16
19,405
Total Credit Risk to the Public
by Economic Sectors - Consolidated
(NIS millions)
Appendix 5
1. In respect of borrower activities in Israel
December 31, 2010
Balance Sheet
credit risk(1)
Off-balance
sheet credit
risk(2)
1,903
641
2,544
Industry
17,899
23,073
40,972
231
2,231
Construction and Real Estate(6)
39,284
28,460
67,744
320
5,074
2,875
1,738
4,613
-
64
Agriculture
Total Annual specific
credit risk to
provision
the public
(income) for
doubtful debts
)6(
Problematic
debt
balances(3)
157
15,885
8,018
23,903
109
683
5,493
1,373
6,866
)10(
498
5,837
2,164
8,001
)39(
258
6,173
4,159
10,332
)9(
537
18,331
14,093
32,424
46
1,979
8,763
3,924
12,687
46
144
Public and community services
6,707
1,767
8,474
6
164
39,860
4,684
44,544
-
733
Commerce
Financial services
Private individuals - housing loans
Private individuals - other
Total
39,158
33,598
72,756
355
914
208,168
127,692
335,860
1,049
13,436
3,189
1,270
4,459
4,260
248
4,508
Credit risk included within the various economic sectors
Settlement movements(4)
(5)
Local authorities
)23(
-
666
37
(1) Credit to the public, investments in corporate bonds, securities which were borrowed or bought under agreements to resell
and other assets deriving from derivative instruments transacted against the public amounted to NIS 204,144, 1,768, 0 and
2,256 million respectively.
(2) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of single borrower credit limitations
(Excluding unutilized credit-card credit facilities under the responsibility of other banks in the amount of approximately
NIS 9,744 million).
(3) Problematic debt balance, net of credit covered with collateral, which is permitted as a deduction for purposes of individual
and borrowers' group credit limits. including off-balance sheet credit risk components.
(4) Kibbutzim and Moshavim, regional and national organizations and entities controlled by settlement movements.
(5) Including entities under their control.
(6) Including balance-sheet credit risk in the amount of NIS 363 million, and off-balance-sheet credit risk in the amount of
NIS 1,690 million in respect of housing loans extended to certain purchasing groups, which are currently in the process of
construction.
Credit risk and problematic debt balances are presented net of specific provision for doubtful debts.
280
(NIS millions)
1. In respect of borrower activities in Israel (continued)
December 31, 2009
Balance Sheet
credit risk(1)*
Agriculture
Off-balance
sheet credit
risk(2)*
Total credit Annual specific
risk to the provision for
public* doubtful debts
Problematic
debt
balances(3)
1,810
674
2,484
6
147
Industry
18,263
19,062
37,325
423
3,031
40,756
**22,119
**62,875
580
*5,373
2,383
1,862
4,245
2
7
14,860
7,306
22,166
49
691
Commerce
5,543
1,021
6,564
22
786
5,625
2,105
7,730
5
240
3,539
7,927
11,466
132
308
17,740
17,253
34,993
83
1,277
7,311
3,863
11,174
98
303
Financial services
6,836
1,667
8,503
13
285
33,727
**3,484
**37,211
3
894
35,667
34,901
70,568
400
885
194,060
**123,244
**317,304
1,816
*14,227
3,729
1,837
5,566
14
630
Local authorities(5)
4,177
295
4,472
-
45
Total
Credit risk included within the various economic sectors
* Data on overall credit risk to the public by economic sectors were restated, as part of the Bank’s preparations for the
implementation of the Bank of Israel's directive concerning impaired debts, and the reliance on these data to determine the
group provision. As part of this preparation, the Bank reexamined the classification of borrowers by economic sectors.
The following are data regarding overall credit risk to the public, as published as of December 31, 2009, for the principal
economic sectors that were restated: other business services – approximately NIS 16.7 billion; construction and real estate –
** Data on off-balance-sheet credit risk in respect of unutilized credit facilities in housing loans were restated to include a total
of approximately NIS 2.8 billion not included in the previous period.
(2) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of single borrower credit limitations.
NIS 15,544 million).
NIS 407 million in respect of housing loans extended to certain purchasing groups, which are currently in the process of
construction.
281
(NIS millions)
2. In respect of borrower activities abroad
December 31, 2010
Agriculture
Balance Sheet
credit risk(1)
Off-balance
sheet credit
risk(2)
14
26
credit risk to
provision
the public
(income) for
doubtful debts
40
-
Problematic
debt
balances(3)
-
Industry
2,134
2,843
4,977
25
304
6,234
1,333
7,567
27
633
633
1,220
1,853
7
-
Commerce
710
809
1,519
7
24
1,893
136
2,029
1
72
631
313
944
-
30
156
569
725
-
-
7,029
8,180
15,209
712
218
930
-
1
857
298
1,155
8
108
Financial services
Total
)21(
243
517
56
573
1
10
3,779
2,197
5,976
)2(
34
25,299
18,198
43,497
53
1,459
(1) Credit to the public, investments in corporate bonds, securities which were borrowed or bought under agreements to resell and
other assets deriving from derivative instruments transacted against the public amounted to NIS 22,176, 2,412, 0 and 711 million
respectively.
282
(NIS millions)
2. In respect of borrower activities abroad (continued)
December 31, 2009
Balance Sheet
credit risk(1)*
Agriculture
Off-balance
sheet credit
risk(2)*
credit risk to
provision for
the public* doubtful debts
Problematic
debt
balances(3)
24
34
58
1
1
Industry
3,508
2,653
6,161
47
434
6,678
1,008
7,686
7
*456
813
1,785
2,598
-
-
Commerce
746
738
1,484
-
81
3,320
284
3,604
1
83
491
207
698
-
86
251
652
903
-
5
7,259
8,701
15,960
38
744
888
232
1,120
-
301
1,060
256
1,316
8
132
932
63
995
4
*27
3,319
2,040
5,359
15
18
29,289
18,653
47,942
121
*2,368
Financial services**
Total
economic sectors that were restated: construction and real estate – approximately NIS 4.9 billion; industry – approximately
NIS 5.2 billion.
** For further details regarding investment in asset-backed securities, see Note 3.
672 million respectively.
283
(NIS millions)
3. Total in respect of borrower activities in Israel and abroad
December 31, 2010
Balance Sheet
credit risk(1)
Off-balance
sheet credit
risk(2)
1,917
667
2,584
Industry
20,033
25,916
45,949
256
2,535
45,518
29,793
75,311
347
5,707
3,508
2,958
6,466
7
64
116
707
Agriculture
credit risk to
provision
the public
(income) for
doubtful debts
)6(
Problematic
debt
balances(3)
157
16,595
8,827
25,422
7,386
1,509
8,895
)9(
6,468
2,477
8,945
)39(
288
Communication and computer services
6,329
4,728
11,057
)9(
537
25,360
22,273
47,633
25
2,222
Commerce
Financial services
570
9,475
4,142
13,617
46
145
7,564
2,065
9,629
14
272
40,377
4,740
45,117
1
743
42,937
35,795
78,732
353
948
233,467
145,890
379,357
1,102
14,895
3,189
1,270
4,459
4,260
248
4,508
Total
Credit risk included within the various economic sectors:
(5)
Local authorities
)23(
-
666
37
(1) Credit to the public, investments in corporate bonds, securities which were borrowed or bought under agreements to resell,
NIS 9,744 million).
NIS 1,690 million in respect of housing loans extended to certain purchasing groups, which are currently in the process of
construction.
Credit risk and problematic debt balances are presented net of specific provisions for doubtful debts.
284
(NIS millions)
3. Total in respect of borrower activities in Israel and abroad (continued)
December 31, 2009
Balance
Sheet
credit risk(1)*
Agriculture
Off-balance
sheet credit
risk(2)*
credit risk to provision for
the public* doubtful debts
Problematic Average balance
debt
of overall
balances(3)
credit risk(7)*
1,834
708
2,542
7
148
2,574
Industry
21,771
21,715
43,486
470
3,465
44,320
47,434
**23,127
**70,561
587
5,829
**70,451
3,196
3,647
6,843
2
7
7,814
15,606
8,044
23,650
49
772
24,997
8,863
1,305
10,168
23
869
10,465
6,116
2,312
8,428
5
326
9,522
Communications and computer
services
3,790
8,579
12,369
132
313
9,016
24,999
25,954
50,953
121
2,021
53,008
8,199
4,095
12,294
98
604
13,040
7,896
1,923
9,819
21
417
9,893
34,659
**3,547
**38,206
7
*921
**35,744
38,986
36,941
75,927
415
903
94,598
223,349
**141,897
**365,246
1,937
*16,595
**385,442
Commerce
Financial services
Total
Credit risk included within the various economic sectors:
Local authorities
(5)
3,729
1,837
5,566
14
630
1,553
4,177
295
4,472
-
45
1,129
economic sectors that were restated: other business services – approximately NIS 17.9 billion; construction and real estate –
** Data on off-balance-sheet credit risk in respect of unutilized credit facilities in housing loans were restated to include a total
of approximately NIS 2.8 billion not included in the previous period.
(1) Credit to the public, investments in corporate bonds, securities which were borrowed or bought under agreements to resell,
NIS 15,544 million).
NIS 407 million in respect of housing loans extended to certain purchasing groups, which are currently in the process of
construction.
(7) Based on quarterly balances.
285
Exposures to Foreign Countries - Consolidated(1)
Appendix 6
Part A – Information regarding total exposures to foreign countries and exposures to countries where total exposure to
each country is greater than 1% of total consolidated assets or greater than 20% of capital, whichever is lower.
Balance Sheet Exposure
Cross-Border
To
Governments(3)
To Banks
To Others
A. United States
1
1,441
1,729
B.Switzerland
-
552
329
C.England
-
1,638
1,738
D.Turkey
-
51
38
Country
178
1,173
838
F.France
62
1,073
493
G.Ireland
2
16
197
H.Spain
E.Germany
25
129
32
I.Portugal
-
-
-
J.Greece
1
-
1
K.Others
1,152
1,822
5,124
Total exposure to foreign countries
1,421
7,895
10,519
16
208
447
Total exposure to LDC countries
The line “total LDCs” includes the total exposure to countries defined as Less Developed Countries (LDCs) in Proper Conduct
of Banking Business Directive No. 315, “Supplementary Provisions for Doubtful Debts”. This amount includes data for Turkey, as
detailed in the table above.
The balance-sheet exposure to a foreign country includes cross-border balance-sheet exposure and balance-sheet exposure of
the offices of the banking corporation in the foreign country to local residents. Cross-border balance-sheet exposure includes
balance-sheet exposure of the offices of the banking corporation in Israel to residents of the foreign country, and balance-sheet
exposure of the overseas offices of the banking corporation to non-residents of the country in which the office is located.
The balance-sheet exposure of the offices of the banking corporation in a foreign country to the local residents includes
balance-sheet exposure of the offices of the banking corporation in the foreign country to the residents of that country, net of the
liabilities of such offices (the deduction is performed up to the amount of the exposure).
(1) Based on the final risk, taking into account guarantees, liquid collateral and credit derivatives..
(2) Credit risk in respect of off-balance-sheet financial instruments, as calculated for the purpose of the limits on indebtedness of
a borrower.
(3) Governments, Official institutions and Central Banks.
(4) Balance of problematic debts, net of debts covered by collateral deductible for the purpose of the limits on indebtedness of
a borrower and of a group of borrowers. Does not include off-balance-sheet risk components.
286
(NIS millions)
Off-Balance Sheet Exposure(2)
Balance-sheet exposure
of the Bank's overseas offices to local residents
Cross-Border
Balance-sheet
exposure,before
deduction for
local liabilities
Deduction for
local liabilities
Balance-sheet
exposure,
net of local
liabilities
Total
Balance Sheet
exposure
Problematic
debt balance(4)
Total
off-balancesheet
exposure
Of which: offbalance sheet
problematic
credit risk
Maturity
up to
one year
Maturity
over
one year
11,120
9,529
1,591
4,762
413
11,483
99
1,097
2,074
3,598
-
3,598
4,479
-
3,746
-
718
163
1,231
304
927
4,303
32
8,565
4
1,637
1,739
3,199
531
2,668
2,757
68
1,197
-
31
58
-
-
-
2,189
9
3,432
-
1,228
961
-
-
-
1,628
1
4,377
-
859
769
-
-
-
215
-
178
-
197
18
-
-
-
186
-
115
-
86
100
-
-
-
-
-
-
-
-
-
-
-
-
2
-
1
-
2
-
327
146
181
8,279
1
2,434
-
4,408
3,690
19,475
10,510
8,965
28,800
524
35,528
103
10,263
9,572
3,505
676
2,829
3,500
69
1,865
-
252
419
287
Exposures to Foreign Countries - Consolidated(1)
Part A – Information regarding total exposures to foreign countries and exposures to countries where total exposure to
each country is greater than 1% of total consolidated assets or greater than 20% of capital, whichever is lower. (continued)
Cross-Border
To
Governments(3)
To Banks
To Others
A. United States
7
1,586
1,593
B.Switzerland
-
251
327
C.England
8
797
1,886
D.Turkey
-
44
140
E.Germany
314
1,201
744
F.France
136
644
370
-
79
252
Country
G.Ireland*
H.Spain*
12
558
48
I.Portugal*
-
-
5
J.Greece*
-
-
1
K.Others*
1,289
3,074
4,834
Total exposure to foreign countries
1,766
8,234
10,200
13
332
544
Total exposure to LDC countries
* Reclassified. Data regarding Ireland, Spain, Portugal and Greece, which were included in “other countries”, are presented separately.
The line “total LDCs” includes the total exposure to countries defined as Less Developed Countries (LDCs) in Proper Conduct
of Banking Business Directive No. 315, “Supplementary Provisions for Doubtful Debts”. This amount includes data for Turkey, as
detailed in the table above.
The balance-sheet exposure to a foreign country includes cross-border balance-sheet exposure and balance-sheet exposure of
the offices of the banking corporation in the foreign country to local residents. Cross-border balance-sheet exposure includes
balance-sheet exposure of the offices of the banking corporation in Israel to residents of the foreign country, and balance-sheet
exposure of the overseas offices of the banking corporation to non-residents of the country in which the office is located.
The balance-sheet exposure of the offices of the banking corporation in a foreign country to the local residents includes
balance-sheet exposure of the offices of the banking corporation in the foreign country to the residents of that country, net of the
liabilities of such offices (the deduction is performed up to the amount of the exposure).
(1) Based on the final risk, taking into account guarantees, liquid collateral and credit derivatives..
(2) Credit risk in respect of off-balance-sheet financial instruments, as calculated for the purpose of the limits on indebtedness of
a borrower.
(3) Governments, Official institutions and Central Banks.
(4) Balance of problematic debts, net of debts covered by collateral deductible for the purpose of the limits on indebtedness of
a borrower and of a group of borrowers. Does not include off-balance-sheet risk components.
Part B – Information regarding countries where total exposure to each country is between 0.75% and 1% of total
consolidated assets, or between 15% and 20% of capital, whichever is lower.
Name of Country:
Canada
The aggregate balance-sheet exposures to foreign countries on consolidated basis detailed in this section total
NIS 2,235 million as at December 31, 2010 (December 31, 2009: NIS 1,854 million).
Note: December 2010 data includes countries that did not exceed the required total exposure, since these countries were
included in the data in December 2009.
288
(NIS millions)
Off-Balance Sheet Exposure(2)
Balance-sheet exposure
of the Bank's overseas offices to local residents
Cross-Border
Balance-sheet
exposure, before
deduction for local
liabilities
Deduction for
local liabilities
Balance-sheet
exposure, net of
local liabilities
Total Balance Problematic debt
Sheet exposure
balance(4)
Total
off-balancesheet exposure
Of which: offbalance sheet
problematic
credit risk
19,386
7,505
11,881
15,067
4,299
-
4,299
2,244
862
3,518
268
-
-
Maturity up to Maturity over one
one year
year
1,035
12,474
387
1,166
2,020
4,877
-
2,228
-
417
161
1,382
4,073
20
7,690
3
1,334
1,357
3,250
3,434
73
1,020
-
104
80
-
2,259
32
2,959
-
857
1,402
-
-
-
1,150
2
2,954
-
424
726
-
-
-
331
26
351
-
281
50
-
-
-
618
-
264
-
305
313
-
-
-
5
-
-
-
3
2
-
-
-
1
-
1
-
1
-
274
11
263
9,460
40
2,335
9
4,425
4,772
29,721
8,646
21,075
41,275
1,228
32,276
399
9,317
10,883
3,756
276
3,480
4,369
73
1,404
-
465
424
289
Consolidated Balance Sheet as of the
end of every quarter for the years 2009-2010
Multi-Quarter Data
(NIS millions)
Appendix 7
For the year 2010
Quarter 4
Quarter 3
Quarter 2
Quarter 1
50,331
37,236
46,766
47,249
Securities
31,604
28,935
26,680
26,516
16
10
-
16
Assets
Securities which were borrowed or bought under
agreements to resell
225,288
220,665
217,749
213,203
339
296
234
105
Investments in equity-basis investees
132
125
123
118
3,803
3,669
3,731
3,777
Other assets
9,363
11,679
12,034
8,861
320,876
302,615
307,317
299,845
Total assets
233,965
217,554
225,237
223,216
Deposits from banks
4,834
4,885
7,379
5,654
1,335
1,423
1,435
1,549
386
820
471
418
27,608
25,920
22,555
21,395
Other liabilities
29,322
29,351
28,236
26,074
Total liabilities
297,450
279,953
285,313
278,306
337
355
337
344
23,089
22,307
21,667
21,195
320,876
302,615
307,317
299,845
Securities which were lent or sold under agreements to
repurchase
Minority interests
290
Consolidated Balance Sheet as of the
end of every quarter for the years 2009-2010
Multi-Quarter Data
(NIS millions)
For the year 2009
Quarter 4
Quarter 3
Quarter 2
Quarter 1
53,115
44,864
44,249
41,079
Securities
28,055
28,170
29,489
27,587
-
283
15
19
Assets
Securities which were borrowed or bought under
agreements to resell
215,788
215,638
215,973
220,859
218
235
283
333
114
134
151
118
3,845
3,791
3,865
3,872
Other assets
8,420
8,779
8,819
11,289
309,555
301,894
302,844
305,156
Total assets
231,993
225,196
228,136
232,442
Deposits from banks
6,455
6,034
6,936
6,519
1,551
1,534
1,562
1,652
794
91
1
185
23,112
23,307
22,162
18,967
Other liabilities
24,702
25,083
23,965
26,016
Total liabilities
288,607
281,245
282,762
285,781
350
333
349
389
20,598
20,316
19,733
18,986
309,555
301,894
302,844
305,156
Securities which were lent or sold under agreements to
repurchase
Minority interests
291
Quarterly consolidated Statement
of Profit and Loss for the years 2009-2010
Multi-Quarter Data
(NIS millions)
Appendix 8
For the year 2010
For the year 2009
Quarter 4 Quarter 3 Quarter 2 Quarter 1 Quarter 4 Quarter 3 Quarter 2 Quarter 1
Profit from financing activities
before provision for doubtful debts
2,133
2,053
1,837
1,752
2,012
1,779
1,955
972
100
290
341
299
536
629
538
314
2,033
1,763
1,496
1,453
1,476
1,150
1,417
658
1,244
1,159
1,246
1,162
*1,210
*1,107
*1,102
*1,070
Profits from investments
in shares, net
40
6
16
15
181
160
47
4
Profit from financing activities
after provision for doubtful debts
57
52
72
40
69
53
47
57
1,341
1,217
1,334
1,217
*1,460
*1,320
*1,196
*1,131
1,327
1,172
1,048
1,103
1,143
787
1,010
1,122
Maintenance and depreciation
of buildings and equipment
401
383
365
369
372
374
345
341
Other expenses
606
509
571
456
*580
*483
*500
*446
*1,909
Other income
2,334
2,064
1,984
1,928
*2,095
*1,644
*1,855
1,040
916
846
742
841
826
758
)120(
370
364
330
289
349
418
369
)140(
670
552
516
453
492
408
389
20
7
2
Share in net, after-tax operating profits
(losses) of equity-basis investees
Minority interests in net after-tax
operating (profits) losses
of subsidiary companies
Net profit from extraordinary
transactions, after taxes
Net profit
)8(
2
)17(
)7(
6
3
4
6
)10(
21
)15(
)2(
24
)16(
701
538
512
461
465
422
380
21
12
2
1
1
2
3
2
21
713
540
513
462
467
425
382
42
0.53
0.41
0.39
0.35
0.35
0.32
0.29
0.02
Basic profit per share in NIS
Profit from extraordinary
0.01
-
-
-
-
-
-
0.01
Total
0.54
0.41
0.39
0.35
0.35
0.32
0.29
0.03
0.53
0.40
0.38
0.35
0.35
0.32
0.29
0.02
Diluted profit per share in NIS
Profit from extraordinary
0.01
-
-
-
-
-
-
0.01
Total
0.54
0.40
0.38
0.35
0.35
0.32
0.29
0.03
292
CEO Certification
I, Zion Kenan, declare that:
1.I have reviewed the annual report of Bank Hapoalim B.M. (hereinafter: the “Bank”) for the year 2010 (hereinafter:
the “Report”).
2.Based on my knowledge, the Report contains no incorrect presentation of a material fact, and there is no
presentation of a material fact missing from the Report that is necessary so that the presentations included therein,
in light of the circumstances under which such presentations were included, are not misleading with regard to
the period covered by the Report.
3.Based on my knowledge, the financial statements and other financial information included in the Report fairly
reflect the financial condition, results of operations, changes in shareholders’ equity, and cash flows of the Bank in
all material aspects, for the dates and periods presented in the Report.
4.I, and others at the Bank making this declaration, are responsible for the establishment and application of controls
and procedures with regard to the Bank's disclosure and internal control of financial reporting (as defined in the
Public Reporting Directives concerning the "Board of Directors' Report"); furthermore:
A.We have established such controls and procedures, or caused such controls and procedures to be established
under our supervision, aimed at ensuring that material information pertaining to the Bank, including its
consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in
particular during the preparation of the Report;
B.We have established such internal control of financial reporting, or caused such internal control of financial
reporting to be established under our supervision, intended to provide a reasonable degree of confidence
with regard to the reliability of the financial reporting, and that the financial reports 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 assessed the effectiveness of the controls and procedures concerning disclosure at the Bank, and
we have presented our findings with regard to the effectiveness of the controls and procedures concerning
disclosure in the Report, as at the end of the period covered in the Report, based on our assessment; and
D.We have disclosed in the Report any change in the internal control of financial reporting at the Bank that
occurred during the fourth quarter, and that had a material effect, or could reasonably be expected to have
a material effect, on the internal control of financial reporting at the Bank; and
5.I, and others at the Bank making this declaration, have disclosed to the auditors, to the Board of Directors, and
to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the
internal control of financial reporting:
A.Any significant deficiencies and material weaknesses in the establishment or application of internal control of
financial reporting that can reasonably be expected to impair the Bank’s ability to record, process, summarize,
or report financial information; and
B.Any fraud, whether material or immaterial, in which the Board of Management was involved, or in which other
employees were involved who have a significant role in the internal control of financial reporting at the Bank.
The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.
Zion Kenan
President & Chief Executive Officer
Tel Aviv, March 30, 2011
293
Chief Accountant Certification
I, Ofer Levy, declare that:
1.I have reviewed the annual report of Bank Hapoalim B.M. (hereinafter: the “Bank”) for the year 2010 (hereinafter:
the “Report”).
2.Based on my knowledge, the Report contains no incorrect presentation of a material fact, and there is no
presentation of a material fact missing from the Report that is necessary so that the presentations included therein,
in light of the circumstances under which such presentations were included, are not misleading with regard to
the period covered by the Report.
3.Based on my knowledge, the financial statements and other financial information included in the Report correctly
reflect the financial condition, results of operations, changes in shareholders’ equity, and cash flows of the Bank, in
all material aspects, for the dates and periods covered in the Report.
4.I, and others at the Bank making this declaration, are responsible for the establishment and application of controls
and procedures with regard to the Bank's disclosure and internal control of financial reporting (as defined in the
Public Reporting Directives concerning the "Board of Directors' Report"); furthermore:
A.We have established such controls and procedures, or caused such controls and procedures to be established
under our supervision, aimed at ensuring that material information pertaining to the Bank, including its
consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in
particular during the preparation of the Report;
B.We have established such internal control of financial reporting, or caused such internal control of financial
reporting to be established under our supervision, intended to provide a reasonable degree of confidence
with regard to the reliability of the financial reporting, and that the financial reports 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 assessed the effectiveness of the controls and procedures concerning disclosure at the Bank, and
we have presented our findings with regard to the effectiveness of the controls and procedures concerning
disclosure, as at the end of the period covered in the Report, based on our assessment; and
D.We have disclosed in the Report any change in the internal control of financial reporting at the Bank that
occurred during the fourth quarter, and that had a material effect, or could reasonably be expected to have
a material effect, on the internal control of financial reporting at the Bank; and
5.I, and others at the Bank making this declaration, have disclosed to the auditors, to the Board of Directors, and
to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the
internal control of financial reporting:
A.Any significant deficiencies or material weaknesses in the establishment or application of internal control of
financial reporting that can reasonably be expected to impair the Bank’s ability to record, process, summarize,
or report financial information; and
B.Any fraud, whether material or immaterial, in which the Board of Management was involved, or in which other
employees were involved who have a significant role in the internal control of financial reporting at the Bank.
The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.
Ofer Levy
Senior Deputy Managing Director
Chief Accountant
294
Report of the Board of Directors and the Board of Management on
the Internal Control of Financial Reporting
The Board of Directors and the Board of Management of Bank Hapoalim (hereinafter: the "Bank") are responsible
for the establishment and application of adequate internal control of 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 a reasonable degree of confidence to the Board of Directors and the Board of Management of
the Bank with regard to the adequate preparation and presentation of financial reports published in accordance with
generally accepted accounting principles and the directives and guidelines of the Supervisor of Banks. Regardless of
the quality of planning of the internal control systems, any such system has inherent limitations. Thus, even if these
systems are found to be effective, such systems can provide only a reasonable degree of confidence with regard to
the preparation and presentation of the financial reports.
The Board of 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 the Board of Management's
authorizations, that assets are protected, and that accounting records are reliable. In addition, the Board of Management,
under the supervision of the Board of Directors, applies measures to ensure that information and communication
channels are effective and monitor performance, including the performance of internal control procedures.
The Board of Management of the Bank, under the supervision of the Board of Directors, assessed the effectiveness
of the Bank's internal control of financial reporting as at December 31, 2010, 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, the Board of Management believes that as at December 31, 2010, the Bank's internal control of
financial reporting is effective.
The effectiveness of the Bank's internal control of financial reporting as at December 31, 2010 was audited by the
Bank's external auditors, Ziv Haft Certified Public Accountants (Isr.) and Somekh Chaikin Certified Public Accountants
(Isr.), as noted in their report on page 298 The auditors' report includes an unqualified opinion with regard to the
effectiveness of the Bank's internal control of financial reporting as at December 31, 2010.
Yair Seroussi
Zion Kenan Chairman of the Board of Directors
President and Senior Deputy Managing Director,
Chief Executive Officer
295
Ofer Levy
Chief Accountant
2010
Bank Hapoalim
Financial Statements 2010
Auditors’ Report - Internal Control over Financial Reporting
298
Auditors’ Report to the Shareholders
299
Consolidated Balance Sheet
300
301
302
304
Notes to the Financial Statements
307
Ziv Haft
Somekh Chaikin
Auditors' Report to the Shareholders of Bank Hapoalim B.M. according to Public Reporting Directives of the Supervisor of
Banks regarding Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Bank Hapoalim B.M. and its subsidiaries (hereinafter together – “the Bank”) as of December
31, 2010, 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
Institute of Certified Public Accountants in Israel.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 aspects. 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.
A bank’s internal control 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 in accordance with directives and guidelines of the Supervisor of Banks. The internal control over financial reporting of a bank includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
transfers of the assets of the bank (including their removal from its possession); (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statement in accordance with Israeli GAAP and in accordance with 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
(including removal from its possession) 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 aspects, effective control over financial reporting as of December 31, 2010, 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 in Israel, and certain auditing standards applied in the audit of banking
corporations as determined by guidelines of the Supervisor of Banks, the accompanying consolidated financial statements of the Bank as of December
31, 2010 and 2009 and for each of the years in the three-year period ended on December 31, 2010, and our report dated March 30, 2011, expressed
an unqualified opinion on the said financial statements.
Somekh Chaikin
Ziv Haft
Certified Public Accountants (Isr.)
Somekh Chaikin, an Israeli partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International
Cooperative ("KPMG International"), a Swiss entity.
Ziv Haft
Ziv Haft
is a member of BDO.
Ziv Haft
Somekh Chaikin
Auditors’ Report to the Shareholders of Bank Hapoalim B.M.
We have audited the accompanying consolidated balance sheets of Bank Hapoalim B.M. (hereinafter: "the Bank") as of December 31, 2010 and
2009 and the related consolidated statements of profit and loss, changes in shareholders' equity and consolidated cash flows, for each of the years
in the three year period ended December 31, 2010. These financial statements are the responsibility of the Bank's Board of Directors and of its
Management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards in Israel, including standards prescribed by the Auditors Regulations
(Manner of Auditor's Performance), 1973 and certain auditing standards applied in the audit of banking corporations guidelines of the Supervisor of
Banks.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material aspects, the financial position of the Bank and its subsidiaries as
of December 31, 2010 and 2009 and the results of operations, changes in shareholders' equity and cash flows of the Bank and its subsidiaries for each
of the years in the three year period ended December 31, 2010, in conformity with generally accepted accounting principles in Israel (Israeli GAAP).
Furthermore, in our opinion, these financial statements are prepared in accordance with the directives and guidelines of the Supervisor of Banks.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), as adopted
by the Institute of Certified Public Accountants in Israel, the Bank’s internal control over financial reporting as of December 31, 2010, 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 March 30, 2011 expressed an unqualified opinion on the effectiveness of the Bank’s internal control over financial reporting.
Somekh Chaikin
Ziv Haft
Somekh Chaikin, an Israeli partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International
Cooperative ("KPMG International"), a Swiss entity.
Ziv Haft
Ziv Haft
is a member of BDO.
Consolidated Balance Sheet
(NIS millions)
as at december 31, 2010
December 31
Note
2010
2009
2
50,331
53,115
3, 14
31,604
28,055
16
-
4
225,288
215,788
5
339
218
6
132
114
7
3,803
3,845
Other assets
8
Assets
Securities
Securities which were borrowed or bought under agreements to resell
9,363
8,420
320,876
309,555
9
233,965
231,993
10
4,834
6,455
1,335
1,551
386
794
Total assets
Deposits from banks
Securities which were lent or sold under agreements to repurchase
11
27,608
23,112
Other liabilities
12
29,322
24,702
297,450
288,607
337
350
23,089
20,598
320,876
309,555
Total liabilities
Minority interests
13
The accompanying notes are an integral part of the financial statements.
Yair Seroussi
Zion Kenan
Ofer Levy
President & Senior Deputy Managing Director
Chief Executive Officer
Chief Accountant
300
(NIS millions)
for the year ended December 31, 2010
Note
2010
2009
2008
Profit from financing activities before provision for doubtful debts
23
7,775
6,718
3,256
4B
1,030
2,017
1,520
6,745
4,701
1,736
4,811
*4,489
*4,531
Profit from financing activities after provision for doubtful debts
24
Profits (losses) from investments in shares, net
25
77
392
)113(
Other income
26
221
226
114
5,109
*5,107
*4,532
4,650
4,062
4,762
27
Other expenses
28
Provision for taxes (tax benefit) on operating profit (loss)
29
Share in net, after-tax operating profits (losses) of equity-basis
investees
6B
Minority interests in net, after-tax operating (profits) losses of
subsidiary companies
1,518
1,432
1,355
2,142
*2,009
*1,907
8,310
*7,503
*8,024
3,544
2,305
)1,756(
1,353
996
)397(
2,191
1,309
)1,359(
3
)15(
18
)6(
)195(
85
2,212
1,288
16
28
2,228
1,316
)895(
1.67
0.98
)1.13(
0.01
0.02
0.44
Total
1.68
1.00
)0.69(
1.66
0.97
)1.13(
0.01
0.02
0.44
Total
1.67
0.99
(0.69)
30
Net profit (loss)
Basic profit (loss) per share in NIS:
)1,469(
574
1Q, 31
Diluted profit (loss) per share in NIS:
301
for the year ended December 31, 2010
Balance as at January 1, 2008
Net loss for the year
Shares and options issue
Adjustments in respect of presentation of securities available for sale at fair value
Adjustments in respect of presentation of securities available for sale which were reclassified to the statement of profit and loss
Related tax effect
Benefit inherent in share based payment transactions
Realization of options to shares
Net loss in respect of cash flow hedging
Net profits in respect of cash flow hedging which were reclassified to the statement of profit and loss
Related tax effect
Translation adjustments relating to equity basis investees**
Other adjustments relating to equity basis investees
Net profit for the year
Buyback of shares
Adjustments in respect of presentation of securities available for sale which were reclassified to the statement of profit and loss
Related tax effect
Realization/Expiration of options to shares
Related tax effect
Translation adjustments relating to equity basis investees**
Other adjustments relating to equity basis investees
Net profit for the year
Adjustments in respect of presentation of securities available for sale which were reclassified to the statement
of profit and loss
Related tax effect
Realization/Expiration of options to shares
Related tax effect
Balance as at December 31, 2010
* Deducting 653,853 shares purchased by the Bank (December 31, 2009: 700,000 shares) at a cost of approximately NIS 10 million.
** Adjustments from translation of financial statements of autonomous units.
***Including an amount of NIS 2,734 million which cannot be distributed as dividend.
302
(NIS millions)
Capital reserves
Share
Capital reserve
capital and
from benefit
premium* inherent in share
based payment
transactions
7,259
137
Cumulative other comprehensive income
Other
capital
reserves
Total
and capital
reserves
7
7,403
Adjustments
in respect of
presentation of
securities available
for sale at fair value
)145(
Translation
adjustments**
)11(
Net profits
(losses) in
respect of
cash flow
hedging
)147(
Surplus
Total
shareholders'
equity
11,678
18,778
)895(
736
3
52
38
739
739
)400(
)400(
659
659
)86(
)86(
52
52
)38(
)11(
)11(
133
133
)45(
)45(
)124(
)5(
8,033
151
5
)10(
)124(
)5(
8,189
)5(
28
)135(
)70(
10,783
18,795
1,316
1,316
)10(
53
55
)50(
)1(
)10(
678
678
)50(
)50(
)214(
)214(
53
53
4
4
38
38
)14(
)14(
25
)23(
8,078
154
)19(
25
)23(
8,213
)23(
442
)110(
)46(
12,099
20,598
2,228
2,228
216
216
)84(
)84(
)21(
126
69
8,147
)895(
)63(
217
303
)2(
)21(
)21(
126
126
4
4
8,343
553
)110(
33
33
)11(
)11(
)24(
***14,327
23,089
(NIS millions)
for the year Ended December 31, 2010
2010
2009
2008
2,228
1,316
)895(
-
17
Cash flows generated by operating activity
Net profit (loss) for the year
Adjustments to reconcile net profit to net cash generated by operating activity:
The bank's share in undistributed losses of equity basis investees
243
Minority interests in net profits (losses) of consolidated companies
)18(
Depreciation of buildings and equipment
715
679
628
Other amortizations, net
151
103
46
1,030
2,017
1,520
Loss (profit) from sale and adjustment of securities available for sale
and held to maturity
)433(
Realized and unrealized loss (profit) from adjustments to fair value of
securities held for trading
)52(
Loss (profit) from sale, decrease in value and change in holding
rates in affiliates
-
6
)523(
)85(
7,896
9
)35(
1
)164(
Profit from sale of buildings and equipment
)12(
)3(
)12(
Change in benefit inherent in share based transactions
114
53
59
Retirement compensation - Increase (decrease) in excess accrued
reserve over prepaid assets
37
)88(
627
Deferred taxes, net
49
114
)338(
372
662
440
4,181
4,363
9,930
477
7,137
)1,510(
Adjustments differentials included in investment and financing activities
Net cash inflow generated by operating activity
Cash flows generated by activities (for activities) in assets
Deposits in banks, net
Acquisition of debentures held to maturity
Proceeds from redemption of debentures held to maturity
Acquisition of securities available for sale
Proceeds from sale of securities available for sale
Securities held for trading, net
Securities which were borrowed or bought under agreements to resell, net
Credit to the public, net
Credit to governments, net
)137(
112
)13,282(
9,485
904
)10,710(
)25,678(
10,871
33,942
)1,551(
1,598
)16(
4,480
)121(
52
-
Acquisition of subsidiaries consolidated for the first time (Addendum A)
)18(
)175(
1,051
)10,602(
Additional acquisition of shares in Consolidated companies
Acquisition of rights in equity-basis investees
)60(
1,586
)53(
)12(
471
)24,587(
134
-
Investment in capital note of an equity-basis investee
-
-
)202(
Proceeds in respect of subsidiaries removed from consolidation (Addendum B)
-
-
)823(
Proceeds from sale of investment in equity-basis investees
Acquisition of buildings and equipment
Proceeds from sale of buildings and equipment
Other assets, net
Net cash inflow generated by activities (for activities) in assets
304
)687(
26
2
-
)665(
)820(
49
38
)1,132(
6,041
)6,076(
)14,991(
17,167
)22,637(
(NIS millions)
(continued)
2010
2009
2008
Cash flows generated by activities in liabilities and capital
Deposits from the public, net
Deposits from banks, net
Deposits from the Government, net
Securities which were lent or sold under agreements to repurchase, net
Issuance of debentures and subordinated notes
Redemption of debentures and subordinated notes
Other liabilities, net
Shares and options issue
Buyback of shares
Dividend paid to minority shareholders of consolidated companies
Net cash inflow generated by activity in liabilities and capital
1,972
5,040
7,565
)1,621(
)1,743(
)3,229(
)216(
)106(
)553(
)408(
557
)1,151(
6,155
4,521
3,447
)2,031(
)2,910(
)1,881(
4,608
)5,134(
9,689
4
4
-
)10(
-
)4(
)43(
-
8,459
176
739
14,626
Increase (decrease) in cash
)2,351(
21,706
1,919
Balance of cash at beginning of year
51,625
29,919
28,000
Balance of cash at end of year
49,274
51,625
29,919
305
(NIS millions)
(continued)
Addendum A
2010
2009
2008
-
8
-
Liabilities
-
16
-
Minority interests
-
2
-
Goodwill
-
10
-
Cash flow for acquisition of subsidiaries consolidated for the first time
-
-
-
2010
2009
2008
Assets(2)
-
-
9,563
Liabilities
-
-
10,121
Minority interests
-
-
429
Capital gain from realization of investments in subsidiaries that were
consolidated in the past
-
-
164
Cash flow from realization of investments in subsidiaries
removed from consolidation
-
-
)823(
Acquisition of subsidiaries consolidated for the first time
Assets and Liabilities of consolidated subsidiaries,
at the date of acquisition:
Assets(1)
Liabilities of the companies, at the date of consolidation
for the first time
Addendum B
Consideration from realization of investments in
subsidiaries that were consolidated in the past
Assets and Liabilities of the subsidiaries consolidated in
the past, at the date of sale:
(1) In 2009: Excluding cash in the amount of NIS 10 million.
(2) In 2008: Excluding cash in the amount of NIS 1,516 million.
306
as at December 31, 2010
Note 1
Significant
Accounting Policies
A.General
Bank Hapoalim B.M. (hereinafter: the “Bank”) is a corporation incorporated in Israel.The financial statements of the Bank were prepared
in accordance with the directives and guidelines of the Supervisor of Banks with regard to the preparation of annual financial statements
of banking corporations and in accordance with generally accepted accounting principles in Israel (Israeli GAAP).
The Bank has received approval from the Supervisor of Banks to publish the annual financial statements on a consolidated basis only.
Note 34 presents the unconsolidated condensed financial statements of the Bank, including the balance sheet, statement of profit and
loss, and statement of cash flows.
B. Financial Statements in Reported Amounts:
(1) In October 2001, the Israel Accounting Standards Board published Accounting Standard No. 12, “Cessation of Adjustment of Financial
Statements”. In accordance with this standard, and in accordance with Accounting Standard No. 17, published in December 2002, the
adjustment of financial statements for inflation ceased as of January 1, 2004, and the Bank began reporting in reported amounts as of
that date.
(2) In the past, the Bank prepared its financial statements based on historical cost adjusted to the consumer price index. Amounts
adjusted in the aforesaid manner included in the financial statements as at December 31, 2003 served as a starting point for nominal
financial reporting as of January 1, 2004. Additions performed during the period were included at nominal values.
(3) The amounts of non-monetary assets do not necessarily represent the exercise value or the current economic value; they reflect
only the reported amounts of those assets.
(4)Definitions:
In these financial statements:
Adjusted amount – Nominal historical amount adjusted to the CPI for December 2003, in accordance with the provisions of Opinion
Statements 23 and 36 of the Institute of Certified Public Accountants in Israel.
Reported amount – Amount adjusted to the transition date (December 31, 2003), with the addition of amounts in nominal values
added subsequent to the transition date, less amounts deducted subsequent to the transition date.
Nominal financial reporting – Financial reporting based on reported amounts.
Adjusted financial reporting – Financial reporting in adjusted values, according to the changes in the general purchasing power of Israeli
currency, in accordance with the directives of the Opinion Statements of the Institute of Certified Public Accountants in Israel.
(5) Balance Sheets:
(a) Non-monetary items (mainly fixed assets and investments presented at cost) are presented in reported amounts.
(b) Monetary items are presented in the balance sheet according to the linkage terms of each balance.
(c) The equity value of investments in affiliates is determined on the basis of these companies’ financial statements in reported amounts.
(d) In the financial statements, “cost” refers to cost in reported amounts.
(6) Statements of Profit and Loss:
(a) Income and expenses arising from non-monetary items (e.g. amortization and depreciation, advance expenses and income, etc.)
or from provisions included in the balance sheet are derived from the difference between the reported amount at the opening balance
and the reported amount at the closing balance.
(b) Other components of the statement of profit and loss are presented in nominal values.
(c) The Bank’s share in the results of operations of affiliates and minority interests’ share in the results of consolidated companies are
determined based on these companies’ financial statements in reported amounts.
(7) Report on Changes in Shareholders' Equity:
Dividends declared or actually paid during the reporting period are presented in nominal values.
C. Principles of Consolidation and Application of the Equity Method:
(1)Definitions:
In these financial statements:
Consolidated companies – Companies whose reports are fully consolidated, directly or indirectly, with the reports of the Bank.
Equity-basis investees – Companies, excluding consolidated companies, wherein the Bank's investments are included, directly or indirectly,
in the financial statements of the Bank on an equity basis.
Affiliates – Consolidated companies and equity-basis investees.
For details of the principal affiliates, see Note 6.
307
Note 1
Significant
Accounting Policies
(continued)
(2) Consolidation Basis:
(a)Subsidiaries:
Subsidiaries are entities controlled by the Bank. Control exists when the Bank has the ability to determine the financial and operational
policy of the entity in order to obtain benefits from its resources and activities. Control exists when the Bank, directly or indirectly,
holds shares granting more than 50% of the voting rights in the subsidiary and the rights to appoint a majority of the members of its
board of directors, unless there are circumstances that expressly prevent the parent company from exercising its control in practice.
The consolidated financial statements include the audited financial statements of the Bank and of the entities under the Bank’s control.
Financial statements of subsidiaries are included in the consolidated financial statements from the date on which control is obtained to
the date on which control ceases. The accounting policies of the subsidiaries were changed, where necessary, in order to adjust them
to the accounting policies adopted by the Bank, except in cases where the Supervisor of Banks has permitted otherwise.
Significant intercompany balances and transactions of consolidated companies have been offset in the preparation of the consolidated
financial statements.
The unconsolidated condensed financial statements of the Bank, presented in Note 34, include the financial statements of asset companies
wholly owned by the Bank, most of the assets of which are used by the Bank.
With regard to the consolidation of variable interest entities (VIEs), see Section I below.
(b) Equity-basis investees:
Equity-basis investees are entities in which the Group has a material influence on financial and operational policy, but has not obtained
control. Investments in equity-basis investees are treated according to the equity method and recognized for the first time at cost.
The investment includes goodwill or negative goodwill calculated at the acquisition date, and is presented net of accrued losses from
impairment.The consolidated financial statements include the Bank’s share in income and expenses of affiliates, from the date on which
the material influence exists, until the date when the material influence ceases to exist.
The Bank’s share in the financial results of these companies is stated after amortization of the surplus cost created by their acquisition.
When the Bank’s share in losses exceeds the value of the Bank’s rights in an equity-basis investee, the book value of such rights is written
down to zero, and the Bank does not recognize further losses, unless the Bank is a guarantor for obligations of the equity-basis investee,
or has another obligation to provide financial support to the equity-basis investee.
The Bank examines from time to time whether declines in value have occurred in its investments in equity-basis investees. This
examination is performed when signs appear that could be indicative of the possibility that the value of the investments has fallen,
including a fall in prices in the stock market, prolonged losses at an equity-basis investee, the value of the goodwill included in the
investment, and additional parameters. The amortization necessary for adjusting the value of these investments, as assessed by the
Board of Management, based on an examination of the entire range of matters mentioned above and with due weight accorded these
matters, is charged to the statement of profit and loss (see also Section L below).
(c) Goodwill and intangible assets of affiliates:
(1) Surplus original cost attributed to identifiable assets and liabilities of the acquired company, net of deferred taxes, is amortized over
the lifetime of the asset or the liability in the acquired company.
(2) Surplus cost of the acquisition of the investment in an affiliate over the Bank’s share in the fair value of identifiable assets (including
intangible assets), less the fair value of its identifiable liabilities (after the attribution of taxes), at the acquisition date, constitutes goodwill,
which is amortized in a straight line over a period of no more than ten years.
(3) In cases in which the acquisition cost is lower than the fair value of the identifiable assets and liabilities, the surplus fair value (negative
goodwill) is offset against the intangible assets and the non-monetary assets, proportionally to their fair value.The remaining balance is
amortized in a straight line over a period of ten years.
(4) The surplus cost attributed to assets and liabilities as noted above is charged to the appropriate items in the balance sheet. Goodwill
is presented in the balance sheet under the “other assets” item.
D. Functional Currency and Presentation Currency:
(1) The consolidated financial statements are presented in New Israeli Shekels, the functional currency of the Bank. The NIS is the
currency representing the primary economic environment in which the Bank operates.
308
Note 1
Significant
Accounting Policies
(continued)
(2) In accordance with the directive of the Supervisor of Banks, all investee units abroad under the control of the Bank (including
branches) constitute activities with functional currencies identical to the functional currency of the Bank. Accordingly, their financial
statements are translated into NIS, as follows: Non-monetary balance-sheet items are translated based on exchange rates at the date of
the transaction. Monetary balance-sheet items are translated at the current exchange rates on the balance-sheet date. 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. Differences resulting from the translation of the aforesaid
financial statements are included in the appropriate items under profit from financing activity. Income and expenses of the aforesaid
units (excluding income and expenses related to non-monetary items, which are translated at the historical exchange rates by which
the relevant non-monetary items were translated) were translated at the average monthly exchange rate for the date of execution of
the transactions, and include exchange-rate differences on balance-sheet balances at the beginning of the month.
(3) The share in the "translation adjustments" of external activities held by equity-basis investees is allocated to the item "adjustments
from the translation of financial statements of external activities" in the statement of changes in shareholders' equity.
E. Linkage and Foreign Currency:
(1)Linkage:
Assets and liabilities linked to foreign currency are stated with the addition of exchange-rate differences based on the representative
exchange rates published by the Bank of Israel at the balance-sheet dates. Those linked to the consumer price index (hereinafter: the
“CPI”) are stated with the addition of linkage differentials, according to the CPI to which they are linked (mainly the known CPI at the
balance-sheet dates – the November CPI).
(2) Foreign-currency transactions:
Transactions in foreign currency are translated into the functional currency according to 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 according to the exchange rates in effect at that date. Exchange-rate differences in respect
of 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
according to the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currency and
measured according to fair value are translated into the functional currency according to the exchange rate in effect on the date on
which the fair value is determined. Exchange-rate differences are recognized in profit and loss, with the exception of differences arising
from the translation of non-monetary capital instruments classified as available for sale, financial liabilities hedging investments in external
activity, or hedges of cash flows, which are recognized directly in shareholders' equity.
(3) CPI and exchange rates:
Set out below are details regarding the CPI and representative exchange rates of the major currencies, and their rates of change:
December 31
2010
Percent change for the year
2009
2008
2010
2009
2.3%
3.8%
NIS
November CPI (in points)
107.6
105.2
101.3
USD exchange rate (in NIS per USD 1)
3.549
3.775
3.802
)6.0%(
)0.7%(
GBP exchange rate (in NIS per GBP 1)
5.493
6.111
5.548
)10.1%(
10.2%
EUR exchange rate (in NIS per EUR 1)
4.738
5.442
5.297
)12.9%(
2.7%
CHF exchange rate (in NIS per CHF 1)
3.788
3.667
3.565
3.3%
2.9%
TRY exchange rate
2.296
2.518
2.445
)8.8%(
3.0%
309
Note 1
Significant
Accounting Policies
(continued)
F.Securities:
(1) Securities are classified into three portfolios:
(a) Bonds held to maturity:
When the Bank has the explicit intention and ability to hold debt instruments to their maturity date, the debt instruments are classified
as held to maturity. Bonds held to maturity are stated in the balance sheet at cost, plus interest and accrued linkage and exchange rate
differentials, taking into account the proportional part of the discount or premium. The accrual of interest, linkage differentials, and
exchange-rate differentials, as well as the amortization of the premium or discount (according to the interest method) are allocated
to the statement of profit and loss. Provisions for other-than-temporary impairment are deducted from the balance-sheet balance and
allocated to the statement of profit and loss.
(b) Securities held for trading:
Securities acquired and held with the aim of selling them in the near future are classified as securities held for trading. Securities held
for trading are stated in the balance sheet at fair value, and changes in their fair value are allocated to the statement of profit and loss.
Shares for which no fair value is available are not included in the portfolio of securities available for trading.
(c) Securities available for sale:
The Bank's investments in shares and in certain debt instruments which are not classified as securities held to maturity or as securities
held for trading are classified as securities available for sale. These securities are presented in the balance sheet at fair value, with the
exception of shares and options to purchase shares for which no fair value is available, which are presented at cost. Unrealized profits or
losses from adjustments to fair value, net of tax, are charged directly to a separate item within shareholders' equity, and are transferred to
the statement of profit and loss upon realization or redemption, with the exception of provisions for other-than-temporary impairment,
which are allocated to the statement of profit and loss.
Income from interest and linkage and exchange-rate differentials are recognized on a current basis in the statement of profit and loss,
based on the interest method. Dividend income in respect of securities available for sale is recognized upon solidification of the right
to receive such income.
(2) In the calculation of profit from the realization of securities, the cost is calculated according to the "first in - first out" (FIFO) method.
(3) Determining the fair value of securities:
The fair value of securities held for trading and securities available for sale is determined on the basis of quoted market prices in active
markets. The Bank implements the directives of the American publication FSP FAS 157-3 (ASC 820), "Determining the Fair Value of
Financial Assets in an Inactive Market". Accordingly, in determining the fair value of securities traded in an inactive market, significant use
of judgment is sometimes involved, including an examination of whether the transactions were executed under conditions of duress
and coercion. In cases in which there is no available quote of prices in an active market, fair value is determined on the basis of an
independent, validated system of the Bank, or on the basis of estimates received from experts in the valuation of financial instruments.
The valuation methods include the use of various parameters, such as interest-rate curves, currency exchange rates, and standard
deviations, taking into account assumptions with regard to various factors.
(4) Impairment of securities:
Each reporting period the Board of Management of the Bank examines whether impairments in the fair value of securities classified
into the available-for-sale portfolio and the held-to-maturity portfolio are of an other-than-temporary nature.
This examination includes several stages and principles, according to the policy established by the Bank. The Board of Management’s
analysis focuses, among other matters, on examinations of signs that may indicate the existence of other-than-temporary impairment,
as detailed below:
- The Bank's ability and intention to hold the security for a sufficient period to allow the value of the security to return to the level
of its cost.
- The value of collateral and safety cushions backing the security.
- The rating of the security by international rating agencies, including developments in these ratings after the balance-sheet date.
- The rate of the impairment of the security relative to its total cost.
- The amount of time for which the value of the security is lower than its cost.
-The financial condition of the issuer and changes in its business environment, including an examination of whether the impairment
reflects circumstances unique to the issuer, or to the sector in which the issuer operates, or general market conditions.
- Events after the balance-sheet date.
310
Note 1
Significant
Accounting Policies
(continued)
The Bank has established several principles in order to determine whether impairment is of an other-than-temporary nature, and the
amount of such declines, as follows:
(a) Securities which at the balance-sheet date the Bank does not intend to hold, or securities sold after the balance-sheet date, constitute
securities in which other-than-temporary impairment has occurred.
(b)Securities in which an impairment of 40% or more of the cost of the security has occurred, at or after the balance-sheet date,
constitute securities in which other-than-temporary impairment has occurred, unless the Bank has objective evidence proving with a
high degree of confidence that the impairment is of a temporary nature.
(c) Debt instruments which have been significantly downgraded, classified as problematic by the Bank, or in which defaults on payments
have occurred after acquisition shall be considered to be securities in which other-than-temporary impairment has occurred.
When other-than-temporary impairment occurs in a security, the cost of the security is written down to its fair value at the balance-sheet
date and used as the new cost base. The amount of the write-down is allocated to the statement of profit and loss.
(5) Recognition of financing income in consecutive periods following other-than-temporary impairment:
In consecutive periods following other-than-temporary impairment, interest income from investments in debt instruments shall be
recognized as follows:
(a) Beneficiary rights purchased or beneficiary rights that continued to be held by the Bank in the securitization of financial assets,
treated using the prospective interest method – The surplus of the amount of expected cash flows to be collected on the fair value of
the debt instrument shall be recognized as interest income over the remaining lifetime of the debt instrument. In rare cases in which
the Bank has no reasonable estimate of the amounts and timing of the expected cash flows to be collected from the debt instrument,
the Bank recognizes income according to the method of recovery of the cost, or recognizes income on a cash basis.
(b)Other debt instruments – Income is accrued during the reporting period based on surplus expected cash flows of the debt
instrument (the basic amount of the debt instrument at the date of other-than-temporary impairment is its fair value).
G. Provision for Doubtful Debts:
(1) The provision for doubtful debts is determined on a specific basis. In addition, a general provision and a supplementary provision
are included, in accordance with the directives of the Supervisor of Banks.
(2) The specific provision for doubtful debts is made on the basis of the Board of Management's estimate of the losses inherent in
the credit portfolio, including debts in off-balance-sheet items. In the aforesaid estimate, the Board of Management takes into account,
among other considerations, the extent of the risks related to the financial stability of borrowers, based on its information regarding
their financial condition; the volume of their business operations; and an evaluation of collateral received from them.
Interest income in respect of a debt declared as doubtful is not recorded as of the beginning of the quarter in which the debt is declared
doubtful. Upon collection of the interest, the interest income is recorded in the item "other financing income."
(3) The specific provision for housing loans is calculated according to the directives of the Supervisor of Banks, taking into account the
extent of the arrears, such that the percentage of the provision increases as the period of the arrears lengthens.
(4) The specific provision for doubtful debts at consolidated banking companies abroad is determined as necessary, taking into account
the accepted principles in the countries in which the companies are located.
(5) Write-offs of bad debts are carried out when the Bank has determined that the debt is uncollectible, following legal proceedings
undertaken or as a result of agreements or arrangements, usually in cases in which no legal proceedings were undertaken, and the
debts are not collectible, or due to other reasons for which the debts are uncollectible.
(6) The supplementary provision for doubtful debts is based on the quality of the customer debt portfolio, in accordance with risk
attributes defined in the directives of the Supervisor of Banks. Different provision rates have been determined for each such risk attribute.
The supplementary provision for doubtful debts is calculated according to the rates determined for the different attributes.
The general provision is in values adjusted for the end of 2004, in an amount constituting 1% of the total indebtedness under the
responsibility of the Bank Group on December 31, 1991.
The cumulative ratio of the supplementary and general provisions for doubtful debt to total credit risk to the public as of
December 31, 2010 is 0.27% (December 31, 2009: 0.30%).
The general provision, as well as the supplementary provision for doubtful debts, are not recognized as an expense for tax purposes.
In accordance with the directives of the Supervisor of Banks, deferred taxes are not recorded in respect thereof.
For details regarding the manner of implementation and the expected effect of the new directives on the measurement and disclosure
of problematic debts, see note 1A below.
311
Note 1
Significant
Accounting Policies
(continued)
H. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities:
The Bank implements the measurement and disclosure rules set forth in the American accounting standard FAS 140 (ASC 860-10), “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, as amended by FAS 166 (ASC 860-10), Accounting for Transfers
of Financial Assets”, with regard to the accounting treatment of transfers of financial assets and extinguishment of liabilities.
Pursuant to these rules, transfers of financial assets are accounted for as sales if and only if all of the following conditions are met:
(1) the financial asset transferred is isolated from the transferring party, including in situations of bankruptcy or other receivership; (2)
any recipient (or, if the recipient is an entity whose sole purpose is to engage in securitization or in asset-backed financing activity, and
that entity is barred from pledging or exchanging the financial assets which it receives – any third party holding beneficiary rights) may
pledge or exchange the assets (or the beneficiary rights) received, and there is no term that also restricts the recipient (or the third
party holding beneficiary rights) from exercising the right to pledge or exchange, or grants the transferring party a benefit that is more
than trivial; (3) the transferring party, or consolidated companies included in its financial statements, or its agents, do not retain effective
control of the financial assets or of the beneficiary rights referring to the transferred assets.
In addition, in order for the transfer of part of a financial asset to be considered a sale, the transferred part must comply with the
definition of participatory rights. Participatory rights must meet the following criteria: the right must represent proportional rights
relative to the full financial assets; all cash flows obtained from the assets are distributed between the participatory rights in a manner
proportional to their share of the ownership; the rights are not subordinated to other rights; there is no right of return to the transferring
party or to other holders of participatory rights (except in cases of a breach of representations or commitments, current contractual
commitments to service a financial asset in its entirety and manage the transfer contract, and contractual commitments to share the
offsets of any benefits received by any holder of participatory rights); and the transferring party and the holder of participatory rights
have no right to pledge or exchange the financial asset in its entirety, unless all of the holders of participatory rights agree to pledge or
exchange the financial asset in its entirety.
If the transaction complies with the conditions for treatment of a transaction as a sale, the transferred financial assets are derecognized
in the balance sheet of the Bank. If the conditions for a sale are not met, the transfer is considered a secured debt. The sale of part of
a financial asset that is not a participatory right is treated as a secured debt; i.e., the transferred assets continue to be recorded in the
balance sheet of the Bank, and the consideration from the sale is recognized as a liability of the Bank.
Therefore, securities sold under agreements to repurchase or purchased under agreements to resell, securities borrowed or lent, and
other financial instruments transferred or received by the Bank, where the Bank has not lost control of the transferred asset or has not
gained control of the asset received, are treated as 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 secured debt. Financial instruments transferred in such transactions are measured according to the same measurement
principles implemented prior to the transfer. Thus, such securities are not derecognized in the balance sheet, and the deposit for the
return of which the securities were pledged is presented against them, under the item “securities lent or sold under agreements to
repurchase.” Securities received in such transactions are recorded according to the amount of cash received by the Bank, under the
item “securities borrowed or bought under agreements to resell”.The Bank monitors the fair value of securities borrowed and lent, and
of securities transferred in repurchase and resale agreements, on a daily basis, and issues a requirement for collateral in suitable cases.
Interest received or paid in respect of such securities is reported as financing income or expenses, respectively.
In addition, transactions such as syndications and loan participations are examined to determine whether the parts of financing supplied
by other credit granters comply with the definition of a participatory right.
The Bank derecognizes a liability if and only if the liability has been extinguished, i.e. if one of the following conditions is met: (A) the Bank
has paid the lender and has been released from its commitment in respect of the liability; or (B) the Bank has been legally released, by
legal process or with the consent of the lender, from the status of the primary debtor in respect of the liability.
I. Treatment of Variable Interest Entities:
An entity is a VIE if it complies with the tests detailed in FAS 167, “Amendments to FASB Interpretation No. FIN46(R) – Consolidation
of Variable Interest Entities” (ASC 810-10). (1) the equity investment at risk is not sufficient to permit the entity to finance its activities
without additional subordinated financial support provided by mixed parties, including shareholders; or (2) the investors in the equity
at risk, as a group, do not have the power to direct activities with a highly significant effect on the economic performance of the entity,
or do not absorb their proportional share of the expected losses, or of the expected residual profits of the entity.
A VIE shall be consolidated in the financial statements if the Bank has the power to direct activities with a highly significant effect on
the economic performance of the VIE, and the Bank has the right to receive benefits from the VIE or an obligation to absorb its losses,
which could potentially be significant for the VIE. The Bank has variable interests in other VIEs which are not consolidated because the
Bank is not the primary beneficiary of the VIE.
312
Note 1
Significant
Accounting Policies
(continued)
The Bank monitors all VIE in order to determine whether an event has occurred that may cause a change in the identity of the primary
beneficiary. Such events include, among others:
• Additional acquisitions or sales of variable interests by the Bank or by an unrelated third party, causing the overall ownership of
variable interests of the Bank to change;
• Changes in contractual arrangements that redesignate expected losses or residual profits among the holders of the variable interests; and
• The provision of support to the entity leading to a significant variable interest.
For further details regarding variable interest entities, see Note 19E
J. Expenses Related to Issues of Bonds and Subordinated Notes:
Issuance and discounting expenses related to issues of bonds and subordinated notes are amortized based on the effective interest
rate method.
K. Buildings and Equipment:
(1) Buildings and equipment are recognized for the first time at cost, including costs directly attributable to the acquisition of the
buildings and equipment.
(2) In periods subsequent to the first recognition, these items are stated at cost, less accumulated depreciation, and less a provision for
decline in value.
(3) Amortization and amortization method:
(a) The Bank separately amortizes each part of buildings and equipment with a cost that is significant relative to the total cost of the
item. Amortization expenses in each period are recognized in profit and loss, or capitalized to other assets, in accordance with generally
accepted accounting principles.
(b)The Bank uses the straight-line method to allocate the amortizable amount of buildings and equipment systematically over their
useful lifetime. The amortization method used reflects the predicted pattern for the consumption of future financial benefits from the
asset.
(c) The Bank reviews the residual value, the useful lifetime of the item of buildings and equipment, and the amortization method
used at least once annually. Changes are treated as changes in accounting estimates, in accordance with generally accepted accounting
principles.
(4) The replacement costs of part of a fixed asset are recognized as part of the book value of that item, if the future economic benefit
inherent in the item is expected to flow to the Bank, and if its cost can be measured reliably. The book value of the replaced part is
subtracted. Routine maintenance costs are allocated to profit and loss as incurred.
(5) Improvements to rental properties are amortized over the rental period, including option periods reasonably likely to be exercised,
or their useful lifetime, whichever is shorter.
(6) Software costs:
(a) Software acquired by the Bank is measured at cost, less accrued depreciation and losses from decline in value.
(b) Direct costs for the development of software for the Bank's own use that were incurred in the development stage are capitalized
as intangible assets, if and only if:
- The costs can be measured reliably;
- The product or process is feasible in technical and commercial terms;
- Future economic benefit is expected to arise from the product;
- The Bank has sufficient intent and resources to complete the development and to use or sell the asset.
Costs recognized as intangible assets are amortized as of the date when the software is ready for use, over its useful lifetime. Costs in
the preliminary stage of the software development project and routine maintenance costs are allocated to profit and loss, as incurred.
Subsequent costs in respect of software are recognized as an asset only when they increase the future economic benefits inherent in
the asset in respect of which they are expended. Other costs are charged to the statement of profit and loss as incurred. Pursuant to
the instructions of the Supervisor of Banks, software costs recognized as intangible assets are stated in the Bank's balance sheet under
the item "buildings and equipment".
(7) Buildings and land used by the Bank in the past which are rented to others are classified as real estate for investment, which is
stated at cost, less accrued depreciation and the provision for decline in value.
(8) Leases where the Bank bears substantially all of the risks and returns from the asset, in accordance with quantitative thresholds
established, are classified as financing leases. At the initial recognition, the leased assets are measured at an amount equal to the lower
of the fair value and the minimum future leasing fees. Other leases are classified as operating leases.
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L. Impairment of Non-Financial Assets:
The book value of non-monetary assets of the Bank, excluding deferred tax assets, and including monetary assets which are investments
treated using the equity method, is examined at each reporting date in order to determine whether signs exist to indicate impairment.
If such signs exist, an estimate of the recoverable amount of the asset is calculated. In periods subsequent to the first recognition date,
the Bank assesses, once annually on a fixed date for each asset, the recoverable amount of intangible assets with an undefined lifetime,
or which are unavailable for use; or more frequently if signs of impairment exist.
The recoverable amount of an asset or of a cash-generating unit is the higher of the use value and the net sale value (fair value net
of selling expenses). In determining use value, the Bank capitalizes the estimated future cash flows according to a pretax capitalization
rate reflecting market estimates regarding the time value of the money and the specific risks related to the asset. For the purpose of
examining impairment, assets which cannot be examined individually are aggregated into the smallest group of assets that generates cash
flows from ongoing use, which are essentially non-dependent on other assets and groups (a "cash-generating unit"). For the purposes of
examining impairment of goodwill, cash-generating units to which goodwill is allocated are aggregated such that the level at which the
impairment is examined reflects the lowest level at which goodwill is monitored for internal reporting purposes, but is not larger than
a segment of activity. Goodwill acquired in the course of the addition of businesses is allocated to the cash-generating units expected
to derive benefit from the synergy arising from the addition.
Assets of the headquarters of the Bank do not generate separate cash flows. If there are signs of impairment of an asset belonging to
the headquarters of the Bank, the recoverable amount of the group of cash-generating units served by the headquarters is determined.
Losses from impairment are recognized when the book value of the asset or of the cash-generating unit to which the asset belongs
exceeds the recoverable value, and are charged to profit and loss. Losses from impairment recognized with regard to cash-generating units
are first allocated to the amortization of the book value of the goodwill attributed to such units, and subsequently to the amortization
of the book value of the other assets in the cash-generating unit, proportionally.
Loss from the impairment of goodwill is not cancelled. With regard to other assets, losses from impairment recognized in previous
periods are reexamined each reporting period, in order to test for signs that the losses have decreased or no longer exist. Losses from
impairment are cancelled if a change has occurred in the estimates used to determine the recoverable amount, only if the book value
of the asset, after cancellation of the loss from impairment, does not exceed the book value net of amortization or depreciation that
would have been determined if no loss from impairment had been recognized.
Goodwill which is part of an investment account in an equity-basis investee is not recognized separately, and is therefore not examined
separately for impairment. Alternatively, impairment is examined with regard to the investment as a whole, when objective evidence
pointing to impairment exists.
M. Basis for Recognition of Income and Expenses:
(1) Income and expenses are included on an accrual basis, except for financing income on problematic debts classified as non-income
bearing and interest on arrears of housing loan recipients, which is allocated to the statement of profit and loss based on actual collection.
(2) Income from early-repayment fees on loans, after deduction of a proportional part relating to the financial capital, are included in
the statement of profit and loss at equal annual rates over the remaining period for repayment of the credit or over three years from
the date of the early repayment, whichever is shorter.
(3) Allocation fees for credit facilities and fees from financing business are recognized in profit and loss in proportion to the period of
the transaction.
(4) Operational fees for the provision of services (e.g. from activity in securities and derivatives, credit cards, account management,
credit handling, organizing syndications, conversion differences, and foreign-trade activity) are recognized in profit and loss when the
Bank’s entitlement to receive them emerges.
(5) Supplementary interest from the state treasury for the interest margin on loans for home buyers is allocated to the statement of
profit and loss over the repayment period of the loans, based on the interest method.
(6) Securities – see Section F, above.
(7) Provision for doubtful debts – see Section G, above.
(8) Derivative financial instruments – see Section U, below.
N. Share-Based Payments:
Share-based payment transactions include transactions with employees or other parties settled in capital instruments, in cash, or in
other assets. Share-based payment transactions in which goods or services are received in consideration for the payment are recorded
at fair value.
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With regard to share-based payment transactions settled in capital instruments, the Bank records the benefit created at the allocation
of option notes to employees as a salary expense, with a corresponding increase in shareholders' equity, according to the fair value of
the options at the allocation date, using the Black & Scholes model. In accordance with this policy, the benefit generated is spread over
the vesting period of the option notes, based on the Bank's estimates regarding the number of options expected to vest.
This accounting treatment applies to transactions settled in capital instruments which were executed after March 15, 2005, but not yet
vested by January 1, 2006; and to changes in the terms of transactions settled in capital instruments performed after March 15, 2005,
even if the grants in respect of which the changes were performed occurred prior to that date.
Liabilities to employees in respect of rights to increases in the value of shares in cash (phantom options) are measured at the date of
allocation and at each reporting date until the liability is defrayed, at the fair value of the rights to the increase in the value of shares,
using the Black & Scholes model. Changes in the fair value of these liabilities are recognized in the statement of profit and loss for the
period, over the vesting period of the rights to the increase in the value of shares.
O. Taxes on Income:
Expenses for taxes on income include current and deferred taxes. Current and deferred taxes are allocated to the statement of profit
and loss, unless the tax arises from a transaction or event recognized directly in shareholders’ equity. In such cases, the expense for
taxes on income is allocated to shareholders’ equity. Current tax is the amount of tax expected to be paid (or received) on the taxable
income for the year, calculated according to the applicable tax rates under laws legislated or legislated in practice at the balance-sheet
date, including changes in tax payments referring to previous years.
The provision for taxes on the income of the Bank and its consolidated companies which are financial institutions for the purposes of
value-added tax includes a profit tax imposed on income under the Value Added Tax Law. The value-added tax applied to wages at
financial institutions is included in the statement of profit and loss under the item, "salaries and related expenses".
The Bank recognizes deferred taxes with reference to temporary differences between the book value of assets and liabilities for the
purposes of financial reporting and their value for tax purposes. However, the Bank does not recognize deferred taxes with respect to
the following temporary differences: first-time recognition of goodwill; first-time recognition of assets and liabilities in a transaction that
does not constitute the addition of businesses and does not affect accounting profit or profit for tax purposes; and differences arising
from investments in subsidiaries, entities under joint control, and equity-basis investees, if they are not expected to be reversed in the
foreseeable future.The deferred taxes are measured according to the tax rates expected to apply to the temporary differences at the
date when they are realized, based on laws legislated or legislated in practice at the balance-sheet date. The Bank offsets deferred tax
assets and liabilities in the event that an enforceable legal right exists for the offsetting of current tax assets and liabilities, and they are
attributed to the same taxable income item taxed by the same tax authority for the same taxed company, or in different companies in
the Group which intend to settle current tax assets and liabilities on a net basis, or the tax assets and liabilities are settled simultaneously.
Deferred tax assets in respect of losses carried forward and in respect of rights carried forward to offset tax are recognized in the books
in cases in which the realization of the said tax in the foreseeable future is not in doubt. A deferred tax asset is recognized in respect
of temporary differences when it is probable that a tax saving will be created in respect thereof at the reversal date. The creation of
net deferred tax assets shall not exceed the current taxes in the accounting period, except in special cases in which the realization of
the tax in the foreseeable future is not in doubt.
The Bank may be obligated to add taxes in the case of dividend distribution in respect of affiliates. This added tax is not included in
the financial statements, due to the policy of the affiliates not to cause dividend distribution involving added taxes for the Bank in the
foreseeable future. In cases in which an affiliate is expected to distribute dividends form profits involving added taxes for the Bank, the
Bank creates a reserve for tax in respect of the added tax which it is likely to incur.
Deferred taxes in respect of intercompany transactions in the consolidated report are recorded according to the tax rate applicable
to the acquiring company.
P. Shares in Treasury:
When the Bank buys shares of the Bank, the amount of the consideration paid, including direct costs, is deducted from equity. The
shares that have been bought back are classified as shares in treasury. When shares in treasury are sold or reissued, the amount of the
consideration received is classified as an increase in equity, and the surplus or deficit arising from the transaction is allocated to the
balance of the premium.
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(continued)
Q. Profit per Share:
Profit per share is calculated by dividing net profit by the weighted number of ordinary shares existing during the period. Basic profit
per share includes only shares in actual existence during the period. Potential ordinary shares (convertible securities such as option
notes and options for employees) are included only in the calculation of diluted profit per share, if they have the effect of diluting profit
per share, where their conversion reduces profit per share or increases loss per share from ongoing operations. In addition, potential
ordinary shares converted during the period are included in diluted profit per share only up to the conversion date; from that date
they are included in basic profit per share.
The Bank's share in profits of affiliates is calculated according to its share in the profit per share of such affiliates, multiplied by the
number of shares held by the Bank.
R. Statement of Cash Flows:
The statement of cash flows is presented classified into cash flows from operations, from activity in assets, and from activity in liabilities
and capital.
Cash flows from activity in assets and from activity in liabilities and capital are presented net, except for changes in non-monetary items
and securities. The item "cash" includes cash on hand, deposits with banks, and deposits with central banks for an original period of up
to three months.
S. Employee Benefits:
Appropriate reserves according to law, agreements, customary practice, and management expectations exist in respect of all obligations
due to employee-employer relations. Certain obligations are calculated on an actuarial basis, based on the following assumptions,
among others:
- The capitalization rate of the reserves is determined by the Supervisor of Banks.
- The rate of increase in wages in the future is determined based on management estimates.
- The mortality rate is based on the current directives of the Supervisor of the Capital Market, Insurance, and Savings.
Severance-pay and pension liabilities are mostly covered by amounts funded which are deposited with provident funds for pension
allowances and compensation. Provisions are included in the financial statements in respect of amounts of liabilities that are not covered
as stated above. See Note 15.
In accordance with the directives of the Supervisor of Banks, the Bank recognizes liabilities in respect of voluntary-retirement programs,
based on the Board of Management’s expectations at the reporting date, provided that they have been approved by the Board of
Directors, including in cases in which the approval is granted after the balance-sheet date but before the date of approval of the financial
statements.
T. Contingent Liabilities:
The financial statements include sufficient provisions for legal claims, according to the assessment of the Board of Management and
based on the opinions of its legal counsels. Note 19 contains details of all claims pending against the Bank Group where the amount
of each claim (or the cumulative amount of several claims on similar matters), according to the claim statement, is greater than the
amount constituting approximately 1% of the capital of the Bank (at the date of filing of each claim).The disclosure is in the format set
forth in the directives of the Supervisor of Banks, so that the claims filed against the Bank Group are classified into three risk groups:
(1) Probable risk – the probability of some loss in the claim is over 70%, and a provision for the amount at risk has been included in
the financial statements.
(2) Reasonably possible risk – the probability of some loss in the claim is between 20% and 70%. No provision is included in the financial
statements in respect of claims in this risk group.
(3) Remote risk – the probability of any loss in the claim is under 20%. No provision was included in the financial statements in respect
of claims in this risk group.
In addition, the note includes claims filed against the Bank Group in which, in the opinion of the Bank's Board of Management, based
on evaluations by its legal counsels, the probable outcome of the legal proceedings cannot be assessed at the date of approval of the
financial statements, and therefore no provision was included in the financial statements. According to the directives of the Supervisor of
Banks, this statement is possible only in rare cases, in which the Supervisor of Banks' approval must be obtained prior to publication of
the financial statements, or with respect to class actions, in cases in which the Bank Group has not yet published four financial statements
since the first inclusion in such statements of any claim whose probable outcome could not be assessed.
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U. Derivative Financial Instruments and Hedging Accounts:
(1) The Bank recognizes all derivative instruments, including derivatives embedded in “host” contracts, which are to be separated as
assets or liabilities in the balance sheet, and measures them at fair value.The change in the fair value of a derivative instrument is reported
in the statement of profit and loss or included in shareholders' equity as a component of other comprehensive income, in accordance
with the designation of the derivative instrument.
The change in the fair value of derivatives that hedge against exposure to a change in the fair value of an asset, liability, or firm commitment
is recognized on a current basis in the statement of profit and loss, as is the change in the fair value of the hedged item, which can be
attributed to the risk that is hedged.
The accounting treatment of a change in the fair value of derivatives used to hedge against exposure to a change in cash flow from an
asset, liability, or expected transaction is dependent on the effectiveness of the hedging relations.
- The effective part of the change in the fair value of a derivative intended to hedge a cash flow is reported initially in shareholders'
equity as a component of other comprehensive income, and subsequently, when the asset, liability, or expected transaction affects the
statement of profit and loss, is reclassified to the statement of profit and loss.
- The non-effective part of the change in the fair value of the derivative designated as above is recognized immediately in the statement
of profit and loss.
Profit or loss from a derivative not designated as a hedging instrument is recognized on a current basis in the statement of profit and loss.
With regard to derivatives that do not constitute an independent contract but are embedded in a balance-sheet instrument which is
not measured in its entirety at fair value through profit and loss – these derivatives are measured separately from the host instrument,
according to the rules for measurement of derivatives, provided that the derivative is not clearly and closely tied to the host contract, while
the balance-sheet instrument hosting the derivative is measured according to the appropriate generally accepted accounting principles.
In certain cases (such as in cases in which the Bank is unable to separate an embedded derivative from its host contract), in accordance
with FAS 155 (ASC 815-15), the Bank chooses not to separate the embedded derivative, and to measure the complex financial
instrument as a whole (both the host contract and the embedded derivative) at fair value, allocating changes in the fair value to profit
and loss.This choice is made at the time of acquisition of the combined instrument, or when certain events occur where the instrument
is subject to re-measurement, such as as a result of the combining of businesses or material changes in the debt instruments.The choice
to apply such measurement at fair value is irreversible.
(2) Balance-sheet balances arising from transactions in derivative financial instruments are included in the item "other assets" or "other
liabilities," as appropriate. Balance-sheet balances in respect of embedded derivatives are presented together with the host contracts.
Note 20 to the Financial Statements provides details of the types of transactions and the various types of derivative financial instruments
in which the Bank operates, including the nature and structure of risks involved in such activity.
The effect of derivative financial instruments on linkage bases and terms to maturity of the balance-sheet balances is reflected in
Notes 17 and 18 to the financial statements.
(3) The fair value of derivative instruments is determined on the basis of quoted market prices in active markets. In cases in which
there is no available quote of prices in an active market, fair value is determined on the basis of an independent, validated system of the
Bank, or on the basis of estimates received from experts in the valuation of financial instruments.The valuation methods include the use
of various parameters, such as interest-rate curves, currency exchange rates, and standard deviations, taking into account assumptions
with regard to various factors.
V. Offsetting Assets and Liabilities:
(1) The Bank offsets assets and liabilities arising from the same counterparty and states the net balance thereof in the balance sheet,
when the following cumulative conditions are fulfilled:
(a) An enforceable legal right to offset exists in respect of the assets and liabilities.
(b) The Bank intends to settle the liabilities and realize the assets on a net basis or simultaneously.
(2) The Bank offsets assets and liabilities with two different counterparties and presents a net amount in the balance sheet when the
above two cumulative conditions are fulfilled, provided that there is an agreement among the three parties that clearly anchors the
Bank’s right to offset in respect of those liabilities.
(3) The Bank offsets deposits whose repayment to the depositor is conditional upon the extent of collection of the credit, and the
credit granted out of these deposits, when there is no risk to the Bank of a loss from the credit, and presents them in the balance sheet
in a net amount. The spread from this operation is included in the "operating fees" item.
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W. Segmental Reporting:
A segment of activity is a component of a banking corporation engaged in activities from which it is likely to derive income and bear
expenses, the result of operations of which is regularly examined by the Board of Management and the Board of Directors in order
to make decisions regarding resource allocation and performance evaluation, and with regard to which separate financial information
exists.The format for reporting on the segments of activity of the Bank is established in the Public Reporting Directives of the Supervisor
of Banks.
The division into segments at the Bank is based on characteristics of customer segments.These segments also include banking products.
The results of products which cannot be attributed to the relevant customer segments are included in “Others and Adjustments.”
X. Use of Estimates in the Preparation of the Financial Statements:
The preparation of financial statements in conformity with generally accepted accounting principles in Israel (Israeli GAAP) and the
directives and guidelines of the Supervisor of Banks requires the Board of Management of the Bank to exercise judgment and to use
estimates, evaluations, and assumptions that affect the application of policies and the amounts of assets, liabilities, income, and expenses.
It is hereby clarified that actual results may differ from such estimates.
In formulating the accounting estimates used in the preparation of the financial statements of the Bank, the Board of Management
of the Bank is required to make assumptions with regard to circumstances and events that involve significant uncertainty. The Board
of Management of the Bank bases its judgment in establishing these estimates on past experience, various facts, external factors, and
reasonable assumptions, according to the circumstances, as appropriate for each estimate.
The estimates and the underlying assumptions are reviewed routinely. Changes in accounting estimates are recognized in the period in
which the estimates are amended and in every affected future period.
Y. First-Time Implementation of Accounting Standards, Updates of Accounting Standards, and Directives of the
Supervisor of Banks:
(1) In July 2009, the US Financial Accounting Standards Board (FASB) changed the organization of its accounting standards. The
change is established in FASB Statement No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles" (currently ASC 105-10, “Generally Accepted Accounting Principles”). The statement establishes the
FASB Accounting Standards Codification (ASC) as the exclusive source of generally accepted accounting principles in the United
States applicable to reporting corporations that are not government agencies (nongovernmental US GAAP), with the exception of
the instructions of the US Securities and Exchange Commission (SEC). Therefore, all rules not adopted in the aforesaid manner and
rules not stemming from instructions of the SEC are not included in the codification and have become non-binding rules. Following the
codification, the FASB will no longer issue Statements of Financial Accounting Standards (SFAS), FASB Staff Positions, or clarifications and
guidelines on specific issues (EITF Abstracts). Instead, it will publish Accounting Standards Updates (ASU) to update the codification.
Starting January 1, 2010, pursuant to the update of the definitions section established in the circular of the Supervisor of Banks concerning
fair value measurements, the fair value option, and the adoption of certain IFRS, issued on December 31, 2009, the Bank adopted the new
hierarchy established in FAS 168 (ASC 105-10). In addition, as determined by the Supervisor of Banks, despite the hierarchy established
in FAS 168, any position stated to the public by bank supervision agencies in the United States or by staff members of bank supervision
agencies in the United States with regard to the manner of implementation of US GAAP is a generally accepted accounting principle
for US banks and shall also be binding for banking corporations and credit-card companies on matters of the implementation of US
accounting principles adopted in the past or to be adopted in the future within the Public Reporting Directives of the Supervisor of
Banks.The implementation of the codification had no effect on the accounting principles applicable to banks; it affects only the manner in
which banks will treat generally accepted accounting principles for banks in the US in significant reporting rules and accounting policies
in interim and annual financial statements for periods beginning January 1, 2010 or later.
(2) In June 2009, the FASB issued FAS 166 (ASC 860-10), "Accounting for Transfers of Financial Assets" (an amendment of FAS 140 (ASC
860-10)). FAS 166 cancels the principle of Qualified Special Purpose Entities (QSPE); establishes stricter terms for accounting treatment
as a sale with regard to the transfer of part of a financial asset, including clarifications of the terms for derecognition of financial assets;
amends measurement rules for the initial recognition of retained interests; and cancels reclassification rules in guaranteed mortgage
securitization.
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(continued)
The FASB concurrently issued FAS 167 (ASC 810-10), “Amendments to FASB Interpretation No. 46(R)” (ASC 810-10), which amends
the rules set forth in FIN 46(R) (ASC 810-10), “Consolidation of Variable Interest Entities”. FAS 167 requires an examination, at the
initial implementation date of the standard on January 1, 2010, of the consolidation requirement with regard to all entities previously
defined as QSPEs as well as other Variable Interest Entities (VIEs) in which the Bank is involved; updates the criteria for the identification
of VIEs; changes the method of establishing the identity of the primary beneficiary (from an approach based on quantitative tests to
a qualitative test to identify the control of financial rights); and requires reporting corporations to reexamine the requirement to
consolidate VIEs more frequently.
In addition, FAS 166 and FAS 167 establish new disclosure requirements to be included in annual and interim financial statements.
Pursuant to the circular of the Supervisor of Banks of September 6, 2009, the Bank implements the rules set forth in FAS 166 and
FAS 167, including the disclosure requirements established therein, from January 1, 2010 forward, in accordance with the transitional
directives established in those standards. In general, the transitional directives require the following:
• Implementation of the recognition and measurement requirements in the standard with regard to transfers of financial assets
performed as of January 1, 2010.
• From January 1, 2010 forward, examination of entities defined as QSPEs under the former rules, to determine whether consolidation
is required pursuant to FAS 167.
The effect of the initial implementation of FAS 166 and FAS 167 is immaterial.
(3) In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives”, an exception from FAS
133 (ASC 815-15), “Accounting for Derivative Instruments and Hedging Activities,” which sets forth instructions regarding the manner of
determining whether the characteristics of credit derivatives embedded in financial instruments require accounting treatment in which
the embedded derivative is separated. The update clarifies that only the concentration of credit risk in the form of subordination of
rights according to one financial instrument relative to another shall not be considered an embedded derivative. In addition, the update
provides instructions regarding the assessment whether an embedded credit derivative meets the criterion of being “clearly and closely
related”. In light of the clarifications provided in the update, the following situations, among others, shall not be considered eligible for
exception from the scope of FAS 133 (ASC 815-15), and shall require separate accounting treatment, pursuant to the standard, or
treatment according to the rules set forth in FAS 155 (ASC 815-10):
• An embedded credit derivative that exposes the holder of the tranche to possible future payments shall not be considered to be
clearly and closely related to the host contract;
• In a securitization structure, if a new credit risk is added to the beneficiary rights through a written CDS, the embedded credit
derivative including the subordinate characteristic of the tranche shall not be considered to be clearly and closely related to the host
contract.
The Bank has implemented these directives as of July 1, 2010. The effect on the financial statements was immaterial.
Z. Effect of New Accounting Standards and New Directives of the Supervisor of Banks in the Period Prior to
Implementation:
(1) In July 2006, the Israel Accounting Standards Board published Accounting Standard No. 29, "Adoption of International Financial
Reporting Standards (IFRS)" (hereinafter: the "Standard"). The Standard stipulates that entities subject to the Securities Law, 1968 and
required to report under its regulations shall prepare their financial statements according to IFRS for periods starting as of January 1, 2008.
The aforesaid does not yet apply to banking corporations and credit-card companies whose financial statements are prepared according
to the directives and guidelines of the Supervisor of Banks.
In June 2009, the Supervisor of Banks issued a circular concerning "Reporting by Banking Corporations and Credit-Card Companies in
Israel in Accordance with International Financial Reporting Standards (IFRS)," which establishes the expected manner of adoption of
IFRS by banking corporations and credit-card companies.
Pursuant to the circular, the deadlines for reporting by banking corporations according to IFRS are as follows:
• On matters not related to the core business of banking – As of January 1, 2011. From that date forward, banking corporations
will be required to update the accounting treatment of these matters routinely, pursuant to the transitional directives in the new
international standards to be published on these matters, and in accordance with the clarifications to be issued by the Supervisor
of Banks.
• On matters related to the core business of banking – As of January 1, 2013. During 2011, the Supervisor of Banks intends to reach a final
decision on this matter. The final decision will be made taking into consideration the schedule established in the United States and the
progress of the convergence process between international and American standards.
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(continued)
The circular clarifies that subsequent to the completion of the process of adjusting the directives to the international standards, the
Supervisor of Banks will retain the authority to set forth binding clarifications with regard to the manner of implementation of the
requirements of the international standards, and to set forth additional directives in cases in which it is necessary due to the requirements
of the supervisory agencies in developed countries globally, or on matters not addressed by the international standards. In addition, the
Supervisor of Banks will retain the authority to establish disclosure and reporting requirements.
Thus, until the target dates for the adoption of IFRS, as noted above, the financial statements of the Bank will continue to be prepared
in accordance with the directives and guidelines of the Supervisor of Banks.
Within the published updates of the Public Reporting Directives, the following IFRS were adopted, which address matters not related
to the core business of banking:
(1) IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors;
(2) IAS 21, The Effects of Changes in Foreign Exchange Rates;
(3) IAS 33, Earnings Per Share;
(4) IFRS 2, Share-Based Payment;
(5) IAS 29, Financial Reporting in Hyperinflationary Economies;
(6) IAS 34, Interim Financial Reporting;
(7) IFRS 3 (2008), Business Combinations;
(8) IAS 27 (2008), Consolidated and Separate Financial Statements;
(9) IAS 28, Investments in Associates;
(10) IAS 36, Impairment of Assets;
(11) IAS 17, Leases;
(12) IAS 16, Fixed Assets;
(13) IAS 40, Investment Property;
(14) IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations;
(15) IAS 10, Events After the Reporting Period;
(16) IAS 20, Accounting for Government Grants and Disclosure of Government Assistance;
(17) IAS 31, Interests In Joint Ventures;
(18) IAS 38, Intangible Assets.
The IFRS listed above and the related interpretations of the IFRIC (International Financial Reporting Interpretations Committee) are
to be adopted according to the following principles:
• In cases in which material matters are not specifically addressed by the standards or interpretations, or there are a number of
alternatives for the treatment of a material matter, banking corporation shall act according to specific implementation instructions
established by the Supervisor;
• In cases in which a material issue arises which is not resolved in the IFRS or in the implementation instructions of the Supervisor,
banking corporations shall treat the issue according to GAAP at US banks specifically applicable to these matters;
• Where an IFRS contains a reference to another IFRS adopted in the Public Reporting Directives, the banking corporation shall act
in accordance with the IFRS;
• Where an IFRS contains a reference to another IFRS not adopted in the Public Reporting Directives, the banking corporation shall
act in accordance with the Reporting Directives and with Israeli GAAP;
• Where an IFRS contains a reference to a definition of a term defined in the Public Reporting Directives, the reference to the
definition in the Directives shall replace the original reference.
Banking corporations shall implement the IFRS listed above and the IFRIC interpretations related to the implementation of these standards
from January 1, 2011 forward.The first-time implementation of the IFRS adopted in this Circular shall be performed in accordance with
transitional directives established in these IFRS, including the retroactive adjustment of comparison figures when necessary.
As of January 1, 2011, banking corporation shall routinely update the accounting treatment of the matters addressed in the Circular,
according to the inception dates and transitional directives established in new IFRS to be issued on these matters, and according to the
adoption principles and clarifications of the Supervisor of Banks.
The main effects of the adoption of IFRS applicable as of January 1, 2011 are described below:
IFRS 3 (2008), Business Combinations, and IAS 27, Consolidated and Separate Financial Statements
IFRS 3 and IAS 27 change the required accounting treatment of some of the matters addressed by these standards. In addition, these
standards clarify issues which were not previously addressed concerning business combinations and consolidated financial statements.
The following is a review of the principal changes in the new standards:
320
Note 1
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Accounting Policies
(continued)
(a) Transaction costs of an acquiring company in a business combination shall be recognized as an expense in the period in which they
are created (with the exception of issuance costs), and shall not be recognized as part of the cost of the business combination.
(b) Additional purchases of shares of an affiliate, after the attainment of control, shall be recognized as a transaction on the equity level.
(c) Realizations of shares of an affiliate while retaining control shall be recognized as a transaction on the equity level.
(d) In the loss of control over an affiliate, the balance of the investment in the company shall be measured at fair value at the date of
the loss of control, and the difference shall be allocated to profit or loss for the period. The fair value shall constitute the cost for the
purposes of accounting treatment in subsequent periods.
(e) Goodwill is no longer amortized, and an examination of impairment shall be performed annually.
(f) Rights that do not grant control (formerly called minority interests) shall constitute part of shareholders’ equity, and shall be measured
at fair value at the acquisition date, against recognition of the entire goodwill of the acquired company.
(g) Profit or loss in a consolidated company shall be recognized in full in the Bank’s statements, with a division between the part
attributed to the holders of equity rights at the Bank and rights that do not grant control (formerly minority interests), even if this causes
such rights to be presented as negative.
(h)The existence of potential voting rights exercisable immediately is taken into account when assessing the existence of control in
an affiliate.
(i) Changes recognized directly in other comprehensive profit of the affiliate shall be recognized in full in shareholders’ equity, with a
division between the part attributed to the Bank and rights that do not grant control (even if this causes such rights to be presented
as negative).
(j) In an acquisition in stages, the existing investment in the books of the holding company at the date of attainment of control shall
be measured at fair value, with the difference between the book value and the fair value recognized in profit or loss for the period.
Pursuant to the directives of the Supervisor of Banks, banking corporations are permitted to implement the standard retroactively, or
from this point forward, starting with the financial statements for periods beginning January 1, 2011.The Bank has chosen to implement
the standard from this point forward, starting with the financial statements for periods beginning January 1, 2011. Accordingly, the
implementation of these standards is not expected to affect the financial statements.
IFRS 2, Share-Based Payment
Share-based payments granted after March 15, 2005 and not yet vested by January 1, 2011 were treated in accordance with
Accounting Standard 24, which is based on IFRS 2. IFRS 2 requires the treatment of equity grants performed during the period starting
November 7, 2002 and not yet vested by the adoption date. Accordingly, the measurement and recording of option plans granted to
employees during the said period shall be amended. Following the amendment, the balance of retained earnings will increase by a total
of approximately NIS 65 million, against a decrease in the same amount in the balance of the capital reserve from a benefit due to
share-based payment transactions, such that the net effect on shareholders’ equity is zero.
IAS 17, Leases
The standard establishes principles for the classification of a lease as a financing lease or an operating lease. Pursuant to the standard,
leases of land shall also be examined according to the same principles, and amortized accordingly. The effect of the implementation of
IAS 17 at the Bank is expressed in the amortization of land treated as a financing lease over the period of the lease, amounting to a
reduction of the balance of retained earnings by a total of approximately NIS 35 million.
IAS 21,The Effect of Changes in Foreign Exchange Rates
Pursuant to the directives of the Supervisor of Banks prior to the adoption of the IFRS, overseas banking offices of banking corporations
were classified as foreign operations with a functional currency identical to the functional currency of the banking corporation. Under
the IFRS, in order to determine the functional currency, the banking corporation must take the following factors into consideration,
among others:
(a) The currency with the primary impact on selling prices of goods and services (usually the currency in which the selling prices of
the goods and services are denominated and settled), and the currency of the country whose competitive forces and supervision
(regulation) primarily determine the selling prices of the goods and services.
(b)The currency with the primary impact on costs of labor, materials, and other costs involved in the delivery of goods or services
(usually the currency in which such costs are denominated and settled).
(c) Other factors that can provide evidence of the functional currency of the entity, such as the currency in which monetary resources
are derived from financing activities, and the currency in which proceeds of operating activities are usually held.
321
Note 1
Significant
Accounting Policies
(continued)
(d) The relationship of the office with the banking corporation – whether the foreign operation has a substantial degree of independence,
whether transactions of the office with the banking corporation constitute a high or low percentage of the foreign operation, whether
cash flows from the foreign operation directly affect the cash flows of the banking corporation and are easily available for transfer to the
banking corporation, and whether the cash flows from the foreign operation are sufficient to finance its existing and forecast liabilities,
in the regular manner of the entity, without the provision of resources by the banking corporation.
As part of the preparations for the initial implementation of IAS 21, the Bank examined the tests established in the standard with regard
to each of the banking offices operating overseas. As required in the circular of the Supervisor of Banks concerning the adoption of
the international standards, the Bank requested preliminary instructions on this matter from the Supervisor of Banks. At this stage, the
decision regarding the functional currency of certain overseas offices of the Bank is under examination.
In accordance with the directives of the Supervisor of Banks, a banking corporation may implement the standard retroactively, or
from this point forward, with regard to translation differences accrued as of December 31, 2010, which are included in shareholders’
equity in respect of overseas offices.The Bank has chosen to implement the standard from this point forward, starting with the financial
statements for periods beginning January 1, 2011. Accordingly, a negative capital reserve from translation differences in the amount
of NIS 110 million will be classified into the balance of retained earnings on the transition date. Starting on that day, exchange-rate
differences of foreign currencies in respect of offices with a functional currency other than the NIS shall be allocated to the capital
reserve from translation differences.
IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations
Israeli GAAP, as adopted in the directives of the Supervisor of Banks, do not provide specific instructions for the measurement of assets
held for sale. Pursuant to the international standards, as adopted in the Public Reporting Directives, non-current assets and realization
groups meeting the criteria set forth in the standard, with the exception of assets seized, as defined in the Public Reporting Directives,
shall be measured according to the lower of the book value or the fair value net of selling costs. In addition, under IFRS, no depreciation
is included in respect of such assets from the date of the classification of the assets as held for sale. The standard is implemented from
this point forward, starting with the financial statements for periods beginning January 1, 2011. The implementation of this standard is
not expected to have a material effect on the financial statements.
(2) In December 2006, the Israel Accounting Standards Board issued Accounting Standard No. 23, “Accounting Treatment of Transactions
Between an Entity and its Controlling Party” (hereafter: the "Standard"). The Standard replaces the Securities Regulations (Statement of
Transactions between a Corporation and its Controlling Party in Financial Statements), 1996, as adopted in the Public Reporting Directives
of the Supervisor of Banks.The standard stipulates that assets and liabilities in respect of which a transaction has been executed between
an entity and its controlling party shall be measured at the date of the transaction at fair value, with the difference between the fair value
and the consideration for the transaction allocated to shareholders' equity. A negative difference essentially constitutes a dividend and
therefore reduces the balance of surpluses. A positive difference essentially constitutes an owner’s investment, and is therefore stated in
a separate item under shareholders’ equity: “capital fund from a transaction between an entity and its controlling party”.
The standard addresses three issues related to transactions between an entity and its controlling party, as follows:
• Transfers of assets to the entity from the controlling party, or alternatively, transfers of assets from the entity to the controlling party.
• Undertaking of a liability of the entity towards a third party, in full or in part, by the controlling party, or indemnification of the entity
by its controlling party for expenses, or a waiver by the controlling party of a debt owed by the entity, in full or in part.
• Loans given to or received from the controlling party. In addition, the standard stipulates the disclosure to be made in the financial
statements with regard to transactions between an entity and its controlling party during the period.
In May 2008 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 corporation or credit-card
companies and their controlling parties, and to transactions between banking corporation and companies under their control:
(a) International financial reporting standards.
(b) 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 US shall be applied, provided that they do not conflict with IFRS.
(c) In the absence of references in US GAAP, parts of Standard 23 shall be applied, provided that they do not conflict with IFRS or
with US GAAP, 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
adoption of specific rules on this subject and with regard to the manner of the first-time implementation thereof.
322
Note 1
Significant
Accounting Policies
(continued)
(3) A circular of the Supervisor of Banks on the subject of the measurement and disclosure of impaired debts, credit risk, and provision
for credit losses was issued in December 2007. The circular is based, inter alia, on US accounting standards (ASC 310) and on the
relevant regulatory directives of bank supervision agencies and the Securities and Exchange Commission in the United States. The
guiding principles of the circular represent a substantial change from the current directives on the classification of problematic debts
and the measurement of provisions for credit losses in respect of such debts. The Bank has implemented the provisions of the circular
as of January 1, 2011, in accordance with the transitional directives and guidelines established by the Supervisor of Banks. The effect of
the initial implementation of the directive, in the amount of NIS 964 million (net of tax), will be charged against the opening balance of
retained earnings.The directive of the Supervisor of Banks requires the presentation of a pro-forma note detailing the effect of the new
directives on the principal balance-sheet items in the consolidated statements as of December 31, 2010, provided that the directives
were implemented as of that date.
In addition, in December 2010, the Supervisor of Banks issued a circular on the treatment of problematic debts. The circular changes
the definition of housing loans in respect of which the Bank is required to assess a provision for credit losses according to the method
of the extent of arrears. Pursuant to the directive of the Supervisor, the Bank implemented the amendment from this point forward,
starting with the financial statements for periods beginning January 1, 2011. According to estimates by the Bank, the provision for credit
losses according to the method of the extent of arrears will increase by a total of NIS 49 million as a result of the initial implementation
of the circular.
For details regarding the manner of implementation and the expected effect of the new directives, see Note 1A below.
(4) On December 31, 2009, the Supervisor of Banks issued a circular regarding fair value measurements and the fair value option
(hereinafter: the “Circular”). The Circular adopts:
(1) US Financial Accounting Standard 157, “Fair Value Measurements” (ASC 820-10, hereinafter: “FAS 157”);
(2) US Financial Accounting Standard 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (ASC 825-10, hereinafter:
“FAS 159”).
(a) FAS 157 – Fair Value Measurements
FAS 157 defines fair value and establishes a consistent working framework for the measurement of fair value by defining fair value
assessment techniques with regard to assets and liabilities, and by establishing a fair value hierarchy and detailed instructions for
implementation.
Observable inputs represent information available in the market and received from independent sources, whereas unobservable
inputs reflect the assumptions of the banking corporation.These types of inputs give rise to the hierarchy of fair value described below:
• Level 1 data: Prices quoted (unadjusted) in active markets for identical assets or liabilities.
• Level 2 data: Prices quoted in active markets for similar assets or liabilities; prices quoted in inactive markets for identical assets or
liabilities; prices derived from evaluation models in which all significant inputs are observed in the market or supported by observed
market data.
• Level 3 data: Unobserved data regarding the asset or liability, arising from evaluation models in which one or more of the significant
inputs is unobserved.
In addition, FAS 157 expands the disclosure requirements for measurements of fair value. The implementation of the rules set forth
in FAS 157 will require the cessation of the use of the blockage factor in the calculation of fair value, and will replace the directives of
EITF 02-3 (ASC 815-10), “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved
in Energy Trading and Risk Management Activities”, which prohibit the recognition of day one profits and require that the fair value of
derivative instruments not traded on an active market be determined according to the transaction price. In addition, FAS 157 requires
banking corporations to reflect nonperformance risk in the measurement of the fair value of debt, including derivatives, issued by the
banking corporation and measured at fair value. Nonperformance risk shall include the credit risk of the banking corporation, but shall
not be limited to this risk alone.
FAS 157 will apply from January 1, 2011 forward, and will be adopted for the first time in a limited format of retroactive implementation.
Consequently, FAS 157 will be implemented from this point forward, with the exception of financial instruments measured prior to the
initial implementation of FAS 157, in the following manner:
(1) Positions in financial instruments traded on an active market which were measured at fair value using the blockage factor;
(2) Financial instruments measured at fair value at the first recognition date according to section A1 of the Public Reporting Directives,
using the transaction price, pursuant to the directives of EITF 02-3 (ASC 815-10);
(3) Hybrid financial instruments measured at fair value at the first recognition date, using the transaction price, according to Section
A1 of the Public Reporting Directives.
323
Note 1
Significant
Accounting Policies
(continued)
At the initial implementation date, the difference between the balance-sheet balances of the aforesaid financial instruments and the fair
values of those instruments shall be recognized as a cumulative effect in the opening balance of retained earnings as of January 1, 2011,
which will be presented separately. According to estimates by the Bank, the aforesaid effect to be recognized in retained earnings on
January 1, 2011, is negligible.
The new disclosure requirements, including the disclosure required in annual statements only, were implemented in the first quarter of
2011, with no obligation to apply the aforesaid disclosure requirements to financial statements for periods presented before the initial
implementation of the standard.
In addition, the transitional directives for 2011 set forth specific instructions regarding the data to be used in the calculation of the fair value
of derivative instruments. It was further established that in quarterly and annual financial statements in 2011, a banking corporation is not
required to use complex models that include different scenarios of potential exposure in order to measure the credit-risk component
included in the fair value of derivative instruments. In accordance with the aforesaid transitional directives and the directives of the Supervisor
of Banks, the Bank implemented the rules set forth in FAS 157 with certain adjustments concerning the manner of calculation of the
credit-risk component in the fair value of financial instruments.The Bank is preparing for the implementation of FAS 157. According to the
Bank’s estimates, the implementation of the standard is not expected to have a material effect on the results of operations.
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, “Improving Disclosures about Fair Value Measurements.”
The update requires disclosure of amounts of significant transitions from level 1 fair value measurements to level 2 measurements
and vice versa, and the inclusion of explanations for such transitions. In addition, the update requires disclosure of gross amounts of
changes in level 3 fair value measurements resulting from transactions of acquisition, sale, issuance, and maturation. These disclosure
requirements will apply to the quarterly and annual financial statements of banking corporations for the reporting periods beginning
from January 1, 2011 forward.The Bank is preparing to implement the aforesaid additional disclosure requirements as part of the project
of preparing for the implementation of FAS 157 (ASC 820-10).
(b) FAS 159 – The Fair Value Option for Financial Assets and Financial Liabilities
The purpose of FAS 159 is to allow reduced fluctuations in reported profits arising from the measurement of hedged assets and hedged
liabilities and hedging derivative instruments using different measurement bases.
FAS 159 allows a choice, at defined dates, to measure financial instruments and certain other items (the eligible items) at fair value,
which under Public Reporting Directives are not required to be measured at fair value. Unrealized profits and losses in respect of
changes in the fair value of the items for which the fair value option is selected shall be reported in the statement of profit and loss for
each consecutive reporting period. In addition, prepaid costs and fees related to the items for which the fair value option is selected
shall be recognized in profit and loss on the date of creation, rather than deferred. The choice to apply the fair value option, as noted
above, shall be made instrument by instrument, and cannot be cancelled. In addition, FAS 159 establishes presentation and disclosure
requirements aimed at facilitating comparisons between banking corporations that choose different measurement bases for similar
types of assets and liabilities.
Despite the aforesaid, the Circular clarifies that a banking corporation shall not choose the fair value option unless the banking corporation
has developed knowledge, systems, procedures, and controls at a high level, in advance, which will enable it to measure the item at a high
degree of reliability.Thus, a banking corporation shall not choose the fair value option with regard to any asset classified in level 2 or level
3 of the fair value hierarchy, or with regard to any liability, unless it receives advance approval to do so from the Supervisor of Banks.
FAS 159 will apply from January 1, 2011 forward. Implementation through retroactive adoption or implementation through early
adoption are prohibited.
324
Note 1
Significant
Accounting Policies
(continued)
The transitional directives of the Supervisor of Banks refer to the implementation with regard to eligible assets existing at the inception
date, and to securities available for sale and securities held to maturity, as follows:
• Implementation for eligible items existing at the inception date: A banking corporation is permitted to choose the fair value option
for eligible items existing at the inception date. In these cases, the balance-sheet balances of these eligible items shall be adjusted to
fair value, and the effect of the initial re-measurement at fair value shall be allocated as an adjustment in respect of the cumulative
effect to the opening balance of surpluses. In addition, a banking corporation choosing the fair value option for items existing at the
inception date shall include extensive disclosures, as required in the Circular, in its annual financial statements and in its first interim
financial statements for 2011.
• Securities available for sale and securities held to maturity: Securities available for sale and securities held to maturity held at the inception
date are eligible for the fair value option at that date. If the fair value option is chosen for any of these securities at the inception date,
accrued profits and losses not yet realized at that date shall be included in the adjustment in respect of the cumulative effect, and the
security in question shall be reported as of that date as a security held for trading. In addition, separate disclosure shall be given to
the amount of unrealized profits and losses reclassified from cumulative other comprehensive profit, and to the amount of unrealized
profits and losses not previously recognized. The choice of the fair value option for an existing security held to maturity at the initial
adoption shall not cast doubt on the banking corporation’s intention to hold other bonds to maturity in the future.
With the adoption of FAS 159, at this stage the Bank does not intend to change the measurement of financial instruments.
(5) Instructions and clarifications regarding the reinforcement of internal control over financial reporting in the area of employee benefits
On February 16, 2011, a draft was issued by the Supervisor of Banks concerning instructions and clarifications regarding the reinforcement
of internal control over financial reporting in the area of employee benefits. The draft establishes instructions regarding the internal
control of the financial reporting process in the area of employee benefits, with a requirement for the involvement of a licensed actuary,
identification and classification of liabilities in respect of employee rights, application of internal controls for the reliance on the actuary’s
assessment, and a requirement for disclosure, within significant accounting policies and accounting estimates on critical matters, regarding
the quantitative effect of various estimates used to assess the liability of the banking corporation for employee benefits.
In addition, according to the draft a banking corporation that expects to pay a group of employees benefits beyond the contractual terms
should take into account the percentage of employees expected to depart (including employees expected to retire under voluntaryretirement programs, or upon the receipt of other preferred terms) and the benefits which they are expected to receive upon departure.
The liability for severance pay to this group of employees should be presented in the financial statements at the higher of the amount of
the liability calculated on an actuarial basis, taking into account the additional cost expected to be incurred by the banking corporation
due to the grant of the said benefits, or the amount of the liabilities calculated by multiplying the monthly salary of the employee by
the number of years of employment, as required in Opinion Statement 20 of the Institute of Certified Public Accountants in Israel.
The instructions included in the draft will be implemented starting with financial statements for periods after January 1, 2011.The Bank
is preparing to implement the draft. At this stage, the Bank is unable to estimate the effect of the implementation of the measurement
directives established in the draft.
325
Note 1A
Effect of the Directive
on the Measurement
and Disclosure of
Impaired Debts, Credit
Risk, and Credit Loss
Provisions on Certain
Balance Sheet Items as of
December 31, 2010
Accounting Policy Starting on the Date of Implementation of the Directive
Pursuant to the new directive of the Supervisor of Banks concerning the measurement and disclosure of impaired debts, credit risk, and
credit loss provisions, as of January 1, 2011, the Bank is required to implement the US accounting standards (ASC 310) and the position
statements of the banking supervision agencies in the United States and of the Securities and Exchange Commission in the Unites States,
as adopted in the Public Reporting Directives.The guiding principles of the new directive represent a substantial change from the current
directives, which are detailed in Note 1(G) to the Financial Statements, on the classification and measurement of problematic debts.
Under this directive, the Bank is required to maintain provisions for credit losses at an appropriate level in order to cover estimated
credit losses with respect to its credit portfolio. The directive applies to balance-sheet credit risk balances within its purview, such as
deposits with banks, securities borrowed or bought in resale agreements, credit to the public, credit to the government, etc. In addition,
the Bank is required to maintain a provision in a separate liability account at an appropriate level to cover estimated credit losses related
to off-balance-sheet credit instruments, such as contractual engagements to provide credit, unutilized credit facilities, and guarantees.
The required provision to cover estimated credit losses with respect to the credit portfolio is to be assessed by one of two methods:
“individual provisions” and “group provisions.”The Bank is also required to examine the overall fairness of the provision for credit losses.
Individual provision for credit losses – The Bank has chosen to identify debts with a total contractual balance (without deducting
accounting write-offs that do not involve legal waivers, unrecognized interest, provisions for credit losses, and collateral) aggregated
at the customer level of more than NIS 1 million for individual examination. In addition, the Bank identifies certain debts with other
problematic characteristics for individual examination, as well as debts of customers in restructuring of problematic debt, for which the
provision for impairment is not included in the credit loss provision assessed on a group basis. An individual provision for credit losses
is recognized for debt classified as impaired. Debts are classified as impaired when, based on current information and events, the Bank
estimates that it will be unable to collect the full amount owed to it according to the contractual terms of the debt agreement. In any
case, debts are classified as impaired when the principal or interest is in arrears of 90 days or more. In addition, any debt where terms
have been changed in restructuring of problematic debt is classified as impaired debt, unless a minimal provision for credit losses was
performed in respect of the debt before and after the restructuring, based on the method of the extent of the arrears, in accordance
with Proper Conduct of Banking Business Directive No. 314 concerning problematic debts in housing loans at a mortgage bank. The
individual provision for credit losses is to be assessed based on expected future cash flows, discounted at the original effective interest
rate of the debt. When the debt is contingent upon collateral, or when the Bank determines that seizure of an asset is expected, the
individual provision is assessed based on the fair value of the collateral pledged to secure the debt.The individual provision required in
respect of off-balance-sheet credit instruments is assessed in accordance with the rules established in ASC 450, Contingencies (originally
FAS 5, Accounting for Contingencies).
Provision for credit losses assessed on a group basis – Calculated to reflect provisions for impairment in respect of credit losses not
individually identified inherent in large groups of small debts with similar risk attributes, and in respect of debts examined individually
and found to be unimpaired. The provision for credit losses in respect of debts evaluated on a group basis, excluding housing loans,
for which a minimum specific provision was calculated based on the extent of arrears, is to be calculated in accordance with the rules
stipulated in ASC 450 (FAS 5), based on a formula detailed in the temporary order of the Supervisor of Banks, which is in effect up to
and including December 31, 2012.The formula is based on historical rates of loss in the various sectors of the economy, with a division
between problematic and non-problematic credit, in 2008, 2009, and 2010, as well as on actual rates of net accounting write-offs during
the periods following the initial implementation date.The temporary order further states that following its implementation there is no
requirement to maintain a general and supplementary provision; however, in any case the amount of the group provision at the end of
each reporting period shall not be less than the amount of the general and supplementary provision calculated for that date, embedded
in the tax rate. Pursuant to the directives of the Supervisor of Banks, the provision assessed on a group basis for off-balance-sheet credit
balances is based on the provision rates established for balance-sheet credit (as detailed above), taking into consideration the expected
rate of realization of credit of the off-balance-sheet credit risk. This is based on the credit conversion coefficients specified in Proper
Conduct of Banking Business Directive No. 203, “Capital Measurement and Adequacy – Credit Risk – The Standard Approach,” with
certain adjustments.The total provision in respect of off-balance-sheet credit balances, which was calculated as noted above, amounted
to NIS 335 million.This provision will not be deducted from the "credit to the public" item, and will be included in the "other liabilities"
item of the balance sheet.
Minimum provision in respect of housing loans – Calculated according to a formula specified by the Supervisor of Banks, taking into
account the extent of the arrears, such that the rate of the provision increases for greater arrears. An amendment to the appendix of
Proper Conduct of Banking Business Directive No. 314 (Problematic Debts in Housing Loans), effective on the initial implementation
date of the new directive, expands the application of the calculation of the provision according to the formula of the extent of arrears
to all loans secured by mortgages of homes, with the exception of loans not repaid in periodic installments and loans that finance
activity of a business nature.
326
Note 1A
on the Measurement
and Disclosure of
December 31, 2010
(continued)
The Bank shall not accrue interest income in respect of a debt classified as impaired, except as stipulated below with regard to certain
restructured debts; and in any event, no financing income shall be recognized on a debt balance which has been written off in accounting
(see below). In addition, upon classification of a debt as impaired, the Bank shall cancel all uncollected accrued interest income that has
been recognized as income in the statement of profit and loss. Such debts are defined by the Bank as debts that do not accrue interest
income. The debt will continue to be classified as debt that does not accrue income, as long as its classification as an impaired debt is
not cancelled. However, when an impaired debt has been formally restructured, and following the restructuring there is a reasonable
degree of confidence that the debt will be repaid and will perform in accordance with its new terms, the debt shall be treated as an
impaired debt accruing interest income.
In accordance with the rules set forth in the directive, the Bank performs accounting write-offs for all individually examined debts, or
parts of debts, thought to be uncollectible, of such low value that their retention as assets is unjustified, or debts in respect of which
the Bank has carried out prolonged collection efforts (defined in most cases as a period exceeding two years). In cases in which the
individual provision for the debt is assessed based on the fair value of the collateral, the Bank performs accounting write-offs for any
debt balance in excess of the fair value of the collateral. With regard to debts evaluated on a group basis, accounting write-off rules
were established based on the period of arrears (in most cases, more than 150 consecutive days of arrears) and other problematic
parameters. Pursuant to the directive, accounting write-offs do not involve a legal waiver, and they reduce the balance of reported debt
for accounting purposes only, creating a new cost base for the debt in the Bank’s books.
In addition, the directive establishes various definitions and classifications of problematic credit risk (the Bank classifies all of its problematic
debts and problematic off-balance-sheet credit items under the categories: under special supervision, inferior, or impaired).
Following the implementation of the new directive, the credit balance in the financial statements will be presented as a “recorded
balance,” defined as the debt balance including recognized accrued interest, premiums or discounts not yet deducted, and net deferred
fees or net deferred costs allocated to the debt balance in accordance with the Public Reporting Directives and not yet written down,
excluding any debt amount (principal and interest) previously written off in accounting, but before the exclusion of the individual or
group provision for credit losses. In addition, a “net debt balance” will be presented, defined as the reported debt balance excluding the
individual and group provision for credit losses.
The directive is to be implemented in financial statements for periods beginning January 1, 2011, or later. The directive shall not be
implemented retroactively in financial statements for previous periods. At the initial implementation date, the Bank will, among other things:
- Perform accounting write-offs of all debts meeting the conditions for accounting write-offs on that date;
- Classify all debts meeting the conditions for such classification as under special supervision, inferior, or impaired. In this context,
it is clarified that despite the definition according to which restructured problematic debt is impaired debt, the Bank shall not classify
as impaired debts restructured before January 1, 2007, provided that the debt is not impaired based on the terms established in the
restructuring agreement;
- Cancel all accrued unpaid interest income in respect of all debts meeting the relevant conditions on that date;
- Adjust the balance of the provision for credit losses in respect of balance-sheet credit risk and in respect of off-balance-sheet credit
instruments as of January 1, 2011 to the requirements of the directive; and
- Examine the need to adjust the balance of current and deferred taxes receivable and payable as of January 1, 2011.
Adjustments arising from the aforesaid actions as of the initial implementation date shall be included directly in the retained earnings
item of shareholders' equity.
In determining the expected effect on the data included in the financial statements as of December 31, 2010, as a result of the adoption
of the new directives, estimates and assumptions were used, the main points of which are detailed above, based on directives and
guidelines issued by the Supervisor of Banks.These estimates and assumptions have a material effect on the pro-forma data presented in
the financial statements.The Board of Management of the Bank believes that these data fairly reflect the effect of the implementation of
the directive on the financial statements, but finds it necessary to note that, in view of the complexity of the directive and the processes
involved in its implementation, the effect may differ from the description below.
The following pro-forma note details the expected effect of the initial adoption of this directive on January 1, 2011:
327
(NIS millions)
Note 1A
on the Measurement
and Disclosure of
December 31, 2010
(continued)
A. Effect of the Initial Implementation of the New Directives on the Principal Balance Sheet Items as of
December 31, 2010
This section presents the effect that the initial implementation of the new directives regarding the measurement and disclosure of
impaired debt, credit risk, and credit loss provisions would have had, if the new directives had been implemented for the first time on
December 31, 2010
1. Summary of the effect on retained earnings as of December 31, 2010
December 31,
2010
14,327
Balance of retained earnings as of December 31, 2010 included in the financial statements
)964(
Cumulative effect net of tax of initial implementation of the new directives as of December 31, 2010
Of which:
)1,942(
Change in provision for credit losses*
978
Related tax effect
13,363
Balance of retained earnings as of December 31, 2010 under the new directives
* Includes an effect in the amount of NIS 49 million in respect of housing loans for which a minimum provision for credit losses
was performed based on the extent of arrears, in accordance with the amendment of the appendix to Proper Conduct of
Banking Business Directive No. 314.
2. Effect on credit to the public (before deduction of credit loss provisions) as of December 31, 2010
December 31,
2010
Balance of credit to the public (before deduction of provision* for doubtful debts)
as of December 31, 2010 included in the financial statements
245,633
Effect of initial implementation as of December 31, 2010 of the new directives:
Net* accounting write-offs recognized as of December 31, 2010
Other changes in the balance of credit to the public as of December 31, 2010
Recorded balance of credit to the public (before deduction of credit loss provisions) as of
December 31, 2010, under the new directives
* Principal and interest.
328
)16,499(
229,134
(NIS millions)
Note 1A
on the Measurement
and Disclosure of
December 31, 2010
(continued)
3. Effect on provision for credit losses in respect of debts and in respect of off-balance-sheet credit instruments
as of December 31, 2010
Provision for credit losses
On a group basis*
Individual
Balance of provision for credit losses as of
December 31, 2010 included in the financial statements(1)
By extent of
arrears
Other
Total
261
1,032
11,589
-
-
****581
49
947
1,577
3,432
310
1,979
5,721
**10,296
Effect of initial implementation of the new directives
Net accounting write-offs recognized as of
December 31, 2010
Other changes in the provision for credit losses as of
December 31, 2010 (allocated to shareholders’ equity)
***)7,445(
Balance of provision for credit losses as of
December 31, 2010, according to the new directives
)7,445(
*
Including provisions on a group basis in respect of debts examined individually and found to be unimpaired.
** Including provisions not deducted from the item “credit to the public,” in the amount of NIS 206 million.
*** Of the balance of the provision on an individual basis, as of December 31, 2010.
****Composition:
Increase in individual provision for credit losses
195
Increase in individual provision in respect of discounting
of expected cash flows
386
(1) See Note 4B to the Financial Statements.
4. Effect on balance of other assets in respect of net deferred taxes receivable as of December 31, 2010
December 31,
2010
Balance of other assets in respect of net deferred taxes receivable as of December 31, 2010 included in the
financial statements(1)
859
Effect of initial implementation as of December 31, 2010, of the new directives*
781
Balance of other assets in respect of net deferred taxes receivable as of December 31, 2010 according to the
new directives
1,640
*Composition:
Deferred taxes receivable in respect of the provision on a group basis
657
Deferred taxes receivable in respect of the provision on the individual provision discounted expected cash flows
124
(1) See Note 8 to the Financial Statements.
329
(NIS millions)
Note 1A
on the Measurement
and Disclosure of
December 31, 2010
(continued)
B. Additional Details Regarding the Data Based on the New Directives
All balances presented in this section are presented as they would be under the new directives regarding the measurement and risk of
impaired debt, credit risk, and credit loss provisions, if the directives had been implemented for the first time on December 31, 2010
5. Balance of credit to the public as of December 31, 2010, according to the new directives
December 31, 2010
Credit to the public examined on an individual basis*
Credit to the public examined on a group basis**
Total credit to the public
Of which: Customers’ liabilities for acceptances
Recorded debt
balance
Provision for
credit losses
Net debt
balance
137,071
4,419
132,652
92,063
761
91,302
229,134
5,180
223,954
380
3
377
* Including credit examined on an individual basis and found to be unimpaired.The provision for credit losses in respect of such
credit was calculated on a group basis. For further details regarding credit examined on an individual basis, see Section 6 below.
** Credit for which the provision for credit losses in assessed on a group basis using the method of the extent of arrears, pursuant
to the appendix to Proper Conduct of Banking Business Directive No. 314, and other credit not individually examined for
which the provision for credit losses was calculated on a group basis. For further details, see Sections 7 and 9 below.
6. Credit to the public examined on an individual basis
December 31, 2010
Recorded debt
balance
Provision for
credit losses
Net debt
balance
10,689
3,231
7,458
-
-
-
394
13
381
Other unimpaired credit to the public**
125,988
1,175
124,813
Total unimpaired credit to the public**
126,382
1,188
125,194
Total individually examined credit to the public
137,071
4,419
132,652
Impaired credit to the public*
Unimpaired credit to the public, 90 days or more in arrears**
Unimpaired credit to the public, 30 to 89 days in arrears**
* Impaired credit does not accrue interest income, with the exception of certain credit in restructuring, as noted below.
** Credit examined individually and found to be unimpaired.The provision for credit losses in respect of this credit was calculated
on a group basis.
330
(NIS millions)
Note 1A
on the Measurement
and Disclosure of
December 31, 2010
(continued)
Additional information regarding impaired credit to the public examined individually:
December 31,
2010
Impaired credit to the public for which an individual credit loss provision exists
8,054
Impaired credit to the public for which an individual credit loss provision does not exist
2,635
10,689
Total impaired credit to the public
7,275
Impaired credit to the public measured at the current value of cash flows
3,414
Impaired credit to the public measured by the value of collateral
10,689
Total impaired credit to the public
Problematic credit in restructuring where the terms of the credit have been changed:
December 31, 2010
Recorded debt
balance
Provision for
credit losses
Net debt
balance
3,380
1,350
2,030
Accruing interest income, in arrears of 90 days or more
-
-
-
Accruing interest income, in arrears of 30 to 89 days
-
-
-
271
-
271
3,651
1,350
2,301
Not accruing interest income
Accruing interest income
Total credit (included in impaired credit to the public)
Commitments to grant additional credit to debtors whose problematic credit has been restructured with changes to the terms
of the credit totaled NIS 151 million as of December 31, 2010.
7. Credit to the public examined on a group basis
Housing loans in respect of which a minimum provision for credit losses was performed based on the extent of
arrears, pursuant to Proper Conduct of Banking Business Directive No. 314:
Extent of arrears
30 to
90 days
More than
90 days
1-3
months
Over 3
Over 6 Over 15
months, months, months,
up to 6 up to 15 up to 33
months months months
Over 33 Total over Balances in
months 3 months respect of
refinanced
loans in
arrears***
Total
Amount in arrears
9
10
22
22
101
155
59
223
Of which: Balance of provision
for interest*
-
-
-
1
41
42
5
47
592
272
234
93
164
760
417
1,769
-
-
33
40
90
163
147
310
592
272
201
53
71
597
270
1,459
Recorded debt balance
Balance of provision for credit losses**
Net debt balance
* In respect of interest on amounts in arrears.
** Excluding the balance of the provision for interest.
***Loans in which an arrangement has been signed for repayment of the arrears of the borrower, where the amortization table
has been changed in respect of the balance of the loan that has not yet matured.
331
(NIS millions)
Note 1A
on the Measurement
and Disclosure of
December 31, 2010
(continued)
Other credit not individually examined, for which the credit loss provision was calculated on a group basis:
December 31, 2010
Recorded
debt balance
Provision for
credit losses
Net debt
balance
-
-
-
Unimpaired credit to the public, 90 days or more in arrears
132
25
107
Unimpaired credit to the public, 30 to 89 days in arrears
394
20
374
Other unimpaired credit to the public
48,160
406
47,754
Total
48,686
451
48,235
Impaired credit to the public
8. Composition of the balance of the provis

Bank Hapoalim Annual Report 2010 - RNS Submit

Transcription

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