TEL AVIV (Reuters) - Israel's top three banks all posted a drop in quarterly profits on Thursday, with slowing economic growth leading to increased bad debts and a weaker stock market hitting income from commissions and investments.
The results underscored the advantages of top bank Hapoalim POLI.TA, which benefited from a lower exposure than rivals to non-banking investments and the troubles of foreign banks, unlike its biggest rival, Leumi (LUMI.TA), a holder of Spanish and Italian bank bonds.
But analysts predict Israel's economy will grow by about 2.5 percent in 2012, down from 4.6 percent in 2011, raising fears of an increase in problems for the country's many highly indebted conglomerates.
The banks have boosted their interest income with a rise in lending to companies in Israel who face difficulties in issuing bonds, Leader Capital Markets analyst Alon Glazer said. Due to a series of debt restructurings that spooked investors, only top investment grade companies are issuing new bonds.
"On the other hand operating income is falling, mainly due to the weak capital markets," he said. "At some of the banks we saw a fall in commissions from ongoing activities due to a decline in the level of economic activity ... We assume this trend will continue in the light of estimates that economic growth is expected to drop."
Hapoalim reported a 15 percent fall in its second-quarter net profit to 607 million shekels ($151 million), just shy of the 613 million average forecast given in a Reuters poll of analysts.
UBS analyst Roni Biron said the results were in line with his forecast, with a slight fall in total income mainly due to lower fees being earnt in the weak capital markets, he added.
"While results provide few reasons for either excitement or concern, they highlight the low volatile nature of Hapoalim's model," Deutsche Bank analyst Dan Harverd wrote in a note.
Hapoalim's shares were down 1 percent at 12.46 shekels in afternoon trade.
Meanwhile Leumi saw its net profit in the last quarter fall 50 percent to 280 million shekels compared with 435 million forecast. Credit loss expenses rose to 333 million shekels, above expectations.
The bank was also hit by a 101 million-shekel charge for its investment in mobile phone operator Partner Communications (PTNR.TA), whose shares slid 45 percent in the quarter.
"Higher taxes, fee reforms and further potential capital market headwinds leave substantial risk to Leumi's bottom line," said Micha Goldberg, an analyst at Excellence Nessuah brokerage.
"Leumi's exposure to international financials and a potential sizeable share overhang further dampens any real investment case, despite distressed valuations."
Leumi'a shares were off 1.6 percent at 9.224 shekels.
Glazer said credit loss charges at Israel's banks will likely continue to rise, though not dramatically.
Israel's regulator has called for its banks to raise their core capital adequacy ratio to 9 percent of assets by the end of 2014 with a view to complying with the international Basel III standards.
At the end of the second quarter Hapoalim had a core Tier 1 ratio of 8.3 percent while Leumi had a ratio of 8.38 percent and the country's next biggest lender Israel Discount Bank (DSCT.TA) had a ratio of 8.25 percent.
"Compared with the market's big fears, the banks continue to show us in their results that as of now their credit portfolios are in much better shape than in recent crises," Glazer said.
Discount suffered a 28 percent fall in its second-quarter profit to 165 million shekels. But excluding a provision for the impairment of its investment in the First International Bank (FTIN.TA), net profit was 238 million shekels, above the average forecast given by analysts in a Reuters poll of 184 million shekels.
Results at Israeli banks are expected to decline further in the coming quarters, but not by much, Glazer estimated.
"An investment in the banks is expected to yield a 15 percent return or more and therefore we continue to rate the banks 'buy'," Glazer said.
Additional reporting by Steven Scheer; Editing by Greg Mahlich