Leumi Bank now leads Israel’s booming banking sector, despite the government’s protracted struggle to sell its controlling stake. David Lipkin reports from Tel Aviv.

The Israeli economy is booming. For the fourth year in succession, gross domestic product (GDP) for 2007 is expected to grow by 5.5%, despite geopolitical tensions in the Middle East. The flow of foreign investment into Israel continues and has reached about $10bn, a large slice of which was invested in the purchase of Israeli high-tech companies.

A significant share of foreign investment was made in the Tel Aviv Stock Exchange, which continued to boom, despite declines in leading international stock exchanges such as Wall Street, London, Frankfurt and Tokyo.

Israeli banks have also benefited from a sharp rise in business and profitability, and only one bank has been affected by the US subprime crisis. The banks also did not suffer from the forced sale of provident and trust funds, as a result of capital markets reform in Israel. The banks were required to relinquish control of these funds to ensure that the public could invest in them independently, without having to go through the banks’ consultants.

Profits up for big five

Israel’s five largest banks – Leumi, Hapoalim, Discount, Mizrahi and First International – registered a NIS2.63bn ($674m) profit in the third quarter of 2007 – a 16% increase from the corresponding period in 2006. The sale of the provident and trust funds did not reduce their income from banking fees, which totalled NIS3.24bn for the five largest banks in the third quarter of 2007 – 9% up from the corresponding period in 2006.

The largest banks also increased the total amount of credit they provided to the public in the third quarter by 6.3%, in line with growth in business activity in Israel. The amount of bank credit totalled NIS619.5bn.

Following decades in the shadow of Bank Hapoalim, Bank Leumi claimed the title of Israel’s largest bank by market capitalisation during the third quarter of 2007. At the end of November, its market capitalisation stood at NIS23.9bn, while Bank Hapoalim’s market capitalisation was NIS23.8bn.

Leumi also netted higher profits than the other banks in the third quarter, at NIS901m, compared with Hapoalim’s NIS826m. Another of Leumi’s achievements in November was to win the bid to finance the $500m Tel Aviv first light train line, beating Hapoalim.

Struggle for top spot

The struggle for the title of Israel’s largest bank has been going on for decades. In the 1970s, Bank Hapoalim was the third largest bank in Israel, making the leap to number one in the 1980s. But a few years later, Leumi again become the biggest Israeli bank.

At the end of the 1990s, Bank Hapoalim was taken over by Ted Arison, owner of cruise ship company Carnival Cruise. This reinvigorated Bank Hapoalim, pushing Bank Leumi into second place again. The bank set new standards for computer systems, logistical and operational methodologies, which, over the past 10 years, helped retain Hapoalim’s position as the largest bank.

However, government-owned Bank Leumi has closed the gap over the past two years, thanks to its competitive edge in retail banking, both for individuals and small businesses.

Gaining first place in the Israeli banking industry fulfils the ambition of Bank Leumi president and CEO Galia Maor, who took charge of the bank in 1995. This achievement was made despite the difficulties of managing a bank that the Israeli government has been trying to privatise for many years. Devising a strategy to expand the bank’s activities has proved difficult and there has been a wave of resignations by senior bank staff, who have lost patience waiting for privatisation and moved to companies promising higher salaries, options and bonuses.

The government refrains from involving itself in management of the bank, which is controlled by chairman Eitan Raff and the 63-year-old Mrs Maor. Since becoming the bank’s CEO and president she has focused on private customers as well as business banking activities. She has also improved the bank’s technological standards, overseeing significant investment in this area.

Mrs Maor has been the ‘first lady of Israeli banking’ for many years. Her previous role was as the country’s banking supervisor, a post she had held for only a few months when, in 1983, a scandal broke over manipulation of bank share prices, triggering the collapse of bank stocks. However, the manipulation of stock prices had been going on for five years before Mrs Mayor became banking supervisor and a national inquiry found no grounds for action against her.

Privatisation struggle

The government bailed out the banks involved by purchasing their shares – at a $7bn cost to taxpayers – thereby becoming their major shareholder. All the other banks nationalised in 1983 were later sold to Israeli and US private investors, but the government has been attempting to privatise Bank Leumi for 10 years, without success. The finance ministry has examined various options for selling its controlling stake in the bank, including issuing shares on the stock exchange or distributing them free to the Israeli public.

In November 2005, the government reverted to the original idea of issuing an international tender for the sale of 20% of the bank’s shares, giving the buyer a controlling stake. Bidders included Israeli and overseas investors, but the surprise winners were US hedge funds Cerberus and Gabriel, which control multi-million-dollar corporations in the US, Europe and Asia. They bought 9.99% of the bank’s shares for $500m and received an option to purchase a further 10.1%, together with other investors, conditional upon the Bank of Israel’s authorisation, within 18 months.

However, a series of problems arose immediately after the tender. Cerberus was unable to comply with the timetable to provide Bank of Israel with a list of additional investors so the national bank could conduct a comprehensive review of each. In New York, the banking commissioner prohibited Cerberus from taking control of Bank Leumi New York, as US law prevents hedge funds from owning banks. Leumi, however, was reluctant to sell the New York bank, as this would leave it without a banking arm in the US.

Earlier this year, Cerberus pressed Israel’s Finance Ministry to extend the option period for the purchase of the further portion of Bank Leumi shares by several months. However, the government rejected this request.

Speaking to The Banker in November about Bank Leumi’s privatisation, Mrs Maor said: “We want it to be finalised. This has been a prolonged process, creating a high level of uncertainty. It is difficult to run a business with uncertainties and clear ownership will help us in the future.”

Olmert cleared

Meanwhile, the Israeli police recently concluded that prime minister Ehud Olmert was not guilty of a breach of trust during the attempted privatisation of Bank Leumi when he had been finance minister. Mr Olmert had been suspected of altering the terms of the government tender to sell the controlling shares in Leumi to an old friend, Australian property entrepreneur Frank Lowy.

The Finance Ministry has now asked Bank of Israel governor Stanley Fischer to help find a foreign bank willing to buy the government’s remaining shares in Bank Leumi and has approached foreign investment banks with a view to issuing a new tender. It is not yet clear how Cerberus, which still holds 9.9% of Bank Leumi’s shares, will react.

Bank Leumi’s dilemma, similar to that of Bank Hapoalim, revolves around the small size of the Israeli economy. Leumi is seeking to expand its international activities, in addition to the activities of its subsidiaries in the UK, the US, Switzerland and Romania.

Mrs Maor is seeking to increase Leumi’s income from international activities to 35% of its overall income. She has engaged international consulting firm McKinsey to advise the management and board of directors on the strategic development of Bank Leumi’s international operations.

Bank Leumi is also examining the possibility of investing $50m in a financial enterprise in India. A further possible investment being examined is in a Chinese internet bank. The plan is for Bank Leumi to supply the professional and technological expertise to the enterprise, while the Chinese partner will handle the marketing.

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