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BANK OF ISRAEL Office of the Spokesman and Economic Information PRESS RELEASE August 3, 2011 The following is an excerpt from the 2010 Banking System Annual Survey which will be published shortly: The Measurement and Disclosure of Impaired Debts, Credit Risk and Allowance for Credit Losses On January 1, 2011, a Supervisor of Banks directive, "The Measurement and Disclosure of Impaired Loans, Credit Risk and Allowance for Credit Losses (“the Directive”) went into effect. This directive brings the Directives for Reporting to the Public, applicable to banking corporations and credit card companies in Israel, into line with the issue's regulations applicable to the banking systems in the US and in other major economies. Below are figures which show the effect on Israel's five major banking groups of the initial implementation of the directive as of January 1, 2011, based on the data included in their financial statements as of March 31, 2011. Due to the complicated nature of the directive, the Banking Supervision Department decided that it will not be implemented retroactively on financial reports from previous periods. As such, the following figures do not include comparison data. 1. Allowances for credit losses As a result of the implementation of the directive, allowances for credit losses in the banking system increased by about NIS 4 billion1. Additionally, as a result of its implementation, the banking corporations recorded significant loan write offs, for part of which NIS 23 billion had previously been included in allowances (Table 1). As a result, the ratio of the allowance for credit losses to total credit to the public reached 2.1%, of which 1.1 percentage points was for allowances on an individual basis, and 1 percentage point of which was for allowances on a group basis (Table 2). Table 1 The directive's effect on the allowance for credit losses for loans and off balance sheet items The five major banking groups (NIS million ) Leumi Allowance for credit losses, as of December 31, 2010 Cumulative write offs, as of January 1, 2011 Other changes in the allowance, as of January 1, 2011 Allowance for credit losses, as of January 1, 2011 1 Hapoalim Discount MizrahiTefahot First Int'l. The five groups 10,541 -5,840 1,074 5,775 11,589 -7,712 1,677 5,554 6,384 -5,543 1,382 2,223 3,607 -1,891 919 2,635 2,836 -2,236 432 1,032 34,957 -23,222 5,484 17,219 Change in the allowance for credit losses (exc. write offs) 10.2% SOURCE: Reports to the Banking Supervision Department. 14.5% 21.6% 25.5% 15.2% 15.7% The figure is the net increase, net of the effect of tax adjustment of NIS 1.5 billion. Table 2 Credit to the publica, and the allowance for credit losses, as of January 1, 2011 The five major banking groups (NIS million ) Leumi Credit to the public Allowance for credit losses Share of allowance for credit losses out of credit to the public Hapoalim MizrahiTefahot Discount First Int'l. The five groups 229,626 5,378 2.3% 229,222 5,013 2.2% 119,386 2,068 1.7% 108,832 2,454 2.3% 64,047 941 1.5% 751,113 15,854 2.1% 3,233 1.4% 2,938 1.3% 461 0.4% 1,060 1.0% 404 0.6% 8,096 1.1% 2,145 0.9% 2,075 0.9% 1,607 1.3% 1,394 1.3% 537 0.8% 7,758 1.0% of which: Allowance for credit losses on an individual basis % of credit to the public Allowance for credit losses on a group basis % of credit to the public a Before allowance for credit losses SOURCE: Financial Statements. 2. Equity Following the coming into effect of the directive on January 1, 2011, the equity of the five major banking groups decreased by about 4% (Table 3). All banking groups still have capital adequacy ratios above 12%, and all of them, except Discount group, have a core capital ratio above 7.5%. The drop in the capital adequacy ratio ranged from 0.27 percentage points at the Leumi group to 0.56 percentage points at the Discount group, and the decline in the core capital ratio ranged from 0.27 percentage points at the Leumi group to 0.59 percentage points at the Discount group (Table 4). Table 3 Effect on equity, as of January 1, 2011 The five major banking groups (NIS million ) Leumi Equity, as of December 31, 2010 Change in equity Percentage change in equity 23,985 -721 -3.0% Hapoalim Discount 23,426 -807 -3.4% MizrahiTefahot 11,569 -830 -7.2% First Int'l. 7,591 -357 -4.7% 6,205 -220 -3.5% The five groups 72,776 -2,935 -4.0% SOURCE: Financial Statements. Table 4 Effect on capital adequacy, as of January 1, 2011 The five major banking groups: Before and after implementation of the directive Before Leumi After Hapoalim Before After Before Discount After Mizrahi-Tefahot Before After First Int'l. Before After The five groups Before After Core tier 1 capital ratio 8.6 8.3 8.2 7.9 7.9 7.3 8.0 7.6 8.1 7.8 8.2 7.9 Capital adequacy ratio 15.1 14.8 14.1 13.8 13.7 13.1 14.1 13.6 12.5 12.1 14.2 13.9 SOURCE: Financial Statements. 3. Problem loans Based on the new definitions of problem loans, the share of impaired credit (not accruing interest) to the public, out of total credit to the public of the five major banking groups, as of January 1, 2011 reached 3.6%; the share of loans to the public that are past due 90 days or more out of total credit to the public was 0.7%; and the share of commercial credit risk exposures to the public out of total credit risk to the public was 3.9% (Table 5). 2 Table 5 Data on problem loans, as of January 1, 2011 The five major banking groups (NIS million ) The five major banking groups ( NIS million ) Leumi Hapoalim Discount MizrahiTefahot First Int'l. The five groups Non-performing loans to the public Ratio of non-performing loans to loans to the publica 8,904 3.9% 10,887 4.7% 3,359 2.8% 2,318 2.1% 1,219 1.9% 26,687 3.6% Impaired and performing loans to the publicb Ratio of impaired and performing loans to loans to the publica 43 0.0% 271 0.1% 2,491 2.1% 61 0.1% 109 0.2% 2,975 0.4% Total impaired loans to the public Ratio of impaired loans to loans to the publica 8,947 3.9% 11,158 4.9% 5,850 4.9% 2,379 2.2% 1,328 2.1% 29,662 3.9% Credit to the public past due 90 days or more Ratio of credit past due 90 days or more to loans to the publica 1,105 0.5% 1,326 0.6% 891 0.7% 1,810 1.7% 352 0.5% 5,484 0.7% 14,534 15,372 8,307 3,869 2,426 44,508 4.2% 4.0% 5.8% 2.5% 2.5% 3.9% Problem commercial credit risk to the public Ratio of problem commercial credit risk to the public to total credit risk to the public a. Gross credit to the public Impaired credit to the public after reorganization of problem debts which accrue interest c. Includes balance sheet and off balance sheet credit risk which is impaired, substandard, or under special supervision, excluding balance sheet and off balance sheet consumer credit.. SOURCE: Financial Statements. b. 3