Financial Reports 2nd Quarter 2008
The following major factors contributed to growth in Group operating income in the first half of 2008 over the same period last year:
Profit from financing operations before provision for doubtful debt, net of provision for impairment of a non-temporary nature in respect of bank investments in leveraged funds (as explained below), increased by NIS 126 million, or 12.7%.
Decrease of NIS 17 million in current provision for doubtful debt for problem loans. This decrease was offset by a NIS 19 million write-off ? the balance of bank investment in leveraged funds ? which was made in Q1 of 2008. At that time, the write-off of the complete investment cost in leveraged funds and instruments exposed, directly or indirectly, to the US mortgage market was completed (original investment amounting to NIS 157 million, or US $35 million).
The major factors which moderated growth in Group operating profit:
Increase of NIS 41 million in provision for taxes on operating profit, due to rescinding of the Inflationary Adjustment Act and revisions to the VAT Act.
Decrease in dividends received - in the first half of 2008, dividends received from shares amounted to NIS 17 million, compared to NIS 38 million received in the corresponding period last year ? as well as loss of provident fund management fee revenues amounting to NIS 22 million due to sale of provident fund operations ? resulted in a NIS 31 million decrease in operating and other revenues. Excluding the aforementioned items, operating revenues grew in the first half of 2008 by NIS 12 million, compared to the corresponding period last year.
Operating and other expenses, excluding payroll expenses, in the first half of 2007 were low compared to their annual average, so that in effect the first half of 2008 saw no increase in these expenses. In the period January-June 2008, operating expenses, excluding payroll and associated expenses, grew by NIS 24 million compared to the corresponding period last year.
Payroll expenses in Q2 of 2008 remained unchanged compared to the preceding quarter.
In the first half of 2008, a NIS 28 million increase was recorded in payroll and associated expenses, primarily due to constantly continued growth in business operations in general, and in the retail banking segment in particular, while expanding the bank's customer base by tens of thousands of new customers. In order to support these developments, the Bank has conducted a close review of both branch layout and alignment of headcount with the growth rate of operations over time. As a result of a meticulous process of standardization, the Bank recruited, last year through the end of Q1 of 2008, some 270 new employees, who were mostly assigned to branches, for staffing points of sale and new branches, and to continue improvement of quality of service and marketing capacity at existing branches.
Some of the new employees were assigned to the call center - which is a major factor in new customer recruitment operations and in ongoing service to existing and new customers.
This process was concluded in Q1 of 2008, and in Q2 of this year, payroll expenses remained unchanged over the preceding quarter.
We are achieving objectives of our work plan
"Mizrahi-Tefahot continues to record consistent profit growth and to achieve the objectives of our work plan. Results of the first half of 2008 reflect continued growth of our business operations - a fact primarily reflected in an 11% growth in financing profit. As for revenues, the bank successfully compensates for revenue loss from provident fund management fees, which the bank was required to sell in conjunction with the Bachar Reform, inter alia thanks to a 5% increase in operating and other revenues recorded in the second quarter. With regard to expenses, excluding a modest increase in payroll expenses in the first quarter of this year, which is almost entirely due to growth of retail operations: Recruiting of tens of thousands of new customers from our target audience, and consequently - an increase in headcount required to meet growth in the number of branches and points of sale, along with continued expansion of direct banking systems headed by the call center - the bank maintains a steady, fixed level of expenses. At the same time we should note the Mizrahi-Tefahot is the first and only bank in Israel at which most of the annual seniority bonus for managers is contingent on business results. This unique agreement, reached by management and the Manager Union, would lead to a lower fixed expense component out of the bank's payroll expenses, allowing it to continue improving its efficiency ratios in the future. The downward trend in provision for doubtful debt, which started last year, continued in the first two quarters of 2008 - a further reflection of the quality of the bank's credit portfolio. Concurrently, the bank's capital adequacy rate continues to climb, standing at 11.55% at the end of the first half - with the target capital adequacy rate of 12% planned to be achieved by end of 2009, as decided by the Board of Directors in February this year", says President of Mizrahi-Tefahot, Mr. Eli Yones.