Financial Report 2nd Quarter 2009

Implementation of Basle II directives would increase the Bank's capital adequacy ratio

The Bank began preparing for application of the Basle II recommendations in 2006, established a steering committee headed by a Bank executive, established the required teams and started mapping gaps and technology required for application of this directive.

As of the publication date of these financial statements, the Bank has completed its preparations for initial application of the directive, including data input required for capital calculation in accordance with Basle II directives, into a dedicated system and using the system to produce the report for the Supervisor of Banks. The Bank has completed calculations for Pillar 1 of the directive, in accordance with Bank of Israel requirements.

Results for Pillar 1 indicate that as of March 31, 2009, the Bank's capital adequacy ratio, as calculated in accordance with rules of the Basle II standard model, would increase by -1% over the capital adequacy ratio indicated in financial statements as of the same date based on the previous instructions.

 In late June 2009, the Bank filed with the Bank of Israel its draft ICAAP document (in conjunction with Pillar 2 of the Basle II directive), which reflects the Bank's assessment of the capital required by the Bank to cover all risk exposures arising from its business operations.

The Bank's ICAAP calculations, as filed with the Bank of Israel, also indicate that in accordance with calculation rules of Basle II, the Bank has significant excess capital compared to the risk to which it is exposed.

Compliance with capital adequacy objectives

Even before the deadline specified by the Board of Directors

The Bank Board of Directors has made, in recent years, several decisions with regard to capital adequacy at the Bank.

Inter alia, on February 25, 2008, the Bank's Board of Directors resolved to instruct Bank management to act so as to have the capital adequacy ratio (including upper tier II capital) be no less than 12% by end of 2009.

Furthermore, on June 29, 2009 the Bank Board of Directors resolved to instruct Bank management to act so as to have the original Tier I capital adequacy ratio for the Bank be no less than 6.7% by end of 2009.

Based on financial results as of June 30, 2009, the Bank's overall capital adequacy ratio was 12.24%, and its original Tier I capital ratio was 6.88%. Thus the Bank has achieved and even exceeded the objectives set by its Board of Directors - six month before the target date set.

 Eli Yones:

Despite the state of the economy, the Bank once again achieved double-digit return on equity and successfully achieved its capital adequacy objectives six months prior to the target date set by the Board of Directors.

"Results for the second quarter of this year, primarily the 36.4% increase in profit over the first quarter and the return to double-digit return on equity, indicate that despite the economic crisis and its impact on activity in Israel's economy, Mizrahi-Tefahot is successful in showing resilience and in executing its annual work plan.

Thus, for example, the Bank recorded a 4.1% increase in Group revenues from operating commissions, which excluding impact of consolidation of Bank Yahav's financial statements, amounted in the first half of 2009 to NIS 559 million, compared to NIS 537 in the corresponding period last year.

As for expenses, the Bank continues to make progress in line with its strategic plan, with Payroll and associated expenses increased by a modest 2.9% in the first half of 2009, amounting to NIS 633 million, excluding impact of Bank Yahav's financial statements and excluding the non-recurring impact of the extended exercise period of the employee stock option plan.

In the first half of this year, the Bank continued to expand its credit operations, with a 4.2% increase in the credit portfolio to the public - mostly consisting of retail credit - mortgage financing and in the household segment.

Concurrently, the Bank acted to improve its capital adequacy ratio, inter alia by means of raising Tier II capital and upper Tier II capital. As of June 30, 2009, the Bank's overall capital adequacy ration was 12.24%, higher than the 12% objective set by the Bank Board of Directors and six months earlier than the target date specified in said decision - end of 2009.

Note that implementation of the Basle II directives, starting at the end of this year, is expected to significantly improve the Mizrahi-Tefahot's capital adequacy ratio, allowing it to make capital available for various uses", says Bank President, Mr. Eli Yones.

Mizrahi-Tefahot Bank Ltd. Highlights of financial statements

As of June 30, 2009 - NIS in millions