Fitch Affirms Israel's Bank Hapoalim on 2004 Results

Business Wire, March 22, 2005

NEW YORK -- Fitch Ratings, the international rating agency, has today affirmed Israel-based Bank Hapoalim's ratings as follows

-- Long-term 'BBB+',

-- Short-term 'F2',

-- Individual 'C'

-- Support '2'.

These actions follow the release of satisfactory 2004 results. The Outlook on the long-term rating is Stable.

"The continued improvement in Hapoalim's profitability underlines the strength of its franchise as one of the two leading commercial banks in Israel. However, weak capital by international standards remains a concern," said Martin Oldham, Director in Fitch's Financial Institutions team in London.

In the context of stronger economic growth in Israel, Hapoalim's net income before minority interests increased to ILS2.2 billion in 2004, up 54% year-on-year. Higher net interest revenue and improved earnings from capital markets activities contributed to an 8% rise in operating income. With a similar increase in overheads, the cost/income ratio strengthened to 56.5%. Loan loss provisions reduced by ILS591 million, but still remain at historically high levels, reflecting the continuing asset quality problems caused by the Israeli recession. Hapoalim also recorded ILS241 million of extraordinary income during 2004, mainly from gains arising from the reduction of its holding in Signature Bank. The group's priority for 2005 is to continue to develop and diversify its international activities. However, with domestic operations still providing over 85% of group income, Hapoalim's performance remains highly dependent on the Israeli economy.

Hapoalim's long-term, short-term, and individual ratings are based on the strength of its domestic franchise, its stable retail deposit base, and strong core earnings, but also reflect relatively weak capital and high net nonperforming loans. The bank's Tier 1 capital ratio strengthened during 2004 to 7.4%, but is still low by international standards, particularly if unreserved nonperforming loans, which amounted to 45% of equity, are taken into account.

Hapoalim has recently been investigated by the Israeli police in connection with suspected violations of the Money Laundering Prohibition Law. Documents were seized from various offices of the bank, a number of employees were questioned, and certain customers' accounts have been frozen. The bank does not consider at this stage that its business will be materially affected by the matters under investigation. Fitch does not expect the event to have an effect on the bank's ratings, but will continue to monitor the outcome of the investigation.

Note to Editors: Fitch Ratings' Support and Individual Ratings for Banks:

Fitch's Individual ratings assess how a bank would be viewed if it were entirely independent and could not rely on external support. Its Support ratings deal with the question of whether a bank would receive support from its owners or from the state if it were to get into difficulty. These ratings are not debt ratings but rather, respectively, an assessment of the intrinsic strength of a bank and of any level of outside support that may, or may not, be available to it.