The First International Bank of Israel Ltd. Condensed financial statements as of March 31, 2014

Transcription

1 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 The First International Bank of Israel Ltd. Condensed financial statements as of March 31, 2014 (unaudited) Table of contents: Page Board of directors' report 5 Principal data at the Bank's group 10 Management review 132 CEO declaration 152 Chief accounting officer declaration 153 Condensed financial statements 155 Notes to the condensed financial statements 163 3

2 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 BOARD OF DIRECTORS' REPORT ON THE FINANCIAL STATEMENTS AS AT MARCH 31, 2014 At the Board of Directors' meeting held on May 22, 2014, it was resolved to approve and publish the consolidated unaudited financial statements of the First International Bank of Israel Ltd. (hereinafterthe Bank) and its consolidated subsidiaries (hereinafter"the First International Group") for the first three months of the year ending on March 31, The financial statements were compiled in accordance with directives of the Supervisor of Banks. Data therein are expressed in reported amounts. GENERAL BACKGROUND ECONOMIC AND FINANCIAL DEVELOPMENTS MAIN ECONOMIC DEVELOPMENTS IN ISRAEL Real developments According to the initial estimation of the Central Bureau of Statistics the moderate growth continues in the Israeli economy. In the first quarter of 2014 the annualized growth amounted to 2.1% following growth of 2.9% in the previous quarter and 1.9% in the third quarter of The private consumption per capita declined by 4.0% in the first quarter of 2014, following a decline of 1.0% in the previous quarter and a rise of 1.7% annualized in the third quarter of The public consumption stayed unchanged in the first quarter of 2014, following rises of 2.8% in the previous quarter and 4.6% in the third quarter of The GDP of the corporate sector rose by 0.4% in the first quarter of 2014, following increases of 2.1% in the previous quarter and 1.0% in the third quarter of The Bank of Israel growth forecast from March 2014 for the GDP growth in 2014 was reduced to 3.1% compared with the previous forecast of 3.3%, and exclusive of the inflow of gas from the Tamar field, the growth is expected to amount to 2.8%. It is a high growth rate (exclusive of the inflow of gas) compared with 2013, on the background of increase in the export and investment rates, together with the expected improvement in the world economy. The budget In the last months appears a decrease in the deficit (last 12 months) to an amount of NIS 28.2 billion at the end of March 2014, a 2.65% of the GDP, compared with a deficit of NIS 33.2 billion in 2013, a 3.2% of GDP and NIS 42.0 billion in the same period last year (4.5% of GDP). The target budget deficit for 2014 is NIS 26.9 billion (3.0% of GDP). The decrease in the deficit derived mainly from an increase in the revenues from taxes. Inflation The consumer price index decreased by 0.5% in the first quarter of 2014, while in the same period last year its rate amounted to 0.02%. and an incease of 1.8% un The annual rate of inflation in the last 12 month (March 2014 compared with March 2013) was 1.3%. The inflation in the last 12 month was influenced mainly by the increase of housing prices. Inflation expectations for 2014 amounts to 0.9% and for the 12 months ahead 5

3 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 amounts to 1.6%, slightly lower than the center of the inflation target range, according to the Bank of Israel's forecast. The housing market According to the housing price estimates of the Central Bureau of Statistics, a moderate increase was recorded in the housing prices. In the last survey (12/2014) the prices rose by 0.6% compared with an increase of 0.9% in the previous survey. From comparing the transaction prices in January February 2014 to the same period last year, the prices rose by 6.4% compared with 7.2% in In 2013 a 44.3 thousands construction starts were recorded (an increase of 3.4% compared with 2012) and 42 thousands construction endings (an increase of 11.8% compared with 2012). The trends of prices in the housing market have great influence on the monetary policy and the monetary interest decisions of the Bank of israel. The decision of the housing cabinet on the law for the exemption from VAT to young couples, is desined to moderate the increase in the housing prices in the last years and is expected, acording to the prevailing forcasts, to bring to a halt the housing demand of the young couples, while parallel to that a temporary excess demand to leasing as an interim solution, until the aplication of the law. The labor market In March 2014 the improvement in the labor market continues, as the unemployment rate decreased to a level of 5.8% compared with 5.9% in January Regarding the ages 2564, which are a good indication to the employment state, a sharper decrease was recorded in the unemployment rate to 5.0%, compared with 5.4% in January 2014 and 5.3% in December The exchange rate During the first three months of the year the exchange rate of the Shekel rose aginst the Dollar by 0.5% and by 0.6% against the Euro, compared with a decrease in The weakening of the Shekel derived from increased purchases of Dollars by the Bank of Israel. Bank of Israel purchased in 2013 Dollar 5.3 billion (of which Dollar 2.1 billion from the production of gas from the Tamar field). According to the declarations of the Bank of Israel, it is expected to purchase the sum of Dollar 3.5 billion during 2014, in accordance to the estimated impact of the production of natural gas on the balance of payments in During the first quarter of 2014 the Bank of Israel purchased Dollar 3.0 billion, (of which Dollar 875 million in respect of the productuin of gas in the Tamar field). Exchange rate as of Change % first quarter Dollar % (7.0%) Euro % (2.8%) The Bank of Israel interest During 2013 a decrease in the Bank of Israel interest rate was recorded from 1.75% at the end of 2012 to 1% in October

4 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 At the end of March 2014 the Bank of Israel decided to lower the interest rate to 0.75%, as part of its efforts to prevent the continued appreciation of the exchange rate of the Dollar and on the background of the macro data showing moderate growth in the economy and a decrease in the rate of inflation. The global invironment The USA economy data continue to show a positive trend. In March thousands new employees were added and the data for JanuaryFebruary were adjusted to show additional 37 thousands employees. The unemployment rate (6.7%) and wages are stable. The Purchase Managers Index (PMI) was slightly decreased in March 2014 to 55.5, compared with 56.9 in February, but still points to a positive direction. The growth data for the forth quarter of 2013 were updated upwards to 2.6% (the growth rate in the first quarter is expected to be lower due to the impact of the stormy weather during the last winter). On December 2013 the central bank started to retreate from the quantitive expension program and starting with April the bonds purchases will amount to Dollar 55 billion per month instead of Dollar 65 billion so far. In Europe the last indicators are still mixed, however similar to the USA they are in an improvement trend. The unemployment in the Euro bloc is still high (11.9% in February), shading the recovery of the growth rate. The inflation rate in the Euro bloc continues to be low (0.5% in the 12 months ending March 2014, the lowest rate in the last four years). The last events between Russia and the Ukraine might harm the European economy mainly due to the high dependent of Europe in the natural gas coming from Russia through the Ukraine (30% of gas imports to the European unity). The capital markets On the background of the low interest rate, during the first quarter of the year a rise in the volume of trade and the shares and various bonds indices continued in the Tel Aviv Stock exchange. The Tel Aviv 100 index rose by 6.2% and Tel Aviv 25 index rose by 5.5%, and the YETER 50 index rose by 3.8%. The linked to the CPI Companies Bonds index increased by 1.9%. The CPIlinked Government Bonds index increased by 2%. In the US the S&P index rose by 1.3% and in Europe the Eurostock 600 index rose by 1.84%. However, the developing countries index (the EMMSCI) decreased by 0.8%. In the first quarter of the year the average daily turnover was NIS 1.3 billion, an increase of 11% compared First quarter 2014 Change in % First quarter 2013 First quarter 2014 Daily average turnovers NIS million First quarter 2013 Tel Aviv 25 index 5.48% 4.39% Tel Aviv 100 index 6.22% 4.86% General bonds index 2.10% 0.57% 3,936 4,228 7

5 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 Total funds raising in the local market show a decrease of 7% in the first quarter, compared with the similar period last year, derived mainly from the bonds sector (corporate and governmet) while the equity and convertibles a sharp increase in fund raising occurred. First quarter 2014 Funds raising volume NIS million First quarter 2013 Rate of change Shares and convertibles 4,027 1, % Government bonds 14,326 17,391 (17.6%) Corporate bonds (including institutions) 9,306 10,783 (13.7%) Total 27,659 29,777 (7.1%) PUBLIC INFORMATION The information presented in this report is based inter alia on publications issued by the Central Bureau of Statistics, the Ministry of Finance and Bank of Israel data, as well as on public information provided by entities operating in and connected with the capital and money markets. FORWARDLOOKING INFORMATION Part of the information detailed in this report which does not refer to historical facts is forwardlooking information as defined in the Securities Law, Actual results are likely to be substantially different from those included in the context of forwardlooking information due to a large number of factors, including changes in legislation and supervisory directives, macroeconomic developments in Israel and abroad and their effect on the liquidity position and stability in the capital markets at business companies in Israel and abroad, exceptional economic developments such as extreme changes in interest rates, exchange rates and inflation, stock prices, bond prices, competitors' behavior and changes in the terms of competition. Forwardlooking information is notable for such words or expressions as: "forecast," "expected," "in the Bank's estimation" and "the Bank intends," as well as expressions such as "will be able," "might be" and "will be." These forwardlooking expressions involve risks and uncertainty because they are based on the Management's assessments regarding future events that may not occur or that may occur in a different manner than expected as the result inter alia of the aforementioned factors or as the result of the materialization of one or more of the risk factors detailed in the table of risk factors presented in this report. 8

6 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 BUSINESS DEVELOPMENTS AT THE FIRST INTERNATIONAL BANK GROUP IN THE FIRST THREE MONTHS OF 2014 Detailed below are the description of the main developments in the balancesheet and income statements items of the Bank group for the first three months of Net profit attributed to the Bank's shareholders amounted to NIS 120 million in the first three months of 2014, compared with NIS 136 million in the same period last year a decrease of 11.8%. Net return on equity attributed to the Bank's shareholders amounted to 7.2% annualized in JanuaryMarch 2014 compared with 8.5% annualized in the same period last year and 8.6% during Earnings before taxes totaled NIS 203 million in the first three months of the year compared with NIS 235 million in the same period last year, a decrease of 13.6%. The main changes in income statement items, for the first three months of the year, compared with the same period last year: A NIS 42 million or 6.8% decrease in net interest income and noninterest financing income. A decrease of NIS 22 million in the expenses for credit losses. An increase of NIS 5 million or 1.4% in commission and other income. An increase of NIS 17 million or 2.4% in operating and other expenses. Earnings after taxes totaled NIS 117 million in the first three months of the year compared with NIS 130 million in the same period last year, a decrease of 10.0%. Basic earnings per NIS 0.5 share amounted to NIS 1.20 in the first three months of the year compared with NIS 1.35 in the same period last year. The Bank Group's total assets on March 31, 2014 amounted to NIS 112,543 million compared with NIS 103,666 million on March 31, 2013 and NIS 111,103 million on December 31, 2013, an increase of 8.6% and 1.3%, respectively. Credit to the public, net on March 31, 2014 amounted to NIS 67,894 million compared with NIS 67,421 million on March 31, 2013 and NIS 68,706 million at the end of 2013, an increase of 0.7% and a decrease of 1.2%, respectively. Deposits from the public on March 31, 2014 amounted to NIS 91,103 million, compared with NIS 82,418 million on March 31, 2013 and NIS 89,122 million at the end of 2013, an increase of 10.5% and 2.2% respectively. Capital attributed to shareholders totaled NIS 6,789 million on March 31, 2014, compared with NIS 6,682 million on March 31, 2013 and NIS 6,892 million at the end of 2013, an increase of 1.6% and a decrease of 1.5%, respectively. The decrease was affected by the dividend in the amount of NIS 230 million paid in the first quarter of The equity capital ratio (Basel 3) amounted to 9.73% on March 31, 2014, compared with 10.11% at the end of

7 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 PRINCIPAL DATA For the three months Earnings and profitability ended March Change NIS million in % Net interest income (1.3) Noninterest income (7.0) Total income (3.8) Of which: Commission fees Allowance for credit losses (68.8) Operating and other expenses Earnings before taxes (13.6) Net earnings attributed to shareholders (11.8) Change Balance Sheet Highlights NIS million in % Total assets 112, , , Net credit to the public 67,894 67,421 68, (1.2) Securities 11,197 10,531 10, Deposits from the public 91,103 82,418 89, Bonds and subordinated notes 5,574 5,500 5, (2.2) Capital attributed to shareholders 6,789 6,682 6, (1.5) For three month ended 31 March For the year ended December 31 Principal financial ratios Capital attributed to shareholders of the bank to total assets 6.0% 6.4% 6.2% Expenses from credit losses to the public, net* 0.06% 0.19% 0.14% Ratio of equity capital to risk components (Basel 3) 9.73% 10.11% Ratio of total capital to risk 14.48% 14.78% Credit to the public, net to total assets 60.3% 65.0% 61.8% Deposits from the public to total assets 80.9% 79.5% 80.2% Deposits from the public to credit to the public, net 134.2% 122.2% 129.7% Operating and other expenses to total income 77.2% 72.5% 73.0% Net return on equity attributed to shareholders of the bank* 7.2% 8.5% 8.6% * annualized 10

8 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 DEVELOPMENTS IN INCOME AND EXPENSES Net interest income totaled NIS 537 million in the first three months of the year compared with NIS 544 million in the same period last year, a decrease of 1.3%. See note 1.D to the financial statements, for the effect of first application of the circular of the Supervisor of Banks regarding adoption of accepted accounting standards for US banks regarding measurement of interest income (ASC 31020), which, among other things, stipulate rules for handling commissions fees connected with credit providing, liabilities for credit granting, change in debt conditions and early repayment fees. Noninterest financing income totaled NIS 41 million in the first three months of the year compared with NIS 76 million in the same period last year. Financing income deriving from all of the Bank's assets and liabilities includes net interest income together with noninterest financing income. Noninterest financing income includes financing income in respect of derivative instruments that form an integral part of the Bank's positions management. Income from derivative instruments includes the effects of the time value on derivatives' fair value, which form an integral part of the Bank's interest risk management, and the effect of the rate of increase in the known index on derivatives, which forms an integral part of CPIexposure management. Set out below is the composition of net financing earnings: Q1 Q4 Q3 Q2 Q1 NIS million Interest income Interest expenses (82) (176) (382) (320) (257) Net interest income Noninterest financing income Net financing earnings Set out below is an analysis of net financing earnings: Q1 Q4 Q3 Q2 Q1 NIS million Earnings from current activity Reconciliations to fair value of derivative instruments (2) Income from realization and reconciliations to fair value of bonds Earnings from investments in shares Provision for writedown of securities (2) (1) Financing income (expenses) deriving from investments abroad (1) (1) (4) 10 Net financing earnings

9 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 Set out below are details of the contribution of activity in the different linkage segments to net interest income as included in Appendix A to the Management Review: For three month ended 31 March Activity volume Share in net interest Activity volume Share in net interest % NIS million % % NIS million % Non linked Shekel segment CPIlinked segement Foreign currency segment and linked to fc(incl abroad) Total Set out below are the interest spread on the basis of average balances, attributed to the activity in Israel, in the different linkage bases: Linkage segment Three months ended March in % Nonlinked shekel segment CPIlinked segment Foreign currency and fc linked Total The decline in the interest spread in the Nonlinked Israeli Shekel segment derives from decrease in the gap of deposit taking mainly due to the low interest. The increase in the interest spread in the CPI linked NIS segment attributed mainly to the decrease in the cost of raising subordinated capital notes. Expenses on credit losses were compiled on a conservative basis and amounted to NIS 10 million in the first three months of 2014 compared with NIS 32 million in the same period last year. Expense on credit losses totaled NIS 7 million in respect of credit to private individuals, NIS 1 million in respect of commercial credit and NIS 2 million in respect of housing credit. In the same period the last year, expenses on credit losses totaled NIS 3 million in respect of commercial credit, NIS 25 million in respect of housing credit and NIS 4 million in respect of credit to private individuals. In the same period last year the provision for credit losses included an increase in the group provision in the amount of NIS 24 million in respect the application of the Supervisor of Banks' directive according to which the banking corporation had to position the group provision of housing loans at a rate no less than 0.35% of the balance of such loans. Expenses on credit losses as a ratio of total credit to the public amounted to 0.06% in the first three months of 2014 compared with 0.19% in the same period last year and 0.14% in the year

10 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 Commission income totaled NIS 347 million in the first three months of 2014, compared with NIS 340 million in the same period last year, an increase of 2.1%. Excluding the effect of the circular of the Supervisor of Banks as said in note 1.D to the financial statements, commission income amounted to NIS 372 million, an increase of 9.4% compared to the same period last year. The increase derived mainly from income in respect of activity in the capital market. Other income amounted to NIS 9 million, compared with NIS 11 million in the same period last year. Operating and other expenses totaled NIS 721 million compared with NIS 704 million in the same period the last year, an increase of 2.4%. Salaries and related expenses totaled NIS 438 million compared with NIS 430 million in the same period last year, an increase of 1.9%. Expenses on depreciation and maintenance of premises and equipment totaled NIS 112 million, compared to NIS 108 million in the same period last year. Amortizations of intangible assets totaled NIS 42 million compared with NIS 46 million in the same period last year. Amortization of the excess of cost of the acquisition attributed to customer relations which was included in this item amounted to NIS 13 million. Since amortization of the excess of cost of the acquisition is not a recognized expense for tax purposes, it has the effect of reducing earnings by the full amount of the amortization. Other expenses totaled NIS 129 million compared with NIS 120 million in the same period last year, an increase of 7.5%. The provision for taxes on operating earnings amounted to NIS 86 million compared with NIS 105 million in the same period last year. The effective tax rate as a proportion of earnings before taxes amounted to 42.4% compared with the statutory rate of tax of 37.7%. The effective tax rate was affected mainly from unrecognized expenses, mainly the amortization of intangible assets. In the same period last year the effective tax rate totaled 44.7%, compared with statutory tax rate of 35.9%. Set out bellow are the elements that affected the increase in the tax rate compared with the statutory tax rate last year: a. expenses that are not recognized for tax purposes and tax and interest differentials in respect of the collection of impaired debts that had been written off from the accounting aspect. b. negative exchange rate attributed to the income from the subsidiary abroad, due to revaluation of the NIS to the Pound Sterling, which are not recognized as an expense for tax purposes. This effect was offset in the noninterest financing income. The Bank s share in the operating earnings of investee companies after the tax effect amounted to NIS 8 million compared with NIS 11 million in the same period last year. The decrease in the Bank's share in the profit of investee companies is explained by the decrease in the Bank's share in the profit of Israel Credit Cards Ltd ("ICC"), derived from the increase of royalties paid by ICC to the Bank and to Israel Discount Bank Ltd ("Discount"), as a result of the mutual issuance agreement signed with the Bank and Discount. 13

11 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 CONTRIBUTION TO THE COMMUNITY The Bank is launching an additional social and community project for the next three years, in cooperation with MATANInvesting in the Community Organization and JOINTAshalim. The new project is designed to advance wellness, the quality of life and a healthy lifestyle in the community, with a focus on children and youth in risk situations. The project includes four central programs: "Ecological Corners", "Running with the Whole Heart", "Father and Son Football Teams" and "Community Gardens". The new programs would be conducted during the initial period in parallel to "Turning point" the long running community project of the Bank, in operation already for seven years, also in cooperation with "Ashalim" Organization founded by the JOINT and the MATAN Organization. This project was designed to encourage and promote business entrepreneurship among young persons in risk situations with the aim of bringing them back to normative life. The Bank provides the project in each year volunteers from among employees of the Bank, who contribute their time, experience and skills in favor of these young persons. Since 2010, the Bank has increased its contribution to the community by means of the "Culture and Community at the First International" project, which is aimed at encouraging and promoting artistic endeavor from peripheral areas and providing artists with the opportunity for coverage in the heart of Tel Aviv. All cultural events in the project are held at the Bank's head office building on Rothschild Boulevard in Tel Aviv, and are open to the public free of charge. In addition to these projects, the Bank and its subsidiaries donate to various foundations and organizations. 14

12 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 COMPOSITION AND DEVELOPMENT OF THE BANK GROUP'S ASSETS AND LIABILITIES Total Group assets as of March 31, 2014 amounted to NIS 112,543 million compared with NIS 103,666 million as of March 31, 2013 and NIS 111,103 as of December 31, 2013, an increase of 8.6% and 1.3% respectivly. Credit to the public, net as of March 31, 2014 amounted to NIS 67,894 million compared with NIS 67,421 million as of March 31, 2013 and NIS 68,706 as of December 31, 2013, an increase of 0.7% and a decrease of 1.2%, respectivly. Credit risk of problem loans, including offbalancesheet components, totaled NIS 2,853 million compared with NIS 2,767 million as of March 31, 2013 and NIS 2,836 at the end of 2013, an increase of 3.1% and 0.6%, respectively. a. Problem credit risk March 31, 2014 March 31, 2013 Total Total NIS million Impaired credit risk ,082 1, ,252 Inferior credit risk Credit under special supervision risk , ,029 Total problem credit risk* 2, ,853 2, ,767 Balancesheet Offbalancesheet Balancesheet Offbalancesheet December 31, 2013 Balancesheet Offbalancesheet Total NIS million Impaired credit risk 1, ,154 Inferior credit risk Credit under special supervision risk Total problem credit risk* 2, ,836 Balance on Balance on Balance on March 31, 2014 March 31, 2013 December 31, 2013 NIS million NIS million NIS million * Of which: Nonimpaired debts in arrears of 90 days or more Of which: Housing loans for which allowance according to extent of arrears exists Housing loans for which allowance according to extent of arrears does not exist (3) Nonimpaired bonds in arrears of 90 days or more 15

13 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 b. Nonperforming assets Impaired credit to the public not accruing interest income: Balance on Balance on Balance on March 31, 2014 March 31, 2013 December 31, 2013 NIS million NIS million NIS million Examined on an individual basis Examined on a group basis Impaired bonds not accruing interest income 3 1 Total nonperforming assets c. Impaired debts undergoing problem loan rescheduling and accruing interest income d. Problem loans relative to credit risk Ratio of impaired credit to the public to total credit to the public 1.3% 1.6% 1.4% Ratio of nonimpaired credit to the public in arrears of 90 days+ to total credit to the public 0.5% 0.5% 0.4% Ratio of credit loss allowance for credit to the public to total credit to the public 1.2% 1.3% 1.2% e. Ratio of credit loss allowance for credit to the public to total impaired credit to the public not accruing interest income 95.7% 87.7% 88.2% f. Ratio of problem credit risk in respect of the public to overall credit risk in respect of the public 2.9% 2.8% 2.8% g. Ratio of expenses to total credit to the public Ratio of expenses on credit losses to average total credit to the public 0.03% 0.19% 0.12% Ratio of net writeoffs of credit to the public to average total credit to the public 0.05% 0.08% 0.14% Ratio of net writeoffs of credit to the public to total allowance for credit losses in respect of credit to the public 3.94% 6.21% 11.25% * annualized 16

14 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 Set out below is the sectorspecific distribution of the six largest borrowers at the Group (by size of gross indebtedness before deduction of collateral whose deduction is permissible for the purpose of limiting the indebtedness of a borrower and group of borrowers): As of March 31, 2014 Borrower no. Sector of the economy Balancesheet credit risk(*) Offbalancesheet credit risk Aggregate credit risk Aggregate credit risk after permitted deductions NIS million Financial services Electricity and water Financial services Communications Manufacturing Real estate 1, , As of December 31, 2013 Borrower no. Sector of the economy Balancesheet credit risk(*) Offbalancesheet credit risk Aggregate credit risk Aggregate credit risk after permitted deductions NIS million Financial services Electricity and water Financial services Financial services Manufacturing Real estate 1, , * Including credit to the public after net accounting writeoffs, investment in bonds and other assets in respect of derivative instruments. Deposits from the public on March 31, 2014 totaled NIS 91,103 million compared with NIS 82,418 million as of March 31, 2013 and NIS 89,122 at the end of 2013, an increase of 10.5% and 2.2%, respectivly. Balance of deposits from the public of the three largest depositors: As of March 31 As of December NIS million 1 3,081 2, ,667 2, ,232 1,048 The investment in securities totaled NIS 11,197 million compared with NIS 10,531 million as of March 31, 2013 and NIS 10,799 million at the end of 2013, an increase of 6.3% and 3.7%, respectivly. 17

15 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 Set out below is the composition of the portfolio: Balance as of Share of total securities NIS million % Government bonds 7,096 7, Banks bonds (1) 1,953 1, Other bonds (corporate and assetbacked) (2) 1,743 1, Shares (3) Total 11,197 10, (1) The balance includes bonds that were issued by banks issuing companies. Of which: Banks foreigncurrency bonds guaranteed by foreign governments in the amount of NIS 36 million. (December 31, 2013 NIS 43 million). (2) Of which: Foreigncurrency bonds guaranteed by foreign governments in the amount of NIS 411 million (December 31, 2013NIS 380 million), and localcurrency bonds guaranteed by the Israel Government in the amount of NIS 338 million (December 31, 2013 NIS 346 million). (3) Investment in shares includes inter alia investment in private equity funds in the amount of NIS 145 million, permanent capital notes amounting to NIS 78 million, investment in foreign currency shares of NIS 31 million and investment in shares traded on the Tel Aviv Stock Exchange amounting to NIS 137 million ( : investment in private equity funds amounting to NIS 138 million, permanent capital notes amounting to NIS 56 million and investment in shares traded on the Tel Aviv Stock Exchange amounting to NIS 149 million). Set out below is the distribution of the securities portfolio by linkage segments: Balance as of Segment's share of total securities Change NIS million NIS million % % % Local currency Nonlinked 3,977 4,270 (293) (6.9) CPIlinked 1,927 2,115 (188) (8.9) Foreign currency denominated & linked 4,888 4, Nonmonetary items Total 11,197 10, Set out below are the sources for the price quotations which the Bank used for determining the fair value of securities on March 31, 2014: Price quoted in active market Indicative price* Counterparty price** Total NIS million Shares and private investment funds Local currency government bonds 4,749 4,749 Local currency corporate bonds ,155 Nonasset backed foreigncurrency and fc linked bonds 33 4,210 4,243 MBS bonds Others (structured and creditbased structured) Total 5,784 5, ,197 % of portfolio 51.7% 46.7% 1.6% 100.0% * Indicative pricean indication determined by the Bank and which is based mainly on price quotations obtained from an external entity or entities specializing in the matter, and the remainder is based on internal models determined by the Bank. ** Counterparty price quotation obtained from the entity with which the transaction is conducted. With respect to private equity funds, the need for a provision for writedown is examined on the basis of their financial statements. 18

16 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 Below are additional details of bonds denominated in and linked to foreign currency, which are not assetbacked, by country/continent: Israel (incl. Israel Government NIS 1,842 million, NIS 1,387 million) USA Canada France UK Europe others * ( countries; countries) Australia Far East, New Zealand and others* ( countries; countries) Total , ,243 As of NIS million 1, ,462 It should be noted that there is no issuer (except the Israel Government) whose bond balance exceeds 2% of the shareholders equity of the Bank. * Among these countries, there is no country whose bond balance exceeds 4% of the shareholders equity of the Bank. For details of total exposure to foreign countries, see Appendix D to the Management Review. Set out below are additional details on local currency corporate bonds by sector: Financial services Banks Manufacturing Electricity and water Construction and real estate Other business services Transportation Communications and computer services Commerce Hotels, guest and food services Total * Including NIS 338 million guaranteed by the Israel Government ( NIS 346 million) (*) ,155 As of NIS million (*) ,185 19

17 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 Set out below is the composition of the foreigncurrency bond portfolio at the Bank Group: Non assetbacked bonds denominated in or linked to foreign currency amounting to NIS 4,243 million ($1,217 million) (includes foreign corporations amounting to NIS 1,843 million, foreign currency denominated bonds of Israeli government amounting to NIS 1,842 million, foreign government bonds amounting to NIS 505 million and foreign currency bonds of Israeli corporations, mostly traded abroad, amounting to NIS 53 million). All of the foreign bonds are investment grade and 92% of the portfolio is rated A or higher; 43% of the exposure is to leading banking and financial institutions in OECD countries. This portfolio is diversified, in a manner whereby exposure to any single issuer does not exceed 2.9% of the total foreign currency bond portfolio. The duration (average termtomaturity) of the foreign currency bond portfolio is 2.5 years. The balance of unrealized gross gains (included in shareholders equity under reconciliations to fair value in respect of the presentation of securities available for sale) as of the report date in respect of this portfolio amounted to NIS 45 million ($13 million) similar to December 31, Mortgage Backed Securities (MBS) amount to NIS 621 million ($178 million). The bonds were issued by federal agencies in the USA. Of these, NIS 374 million ($107 million) were issued by Ginnie Mae, which is wholly owned by the US government. The balance of NIS 247 million ($71 million) was issued by the US federal agencies Fannie Mae and Freddie Mac. Set out below is a sensitivity analysis as of March 31, 2014 of the effect of changes in the interest rate on the rate of early repayments and the fair value of the MBS portfolio (including economic hedging of interest rate swaps): Change in rate of early repayments Change in fair value Percentage points $ million Increase of 100 base points (4.5) (2.1) Decrease of 100 base points 6.1 (0.1) The credit risk inherent in the portfolio is managed in a dynamic manner by means of delta hedging. Structured products amounting to NIS 12 million ($3 million) are relatively shortterm investment products based on interest rates, share prices and currency rates. With most of them, the principal of the investment is guaranteed. Private equity funds investments in private equity funds amounted to NIS 145 million ($42 million). Commitments to invest in private equity funds amounted to NIS 38 million as of March 31, Permanent capital notes of foreign financial corporations in OECD countries (which are part of their Tier 1 capital) investment in permanent capital notes amounted to NIS 78 million ($22 million). 20

18 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 Set out below are details of the negative gap, before tax effect, between the fair value of securities available for sale and their adjusted cost, distributed by the length of time for which the negative gap has existed (in NIS million): As of March 31, 2014 Up to 6 months 69 months 912 months Over 12 months Total a. Other bonds available for sale Up to 20% b. Assetbacked securities available for sale Up to 20% Total As of December 31, 2013 Up to 6 months 69 months 912 months Over 12 months Total a. Other bonds available for sale Up to 20% b. Assetbacked securities available for sale Up to 20% c. Shares available for sale UP to 20% Total Investments in premises and equipment totaled NIS 1,204 million compared with NIS 1,180 million on December 3l, Shareholders' equity at the Bank as of March 31, 2014 amounted to NIS 6,789 million compared with NIS 6,892 million as of December 31, 2013, a decrease of 1.5%. The decrease in shareholders' equity resulted from the dividend in the amount of NIS 230 million, offset mainly by the periodical earnings of NIS 120 million and from an NIS 7 million incraese in the capital fund in respect of securities available for sale. The ratio of shareholders' equity to total assets amounted to 6.0% as of March 31, 2014 compared with 6.2% at the end of The ratio of capital to the elements of risk as of March 31, 2014, calculated in accordance with the Proper Conduct of Banking Business Regulation concerning the measurement of capital and capital adequacy (Basel 3), amounted to 14.50%, compared with 14.78% at the end of This ratio is higher than the minimum ratio of capital to riskweighted assets of 12.5% required by the Bank of Israel. The core capital ratio amounted to 9.74%, compared with 10.11% at the end of The Bank's Board of Directors has resolved that the Group's overall capital ratio will be no less than 12.5%, and its core capital ratio will be no less than 9.3%. The Board of Directors also resolved that the overall capital ratio under stress scenarios will be no less than 9%, and the core capital ratio under stress scenarios will be no less than 6.5%. 21

19 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 Overall capital ratio and Tier 1 capital ratio of the Bank and significant subsidiaries, in accordance with the directives concerning "working framework for capital measurement and adequacy": Ratio of capital to risk assets Ratio of Tier 1 capital to risk assets Ratio of overall capital to risk assets Significant subsidiaries Bank Otsar Hahayal Ltd. Ratio of Tier 1 capital to risk assets Ratio of overall capital to risk assets Bank Poalei Agudat Israel Ltd. Ratio of Tier 1 capital to risk assets Ratio of overall capital to risk assets Ubank Ltd. Ratio of Tier 1 capital to risk assets Ratio of overall capital to risk assets Bank Massad Ltd. Ratio of Tier 1 capital to risk assets Ratio of overall capital to risk assets March 31, December 31, 2013 In percent

20 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 DIVIDEND DISTRIBUTION POLICY On August 30, 2010, the Bank Board of Directors resolved to adopt an earnings distribution policy, whereby the Bank will distribute annual dividends equal to 50% of its distributable annual net earnings, subject to the Bank's ratio of capital to risk elements being no less than the target specified by the Bank's Board of Directors from time to time. Past retained earnings will be distributed in accordance with ad hoc resolutions. Such distributions will be made subject to legislative provisions and to Proper Conduct of Banking Business Regulations, providing that no adverse changes occur in the Bank's earnings and/or business and/or financial position and/or the overall state of the economy and/or the regulatory environment. This resolution is not to be construed as detracting from the Board of Directors' authority to review policy from time to time and to resolve at any time, after taking due account of business considerations and of the legislative provisions applying to the Bank, changes in policy or the rate of dividend to be distributed for a specific period, or to resolve not to distribute any dividend at all. It is clarified that any dividend distribution (including in accordance with the aforementioned resolutions) shall be subject to specific approval by the Board of Directors and to all the restrictions applying to the Bank regarding dividend distribution, and shall be made public with all required details in accordance with the law. It should be noted that in addition to the provisions of the Companies Law, dividend distribution by the Bank is subject to additional restrictions that are detailed in Note 19.f. to the financial statements for On January 13, 2014 the Board of Directors of the Bank resolved to divide a cash dividend to the shareholders of the Bank in the amount of NIS 100 million. The effective date for the paymanet of the dividend was January 22, 2014, and payment date was February 3, On March 25, 2014 the Board of Directors of the Bank resolved to divide a cash dividend to the shareholders of the Bank in the amount of NIS 130 million. The effective date for the paymanet of the dividend was April 3, 2014, and payment date was April 16, This amount is before any tax due, including tax deduction at source, which the Bank has to deduct, according to the Law. The decision and considerations are detailed in an immediate report dated the same day (reference no and ). The mentioned reports is by referal. 23

21 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 LIQUIDITY POSITION AND CAPITAL SOURCING POLICY The Bank Group regularly monitors the liquidity position at the Group by means of an internal model and by means of other supplementary means. The Group has placed an emphasis on diversification of the deposit base, and on the retention of a portfolio of liquid assets at an appropriate amount. In January 2013, the Bank of Israel issued a revision of the Liquidity Risk Management Directives (Regulation 342), which calls mainly for an expansion of the framework for monitoring and reporting liquidity risk in the banking system. The Bank Group manages and controls the liquidity risks by the internal model that conforms with the updated directive no Liquidity position and the composition of assets and liabilities The banking system's balances at the Bank of Israel (current accounts and monetary deposits) at the end of March 2014 amounted to NIS 121 billion, compared with NIS 116 billion at the end of The liquidity buffer at the group, which includes cash, deposits at banks and liquid securities, amounted to NIS 36.1 billion on March 31, 2014, compared with NIS 34.2 billion at the end of Of this amount, the balance of cash and deposits with banks accounted for NIS 28.0 billion, and NIS 8.1 billion were invested in securities, principally Israel government bonds, bonds of foreign governments and bonds of banks abroad an in Israel at a high level of liquidity. The ratio of deposits from the public to credit to the public on March 31, 2014 amounted to 134.2% compared with 129.7% on December 31, At the end of March 2014, deposits from the public, bonds and subordinated notes totaled NIS 96.7 billion compared with NIS 94.8 billion at the end of 2013, an increase of 2.0%. The balance of credit to the public totaled NIS 67.9 billion on March 31, 2014, compared with NIS 68.7 billion at the end of 2013, a decrease of 1.2%. 24

22 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 THE BANK'S RISK EXPOSURE AND RISK MANAGEMENT General a. The Group's activity is accompanied by exposure to risks, the most significant of which are: credit risk, market risk, liquidity risk, operational risk and legal risk. Members of the Board of Management are responsible for management of these risks. With respect to credit risk, market risk and operational risk, a regulatory requirement for capital adequacy in accordance with the Pillar 1 Basel 3 directives exists. With respect to operational risk and other risks, the Group makes an additional capital allocation in accordance with Basel 3 Pillar 2ICAAP (Internal Capital Adequacy Assessment Process). b. The Group's risk management policy is directed at achieving the strategic and business objectives defined by the Group and at increasing its earnings expectancy by developing areas of specialization at the Group, exploiting economies of diversity and scale, keeping to the levels of risk which have been approved, and by operating suitable management, control and reporting mechanisms. c. The Supervisor of Banks has prescribed a number of directives applying to risk management in the Proper Conduct of Banking Business Regulations and in other regulations. These directives stipulate inter alia basic principles for the management of risks and their control, including: suitable involvement in risk management and comprehension of risks by the Board of Directors and Management of the Bank, formulation of risk policy and risk appetite, establishment of an independent chief risk management function, receipt of periodic reports on developments in exposure to risks, and the maintenance of supervision and control mechanisms matching the Bank's risk profile. d. The Group s overall risk concept conforms to the regulatory framework prescribed by the Supervisor of Banks and to the sound practices prescribed by the Basel Committee, based on the principle that with respect to every banking activity in which risk is inherent, the following parameters will be defined and characterized: risk policy and risk appetite, restrictions on the extent of exposure and definition of the volume of exposure, control and auditing circles, reporting systems, and a mechanism for quantifying, measuring and reporting earnings in accordance with accepted standards. e. Risk management and control at the Group are implemented by means of a suitable infrastructure of control, supervision, review and auditing mechanisms, and are applied via three lines of defense: The first line of defense consists of those responsible for the creation and management of risk. The second line consists of independent risk management control units. The third line consists of the internal and external auditing functions. f. Those responsible for risk management at the Group are: Mr. Bentzi Adiri CPA, Head of the Risk Management DivisionChief Risk Manager and Operational Risk Manager. Mr. Ilan Batzri CPA, Head of the Business DivisionCredit Risk Manager and Settlement Risk Manager; Mr. Avi Sternschuss, Head of the Finance DivisionFinancial Risk Manager and Reputation Risk Manager; Adv. Dalia Belnek, Chief Legal CounselLegal Risk Manager. g. Additional risks to which the Bank is exposedstrategic risk, reputation risk, risks connected with the Israeli economy, compliance and money laundering risk, settlement risk, regulatory and legislative risk are managed and supervised as part of overall business management by each member of the Board of Management in the area for which he is responsible. 25

23 קובץ,eng 0525.doc תאריך 16:11:50 25/05/2014 h. Risk management is carried out at each banking subsidiary in the Group separately, in accordance with the policy determined by the subsidiary s board of directors on the basis of Group policy, and on the basis of Group risk management methodology with an emphasis on the special nature of each subsidiary s activity. In accordance with the Supervisor of Banks' directive on "the Chief Risk Manager and the risk management function," a Chief Risk Manager was appointed at each banking subsidiary, subordinate to the subsidiary's CEO and guided professionally by the Bank's Chief Risk Manager. i. Every quarter, the Risk Management Division, which is independent of the risktaking units, compiles a risks document which is presented to the Management of the Bank, the Risk Management Committee and the Board of Directors of the Bank. j. The risks document contains an examination of all the risks to which the Bank Group is exposed in the course of its activity, with details of the findings at the specific risk level as well as the results of stress scenarios that were conducted. Presented in the document is the Chief Risk Manager's review of the risk management situation at the group and of the effectiveness and the quality of the risk management. Also reviewed in the document are developments in the business environment and in the financial markets, and the measures taken by the division with respect to the main process involved with the different types of risks and special action which the division took during the quarter in question. Corporate governance and involvement of Management and the Board of Directors In the framework of Proper Conduct of Banking Business Regulation No. 301 concerning the work of the Board of Directors, adopted Basel principles for corporate governance and risk management. In March 2012 the Bank's Board of Directors approved a base document on corporate governance and risk management at the Group in accordance with Proper Conduct of Banking Business Regulation No. 301, Basel 2 principles and other Bank of Israel directives. A revision of this infrastructure document was approved in October 2012, taking into account the principles of Proper Conduct of Business Regulation no. 310 concerning Risk Management (this directive went into effect on January 2014). The document specifies a working framework for effective corporate governance for supporting the activities of the Board of Directors and the Management, enabling them to define the Bank's strategy and objectives, to formulate its risk appetite, to manage the Bank's current business activity and to protect the interests of depositors, shareholders and other risk takers. The document serves as a binding framework for the Bank and Bank Group in all matters concerning the perception of corporate governance and the risk management format. The document is applied by means of a Board of Directors and Management procedure, relevant policy documents and the principal elements of the corporate governance framework at the Groupheaded by the Board of Directors and the Management. 26