The First International Bank of Israel Ltd. Condensed financial statements as of September 30, 2014

Transcription

1 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ The First International Bank of Israel Ltd. Condensed financial statements as of September 30, 2014 (Unaudited) Table of contents: Page Board of directors' report 5 Principal data at the Bank's group 10 Management review 144 CEO declaration 166 Chief accountant declaration 167 Condensed financial statements 169 Notes to the condensed financial statements 178 3

2 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ BOARD OF DIRECTORS' REPORT ON THE FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2014 At the Board of Directors' meeting held on November 18, 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 nine months of the year ending on September 30, 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 macro economic data the moderate growth continues in the Israeli economy. In the first half of 2014 the annualized growth amounted to 2.5% following growth of 3.2% in the second half of 2013 and 3.0% in the first half of The economic indicators for the months July September 2014 show recovery in the private consumption. The sales in the marketing chains rose by 2.9% (annualized), while in the month of September a rise was recorded of 3.7% compared with August. The slowdown in the economic growth rate is also expressed by the expense of private consumption per capita that increased by 0.6% in the first half of 2014, following an increase of 1.5% in the second half of 2013 and a rise of 2.4% annualized in the first half of The growth rate of the public consumption declined, while in the first half of 2014 the growth rate was 1.9%, following rises of 5.1% in the second half of 2013 and 3.4% in the first half of The GDP of the corporate sector rose by 2.0% in the first half of 2014, following increases of 2.6% in the second half of 2013 and 3.5% in the first half of The continued slowdown in the economy growth is also indicated by the combined index of the Bank of Israel comprising another indicator to diagnose the way of development of the real activity in the economy, which rose only by 1.6% in the last 12 months up to September 2014, compared with 2.0% in June 2014 and 3.3% in December The Bank of Israel growth forecast from September 2014 for the GDP growth in 2014 was reduced to 2.3% compared with the previous forecast of 2.9%, mainly due to the "Strong Rock" operation that decreased the GDP by 0.4%. The "Strong Rock" operation impact related mainly by reducing private consumption, which, according to the Bank of Israel is expected to be short term, and negative impact on export of tourism services, which is expected to be longer. The budget In the months January September 2014 the deficit in the budget amounted to NIS billion The target of the budget deficit is NIS billion The reduction in the deficit was affected from an increase of 6.6% in taxes revenues and a moderate increase (less than expected) in the expenses of the Government departments, except for the defence department. According to the initial estimate of the general accountant in the tresury 5

3 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ department, in the 12 last months ended September 2014 the deficit amounted to NIS 29.7 billion, a 2.7% of the GDP, compared with a deficit of NIS 32.9 billion in 2013, a 3.2% of GDP. Inflation The consumer price index decreased in the first nine months of 2014 by 0.3%. The negative rate of inflation is derived from the sharp decrease of the commodities prices (the oil prices declined by 13% and commodities prices by 5.4% in the last 12 months), the appreciation of the Shekel from the beginning of 2013 and up to the middle of 2014, the impact of "Strong Rock" operation, a moderate increase of wages and an increase of unemployment. It is expected that the inflation in 2014 will remain unchanged and for the 12 months ahead amounts to 1.0%, lower than the center of the inflation target range (1%3%). The housing market Moderation in the rise of housing prices. According to the housing price estimates of the Central Bureau of Statistics, from comparing transactions made during July August 2014 with transactions made during June July 2014, the housing prices decreased by 1.0%. From comparing the transaction prices in July August 2014 to the same period last year, the prices rose by 5.0% compared with 7.3% in The housing prices are also affected by the decline in construction starts. In the first half of 2014 a 20,900 construction starts were recorded (a decrease of 11.0%% compared with the same period last year) and 19,830 construction endings (a decrease of 7.0% compared with the same period last year, mainly in the public initiative decline of 19%). There is also slowdown in demands deriving from the expectations of zero VAT law. The labor market The slowdown in the economy is also seen in the labor market. The labor market data shows an increase in the unemployment level in the month of September to 6.5%, compared with 6.3% in June 2014 and 5.9% at the end of On the background of the moderation in the economic activity, an additional increase in the unemployment rate is expected. The exchange rate During the third quarter of the year the exchange rate of the Dollar rose by 7.5% and the exchange rate of the Euro declined by 1.0% In the first 3 quarters of 2014 the exchange rate of the Dollar against the Shekel rose by 6.5%, and the exchange rate of the Euro against the Shekel declined by 2.8%. In order to support the exchange rate, Bank of Israel purchased in the first 3 quarters of 2014 Dollar 6.2 billion (of which Dollar 2.6 billion from the production of gas from the Tamar field) Exchange rate as of Change % January September 2014 Dollar % (7.0%) Euro (2.8%) (2.8%) 2013 The Bank of Israel interest The lowering of the interest continued at the third quarter of 2014, during which the Bank of Israel decided to lower the interest to 0.25% in order to bring back the inflation to the target of prices stability of 1% to 3% in the 6

4 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ next 12 months and to back up growth, while maintaining financial stability. The path of the interest is dependent on the developments in the inflation, the growth in Israel and the global economy, the monetary policy of the main central banks and developments in the exchange rates, as the Bank of Israel mentioned lately that in order to support the growth in the economy, it might be needed another lowering of interest and/or other expending steps. The global invironment The international growth froecasts were recently lowered by the International Currency Fund. The International Currency Fund reduced on October the growth forecasts and international trade for the year 2014 to 3.3%, compared with 3.4% in the forecast published in July. The forecasts for 2015 was reduced to 3.8%, compared with 4.0% in the previous forecast. The International Currency Fund increased the growth forecast in the USA for 2014 to 2.2% (compared with 1.7% in the previous forecast) and the forecast for 2015 to 3.1% (compared with 3.0% in the previous forecast). The forecast for the Euro bloc for 2014 is still low and amounts to 0.8% and for % (1.5% in the previous forecast). The USA economy data in the third quarter of 2014 continue to show a positive trend and a monetary path of reducing the expension is showing. The unemployment rate declined to 5.9% in September compared with 6.1% in the previous month. On the background of the improvement of the macro data, the central bank reduced during August September the purchase of bondsin the framework of the quantitive expension program and at the end of October 2014 announced its ending as of November The interest rate remained at its zero level and the central bank repeated its estimation that by the end of 2015 a return of interest rise is expected to a level of 1.38%. In Europe most of the economies are having difficulties showing a continous improvement in the economic activity. The inflation rate in the Euro bloc remained low up to a concern of deflation. The low inflation rate supports the lowering of the interest to an historical low of 0.05%, while concurrently the centeral bank announced a policy of quantitative expension, by purchasing asset backed bonds of the european central bank. The interest on deposits with the central bank was lowered in September from negative rate of 0.1% to a negative rate of 0.2%. The capital markets During the third quarter of the year the prices in the local market continued to rise. The TLV 100 index increased by 4.2% (an increase of 8.1% from the begining of 2014), the TLV 25 index increased by 5.1% (an increase of 9.7% from the begining of the year) The linked to the CPI corporate bond index increased by 1.1% during the third quarter (3.1% from the begining of the year) and the overall government bonds index increased by 2.1% during the third quarter of the year (6.7% from the begining of the year). The volume of the daily average turnover of shares and convertibles increased from the beginning of the year by almost 4.0%, compared with the similar period last year, while on the other hand the volume of the daily average turnover of bonds declined by 7.8%, compared with the same period last year. 7

5 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ January Sptember 2014 Change in % January Sptember 2013 January Sptember 2014 Daily average turnovers NIS million January Sptember 2013 Tel Aviv 25 index 9.75% 6.70% Tel Aviv 100 index 8.14% 8.91% General bonds index 5.77% 3.91% 4,091 4,438 Total funds raising in the local market (shares and bonds) show an increase of 13.0% in the first nine months of 2014, compared with the similar period last year, derived mainly from the corporate sector while governments bonds show a decline in the rate of the fund raising. January Sptember 2014 NIS million Funds raising volume January Sptember 2013 Rate of change Shares and convertibles 7,267 5, % Government bonds 41,611 51,140 (18.6%) Corporate bonds (including institutions) 46,030 27, % Total 94,908 84, % Also in the USA and Europe the trend of rate increases continued, while the S&P index in the USA rose by 0.6% in the third quarter (6.7% rise from the begining of the year) and in Europe the Eurostock 600 index rose by 0.4% in the second half (4.5% rise from the begining of the year). The developing countries index (the EMMSCI index) declined by 4.3% in the third quarter of the year (a rise of 0.3% from the begining of the year). 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_A.docx_ תאריך 2:15 20/11/2014 אחה"צ BUSINESS DEVELOPMENTS AT THE FIRST INTERNATIONAL BANK GROUP IN THE FIRST NINE 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 nine months of Net profit attributed to the Bank's shareholders amounted to NIS 426 million in the first nine months of 2014, compared with NIS 429 million in the same period last year, a decrease of 0.7%. In the third quarter of the year the net profit amounted to NIS 146 million, compared with NIS 144 million in the third quarter of 2013, an increase of 1.4%. Net return on equity attributed to the Bank's shareholders amounted to 8.3% annualized in January September 2014 compared with 8.7% annualized in the same period last year and 8.6% during In the third quarter of the year the net return on equity annualized amounted to 8.6% compared to 9.0% in the same period last year. Earnings before taxes totaled NIS 712 million in the first nine months of the year compared with NIS 716 million in the same perios last year. The main changes in income statement items, for the first nine month of the year, compared with the same perios last year: A NIS 34 million or 1.9% decrease in net interest income and noninterest financing income. A decrease of NIS 73 million in the expenses for credit losses. A decrease of NIS 12 million or 1.1% in commission and other income. An increase of NIS 31 million or 1.5% in operating and other expenses. Earnings after taxes totaled NIS 413 million in the first nine months of the year compared with NIS 421 million in the same period last year, a decrease of 1.9%. Basic earnings per NIS 0.5 share amounted to NIS 4.24 in the first nine months of the year compared with NIS 4.28 in same perios last year. The Bank Group's total assets on September 30, 2014 amounted to NIS 111,364 million compared with NIS 107,303 on September 30, 2013 and NIS 111,103 million on December 31, 2013, an increase of 3.8% and 0.2%, respectively. Credit to the Public, net on September 30, 2014 amounted to NIS 69,908 million compared with NIS 66,895 on September 30, 2013 and NIS 68,706 million at the end of 2013, an increase of 4.5% and 1.7%, respectively. Deposits from the public as of September 30, 2014 amounted to NIS 88,737 million, compared with NIS 85,380 on September 30, 2013 and NIS 89,122 million at the end of 2013, an increase of 3.9% and a decrease of 0.4%, respectively. Capital attributed to shareholders totaled NIS 7,083 million on September 30, 2014, compared with NIS 6,764 million on September 30,2013 and NIS 6,892 million at the end of 2013, an increase of 4.7% and 2.8%, respectively. The equity capital tier 1 ratio (basel 3) amounted to 9.93% on September 30, 2014, compared with 10.11% at the end of

7 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ PRINCIPAL DATA For the nine months ended Earnings and profitability September Change NIS million in % Net interest income 1,603 1,653 (3.0) Noninterest income 1,238 1, Total income 2,841 2,887 (1.6) Of which: Commission fees before the effect of FAS 91 1,101 1, FAS 91 (79) Total commission fees 1,022 1,050 (2.7) Expenses (income) from credit losses (8) 65 Operating and other expenses 2,137 2, Earnings before taxes (0.6) Net earnings attributed to shareholders (0.7) Change Balance Sheet Highlights NIS million in % Total assets 111, , , Net credit to the public 69,908 66,895 68, Securities 12,181 12,656 10,799 (3.8) 12.8 Deposits from the public 88,737 85,380 89, (0.4) Bonds and subordinated notes 5,468 5,815 5,702 (6.0) (4.1) Capital attributed to shareholders 7,083 6,764 6, For the nine months ended September 30 For the year ended December 31 Principal financial ratios Capital attributed to shareholders of the bank to total assets 6.4% 6.3% 6.2% Expenses from credit losses to the public, net* (0.02%) 0.13% 0.14% Ratio of equity capital tier 1 to risk assets (Basel 3) 9.93% 10.11% Ratio of total capital to risk assets (Basel 3) 14.56% 14.78% Credit to the public, net to total assets 62.8% 62.3% 61.8% Deposits from the public to total assets 79.7% 79.6% 80.2% Deposits from the public to credit to the public, net 126.9% 127.6% 129.7% Operating and other expenses to total income 75.2% 72.9% 73.0% Net return on equity attributed to shareholders of the bank* 8.3% 8.7% 8.6% * on an annualized basis. 10

8 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ DEVELOPMENTS IN INCOME AND EXPENSES Net interest income totaled NIS 1,603 million in the first nine month of the year compared with NIS 1,653 million in the same period last year, a decrease of 3.0%. 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 income (FAS 91), as from January 1, 2014, compared with the previous directions is an increase of NIS 65 million in the interest income in the first nine month of the year. Noninterest financing income totaled NIS 156 million in the first nine month of the year compared with NIS 140 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: Q3 Q2 Q1 Q4 Q3 Q2 Q1 NIS million Interest income Interest expenses (171) (217) (82) (176) (382) (320) (257) Net interest income Noninterest financing income Net financing earnings Nine months NIS million Interest income 2,073 2,612 Interest expenses (470) (959) Net interest income 1,603 1,653 Noninterest financing income Net financing earnings 1,759 1,793 11

9 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ Set out below is an analysis of net financing earnings: Q3 Q2 Q1 Q4 Q3 Q2 Q1 NIS million Earnings from current activity before FAS The effect of FAS Earnings from current activity Reconciliations to fair value of derivative instruments (2) (7) (2) 14 (1) Income from realization and reconciliations to fair value of bonds Earnings from investments in shares Financing income (expenses) deriving from investments abroad (1) (1) (1) (4) 10 Net financing earnings Nine months NIS million Earnings from current activity before FAS 91 1,505 1,564 The effect of FAS Earnings from current activity 1,570 1,564 Reconciliations to fair value of derivative instruments (11) 36 Income from realization and reconciliations to fair value of bonds Earnings from investments in shares Financing income (expenses) deriving from investments abroad (2) 6 Net financing earnings 1,759 1,793 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 the nine months ended September Activity volume Share in net interest Activity volume Share in net interest % NIS million % % NIS million % Non linked Shekel segment 72 1, , CPIlinked segement Foreign currency segment and linked to fc(incl abroad) Total 100 1, , 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 For the nine months ended September in % Nonlinked shekel segment CPIlinked segment Foreign currency and fc linked Total

10 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ 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 from credit losses were compiled on a conservative basis and amounted to an income of NIS 8 million in the first nine months of 2014 compared with an expense of NIS 65 million in the same period last year. Expenses from credit losses totaled NIS 13 million in respect of credit to private individuals, income of NIS 21 million in respect of commercial credit and in respect of housing loans no expense was recorded. In the same period the last year, expenses from credit losses totaled NIS 24 million in respect of commercial credit, NIS 30 million in respect of housing credit and NIS 11 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 from credit losses as a ratio of total credit to the public amounted to negative rate of 0.02% compared with 0.13% in the same period last year and 0.14% in the year Commission income totaled NIS 1,022 million, compared with NIS 1,050 million in the same period last year, a decrease of 2.7%. Excluding the effect of the first implementation of FAS 91 commission income amounted to NIS 1,101 million, an increase of 4.9% compared to the same period last year. A decrease in credit handling income was recorded due to first implimentation of FAS 91 starting with January 1, 2014 (see note 1.D. to the financial statements), according to which commissions for granting credit are to be classified to interest income and are not to be recognized immediately in the income statement but deffered and recognized during the period of the loan as adjustment of yield. An increase in the income from activity in the capital market was recorded of NIS 51 million. Other income amounted to NIS 60 million, compared with NIS 44 million in the same period last year. The increase in other income derives from the gain in the sale of FIBI London as stated in Note 13 to the financial statements. Operating and other expenses totaled NIS 2,137 million compared with NIS 2,106 million in the same period the last year, an increase of 1.5%. Salaries and related expenses totaled NIS 1,273 million compared with NIS 1,263 million in the same period last year, an increase of 0.8%. Expenses on depreciation and maintenance of premises and equipment totaled NIS 334 million, compared to NIS 332 million in the same period last year. Amortizations of intangible assets totaled NIS 127 million compared with NIS 128 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 38 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 403 million compared with NIS 383 million in the same period last year, an increase of 5.2%. 13

11 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ The provision for taxes on operating earnings amounted to NIS 229 million compared with NIS 295 million in the same period last year. The effective tax rate as a proportion of earnings before taxes amounted to 42% 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 41.2%, compared with statutory tax rate of 36.2%. 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 mainly amortization of intangible assets and tax and interest differentials in respect of the collection of impaired debts. 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. On the other hand, the increase in the statutorical tax rate last year affected the decrease in tax provision on income in the amount of NIS 22 million. The Bank s share in the operating earnings of investee companies after the tax effect amounted to NIS 28 million compared with NIS 23 million in the same period last year. CONTRIBUTION TO THE COMMUNITY The Bank launched 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_A.docx_ תאריך 2:15 20/11/2014 אחה"צ COMPOSITION AND DEVELOPMENT OF THE BANK GROUP'S ASSETS AND LIABILITIES Total Group assets as of September 30, 2014 amounted to NIS 111,364 million compared with NIS 107,703 million as of September 30, 2013 and NIS 111,103 million as of December 31, 2013, an increase of 3.8% and 0.2% respectively. Credit to the public, net as of September 30, 2014 amounted to NIS 69,908 million compared with NIS 66,895 million as of September 30, 2013 and NIS 68,706 million as of December 31, 2013, an increase of 4.5% and 1.7% respectively. Credit risk of problem loans, including offbalancesheet components, totaled NIS 3,005 million compared with NIS 2,775 million as of September 30, 2013 and NIS 2,788 at the end of 2013, an increase of 8.3% and 7.8% respectively. a. Problem credit risk September 30, 2014 September 30, 2013 Total Total NIS million Impaired credit risk ,135 Inferior credit risk Credit under special supervision risk 1, , Total problem credit risk* 2, ,005 2, ,775 Balancesheet Offbalancesheet Balancesheet Offbalancesheet December 31, 2013 Balancesheet Offbalancesheet Total NIS million Impaired credit risk 1, ,145 Inferior credit risk Credit under special supervision risk Total problem credit risk* 2, ,788 Balance on Balance on Balance on September 30, 2014 September 30, 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_A.docx_ תאריך 2:15 20/11/2014 אחה"צ b. Nonperforming assets Impaired credit to the public not accruing interest income: Balance on Balance on Balance on September 30, 2014 September 30, 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 1 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 1.1% 1.4% 1.4% Ratio of nonimpaired credit to the public in arrears of 90 days+ to total credit to the public 0.4% 0.5% 0.4% Ratio of provision for credit losses for credit to the public to total credit to the public 1.2% 1.3% 1.2% e. Ratio provision for credit losses in respect of credit to the public to total impaired credit to the public not accruing interest income 108.7% 97.0% 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 (income) from credit losses to average total credit to the public (0.02%) 0.10% 0.12% Ratio of net writeoffs of credit to the public to average total credit to the public (0.02%) 0.05% 0.14% Ratio of net writeoffs of credit to the public to total provision for credit losses in respect of credit to the public (1.45%) 3.89% 11.25% * on an annualized basis. 16

14 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ 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): September 30, 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 Industry Communications Industry 2, , 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 Industry 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 September 30, 2014 totaled NIS 88,737 million compared with NIS 85,380 million as of September 30, 2013 and NIS 89,122 at the end of 2013, an increase of 3.9% and decrease of 0.4% respectively. Balance of deposits from the public of the three largest depositors: September 30 December NIS million 1 2,721 2, ,651 2, ,140 1,048 The investment in securities totaled NIS 12,181 million compared with NIS 12,565 million as of September 30, 2013 and NIS 10,799 million at the end of 2013, a decrease of 3.8% and an increase of 12.8% respectivly. 17

15 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ Set out below is the composition of the portfolio: Balance as of Share of total securities NIS million % Government bonds 7,771 7, Banks bonds (1) 2,085 1, Other bonds (corporate and assetbacked) 1,224 1, Other bonds (corporate and assetbacked) guaranteed by governments Shares (2) Total 12,181 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 19 million. (December 31, 2013 NIS 43 million). (2) Investment in shares includes inter alia investment in private equity funds in the amount of NIS 148 million, permanent capital notes amounting to NIS 50 million, investment in foreign currency shares of NIS 45 million and investment in shares traded on the Tel Aviv Stock Exchange amounting to NIS 106 million (December 31, 2013 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 5,339 4,270 1, CPIlinked 2,427 2, Foreign currency denominated and linked 4,052 4,056 (4) (0.1) Nonmonetary items Total 12,181 10,799 1, Set out below are the sources for the price quotations which the Bank used for determining the fair value of securities on September 30, 2014: Price quoted in active market Indicative price* Counterparty price** Total NIS million Shares and private investment funds Local currency government bonds 6,029 6,029 Local currency corporate bonds 1, ,737 Nonasset backed foreigncurrency and fc linked bonds 11 3,432 3,443 MBS bonds Others (structured and creditbased structured) Total 7,619 4, ,181 % of portfolio 62.5% 35.9% 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_A.docx_ תאריך 2:15 20/11/2014 אחה"צ 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 1,619 million, NIS 1,387 million) USA France UK Europe others * ( countries; countries) Australia Germany Canada Far East, New Zealand and others* ( countries; countries) Total , , NIS million 1, ,462 It should be noted that there is no issuer (except the Israel Government) whose bond balance exceeds 1% of the shareholders equity of the Bank. * Among these countries, there is no country whose bond balance exceeds 2% 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 Industry Electricity and water Construction and real estate Other business services Communications and computer services Commerce Hotels, hospitality and food services Pubilic and community services Transportation Total * Including NIS 424 million guaranteed by the Israel Government ( NIS 346 million) * , NIS million * ,185 19

17 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ 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 3,443 million ($ 932 million) (includes foreign corporations amounting to NIS 1,587 million, foreign currency denominated bonds of Israeli government amounting to NIS 1,619 million, foreign government bonds amounting to NIS 123 million and foreign currency bonds of Israeli corporations, mostly traded abroad, amounting to NIS 114 million). All of the foreign bonds are investment grade and 89% of the portfolio is rated A or higher; 44% 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 2.8% of the total foreign currency bond portfolio. The duration (average termtomaturity) of the foreign currency bond portfolio is 3 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 21 million ($6 million) compared with NIS 45 million ($13 million) as of December 31, Mortgage Backed Securities (MBS) amount to NIS 583 million ($158 million). The bonds were issued by federal agencies in the USA. Of these, NIS 256 million ($70 million) were issued by Ginnie Mae, which is wholly owned by the US government. The balance of NIS 327 million ($88 million) was issued by the US federal agencies Fannie Mae and Freddie Mac. Set out below is a sensitivity analysis as of September 30, 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 (3.8) (3.3) Decrease of 100 base points The credit risk inherent in the portfolio is managed by economic hedging. Structured products amounting to NIS 14 million ($4 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 148 million ($40 million). Commitments to invest in private equity funds amounted to NIS 46 million as of September 30, 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 50 million ($14 million). 20

18 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ 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): September 30, 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 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 to NIS 1,198 million compared with NIS 1,180 million on December 31, Shareholders' equity at the Bank totaled to NIS 7,083 million compared with NIS 6,892 million as of December 31, 2013, an increase of 2.8% The increase in shareholders' equity resulted from the dividend in the amount of NIS 230 million, by the periodical earnings of NIS 426 million and from an NIS 5 million decraese in the capital fund in respect of securities available for sale. The ratio of shareholders' equity to total assets amounted to 6.4% as of September 30, 2014 compared with 6.2% at the end of After balance sheet date, on November 18, 2014 the Board of Directors decided on distribution of cash dividend to shareholders in the amount of NIS 55 million. The determining date for the payment of dividend will be November 27, 2014 and payment date will be December 9, The ratio of capital to the elements of risk as of September 30, 2014, calculated in accordance with the Proper Conduct of Banking Business Regulation concerning the measurement of capital and capital adequacy (Basel 3), amounted to 14.56% 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 ratio of tier 1 capital to risk assets amounted to 9.93% 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 21

19 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ under stress scenarios will be no less than 9%, and the core capital ratio under stress scenarios will be no less than 6.5%. 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 September 30, January 1, 2014 In percent

20 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ 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 14, 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_A.docx_ תאריך 2:15 20/11/2014 אחה"צ 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 September 2014 amounted to NIS 130 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 31.4 billion on September 30, 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 22.5 billion, and NIS 8.9 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 September 30, 2014 amounted to 126.9% compared with 129.7% on December 31, At the end of September 2014, deposits from the public, bonds and subordinated notes totaled NIS 94.2 billion compared with NIS 94.8 billion at the end of

22 קובץ,ENG_A.docx_ תאריך 2:15 20/11/2014 אחה"צ 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 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. Chief Risk Manager and management member in charge of the Risk management division is CPA Bentzi Adiri. g. Those responsible for risk management at the Group are: Mr. Ilan Batzri CPA, Head of the Business Division Credit Risk Manager and Settlement Risk Manager; Mr. Avi Sternschuss, Head of the Finance Division was the Financial Risk Manager and Reputation Risk Manager until June 30, 2014; CPA Liat Ben Ari, head of the financial subdevision as Financial risk manager. CPA Nachman Nizan, head of the chief accounting devision as Reputation Risk manager. Mr. Bentzi Adiri CPA Operational Risk Manager. Adv. Dalia Belnek, Chief Legal CounselLegal Risk Manager. 25