- 1 - UNION BANK OF ISRAEL LTD. ANNUAL REPORT 2011
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UNION BANK OF ISRAEL LTD.
ANNUAL REPORT
2011
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THE BOARD OF DIRECTORS
Mr. Zeev Abeles – chairman of the Board of Directors Mr. Yeshayahu Landau, Vice Chairman of the Board of Directors
Mr. Yigal Landau Mr. Haim Almog Mr. Yaacov Lifshitz Mr. Uzi Vardy-zer Ms. Miri Lent Sharir Mr. Giora Morag Mr. Zalman Segal Mr. Alberto Garfunkel Mr. Izhak Zisman
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Contents Page Board of Directors’ Report to the Shareholders’ General Meeting 4 Management Review of Bank’s Financial Position and Results of its Operations 236 Certifications of the President & C.E.O. and of the Chief Accountant 256 Board of Directors’ and Senior Management’s Report About the Internal Control over Financial Reporting 258 Financial Statements for the Year Ended December 31, 2010 259 This is a translation from the Annual Report for 2011 in Hebrew, and has been prepared for convenience only. In case of any discrepancy, the Hebrew version will prevail.
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BOARD OF DIRECTORS' REPORT TO THE SHAREHOLDERS' GENERAL MEETING
Table of Contents Page
1. Forward-looking Information 5
2. Economic Developments 5
3. Activity of the Bank and Description of Business Developments 10
4. Profit and Profitability 14
5. Developments in Balance-Sheet Items 18
6. Objectives and Business Policy 32
7. Controlling Interests in the Bank 34
8. Investments in the Bank’s Capital and Transactions in its Shares 34
9. Dividend Distribution 36
10. Material Agreements 37
11. Licenses, permits and approvals 43
12. Activity Overseas 45
13. Legal Proceedings 46
14. Fixed Assets and Facilities 49
15. Activity of Investee Companies 52
16. Human Capital 63
17. Description of Tax Situation 68
18. Description of the Bank’s Business by Activity Segments 70
19. Capital Adequacy 97
20. Risk Exposure and Management 117
21. Critical Accounting Policies and Estimates 167
22. Legislative Developments 183
23. Transaction with Controlling Shareholders 192
24. Community activity and Donations 201
25. Disclosure Regarding the Internal Auditor 202
26. The Board of Directors 207
27. Members of Management and Senior Officials 218
28. Disclosure Regarding the Process of Approval of the Financial Statements 222
29. Controls and Procedures 224
30. Details of compensations for High Wage Recipients at the Bank 228
31. Remuneration of Auditors 235
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Board of Directors’ Report to the Shareholders' General Meeting
At the meeting of the Board of Directors of the Bank held on February 29, 2012, it was resolved to approve the
financial statements of the Bank and its subsidiaries as at December 31, 2009. The financial statements are prepared
in accordance with directives issued by the Supervisor of Banks.
Forward-looking Information
Part of the information presented in the report of the board of directors, which does not relate to historical facts,
constitutes forward-looking information as defined in the Securities Law - 1968. The actual results of the Bank may
be significantly different from those that were included in the forward-looking information, as a result of a number
of factors. These factors include, but are not limited to, changes in legislation and the provisions of supervisory
agencies, macro-economic developments, and in particular developments in the global financial crisis and the
consequent uncertainty, extraordinary economic events, such as drastic changes in interest, exchange, and inflation
rates, the behavior of competitors and specific changes to be detailed below.
Forward-looking information is characterized by words or expressions such as "intend to", "expectation", "should",
"forecast", "in the opinion of the Bank", "the Bank intends", "plan", and similar expressions such as: "may", "will
be".
These forward-looking expressions involve risks and uncertainty since they are based on management assessment of
future events which may not materialize or materialize differently than expected.
The information presented below relies on, among other things, future forecasts regarding matters pertaining to
economic developments in Israel and abroad and on the work plans and budgets of the Bank for 2011. The Bank
makes no commitment to publish an update to the forward-looking information included in these reports, including
in respect of the effect on such information of circumstances and events that may occur after the publication of the
reports.
Economic Developments
General
2011 was mainly marked by the continued spread and deepening of the debt crisis in the Eurozone countries.
Among other effects, this was reflected in downgrades of credit ratings of several of these countries, such as Greece,
Portugal, Spain, Italy, and recently even France. The downgrades contributed to the expansion and severity of the
crisis, as noted, and led to concerns over the stability of the global banking system. As a result, credit ratings of
major banks around the world were also downgraded. The European Union, the International Monetary Fund, and
the various governments initiated several measures during 2011, including austerity plans, bailouts, and injections of
capital to the European banking system at a total volume of trillions of euro, with the aim of stabilizing the banking
system and the Eurozone economy, and preventing the collapse of the currency bloc. Thus far, these initiatives have
failed to bring about a substantial improvement in this situation.
Due to the increased risks resulting from the ongoing Eurozone debt crisis, in January 2012 the IMF lowered its
growth forecast for the European economy to a negative rate of 0.5% in 2012, from the earlier forecast of a positive
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growth rate of 2.5%; the forecast for 2013 was adjusted to 0.8% growth, from 1.5% growth. Further to this
announcement, the IMF lowered its global growth forecast, estimating 3.3% growth of global GDP in 2012, versus
the previous growth forecast of 4.0%, and 3.9% growth in 2013, down from 4.5% previously.
In the United States, the slowdown in economic activity continued in 2011. For the first time in its history, the US
experienced a downgrade of its credit rating by the international rating agency S&P, while its rating outlook
remained at Negative. During the year, the US government launched several programs, jointly with the Federal
Reserve, aimed at stimulating growth and employment and cutting back the deficit. Although some macro data
released in early 2012 point to initial signs of a resurgence of economic activity, forecasts call for the slowdown to
persist in 2012. In view of the worries over possible implications of a deepening debt crisis in Europe for the
continued recovery of the US economy, the Fed Chairman made a commitment, in January 2012, to continue the
stimulus plans and expansionary monetary policy until indications of recovery and stabilization of the growth of the
US economy can be seen. At the same time, the Chairman updated the growth forecast for the US in 2012 to 2.2%-
2.7%, from an earlier estimate of 2.5%-2.9%, versus the IMF's January estimate of 1.8%.
The emerging economies posted high growth rates in 2011, in comparison to the other developed economies.
However, economic activity is cooling there too, due among other causes to the continued application of restraining
monetary policies designed to reduce the mounting inflationary pressures in these countries, and the slowdown of
exports as a result of the economic conditions in the developed economies. Following these developments, in
January 2012 the IMF lowered its growth forecasts for the emerging markets in 2012 and 2013 to 5.4% and 5.9%
respectively, a decrease of 0.7 and 0.6 percentage points.
The events of the "Arab spring" and the geopolitical turmoil in the Middle East, which began in Tunisia in January
2011 and spread to other Arab countries, including Syria, Egypt, and Libya, as well as the ongoing development of
the nuclear program in Iran, further contributed to economic instability by increasing uncertainty and causing an
increase in oil prices.
Activity in the Israeli economy expanded throughout 2011, although the growth rate cooled significantly starting in
the second half of the year, as global demand (influencing exports) and domestic demand became more moderate.
According to an initial estimate for the second half of 2011 by Israel’s Central Bureau of Statistics, GDP grew by
3.6% in the second half of 2011, in annualized terms (all data in this paragraph are annualized), following increases
of 5.3% in the first half and 5.8% in the second half of 2010. The development of GDP by quarter indicates an
increase of 3.2% in the fourth quarter of 2011, following gains of 3.8% in the third quarter, 3.9% in the second
quarter, and 4.8% in the first quarter. The increase in GDP in the second half of 2011 consists of a 5.1% increase in
public consumption and a 9.0% increase in fixed-asset investments, versus a 1.1% decrease in private consumption
and a 7.3% decrease in exports of goods and services. The cooling growth is also reflected in the composite state-of-
the-economy index, which rose by a cumulative 3.4% in 2011, following a cumulative increase of 5.9% in 2010. In
view of the expected damage to exports as a result of the lower demand following the global developments,
especially in Europe, as reflected in the composite index data as well, in December 2011 the Bank of Israel updated
its macro-economic forecast for 2011-2012. According to the revised estimates, GDP is expected to grow by 2.8%
in 2012, versus the previous forecast of 3.2%, while average unemployment in 2012 will stand at 6.3%.
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The Ministry of Finance released its economic forecasts for 2012 in January 2012, as part of the obligations of the
two-year budget. According to the revised estimate, growth in 2012 is expected to reach 3.2%, versus the previous
forecast of 4%; the deficit is expected to stand at 3.4% of GDP, versus a target of 2% in the two-year budget.
Following the social protests, the Trachtenberg Committee was appointed in August 2011. To date, the government
has approved the committee's recommendations in the areas of taxation and education, with implementation planned
during 2012. The other recommendations will be discussed by the Ministerial Committee for the Implementation of
Legislation for Socio-Economic Change, and are planned for incremental implementation.
The Committee for Increased Competition in the Economy, established in October 2010, submitted its final
conclusions to the prime minister in February 2012. The main recommendations address matters including the
structure of companies in the economy, the authority of the Antitrust Commissioner, and the sale of the state's
holdings in various companies. The final report will be submitted for approval by the government, and if approved,
transferred to Knesset for the completion of legislative procedures.
Employment and Private Consumption
The trend of improvement in the job market continued, from the beginning of the year. During the period from July
2011 to November 2011, the unemployment rate stood at 5.4%, a level essentially indicating full employment –
compared to 6.5% in November 2010 and 6.3% in December 2010. Credit-card purchases increased by 3.7% year-
on-year in 2011, versus an 8.2% increase in 2010. Total revenues of retail chains grew by 1.3% year-on-year in
2011, further to an increase of 3.4% in 2010. The slowdown resulted from the social protests, among other factors.
2011 was a record year for overseas travel by Israelis, with a 3% increase year-on-year.
Foreign Trade, Capital Movements, and Exchange Rates
The trade deficit totaled USD 54.2 billion in 2011, versus a deficit of USD 29 billion in 2010, an increase of
approximately 87%. The ratio of exports to imports (excluding ships, aircraft, and diamonds) in 2011 was
74.5%, versus 83.2% in 2010. Imports of goods in 2011 grew by 18.7% year-on-year; the main increases are
growth of 35.3% in imports of investment products, 25.1% in imports of energy materials, and 22.9% in imports
of diamonds. Exports of goods also increased, but only by 8.3% compared to 2010; the data points to a growth
of 6.6% in industrial production, 23.1% in exports of diamonds while the agricultural exports decreased by 1.7%
compared to 2010.
During 2011, the NIS depreciated against the US dollar, the euro, the British pound, and the yen by 7.7%, 4.2%,
7.3%, and 13.1%, respectively.
The main factors contributing to the change in trend in the foreign-currency market were the regulatory changes
applied at the beginning of the year, including the imposition of a liquidity requirement on transactions in
foreign-currency derivatives by non-residents, the requirement to report to the Bank of Israel on transactions in
foreign currency and debt instruments and the expansion of the group of entities required to make such reports,
and the inception, in July, of the new directives for the equalization of tax rates applicable to non-residents and
residents of Israel on short-term debt instruments.
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In view of the change in trend in exchange rates, the Bank of Israel reduced its intervention in the market;
foreign-currency purchases by the BOI during the year amounted to only USD 4.9 billion, compared to USD
12.3 billion in 2010.
Fiscal Policy
The government deficit in 2011 totaled NIS 28.6 billion, about 3.3% of GDP, versus an annual deficit of NIS
25.2 billion, or 3% of GDP, planned in the budget; in the same period last year, the deficit amounted to NIS 30.2
billion. Government expenditures grew by 4.2% year-on-year, while government revenues increased by 5.3%.
State tax revenues grew by 8.1% year-on-year, constituting 99.0% of the planned amount in the annual budget.
The revised forecast for 2012 published in early 2012 by the Ministry of Finance included a reduced growth
estimate, as noted above; as a result, the volume of tax collection is expected to be lower than the estimate used
to build the budget for 2012. This year's deficit is expected to reach 3.4%, versus the target of 2%.
Prices and Monetary Policy
The governor of the Bank of Israel applied a varying monetary policy during 2011. In the first half, the BOI
interest rate was gradually raised by a cumulative 1.25 percentage points, to 3.25% by June, in order to return
inflation to the target range while supporting continued economic growth. In the second half, in view of the
negative developments in global growth and the worries over the effects of the European debt crisis on growth
in Israel, the interest rate was gradually lowered by a cumulative 0.5 points, to 2.75% in December 2011. In
light of the continued negative trend in the global economy in early 2012 and the forecast that it would continue,
the interest rate was lowered by 0.25 percentage points at the end of January, to 2.5%.
During 2011, the consumer price index rose by 2.2%, within the inflation target range, compared with 2.7% in
2010. The main items contributing to the increase in CPI in 2011 were housing, housing maintenance,
transportation and communication, and food.
According to the updated estimate by the research division of the Bank of Israel, released on December 26,
2011, inflation in 2012 is expected to reach 2.1%, close to the midpoint of the target range. Influencing factors
include the depreciation of the NIS in the second half of 2011, the expected decrease in commodity prices
globally, the anticipated slowdown in the growth of demand, and the more moderate increase in the housing
item.
Capital Market
2011 opened with stable stock prices, but a reversal began in April and continued through the rest of the year, as
trading in the capital markets in Israel and globally was burdened by the negative effects of the slowdown in
most of the world's economies, the continued expansion of the European debt crisis, and the uncertainty
surrounding the possible consequences of the "Arab spring" in the Middle East for oil prices. These effects were
reflected in volatile, negative trading on most of the leading global indices.
Overall for the year, the TA-25 and TA-100 indices lost 18.2% and 20.1% respectively. The declines
encompassed all sectors, but were especially prominent in the financial sector, led by the segments of
investments and holdings, banks, and insurance companies, which posted declines of 41.0%, 34.3%, and 33.0%,
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respectively, for the year. Stock trading was characterized by low turnovers, as monetary values declined along
with prices, so that the average daily turnover in equities amounted to NIS 1.7 billion in 2011 – about 15%
lower than in 2010.
A slowdown relative to the previous year was apparent in capital raising as well. Overall in 2011, about NIS 5.5
billion were raised in the local equity market (of which about NIS 1.3 billion by real-estate companies) through
offerings, private placements, and options exercised, versus NIS 12.8 billion in 2010.
In contrast to the equity market, the bond market in 2011 showed price gains in almost all types of bonds;
overall in 2011, the general bond index and the CPI-linked bond index posted increases of 2.5% and 1.0%
respectively, along with a steep increase of 8.2% in the foreign-currency-linked bond index. The Tel Bond 20
index of corporate bonds rose by 0.7% in 2011, while the Tel Bond 40 index fell by 1.6%.
During 2011, 22 debt arrangements were completed for publicly traded companies that fell into difficulties
meeting their obligations to bond holders; 37 additional arrangements were still not finalized by the end of the
year. These arrangements reinforced investors' worries and contributed to the volatile trading in corporate
bonds.
Trading volumes in the bond market showed an opposite trend to the equity market. In 2011, the average daily
turnover in bonds totaled NIS 3.8 billion, 15% higher than in 2010. The increase in turnover resulted from a
steep rise in trading volumes in Shahar unlinked government bonds, influenced by foreign investors, who
bought large volumes of these bonds, due to the inception in July of the new regulations for the equalization of
tax rates imposed on non-residents and residents of Israel with regard to short-term debt instruments.
During 2011, the business sector raised NIS 41 billion from the public and from institutional investors, about
95% of the total amount raised in 2010. The commerce and services sector, the banking sector, and real-estate
companies stood out, raising NIS 15.8 billion, NIS 12.2 billion and NIS 7.8 billion respectively, or 39%, 30%,
and 19% of the total amount raised through marketable bonds.
In government offerings, the government sharply reduced its activity in the bond market this year, for the
second consecutive year. Overall for the year, the government raised NIS 3.1 billion through bonds, versus a net
amount of NIS 9.5 billion in the preceding year and NIS 30 billion in each of the years 2008 and 2009.
The government bond index rose by 5.0% in 2011.
Construction and Real Estate
In late 2011, the pace of the increase in prices of homes cooled somewhat, halting the upward trend for the first
time since the end of 2008. This was reflected in an increase of 6.9% in prices from November 2010 to
November 2011, versus an increase of 8.5% from October 2010 to October 2011.
The slowdown in housing prices resulted from a continued increase in construction starts, a delayed effect of the
increase in the interest rate, measures taken by the BOI in the area of mortgages, and actions by the Ministry of
Finance in connection with real-estate taxation. The effect of these measures is expected to continue in 2012.
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Activity of the Bank and Description of Business Developments
Union Bank of Israel Ltd. (hereinafter – the "Bank") was founded in 1951. The Bank is a banking corporation
and possesses a banking license under the provisions of the Banking Law (Licensing) - 1981. The Bank was
founded by the Eretz Israel Economic Company (U.S.A.) of New York and the Economic Company Ltd. of
London, which in fact continued the operations of the banking division of the Eretz Israel Union which had
commenced its operations in Israel already in 1922. From 1983 until May 17, 1993, control of the Bank was
held by the State of Israel (through BLL Securities) and by Bank Leumi Le-Israel B.M., which purchased the
shares of the Bank in 1954 and 1961. Further to the agreement to sell the controlling interest in the Bank, the
controlling interest was transferred in 1993 to Shlomo Eliyahu Holdings Ltd., Yeshayahu Landau Holdings
(1993) Ltd., and David Lubinski Properties (Holdings) 1993 Ltd., who are the present controlling shareholders
of the Bank.
The Banks shares are registered for trade in Tel Aviv stoke Exchange.
The Bank has 34 branches across Israel and two centers for private banking (premium) clients. The Bank provides
its customers with a variety of banking services. Based on the financial statements of the banking system as of
September 30, 2011, to the best of the Bank’s knowledge, the Bank is the sixth largest in the system.
We present below details of the Bank's share in some areas in the banking system:
September 30 December 31 December 31 *2011 2010 2009 % % % Credit to the public 2.8 2.8 2.8Public deposits 3.5 3.4 3.5Shareholders' equity 2.7 2.8 2.9Net income 1.9 2.2 2.1
* Relates to the first nine months of 2011. The Bank's business operations focus on a number of areas:
- Financial brokerage between depositors and borrowers. The profit from this activity is reflected in the
Bank's profit from financing activity and it constitutes the Bank's major source of income.
- Financial and banking services that generate commissions, in a broad variety of activities, in the fields of
foreign currency, international trade, securities, information services, banking and financial consultancy and
management, derivative financial instruments, etc.
- Investment of the Bank's shareholders' equity and market risk management.
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The board of directors of the Bank, in accordance with the risk appetite and risk tolerance that it establishes,
delineates the business policies of the Bank and guides and directs the management of the Bank in accordance
with these policies. As part of this process, the board of directors discusses and approves goals, objectives,
resource allocation for work plans, and budgets.
On December 2010, Midroog announced that the rating and rating horizon of the Bank had remained unchanged
relative to the preceding year, as follows:
Long-term deposits Aa3
Short-term deposits P-1
Subordinated notes (lower Tier II capital) A1
Subordinated notes (upper Tier II capital) A2
Rating horizon Stable
Set below is a diagram of the Bank's main investee companies as at December 31, 2011:
(1) 100% holding, except for union underwriting & finances Ltd – see (3) below.
(2) Held by Union Investments and Enterprise (A.S.Y.) Ltd.
(3) The Company Union Issuance Advising (2010) Ltd. was established on January 10, 2010. On December 15, 2010, its
name was changed to Union Underwriting & financed (2010) Ltd. The company held by union capital Markets and
Investments Ltd at a rate of 85%. On January 1, 2012, the holding rate declined to 75%.
For more details - See section "Activity of Principal Investee companies".
(4) For details regarding the principal investee companies of the Bank, their areas of activity, and their contribution to the
profitability of the Bank, see Note 5 to the Financial Statements and in the section “Activity of Investee Companies.”
Union Bank
Auxiliary corporation(1)
Union Investments and Enterprise (A.S.Y) Ltd.
Union Leasing Ltd.
Union Bank Trust Co. Ltd.
Union Issuances Ltd.
Carmel Union Mortgages and Investments Ltd.
Igudim Insurance Agency Ltd.
Livluv Insurance Agency (1993) Ltd.
Capital market(1)
Impact Portfolio Management Ltd.
Union Capital Markets and Investments Ltd. (2)
Union underwriting finances Ltd (3)
Consolidated auxiliary corporations
in the Bank's reports(1)
Igudim Ltd.
Union Systems Ltd.
Equity-basis investee (non-financial corporation) (2)
20% holding
Kukerman Investments Ltd.
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The Bank's Organizational Structure Set below is a diagram of the Bank's organizational structure as of December 31, 2011:
Chairman of the Board of Directors
Internal Audit
Secretary of the
Bank
President & C.E.O.
of the Bank
Legal Counsel
Controls and Risk
Management Division
Corporate Division
Retail, Client Asset, and Advising Division
Financial Management
Division
Chief Accountant
Division
Resources Division
The Bank's
Branches (34)
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Description of Areas of Responsibility
A brief description of the distribution of areas of responsibility at the Bank, based on the current organizational
structure of the Bank, is set out below.
A. Retail, Client Asset, and Advising Division - Responsible for the activity of all branches of the Bank with
private customers (households and private banking) and small businesses (including credit to these
customers); supervises units including branches, marketing, advertising and direct channels, mortgages,
and client asset management and advising. The division also monitors the activity of the subsidiaries
Impact Investment Portfolio Management Ltd., Union leasing Ltd.
B. Corporate Division - Responsible for the routine management of credit (excluding privet customers credit,
small businesses and mortgages, which are under the responsibility of the Retail, Client Assets, and
Advising Division) and credit ratings. The division is also responsible for handling problematic debts and
implementing debt collection proceedings through the special credit department, for Credit rating and for
reports in the field of credit to various supervision entities.
C. Financial Management Division - Responsible for the management of Banks operating liquidity,
execution of transactions in Israeli and foreign securities and in foreign currency, the Bank’s proprietary
activity, management of assets and liabilities in NIS, foreign currency, CPI and providing quotes for
interest and original cost and for making a market with government bonds. The division supervises the,
back-office systems, foreign currency, foreign and Israeli securities. The division also monitors the activity
of the following subsidiaries: Union Investments and Enterprise (A.S.Y.) Ltd., Union Capital Markets and
Investments Ltd., Union underwriting and finances Ltd., Union Bank Trust Company Ltd., Union Issuances
Ltd.
D. Resources Division – Responsible for management of the Bank’s resources in the areas of human capital,
information systems, purchasing and logistics, information security, assets, construction and maintenance,
and the Bank’s operational expense budget. The division also monitors the activity of the following
subsidiaries: Igud Systems Ltd. and Igudim Ltd.
E. Chief Accountant Division – Responsible for accounting and financial reporting of the Bank and its
subsidiaries (to the public, to the board of directors, to management, and to the various supervisory
agencies); financial execution, planning, and analysis, including oversight of the Bank’s work plans and
budgets; oversight of the implementation of the third pillar of Basel II (including involvement in the
implementation of the first and second pillars); oversight of capital planning forum, oversight of the system
of internal control of financial reporting (SOX 404); and responsibility for the Israeli currency execution
unit.
F. Controls and Risk Management Division – Responsible for the development of models and processes for
the examination of risk and evaluation of risks in the Bank’s diverse areas of activity. This responsibility
includes submitting the quarterly exposure document, and overseeing the processes involved in formulating
the Bank’s ICAAP document. In addition, the division is responsible for risk-control processes, control
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over trading units, operational risk management, compliance, and monitoring connections with foreign
banks.
G. Legal Counsel – Provides legal support for all activities of the Bank, including all organs, administrative
units, branches, and subsidiaries. Legal support takes the form of routine legal advice, preparation of legal
opinions, formulation and preparation of documents and agreements, and management and handling of
legal proceedings. In addition the legal counsel is responsible for the compliance, including the prohibition
of Money laundering unit, compliance unit and public appeals unit.
H. Secretariat – Responsible for assisting the work of the board of directors according to the requirements of
the relevant regulatory directives for public companies and banking corporations, the procedures of the
Bank, and the resolutions of the board of directors; Reports on behalf of the Bank immediate reports to
securities authority and to Stock Exchange and reports to the Bank of Israel according to the directives of
the supervisor of Banks. The Secretariat also handles convening and preparing for general assemblies of the
Bank and related reports required by law.
I. Internal Audit – Reports to the chairman of the board of directors; responsible for internal audits of the
units of the Bank and its consolidated subsidiaries at the frequency established in the multi-year work plan,
based on a risk survey updated on a regular basis. The internal audit is also responsible for the performance
of independent review of ICAAP document. Internal auditing is performed in accordance with the
provisions of the Internal Audit Law - 1992; the Banking Ordinance - 1941; the Banking Rules (Internal
Audit) - 1992; the directives of the Supervisor of Banks; and the professional guidelines of the Institute of
Internal Auditors in Israel.
Profit and Profitability (Consolidated)
Net profit totaled NIS 132 million in 2011, compared with net profit of NIS 149 million in 2010, an increase of 11%.
Net return on equity (based on average capital base) reached 6.7% in 2011, compared with 7.6% in 2010.
Set below are the main changes in the net profit, in 2011 compared with 2010:
Decline of 4% in the profit from financing activity before provision for credit losses.
A decline of 69% in provision for credit losses.
A decline of 3% in operating and other income.
A 13% increase in operating and other expenses.
A decline in tax provision rate from 32.1% to 13.2%. (A significant decrease in tax provision for the
year 2011 occurred due to an increase of deferred tax balances as a result of the annulment of
future corporate tax rate – See further details below).
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The net profit from regular activities totaled NIS 132 million in 2011, compared with NIS 148 million in 2011,
a decline of 11%.
The return on equity of net profit from regular activities (based on average capital base) reached 6.7%
compared with 7.5% during 2010.
The profit from regular activities before taxes totaled NIS 152 million in 2011 compared to NIS 218 million in
2010, a decline of 30%.
The return on equity of net profit from regular activities before taxes (based on average capital base)
was 7.7% in 2011 compared to 11.1% in 2010.
Restatement - Beginning with the financial reporting for June 30, 2011 the Bank retroactively applies new
Bank of Israel directives concerning the retirement compensations beyond the contractual obligation.
The data above and ahead regarding prior periods is after the effect of the aforementioned implementation.
Developments in Income, Expenses and Provisions for Taxes
Profit from financing activities before provision for credit losses totaled NIS 689 million in 2011, compared
with NIS 716 million in 2010, a decrease of 4%.
On one hand, there has been an increase in the Bank's business activity, which has been expressed through an
increase in the volume of credit and the average deposits and an increase of the deposit margin. In addition,
there has been an increase in the interest on available capital as the result of the increase of the Bank Of Israel
interest rate.
On the other hand, mainly as a result of market events, there has been a decrease in profit from financial
activities as specified below:
‐ A decrease of approximately NIS 68 million in profits from realization and value adjustment of bonds.
‐ Provision for non-temporary decrease in value of corporate bonds totaling NIS 23 million during 2011,
compared to NIS 4 million in 2010.
The presentation of the Bank's activities in derivative financial instruments at fair value (as required under
GAAP) led to financing expenses in 2011 totaling NIS 22 million. The main decrease resulted from sharp
declines of the interest curves during the first half of 2011. In 2010, the written expenses totaled NIS 5 million.
Furthermore, there was a decrease of approximately NIS 22 million in interest income from debts that have been
written for provision in the past, as a result of the implementation of the impaired debt directive, according to
which this collection is presented as a reduction of allowance for credit losses, starting in 2011.
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A condensed analysis of income and expense rates by linkage base (for detailed information, see Appendix C to the Management’s Review): For the year ended December 31, 2011 2010
Volume of
Assets
Contribution to financing
profit including effect of
derivatives
Interest spread
excluding effect of
derivatives
Interest spread
including effect of
derivatives Volume of
Assets
Contribution to financing
profit including effect of
derivatives
Interest spread
excluding effect of
derivatives
Interest spread
including effect of
derivatives % NIS Millions % % % NIS Millions % % Israeli Currency: Unlinked 46 449 1.59 1.41 52 405 1.76 1.63 CPI-Linked 10 87 0.39 1.02 11 23 0.42 0.34 Foreign Currency (including foreign currency linked) 44 76 1.22 0.3 37 99 1.90 0.60 Options 16 15 Other financial Income, net 61 174 Total *689 1.16 0.87 100 *716 2.10 1.09 * Profit from financing activity before provision for credit losses.
Unlinked shekel segment – The interest spread decreased by 0.22 percentage point's year-on-year, (including the effect of derivates) partially due to decrease in profits
from holding bonds.
CPI-linked shekel segment – The interest spread grew by 0.68 percentage point's (including the effect of derivatives), partially resulted from the measurement of
derivatives instrument at fair value.
Foreign currency – The interest spread decreased by 0.3 percentage points, (including the effect of derivatives), partially resulted from measurement of derivatives
instrument at fair value.
Other income from financing activities, net – The decrease mainly resulted from a decline in profits from realization and adjustments of bond's value, increase of
provision for impairment of an other-than temporary nature and a decrease in collection of interest in respect of impaired debts for which a provision has been
performed, as a result of implementation Impaired debts Directive, as detailed above.
- 17 -
Provision for credit losses totaled NIS 27 million in 2011, compared to NIS 87 million in 2010 a decrease of
69%. The decrease is largely due to an increase in collection of debts that have been written for provision in the
past, totaling NIS 56 million (including collection of interest in the total of NIS 8.5 million which is included as
part of this item) compared to NIS 14 million in 2010 (not including collection of interest). As of January 1,
2011 the Bank implements a new directive concerning "Measurement and disclosure of impaired debts, credit
risk and allowance for credit losses" The directive is implemented henceforth without restatement of
comparative figures for the period prior to the implementation of the directive.
The ratio of expenses in respect of provision for credit losses to the total credit to the public stood at 0.1% in
2011, compared to 0.4% in 2010.
Profit from financing activity after provision for credit losses totaled NIS 662 million in 2011, compared with
NIS 629 million in 2010, an increase of 5%.
Operating and other income totaled NIS 277 million in 2011, compared with NIS 287 million in 2010, a
decrease of 3%.
Operating fees totaled NIS 267 million in 2011, compared with NIS 270 million in 2010, a decrease of 1%. The
decrease resulted mainly from customer security activity fees and management fees, which was partially offset
by the increase in foreign exchange differential fees.
Net profit from net investment in shares amounted to NIS 6 million in 2011, compared with a profit in the
amount of NIS 13 million in 2010. The decrease resulted mainly from a decrease of dividend income which
totaled NIS 5 million in 2011 compared with NIS 8 million in 2010 and from a decrease in realized and
unrealized gains from investment in tradable shares totaling NIS 6 million.
Other income totaled NIS 4 million in 2011 without change from 2010.
Operating and other expenses totaled NIS 787 million in 2011, compared with NIS 698 million in 2010, an
increase of 13%.
Payroll expenses in 2011 totaled NIS 459 million, compared with NIS 396 million in 2010, an increase of 16%.
The increase is mainly due to losses of a central fund for severance pay during the current period, compared to
the profits during the same period last year, and due to expense totaling NIS 15 million that was included in
2011 as a result of the net effect of a retirement plan and the effects of payroll taxation. In addition, there was an
increase in the provision for the various payroll components. After neutralizing the effect of the fund losses,
implications of the retirement plans and tax implications the increase in payroll compared to last year totals
approximately 6%.
Maintenance expenses and depreciation of buildings and equipment amounted in 2011 to NIS 135 million,
compared with NIS 127 million in 2010, an increase of 6%. The increase resulted from an increase in both the
maintenance expenses and the computerization depreciation mainly due to expansion of the Bank's activities.
Other expenses amounted to NIS 193 million in 2011, compared with NIS 175 million in 2010, an increase of 10%,
mainly as the result of an increase in computerization expenses.
The rate of coverage of operating and other expenses by operating and other income in 2011 was 35.2%,
compared with 41.1% in 2010.
- 18 -
The ratio of operating other expenses to the total income (profit from financing activity before provision for credit
losses and operating and other income) in 2011 was 81.5%, compared with 69.6% in 2010. These rates were
influenced by, among other things the decrease of financial income, mainly due to the market events and a decrease
in the collection of interest, as a result of the implementation of the impaired debt directive (see previous details)
and from the increase in payroll expenses, mainly as a result of fund losses, the retirement operation and effects of
taxation. (See previous details).
The provision for taxes in 2011 was 13.2%, compared with 32.1% in 2010. The statutory tax rate in 2011 is
34.48% compared to 35.34% in 2010. The 2011 tax provision includes a decrease of approximately NIS 29
million, due to the effect of annulment of the future tax rate reduction on the balance of the long term deferred
tax asset. For further details regarding the difference between statutory tax rate and effective tax rate – see note
28.B.
The fourth quarter of 2011 resulted in a net profit of NIS 34 million, compared to a net profit of NIS 51
million during the same quarter of last year-a decrease of 33.3%. The decrease is mainly due to the decrease in
profit from the financing activity that is mainly a result of the effect of fair value of derivative financial
instruments (as required under GAAP), and from decrease in profits from realization and value adjustment of
bonds. In addition, there was an increase in payroll expenses as a result of fund losses, complications of the
retirement operation and the effect of payroll taxation during the fourth quarter of 2011 among other things.
On the other hand, the decrease in tax provision during the fourth quarter of 2011, resulting from the effect of
annulment of the reduction of future corporate taxes on the balance of the deferred tax, partially offset the
decrease mentioned above.
Developments in Balance-Sheet Items
The balance sheet of the Bank totaled IS 38,915 million on December 31, 2011, compared with NIS 35,312
million at the end of 2010, an increase of 10%/
Net credit to the public (after deduction of allowance for credit losses) totaled NIS 22,868 million as of
December 31, 2011, compared with NIS 21,713 million at the end of 2010, an increase of 5%. The average
balance of credit to the public stood at NIS 23,191 million in 2011, compared with NIS 20,299 million in 2010,
an increase of 14.2%.
The allowance for credit losses totaled NIS 272 million as at December 31, 2011. In addition, there is an
allowance for credit losses of NIS 44 million due to off-balance credit, presented within the other liabilities
item.
Problematic debts - In light of the fact that the new directive was implemented prospectively, without
restatement of comparative figures, data for the current period are presented below, for the purpose of
comparability of the disclosure, in relation to the relevant balances as at December, 31 2010 (pro-forma data), as
they would have been if the directive had been implemented for the first time at the end of 2010.
- 19 -
A. Total problematic credit risk*:
Balance as at
December 31, 2011 December 31, 2010
pro-forma data NIS millions
Problematic commercial credit risk 997 1,067
Problematic credit risk in respect of private individuals 79 128
Total problematic credit risk 1,076 1,195
* The data presented after the deduction of accounting write-offs and before the deduction of allowance for credit losses and prior to
the collateral deductible for the purposes of the indebtedness of borrowers and borrower groups.
B. Segmentation of problematic debts:
December 31, 2011 December 31, 2010
pro-forma data
Balance sheet
Off-balance
sheet Total Balance
sheet
Off- balance
sheet Total NIS millions NIS millions Impaired credit risk 565 3 568 716 5 721
Substandard credit risk 69 39 108 *54 - 54
Credit risk under special supervision 329 71 400 267 153 420 Total 963 113 1,076 1,037 158 1,195
* Reclassified (see Note 1.C.(5).b. C. Risk indices:
December 31,
2011
December 31, 2010
pro-forma data
Balance of impaired credit to the public not accruing interest income, as a percentage of the balance of credit to the public 2.2% 2.9%
Balance of unimpaired credit to the public, in arrears of 90 days or more, as a percentage of the balance of credit to the public 0.3% 0.2%
Balance of allowance for credit losses in respect of credit to the public, as a percentage of the balance of credit to the public 1.2% 1.4%
Balance of allowance for credit losses in respect of credit to the public, as a percentage of the balance of impaired credit to the public not accruing interest income 53.6% 47.3%
Problematic commercial credit risk in respect of the public, as a percentage of the total credit risk in respect of the public 2.8% 3.0%
Ratio of provisions for credit losses to the average recorded balance of credit to the public 0.1%
Ratio of net accounting write-offs in respect of credit to the public to the average balance of credit to the public 0.3%
Ratio of net accounting write-offs in respect of credit to the public to the allowance for credit losses in respect of credit to the public 23.2%
- 20 -
D. Nonperforming assets, impaired debts accruing interest income, commercial problematic credit risk and
unimpaired debts in arrears of 90 days or more (recorded debt balance):
Balance as at December 31,
2011
Balance as at December 31,
2010 pro-forma data
NIS millions NIS millions Nonperforming assets:
Impaired credit to the public not accruing interest income:
Examined on an individual basis 507 *639
Examined on a group basis - -
Impaired bonds not accruing interest income (1) 40 54
Other impaired debts not accruing interest income (2) - -
Total debts not accruing interest income 547 693
Assets received in respect of credit repaid - -
Total nonperforming assets 547 693 Impaired debts in restructuring of problematic debts, accruing interest income 17 *23
Problematic commercial credit risk (3):
Balance-sheet credit risk 886 *912
Off-balance-sheet credit risk (4) 111 155
Total problematic commercial credit risk in respect of the public 997 1,067
Total problematic commercial credit risk in respect of others (2) - -
Total problematic commercial credit risk 997 1,067
Unimpaired debts in arrears of 90 days or more 69 *54
Of Which:
Housing loans for which an allowance to the extent of arrears exists 49 *39
Housing loans for which an allowance to the extent of arrears does not exist(5)
11 8
* Reclassified (See Note 1.C.(5).b)
Note: Balance-Sheet and off-balance-sheet credit risk are presented before the allowance for credit losses and prior to the effect of collateral deductible for the purposes of the indebtedness of borrowers and borrower group. (1) Impaired bonds not accruing interest income are not included in the allowance for the credit losses. See Note 3.C. (2) Credit debts in respect governments and banks. (3) Balance-Sheet credit risk (credit, bonds, other debts recognized in the balance-sheet and assets in respect of derivative
instruments) and off-balance-sheet credit risk that is impaired, substandard or under special supervision, excluding balance-sheet and off-balance-sheet credit risk in respect of private individuals.
(4) As calculated for the purposes of the limits on indebtedness of borrowers and borrower groups, except in respect of guarantees provided by a borrower to secure the indebtedness of a third party, prior to the effect of deductible collateral.
(5) Housing loans for which the minimum provision is calculated according to the extent of arrears, which are in arrears of more than 3 months and up to 6 months; and other unimpaired housing loans in arrears of 90 days or more, for which the minimum provision is not calculated according to the extent of arrears.
- 21 -
Deposits from the public totaled NIS 31,158 million as at December 31, 2011, compared with NIS 28,844
million at the end of 2010, an increase of 8%. The average balance of deposits from the public stood at NIS
29,741 million in 2011, compared with NIS 27,052 million in 2010, an increase of 9.9%.
Securities totaled NIS 6,785 million as at December 31, 2011, compared with NIS 4,553 million at the end of
2010, an increase of 49% (The main increase is from government bonds).
The balance of securities as of December 31, 2011 is distributed as follows:
Approximately 70.5% of the securities portfolio is invested in government bonds, approximately 15.3% is
invested in bonds of banks, and approximately 11.9% is invested in corporate bonds, mainly of Israeli
companies (including government companies).
Approximately 84.4% of the securities portfolio are classified as available for sale (See additional details in
Note 3 to the financial statements). The securities in the available-for-sale portfolio are stated in the balance
sheet at fair value, with the difference between the fair value and the depreciated cost allocated to a capital
reserve, with the exception of declines in value of an other-than-temporary nature, which are not allocated to a
capital reserve but to the statement of profit and loss.
In 2011, other-than-temporary impairments in the amount of approximately NIS 23 million in respect of bonds
and in the amount of approximately NIS 5 million in respect of shares were charged to profit and loss, versus
NIS 4 million and NIS 3 million in 2010, respectively.
The net negative capital reserve as at December 31, 2011, stands at approximately NIS 7 million (before tax
effect), consisting of a positive capital reserve in the amount of NIS 84 million, offset by a negative capital
reserve in the amount of NIS 91 million.
At the end of 2010, the net positive capital reserve stood at approximately NIS 122 million (before tax effect),
consisted of a positive capital reserve in the amount of NIS 139 million, offset by a negative capital reserve in
the amount of NIS 17 million.
- 22 -
The following table shows the distribution of the capital reserve and of fair value in the available-for-sale
portfolio as of December 31, 2011 (in NIS millions):
Balance sheet value
(constituting fair value)
Negative capital fund (unrealized
losses)
Positive capital fund (unrealized
gains) Net capital
fund Shares (1) 125 (3) 12 9
Bonds of Israeli government 3,778 (6) 48 42
Bonds of foreign governments 3 (1) - (1)
Bonds of financial institutions in Israel (2) 828 (17) 8 (9)
Bonds of foreign financial institutions (3) 230 (8) 1 (7)
Corporate bonds: (4)
Government companies (5) 186 (11) 1 (10)
The real estate industry (6) 122 (10) 3 (7)
Others (7) 458 (35) 11 (24)
Total corporate bonds 766 (56) 15 (41)
Total available-for-sale portfolio 5,730 (91) 84 *(7)
* This capital reserve reflects net unrealized gains and is a part of the bank's equity, after tax effect, in the amount of
approximately NIS 5 million; see the report on changes in equity - adjustments in respect of the statement of securities available-for-sale at fair value.
1 Including 28 issuers; the highest balance is NIS 36 million. 2 Including 14 issuers; the highest balance is NIS 624 million in respect of Bank Hapoalim Bonds. 3 Including 11 issuers. The issuers are Banks from US, Britain, Holland, Germany, France and Australia; the highest
balance is NIS 63 million. 4 All corporate bonds are of Israeli companies, with the exception of a balance on NIS 26 million issued by a foreign
issuer. 5 Including 3 issuers; the highest balance is NIS 167 million. 6 Including 55 issuers; the highest balance is NIS 13 million. 7 Including 68 issuers; the highest balance is NIS 47 million.
- 23 -
The following table shows the distribution of the negative capital reserve (unrealized losses), according to the
rate of decrease below cost and periods of time* for which the fair value is lower than the cost (in NIS millions):
Up to 6 months
From 6 months to 9 months
From 9 months to 12 months
Over 12 months Total
Bonds available for sale:
Others-
up to 20% 20 36 8 8 72
20%-30% 1 2 1 4 8
30%-40% 1 - 4 - 5 Total 22 38 13 12 85 Backed by assets:
up to 20% - - - 3 3 - - - 3 3
Shares:
up to 20% 1 - 1 - 2
Over 40% - - 1 - 1 1 - 2 - 3 Total 23 38 15 15 91
* The reference point for determining the amount of time for which the investment was in a position of unrealized loss is the balance-sheet date of the reported period during which the first decline in value occurred, regardless of the rate of the decline.
The policies and procedures of the Bank with regard to the examination of the need to perform provisions for other-than-temporary impairments are detailed in the section, “Critical Accounting Policies and Estimates.”
- 24 -
The following table shows the distribution of the capital reserve and of fair value in the available-for-sale
portfolio as of December 31, 2010 (in NIS millions):
Balance sheet value
(constituting fair value)
Negative capital fund (unrealized
losses)
Positive capital fund (unrealized
gains) Net capital
fund Shares (1) 137 **- 38 38
Bonds of Israeli government 1,832 (4) 43 39
Bonds of foreign governments 4 - - -
Bonds of financial institutions in Israel 847 (2) 9 7
Bonds of foreign financial institutions 229 (2) 2 -
Corporate bonds:
Government companies (5) 143 - 4 4
The real estate industry (6) 191 (3) 18 15
Others (7) 396 (6) 25 19
Total corporate bonds 730 (9) 47 38
Total available-for-sale portfolio 3,779 (17) 139 122*
* This capital reserve reflects net unrealized gains and is a part of the bank's equity, after tax effect, in the
amount of approximately NIS 82 million; see the report on changes equity - adjustments in respect of the statement of securities available-for-sale at fair value.
** Less than NIS 500 thousand. 1 Including 23 issuers; the highest balance is NIS 55 million. 2 Including 18 issuers; the highest balance is NIS 604 million in respect of Bank Hapoalim Bonds. 3 Including 11 issuers. The issuers are Banks from US, Britain, Germany, Holland, France and Sweden; the
highest balance is NIS 57 million. 4 All corporate bonds are of Israeli companies, with the exception of a balance on NIS 24 million issued by a
foreign issuer. 5 Including 3 issuers; the highest balance is NIS 125 million. 6 Including 49 issuers; the highest balance is NIS 23 million. 7 Including 80 issuers; the highest balance is NIS 53 million.
- 25 -
The following table shows the distribution of the negative capital reserve (unrealized losses), according to the
rate of decrease below cost and periods of time* for which the fair value is lower than the cost (in NIS millions):
Up to 6 months
From 6 months to 9 months
From 9 months to 12 months
Over 12 months Total
Bonds available for sale:
Others-
up to 20% 8 1 - 5 14 8 1 - 5 14 Backed by assets:
up to 20% - - - 2 2 20%-30% - - - 1 1 - - - 3 3 Total 8 1 - 8 17
* The reference point for determining the amount of time for which the investment was in a position of unrealized loss is the balance-sheet date of the reported period during which the first decline in value occurred, regardless of the rate of the decline.
The following table shows more details in respect of the tradable portfolio as at December 31, 2011 (in NIS
millions):
Balance sheet value
(constitutes fair value)
Shares (1):
Israeli companies 20
Foreign companies 9
29 Israeli Government bonds 1,004
Other bonds 22
1,026 Total tradable portfolio 1,055
(1) Mainly exchange traded Funds.
- 26 -
Assets in respect of derivatives as at December 31, 2011 totaled NIS 846 million, compared to NIS 562 million at the end of 2010. Liabilities in respect of derivatives as at December 31, 2011 totaled NIS 907 million compared to NIS 737 million at the end of 2010. The fluctuation of these assets and liabilities is mainly the result of activity in foreign currency contracts and transactions in Maof derivatives. Other assets totaled NIS 1,041 million as at December 31, 2011, compared to NIS 556 million at the end of 2010. Other liabilities totaled NIS 1,710 million as at December 31, 2011, compared to NIS 1,108 million at the end of 2010. The fluctuation in other assets and other liabilities is mainly the result of activities in the Maof market in instruments that do not meet the definition of derivatives. The Bank's equity totaled NIS 1,986 million as at December 31, 2011, compared with NIS 2,006 million at the end of 2010. Following the implementation of the Bank Of Israel directive concerning the retirement compensations beyond contractual obligation, the Bank's equity was retrospectively presented for previous periods: December 31, December 31, 2010 2009
NIS millions Bank's previously reported equity 2,051 1,945 Effect of retrospective implementation (45) (52)
Bank's equity as reported in current statements 2,006 1,893
For detailed information see Note 1.(E).(21) at the Financial Statements. The decrease since late 2010, after the aforementioned retroactive presentation, was the result from initial implementation of new standards and directives, as of January 1, 2011. Shown below is the effect of the new standards and directives on the opening surplus balances: A. A total decrease of NIS 61 million (after taxes) due to an initial implementation of the directive on the issue of
measurement of impaired debts and provision for credit losses.
B. A total decrease of NIS 4 million (after taxes) due to the amendment of the directive on the matter of handling impaired debts from housing loans, which extends applicability of provision calculation according to the formula of the extent of arrears.
- 27 -
In addition, there is a decrease in adjustments in respect of presentation of securities available for sale at net fair value. These declines were partially offset as a result of the profits of the Bank. Ratio of Capital to Risk-Adjusted Assets (percent) December 31,
2011 December 31,
2010 * Ratio of Tier I capital to risk-adjusted assets 8.09 8.29 Ratio of overall capital to risk-adjusted assets 13.82 14.42
* The data for December 31, 2010 includes the effect of issuance of capital bills at the volume of NIS 235 million on
December 21, 2010. Following the implementation of the Bank of Israel directive concerning the retirement compensations beyond contractual obligation, the Bank's equity was retrospectively presented for previous periods. Shown below are the effects on the ratio of capital (percent): December 31, 2010 Ratio of Tier I capital to risk-adjusted assets previously reported 8.48 Ratio of Tier I capital to risk-adjusted assets as reported in current statements 8.29 Ratio of overall capital to risk-adjusted assets previously reported 14.63 Ratio of overall capital to risk-adjusted assets as reported in current statements 14.42 For further details regarding the risk assets and capital - See Note 13 to the Financial Statements and the section "Capital adequacy". For details regarding the Bank's policy in respect of capital adequacy ratio see section "Capital adequacy", subchapter "capital adequacy targets".
- 28 -
Bank of Israel rate (Percent)
Rate of GDP Growth (Percent)
2.00
2.50
3.25 3.25
2.75
0
1
2
3
4
12.10 3.11 6.11 9.11 12.11
4.8
3.9 3.83.2
0
1
2
3
4
5
6
Q1.11 Q2.11 Q3.11 Q4.11
- 29 -
Net Operating Profit (NIS Million)
Ratio of Capital Adequasy (percent)
123
54
111
148132
020406080
100120140160
2007 2008 2009 2010 2011
12.0 11.5
13.7 14.4 13.8
7.9 7.68.6 8.3 8.1
02468
10121416
*31.12.07 *31.12.08 **31.12.09 **31.12.10 **31.12.11Overall Initial* Basel 1
** Basel 2
- 30 -
Credit to the public
(NIS Billion)
Breakdown of problematic debts to the end of 2011
(percent)
53%
10%
37%
Impaired credit risk
Substandard credit risk
Credit risk under special supervision
17.5 18.5 19.021.7
22.9
0
5
10
15
20
25
31.12.07 31.12.08 31.12.09 31.12.10 31.12.11
- 31 -
Development of income from Retail Sector
(NIS Million)
Development of Execution of Mortgages performance
(NIS Million)
1,016
1,313
1,576
1,972
1,752
0
500
1,000
1,500
2,000
2007 2008 2009 2010 2011
326 326 335365
406
050
100150200250300350400450
2007 2008 2009 2010 2011
- 32 -
Objectives and Business Policy
The Bank operates under a three-year ahead strategic plan, which gets updated near the end of every year, for an
additional three years. The strategy is based on the risk appetite, risk capacity, and capital targets defined by the
Board of Directors (For details in respect of the capital targets, see the section “Capital Adequacy”). The Bank's
board of directors approved the three year strategy for 2012-2014 in November 2011.
The main issues covered by the three-year strategy of the Bank are:
Retail - Continued expansion of retail activity by recruitment new customers, concurrent with customer
retention and expansion of activity with existing customers, by the way of integrated marketing moves,
unique product development and leveraging of upgraded infrastructure of direct channels.
Credit - Continued activity in core sectors alongside expansion into additional business segments, including
through collaborations with other entities, while maintaining the high quality of the credit portfolio and
increasing its diversification, both in sectoral terms and in terms of borrower size, while also strictly
maintaining the connection between returns and the totality of risks arising from the various activities.
Capital market - Expansion of the activity focusing on target populations, in the capital market, including
through the expansion of consulting activity use of advanced trading systems, and increasing the existing
product portfolio, while implementing appropriate control processes.
Continued integration of corporate governance rules based on Basel rules, with emphasis on risk
management and control processes.
The work plan for 2012 is derived from the aforesaid three-year strategic plan. The plan was constructed based
on the estimate that the slowdown in growth in Europe and in the United States will lead to a continued decrease
in the growth rate of the Israeli economy. The objectives of the work plan are based, among other factors, on a
gradual increase of the capital ratio over the coming five years, and on the derived capital planning for 2012; for
details, see the section "Capital Adequacy."
Key objectives of the 2012 work plan:
In the retail sector -
- To continue the expansion of retail banking, focusing on the recruitment of active salary recipient
clients through recruitment products.
- To conduct ongoing activities aimed at retaining and increasing activity with existing customers, by
deepening activity and developing identification processes and retention products tailored to the
customer.
- To implement the branching strategy for the opening of branches with retail potential.
- To leverage the upgraded infrastructure of the direct channels and to expand the volume of customers
active on these channels.
- 33 -
To maintain the volume of the corporate credit portfolio, while striving to reduce sectoral concentration and
borrower concentration; concurrently, to continue to expand retail credit; all while maintaining the level of
risk-adjusted assets, adjusting returns to risk, and maintaining the risk appetite established by the board of
directors of the Bank.
In the capital market, to continue to expand activity in the area of securities and foreign currency of the
target populations that have been identified, by increasing the proactive activity of investment advisors and
leveraging the upgraded infrastructure of the direct channels and advanced trading systems.
To continue to adapt liquidity to the Bank's business environment, and to take steps to reduce depositor
concentration.
In the area of information systems, to continue to upgrade the infrastructures of the Bank, and to promote
the independent IT systems and expand the use of Leumi systems in order to improve business capabilities
and control processes.
To continue to solidify the Bank's image and strengthen its position as a high-quality alternative to
competing banks.
To continue to instill corporate governance rules.
Additional information regarding the objectives and business policy of each activity segment appears in the section
"Description of the Bank's Business by Activity Segments".
The information in this paragraph is forward-looking information, as defined in the Securities Law, based on
the business strategy and work plan of the Bank, which have been adjusted to the Israeli and global business
environment, against the background of the recovery from the global crisis; the estimates of the business
functions at the Bank regarding the probability and possibility of achieving goals and carrying out activities; and
the regulatory and intra-organizational environment of the Bank’s operations. This information also relies on the
macro-economic forecasts of the Bank of Israel and of the Research and Products Section of the Bank. The
work plans and the objectives under the business strategy established may not materialize, in full or in part, or
may materialize in a manner materially different than expected. The main factors influencing this are: changes
in macro conditions in the markets relative to existing estimates; severe volatility in the capital and commodity
markets; and regulatory changes affecting the activity of the Bank. Fulfillment of the work plan also depends on
the success of marketing efforts, on competition, on the success of planned technological improvements, and on
the degree of the Bank’s success in implementing its internal plans.
- 34 -
Controlling interests in the Bank
The major shareholders of the Bank as of the issuance of the financial statements are as follows:
Shlomo Eliyahu Holdings Ltd. (*) 22.92%
Yeshayahu Landau Holdings (1993) Ltd. (*) 24.77%
David Lubinski Properties (Holdings) 1993 Ltd. (*) 15.15%
Cheroudar Properties Ltd. 7.69%
Eliyahu Insurance Company Ltd. 4.20%
(*) Constitute the controlling shareholders of the Bank, broken down equally among the members.
Investments in the Bank's Capital and Transactions in its Shares
A. On August 10, 2011, Mrs. Ruth Manor, who is part of the group of controlling shareholders of the Bank,
due to her joint holding, with Dr. Yael Almog, of equal shares in David Lubinski Properties (Holdings)
1993 Ltd. and in Cheroudar Properties Ltd., presented a letter to the Bank which was addressed to her by
the Supervisor of Banks, the content of which is detailed below.
According to the letter from the Supervisor, upon completion of the period established in Section 3 of the
Law for Increasing Competition and Reducing Concentration and Conflicts of Interest in the Capital
Market in Israel (Legislative Amendments), 2005, which permits control of a banking corporation
concurrently with holdings in a management company or corporation engaged in the management of
investment portfolios (hereinafter: "Management Companies"), or in another corporation that controls one
of these, or holds more than 25% of any type of means of control in a corporation engaged in the
aforesaid activity, in light of the fact that Mrs. Ruth Manor still holds control, with others, of the Bank,
and concurrently holds control, with others, and indirectly holds a stake in IDB Holdings Ltd.
(hereinafter: "IDB"), which controls and holds means of control in Management Companies, holdings
allegedly in contradiction of Section 27F of the Banking (Licensing) Law, 1981 (hereinafter: the "Law") –
the Supervisor ordered, within his authority pursuant to Sections 27H and 27(A) of the Law, the sale, by
August 10, 2012, of the means of control through which Mrs. Ruth Manor holds the corporation
controlling the aforesaid Management Companies beyond the rate permitted by the Law.
Pursuant to the Supervisor's letter, the continued holding by Mrs. Ruth Manor of the aforesaid controlling
corporation until the execution of the sale is contingent upon the following:
- Granting of a power of attorney for the exercise of voting rights or other rights of Mrs. Ruth Manor
in the Bank, due to her control and indirect holding in shares of the Bank, to a holder of power of
attorney, with the phrasing of the authorization letter to be approved by the Supervisor, and with the
identity of the holder of power of attorney to be approved by the Supervisor.
- Immediate resignation of Mr. Itzhak Manor, who serves on the board of directors of the Bank, as
determined by Mrs. Ruth Manor. Mrs. Ruth Manor and her relatives are prohibited from serving as
- 35 -
directors of the Bank or acting to appoint a director in any manner during the authorization period.
The holder of power of attorney shall be entitled to exercise the right in this matter at his discretion,
provided that the candidate to serve as a director of the Bank meets the conditions for an external
director pursuant to the Proper Conduct of Banking Business Directive concerning the board of
directors (No. 301) with regard to the lack of affiliation with Mrs. Ruth Manor.
- A written report to be submitted to the Supervisor by Mrs. Ruth Manor, every three months,
concerning the measures she has taken and intends to take in order to comply with the directives of
the Supervisor's letter.
The Supervisor of Banks clarified that if the alleged violation ceases in any other manner, including the
sale of control of the Bank or the departure of Mrs. Ruth Manor from the controlling core thereof, or if
the corporation controlling the aforesaid Management Companies holds a rate bringing her indirect
holding therein to a rate permitted under the Law, the aforesaid sale shall become unnecessary, provided
that the sale of control of the Bank or the departure from the controlling core thereof is performed in
coordination with the Supervisor of Banks.
The Supervisor further clarified that in the event that he is persuaded that binding proceedings have been
implemented in order to cease the alleged violation during the period established in the letter, but the
completion of such proceedings depends on conditions that are not under Mrs. Ruth Manor's control, or
under the control of the corporation that controls the Management Companies, he shall be willing to
consider extending the period granted for the aforesaid sale, and that the authorization letter shall not
expire as long as the violation has not ceased, even if the extension period granted for the sale has
expired.
Further to the letter of the Supervisor of Banks, Mr. Itzhak Manor gave notice of his resignation from the
board of directors of the Bank on August 10, 2011. The holder of power of attorney who will exercise the
rights granted to Mrs. Ruth Manor as a result of her holdings in the shares of the Bank, as required by the
letter of the Supervisor detailed above, is Adv. Izhak Zisman. Adv. Zisman was appointed as a director of
the Bank on January 30, 2012.
B. According to notification provided to the Bank, on July 21, 2010, Mrs. Drora Zakai and her daughter, Dr.
Yael Almog, signed an agreement under which Mrs. Drora Zakai will transfer her full holdings in the
companies David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd., which are part
of the group of controlling shareholders of the Bank, to Dr. Yael Almog. Mrs. Drora Zakai owns half of
the shares and voting rights in each of the companies David Lubinski Properties (Holdings) 1993 Ltd. and
Cheroudar Properties Ltd., which hold 15.15% and 7.69% of the shares of the Bank, respectively.
According to the notification provided to the Bank, the transfer of shares in the aforesaid companies will
be performed at no cost, subject to the receipt of a control permit by Dr. Yael Almog from the Bank of
Israel, under the provisions of the Banking (Licensing) Law, 1981. According to another notification
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provided to the Bank, on August 4, 2010, Mrs. Drora Zakai and Dr. Yael Almog completed the execution
of the transfer of the aforesaid holdings; and the permit for control and holding of means of control of the
Bank, pursuant to the Banking (Licensing) Law, 1981, was amended so that the name of Mrs. Drora
Zakai was replaced in the permit and in the appendices thereto with the name of her daughter, Dr. Yael
Almog.
C. Under a shelf prospectus of the subsidiary Union Issuances Ltd., published on August 29, 2011, and dated
August 30, 2011, Union Issuances can issue series of bonds, subordinated notes, notes and/or commercial
securities, and expand existing series, which may constitute part of the secondary (lower) capital of the
Bank. For details, see Note 10 to the Financial Statements.
D. With regard to the issuance of Subordinated Notes (Series R and S), see the section Activity of Affiliated
Companies, and Note 10.C to the Financial Statements.
E. Concerning options that issued to the chief executive officer - see note 15A to the financial statements.
Dividend Distribution
On October 31, 2010, the board of directors of the Bank resolved to adopt a dividend distribution policy for
2011-2013, according to which the Bank will distribute an amount each year equal to at least 40% of the net
profit of the Bank from operating activity in the year preceding the distribution, provided that the return of the
Bank in the year preceding the distribution is at least 6%, subject to legal directives regarding “distribution” and
the Bank’s compliance, after such distribution, with the regulatory directives (including directives arising from
the requirements of the Supervisor of Banks, such as they shall be from time to time) and the limits set by the
board of directors from time to time with regard to the risk appetite and risk tolerance of the Bank, all to the
extent that no changes for the worse occur in the Bank’s profits and/or its business position and/or economic
conditions and/or changes in the regulatory environment that may have a negative effect on the Bank. The
foregoing shall not detract from the authority of the board of directors of the Bank to decide, from time to time,
taking into account business considerations, legal directives, and the regulatory directives applicable to the
Bank, on a change of policy or a change of the rate of the dividend to be distributed in respect of a particular
period, or to decide not to distribute a dividend.
It is hereby clarified that actual dividend distribution is subject to compliance with all of the conditions which
the Bank is required by law, to the limits that apply to the Bank with a respect of dividend distribution and to the
specific decisions of the Banks board of directors. Within all of this the actual dividend distribution is subject, to
limits established by the Supervisor of Banks regarding dividend distribution, including a prohibition on
dividend distribution if the non-monetary assets of the Bank exceed its shareholders’ equity, or if the dividend
distribution would cause this situation; a prohibition on dividend distribution from capital reserves; and a
prohibition on dividend distribution if one or more of the last three calendar years ended in a loss (2003 ended in
a loss; the Bank therefore did not distribute dividends until 2006), and to the requirements of article 23A of the
Banking Law (Licensing) -1981, which set limits for the percentage of capital that a banking institution is permitted
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to invest in real entities. It also requires the Bank to comply with the limitations set by the Supervisor of Banks
regarding the granting of credit as a percentage of capital.
In accordance with the permit granted in 1993 for the purchase of the controlling interest in the Bank, the Bank was
prohibited from distributing a dividend from income accrued in the period prior to the purchase, without the express
written consent of the Supervisor of Banks in advance. The amount of the retained earnings as of December 31,
2010 from which no dividends can be distributed is NIS 463 million.
In addition, note that in accordance with the issuance terms of the Upper Tier II capital notes issued on
September 10, 2009 by Igud Hanpakot Ltd., a subsidiary under the full control of the Bank (“Igud Hanpakot”),
and in accordance with the shelf prospectus of Igud Hanpakot of August 31, 2009, as amended on March 10,
2011, as long as there is unpaid interest, the settlement of which was postponed, in respect of the hybrid capital
notes issued, the Bank cannot distribute dividends or perform distributions, as these terms are defined in the
Companies Law.
Note that due to the policy of Supervisor of Banks with regard to the Capital Adequacy required in the banking system,
the Board of Directors decided on the gradual increase of capital objectives (as detailed in the "Capital Adequacy"
Section), which can limit the dividend distribution with accordance to the aforesaid policy.
On December 29, 2010, dividend in cash, in the amount of NIS 60 million was distributed, this follow the
approval of the general Meeting from December 7, 2010 as recommended by the Board of Directors on October
31, 2010. The dividend distributed based on the balance of the Bank's profits (as defined in paragraph 302(B) of
the Companies Law, 1999), according to the financial statements of the Bank as at June 30, 2010 (the dividend
in respect of each ordinary share NIS 0.01 par value of the Bank is in the amount of NIS 0.8154, the amounts
above are before any taxes, including tax at source).
Material agreements
Except for agreements made in the normal course of business, and additional agreements mentioned in the financial
statements, the agreements described below to which the Bank is either a party or in which it has an interest, may be
considered to be material agreements not in the normal course of business.
Collective labor agreements
Labor relations at the Bank are based on labor laws, on additional collective labor agreements signed at the Bank,
and on various work arrangements reached mainly through deliberations between Bank Management and
representatives of the employees of the Bank.
The regular employee population at the Bank is divided up on the basis of job, as well as by applicability of labor
agreements, into three categories: clerks, managers and authorized signatories, and employees who work under
personal contracts.
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We present below a summary of the major agreements that were signed with the representatives of the clerks,
managers and authorized signatories:
A. Clerks
The labor relations of clerks are based on a special collective agreement for employees of the Bank
(hereinafter – the "Labor Constitution"), which is updated with ongoing salary agreements. The Labor
Constitution was drawn up between the Bank and the General Workers Labor Federation in 1990. It
regulates the infrastructure for labor relations with the clerks and includes such things as: the process for
hiring employees, discipline at work, employee promotions, right to vacation and sick leave, various
bonuses paid to employees and the terms of such payments, social benefits, the process for termination or
resignation, severance pay, etc.
The Labor Constitution remains in force as long as neither of the parties announces its desire to cancel it or
introduce changes therein. On August 22, 1996, a special collective agreement was signed regarding the
admission of the clerks to the "Amit" pension fund, whereby the payments of the Bank to the pension fund
from January 1, 1995 would replace the amounts the Bank would be required to pay the clerks by law in
respect of severance pay for the same period.
On September 17, 1998, agreements were signed between the Bank and the National Committee of the
Union Bank Employees Organization and between the Bank and the Organization of Managers and
Authorized Signatories of the Bank, dealing with the transition to a five-day work week, commencing on
November 1, 1998.
The New General Labor Federation and the Clerks Labor Federation/Bank Workers Division are parties to
all of the agreements.
In addition to the above, timely agreements are also made to deal with updates to salaries and related
benefits of the various levels of clerks, as well as other matters that have to be dealt with.
On September 10, 2007, a special collective agreement concerning labor terms for probationary employees was
signed between the Bank, on one hand, and the New General Labor Federation and the national union of
employees of the Bank, on the other hand. Under the agreement, various payments paid to new probationary
employees as supplements to their wages were reduced. In addition, the trial period for probationary employees
in certain positions was extended.
A three-year agreement for 2010-2012 was signed in November 2011. Highlights of the agreement: A wage
increment for permanent clerks of the Bank, for each year of the years of the agreement, subject to certain
conditions; an update of rates of well-being pay and meal pay; introduction of a computerized entry control
system at the facilities of the Bank; and reduction of the quota for absences due to illness without a doctor’s
certificate.
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B. Managers and authorized signatories
Labor relations with managers and authorized signatories are regulated by a special collective agreement since
1979, in which the wage terms of the managers and authorized signatories are linked to the wage terms of
managers and authorized signatories at Bank Leumi (hereinafter: the "Implementation Agreement"). The
implementation agreement also grants members of this group the option of electing between receiving
severance pay and the savings accumulated in a provident fund, or receiving a pension from the Bank. Such
option is granted only to managers and authorized signatories who have reached retirement age and have
worked at the Bank for at least 15 years (or in the event of disability or death if they have 5 years of
employment).
In accordance with a special collective agreement dated February 24, 1997, the social insurance of the
managers and authorized signatories of the Bank was transferred to the "Amit" pension fund, similar to the
arrangement with the clerks mentioned above. This agreement treats the pension rights of the veteran
managers and authorized signatories in accordance with Leumi and with the "Amit" pension fund. Newer
members of this group have their pension rights only with "Amit". The agreement also stipulates that
payments to "Amit" in respect of newer managers and authorized signatories replace the entire severance pay
of those employees. In addition to the above, there are also local agreements made to handle specific matters
that arise.
In June 2010, an agreement regarding bonuses was signed with the clerks’ union and signatories for 2009 through
2012. The formula for the amount of the bonuses is based on the profitability of the Bank, subject to the
achievement of a rate of return greater than 6%.
In February 2011, Bank Leumi Le' Israel B.M. (hereinafter: Bank Leumi) entered into a new collective agreement
for terms of employment of its employees, effective January 1, 2011. Because the labor relations of the group of
managers and authorized signatories of the Bank are founded on a special collective agreement from 1979, which
links the wage terms for this group to the wage terms of authorized signatories at Bank Leumi (hereinafter: the
Implementation Agreement), the new agreement has a direct effect on the terms of employment at the Bank;
however, it does not have a material effect on the financial statements.
The agreement addresses three main areas: In the area of management – the "executive track" rank was expanded,
and a new "professional track" was created, as part of the collective agreement. In the area of wages – Each
manager is entitled to an annual seniority increment, at a rate close to 1%, up to a ceiling of 37 years of
employment; the seniority increment replaces other wage components. In addition, expenses for employee well-
being were increased.
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C. Employees under personal contracts
The Chairman of the Board of Directors, the General Manager, all members of management and some other
employees have personal employment contracts with the Bank.
Agreement to receive computer services from Bank Leumi Le-Israel B.M. (hereinafter – "Leumi")
On September 29, 2001, an operating and computer agreement was signed with Leumi for a period of 11 years,
commencing in 1998, whereby Leumi provides operating services to the Bank, in respect of the banking
infrastructure systems. In addition, the Bank is entitled to receive most of the information systems in operation
at Leumi, most of which have been installed at the Bank (hereinafter - the "Agreement").
The services that Leumi undertook to provide to the Bank through its Operation and Administrative Network
(hereinafter - "OAN") or any other entity that replaces the OAN are based on computer services that OAN
renders to its customers, plus other services detailed in the agreement. Leumi also provides the Bank with
ongoing and full support and maintenance services and training services in connection with the systems that are
used in providing the operating services. Operating, maintenance and system development services are
provided by Leumi at the same level as the services granted to units and branches of Leumi.
Leumi undertakes in the agreement to provide the Bank with operating information relating to the systems, to
maintain a level of data security regarding the Bank's data and, subject to receiving a special fee, to prepare the
infrastructure for the conversion of systems and the migration of the systems to independent computer systems
should the Bank decide to implement such systems. In addition, Leumi undertook by agreement to preserve
the confidentiality of the Bank's data. The Bank's database is independent of the database of Leumi.
On December 31, 2007, after the bank examined alternatives, signed an addendum to the agreement in which
the term of the agreement was extended for ten years, starting January 1, 2007; the terms of the agreement were
improved on the monetary level, via a decrease in the cost of routine services and the reduction of uncertainty
related to uncontrolled increases in the cost of services in the future, as well as on the service-quality level, by
the signing of a service-level agreement (SLA). Pursuant to the addendum to the agreement, the annual price of
routine services is set at NIS 37-40 million in the first two years, rising gradually to NIS 42-45 million starting
in the sixth year, according to the range of services to which the Bank is entitled under the agreement. These
sums are linked to the consumer price index of December 2006, and may change in accordance with changes
in the volume of activity of the Bank.
The addendum to the agreement covers systems that have not yet been transferred to the Bank’s use, and which
can assist the Bank in complying with various regulatory requirements, among other things.
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Indemnification of directors and senior officers
A. Letter of commitment to indemnify an officer of the Bank – for details, see Note 18C(13), as well as the
immediate report dated May 14, 2009 and the immediate report regarding the outcomes of the assembly
of June 22, 2009.
B. With regard to the contractual engagement of the Bank for the purchase of a directors’ and officers’
insurance policy, which was approved by the general assembly of the Bank on October 27, 2010 – see
the section “Transactions with Controlling Parties,” Paragraph D(1) and Note 18.C.16.
Services and areas of activity based in agreements or special arrangements
A. Credit cards – The Bank has contractual arrangements with credit card companies. Among other
matters, the agreements specify provisions with regard to the division of responsibility between credit
card companies and the Bank, in view of the provisions of the Charge Cards Law, as well as the
business, operational, and legal terms relevant.
On July 1, 2010, an agreement was signed between the Bank and Cartisei Ashrai LeIsrael Ltd.
(hereinafter: “CAL”), and an additional agreement was signed between the Bank and Diners Club Israel
Ltd. (hereinafter: “Diners”), a company controlled by CAL (hereinafter: “the Agreements”).
Under the agreement with CAL, subject to the contingent terms, the Bank was granted a nontransferable
option to buy common shares of NIS 0.0001 of CAL, which as of the date of signing of the agreement
constitute 3% of the issued and paid-up common share capital of CAL, subject to adjustment events
specified in the agreement, at the date of completion of the offering to the public of securities of CAL, and
subject to the completion of such offering (insofar as shall be executed). The validity of the option during
the term of the agreement is contingent upon a series of business terms, as established in the agreement.
The option shall take effect when an exemption from a restrictive arrangement is received from the
Antitrust Commissioner with regard to the provisions of the agreement that concern the terms of the
option, and when approval is received from the Supervisor of Banks referring to the Bank and CAL, to the
extent that such approvals shall be required.
In December 2010, the Bank received a decision of the Antitrust Commissioner to grant an exemption
from the approval of a restrictive arrangement, for five years, to the option aforementioned. The reasons
noted in the decision, on which the Commissioner’s decision was based, include the consideration that the
exclusivity stipulation contained in the agreement with regard to the option does not cause substantial
damage to competition. It was further established that when the five-year period has elapsed, it will be
possible to request another extension of the period of the exemption.
In May 2011, the Bank was notified about the position of the Supervisor of Banks according to which no
supervisory authorization is required in connection with the option that was granted to the Bank within the
agreement. These circumstances meet the contingent terms required for the validity of the option.
For more details see note 18.C.5 in the Financial Statements.
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On February 3, 2011, the Bank entered into an agreement with Isracard Ltd., for a period of five years,
for the issuance of charge cards under the brands Isracard and MasterCard. For details, see note 18.C.6
to the financial statements.
B. Market making – The Bank serves as a market maker for government bonds, under the State Loans
Law.
C. Pension advising – Concurrently with the sale of the activity of the provident funds by the Bank in
2006, the Bank began to provide pension-advising services to customers, through investment advisors at
its branches who were trained and licensed to provide such advice.
D. Purchase of rights in consumer loan portfolio – In accordance with the business strategy of the Bank,
which includes an emphasis on retail banking, on February 6, 2011, the Bank entered into a framework
agreement with Mimun Yashir of the Yashir (2006) Ltd. Group (hereinafter: “Mimun Yashir”), pursuant
to which the Bank will acquire, from Mimun Yashir, through the assignment of rights and liabilities by
way of a sale, portfolios of loans extended by Mimun Yashir to private customers for purchases of
motor vehicles, as well as all collateral provided to secure such loans, at a maximum amount of NIS 180
million (hereinafter: the “Framework Agreement”);
This agreement is further to a framework agreement in an identical amount from 2010, which was
assigned in full. The framework agreement entered into by the Bank on February 6, 2011 was in effect
for a period of twelve months from the signing date, or until the full amount of the aforesaid framework
agreement was assigned – whichever was earlier. The execution of the assignment transactions under
the framework agreement was subject to the fulfillment of the terms agreed upon in the agreement, and
to all laws.
In March and July 2011, loans in the amount of NIS 74 million and NIS 103 million, respectively, were
assigned via sale, in accordance with the framework agreement. Further to the framework agreements
described above, it was agreed between the Bank and Mimun Yashir that the maximum amount of the
principal of the loans to be acquired by the Bank from Mimun Yashir, under all of the agreements
between them, would stand at NIS 500 million (hereinafter: the "Ceiling Amount"). The execution of
each transaction between the parties in the sale of the aforesaid loan portfolio shall be subject to the
fulfillment of suspending conditions agreed upon in the agreements between the parties, and to all laws.
Concurrent with this agreement, an assignment agreement was executed by the parties, on December 28,
2011, in the amount of approximately NIS 50 million. In addition, on January 26, 2012, an additional
assignment agreement in the amount of NIS 100 million was executed by the parties. The execution of
additional assignment agreements, subject to the Ceiling Amount, is contingent upon approval by the
Bank, in advance and in writing. In any event, the period of the acquisition of the loans has been
limited, subject to the foregoing and to the terms of the agreement, up to December 27, 2012, unless
extended by agreement of the parties.
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At the date of the purchase of the loans from Mimun Yashir, upon fulfillment of the terms for the
recognition of a financial asset (pursuant to FAS 166), the Bank records the acquired loans in its books,
at the amount of the consideration, i.e. at fair value, with the exception of loans where the Bank has a
right of return for a period defined in the agreement, which are recorded as secured debt to Mimun
Yashir. Financing income in the transaction is recorded according to the effective interest rate of the
acquired loans.
E. For agreements related to the Bank’s overseas operations, including in foreign capital markets, see the
section “Overseas Operations.”
Lien agreements - as detailed in note 14 to the financial statements.
For additional commitments related to the prospectus of Igud Hanpakot Ltd. of August 2011, see the
section “Investments in the Capital of the Bank and Transactions in its Shares” paragraph C and Note 10 to
the Financial Statements.
A deposits agreement was signed between the Bank and Union Issuances Ltd. on August 28, 2011
(hereinafter: the "Updated Agreement"). The Updated Agreement will apply to offerings of bonds and/or
notes and/or commercial securities executed under the shelf prospectus published on August 29, 2011 by
Union Issuance. For more details regarding this agreement and other agreements between the Bank and its
investee companies see section "Activity of Principal Investee Companies" and sub-section "Agreements,
Transactions, and Payments between the Group Companies".
Licenses, Permits, and Approvals
The Bank and its subsidiaries are subject to various legal directives specially applicable to banking corporations,
including rules and guidelines arising from the Proper Conduct of Banking Business Directives of the
Supervisor of Banks at the Bank of Israel, and from circulars and various guidelines applied from time to time
by the Supervisor of Banks.
Subject to compliance with these requirements, the Bank holds a license to manage its business in accordance
with the Banking Law (Licensing) - 1981, and branch licenses for its branches.
In addition to these, the Bank, which is a public company and a member of the Tel Aviv Stock Exchange Ltd., a
member of the TASE Clearinghouse, and a member of the Maof Clearinghouse, and its subsidiaries, which
operate in various areas of the capital market and in additional areas permitted to them by law, hold licenses,
permits, and approvals from various authorized agencies, including the Israel Securities Authority, the
Supervisor of the Capital Market, the Antitrust Commissioner, and others. The licenses, permits, and approvals
pertaining to the various operating segments of the Bank are listed below.
Licenses granted by the Israel Securities Authority include a portfolio management license to the wholly owned
subsidiary which is a portfolio manager, as defined in the Regulation of Engaging in Investment Advising,
Investment Marketing, and Investment Portfolio Management Law - 1995. In addition, the Securities and
Exchange Commission approved the registration in the underwriters registerer according to Securities
Regulations (Underwriting) – 2007 of an underwriting company in full control of the Bank, which is an
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underwriter as defined in the aforementioned regulations (in respect of the activity of the underwriter, see details
in the section "Activity of Investee Companies"). In addition, employees of the Bank who are authorized to
provide investment advice and employees of the subsidiary who are authorized to manage investment portfolios
have been granted the relevant licenses by the Israel Securities Authority.
The Bank holds a pension advisor’s license, as defined in the Supervision of Financial Services Law (Engaging
in Pensions and Pension Marketing) - 2005, granted by the Supervisor of the Capital Market at the Ministry of
Finance for the purposes of this activity, and its employees who provide pension advice also hold the
appropriate licenses from the same agency. Two wholly owned subsidiaries of the Bank which are insurance
agencies, under the Supervision of Financial Services Law (Insurance) - 1981 and the provisions of Section
11(B)(2) of the Banking Law (Licensing) - 1981, also hold insurance agents’ licenses which allow them to
engage in their area of activity. The general managers of each of these companies hold insurance agents’
licenses, as required.
The Bank was a participant in petitions for exemption from the duty to obtain the approval of the Restrictive
Trade Practices Tribunal for restrictive arrangements, which were filed with and approved by the Antitrust
Commissioner, with regard to various areas of its activity, as follows:
1. On November 18, 2008, the Antitrust Commissioner announced the extension of the existing exemption
for the arrangement among the banking corporations with regard to the operation of an automated risk-
management database, for four years. This arrangement allows the continued maintenance and operation
of a general database regarding market data which is needed by the banks to manage market risks; i.e.,
to assess the risk to which the asset and liability portfolios of the banks are exposed as a result of
changes in the financial markets.
2. On February 13, 2008, the Commissioner extended the exemption granted in the past for the agreement
between Union Bank and Bank Leumi concerning the provision of IT and operational services to Union
Bank by Bank Leumi, for seven additional years. For details regarding the IT agreement with Bank
Leumi, see the section “Material Agreements.”
In addition, on March 8, 2007, the Commissioner notified the banks in Israel, including the Bank, of the
conditions under which he does not intend to enforce the provisions of the Restrictive Trade Practices Law with
regard to credit consortiums in which all parties are banks. Pursuant to this decision, credit consortiums between
banks are permitted under the following conditions: the joining of several banks in a consortium is essential, in
that without such joining it is not possible to extend credit to the customer under reasonable terms; the customer
consents to the consortium, in advance and in writing, on a separate form; the customer is given the opportunity
to negotiate the terms of the credit extended with any of the banks which are members of the consortium,
including through another person acting on the customer’s behalf; and more.
In addition to the foregoing, on March 2, 2008 the Commissioner announced the conditions under which the
provisions of the Restrictive Trade Practices Law would not be enforced with regard to credit consortiums in
which banks join with insurance companies, and among insurance companies. These conditions are similar in
essence to the conditions established with regard to credit consortiums wherein the parties are banks only, with
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the exception of the condition regarding arrangements to which Bank Hapoalim and Bank Leumi are parties
concerning the minimum credit requirement.
In December 2010, the Bank received a decision of the Antitrust Commissioner to grant an exemption from the
approval of a restrictive arrangement, for five years, to the option granted by Cartisei Ashrai LeIsrael Ltd.
(hereinafter: “CAL”) within the contractual engagement between the Bank and CAL, and with regard to the
agreement between the Bank and CAL and the additional agreement between the Bank and Diners Club Israel
Ltd., a company under the control of CAL. The reasons noted in the decision, on which the Commissioner’s
decision was based, include the consideration that the exclusivity stipulation contained in the agreement with
regard to the option does not cause substantial damage to competition. It was further established that when the
five-year period has elapsed, it will be possible to request another extension of the period of the exemption.
Activity Overseas
Activity with Banks and Financial Institutions Overseas
The Bank’s activity with foreign banks and financial institutions overseas is conducted in several main areas:
deposits of surplus liquidity, receiving guarantees, transactions in exchange rates (spots, forwards, options, etc.)
and interest rates (IRS – interest-rate swaps, etc.) and other instruments, clearing, transfers of funds, and activity
in foreign securities. The Bank establishes its exposure policy, from time to time, according to various criteria
for the assessment of risk in the activity with these banks and financial institutions. Credit risk arising from
exchange-rate transactions and future transactions with some of the aforesaid foreign banks is addressed mainly
through ISDA (International Swaps and Derivatives Association) agreements, which are the framework
agreements for activity of the Bank with each of the foreign banks, and CSA (Credit Support Annex) collateral
agreements, which are added as an appendix to some of the ISDA agreements in support thereof. These
agreements, the format of which follows a customary international standard, help the financial institutions that
enter into the agreements reduce their exposure to the risks involved in trading activities between them,
primarily through the use of netting of transactions. Since the beginning of 2008, the bank has reduced the
volume of its activity with bank overseas, both in terms of the number of banks with which it does business and
in terms of the volume of approved exposures for activity with these banks. In addition, the Bank has entered
into a CLS (Continuous Linked Settlement) agreement with one of the biggest banks in the world, which is
designed to ensure receipts against payments in order to minimize settlement risks in foreign currency buying
and selling transactions.
Agreements with Financial Institutions Overseas to Receive Trading and Custody Services in Securities
and Financial Assets
The Bank has entered into various agreements with brokers, banks and clearing-houses outside Israel for the
execution of trading activity in various securities and financial assets for the Bank and for its customers. In
addition, the Bank has entered into a global custody agreement with a well-known international financial
institution (and with other financial entities with which the aforesaid institution has agreements for this
purpose), pursuant to which the Bank keeps foreign securities with the aforesaid financial institution, for itself
and for its customers, and occasionally keeps monetary deposits in custody. The main services provided to the
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Bank under this agreement include custody, settlement of transactions in foreign securities, handling of relevant
tax issues related to the transactions, provision of alerts and updates, provision of notifications from
corporations whose securities are in custody (corporate actions), and the execution of related actions, such as
receiving dividends, benefit shares, participation in rights offerings, etc. The financial institution executes the
aforesaid actions in accordance with the instructions of the Bank, subject to the provisions of the relevant laws.
In addition, the Bank receives custody services from the foreign financial entities, from time to time, in the
course of the fulfillment of their other functions. Within this activity, the Bank keeps most of its holdings in
foreign bonds at a large European clearing house.
Branches and Representative Offices Overseas
Pursuant to a resolution of the board of directors of the Bank of March 31, 2010, the Bank dosed its
representative office in New York and returned its license to the supervisory agencies in the United States (note
that this representative office was inactive).
Legal Proceedings
Below is presented information concerning two legal proceedings which are in material amounts exceeding 1% of the
Bank’s capital, petition for declaratory relief and class action:
A. Pending liability in connection with the consolidated company Carmel Igud Mortgages and Investments Ltd.
(hereinafter - the “Company”):
On November 2, 1997, a claim statement was filed with the District Court of Tel Aviv against the Company and
three other mortgage banks, in a total amount of approximately NIS 500 million. A petition to certify the claim as a
class action was also filed. The claim concerns fees in respect of life and property insurance. For further details, see
Note 18.C.17.E.1 to the financial statements and the opinion statement of the auditors.
B. On March 13, 2006, Shlomo Eliyahu Holdings Ltd. and Mr. Shlomo Eliyahu (a controlling shareholder of
the Bank) filed a claim with the District Court of Tel-Aviv, with regard to the appointment of the CEO of
the Bank in 2006, against the other controlling shareholders of the Bank, against the Bank, and against other
defendants, including the chairman of the Board of Directors of the Bank. For details of the claim, see the
immediate report issued by the Bank on March 15, 2006. On August 8, 2011, the court delayed the claim
against all the respondents. See the immediate report issued by the Bank on August 10, 2011.
C. In December 2007, a payment demand in a total amount of USD 10 million was submitted to the bank, in
connection with the capital-market activity of a holder of power of attorney in an account ("the Demand"). The
Demand was filed by the trustee in bankruptcy of the assets of the holder of the power of attorney. The main
arguments specified in the Demand concern the conduct of the holder of the power of attorney in the
relevant bank accounts. According to the trustee, the Bank violated the trust of the customers of the Bank
and the duty of caution towards the customers of the holder of the power of attorney, and violated legislated
duties which allowed the holder of the power of attorney to perform the alleged acts of fraud against the
customers of the holder of the power of attorney. After the bank denied the payment demand, the trustee in
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bankruptcy of the holder of power of attorney filed a report with the court in which he presented arguments against
the bank with regard to the management of accounts, including that the Bank violated the duties of caution and
fidelity incumbent upon it as a bank, and violated directives related to the prohibition of money laundering
and/or to taxation. In the aforesaid report, no monetary remedy is requested against the Bank; instead, the
Bank is asked to respond to the report and to provide various specific reports and documents. The Bank
submitted its response, and subsequently repeated responses were submitted both by the trustee and by the
Bank. According to a ruling by the court, the Bank must provide reports and documents to the trustee related
to the account of the holder of the power of attorney (to the extent that these exist) and not to any other
accounts. In the opinion of the management of the bank, based on the opinions of its legal advisors, in the
absence of a foundation for liability of the Bank and in the absence of details and/or quantification of the
arguments and the manner in which they form the basis of the right to a remedy, it is not yet possible to
assess the probability of materialization of exposure to risk with respect to this matter.
In late October 2011, a monetary claim in the amount of NIS 12 million was filed against the Bank with the
Central District Court, by two claimants who are not customers of the Bank, who claim that they incurred
damage due to the actions of the aforesaid holder of power of attorney. In the opinion of the management of
the Bank, based on the opinion of the legal advisors of the Bank, because this claim is still in its earliest
stages, it is not possible to estimate its outcome at this point. In December 2011, an additional claim in the
amount of NIS 6 million was filed against the Bank with the District Court of Tel Aviv, in connection with
an account opened in the name of the claimant under a power of attorney granted to the aforesaid holder of
power of attorney, in which the claimant states that he incurred damage due to these actions. In the opinion
of the management of the Bank, based on the opinion of the legal advisors of the Bank, because this claim is
still in its earliest stages, and a statement of defense has not yet been filed, it is not possible to estimate its
outcome at this point.
D. Contingent liability in connection with the Bank and the consolidated company Union Bank Trust
Company Ltd. (hereinafter: the “Company”): On June 22, 2009, an amended claim statement was filed with
the Central District Court against the Bank and against the Company by two American companies (one of
which is in liquidation in Israel), claiming the release of cargos of steel imported to Israel for a third party,
without payment for the cargos by the third party. The amended claim statement was filed following
prolonged discussions in fee exemption proceedings. The amount of the claim noted in the claim statement
is approximately USD 155 million, but for the purposes of the fee it was set at NIS 10 million. A renewed
petition was recently filed to increase the sum of the claim to approximately USD 22 million, plus interest
from August 7, 1992, at a rate which according to the claimants was established in an agreement between
the claimants and the Bank and Union Bank Trust Company Ltd., which are the defendants, and to grant an
exemption from fees for the enlarged amount. Soon after the renewed petition was filed, it was deleted
according to the claimant's request. In the opinion of the management of the Bank, based on the opinion of
the external consultants handling this claim, based on the facts known to them, the probability of
acceptance of this claim is estimated as remote. In addition, the Bank has an arrangement with its insurers
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with regard to the coverage of a principal part of the amounts that may be paid by the Bank in respect of
this claim, including legal expenses for the administration of the claim. For further details, see Note
18.C.17.E.2 to the Financial Statements and the Auditors’ Opinion.
E. On October 29, 2009, a claim was filed with the Central District Court by Zeevi Communications Holdings
Ltd. (in receivership) and Zeevi Communications – Financing and Management Ltd. (in receivership) for
declaratory relief against the Bank and against six other banks, concerning the alleged attempt by the banks
to collect differences from the plaintiffs in respect of “violation interest,” as it is called in the claim, on a
loan extended to them by the banks, for which shares of Bezeq served as collateral. The accrued
differences, according to the claim, as of the filing date of the claim, amount to approximately NIS 840
million for all of the banks (hereinafter: the “Amount of the Difference in Respect of the Violation
Interest”) beyond the contractual interest, as defined in the claim. The claim does not refer to the “share” of
each of the banks in the Amount of the Difference in Respect of the Violation Interest, but notes the
percentage of the participation of the banks in the financing; the Bank’s share is 4%. In January 2010, the
court ruled that the claim would be examined as an ordinary monetary claim, in respect of which the
plaintiff must pay the full fee within the timeframe allotted by the court; this was submitted to the court in
February 2010. According to the opinion of the legal advisors of the Bank, it can be assumed that the share
of each of the banks in the alleged difference is proportional to its participation in the financing.
In the opinion of the management of the Bank, based on the opinion of its external legal advisors handling
this claim, based on the information and data known to them, the probability of acceptance of the claim is
estimated to be remote. For further details, see Note 18.C.17.C.
F. In December 2011, a claim was filed against the Bank with the District Court of Tel Aviv, and a petition
was filed to certify the claim as a class action, in a total amount of approximately NIS 5.4 million. The
claim statement alleges that in transactions of withdrawal, deposit, or conversion into smaller
denominations of cash in amounts exceeding NIS 10 thousand, the Bank is entitled to collect a fee as a
percentage derived only from the difference between the amount handled and NIS 10 thousand, rather than
from the full amount of cash handled. It is further alleged that if several transactions of the same type are
executed on the same day, the Bank calculates the fee according to the total aggregate amount, in
contradiction of the directives of the law. In the opinion of the management of the Bank, because the
aforesaid claim is still in its earliest stages, and the petition for certification of the claim as a class action
has not yet been discussed, the management of the Bank, based on the opinion of its legal advisors, is not
able to estimate the outcome of the claim at this stage.
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Fixed Assets and Facilities
The depreciated cost of buildings and equipment as of December 31, 2011 amounted to NIS 408 million, compared
with NIS 380 million at the end of 2010. For information pertaining to the composition of the investment in
buildings and equipment, see Note 6 to the financial statements. The Bank's business operates at different locations,
some of which are owned by the Bank (or by subsidiaries of the Bank) and some of which are leased. The Bank's
real estate locations are operated through Igudim Ltd. (a wholly-owned subsidiary whose financial statements are
consolidated with those of the Bank).
As of January 1, 2011, the Bank implements IAS36, which regulates the treatment of decline in asset value.
The total area of the land owned by the Bank, or rented by the Bank for its use, is approximately 34,763
sq.m. as of December 31, 2011, as detailed in the following table:
Type of property Owned Leased Total area
Gross sq.m. Gross sq.m. Gross sq.m.
Branches throughout Israel 10,180 8,436 18,616
Offices and warehouse 7,557 4,114 11,671
Other properties 3,027 1,449 4,476
Total 20,764 13,999 34,763 Total investments in buildings and real estate of the Bank as at December 31, 2011 is as follows
(in NIS millions):
Cost Accumulated depreciation
Depreciative balance
Rates of depreciation
%
Buildings and real estate 407 179 228 2-10 Equipment, furniture and vehicles 190 150 40 7-15 Computers 483 343 140 14-33
Total 1,080 672 408 The Bank owns several properties, held by the Bank itself or through a subsidiary, a consolidated company
wholly owned by the Bank, Igudim Ltd. These properties are used for the head offices of the Bank, its various
administrative units, the offices of its subsidiaries, and some of its branches. Some of the branches operate in
properties rented by the Bank (or by Igudim Ltd.) for various rental periods. The Bank (on its own behalf or
through Igudim Ltd.) buys and sells real-estate properties, from time to time, according to its changing needs.
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Information Systems and Information Technology at the Bank
The banking activity performed by the Bank is heavily reliant and dependent upon the suitability, quality, and
proper functioning of the information systems and technology used to carry out this activity. The Bank, which is
subject to the directives of the Supervisor concerning information technology, as detailed below, invests
extensive resources in building and adapting information systems and technologies, software, and hardware
which it uses for the growing needs of its activity and in creating an appropriate system of information security.
However, information systems and technologies, like any complex technological system, are not and cannot be
entirely free of malfunctions. The Bank continually tracks innovations and updates in this area, through its
information systems units and its information security and logistics units, and invests extensive resources in
improving and upgrading these systems and in optimal identification and correction of malfunctions. The
Bank’s total investment in information technology in 2011 amounted to NIS 69 million; total routine
information technology expenses in 2011 amounted to NIS 83 million. Bank Leumi (“Leumi”) is the central and
material supplier to the Bank in the area of outsourced information technology services. The Bank receives most
of the services in this area from Leumi, and performs the remainder itself or through other suppliers of such
services. For extensive details of the agreement with Leumi and its terms, see the section “Material
Agreements.”
Framework for Activity in this Area
Characteristics of the information technology area include horizontal organization processes with a significant
impact on the conduct of the Bank.
The information technology (IT) activity at the Bank based on the Bank's IT management policy document (the
“Document”), which is derived from the directives of the Supervisor (Directive No. 357). As noted above, the
Bank has a material long-term contractual engagement with Leumi concerning the provision of IT and
operational services for a considerable part of the core banking systems. The updated terms of this engagement
were established in an addendum to the agreement, signed in December 2007 and applied retroactively from
January 1, 2007 (the “Leumi Agreement”). The main points of the addendum are: A. Extension of the Leumi
Agreement for a period of ten years (until December 31, 2016); B. An update of the model for account
settlement between the parties, including arrangements regarding specific systems; C. Improvement of the level
of service provided to the Bank, formalized in a detailed SLA (Service Level Agreement).
Following conclusions drawn from failures and malfunctions in the banking system, the Supervisor of Banks
instructed the banks to take steps to reduce the potential for the materialization of risks arising from failures in
IT systems. In addition, the Supervisor of Banks instructed the banks to reexamine change management and
malfunction management processes, in order to strengthen and improve the processes. The Bank prepares and
works regularly according to those directives.
In a considerable part of the material business processes at the Bank, the Bank relies on the IT services of Bank
Leumi. The branches of the Bank, as well as its executive and administrative units, are linked to an IT
environment designated for the Bank within the Banking Service Center of Leumi; routine operations at the
Bank’s branches are performed almost entirely within this framework. In order to evaluate the controls
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integrated in the operational services provided by Leumi to the Bank, examinations are performed both by the
Bank and by Leumi. With regard to controls integrated in Leumi systems, the Bank receives an annual report
from Leumi, prepared by independent auditors, regarding the controls integrated in the operational system of
Leumi and tests of the effectiveness of such controls. In addition, the Bank receives a report from Leumi on
examinations performed by independent auditors, under procedures agreed upon with the Bank, regarding the
existence of certain controls in the internal control system of Leumi, which are implemented in the computer
processes of Leumi with respect to the data of the Bank. The Bank also has an internal communications
network. There are also additional core banking systems not included in the Leumi Agreement, which are
handled by and are under the responsibility of the information systems units at the Bank, including the
following: securities and foreign currency trading systems, the mortgage management system, diamond dealers’
business management system, customer relationship management system, back office systems, and routine
administrative systems of the Bank.
The Bank is currently working to improve and streamline the functioning of its computer and information-
security systems, and to reduce the risks arising from potential malfunctions of such systems, to the extent
possible, both by integrating new, more advanced computer and information-security systems, and by upgrading
and maintaining existing systems. As noted above, these systems are complex and technologically sensitive,
such that the risks arising from malfunctions of the systems cannot be entirely minimized. Among other means,
the Bank is working in this area to provide advanced IT solutions, matched to the various business, operational,
and managerial needs, including in the area of risk management, while complying with regulatory requirements,
with an emphasis on the Basel II directives, including all pillars, and implementation of the relevant models
required in these directives.
Due to the cost- and resource-intensive nature of these processes in terms of managerial and professional
resources, the Bank is performing these processes in a gradual manner, based on prioritization derived primarily
from the imperative to comply with the relevant regulatory requirements, as well as the need to create a business
advantage and cost/benefit considerations.
Infrastructures
The Bank is working to implement advanced solutions in the areas of software, hardware, and communications,
using Microsoft infrastructures as the basis for the central operating and development environments, which are
not included under the Leumi agreement.
Pursuant to the regulatory directives applicable to the Bank in this area, the Bank is obligated to ensure the
existence of backup systems and business continuity plans at all times.
The Bank’s policy on business continuity in emergencies was updated during 2010. This policy is aligned with
the new directives of the Bank of Israel regarding emergency preparedness and the various regulatory directives
concerning the importance of business continuity for financial organizations and the ability of such
organizations to survive and continue to function during emergencies. In accordance with these principles,
business continuity planning refers to all resources of the Bank, and to the readiness of such resources to
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continue to operate, in a full or limited capacity, during emergencies and during the return to routine conditions,
while minimizing the potential direct and indirect damage.
This policy is implemented in the Bank’s information systems through systems that provide incremental backup
along the time axis for the Bank’s central computer systems, according to the degree of importance and
materiality of the malfunctioning system. The backup systems are located both at the central backup facility of
the Bank, within the backup facility site of Bank Leumi, and at the Bank’s backup facility adjacent to one of its
branches in central Israel. In systems based on Leumi services, pursuant to the "Leumi Agreement," the business
continuity policy of Bank Leumi applies. The board of directors of the Bank and the management of the Bank
accord high importance to the protection of the Bank's sites, as part of the preparations for business continuity in
emergencies – see the section "Legislative Updates" and the section "Exposure to Risks and Risk Management,"
subsection "Operational Risk." The board of directors of the Bank has granted approval in principle for a project
in which the Bank's computer will be transferred to a secure building distant from the offices of the headquarters
of the Bank.
Principal Suppliers and Dependence on Suppliers
The Bank has several suppliers in the area of information systems and technology. The main suppliers are listed
below; each supplier upon which the Bank is dependent is expressly noted:
A. Leumi – Supplies core banking systems and related operational services. The Bank is dependent upon
Leumi, as there is no immediately available alternative to the systems which it provides, and damage to
these systems may cause exposure or material damage to the Bank.
B. FMR – Supplies software services for execution and control of securities trading. The Bank is dependent
upon the service supplied by FMR, because it is a material supplier of this service in Israel.
C. Matrix – Supplies a CRM (Customer Relation Management) system and maintenance and development
services for the Bank’s mortgage system, as well as for the control system of Union Bank Trust Company
Ltd.
D. Reuters – Supplies foreign-currency trading, financial information, and interest-rate transaction
management systems.
E. Taldor – Supplies call center operation, support, hardware, and ATMs, and management of the
authorization center for users.
F. Sivron – Supplies software services for securities trading.
G. E & I Finance Software Systems – Supplies software services for securities trading.
Activity of Investee Companies
The following is a general description of the principal activities of the investee companies of the Bank, their
profits before and after provision for taxes, and details regarding dividends, interest, management fees, or other
payments to which the Bank is entitled:
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Union Investments and Enterprise (A.S.Y.) Ltd. (“ASY”)
A.S.Y was established in 1998 and serves as the Bank’s non-financial investment arm, in accordance with the
Bank's strategy to channel part of its disposable capital into non-financial investments, subject to limits
established by law on the permitted rates of investment in non-financial corporations, and subject to the
maximum investment amounts established for this purpose by the board of directors of the Bank. As such, ASY
examines, executes, and monitors investments meeting the basic criteria established for the execution of such
non-financial investments. In addition, ASY advises the Bank on the acquisition of companies and activities in
areas of activity complementary to its banking business. The volume of the investment portfolio is
approximately NIS 109 million in various investment areas. ASY identifies suitable companies for investment
and executes investments and the related required due diligence, on its own and through external experts. In
some of these investment transactions, ASY retains the right to appoint a representative to serve as a director or
observer on the board of directors of the investee company. ASY owns the subsidiary Union Capital Markets
and Investments Ltd., and the granddaughter company, Union Underwriting and Finance Ltd., described below.
ASY’s profits (excluding the subsidiary's profits) in 2011 and 2010 were NIS 9,338 thousand and NIS 7,175
thousand, respectively, before provision for taxes; and NIS 6,300 thousand and NIS 5,142 thousand,
respectively, after provision for taxes.
Union Capital Markets and Investments Ltd. (“Union Capital Markets”)
Union Capital Markets was established in 1965 and was primarily engaged in distribution and underwriting
activity, as defined in Securities Regulations (Underwriting) - 2007 (hereinafter - "Underwriting Regulations")
until November 21, 2010. On November 21, 2010, the board of directors of Union Capital Markets resolved on
the cessation of its activity as an underwriter, pursuant to Regulation 3(E) of the Underwriting Regulations.
Consequently, the company moved to “inactive” status, as defined in the Underwriting Regulations. On January
10, 2010, a subsidiary of Union Capital Markets was established: Union Underwriting and Finance Ltd.
(formerly, until the change of its name on December 15, 2010, Union Issuance Advising (2010) Ltd.).
The profits of Union Capital Markets (excluding the subsidiary's profits) in 2011 and 2010 were NIS 105
thousand and NIS 2,419 thousand, respectively, before provision for tax; and NIS 89 thousand and NIS 1,815
thousand, respectively, after provision for tax.
Union Underwriting and Finance Ltd.
Union Underwriting was established on January 10, 2010, as a subsidiary of Union Capital Markets. On
November 9, 2010, Union Underwriting was registered in the registry of underwriters. The company formed
collaborations with parties having expertise and reputation in its areas of activity; as part of these collaborations,
service providers were allocated holdings, at a rate not to exceed 30% from the issued share capital of the
Company. Of that rate, by the end of 2011, 15% have been allocated to a company controlled by the CEO of
Union Underwriting. This company signed an agreement with Union Underwriting to provide such services. In
January 1, 2012, another approximately 5% from the issued share capital of the Company were allocated to the
Company controlled by the CEO, so that the CEO of Union Underwriting indirectly holds 20% of the shares of
Union Undewriting.
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In addition, on January 1, 2012, an additional 5% of the shares of Union Underwriting were allocated to an
additional service provider that contracted with the company; under certain conditions stipulated in the
agreement with the additional service provider, a further 5% of the shares of Union Underwriting may be
allocated to the service provider. The company's profits totaled NIS 823 thousand in 2011, before provision for
taxes, and NIS 623 thousand after provision for taxes.
Impact Investment Portfolio Management Ltd. (“Impact Management”)
Impact Management was established in 1996. The company is engaged in consulting and investment portfolio
management for institutional, business, and private customers. Profits of Impact Management in 2011 and 2010
were NIS 2,599 thousand and NIS 3,393 thousand, respectively, before provision for tax; and NIS 1,942
thousand and NIS 2,538 thousand, respectively, after provision for tax.
Union Bank Trust Company Ltd. (“Trust Company”)
The Trust Company provides trust services to mutual funds (under the Joint Trust Investment Law - 1994) and
to holders of securities in public and private offerings, and provides private trust services (monetary trusts, stock
custody, and more). Profits of the Trust Company in 2011 and 2010 were NIS 4,432 thousand and NIS 5,651
thousand, respectively, before provision for tax; and NIS 2,905 thousand and NIS 4,745 thousand, respectively,
after provision for tax. The net profit in 2010 includes a net profit of NIS 0.7 million from extraordinary
activities in respect of the sale of some of the trusts to bonds.
Union Leasing Ltd. (“Union Leasing”)
Union Leasing was established in 1996, and finances vehicles and equipment using the financed leasing method
for customers of the Bank and for other customers. The balance of financing provided by Union Leasing to its
customers on December 31, 2011 amounted to NIS 303 million, versus NIS 304 million at the end of 2010.
Profits of Union Leasing in 2011 and 2010 were NIS 10,228 thousand and NIS 8,839 thousand, respectively,
before provision for tax; and NIS 7,888 thousand and NIS 6,600 thousand, respectively, after provision for tax.
Union Issuances Ltd. (“Union Issuances”)
Union Issuances was established in 2005 to issue certificates and deposit the proceeds of the offerings at the
Bank. Union Issuances is a reporting corporation, as defined in the Securities Law, as long as securities issued
by it are held by the public.
On April 11, 2011, the Company published a shelf offer report under a shelf prospectus of Union Issuances
published on August 31, 2009 and its amendment from March 10, 2011 (see immediate report 2011-01-076152).
210,176 units of (Series R) subordinated notes were issued (through a unit price auction) according to the shelf
offer report; the issuance made by a way of extending the tradable series. Each unit consists of a par value of
NIS 1,000. The gross consideration in respect of these units amounted NIS 214 million. Pursuant to an
announcement of Midroog on April 6, 2011, the subordinated notes (Series R) were assigned a rating of A1,
outlook stable.
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On June 30, 2011 Union Issuances published a shelf offer report under a shelf prospectus of Union Issuances
published on August 31, 2009, and it's amendment from March 10, 2011. 300,895 units of (Series S)
subordinated notes were issued (though an interest-rate auction) according to the shelf offer report. Each Unit
consists of a par value of NIS 1,000. The gross consideration in respect of these units amounted approximately
NIS 301 million.
Within the approval granted by the Bank of Israel with regard to the notes in this offering, it was clarified that
the recognition of the notes as lower Tier II capital shall be subject to compliance with transitional directives to
be established in the future, until the instructions in this area are formulated. Pursuant to an announcement by
Midroog on June 22, 2011, the Subordinated Notes (Series S) were assigned a rating of A1, outlook Stable.
An updated deposits agreement was signed between the Bank and the company on August 28 – see the
subsection "Agreements, Transactions, and Payments between Group Companies," below.
Union Issuances published a shelf prospectus on August 29, 2011, dated August 30, 2011, for the issuance of
series of bonds, subordinated notes and/or commercial securities, and the expansion of existing series. For
details, see Note 10 to the Financial Statements.
With regard to the draft amendment of the Securities Regulations (Details of a Prospectus and Draft Prospectus
– Structure and Format), see the section "Legislative Updates."
Profit of Union Issuances in 2011 and 2010 were NIS 1,539 thousand and NIS 495 thousand, respectively.
According to an arrangement with the Income Tax Commission, the company is not assessed for taxes, and its
income and/or expenses for tax purposes are included in the income and/or expenses for tax purposes of the
Bank. Carmel Union Mortgages and Investments Ltd. (“Carmel”)
Carmel Mortgage and Investment Bank Ltd. (“Carmel Bank”) operated in the area of mortgages. In 2001, an
agreement was signed between the Bank and the Carmel Investments Ltd. Group in which the Bank acquired the
majority of the assets, liabilities, and banking activity of Carmel Bank, and concurrently the banking license of
Carmel Bank was cancelled. Subsequent to the cancellation, the name of Carmel Bank was changed to its
current name. Following the acquisition of its banking activity by the Bank, a debt balance bearing interest and
linkage differentials was recorded at Carmel. The profits of Carmel mainly arise from this debt balance. Profits
of Carmel in 2011 and 2010 were NIS 10,878 thousand and NIS 10,708 thousand, respectively, before provision
for tax; and NIS 7,390 thousand and NIS 6,985 thousand, respectively, after provision for tax. Carmel does not
engage in new activities; it maintains the loan portfolio acquired by the Bank.
Igudim Insurance Agency (1995) Ltd. (“Igudim Insurance Agency”)
Igudim Insurance Agency provides life insurance to borrowers or home insurance executed in the course of
housing loans granted to customers of the Bank, pursuant to Section 11 (B) 2 of the Banking Law. Profits of
Igudim Insurance Agency in 2011 and 2010 were NIS 542 thousand and NIS 243 thousand, respectively, before
provision for tax; and NIS 412 thousand and NIS 183 thousand, respectively, after provision for tax.
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Livluv Insurance Agency (1993) Ltd. (“Livluv”)
Livluv was under the full ownership of Carmel Bank when it was acquired by the Bank in 2001. Livluv provides
home insurance executed in the course of housing loans granted to customers of Carmel, pursuant to Section 11
(B) 2 of the Banking Law. Livluv does not engage in new activity, but is maintaining its existing activity until
its conclusion. Monetary data of Livluv are consolidated with those of Carmel; see above.
Igudim Ltd. (“Igudim”)
Igudim is engaged in the acquisition, rental, maintenance, management, and construction of the real-estate
properties of the Bank, for the Bank and for its subsidiaries. The monetary data of Igudim are consolidated with
those of the Bank.
Union Systems Ltd. (“Union Systems”)
Union Systems provides computer services to the Bank and to its subsidiaries. The monetary data of Union
Systems are consolidated with those of the Bank.
Union Finances Ltd. (formerly Union Mutual Funds (U.M.F.) Ltd.) (“Union Finances”)
Union Finances was established in 1995 and began its business activity in 1996. Union Finances managed joint
trust investment funds. The activity of Union Finances was sold to Menorah Mutual Funds Ltd. in 2006, and it
is currently an auxiliary corporation of the Bank. As of the report date, Union Finances has no business activity,
and is solely engaged in holding moneys received from the sale of its assets, holding moneys of its equity
capital, investing these moneys, and making payments related to such investments. Profits of Union Finances in
2011 and 2010 were NIS 933 thousand and NIS 404 thousand, respectively, before provision for tax; and NIS
611 thousand and NIS 273 thousand, respectively, after provision for tax.
Union Balances Ltd. (formerly Union Provident Funds Management Ltd.) (“Union Balances”)
Union Balances was established in 1996 to manage provident funds (including study funds) and severance-pay
funds for employers. Its activity was sold to Ayalon Provident Fund Management Company Ltd., a company
under the control of Ayalon Insurance Company Ltd., in 2006, and it is currently an auxiliary corporation of the
Bank. As of the report date, Union Balances has no business activity, and is solely engaged in holding moneys
received from the sale of its assets, holding moneys of its equity capital, investing these moneys, and making
payments related to such investments. Profits of Union Balances in 2011 and 2010 were NIS 961 thousand and
NIS 220 thousand, respectively, before provision for tax; and NIS 745 thousand and NIS 104 thousand,
respectively, after provision for tax.
Union Bank Israel Records Ltd.
Established in 1954. At the report date, no business activity is conducted by this company.
Kikar Zion 23 Netanya Ltd.
The company owned a real-estate property in Netanya which was used in the past as a branch of the Bank and
was sold in 2007. The ownership of this property constituted the entire business activity of this company. As of
the report date, no additional business activity is conducted at this company.
- 57 -
Ahuzat Yehuda Ltd.
The company owned a real-estate property in Tel Aviv which was used in the past as a branch of the Bank and
was sold in 2009. The ownership of this property constituted the business activity of this company. As of the
report date, no additional business activity is conducted at this company.
Bank Safes Company
Established in 1968 to buy, hold, manage, and sell safes at the Diamond Exchange building in Ramat Gan, and
in order to rent safes to customers or other entities. The Bank holds 25% of the shares of the company; the other
holders are Israel Discount Bank Ltd. (50%) and Bank Leumi LeIsrael Ltd. (25%). As of the report date, no
business activity is conducted at this company.
The Bank's return on its investments in those investee companies as at December 31, 2011 was 6.1%, compared
with 5.6% in December 31, 2010.
The composition of the Boards of Directors of some of the subsidiaries changed at the end of 2011, due to the
resignation of directors serving on the Board of Directors of the Bank, who also served as directors at the
subsidiaries of the Bank, from their positions at the subsidiaries. This change was made due to the
implementation of Proper Conduct of Banking Business Directive No. 301, which took effect at that time.
Other investment
In addition, the Bank holds approximately 14% of the share capital of a company Development HOF Hatehelet
(Tel-Aviv - Herzliya) Ltd., which owns a land division in central Israel. The rate of holdings of the Bank in the
Company may grow beyond the current rate, but in any case shall not exceed 20% of the share capital of the
Company, as long as the limit on the maximum rate of holdings in non-financial corporations remains in effect,
pursuant to Section C of the Banking Law. For further details regarding this holding, see Note 7 to the financial
statements.
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The following table lists the investee companies of the Bank, noting the number of shares of all types held
by the Bank1 and their face value, cost, price recorded in the books of the Bank, balance of loans, and
details of other investments therein (as of December 31, 2011).
Name of company Number of shares
held and face value Cost Book )2( price
Balance of loans and
capital notes In NIS millions Union Investments and Enterprise (A.S.Y.) Ltd ("A.S.Y.") (9)
8,622,075 ordinary shares, par value NIS 1.00 each 9 35 139
Union Leasing Ltd. 999,999 ordinary shares, par value NIS 1.00 each 1 50 247
Union Bank Trust Company Ltd. (3)
9,599,999 ordinary shares, par value NIS 0.1 each 2 23 -
Union Issuances Ltd. 100 ordinary shares, par value NIS 1.00 each - 2 16
Carmel Union Mortgages and Investments Ltd. ("Carmel Union")
11,625, 041 ordinary shares, par value NIS 1.00 each 149 152 -
Igudim Insurance Agency (1995) Ltd.
99 ordinary shares, par value NIS 1.00 each - 1 -
Livluv Insurance Agency (1993) Ltd. (3)
100 ordinary shares, par value NIS 1.00 each Consolidated with Carmel Union(4)
Impact Ltd. Investments Portfolios 2,999,999 ordinary shares, par value NIS 1.00 each 5 19 5
Union Capital Markets and Investments Ltd. (4)
1,750,002 ordinary shares, par value NIS 1.00 each
Consolidated with A.S.Y. (5)
Union Underwriting and Finances (2010) Ltd.(10)
2,550,000 ordinary shares, par value NIS 1 each
Consolidated with Union Capital Markets
Igudim Ltd. 15,978,087 ordinary shares, par value NIS 0.0001 each Reported in the Bank’s “solo” reports
Union Systems Ltd. 99 ordinary shares, par value NIS 1.00 each Reported in the Bank’s “solo” reports
Union Finances Ltd. (formerly Union Mutual Funds (U.M.F.) Ltd.) (7)
1,699,999 ordinary shares, par value NIS 1.00 each 2 39 -
Union Balances Ltd. (formerly Union Provident Funds Management Ltd.) (8)
850,000 ordinary shares, par value NIS 1.00 each 1 40 -
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Name of company Number of shares
held and face value Cost Book )2( price
Balance of loans and
capital notes In NIS millions Union Bank Israel Records Ltd. 98 shares with a face
value of 0.0001 (Old Shekel) each A company with no business activity
Kikar Zion 23 Netanya Ltd. (5) 2 redeemable preferred shares with a face value of 0.0001 (Old Shekel) each(6) A company with no business activity
Ahuzat Yehuda Ltd. (6) 1,000 ordinary shares with a face value of 0.0001 (Old Shekel) each (7) A company with no business activity
Bank Safes Company 150,000 Class B ordinary shares with face value of NIS 0.01 each A company with no business activity
* Less than NIS 500 thousand. Notes:
1. In some cases, in addition to the shares held by the Bank, which constitute at least 99% of the issued capital
of the Company listed, individual shares of the same company are also held by other subsidiaries of the
Bank.
2. An investment listed in the books on an equity basis.
3. Held through Carmel Union Mortgages Ltd. (99 shares) and Union Bank Trust Company Ltd. (1 share),
wholly owned subsidiaries.
4. Held through A.S.Y. (1,750,001 shares) and Union Bank Israel Records. (1)
5. An additional share of the total existing 3 shares of the company is held by Union Bank Israel Records Ltd.
6. Held through Union Bank Records Ltd. (999 ordinary shares) and Igudim Ltd. (1 ordinary share).
7. The activity of trust funds was sold in 2006.
8. The activity of provident funds was sold in 2006.
9. One share is held by Union Bank Trust Company Ltd.
10. Held through Union Capital Markets in the holding rate of 85%. In January 1, 2012 the holding rate in the
Company declined to 75%.
Dividends, Interest, and Management Fees Received by the Bank
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The following table lists dividends, management fees, participation in expenses and net financing income
(expenses) received by the Bank, or which the Bank is entitled to receive, from its subsidiaries, for 2011 and
2010, in NIS thousands.
Name of company Dividend
Management fees and participation in
expenses Financing income
(expenses), net 2011 2010 2011 2010 2011 2010 Union Investments and Enterprise (A.S.Y.) - - 54 54 (1,735) (114)Union Capital Markets and Investments Ltd. * - - 48 48 (141) (47)Union Bank Trust company - - 90 90 (638) (72)Impact Union Investments Portfolios - - 90 90 (99) 128 Union Leasing - - 42 42 9,401 8,938 Carmel Union Mortgages and Investments 6,985 8,720 - - - -Union Issuances - - 42 43 (138,321) (101,537)Union Underwriting and Finance** - - 48 - (16) -Igudim Insurance Agency - - 2,927 1,214 (20) (3)Igudim Consolidated with the “solo” reports of the Bank Union Systems Consolidated with the “solo” reports of the Bank Union Balances Ltd. - - - - (948) (474)Union Finances Ltd. - - - - (953) )285(Livluv Insurance Agency Consolidated with Carmel Union Mortgages and Investments
* Consolidated with the financial statements of Union Investments and Enterprise. ** Consolidated with the financial statements of Union Capital Markets.
Agreements, Transactions, and Payments between the Group Companies
A. Deposit Agreements with Union Issuances
A deposits agreement was signed between the Bank and Union Issuances Ltd. on August 28, 2011
(hereinafter: the "Updated Agreement"). The Updated Agreement will apply to offerings of bonds and/or
notes and/or commercial securities (hereinafter: the "Offered Securities") executed under the shelf
prospectus published on August 29, 2011 (hereinafter: the "Shelf Prospectus"). The Updated Agreement
shall not prejudice the validity of previous deposit agreements with regard to shelf prospectuses published
by the subsidiary in 2005-2007 and in 2009. For further details regarding the new deposits agreement, see
Note 18.C.15.
B. Account Settlement Agreements
The Bank routinely provides managerial and operational services to its subsidiaries, such as legal services,
office services, bookkeeping, and internal auditing. In order to regularize the contractual relationships
between itself and these companies, the Bank has entered into agreements under which the subsidiaries pay
certain amounts to the Bank for the services, or indemnify the Bank for the operational expenses paid by
the Bank in respect of the provision of such services.
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C. Capital Notes
From 2000 to 2005, the Bank provided capital notes to its subsidiaries against equity capital, under the
following terms:
1. A.S.Y. – It was agreed that the capital note was issued against an amount of NIS 139 million which
the Bank would transfer to A.S.Y. at rates and dates to be agreed upon by A.S.Y. and the Bank from
time to time, by crediting the account of A.S.Y. at the main branch of the Bank. Each of the said
amounts shall be presented for settlement, at the demand of the Bank, not before one year has elapsed
from the end of the year in which the amount was provided. The capital note has a preferred
repayment priority rank over all other debts of A.S.Y. It was agreed that the aforesaid amount would
not bear interest and would not be linked in any way.
2. Union Issuances - It was agreed that the capital note was issued against an amount of NIS 16 million
which the Bank would transfer to Union Issuances, through a one-time credit of the account of Union
Issuances with the full amount.
It was agreed that the aforesaid amount would not bear interest and would not be linked in any way. It
was further agreed that the capital note would be presented for settlement only upon the liquidation of
Union Issuances, and only after the settlement of all of its liabilities to all of its other creditors.
3. Impact Management – It was agreed that the capital note was issued against an amount of NIS 5
million (as of today), which the Bank provided to Impact at rates and dates to be agreed upon by
Impact and the Bank from time to time, by crediting Impact’s account at the main branch of the Bank.
The number of capital notes shall be equal to the total number of NIS provided by the Bank to Impact.
Any of the amounts against which the capital notes were issued shall be presented for settlement at the
demand of the Bank, which can be made not before one year has elapsed from the date on which that
amount was provided. Alternatively, the Bank is entitled to demand to convert these capital notes, or
part thereof, into shares, in a number equal to the number of the converted capital notes. The capital
notes cannot be settled early and their terms cannot be changed. It was agreed that the aforesaid
amount would not bear interest and would not be linked in any way.
For further details regarding the capital notes, see Note 5 to the financial statements.
D. Indemnification Letters
The board of directors of the Bank approved the granting of irrevocable and unconditional indemnification
letters, which took effect on June 30, 2009, to the consolidated companies, for details see Note 18.C.14.
E. Agreements Regarding Employees
On August 4, 1996, a collective agreement was signed, to which the Bank and Union Systems are a party,
in which the Bank undertook a commitment to employ under personal contracts only workers in specific
professions at Union Systems.
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F. Additional Contractual Engagements
The Bank regularly and routinely receives paid services from its subsidiaries, as follows:
1. Igudim (maintenance, rental, management, and construction of real-estate properties of the Bank).
2. Union Systems (computer services).
The activity of Igudim and Union Systems consists mainly from providing services to the Bank.
In addition the Bank receives from time to time, consulting services on various subjects from A.S.Y.
G. Credit Facilities for Subsidiaries
The Bank occasionally provides credit facilities to subsidiaries in the group for their routine operations. As
of December 31, 2011, the Bank provided credit facilities to subsidiaries in the amount of approximately
NIS 328 million, either in the form of financing or of financial guarantees.
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Human Capital
Details regarding developments in manpower are set out below:
Employee positions* as of December 31
Average annual number of positions*
2011 2010 2011 2010 The Bank 1,237 1,191 1,219 1,167
Consolidated companies 37 36 37 34
**1,274 **1,227 1,256 1,201 * Position - A full-time position including specific overtime, working hours of contractors and others.
** Of which, managers and authorized signatories, as of December 31, 2011 - 253 (December 31, 2010 - 244).
Labor relations and employee wages are regularized in collective labor agreements with the employees and the
unions of Bank employees, the executives’ union and the clerks’ union.
Wages of employees of the Bank are subject to labor agreements. For details see paragraph "Material
Agreements".
In 2011, special emphasis was continued to place on employee training and on development of human resources at
the various levels by the Bank. Almost all training and professional instruction is carried out at the Bank’s training
center or in the workplace, and provided through the Bank’s professional staff. The team of internal instructors and
content experts is composed of some 60 instructors who are employees and executives at the Bank.
Training and instruction in the areas of management, sales, executive development and organizational culture are
provided by external instructors and organizational consultants. Training expenses totaled NIS 2.7 million in 2011.
Training focused on the following main subjects in 2011:
Training focused on the following main areas in 2011: Development of executives at all levels of management at
the Bank, through the implementation of a broad development program, so that each executive of the Bank
received training; training of a pool of potential candidates for junior and senior management; and a direct track to
management. Absorption and implementation of information systems and capital-market systems; broad
professional training for the entire segment working with private customers; and training sessions on various
regulatory issues.
In 2009, an ethical code was formulated and written by the Bank in a comprehensive process, with the
participation of various parties, including shareholders, directors, managers, employees, clients, and
suppliers, based on a deep understanding of the responsibility of the Bank – in its capacity as a bank, and as
an organization operating within Israeli society. An ethical code is a set of values and rules of conduct that
serve as a compass for ethical behavior for all employees and managers. The principles of the code should
provide a framework for appropriate ethical behavior.
The ethical code is composed of five key values: professionalism; service; excellence; fairness and
integrity; and mutual respect and individual treatment.
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In 2011 the bank continued the program that began in 2010 for integration and comprehensive
implementation of the ethical code in the work processes and the procedures of the bank, in order to make
the ethical code as a part of the bank's organizational culture. Concurrently, work processes of ethics
institutions in the bank, including ethics committee which convenes once a quarter have been established.
In June 2010, agreements regarding bonuses were signed with the union of managers and authorized
signatories and with the clerks' union, for the period from 2009 to 2012. The formula for the amounts of the
bonuses is based on the profitability of the Bank, subject to attainment of a rate of return greater than 6%.
Also see the section, "Material Agreements."
On April 5, 2009, the Supervisor of Banks sent a letter to banking corporations concerning remuneration
policy at banking corporations. In the letter, banking corporations and the corporations under their control
are instructed to adopt an appropriate remuneration policy for all of their employees, in order to reduce
risks arising from improper incentive structures. The board of directors held a discussion on December 7,
2009 and established a policy, based on the directives of the Supervisor, the main points of which are as
follows:
A. Remuneration incentives shall be adjusted to the organization-wide profitability and long-term goals
of the banking corporation.
B. Remuneration incentives shall not encourage risk-taking beyond the risk appetite of the banking
corporation.
C. The payment of remuneration incentives shall be based on profit adjusted for risk and for the cost of
capital.
D. Remuneration incentives shall include a component reflecting the effect of the business unit's
contribution on the overall value of other business units, and shall not refer to the business unit in
detachment from the banking corporation as a whole.
E. Remuneration incentives shall include a component reflecting the attainment of the general objectives
of the banking corporation in the area of risk management and compliance with laws, regulatory
directives, and regulations of the banking corporation.
F. Agreements establishing end-of-service payments for senior executives shall take actual performance
over time and the reason for the end of the executive's service into consideration.
G. This policy is designated for implementation in the coming years, and is subject to the wage
agreements in effect at the Bank and the agreements with the employees’ and managers’ unions at the
Bank.
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On April 10, 2011, following approval by the audit committee on February 6, 2011, and following the
recommendation of the ad-hoc committee on remuneration of the board of directors, based on the
remuneration policy established by the board of directors in November 2009, the board of directors of the
Bank approved a long-term bonus plan for the senior executives of the Bank: the chairman of the board, the
chief executive officer, the members of management, the legal advisor, and the auditor of the Bank. On
May 22, 2011, the general assembly approved the plan with regard to the chairman of the board of
directors.
During 2011, annual bonuses in respect of 2010 were paid to the chairman of the board, the chief executive
officer, and the members of management of the Bank, in accordance with the aforesaid bonus plan. For
details, see the section "Remuneration of Interested Parties and Senior Officers" in the Immediate Report
issued by the Bank on April 11, 2011 (reference no. 2011-01-116199) and Note 15.D to the Financial
Statements.
In addition, remuneration formulas for additional groups of employees were approved during 2011, based
on the remuneration policy established by the board of directors.
In 1997, an agreement was signed between the managers and authorized signatories and the Histadrut
federation and the Bank, stating, among other matters, that the long-serving managers and authorized
signatories of the Bank eligible for budget-based pensions in a certain format used at the Bank until that
time (hereinafter: the “Binding Pension”) shall receive pensions from the Amit pension fund, with which
the Bank and employees of the Bank entered into an agreement, and from the Bank, in an integrated
manner, with the integration formula established in the agreement. A dispute exists over this integration
formula between the union of managers and authorized signatories, and the Bank. The Bank’s position is
that the Bank’s indebtedness to retirees is in the amount of the difference between the amount of the first
pension which the retiree receives from Amit upon retirement and the amount of the Binding Pension (to
the extent that such a difference exists at that time), and which the Bank must pay to the retiree each month,
fully linked to the consumer price index. The position of the managers is that the Bank’s indebtedness to
retirees is in the amount of the difference (to the extent that it exists) between the amount of the pension
which the retiree receives from Amit and the amount of the Binding Pension, as the difference stands each
month (the amounts of the aforesaid differences which the Bank must pay, hereinafter: the “Supplementary
Amounts”). In 2008, the managers’ union and the Bank conducted a procedure with regard to this matter in
order to settle the dispute through an arbitrator. The procedure was suspended by the parties. In July 2009,
the pension paid by Amit was reduced by 10%; the pension has remained at the reduced values established
at that time until the present date. The amount in dispute as a result of this reduction is immaterial. In July
2011, the Bank received a letter from the Executive Board demanding a renewal of the arbitration
proceeding. The procedural process for the renewal of arbitration has not been completed by the Histadrut
as of this writing. In the opinion of the management of the Bank, based on the opinion of its legal advisors,
it is currently not possible to quantify the degree and extent of risk with respect to possible liability of the
Bank for the payment of supplementary amounts, both due to the existence of the aforesaid dispute
regarding the interpretation of the integration formula, and due to the fact that it is not possible to foresee
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the frequency or volume of situations in which a difference may arise between the amount of the required
pension and the amount of the pension paid by the Amit fund, which could necessitate the payment of such
supplementary amounts.
Retirement Plan and Change in Retirement Policy
On February 26, 2012, the Board of Directors of the Bank approved a framework for a preferred-terms
retirement plan (hereinafter: the "Plan"), within a defined period of time. The Plan is targeted to all
employees aged 57 to 64.
Pursuant to the Plan, relevant employees will be permitted to declare, within a specified timeframe,
whether they wish to retire within the Plan. The management of the Bank shall have exclusive discretion to
approve retirement under the terms of the Plan. The actual retirement process of employees approved for
early retirement under the Plan shall be gradual and spread over approximately two years. The Board of
Directors of the Bank also affirmed that along with the approval of the format for the Plan, a policy would
take effect under which early retirement with preferred terms would not be possible for the coming seven
years (through the end of 2018).
According to estimates by the management of the Bank, approximately 40 employees will retire within this
program. The total cost of Excess Compensation to be paid to the employees who retire under the Plan
(beyond the compensation required by law), according to average calculations, is estimated at
approximately NIS 50 million.
This estimated cost is reflected in the financial statements. Concurrently, actuarial reserves were reduced,
in accordance with the aforesaid estimates by management and the aforesaid change in policy, such that the
increase in wage expenses in the statement of profit and loss for 2011 amounted to approximately NIS 15
million – for details see Note 15.A.5 and the section "Significant Accounting Policies," subsection
"Employee Benefits."
The realization of the Plan will enable the Bank to reduce costs and improve efficiency, among other
effects, thereby allowing it to cope with the challenges posed by the forecasts regarding the performance of
the economy in the coming years.
Some of the information in this paragraph is forward-looking information, as defined in the Securities
Law, and is based on the work plans of the Bank. Such expectations may not materialize, in full or in part,
or may materialize in a manner significantly different than expected, mainly as a result of the degree of the
Bank's success in realizing its intra-organizational plans.
Note 15.A.7 provides details regarding reserves for severance pay, retirement, and pensions. Reserves for
pensions and Excess Compensation included in "total reserves, net" are calculated according to actuarial
estimates. In addition, Note 15.B provides details of liabilities for bonuses in respect of employee seniority
(long-service bonuses). This liability is also calculated according to an actuarial estimate. The following
table details the change in these reserves in 2011 and 2010, as well as details of the change in "amounts
funded" in the same years.
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Change in current value of actuarial liabilities - 2011 (NIS millions)
Pensions and surplus
compensation Jubilee bonuses Total Current value of liability, Jan. 1, 2011 216.7 18.7 235.4
Current service cost(1) 11.4 3.2 14.6
Financial expenses(2) 26.6 1.2 27.8
Net benefits paid (including benefits expected to be paid)(3) (63.4) (1.1) (64.5)
Expected return on program assets(4) (11.6) - (11.6)
Net actuarial loss (profit)(5) 4.7 1.4 6.1 Current value of liability, Dec. 31, 2011 184.4 23.4 207.8 Change in current value of actuarial - 2010 (NIS millions) *
Pensions and excess
compensation Jubilee bonuses Total
Current value of liability, Jan. 1, 2010 210.1 15.6 225.7
Current service cost (1) 10.7 2.8 13.5
Financial expenses (2) 24.0 1.0 25.0
Net benefits paid (3) (16.9) (1.6) (18.5)
Expected return on program assets (4) (10.4) 0.9 (9.5)
Net actuarial loss (profit) (5) (0.8) - (0.8) Current value of liability, Dec. 31, 2010 216.7 18.7 235.4 * The comparative data were restated following the retroactive implementation of the directive regarding employee
benefits - See Note 1.E.21.
(1) Current service cost constitutes from cost of the pension rights cost, the increased compensation and the cost of Jubilee bonuses which the employees "purchased" in return for their services at the current year.
(2) Financial expenses constitute the increase during the period in the current value of the commitment to a defined reserves arising from the fact that the date of settlement of the benefits grew closer by one period.
(3) This paragraph includes repaid benefits: pension payments to retirees, payments of Jubilee bonuses, payments for employers which retired and relinquished their right for pension and excess compensation payments; and also estimate of the expected payments in respect of retirement - see details in chapter "Human Capital" and Note 15.A.5. In addition the section includes deposits and withdrawals from the assets of the program, including expected withdrawals in respect of retirement. The main increase in 2011 compared to 2010 arises from the estimate of payments and withdrawals in respect of retirement.
(4) Expected return on the assets of the program takes into account the changes in the fair value of the assets of the program, which held during the period as a result of actual deposits and actual benefits which have been paid. The expected return is based on the market forecasts at the beginning of the period. The difference between the expected return and actual return on the assets of the program included in an actuarial loss or profit.
(5) Net actuarial loss/profit arises from adjustments based on experience (the effect of differences between actuarial assumptions and actual outcomes), and the effect of changes in actuarial assumptions. Most of the losses in 2011 resulted from an impairment of assets of the program (the difference between the expected return and actual return).
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Change in amounts funded for the year ended December 31, 2011 (in NIS millions)
2011 2010
Opening balance 101 95
Deposits - *-
Withdrawals (1) (2)
Profit (loss)** (5) 8 Closing balance 95 101 * Less than NIS 500 thousand. ** Profit (loss) arising from the revaluation of the central severance pay fund, recorded according to the approved balance
received from the external entity where the money is deposited.
Description of the Tax Situation
A. On July 14, 2009, the Knesset approved the Economic Efficiency Law for the tax years 2009
and 2010. The law approved, among other matters, directives concerning the gradual reduction
of the corporate tax rate in the years 2011 through 2016, to a tax rate of 18%. Under
Amendment 147 of the Ordinance, which is currently in effect, the corporate tax rate is 25% in
2010. According to the amendment of the Income Tax Ordinance established in the Economic
Efficiency Law, as noted, the following tax rates will apply starting in 2011: 24% in the tax
year 2011, 23% in the tax year 2012, 22% in the tax year 2013, 21% in the tax year 2014, 20%
in the tax year 2015, and corporate tax rate of 18% from 2016 forward.
In addition, on July 1, 2009, the Knesset approved an increase of the value-added tax rate, in the Value
Added Tax Order (Rate of Tax on Transactions and on Imports of Goods) (Temporary Order) - 2009
and the Value Added Tax Order (Rate of Tax on Non-Profit Organizations and Financial Institutions)
(Temporary Order) - 2009, pursuant to which the VAT rate will rise from 15.5% to 16.5% for the
period from July 1, 2009 to December 31, 2010.
On December 29, 2010 the Knesset plenum approved in the frame the biennial budget, that the VAT
rate shall remain at the rate of 16% for the years 2011 and 2012. In addition, the tax rate on salaries and
profit that applies on financial institutions of 16%, until the end of 2012, was approved.
On December 5, 2011 the Knesset approved an amendment of the Law for Change in the Tax Burden
(legislative amendments), 2011. Pursuant to this law the tax reduction established in Economic
Efficiency Law, will be canceled, as stated above, and the rate of corporation tax will stand at 25% from
2012 forward.
Subsequent to the aforesaid amendments, the statutory tax rates applicable to banking corporations
stand at 34.48% in 2011. The statutory tax rates applicable to banking corporations stand at 35.34% in
tax year 2012, and 35.06% from tax year 2013 forward. Following the amendment, the balance of
deferred tax assets increased, and income tax in the amount of approximately NIS 29 million were
recorded in the fourth quarter in 2011.
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B. The Bank has final tax assessments up to, and including, the tax year 2007. Its consolidated
companies have final tax assessments (or assessment considered to be final) up to, and
including, the tax years 2007-2008.
C. As part of an audit performed by the Israel Tax Authority (VAT Audit Department) at a
subsidiary of the bank, Union Systems Ltd., a private company providing computer services to
the Bank (hereinafter - the "Company"), an investigation was conducted in respect of to the
Company's status as a dealer for VAT purposes.
On June 18, 2008, the Company received a transaction tax assessment for the tax periods from
September 2005 to March 2008. On August 18, 2011, the company received a letter from the Israel Tax
Authority, stating that the ITA had decided to change the company's classification from "business" to
"financial institution," effective September 1, 2011. The significance of the change in classification is a
"notional sale" of the company's assets (computer equipment), in respect of which input tax was
deducted upon purchase, and the imposition of VAT in respect thereof. The date of the "sale" shall be
according to the date of the change in classification, and the selling price shall be according to the
market value of the company's assets. In the opinion of the legal advisors of the company, the change in
classification, if implemented, is expected to be performed according to the adjusted undepreciated
balance of the assets that were acquired from April 2008 forward and were not included in the aforesaid
tax assessment. The company disputes the decision to change the classification, and submitted a
statement of its objection on December 1, 2011. According to estimates by the Bank, if the Bank's
objection is not accepted, no material effect is expected on the Financial Statements as at December 31,
2011. For further details, see Note 18.C.18 to the Financial Statements.
D. The Bank has the status of a Qualified Intermediary (Q.I.) as defined in the rules of the income
tax authorities in the U.S.A. The significance of this status is that the Bank has entered into an
agreement with the tax authorities in the U.S.A. regarding reporting certain and tax deduction
processes, as required under the U.S.A. law.
E. For additional information regarding the Bank's policy for recording taxes and the provision for
taxes, see Notes 1.E.11 and 28 to the financial statements.
F. An agreement was signed in February 2012, led by the Association of Banks, between the banks
and the tax authorities, for implementation of the directive on impaired debts for tax purposes.
According to the main principles of the agreement, provisions for credit losses assessed on an
individual basis will be recognized in the year in which they are recorded, and provisions for
credit losses assessed on a group basis that have been written off will be recognized in the year
following the year of the write-off. The effect on the provision for tax in 2011 as a result of the
implementation of the agreement is immaterial.
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Description of the Bank's Business by Activity Segments
The characterization of the segments is based mainly on the types of customers included in each segment. The
accounting principles implemented in the presentation of this data are described in Note 30 to the financial
statements.
The Bank’s activity focuses on the hence for the activity segments:
Private segment - provides banking services and financial products to households and people who are financially
secure, including investment consulting services and housing financing activity. In addition, the segment includes
small businesses with an obligo of up to NIS 400 thousand, which are managed at the retail department.
Business segment - the segment provides a range of banking services and financial products to business
customers, from a variety of economic sectors - including construction and real estate and the capital market.
Diamond Segment - the segment consists of customers operating in the diamond industry, most of whom are
members of the Diamond Exchange in Ramat Gan.
Financial Management Segment - Includes the Bank’s activity on its own behalf in securities, asset and liability
management, market liquidity and clearing risk management, the activity of the Bank’s dealing rooms, and the
activity of the consolidated company Union Investments and Enterprise Ltd. (A.S.Y.), which serves as the non-
financial investment arm of the Bank. The results of the segment include the effects of stating the derivative
financial instruments at their fair value.
Others and adjustments – segment includes activities which cannot be classified to any specific segment.
The following are the main rules applied in the division of results of operations among the different
segments:
Profit from financing activity – In segments in which activity focuses on customers, this item includes a financial
clearance on customers’ loans and deposits. The spread is generally calculated against a transitional price
representing the cost of resources, according to duration and in reference to the relevant type of linkage. This item
also includes risk-free interest on available capital calculated for the purpose of the return on equity attributed to the
segment. Equity is attributed based on the risk assets assigned to each segment (according to the Basel II rules).
Operating and other income – This relates to the segment to which the customer is classified.
Provision for credit losses – The provision for credit losses is charged to the segment to which the customer
against whose debt the provision was recorded is classified
Operating and other expenses - Direct expenses are classified to a specific segment. The rest of the expenses are
classified according to various criteria.
Taxes on income - The provision for taxes on the business results of each activity segment is calculated according
to the effective rate of tax, as a rule, with the exception of certain cases in which specific attributions can be made.
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Return on equity - This comprises the ratio between the net income of each segment and the capital resources that
are allocated to each segment. Capital resources are allocated to the segments according to average risk assets of
each segment (according to Basel II rules).
Reclassification - The data model and methodology used to report the results of the segments of activity of the
Bank is in a continual process of data optimization; accordingly, results for comparison periods are reclassified,
as it possible.
The following is a summary of developments in net profit and total assets, by activity segment:
A. Net operating profit (loss) for the year ended December 31
2011 **2010 Segment NIS millions Private customers 31 20
Corporate 123 67
Diamonds 16 10
Financial management (38) 52
Others and Adjustments *- *- Total 132 149
B. Total Assets (Average Balance) for the year ended December 31
2011 **2010 Segment NIS millions Private Customers 8,033 6,588
Corporate 13,775 13,073
Diamonds 1,395 1,455
Financial Management 13,516 11,572
Others and adjustments 394 363 Total 37,113 33,051
* Less than NIS 500 thousand.
** Restated following the retroactive implementation of the directive regarding employee benefits - See Note 1.E.21
and Note 1.C.5 regarding reclassification.
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Private Segment
Segment Structure
The Private Segment is under the management of the Retail, Client Asset, and Advisory Division.
The segment provides banking services and financial products including advisory services to all households and
financially wealthy private customers: retail and private banking. The segment also includes small businesses with total
indebtedness of up to NIS 400,000 which are managed under the retail division and housing-finance activity.
The division includes the entire range of activities related to private customers.
Services are provided to customers of the segment through the branches of the Bank, in the Union Premium Private
Banking Centers, as well as through direct banking channels: the Internet and the Bank's call center – Union Direct.
The major products of the segment include ongoing account management, investment consultancy, pension
consultancy, securities investments, deposits, structured products, credit cards and consumer credit, granting of
loans for the purchase, leasing, expansion, renovation or construction of residential housing, and the granting of
loans for any purpose which are secured by a mortgage on residential housing.
The segment also includes the activity of subsidiaries in the areas of portfolio management, trust services to private
customers and leasing services to private customers and small businesses.
Objectives and Business Strategy
In accordance with its strategic plan for 2012-2014, the Bank continues its retail expansion concurrently with
the retention and expansion of the activity with existing customers, while maintaining the volume of mortgage
portfolio.
The following activities and objectives are planned for 2012:
To continue implementation of the strategy of increasing the number of active salary-receiving accounts at the
Bank through the development of customer recruitment and retention products.
To expand activity in the area of the various client asset ("passiva") products, including with the aim of
increasing diversification and reducing concentration of resources.
To continue implementation of the branching strategy for the expansion of the retail banking infrastructure,
while improving the current branch deployment, according to the branching strategy approved within the
strategic plan.
To expand the volume of retail credit, with an emphasis on loans backed by collateral, while maintaining the
planned limit on risk-adjusted assets, by means including the expansion and creation of collaborations and the
acquisition of synergetic activities.
To increase activity in the capital market, and to continue to strengthen infrastructures in the area of consulting,
leverage trading platforms, and expand the volume of users, while applying the appropriate control processes.
To maintain the volume of the mortgage portfolio while focusing on customers of the Bank, expanding spreads,
and strengthening the connection of mortgage product clients with other banking products.
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To develop and implement measures for the cultivation of customer loyalty, reduction of desertion, and
increased activity with existing and new customers.
To continue to strengthen awareness of the Bank in the retail sector.
The information in this section is forward-looking information, as defined in the Securities Law, and is based on
the work plans of the Bank in the area of marketing and IT, and on estimates by the business functions at the
Bank with regard to the probability and possibility of achieving objectives and executing activities in these
areas. The information in this section relies, among other things, on the relevant macro-economic estimates of
the Bank of Israel and of the Research and Products Division of the Bank. This information and the expectations
regarding such information may not materialize, in full or in part, or may materialize in a manner materially
different than expected, mainly due to the following factors: the degree of success in recruiting new customers,
and the probability of attaining improvement in technological capabilities (including in the area of the Internet).
Additional main factors that may affect the materialization of this information are: macro-economic changes,
regulatory changes, the degree of the Bank’s success in realizing its intra-organizational plans, the success of
marketing efforts, and the success of planned technological improvements.
Legislative Restrictions, Supervision, Regulations, and Special Constraints Applicable to the Segment
The Bank's operations are subject to laws, regulations, and regulatory guidelines that apply to the Israeli banking
system through entities such as: the Supervisor of Banks, the Commissioner of the Capital Market, Insurance and
Savings, the Commissioner of Restrictive Trade Practices, the Israeli Securities Authority, etc.
See details in the section “Legislative Updates.”, among other things, details about the letters of the Supervisor
of Banks regarding the leveraged variable interest loans.
Developments in the segment's markets
The slowdown in economic growth in Israel continued during 2011, and estimates indicate that this trend will
persist in 2012. Although the job market showed a trend towards recovery during the year, reflected in a
continuous decrease in the unemployment rate in the civilian workforce, this is expected to change during 2012.
The volatile trading in the financial markets led to a real decrease in the public's share of the capital markets;
this trend is expected to continue. The Bank of Israel slowly and gradually raised the interest rate, from the
beginning of 2011 to the end of the third quarter, to 3.25% by the end of September 2011. Starting in the fourth
quarter, due to the slower growth, the Bank of Israel began a gradual reduction of the interest rate, to 2.50% at
the end of January 2012. The continued decrease of the interest rate is expected to have a negative effect on
bank spreads.
Part of the information in this section is forward-looking information, as defined in the Securities Law, and is
based on macro-economic estimates of the Bank of Israel and of the Research and Products Division of the
Bank. Expectations regarding the composition of the asset portfolio and the spreads of the banks are based on
estimates by the business functions at the Bank. This information may not materialize, in full or in part, or may
materialize in a manner materially different than expected, if macro estimates - including expectations regarding
the increase in the Bank of Israel interest rate – do not materialize.
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Technological Changes with a Potential Material Effect on the Segment
In 2011, the Bank began the implementation of advanced IT systems related to most of its core banking
activities (current accounts, sample signatures, document scanning, collateral, direct channels, and more). These
systems are expected to improve processes with customers and reduce paperwork at the branches. The Bank
expects to complete the implementation process during 2012 and add new systems based on these
infrastructures.
Additional tools were added to the customer relationship management system during 2011, to improve and
streamline sales processes; the system was also integrated with the mortgage system.
The range of services offered by the Bank through direct channels was expanded in 2011. In 2012, this process
is expected to continue, with the integration of the marketing campaign system into the website.
Part of the information in this section is forward-looking information, as defined in the Securities Law, and is
based on the work plans of the Bank. These expectations may not materialize, in full or in part, or may
materialize in a manner materially different than expected, mainly as a result of the degree of the Bank’s success
in realizing its intra-organizational plans and implementing the various technological systems.
Critical Success Factors and Main Entry and Exit Barriers in the segment
● A variety of banking products and their adaptation to the customer, including unique products and services
not offered by competitors.
● A broad deployment of branches in line with the business strategy of the Bank, as well as development of
direct channels.
● Maintaining an adequate level of service. ● Recruitment and training of suitable personnel.
● Setting up and maintenance of information and technology systems, to address strategic needs in this
segment.
● Allocation of marketing and advertising budgets to strengthen the retail brand.
Alternatives to the segment's products and services and changes thereto
Competition from non-bank entities, credit card companies and other niche companies in the area of investment,
such as investment house, private brokers and insurance companies, exists for the majority of banking products
and services. However, there is no competition for current-account services and for the provision of
comprehensive financial services under one roof.
During 2011, due to the fluctuations in the capital market as well as the continuing uncertainty, the public
decreased its involvement in the capital market.
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Structure of competition in the segment
Competition in the private customers segment has grown in recent years, and estimates indicate that this
tendency will continue in 2012 with all banks in Israel taking part as well as non-banking entities (insurance
companies, investment house etc.) which offering retail products, as mentioned above. The customer mobility in
this segment is low and the majority market share is held by the two largest banks. Among other things, the
competition from the banks takes the form of the opening of new branches and providing benefits primarily to
the new customers.
Competition in the area of mortgages has intensified in recent years due to banks’ recognition of this product as
an anchor product and a lever for the recruitment of customers for activity in additional retail areas.
Legislative and regulatory changes have been made over recent years in the various areas of activity in the
capital market, with the aim of increasing customer mobility and removing barriers to transfers between
providers. Concurrently, the Bank has used various marketing measures to recruit customers, as detailed in the
subsection "Marketing and Distribution" below, while creating differentiation from competitors in response to
the competition in the industry. These measures are expected to enable the Bank to increase the proportion of
activity in this segment at the Bank.
Part of the information in this section is forward-looking information, as defined in the Securities Law, and is
based on internal estimates by the business functions at the Bank. This information and these expectations may
not materialize, in full or in part, or may materialize in a manner materially different from expectations, mainly
due to the following factors: an increase in the intensity of competition in this customer segment; the degree of
success of the Bank in realizing its intra-organizational plans; and the degree of success of the marketing
measures applied by the Bank, as well as regulatory changes.
New Services and Products in the Segment
New customers are recruited and the share of customers’ activity is increased, among other means, through the
development of new products and the adaptation of activity to customers’ needs.
Development of services:
The Bank operates to expand its network of branches, activities, infrastructures and computer systems, in order
to enlarge the scope of its activity with private customers:
Branch deployment - The bank continue to implement the branch policy according to which it was decided
to expand the Bank’s branches into urban spaces with retail activity characteristics, near the Bank’s target
populations, while maintaining relatively low investment and cost structures.
Union Premium - In the area of private banking, the Bank mainly operates through its Premium centers in
Ramat Gan and Haifa. The premium-centers activity support increasing activity and focus with private-banking
customers of net worth greater than NIS 1 million while offering services of the highest quality to customers. Top
professional advisors were hired for the premium centers in order to provide professional, personal and flexible
service. Customer service at the center is grounded in a philosophy of providing solutions to the full range of
customers’ needs, including tailoring of advanced financial products: structured deposits and complex foreign-
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currency transactions. In providing service to customers in this sector, special emphasis is placed on forging close
long-term relationships.
Customer Focus project - In 2011, the Bank continued the implementation of service package that
designed to improve the level of customer service by defining binding criteria to ensure ongoing contact
with customers as part of the means to expand and retain the customer base and to increase the volume of
activity of customers.
The bank intends to continue with the development and implementation of the customer relationship
management system also during 2012, a system that constitutes a significant element supporting sales and
marketing processes.
Websites and trading systems – During 2011 the Bank continued the implementation of new applications
together with expansion of the services provided at the Bank's web. In addition, the trade infrastructure was
upgraded. The Bank intends to continue with the development and upgrade of the web sites and cellular.
Products development
The Bank develops and markets innovative products in the different areas of banking activity and the
services provided to private customers, including the area of deposits and the area of structured deposits,
allowing the diversification of investments and spreading of risks. The Bank is continuing a large-scale
effort to recruit private customers. As part of this drive, the value offer for new customers has been
enhanced; the Bank offers a package of benefits to customers who transfer their salaries to Union Bank and
execute activity in their accounts, including an exemption from the main current-account fees (clerk fees
and direct channel fees), an exemption from interest on negative balances, automatic interest on positive
balances, and 3% interest on deposits. The benefit package, marketed under the heading "Current Account
Tripled," provides an optimal solution for customers' everyday banking needs. In addition, for the first
time, existing Union Bank customers are entitled to benefits in their current accounts. The Bank allows
customers to select the "Free Account" track, offering an exemption from the main current-account fees.
These benefits are contingent upon the transfer of a salary in a minimum amount, and on the volume of
activity in the account. These steps have created a competitive advantage for the Bank and constitute an
additional element in the implementation of its strategy. Concurrently, the Bank is also working to expand
its customer base through product-based measures; periodically, the Bank launches a drive to expand its
base of small-scale depositors through the use of campaigns designed to recruit deposits from customers of
all banks. As part of this effort, in 2011 the Bank launched an initiative for the recruitment of deposits at a
fixed interest rate of 4%. Further phases of activity in this area are planned during 2012.
In the area of mortgages, the Bank works to maintain the existing volume of its mortgage portfolio and to
adapt the portfolio to its capital planning and to developments in the industry. At the same time, the Bank
is acting to strengthen the connection between the mortgage sector and the salary-receiving customer sector
by offering unique benefits both in mortgages and in current accounts to customers who take mortgages
and open salary accounts.
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Some of the information in this section is forward-looking information, as defined in the Securities Law, and is
based on the Bank’s work plans, which are prepared according to the estimates of the business functions of the
Bank, and which include, among other things, reliance on segmentation of data of the Bank. This information
may not materialize, in full or in part, or may materialize in a manner materially different from expectations,
depending upon the following key factors: macro-economic conditions, regulatory changes affecting revenues in
this segment, and the degree of success of the Bank in realizing its intra-organizational plans.
Marketing and Distribution
In 2011, the Bank was continued to invest marketing efforts and resources in the recruitment of new customers,
in particular from the population of paycheck recipients and the private banking segment. Efforts to recruit new
salary-receiving customers will continue during 2012, with an emphasis on the cultivation of loyalty, customer
retention, and reduction of desertion, along with continued development of the direct banking channels, with the
aim of improving the availability of the Bank's services.
Marketing is performed through advertising in various media: newspapers, billboards, television, radio, and
Internet, as well as electronic screens and informational brochures at branches, while maintaining an effective
media mix and maximizing utilization of the advertising budget. In addition, activities are conducted locally in
the vicinity of the branches, through Union Premium, on the Bank's website, and through direct mail to
customers.
Union Direct serves as a complementary marketing and sales channel to the Bank's network of branches, in
addition to its role as an operational banking channel. During 2011, proactive sales activity at the marketing
center and the support of the center for customer recruitment and sales drives were strengthened and expanded;
the center's role in processing customer activity and business operations was enlarged. The Bank plans to
continue this development during 2012.
The information regarding the objectives of the Bank appearing in this section is forward-looking information,
as defined in the Securities Law, and is based on the work plan of the Bank and on estimates by the business
functions at the Bank. This information may not materialize, in full or in part, or may materialize in a manner
materially different from expectations, depending upon the following key factors: regulatory changes affecting
revenues in this segment, and the degree of success of the Bank in realizing its intra-organizational plans and in
implementing technological systems.
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Human Capital
Ongoing training and instruction are provided in the areas of sales, marketing, and service, as well as in other
professional fields.
In 2011, planning and preparing management reserves, expanding the professional knowledge and implementation of
programs to strengthen the knowledge and qualification were emphasized.
In addition, the process of absorption of the ethical code and strengthening of awareness to the Bank's principles
was continued.
In 2011, the average number of employee positions was 605; the cost of these positions was charged to the segment.
In 2012, within the objectives of expansion in the retail sector, the Bank plans to hire and train additional high-
quality employees, while concurrently, developing the administrative reserve data base.
Legal Proceedings
For further details regarding legal proceedings related to housing-finance activity, see the section "Legal Proceedings"
and the opinion statement of the auditors.
Special Agreements or Arrangements
See details in the section “Material Agreements,” in the subsection “Services and Areas of Activity Fixed in
Special Agreements or Arrangements,” regarding credit cards, pension advising, and the acquisition of rights to
a portfolio of consumer loans.
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The following table presents a summary of the results of the private segment for the year ended December 31, 2011 for the year ended December 31, 2010* Private Business Household Capital Total Private Business Household Capital Total Customers Checking(2) Financing Market(1) Customers Checking(2) Financing Market(1) NIS million NIS million Profit from financing activities before provision for credit losses: - From outsiders 167 28 67 **- 262 138 24 57 **- 219 - Inter-segment 2 - - - 2 1 - - - 1
Operating and other income: - From outsiders 109 17 15 1 142 116 14 14 1 145 - Inter-segment - - - - - - - - - - Total income 278 45 82 1 406 255 38 71 1 365 Provision for credit losses 5 3 5 - 13 6 4 3 - 13 Operating and other expenses - From outsiders 255 39 63 1 358 234 33 55 1 323
Net operating profit before taxes 18 3 14 **- 35 15 1 13 **- 29 Provision for taxes on operating profit 2 **- 2 **- 4 5 **- 4 **- 9 After tax profit from extraordinary activities - - - - - - - - **- **- Net profit 16 3 12 **- 31 10 1 9 **- 20
Return on equity 7.9% 6.3% 6.4% - 7.1% 5.8% 3.6% 4.9% **- 5.2% Average balance of assets 1,397 97 6,539 - 8,033 1,161 79 5,348 - 6,588
Average balance of liabilities 12,827 2,772 242 - 15,841 12,155 2,660 191 - 15,006
Average balance of risk assets 2,498 588 2,304 - 5,390 2,018 323 2,137 3 4,481
Average balance of securities 7,907 3,411 - - 11,318 8,142 2,342 - - 10,484
Average balance of managed securities - - - 308 308 - - - 402 402 Components of profit from financing activities before provision for credit losses: Margin from credit granting activities 54 6 59 - 119 45 5 47 - 97 Margin from deposit granting activities 128 16 - - 144 93 12 - - 105 Other -13 6 8 - 1 1 7 10 - 18 Total profit from financing activities before provision for credit losses 169 28 67 - 264 139 24 57 - 220
* Reclassified (See Note 1.C.(5).b). Restated (See Note 1.E.(21)). ** Less than NIS 500 thousand. (1) Services in capital market. (2) Business customers having frameworks of up to NIS 400 thousand.
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Changes in the Volume of Activity and Net Profit of the Segment
Net operating profit totaled NIS 31 million in 2011, compared with NIS 20 million in 2010, an increase of
approximately 55%. Net return of operating profit on equity was 7.1% in 2011, compared with 5.2% in 2010.
The segment’s revenues totaled NIS 406 million in 2011, compared with NIS 365 million in 2010, an increase of
approximately 11%.
Financing income totaled NIS 264 million, versus NIS 220 million, an increase of approximately 20%, which
mainly resulted from an increase in financing income in the area of credit and deposits, as a result of an increase
in volumes and an increase in margins, among the other things, due to an increase in the shekel interest rate at
the first three quarters of the year.
Operating and other income totaled NIS 142 million, versus NIS 145 million in 2010.
The expenses totaled NIS 358 million, versus NIS 323 million in 2010, an increase of approximately 11%,
mainly due to an increase in the total Bank's expenses, including losses of funds for severance pay and
implications of retirement plan (see details in "Profit and Profitability").
Provision for credit losses totaled NIS 13 million in 2011, the same as in 2010. The provision for taxes in 2011 was
13.2% (including the effect of an increase of deferred tax balances as a result of the reduction of future corporate taxes)
compared with 32.1% in 2010.
The average volume of segment liabilities (primarily deposits from the public) totaled approximately NIS 15.8 billion in
2011, compared with approximately NIS 15.0 billion in 2010. The average volume of segment assets (primarily credit to
the public) totaled approximately NIS 8.0 billion in 2011, compared with approximately NIS 6.6 billion in 2010.
Net profit of housing-finance activity totaled NIS 12 million in 2011, compared with NIS 9 million in 2010, an
increase of approximately 33%. Revenues totaled NIS 82 million in 2011, compared with NIS 71 million in 2010, an
increase of approximately 15%, which mainly resulted from an increase in incomes from credit, as a result of an
increase in the volume of the portfolio and in the average margin. Oppositely there was an increase of
approximately 14% in the expenses, which mainly resulted from aforementioned increase of the total Bank's
expenses. The provision for credit losses in 2011 totaled NIS 5 million (among them, approximately NIS 6
million in respect of the use of more stringent coefficient for the purpose of group allowance in respect of
buying groups - see further details), compared with a provision of approximately NIS 3 million in 2010. In
addition, there was a decrease in the rates of provision for taxes, as mentioned above.
The balance of balance-sheet credit in housing loans totaled approximately NIS 6.6 billion on December 31,
2011 (including mortgage to buying groups), an increase of approximately 12%, versus December 31, 2010.
Total new loans granted in 2011 amounted to approximately NIS 1,752 million, compared with NIS 1,972 million in
2010.
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Information on new executed loans for the purchase of apartments, secured by mortgages, and the turnover
of refinanced loans
For the year ended
December 31 2011 2010 NIS millions
Bank funds 1,641 1,848
Finance Ministry funds 2 1
Standing loans *- *- Total new loans 1,643 1,849
Refinanced loans 109 123
Total loans granted 1,752 1,972
* Less than NIS 500 thousand.
For further details regarding risks in the housing loan portfolio, also see the section "Risk Exposure and
Management", subsection "Credit Management". Also see the section "Legislative Updates" for details
regarding the instruction of the Supervisor of Banks that limits the part of a housing loan with a floating rate of
interest to one-third of the total housing loans extended by a banking corporation to a borrower.
According to the policy of the Bank, the group provision is calculated according to the average historical
quarterly rate of credit losses starting in 2008, with a distinction between problematic and non-problematic
credit. In addition, according to this policy, in cases in which the condition of a particular industry and/or of the
economy has worsened, the need to use a higher coefficient to calculate the group provision is examined (see
details in the section "Critical Accounting Policies and Estimates"). Starting in the fourth quarter of 2011, a
stricter coefficient has been used with respect to the exposure to purchasing groups belonging to this subsector;
as a result, a provision for credit losses in the amount of approximately NIS 6 million was recorded.
Private customers - net profit totaled NIS 16 million in 2011, versus NIS 10 million in 2010, an increase of
approximately 60%. The income totaled NIS 278 million in 2011, versus NIS 255 in 2010, an increase of
approximately 9%. The increase was mainly resulted from an increase in financing income at the credit and
deposit area due to the increase in volumes and an increase in deposits margins, among the other things, due to
an increase in the shekel rate. Parallelly, there was an increase of approximately 9% in expenses, which mainly
resulted from increase of the total Bank's expenses, as mentioned above. Provision for credit losses totaled
approximately NIS 5 million, versus approximately NIS 6 million in 2010. In addition, there was a decrease at
the rates of the provision for taxes, as mentioned above.
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Corporate Segment
Segment Structure
The Bank's business segment is managed by the Business Division and comprises business customers in a variety of
industries. The borrowers that belong to this segment are business borrowers with a volume of credit from NIS
400,000. The Bank renders a variety of banking services to business customers. The core industries in which the
segment specializes are: construction and real estate (with an emphasis on financing of residential construction),
customers engaged in the capital market, diamonds.
Banking services are provided to customers of the segment in most of the Bank's branches. The products and
services of the segment are adapted to customer needs and include mainly financing ongoing operations, investment
financing, real estate project accompaniment primarily residential, financial services, foreign-trade activity,
derivative financial instruments transactions and investment consulting services at the branches and in the dealing
rooms of the Bank.
During 2011 the bank performed re-organization process at the department structure in order to improve its work
processes while assimilating the corporate governance rules based on Basel rules, with emphasis on risk management
and control processes, for the purpose of suitability to the business and regulation environment of the bank.
Objectives and Business Strategy
Within its strategic plan for 2012-2014, the Bank intends to continue to specialize in its core sectors, while
concurrently expanding into additional business sectors, including through collaborations with other entities, and
examining measures to realize the inherent potential of existing customers. This will be achieved while maintaining
the high quality of the credit portfolio and increasing its diversification, both in sectoral terms and in terms of
borrower size; ensuring the connection between returns and the totality of risks arising from the various activities;
and maintaining the limit on risk-adjusted assets established in the Bank's capital planning, subject to the risk
appetite and risk tolerance established by the board of directors of the Bank.
The following activities and objectives are planned for 2012:
To maintain the status and positioning of the Bank in the business sector.
To continue to specialize in core areas, while expanding into additional business sectors, in order to
reduce sectoral concentration and borrower concentration, among other reasons.
To implement the updated credit policy and to continue to improve work processes based on the
restructuring of the division.
To continue to improve the management and control of rating processes.
To maintain the quality of the business credit portfolio, while striving to reduce sectoral concentration
and borrower concentration, and maintaining the level of risk-adjusted assets.
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The information in this section is forward-looking information, as defined in the Securities Law, and is based on
the work plans of the Bank and on estimates by the business functions at the Bank with regard to the probability
and possibility of achieving objectives and executing activities in these areas. The information in this section
relies, among other things, on the relevant macro-economic estimates of the Bank of Israel and of the Research
and Products Division of the Bank. This information and the expectations regarding such information may not
materialize, in full or in part, or may materialize in a manner materially different than expected, mainly due to
the following factors: macro-economic conditions, interest rates, the level of competition in the economy,
regulatory changes affecting revenue in this segment, and the degree of the Bank’s success in realizing its intra-
organizational plans.
Legislative Restrictions, Regulations, and Special Constraints Applicable to the Segment
The Bank carries out its operations in accordance with laws, regulations, and regulatory guidelines that apply to the
Israeli banking system through the Supervisor of Banks, the Commissioner of the Capital Market, Insurance and
Savings, the Commissioner of Restrictive Trade Practices and the Israeli Securities Authority. The following
represent specific restrictions that apply to the segment: as part of the Directives for Proper Banking Management,
there is a restriction as to the amount of indebtedness of an individual borrower, a group of borrowers, a banking
group of borrowers, and the net total indebtedness of the borrowers, a group of borrowers and banking groups of
borrowers that the net indebtedness of each of them exceed the rate of 10% of the bank capital (this restriction was
updated by Proper Conduct of Banking Business No. 313 from December 31, 2011, for further details see also the
section "Legislation Updates"), and customers who are defined as "related persons" to the Bank, for indebtedness
in respect of transactions to finance the acquisition of means of control of corporations; a limit also applies to
the permitted credit rate in each sector of the economy relative to the total Bank's credit. These restrictions may
have ramifications on the manner and volume of activity in the business segment of the Bank with those same
customers. The balance of credit and the credit risk attributable to the customers of this segment, are also sensitive
to exogenous changes, such as: the global and local growth rate, crises in certain sectors, changes in foreign
currency exchange rates, the Israeli Consumer Price Index, changes in interest rates, mergers and acquisitions of
companies, changes in agreements between shareholders pertaining to characteristics of their control of companies,
joint ventures and partnerships between various parties, etc.
The volume of activity in this segment is also affected by the risk appetite and risk capacity established by the
board of directors of the Bank. For details, see the section “Exposure to Risks and Risk Management,”
subsection “Credit Risks.”
On November 30, 2011, within the discussions of the three-year strategy of the Bank, a rising trajectory for
capital targets through 2016 was adopted. In order to comply with this trajectory, the Bank will be required to
maintain its present level of risk-adjusted assets.
On December 29, 2010, the Supervisor of Banks issued an amendment to Proper Conduct of Banking Business
Directive No. 301, "The Board of Directors" (for further details, also see the section "Legislative Updates").
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Among other matters, the directive addresses the involvement of the board of directors of a banking corporation
in the approval of credit. On June 30, 2011, the board of directors of the Bank approved a trajectory for the
gradual implementation of the directive. Within the Bank's policy for 2012-2013, rules, metrics, parameters, and
processes related to credit approval, credit process management, and the control thereof will be updated, in
accordance with the approved trajectory.
In addition, as part of the Bank's preparations for the adjustment of the credit authority of the board of directors,
and in order to improve the efficiency of credit approval processes at the Bank, during 2011 the board of
directors of the Bank approved an update of authority to approve credit at the Bank, from the level of the credit
committee of the board of directors, to the level of management, to the level of the business division and the
branches of the Bank. As noted, an organizational change was carried out at the business division during 2011,
aimed among other matters at improving credit approval, management, and control processes at the Bank and
supporting the update of credit approval authority, as approved by the board of directors of the Bank.
As of January 1, 2011, the Bank implemented the directive of the Supervisor of Banks, "Measurement and
Disclosure of Impaired Debts, Credit Risk and Provision for Credit Losses".
The change in the balance of the allowance for credit losses is detailed in Note 4 to the financial statements. For
more details about the directive and its implementation - See Note 1.E.(5).
For the purposes of the implementation of the requirements of the directive, the Bank carried out the required
adjustments to the automated systems of Bank Leumi and to the necessary work processes. In addition, the
necessary changes to independent systems were carried out, for the calculation of specific provisions and group
provisions, as required by the directive. The Bank also developed and implemented additional controls.
For further details, see the section “Exposure to Risks and Risk Management,” subsection “Credit Risks”.
For further legislative restrictions - see details at the section "Legislation Updates".
Developments in the Segment’s Markets
The activity of the Corporate Segment of the Bank is influenced by the growth rate of the economy, monetary
and fiscal policy, the level of demand in the domestic and global economy, the fluctuation in the capital market,
the security situation, security-related events that mainly affect the tourism industry, and on investments by non-
residents. The debts crisis escalation in Europe and the economic slowdown in United States led to a decrease at
the growth of the Israeli economy in 2011, as reflected in the key economic parameters, including the increase
rate in GDP, private consumption, fixed-asset investments, exports of goods and services, and the moderate
increase in the composite state-of-the-economy index. Meanwhile, the shekel depreciated against the US dollar,
the Bank of Israel interest rate was raised by 1.25 percentage point during the first half of 2011, and was
reduced by 0.5 percentage point during the second half of 2011, and the prices of energy and commodities were
increased continuously; that affect the developments in this sector. Starting in the second half of 2011, the
effect of the economic downturn in Israel was felt in the real-estate sector as well, influenced by regulatory
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measures applied by the Bank of Israel, which led to a slowdown in sales of new homes; the inventory of homes
for sale increased, slowing the pace of the increase in prices of homes. For further details, see the section
“Economic Developments". As a result, the macro-economic forecasts by the Bank of Israel for 2012 predict
GDP was lowered to 2.8 percent and an increase in unemployment to an average annual rate of 6.3%.
Some of the information in this section constitutes forward-looking information, as defined in the Securities
Law, and is based on macro-economic estimates by the Bank of Israel and by the Research and Products Sector
at the Bank. Such information may not materialize, in full or in part, or may materialize in a materially different
manner than expected, if the macro estimates are not realized, due to changes in the domestic and global
economy, among other factors.
Technological Changes with a Potential Material Effect on the Segment
The information systems used by the Corporate Segment are designed to assist analysis, control, and marketing
processes. The Corporate Segment routinely works to improve and update its technological systems.
During 2011, as part of the implementation of the requirement of the directive on impaired debts, the Bank carried out
the required adjustments to automated systems for the purpose of the calculation of the individual and group provisions
for credit losses, as required by the directive. In addition, additional controls were developed and implemented, and the
necessary work processes were adjusted. Additional updates of supporting systems are planned during 2012, especially
those connected with monitoring and identifying potential problematic debts.
For details, see the section “Exposure to Risks and Risk Management", subsection “Credit Risks".
Improvements were made to independent systems during 2011 with the aim of allowing tighter management of risk-
adjusted assets in the area of credit, and monitoring of the adjustment of the credit spread to risk-adjusted assets.
Additional modules making it possible to expand the rated population beyond the group currently addressed will be
integrated gradually during 2012, and a new borrower rating system will be implemented at the branches. Further,
additional tools for the maximization of business potential are planned to be integrated into the customer relationship
management system; upgrades are planned for additional systems to support control and regulation processes.
In the area of credit for customers active in the capital market, the Bank plans to continue to improve and adjust models
for controls applied to the activity of these customers. Concurrently, the specification process has been started for an
advanced new control system to enhance the monitoring, supervision, and control of these customers' activity.
During 2011, the Bank began the implementation of advanced computer systems, which involve most of the
core banking activities (current accounts, signature samples, document scanning, collateral, direct channels, and
more). This project is expected to continue throughout 2012.
Some of the information in this section is forward-looking information, as defined in the Securities Law, and is
based on the work plans of the Bank. These expectations may not materialize, in full or in part, or may
materialize in a manner materially different than expected, mainly due to the degree of success of the Bank in
realizing its intra-organizational plans and the success of the planned technological improvements.
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Critical Success Factors/Main Entry and Exit Barriers in the Segment
Management and control of credit risks - credit risk is the most significant risk in the segment's activity. Wisely
risk management and controls and an appropriate rating are vital for reducing risk and achieving satisfactory
profitability in the segment.
Achieving returns from customer in accordance with the locking in the capital required in respect thereof,
and the customers' risk level.
Compliance with regulatory limits applicable to the segment.
Long term relationship with the customers.
Recruitment and training of suitable personnel.
Setting up and maintaining systems and technology.
Early detection and identification, as for as possible, of potential to problems among existing customers.
Alternatives to the segment's products and services and changes thereto
Financing sources that are alternatives to bank credit are offered by non-bank financial institutions: public and
private offerings of shares, bonds, and other securities in capital markets in Israel and abroad as well as
corporate credit granted by insurance companies.
Overall in 2011, approximately NIS 5.1 billion were raised in the local equity market, in private offerings and
allocations, of which approximately NIS 1.7 billion by real-estate companies, versus NIS 12.8 billion for all of
2010. The raisings in the bond market decreased a moderate decrease. Overall in 2011, the business sector
raised approximately NIS 41 billion from the public and from institutional investors through private offerings
and allocations of bonds, down approximately 5% year-on-year. The banking sector, commerce and services
sector, and real-estate sector stood out with NIS 12.2 billion, NIS 15.8 billion and NIS 7.8 billion raised,
respectively, which are accounting for about 30%, 39% and 19% respectively of total capital raised in
marketable bonds.
Structure of competition in the segment
The principal competition in this segment is against banks operating in Israel, and also against foreign banks
and non-bank institutions, as described below. Institutional entities such as insurance companies and pension
funds have become more involved in this sector in recent years, and competition exists due to credit substitutes
in the form of public and private bond offerings.
A majority part of its corporate customers maintain accounts with several banks. The demand for business credit
increased during 2011. As a result, competition in the business banking sector was reignited, leading to some
damage to interest spreads, which was partially offset by the 1.25 point increase in the Bank of Israel interest
rate during the first half of 2011 and the 0.5 point reduction in the second half of 2011. In view of the intention
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to raise capital targets in the banking system, as early as the end of 2011, the supply of business credit offered
through the banking system is expected to decrease during 2012.
Some of the information in this paragraph is forward-looking information, as defined in the Securities Law, and
is based on internal estimates by business functions at the Bank. This information and these expectations may
not materialize, in full or in part, or may materialize in a manner materially different than expected, mainly due
to the following factors: an increase in the intensity of competition in this customer segment; the degree of the
Bank's success in realizing its intra-organizational plans and the degree of success of marketing efforts of the
Bank; and regulatory changes.
Marketing and distribution
Business segment activity with customers is executed in the Business Division and the branches, who maintain
constant contact with the customers in order to adapt finance solutions for individual transactions, to respond to
banking requirements and to market the products of the Bank. The Bank also periodically holds conventions for
its business customers. Since the beginning of 2011, the business division and the marketing system have been
conducting a joint operation aimed at recruiting new business clients in various areas of activity, with an
emphasis on non-core sectors, in order to increase diversification. This year, this activity has focused on three
main objectives:
To recruit new business clients;
To increase activity with clients recruited over the last year;
To expand activity with existing clients identified as having potential for such expansion.
Human Capital
In 2011, the average number of employee positions in the segment was 505; Employees regularly receive
appropriate professional training at the Bank, including training in the area of the analysis of financial
statements following the implementation of International Financial Reporting Standards (IFRS), training
sessions on credit policy, and training on the periodically updated regulatory directives. In their work,
employees are required to display analytical capabilities, handle complex transactions, with strict to control
level and credit considerations according to the customer quality concurrently to provide a high quality of
service to the segment’s customers. Activity in the areas of the capital market and credit requires in-depth
knowledge and familiarity with these fields. Due to the growing professional expertise in this area, there is
competition for employees in these areas; accordingly, resources are invested in employee cultivation and
retention.
Legal Proceedings
For further details regarding a legal procedure relating the Trust Company activity, see the section "Legal
Proceedings" and the opinion statement of the auditors.
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The following table presents a summary of the results of the corporate segment
for the year ended December 31, 2011 for the year ended December 31, 2010* Businesses Construction Capital Total Businesses Construction Capital Total & Real estate(1) Market (2) & Real estate(1) Market (2) NIS Million NIS Million Profit from financing activity before provision for credit losses:
- From outsiders 202 104 67 373 189 108 46 343 - Inter-segment 3 - 19 22 2 - 13 15 Operating and other income: - From outsiders 65 17 29 111 67 20 26 113 - Inter-segment - - - - - - - - Total income 270 121 115 506 258 128 85 471 Provision for credit losses 2 8 2 12 55 17 - 72 Operating and other expenses: - From outsiders 219 65 68 352 186 61 55 302 Net operating profit before taxes 49 48 45 142 17 50 30 97 Provision for taxes on operating profit 6 7 6 19 5 16 10 31 After-tax profit from extraordinary activities - - - - - - 1 1 Net profit 43 41 39 123 12 34 21 67
Return on equity 6.7% 10.4% 20.7% 10.1% 1.8% 8.6% 12.1% 5.4% Average balance of assets 8,215 3,116 2,444 13,775 8,189 3,214 1,670 13,073 Average balance of liabilities 8,711 2,231 6,519 17,461 7,397 1,848 5,497 14,742 Average balance of risk assets 7,926 4,880 2,330 15,136 7,780 4,595 2,017 14,392 Average balance of securities 3,992 1,205 24,469 29,666 3,727 949 18,946 23,622 Average balance of managed securities - - 338 338 - - 324 324 Components of profit from financing activities before provision for credit losses: Margin from credit granting activities 156 70 30 256 153 72 22 247 Margin from deposit granting activities 31 10 19 60 16 8 12 36 Other 18 24 37 79 22 28 25 75 Total profit from financing activities before provision for credit losses 205 104 86 395 191 108 59 358 * Reclassified (See Note 1.C.(5).b). Restated (See Note 1.E.(21)). ** Less than NIS 500 thousand. (1) Customers that operating in the construction and real estate sector. (2) Customers that operating in the capital market sector.
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Changes in the Volume of Activity and Net Profit of the Segment
Net operating profit totaled NIS 123 million in 2011, compared with NIS 67 million in 2010, an increase
of approximately 84%. Net return of operating profit on equity was 10.1% in 2011, compared with
5.4% in 2010.
The segment’s revenues totaled NIS 506 million in 2011, compared with NIS 471 million in 2010, an
increase of 7%. Financing income totaled NIS 395 million, versus NIS 358 million in 2010, an increase
of approximately 10%, which resulted from an increase in financing income in the area of credit and
deposits, as a result of an increase in volumes, as mentioned below.
Operating and other income totaled NIS 111 million, compared with NIS 113 million in 2010. The
segment's expenses totaled NIS 352 million in 2011, compared with NIS 302 million in 2010, an increase of
approximately 17%, mainly due to an increase at the total Bank's expenses, including losses of funds for
severance pay and implications of retirement plan (see details in "Profit and Profitability").
Provision for credit losses totaled NIS 12 million in 2011, mainly due to collection of debts that have been
written for provision in the past, compared with NIS 72 million in 2010. The provision for taxes in 2011 was
13.2% (including the effect of an increase of deferred tax balances as a result of the reduction of future
corporate taxes) compared with 32.1% in 2010.
The average balance of assets in the segment (primarily credit to the public) totaled NIS 13.8 billion in 2011,
compared with NIS 13.1 billion in 2010. The average balance of liabilities in the segment (primarily deposits
from the public) totaled NIS 17.5 billion in 2011, compared with NIS 14.7 billion in 2010.
Customers that operating in the construction and real-estate sector - net profit from activity in the
construction and real-estate sector totaled NIS 41 million in 2011, compared with NIS 34 million in 2010, an
increase of approximately 21%. Revenues totaled NIS 121 million in 2011, compared with NIS 128 million
in 2010, decrease of approximately 5%, mainly due to a decrease in interest income from debts, that have
been written for provision in the past, as a result of the implementation of the impaired debt directive,
according to which this collection presented as a reduction of allowance for credit losses, starting in 2011.
There was an increase of approximately 7% in expenses, which mainly resulted from increase of the total
Bank's expenses, as mentioned above.
Allowance for credit losses totaled approximately NIS 8 million in 2011, compared with NIS 17 million in
2010. In addition, there was decrease at the rates of the provision for taxes, as mentioned above.
Balance-sheet credit for construction and real estate totaled NIS 3.4 billion on December 31, 2011, compared
with NIS 3.2 billion on December 31, 2010 (except for credit to buying groups). The balance of guarantying
totaled NIS 2.2 billion on December 31, 2011, compared with NIS 2.3 billion on December 31, 2010.
In light of the situation in the markets, the Bank continues to routinely monitor the condition of credit in
general, and in the real-estate industry in particular. Note that in the Board of Directors' discussion of the key
elements of the Bank's credit policy, a decision was made to make some of the parameters in this area stricter.
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Among other matters, the board of directors resolved to increase shareholders' equity requirements for loans
granted for the purchase of land designated for ongoing financing.
Due to the continuing uncertainty in the construction industry, and in accordance with the Bank's policy on
group provisions, as described above, the decision was made, as of the second quarter of 2011, to use a higher
coefficient for the calculation of the group provision in respect of the volume of non-problematic exposure to
project financing in the housing construction sector (general contracting subsector).
Customers that operating in the capital market sector - net profit totaled NIS 39 million in 2011,
compared with net loss of NIS 21 million in 2010, an increase of 86%. The segment's revenues totaled NIS
115 million, compared with 85 million in 2010, an increase of 35%. The increase is mainly resulted from an
increase of segment's financing income, due to the increase in volumes and the increase in income from
securities.
The expenses totaled NIS 68 million, versus NIS 55 million in 2010, an increase of approximately 24%,
mainly due to an increase in the total Bank's expenses and an increase in expenses related to customers'
activity in securities. The provision for credit losses totaled NIS 2 million, mainly resulted from group
allowance. Provision for credit losses has not been recorded in 2010 at this sub-segment. In addition, there
was a decrease in the rates of the provision for taxes, as mentioned above.
Other corporate customers - net profit totaled NIS 43 million in 2011, compared with NIS 12 million in
2010. The increase is mainly resulted from a decrease in the provision for credit losses, amounted to
approximately NIS 2 million in 2011, mainly due to collection of debts that have been written for provision in
the past, compared with approximately NIS 55 million in 2010 (most of the amount derives from one group
of borrowers). The segment's revenues totaled NIS 270 million compared with NIS 258 million in 2010, an
increase of approximately 5%. By contrast, there was an increase of approximately 18% in the expenses, that
amounted to NIS 219 million, mainly resulted from increase of the total Bank's expenses. In addition, there
was a decrease in the rates of the provision for taxes, as mentioned above.
Diamond Segment
Segment Structure
The segment includes customers operating in the diamond industry, most of whom are members of the
Diamond Exchange in Ramat Gan. This activity is conducted at the Bank’s branch in Ramat Gan and
primarily consists of granting credit. The products and services of the segment are suited to customers’ needs:
foreign-trade activity, investment financing, financial services, at the branch and the Bank’s dealing rooms.
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Objectives and Business Strategy
The Bank’s policy is to remain dominant in the area of financing the diamond industry, while adapting
its credit policy and volume of credit, on a routine basis, according to the risks derived from the
industry and the economic environment in which it operates.
Some of the information in this section is forward-looking information, as defined in the Securities
Law, and is based on import and export data in the diamond industry in 2011, on macro-economic
estimates of the International Monetary Fund, on the recovery of the global economy, and on estimates
by business functions, in accordance with the experience accumulated at the Bank in this area. This
information may not materialize, in full or in part, or may materialize in a manner materially different
from expectations, in the event of material changes in macro conditions in the markets.
Legislative Restrictions, Regulations, and Special Constraints Applicable to the Segment
The Bank's operations are subject to the laws, regulations, and regulatory guidelines that apply to the
Israeli banking system from the Supervisor of Banks, and the Supervisor of Diamonds in the Ministry of
Trade and Industry. See details in the section on legislative restrictions, regulations, and special
constraints applicable to the segment in the review of the corporate customer segment, above.
Development in the Segment's Markets
During the first half of 2011, a substantial increase in activity was recorded, as prices of both raw and
polished diamonds increased. However, starting in the second half of the year, activity slowed due to the
slowdown in global growth. Most of the decline in activity occurred in the East, whereas the positive trend
continued in the United States. In view of the global economic situation, especially in Europe and Asia,
estimates in the industry indicate that demand for diamonds (raw and polished) will continue in 2012,
though at lower rates and prices than in the first half of 2011.
The increase in global activity in the industry was also reflected in activity in the Israeli diamond
industry; overall for the year, exports and imports of raw and polished diamonds increased by
approximately 20.5% and 27% respectively, as compared to 2010.
Critical success factors for the segment / the major entrance and exit impediments of the segment
● An in-depth knowledge of the diamond industry in Israel and around the world.
● Risk control and management.
● Recruitment and training of suitable personnel.
● Economic growth in diamond export destination's countries.
● Setting up and maintaining systems and technology.
Alternatives to the segment's products and services and changes thereto
There are no non-bank credit alternatives in the segment.
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Structure of Competition and Developments in the Segment
While this industry flourished, the competition between banks financing it is intense, while the bank's
main competitors are Discount Bank and Bank Leumi.
Total volume of credit to this industry from the banking system in Israel at the end of 2011 assumed to
be in the amount of USD 1.6 billion, similar to the end of 2010. The Bank’s share in credit to the
diamond industry, out of total credit in the banking system, is 24% at the end of 2011, similar to the
end of 2010.
As mentioned above, the Bank’s credit policies is currently adapted to the economic environment in
which this industry operates and to the risk capacity and risk appetite which determined by the Bank's
board of directors in a respect of segment's composition of the Bank's credit portfolio. As of the end of
December 2011, the rate of total credit for diamonds out of total credit at the Bank was approximately
5.2%, versus approximately 5.0% in December 2010.
Marketing and distribution
The diamond segment activity is concentrated in the Ramat Gan branch, located in the Diamond
Exchange District. The segment's employees maintain constant contact with customers in order to
provide tailored financing solutions and supplementary banking services. The Bank hosts periodic
seminars for customers of the industry, and maintain constant contact with the customers in Israel and
abroad.
Human Capital
In 2011, the average number of employee positions in the segment was 54; the cost of these positions was
charged to the segment. The employees’ work requires analytical capabilities for the examination of
applications and examination the financial stability of customers, with strict on current and tight control, as
well as the ability to handle complex transactions and provide a high level of service with the aim of
supplying the full range of services to customers at a single point of contact with the branch. During 2011 the
professional knowledge was expanded. Among other matters, training sessions were held on the Basel II
directive and its implications for business and credit conduct at the Bank, moreover there were an
instructions on regulatory matters.
Changes in the Volume of Activity and Net Profit of the Segment
Net operating profit totaled NIS 16 million in 2011, compared with NIS 10 million in 2010. Net return
of operating profit on equity was 14.1% in 2010, compared with 8.2% in 2010.
The segment’s revenues totaled NIS 55 million in 2011, compared with NIS 51 million in 2010. It should be
noted that the segment's revenues affected, among other things, from the volatility in the exchange rate of the
shekel against the US dollar. In 2011 provision for credit losses was recorded, and totaled NIS 2 million
similar to 2010.
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The segment's expenses totaled approximately NIS 34 million similar to 2010.
The provision for taxes in 2011 was 13.2% (including the effect of an increase of deferred tax balances as a
result of the reduction of future corporate taxes) compared with 32.1% in 2010.
Balance-sheet credit for diamonds totaled NIS 1.3 billion on December 31, 2011, compared with, NIS 1.1
billion on December 31, 2010. Off-balance sheet credit risk totaled NIS 1.0 billion on December 31, 2011,
compared with NIS 0.9 billion on December 31, 2010.
Financial Management Segment
Segment Structure
Activity in this segment is under the responsibility of the Financial Management Division, that centralizes all
asset and liability management at the Bank, in local and foreign currency. Accordingly, segment's income
includes the Bank’s proprietary activity through investments in securities (mainly bonds), deposits with banks,
transactions in derivative financial instruments, market making, management of market and liquidity exposure
arising from Bank customers’ business. In addition, the segment includes the activity of the subsidiary Union
Investments and Enterprise Ltd.
Objectives and Business Strategy
Management of assets and liabilities, market and liquidity risks in accordance with the risk appetite
and risk capacity defined by the board of directors, as detailed in the section “Exposure to Risks and
Risk Management.” In addition, the segment provides services to the Bank and to its branches in the
area of dealing rooms, the capital market, raising deposits, etc.
The following activities and objectives are planned for 2012:
To increase the diversification of depositors.
To improve and strengthen command and control tools in the area of liquidity, in respect to all
aspects of the qualitative and quantitative management of liquidity risk, with reference to the
Basel III directives and the anticipated update of Proper Conduct of Banking Business
Directive No. 342.
In proprietary activity - to maintain an appropriate level of income, according to the condition
of the capital market in Israel and globally.
The information in this section is forward-looking information, as defined in the Securities Law, and is
based on the work plans of the Bank and on estimates by the business functions at the Bank with
regard to the probability and possibility of achieving objectives and executing activities in these areas.
The information in this section relies, among other things, on the relevant macro-economic estimates
of the Bank of Israel and of the Research and Products Division of the Bank. This information and the
expectations regarding such information may not materialize, in full or in part, or may materialize in a
manner materially different than expected, mainly due to the following factors: macro-economic
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conditions, interest rates, the level of competition in the economy, regulatory changes affecting
revenue in this segment, and the degree of the Bank’s success in realizing its intra-organizational
plans.
Legislative Restrictions, Regulations and Special Constraints Applicable to the Segment
The Bank's operations are subject to laws, regulations, and regulatory guidelines that apply to the Israeli
banking system through entities such as: the Supervisor of Banks, the Supervisor of Capital Markets,
Insurance, and Savings, the Supervisor of Restrictive Trade Practices, the Israeli Securities Authority,
etc. In addition, the Bank's activity conducted subject to the risk appetite and risk tolerance,
established by the Board of Directors of the Bank.
Developments in the segment's Markets
The markets experienced high volatility in 2011, due to the ongoing global financial crisis and the
forecasts concerning the effects of the crisis on the future growth of the leading economies. This
volatility was reflected in declines on the leading indices, a decrease in stock trading volumes,
declines in the corporate bond market along with gains in the government bond market, a decline in
the volume of offerings and capital raising, and a decline in the long-term interest rate in the United
States. For details, see the section “Economic Developments.”
The global economic crisis caused to adoption of a conservative policy, including elements such as a
liquidity level congruent with the needs and risks faced by the Bank, as well as examination of the
foreign banks and countries with which the Bank operates. The board of directors of the Bank
establishes risk appetite and liquidity risk management policy, while setting limits regarding the
minimum liquidity ratio, which is calculated according to an internal model. For further details, see the
section "Exposure to Risks and Risk Management", subsection "Liquidity risk".
Technological Changes with a Potential Material Effect on the Segment
During 2011, liquidity command and control systems were improved and strengthened; during 2012,
additional advanced liquidity management systems are expected to be examined. Further, additional
platforms for securities trading and clearing will be examined in 2012.
Some of the information in this section is forward-looking information, as defined in the Securities
Law, and is based on the work plans of the Bank. This information may not materialize, in full or in
part, or may materialize in a manner materially different than expected, mainly due to the degree of
the Bank’s success in realizing its intra-organizational plans.
Critical Success Factors/Main Entry Barriers in the Segment
● Knowledge of the market, identifying customer needs, adapting activity accordingly, while
developing the ability to respond quickly to changes in the market.
● Recruitment and training of suitable personnel.
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● High-level computerized systems, both in the area of transaction performance and in the area of
information, analysis and risk control.
● A well-developed network of cooperation with banks and financial institutions around the world.
These contacts enable the segment to serve a variety of customers and to carry out a large volume of
transactions.
Alternatives to the segment's products and services and changes thereto
There are alternatives to most of the products and services rendered by the segment.
Structure of the competition and developments in the segment
The segment competes with the dealing rooms of the banks operating in Israel. There is also competition
from banks and other financial entities abroad who allow customers to operate in a direct manner.
Human Capital
In 2011, the average number of employee positions in the segment was 73; the cost of these positions was
charged to the segment. There is significant competition for the services of these employees from local and
foreign banks, other financial entities, and business firms. Accordingly, the Bank invests in the cultivation and
development of human resources in this segment. During 2012 training sessions, and upgrade of the Bank's
employees work processes, for the expansion of activity in foreign currency in collaboration with dealing
room, are planned.
Collaboration Agreements
During the normal course of its business, the Bank and its financial management segment maintain broad
contacts with the leading banks and investment houses in the world. The business connections between
the Bank and these entities are based on, among other things, standard international arrangements such as:
framework agreements that support dealing activities (ISDA). The Bank aims to increase the number of
banks with which it signs agreements to offset transactions in the event of business failures. The Bank also
aims to increase the number of agreements for the reduction of exposure to market risks (CSA agreements). In
addition, activity is conducted through an international clearing house (CLS), the main goal of which is to
minimize clearing risks in foreign-currency swap transactions. The Bank centralizes most of securities
clearing activity in USA stock exchanges in one bank, which serves as principal correspondent. The main
purpose of this agreement is at reducing risks inherent in clearing activity, within promoting level of
service to customers.
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Changes in the volume of activity and net profit of the segment
A loss of approximately NIS 38 million was recorded in 2011, compared with net profit of
approximately NIS 52 million in 2010.
Income decreased by NIS 117 million, mainly due to the effect of events in the markets - a decrease in
the amount of approximately NIS 68 million in profits from realization and value adjustment of bonds,
an increase of approximately NIS 19 million in provisions for other-than-temporary impairment, and
an increase of approximately NIS 17 million in financing expenses as a result of the presentation of
the Bank's activity in derivative financial instruments at fair value (as required by GAAP). The
provision for taxes in 2011 was 13.2 (including the effect of an increase of deferred tax balances as a
result of the reduction of future corporate taxes) compared with 32.1% in 2010.
The average balance of the Bank's securities totaled approximately NIS 4.9 billion in 2011, compared
with NIS 4.7 billion in 2010.
Amounts not allotted and adjustments
The segment includes activities that cannot be classified to any specific segment.
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Capital Adequacy
The capital adequacy of a banking corporation is a key element in the assessment of its stability.
The capital adequacy is examined through the ratio of capital to the weighted amount of risk
components in the Bank’s business as defined in the Basel II directive.
The working framework for capital measurement and adequacy was published by the Supervisor of
Banks in December 2008 (hereinafter: the "Basel II directives"). The Basel II directive emphasizes
risk management while linking the Bank’s risk profile and the quality of risk management to the
required allocation of capital.
Main points of the Basel II directives - The directive is composed of three pillars:
A. Pillar I: Allocation of the minimum capital against credit risks, market risks and operational risks,
using a new method that links the volume of exposures to the various risks to the regulatory
capital requirements.
B. Pillar II: Capital requirements in respect of additional potential risks to which the banking
corporation is exposed, beyond the minimum capital requirement of Pillar I. This includes the
expansion and refinement of supervision, control, and risk management mechanisms, and a
requirement to allocate capital internally, based on the ICAAP (Internal Capital Adequacy
Assessment Process).
C. Pillar III: Expansion of reporting and disclosure to the public on risk management and controls.
The directives of Basel II, and consequently of the Bank of Israel, permit three approaches to the
allocation of capital in respect of credit risks: the standard approach, and two internal ratings-based
approaches: fundamental (FIRB) and advanced (AIRB).
In the standard approach, the capital allocation is determined according to weights established by the
regulator and adjusted to risk levels while ratings by approved external rating agencies can be used.
In the internal-ratings-based approaches, the banks assess the credit risk of individual borrowers based
on models. In the FIRB approach, the bank generates an estimate of the probability of default by the
customer (PD). In the AIRB approach, the bank additionally generates estimates of the loss given
default (LGD) and the extent of exposure at default (EAD). From these figures, the bank derives the
volume of regulatory capital it must hold in respect of the credit exposure to a given borrower.
According to the instructions of the Supervisor of Banks, banking corporations must ensure
compliance with the requirements of the standard approaches for Pillar I and the requirements of Pillar
II and Pillar III of the Proper Conduct of Banking Business Directives 201-211.
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Implementation at the Bank – The Bank acts on implementation of the standard approach in the area
of credit risk and market risk, and the basic indicator approach for operational risks.
The Basel II working framework is implemented on a consolidated basis and applies to the Bank and
its subsidiaries (for details regarding the principal investee companies and their areas of activity, see
the section “Activity of Principal Investee Companies”). In addition, with regard to investee
companies to which the Bank has provided indemnity letters pursuant to the Basel II directives, no
obstacle exists or is foreseen to the immediate transfer of resources or to the return of liabilities of the
investee companies of the Bank.
Pillar I - In accordance with the directive of the Supervisor of Banks and the instructions of the board
of directors, the Bank applies the standard approach to credit risks, in which capital allocation is
determined by weights established by the Supervisor of Banks, adjusted to the risk levels of groups of
assets.
In Pillar II, the Bank is required to establish an internal process to assess capital adequacy and a
strategy for ensuring capital adequacy (hereinafter: ICAAP). In the ICAAP, the Bank performs a
proactive process of identifying and assessing each of the material risks in each of the main activities
of the Bank. This process also surveys the components of the existing policies and restrictions,
measurement and tracking tools, reporting systems, main processes and products, and components of
corporate governance. The assessment is aided by a qualitative review and an analysis of quantitative
data, while examining the ability to rely on internal models.
The approach adopted by the Bank considers the ICAAP to consist of two main processes:
A. An internal process of identification, measurement, management, and reporting of the main risks
to which the Bank is currently exposed and to which it may be exposed in the future.
B. An internal process of establishing a capital objective to ensure a proper capital ratio, taking into
consideration the risk profile of the Bank, including capital planning and management.
The ICAAP is a comprehensive process pertaining to various levels of the processes of risk
management, transaction pricing, and capital management. Pillar II is therefore implemented in
phases, with full absorption to be spread over several years. The ICAAP is integrated into the Bank’s
three-year strategy for 2012-2014 and in its work plan for 2012.
As part of the implementation process, according to the instructions of the Supervisor of Banks, a draft
ICAAP report based on consolidated data as of the end of 2010 was submitted to the Bank of Israel in
May, 2011. An independent review of the internal controller was attached to that report. Within the
Supervisory Review and Evaluation Process (SREP) of the Supervisor of Banks, on September 27,
2011, the Bank of Israel issued a letter addressing the ICAAP report as of December 31, 2010, and a
letter addressing the SREP. The Bank will address the topics raised in the letter in its ICAAP
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document, to be submitted to the Supervisor of Banks by April 30, 2012, based on the financial
statements as of December 31, 2011.
The disclosure requirements under Pillar III are applied in full starting with the annual financial
statements for 2009.
A disclosure policy according to Pillar III has been established and approved by the management and
board of directors of the Bank, including references to the Bank’s approach regarding the disclosure to
be given in the financial statements (including the frequency of such disclosure and its location in the
reports, and internal controls on the disclosure process).
The following table lists references to the qualitative and quantitative disclosures required under
Pillar III, according to the policy established, as noted above.
Qualitative disclosures:
Topic Subtopic Location Section Subsection Page
Application
Brief description of entities in the group
Board of directors’ report
Activity of the Bank and description of the development of its business
10
Restrictions on transfers of money or supervisory capital within the group
Board of directors’ report
Capital adequacy
Principle directives - Basel II – implementation of the Bank
98
Structure of capital
Terms and conditions of capital instruments
Board of directors’ report
Capital adequacy
The capital ratio according to Basel II 102
Capital adequacy
The corporation’s approach to the assessment of its capital adequacy
Board of directors’ report
Capital adequacy
The capital ratio according to Basel II 102
Risk exposure and assessment
Risk management policy for each separate risk area
Board of directors’ report
Exposure to risks and risk management
117
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Topic Subtopic Location Section Subsection Page
General qualitative disclosure
Board of directors’ report
Exposure to risks and risk management
Credit risks
120
Credit risk Portfolios handled according to the standard approach
Board of directors’ report
Capital adequacy
Basel II
105
Credit risk mitigation (CRM)
Board of directors’ report
Capital adequacy
Credit risk in the standard approach
105
Counterparty credit risk
Board of directors’ report
Capital adequacy
Credit risk in the standard approach
112
Market risk General qualitative disclosure
Board of directors’ report
Exposure to risks and risk management
Market risks
100
Operational risk General qualitative disclosure,
Board of directors’ report
Exposure to risks and risk management
Operational risk
156 including the use of insurance to risk reduction
Shares in the
General qualitative disclosure
Board of directors’ report
Exposure to risks and risk management
Positions in shares in the banking book
151
banking book Accounting policy for valuation
Board of directors’ report
Critical accounting policies and estimates
Investments in non-financial corporations
180
Interest-rate risk in the banking book (IRBB)
General qualitative disclosure
Board of directors’ report
Exposure to risks and risk management
Market risks / interest-rate risk 145
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Quantitative disclosures:
Topic Subtopic Location Section Subsection Page
Structure of Details of tiers
Board of directors’ report
Capital adequacy
The capital ratio according to Basel II 102
capital of capital structure
Financial statement
Note 13 – Minimum capital ratio
352
Capital adequacy
Risk-adjusted assets and capital requirements
Board of directors’ report
Capital adequacy
The capital ratio according to Basel II
102
Credit risk
Total exposures and average exposure
Board of directors’ report
Capital adequacy
Credit risk in the standard approach
106
Portfolio distribution by counterparty / remaining contractual period
Board of directors’ report
Capital adequacy
Credit risk
106-107
Portfolio distribution by geographical region
Board of directors’ report
Exposure to risks and risk management
Credit risk
134
Change in balance of allowance for credit losses
Financial statement
Note 4.D.
334
Credit risk mitigation in the standard approach
Board of directors’ report
Capital adequacy
Credit risk in the standard approach
107
Counterparty credit risk
Board of directors’ report
Capital adequacy
Credit risk in the standard approach
112
Market risk Capital requirement
Board of directors’ report
Capital adequacy
The capital ratio according to Basel II
102
Shares in the banking book
Balance of investment, including capital requirement
Board of directors’ report
Capital adequacy
Credit risk in the standard approach
114
Interest-rate risk in the banking book (IRBB)
Increase/decrease in profits or economic value due to change in interest rates
Board of directors’ report
Exposure to risks and risk management
Market risks/Interest-rate risk 145
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Capital Ratio Targets:
In the discussions regarding the three-year strategy of the Bank, on November 30, 2011, the Board of
Directors was presented with a possible trajectory for capital targets in several scenarios and a
proposed trajectory derived from these scenarios through 2016, in accordance with the expectations of
the Supervisor of Banks, taking into consideration the risks and challenges confronting the Bank and
the international trends indicated by the Basel III guidelines.
In the discussion, the Board of Directors of the Bank determined that the Bank would meet the target
of a gradual increase in its core capital ratio, to 10% by mid-2016. The increase will follow an upward
trajectory in the core capital ratio at a rate of 0.5% annually, from the end of 2011 (a target ratio of
7.75%) to mid-2016 (10%). The total capital ratio will stand at 150% of the core capital ratio, and no
less than 13%. The trajectory established constitutes the lowest threshold of tolerance for this ratio. In
addition, in extreme scenarios the target total capital ratio is to be maintained at no less than 9.0% and
the core capital ratio at 6.0%-6.5%.
Some of the information in this section is forward-looking information, as defined in the Securities
Law, and is based on the work plans of the Bank with regard to compliance with the requirements and
improvement of the capital adequacy ratio and composition, including the reduction of risk
components or the increase of primary capital through profit accrual and/or the issuance of secondary
capital. This information may not materialize, in full or in part, or may materialize in a manner
materially different than expected, depending mainly on the following factors: regulatory changes (if
any) in the area of the capital ratio requirements which the Bank must meet, damage to the
profitability of the Bank, and the degree of the Bank’s success in raising capital through issuances.
Capital Ratio under Basel II
Note 13 to the financial statements provides detailed information regarding capital measurement and
risk weighting. The following table provides a summary1 of the data in the Note (in NIS millions):
December 31, 2011
December 31, 2010
Tier I capital 1,986 *1,924
Tier II capital1,2 1,408 *1,424
Tier III capital2 - - Total capital 3,394 3,348 Credit risk assets3 22,664 *21,382
Market risk assets 208 249
Operational risk assets 1,680 1,589 Total risk assets 24,552 23,220
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* Restated following the retroactive implementation of the directive regarding employee benefits. See note 1.E.21.
1 For more details, see Note 13.
2 In accordance with the directives of the Supervisor of Banks, total tier II and tier III capital shall not exceed
100% of total tier I capital, after the required deductions from the capital in this tier only. In addition,
subordinated notes or other capital instruments included in lower tier II capital shall not exceed 50% of the
tier I capital not allocated to market risks, after the required deductions from tier I capital only.
3. Prior to deduction of a general allowance totaling NIS 52 million.
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The following table provides details of the capital ratio of the Bank according to Basel II, (in NIS
millions):
December 31, 2011 December 31, 2010
Risk-weighted assets
Capital requirements3 (9%)
Risk-weighted assets
Capital requirements 3 (9%)
Credit risk Sovereign debt 135 12 104 9 Debts of public sector entities 213 19 199 18 Debts of banking corporations 880 79 1,068 96 Debts of corporations **16,675 1,501 15,903 1,431 Debts secured by commercial real estate 275 25 176 16 Retail exposure to individuals 1,273 115 988 89 Small businesses 78 7 131 12 Housing mortgages 2,344 211 2,133 192 Other assets 791 71 *680 *61
22,664 2,040 21,382 1,924 Market risks1
Interest-rate risk 92 9 72 6 Share risk 57 5 38 3 Foreign currency exchange rate risk 46 4 72 6 Option risk 13 1 67 5
208 19 249 20 Operational risk2 1,680 151 1,589 143
Total risk-weighted assets in respect of the different risks 24,552 2,210 *23,220 2,087 Total capital base 3,394 *3,348 Ratio of overall capital to risk components 13.82% *14.42% Ratio of tier I capital to risk components 8.09% *8.29% Minimum capital ratio required by the Supervisor of Banks3 9.0% 9.0%
* Restated following the retroactive implementation of the directive regarding employee benefits - See Note 1.E.21. ** Prior to deduction of a general allowance totaling NIS 52 million.
1. Market risks are calculated according to the standard approach, in respect of transactions in the Bank’s trading portfolio. The capital allocation is in respect of interest-rate risk, exchange-rate risk, option risk, and share risk.
2. Operational risks are calculated according to the basic indicator approach, based on the gross income of the Bank, as defined in the directive.
3. The capital requirement is 8.0% in respect of Pillar I and a minimum of 1.0% in respect of Pillar II. The total minimum capital ratio required by the Supervisor of Banks is 9.0%.
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Instruments Included in the Capital Base
The following is the composition of the capital instruments comprising the qualifying capital base of
the Bank.
Upper tier II capital - As at December 31, 2011, deferred capital notes totaling NIS 371 million.
Lower tier II capital - As at December 31, 2011, subordinated notes totaling NIS 985 million,
distributed as follows:
1. Marketable subordinated notes in the amount of NIS 883 million issued in several series by Union
Issuances.
2. Non-marketable subordinated notes in the amount of NIS 102 million issued in several series by
the Bank.
These notes have been approved by the Supervisor of Banks for inclusion in the tier II capital of the
Bank, in accordance with Proper Conduct of Banking Business Directive 202 "Capital Measurement
and Adequacy - Capital Components". See reference to the approval of the Bank of Israel of the
deferred capital notes issued on July 2011 in the chapter "Activities of main affiliated companies" sub-
chapter "Union Issuances Ltd." Also see reference to Basel III in sub-chapter "Basel III" previously
mentioned.
In 2012 a total deduction of NIS 160 million is expected for lower tier II capital. See also reference in
sub-chapter "Capital Planning".
Credit Risk in the Standard Approach
The risk of monetary loss as a result of default or a decline in the quality of credit of borrowers who
fail to meet their obligations to the Bank, and the lack of adequate collateral to cover the debts of such
customers.
The allocation of capital in Pillar I in respect of credit risk in the portfolio is calculated according to
the standard approach.
For the purposes of determination of fair value, the Bank performs valuations for non-marketable
bonds, based, among others, on ratings by rating agencies as published in public information sources.
See also details in chapter "Accounting Policy on Critical Issues and Critical Accounting Estimates".
In order to meet pillar I of Basel II directives according to the standard approach, the Bank uses
country ratings (also for the assessment of Banks' risk ) from approved sources, that present ratings by
acknowledged by the directive international rating agencies.
The Bank does not use information from export credit agencies.
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The following table shows portfolio exposure development according to the remainder of contractual
term to maturity1:
As at December 31, 2011
Less than 1
year
More than 1 year less
than 5 years More than 5
years3 Total NIS millions Credit and deposits with banks and government 4 17,730 4,169 8,060 29,959
Securities2 1,254 1,300 3,051 5,605
Derivative financial instruments6 292 64 214 570
Unutilized credit facilities 7,184 1,900 31 9,115
Other off-balance sheet exposures5 1,398 265 2,291 3,954
Other assets 629 - 408 1,037
Total 28,487 7,698 14,055 50,240 As at December 31, 2010
Less than 1
year
More than 1 year less
than 5 years More than 5
years3 Total NIS millions Credit and deposits with banks and government 4 19,103 3,676 7,312 30,091
Securities2 595 1,212 1,835 3,642
Derivative financial instruments6 215 37 151 403
Unutilized credit facilities 8,406 1,414 146 9,966
Other off-balance sheet exposures5 1,191 283 2,375 3,849
Other assets 510 - 380 890
Total 30,020 6,622 12,199 48,841 1. These tables present the balance of products according to the final contractual maturity date of the product.
Starting with the report for June 2011, the presentation format was changed, such that the balances are presented based on the volume of exposures as defined for the purposes of Basel II (previously, the balances were based on the volume of exposures as defined for the purposes of economic sectors). Comparison figures were restated.
2. Not including shares in the portfolio held for trading and non-monetary items such as activity in the Maof market, which is included in other off-balance-sheet exposures.
3. Including balances with no term to maturity.
4. Credit after accounting write-offs and before allowance for credit losses.
5. Including customers' activity in the Maof market that does not meet the definition of a derivative.
6. As calculated according to Appendix C to Directive 203.
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The following is the distribution of exposures of the portfolio by products and counter-party*:
As at December 31, 2011 Credit3 Securities1 Derivatives Unutilized Other off- Other assets Gross credit Average gross
credit balance sheet exposure credit facilities exposures4
exposure2 NIS Million Sovereignties 5,591 3,782 - - - - 9,373 8,815 Public sector entities 195 218 3 32 8 - 456 530 Banking corporations 1,174 1,044 216 2 112 - 2,548 2,733 Corporations 14,767 561 351 7,658 3,753 - 27,090 27,741 Secured commercial real-estate 303 - - - 14 - 317 356 Individual retail 1,595 - - 974 41 - 2,610 2,405 Small businesses 86 - - 115 26 - 227 303 Housing mortgages 6,248 - - 334 - - 6,582 6,394 Other assets - - - - - 1,037 1,037 985 Total 29,959 5,605 570 9,115 3,954 1,037 50,240 50,262
As at December 31, 2010 Credit3 Securities1 Derivatives Unutilized Other off- Other assets Gross credit Average gross
credit balance sheet exposure credit facilities exposures4
exposure2 NIS Million Sovereignties 5,989 1,836 1 - - - 7,826 6,710 Public sector entities 158 178 4 276 6 - 622 422 Banking corporations 1,352 1,049 121 55 86 - 2,663 2,789 Corporations 15,267 579 277 8,144 3,693 - 27,960 27,325 Secured commercial real-estate 200 - - - 1 - 201 183 Individual retail 1,300 - - 941 36 - 2,277 2,491 Small businesses 175 - - 144 27 - 346 250 Housing mortgages 5,650 - - 406 - - 6,056 5,891 Other assets - - - - - 890 890 901 Total 30,091 3,642 403 9,966 3,849 890 48,841 46,962
* These tables present the balance of products according to the final contractual settlement date of the product. Starting with the report for June 2011, the presentation format was changed, such that the balances are presented based on the volume of exposures as defined for the purposes of Basel II (previously, the balances were based on the volume of exposures as defined for the purposes of economic sectors). Comparison figures were restated.
1. Not including shares in the portfolio held for trading and non-monetary items such as activity in the Maof market, which is included in other off-balance-sheet exposures.
2. Quarterly average for the period.
3. Including credit to the public, after accounting write-offs and before provision for credit losses, deposits with banks, and deposits with the government.
4. Including customers' activity in the Maof market that does not meet the definition of a derivative.
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Set out below is the credit exposure according to the standard approach* by weight of risk 1,2 and by final risk weight of exposure (in NIS millions):
As at December 31, 2011
0% 20% 35% 50% 75% 100% 150%
Eligible financial
collateral Net total exposure
Sovereignties 8,698 675 - - - - - - 9,373 Public sector entities - - - 456 - - - 7 449 Banking corporations - 1,362 - 1,224 - 10 - - 2,596 Corporations - - - - - 26,619 172 3,513 23,278 Secured commercial real-estate - - - - - 317 - 36 281 Individual retail - - - - 2,278 304 6 191 2,397 Small businesses - - - - 226 - - 30 196 Housing mortgages - - 6,060 - 398 82 - - 6,540 Other assets 252 - - - - 772 13 - 1,037 Total 8,950 2,037 6,060 1,680 2,902 28,104 191 3,777 46,147
As at December 31, 2010
0% 20% 35% 50% 75% 100% 150%
Eligible financial
collateral Net total exposure
Sovereignties 7,307 518 - - - - - - 7,825 Public sector entities - - - 621 - - - - 621 Banking corporations - 892 - 1,833 - 11 - - 2,736 Corporations - - - - - 26,790 216 **3,845 23,161 Secured commercial veal-estate - - - - - 198 - 21 177 Individual retail - - - - 2,060 152 2 171 2,043 Small businesses - - - - 336 - 1 50 287 Housing mortgages - - 5,445 - 489 87 3 - 6,024 Other assets 233 - - - - 641 16 - 890 Total 7,540 1,410 5,445 2,454 2,885 27,879 238 4,087 43,764
* These tables present the balance of products according to the final contractual settlement date of the product. Starting with the report for June 2011, the presentation format was changed, such that the balances are presented based on the volume of exposures as defined for the purposes of Basel II (previously, the balances were based on the volume of exposures as defined for the purposes of economic sectors). Comparison figures were restated.
** This figure was restated, such that from this point forward it also includes the adjustment for volatility of the exposure covered by eligible financial collateral. The change in presentation method has no effect on the calculation of capital adequacy.
1. Gross exposure, after allowance for credit losses, according to the final risk of the exposure, after accounting offsets according to generally accepted accounting principles, without taking into account the effects of credit-risk mitigation methods, such as collateral and offsetting, and before multiplying by conversion coefficients.
2. Not including the portfolio held for trading. Presentation of derivative financial instruments according to the standard approach.
- 109 -
Collateral evaluation and management - Under Basel II, collateral can be recognized according to
the "comprehensive approach", as defined in the directive. In that approach the net value of the
collateral is deducted in accordance with application of coefficients stemming from type of security,
incongruence's in currency or term to maturity.
The types of eligible financial collateral used by the Bank in order to calculate capital adequacy are
listed below, with the manner of evaluation of such collateral for risk mitigation purposes:
‐ Securities - Securities placed under lien in favor of their owners or of a third party. In order for a
security to be eligible to serve as a risk mitigator, it must be a government or bank security or a
rated security listed for trading on a recognized stock market; shares must belong to a recognized
share index, as detailed in the directive. The evaluation of collateral is based on the market price of
the security in the securities deposit placed under lien, and according to the coefficients for
deduction from the value of the collateral which are affected by factors including the number of
days of holding and the nature of the customer’s activity. The deduction rate implemented by the
Bank is examined to the case in question, so that in some cases the rate is 50% in accordance with
item 151a.c of Proper Conduct of Banking Business Directive 203. In the report as of the end of
2010, the Bank implements a specified ratios deduction mechanism, in accordance a with the
customers' activity, agreements and under directives of item 151a.b.
‐ Deposits and savings plans - Liquid means taken as collateral by way of an offsetting letter or lien,
as necessary, and which cannot be withdrawn until they cease to serve as collateral. The value of
the collateral is established according to the revaluation in respect of withdrawal prior to the stated
maturity date.
‐ Bank guarantees (Israeli and foreign banks) - Guarantees provided by banks against customers’
exposures. With the provision of the bank guarantee, the guarantor bank becomes the counterparty
to the exposure, which changes the risk weighting in respect of the exposure. A guarantee of this
type allows a reduction of the risk-weighted assets arising from the exposure, according to the risk
of the guarantor bank (stems from the rate of the country in which the bank is associated).
Guarantees provided by foreign banks are subjected to individual legal examination as for the
validity of the guarantee in accordance with the laws that apply to it (mostly, the low of the country
of association of the guarantee providing bank).
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The following table shows credit exposure covered by eligible financial collateral and/or
guarantees or credit derivatives:
As at December 31, 2011
Total gross exposure 1,2
Total exposure covered by reducted guaranties3
Total added amounts3
Total exposure covered by eligible financial collateral4
Net total exposure
NIS millions Sovereign debts 9,373 - - - 9,373
Debts of public sector entities 456 - - (7) 449
Debts of banking corporations 2,548 - 48 - 2,596
Debts of corporations 26,839 (48) (3,513) 23,278
Debts secured by commercial real estate 317 - - (36) 281
Retail exposure to individuals 2,588 - - (191) 2,397
Small businesses 5 226 - - (30) 196
Housing mortgages 6,540 - - - 6,540
Other assets 1,037 - - - 1,037 Total 49,924 (48) 48 (3,777) 46,147
* Restated following retroactive implementation of the directive regarding of employee benefits - See Note 1.E.21.
** The data is restated so as to also include henceforth the adjustment to fluctuation of the exposure covered by eligible financial collateral, the change of the method of presentation has no effect on the capital adequacy calculation.
1 Credit net of allowance for credit losses. Off-balance sheet credit risk is before conversion to credit
equivalent (before multiplying by CCF factors).
2 Credit risk in respect of derivative financial instruments presented as credit equivalents (after Netting
effect and multiplication by Add-on).
3 Exposure covered by guarantees, that is transferred to debts of the counterparty, provider of the
guarantee.
4 After, when applicable, on/off-balance-sheet offsets and after haircuts, including positive adjustments
added to the exposure.
5 Small businesses with obligo which does not exceed NIS 400 million that are managed as part of the
retail department.
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As at December 31, 2010
Total gross exposure 1,2
Total exposure covered by reducted guaranties3
Total added amounts3
Total exposure covered by eligible financial collateral4
Net total exposure
NIS millions Sovereign debts 7,825 - - - 7,825
Debts of public sector entities 621 - - - 621
Debts of banking corporations 2,664 - 72 - 2,736
Debts of corporations 27,078 (72) - **(3,845) 23,161
Debts secured by commercial real estate 198 - - (21) 177
Retail exposure to individuals 2,214 - - (171) 2,043
Small businesses5 337 - - (50) 287
Housing mortgages 6,024 - - - 6,024
Other assets* 890 - - - 890 Total 47,851 (72) 72 (4,087) 43,764
* Restated following the retroactive implementation of the directive regarding of employee benefit - See Note 1.E.21.
** The data is restated so as to also include henceforth the adjustment to fluctuation of the exposure covered by eligible financial collateral, the change of the method of statement has no effect on the capital adequacy calculation.
1 Credit net of allowance for credit losses. Off-balance sheet credit risk is before conversion to credit
equivalent (before multiplying by CCF factors).
2 Credit risk in respect of derivative financial instruments presented as credit equivalents (after Netting
effect and multiplication by Add-on).
3 Exposure covered by guarantees, that is transferred to debts of the counterparty, provider of the
guarantee.
4 After, when applicable, on/off-balance-sheet offsets and after haircuts, including positive adjustments
added to the exposure.
5 Small businesses with obligo which does not exceed NIS 400 million that are managed as part of the
retail department.
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Counterparty credit risk – The Bank is exposed to counterparty credit risk as a result of the activity
of its customers in over-the-counter derivatives and stock-exchange derivatives (for further details, see
the section “Exposure to Risks and Risk Management”). The capital allocated in reporting according
to appendix C to Proper Conduct of Banking Business Directive 203.
In addition to Pillar I counterparty credit risk allocation of capital, performed in accordance with the
directives of the regulator, the Bank examined the economic risk and the need to allocate additional
capital as part of Pillar II. Counterparty credit exposures were mapped to several economic sectors and
a proper maintenance period in accordance with the resolution of the exposure was set for each one of
them.
Pillar II counterparty credit risk estimating scenarios were performed for the various currency pairs.
As for now, the calculation was performed in a conservative manner without diminution of
counterparty exposures between the various currency pairs. In accordance, an additional counterparty
credit risk capital allocation was defined in Pillar II.
The following table lists counterparty credit risk exposures under the standard approach.
As of December 31, 2011
As of December 31, 2010
NIS millions NIS millions Positive gross fair value 680 350
Par value (after conversion to credit) 310 257
Deduction offsetting benefits 420 204 Total credit exposures after offsetting 570 403 Deducting collateral:
Cash and deposits 113 111
Government bonds 1 4
Shares (including convertible bonds) 9 16 Total credit derivatives (par value) 447 272
- 113 -
The following table lists counterparty credit risk exposures arising from the sale or purchase of credit
protections:
As of December 31, 2011 As of December 31, 2010 Protections
purchased Protections sold
Protections purchased
Protections sold
NIS millions NIS millions Alm
Credit linked notes (CLN) / credit default swaps (CDS) - *134 - *124
Total return swaps (TRS) - - - -
Credit options - - - -
Other - - - -
Mediation activity
Credit linked notes (CLN) / credit default swaps (CDS) - - - -
Total return swaps (TRS) - - - -
Credit options - - - -
Other - - - - Total credit derivatives (par value) - *134 - *124 * Arising from CLN only, in which protection was sold against risk of the state of Israel.
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Offsetting - As at December 31, 2011, the volume of balance-sheet offsets (offsets between assets and
liabilities) is immaterial (similarly to December 31, 2010).
Shares in the banking book - The Bank has holdings in shares in the banking book, as detailed in the
section “Exposure to Risks and Risk Management.” The following are the positions in shares in the
banking book:
As at December 31, 2011 As at December 31, 2010 Balance-
sheet balance Fair value
Capital requirements (9%)
Balance-sheet balance Fair value
Capital requirements (9%)
NIS millions NIS millions
Shares 73 73 7 83 83 7
Index certificates on shares - - - - - -
Index certificates on index funds - - - - - -
Hedge funds/venture-capital funds/private-equity funds - - - - - -
Others - - - - - - Traded by the public 73 73 7 83 83 7 Shares 17 17 2 19 19 2
Index certificates on shares - - - - - -
Index certificates on index funds - - - - - -
Hedge funds/venture-capital funds/private-equity funds3 35 35 4 35 35 4
Others1 1 1 - 1 1 - Private holdings2 53 53 6 55 55 6
1. Investment in an equity-basis investee company in the amount of NIS 1 million. 2. Non-tradable. 3. Capital requirements in respect of venture-capital funds and private-equity funds are calculated in
accordance with risk components in the amount of 150% from the fair value of the holding.
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Capital Planning
The Bank's capital planning forum, headed by the CEO and comprising senior employees of the Bank,
is charged with measuring and monitoring the capital adequacy ratio, risk-adjusted assets, and the
capital base, and with planning capital during the current year, within the annual work plan. The forum
convenes on a monthly basis. Results of the discussions of the forum are reported to management and
to the board of directors. In addition, compliance with capital targets under an extreme scenario
defined annually by the board of directors of the Bank, as part of the ICAAP, is tested each quarter.
Capital planning for 2012 was established within the discussion of the work plan for 2012 held by the
Board of Directors in late December 2011. The annual capital planning is derived from capital targets
established in the three-year strategic plan for 2012-2014 (for further details, see the subsection
"Capital Targets").
The Bank's capital base is expected to grow during 2012, both as a result of the expected increase in
the retained earnings item, and as a result of the recognition of notes issued in the past, according to
the maximum potential for recognition of lower secondary capital, under the required regulatory
assumptions. However, the risk-adjusted assets of the Bank are not intended to grow in 2012, in order
to support the increase in the Bank's capital targets, as determined by the board of directors.
The capital planning for the years 2012 - 2014 will be updated in framework of deliberations on the
ICAAP document for December 31, 2011 that will be submitted to the Bank of Israel until April 30,
2012. Within this teamwork, the Bank's level of compliance with capital adequacy requirements even
during extreme scenarios will be examined.
Some of the information in this section is forward-looking information, as defined in the Securities
Law, and is based on the work plans of the Bank and on its estimates with regard to market conditions,
the extent of the public’s response to issuances, and the existence of suitable market conditions for
issuances. This information and the expectations regarding such information may not materialize, in
full or in part, or may materialize in a manner materially different than expected, depending on the
following main factors: market conditions, the extent of the public’s response to issuances, the absence
of market conditions supporting issuances, damage to the profitability of the Bank, and regulatory
changes concerning the capital ratio.
Basel III
In December 2010, the Bank for International Settlements (BIS) published the Basel III working
framework. The goal of these directives is to reinforce the resilience of the banking system during
times of crisis. The directive poses stricter standards for the achievement of capital adequacy, as well
as new requirements in the area of liquidity, new requirements regarding the composition of exposures
and the capital required in respect thereof, an expansion of the methods for risk management, and
more.
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On November 30, 2011, the Supervisor of Banks issued a draft translation of the document "A global
regulatory framework for more resilient banks and banking systems" (hereinafter: Basel III). The draft
translation includes the original transitional directives in the original phrasing. The transitional
directives of the Supervisor of Banks, which will be binding for banking corporations in Israel, are not
included in the translation of the document. In this context, the Supervisor of Banks declared that the
Supervisor's office intends to apply the Basel III guidelines starting at the beginning of 2013, after
completion of a round of meetings with the banks and formulation of the final guidelines. The Bank is
preparing for the possible implications of the implementation of the Basel III principles as of 2013.
A key topic in the Basel III directives is the quality of capital and capital adequacy. The Basel III
working framework clearly defines the components of capital, and requires compliance with various
regulatory capital ratios, as a function of the volume of risk-adjusted assets, with an emphasis on the
core capital ratio, i.e. share capital and retained earnings. Within this framework, two new capital
cushions were also established: a cushion for the preservation of capital, at a rate of 2.5%, to serve as a
safety cushion in the event of materialization of an extreme scenario; and an anti-cyclical capital
cushion in the range of 0%-2.5%, to be determined according to the local regulator's estimate of the
degree of risk to which the banking system is exposed.
In the past, the Supervisor of Banks established minimum capital targets that banks were required to
adopt: a minimum core capital ratio of 7.5% and a minimum total capital ratio of 12%. These ratios
are expected to be raised, in light of the Supervisor of Banks' intention to establish that the banking
system in Israel should increase its core capital ratio (see the subsection "Capital Targets" with regard
to the establishment of a rising trajectory for capital targets at the Bank).
In addition, the Basel III directives refer to the various capital components, including debt instruments
recognized in the capital base. The new guidelines are expected to include additional minimum
requirements, according to which capital instruments included in Tier I or Tier II capital are to include
a mechanism for the absorption of losses under certain conditions. As a result of these changes in
definitions, debt instruments currently recognized may not be recognized under the Basel III
directives. It is likely that the process will be gradual, such that during the transitional period capital
instruments no longer eligible as Tier I capital other than shareholders' equity or as Tier II capital will
be cancelled gradually, starting January 1, 2013. The Basel III guidelines are also expected to include
stricter capital requirements with respect to counterparty credit risk and with respect to credit risk in
the market in the portfolio held for trading.
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Risk Exposure and Management
The Bank’s business activity entails credit risks, market risks and liquidity risks, operational risks including
legal risks, and also goodwill risks and strategic risks.
Risk management policy is aimed to assist the Bank in achieving its set strategic and business
objectives through absorption of risk management and monitoring policy. The Banks' risk
management policy helps the Bank reach those objectives, through definitions of risk types and
scopes, in the limits of risk appetite and tolerance set by the board of directors, while operating report
systems and control and monitoring mechanisms.
Organizational Responsibility
Risk-management processes at the Bank are organized and supervised by the board of directors and its
committees, the CEO of the Bank and the management, management committees, the business sectors
generating the risk, risk control and management sector, legal advise system and the internal audit.
The Board of Directors of the Bank establishes its business strategy and policy, and guides the Bank's
Management on it, as well as on the Bank activity and targets. The board of directors establishes the
risk appetite and tolerance in every activity sector and the risk exposure policy. The board of directors
supervises implementation of the strategy and the policy, meeting the set targets, and meeting the
limits of risk appetite and tolerance, all those, through maintaining strict separation in the management
between risk generators, risk managers and the independent control processes in respect of them.
The overall exposure policy is expressed by the board of directors in the ICAAP document and the
quarterly exposures document, by defining risk appetite and risk tolerance, and in additional specific
policy documents.
The board of directors and its committees hold discussions regarding the nature and characteristics of
the various risks to which the activity of the Bank is exposed, risk assessment methods, and the
effectiveness of risk supervision, including discussions of the tools and manner of use of tools, and of
risk assessment, measurement and monitoring.
In addition, the board of directors establishes the risk exposure policy of the Bank based on discussion
of the mix of exposures reflecting the risk profile of the Bank, and the required volume of capital,
while allocating such capital to the various business activities. When planning the activity of the Bank
for the coming years, the board of directors of the Bank established its risk appetite and risk tolerance
in all areas of activity and risk exposures. These areas include capital targets, credit risks, market risks,
liquidity risk, operational risks including risks and compliance risks including legal risks and
compliance risks, and concentration risks. Monitoring tools were developed in order to routinely test
for compliance with the risk appetite and risk tolerance and examine the development of the exposure
to risks over time.
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Monitoring of the compliance with the risk appetite and risk tolerance for all of the activities is
performed by using the quarterly exposure document discussed by the risk-management committee of
the board of directors and by the plenum of the board of directors.
In addition, the board of directors has approved a framework for the application of extreme scenarios
to the exposures to market, liquidity, and credit risks, and their effects on the capital ratios, with
principles defined for the establishment of the extreme scenarios and reporting on their results.
The board of directors has defined the areas of responsibility, duties and authority of the chief
executive officer, who, among other things, is responsible for the implementation of the strategy and
business policy of the Bank, set forth by the board of directors; the routine business and organizational
management of the Bank, while securing its stability and profitability; the preparation of an annual
work plan and budget, including an investment budget, and the presentation thereof for discussion and
approval by the board of directors; maintaining managerial supervision and control over the
organizational system of the Bank and the execution of the work plan; in accordance with the Bank's
risk management policy and its risk appetite. Special attention is devoted to compliance, including all
of the various components of this field. The Bank ensures that an appropriate system of procedures is
maintained, that violations and other failures are prevented, and that conclusions are drawn as
necessary. For further details regarding compliance, see the subjection "Legal Risk".
Risk managers and generators of exposures are separate from those responsible for risk control at the
Bank. Some members of the management of the Bank are generators of the various risks, who realize
the risk policy and risk appetite established by the board of directors. For the purpose of performing
their duties, the chief executive officer and the members of management receive daily and periodic
reports allowing them to monitor risks at the Bank, in addition to discussions in various forums and
committees.
These discussions are attended by regular members, as determined by the chief executive officer, and
other office holders, as necessary.
Corporate credit risks, including credit risks in respect of customers operating in the financial sector and in
the diamond sector Environmental risks and credit concentration risk are managed by the Head of the
Corporate Division, Mrs. Shevi Shemer.
Credit exposure risks in the consumption sector and mortgages sector, are managed under the
responsibility of the Head of the Retail Banking, Client Assets and Advisory Mrs. Edna Peres-Lachish.
The management of exposures to market and liquidity risks is performed by the Head of the
Financial Management Division, Mr. Efraim Avraham. Exposures are created primarily through the
dealing rooms, the Asset and Liability Management Unit and the Proprietary Investments Unit within
the division. In addition, the division is responsible for the management of credit risks arising from the
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Bank’s investments in corporate bonds, as well as of credit risks in respect of countries and banks
and clearing risks.
Legal risks and compliance risks are managed by the chief legal advisor of the Bank, Dr. Moriah
Hoftman-Doron, Adv.
The CEO of the Bank, Mr. Haim Freilichman, serves as the Reputation Risk and Strategic risk Manager.
The head of the controls and risks management division, Dr. Akiva Sternberg, serves as the Bank’s
Chief Risk Officer (CRO). Dr. Sternberg serves also as Operational Risks manager.
Risk Management System – Responsible for the identification, definition, mapping and measuring of the
various risks, and formulation of a general overview of risks and reporting in respect of it to the management
of the Bank and the Board of Directors. This role includes the development and implementation of
internal methodology and models for risk measurement and assessment in all risk sectors. The risk-
management system bears professional responsibility for the analysis and implementation of the Basel
II directives. The Head of the Risk Management System is Mr. Ami Shoshani, who serves also as Deputy
Head of Controls and Risk Management Division.
Controls - Responsible for risk control at the Bank, control of market and liquidity risks, the Banks
abroad exposure, controls over the Banks' trading units, and control and validation of models.
During the third quarter of 2010, the Supervisor of Banks issued a directive on the validation of
models. The aim of this directive is to minimize the risks inherent in the development and
maintenance of models, through an established process of model construction and strict model
validation procedures.
The directive establishes timeframes whereby the Banks are required to complete model validation
processes for all models, incrementally, by June 30, 2013. The Bank began carrying out the directive
according to the schedule set.
Credit control domain is responsible for performing credit controls, encompassing the major
borrowers of the Bank, including evaluation of the quality of the borrower, the quality of the
fundamental documents and collateral in the customer’s portfolio, the quality of the credit portfolio,
and the examination of the reliability of the credit rating at the Bank. The credit control unit works
within an annual and multi-year work plan, which is submitted for approval to the credit committee of
the board of directors.
As part of the preparations for the implementation of the Basel II directives, and during the
implementation of the Pillar II, the Bank of Israel published a series of BIS documents establishing
standards for proper management of the various types of risks by banking corporations. The Bank
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carried out an in-depth gap survey regarding actual practice relative to the prescriptions of these
documents. The survey indicated that in general, the corporate governance of the Bank is in line with
the prescriptions of the BIS documents, and that the main remaining gaps do not expose the Bank to
significant additional risks.
Credit Risks
Credit risk if the most significant risk the Bank is exposed to in the scope of its activity, mainly
because of its range in comparison to the other risks. The risk may cause financial loss to the Bank as
a result of insolvency or a decline in the quality of credit of a counterparty of the Bank in a
transaction, while failing to meet the set conditions.
A. Credit Portfolio Quality Risk:
The board of directors holds a discussion and approves the Bank’s overall credit policy at least
once annually. When necessary, this policy discussed in full or in part during the year. The aim of
the credit policy is to limit the abovementioned risk in accordance with the Bank's risk appetite
and tolerance and the managing says as set by the board of directors.
The policy document refers to principles and rules for rating borrowers and for granting,
managing, and controlling credit, with the aim of improving credit quality and reducing the risk
inherent in credit management. As part of this process, rates of reliance upon collateral received
by the Bank are established. In addition, the policy document presents the methodology for the
regularization of the activity of the Bank in the area of credit granting, including operational
aspects, reporting, and control, with an emphasis on the credit risk management principles
detailed in the Basel Committee's recommendations. The policy also addresses the manner of
locating, identifying, and treating potentially problematic borrowers and of handling doubtful
debts, as well as the methodology for calculating the provision for credit losses. Note that in
calculating the balance of the group provision as of December 31, 2011, the Bank examined the
effect of the uncertainty prevailing in the markets on the group provision coefficients, in order to
faithfully reflect the risk potential in the period under examination.
During the year, compliance with this policy is examined through monthly and quarterly reports
to management and to the board of directors on the credit position. Concurrently, extensive
means and resources are invested in updating and developing automated control tools and in
improving information systems in the area of credit, in order to adjust them to the changing
business environment and to the regulatory directives.
On December 29, 2010, the Supervisor of Banks issued an amendment to Proper Conduct of
Banking Business Directive No. 301, "The Board of Directors." Among other matters, the
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directive addresses the involvement of the board of directors of a banking corporation in the
approval of credit. On June 30, 2011, the board of directors of the Bank approved a trajectory for
implementation of the directive, according to the schedule established therein. The Bank's policy
for 2012-2013 will contain updates of rules, metrics, parameters, and processes related to credit
approvals, credit process management, and credit control at the Bank, in accordance with the
approved trajectory.
In addition, as part of the Bank's preparations for the implementation of Proper Conduct of
Banking Business Directive No. 301 and for the reduction of the Board of Directors' involvement
in the area of credit, and in order to improve the efficiency of credit approval processes at the
Bank, during 2011 the board of directors of the Bank approved an update of authority to approve
credit at the Bank, from the level of the credit committee of the board of directors, to the levels of
management, to the levels authorized to approve credit in the business division and the branches
of the Bank. Further, an organizational change was carried out at the business division during
2011 with the aim, among other matters, of supporting the update of credit approval authority, as
approved by the board of directors of the Bank, and to improve the credit approval, management,
and control processes of the credit in the Bank.
Credit management:
Considerations in granting credit mainly concern the nature of the customer and the customer’s
repayment capability, financial stability, liquidity, reliability, time in the industry, time with the Bank,
the quality of the collateral which the customer can provide, and more. The Bank endeavors to
match the type of credit to the customer’s needs and activity.
As part of the Bank’s preparations for the implementation of internal models to improve credit
risk assessment, the Bank is increasing the sophistication of its processes for rating corporate
and retail customers, and acts to adjust the spread to the client and transaction risks.
- Credit-granting authority:
Credit granting is based on credit authority at the various levels, up to the level of the Board of
Directors’ Credit Committee. Credit-granting decisions that are beyond the personal authority of
branch managers and the management of the Corporate Division are made at the level of credit
committees, in order to minimize the risk involved in reliance on the judgment of a single
individual.
- Credit control:
The Bank operates numerous, varied automated control tools, at its branches and headquarters,
aimed at the earliest possible detection of changes in customer behavior, formation of collateral
gaps, exceptions from approved credit limits, and breaches of authority. The Bank integrates
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information from external sources with its control tools in order to identify activities and events
that may influence customers’ ability to repay their debts.
An automated systems that identifies potential problems with customers who are not classified as
having problematic debts is used for early detection of such problems.
In addition, a credit control process based on Proper Conduct of Banking Business
Directives and on the group of borrowers defined by the management of the bank is
performed at the Credit Control Unit in the Control Division.
- Training:
The Bank invests extensive resources in training employees involved in the area of credit,
including training new employees in specially designed courses, advanced courses for
experienced employees in this area, a forum of corporate department heads, analysis of lessons
learned from various events, etc.
In addition, training and refresher courses are provided on the subject of regulation related to
credit, including a review of International Financial Reporting Standards (IFRS), and practical
training sessions are held regarding the regulatory and business implications of the Basel II
directives.
Credit risk in housing loans
Expansion in the area of mortgages within the strategic plan - As part of its strategic plan, the
Bank continues to adopt a policy of expansion in the retail sector in general and in the area of
mortgages in particular. In preparation for this expansion, appropriate tools have been created,
including detailed definitions of the components of risk management and control, the
establishment of a risk appetite and risk tolerance for the various components of the activity,
implementation of supporting automated systems at both the branch and headquarters levels,
targeted training activities, and a format for reporting and control at all levels of the Bank.
Housing loan policy - The policy details the ways of achieving the business objectives derived
from the strategic plan and the methodology for granting and managing credit. The policy
establishes risk appetite and risk tolerance with regard to both the specific transaction and the
overall portfolio, in order to limit the exposure to credit risks, with the aim of maintaining the
quality of the credit portfolio and minimizing risk in the portfolio. Credit risk in housing loans
is the risk of loss to the Bank as a result of the possibility that borrowers may fall behind on
repayment of the loan or may fail to meet their obligations; in cases of default, the risk is that
the collateral provided to secure the credit may not cover the debt. The credit policy is
translated into detailed procedures and instructions for granting credit, managing the credit
portfolio, and applying control processes. The implementation of the procedures and
instructions allows controlled management of the risks involved in granting housing loans.
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The policy is examined by the Board of Directors, at least once annually, and adjusted to the
economic conditions and the developments in the business environment, with an examination
of the probabilities, risks, and changes in regulatory directives. To express such changes, the
Bank adjusts its product mix, limits, and mortgage pricing from time to time. In late May
2011, due to the events in the housing sector during the recent period, credit policy in this area
was reexamined by the board of directors; following the reexamination, the determination was
made that no change in policy was necessary as of the date of the discussion.
Credit granting authority - The decision-making process with respect to credit granting is
based on a hierarchy of authority for holders of positions at different levels, at the branch, in
the mortgage system, and in credit committees, up to the credit committee headed by the CEO,
in accordance with the risk appetite and tolerance established by the Board of Directors.
Examination of risks during the approval process of a housing loan - The Bank has a policy
that establishes clear criteria for the examination of customer quality and transaction risks
characteristic of the mortgage sector, such as the identity of the seller and buyer, the value of
the acquired property, the location of the property, its legal status, various liens, and the
borrower's ability to comply with the terms of the transaction.
Within the credit application process, parameters are examined which are established and
updated from time to time, in accordance with the risk limits, among other factors:
‐ Special emphasis is placed on the examination of borrowers' repayment capability,
disposable income, and financial wealth.
‐ Rate of financing relative to the value of the property (LTV ratio).
‐ Ratio of repayment to income.
‐ Financing of homes purchased for investment purposes.
‐ Examination of the location of the property and evaluation of its marketability.
‐ For all credit applications, automatic soundness tests are performed based on various
databases, and presented to the credit officer as a preliminary parameter for the examination
and approval of the transaction.
‐ Housing loans with significant risk attributes are examined according to specific criteria.
For example, in loans with a variable interest track, the customer's repayment capability is
examined using a simulation of an increase in the interest rate exceeding the average interest
offered to the customer in all tracks containing a variable interest component.
Examination of risks in the portfolio - The portfolio is examined by examining various sectors
and cross-sections (such as purchasing groups, homes purchased as investments), examining
borrower quality, and examining risks in a range of extreme scenarios. The mortgage system
routinely and continuously monitors developments in housing credit, as well as developments
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and changes in mortgage repayments, both at the level of the branch and at the level of the
overall portfolio, and examines the various implications thereof.
- Borrower rating - The Bank periodically examines the assessment of credit risk in the
mortgage portfolio, based on 11 risk levels. The quarterly exposures document, which is
presented to the management of the Bank, the Board of Directors' committee on risk
management, and the board of directors of the Bank for discussion each quarter, contains an
examination and report on mortgage credit, including the development of the portfolio,
compliance with risk appetite and risk tolerance components of individual mortgages,
examination of the quality of management of mortgages, examination of the ability of the
portfolio to withstand a series of extreme scenarios specific to the mortgage sector, analysis
of the distribution of the mortgage portfolio by rating groups, changes in comparison to the
preceding period, provisions, and data on problematic debts.
Exposure to extreme scenarios - Every six months, the mortgage portfolio is examined, using
extreme scenarios, in order to assess the development of risk in the portfolio.
For the examination of the results of the scenarios, a definition has been established according
to which borrowers affected by a scenario in the mortgage sector are those borrowers who
meet 3 cumulative conditions with regard to the rate of financing, the level of monthly
income, and the ratio of the monthly payment to income. The assumption is that the higher the
borrower's income, the borrower will be able to meet loan payments at a higher proportion to
income, as a function of the LTV ratio.
To examine the sensitivity of the mortgage portfolio to various scenarios, the Bank defined 7
leading scenarios. The number of customers and the volume of loans expected to be
influenced by the materialization of each scenario were examined.
The semiannual test of the extreme scenarios, as of June 30, 2011, indicated that the exposure
to extreme scenarios is immaterial and does not expose the mortgage portfolio to material
risks.
Risk component supervision and control processes - The Bank has various control
mechanisms, both internal, within the mortgage system management chain, and external to the
credit processes.
Credit risk mitigation - Achieved by adjusting risk appetite and by addressing problematic
credit, as detailed below:
- Adjustment of risk appetite – In light of the development of risks in the real-estate market,
in October 2010, the risk appetite with regard to the LTV ratio was lowered.
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- Addressing problematic housing credit and collecting debts - Addressing this type of credit
requires special focus and expertise. Accordingly, work with these customers is centralized
in a separate sector within the mortgage system, which is not connected to the level that
approves or executes credit and collateral.
Resources - The Bank invests constant efforts in improving the professional skill and expertise
of employees in this area, through banking courses and training. Concurrently, extensive
means are invested in mapping work processes and improving and enhancing control tools and
computerized information systems available to mortgage clerks and decision-makers in this
area.
Development of the portfolio - Developments of balances in the Bank's housing loan portfolio
are set out below (funds of the Bank, in NIS millions):
As at December 31
2011 2010* 2009 2008 Volume of credit 6,763 6,001 4,944 4,032
An increase from preceding period 12.7% 21.4% 22.6% 21.8%
* Pro-forma data.
Notes: 1. The volume of housing credit includes purchasing groups in the process of construction.
2. The volume of housing credit is stated with the deduction of accounting write-offs, and before provision for credit losses.
The development of Union Bank's share of the overall banking system is set out below (in NIS
millions):
As at December 31
2011 2010* 2009 2008 Volume of credit 6,763 6,001 4,944 4,032
Volume of credit overall system 224,914 200,317 172,637 154,123
The rate of the Bank from the overall system 3.0% 3.0% 2.9% 2.6%
* Pro-forma data.
The Bank's share of the overall banking system in the last three years stood at approximately
3%, similar to its share of the banking system in total credit.
Geographical distribution - Approximately 70% of mortgages are granted in the regions of Tel
Aviv, Jerusalem, and central Israel (where most of the Bank's branches are concentrated). This
geographical distribution indicates relatively low risk, due to the level of employment in these
areas, supply and demand data, and the fact that the population in this region is more
financially stable.
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Loans at a financing rate greater than 60% - The execution of housing loans at a financing rate
greater than 60% in the last three halves is set out below (in NIS millions):
7-12/2011 1-6/2011 7-12/2010 Executions for period at a financing rate greater than 60%
198 193 266
Total executions of housing loans for period 846 906 1,069
The rate of executions for housing greater than 60% from total executions of housing 23.4% 21.3% 24.9%
As of December 31, 2011, most mortgages granted at a financing rate greater than 60% were
at rates between 60% and 70%. The rate of executions with a financing rate greater than 70%
is immaterial.
Long-term loans - In general, the Bank customarily does not grant loans with repayment
periods longer than 25 years.
Floating-rate loans - As of the end of the fourth quarter of 2011, floating-rate loans constituted
71.2% of all housing loans at the Bank.
Exposure to linkage segments - Mortgage executions over each year, by linkage segments, are set out below:
Permanent CPI-linked
Floating CPI-linked
Permanent Unlinked
Floating Unlinked Prime*
Foreign Currency
31.12.2008 23.26% 7.50% 5.94% - 59.52% 3.78%
31.12.2009 17.86% 7.32% 5.39% 5.25% 62.58% 1.60%
31.12.2010 18.26% 9.39% 3.77% 1.58% 62.64% 4.36%
31.12.2011 15.68% 30.45% 11.15% - 40.7% 2.02%
* In comparison to the end of 2010, there has been a downward trend in the execution of loans
based on the Prime interest rate, following the Bank of Israel's directive of May 4, 2011,
which restricts the proportion of loans at a floating interest rate for up to five years to 33%
of the loan.
Information regarding borrowers / collateral - As a policy, the Bank customarily does not
grant credit in mortgages secured by secondary liens, where the Bank's right to collateral is not
guaranteed.
As a policy, the Bank customarily grants mortgage credit only in cases in which the
information regarding the borrowers and the collateral is complete, current, and verified at the
date of granting of the loan.
Allowance for credit losses - The decision regarding allowance for credit losses is made by the
mortgage system, based on a review of the entire housing credit portfolio, according to a
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structured procedure, which among other matters determines the authority to examine and
decide upon such allowances. The allowance for credit losses in housing loans is performed
according to the extent of arrears, with the exception of loans to which special circumstances
apply, as defined in the Proper Conduct of Banking Business Directives; for such loans, an
allowance is made based on an individual or group examination, according to the impaired
debts directive.
Developments in balances in arrears and in allowance for credit losses across periods are set
out below (in NIS millions):
As at December 31
2011 2010* 2009 2008 Gross balance in arrears (including interest in arrears) 40 43 46 43 Rate from the portfolio 0.59% 0.72% 0.93% 1.07% Balance of allowance according to the extent of arrears 302 22 22 23 Balance of a group allowance 93 83 - - Balance of an individual allowance -4 12 5 5 Total balance of allowance for credit losses 39 42 27 28
Rate from the portfolio 0.58% 0.70% 0.55% 0.69%
1. Pro-forma-data.
2. Includes an increase in the amount of approximately NIS 7 million resulting from the expansion of the
population in respect of which an allowance is recorded according to the extent of arrears, pursuant to the
regulatory directives of April 28, 2011.
3. Of which: A group allowance for credit losses of NIS 8 million in respect of housing loans beyond the
requirement based on the extent of arrears – see details below.
4. An individual allowance for credit losses, which was recorded and written off in accounting, in accordance
with the criteria in the impaired debts directive.
An examination of the data regarding balances in arrears in the portfolio across periods
indicates that the rate of such balances decreased from approximately 1.07% as of the end of
2008 to approximately 0.58% as of the end of the fourth quarter of 2011. As part of the
examination of the overall adequacy of the allowance for credit losses, as required by the Bank
of Israel's new directive, "Measurement and disclosure of impaired debts, credit risk, and
provision for credit losses," the Bank recorded a group allowance for credit losses in respect of
housing loans (beyond the amount required based on the extent of arrears), in the amount of
approximately NIS 8 million, in view of the rapid increase in housing credit in recent years,
which has not yet been reflected in provisions based on the extent of arrears.
Collateral
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Collateral policy includes principles and rules regarding the types and volume of collateral. Collateral
requirements and rates are derived from the risk level which the Bank is willing to undertake when
providing credit. Special emphasis is placed on borrower ranking and customers’ repayment
capability as criteria for granting credit, in addition to the weight accorded to the usual collateral.
Collateral is matched to the type of credit it secures, with reference to the timeframe, type of linkage,
and nature and purpose of the credit. The security value of the different types of collateral is derived
from their nature, liquidity, quality, and speed of realizability, including changes in value as a result
of slowdowns or growth in the borrower’s business environment. The Bank verifies the value of
collateral as necessary and according to the type of collateral, by obtaining current assessor
estimates or valuations.
The Bank uses a computerized system to manage collateral in terms of collateral value and validity
periods, production of various types of alert reports, and production of information.
Treatment of problematic credit and debt collection
The Special Credit line at the Corporate Division coordinates the handling most of the problematic
customers at the Bank. The process is aimed first and foremost at restructuring customers’ debt and
improving their ability to repay the debt. In the absence of such capability, the line acts to collect the
debt, by attempting to reach an arrangement with the debtor, or by initiating legal collection
proceedings to collect the debt and minimize the damage to the Bank. In order to identify borrowers
whose risk and exposure level has increased, as early as possible, the Bank operates two processes.
The first is for identifying borrowers up to a certain amount with potential for problematic character,
and the second is for identifying borrowers starting from a certain amount with potential for inclusion
in a watch list. The first processes use an automated system to detect potential problems with
customers according to different parameters. Customers flagged by the system are thoroughly
investigated and discussed by an internal committee, which considers the measures required in
dealing with these customers and examines the need for classification as problematic debts,
including the need to perform allowance for credit losses in respect of those customers. The
second process, operated at the Bank during 2011, is aimed at examining and addressing the broadest
possible population of customers, at a high frequency, and properly monitoring and addressing these
customers. Customers whose debt is defined as a debt on the watch list as a result of the review, in
accordance with the classification rules that have been established, as well as customers added to this
list by routine credit committees, will be discussed quarterly by a special committee established for
that purpose. The committee will discuss borrowers included in the customer watch list, both from an
operational and control perspective and from a credit perspective. The discussion of these borrowers
also includes a discussion of the existing credit structure, decisions regarding the status and
classification of the debt, credit applications of these customers, and extension of existing credit
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facilities. Customers on the watch list under the authority of the Board of Directors are discussed by
the board of directors' credit committee.
In addition, problematic customers above a certain amount are discussed on a quarterly basis by the
committee for the examination of the financial statements.
As of January 1, 2011 the Bank implemented the directive of the Supervisor of Banks
concerning "Measurement and Disclosure of Impaired Debts Credit Risk and Provision for
Credit Losses". The change in the balance of the allowance for credit losses is detailed in Note
4 to the financial statements.
For more details about the directive and its implementation – See Note 1(E)(5).
Extreme scenarios
The Bank applies a variety of extreme scenarios to its exposures to credit risks, with
reference to sensitivity analyses and tests of macro-economic scenarios and scenarios
specific to various business lines. These extreme scenarios help the Bank in analyzing its
exposure to risks and in planning capital. As part of this process, the Bank examines the
degree of its sensitivity to events in the various business lines, and the effect of extreme
scenarios on the volume of risk-adjusted assets, the income, and the compliance with the
capital targets and capital requirements.
The capital planning included within the application of the ICAAP constitutes a three-year
plan, accordingly, the extreme scenarios also refer to a three-year horizon.
The results of the extreme scenarios are presented quarterly to management and to the board
of directors. The scenarios used in capital planning are presented with the following
information:
- Basic assumptions of each scenario; - Details of the effect of the scenario on the profitability of the business line; - Calculation of the capital ratio in the scenario; - Managerial and business conclusions derived from the analysis of the extreme
scenarios.
In addition, background data regarding the macro-economic environment are presented, in
order to examine whether crisis conditions are developing.
In order to formulate basic assumptions for the extreme scenarios, the effect of the economic
cycles of 2000-2010 on the quality of the credit portfolio and on the rates of provisions for
doubtful debts (at the overall level of the Bank and by sector) was examined. This process
allowed an examination of the volume of capital required, for through-the-cycle planning,
and provided a benchmark for quantification of the scenarios and the required capital for the
scenarios.
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In addition, due to the uncertainty regarding the timing of the materialization of extreme
scenarios during the three years of the plan, an estimate is performed of the capital ratios in
the scenarios used in capital planning, with different assumptions regarding the timing of the
materialization of the scenario, in each of the years of the plan (the coming three years).
In addition to the aforesaid extreme scenarios, the Bank calculated a reverse extreme
scenario designed to test the intensity of events that may lead to damage to the financial
results of the Bank, such that the core capital ratio would fall below the risk appetite and risk
tolerance established by the Bank for extreme scenarios.
Exposure to corporate bonds:
The bank views part of its proprietary investment in corporate bonds as a substitute for
granting credit. The limits and rules for this investment discussed and approved by the
Board of Directors and include the volume of the exposure, the permitted types of bonds,
bond ratings, maximum exposure to a single issuer, diversification limits, and minimum
spread by rating.
The decision-making process regarding investments in this area is performed at the
Financial Management Division, according to the hierarchy of authorizations. The limits on
investment in corporate bonds are controlled routinely, and the bank's policy in this area is
adjusted to market developments.
For additional information with regard to the composition of the corporate-bond portfolio,
see the section "Developments in Assets and Liabilities," under the analysis of the
securities item.
Also see the reference in the section "Critical Accounting Policies and Estimates" with
regard to the examination of the need to perform provisions for declines in value of an
other-than-temporary nature.
Counterparty risk
The risk that the counterparty to an OTC (over the counter) transaction may default before
the final settlement of cash flows in the transaction. Loss results if, when the counterparty
defaults, there are transactions with the customer with a positive economic value.
These exposures are concentrated in the Bank’s activity with customers, banks in Israel,
and banks overseas. The action is performed after activity limits are set for customers, and
compliance with these limits is monitored routinely. This monitoring includes current revaluation
of transactions with customers at market prices (mark to market), assessments of potential risk
according to the type of instruments and market risks, and suitable collateral requirements.
Limits and collateral are examined routinely. Procedures and rules have been established for
control and for working with customers. The Bank applies the historical scenarios method and
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additional internal models, at the level of the transaction and the customer, to determine the
required collateral. These scenarios periodically undergo validation processes, such as tests
of their validity during periods of financial crisis.
The activity in derivative instruments is presented in Note 19 to the financial statements.
Further details of the item “Gross fair value of derivative instruments” are set out below:
Counterparty: “Banks,” as of December 31, 2011:
The total balance in respect of the counterparty “Banks” is in the amount of NIS 320
million; the highest balance for a single entity is in the amount of NIS 54 million.
Counterparty: “Others,” as of December 31, 2011:
The total balance in respect of the counterparty “Others” is in the amount of NIS 447
million; the highest balance for a single entity is in the amount of NIS 155 million.
Activity with banks abroad
Credit exposure in activity with banks overseas mainly derives from the following activities:
deposits of surplus liquidity, receiving guarantees as collateral for customers, FX activity, activity
in derivatives, including credit derivatives, clearing activity, and purchases of bonds of banks.
The Bank’s activity with banks abroad is based on limits of exposure approved annually, examined
routinely, and updated as necessary. The Bank acts manly with banks with which it has ISDA
agreements and CSA agreements. The Bank has transaction-clearing arrangements in foreign currency
through CLS (Continuous Linked Settlement) through a big international Bank with a high rating.
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Credit exposure to foreign financial institutions
Credit exposure to foreign financial institutions1 on a consolidated basis as of December 31, 2011
(in NIS millions):
External credit rating*
Balance-sheet credit
risk 2
Off-balance-sheet credit
risk 3 Credit
exposure AAA - AA- 278 113 391
A + - A- 1,115 6 1,121
BBB + - BBB- 8 - 8
Unrated 6 - 6
Total exposure 4 1,407 119 1,526
Credit exposure to foreign financial institutions1 on a consolidated basis as at December 31, 2010
(in NIS millions):
External credit rating*
Balance-sheet credit
risk 2
Off-balance-sheet credit
risk 3 Credit
exposure AAA - AA- 464 97 561
A + - A- 526 5 531
BBB + - BBB- 5 - 5
Unrated 3 1 4
Total exposure 4 998 103 1,101
1. Foreign financial institutions include banks, bank's holding companies, investment banks and
brokers.
2. Deposits and current-account balances with banks, investments in bonds, and other assets in respect
of the fair value of derivative instruments presented before bilateral offsetting as defined in
Appendix C to Proper Conduct of Banking Business Directive No. 203.
3. Guarantees to secure debts of third parties.
4. There are no financial institutions that classified as impaired, substandard or under special
supervision debt and there is no allowance for credit losses.
* The rating is at the consolidated banking group level.
Notes:
A. Credit exposures do not include exposure to financial institutions with full explicit
guarantees by governments, and do not include investments in asset-backed securities (see
details in Note 3A to the financial statements).
B. For further information regarding the composition of credit exposures in respect of
derivative instruments with banks and broker/dealers (local and foreign), see Note 19B to the
financial statements.
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The institutions included in the table above are banks and brokers operating in OECD countries.
Most of the exposures as of December 31, 2011 are to institutions operating in the United States,
Swiss, England, Germany and Canada. The Bank has no exposure to banks operating in Portugal,
Ireland, Greece, or Spain. There is negligible exposure of less than NIS 0.2 million to Banks
operating in Italy.
The exposure in respect of the United States's total credit risk in NIS 555 million (exposure to
foreign financial institutions in exceeding 15% of the capital base of the Bank, as defined in
Proper Conduct of Banking Business Directive No. 202 concerning capital components).
The bank monitors changes in the ratings of these institutions issued by the rating agencies
Moody's and S&P. Due to the financial crisis and the rapid developments in the condition of
various financial institutions, the bank is monitoring additional parameters indicative of these
institutions' condition. Such parameters include rapid changes in share prices, changes in bond
spreads and credit default swap spreads, resource raising costs, and other information published
with regard to the financial institutions. Based on the aggregate information collected, the Bank
adjusts its policy with regard to the extent of its exposure to the various financial institutions.
The Bank has set limits on its exposure to the various financial institutions, addressing direct
credit exposure as well as exposure arising from derivative financial instruments and clearance
risk. These exposure limits are updated according to developments in the financial markets and
the condition of the various financial institutions. The majority of the direct credit exposure is
short term, constituting part of the management of the bank's liquidity surpluses in foreign
currency. The exposure arising from derivative financial instruments mainly derives from activity
with customers, and is mostly for terms of up to one year.
In light of the debt crisis in European countries and the increase in CDS's spreads in different
countries it was decided on additional reduce of the limits of exposure to various banks.
In Appendix E - Overall Credit Risk to the Public by Economic Sector, the "Financial Services"
sector does not include exposures to banks. The two reports are therefore not identical.
Leveraged Financing
The bank occasionally provides credit it finance the acquisition of means of control of
corporation, sometimes in large amounts or at high financing rates, where the ability to repay the
credit is primarily based on the acquired corporation. The credit granted allows, among other
things, the financing of mergers and acquisitions, business expansions, etc.
Each application for credit of this type is examined individually, taking into consideration the
nature of the customer, the repayment capability, and the collateral offered. As a rule, the bank
strictly maintains the practice of setting a financing rate relative to the market value above which
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the customer must provide supplementary collateral. This credit is granted subject to regulatory
limits.
The following table shows the distribution of the exposure for leveraged financing transactions by
economic sector and geographical region (in NIS millions):
December 31, 2011 December 31, 2010
Balance sheet (1)
Off-balance
sheet Total (2) Balance sheet (1)
Off-balance sheet Total (2)
Israel:
Construction and real estate 50 - 50 54 - 54
Trade 295 - 295 299 - 299
Communication 135 - 135 169 - 169
Financial services 60 - 60 - - -
Business services 96 - 96 98 - 98
Total 636 - 636 620 - 620
Europe(3):
Financial services 72 - 72 69 - 69
Total 72 - 72 69 - 69 Total leveraged financing * 708 - 708 689 - 689
(1) Net balance-sheet balance after deducting liquid collateral deductible under Section 5 of Proper Conduct of
Banking Business Directive No. 313. (2) Net liability balance in excess of the liability amount specified in Section 2(A) of Proper Conduct of
Banking Business Directive No. 323, in the amount of NIS 25 million linked to June 1998 CPI. (3) No exposure to Portugal, Ireland, Greece, Spain or Italy.
* There are no customers granted by credit finance to the acquisition of means of control, that classified as impaired, substandard or under special supervision debts.
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Allowance for credit losses, impaired credit to the public, in arrears and write-offs by
counterparty
As of December 31, 2011
Governments Banks Public Total In NIS million Balance-sheet exposures:
Impaired credit to the public - - 524 524
Unimpaired credit to the public, in arrears of 90 days or more - - 69 69 Unimpaired credit to the public, in arrears of 30 days to 89 days - - 109 109
Allowance for credit losses (balance- sheet and off-balance- sheet) - - 316 316 Individual provision for credit losses at the statements of Profit and Loss - - 13 13 Net accounting write-offs during the period - - 63 63
B. Credit Portfolio Concentration Risk:
Concentration risk is one of the types of risk faced by banking corporations in their business
activities. In contrast to other risk components, which are usually defined at the level of the
individual transaction or single counterparty, the exposure to concentration risk arises from the
composition of the portfolio of risk-adjusted assets of the Bank or from the composition of its
exposures.
Portfolio risks can be divided into two types: systematic risk factors and idiosyncratic risk factors.
Systematic risk represents the effect of macro-economic and financial events on the quality of
the asset portfolio of the banking corporation, and in particular the quality of its credit portfolio.
The sensitivity of borrowers to macro-economic events may vary, but the basic assumption is that
no borrower is entirely immune to events of this type. Consequently, systematic risk is
unavoidable, by definition, and cannot be mitigated by management or by effective hedging.
By contrast, idiosyncratic risk is defined at the level of the specific borrower, and depends on the
quality of management and business performance of the firm. As a result, the lower the relative
weight of the exposure to a single borrower, the smaller the idiosyncratic component of portfolio
risk.
The more diversified the credit portfolio, the lower the exposure of the Bank to idiosyncratic risk;
however, the exposure to systematic risk remains unchanged.
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The Bank’s credit policy is based on the diversification and controlled management of credit
risks. This is reflected in the striving for diversification of the credit portfolio among the different
economic sectors, and in diversification among a large number of borrowers and in the different
linkage segments.
The Bank set risk appetite for credit concentration at a different sections.
Sectoral concentration
In general, the Bank’s credit policy is to increase the diversification of the credit portfolio among
the different economic sectors.
The Board of Directors of the Bank conducts discussions regarding credit to certain sectors,
particularly sectors sensitive to fluctuations and sectors in which sectoral risk is high compared to
other sectors of the economy, and establishes policy based on the expected developments in these
sectors.
Credit to sectors in which the Bank’s activity is focused, such as diamonds, residential real estate,
and finance, is handled by professional units specializing in these sectors. Specific working
procedures and special controls have been set for these sectors in addition to the usual procedures
and controls, in order to address the credit risks unique to these sectors.
The Bank complies with the directives of the Bank of Israel concerning limits on credit to a
specific sector, and actively manages the concentration of its exposure to the sectors, while
adjusting the volume of credit in each sector to the changing map of risks.
The Board of Directors of the Bank set the risk appetite and the risk capacity to the sectoral
concentration metrics.
See also Appendix E to the Management’s Review regarding overall credit risk to the public by
sectors of the economy.
Borrower concentration
In general, the Bank's credit policy is to increase the diversification of the credit portfolio among
the different borrowers. In May 2011, the Supervisor of Banks issued an update of Proper
Conduct of Banking Business Directive No. 313, effective December 31, 2011. For further
details, also see the section "Legislative Updates." Among other matters, the updated directive
contains changes to the definition of indebtedness, the definition of a borrower, and the definition
of a group of borrowers; and changes to the limits on indebtedness of borrowers and groups of
borrowers. Pursuant to the updated directive, total credit to a single borrower shall not exceed
15% of the capital of the Bank; total credit to a group of borrowers and to a group of banking
borrowers shall not exceed 25% of the capital of the Bank; and the exposure of total net
indebtedness (after deduction of the amounts specified in Section 5 of the directive) of
"borrowers," "groups of borrowers," and "groups of banking borrowers" with a net indebtedness
exceeding 10% of the capital of the Bank shall not exceed 120% of the capital of the Bank. The
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Board of Directors of the Bank has established a risk appetite and tolerance that include a certain
margin to be maintained relative to the aforesaid limits of the Bank of Israel. The Bank complies
with and does not deviate from these instructions.
The Bank routinely examines its compliance with the risk appetite and tolerance established by
the Board of Directors for exposures to single borrowers and groups of borrowers, including
compliance with the limits on the level of concentration, through various metrics and scenarios.
As noted, these exposures are lower than the maximum exposures established in Proper Conduct
of Banking Business Directive No. 313. The Bank routinely monitors developments in balances
of the large borrower groups. However, due to the developments in the markets in Israel and
globally, and the increase in uncertainty, the Bank conducted an examination of the condition of
the large borrower groups of the Bank, including an examination of the effect of the volatility in
the markets on the collapse of one of the ten largest borrower groups. No exceptional findings
emerged from these examinations.
Balances of credit to the public and off-balance-sheet credit risk as at December 31, 2011, to
groups of borrowers of the Bank whose net indebtedness, on a consolidated basis, after the
permitted deductions under Section 5 of Proper Conduct of Banking Business Directive No. 313,
exceeds 15% of the capital of the banking corporation, in NIS millions, are set out below:
Current credit risk as at the reporting date
Principal economic sector of the group
Balance-sheet credit
risk(1)
Off-balance-
sheet credit risk(1)
Off-balance-sheet credit
exposure
Net total credit risk(2)
A. Industry 458 62 3 523
B. Financial services 595 105 - 506
C. Financial services 795 19 - 487
1. Balance-sheet and off-balance-sheet credit risk, before the permitted deductions, and after deduction of the
individual allowance for credit losses.
2. Credit risk after deduction of individual allowance for credit losses and permitted deductions.
In addition, exposure exists to a group of banking borrowers, in a total amount of NIS 626
million, mainly derived from bonds.
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The following table lists balances of credit to the public and off-balance-sheet credit risk to
borrowers with debt balances greater than NIS 200 million, by economic sector, as of December
31, 2011 in NIS millions:
Sector Number of borrowers
Balance-sheet
credit*
Off-balance-sheet credit
risk Total
Industry 1 1 247 248
Construction and real estate 3 430 345 775
Financial services 7 2,040 224 2,264 Total 11 2,471 816 3,287
* Credit to the public and assets arising from derivative financial instruments.
Notes:
1. Balance-sheet credit and off-balance-sheet credit risk were classified before deduction of allowance for credit
losses (recorded debt balance).
2. Credit risk in off-balance-sheet financial instruments was calculated according to definitions established for the
purpose of the calculation of limits on the indebtedness of a borrower.
3. The data is presented before the deduction of the guaranties which are permitted to be offset in order to set limits
for single borrower and group of borrowers.
4. See also Note 4.F to the financial statements.
Concentration of collateral
The risk of concentration of collateral is defined as the risk of potential losses in the credit
portfolio as a result of excessive concentration or dependence of the composition of the collateral
portfolio of the Bank on a small number of specific assets or types of collateral. As part of the
implementation of the second pillar of Basel II, this risk was analyzed and included in the annual
ICAAP document.
Geographical concentration
The main activity of the Bank is with Israeli customers. The Bank has no branches outside Israel.
The Bank has not extended direct credit to customers whose primary operations are in LDCs (less
developed countries), where it relies on assets in these countries as the source for repayment of
the credit. In addition there is no direct exposure to customers which mainly active in Greece,
Portugal, Spain, Italy and Ireland.
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The following table shows the distribution of exposures in the portfolio by geographical region
according to client's final risk1,2 (see also Appendix F to the Management’s Review regarding the
exposure to country risk) (NIS Millions):
As at December 31, 2011
Israel U.S. Switzerland Italy5,6 Others Total Credit 22,145 84 92 8 539 22,868 Deposits in banks 5,949 441 381 - 190 6,961 Securities 6,535 50 - - 200 6,785 Securities borrowed 5 - - - - 5 Fair value of derivatives4 1,308 64 39 - 174 1,585 Guaranties 2,146 7 - - 1 2,154 Commitments to grant credit 8,172 177 1 2 220 8,572 Off-balance-sheet derivatives risk4 579 75 20 - 46 720
46,839 898 533 10 1,370 49,650
As at December 31, 2010**
Israel U.S. Switzerland Others Total NIS millions Credit3 *20,907 *113 106 665 21,791 Deposits in banks *6,435 *238 240 219 7,132 Securities 4,280 113 - 160 4,553 Securities borrowed 415 - - - 415 Fair value of derivatives4 817 34 9 92 952 Guaranties 2,386 3 - 1 2,390 Commitments to grant credit 9,277 49 - 307 9,633 Off-balance-sheet derivatives risk4 1,309 302 144 876 2,631
45,826 852 499 2,320 49,497
* Reclassified. ** As a result of implementation of the directives of the Supervisor of Banks concerning the "Measurement
and disclosure of impaired debts, credit risk and provision for credit losses", and following the amendment of the definition of "indebtedness" by Proper Conduct of Banking Business No. 313 – "limits on indebtedness of borrower and group of borrower", comparative numbers for previous years were not restated, therefore they are not comparable.
1. Data based on Appendix F, with completion of the exposures in Israel. 2. The allocation to geographical regions was performed in accordance with the final risk of the exposure, as
detailed in the directives of Appendix F of the quarterly Public Reporting Directives. 3. Excluding the general and supplementary provision (31.12.10 – NIS 78 million). 4. Including client's activity in the Maof market that not meets the derivative definition. 5. Pursuant to the directives of the Supervisor of Banks, from the reports as at September 30, 2011, the Bank
is required to disclose on a separate line, the exposure to the next countries: Portugal, Italy, Greece and Spain. As at December 31, 2011, the Bank does not have exposure to the next countries: Portugal, Ireland, Greece and Spain.
6. Because risk is classified by place of residence pursuant to the rules of the directive, this amount includes borrowers whose debt is backed by guarantors (in this case also the owners) who hold an Italian passport. The Bank does not rely solely on this guarantee; instead it mainly relies on other collateral, including non-liquid collateral. The Bank does not directly grant credit to or finance projects of PIIGS countries.
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Market Risks
Market risks are risks to the Bank’s revenues and equity arising from changes in prices and rates in the
financial markets, primarily changes in interest rates, exchange rates, inflation, and share prices, and in the
volatility of movements in these areas.
The Board of Directors of the Bank establish the policy of exposure to market risks, which includes also risk
appetite and the risk capacity for market risks (linkage base, interest rate, options, and shares) in purpose to
minimize the potential loss that can be derived from those risks. Based on the examination of market risks, it
was decided in the third quarter of 2011 to reduce the risk appetite to market risk (without offsets) in terms of
VAR from NIS 80 million to NIS 60 million. In addition, the exposure document that includes, among
others, reference to market risks presented quarterly to discuss in the risk management committee and later in
the Board of Directors. In addition, the results of BACKTEST to examine the validity of market risk
evaluation modules, extreme case scenarios to market risks and the revenue versus risk tests are discussed on
a quarterly basis in the risk management committee. In addition the Board of Directors receive a periodical
report regarding the results of process that tests all the Bank's modules, including the market risks
management module.
The head of the Financial Management Division, Mr. Efraim Avraham, manages the Bank’s market
exposures.
The market-risk situation is examined in detail on a weekly basis in the Management Forum for Financial
Matters, headed by the head of the Financial Management Division, and the members of the administration
and another relevant holders of positions participate in this Forum. As part of this process, there is a
discussion regarding all the Bank's market exposures, interest exposures and liquidity exposures, and
also an approval of a new financial products or new activities. In addition the Forum establish internal
frameworks which was established by the board of directors. The Forum discussions and its decisions
are submitted for approval by the management of the Bank. The decisions are made only after their
discussion and approval by the weekly Management Forum, headed by the General Manager of the
Bank. These decisions are discussed and approved also by the board of directors of the Bank if
necessary. The members of the administration are responsible to the implementation of these decisions
(each one at his area).
Exposures to market risks are created at the Financial Management Division, primarily by the dealing
room and the proprietary unit, within the limits established by the board of directors. In addition, the
asset and liability management unit of the Bank performs actions aimed at handling positions arising
from the routine banking activity of the Bank.
The dealing room creates market exposures (linkage base, interest rate, options), based on the limits
set by the board of directors.
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The proprietary unit within the division has a material effect on the market risks of the Bank, mainly
with regard to the CPI-linked position, interest-rate risks, and share risks. The activity of this unit is
examined on a daily basis by the Controls and Risk Management Division, and on a weekly basis by
the Forum on Financial Matters.
The ALM unit is responsible for establishing and publishing benchmark prices in NIS in the linked
and unlinked segments, and managing the gap (exposure) between assets and liabilities arising from
the routine operations of the Bank.
The Controls Section within the Controls and Risk Management Division oversees the control of
total market risks, including tests of compliance and adaptation of the activity and exposures of the
Financial Management Division to the exposure limits set and approved by the board of directors
(which also include ALM exposures). The results of these measurements are submitted to the CEO
and to the members of the Forum on Financial Matters.
The risk-management system is responsible for identifying, defining, and mapping market risks, and
for creating a risk overview and reporting on it to the management’s Forum on Financial Matters. This
includes the development of internal models for risk measurement in all sectors of market risk.
The Bank measures market risks using, inter alia, the value-at-risk (VAR) model of potential risk (possible
decline in value during a given time period). The calculation is performed based on the parametric method,
for a holding period of ten days, at a confidence level of 99%.
The board of directors of the Bank has set VAR limits for each component of market risk (linkage-
base risk, interest-rate risk, and option risk), as detailed below.
It is emphasized that all VAR tests are performed on a daily level, or at an intraday resolution level in
certain areas (including options). During 2011, no immaterial deviations from the VAR limits were
observed, excluding few deviations in foreign currency options/options VAR which their value does
not exceed NIS 0.5 million.
The Bank applies a range of stress tests to market risks. The stress scenarios pertain to the various
market risks and include references to linkage-base risks, interest-rate risks, and option risks, based on
fluctuations in currencies and markets in which the Bank operates. The scenarios are based on past
crises in the financial markets, including the crisis of 2008. In 2011 no deviations were observed in
stress tests value compared with defined limits.
The Bank routinely applies five scenarios in the area of market risks:
1. The October 1998 crisis scenario (based on observed changes in the markets in a period of about
one month during the crisis).
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2. The 2008 crisis scenario (based on observed changes in the markets in a period of about three
months during the crisis).
3. A scenario of a liquidity crisis in the financial markets.
4. Extreme scenario, based on values which were established during 2011 by the European Central
Bank in order to examine market risks scenarios ( this scenario was added on December 2011).
5. A scenario consisting of the worst case in each type of exposure in each of the foregoing events
(1-4).
The list of scenarios is examined at least once annually, and is also updated from time to time based on
developments in the markets (the list was updated three times - twice in 2008, once in a routine annual
update, and a second time due to the crisis during that year and once again during 2011, as mentioned
above). This list is submitted for discussion to management and to the board of directors, for
examination and approval, as necessary and at least once annually.
The running of the scenarios is conducted at least on a weekly basis and there is a quarterly discussion
in the Forum of Management for Financial Matters, Management of the Bank, Risk Management
Committee of Board of Directors and the Board of Directors regarding the following Matters:
List of the extreme case scenarios.
Values of the scenarios.
Actual result of the scenarios versus the established limits.
Administrative and business conclusions arises from the scenarios.
In addition, data on market risk factors tendency is presented. This data can exhibit the market
tendency and the potential development of extreme case scenarios which can affect on the value of the
Banks market positions.
As a supplement to the VAR testing and validation of this model, the Bank performs back tests. These
tests are designed to examine the adequacy and reliability of the VAR model for the measurement of
risks, by matching the forecasts of the VAR model against actual observed changes over a period of
time.
Linkage-base risk – Refers to possible loss arising from changes in rates of currencies, linkage bases, or
shares, when the linkage base of the assets is not parallel to the linkage base of the liabilities. Linkage-base
risk management aims to maximize the Bank’s profitability while taking advantage of opportunities in the
various markets, among other goals. As part of this activity, the Bank creates exposures in the local and
international currency markets, as well as exposures in the CPI-linked market. The Bank’s management
administers risks arising from linkage-based exposure in a controlled manner, within the appetite risk set by
the Board of Directors.
The risk appetite for all the linkage-base exposures all the CPI-linked segment and in the main foreign
currency was updated to a risk value in an amount of NIS 20 million during the fourth quarter.
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A. Foreign currency exposures: The Bank’s activity as a market maker in the field of foreign
currency makes it necessary to initiate deliberate exposures in the course of trading. Working
procedures and restrictions have been defined for the extent of these trading positions and the
method of managing them in the course of trading. In addition, from time to time, decisions are
taken to initiate exposures on the basis of assessments of developments in the relative prices of
different currencies. These exposures are conducted within the frameworks prescribed by the
Board of Directors, which include restrictions on the maximum losses that may be incurred. The
Bank operates a computerized system that provides an indication of all foreign currency
exposures at any given point in time. The Board of Directors’ restriction on the total foreign
currency/NIS exposure at the end of the day was set in terms of value at risk, at a total of NIS 13
million in terms of value at risk. The actual exposure on December 31, 2011, was a value at risk
of NIS 0.3 million (December 31, 2010 - NIS 1.3 million). The highest value at risk (at the end of
the business day) in 2011 was NIS 4.3 million (2010 - NIS 4.2 million). The Bank's activity in
foreign currencies is carried out mainly in U.S. Dollar, Euro, Yen, Sterling and Swiss Franc.
In addition, additional limits on value at risk were set for foreign currency (excluding USD) -
NIS and for non-major currencies, as well as intraday and end-of-day position limits.
A quantitative limit on surpluses/shortages of assets versus liabilities was also set at USD 40
million, of which USD 15 million in foreign currency excluding USD, and USD 10 million in
non-major currencies (major currencies: USD, EUR, GBP, CHF, JPY).
B. CPI-linked exposure: The limit on CPI linkage base exposure in terms of value at risk was updated
during the fourth quarter to NIS 10 million. The quantitative limit on the surplus of assets over
liabilities was also set at NIS +1000/-750 million. Actual exposure as at December 31, 2011 was a
value at risk of NIS 1.42 million (December 31, 2010 - NIS 1.3 million). The highest value at risk (at the
end of the business day) in 2011 was NIS 5.2 million (2010 - NIS 5.05 million).
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The following table shows sensitivities to changes in foreign-currency exchange rates and in the CPI, in
NIS millions (parentheses denote loss):
(Measurements include both balance-sheet and off-balance-sheet activity)
As at December 31, 2011 CPI USD EUR GBP JPY CHF Other FX 5% increase 12.5 (0.8) 2.3 - 0.8 0.1 0.1 10% increase 24.9 (2.9) 5.7 (0.1) 1.5 0.3 0.2 5% decrease (12.5) 3.0 (2.4) - (0.8) (0.1) (0.1) 10% decrease (24.9) 9.5 (5.1) 0.1 (1.5) (0.3) (0.2)
As at December 31, 2010 CPI USD EUR GBP JPY CHF Other FX 5% increase 18.2 0.2 1.1 2.0 (0.9) (0.8) 0.3 10% increase 36.5 6.7 5.4 3.9 (1.8) (1.6) 0.6 5% decrease (18.2) (0.6) 0.4 (1.7) 0.9 0.8 (0.3) 10% decrease (36.5) (8.0) 4.2 (2.8) 1.8 1.6 (0.6)
The following table shows the condensed linkage balance-sheets:
As at December 31, 2011
Unlinked CPI-linked
Foreign currency, including foreign currency linked
Non-monetary items Total
Assets 26,479 5,441 6,046 949 38,915 Liabilities 24,175 4,604 7,412 738 36,929
2,304 837 (1,366) 211 1,986 Forward transactions, net (883) (425) 1,308 Options (delta value) 28 - (28) 1,449 412 *(86)
* Of which, USD - NIS (87) million; EUR - NIS 1 million.
As at December 31, 2010
Unlinked CPI-linked
Foreign currency, including foreign currency linked
Non-monetary items Total
Assets **23,812 5,080 5,555 865 35,312 Liabilities **21,690 4,293 6,754 569 33,306
2,122 787 (1,199) 296 2,006 Forward transactions, net (329) (472) 801 Options (delta value) (401) - 401 1,392 315 *3
* Of which, USD - NIS (8) million; EUR - NIS 14 million; other currencies - NIS (3) million.
** Restated following the retroactive implementation of the directive regarding employee benefits - See Note 1.E.21.
For additional details of the break down of the Bank’s assets and liabilities by linkage bases and
maturity periods - see Note 16 to the financial statements.
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C. Linkage-base exposure in shares and index certificates: The Bank has holdings in shares in the
banking book and in the trading book. Some of the bank's investments are in index certificates on
shares, or ETFs (exchange-traded funds).
The bank is exposed to risk in the event of fluctuations in share prices. Separate risk limits in
terms of volume and in terms of VaR, have been set by the Board of Directors of the Bank for the
Maof index and for Israeli index certificates on indices, as well as for index certificates on
foreign indices or ETFs.
The risk appetite for the Maof index, the Israeli index certificates and the Israeli shares was
updated during the fourth quarter to a value at risk of NIS 16 million. Actual utilization as at
December 31, 2011 was a value at risk of NIS 6.2 million (December 31, 2010 - NIS 3 million).
The risk appetite for the index certificates and ETFs in foreign markets was updated during the
fourth quarter to a value at risk of NIS 16 million. Actual utilization as at December 31, 2011 was
a value at risk of NIS 4.15 million (December 31, 2010 - NIS 1.5 million).
Other limits have been set by the Board of Directors on value at risk at the level of a single ETF
and at the level of ETF portfolios, divided into sectors and markets.
The total risk appetite for exposure to shares in the markets and instruments approved by the
board of directors was updated during the fourth quarter to a total value at risk of NIS 25 million.
Interest-rate risk - Arises from the possible effect of changes in interest-rate curves on the fair value of assets
and liabilities.
Interest-rate risks to the overall portfolio of the Bank constitute the principal market risk to which the Bank is
exposed.
The instruments composing interest-rate risk at the Bank are divided into products in the banking
book, in which the Bank has no intention to trade, and products in the trading book, where instruments
are held with the intention to trade or with the intention to hedge other components of the trading
book. Holdings in the trading book are at a higher level of liquidity than in the banking book.
The Bank measures and manages interest-rate risk for its overall portfolio, encompassing instruments in the
banking portfolio and the trading portfolio with reference to the risks deriving from ALM activity, as a result
of proprietary activity and dealing room.
Interest-rate exposure management policy is aimed at maintaining desirable exposure levels in each of the
linkage segments to which the Bank is exposed, according to market forecasts and the targeted risk levels, and
based on the limits set by the board of directors. The main exposures are taken in the unlinked shekel
segment and in the CPI-linked shekel segment. There are immaterial interest-rate exposures in the major
foreign currencies.
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Interest-rate exposure is measured on a daily basis for the principal currency segments: unlinked shekel, CPI-
linked shekel, U.S. dollar, euro, yen, Swiss franc, and pound sterling.
Interest-rate exposure is measured using two main techniques:
A. DV1% (Delta Value 1%) - An estimate of the possible change in the portfolio given a 1% parallel shift
in the interest-rate curve.
B. VAR (Value at Risk) - Measures the potential risk to the portfolio at a confidence level of 99%, and
holding period of 10 days. During the fourth quarter, according to the validation results, the assurance
level of GBP currency was set at 99.99%
Measuring interest-rate exposure in the CPI-linked segment takes into account, among other factors, working
assumptions regarding the rate of early settlements in mortgages in fixed interest rate, and working
assumptions regarding the rate of withdrawals at optional exit points in saving plans. These assumptions are
based on past experience.
Interest-rate exposure in the unlinked shekel segment takes into account working assumptions regarding
interest-rate exposure in Gilon bonds, early repayment of fixed-rate mortgages, and working assumptions
regarding the volume and duration of current-account products without defined maturity dates (the
existence of a stable balance of some current accounts, while the other part of current accounts is
defined as having no maturity date, and calculated as having a duration of two days). There are no
special adjustments in the foreign-currency segment.
The assumptions detailed above are approved by the board of directors, and are an element of the
exposure calculation method.
The Board of Directors of the Bank has set limits in terms of value at risk with regard to the possible effect of
changes in interest rates. A limit has been set for total interest-rate risk, as well as for each linkage base,
including each foreign currency separately. In the CPI-linked shekel and unlinked shekel currency
segments, a limit in terms of DV1% was set in addition to the VaR limit. Details of the limits and
actual exposures at the balance-sheet date are presented in the table below.
Actual exposure as at December 31, 2011 was a value at risk (VAR including correlation) of NIS 18.3 million
(December 31, 2010 - NIS 24 million). The highest value at risk (at the end of the business day) in 2011 was
NIS 29 million (2010 - NIS 43 million).
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The following table shows the risk appetite and the actual exposure, in NIS million:
Segment Type of limit Limit Actual exposure
31.12.2011 31.12.2011 31.12.2010 Total VAR interest offset * 60 18.3 23.8
CPI-linked VAR 40 5.5 20.1
DV1% 60 37.8 36.7
Unlinked VAR 30 13.9 6.1
DV1% 90 39.9 11.0
Foreign currency VAR for all currencies 20 3.9 2.6
* In calculating the total, reductions of interest-rate risks due to correlations in interest-rate
exposures between different currencies, by periods, are taken into account.
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The table below shows details on the fair value of the financial instruments of the Bank and its subsidiaries,
excluding non-monetary items (before the effect of hypothetical changes in interest rates):
December 31, 2011 Israeli currency Foreign Currency2
Unlinked CPI-
Linked USD EUR Other Total In NIS million Financial assets 1 26,474 5,359 3,615 1,064 726 37,238
Amounts receivable in respect of derivative and off-balance-sheet financial instruments3 10,386 227 15,794 2,758 9,142 38,307
Financial liabilities1 24,367 4,593 5,031 1,169 505 35,665
Amounts payable in respect of derivative and off-balance-sheet financial instruments3 11,251 652 14,468 2,650 9,361 38,382 Net fair value of financial instruments 1,242 341 (90) 3 2 1,498
December 31, 2010* Israeli currency Foreign Currency2
Unlinked CPI-
Linked USD EUR Other Total In NIS million Financial assets 1 23,683 5,101 3,797 896 600 34,077
Amounts receivable in respect of derivative and off-balance-sheet financial instruments3 12,109 321 10,591 3,016 5,802 31,839
Financial liabilities1 21,677 4,289 4,758 1,299 437 32,460
Amounts payable in respect of derivative and off-balance-sheet financial instruments3 12,869 929 9,637 2,612 5,969 32,016 Net fair value of financial instruments 1,246 204 (7) 1 (4) 1,440
For more details regarding the assumptions used to calculate the fair value of the financial instruments,
see Note 20.C. to the Financial Statements.
* Reclassified.
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The effect of hypothetical changes in interest rates on the net fair value of the financial instruments of
the Bank and its subsidiaries, excluding non-monetary items:
December 31, 2011
Net fair value of financial instruments, after the effect of changes in interest rates4
Israeli Currency Foreign Currency2 Change in fair value Changes in interest rates Unlinked
CPI-Linked USD EUR Other
Offsetting effects Total Total Total
In NIS million
In NIS million Percent
1% immediate parallel increase 1,212 299 (75) (6) (2) - 1,428 (70) (4.7%)
0.1% immediate parallel increase 1,240 336 (85) 2 - - 1,493 (5) (0.3%)
1% immediate parallel decrease 1,277 384 (98) 12 1 - 1,576 78 5.2%
December 31, 2010**
Net fair value of financial instruments, after the effect of changes in interest rates4
Israeli Currency Foreign Currency2 Change in fair value Changes in interest rates Unlinked
CPI-Linked USD EUR Other
Offsetting effects Total Total Total
In NIS million
In NIS million Percent
1% immediate parallel increase 1,213 171 (23) (14) (4) - 1,343 (97) (6.7%)
0.1% immediate parallel increase 1,251 201 (18) - (3) - 1,431 (9) (0.6%)
1% immediate parallel decrease 1,296 251 (11) 17 (3) - 1,550 110 7.6%
1. Includes hybrid financial instruments; does not include balance-sheet balances of derivative financial instruments and the fair value of
off-balance-sheet financial instruments.
2. Including Israeli currency linked to foreign currency.
3. Amounts receivable (payable) in respect of derivative financial instruments and in respect of off-balance-sheet financial instruments,
discounted at the interest rates used to calculate the fair value presented in Note 20 to the financial statements.
4. The net fair value of financial instruments presented in each linkage segment is the net fair value in that segment, assuming that the
change noted in all interest rates in the linkage segment occurs. The total net fair value of financial instruments is the net fair value of
all of the financial instruments (excluding non-monetary items), assuming that the change noted in all interest rates in all linkage
segments occurs.
* Options embedded in structured instruments (at a value of approximately NIS 12 million as at December 31, 2011, NIS 9 million as at December 31, 2010) and a floor option (at a value of approximately NIS 155 million as at December 31, 2011, NIS 90 million as at December 31, 2010), (prior to the effect of credit risk) are presented at their balance-sheet balance, without opening off-balance-sheet branches, after fulfillment of the conditions listed in subsection 11(B) of the directive.
** Reclassified.
Note: No cumulative weekly change occurred in the last ten years which, had it occurred at the reporting date,
would have hurt the going concern assumption based on which the financial statements were prepared.
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Option portfolio risk - Most of the Bank’s activity in foreign currency / foreign currency options is
performed with back-to-back coverage in trading, without the creation of market risks over time. This
portfolio is included in “other derivatives” in Note 19 to the financial statements as of December 31,
2011 (the face value totaled NIS 11,613 million, and the balance of the fair value totaled NIS 361
million, presented both under the "assets in respect of derivatives instruments" item and under the
"liabilities in respect of derivatives instruments" item).
In NIS / foreign currency options, and to a limited extent in foreign currency / foreign currency
options, the Bank manages its option portfolio and is thereby also exposed to the risk of changes in
volatility in the various currencies. This portfolio also includes certain activity in options for the
coverage of linkage-base exposures, which constitutes a small part of the portfolio. This portfolio is
included in “ALM derivatives” in Note 19 to the financial statements as of December 31, 2011.
The following table shows the distribution of the portfolio by currency, as of December 31, 2011 (in
NIS millions):
Face value EUR/NIS EUR/USD USD/NIS Other Total Purchased options 656 19 1,083 594 2,352
Written options 762 10 1,065 630 2,467
Total 1,418 29 2,148 1,224 4,819 Fair value EUR/NIS EUR/USD USD/NIS Other Total Purchased options 16 *- 20 11 47
Written options 16 *- 18 11 45
* Less than NIS 500 thousand.
The risks in the option portfolio managed by the Bank are examined using the Value at Risk (VaR)
model, based on simultaneous scenarios for currency exchange rates and volatility. These scenarios
are based on a historical simulation of changes in volatility and exchange rates, going one year back,
over ten business days, locating the 99th percentile. The option portfolio is managed using a
computerized system that allows for analysis and examination of risks in the portfolio according to
changes in the market. The overall limit as set by the board of directors for the management of the
option portfolio reduced during June 2011 from NIS 10 million to NIS 8 million.
The actual exposure on December 31, 2011, was a VAR of USD 0.3 million (December 31, 2010 -
USD 0.52 million). The highest value at risk (at the end of the business day) in 2011 was USD 2
million (USD 2.8 million in 2010). In addition, a limit of USD 1.6 million in terms of VAR was
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approved for activity in exotic options, and a limit of USD 1.5 million for activity in foreign currency /
foreign currency options. The value at risk as of the end of fourth quarter of 2011 was USD 161
thousand in respect of activity in exotic options and USD 3 thousand in respect of foreign currency /
foreign currency options. The highest value at risk (at the end of the business day) in 2011 was USD
0.5 million (USD 0.5 million in 2010) in respect of activity in exotic options and USD 0.9 million
(USD 0.8 million in 2010) in respect of foreign currency/foreign currency options.
Positions in Shares in the Banking Portfolio
As of December 31, 2011, the Bank has two main types of holdings in shares in its banking portfolio:
A. Investments in a variety of shares tradable on the Israeli stock market through the Proprietary
Unit of the Bank, via the available-for-sale portfolio. This activity is performed within the
limits and facilities approved by the board of directors of the Bank, and are aimed at
improvement of the Bank's return. This investment is recorded in the balance sheet as of
December 31, 2011 at a total of NSI 25 million (December 31, 2010: NIS 15 million).
B. Investments through the subsidiary Union Investments and Enterprise (A.S.Y.), which serves as the
non-financial investment arm of the Bank. The company focuses on improving the Bank’s return
on equity by investing in companies in various fields of activity other than banking and
complementary activities to banking. Accordingly, the company carries out investments with the
intention of participating in the investee companies’ profits over the long term, and in certain cases
realizing the investment at a profit within a period of several years (through an offering or sale to a
third party).
Investments are carried out in accordance with investment policies and work plans that establish
limits and objectives, including preferred fields. A limit of up to 20% of the capital of a single
company and up to 15% of the capital of the Bank in non-financial investments applies by law,
with certain exceptions.
A decision of the Board of Directors is currently in effect according to which the Bank’s subsidiary
(A.S.Y) investment in non-financial corporations shall not exceed NIS 195 million. The Board of
Directors of the Bank has also restricted the Company’s authority with regard to individual
investment to NIS 5 million. Any individual investment greater than NIS 5 million and up to NIS
15 million, requires additional approval by the Investment Committee of the Board of Directors of
the Bank.
Any individual investment greater than this amount, requires additional approval by the board of
directors of the Bank.
The balance-sheet balance of the investment in equity-basis investee companies as of December 31,
2011 totaled NIS 1 million similar to the balance as of December 31, 2010. The balance-sheet
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balance of the investment in other companies through A.S.Y. as of December 31, 2011 totaled NIS
100 million (December 31, 2010 - NIS 122 million). These investments are classified as shares in
the available-for-sale portfolio.
For details regarding accounting principles for measurement methods, see Note 1.E.4 - Significant
Accounting Policies.
For further details regarding positions in shares in the banking book, also see the section “Capital
Adequacy.”
Liquidity Risk
The risk that the Bank may be unable to finance its assets in the short term, or may be unable to allow
customers to withdraw their deposits upon demand. This risk may develop as a result of internal
management and control processes that do not take all risk factors into consideration, or that fail to
properly estimate the liquidity level of assets or the availability of resources and depositors in various
market situations. In addition, liquidity risk may materialize as a result of changes in estimates of
deposit owners regarding the risk level of the Bank, or as a result of changes in their estimates
regarding the risk level of the banking and financial system as a whole.
The Bank implements a comprehensive liquidity risk management policy, based on the requirements
of Proper Conduct of Banking Business Directive 342, “Liquidity Risk Management.
On August 2011 the Supervisor of Banks issued an updated draft of Proper Conduct of Banking
Business Directive 342, "Liquidity Risk Management", that apply gradually as of April 2012 until July
2012.
For further details, see the section "Legislative Developments".
The board of directors of the Bank updated liquidity risk management respectively following the
directive draft in BIS documents and with regarding to the findings in internal and external audit
reports.
The board of directors establishes risk appetite and liquidity risk management policy while
establishing the limits if minimal liquidity ratio required by the internal model and the structure of
resources.
The liquidity risk management policy approved by the board of directors is aimed at achieving the
following key objectives:
Routine financing of the activity of the Bank.
Assurance that customers will be able to withdraw deposits, during the ordinary course of business
and during certain stress situations.
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Maintaining a level of diversification of deposits, both in terms of size and in terms of maturity
dates.
In addition, the policy defines processes required during extreme changes in liquidity or during the
development of a liquidity crisis.
The exposures document (which refers to liquidity risk, among other matters) is presented to the board
of directors each quarter, and a discussion is conducted regarding the liquidity position and the
structure of resources, in reference to the limits established, and the development of the liquidity ratio
over the quarter. In addition, the board of directors holds discussions of the overall liquidity position
and the management of liquidity in foreign currency, according to the developments in the markets
and the derived needs, including the establishment of general and specific limits for the management
of liquidity surpluses at banks in foreign currency.
The Financial Management Division is responsible for routine daily liquidity management, reporting
on the liquid asset position, and examining trends in the liquidity position in order to ensure that
appropriate capital is held by the Bank. As part of this role, the division is responsible for the
management of balances at the Bank of Israel, raising resources and participation in credit auctions or
deposit auctions of the Bank of Israel, investing the liquidity surpluses of the Bank (deposits with
banks, deposits with the Bank of Israel, or purchases of short-term bonds), and calculating the
cumulative daily and monthly liquidity position. Furthermore, the division is responsible for
management of sources structure and maintaining compliance of spreading proportions of the
investors.
The Chief Accountant Division is responsible for reporting data to the Financial Management
Division with regard to the required liquidity to be deposited with the Bank of Israel. Also see the
section “Legislation Updates” – “Directive of the Bank of Israel (Liquid Assets),” with regard to the
10% liquidity requirement for transactions in derivatives by foreign investors.
The Controls and Risk Management Division is responsible for the development of the internal
liquidity model, including validation of the model and development of extreme scenarios. The division
performs daily measurements of the current liquidity ratio and the extreme scenarios ratio, according
to the model, while examining compliance with the liquidity limits established, and monitoring trends
in the structure of resources on a monthly level. The liquidity ratio and the structure of resources are
routinely reported to management and to the Forum on Financial Matters.
Internal liquidity model
The Bank manages its liquidity level based on an internal model derived from its liquidity risk
management policy. This model is used to estimate the volume of liabilities expected to mature,
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against the volume of liquid assets available to the Bank for the settlement of these liabilities. The
basic assumptions of the liquidity model are established conservatively, with reference to capability to
realize various assets, following discussion by the forum on financial matters, management, and the
board of directors, and are examined at least once a year, according to developments in the markets
and/or at the Bank, and are brought before the board of directors for discussion and approval, as
necessary. The model is updated from time to time, and its components are brought before the board
of directors of the Bank for approval, as required in the directive of the Supervisor of Banks.
The objective of the internal liquidity model is to examine the Bank’s ability to withstand the
maturation of deposits, even if no substitute depositors are added, or when the realization of assets is
difficult. The ratio of liquid assets that can be realized in practice in all sectors to liabilities expected to
mature within one month is calculated. The model takes into account the cash in hand, the actual
realization capacity of the Bank’s bond portfolio and the ability to call in on-call credit, and assumes a
withdrawal forecast based on recent withdrawal history, taking into consideration the distinction
between the different bond types and their liquidity the level of concentration in the deposits portfolio
and the characteristics of the activity of the depositors.
The liquidity ratio according to the internal model is measured daily, and reported to the managements
of the Bank, examined weekly by the Management Forum on Financial Matters, and included in the
monthly report to the board of directors in addition to the monthly report regarding the deposits
concentration and significant changes in the liquidity situation. In addition, compliance with the limits
for stress scenarios is tested.
In the third quarter, the board of directors updated the liquidity risk management policy. Within this
process, the risk appetite and tolerance with regard to balance-sheet and off-balance sheet flows were
updated, and a minimum liquidity ratio was established, at a level of at least one liquidity month in a
routine scenario and in an extreme scenario, with respect to the overall activity of the Bank, separately
in NIS and in foreign currency.
During 2011, the liquidity ratio did not fall below the established limits, other than an immaterial
deviation for two days during the second quarter, and two immaterial deviations for up to six days
during December, in two liquidity ratios under extreme scenarios.
In addition, the Bank continues to routinely examine its exposure, in accordance with the
developments in the various markets. The structure of resources is also monitored periodically, with
reference to the type and characteristics of the various depositors.
In addition to the risk appetite and tolerance established for the liquidity ratio, the Bank has
established a risk appetite and tolerance for the structure of resources. In addition, risk appetite and
tolerance limits have been established with regard to the volume of business liquidity, the
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concentration of depositors, the proportion of short-term deposits, the proportion of private depositors,
the volume of financing of the balance sheet using foreign currency, the policy on investment of
liquidity surpluses in foreign currency, and more. The structure of resources and compliance with the
limits are discussed in the management forum on financial issues, on a monthly basis, and reported to
and discussed by the Risk Management Committee of the Board of Directors and the plenum of the
Board of Directors, within the quarterly exposures document. Due to the increase in the volume of
assets as a result of the increase in capital executed at the end of 2009, deviations from some of the
established objectives occurred from 2010 to the end of the first quarter of 2011. These deviations
were discussed by the Risk Management Committee of the Board of Directors in the third quarter of
2011. As part of this process, the committee reexamined the risk appetite. During the fourth quarter,
negligible deviations from one of the limits on liquidity resources in foreign currency occurred a
number of times.
The Bank manages liquidity risk based on principles derived from the directives of the Supervisor of
Banks, with the adjustment of processes, including as a result of internal audit reports and the audit
report of the Bank of Israel on this matter. The Bank has acted and continues to act to reduce the gaps,
within the work plan for 2011, while formulating and implementing processes, procedures, computer
systems, and emergency plans. The steering committee headed by the head of the financial
management division monitors closure of gaps, according to the established schedule.
Extreme Scenarios
The Bank examines liquidity risk by examining the effect of various extreme scenarios on its internal
liquidity model, among other means. Extreme scenarios include systemic scenarios, scenarios focused
on the Bank, integrated scenario and reverse scenario, that examine the intensity of an event which
brings the liquidity ratio to the higher risk tolerance. Within the implementation of the second pillar of
Basel II, the scenarios were expanded, and now include a business description, quantification of the
effect of the scenarios on cash flows and on the liquidity ratio, responsibility for identifying the
development of a crisis situation, and ways of coping in the event of materialization of an extreme
scenario. In addition, from the beginning of 2012, measurement of extreme scenarios, up to month and
above month, is executed. Such extreme scenarios are measured on a weekly basis, and are presented
to the Management Forum on Financial Matters as background material for its weekly meeting. In
addition, a discussion is conducted each quarter by management, by the Risk Management Committee
of the Board of Directors and by the Board of Directors regarding the list of extreme scenarios, values
of the scenarios, and a comparison of the results of actual scenarios to the limits established.
The systemic scenarios include problems in the interbank market, including unwillingness of banks to
trade in interbank liquidity and loss of confidence of investors in the stability of the banking system.
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The scenarios focused on the Bank include a downgrade of its rating or a change for the worse in the
assessment of the Bank’s financial position and stability. The integrated scenario regards to a change
for the worse in assessment of Israel's financial position and difficulty with rising sources in foreign
currency. Additionally, the Bank examines a reverse extreme scenario.
In addition, the overall liquidity position of the Bank is examined, as well as indices pointing to the
possible development of crisis conditions concerning the Bank or the banking system.
The Bank has an emergency plan describing modes of action aimed at coping with the materialization
of extreme scenarios, including various actions to be taken by the management and branches of the
Bank. In addition, limits were set for the liquidity ratio in extreme scenarios, for all extreme scenarios.
In addition to the definition of extreme scenarios, establishment of responsibility for identification of
the development of an extreme scenario, definition of principles for emergency plans, and
measurement of actual scenarios, the Bank performs estimates of the cost of coping with the extreme
scenarios, and includes this cost in the planning of the future capital of the Bank in extreme scenarios.
The liquidity ratio in extreme scenarios, including compliance with the limits for such scenarios, is
reported routinely to management and to the Forum on Financial Matters, and discussed by the Risk
Management Committee of the Board of Directors and by the board of directors as part of the
discussion of the quarterly exposures document.
Operational Risks
Operational risk is defined as the risk of loss that may arise of inadequate or failed internal processes,
human or system failures, or external events. This definition includes legal risk, money laundering and
compliance risks but does not include strategic risk or goodwill risk.
The head of the Controls and Risk Management Division is the manager of operational risks at the
Bank. Operational risk management includes responsibility for the formulation of operational risk
management policy, execution of periodic risk mapping by business line and risk type, guidance of the
various units, monitoring of the work plan for the correction of gaps identified, and establishment of
procedures for monitoring, reporting, and control.
In light of the sensitivity of the processes related to the management of information systems,
information security, security, and backups, it has been established that the Resources Division has
direct responsibility for the management of risks in these activities.
The board of directors of the Bank has approved an operational risk management policy document,
which includes the risks of embezzlement and fraud. The policy defines risk-management principles
and the distribution of roles and authority in mapping and minimizing operational risks at the Bank.
The purpose of the Bank’s policy is to minimize operational risks to the extent possible, while drawing
conclusions from actual failures in order to reduce the risk of recurrence of failures in the future.
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Based on the policy established, working procedures were established for the management of
operational risk, with definitions of the organizational structure, authority, evaluation processes, and
reporting.
Within the discussion of the overall risk appetite of the Bank, risk appetite and risk tolerance for
operational risks were defined, with reference to the types of activities and the possible exposures.
In addition, management establishes priorities for the mitigation of risks indicated by the risk survey.
The priorities for risk mitigation are based on the principles established by the board of directors in
April 2010. In addition, priorities have been established with regard to residual risk and the process of
addressing risks with high and medium residual risk levels.
Management receives reports regarding the volume of cumulative damages from actual failure events.
Failure events of more than NIS 100,000 are also reported to the board of directors of the Bank.
In order to provide a full overview of the exposure to operational risks, and as part of the preparations
for the Basel II directives and compliance with the document entitled “Sound Practices for the
Management and Supervision of Operational Risk,” during 2009-2010 a comprehensive process of
mapping of organizational risks was performed at the Bank and at its subsidiaries, including details of
processes, description of the types of risks, controls, evaluation of residual risk (after the operation of
the controls), and recommendations for improvement or addition of controls in order to minimize
risks. The mapping process was performed based on methodology formulated jointly with external
advisors, which was approved by the management and board of directors of the Bank. Within this
survey, the main business processes, the controls, and the evaluation of the severity of risks and
quality of controls were documented. During the survey, training sessions were conducted in order to
heighten the awareness of the representatives of the various units with regard to the essence of
operational risk, and the process and meaning of the survey.
The results of the survey were centralized on a specialized computer system allowing examination of
the totality of risks and presentation of an overall map of the operational risks of the Bank. These
results were discussed by management and the board of directors, and objectives and priorities were
established in order to address the findings.
As part of the process of increasing awareness of the prevention of materialization of operational risks
and involvement of the divisions of the Bank in reducing the level of residual risks, a forum for
operational risk management was established. Failure events of the preceding half year are presented
in the forum, every six months, the progress of resolving the findings of the risk survey is presented
and suggestions of the Forum's Members in order to increase the awareness at the Bank of the
operating risks are presented.
In 2007, the Bank defined and began to measure KRI’s (Key Risk Indicators) in the areas of its
business activity. Key risk indicators are performance metrics indicating developments in the activity
of the Bank that may affect its exposure to operational risks. These indicators are established
according to trends in business activity, with reference to the resulting possible operational risks.
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Based on the results of the measurement of the KRIs, a sample test of operational processes is
performed. The KRI measurement process was updated and improved during 2010, in accordance with
the results of the operational risk surveys performed at the Bank. Based on data regarding compliance
with current objectives at the branches of the Bank, a mapping process was conducted, during the first
quarter of 2011, referring to the level of exceptional activity deviating from the objectives established
for each area of activity. In addition, relevant operational risks were defined in each area, based on the
operational risk survey. The branches of the Bank conducted sample testing of the findings discovered
regarding exceptional activity and the relevant operational risks defined in each area.
Risk mapping in business processes and IT systems under the management of the Bank was concluded
during the second quarter of 2010. In addition to this survey, the results of a survey of information
security risks in the Bank’s independent systems were approved during 2009. The management of
information technology and of IT processes has been adjusted to the ISO 9001 information systems
quality management standard and examined by the Israel Standards Institute, which awarded the Bank
a Standard Mark. In addition, a process of data collection is being conducted at the Bank with regard
to the actual materialization of operational risks, including an examination of the nature of the event,
the financial damages, and the reasons for the materialization of the event.
The results of the operational risk survey help the management of the Bank evaluate the degree of
exposure to these risks and determine the volume of capital required within the ICAAP and the
evaluation of required capital under Pillar II.
In addition, information security surveys were performed over recent years, with the aim of examining
the degree of exposure of the Bank’s systems to risk (internal and external). A survey was also
performed with regard to the feasibility of business continuity in the event of damage to the
headquarters of the Bank (a disaster recovery plan), including mapping of key processes and systems
of the Bank and the establishment of priorities for disaster recovery.
The Bank examine the exposure to operating risk also by extreme scenarios which regard mainly to
three risk surveys which were performed at the Bank in recent years and to another extreme scenarios
which regard to the information security and other processes.
In order to increase awareness of compliance and additional control processes, the Bank has
formulated and adopted an ethical code. The ethical code includes values, and the translation of these
values into behavior with regard to stakeholders, which guide the Bank in all of its activities. The
ethical code reflects the core values that have guided the Bank’s business activities throughout the
years of its existence. The code serves as a compass for day-to-day work, and is designed to guide and
direct employees’ behavior towards stakeholders in situations of dilemmas and questions regarding the
appropriate, correct behavior in terms of values and professional standards.
Business Continuity – Emergency Preparedness
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Events of various types may damage or cause shutdowns of material activities of the Bank and its
customers, harm the continuity of its business, expose the Bank to a variety of risks, and cause
significant damage to the Bank and/or to its customers.
The Bank of Israel, which coordinates the activity of the financial system during emergencies through
the Emergency Economy system, has established new guidelines for the formulation of policies
allowing business continuity of the banking system during disasters. The guidelines are detailed in
Proper Conduct of Banking Business Directive No. 357, the Basel II Accord, and specific
requirements distributed to the banks by the Bank of Israel from time to time.
The Bank is in the process of preparing to cope with the events of this kind. This preparation includes
preparedness for various types of potential disaster situations, in order to allow business continuity
even in case of disaster; preparation for a disaster recovery process, in order to return to routine work
efficiently and within a brief timeframe; and proper management of information technology assets
supporting processes with a material effect on the conduct of the Bank’s business.
Towards that end, in the late second quarter of 2010, the Bank completed a comprehensive survey to
map key gaps in its preparedness, with the assistance of external advisors. In December 2010, the
board of directors of the Bank approved an updated policy on preparation for business continuity in
emergencies. In addition, a working outline were established and timelines are established for each
project in overall preparation.
Mr. Hami Morag, Senior VP and Head of the Resources Division, was appointed to be responsible for
activity in emergencies. The management of the preparedness project is conducted within the
Information Security, Purchasing, and Logistics System in the Resources Division. Within this
process, a specialized unit was established to address this matter. The unit is working to implement the
new requirements of the Supervisor of Banks regarding the management of business continuity, as
detailed in Proper Conduct of Banking Business Directive No. 355, and to prepare the Bank for
certification under the international standard on business continuity management, BS25999.
A project began in 2011 for the adjustment of the Bank's disaster recovery plan to the new instructions
of the Supervisor of Banks, which are scheduled to take effect in July 2012.
In January 2012, an organization-wide process for examination of business implications of scenarios
related to emergencies was completed. Within this process, all of the services provided by the various
units of the Bank were mapped and analyzed, and risk assessments were performed with regard to
these services.
The Bank is currently formulating a business continuity strategy, based on the results of the analysis of
business implications, while analyzing the behavior of environmental variables such as employees,
customers, government agencies, national infrastructures, etc., in connection with the various
scenarios. This process is expected to be completed during the first quarter this year.
Within the strategy, banking services will be prioritized, and recovery objectives will be established,
with reference to parameters of time and volume.
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New recovery plans will be written, from the second quarter of 2012 to the end of the year, in
accordance with the strategy. The plans will detail the manner of operation of the services during an
emergency, and the necessary resources.
Concurrently with the writing of the plans, gaps will be closed in the existing backup systems for these
resources.
While the recovery plans are being written, a comprehensive drill plan will be prepared, with the aim
of achieving absorption of the new plans by the employees of the Bank and examining the
effectiveness of the business continuity system.
In addition to the establishment of the business continuity management framework, projects are being
carried out for the improvement of the Bank's preparedness for emergencies, including improved
protection of buildings at the Bank's branches and preparation with suppliers who support essential
services and processes.
The board of directors of the Bank has granted approval in principle for a project in which the Bank's
computer will be transferred to a secure building at a distance from the offices of the headquarters of
the Bank. For further details, also see the section "Legislative Updates."
The Bank implements an information security policy, within which it conducts a wide range of
activities in the areas of technology, operations, and processes. The information security policy has
been adjusted to the information security standard ISO 27001 and examined by the Standards
Institution of Israel, which granted the Bank a Standard Mark. Information security activities in
aggregate are aimed at responding to the dynamic range of threats present in the technological
environment in which modern-day banking information systems operate, and at allowing compliance
with regulatory directives.
The Bank’s information security system is based on the following elements:
Continuous, ongoing mapping and management of information security risks - the Bank’s
methodology in this area is derived directly from the regulatory directives applicable to the Bank
on this matter, in particular Directive 357 of the Supervisor of Banks.
Development, installation, and maintenance of a variety of automated tools for the security of the
computer and data systems of the Bank (including software and hardware), using tools for the
analysis, control, and identification of exceptional events in the area of information security.
Increasing and instilling awareness of information security at the Bank through training for the
Bank’s employees and customers.
A continuous process of reduction of information security risks through gradual resolution of faults
and safety surveys performed by external professionals, and reexamination and resolution of such
faults over time.
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In 2011, the Board of Directors of the Bank decided to establish a Board of Directors' Committee
specializing in compliance and regulation, to increase supervision over the management of compliance
processes at the Bank, in light of the importance of this subject due to the regulatory developments. It
was further decided to implement a change in the organizational structure of the compliance function
at the Bank, within which the compliance sector was established, reporting to the legal counsel system.
The compliance sector is headed by the compliance officer, who reports to the chief legal advisor of
the Bank. Prior to the aforesaid change, the compliance function was subordinate to the controls and
risk management division of the Bank.
The compliance sector is responsible for helping the Bank's employees and managers comply with and
maintain the legal directives applicable to the Bank, both in the area of bank-customer relationships
and in other areas relevant to the Bank's work. As part of its role, the compliance sector examines and
improves compliance processes at the Bank on a lateral basis, through routine interfaces with other
units and divisions of the Bank.
The following units report to the compliance sector:
1. The prohibition of money laundering and terrorism financing unit – Works to enforce the
duties imposed upon the Bank in this area and supervise the fulfillment of such duties, while
implementing the Bank's policy in this area. The prohibition of money laundering and terrorism
financing unit routinely provides consulting to the branches and subsidiaries of the Bank and
conducts continuous monitoring of banking activity in customers' accounts, with the aim of
identifying activities that appear to be unusual and reporting them to the Israel Money
Laundering Prohibition Authority.
The area of the prohibition of money laundering and terrorism financing is integrated into the
multi-year work plan of the internal audit unit, which performs audits at the branches to ensure
compliance with legal directives.
The officer responsible for the implementation of the Money Laundering Prohibition Law and the
Terrorism Financing Prohibition Law at the Bank is the chief legal advisor, Dr. Moriah Hoftman-
Doron, Adv.
In October 2011, the Bank received a report on an audit conducted by the Supervisor of Banks in
the area of the prohibition of money laundering, with respect to the period of 2004-2008 and part
of 2009. The report contains a list of findings and requirements for actions by the Bank. In the
report, the Supervisor of Banks noted that it would consider filing a petition for the imposition of
a monetary sanction on the Bank, according to the authority established by law. The Bank
responded to the report, within the timeframe established, and presented a trajectory for
addressing the required matters.
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2. Compliance unit – Responsible for the measures necessary in order to comply with the legal
directives applicable to the Bank, as noted above, including legal requirements derived from the
Law for Increased Efficiency of Enforcement Procedures at the Israel Securities Authority
(Legislative Amendments), 2011 (hereinafter: the "Enforcement Procedures Efficiency Law"),
which apply to the Bank as a corporation operating in the area of securities and as a public
company. In this context, the Board of Directors of the Bank decided to formulate an internal
enforcement plan, in congruence with the legal requirements arising from the Enforcement
Procedures Efficiency Law, and with the criteria formulated by the Israel Securities Authority for
the Bank and the subsidiaries subject to the law, and is acting to implement this resolution. For
further details regarding the Enforcement Procedures Efficiency Law, also see the section
"Legislative Updates."
3. Public inquiry unit – Handles contact with customers on all matters related to the bank-
customer relationship.
Legal Risk
According to the definitions of the Bank of Israel, legal risk is the risk of loss as a result of the
inability to legally enforce an agreement. Such inability may arise for various reasons, such as the
absence of material necessary information in agreements, lack of authority of a party to the agreement,
and other legal flaws.
The main sources of legal risk are the activity of the Bank insofar as it is incongruent with the various
types of legal and regulatory directives, including rulings of authorized judicial bodies; and the
activity of the Bank with parties with which it has contractual engagements, including customers,
other businesses, suppliers, advisors, and various service providers, if such activity is not supported by
legal counsel or by fully enforceable agreements.
The legal system of the Bank is responsible for managing the legal risk in the Bank and it provides
support and response for all the legal aspects of the activities of the Bank and its' Group. The legal
advisor of the Bank serves as a legal risk director of the Bank.
In this context, the routine management of legal risk mainly takes the form of legal advice regularly
provided by the legal counsel system to the authorized organs of the Bank and to its various units and
subsidiaries on the various topics related to the activity of the Bank; the preparation of contractual
documents and banking agreements; writing of procedures in areas under the responsibility of the legal
counsel system; legal support for the preparation and update of procedures under the responsibility of
other parties within the Bank; management of legal knowledge at the Bank, including updates to the
relevant parties in the organization regarding changes in the various types of legal and regulatory
directives that affect the work of the Bank; routine instruction on a range of legal matters, including
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lessons learned from various events; adaptation of the system of agreements and procedures to such
changes; routine updates of the system of agreements and documents generally used by the Bank; and
oversight of legal claims against the Bank and supervision of professional parties processing such
claims on behalf of the Bank.
The Bank’s approach to legal risks is expansive; accordingly, the Bank, including at its subsidiaries,
takes actions to minimize risks arising from the various sources, in order to prevent the materialization
of such risks.
During January 2011, the Board of Directors of the Bank approved the Bank's policy document on
legal risk management. In addition, during the same month, a Legal Risk Management Committee was
established within the legal counsel system, convening periodically. The committee's role includes
conducting routine examinations of material legal risks and exposures, establishing legal policy on
various issues, drawing conclusions from various events and topics, providing recommendations for
the establishment of the Bank's risk appetite on material legal matters, and establishing legal policy
and transmitting it to lawyers in the legal counsel system and at the various units of the Bank.
Reputation Risk
Reputation risk is defined as risk arising from negative perceptions by customers, counterparties,
shareholders, investors, bond holders, analysts, other relevant parties, or regulators, which may have a
negative effect on the public’s confidence in the Bank and on the Bank’s ability to retain existing
business relationships or to create new relationships, and to sustain continuous access to financing
sources (such as through interbank markets or securitization markets). Reputation risk is characterized
by multidimensionality and reflects the perceptions of other participants in the market. Moreover, the
risk is present throughout the organization, and by essence is a function of proper internal risk
management processes at the Bank, as well as of the manner and efficiency of response of
management to external effects on transactions related to the Bank. The CEO is responsible for the
management reputation risk. The Bank makes every possible effort to preserve its existing positive
reputation. Reputation risk appetite is zero and risk tolerance is particularly small.
Strategic Risk
Strategic risk is defined as the risk of present and future effects on profits, capital, reputation, or status
arising from erroneous business decisions, improper implementation of decisions, or failure to respond
to sectoral, economic, or technological changes. This risk is a function of the congruence among the
strategic objectives of the banking corporation, the business strategies developed to achieve these
objectives, the resources allocated to the attainment of the objectives, the quality of implementation,
and the controls over work processes at the Bank.
In November 2011, the board of directors approved a three-year strategic plan for 2012-2014,
addressing the capital objectives of the Bank and its risk appetite and risk tolerance with regard to the
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various types of exposures and risk components. The capital objectives presented take into
consideration the need to maintain stability and liquidity, and the achievement of profitability for
shareholders over time, with reference to the approved limits on risk appetite and risk tolerance.
The board of directors sets the general trajectory and guidelines for the establishment of the strategic
plan. These guidelines are transformed into a detailed plan by management, based on internal
discussions. The detailed plan is presented for approval by the board of directors. Annual work plans
are derived from this plan.
The CEO of the Bank is responsible for the management of strategic risk. Within this responsibility,
the strategic plan was formulated based on internal discussions held by the Strategy Forum, headed by
the CEO, with the participation of representatives of the business divisions and the Chief Accountant
Division. The formulation of the plan was based on evaluations of the strengths and weaknesses of the
Bank in comparison to competitors, and an estimate of the expected developments in the banking
system in the coming years.
The strategic plan of the Bank does not include activities that deviate from the current course of its
business; thus, the strategic risks inherent in the objectives of the plan are low, as is the strategic risk
derived from this plan.
Environmental Risk
Environmental risk is defined as the risk of loss as a result of directives related to the protection of the
environment, and the enforcement thereof. Banks can be exposed to environmental risks through
various aspects of their activity. Such risks can also be encompassed by other risks (such as credit risk,
market risk, operational risk, legal risk, and liquidity risk). Exposure to reputation risk is also possible,
as a result of the possibility of attribution to the Bank of a connection with a party causing an
environmental hazard.
Credit risk arising from environmental risk is defined as the risk of damage to the credit repayment
capability of a borrower as a result of violation of a law leading to the imposition of significant
monetary fines, unexpected costs for compliance with legal requirements, damage to profitability and
reputation of the borrower due to the results of the environmental aspect of the borrower's activity,
exposure to legal claims, etc. Credit risk also includes the risk of exposure of collateral – the risk of
damage to the value of collateral as a result of various environmental hazards.
Awareness of the potential exposure of financial institutions to risk arising from environmental
hazards and from noncompliance with environmental directives has grown progressively in recent
years, globally and in Israel. In June 2009, the Supervisor of Banks issued a letter regarding
environmental risks at banking corporations, pursuant to which banking corporations must act to
implement environmental risk exposure management within overall risks. The Bank recognizes that
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the identification and assessment of environmental risk are part of an appropriate process of
assessment of the risks to which the Bank is exposed.
Responsibility for management of the credit aspects of environmental risk exposure at the Bank rests
with the head of the business division. Other aspects of environmental risks are under the
responsibility of the resources division. Accordingly, a steering committee operates at the Bank,
headed by the head of the business division, which has defined the main objectives to be achieved over
the coming years, with detailed tasks in an annual work plan. Since its appointment, the committee has
submitted semiannual reports to the management of the Bank, in which it reviews its activity during
the period.
Below are the details of the Bank Management's evaluation of the effect of risk factors in the
Bank as at December 31, 2011:
Risk factor Effect of the Risk
(High, Medium, Low)
1 Overall Effect of Credit Risks* Medium
1.1 Borrowers and Collaterals Quality Risk Low
1.2 Industry Concentration risk Medium
1.3 Borrowers/Groups of Borrowers Concentration Risk Medium
2 Overall Effect of Market Risks Low
2.1 Interest Risk Low
2.2 Inflation Risk Low
2.3 Exchange Rate Risk Low
2.4 Share Prices Risk Low
3 Liquidity Risk Low
4 Operational Risk Low
5 Legal Risk Low
6 Goodwill Risk Low
7 Clearance Risk Low
8 Strategic Risk Low
9 Corporate Governance Low
* The overall effect of credit risk determined according the highest risk assessment from amongst the borrowers and collaterals quality risk, industry concentration risk and the borrowers/groups of borrower's concentration risk.
Note: The estimated ranking of the impact of risks cannot be compared among different banks.
The risk assessment is based on structured questionnaires, by business lines, in which issues are
presented for each business line that reflect the risks inherent in that line. The questions were
formulated in discussions held with those responsible for risk management in the various business
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lines. The answers to the questions are based on existing information at the Bank, and were also
reviewed by managers at the business lines. The overall risk assessment for every risk factor at the
level of the Bank was weighted by risk types. In September 2011 the methodology of weighting
answers to risk assessment questions was updated.
The answers to the questions are updated on a quarterly basis, and also serve as the basis for risk
assessment in the exposures document of the Bank, and the basis for the establishment of the work
plan and risk assessment in the ICAAP document.
No change occurred in the risk factors table as of December 31, 2011 relative to September 30, 2011.
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Critical Accounting Policies and Estimates
The accounting policies used in preparing the Bank’s financial statements are set out in Note 1 to the
financial statements. Implementation of these policies by Bank Management involves the use of various
estimates and assumptions that affect the values of assets, liabilities (including contingent liabilities), and
the business results of the Bank. All assumptions, evaluations, and estimates are “forward-looking
information” by nature. Such evaluations and estimates may materialize in the future in a manner
different than estimated during the preparation of the financial statements.
We present below various issues regarding which, the estimates and assumptions used in the preparation
thereof are sensitive to changes in various variables that may affect the results of operations. Bank
Management believes that the estimates and assumptions used in preparing the financial statements are
fair and were arrived at on the basis of the best of its knowledge and professional discretion.
A. Allowance for credit losses
As of January 1, 2011, the Bank implements the new directive of the Supervisor of Banks in respect
of "Measurement and Disclosure of Impaired Debts, Credit Risk, and Provision for Credit Losses"
(henceforth: "the new directive").
The allowance to cover estimated credit losses with respect to the credit portfolio is assessed by one
of two methods: allowance for credit losses estimated on an individual basis and allowance for credit
losses estimated on a group basis. See details of the new directive principals in Note 1.E.5.
The Bank has established procedures for the classification of credit and the measurement of the
allowance for credit losses, in order to maintain an allowance at an appropriate level to cover
estimated credit losses in respect of its credit portfolio. In addition, the Bank has established the
necessary procedures in order to maintain an allowance (in a separate liability account) at an
appropriate level to cover estimated credit losses in connection with off-balance-sheet credit
instruments
The allowance for credit losses is an estimate established using various variables and working
assumptions that have a material effect. These estimates include, among others: the classification of
debts (sound, or problematic – under special supervision, substandard, or impaired), establishment of
expected future cash flows, establishment of the fair value of collateral, establishment of the date of
accounting write-offs, the rate of coefficients for group allowances, etc. The implementation of the
new directive necessitated the formulation of methodology on various matters, based on the directive
and the accompanying interpretations, while exercising judgment and applying assumptions and
estimates, as noted above.
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Identification and classification of the group of problematic debts - Partially based on parameters in
accordance with the definitions in the directive, and partially based on rules established by the Bank
for the identification and location of problematic debts.
The Bank routinely examines its credit portfolio in order to identify, as early as possible, borrowers
for which the risk and exposure level has increased. For that purpose, two processes are applied by
the Bank in order to identify potentially problematic borrowers: an automated system used to
identify potential problems with customers whose debts are not classified as problematic, based on
various parameters; and a comprehensive review of borrowers and borrower groups with
indebtedness exceeding a certain amount, according to a list of criteria, with the aim of examining
the quality of the debt and the need to assign it to a watch list. For further details, see the section
"Risk Management," subsection "Treatment of Problematic Credit and Debt Collection."
Individual evaluation for credit losses - The Bank examines on an individual basis any debt that its
contractual balance is mainly greater than NIS 500 thousand and if the debt is found to be impaired,
an individual assessment is performed for it with the purpose of examining the need for allowance
for credit losses. The Bank classifies a debt as impaired when, based on current information and
events, the Bank expects to be unable to collect the full amount owed to it according to the
contractual terms of the debt agreement. In addition, debts are classified as impaired, integratively,
by the automated systems, when there are objective reasons for such classification (for example,
restructured debts, or debts with principal or interest in arrears of 90 days or more).
When a debt examined individually is classified as impaired, the individual allowance for credit
losses in respect of the debt is assessed based on the expected future cash flows from the operating
activity of the debtor, funds to be received from other sources, or the realization of collateral,
capitalized by the original effective interest rate of the debt.
When the collection of the debt is contingent upon collateral, the individual allowance is assessed
based on the fair value of the collateral pledged to secure the debt. If the present value of future
cash flows or the fair value of the pledged asset is lower than the recorded balance of the debt, the
Bank records the difference as an individual allowance for credit losses. With respect to debts
examined individually and found to be unimpaired (with the exception of housing loans, for which
a minimum allowance was calculated according to the method of the extent of arrears), a group
allowance for credit losses shall be calculated, as described below. The Bank has methodologies
for the measurement of the cash flow of a debt, the collection of which is not contingent upon
collateral, based on criteria for examining the level of certainty that the funds will be received, and
the coefficient to be applied to the certainty level. The coefficient depends on the level of certainty
and the estimated period of time for the receipt of the funds. The expected proceeds of the
collection are determined by the managers of the various units, according to principles that have
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been established. The establishment of amounts of allowance for credit losses and update of
provisions recorded in the past are performed routinely and based on renewed assessments
(performed on a quarterly basis) of the impaired borrowers of the Bank. These decisions are
discussed on a quarterly basis by a forum in which the CEO of the Bank and the head of the
business division participate, as well as by the board of directors' committee for the examination
of the financial statements and the plenum of the board of directors.
The balance of individual allowance for credit losses as at December, 31, 2011 is NIS 88 million. Group evaluation for credit losses- According to the new directive, a group allowance shall be
performed with respect to any debt found to be unimpaired (with the exception of housing loans,
for which a minimum allowance was calculated according to the method of the extent of arrears).
The group allowance is calculated based on the historical average rate of credit losses in 2008-
2010 in the economic sector to which the allowance refers, with a distinction between problematic
credit and non-problematic credit. Starting in 2011, the average rate of net accounting write-offs
actually recorded since the initial implementation date of the directive shall be added to the group
allowance formula (the averages are updated each quarter). The use of net accounting write-off
rates for 2011, in combination with the policy adopted by the Bank would have reduced the rates
of the coefficients of the group allowance; the Bank therefore decided, at this stage, to continue to
use the allowance coefficients of 2008-2010. In addition, in cases in which the condition of a
sector and/or the condition of the economy deteriorates, the need to use a higher coefficient is
examined. The coefficient for the calculation of the group allowance faithfully represents, in the
opinion of the Bank, the potential for risk in the sector during the examined period.
The calculation of allowance on a group basis for off-balance-sheet credit instruments is based
on the rates of allowances established for balance-sheet credit (as detailed above), taking into
consideration the expected rate of realization of off-balance-sheet credit risk. The expected
realization rate of credit is calculated by the Bank based on credit conversion coefficients as
specified in Proper Conduct of Banking Business Directive 203, Capital Measurement and
Adequacy – Credit Risk – The Standard Approach.
In view of the rapid growth of housing credit in recent years, as part of the examination of the
overall adequacy of the allowance for credit losses, the Bank recorded a group allowance for credit
losses in respect of housing loans, in order to take into consideration the potential allowance in
respect of new loans that has not yet been expressed in allowances based on the extent of arrears.
The method used to calculate this group allowance takes into consideration, among other factors,
the historical rates of allowances according to the extent of arrears. See additional information in
the section "Risk Exposure and Management" subchapter "Credit Risk in Housing Loans".
In the calculation of the group allowance in respect of credit to the public, the Bank took into
consideration, among other factors, uncertainties deriving from flaws in processes arising from the
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initial implementation of the directives of the Supervisor regarding the measurement and
disclosure of impaired debts, until such flaws can be remedied.
The balance of group allowance for credit losses as at December, 31, 2011 (including allowance
by extent of arrears) is NIS 288 million.
Accounting Write-offs - An accounting write-off is performed for sums of debt which are thought
to be uncollectible and /or are of such low value that their retention as assets is unjustified. A debt
examined individually which is impaired and with regard to which the Bank has conducted
prolonged collection efforts (when more than two years have elapsed from the commencement of
the proceedings, and the debt has not yet been collected) is written off in accounting, through an
automated system that measures the time elapsed from the date of classification of the debt as
impaired, as required by the directive. In other cases, accounting write-offs are performed
according to specific examinations.
With regard to debts evaluated on a group basis, an automated system performs an accounting
write-off based on their period of arrears and other parameters.
Revenue recognition - Upon classification of a debt as impaired, the Bank defines the debt as a
debt not accruing interest income, and stops accruing interest income in respect of the debt, with
the exception of certain restructured debts. In addition, upon classification of the debt as impaired,
the Bank cancels all uncollected accrued interest income recognized as income in the past in the
statement of profit and loss. The debt continues to be classified as debt that does not accrue
interest income, as long as its classification as an impaired debt is not cancelled. As long as the
collection of the written remaining balance of an impaired debt is under doubt, any payment
received will be used to reduce the principal and afterwards for recognition of income from
interest that will be written as profit from financing activity before provision for credit losses. For
further details on allowances and write-offs, see Note 4 to the financial statements.
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B. Provision for decline in value of an other-than-temporary nature of bonds available for
sale:
With regard to bonds classified as available for sale, the difference between the bonds' fair
value and depreciated cost is allocated to a capital reserve, in accordance with GAAP. When
the capital reserve is negative, the bank examines the need to record a provision for decline in
value in profit and loss, according to GAAP, including with reference to the American
standards published on this matter (FAS 115).
These rules require the bank to examine whether the decline in value of the bonds is of an
other-than-temporary nature. Pursuant to the policy of the Bank, which is in line with the
directives of the Supervisor of Banks, impairment of securities is recognized as other than
temporary for all securities meeting one or more of the following conditions:
1. Securities sold by the date of publication of the report to the public.
2. Securities which, near the date of publication of the report to the public, the Bank intends
to sell within a short period.
3. Securities which have been significantly downgraded from the date of purchase to the
date of publication of the report. A significant downgrade is considered to be a decrease
of at least three grades, such that the new grade is lower than Investment Grade (BBB).
4. Securities classified as problematic by the Bank following acquisition.
5. Securities in which a default has occurred following acquisition.
6. Securities whose fair value at the end of the reporting period and near the date of
publication of the financial statements is significantly lower than their adjusted cost,
unless the Bank has solid objective evidence and a cautious analysis of all relevant
factors proving at a high level of confidence that the impairment is of a temporary nature.
Various criteria have been established by the Bank for this purpose. When these criteria
are met, the securities are examined in depth and subsequently discussed specifically by
internal committees within the Bank. The main criteria examined are:
Securities with a decline in fair value of more than 20%, and more than one year of
decline below the adjusted cost.
Securities with a decline in fair value of 30% or more, and a yield to maturity of more
than 10%.
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Securities with a decline in fair value of 20% to 30%, provided that the amount of the
impairment is more than NIS 5 million and the yield to maturity is more than 10%.
The in-depth examination is based on an internal methodology approved by the board of
directors.
Discussions regarding the need to perform provisions are held in internal committees
established for this purpose: a subcommittee headed by the Head of the Financial
Management Division makes recommendations regarding provisions, based, inter alia, on
factors including an internal methodology for detailed analysis of the issuing company. These
recommendations are submitted to a committee headed by the CEO of the Bank.
The decisions are presented to the balance-sheet committee of the board of directors for
discussion. All relevant materials concerning the bonds, including a summary of the detailed
analysis performed based on the internal methodology, are presented as background material
for the discussion.
The total provision for decline in value of an other-than-temporary nature in 2011 amounted to
NIS 23 million, allocated as an expense to profit from financing activity (2010 - NIS 4
million).
C. Fair value of financial instruments
As of January 1, 2011, the measurement of fair value is based on the principles of FAS 157
(ASC 820-10), that defines fair value as the price that would be obtained from the sale of an
asset, or the price that would be paid to extinguish a liability (henceforth: exit price), in a
regular transaction, meaning in a transaction that is not a forced transaction or a sale during
liquidation, between participants in the market at the time of measurement. According to the
principles of the standard, the banking corporation is required to make maximum use of
observable inputs, representing information available in the market and received from
independent sources, and minimal use of unobservable inputs, which reflect the assumptions
of the Bank when determining the exit price. FAS 157 specifies a hierarchy of measurement
techniques, based on the question whether the inputs used to establish fair value are
observable or unobservable. See details on the principles of the new directive and their
implementation in the Bank in Note 1.E.6.
Some of the financial instruments in which the bank operates - securities (in the available-for-
sale portfolio and in the trading portfolio) and derivative financial instruments, are recorded in
the balance sheet and/or profit and loss at fair value.
Numerous parameters are used to establish the assumptions and estimates used in the fair
value process and to validate fair values. These parameters are used both in inputs observed in
the market from independent sources and in unobserved inputs that reflect the assumptions of
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the Bank. These parameters may change as a result of possible changes, mainly in interest
rates and standard deviations in the various markets. The Bank has determined a methodology
for the measuring method, internal control procedures and disclosure of the process of
determining the fair value of these instruments.
In the first stage, financial instruments measured at fair value were mapped, with
differentiation between:
‐ Financial instruments quoted on an active market (level 1);
‐ Financial instruments quoted on an inactive market, where the data used to establish
fair value are observable (level 2);
‐ Financial instruments whose fair value is measured according to unobservable inputs
reflecting the assumptions of the Bank (level 3).
An active market is an active stock exchange, in Israel or elsewhere, where financial
instruments are traded, where fair value is quoted and can be quoted at every measurement
date. The process of identifying the active market for the purpose of obtaining observable
inputs for non-tradable instruments is carried out through guiding questions addressed to the
financial management division, based on criteria of the volume of transactions in the market,
the BID/ASK spread, and more. The answers are used to determine the degree of reliance on
the observable inputs of the instrument based on the market in which the financial instrument
operates.
Fair-value measurements for financial instruments where the price is determined based on
assumptions of the Bank are performed only after maximum effort has been invested in
finding observable inputs to use in determining the fair value at the measurement date, or
when the fair-value pricing model is a complex model based on assumptions of the Bank and
no other usable economic model exists that is based on assumptions of market participants.
Fair-value measurements of financial instruments in which the Bank operates where the fair
value is not determined according to prices quoted in an active market (levels 2 and 3) are
established by one of the following two methods:
The income approach – Involves measurement of the current value of cash flows, or option
pricing models (B&S). This assessment technique has been defined by the Bank as a "common
practice / standard model."
The market approach – Uses prices and other relevant information derived from market
transactions involving identical or comparable assets or liabilities. This assessment technique
has been defined by the Bank as a "complex model."
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Determining fair value by common/standard pricing:
The risk-management system at the Control and Risk Management Division is responsible for
choosing the appropriate model to be used for each type of instrument in this group. Actual
computation of fair values is performed at the Chief Accountant Division or at the Control
Unit in the Control and Risk Management Division, including reasonableness tests and
sampled tests of fair value. Validation of the risk-management system's selection of the most
suitable model is under the responsibility o the Controls Section.
Determining fair value by composite pricing:
The risk-management system determines pricing methodology and calculates fair values. The
methodology is validated by the Controls Section, who has sufficient professional expertise
and is independent of the calculating function. The Controls Section also provides comments
on the reasonableness of actual fair values obtained. With regard to non-tradable Israeli
corporate bonds, the fair value calculated by the risk-management system is submitted for
additional examination by an internal committee that consults on fair value; this committee
discusses the fair-value results obtained using the composite model. The committee consists of
representatives of different divisions of the bank with sufficient professional expertise to
validate the fair-value estimates.
‐ In cases in which the fair value can not be determined with a reasonable degree of
confidence, in accordance with the Public Reporting Directives, the risk-management
system examines the materiality of the volume of such financial instruments. The
determination of materiality is performed both in relation to the par value and in relation to
the fair value, and is measured once quarterly. Limits for the bank's activity in these areas
are determined according to the results of the materiality tests. As at December 31, 2011,
the volume of the aforesaid financial instruments was assessed as immaterial. In addition, a
decision was made to refrain from increasing the volume of activity in these instruments at
this stage.
‐ In the event of a dispute between the risk-management system and the validating party (the
the Controls Section), the issue is brought for a discussion with the Head of the Control
Division, and afterwards before the CEO of the bank for resolution. With regard to non-
tradable Israeli corporate bonds, the dispute is first discussed by the advisory committee on
fair value mentioned above; in the event that a decision still has not been reached, the issue
is brought before the Head of the Control Division and than before the CEO for resolution.
A summary of the discussion of this inquiry procedure is reported to the Committee for the
examination of the financial statements and to the Board of Directors when discussing fair
value.
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‐ The policies and work process described above, including the internal models in use, were
approved by the Committee for the examination of the financial statements and by the
Board of Directors.
‐ The process of determining the fair value of new products measured in the financial
statements at fair value is examined by the risk-management system and validated by the
Controls Section on a routine basis, and brought before the Committee for the examination
of the financial statements and the Board of Directors for approval.
The standard requires reflection of credit risk in measuring the fair value of derivative
instruments which are not tradable in an active market. The credit risk must be reflected in both-
positions of the asset side in respect of counterparty risk as well as positions of the liability side in
respect of the Bank's risk. The Bank's risk is derived from the Bank's rating. The counterparty risk
is derived from indications from transactions in an active market of the credit quality of the
counterparty, to the extent that such indications are available with reasonable effort. The Bank
derives the indications among other sources, from prices of debt instruments of the counterparty
traded in an active market, and from prices of credit derivatives based on the credit quality of the
counterparty. If no such indications are present, the Bank calculates the adjustments based on
internal ratings (such as estimated default rates and rates of credit losses in the event of default).
For counterparties who have signed netting agreements, credit risk is calculated based on the total
portfolio of derivative instruments of the counterparty, at the level of net exposure. For
counterparties who have not signed such agreements, the calculation is performed separately on
the asset side and on the liability side, without offsetting. The transitional directives of the
Supervisor of Banks for 2011 state that in 2011(only), banking corporations are not required to
use complex models including various scenarios of potential exposure in order to measure the
credit-risk component included in the fair value of derivative instruments. The Bank adopted the
aforesaid transitional directives. At the end of 2011, the Supervisor of Banks extended these
eased requirements to 2012 as well.
Total assets measured by fair value as at December 31, 2011 stands at NIS 9,358 million (of
which: NIS 1,041 million fair value of credit to the public, NIS 6,732 million securities, NIS 846
million fair value of derivatives and NIS 739 million other assets) and the total liabilities
measured by fair value stands at NIS 2,663 million (of which: NIS 1,005 million fair value of
deposits in respect of the public, NIS 919 million fair value of derivatives and NIS 739 million
other liabilities). The rate of assets with a fair value classified as level 3 out of the total assets
measured at fair value on a repeating basis in the balance sheet or profit and loss is 2.5%. For
additional details see Note 20B to the financial statements.
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D. Employee benefits
In calculating the bank's liabilities related to employee benefits, the bank makes use of external
actuarial calculations on the three main matters (Details regarding employee benefits are provided
in Note 15 to the financial statements):
1. Pension rights - Refers to the group of long-serving executives and authorized signatories of
the Bank who are entitled to budget-based pensions upon retirement (Henceforth: "active
employees"), and to executives who have retired and chosen the pension track (Henceforth:
"pensioners"). See also Note 15.A.4 and the section “Human Capital” in the Board of
Directors’ Report.
2. Bonuses for length of service (jubilee bonuses) applies to all permanent employees of the
Bank. See also Note 15.B.
3. Excess compensations - compensations at the retirement beyond contractual obligation.
Implemented as of June 30, 2011 based on the new directives issued by the Bank of Israel. It
should be noted that to the estimate of the Bank and its legal advisors, the Bank has no legal
responsibility, be it direct or implied, to pay excess compensation. See also note 15.A.3 of
the financial statements.
The actuarial calculations were performed using the "Accrued Benefit Cost Method" which
reflects the total benefits accrued up to the date of the Balance-sheet report with the total benefit
expected at the future eligibility date spread linearly over the employment period.
The actuarial calculations include assumptions with regard to the real rate of increase of wages,
mortality tables, disability rates, departure rates, the rate of employees choosing pensions, rates of
utilization of pensions, etc. Although these assumptions are made with appropriate caution and
professional skill, a change in any one or several of them and/or a change in the discounting rate
would lead to a change in the amount of the Bank’s liability.
For the purposes of the actuarial calculation of Excess Compensation, as required in the directives
of the Bank of Israel as of June 30, 2011, the actuary of the Bank conducted a survey of data on
retirees in the relevant years as a basis for the aforesaid actuarial calculation according to
management's assessment (2007-2010). Based on the findings of the survey, taking into
consideration the characteristic size of population groups at the Bank, the actuary estimated future
rates of departure before retirement age, with ordinary compensation and with Excess
Compensation. The management of the Bank also estimated the rates of the Excess Compensation.
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Main effects of the initial implementation of the directive on Excess Compensation as at initial
implementation date June 30, 2011:
A new reserve was created in respect of Excess Compensation for the group of managers (who
are not entitled to pensions) and permanent clerks of the Bank. Beyond the aforesaid estimates
of departure rates and of the rate of Excess Compensation, the additional assumptions used to
calculate this reserve (such as the forecast future real increase in wages, mortality rates,
capitalization rates) are identical to the assumptions used until now for the calculation of
actuarial reserves at the Bank. This surplus reserve, beyond the provision for compensation
pursuant to Opinion Statement 20, amounts to approximately NIS 56 million as at the initial
implementation date, June 30, 2011.
The actuarial reserve in respect of pension rights, which refers to the group of long-standing
managers and authorized signatories of the Bank who are entitled to budget-based pensions
upon retirement (hereinafter: "Active Employees"), was updated to include the aforesaid
estimates regarding departure rates and rates of Excess Compensation (departure rates of 2%
per year were used in the past). The other assumptions have not changed. This surplus reserve,
beyond the provision for compensation pursuant to Opinion Statement 20, amounts to
approximately NIS 68 million as at the initial implementation date, June 30, 2011 (As at
March 31, 2011, this reserve totaled approximately NIS 52 million before restatement).
The actuarial reserve in respect of long-service bonuses was updated to reflect the new
departure rates used for the purposes of Excess Compensation (as at March 31, 2011,
departure rates prevalent in the banking industry were used). This reserve amounted to
approximately NIS 21 million as at June 30, 2011. (As at March 31, 2011 this reserve
amounted to approximately NIS 18 million before restatement).
Pursuant to the instructions of the Bank of Israel, implementation is through retroactive amendment
in previous reporting periods. The restatement was performed based on the estimates described
above with regard to departure rates and rates of increased compensation. For details, see Note
1.E.21 with regard to the effect of the retroactive amendment on previous reporting periods.
‐ On February 26, 2012, the board of directors of the Bank approved a format for a preferred-
terms retirement plan. According to estimates by the management of the Bank, approximately
40 employees will retire within this program, while the total cost of Excess Compensation
(beyond the compensation required by law), according to average calculations, is estimated at
approximately NIS 50 million. The board of directors of the Bank also affirmed that along
with the approval of the format for the retirement plan, a policy would take effect under which
early retirement with preferred terms would not be possible for the coming seven years. See
additional details in the section "Human Capital" and in Note 15.A.5.
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‐ Actuarial calculations as at December 31, 2011 take into consideration the estimate by the
management of the Bank that approximately 40 employees will retire under the expected
retirement Plan. The actuarial calculations also encompass the change in policy for 2012
through 2018, whereby early retirement with preferred terms will not be possible and rates of
departure with Excess Compensation starting in 2019 are based on the survey performed for
2007-2010 (as described above). Of the group of executives and senior authorized signatories
who are entitled to pensions, those approved for retirement under the Plan will be permitted a
choice between early pension and increased compensation. This is included in the financial
statements within the reserve for Excess Compensation, with the working assumption that the
present value of the early pension is equivalent to the increased compensation.
Note that for the purposes of the aforesaid actuarial calculation, assumptions were made
according to estimates by the management of the Bank with regard to the volume of
retirement, the manner of retirement, and the characteristics of the population of retirees; thus,
actual materialization differing from these assumptions will require an adjustment of actuarial
reserves in the future, based on actual materialization.
The balance of the reserve for compensation as at December 31, 2011 (not on an actuarial
basis) covers the estimated monetary cost of the aforesaid plan. The reserve also includes a
special fund for a small number of exceptional cases over the coming seven years, in the
amount of approximately NIS 5 million.
- The actuarial calculations are mainly sensitive to changes in the discounting rate, to change
in the forecast rate of annual wage increments, to departure rates, the rate of excess
compensations the rate of employees choosing pensions and mortality tables. Set forth, are
examples of the effects of changes of these rates on all of the actuary reserves:
The current value of the reserves above is calculated by the actuary according to a
discounting rate of 4%, in accordance with the directives of the Supervisor of Banks. For
example, an increase/a decrease of 0.5 percentage points in the discounting rate would
increase/decrease the reserve as at late 2011 accordingly by approximately NIS 22
million.
The calculation of the current value takes into account the forecast of the future real
increase in wages of employees - pension rights - 2%, excess compensation – 3%, Jubilee
grants - 3%, according to the option of the management of the Bank and in accordance
with variance of these populations. For example, an increase/decrease in the forecast rate
of wage increments would increase/decrease the liability accordingly, as at late 2011 by
approximately NIS 14 million.
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The calculation of the current value of regular and excess compensation takes into
account the forecast of the future rates of departure before retirement age (excess
compensations as of 2019 as previously mentioned). For example, an increase/decrease of
10% in the departure rate with regular and excess compensation (the departure rate was
multiplied by 0.9/1.1 respectively) would decrease/increase the liability for late 2011 by
approximately NIS 4 million, respectively.
The calculation of the reserve in a respect of "active" pension rights, takes into account
the forecast of the rates of excess compensation. For example, an increase/decrease of
10% in the rate of increased compensation would increase/decrease the reserves of late
2011 be approximately NIS 4 million, respectively.
The calculation of the reserve of excess compensations and the reserve in a respect of
"active" pension rights, takes into account the forecast of the rates of utilization of
pension rights (72% choose the pension, while exploiting 61% of their pension rights,
based on the Bank's data at the last years). For example, an increase/decrease of 10% in
the rate of utilization of pension rights (the rate of utilization of pension rights was
multiplies by 0.9/1.1) would increase/decrease the reserves of late 2011 respectively by
approximately NIS 3 million.
The amounts of the actuarial calculations are also sensitive to mortality tables. An Israeli
mortality table is used, with a future improvement in life expectancy and a margin in
respect of life-expectancy risk, in accordance with the directives of the Capital Market
Division of the Ministry of Finance from 2007. Changes in these tables usually have a
material impact. In the years 2005, 2006 and 2007, the bank recorded expenses in the
amounts of NIS 9 million, NIS 5 million and NIS 5 million, respectively, as a result of
the adoption of the new tables - with longer life expectations.
- See details on balances and changes of these liabilities during the years 2010-2011 in the
section "Human Resources".
- For details regarding the actuarial estimate upon which the Bank bases the employee benefits
as described above, see the estimate of the actuary Mr. Dan Hershkovitz that was attached via
the Magna electronic disclosure system of the Israeli Security Authority.
E. Derivative Financial Instruments
The Bank has extensive operations in derivative financial instruments, both in its activity for its
customers and within its asset and liability management policy (closing or creating market
exposures).
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These instruments include, inter-alia, futures, forwards, swaps, and options on interest rates,
currencies, shares, commodities, and others. In accordance with the directives of the Supervisor
of Banks, all derivatives are measured at fair value.
Note 19 to the financial statements provide comprehensive information about the Bank’s activity
in these instruments. Section A.2 of note 19 provides information regarding the fair value of the
instruments by type of instrument.
The Bank’s activity in derivative financial instruments within its asset and liability management
policy creates measurement gaps between the economic measurement, which is used for risk-
management purposes, and the accounting measurement on the other hand, which does not
comply with the accounting hedge rules.
Financial income in 2011 according to accounting principles is lower by approximately NIS 22
million than the economic calculation (2010 lower by approximately NIS 5 million).
F. Contingent liabilities
Contingent liabilities are handled in accordance with the directives of the Bank of Israel regarding
this matter. According to these directives, contingent liabilities are classified in accordance with the
probability of the exposure to risk loss in a claim, based on the opinions of the Bank's legal counsel,
as follows:
A probable risk expected - a probability of more than 70% - requires that a full provision be made.
Reasonably possible risk expected - a probability of more than 20% to less or equal 70% - No
provision required. Requires disclosure if the aggregate amount of the claims is material. For
information, see details in Note 18.C.17.A.
Remote risk - a probability of less than or equal 20% - No provision required, requires disclosure of
the maximum possible loss, if the amount is highly material. For further information, see details in
Note 18.C.17(b-e) to the financial statements. The management of the Bank, included in the
financial statements, sufficient provisions required to cover the possible damages resulted from the
claims, based on the legal advisors' estimates. The legal advisors’ estimates are based on their best
judgment, taking into consideration the stage which the proceedings have reached and accumulated
legal experience. However, it must be taken into account that the actual outcome of a claim may
differ from the estimates established in the manner described above, which are used to examine the
need to perform provisions in the financial statements, and the effect may be material.
G. Non-financial investments
The Bank’s non-financial investments are made through its subsidiary, Union Investments and
Enterprise, Ltd. (A.S.Y.). Companies in which the Bank holds less than 20% are presented on the
cost basis. The investment in affiliated companies is presented on the equity basis, on the basis of
the financial statements of those companies. The excess of the cost of the investments over the fair
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value of the assets of the investee company is recorded as goodwill and amortized over the ten-year
period following the date of acquisition - see Note 1.E.1 and Note 1.E.15 to the financial statements.
In order to ensure that non-financial investments are not presented at amounts in excess of their
recoverable value, the Company implements the procedures as mandated in International
Accounting Standard No. 36. For more details, see Note 1.E.16 to the financial statements.
Provision for declines in value of another-than-temporary nature totaled NIS 4 million in 2011,
allocated as loss from share investment (NIS 3 million in 2010).
H. Buildings and Equipment
Buildings and equipment are stated in the balance sheet at cost, less accrued depreciation and less loss
from decline in value, if any.
The Bank applies IAS 16 (Fixed Assets) IAS 38 (Intangible Assets), and IAS 36 (Impairment of Assets)
including mandatory interpretations and publicized updates, with the exception of areas in which the
Supervisor of Banks has set forth specific directives. Initial implementation of this Standard had no
effect on the Bank's activity results. See details in Note 1.E.12 to the financial statements.
Depreciation percentages are based on the estimated economic life of the asset. The Bank uses the best
available information, including past experience, to make such estimates. Costs of the development of
software for internal use are capitalized as investments in equipment after the end of the initial planning
stage, and depreciated from the date of operation of the software, according to an estimate of the period
of time for which it will be used. For further details see chapter "Fixed Assets and Facilities".
The Bank implements procedures in order to ensure that the value of assets in the balance sheet does not
exceed their fair value. When necessary, the Bank records a decline in value. The test for decline in
value of assets is a comparison of the book value of the asset to its recoverable value, which is the higher
of its exercise price (net of sale costs) and its exercise value (which is the present value of the future cash
flows expected to be derived from an asset). See details in Note 1.E.16 to the financial statements with
regard to the implementation of IAS 36 (Impairment of Assets). During the years 2011 and 2010 no
impairment was recorded for the buildings or equipment. For details see Note 6 to the financial
statements.
I. Deferred Taxes
Deferred taxes are recorded in respect of temporary differences between the value of assets and
liabilities in the balance sheet, and the value thereof for tax purposes. In cases in which the date
of recognition of income or expenses for tax purposes is later than the date on which the income
or expense is recorded in the books, the deferred tax balances are calculated according to the tax
rates expected to apply when the income or expense is recognized for tax purposes, as far as is
known near the date of approval of the financial statements. Accordingly, when deferred taxes
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receivable are recorded, the Bank is required to perform estimates and evaluations regarding the
possible future materialization thereof.
In accordance with the directives of the Supervisor of Banks, as of January 1, 2012, the Bank will
adopt the international financial reporting standard IAS 12 (Taxes on Income), including the
required interpretations and updates that have been published. The initial implementation of this
standard is expected to have no effect on the Bank. For details, see Note 1.F.3 to the Financial
Statements.
On December 5, 2011 the Knesset approved an amendment of the Law for Change in the Tax
Burden (legislative amendments), 2011. Pursuant to this law the tax reduction established in
Economic Efficiency Law, will be canceled and the rate of corporation tax will stand at 25% from
2012 forward. Subsequent to the aforesaid amendment, the statutory tax rates applicable to
banking corporations will stand at the following rates: 35.34% in tax year 2012, and 35.06% from
tax year 2013 forward (due to the expected decrease of VAT in 2013 to 15.5%).
The effect of the tax change on the financial statements as at December 31, 2011, is an increase in
the balance of deferred tax assets of approximately NIS 29 million, against a tax income of the
same amount.
The net balance of deferred taxes as of December 31, 2011 is in the amount of approximately NIS
219 million, versus NIS 111 million as of December 31, 2010. For further details, see Note 28.G.
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Legislative Developments
Statements in this section of the financial report shall not detract from statements in other sections and
items of the report, where additional references are made to the legislative amendments described
below and to other legislative amendments. Updates of legislation which passed during 2011 and
published in the financial statements as of 2010 are not appearing in this chapter.
Updates of legislation and proper conduct of banking business directives in the banking system:
Letter of the Supervisor of Banks Concerning Risks of Monetary Transfers Involving Bank
Accounts that Appear on Websites Allegedly Used for Illegal Gambling Activity
Pursuant to the letter, issued on January 29, 2012, banks are required to be aware of the risks involved
in monetary transfers the origin or destination of which are bank accounts appearing on websites
allegedly used for illegal gambling activities, which are included in a list published on the website of
the Israel Money Laundering and Terrorism Financing Prohibition Authority. The board of directors of
the Bank is required to establish policy regarding the risks involved in such transfers, including
controls and due diligence regarding the identification of such transfers. The instructions of the letter
are to be implemented by March 31, 2012. The Bank is acting to implement the instructions of the
letter.
Proper Conduct of Banking Business Directive No. 307 –The Internal Audit Function
The directive was published on December 25, 2011, as part of the update of the Proper Conduct of
Banking Business Directives and the adjustment of the directives to the Basel working framework,
with the aim of reinforcing the principles of corporate governance. The directive regularizes the
internal audit function of banking corporations, and addresses matters including this function's
characteristics, roles, volume of activity, work methods, and reports. The directive also amends Proper
Conduct of Banking Business Directive No. 301, "The Board of Directors," such that the audit
committee of the board of directors is authorized to charge the internal audit function with the duty of
performing special examinations, with reasonable advance notice, in addition to the examinations
established in the function's work plan. The inception date of the directive has been set at July 1, 2012.
The Bank is preparing to implement this directive on time.
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Proper Conduct of Banking Business Directive No. 355 – Business Continuity Management
On December 25, 2011, the Supervisor of Banks issued the directive, "Business Continuity
Management." The directive is based on prevalent standards in the area of business continuity
management, including guidelines published by the Basel Committee, as overarching principles in this
area. Business continuity management is a comprehensive, extensive framework of guidelines in the
areas of infrastructure, corporate governance, and risk management, aimed at ensuring that banking
corporations continue to provide key banking services despite the occurrence of events that cause
severe operational disruption to their systems and activities.
Among other matters, the directive clarifies the responsibility of the Board of Directors and senior
management for instilling the business continuity management framework, and requires the
appointment of a head of business continuity and a crisis management team, consisting of senior
management members and responsible for managing the crisis and making decisions under stressful
conditions. The inception date of the directive has been set at July 1, 2012.
The Bank has begun to prepare and take the necessary actions in order to comply with the instructions
in the directive.
Banking Law (Service to Customers) (Amendment No. 17), 2011
The law was published in the Official Gazette of the Israeli Government on December 19, 2011.
Pursuant to the law as published, non-collection of early settlement fees for execution of a mortgage or
realization of a lien has been limited to a mortgage or lien recorded to secure a housing loan, with
respect to a residence used by an individual as the individual's only residence in Israel or in the region
(according to the definitions in the law),and provided that the consideration for the sale does not
exceed NIS 2.5 million (linked to the CPI). Early settlement fees can also be collected in cases in
which the consideration does not exceed the aforesaid amount, but only with respect to the difference
between the consideration for the sale and the full debt on the loan.
The law will take effect on the inception date of rules to be published by the Governor of the Bank of
Israel (following consultation with the advisory committee, and after receiving approval from the
Knesset Economics Committee).
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Circular of the Supervisor of Banks for the Amendment of Proper Conduct of Banking Business
Directive No. 411 – Prevention of Money Laundering and Terrorism Financing, and
Identification of Customers
On December 26, 2011, the Supervisor of Banks issued a circular to banking corporations amending
Proper Conduct of Banking Business Directive No. 411. Pursuant to the amendment, the Bank is
required to perform a preliminary survey to examine the extent of its exposure to entities declared on
international lists to be entities involved in or assisting the Iranian nuclear program or related
programs. The results of the survey are to be submitted to the Supervisor of Banks no later than March
31, 2012. In addition, the board of directors of the Bank is required to establish policy concerning risks
involved in contractual engagement or execution of transactions for customers with entities declared
on international lists, to be published by the Israel Money Laundering and Terrorism Financing
Prohibition Authority, as assisting the Iranian nuclear program. This policy must address controls and
due-diligence tests designed to identify such declared parties.
The Bank is acting to implement the instructions of the circular.
Instruction of the Israel Securities Authority on Disclosures of Risks and Restrictions due to
Connections with Iran or with Hostile Entities
On November 27, 2011, the Israel Securities Authority issued an instruction according to which
reporting corporations must give full disclosure in their periodic reports and prospectuses of the degree
of their exposure to the various prohibitions established by law on connections with Iran or with
hostile entities, to the extent that such exposure is material with respect to the corporation. With regard
to the Bank's preparations for the amendment to Proper Conduct of Banking Business Directive No.
411 concerning entities involved in or assisting the Iranian nuclear program, see above, in this
subsection.
Circular of the Supervisor of Banks on CSR Reports
On October 3, 2011, the Supervisor of Banks issued a circular concerning the report on corporate
social responsibility.
In light of the importance accorded by the Supervisor of Banks to the activity of banking corporations
in this area, a requirement to publish a CSR report, for a period of up to two years, has been added to
the Public Reporting Directives for banking corporations. The reporting requirement was established
with regard to the period from January 1, 2012, forward. The Bank is studying the requirements of the
circular.
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Instruction of the Databases Registrar Concerning the Prohibition of Use of Information
Regarding Foreclosures Imposed with Third Parties
On September 20, 2011, the Justice, Technology, and Information Authority issued an instruction of
the Databases Registrar concerning prohibition of the use of information regarding foreclosures
imposed with third parties.
Pursuant to the instruction, third parties with which foreclosures are imposed upon debtors, such as
banking corporations, insurance companies, and provident funds, are prohibited from making any use
of the information regarding the imposition of the foreclosure order, beyond the fulfillment of the
goals of the order, including use for the third party's own purposes.
However, the Databases Registrar permits third parties to make exceptional use of information
regarding foreclosure, if the debtor has granted informed consent in advance, after the third party has
informed the debtor of certain details specified in the instruction, as a condition for such consent.
The Bank, as a third party with which foreclosures are imposed upon debtors, is examining the
implications of this instruction for its routine business operations.
Criteria for Recognition of an Internal Enforcement Program in the Area of Securities and
Investment Management
On August 15, 2011, the Israel Securities Authority published a list of criteria for the effectiveness of
enforcement programs in the area of securities laws. This refers to programs that constitute voluntary
mechanisms adopted by corporations in order to ensure that they, and the individuals operating on
their behalf, comply with the securities laws. In addition, the ISA published the eased requirements
that individuals and corporations can earn through effective internal enforcement programs, as well as
the standards that will be used to examine the effectiveness of internal enforcement programs in order
to make a decision regarding eased requirements. The criteria established by the ISA for recognition of
an internal enforcement program as effective include: responsibility of the Board of Directors and
management for the formulation, adoption, and implementation of the enforcement plan; suitability of
the program for the corporation and its unique circumstances, after examination of its business activity
and mapping of the risks in the area of securities laws involved in such activity; and the adoption of
procedures and processes for addressing the mapped risks. The implementation of an internal
enforcement program can serve as a defense argument, in certain circumstances, under the Law for
Increased Efficiency of Enforcement Procedures at the Israel Securities Authority (Legislative
Amendments), 2011 (hereinafter: the "Enforcement Procedures Efficiency Law"). In addition,
according to the ISA, an effective program shall constitute a consideration in the formulation of a
recommendation by the ISA to the state's attorney office to refrain from indicting a corporation under
criminal charges and to use an administrative proceeding instead. The board of directors of the Bank
resolved to formulate an internal enforcement program, in congruence with the legal requirements and
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with the criteria formulated by the ISA for the Bank and the subsidiaries subject to the law, and is
currently acting to implement this resolution.
As part of this process, in September 2011, the Board of Directors of the Bank appointed the chief
legal advisor of the Bank as the head of enforcement, pursuant to the Enforcement Procedures
Efficiency Law; in addition, the compliance and regulation committee of the board of directors was
established, the duties of which include supervision over the formulation of the internal enforcement
program and the implementation of the program upon completion.
Restrictive Trade Practices Law (Amendment No. 12), 2011
An amendment published on record on July 25, 2011. The amendment is aimed at coping with a
competitive failure caused in many economic sectors in which “concentrated groups” operate. The
amendment grants the Antitrust Commissioner the authority to declare groups of companies in a
particular sector to be “concentrated groups", using broad causes, while expanding the supervisory
authority of the Commissioner.
Within the amendment, the Antitrust Commissioner is authorized to perform regularizing activities in
order to “prevent damage to competition” and “promote competition". With regard to the banking
system, the amendment states that the Antitrust Commissioner shall consult with the Bank of Israel
and the Supervisor of Banks about an intention to declare a concentrated group in the banking sector,
and that they may object to such declaration (veto rights), if the declaration would jeopardize the
stability of any banking corporation, or the stability of the banking system as a whole.
Inception of the Money Laundering Prohibition Order (Identification, Reporting, and Record-
Keeping Duties of Portfolio Managers for the Prevention of Money Laundering and Terrorism
Financing), 2010
The aforesaid order took effect at the end of May 2011, replacing the previous order issued in 2001.
The order applies to the Bank's portfolio management company, Impact Investment Portfolio
Management Ltd. (hereinafter: "Impact"). The main changes introduced by the order are:
establishment of a duty to conduct a Know Your Customer procedure; addition of a duty to check
identifying information against a centralized list of declared terrorist operatives; cancellation of the
reporting duty on ordinary transactions, with an expansion of the reporting duty on unusual
transactions; and establishment of specific reporting duties in the area of the prevention of terrorism
financing. Impact has prepared for the implementation of the relevant requirements of the new order.
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Circular Concerning Limits on Indebtedness of Borrowers and Borrower Groups
On May 8, 2011, the Supervisor of Banks issued a circular amending Directive No. 313 concerning
limits on indebtedness of borrowers and of groups of borrowers. The circular was issued following the
issuance of Circular No. H-06-2268, "Capital Adequacy and Measurement," and the subsequent need
to update the definitions of the term "capital" and other related matters, and to add references to the
new directives (Chapter 200). Among other matters, the draft amends the definitions of the terms
"capital," "bank," "indebtedness," "borrower," "group of borrowers," "controlled group of borrowers,"
"control," and more, with the aim of matching the definitions to the Basel II directives (Chapter 200 of
the Proper Conduct of Banking Business Directives). In addition, Section 4 of the directive (Limits)
was updated, stating among other matters that the indebtedness of a borrower group and of a banking
borrower group to a banking corporation shall not exceed a rate of 25% of the capital of the bank, in
accordance with common practice globally. It was further established that the total indebtedness of all
borrowers, borrower groups, and banking borrower groups with net indebtedness of more than 10% of
the capital of the bank shall not exceed 120% of the capital of the bank. The amendments of the
directive pursuant to the circular take effect on December 31, 2011; the amendment of the definition
of capital took effect at the date of publication of the circular. The Bank implemented the amendment
of the definition of capital, and implemented the amendments of the directive, starting with the current
financial statements.
Floating-Rate Housing Loans
On May 3, 2011, the Supervisor of Banks issued an instruction concerning floating-rate housing loans,
applicable to loans approved in principle from May 5, 2011, forward. The instruction restricts the part
of the housing loan (mortgage) with a floating rate of interest to one-third of the total loan granted by a
banking corporation to a borrower. This limit applies to new housing loans in all tracks with floating
interest rates in which the interest rate may vary within a period shorter than five years. In addition,
the directive imposes a requirement for disclosure to customers who took housing loans in the past
with unlinked floating rates based on the Prime rate, where the component of the loan in this track
constitutes one-third or more of the total loan. The instruction changed the expected mix of mortgage
loan tracks at the Bank, increasing the proportion of loans with fixed rates. The Bank is acting in
accordance with the directives of this instruction.
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Companies Law (Amendment No. 16), 2011
The amendment was published on March 15, 2011. The amendment aims to implement the
recommendations of the Goshen Committee on the examination of the corporate governance code in
Israel. In practice, a series of amendments in the area of corporate governance are proposed, as noted
above, including a change in the rules regarding eligibility and decisions concerning the appointment
of external directors, determining various instructions in respect of audit committee structure, as well
as disallowing the presence of various factors within the audit committee, establishment of the audit
committee as the organ authorized to determine whether a transaction is an “exceptional transaction”
and whether the transaction is a material transaction, a requirement for directors to exercise
independent judgment in voting in the board of directors and the committees thereof, expansion of the
matters on which shareholders of a public company may vote by proxy and more. Furthermore,
recommended corporate governance directives for public companies were published within the first
addendum to the law. The Bank, as a public company, is studying the bill and its implications for the
Bank.
Land Taxation Law (Betterment and Acquisition) (Amendment No. 70), 2011
The amendment to the law was published in the Official Gazette of the Israeli Government on March
15, 2011. Pursuant to the amendment, a buyer who pays 40% of the amount of the total consideration
for a home (which is not an "entitling residence," as defined in the law), is required to transfer a total
of 7.5% of the consideration, as of that stage, directly to the tax authorities, as an advance payment
which the authorities are entitled to receive from the seller to defray betterment tax applicable to the
sale transaction, in the event of a transaction concerning land acquired by the seller from November 7,
2001, forward (land acquired by the seller prior to that date requires the transfer of 15% of the
consideration to the tax authorities). The amendment to the law further states that the advance payment
to the tax authorities shall be considered a payment to defray the consideration to the seller. The
aforesaid amendment to the law took effect on March 31, 2011, and also applies to contractors who
sell homes to a first owner.
The amendment applies to the Bank in connection with its activity in the area of financing for
contractors, as the law imposes a legal obligation to grant guarantees under the Sale Law to all buyers
who make payments to the contractor in consideration for the purchase of a home, including the
amount of the advance payment considered as a payment to defray the consideration to the seller, as
noted above. The advance payment is not paid into the financing account of the construction project;
therefore, the financing bank may encounter a situation in which it has issued a guarantee under the
Sale Law, without receiving any proceeds in respect thereof. However, the circular issued by the Tax
Authority states that the foregoing shall not apply if and inasmuch as the contractor has received Form
50 from the Tax Authority, which indicates that the sale of the land is exempt from betterment tax. In
view of the need arising from the amendment to the law for preparation by the banking system for
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implementation of the directives, and due to the demand that has been raised to allow contractors to
act to receive Form 50 from the Tax Authority, the Tax Authority decided to lower the rate of the
advance payment applicable to buyers of rights to land from a contractor, to 0%, until July 31, 2011.
The Bank is acting in accordance with the directives of the amendment.
Legislation and regularization initiatives:
Bill for Regularization of Engagement in Investment Advising, Investment Marketing, and
Investment Portfolio Management (Amendment – Investment Advising Activity), 2011
A private bill submitted to Knesset on March 30, 2011, and approved in a preliminary reading by the
Knesset plenum on July 6, 2011. The main point of the bill is to establish a separate, differentiated
arrangement for general investment advising activity and general investment marketing activity (in
contrast to individual advising/marketing tailored to the needs of a particular customer). The bill states
that general advising and marketing services shall not require a license (in contrast to the existing
situation prior to the proposed amendment), and shall be subject to specific disclosure requirements
(such as a requirement to disclosure any conflict of interest of anyone offering general services, and a
requirement to publish a notice that the provision of the services does not constitute a substitute for
advising or marketing that take the unique information and needs of each person into consideration).
In addition, the bill seeks to introduce several additional amendments to the law, including the
removal of study funds from the definition of "financial assets," and imposition of duties on license
holders, even if the result of the service is a recommendation to the customer concerning assets that
are not securities or financial assets (such as bank deposits).
Draft Regulations for Regularization of Engagement in Investment Advising, Investment
Marketing, and Investment Portfolio Management (Reports to the ISA), 2011
In early July 2011, a draft of the aforesaid regulations was submitted to the Knesset Economics
Committee. The draft states that a banking corporation permitted to engage in investment advising
shall submit a monthly report to the Israel Securities Authority, containing data on all transactions
executed during the preceding month in securities and financial assets through the investment advisors
employed by the banking corporation in accounts of its customers who have signed advising
agreements. The regulations will take effect 180 days after the date of publication.
Draft Amendment to Proper Conduct of Banking Business Directive No. 342 – Liquidity Risk
Management
On August 1, 2011, the Supervisor of Banks issued a draft amendment to Proper Conduct of Banking
Business Directive No. 342 – Liquidity Risk Management. The draft states that the Supervisor of
Banks intends to adopt the Basel III directive concerning liquidity risk, with the necessary changes, at
a date to be determined. According to the draft, for the interim period until the full update of Directive
No. 342, a decision has been made to partially amend the directive in order to clarify and emphasize
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certain aspects of the management and assessment of liquidity risk. Among other matters, the draft
adds several sections to the directive, including definitions of the regulatory liquidity ratio and
instructions for the calculation of this ratio. A requirement has been added to monitor the stable
financing ratio (to be defined by the banking corporation), as well as additional requirements to
maintain a range of tools and measures in order to monitor liquidity status; limits and objectives have
been established in respect thereof.
The inception date of the amendment to the directive is established in the draft at April 1, 2012, with
the exception of the section concerning the stable financing ratio, which takes effect on July 1, 2012.
The Bank is preparing for the implementation of the main points of the proposed draft.
Draft Amendment to the Securities Regulations (Details of Prospectus and Draft Prospectus –
Structure and Form) (Amendment), 2011
On March 29, 2011, the Israel Securities Authority issued a draft for comments by the public of an
amendment to the Securities Regulations (Details of Prospectus and Draft Prospectus – Structure and
Form), 1969 (hereinafter: the "Prospectus Details Regulations"), concerning investment of the
proceeds of an offering and guarantor corporations. Pursuant to the draft amendment, among other
matters, the ISA proposes canceling the exception established in Regulation 51(B)of the Prospectus
Details Regulations, according to which when the proceeds of an offering are invested in a banking
corporation or insurer (hereinafter: a "Supervised Corporation") rated Investment Grade, the
requirement to describe the Supervised Corporation in a prospectus description does not apply. This
exception made it possible for issuance companies to exist within banking corporations and for notes
to be issued through these companies, with the proceeds deposited at the banks. Note that in the
amendment, the ISA also proposes the cancellation of a similar exemption from prospectus
description, established in Regulation 44B(A), with regard to a Supervised Corporation that provides a
guarantee to secure the fulfillment of the terms of commercial securities or bonds.
The proposed inception date of the regulations is 30 days from the date of publication in the Official
Gazette of the Israeli Government. The Bank has an issuance company, Union Issuances Ltd., engaged
in raising resources by issuing notes and depositing the proceeds of the offerings with the bank.
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Transactions with Controlling Shareholders
A. Definition of Exceptional and Negligible Transactions with Controlling Parties
Definition of “Exceptional” and “Negligible” Transactions
On August 6, 2008, the Amendment to the Securities Regulations (Periodic and Immediate
Reports), 1970 (hereinafter- the "Amendment") took effect. Among other matters, the
Amendment imposes a duty to issue an immediate report and include information in periodic
reports with regard to all transactions with controlling shareholders or in the approval of which
controlling shareholders have a personal interest ("transactions with controlling shareholders").
Pursuant to the Amendment, the reporting duty does not apply to transactions belonging to a type
of transactions determined to be negligible in the financial statements of the Bank.
1. “Exceptional” transactions -
Pursuant to the law, the Bank shall file immediate and periodic reports of any exceptional
transaction which it executes. According to the position of the Bank, an “exceptional
transaction” with a controlling party or one in which a controlling party has a personal
interest shall be defined as a transaction meeting the following criteria:
A transaction which is not in the ordinary course of business of the Bank, or which is not at
market terms, or a transaction which may have a material effect on the profitability, assets,
or liabilities of the Bank. A transaction likely to have an impact on profitability, assets, or
liabilities shall be considered a “material transaction,” according to the criteria set out
below.
For this purpose, “market terms” are terms which are not preferable to the terms at which
similar transactions of the same type are carried out by the Bank with persons or
corporations which are not controlling parties of the Bank, or with persons in whose
transactions controlling parties have no personal interest. With regard to market terms in
banking transactions, the transaction shall be examined in relation to deals or transactions of
the same type at similar volumes, as is common practice in examining transactions with
related parties, pursuant to Directive 312 of the Supervisor (“Directive 312”). With regard to
market terms in non-banking transactions, the transaction shall be examined in relation to
transactions of the same type contracted by the Bank with other suppliers or third parties, as
relevant, or in relation to the terms of contractual engagements proposed by suppliers or third
parties against which the terms of the transaction are examined. In cases in which it is
difficult for the Bank to obtain corresponding offers of terms of a transaction, market terms
shall be examined based on the opinion of a professional consultant in the field of the
contractual engagement, who will compare the terms of the transaction or the proposal to
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similar transactions that may be contracted in the relevant market at the same time. It is
hereby clarified that this refers to a transaction executed in the ordinary course of business of
the Bank, where a market exists for transactions of that type in which similar transactions are
executed.
The criteria for market terms specified in the first part of the definition of “market terms,” as
adopted by the Bank, were established by the Supervisor in Directive 312 with regard to
related parties of the Bank, and also apply to controlling parties of the Bank. In addition,
transactions with related parties are approved by the audit committee of the Bank, and the
audit committee must determine that the transaction is at market terms, according to the
criteria described above.
The criteria established by the Supervisor are suitable for the examination of the compliance
of transactions with market terms, under the circumstances noted.
Monetary volume of “exceptional transactions” – According to the position of the Bank, a
transaction with a monetary volume equal to or greater than the monetary volume listed
below, as relevant, shall be considered a “material transaction.”
2. Banking transactions -
2.1 Material credit transaction, including off-balance-sheet credit:
For this purpose, a "material transaction" is a credit transaction the amount of which
is greater than 3.33% of the capital of the bank, as defined in Proper Conduct of
Banking Business Directive No. 311, Minimum Capital Ratio. A "credit transaction"
is the provision of credit or a credit facility (including transactions involving credit
and constituting off-balance-sheet items, such as transactions in derivatives,
guarantees, and commitments to extend credit) including the acquisition of bonds
constituting a substitute for credit, the volume of which, for this purpose, is
determined according to the definition of “indebtedness” in Directive 312. The
measurement for this purpose is performed according to the total credit of each
controlling party (with regard to the relevant controlling party, the total credit shall
also take into account credit to companies in which the controlling party has holdings
of more than 10%, and credit to relatives of the controlling party).
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2.2 Material deposit transactions:
Each deposit or renewal of a deposit shall constitute a separate transaction for this
purpose.
For this purpose, a "material transaction" is a transaction the amount of which is
greater than 2% of total deposits from the public according to the most recent financial
statements of the bank, published prior to the execution of the transaction ("The
Recent Financial Statements").
2.3 Material transactions in securities or transactions in foreign currency (foreign-
currency transactions which are not credit transactions or deposit transactions,
as detailed above):
For this purpose, "material transaction" is a securities transaction or a foreign
currency transaction where the amount of the fee collected in respect of the transaction
is equal or greater than 2% of the annual total operating income (net of income from
investment in shares) according to the most recent annual financial statements of the
bank.
2.4 "Negligible transaction" - Pursuant to the instructions given by the Israel Securities
Authority to the Bank (in advance of the approval of its prospectus in September
2009), with regard to non-exceptional banking transactions with controlling parties,
the Bank shall report in its prospectus, as well as in periodic reporting only, referring
solely to the balances of credit and balances of deposits, according to the format
shown in the tables below, as of the reporting date noted for each table. In addition,
beginning with the annual financial statements for 2009, the Bank is required to
disclose the highest balance of deposits of each controlling party for the period (for
this purpose, the controlling party include companies in which the controlling party
holds more than 10% and relatives of the controlling party; the “Controlling Party
Group”), and, to the extent required by the ISA, the disclosure of the balance of credit
(cumulative) of the relatives of the controlling party shall be broken down in the credit
table.
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3. Non-banking transactions -
3.1. “Material transaction” – A non-banking material transaction is a nonrecurring
transaction, or a continuous transaction (several transactions of identical essence with
the same company), or several transactions executed in accordance with a framework
agreement, with a cumulative amount over one calendar year equal to or greater than
2% of the annual total operating and other expenses according to the most recent
annual financial statements.
3.2. A “negligible transaction,” according to the definition of the Bank, is a transaction in
the ordinary course of business, at market terms, in an amount not exceeding the
following amounts:
A nonrecurring transaction in an amount not greater than 0.1% of the capital of the
Bank, as defined in Directive 312, according to the most recent financial statements of
the Bank published prior to the execution of the transaction; or a continuous
transaction (several transactions of identical essence with the same company), or
several transactions executed in accordance with a framework agreement, with a
cumulative amount over one calendar year not greater than 0.75% of the annual total
operating and other expenses according to the most recent annual financial statements
of the Bank.
B. Details of the facts, justifications, and explanations in the determination of definitions and
parameters with regard to "negligible transactions":
With regard to the monetary volume of non-banking transactions, for nonrecurring transactions
the volume established is congruent with the minimum amount established in Directive 312. With
regard to transactions requiring approval by the audit committee or by the committee for
transactions with related persons, and with regard to continuous transactions or transactions under
a framework agreement, in view of the fact that these are transactions in the ordinary course of
business rather than unique transactions, the comparison of the weight or share of the transaction
relative to the total relevant expenses over a period at the Bank is the most relevant criterion for
this purpose, in the opinion of the Bank.
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C. Further to the foregoing, the following table summarizes data on banking transactions with
controlling parties:
1. Credit transactions (1)
Data as at December 31, 2011 (in NIS thousand) (2)
Details
Balance of balance-sheet
credit Unutilized
credit facility
Risk-adjusted assets arising
from activity in derivatives
Bank guarantees
Proprietary investments by
the Bank in bonds issued by
companies controlled by a
controlling party Total indebtedness
Guarantees to third parties issued by a controlling
party to companies under its control
Eliyahu Shlomo and private companies under his control 27,233 46,732 - - - 73,965 12,806
Public companies under his control 35 - - - - 35 -
Total Eliyahu group 27,268 46,732 - - - 74,000 12,806
Yeshayahu Landau group and private companies under its control 91,282 218 - - - 91,500 33,997
Public companies under his control** - Granite Hacarmel Group 328 2,172 - - - 2,500 -
Total Yeshayahu Landau group 91,610 2,390 - - - 94,000 33,997
Manor group and private companies under her control - - - 1,242 - 1,242 -
Public companies under her control
(IDB group) 19,109 13,311 *2,115 1,718 53,784 90,037 -
Total Manor group 19,109 13,311 2,115 2,960 53,784 91,279 -
* Including off-balance sheet exposure in respect of derivative instruments. ** Granit is not controlled by Yeshayahu Landau, but is included in the definition of related parties due to
holding of more than 10%. 1. Note that the credit facility or the specific credit is approved individually for each controlling party, and the
terms are established, among other matters, according to the type and volume of the transaction. There is no
problematic credit or credit in respect of which provisions have been made in the credit listed in the
following tables.
2. The data listed above is in accordance with the definition of “indebtedness” in Directive 313.
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2. Transactions in deposits
The balances of deposits with the Bank of all controlling shareholders totaled NIS 619 million
on December 31, 2011, with the following division into groups of controlling parties: Group I –
NIS 412 million; Group II – NIS 207 million; Group III - NIS 0.1 million.
The highest balance during 2011 was as follows: Group I – NIS 500 million; Group II – NIS
163 million; Group III – NIS 0.1 million.
These amounts do not include deposits managed by institutional entities controlled by the
controlling parties at the Bank for insured clients, provident funds, and mutual funds.
Most of the amounts of the deposits of the balances noted above as of December 31, 2011 are
deposited in deposits of the types listed below, with interest rates within the range of the
minimum and maximum rates noted:
Most significant types of deposits
Type of deposit
Minimum annual interest
December 31, 2011
Maximum annual interest
December 31, 2011
Weekly fixed-rate deposit in NIS 1.90% 3.70%
Daily fixed-rate deposit in NIS 2.55% 3.05%
Foreign currency deposit 0% 1.80%
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3. Other banking transactions
The following table lists benefits in rates of the principal fees for each group of controlling
parties1:
Concentration of the principal fees
Name of fee Fee's level as of December 31, 2011 (according to the Bank's price list)
Maximum benefit rate
Minimum benefit rate
Account transactions recording
Payment of NIS 1.42 per transaction 100% 0%
Transfer/deposit to an account in another bank
Payment of NIS 43 for transfer/deposit
100% 0%
Deposit management fees (securities custody fees) tradable on Tel-Aviv Stock Exchange (including nontradable securities, certificates in mutual funds and bonds).
Payment of 0.15% for quarter minimum NIS 6 for security NIS 39 for deposit
1. The benefit rates are not at preferable terms relative to rates of benefits granted to other similar customers who are not part of the groups of controlling parties. The Bank periodically approves the rates of the benefits on fees. The rates of the benefits approved at the reporting date appear in the fee table above.
D. Details of exceptional transactions with controlling parties and additional transactions with
controlling parties:
1. On October 31, 2011, the general assembly of shareholders of the Bank approved the
acquisition of a directors’ and officers’ liability (D&O) policy for directors and officers of
the Bank that also applies to controlling shareholding directors or their relatives, together
with a banking liability policy with liability limits of USD 85 million per event and per
period for both policies, for a period of twelve months, from September 15, 2011 to
September 14, 2012. The policies will be purchased from a consortium of insurers in
London. The Phoenix Insurance Company Ltd. will provide front-office services to the Bank
in respect of the policies. The total premium to be paid by the Bank for the purchase of the
D&O policy (including the payment for the "front-office services") is a total amount not to
exceed approximately USD 275,300. The acquisition of the insurance policy as described
above was approved by the audit committee on September 8, 2011, and subsequently by the
board of directors of the Bank on September 12, 2011.
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The policy applies, with identical terms, both to officers who are controlling parties of the
Bank or their relatives (Mr. Yeshayahu Landau – with regard to the acquisition of the
insurance policy for Mr. Yeshayahu Landau and for Mr. Yigal Landau, who serve as
directors of the Bank, as Mr. Yeshayahu Landau, father of Mr. Yigal Landau, is the
controlling party of Yeshayahu Landau Holdings (1993), which is a controlling party of the
Bank; and Ms. Ruth Manor – with regard to the acquisition of the insurance policy for Mr.
Yitzhak Manor, who served as a director of the Bank until August 20, 2011, as Mr. Yitzhak
Manor is the husband of Ms. Ruth Manor, who with her niece, Dr. Yael Almog, controls
David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd., which are
controlling parties of the Bank), and to other officers of the Bank. For further details
regarding this transaction, see the Immediate Report issued by the Bank on September 12,
2011 (reference no. 2011-01-271914) and on September 13, 2011 (reference no. 2011-01-
272829).
2. On February 8, 2010, the general assembly of the Bank approved identical remuneration for
the external directors of the Bank and for the other members of the Board of Directors of the
Bank, with the exception of the Chairman of the Board of Directors, in the following
amounts: annual remuneration in the amount of NIS 95,000, and remuneration for
participation in a meeting in the amount of NIS 3,500. These amounts will be updated on
February 1 and August 1 each year (hereinafter: the “Date of Change”), according to the rate
of increase in the CPI published most recently prior to the Date of Change, relative to the
CPI published most recently prior to the date of approval of the remuneration. The
remuneration for participation in a meeting shall be paid to the members of the Board of
Directors in return for their participation in meetings of the Board of Directors and of the
committees of the Board of Directors. In respect of resolutions of the Board of Directors or
of its committees which are passed without convening in person, the directors shall be paid
remuneration for a meeting at a rate of 50% of the remuneration for participation in an
ordinary meeting. Directors are entitled to remuneration for participation in a meeting if they
participate in all or most of the meeting.
Dates of payment shall remain in accordance with the existing practice at the Bank, subject
to the provisions of the Companies Regulations (Rules Regarding Remuneration and
Expenses for External Directors), - 2000 (hereinafter: the “External Directors Remuneration
Regulations”).
The remuneration for directors, as detailed above, was approved by the audit committee and
the Board of Directors on January 3, 2010.
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3. On June 22, 2009, the general assembly of the Bank approved a transaction for the increase
of the amount of the indemnity commitment granted to those serving from time to time as
officers of the Bank and of the subsidiaries of the Bank (hereinafter: the “Officers”), within
the indemnity commitment letter approved by the general assembly of the Bank on
December 29, 2005 (hereinafter: the “Commitment Letter”), with regard to offers and/or
issuances of securities through a prospectus, with all implications thereof, as detailed in
Section (1) of Appendix A of the Commitment Letter, in an additional amount of USD 15
million (hereinafter: the “Additional Indemnity Amount”), beyond the indemnity
commitment in the amount of USD 35 million stated in the aforesaid Commitment Letter.
The Additional Indemnity Amount shall be designated solely for the event described in
Section (1) of Appendix A of the aforesaid Commitment Letter (which concerns offers
and/or issuances of securities through a prospectus). It is hereby clarified that
indemnification related to events included in Section (1) of Appendix A to the Commitment
Letter will first be granted out of the Additional Indemnity Amount (USD 15 million), and to
the extent that indemnification is required in respect of an event of the aforesaid type in
excess of the Additional Indemnity Amount, the Officers will also be indemnified from the
existing indemnity commitment amount of USD 35 million. The increase of the amount of
the indemnity commitment, as detailed above, was approved by the audit committee on April
27, 2009 and by the board of directors of the Bank on April 30, 2009. The controlling parties
whose names are listed below have a personal interest in the transaction, due to the increase
of the indemnity amount in respect to themselves and/or their relatives who serve as
directors of the company: Mr. Yeshayahu Landau, controlling party of Yeshayahu Landau
Holdings (1993) Ltd., which is a controlling party of the Bank – with regard to the increased
indemnity commitment to himself and to Mr. Yigal Landau (his son); Mrs. Ruth Manor and
Mrs. Drora Zakai*, controlling parties of David Lubinski Properties (Holdings) 1993 Ltd.
and Cheroudar Properties Ltd., on the transaction approval date, which are controlling parties
of the Bank – with regard to the increased indemnity commitment to Mr. Yitzhak Manor
(husband of Mrs. Ruth Manor) and to Mr. Haim Almog (son-in-law of Mrs. Drora Zakai at
the time of granting of the indemnity).
For further details regarding this transaction, see the immediate report dated May 14, 2009
and the immediate report regarding the results of the assembly of June 22, 2009. With regard to the change of controlling shareholders, it is noted that on August 4, 2010, the
Bank was notified that, on August 4, 2010, a transfer of shares had been completed at the
companies David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd.,
which are part of the group of controlling shareholders of the Bank, from Mrs. Drora Zakai
to her daughter, Dr. Yael Almog. It was further stated that the permit for control and holding
of means of control of the Bank, pursuant to the Banking Law (Licensing), 1981, was
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amended such that the name of her daughter, Dr. Yael Almog, would appear in place of the
name of Mrs. Drora Zakai in the permit and the appendices thereto.
4. Banking transactions, with details listed cumulatively and by controlling party groups – see
Section C of this chapter, above.
Community Activity and Donations
The employees, management, and the board of directors of the Bank see themselves as involved in the
community and committed to activity on behalf of the community and society. This effort, based on
the values of the ethical code adopted by the Bank, is reflected in a range of activities and initiatives,
included community-oriented activities at the branches, volunteering initiatives, and involvement in
and promotion of socially oriented activities, especially among population groups with special needs
and the disadvantaged sectors of Israeli society, as well as monetary donations.
The board of directors and management of the Bank have established a policy regarding donations.
The donations committee, headed by the CEO, works to implement this policy and allocates donations
to various entities and organizations, in order to provide assistance in the areas of society, the
community, education, and health care.
The Bank's involvement in the community takes the form of a variety of initiatives and activities, with
the participation of employees and managers as well as customers. As part of this effort, the Bank
launched a special initiative to promote local art, and founded the Union Gallery – a series of art
exhibitions displayed at some of the Bank's branches, providing a venue for local artists residing in the
vicinity of the branch. The Union Gallery creates a unique connection between artists, local
government agencies (which usually support the exhibitions), customers, employees, and the general
public of visitors to the exhibitions at the branches.
The Bank and its employees conduct additional community-oriented activities, such as collecting and
preparing food baskets for those in need, in collaboration with various aid foundations; donations to
various organizations; participation in events for institutions that promote special population groups;
and more. The Bank has joined forces with various volunteering organizations to conduct community-
oriented activities that benefit disadvantaged population groups while also offering stronger groups an
opportunity to contribute and provide assistance.
Another key area to which the Bank devotes extensive attention is encouraging success for children
and providing assistance with mathematics studies for children at risk. For many children, this effort
provides a boost to their future success and opens a window of opportunity for achievement.
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In 2011, the Bank continued promotion activities in mathematical studies at two institutions for
children at risk. Due to the success of this activity, the decision was made to continue it. In addition,
employees undertook personal volunteering efforts at these institutions, and children from the
institutions were invited to participate in recreational events held by the Bank. The success of the project
led to the decision to continue in the future.
Beyond the Bank’s involvement in direct donations of funds to the various organizations, the Bank
also assists institutions and foundations that promote special population groups by providing
employment and producing consumer products. The Bank promotes purchases of products produced
by organizations that provide assistance through rehabilitation and employment of persons in need,
with the aim of helping them serve in contributing and beneficial capacities and integrate into society.
The direct monetary contribution in 2011 amounted to NIS 500 thousand, similar to 2010. For the year 2012,
it was decided to double the Bank's donations budget.
Disclosure Regarding the Internal Auditor
About the Chief Internal Auditor
The internal auditor of the Bank and its subsidiaries is Mr. Yehuda Orbach, a certified public accountant.
Mr. Orbach has been serving in this role since November 2000. Mr. Orbach holds a degree in economics
and accounting from the Hebrew University in Jerusalem, and has more than twenty years of audit
experience. His former positions include the following: internal auditor at the Postal Bank (1988-1990),
and external auditor of the Bank of Israel during the same years; Deputy Commissioner of State
Revenues in the Ministry of Finance, member of management of the Income Tax and Property Tax
Department (currently the Taxes Authority), the head of the computer department at the Finance
Ministry's Tax system ("Shaam") (1990 – 1993), the CEO of a management service company at one of the
leading CPA firms in Israel (1993), VP and head of the members and supervision department at the Tel
Aviv Stock Exchange (1994 – 2000). Mr. Orbach is a lecturer on information systems auditing at the Tel
Aviv University, and at the Jerusalem College of Technology and is the author of articles and books,
including a book about computerized accounting information systems published by the Open University in
2007. In addition he serves as chairman of the sub-committee on control standards and procedures in
computerized information systems at the Institute of Certified Public Accountants in Israel.
The Chief Internal Auditor is an employee of the Bank and meets the conditions specified in Section 3(A) of
the Internal Audit Law, Section 146(B) of the Companies Law, and Section 8 of the Banking Rules. He has
no material business relationships or other material relationships with the Bank or with any entity related to
the Bank. Internal Audit Unit employees also comply with the directives of Section 8 of the Banking Rules.
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Appointment Method and Organizational Hierarchy
The Audit Committee and the Board of Directors of the Bank and its subsidiaries approved the appointment
of Mr. Orbach in 2000. The organizational supervisor of the chief internal auditor is the chairman of the
board of directors of the Bank.
Internal Audit Work Plan
Internal auditing at the Bank follows a multi-year work plan that presents the entities and issues to be audited
during the coming two years, and a comparison to the audits performed in the preceding five years. The multi-
year work plan is based on a comprehensive risk assessment carried out by the internal audit unit at all
units of the Bank. The survey is updated routinely by the internal audit unit and compared with risk
assessments performed by the management of the Bank. The annual work plan is based on the Internal
Audit Unit’s multi-year work plan; the work plan of the Bank; issues submitted for examination by the Board
of Directors, the Audit Committee, and the management of the Bank; and the requirements of government
agencies, including the Bank of Israel. The work plan also encompasses the Bank’s subsidiaries.
In addition to the foregoing, internal audit conducts an independent review of the ICAAP document. As part
of this process, the audit covers a very broad range of topics to be reviewed and audited. Some of these areas
are examined periodically (as they refer only to the measured and reported period). Other areas are integrated
into the multi-year work plan of internal auditing (mainly those related to corporate governance).
The work plan is approved by the Board of Directors of the Bank, after the Audit Committee has discussed
the plan and recommended that the Board of Directors of the Bank approve it. Work plans are also approved
at consolidated companies, accordingly. The work plan grants the Chief Internal Auditor the discretion to
diverge from the plan, subject to advance authorization by the Chairman of the Board of the Bank.
Within the agreement for the provision of computer and operational services between Bank Leumi and Union
Bank, the Internal Audit Unit is perusing the audit reports of Bank Leumi that relate to the services provided
to the Bank. A process has also been established for the immediate transfer of information referring to the
Bank in exceptional cases in which the internal audit unit at Bank Leumi reports on material failures or
defects to the audit committee of Bank Leumi.
Material transactions, if any, are reported to the Chief Internal Auditor and examined in accordance with the
multi-year work plan.
Average Number of Positions in 2011
Chief Internal Auditor 1
Employees of the Internal Audit Unit at the Bank 17
Outsourcing 1.25
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This calculation does not include the resources allocated for audits in the area of information technology,
which are performed by Bank Leumi for the systems operated by Bank Leumi and used by the Bank.
Performance of Audits
Internal auditing is carried out in accordance with the Internal Audit Law, the Banking Ordinance, the
Banking Rules (Internal Auditing), Proper Conduct of Banking Business directives, and including Proper
Conduct of Banking Business Directive No. 307 regarding the internal audit function that was published
recently, individual guidelines of the supervisor of Banks and the professional guidelines of the Institute of
Internal Auditors in Israel, which are based on international guidelines for internal auditors. The Audit
Committee holds discussions from time to time concerning risk mapping and work procedures in internal
auditing, with the aim of ensuring that the auditing is performed at the required volume and frequency, in
compliance with professional standards.
Access to Information
The Internal Auditor is granted free access to all existing information at the Bank, as stipulated in Section 9 of
the Internal Audit Law - 1992, including continuous unmediated access to the Bank’s information systems,
including financial data.
Reports of the Chief Internal Auditor
Each audit report is submitted in writing to the Chairman of the Board of Directors, the Chairman of the Audit
Committee, and the General Manager. A summary of each report is brought before the Audit Committee,
which usually convenes once a month, for discussion. In cases of material reports or reports with
exceptionally serious findings, the full report is brought before the committee. Following conclusion of the
discussion in the audit committee, the Chief Internal Auditor monitors any faults until resolution. As
part of the monitoring process, these matters are discussed approximately once every six months by
the management of the Bank, and subsequently by the audit committee, in accordance with the work
process established by the committee. In addition, in accordance with the Banking Rules (Internal
Auditing), the Internal Auditor submits semi-annual and annual reports on the performance of the auditing
work plan, semi-annual and annual lists of all audit reports in the reported year, and a report summarizing
internal audit activity to the Audit Committee. Discussions of the semi-annual reports for 2011 were held on
July 18, 2011 and January 29, 2012.
Board of Directors’ Evaluation of the Activity of the Chief Internal Auditor
In the opinion of the Board of Directors and the Audit Committee, the volume, nature, and continuity of the
activity of the Chief Internal Auditor and the internal audit staff and work plan are reasonable under the
circumstances, and are sufficient to achieve the objectives of internal auditing at the Bank and its consolidated
subsidiaries.
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Remuneration
The following table lists payments to the Chief Internal Auditor in 2011, in accordance with the details
required in the table of high wage recipients at the Bank:
NIS thousands Remuneration for services(1): Salaries - wages 808
Compensation, pension, advanced-study fund, vacation, National Insurance and usage value 295
Supplement of provisions for incidental expenses due to changes in wages in the accounting year 52
Bonus (2) 195 Total salaries 1,350 Guarantees provided under ordinary terms 22
(1) The amounts of the compensation are in terms of cost to the bank, with the exception of wage tax.
These amounts are included in the statement of profit and loss, under the item “salaries and
incidental expenses.” There is no additional compensation for services – management fees,
consulting fees, commissions, or others.
(2) Estimated bonus in respect of 2011 – see details in Section F(3) of the chapter "Remuneration of
Interested Parties and Senior Officers." Note that payment of half of the bonus is conditional –
see Section 15.D.
The bonus in respect of 2010, in the amount of NIS 210 thousand, which was established in 2011
in accordance with the aforesaid bonus plan, is not included above. Note that this bonus was not
included in the above table column for the preceding year, because it had not yet been determined
at the date of publication of the financial statements. In 2011, it was possible to estimate the
bonus for the current year based on the long-term bonus plan approved as noted above. Also see
Section F(2) of the chapter "Remuneration of Interested Parties and Senior Officers."
(3) There are no other items of compensation not for services. There are no interest-rate benefits in
respect of deposits, as these interest rates are not superior to those paid to other customers of the
bank making deposits on a similar scale, at similar linkage and similar settlement terms. Benefits
in respect of other banking transactions were not included, because the amount of these benefits is
immaterial and does not exceed a total of NIS 50 thousand per year, and the benefits are granted
at the same terms and rates to all employees of the Bank.
(4) Mr. Orbach is employed by the Bank under a personal employment contract in effect as of
November 1, 2000. Each of the parties to the employment agreement may terminate the
contractual engagement at any time, for any reason, with 90-day advance notice in writing,
according to the terms established in the employment agreement.
Upon the conclusion of his employment, Mr. Orbach is entitled to a payment for restriction of
competition in the amount of three monthly salaries in the event of termination by the Bank, and
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1.5 monthly salaries in the event of his resignation, unless the conclusion of his employment
occurs under such circumstances wherein severance pay may be fully or partially denied, or under
circumstances in which the Bank waives the period of restricted competition.
Mr. Orbach’s salary is updated each quarter by 80% of the increase in the consumer price index.
In 2010, in addition to linkage Mr. Orban received a bonus of 5.52%. In 2011, in addition to
linkage Mr. Orban received a salary gain of 3.4%.
In the opinion of the Board of Directors, the payments made to the Chief Internal Auditor of the Bank have no
effect on the exercise of his professional judgment.
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The Board of Directors
Information regarding the Directors of the Bank is set out below:
Zeev Abeles, Chairman of the Board of Directors – Appointed on November 1, 1999.
Chairman of the following committees of the Board of Directors: Board of Directors' Credit Committee;
Insurance Committee; Urgent Credit Approval Committee; Payroll and Remunerations Committee; Credit to
the Diamond Industry Committee; Risk Management Committee; Budgetary Follow-up Committee; the
Compliance and Regulation committee; and the Non-Financial Investments Committee.
Employed on the corporation as Chairman of the Board. Not an employee of a subsidiary of the corporation
or related company or interested party thereof.
Not a family member of another interested party of the corporation.
Has accounting and financial expertise.
CPA; B.A. in Economics, Hebrew University of Jerusalem; B.A. in Accounting, Tel Aviv University.
Occupation in the last five years: Chairman of the Board of Union Israel Bank Ltd.
Director or officer at the following corporations:
Chairman of the Board of the subsidiary Union Investments and Enterprises (A.S.Y.) Ltd.
Director at the following companies: Zofnat Consulting Assets and Management (2002) Ltd.; Tchelet
(Tel Aviv-Herzliya) Coast Development Co. Ltd.; Zur Shamir Holdings Ltd.; Edgar Investments and
Development Ltd.; Melisron Ltd.; Tel Aviv-Jaffa Economic Development Authority Ltd. Chairman of
the Administrative Board of the Open University (voluntarily).
Yeshayahu Landau, Vice Chairman of the Board of Directors - Appointed on June 15, 1993.
Member of the following committees: Board of Directors' Credit Committee, Urgent Credit Approval
Committee, Budgetary Follow-up Committee, Payroll and Remunerations Committee and Fixed Asset
Transactions Committee.
Not an employee of the corporation/a subsidiary/a related company/an interested party thereof.
A family member of another interested party of the corporation.
Has professional qualification.
High-school graduate.
Occupation in the last five years: Manager of companies and Vice Chairman of the Board of Union Israel
Bank Ltd.
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Director or officer at the following corporations:
Chairman of the Board of Hiram Landau Ltd.;
Member of the Board of Governors of the Technion.
General Manager and Director at the following Companies: Yeshayahu Landau Holdings (1993) Ltd.;
Yeshayahu Landau Properties (1998) Ltd.; Riverton Corporation (Switzerland) Ltd.; Carlton Trading
(Switzerland).
Director at the following companies: Bertura Development Ltd.; Carlton Trading (Ukraine); Landlan
Ltd.; Hotam Hiram Management (2002) Ltd.; Langat Development Ltd; Hiram- Epsilon Ltd.; Ratio
Oil Ltd.; Granit Hacarmel Ltd.; and its subsidiaries; and foreign companies abroad.
Haim Almog - Appointed on September 25, 2001.
Member of the following committees: Board of Directors' Credit Committee, Insurance Committee, the
Budgetary Follow-up Committee, and Compliance and Regulation Committee.
Not an employee of the corporation/a subsidiary/a related company/an interested party thereof.
Has accounting and financial expertise.
B.A. in Economics, Tel Aviv University.
Occupation in the last five years: Manager of businesses.
Director or officer at the following corporations:
General Manager and Director at the following companies: C.O.R.A.L. Holdings (H.C) (2007) Ltd.
Director at the following companies: David Lubinski Properties (Holdings) 1993 Ltd.; Cheroudar
Properties Ltd.; Almozlino Ltd.
Uzi Vardi-Zer – Appointed on August 21, 2005.
Member of the following committees: Board of Directors' Credit Committee; Audit Committee; Financial
Statement Review Committee; the Urgent Credit Approval Committee and the Non-Financial Investments
Committee.
External director under Proper Conduct of Banking Business Directive No. 301 and independent director
according to the directives of the Companies Law.
Not an employee of the corporation/a subsidiary/a related company/an interested party thereof.
Not a family member of another interested party of the corporation.
Has accounting and financial expertise.
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B.A. in Economics and International Relations, Hebrew University of Jerusalem; Diploma in Business
Administration, Hebrew University of Jerusalem.
Occupation in the last five years: Chairman of the Board of Housing & Construction Holding Co. Ltd.
and its subsidiaries.
Chairman of the following companies: Ligat Holdings Ltd.; Ligat Industries Ltd.
Director or officer at the following corporations: Gmul Investments Company Ltd.; Gmul Real Estate
Ltd.; Board of Trustees of the Hebrew University of Jerusalem, Hebrew University Properties;
Member of the Governing Board and the Administrative Board of the Finance Committee of the Open
University, member of the Governing Board in A. Dori Ltd. Group, A Dori Construction Ltd. and
subsidiaries, Director in Hiron - Trade Investment and Industrial Building Ltd. and a member of the
Investment Committee of Reality fund of Egged Investments.
Yigal Landau - Appointed on June 15, 1993.
Member of the following committees: Risk Management Committee; the Committee for Credit to the
Diamond Industry; Fixed Asset Transactions Committee and Non-Financial Investments Committee.
Not an employee of the corporation/a subsidiary/a related company/an interested party thereof.
A family member of another interested party of the corporation.
Has accounting and financial expertise.
M.B.A. in Business Administration, Tel Aviv University; B.Sc. in Civil Engineering, Technion, Haifa.
Occupation in the last five years: Engineer, manager of companies.
Director or officer at the following corporations: General Manager of Hiram Landau Ltd. and General
Manager and Director of Ratio Oil Exploration Ltd.
Director or officer at the following corporations:
General Manager of Hiram Landau Ltd. and General Manager and director of Ratio Oil Ltd.
Director at the following companies: Proceed Venture Capital Fund Ltd.; Hotam Hiram Management
(2002) Ltd.; Hiram-Epsilon Ltd.; Dalia Power Energies Ltd.; Langat Ltd.; Landlan Ltd.
Miri Lent-Sharir – Appointed on January 31, 2006.
Member of the following committees: Budgetary Follow-up Committee, Financial Statement Review
Committee, Insurance Committee, Compliance and Regulation Committee, Risk Management Committee
and Non-Financial Investments Committee.
External director under Proper Conduct of Banking Business Directive No. 301 a independent Director in
accordance with the Companies Law.
Not an employee of the corporation/a subsidiary/an interested party thereof.
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Not a family member of another interested party of the corporation.
Has accounting and financial expertise.
B.A. in Economics, M.B.A. in Finance and Accounting, Tel Aviv University.
Occupation in the last five years: Director at various companies; investment activities as a private
investor.
Director at the following companies: Taya Investment Company Ltd.; Shomera Insurance Company
Ltd.; Rosebud Real Estate Ltd.; Gefen Investments Bio-Med Ltd. Inter gamma Investment Ltd. and
M.A. Sharir Management Ltd.
Dr. Yaacov Lifshitz – Appointed on November 2, 2008.
Chairman of the financial Statements Review Committee and Member and of the following committees: Risk
Management Committee; Audit Committee; Insurance Committee; and credit to the diamond industry;
External director under the Companies Law.
Not an employee of the corporation/a subsidiary/a related company/an interested party thereof.
Not a family member of another interested party of the corporation.
Has accounting and financial expertise.
B.A. in Economics and Political Science, M. A. in Economics, the Hebrew University of Jerusalem. PhD in
Philosophy, the Ben-Gurion University in the Negev.
Occupation in the last five years: Director at the following companies: Carmel Investment Group Ltd.; Tesnet
Software Testing Ltd.; Israel Discount Bank Ltd.; Dor-Alon Gas Technology Ltd.;
Elbit Systems Ltd.; Spring Pension Fund Management Ltd.
Guest lecturer at Ben-Gurion University in Economics and Public Policy; Guest lecturer at Bar-Ilan
University in Political Science; Guest lecturer at the School of Business Management and the Economics
Department of the College Of Management.
Director or officer at the following corporations: Poalim IBI - Management and Underwriting Ltd.; Kali –
Management Of Pension Agreements, Insurance Agency Ltd., the Company for Location and
Restitution of Holocaust Victims' Assets Ltd. (member of the Appointment Committee).
Giora Morag – Appointed on October 29, 2006.
Member of the following committees: Audit Committee; Budgetary Follow-up Committee; Financial
Statement Review Committee; Payroll and Remunerations Committee and Compliance and Regulation
Committee.
External director under Proper Conduct of Banking Business Directive No. 301 and a independent Director in
accordance with the Companies Law.
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Not an employee of the corporation/a subsidiary/a related company/an interested party thereof.
Not a family member of another interested party of the corporation.
Has accounting and financial expertise.
Studied Economics and Political Science at the Hebrew University of Jerusalem.
Occupation in the last five years: Director of companies.
Dr. Zalman Segal - Appointed on February 8, 2010.
Chairman of the Audit Committee and member of the following Committees: Financial Statement Review
Committee, Credit to the Diamond Industry Committee, Insurance Committee, Compliance and Regulation
Committee and Payroll and Remunerations Committee.
External director under the Companies Law.
Not an employee of the corporation/a subsidiary/a related company/an interested party thereof.
Not a family member of another interested party of the corporation.
Has accounting and financial expertise.
B.A. in Economics and Political Science; Certificate in Business Administration at the Hebrew University,
Tel-Aviv Branch; M.B.A. in Finance; Ph.D. in Banking and Marketing at New York University.
Occupation in the last five years: Director and Chairman of the Audit Committee of Alon USA {NYSEC};
An external director of Pitkit Printing Enterprises Ltd; Chairman of Bank Leumi Rumania; member of the
Board of Trustees of Tel Hai College.
Director at the following company: Director and Chairman of the Audit Committee of Alon USA
{NYSEC};
Alberto Garfunkel – Appointed on December 7, 2010.
Member of the following committees: Board of Directors’ Credit Committee, Urgent Credit Approval
Committee, Audit Committee, Risk Management Committee; Fixed Asset Transactions Committee
and Non-Financial Investments Committee.
External director under the Companies Law.
Not an employee of the corporation/a subsidiary/a related company/an interested party thereof.
Not a family member of another interested party of the corporation.
Has accounting and financial expertise.
Holds a B.A. degree in Economics from Ben-Gurion University.
Occupation in the last five years: Member of the Board of Management and Head of the International
Area at Bank Hapoalim B.M.; CEO of Bank Hapoalim Switzerland.
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Chairman of the Board of Directors of the following companies: Bank Hapoalim (Switzerland) Ltd.,
Bank Hapoalim (Cayman) Ltd., Poalim Asset Management (Ireland) Limited, Poalim Asset
Management (UK) Limited, Bank Hapoalim (Luxembourg) S.A.
Director and Vice Chairman of the Board at Bank Pozitif Kredi Ve Kalkinma Bankasi Anonim Sirketi.
Director at the following companies: JSC Demir Kazakhstan Bank, Igarot Hevra LeHanpakot shel
Bank Hapoalim Ltd., Bitzur Ltd., Tmura Hevra Finansit Ltd., Te'uda Hevra Finansit Ltd., Tarshish
Holdings and Investments Hapoalim Ltd., Hapoalim Nechasim (Menayot) Ltd., Opaz Ltd., Zohar
HaShemesh LeHashkaot Ltd., Poalim Betevouna Ltd., Bennad Hevra LeHashkaot Ltd., Shiryon Hevra
LeHashkaot Ltd., Tuval Hevra LeHashkaot Ltd., Hapoalim International N.V., Hapoalim Fiduciary
Services Ltd., Hapoalim (Latin America) S.A.
Izhak Zisman - Apppinted on January 30, 2012.
The membership of Izhak Zisman on committees has not yet determined.
Note an employee of the corporation/a subsidiary/a related company or an interested party thereof.
Not a family member of another interested party of the corporation.
Has professional qualification.
Holds a degree in Law, the Hebrew University of Jerusalem.
Occupation in the last five years: partner Shibolet & Co. Law Firm.
Director at the following company: Zisman Izhak Lawyer.
Mr. Izaac Manor announced his resignation from the Board of Directors of the bank on August 10,
2011.
During 2011, the Board of Directors held 21 meetings in plenary session and 78 meetings of its various committees.
The Board of Directors has appointed committees in the following areas, in accordance with its procedures:
a. Board of Directors' Credit Committee - deals with approvals of credit based on the
authority it was granted.
b. Credit to the Diamond Industry Committee - deals with approvals of credit to diamond
merchants based on the authority it was granted.
c. The Audit Committee – holds deliberations among other things on the Bank internal
auditor's work plan and recommend to the Board of Directors of the Bank to approve it
and follows its progress. In addition, holds deliberation on audit reports of various
authorities and of the auditing accountant and internal auditor and conducts follow up
on the treatment of these reports and responsible for monitoring the Chief Internal
Auditor works. In addition it deliberates on transactions with interested parties
pursuant to Section 5 of the Companies Law, 1999, and transactions with “related
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persons,” pursuant to the Proper Conduct of Banking Business Directives, and
addresses additional matters, as required by law and by Proper Conduct of Banking
Business Directive No. 301.
d. The Balance Sheet Committee - holds deliberations on the gamut of issues relating to
the financial statements and submits its recommendation regarding the approval of the
financial statements.
e. The Payroll and Remunerations Committee - holds deliberations on the Bank's
remuneration policy, terms of employment and retirement of officers and manpower
related matters and recommended to the Board of Directors about these matters.
f. The Insurance Committee - holds deliberations on insurance proposals received by the
Bank.
g. Urgent Credit Approval Committee – Handles the approval of credit applications
classified as urgent, according to granted authority levels.
h. Risk Management Committee – Discusses on various matters in the area of risk
management, including the exposures document, approval of models, discussion of the
results of BACK TEST, discussion of limits of extreme scenarios, and monitoring of
compliance with limits set by the Board of Directors, subject to the following
provisions.
Notwithstanding the aforesaid, on matters which the Board of Directors is required to
discuss and/or resolve upon, in accordance with the procedures for the work of the
Board of Directors of the Bank, the directives of the Supervisor of Banks, or any law,
the discussion shall be held and/or the resolution shall be passed by the plenum of the
Board of Directors, after the committee has discussed the matter and submitted its
recommendation regarding the resolution to the Board of Directors.
i. Budget Monitoring Committee – Discusses matters related to monitoring compliance
with the budget and objectives of the Bank, and any derived or related matters.
j. Compensation Committee - An ad-hoc committee charged with formulating and
recommending, to the Wage Committee, the Audit Committee, and the Board of
Directors, a formula and principles regarding compensation for the Chairman of the
Board, the Chief Executive Officer, the members of management of the Bank, and
additional officers with the status of members of management, based on the
compensation policy established by the Board of Directors. The committee was
canceled in 2011.
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k. The Compliance and Regulation Committee – The committee discusses and makes
recommendations to the board of directors on matters relevant to compliance and
regulations that have a material impact on the Bank and its conduct, in connection with
the formulation, adoption, absorption, and implementation of internal enforcement
plans by the Bank and routine monitoring thereof, in all matters related to the
formulation and update of procedures for the work of the board of directors and
matters related to corporate governance.
l. The Fixed Asset Transactions Committee – Approves transactions in fixed assets
executed by the Bank or by companies under its control in amounts exceeding the
amount established by the board of directors of the Bank from time to time, subject to
the Proper Conduct of Banking Business Directives.
m. Non-Financial Investments Committee – Approves transactions of real investment by
the Bank and/or companies under its control, or the realization of such transactions, in
amounts exceeding the amount established by the board of directors of the Bank from
time to time, subject to the Proper Conduct of Banking Business Directives.
The compliance and regulation committee was established in October 2011, in order to
increase supervision by the board of directors over compliance with laws and regulations at
the Bank and at its subsidiaries. In addition, the fixed asset transactions committee and the real
investments committee were established in November 2011, among other factors as part of the
implementation of the updated Proper Conduct of Banking Business Directive No. 301 and the
increased supervision of the board of directors over management activities and the consistency
of such activities with the policy of the Bank and its subsidiaries.
In addition, ad-hoc committees are occasionally appointed.
The Bank’s Board of Directors has stipulated that the minimum number of directors having
financial and accounting expertise, in accordance with the provisions of the Companies Law –
1999, and based on the criteria stipulated in the Companies Regulations (Conditions and Tests of
a Director Having Financial and Accounting Expertise and a Director Having Professional
Qualification) – 2005, will be 25% of the total number of directors serving on the Board
(hereinafter: "the minimum level"). In relation to the total number of directors currently in
office, eleven in number, the required minimum of directors having financial and accounting
expertise is three. The Board of Directors stipulated also that the minimum number of director
having financial and accounting expertise who will serve on the Audit Committee and Balance
Sheet Committee of the Bank will be two.
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At present, there are nine directors with the required accounting and financial expertise: Zeev
Abeles, Haim Almog, Uzi Vardi-Zer, Yaacov Lifshitz, Yigal Landau, Miri Lent-Sharir, Giora
Morag, Zalman Segal and Alberto Garfunkel.
The details of each of the aforementioned directors and their credentials as financial and
accounting experts are presented below:
Mr. Zeev Abeles - Mr. Abeles’s professional experience as Supervisor of Banks and member of
the senior management of Bank of Israel, member of the Israeli Securities Authority, member of
the Israel Accounting Standards Board, Chairman of the Central Securities Company Ltd., and
Chairman of the Bank’s Board since November 1999. His membership in the boards of directors
of various companies, his educational background in economics and accounting, and his CPA
qualification grant him an understanding of business issues and enable him to understand the
financial statements of the Bank in depth and initiate discussions of the manner of presentation of
the financial data of the Bank.
Mr. Haim Almog – Mr. Almog’s professional experience as an executive at various companies,
and as a director at various companies, as well as his education, which includes a degree in
Economics, grant him an understanding of business issues and enable him to understand the
financial statements of the Bank in depth and initiate discussions of the manner of presentation of
the financial data of the Bank.
Mr. Yigal Landau–Mr. Landau’s professional experience as CEO of a number of companies,
including Hiram Landau Ltd., Ratio Oil Exploration Ltd. and as a director of various companies,
together with his education that includes a Masters degree in Business Administration, provide
him with the understanding of business issues and enable him to understand the financial
statements of the Bank in depth and initiate discussions of the manner of presentation of the
financial data of the Bank.
Mr. Uzi Vardi-Zer – Mr. Vardi-Zer’s professional experience as deputy CEO of Bank Hapoalim
Ltd. and as the CEO and chairman of the board of Housing & Construction Holdings Ltd. and
other companies, together with his education which includes a degree in economics and in
Business Administration, provide him with the understanding of business issues and the suitable
expertise needed to have an in-depth understanding of the Bank’s financial statements, and initiate
discussions of the manner of presentation of the financial data of the Bank.
Ms. Miri Lent - Sharir – Ms. Lent-Sharir's professional experience as a vice president of Ampal
Ltd. (an investment company), as an assistant CEO in Housing & Construction Holdings Ltd., and
as a director in various financial companies, together with her education that includes a bachelors
degree in economics and a masters degree in Business Administration provide her with the
understanding of business issues and the suitable expertise needed to have an in-depth
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understanding of the Bank’s financial statements, and initiate discussions of the manner of
presentation of the financial data of the Bank.
Mr. Giora Morag – Mr. Morag's professional experience in the Bank Hapoalim group, inter alia,
as a general manager of the branches of Bank Hapoalim in England and as general manager of
American-Israel Bank, as director in Delta Industries Galil Ltd. (till October 2009), and as
chairman of its audit committee, together with his education in economics provide him with the
understanding of business issues and the suitable expertise needed to have an in-depth
understanding of the Bank’s financial statements and initiate discussions of the manner of
presentation of the financial data of the Bank.
Dr. Yaacov Lifshitz – Dr. Lifshitz’s professional experience as CEO of Ministry of Finance,
senior Deputy CEO, Head of Credit at Israel Discount Bank, Director at Discount Bank for
Industrial Finance Ltd, chairmen of the Board and as Director in additional corporations,
together with his education in economics, provide him with the understanding of business issues
and the suitable expertise needed to have an in-depth understanding of the Bank’s financial
statements, and initiate discussions of the manner of presentation of the financial data of the Bank.
Dr. Zalman Segal - Dr. Segal's professional experience as vice president and CEO of Bank Leumi
USA, president of Bank Leumi Romania and in senior management positions in the Bank Leumi
Group, and as a director at various companies, together with his education in economics and in
Business Administration, provide him with the understanding of business issues and the suitable
expertise needed to have an in-depth understanding of the Bank’s financial statements, and initiate
discussions of the manner of presentation of the financial data of the Bank.
Mr. Alberto Garfunkel - Mr. Alberto Garfunkel's professional experience as CEO of Bank
Hapoalim - Switzerland and as Chairman and director of Banks and companies in the Bank
Hapoalim Group, as well as his economics education, provide him with business understanding
and the suitable expertise needed to have an in-depth understanding of the Bank's financial
statements and initiate discussions of the manner of presentation of the financial data of the Bank.
The minimum level that was stipulated by the Board of Directors places the Bank in a position to
meet its obligations in general, and its obligations to examine the financial position of the Bank
and examine and approve the financial statements in particular, on the basis of the following
reasons:
The other members of the Board of Directors, not included in the number of directors having
accounting and financial expertise, possess the experience, skills and/or education required of a
director having professional qualification, as detailed in the Companies Regulations (Conditions
and Tests of a Director Having Financial and Accounting Expertise and a Director Having
Professional Qualification) – 2005.
Because all members of the Financial Statements Examination Committee have accounting and
financial expertise, and nine of the members of the Board of Directors have accounting and
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financial expertise, the Board of Directors has a sufficient number of directors in order to perform a
pertinent, professional examination of the financial statements. This number permits a discussion to
be conducted and a resolution to be passed even in cases of differences of opinion.
On January 20, 2011, the composition of the Financial Statements Examination Committee was
changed, pursuant to the requirements of the companies Regulations (Directives and Terms
Regarding the Procedure for Approval of Financial Statements), 2010, such that the committee
now comprises two external directors appointed in accordance with the Companies Law and three
additional external directors under Proper Conduct of Banking Business Directive No. 301, who
are independent directors.
With regard to the amendment of Proper Conduct of Banking Business Directive No. 301
concerning the duties, authority, composition, and methods of action of the board of directors, see
the section “Legislative Developments".
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Members of Management and Senior Officers
Members of Management
Mr. Haim Freilichman President & C.E.O.
Mrs. Edna Peres-Lachish Senior Deputy General Manager; Head of Retail Division, Client Assets and Bank Counseling.
Mr. Efraim Avraham Deputy General Manager; Head of Financial Management Division
Mrs. Netta Avrahamov Bitan Deputy General Manager; Head of Chief Accountant Division
Dr. Akiva Sternberg Senior Deputy General Manager; Head of Control Division
Mr. Hami Morag Senior Deputy General Manager; Head of Resources Division
Mrs. Shevi Shemer Deputy General Manager; Head of Business Division
Other Senior Officers:
Dr. Moria Hoftman, Adv. Deputy General Manager; Chief Legal Advisor
Mr. Yehuda Orbach Deputy General Manager; Chief Internal Auditor
Mrs. Irit Makov, Yerushalmi Adv. Deputy Legal Advisor and Secretary of the Bank
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Information regarding the members of management is set out below:
Mr. Haim Freilichman - President & C.E.O - appointed in 2006.
Chairman of the following subsidiaries: Union Systems Ltd.; Union Investments and Enterprises
(A.S.Y.) Ltd.
Not a family member of an interested party of the corporation.
CPA; B.A. in Economics and Accounting, Bar Ilan University, Ramat Gan; M.A. in Business
Administration, Bar Ilan University, Ramat Gan.
Occupation in the last five years: General Manager of the corporation.
Mrs. Edna Peres-Lachish - Senior Deputy General Manager; Head of Retail Division, Client
Assets and Consulting - appointed in 2010.
Chairman of the subsidiary Union Insurance Agency (1995) Ltd.; Carmel Union Mortgage and
Investment Ltd., Livluv Insurance Agency (1993) Ltd.; Director at the following subsidiaries: Igudim
Ltd.; Achuzat Yehuda Ltd.; Kikar Zion 23 Netanya Ltd.
Not a family member of an interested party of the corporation.
M.A. in Business Administration, B.A. in Economics, Tel Aviv University.
Occupation in the last five years: Head of Corporate Division of the Corporation and Head of Retail;
Client Assets and Consulting Division of the Corporation.
Mr. Efraim Avraham - Deputy General Manager; Head of Financial Management Division -
appointed in 2007.
Chairman of the subsidiary Union Finances Ltd. (formerly U.M.F.); Director at the subsidiaries: Union
Issuances Ltd.; Union Bank Trust Company Ltd.; Union Investments and Enterprises (A.S.Y.) Ltd.
Member of the board of directors of the TASE; substitute director at the Maof Clearing House of the
TASE.
Not a family member of an interested party of the corporation.
High-school graduate.
Occupation in the last five years: Deputy Head of the Investment Division of the corporation; Head of
Financial Management Division of the corporation.
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Mrs. Netta Avrahamov Bitan - Deputy General Manager; Head of Chief Accountant Division -
appointed in 2007.
Chairman of the following subsidiaries: Union Issuance Ltd., and Director at the following
subsidiaries: Union Systems Ltd; Union Bank Nominees Ltd.
Not a family member of an interested party of the corporation.
CPA; B.A. in Business Administration, College of Management, Tel Aviv.
Occupation in the last five years: Head of Chief Accountant Division of the corporation.
Dr. Akiva Sternberg – Senior Deputy General Manager; Head of Controls and Risk
Management Division, Chief of Controls Risks Officers (CRO) - appointed in 2007.
Director at the following subsidiaries: Union Balances Ltd.; Member of the board of directors of the
Maof Clearing House Ltd., and a substitute director at the TASE.
Not a family member of an interested party of the corporation.
Ph.D. in Business Administration, Bar Ilan University, Ramat Gan; M.S.M. in Business
Administration, Boston University Ben-Gurion University; B.A. in Economics, The Johns Hopkins
University.
Occupation in the last five years: Head of the Investment Division of the corporation, head of Control
and Risk Management Division and Chief Risk Office of the Corporation.
Mr. Hami Morag – Senior Deputy General Manager; Head of Resources Division - appointed in
2006.
Chairman of the subsidiary Union Balances Ltd. (formerly Union Provident Funds); Igudim Ltd.
Director at the following subsidiaries: Union Investments and Enterprises (A.S.Y.) Ltd.; Kikar Zion 23
Netanya Ltd.; Union Systems Ltd.
Not a family member of an interested party of the corporation.
M.A. in Political Science, Haifa University; B.A. in Political Science, Open University; graduate of
Internal Auditing course, Management College, Tel Aviv; studied Economics and Accounting in
Montgomery, MD.
Occupation in the last five years: Director at the Ampal - American Corporation; Head of Resources
Division of the corporation.
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Mrs. Shevi Shemer – Deputy General Manager; Head of Corporate Division - appointed in 2010.
Serves as a director at the following subsidiaries: Union Leasing Ltd.; Igudim Ltd.
Not a family member of another interested party of the corporation.
Holds an M. A. in Business Administration, and a B.Sc. degree in Industrial Engineering and
Management from Ben Gurion University in Beer Sheva.
Occupation in the last five years: Head of the Negev Business Center, Commercial Division, Bank
Hapoalim B.M.; Head of Central Business Center, Commercial Division, Bank Hapoalim; and Head
of Business Division of the Corporation.
Information about other senior officers is set out below:
Dr. Moria Hoftman-Doron - Deputy General Manager; Chief Legal Advisor - appointed in 2009.
Not an interested party of the corporation and not a family member of another senior officer or another
interested party of the corporation.
Attorney; B.A. in Law, Bar Ilan University, Ph.D. in the direct course of Law, Bar Ilan University.
Occupation in the last five years: Legal advisor on international operations, mergers, and acquisitions
at Bank Hapoalim B.M., Chief Legal Advisor of the Corporation.
Mr. Yehuda Orbach – Deputy General Manager; Chief Internal Auditor - appointed in 2000.
Not an interested party of the corporation, and not a family member of another senior officer or
another interested party of the corporation.
CPA; B.A. in Economics and Accounting, Hebrew University of Jerusalem.
Occupation in the last five years: Chief Internal Auditor of the Bank and its subsidiaries.
Mrs. Irit Makov-Yerushalmi – Deputy Legal Advisor and Secretary of the Bank - appointed in
2007.
Not an interested party of the corporation, and not a family member of another senior officer or
another interested party of the corporation.
Attorney; B.A. in Law, Tel Aviv University; M.A. in Business Administration, Bar Ilan University.
Occupation in the last five years: Senior attorney in the legal advisory system of the corporation;
Deputy Legal Advisor of the corporation; Secretary of the corporation.
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Disclosure Regarding the Procedure for Approval of the Financial Statements
The board of directors of the Bank is the organ charged with overarching control at the Bank and with
the approval of its financial statements.
The financial statements are prepared by the Chief Accountant Division, headed by Mrs. Netta
Avrahamov Bitan, the Chief Accountant. As part of the process of preparing the financial statements,
preliminary discussions are held with the members of management of the Bank and other senior
employees with regard to the matters under their responsibility. In addition, the draft of the financial
statements is discussed with the CEO, Mr. Haim Freilichman, and with the chairman of the board, Mr.
Zeev Abeles.
Within the implementation of Article 302 of the Sarbanes Oxley Act (hereinafter- “SOX”), the
principal processing and preparation processes of the financial statements were mapped, and risks and
controls related to the mapped processes were mapped as well. Article 404 of the SOX took effect as
of the annual reports for 2008. This article sets forth directives with regard to management’s
responsibility for the internal control over financial reporting (see the section “Controls and
Procedures”). At the end of each quarter, all those performing controls confirm that the controls have
been performed to the Head of SOX at the Chief Accountant Division. In addition, the relevant
officers sign a declaration before the CEO and the Chief Accountant stating that based on their
knowledge, the reports under their responsibility contain no misrepresentation of material facts, and no
material presentations of facts are missing which are necessary in order for the presentations included,
in light of the circumstances under which such presentations were included, not to be misleading with
regard to the period covered in the reports, and that the reports fairly reflect, in all material aspects, the
topics contained therein.
Ongoing consultations with the external auditors are conducted as needed during the period of
preparation of the financial statements. In addition, discussions are held each quarter and attended by
the external accountants, the CEO, the chief accountant, the head of the corporate division, and the
head of the financial management division on material issues relevant to that quarter.
When preparation of the financial statements is completed, a “disclosure committee” is convened,
consisting of members of the management of the Bank and other senior executives. The committee
conducts a preliminary discussion of the draft of the financial statements. Minutes of this meeting are
submitted to the financial statement review committee in the detailed preliminary discussion of the
draft financial statements, as described below.
Each quarter, before the discussion of the financial statements by the board of directors, the financial
statement review committee of the board of directors convenes for at least two meetings. The first
meeting is mainly devoted to a discussion of allowance for credit losses, the volume of problematic
debts, the fair value of the financial instruments and provisions for declines in value of another-than-
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temporary nature of corporate bonds in the available-for-sale portfolio. The CEO, the head of the
corporate division, the head of the special credit department, the head of the financial management
division, the head of risk management division, the chairman of the board and the external auditors
participate in this discussion. In addition, accounting policies in critical issues and critical accounting
estimates are discussed annually by this committee pursuant to Pillar III of Basel II (a quarterly
discussion on this subject is held when changes have occurred).
The Financial Statements Review Committee convenes again for a detailed preliminary discussion of
the draft financial statements and the board of directors’ report, the internal controls related to the
financial reporting and the completeness and adequacy of the disclosure made in the financial
statements. The CEO, the chief accountant, the external auditors and others, based on requirement,
participate in this discussion.
As part of the approval of the financial statements by the Financial Statements Review Committee and
the board of directors procedure, drafts of the financial statements and the board of directors’ report
are delivered to the directors for review and comments, several days prior to the date of the meeting
scheduled for discussion on the financial statements.
Five directors are members of the Financial Statement Review Committee; all of them have
accounting and financial expertise. Comments of the financial statement review committee, if any, are
implemented, and it's recommendation for approval of the final draft are brought to discussion and
approval of the Board of Directors.
For details regarding the directors and their membership in the various committees, see the section
“The Board of Directors.”
In addition to the members of the board of directors, the CEO, the chief accountant, the legal advisor
and the external auditors also participate in the meeting of the board of directors in which the approval
of the quarterly financial statements is discussed. In the meeting in which the annual financial
statements are discussed, all members of the management meeting forum also participate.
At the end of the discussion, a resolution is passed with regard to the approval of the financial
statements of the Bank and the authorization of the chairman of the board, the CEO, and the chief
accountant to sign the financial statements.
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Controls and Procedures
According to the Public Reporting Directives, the Supervisor of Banks, Manager and the Chief
Accountant of the Bank, each separately, sign a declaration regarding “Evaluation of Controls and
Procedures Concerning Disclosure,” in accordance with the directives of Section 302 of the law
known as the “Sarbanes-Oxley Act,” enacted in the United States (hereinafter- the “Disclosure
Declaration”). This directive refers to the Management's responsibility to the disclosure in the
financial statements, starting with the quarterly reports for June 30, 2005. The Disclosure Declaration
refers to controls and procedures regarding disclosure established in order to ensure that information
which the Bank is required to disclose in its financial statements is recorded, processed, summarized,
and reported in accordance with the Supervisor of Banks’ Public Reporting Directives, and in
accordance with additional reporting directives. The “controls and procedures concerning disclosure”
are aimed, among other things, at ensuring that such information is accumulated and transmitted to the
management of the corporation in a suitable manner in order to allow decisions to be made at the
appropriate time with respect to the disclosure requirements.
Section 404 of the SOX Act was adopted by the Supervisor of Banks in a circular issued on
December, 2005. Directives concerning the responsibility of management for the internal control of
financial reporting were set forth in Section 404 by the SEC and the Public Company Accounting
Oversight Board.
The directives of the Supervisor of Banks in the aforesaid circular stipulate the following:
- Banking corporations shall implement the requirements of Section 404 and the SEC directives
issued in accordance thereto.
- Starting with the financial statements as of December 31, 2008, banking corporations shall
include a declaration in their reports concerning management’s responsibility for the
establishment and maintenance of a system of adequate procedures for the internal control
over financial reporting, as well as an assessment as of the end of the year of the effectiveness
of these procedures for the control over financial reporting.
- Concurrently, external auditors of financial corporations will be required to provide an
opinion, implementing the relevant standards of the PCAOB.
- Adequate internal control requires the maintenance of a control system based on a defined,
recognized system; the COSO model meets the requirements and can be used for the
evaluation of internal control.
- Implementation of the requirements of the directive requires the upgrade and/or setup of a
system of internal-control infrastructures at the Bank; the development process of this system
requires the Bank to make preparations and establish stages and milestones towards full
implementation.
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The Bank implemented this directive with the assistance of consultants hired to carry out the project.
As part of this implementation, processes affecting financial reporting were documented, and outputs
of the documentation of each process were discussed in depth at the SOX administration established
for that purpose at the Bank, which includes senior representatives of all divisions of the Bank.
In these discussions, all of the process documentations were verified and validated by the person
responsible for each process, by the parties involved in each process, and by all members of the
administration.
Management, under the supervision of the board of directors, ensured the establishment and
maintenance of a system of internal control of financial reporting, including through the establishment
of the SOX Department at the Bank, the approval of the annual work plan of the SOX Department by
the board of directors of the Bank, and regular quarterly follow-up by management and the board of
directors of the progress of implementation of the annual work plan.
In addition, a specialized computer system was acquired and implemented at the Bank, which contains
all accumulated information regarding business processes surveyed, as described above, including a
description of the process, the possible risks in the process, existing controls for the process, and a
rating of the residual exposure considering the existing controls. The system serves as a key tool for
the implementation of the directives and routine monitoring of the effectiveness of internal controls of
financial reporting.
The report of the board of directors and management on the internal control of financial reporting is
attached to the financial statements.
The Bank conducts routine effectiveness tests during the year; in addition, additional effectiveness
tests are conducted near the date of signing of the annual financial statements.
In addition, a "signature cascade" process was implemented at the Bank for all controls documented in
the processes, from the person performing the control, through his or her direct supervisor, the person
responsible for the process, that person's supervisor, the relevant members of the administration,
additional members of management and senior executives, to the chief and CEO accountant. The
objective of this cascade method is to ensure the efficiency of controls and the completeness and
correctness of processes.
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Evaluation of Controls and Procedures Regarding Disclosure
The management of the Bank, in cooperation with the General Manager and the Chief Accountant of
the Bank, has assessed the effectiveness of the controls and procedures regarding disclosure at the
Bank as of the end of the period covered by this report. Based on this assessment, the General
Manager and the Chief Accountant of the Bank have concluded that, as of the end of this period, the
controls and procedures concerning disclosure at the Bank are effective in order to record, process,
summarize, and report the information which the Bank is required to disclose in its annual report, in
accordance with the Public Reporting Directives of the Supervisor of Banks, on the date stipulated in
these directives.
Changes in Internal Control
Following the initial implementation on January 1, 2011, of the directives of the Supervisor of Banks
concerning the measurement and disclosure of impaired debts, credit risk, and provisions for credit
losses, material changes occurred in the processes of identification of and provision for credit losses as
of the beginning of 2011; consequently, a change occurred in the Bank's internal control over financial
reporting. For the purpose of the preparation of the financial statements in the new format, and for the
purpose of the CEO's and chief accountant's signatures on the declaration regarding internal control
over financial reporting, in early 2011 the Bank began to map the control environment related to these
processes. During the year, key controls were implemented in the area of identifying problematic debts
and provisions for credit losses, in connection with the completeness of data and the reasonableness of
results. The new automated systems developed for the purpose of the implementation of the directive,
as well as new specifications for existing system, commenced operation for the first time in 2011.
Accordingly, and in light of the complexity of this subject, the need arose for manual corrections to
the outputs of the systems. The Bank operates compensatory controls and is working to minimize such
manual corrections. In addition, the Bank implemented the directives of the Supervisor of Banks
concerning the reinforcement of internal control over financial reporting on employee benefits, as
published on March 27, 2011, for the first time in the second quarter. The implementation of this
directive required a complex actuarial calculation to be performed with regard to compensation
beyond the contractual obligation upon retirement, which necessitated the use of a survey performed
by the actuary, management estimates, and critical assumptions and evaluations. For details, see Note
1.E.21 and the section "Critical Accounting Policies and Estimates". For the purpose of the
implementation and for the purpose of the signatures of the CEO and the chief accountant on the
declaration regarding internal control over financial reporting, controls were implemented in
connection with the completeness of the data and the reasonableness of the results. However, due to
the complexity of the implementation, as noted, the brief period of time between the publication of the
directive and its inception date did not allow the actuarial model to be validated, as required in the
directive, and did not allow completion of the required controls and procedures, at the date of
- 227 -
publication of the financial statements for the second and third quarters of 2011. The main part of the
validation process was completed during the fourth quarter of 2011.
Except as stipulated above, during the fourth quarter, ended on December 31, 2011, there was no
change in the Bank’s internal control of financial reporting that had a material impact, or could
reasonably be expected to have a material impact, on the Bank’s internal control of financial reporting.
228
Details of compensations for High Wage Recipients at the Bank The following table lists compensations for recipients of the highest compensation among the senior officers at the Bank for 2011, in thousands of NIS:
Compensations for services (1) Other
compensations(2) Compensations receivers details Salary interest Total
Name Function time job Holding rate in the corporation Salaries
Severance pay, compensation, study funds,
vacation, jubilee grants, National Insurance, value
of use
Supplementary provisions for
incidental expenses due to changes in
wages and retirement terms
during the accounting year Bonus (3)
Total salary
Share-based payment
Z. Abeles Chairman of the Board of Directors (A) 75% 40.01% 2,109 923 87 956 4,075 - - 4,075
H. Freilichman President & C.E.O. (B) 100% 5 2,180 676 61,040 1,071 4,967 - - 4,967
E. Peres-Lachish Deputy general manager, Head of Retail Division, Client Assets and Bank Counseling(C) 100% - 1,056 498 381 245 2,180 - 5 2,185
A. Sternberg Deputy general manager, head of controls and risk management division (D) 100% - 1,039 484 267 245 2,035 - 4 2,039
E. Avraham Deputy general manager, head of financial management division (E) 100% - 847 365 271 190 1,673 - 5 1,678
(1) The amounts of the compensation are in the terms of cost to the bank, not including tax of wage. The amounts are included in the statement profit and loss under the item "salaries and related expenses". There is no additional compensation for
services – management fees, consulting fees, commissions, or others.
(2) The interest column includes benefit amounts in respect of discounts on interest rates on loans extended to the officers listed above. The terms and rates of these benefits are identical to those for all employees of the Bank. See also Section (H)
below. No benefits were granted in respect of interest on deposits, because the interest rates granted to officers for their deposits are not preferable to those granted to other customers of the Bank who perform deposits on a similar scale, with
similar linkage and maturity terms. The table does not include benefits in respect of other banking transactions to which these officers are entitled, because the amounts of these benefits are immaterial and do not exceed a total of NIS 50
thousand annually per employee, and they are granted at the same terms and rates to all employees of the Bank.
(3) Amounts presented in this column are estimates of bonuses in 2011 – see details in Section (F)(3) below.
Bonuses in respect of 2010, which were determined in 2011, are not included in the above table – see details in Section (F)(2) below. Note that such bonuses were not included in the table for the preceding year, because they had not yet been
determined at the date of publication of the financial statements. In 2011, it was possible to estimate the bonuses for the current year based on the long-term bonus plan approved as noted above.
(4) Holder in 3,500 ordinary shares.
(5) See note 15A to the financial statements with regard to options granted to the CEO.
(6) Derived from an increase of an additional 100% of indemnifications following the amendment of the employment agreement from September 2011 - see section B below.
Other notes: As regards of loans on benefit condition and on normal condition - see section G below. As regards of compensations to Interested parties - see section H below. As regards of compensations to Internal Auditor - see in the Board of Directors' Report in the section concerning the Internal Auditor.
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Terms of Employment of Senior Executives
A. Mr. Zeev Abeles - Employed at the Bank under a personal employment contract, from November 1,
1999 for an unspecified period. Each of the parties to the employment agreement may terminate the
contractual engagement pursuant to the agreement at any time and at absolute discretion, with six
months' advance notice. Upon the conclusion of his employment at the Bank, Mr. Abeles is entitled to
severance pay of 100%, as approved by the general assembly of the Bank on April 30, 2006. In
addition, according to his employment agreement, Mr. Abeles is entitled to employer contributions to a
severance pay provident fund, under Section 14 of the Severance Pay Law - 1963. In practice, these
amounts are deposited in a central severance pay fund managed on behalf of the Bank, While as of
January 1, 2011 these deposits are entrusted in a personal fund. Period of restricted competition - six
months from the date that the chairman will cease his work actually in the Bank (either through
termination or resignation). Mr. Abeles' salary is linked to the increase in the consumer price index
(update once a year). During 2010 and 2011, no change has occurred in Mr. Abeles's salary except for
this linkage. With regard to entitlement for bonuses, see details in section F below.
B. Mr. Haim Freilichman – Employed at the Bank as of April 1, 2006, under a personal employment contract;
the term of the agreement is extended automatically each year. On September 8, 2011, following approval by
the audit committee of the board of directors on July 18, 2011, the board of directors of the Bank approved an
amendment of the employment agreement with the CEO of the Bank (hereinafter: the "Amendment"). Pursuant
to the Amendment, upon termination of the employment of the CEO of the Bank for any reason, other than
under circumstances in which the CEO may be denied severance pay by law, the CEO shall be entitled to
severance pay at a rate of 100% of his gross monthly salary at the date of termination of his employment,
multiplied by the number of years of his work at the Bank (including part of a year, proportionally), in addition
to his entitlement to the employer contributions for the compensation component made by the Bank for the
CEO pursuant to Section 14 of the Severance Pay Law, 1963, and the general approval of employer
contributions to a pension fund and insurance fund in place of the severance pay owed to him under his existing
employment agreement. In addition, pursuant to the Amendment, the duration of the advance notice which the
CEO is obligated to give the Bank in the event of the termination of his work at the Bank at his initiative shall
be shortened from six months to three months. Upon termination of his employment, Mr. Freilichman shall be
entitled to an adjustment grant in the amount of six monthly salaries. Competition restriction period – Six
months from the date of actual termination of the CEO's work at the Bank (either through dismissal or
resignation). The monthly salary of Mr. Freilichman is linked to increases in the consumer price index. With
the exception of this linkage, no change occurred in his salary during 2011 and 2010. With regard to
entitlement to bonuses, see details in Section F below. With regard to options granted to the CEO, see Note
15A to the Financial Statements.
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C. Mrs. Edna Peres-Lachish - Employed at the Bank from June 22, 1980. In effect as of December 31,
2003, employed under a personal employment contract for an unspecified period. Each of the parties to
the employment agreement may terminate the contractual engagement pursuant to the agreement at any
time and for any reason, with three months' advance notice in writing, in accordance with the terms set
forth in the employment agreement. Upon the conclusion of her employment at the Bank, Mrs. Peres-
Lachish is entitled to increased severance pay of 250% in termination and 150% in resignation. The
redemption value of the compensation deposited on her behalf in pension fund by the Bank will be
deducted from these amounts. In addition, Mrs. Peres-Lachish is entitled to an adjustment bonus of
three monthly salaries, either through termination or resignation. The adjustment bonus will be paid as
part of the payment in respect of the restriction of competition, as detailed below: Payment in respect of
restricted competition - six monthly payments in the amount of one monthly salary, at the end of each
month from the severance of employment relations (either 10 months through termination or 6 months
through resignation) provided that she complied with the restriction of competition in the preceding
month. All of the above, unless the termination of employment was under circumstances in which
severance pay may be fully or partially denied. Mrs. Peres-Lachish's monthly salary is linked to the
increase in the consumer price index. In 2010, in addition to the linkage, Mrs. Edna Peres-Lachish
received a salary increase of 7.43%. In 2011, in addition to the linkage, Mrs. Edna Peres-Lachish
received a salary increase of 3.9%. With regard to entitlement to bonuses, see details in Section F
below.
D. Dr. Akiva Sternberg - Employed at the Bank from August 1, 1987. In effect as of December 16, 2003,
employed under a personal employment contract for an unspecified period. Each of the parties to the
employment agreement may terminate the contractual engagement pursuant to the agreement at any
time and for any reason, with three months' advance notice in writing, in accordance with the terms set
forth in the employment agreement. Upon the conclusion of his employment at the Bank, Dr. Sternberg
is entitled to increased severance pay of 250% in termination and 100% in resignation. The redemption
value of the compensation deposited on his behalf in pension fund by the Bank will be deducted from
these amounts. In addition, Dr. Sternberg is entitled to an adjustment bonus of three monthly salaries,
either through termination or resignation, within overlapping between the adjustment bonus and the
payment due to the previous period notice, as soon as the Bank will break off the employment relations
before the notice period and will redeem its remainder. The adjustment bonus will be paid as part of the
restriction of competition, as detailed below: Payment in respect of restricted competition - six monthly
payments in the amount of one monthly salary, at the end of each month from the severance of
employment relations (either through termination or resignation), provided that the employee complied
with the restriction of competition in the preceding month. All of the above, unless the termination of
employment was under circumstances in which severance pay may be fully or partially denied. Dr.
Sternberg's monthly salary is linked to the increase in the consumer price index. In 2010, in addition to
the linkage Dr. Sternberg received a salary increase of 7.03%. In 2011, in addition to the linkage Dr.
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Sternberg received a salary increase of 4%. With regard to entitlement to bonuses, see details in Section
F below.
E. Mr. Efraim Avraham – Employed at the Bank from May 18, 1978. In effect as of July 1, 2007
employed under a personal employment contract for an unspecified period. Each of the parties to the
employment agreement may terminate the contractual engagement pursuant to the agreement at any
time and for any reason, with three months' advance notice in writing, in accordance with the terms set
forth in the employment agreement. Upon the conclusion of his employment at the Bank, Mr. Avraham
is entitled to increased severance pay in the event of termination of 250%. The redemption value of the
compensation deposited on his behalf in various funds by the Bank will be deducted from these
amounts. In addition, Mr. Avraham is entitled to an adjustment bonus ranging from twelve monthly
salaries as of December 31, 2008 to three monthly salaries, depending on the date of conclusion of his
employment at the Bank (such that when five years have elapsed from the starting date of the
employment agreement, the adjustment bonus will stand at three monthly salaries). The adjustment
bonus will be paid as part of the payment in respect of the restriction of competition, as detailed below.
Payment in respect of restricted competition – In the event of termination until June 27, 2012: six
monthly payments in the amount of one monthly salary, at the end of each month from the severance of
employment relations (either through termination or resignation) forward, provided that the employee
complied with the restriction of competition in the preceding month. All of the above, unless the
termination of employment was under circumstances in which severance pay may be fully or partially
denied. Mr. Avraham's monthly salary is linked to the increase in the consumer price index. In 2010, in
addition to the linkage, Mr. Abraham received a salary increase of 8%. In 2011, in addition to the
linkage, Mr. Abraham received a salary increase of 3.8%. With regard to entitlement to bonuses, see
details in Section F below.
F. Bonuses:
(1) Chairman of the board and CEO:
On April 10, 2011, following approval by the audit committee on February 6, 2011, and following
the recommendation of the ad-hoc committee on remuneration of the board of directors, based on
the remuneration policy established by the board of directors in November 2009, the board of
directors of the Bank approved a long-term bonus plan for the senior executives of the Bank: the
chairman of the board, the chief executive officer, the members of management, the legal advisor,
and the auditor of the Bank. On May 22, 2011, the general assembly approved the plan with regard
to the chairman of the board of directors.
During 2011, annual bonuses in respect of 2010 were paid to the chairman of the board, the chief
executive officer, and the members of management of the Bank, in accordance with the aforesaid
bonus plan. For details, see the section "Remuneration of Interested Parties and Senior Officers" in
the Immediate Report issued by the Bank on April 11, 2011 (reference no. 2011-01-116199) and
Note 15.D to the Financial Statements.
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(2) Pursuant to the Bonus Plan described in Note 15.D, on April 10, 2011, following approval by the
audit committee on April 4, 2011, and the recommendation of the wages and employment
committee of the board of directors of the Bank, the board of directors of the Bank approved the
payment of a bonus in respect of 2010 to the CEO of the Bank, Mr. Haim Freilichman, in the
amount of NIS 1,334 thousand and to the members of management of the Bank, the legal advisor
and the internal auditor of the Bank. The amount of bonuses to the three reported seniors: Mrs.
Edna Peres Lachish – NIS 335 thousand, DR. Akiva Sternberg – NIS 300 thousand, Mr. Efraim
Avraham – NIS 220 thousand.
In addition, on May 22, 2011, following the approval by the audit committee on April 4,2011 and
approval by the Board of Directors, following the recommendation of the wages and employment
committee, the general meeting approved payment of bonus to the chairman of the Board of
Directors, Mr. Zeev Abeles, in the amount of NIS 1,191 thousand.
Note that half of the bonus was paid in 2011, the other half of the bonus is conditional - see Note
15.D.
(3) The amounts of the bonuses provided for in the financial statements in respect of 2011 for the
chairman of the board, the CEO, the members of management of the Bank, and the legal advisor
and internal auditor of the Bank are based on the Bonus Plan described in Section F.1 above
(hereinafter: the "Bonus Plan"), and as detailed below.
On February 29, 2012, the board of directors of the Bank discussed and approved the amounts of
the bonuses1 for the senior offices mentioned above, after receiving a recommendation from the
wages and remuneration committee of the board of directors, and after the audit committee
discussed and approved the estimated amounts of the bonuses2 for the senior officers on February
23, 2012. The bonus for the chairman of the board is also subject to approval by the general
assembly of the Bank.
The data and parameters relevant to the establishment of the bonus for Senior Executives in respect
of 2011, in accordance with the Bonus Plan, were presented to the board of directors and to the
committees of the board of directors, as described above (for more details see Note 15.D in the
1 The amounts approved by the board of directors are not final, as the parameter concerning the comparison of the data of the Bank
to the data of Other Banks was calculated based on data for the first three quarters of 2011. Upon publication of the financial
statements of the Other Banks, at the end of March 2012, a final calculation for this parameter will be performed and the
calculation of the amounts of the bonuses will be adjusted accordingly.
2 The committee's decisions were based on non-final data (including data from the financial statements) that were known at the
time of the discussion in the committees of the board of directors. The results of the bonus amounts, as presented in the
committees, did not diverge materially from the results presented to the board of directors.
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financial statements, regarding to the senior executives Bonus plan). Among other matters, the data
presented to the board of directors and its committees included the business results of the Bank for
2011, the annual operating return of the Bank after taxes, the Bank's annual performance relative to
the objectives approved by the board of directors, the capital adequacy ratio of the Bank, and public
comparative data and information regarding the banking groups in the banking system.
Among other matters, the discussion by the board of directors and its committees addressed the
individual distribution of the total annual bonus among the senior officers mentioned above (and
with regard to the chairman of the board, subject to approval by the general assembly), according to
the Bonus Plan, and following a discussion of each Senior Executive's performance evaluation,
functioning, and contribution to the activity of the Bank in 2011. As part of the data examined, as
noted, the personal evaluation score assigned to each Senior Executive was presented, as well as the
personal BSC (Balanced Score Card) score.
The wages and employment committee, the audit committee, and the board of directors of the Bank
were of the opinion that the volume of the bonuses paid to the Senior Executives under the Bonus
Plan is reasonable and consistent with the business position of the Bank.
Note that the payment of half of the bonus is conditional (see Note 15.D. to the financial
statements).
- 234 -
G. The following are details of loans under benefit terms and loans granted under ordinary terms to
the recipients of the highest remuneration among the senior officers of the Bank, in NIS
thousands:
Loans granted with benefit term (benefit terms are identical for all employees of the
bank) Loans*and
Name
Balance as at December 31, 2011
Average term to maturity - in years
benefit granted during the year
guarantees granted under ordinary terms
Z. Abeles - - - -
H. Freilichman - - - 844
E. Peres-Lachish 126 2 5 -
A. Sternberg 197 3 4 1,008
E. Avraham 106 5 5 -
* Including mortgages.
H. Details of remuneration of interested parties
The following are details of the remuneration for each of the interested parties of the Bank not listed in
the table above, paid by the Bank or by a corporation under its control in 2011:
Total payment received by all directors of the Bank amounted to NIS 3,411 thousand, in respect of
participation in meetings of the board of directors and its committees. This amount is included in the
statement of profit and loss, under the item "other expenses." The amount paid to directors who are
controlling parties or relatives of controlling parties is identical to the remuneration paid to all other
directors of the Bank (other than the chairman).
Of the aforesaid amount, the following amounts were paid to each of the controlling parties serving as a
director of the company (or whose relatives serve as directors thereof):
(1) To Mr. Yeshayahu Landau - a controlling shareholder in the Bank - an amount of NIS 177 thousand.
(2) To Mr. Yigal Landau (Yeshayahu Landau's son, a controlling shareholder of the Bank) - an amount of
NIS 177 thousand.
(3) To Mr. Isaac Manor (Mrs. Ruth Manor's husband, a controlling shareholder of the Bank) - an amount of
NIS 135 thousand.
(4) To Mr. Haim Almog (the former son in law, of Mrs. Drora Zachai, a controlling shareholder of the Bank)
- an amount of NIS 203 thousand.
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Remuneration of Auditors The following table provides details of the remuneration of the external auditors of the Bank:
Consolidated The Bank 2011 2010 2011 2010 NIS
thousandsNIS
thousandsNIS
thousands NIS
thousands For the audit activity: (1)(2)(3)
The external auditors 4,430 4,487 4,175 4,266
Other auditor 178 187 - -Total 4,608 4,674 4,175 4,266
For additional services: (3)
For audit related services:
The external auditors 664 545 664 540
Other auditor - - - -
Tax services:
The external auditors 253 241 161 209
Other services:
The external auditors (4)151 70 93 70
Other auditor 16 - - -Total 1,084 856 918 819 5,692 5,530 5,093 5,085
(1) The remuneration of the external auditors includes payments to partnerships and corporations under their control, and
payments in accordance with the Value Added Tax Law.
(2) Includes audit of the annual financial statements and a review of the interim reports.
(3) Includes remuneration paid and remuneration accrued.
(4) Including remuneration in respect of shelf prospectus for Union Issuances Ltd, a consolidated company.
The Board of Directors wishes to thank the Management of the Bank, its managers and all of the Bank’s
employees for their dedicated work and efforts they have made in advancing the Bank and their contribution
in the results of the Bank's operations.
Z. Abeles
Chairman of the Board of Directors
H. Freilichman
President & C.E.O.
Tel Aviv, February 29, 2012
- 236 -
The accompanying data and exhibits are based on the Bank’s financial statements. The following data and appendices are included in the Management Review: Selected data from the financial statements Appendix A Consolidated Balance Sheets as at the end of 2007 - 2011 Appendix B Consolidated Statements of Profit and Loss for 2007 - 2011 Appendix C Rates of Income and Expenses Appendix D Exposure to Interest Rate Fluctuations Appendix E Overall Credit Risk to Public by Economic Sector Appendix F Exposures to Foreign Countries Appendix G Consolidated Balance Sheet for the end of Quarter - Multi-Quarter Data Appendix H Quarterly Consolidated Statements of Profit and Loss - Multi-Quarter Data
- 237 -
Selected Data from the Consolidated Financial Statements (in NIS Millions) Year ended December 31 Change
2011 2010 %
Profitability
Profit from financing activities before provision for credit losses 689 716 (3.8)
Provision for credit losses 27 87 (69.0)
Profit from financing activities after provision for credit losses 662 629 5.2
Operating and other income 277 287 (3.5)
Of which: Operating fees 267 270 (1.1)
Operating and other expenses 787 *698 12.8
Net profit 132 *149 (11.4)
Net return of the net profit on the average equity 6.7% *7.6%
December 31 December 31 Change 2011 2010 %
Balance sheet
Credit to the public, net 22,868 21,713 5.3
Securities 6,785 4,553 49.0
Deposits from the public 31,158 **28,844 8.0
Total equity 1,986 *2,006 (1.0)
Total balance sheet 38,915 *35,312 10.2
% %
Financial ratios
Equity to total balance sheet 5.1 5.7
Operating and other income to the total operating and other expenses 35.2 41.1
Operating and other expenses to total incomes 81.5 69.6
Provision for credit losses to net credit to the public 0.12 0.40
Total capital ratio to risk components 13.8 14.4
Tier I (core) capital ratio to risk components 8.1 8.3
* Comparative numbers have been restated due to retroactive implementation of the directive on employee benefits -
See Note 1.E.21. ** Reclassified.
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Appendix A Year-End Consolidated Balance Sheets
Reported amounts 2011 2010 2009 2008 2007 NIS millions
Assets Cash on hand and deposits with banks 6,961 7,132 4,188 5,146 4,710 Securities 6,785 4,553 5,545 6,920 8,051 Borrowed securities 5 415 274 11 - Credit to the public(A),(B) 23,140 22,749* 20,054* 19,535* 18,473* Provision for credit losses )272( *(1,036) *(1,002) *(996) *(970) Credit to the public, net 22,868 21,713 19,052 18,539 17,503 Credit to the government - - 188 - - Investment in investee companies 1 1 1 16 16 Buildings and equipment 408 380 364 356 327 Assets in respect of derivative instruments (B) 846 562 521 2,528 880 Other assets (B), (D) 1,041 556 210 612 160 Total assets 38,915 35,312 30,343 34,128 31,647 Liabilities and equity Deposits from the public 31,158 28,844** 24,884** 27,799 26,713 Deposits from banks 392 271** 276** 177 516 Deposits from the government 1 2 2 1 2 Subordinated notes and deposit certificates 2,761 2,344 1,709 1,323 1,295 Liabilities in respect of derivatives (B) 907 737 611 2,677 878 Other liabilities 1,710 1,108* 968* 628* 703* Total liabilities(A),(B),(C),(D) 36,929 33,306 28,450 32,605 30,107 Equity attributed to the shareholders of the Bank(B),(D)
1,985 2,005 1,893 1,523 1,540
Non-controlling interests 1 1 - - - Total equity 1,986 2,006 1,893 1,523 1,540
Total liabilities and equity 38,915 35,312 30,343 34,128 31,647 A. On January 1, 2011, the Bank first adopted the directives of the Supervisor of Banks in respect of measurement and disclosure of
impaired debts, credit risk and provision for credit losses. Comparative numbers from previous years were not restated, and therefore the data as of December 31, 2011 is not comparable to the data marked with * in 2010. For further explanations on the principles of the directive and the effect of initial adoption - See Note 1.E.5 and Note 4.
B. The comparative data were reclassified in order to match the item headings and the presentation method in the current period - See Note 1.C.5.
C. Of which: allowance for credit losses in respect of off-balance sheet credit instruments - NIS 44 million (for the years 2007-2010 NIS 1, 2, 4, 4 million respectively).
D. The comparative data were restated following the retroactive implementation of the directive regarding employee benefits - See Note 1.E.21. The balance sheet data as at late 2007 was restated based on data of balances as at late 2008 since the effect of implementation of the directive on 2008 is immaterial.
** Reclassified - See Note 1.C.5.b.
- 239 -
Appendix B Year-End Statement of Consolidated Profit and Loss Reported amounts 2011 2010 2009 2008 2007 NIS millions Profit from financing activities before provision For credit losses 689 716 620 580 613 Provision for credit losses 27 *87 95 * 94 * 80 *
Profit from financing activities after provision for credit losses 662 629 525 486 533
Operating and other income: Operating commissions 267 270 259 250 247 Profit (loss) from investments in shares, net 6 13 66 (3) 30 Other income 4 4 7 4 6 Total operating and other income 277 287 332 251 283
Operating and other expenses: Salaries and related expenses 459 **396 **362 361 343 Maintenance and depreciation of buildings and equipment 135 127 116 105 95 Other expenses 193 175 167 163 161 Total operating and other expenses 787 698 645 629 599 Operating profit before taxes 152 218 212 108 217 Provision for taxes on operating profit 20 **70 **101 56 93
Operating profit after taxes 132 148 111 52 124 The Bank's equity in net after- tax operating profits (losses) of equity- basis companies ***- ***- ***- 2 (1) Net operating profit: Before attribution to non-controlling interest
132 148 111 54 123
Attributed to non-controlling interest ***- - - - - Attributed to the Bank's shareholders 132 148 111 54 123 Profit (loss) from extraordinary activity after taxes before attribution to non-controlling interest ***- 1 (2) ***- 3 Net profit: Before attribution to non-controlling interest 132 149 109 54 126 Attributed to non-controlling interest ***- ***- - - - Attributed to Bank's shareholders 132 149 109 54 126
- 240 -
Appendix B (cont'd)
Year-End Statement of Consolidated Profit and Loss (cont'd)
Reported amounts
Profit per share (NIS)
2011 2010 2009 2008 2007
Basic and diluted profit: Net operating profit attributed to shareholders of the Bank 1.79 **2.01 **1.68 0.86 1.95 Profit from extraordinary activity, after taxes, attributed to shareholders of the Bank - 0.01 (0.04) - 0.05 Total 1.79 2.02 1.64 0.86 2.00 * On January 1, 2011, the Bank first adopted the directives of the Supervisor of the Banks on measurement and
disclosure of impaired debts, credit risk and provision for credit losses. The comparative numbers for previous years were not restated, therefore the data for 2011 is not comparable to the corresponding data for the periods ended December 31, 2007-2010.
** Restated following retroactive implementation of the directive regarding employee benefits - See Note 1.E.21. The 2007 and 2008 data was not restated because the effect of the implementation on these years is not material.
*** Less than NIS 500 thousand.
- 241 -
Appendix C Rates of Income and Expenses by Linkage Bases - Consolidated (1) Reported amounts 2011 2010 Rate of income (expense) Rate of income (expense) Financing Without Including Financing Without Including Average income derivatives derivatives Average income derivatives derivatives balance (2) (expenses) effect effect(3) balance (2) (expenses) effect effect(3) NIS millions % % NIS millions % %
Israeli currency - Unlinked Assets (4) 25,124 1,029 4.10 21,034 674 3.20 Effect of derivates (3) 2,676 71 3.96 1,992 38 Total 27,800 1,100 23,026 712 3.09
Liabilities 22,580 (567) (2.51) 18,499 (267) (1.44)
Effect of derivates (3) 2,986 (84) 2,596 (40) Total 25,566 (651) (2.55) 21,095 (307) (1.46) Financial margin 1.59 1.41 1.76 1.63
Israeli currency - CPI linked
Assets (4) 5,493 303 5.52 4,848 290 5.98 Effect of derivates (3) 184 50 239 20
Total 5,677 353 6.22 5,087 310 6.09
Liabilities 4,350 (223) (5.13) 4,068 (226) (5.56) Effect of derivates (3) 763 (43) 926 (61)
Total 5,113 (266) (5.20) 4,994 (287) (5.75) Financial margin(9) 0.39 1.02 0.42 0.34
Foreign currency (5) Assets (4) 5,496 536 9.75 5,577 (297) (5.33) Effect of derivates (3) 21,014 568 10,583 674 Total 26,510 1,104 4.16 16,160 377 2.33
Liabilities 6,402 (546) (8.53) 6,751 488 7.23
Effect of derivates (3) 20,260 (482) 9,309 (766) Total 26,662 (1,028) (3.86) 16,060 (278) (1.73)
Financial margin(9) 1.22 0.30 1.90 0.60
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Appendix C (cont'd)
Rates of Income and Expenses by Linkage Bases - Consolidated (1) (cont'd)
Reported Amounts
Foreign currency - in nominal US dollars (5) 2011 2010 Financing Rate of income (expense) Financing Rate of income (expense) Average income Without Including Average income Without Including Balance(2) (expenses) derivatives effect derivatives effect (3) Balance(2) (expenses) derivatives effect derivatives effect (3) USD millions % % USD millions % %
Foreign currency (5) Assets (4) 1,544 41 2.66 1,492 38 2.55 Effect of derivatives (3) 5,889 90 2,820 53 Total 7,433 131 1.76 4,312 91 2.11
Liabilities 1,796 )14( (0.78) 1,799 (9) (0.50) Effect of derivatives (3) 5,678 )98( 2,481 (65) Total 7,474 )112( )1.50( 4,280 (74) (1.73) Financial margin(9) 1.88 0.26 2.05 0.38
Note: Full details regarding rates of income and expenses in each segment, according to balance sheet items, are available upon request.
(1) The data in this table is presented before and after the effect of derivative instruments (including off-balance sheet effects of derivative instruments). (2) On the basis of monthly opening balances, except for the unlinked Israeli currency segment in which the average balance is calculated on the basis of daily balances, and after
deduction of the average balance sheet balance of allowance for credit losses. In 2010, net of the average balance-sheet balance of allowance for credit losses. (3) Hedging derivative instruments (except for options), separated embedded derivatives and ALM derivatives which constitute a part of the Bank's asset and liability management
system. (4) a) The average balance of the unrealized gains and losses from adjustment of bonds to fair value, was subtracted from/added to the average balance of the assets. In the year ended December 31, 2011, an amount of NIS 8 million was deducted from the unlinked segment, an amount of NIS 31 million was subtracted from the CPI
linked segment and an amount of NIS 8 million was added to the foreign currency segment (in the year ended December 31, 2010, an amount of NIS 17 million was subtracted from the unlinked segment, an amount of NIS 74 million was subtracted from the CPI linked segment and an amount of NIS 23 million was added to the foreign currency segment).
b) Except for derivative instruments.
(5) Including Israeli currency linked to foreign currency. (6) Including gains and losses on the sale of investments in bonds and the adjustment of trading bonds to fair value. (7) Average balance sheet balances of derivative instruments (not including average off-balance sheet balances of derivative instruments). (8) As of January 1, 2011, the allowance is affected by implementation of the directive of impaired debts. In 2010, a general provision and supplementary provision for doubtful
debts. (9) The volatility is partially the result of measurement of derivative instruments by fair value.
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Appendix C (cont'd)
Rates of Income and Expenses by Linkage Bases - Consolidated (1) Reported Amounts 2011 2010 Rates of income (expence) Rates of income (expence) Financing Without Including Financing Without Including Average income derivatives derivatives Average income derivatives derivatives balance (2) (expenses) effect effect(3) Balance(2) (expenses) effect effect(3)
NIS millions % % NIS millions % %
Total Monetary assets generating financing income (4) 36,113 1,868 5.17 31,459 667 2.12 Effect of derivates (3) 23,874 689 12,814 732 Total assets 59,987 2,557 4.26 44,273 1,399 3.16
Monetary liabilities generating financing expenses 33,332 (1,336) (4.01) 29,318 (5) (0.02) Effect of derivates (3) 24,009 (609) 12,831 (867) Total liabilities 57,341 (1,945) (3.39) 42,149 (872) (2.07) Financial margin 1.16 0.87 2.10 1.09
In respect of options 16 15 Commissions from financing transactions and other financing income (6) 61 174 Profit from financing activities before provision for credit losses 689 716 Provision for credit losses (27) (87) Profit from financing activities after provision for credit losses 662 629
Total Monetary assets generating financing income (4) 36,113 31,459
Assets deriving from derivative instruments (7) 556 403 Other monetary assets 154 289 Allowance for credit losses (8) (309) (78) Total monetary assets 36,514 32,073
Total Monetary liabilities generating financing expenses 33,332 29,318 Liabilities deriving from derivative instruments (7) 689 556
Other monetary liabilities 1,059 813 Total monetary liabilities 35,080 30,687
Total excess of monetary assets over monetary liabilities 1,434 1,386 Non-monetary assets 720 *722 Non-monetary liabilities 218 *245 Total capital resources 1,936 *1,863
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Appendix D Exposure to Interest Rate Fluctuations as at December 31, 2011 - Consolidated Reported amounts Three As at December 31, 2011 As at December 31, 2010
On demand One to months One to Three to Five to Ten to More than Without Internal Average Internal Average up to one three to one three five ten twenty twenty fixed Total rate of effective Total fair rate of Effective month months year years years years years years maturity fair value return maturity Value** Return** Maturity**
NIS millions % years % years
Israeli currency unlinked Financial assets and amounts receivable in respect of derivative instruments
Financial assets(a) 20,636 2,488 1,785 553 174 300 158 1 379 26,474 5.45 0.3 23,683 5.03 0.2 Derivative financial instruments (except options) 1,379 1,254 995 154 9 - - - - 3,791 0.2 2,872 0.1 Options (in terms of the underlying asset) 5,446 576 564 8 1 - - - - 6,595 *- 9,237 *- Total fair value 27,461 4,318 3,344 715 184 300 158 1 379 36,860 (b)0.2 35,792 (b)0.1 Financial liabilities and amounts payable in respect of derivative instruments
Financial liabilities(a) 18,720 2,418 1,759 1,105 191 64 3 - 107 24,367 2.70 0.2 21,677 2.39 0.2 Derivative financial instruments (except options) 2,786 683 1,070 137 9 - - - - 4,685 0.2 3,224 0.2 Options (in terms of the underlying asset) 5,545 568 444 8 1 - - - - 6,566
*- 9,645
*-
Total fair value 27,051 3,669 3,273 1,250 201 64 3 - 107 35,618 (b)0.2 34,546 (b)0.1 Financial instruments, net Exposure to interest rate fluctuations in the segment 410 649 71 )535( )17( 236 155 1 Cumulative exposure in the segment 410 1,059 1,130 595 578 814 969 970
- 245 -
Appendix D (cont'd)
Exposure to Interest Rate Fluctuations as at December 31, 2011 - Consolidated
Reported amounts
Three As at December 31, 2011 As at December 31, 2010
On demand One to months One to Three to Five to Ten to More than Without Internal Average Total Internal Average up to one three to one three five ten twenty twenty fixed Total rate of effective Fair rate of Effective month months year years years years years years maturity fair value return maturity Value** Return** Maturity**
NIS millions % years % years CPI linked Israeli currency Financial assets and amounts receivable in respect of derivative instruments
Financial assets(a) 78 634 868 1,073 963 872 217 14 10 5,359 4.10 3.0 5,101 3.47 3.4 Derivative financial instruments (except options) - 50 148 29 - - - - - 227 *- 321 - Options (in terms of the underlying asset) - - - - - - - - - - - - *- Total fair value 78 684 1,016 1,732 963 872 217 14 10 5,586 (b)2.9 5,422 (b)3.2 Financial liabilities and amounts payable in respect of derivative instruments
Financial liabilities (a) 24 537 881 1,491 683 957 20 - - 4,593 2.81 2.9 4,289 1.22 3.2 Derivative financial instruments (except options) - 50 451 151 - - - - - 652 *- 929 1.4 Options (in terms of the underlying asset) - - - - - - - - - - - - *- Total fair value 24 587 1,332 1,642 683 957 20 - - 5,245 (b)2.5 5,218 (b)2.9 Financial instruments, net Exposure to interest rate fluctuations in the segment 54 97 (316) 90 280 (85) 197 14 Cumulative exposure in the segment 54 151 (165) )75( 205 120 317 331
- 246 -
Appendix D (cont'd.)
Exposure to Interest Rate Fluctuations as at December 31, 2011 - Consolidated
Reported amounts Three As at December 31, 2011 As at December 31, 2010
On demand One to months One to Three to Five to Ten to More than Without Internal Average Total Internal Average up to one three to one three five ten twenty twenty fixed Total rate of effective fair rate of effective month months year years years years years years maturity fair value return maturity Value** Return** Maturity**
NIS millions % years % years
Foreign currency (d) Financial assets and amounts receivable in respect of derivative instruments
Financial assets 3,444 743 467 96 235 384 12 - 24 5,405 4.17 0.8 5,293 4.03 0.8 Derivative financial instruments (a) (except options) 11,877 4,317 1,707 170 215 226 - - - 18,512 0.3 12,953 0.2 Options (in terms of the underlying asset) 7,017 486 1,524 1 - 154 - - - 9,182 *- 6,456 *- Total fair value 22,338 5,546 3,698 267 450 764 12 - 24 33,099 (b)0.3 24,702 (b)0.3 Financial liabilities and amounts payable in respect of derivative instruments
Financial liabilities (a) 4,121 1,291 1,280 12 1 - - - - 6,705 1.26 0.2 6,494 0.60 0.1 Derivative financial instruments (except options) 10,298 4,198 1,398 195 502 677 - - - 17,268 0.5 12,173 0.4 Options (in terms of the underlying asset) 6,924 488 1,644 1 - 154 - - - 9,211 *- 6,045 *- Total fair value 21,343 5,977 4,322 208 503 831 - - - 33,184 (b)0.3 24,712 (b)0.2 Financial instruments, net Exposure to interest rate Fluctuation in the segment 995 )431( )624( 59 )53( (67) 12 - Cumulative exposure in the segment 995 564 )60( )1( )54( (121) (109) (109)
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Appendix D (cont'd.) Exposure to Interest Rate Fluctuations as at December 31, 2011 - Consolidated Reported amounts Three As at December 31, 2011 As at December 31, 2010
On demand One to months One to Three to Five to Ten to More than Without Internal Average Total Internal Average up to one three to one three five ten twenty twenty fixed Total rate of effective Fair rate of effective month months year years years years years years maturity fair value return maturity Value** Return** Maturity**
NIS millions % years % years
Aggregate exposure to interest rate fluctuations Financial assets and amounts receivable in respect of derivative instruments
Financial assets(a),(c) 24,158 3,865 3,120 2,352 1,372 1,556 387 15 413 37,238 5.06 0.8 34,077 4.63 0.8 Derivative financial instruments (except options) 13,256 5,621 2,850 353 224 226 - - - 22,530 0.2 16,146 0.2 Options (in terms of the underlying asset) 12,463 1,062 2,088 9 1 154 - - - 15,777 *- 15,693 *- Total fair value 49,877 10,548 8,058 2,714 1,597 1,936 387 15 413 75,545 (b)0.5 65,916 (b)0.5 Financial liabilities and amounts payable in respect of derivative instruments
Financial liabilities (a),(c) 22,865 4,246 3,920 2,608 875 1,021 23 - 107 35,665 2.43 0.5 32,460 1.89 0.6 Derivative financial instruments (except options) 13,084 4,931 2,919 483 511 677 - - - 22,605 0.4 16,326 0.4 Options (in terms of the underlying asset) 12,469 1,056 2,088 9 1 154 - - - 15,777 *- 15,690 *- Total fair value 48,418 10,233 8,927 3,100 1,387 1,852 23 - 107 74,047 (b)0.4 64,476 (b)0.4 Financial instruments, net Exposure to interest rate fluctuations in the segment 1,459 315 (869) )386( 210 84 364 15 Cumulative exposure in the segment 1,459 1,774 905 519 729 813 1,177 1,192
* Less than 0.05 years. ** Reclassified.
Specific notes: a. With the exception of balance sheet balances of derivative financial instruments and fair value of off-balance sheet financial instruments. b. Average weighted based on fair value of average effective maturity. c. Including stocks presented in the column "Without fixed maturity". d. Including Israeli currency – foreign currency linked. General notes: 1. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities according to the different balance-sheet items, will be provided upon request. 2. In this table, data by periods reflect the current value of future cash flows of each financial instrument, capitalized by the interest rate used for deduction to the fair value included in respect of the financial instrument, in
consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used in the calculation of the fair value of the financial instruments, see Note 20 to the Financial Statements, 2011.
3. The internal return rate is the interest rate for the deduction of the expected cash flows from the financial instrument to the fair value. 4. The average effective maturity of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an
increase of 0.1%) in the internal return rate of each of the financial instruments. 5. Instruments that embody options which have not been separated from the hosting contract, in accordance with the accounting principles, are included in the deployment of the financial instruments.
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Appendix E Overall Credit Risk to the Public by Economic Sector - Consolidated Reported amounts As at December 31, 2011 Risk of credit to the public Risk of credit to the public includes Credit losses(4)
Balance Sheet credit risk (1)
Off-balance sheet
credit risk (2) Total
credit risk Problematic credit risk(3)
Of which impaired credit to the public
Provision (income) for credit losses
Net accounting write off
Balance of allowance for
credit losses
NIS Millions
Agriculture 183 52 235 - - **- **- 1 Industry 1,830 1,124 2,954 166 65 7 38 82 Diamonds 1,278 1,057 2,335 94 27 2 8 22
Construction and real estate(7) 3,873 4,464 8,337 200 74 17 9 86 Electricity and water 184 80 264 - - - - - Commerce 1,703 778 2,481 12 6 (2) (3) 10 Hotels, hospitality and food services 318 21 339 79 1 (7) **- 19 Transportation and storage 375 67 442 15 5 1 - 4 Communication and 231 221 452 30 4 **- **- 1 computer services Financial services 4,955 1,056 6,011 378 325 **- (1) 33 Other business services 1,079 375 1,454 12 6 **- **- 3 Public and community services 429 254 683 11 1 3 - 3 Private individuals - 6,248 241 6,489 61 - **- 3 39 residential loans Private individuals - other 1,874 1,455 3,329 18 10 6 9 13
Total in respect of Israel
borrowers 24,560 11,245 35,805 1,076 524 27 63 316
In respect of abroad borrowers 26 3 29 - - - - -
Total 24,586 11,248 35,834 1,076 524 27 63 316
Credit risk included within the various economic sectors: Settlement movements (5) 96 - 96 - - - - - Local authorities (6) 188 26 214 - - - - - * See note 1.E.5. with respect to principles of the new directive on measurement and disclosure of impaired debt – credit risk ad provision for credit loss. ** Less than NIS 500 thousand.
(1) Credit to the public, including the public’s investments in bonds in the amount of NIS 806 million and other assets in respect of derivative instruments against the public in the amount of NIS 640 million. (2) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of per borrower credit limitations. Following the amendment of the indebtedness directive comparative numbers of the previous
year have not been restated and therefore are not comparable. (3) Balance sheet and off-balance sheet credit risk in respect of the public that is impaired, substandard or under special supervision including credit risk in respect of housing loans in arrears of 90 days or more. Of which:
off-balance sheet problematic credit risk totaling NIS 107 million. (4) Including in respect of off-balance-sheet credit instruments (presented in the balance sheet under the item "other liabilities"). (5) Kibbutzim and Moshavim, regionals and national organizations and associations controlled by the settlement movements. (6) Including corporations under their control. (7) Including residential loans that were made available to purchasing groups during the construction process due to balance sheet credit risk totaling NIS 515 million and due to off balance sheet credit risk totaling NIS 1,102
million.
The balance-sheet and off-balance sheet credit risk, problematic credit risk and impaired credit to the public are presented before the effect of allowance for credit losses, and before the effect of deductible collateral for the purposes of the indebtedness of a borrower or group of burrowers.
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Appendix E (cont'd) Overall Credit Risk to Public by Economic Sector - Consolidated Reported amounts December 31, 2010 Balance Sheet Off-balance Total Annual specific problematic credit risk (1) sheet credit risk provision for debts credit risk (2) to public doubtful debts balances (3) NIS millions
Agriculture 139 80 219 *- *-Industry 1,800 1,443 3,243 54 131Diamonds 1,138 913 2,051 2 48
Construction and real estate(6) 3,502 5,319 8,821 17 358
Electricity and water 197 60 257 - -Commerce 1,324 757 2,081 1 17Hotels, hospitality and food services 322 29 351 *- 56Transportation and storage 215 134 349 *- 3Communication and computer services 329 150 479 1 16Financial services 5,131 1,476 6,607 3 346Other business services 1,029 414 1,443 2 30
Public and community services 365 501 866 *- 2Private individuals - residential loans 5,615 433 6,048 2 43Private individuals - other 1,772 1,240 3,012 5 27
Total in respect of Israel
borrowers 22,878 12,949 35,827 87 1,077
In respect of abroad borrowers 39 10 49 - -
Total 22,917 12,959 35,876 87 1,077 Credit risk included within the various economic sectors: Settlement movements (4) 107 - 107 - 4Local authorities (5) 184 145 329 - - * Less than NIS 500 thousand. (1) Credit to the public, including the public’s investments in bonds in the amount of NIS 764 million and other assets in
respect of derivative instruments against the public in the amount of NIS 362 million. (2) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of per borrower credit
limitations. (3) Problematic debts balances net of credit covered by collateral which is permitted as a deduction for purposes of
individual and group borrowers limits. Includes off-balance sheet credit risk components. (4) Kibbutzim and moshavim, regional and national organizations and associations controlled by the settlement
movements. (5) Including corporations under their control. (6) Including residential loans that were made available to purchasing groups during the construction process due to
balance sheet credit risk totaling NIS 352 million and due to off - balance sheet credit totaling NIS 1,673 million. The credit risk and balances of problematic debts are presented net of the specific provisions for doubtful debts.
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Appendix F
Exposures to Foreign Countries as of December 31, 2011 – Consolidated (1) Reported amounts A. Information regarding total exposures to foreign countries and exposures to countries where the total exposure to each country is greater than 1% of total consolidated
assets or greater than 20% of capital, whichever is lower (6) Balance-sheet exposure(4) Off-balance-sheet exposure (2),(4)
Cross-border balance-sheet exposure
Balance-sheet exposure of branches of the banking corporation in foreign countries
to local residents Cross-border balance-
sheet exposure
Country To
governments(3) To banks
To others
Balance-sheet
exposure before
deducting for local liabilities
Deduction for local liabilities
Net balance-sheet
exposure after
deducting local
liabilities
Total balance-
sheet exposure
Problematic balance sheet commercial credit risk(4)
Balance of problematic
debts (4)
Total off-balance-sheet
exposure
Of which: problematic off-balance sheet credit
risk(4) Maturity up to one year
Maturity more than one year
NIS millions
USA - 548 91 - - - 639 - - 259 - 520 119 Switzerland - 420 92 - - - 512 - - 21 - 497 15 Italy(7)(8) - *- 8 - - - 8 - - 2 - 1 7 Others (7) 4 547 552 - - - 1,103 5 5 267 - 596 507 Total exposures to foreign countries 4 1,515 743 - - - 2,262 5 5 549 - 1,614 648 Total exposure to LDC countries - 8 53)5( - - - 61 *- *- 115 - 41 20
The line "Total LDCs" includes total exposure to countries defined as less-developed countries (LDCs) in Proper Conduct of Banking Business Directive No. 315, "Supplementary Provision for Doubtful Debts"; this amount is included in the "Others" line in the table above. See Note (5) below. Exposures to foreign countries include cross-border balance-sheet exposure and balance-sheet exposure of the banking corporation's offices in foreign countries to local residents; cross-border balance-sheet exposure includes balance sheet exposure of the banking corporation's offices in Israel to residents of the foreign country and balance sheet exposure of the banking corporation's offices overseas to the residents of the foreign country, with the exception of the balance sheet exposure of the offices in that foreign country. Balance sheet exposure of offices of the banking corporation in a foreign country to local residents includes balance sheet exposure of offices of the banking corporation in that foreign country to its residents, less the liabilities of those offices (the deduction is performed up to the amount of the exposure).
(1) Based on final risk, after the effect of guarantees and liquid collateral.
(2) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on indebtedness of a borrower.
(3) Governments, official institutions, and central banks.
(4) Balance sheet and off-balance sheet credit risk, problematic commercial credit risk and impaired debts presented before the effect of allowance for credit losses, and before the effect of collateral deductable for the purposes of indebtedness of a borrower and of groups of burrowers.
(5) Given that pursuant to the rules of the directive, risk is classified according to residency, and Israeli companies were included in this amount wherein the guarantors of the debt (in this case also the owners) hold passports from LDCs, the Bank does not rely only on this guarantee, but primarily on other collateral, including non-liquid collateral. The Bank does not directly grant credit to or finance projects of LDCs.
(6) Capital is defined in Proper Conduct of Banking Business Directive No. 202 regarding "Capital Management and Adequacy - Components of Capital".
(7) According to the directives of the Supervisor of Banks, due to the latest developments in the markets, a separate line of disclosure is required for exposure to the countries Portugal, Ireland, Italy, Greece and Spain. As at December 31, 2011 the Bank has no exposure to the countries Portugal, Ireland, Greece and Spain.
(8) Given that pursuant to the rules of the directive, risk is classified according to residency, these sums are resultant of burrowers wherein the guarantors of the debt (in this case also the owners) hold Italian passports. The Bank does not solely rely on this guarantee, but primarily on other collateral including non-liquid collateral. The Bank does not directly grant credit to or finance projects of PIIGS countries.
* Less than NIS 500 thousand.
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Appendix F Exposures to Foreign Countries as of December 31, 2010 – Consolidated (1) Reported amounts A. Information regarding total exposures to foreign countries and exposures to countries where the total exposure to each country is greater than 1% of total consolidated
assets or greater than 20% of capital, whichever is lower (6) Balance-sheet exposure(4) Off-balance-sheet exposure (2)
Cross-border balance-sheet exposure
Balance-sheet exposure of branches of the banking corporation in foreign
countries to local residents Cross-border balance-
sheet exposure
Country To
governments(3) To
banks
To others
Balance-sheet
exposure before
deducting for local liabilities
Deduction for local liabilities
Net balance-sheet
exposure after
deducting local
liabilities
Total balance-
sheet exposure
Balance of problematic
debts (4)
Total off-balance-
sheet exposure
Of which: problematic off-
balance sheet credit risk
Maturity up to one year
Maturity more than one year
In NIS millions USA - *385 *113 - - - 498 **- 354 - 332 166 Switzerland - 249 106 - - - 355 - 144 - 353 2 Others (7) 3 465 668 - - - 1,136 4 1,184 - 711 425 Total exposures to foreign countries 3 1,099 887 - - - 1,989 4 1,682 - 1,396 593
Total exposure to LDC countries - 4 84(5) - - - 88 - 82 - 48 40 The line "Total LDCs" includes total exposure to countries defined as less-developed countries (LDCs) in Proper Conduct of Banking Business Directive No. 315, "Supplementary Provision for Doubtful Debts"; this amount is included in the "Others" line in the table above. See Note (5) below. Exposures to foreign countries include cross-border balance-sheet exposure and balance-sheet exposure of the banking corporation's offices in foreign countries to local residents; cross-border balance-sheet exposure includes balance-sheet exposure of the banking corporation's offices in Israel to residents of the foreign country and balance-sheet exposure of the banking corporation's offices overseas to the residents of the foreign country, with the exception of the balance-sheet exposure of the offices in that foreign country. Balance-sheet exposure of offices of the banking corporation in a foreign country to local residents includes balance-sheet exposure of offices of the banking corporation in that foreign country to its residents, less the liabilities of those offices (the deduction is performed up to the amount of the exposure).
(1) Based on final risk, after the effect of guarantees and liquid collateral. (2) Credit risk in off-balance-sheet financial instruments, as calculated for the purpose of the limit on indebtedness of a borrower. (3) Governments, official institutions, and central banks. (4) Balance of problematic debts, less debts covered by deductible collateral for the purpose of the limit on indebtedness of borrowers and borrower groups; excluding off-balance sheet risk-
components. (5) Given that pursuant to the rules of the directive, risk is classified according to the residency of the guarantor, and Israeli companies were included in this amount wherein the guarantors of the debt
(in this case also the owners) hold passports from LDCs, the Bank does not rely only on this guarantee, but primarily on other collateral, including non-liquid collateral. The Bank does not directly grant credit to or finance projects of LDCs.
(6) Capital as defined in Proper Conduct of Banking Business Directive No. 202 in respect of "Measurement and Capital Adequacy - Capital Components". (7) As at December 31, 2010 the Bank has no exposure to the countries: Portugal, Ireland, Greece and Spain. * Reclassified. * * Less than NIS 500 thousand.
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Appendix F (cont'd)
Exposures to Foreign Countries – Consolidated
Reported amounts
B. Information regarding countries where total exposure to each country is between 0.75% and 1% total
consolidated assets, or between 15% and 20% of capital, whichever is lower(6)
As at 31 December 2011:
Country of exposure: Great Britain.
The aggregate balance sheet exposure in this section totals NIS 301 million (Of which a total of NIS 251
million for banks).
As at 31 December 2010:
The Bank has no exposure.
C. Information regarding balance-sheet exposure to foreign countries with liquidity problems (4): Balance-sheet balances
As at December, 31 2011
As at December, 31 2010
Turkey India Turkey India
Amount of exposure at start of reporting period 2 48 4 42
Net changes in amount of short-term exposure - )3( (4) (11)
Other changes -* )3( 2 17
Amount of exposure at year end 2 42 2 48
The aforesaid disclosure includes countries meeting the criteria listed below:
(1) Countries that have received aid from the International Monetary Fund (IMF).
(2) Countries rated CCC or lower by the international rating agency S&P.
(3) Countries classified by the World Bank in the low or medium income level group.
(4) Because risk is classified, under the rules of the directive, according to the residence of the guarantor, this
amount includes Israeli companies whose debt is secured by guarantors (who in this case are also the
owners) who hold passports from these countries. With regard to countries with liquidity problems, the
Bank does not rely on this guarantee alone; it relies primarily on other collateral, including non-liquid
collateral. The Bank does not directly grant credit to or finance projects of countries with liquidity
problems.
(5) As at 31 December 2011, the Bank has no exposure to the countries: Greece, Portugal, Ireland and Spain.
(6) Capital as defined in Proper Conduct of Banking Business Directive No. 202 in respect of "Measurement
and Adequacy of Capital - Capital Components".
* Less than NIS 500 thousand.
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Appendix G Condensed Consolidated Balance Sheet at the End of Each Quarter for the Years 2010 - 2011 Reported amounts Year 2011 2010
Quarter 4 3 2 1 4 3 2 1 NIS millions NIS millions Assets
Cash on hand and deposits with banks 6,961 8,123 9,567 5,708 7,132 5,152 6,259 5,332 Securities 6,785 5,383 4,231 5,519 4,553 6,378 4,827 4,997 Borrowed securities 5 335 347 405 415 551 309 161 Credit to the public(A),(B) 23,140 23,095 22,749 23,018 * 22,749 * 22,280 *21,396 *20,228 Allowance for credit losses (A),(B) (272) (267) (300) (315) *(1,036) *(1,015) *(997) *(1,003) Credit to the public, net 22,868 22,828 22,449 22,703 21,713 21,265 20,399 19,225
Credit to the government - 1 - - - - - 148 Investment in investee companies 1 1 1 1 1 1 1 1 Buildings and equipment 408 381 376 373 380 358 357 357 Assets in respect of derivative instruments(B) 846 1,050 508 596 562 505 519 360 Other assets(B), (C) 1,041 487 290 293 556 768 719 742
Total assets 38,915 38,589 37,769 35,598 35,312 34,978 33,390 31,323 Liabilities and Equity
Deposits from the public 31,158 ** 30,954 **30,722 **28,825 **28,844 **28,586 **26,952 ** 25,690 Deposits from banks 392 ** 432 ** 618 **384 **271 **109 **439 **253 Deposits from the government 1 - 8 1 2 7 3 1 Subordinated notes and bonds 2,761 2,757 2,464 2,320 2,344 2,152 2,099 1,770 Liabilities in respect of derivative instruments (B) 907 1,108 645 717 737 678 690 488 Other liabilities(A),(B), (C) 1,710 1,388 1,353 1,395 *1,108 *1,407 *1,225 * 1,174
Total liabilities 36,929 36,639 35,810 33,642 33,306 32,939 31,408 29,376
Equity attributed to the shareholders of the Bank (B), (C) 1,985 1,949 1,958 1,955 2,005 2,039 1,982 1,947 Non controlling Interest(B) 1 1 1 1 1 - - - Total equity 1,986 1,950 1,959 1,956 2,006 2,039 1,982 1,947 Total liabilities and equity 38,915 38,589 37,769 35,598 35,312 34,978 33,390 31,323
(A) On January 1, 2011, the Bank fist adopted the directive of the supervisor of Banks in respect of "Measurement and Disclosure of Impaired Debts, Credit Risk and Provision for Credit Losses".
The comparative numbers for previous years have not been restated and accordingly the data as at December 31, 2011 is not comparable to the data marked* in 2010. For further explanations regarding the principles of the directive and the effect of initial implementation - See Note 1.E.5. and Note 4.
(B) The comparative data were reclassified in order to match the item headings and the presentation method in the current period (See Note 1.C.5). (C) The comparative data were reclassified following the retroactive implementation of the directive regarding employee benefits - See Note 1.E.21. ** Reclassified.
- 254 -
Appendix H Condensed Consolidated Statements of Profit and Loss for Each Quarter for the Years 2010 - 2011 Reported amounts 2011 2010
4 3 2 1 4 3 2 1 NIS millions NIS millions
Profit from financing activities before provision for credit losses 171 150 174 194 217 190 150 159 Provision for credit losses 26 )13( )4( 18 *32 *31 5 * *19 Profit from financing activities after provision for credit losses 145 163 178 176 185 159 145 140 Operating and other income: Operating commissions 64 66 67 70 71 61 70 68 Profit (loss) from investments in shares, net 3 (4) 1 6 1 9 (1) 4 Other income 1 1 1 1 1 1 1 1 Total operating and other income 68 63 69 77 73 71 70 73
Operating and other expenses: Salaries and related expenses 128 112 107 112 **105 **95 **99 **97 Maintenance and depreciation of buildings and equipment 35 34 32 34 36 31 30 30 Other expenses 52 45 51 45 49 41 43 42 Total operating and other expenses 215 191 190 191 190 167 172 169
Operating profit (loss) before taxes (2) 35 57 62 68 63 43 44 Provision for taxes on operating profit (loss) (37) 11 22 24 **17 **22 14 ** **17
Operating profit after taxes 35 24 35 38 51 41 29 27 The Bank's equity in net after-tax operating profits of equity-basis companies ***- ***- ***- ***- ***- ***- ***- ***- Operating profit before taxes:
Before attribution to non controlling interests 35 24 35 38 51 41 29 27 Attributed to non controlling interests before attribution to shareholders of the Bank ***- ***- ***- ***- ***- ***- - -
35 24 35 38 51 41 29 27 Profit (loss) from extraordinary activities, after taxes before attribution to non controlling interest (1) - - 1 ***- - 1 ***- Net profit:
Before attribution to non controlling interests 34 24 35 39 51 41 30 27 Attributed to non controlling interests ***- ***- ***- ***- ***- ***- - -
Attributed to shareholders of the Bank 34 24 35 39 51 41 30 27
* On January 1, 2011, the Bank first adopted the directive of the supervisor of Banks in respect of "Measurement and Disclosure of Impaired Debts, Credit Risk and Provision for Credit Losses. The comparative numbers for previous years have not been restated and accordingly the data for the year 2011 is not comparable to the corresponding data for the periods ended December 31, 2010 and 2011. ** Restated following the retroactive implementation of the directive regarding employee benefits - See Note 1.E.21. *** Less than NIS 500 thousand.
- 255 -
Appendix H (cont’d) Condensed Consolidated Statements of Profit and Loss for Each Quarter for the Years 2010 - 2011 (cont’d) Reported amounts Profit per share (NIS) 2011 2010
4 3 2 1 4 3 2 1
Basic and diluted profit:
Net operating profit attributed to shareholders of the Bank 0.47 0.33 0.47 0.52 **0.69 **0.56 **0.40 **0.36
Profit (loss) from extraordinary activity, after taxes, attributed to shareholders of the Bank (0.02) - - 0.02 - - 0.02 -
Total 0.45 0.33 0.47 0.54 0.69 0.56 0.42 0.36
* On January 1, 2011, the Bank fist adopted the directive of the supervisor of Banks in respect of "Measurement and disclosure of impaired debts, Credit Risk and Provision for Credit Loss. The comparative numbers for previous years have not been restated and accordingly the data for the year 2011 is not comparable to the corresponding data for the periods ended December 31, 2010 and 2011* in 2010.
** Restated following the retroactive implementation of the directive regarding of employee benefits - See Note 1.E.21.
- 256 -
Certification
I, Haim Freilichman, declare that:
1. I have reviewed the annual report of Union Bank of Israel Ltd. (hereinafter: the “Bank”) for the year 2011 (hereinafter: the “Report”).
2. Based on my knowledge, the Report contains no incorrect presentation of a material fact, and there is no presentation of a material fact missing from the Report that is necessary so that the presentations included in it, in light of the circumstances under which such presentations were included, are not misleading with regard to the period covered by the Report.
3. Based on my knowledge, the financial statements and other financial information included in the Report correctly reflect the financial condition, results of operations, changes in shareholders’ equity, and cash flows of the Bank, in all material aspects, for the dates and periods covered and reported in the Report.
4. I, and others at the Bank making this certification, are responsible for the establishment and application of controls and procedures about disclosure(1) and the internal controls in the Bank’s financial reporting (1) furthermore:
(A) We have established such controls and procedures, or caused such controls and procedures to be established under our supervision, aimed at ensuring that material information pertaining to the Bank, including its consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in particular during the preparation of the Report;
(B) We have established internal control over financial reporting, or caused such internal control to be established under our supervision, designed to provide a reasonable degree of confidence with regard to the reliability of financial reporting, and that the financial statements for external purposes are prepared in compliance with generally accepted accounting principles and with the directives and guidelines of the Supervisor of Banks.
(C) We have assessed the effectiveness of the controls and procedures concerning disclosure at the Bank, and we have presented in the report our findings with regard to the effectiveness of the controls and procedures concerning disclosure, as of the end of the period covered in the Report, based on our assessment; and
(D) We have disclosed in the Report any change in the internal control of financial reporting at the Bank that occurred during the fourth quarter, and that had a material effect, or could reasonably be expected to have a material effect, on the internal control of financial reporting at the Bank; and
5. I, and others at the Bank making this certification, have disclosed to the external auditor, to the Board of Directors, and to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the internal control of financial reporting:
(A) Any significant deficiencies and material weaknesses in the establishment or application of internal control of financial reporting that can reasonably be expected to impair the Bank’s ability to record, process, summarize, or report financial information; and
(B) Any fraud, whether material or immaterial, in which management was involved, or in which other employees were involved who have a significant role in the internal control of financial reporting at the Bank.
The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.
(1) As defined in the Public Reporting Directives concerning the "Board of Directors' Report".
______________ Haim Freilichman President & C.E.O. February 29, 2012
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Certification
I, Netta Avrahamov Bitan, declare that:
1. I have reviewed the annual report of Union Bank of Israel Ltd. (hereinafter: the “Bank”) for the year 2011 (hereinafter: the “Report”).
2. Based on my knowledge, the Report contains no incorrect presentation of a material fact, and there is no presentation of a material fact missing from the Report that is necessary so that the presentations included in it, in light of the circumstances under which such presentations were included, are not misleading with regard to the period covered by the Report.
3. Based on my knowledge, the financial statements and other financial information included in the Report correctly reflect the financial condition, results of operations, changes in shareholders’ equity, and cash flows of the Bank, in all material aspects, for the dates and periods covered and reported in the Report.
4. I, and others at the Bank making this certification, are responsible for the establishment and application of controls and procedures about the disclosure(1) and the internal controls in the Bank’s financial reporting (1); furthermore:
(A) We have established such controls and procedures, or caused such controls and procedures to be established under our supervision, aimed at ensuring that material information pertaining to the Bank, including its consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in particular during the preparation of the Report;
(B) We have established internal control over financial reporting, or caused such internal control to be established under our supervision, designed to provide a reasonable degree of confidence with regard to the reliability of financial reporting, and that the financial statements for external purposes are prepared in compliance with generally accepted accounting principles and with the directives and guidelines of the Supervisor of Banks.
(C) We have assessed the effectiveness of the controls and procedures concerning disclosure at the Bank, and we have presented in the report our findings with regard to the effectiveness of the controls and procedures concerning disclosure, as of the end of the period covered in the Report, based on our assessment; and
(D) We have disclosed in the Report any change in the internal control of financial reporting at the Bank that occurred during the fourth quarter, and that had a material effect, or could reasonably be expected to have a material effect, on the internal control of financial reporting at the Bank; and
5. I, and others at the Bank making this certification, have disclosed to the external auditor, to the Board of Directors, and to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the internal control of financial reporting:
(A) Any significant deficiencies and material weaknesses in the establishment or application of internal control of financial reporting that can reasonably be expected to impair the Bank’s ability to record, process, summarize, or report financial information; and
(B) Any fraud, whether material or immaterial, in which management was involved, or in which other employees were involved who have a significant role in the internal control of financial reporting at the Bank.
The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.
(1) As defined in the Public Reporting Directives concerning the "Board of Directors' Report".
Netta Avrahamov Bitan Chief Accountant, C.F.O. February 29, 2012
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Report of the Board of Directors and Management on the Internal Control over Financial Reporting
The board of directors and the management of Union Bank of Israel Ltd. (hereinafter: "the Bank") are
responsible for the establishment and maintenance of adequate internal control over financial reporting (as
defined in the Public Reporting Directives concerning "The Board of Directors' Report"). The internal
control system of the Bank was designed to provide a reasonable degree of confidence to the board of
directors and management of the Bank regarding the fair preparation and presentation of financial
statements, published in compliance with generally accepted accounting principles and with the directives
and guidelines of the Supervisor of Banks. Regardless of the quality of planning of such systems, all internal
control systems have inherent limitations. Therefore, even if we determine that these systems are effective,
they can provide only a reasonable degree of confidence with regard to the preparation and presentation of
the financial statements.
Management, under the supervision of the board of directors, maintains a comprehensive system of controls
aimed at ensuring that transactions are executed in accordance with management authorizations that assets
are protected, and that accounting records are reliable. In addition, management, under the supervision of the
board of directors, takes steps to ensure that information and communication channels are effective and
monitor performance, including the performance of internal control procedures.
The management of the Bank, under the supervision of the board of directors, has assessed the effectiveness
of the internal control over financial reporting at the Bank as of December 31, 2011, based on criteria
established in the internal control model of the COSO (Committee of Sponsoring Organizations of the
Treadway Commission). Based on this assessment, management believes that as of December 31, 2011, the
internal control over financial reporting at the Bank is effective.
The effectiveness of the Bank's internal control over financial reporting as of December 31, 2011 was
audited by the external auditors of the Bank, Somekh Chaikin, as noted in their report on page 258, which
includes an unqualified opinion regarding the effectiveness of the Bank's internal control over financial
reporting as of December 31, 2011.
Zeev Abeles Chairman of the Board
of Directors
Haim Freilichman President & C.E.O.
Netta Avrahamov BitanChief Accountant,
C.F.O. Date of Approval of the report for publication: February 29, 2012.
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Financial Statements as at December 31, 2011 Contents Page Auditors’ Reports to the Shareholders 260 Financial Statements Balance Sheets 264 Statements of Profit and Loss 266 Statements of Changes in Equity 267 Statements of Cash Flows 268 Notes to the Financial Statements 270
Somekh Chaikin Mail address Office address Telephone 972 3 684 8000 PO Box 609 KPMG Millennium Tower Fax 972 3 684 8444 Tel Aviv 61006 17 Ha'arba'a Street Israel Tel Aviv 64739
Israel
Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is a member of KPMG International, a Swiss cooperative.
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Auditors' Report to the Shareholders of Union Bank of Israel Limited according to Public Reporting Directives of the Supervisor of Banks regarding Internal Control over Financial Reporting We have audited the internal control over financial reporting of Union Bank of Israel Ltd. (hereinafter –the "Bank”) as at December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Bank’s Board of Directors and Management are responsible for maintaining effective internal control over financial reporting and for their assessment of the effectiveness of internal control over financial reporting, included in the accompanying Directors’ and Management’s reports on internal control over financial reporting. Our responsibility is to express an opinion on the Bank’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) in the United States in respect auditing of internal control over financial reporting, as adopted by the Institute of Certified Public Accountants in Israel. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material aspects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A bank’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in Israel (Israeli GAAP) and in accordance with directives and guidelines of the Supervisor of Banks. The internal control over financial reporting of a bank includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the bank (including their removal from its possession); (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statement in accordance with Israeli GAAP and directives and guidelines of the Supervisor of Banks, and that receipts and expenditures of the bank are being made only in accordance with authorizations of management and directors of the bank; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition (including removal from its possession) of the bank’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
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subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Bank maintained, in all material aspects, effective material control over financial reporting as at December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with accepted auditing standards, and certain auditing standards applied in the audit of banking corporations as determined by guidelines of the Supervisor of Banks, the accompanying financial statements of the Bank and consolidated as of December 31, 2011 and 2010 and for each of the years in the three-year period ended on December 31, 2011, and our report dated February 29, 2012, expressed an unqualified opinion on the said consolidated financial statements. We draw your attention to Note 18C.(17)e of the financial statements in respect of contingent liabilities. Somekh Chaikin Certified Public Accountants (ISR) February 29, 2012
Somekh Chaikin Mail address Office address Telephone 972 3 684 8000 PO Box 609 KPMG Millennium Tower Fax 972 3 684 8444 Tel Aviv 61006 17 Ha'arba'a Street Israel Tel Aviv 64739
Israel
Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is a member of KPMG International, a Swiss cooperative.
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Auditors’ Report to the Shareholders of Union Bank of Israel Limited – Annual Financial Statements We have audited the accompanying balance sheets of Union Bank of Israel Limited (hereinafter - the Bank) as at December 31, 2011 and 2010 and the consolidated balance sheets of the Bank and its subsidiaries as at such dates, and the related statements of profit and loss, changes in equity and cash flows – of the Bank and consolidated - for each of the years in the three-year period ended December 31, 2011. These financial statements are at the responsibility of the Bank’s Board of Directors and of its Management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of consolidated subsidiaries, whose assets constitute approximately 0.23% and 0.10%, respectively, of the total consolidated assets as at December 31, 2011 and 2010 respectively, and whose profits from financing activities before provision for credit losses and operating and other income constitutes approximately 1.13%, 1.21% and 0.96% of the consolidated profit from financing activities before provision for credit losses and operating and other income for the three years, which ended December 31, 2011, 2010 and 2009 respectively. The financial statements of those companies were audited by other auditors whose reports thereon were furnished to us. Our opinion, insofar as it relates to amounts emanating from the financial statements of such companies, is based on the said reports of the other auditors. We conducted our audit in accordance with Generally Accepted Auditing Standards in Israel, including standards prescribed by the Auditors Regulations (Manner of Auditors' Performance) - 1973 and auditing standards the application of which in the audit of a bank is prescribed by the directives of the Supervisor of Banks. Such standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and by Management of the Bank, as well as evaluating the overall financial statements presentation. We believe that our audit and the reports of the other auditors provide a reasonable basis for our opinion.
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In our opinion, based on our audit and on the reports of abovementioned other auditors, the financial statements referred to above present fairly, in all material aspects, the financial position of the Bank and the consolidated financial position of the Bank and its subsidiaries, as at December 31, 2011 and 2010 and the results of their operations, the changes in the shareholders’ equity and their cash flows - of the Bank and consolidated - for each of the three-year period ended December 31, 2011, in conformity with generally accepted accounting principles in Israel (Israeli GAAP). Furthermore, in our opinion, the statements have been prepared in accordance with directives and guidelines of the Supervisor of Banks. Without qualifying our said opinion, we draw your attention to Note 18C.(17)e to the financial statements in respect of contingent liabilities. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), as adopted by the Institute of Certified Public Accountants in Israel, the Bank’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report, dated February 29, 2012 expressed an unqualified opinion on the effectiveness of the Bank’s internal control over financial reporting. Somekh Chaikin Certified Public Accountants (Isr.) February 29, 2012
- 264 -
Balance Sheets as at December 31 Reported amounts Consolidated The Bank
2011 2010 2011 2010
Note NIS millions Assets Cash on hand and deposits with banks 2 6,961 7,132 6,961 7,131 Securities 3 6,785 4,553 6,651 4,399 Securities which were borrowed 5 415 5 415 Credit to the public (a), (b) 4 23,140 *22,749 23,082 *22,687 Allowance for credit losses (a), (b) (272) *(1,036) (269) *(1,030) Net credit to the public 22,868 21,713 22,813 21,657 Investment in equity-basis companies 5 1 1 519 513 Buildings and equipment 6 408 380 408 380 Assets in respect of Derivative instruments(b) 19 846 562 846 562 Other assets (b), (d) 7 1,041 556 1,034 558 Total assets 38,915 35,312 39,237 35,615
_____________________________________________ Z. Abeles, Chairman of the Board of Directors _____________________________________________ Y. Landau, Vice Chairman of the Board of Directors _____________________________________________ H. Freilichman, General Manager _____________________________________________ N. Avrahamov Bitan, Chief Financial Officer, Deputy General Manager Date of the approval of the financial statements: February 29, 2012 The accompanying notes are an integral part of the financial statements.
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Balance Sheets as at December 31 (cont'd) Consolidated The Bank
2011 2010 2011 2010
Note NIS millions
Liabilities and Equity Deposits from the public 8 31,158 **28,844 33,873 **31,080 Deposits from banks 9 392 **271 392 **271 Deposits from the government 1 2 1 2 Debentures and Subordinated notes 10 2,761 2,344 222 267 Liabilities in respect of Derivative instruments(b) 19 907 737 907 737 Other liabilities (a),(b),(c),(d) 11 1,710 *1,108 1,857 *1,253 Total liabilities 36,929 33,306 37,252 33,610 Equity attributed to the Shareholders of the Bank (b), (d) 12 1,985 2,005 1,985 2,005 Noncontrolling Interests (b) 1 1 - - Total equity 1,986 2,006 1,985 2,005 Total liabilities and equity 38,915 35,312 39,237 35,615
(a) On January 1, 2011, the Bank adopted the directive of the Supervisor of Banks, "Measurement and
Disclosure of Impaired Debts, Credit Risk, and Provision for Credit Losses", for the first time. Comparison figures for previous years were not restated; therefore, data as at December 31, 2011 are not comparable with data marked with an asterisk (*) in 2010. For further explanations on the main essence, and the effect of the initial adoption of the directive, see Note 1(E)(5), and Note 4.
(b) The comparative data were reclassified to match the item headings and presentation method in the current period (see Note 1(C)(5)).
(c) Of which: Allowance for credit losses in respect of off-balance-sheet credit instruments in the amount of NIS 44 million (December 31, 2010: NIS 4 million).
(d) The comparative data were restated following the retroactive implementation of the directive regarding employee benefits, see Note 1(E)(21).
** Reclassified, see Note 1(C)(5)(b).
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Statements of Profit and Loss for the Year Ended December 31 Reported amounts Consolidated The Bank 2011 2010 2009 2011 2010 2009 Note NIS millions
Profit from financing activities before provision for credit losses 22 689 716 620 657 687 591 Provision for credit losses 4 27 *87 *95 25 *84 *93 Profit from financing activities after provision for credit losses 662 629 525 632 603 498 Operating and other income Operating commissions 23 267 270 259 253 256 251 Profit (loss) from investments in shares, net 24 6 13 66 (1) 7 57 Other income 25 4 4 7 1 1 4 Total operating and other income 277 287 332 253 264 312 Operating and other expenses: Salaries and related expenses 26 459 **396 **362 451 **389 **356 Maintenance and depreciation of buildings and equipment 135 127 116 134 126 116 Other expenses 27 193 175 167 191 173 162 Total operating and other expenses 787 698 645 776 688 634 Operating profit before taxes 152 218 212 109 179 176 Provision for taxes on operating profit 28 20 **70 **101 8 **59 **91 Operating profit after taxes 132 148 111 101 120 85 The Bank's equity in net after-tax operating profits of equity-basis companies 5 ***- ***- ***- 31 29 26 Net operating profit: Before attribution to noncontrolling interests 132 148 111 132 149 111 Attributed to noncontrolling interests ***- - - - - - Attributed to shareholders of the Bank 132 148 111 132 149 111 Profit (loss) from extraordinary activity, after taxes, before attribution to non-controlling interests 29 ***- 1 )2( ***- ***- )2( Net profit: Before attribution to noncontrolling interests 132 149 109 132 149 109 Attributed to noncontrolling interests ***- ***- - ***- ***- - Attributed to shareholders of the Bank 132 149 109 132 149 109 Profit per share (NIS) 29A Basic and Diluted profit: Net operating profit attributed to shareholders of the Bank 1.79 **2.01 **1.68 1.79 **2.01 **1.68 Profit from extraordinary activity, after taxes, attributed to shareholders of the Bank - 0.01 (0.04) - - (0.04) Total 1.79 2.02 1.64 1.79 2.01 1.64
* On January 1, 2011, the Bank adopted the directive of the Supervisor of Banks, "Measurement and Disclosure of Impaired Debts, Credit Risk, and Provision for Credit Losses", for the first time. Comparison figures for previous years were not restated; therefore, data for 2011 cannot be compared with the corresponding data of the periods ended December 31, 2010 and 2009. ** Restated following the retroactive implementation of the directive regarding employee benefits, see Note 1(E)(21). *** Less than NIS 500 thousand. The accompanying notes are an integral part of the financial statements.
- 267 -
Statements of Changes in Equity For the year ended December 31, 2011 Reported amounts
Adjustments in respect of Benefits Share presentation of in respect of capital securities share-based and available for sale payment Noncontrolling premium at fair value (1) transactions Surplus (2) Total Interests Total equity
NIS millions NIS millions Balance as at January 1, 2009 803 (53) 26 793 1,569 - 1,569 Effect of initial implementation of the instructions regarding employee benefits - - - ***(46) (46) - (46) Balance as at January 1, 2009 after the retroactive implementation 803 )53( 26 747 1,523 - 1,523
Net profit for the year - - - ***109 109 - 109 Shares issuance 149 - - - 149 - 149 Benefit in respect of share - based payment transactions (3) - - * - - * - - *- Adjustments to fair value of available for sale securities statement - 266 - - 266 - 266 Adjustments in respect of presentation of securities available for sale which were reclassified for profit and loss statement - (90) - - (90) - )90( Related tax effect - (64) - - (64) - )64( Balance as at December 31, 2009 952 59 26 856 1,893 - 1,893
Shares issuance to noncontrolling interests - - - - - 1** 1 Net profit for the year - - - ***149 149 -* 149 Dividend paid - - - (60) (60) - )60( Adjustments to fair value of available for sale securities statement - 130 - - 130 - 130 Adjustments in respect of presentation of securities available for sale which were reclassified for profit and loss statement - (97) - - (97) - )97( Related tax effect - (10) - - (10) - )10( Balance as at December 31, 2010 952 82 26 945 2,005 1 2,006
Cumulative effect, net of tax, of the Initial Implementation on January 1, 2011 of the directive on the measurement of Impaired debts and provision for credit losses, and amendment regarding the treatment of problematic debts**** - - - )65( )65( - )65( Balance as at December 31, 2010 after the adjustments deriving from the Initial implementation of new directives 952 82 26 880 1,940 1 1,941 Net profit for the year - - - 132 132 - 132 Adjustments to fair value of available for sale securities statement - )105( - - )105( - )105( Adjustments in respect of presentation of securities available for sale which were reclassified for profit and loss statement - )27( - - )27( - )27( Related tax effect - 45 - - 45 - 45 Balance as at December 31, 2011 952 )5( 26 1,012 1,985 1 1,986
(1) See Note 1.(E).(4)(a)(3). (2) With respect to the restriction on a dividend distribution, see Note 12.B. (3) See Note 15.A. * Less than NIS 500 thousand. ** Reclassified to match the presentation method of the current period (see Note 1(C)(5)). *** Restated following the retroactive implementation of the directive regarding employee benefits, see Note 1(E)(21). **** See Note 1(E).(5). The accompanying notes are an integral part of the financial statements.
- 268 -
Statements of Cash Flows for the Year Ended December 31 Reported amounts
Consolidated The Bank 2011 2010 2009 2011 2010 2009
NIS millions NIS millions Cash flows generated by operating activities Net profit for the year 132 **149 **109 132 149** 109** Adjustments to reconcile net profit to net cash generated by operating activities: The Banks' share in the not distributed operating losses of equity-basis investees ****- ****- ****- )31( (29) (26) Decrease in value of buildings and equipment - - 4 - - 4 Depreciation of buildings and equipment 58 51 43 58 51 43 Provision for credit losses 27 87 95 25 84 93 Profit from sale of securities available for sale, net )22( (93) (86) )19( (94) (84) Realized and unrealized loss (profit) from adjustments to fair value of securities held for trading, net 12 (8) (18) 12 (8) (18) Profit from sale of buildings and equipment )1( - (2) )1( - (2) Deferred taxes, net )48( )16**( 10** )45( (16)** 5** Adjustment differences included in investment and financing activities 19 64 46 )25( 37 17 Retirement compensation - increase (decrease) in excess accrued reserve over prepaid assets 41 7** (6)** 41 7** (6)** Decrease (increase) in assets in respect of derivative instruments, net )284( )41*( 2,007* )284( )41*( 2,007* Decrease (increase) in other assets, net )332( )340*( 329* )326( )343*( 341* Increase (decrease) in liabilities in respect of derivative instruments, net 170 126* 2,066* 170 126* )2,066*( Increase in other liabilities, net 559 120* 352* 561 115* 354* Net cash inflow from operating activities 331 106 4,949 268 38 771 Cash flows generated by activities in assets
Acquisition of securities available for sale )5,916( (4,345) (3,720) )5,862( (4,299) (3,554) Securities which were borrowed, net 410 (141) (263) 410 (141) (263) Proceeds from sale of securities available for sale 3,639 4,734 3,633 3,593 4,705 3,505 Proceeds from redemption of securities available for sale 400 493 1,076 394 434 1,068 Deposits from banks, net 47 20 - 46 20 1 Securities for trading, net )293( 210 445 )293( 210 445 Credit to the public, net )1,469( (2,773) (394) )1,468( (2,780) (398) Credit to the government, net - 188 (188) - 188 (188) Proceeds from sale and redemption of investments in equity-basis investees - - 15 - - - Acquisition of buildings and equipment )85( (53) (63) )85( (53) (63) Proceeds from sale of buildings and equipment 2 ****- 3 2 -**** 3 Dividend received from subsidiary - - - 7 9 11 Net cash inflow (outflow) generated by activities (for activities) in assets )3,265( (1,667) 544 )3,256( (1,707) 567
- 269 -
Statements of Cash Flows for the Year Ended December 31 (cont’d) Reported amounts
Consolidated The Bank 2011 2010 2009 2011 2010 2009 NIS millions NIS millions
Cash flows generated by activities in liabilities and equities Deposits from the public, net 2,314 3,960*** )2,915***( 2,793 4,802*** )2,539***( Deposits from banks, net 121 )5***( 99*** 121 )5***( 99*** Deposits from the government, net )1( - 1 )1( - 1 Issuance of subordinated notes and deposit certificates 515 759 353 - 25 - Redemption of subordinated notes and deposit certificates )139( (129) (6) )49( (129) (6) Capital issue by rights - - 149 - - 149 Dividend paid to shareholders - (60) - - (60) -
Net cash inflow (outflow) generated by activities (for activities) in liabilities and equity 2,810 4,525 (2,319) 2,864 4,633 (2,296) Increase (decrease) in cash )124( 2,964 (958) )124( 2,964 (958) Balance of cash at the beginning of year 6,874 3,910 4,868 6,874 3,910 4,868 Balance of cash at end of year 6,750 6,874 3,910 6,750 6,874 3,910 Appendix A - Non-cash activities in assets and liabilities: Year 2011 A. Securities in the amount of NIS 162 million, net, were transferred from the credit to the public to the
available for sale portfolio due to the lending of securities - consolidated and Bank. B. Assets in the amount of NIS 22 million were purchased against commitment to suppliers.
Year 2010 A. Securities in the amount of NIS 25 million, net, were transferred from the credit to the public to the
available for sale portfolio due to the lending of securities - consolidated and Bank. B. Assets in the amount of NIS 19 million were purchased against commitment to suppliers. Year 2009 A. Securities in the amount of NIS 214 million, net, were transferred from the available for sale portfolio to
credit to the public due to the lending of securities - consolidated and Bank. B. Assets in the amount of NIS 5 million were purchased against commitment to suppliers.
* The comparison data were reclassified to match the item headings and presentation method of the current period (see Note 1(C)(5)). ** Restated following the retroactive implementation of the directive regarding employee benefits, see Note 1(E)(21). *** Reclassified. **** Less than NIS 500 thousands. The accompanying notes are an integral part of the financial statements.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
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Note 1 - Principal Accounting Policies A. General
(1) Union Bank Ltd. (hereinafter: the "Bank") is an Israeli corporation. The financial statements were
prepared in accordance with generally accepted accounting principles in Israel (Israeli GAAP)
and in accordance with the directives and guidelines of the Supervisor of Banks with regard to the
preparation of annual financial statements of banking corporations.
(2) In some of the financial statement categories, where there is no material difference between the
amounts for the Bank and those for the consolidated group, the relevant notes refer only to the
consolidated amounts.
(3) The publication of the financial statements approved by the Board of Directors of the Bank on
February 29, 2012. B. Definitions
In these financial statements:
(1) International Financial Reporting Standards (hereinafter: "IFRS") – Standards and interpretations
adopted by the International Accounting Standards Board (IASB), including IFRS and
International Accounting Standards (IAS), and interpretations of these standards by the
International Financial Reporting Interpretations Committee (IFRIC) or the Standing
Interpretations Committee (SIC), respectively.
(2) Generally accepted accounting principles (GAAP) for US banks – Accounting principles which
American banks traded in the United States are required to implement. These rules are established
by the bank supervision agencies in the United States, the Securities and Exchange Commission in
the United States, the Financial Accounting Standards Board in the United States, and other
entities in the United States, and implemented according to the hierarchy established in FAS 168
(ASC 105-10), The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, which has replaced FAS 162. In addition, as established by the
Supervisor of Banks, despite the hierarchy established in FAS 168, it has been clarified that any
position stated to the public by the bank supervision agencies in the United States or by the staff of
the bank supervision agencies in the United States with regard to the manner of implementation of
US GAAP constitutes GAAP for US banks.
(3) Subsidiary - a company whose financial statements are fully consolidated, directly or indirectly,
with the financial statements of the Bank.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 271 -
Note 1 - Principal Accounting Policies (cont'd) B. Definitions (cont'd)
(4) Affiliated company - a company, the investment in which is included in the Bank's financial
statements, directly or indirectly, on the equity basis.
(5) Investee company - a subsidiary or affiliated company.
(6) Related party - as defined in Opinion No. 29 of the Institute of Certified Public Accountants in Israel, excluding Interested Party.
(7) Interested party - as defined in paragraph (1) of the definition of an "Interested party" in
Section 1 of the Securities Law – 1968.
(8) CPI - The Consumer Price Index published by the Central Bureau of Statistics.
(9) Adjusted amount - the nominal historical amount adjusted to the CPI in respect of December
2003, according to the provisions of the Opinions no. 23 and 36 of the Institute of Certified
Public Accountants in Israel.
(10) Reported amount - the adjusted amount as at the transition date (December 31, 2003), with
the addition of amounts in nominal values that were added after the transition date and less
amounts eliminated after the transition date.
(11) Adjusted financial reporting - financial reporting in adjusted values, according to the changes
in the general purchasing power of Israeli currency, in accordance with the directives of the
Opinion statements of the Institute of Certified Public Accountants in Israel.
(12) Cost - Cost in the reported amount.
(13) Nominal financial report - financial report based on reported amounts.
C. Financial statements in reported amounts
(1) Reporting Principles
The financial statements of the Bank are prepared in accordance with the Public Reporting
Directives and Guidelines of the Supervisor of Banks. In preparing the financial statements,
the Bank implements, among other matters, certain IFRS and GAAP for US banks, in
following manner:
o On matters related to the core business of banking – Accounting treatment is in
accordance with the directives of the Supervisor of Banks, and accordance to
GAAP for US banks that have been adopted as part of the Public Reporting
Directives of the Supervisor of Banks.
o On matters not related to the core business of banking - Accounting treatment is
in accordance with Israeli GAAP, and in accordance with certain IFRS.
International standards are implemented accordance to the following principles:
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 272 -
Note 1 - Principal Accounting Policies (cont'd.)
C. Financial statements in reported amounts (cont'd)
(1) Reporting Principles (cont'd)
o In cases in which a material issue arises that is not resolved in the IFRS or in the
implementation instructions of the Supervisor, the Group treats the issue
according to GAAP for US banks specifically applicable to these matters;
o In case in which there is no specific reference to material matters in the
standards or interpretations, or there are several alternatives for the treatment of
a material matter, the Group acts according to specific implementation
guidelines established by the Supervisor.
o Where an IFRS that has been adopted contains a reference to another IFRS
adopted in the Public Reporting Directives, the Group acts in accordance with
the IFRS;
o Where an IFRS that has been adopted contains a reference to another IFRS that
has not been adopted in the Public Reporting Directives, the Group acts in
accordance with the Reporting Directives and with Israeli GAAP;
o Where an IFRS that has been adopted contains a reference to a definition of a
term defined in the Public Reporting Directives, a reference to the definition in
the directives shall replace the original reference.
(2) Functional Currency and Presentation Currency
The NIS is the currency representing the primary economic environment in the Bank operates.
The financial statements are presented in NIS and rounded to the nearest million, unless
otherwise noted.
(3) Measurement Base
The financial statements were prepared on the basis of historical cost, with the exception of the
assets and liabilities listed below:
o Derivative financial instruments and other financial instruments measured at fair
value through profit and loss (such as investment in securities held for trading);
o Financial instruments classified as available for sale;
o Deferred tax assets and liabilities;
o Provisions;
o Assets and liabilities in respect of employee benefits;
o Investments in equity-basis investees.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 273 -
Note 1 - Principal Accounting Policies (cont'd.)
C. Financial statements in reported amounts (cont'd)
(3) Measurement Base (cont'd)
The Value of non-monetary assets and items of capital measured on the basis of historical cost
was adjusted to changes in the CPI up to December 31, 2003, because the Israeli economy was
considered a hyper-inflationary economy until that date. As of January 1, 2004, the Bank has
prepared its financial statements in reported amounts.
(4) Use of estimates
The preparation of financial statements in conformity with generally accepted accounting
principles in Israel (Israeli GAAP) and the directives and guidelines of the Supervisor of Banks
requires the Bank's management to use estimates and evaluations that affect the policy
implementation and the amounts of assets and liabilities, income and expenses. It will be clarified
that actual results may differ from these estimates.
In formulating the accounting estimates used to prepare the financial statements of the Bank, the
management of the Bank is required to make assumptions with regard to circumstances and
events that involve significant uncertainty. In its judgment when establishing the estimates,
management relies on past experience, various facts, external factors, and reasonable
assumptions according to the circumstances appropriate to each estimate.
The estimates and the underlying assumptions are reviewed routinely. Changes in accounting
estimates are recognized in the period in which the estimates are amended and in every affected
future period.
(5) Change in Classification
A. Due to the first-time implementation of certain accounting standards and directives of the
Supervisor of Banks (see Sections D and E below), certain items in the financial statements and
certain comparative figures were reclassified, in order to match the item headings and reporting
requirements for the current period. Specifically, the following items were reclassified:
Assets in respect of derivative instruments in the amount of NIS 562 million, which
were included in the item "other assets" in the consolidated balance sheet and in the
balance sheet of the Bank as at December 31, 2010, were presented in the consolidated
balance sheet and in the balance sheet of the Bank as at December 31, 2011 in a
separate line.
Liabilities in respect of derivative instruments in the amount of NIS 737 million,
which were included in the item "other liabilities" in the consolidated balance sheet
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
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Note 1 - Principal Accounting Policies (cont'd.)
C. Financial statements in reported amounts (cont'd)
(5) Change in Classification (cont'd)
and in the balance sheet of the Bank as at December 31, 2010, were presented in the
consolidated balance sheet and in the balance sheet of the Bank as at December 31,
2011 in a separate line.
Data on net credit to the public as at December 31, 2010 were reclassified for
adjustment to presentation in gross amounts as of January 1, 2011.
Data on Noncontrolling interest in the amount of NIS 556 thousand, which were
included in the item "other liabilities" in the balance sheet as at December 31, 2010,
were presented in the balance sheet as at December 31, 2011 in the equity.
B. Other classification changes include the following, among other matters:
Data for the current period were presented against the appropriate pro-forma balances, as
published in the annual financial statements as at December 31, 2010, as they would have
been if the directive on the measurement and disclosure of impaired debts had been
implemented for the first time in that year. The note on credit to the public and provisions
for credit losses (Note 4) includes a reclassification of the pro-forma data as at December
31, 2010. The net cumulative effect of the initial implementation of the directive as at
January 1, 2011 allocated to equity and included in the annual financial statements as at
December 31, 2010 showed no change.
The results of the segments for comparison periods were reclassified. The database and
methodology used to prepare the note are in a continual process of optimization; results for
comparison periods are reclassified accordingly, to the extent possible.
An amount of NIS 196 million was reclassified from the item of deposits from the public to
the item of deposits from banks as at December 31, 2010.
D. Initial Implementation of Accounting Standards, Accounting Standards updates and
Directives of the Supervisor of Banks
In 2011 the Bank implemented the following accounting standards and directives:
1. Directive of supervisor of Banks concerning the measurement and disclosure of impaired debts,
credit risk, and provision for credit losses, and amendment to the directives concerning the
treatment of problematic debts.
2. Certain International Financial Reporting Standards (IFRS), which address matters, are not
related to the core business of banking:
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
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Note 1 - Principal Accounting Policies (cont'd.)
D. Initial Implementation of Accounting Standards, Accounting Standards updates and
Directives of the Supervisor of Banks (cont'd)
IFRS 2, Share-Based Payment;
IFRS 3, (2008), Business Combinations;
IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.
IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors;
IAS 10, Events after The balance Sheet Date.
IAS 16, Fixed Assets;
IAS 17, Leases;
IAS 20, Accounting for Government Grants and Disclosure of Government
Assistance.
IAS 21, The Effects of Changes in Foreign Exchange Rates;
IAS 27 (2008), Consolidated and Separate Financial Statements;
IAS 28, Investments in Associates;
IAS 29, Financial Reporting in Hyperinflationary Economies;
IAS 31, Interests in Joint Ventures.
IAS 33, Earnings Per Share;
IAS 34, Interim Financial Reporting;
IAS 36, Impairment of Assets;
IAS 38, Intangible Assets.
IAS 40, Investment Property.
3. FAS 157 (ASC 820-10) - Fair Value Measurements, FAS 159 (ASC 825 – 10) - The Fair Value
Option for Financial Assets and Financial Liabilities and an update of ASU 2010-06,
improvement of disclosure regarding the fair value measurement.
4. Instructions of the Supervisor of Banks regarding the reinforcement of internal control over
financial reporting in the area of employee benefits.
5. Update of ASU 2011-02 , A Creditor's Determination of whether a Restructuring Is a Troubled
Debt Restructuring.
The accounting policy of the Bank as detailed in section E below integrates the aforementioned new
accounting policies due to the implementation of accounting standards, updates of accounting
standards and directives of the Supervisor of Banks and presents the influences of it's first-time
implementation, if there were any.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
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Note 1 - Principal Accounting Policies (cont'd.)
E. Accounting Policies applied preparing financial statements
1. Consolidation Base
The Bank has implemented for a first time IFRS 3, (2008), Business Combination, IAS 27,
(2008) Consolidated and Separate Financial Statements, IAS 28, Investments in Associates and
IAS 31, Interests in Joint Ventures as of January 1, 2011.
There is no effect on Bank's results of activity.
(a) Subsidiaries:
Subsidiaries are entities controlled by the Bank. Control exists when the Bank has the ability
to determine the financial and operational policy of the entity in order to obtain benefits from
its resources and activities. Control exists when the Bank, directly or indirectly, holds shares
granting more than 50% of the voting rights in the subsidiary and the rights to appoint a
majority of the members of its board of directors, unless there are circumstances that expressly
prevent the Bank from exercising its control in practice.
The consolidated financial statements include the audited financial statements of the Bank and
of the entities under the Bank's control. Financial statements of subsidiaries are included in the
consolidated financial statements from the date on which the control is obtained to the date on
which control ceases. The accounting policies of the subsidiaries were changed, where
necessary, in order to adjust them to the accounting policies adopted by the Bank.
As aforesaid, the Bank Implemented for a first-time IAS 27, excluding the treatment of
investment in the investee companies in solo financial statements of the Bank. Therefore, in
the preparation of the solo financial statements, the Bank continues to treat the investee
companies by the equity method in accordance with the directives and instructions of the
Supervisor of Banks.
The solo financial statements of the Bank include by consolidation the financial statements of
assets and service companies that are wholly controlled by the Bank.
(b) Noncontrolling interest
Noncontrolling interests represent the share of the equity of a subsidiary that cannot be
directly or indirectly attributed to the parent company.
Noncontrolling interests that are instruments granting a current ownership interest, and that
grant the holder a share of the net assets in the event of liquidation are measured at the date of
the business combination at fair value.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 277 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
1. Consolidation Base (cont'd)
Profit or loss and any component of other comprehensive income are attributed to the owners of
the Bank and to noncontrolling interests (the attribution is performing even if the balance of
noncontrolling interests is negative).
(c) Affiliated companies
Equity-basis investees are entities in which the Bank has material influence over financial and
operational policy, but has not attained control. An assumption is in place according to which a
stake of 20% to 50% in an affiliate grants material influence. In examining the existence of
material influence, potential voting rights available for immediate realization or conversion into
shares of the affiliate are taken into consideration.
Investments in equity-basis investees are treated using the equity method, and are recognized
for the first time at cost. The cost of the investment includes transaction costs.
The consolidate financial statements include the Bank's share of income and expenses, profit or
loss, and other comprehensive income of affiliated entities accounted for using the equity
method, after the adjustments required in order to adjust the entity's accounting policy to the
policy of the Bank, from the date on which material influence is obtained until the date on
which material influence no longer exists.
When the banking corporation's share of losses exceeds the value of the Bank's interests in a
company accounted for using the equity method, the book value of such interests (including all
long-term investments) is written down to zero, and the Bank does not recognize additional
losses, unless the Bank has an obligation to support the investee company, or has paid sums on
its behalf.
The Bank's share in the financial results of these companies is stated after amortization of the
surplus cost created by their acquisition. Surplus cost attributed to assets and liabilities, is
amortized over the useful lifetime of the asset.
Regarding decline in value of investments in affiliates – see section 1.E.16 below, Impairment
of non-financial assets.
(d) Intercompany transactions
Mutual balances in the group and unrealized income and expenses arising from mutual
transactions were cancelled in the preparation of the consolidated financial statements.
Unrealized gains arising from transactions with affiliates were cancelled against the investment,
according to the rights of the group in these investments. Unrealized losses were cancelled in
the same manner as unrealized gains, provided that the loss did not reflect evidence of
impairment.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 278 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
2. Foreign currency and linkage
The Bank implemented for first time IAS 21, effects of changes in foreign exchanges rates as of
January 1, 2011.
The first time implementation has no effect on the Bank's activity results.
(a) Transactions in foreign currency are translated into the relevant operating currencies using the
exchange rates which are in effect at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currency at the reporting date are translated into the operating currency
using the exchange rate in effect at that date (Exchange rate is published by the Bank of Israel one
a day).
Exchange-rate differences in respect of monetary items are the differences between the
depreciated cost in operating currency for the beginning of the year, including adjustments to the
effective interest rate and payments during the year, to depreciated cost in foreign currency
translated using the exchange rate in effect at the end of the year.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair
value are translated into the operating currency using the exchange rate in effect at the date on
which the fair value is established.
Exchange-rate differences which occurred due to translation to operating currency are recognized
in profit and loss, excluding differences which occurred as a result of translation of non-monetary
capital financial instrument which classified into the available for sale portfolio and recognized in
other comprehensive profit.
Non monetary items denominated in foreign currency and measured by historical cost translated
using the exchange rates which are in effect on the dates of transactions.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 279 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
2. Foreign currency and linkage (cont'd)
(b) Details of the representative rates of exchange and the Consumer Price Index are as follows:
December 31, Rate of change during 2011 2010 2009 2011 2010 2009 NIS NIS NIS % % %
Rate of exchange of the:
U.S. dollar 3.821 3.549 3.775 7.7 (6.0) (0.7)
Euro 4.938 4.738 5.442 4.2 (12.9) 2.7
Points Points Points Consumer Price Index for the month of November (index "known”) 110.34 107.6 105.2 2.5 2.3 3.8
December (index "in respect of") 110.34 108.0 105.2 2.2 2.7 3.9
CPI-linked assets and liabilities were included according to the linkage terms established for
each balance.
3. Basis of recognition of income and expenses
(a) Income and expenses are included on an accrual basis, except:
Interest accrued on problematic debts classified as not accruing interest impaired debts is
recognized as income on a cash basis, when there is no doubt regarding the collection of
the remaining recorded balance of impaired debt. In such situations, the amount collected
at the expense of the interest to be recognized as interest income is limited to the amount
that would have accrued during the reporting period on the remaining recorded balance of
the debt, at the contractual interest rate. When the collection of the remaining recorded
balance is in doubt, all payments collected are used to reduce the principal of the loan. In
addition, interest on amounts in arrears in respect of housing loans is recognized in the
statement of profit and loss based on actual collection.
Income and expenses from trading securities and derivative instruments recorded
according to fair value changes.
Income from early-repayment fees on loans, after deduction of a proportional part relating
to the financial capital, are included in the statement of profit and loss at equal annual rates
over the remaining period for repayment of the credit or over three years from the date of
the early repayment, whichever is shorter.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 280 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
3. Basis of recognition of income and expenses (cont'd)
(b) Operational fees for services granting (such as: for securities and derivative instruments'
activity, credit cards, account management, credit treatment, exchange and foreign trade
differentials) are recognized in profit and loss, when the Bank's entitlement to receive them
emerges.
4. Securities
(a) In accordance with the directives of the Supervisor of Banks, the Bank’s securities are
classified into three portfolios as follows:
1. Held to Maturity Bonds -
Bonds which the Bank intends and has the means to hold until maturity, with the
exception of bonds where early repayment or other settlement is possible, such that the
Bank will not cover, materially, its entire registered investment.
Held to Maturity Bonds are stated in the balance sheet at their adjusted value at the
reporting date, consisting of their par value together with interest, exchange or linkage
increments and interest accrued, as well as the unamortized amount of premium or
discount, which arose upon acquisition and net of decline in value losses of an other than
temporary nature. Income from held to maturity bonds is reflected on the statement of
profit and loss on the accrual basis.
2. Trading Securities -
Securities acquired and held with the intention of selling them in the short term, excluding
shares for which no fair value is available. Such securities are stated at their fair value at
the reporting date. Unrealized gains or losses from adjustment to market value are
reflected in the statement of profit and loss.
3. Available for Sale Securities -
Securities which are not included in the two classifications above. Shares for which a fair
value is available and bonds are included in the balance sheet at fair value on the
reporting date. Shares for which a fair value is not available are measured in the balance
sheet at cost. Unrealized gains or losses from adjustments to fair value are not included
in the statement of profit and loss, and are reported net, excluding an appropriate
provision for taxes, in a separate item under equity, within cumulative other
comprehensive profit.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 281 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
4. Securities (cont'd)
(b) Income from dividend, accrued interest, linkage and exchange rate differences, premium or
discount amortization (according to the effective interest rate method), as well as decrease in
value losses of another-than-temporary nature are recorded on the statement of profit and loss.
(c) Each reporting period, the Bank examines whether decline in the fair value of securities
classified into the available for sale portfolio and the held to maturity portfolio is of another-
than-temporary nature.
The Bank recognizes other-than-temporary impairment in the reporting period, at least in
respect of impairments of all securities meeting one or more of the following conditions:
A security sold up to the date of publication of the report to the public for the period;
A security which, near the date of publication of the report to the public for the period,
the Bank intends to sell within a short period of time;
A bond with a significant downgrade from the rating at the time of its purchase by the
Bank to the rating at the date of publication of the report for the period;
A bond which after its purchase was classified by the Bank as problematic;
A bond in which a default has occurred following its purchase;
A security whose fair value as of the end of the reporting period and near the date of
publication of the financial statements is significantly lower than its cost (with regard to
bonds – its depreciated cost), unless the Bank has objective, solid evidence and a
cautious analysis of all relevant factors proving with a high degree of confidence that the
impairment is temporary.
In addition, the examination of other-than-temporary impairment is based on the following
considerations:
The rate of loss compare to the cost of the security (In respect of bonds - depreciated
cost).
The length of the period for which the fair value of the security is lower than its cost;
Changes for the worse in the condition of the issuer or of the market in general;
The intention and ability of the Bank to hold the security for a sufficient period in order
to allow an increase in its fair value, or to maturity;
In the case of bonds – the rate of the yield to maturity;
In the case of shares – reduction or cancellation of dividend distribution.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 282 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
4. Securities (cont'd)
When other-than-temporary impairment has occurred, the cost of the security is written down
to its fair value and used as the new cost base. The cumulative loss referring to a security
classified as available for sale, which was previously allocated to a separate item under equity,
within other comprehensive profit, is transferred to profit and loss when a temporary
impairment has occurred. Appreciation during subsequent reporting periods is recognized in a
separate item under equity, within cumulative other comprehensive profit, and is not allocated
to profit and loss (the new cost base).
(d) Regarding fair value calculation – see Note 1.E.6 below.
(e) Collateral deposited with clearing houses in respect of customers’ activity –
Securities held by the Bank that have been deposited as collateral with the Maof Clearing
House and the TASE Clearing House are stated in the item “securities”.
(f) In the calculation of profit from the realization of securities, the cost is calculated according
to Moving weighted average base.
(g) The investments of the Bank in venture capital funds are accounted for at cost, net of losses
from other-than-temporary impairment. Profit from venture-capital investments is allocated
to the statement of profit and loss at the realization of the investment.
5. Impaired debts, credit risk and provision for credit losses
Pursuant to the new directive of the Supervisor of Banks regarding the measurement and
disclosure of impaired debts, credit risk, and provision for credit losses, as of January 1, 2011, the
Bank has implemented the American accounting standards in this area (ASC 310) and the
regulatory directives of the bank supervision agencies in the United States and the Securities and
exchange Commission in the United States, as adopted in the Public Reporting Directives. In
addition, as of that date, the Bank has implemented the directives of the Supervisor of Banks
regarding the treatment of problematic debts. The guiding principle of the circular represent a
substantial change relative to the previous directive regarding the classification of problematic
debts and measurement of provision for credit losses is respect of those debts.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 283 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risks and provision for credit losses (cont'd)
The directive is applied to all debt balances, such as credit to the public, deposits with banks,
securities borrowed or purchased in resale agreements, credit to the government, etc. The recorded
debt balance in the balance sheet is defined as the debt balance, after the deduction of
accounting write-offs, but before the deduction of the allowance for credit losses in respect of
that debt. The recorded debt balance does not include unrecognized accrued interest, or accrued
interest recognized in the past and later cancelled. It is hereby clarified that before January 1,
2011, the Bank implemented different rules, pursuant to which the debt balance in the Bank's
books included the component of interest accrued before the debt was classified as non-income-
bearing problematic debt. Therefore, credit balances presented in periods prior to the period of
the initial implementation of the directive are not comparable with the credit balances reported
after implementation. With regard to other debt balances for which specific rules exist on the
measurement and recognition of the provision for impairment (e.g. bonds), there is no change in
the rules.
The Bank has established procedures for the classification of credit and the measurement of the
allowance for credit losses, in order to maintain an allowance at an appropriate level to cover
estimated credit losses in respect of its credit portfolio. In addition, the Bank has established the
necessary procedures in order to maintain an allowance (in a separate liability account) at an
appropriate level to cover estimated credit losses in connection with off-balance-sheet credit
instruments (such as contractual engagements to grant credit, unutilized credit facilities, and
guarantees).
The Bank classifies all of its problematic debts and problematic items of off-balance-sheet
credit into the categories: under special supervision, substandard, or impaired.
The allowance to cover estimated credit losses with respect to the credit portfolio is assessed by
one of two methods: allowance for credit losses estimated on an individual basis and allowance
for credit losses estimated on a group basis. The Bank also examines the overall fairness of the
allowance for credit losses. In those cases, an amount collected in respect of interest that will be
recognize as an interest income, is limited to the amount that was accrued during the reporting
period, on the remain recorded balance of the debt, according to the contractual interest rate.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 284 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risks and provision for credit losses (cont'd)
Individual evaluation for credit losses - The Bank examine on an individual basis any debt that
its contractual balance is mainly greater than NIS 500 thousand (without deducting accounting
write-offs, unrecognized interest, allowance for credit losses and collateral). Individual
allowance for credit losses is performed for all debt that was individual examined and classified
as impaired. Debt is classified as impaired when, based on current information and events, the
Bank expects to be unable to collect the full amount owed to it according to the contractual
terms of the debt agreement. In any case, debt is classified as impaired debt when the principal
or interest in respect of the debt is in arrears of 90 days or more, excluding if the debt is
guaranteed and it is in collection process.
In addition, any debt the terms of which have been changed in the course of the restructuring of
problematic debt is classified as impaired debt, unless a minimum allowance for credit losses
was recorded before and after the restructuring according to the method of the extent of arrears,
pursuant to the appendix to Proper Conduct of Banking Business No. 314 concerning
"problematic debts in housing loans at mortgage banks".
When a debt examined individually is classified as impaired, as noted above, the individual
allowance for credit losses in respect of the debt is assessed based on the expected future cash
flows, capitalized by the original effective interest rate of the debt.
When the collection of the debt is contingent upon collateral, the individual allowance is
assessed based on the fair value of the collateral pledged to secure the debt. If the present value
of future cash flows or the fair value of the pledged asset is lower than the recorded balance of
the debt, the Bank records the difference as an individual allowance for credit losses, against a
corresponding charge in the item of provision for credit losses. With respect to debts examined
individually and found to be unimpaired (with the exception of housing loans, for which a
minimum allowance was calculated according to the method of the extent of arrears), a group
allowance for credit losses shall be calculated, as described below.
Group evaluation for credit losses - calculated in order to reflect allowances for impairment in
respect of credit losses not individually identified inherent in large groups of small debts with
similar risk attributes, and in respect of debts identified for individual examination and found to
be unimpaired. The allowance for credit losses in respect of debts assessed on a group basis
(with the exception of housing loans, for which a minimum allowance was calculated according
to the method of the extent of arrears) is calculated according to the rules set forth in FAS 5
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 285 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risks and provision for credit losses (cont'd)
(ASC 450), Accounting Treatment of Contingencies, based on a formula presented in the
temporary order issued by the Supervisor of Banks, which is in effect up to and including
December 31, 2012. The group allowance is calculated based on the historical average rate of
credit losses in 2008-2010 in the economic sector to which the allowance refers, with a
distinction between problematic credit and non-problematic credit. Starting in 2011, the average
rate of net accounting write-offs actually recorded since the initial implementation date of the
directive shall be added to the group allowance formula (the averages are updated each quarter).
The use of net accounting write-off rates for 2011 would have reduced the rates of the
coefficients of the group allowance; the Bank therefore decided, at this stage, to continue to use
the allowance coefficients of 2008-2010. In addition, in cases in which the condition of a sector
and/or the condition of the economy deteriorates, the need to use a higher coefficient is
examined. The coefficient for the calculation of the group allowance faithfully represents, in the
opinion of the Bank, the potential for risk in the sector during the examined period.
The allowance assessed on a group basis for off-balance-sheet credit instruments is based on the
rates of allowances established for balance-sheet credit (as detailed above), taking into
consideration the expected rate of realization of off-balance-sheet credit risk. The expected
realization rate of credit is calculated by the Bank based on credit conversion coefficients as
specified in Proper Conduct of Banking Business Directive 203, Capital Measurement and
Adequacy – Credit Risk – The Standard Approach.
In view of the rapid growth of housing credit in recent years, as part of the examination of the
overall adequacy of the allowance for credit losses, the Bank recorded a group allowance for
credit losses in respect of housing loans, in order to take into consideration the potential
allowance in respect of new loans that has not yet been expressed in allowances based on the
extent of arrears. The method used to calculate this group allowance takes into consideration,
among other factors, the historical rates of allowances according to the extent of arrears.
In addition, in the calculation of the group allowance in respect of credit to the public, the Bank
took into consideration, among other factors, uncertainties deriving from flaws in processes
arising from the initial implementation of the directives of the Supervisor regarding the
measurement and disclosure of impaired debts, until such flaws can be remedied.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 286 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risks and provision for credit losses (cont'd)
Pursuant to the directives of the temporary order, as of January 1, 2011, the Bank does not
maintain a general and supplementary provision (as defined in the previous directives of Proper
Conduct of Banking Business Directive 315), but continues to calculate the supplementary
provision (including according to the conversion coefficients established between problematic
debts in the new directive and problematic debts in the old directive), and ascertains that in any
event, the amount of the group allowance at the end of each reporting period shall not be less
than the amount of the general and supplementary provision that would have been calculated at
that date, before tax.
A minimum allowance in respect of housing loans - calculated according to a formula
established by the Supervisor of Banks, taking the extent of arrears into consideration, such that
the rate of the allowance increases with greater arrears. At the inception date of the new
directive, an amendment of the appendix to Proper Conduct of Banking Business Directive No.
314 on problematic debts in housing loans at mortgage banks took effect. The amendment
expands the application of the calculation of the allowance according to the formula based on
the extent of arrears, to all housing loans, except loans not repaid in periodic installments and
loans used to finance activities of a business nature.
Revenue recognition – Upon classification of a debt as impaired, the Bank defines the debt as a
debt not accruing interest income, and stops accruing interest income in respect of the debt, with
the exception noted below with regard to certain restructured debts. In addition, upon
classification of the debt as impaired, the Bank cancels all uncollected accrued interest income
recognized as income in the past in the statement of profit and loss. The debt continues to be
classified as debt that does not accrue interest income, as long as its classification as an
impaired debt is not cancelled.
When a debt has undergone formal restructuring of problematic debt, and following the
restructuring there is a reasonable degree of confidence that the debt will be repaid and will
perform in accordance with its new terms, the debt is treated as an impaired debt accruing
interest income (after repayment of at least 6 consecutive payments and/or a material part of the
debt).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 287 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risks and provision for credit losses (cont'd)
As long as there is doubt regarding the collection of the remaining recorded balance of an
impaired debt, all payments received shall be used to reduce the principal, and subsequently
recognized as interest income, to be recorded as profit from financing activity before provisions
for credit losses. As long as the remaining recorded balance of a debt is considered to be
collectible in full, all or part of the interest payments received can be recognized on a cash basis.
The Bank's determination of the ability to collect the entire remaining recorded balance of the
debt is supported by an up-to-date, well-documented credit evaluation regarding the financial
condition of the debtor and the forecast for repayment, including reference to the repayment
history of the debtor and other relevant factors.
With regard to debts that have been examined and for which allowances have been made on a
group basis, in arrears of 90 days or more, the Bank does not stop accruing interest income.
Such debts are subject to methods of evaluation of the allowance for credit losses which ensure
that the Bank's profit is not biased upward. Fees in respect of late repayment of such debts are
included as income on the date when the Bank gains the right to receive the fees from the client,
provided that collection is reasonably assured.
Restructuring of problematic debt – Pursuant to American standards in this area (ASC 310), a
debt restructured as problematic debt is a debt that has undergone formal restructuring in which,
for economic or legal reasons related to financial difficulties of the borrower, the Bank has
granted a concession to the borrower, in the form of a change in the terms of the debt, in order
to facilitate the burden of cash payments for the borrower in the near term (reduction or
postponement of cash payments required of the borrower), or in the form of the receipt of other
assets as partial or full settlement of the debt.
In order to determine whether a debt arrangement executed by the Bank constitutes restructuring
of problematic debt, the Bank performs a qualitative examination of the terms and
circumstances of the arrangement in aggregate, to establish whether: (1) the borrower is in
financial difficulties; and (2) the Bank granted a concession to the borrower as part of the
arrangement.
In order to determine whether the borrower is in financial difficulties, the Bank examines
whether there are signs indicating that the borrower was in difficulties at the time of the
arrangement, or whether there is a reasonable probability that the borrower will fall into
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 288 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risks and provision for credit losses (cont'd)
financial difficulties without the arrangement. Among other factors, the Bank examines the
existence of one or more of the following circumstances: at the date of the debt arrangement, the
borrower is in default, including when any other debt of the borrower is in default; with regard
to debts that at the date of the arrangement are not in arrears, the Bank estimates whether, based
on the borrower's current repayment capability, it is likely that the borrower will default in the
foreseeable future and will fail to comply with the original contractual terms of the debt; the
debtor has been declared bankrupt, is in a receivership proceeding, or there are significant
doubts regarding the continued survival of the borrower as a going concern; and, if there is no
change in the terms of the debt, the borrower will be unable to raise funds from other resources
at the prevalent interest rate in the market for borrowers who are not in default.
The Bank concludes that a concession was granted to the borrower in the arrangement, even if
the contractual interest rate was raised as part of the arrangement, if one or more of the
following occurs: As a result of the restructuring, the Bank is not expected to collect the full
amount of the debt (including interest accrued according to the contractual terms); the current
fair value of the collateral, for debts contingent upon collateral, does not cover the contractual
debt balance, and indicates an inability to collect the full amount of the debt; the borrower does
not have the ability to raise resources at the rates prevalent in the market for a debt with terms
and characteristics corresponding to those of the debt created in the arrangement.
In addition, the Bank does not classify a debt as restructured problematic debt if, in the
arrangement, the borrower was granted a postponement of payments that is immaterial in view
of the frequency of payments, the contractual term to maturity, and the expected average
duration of the original debt.
Restructured debts, including those examined on a group basis prior to restructuring, shall be
classified as impaired debt and shall be assessed on an individual basis for the purpose of the
allowance for credit losses or accounting write-offs. In light of the fact that a debt that has
undergone problematic debt restructuring will not be repaid according to its original contractual
terms, the debt continues to be classified as impaired, even after the borrower resumes
repayment according to the new terms.
Accounting Write-off - The Bank performs accounting write-offs for any debt or part of a debt
evaluated on an individual basis which is thought to be uncollectible and is of such low value
that its retention as an asset is unjustified, or debt in respect of which the Bank has carried out
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 289 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risks and provision for credit losses (cont'd)
prolonged collection efforts (defined in most cases as a period exceeding two years). With
regard to debts evaluated on a group basis, write-off rules were established based on the period
of arrears (in most cases more than 150 consecutive days) and other problematic parameters. It
is hereby clarified that accounting write-offs do not entail a legal waiver, and serve to reduce the
reported balance of the debt for accounting purposes only, while creating a new cost base for the
debt in the Bank's books.
Policy of provision for doubtful debts before the implementation of the directives on impaired
debts - The provision for doubtful debts was determined on a specific basis, in addition, a
general provision and a supplementary provision were included, in accordance with the
directives of the Supervisor of Banks.
The specific provision for doubtful debts was made on the basis of a cautious estimate by the
Management in respect of the losses inherent in the credit portfolio, including debts in off-
balance-sheet items. In the aforesaid estimate, the Management took into account, among other
considerations, the extent of the risks related to the financial stability of borrowers, based on its
information regarding their financial condition, their business operations, their compliance with
their obligations and an evaluation of collateral received from them. Interest income in respect
of a debt declared as doubtful was not recorded as of the beginning of the quarter in which the
debt was declared doubtful. Upon collection of the interest, the interest income was recorded in
the item "other financing income".
Write-offs of bad debts are carried out when the Bank determines that the debt is uncollectible,
following legal proceedings undertaken or as a result of agreements or arrangements executed,
usually in cases in which no legal proceedings were undertaken, and the debts are not
collectible, or due to other reasons for which the debts are uncollectible.
The supplementary provision for doubtful debts was based on the quality of the customer debt
portfolio; in accordance with risk attributes defined in the directives of the Supervisor of Banks.
Different provision rates were determined for each such risk attribute. The supplementary
provision for doubtful debts was calculated according to the rates determined for the different
attributes. The general provision was in values adjusted for the end of 2004, in an amount
constituting 1% of the total indebtedness under the responsibility of the Bank and its banking
investee companies as at December 31, 1991.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 290 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risks and provision for credit losses (cont'd)
Initial implementation of the directives – As noted above, the Bank began implementation of the
directive on the measurement and disclosure of impaired debts, credit risk, and provisions for
credit losses on January 1, 2011. The directive was not implemented retroactively in the
financial statements for earlier periods; instead, the initial effect was allocated as a reduction of
the balance of retained earnings as at January 1, 2011, in the amount of NIS 61 million (net of
tax). This effect includes, among other factors:
o Accounting write-offs of all debts meeting the conditions for accounting write-offs on
that date;
o Classification of all debts meeting the conditions for such classification as under special
supervision, substandard, or impaired. In this context, it is clarified that despite the
definition according to which restructured problematic debt is impaired debt, the Bank
did not classify debts restructured before January 1, 2007 as impaired debts, provided
that the debt is not impaired based on the terms established in the restructuring
agreement;
o Cancellation of all accrued unpaid interest income in respect of all debts meeting the
relevant conditions on that date;
o Adjustment of the balance of the allowance for credit losses in respect of credit to the
public and in respect of off-balance-sheet credit instruments as at January 1, 2011, to
the requirements of the directive; and
o Adjustment of the balance of current and deferred taxes as at January 1, 2011.
In addition, the effect of the initial implementation of the directive on the treatment of
problematic debts, which expands the population in respect of which the Bank is required to
assess an allowance according to the method of the extent of arrears, is also allocated as a
reduction of the balance of retained earnings as at January 1, 2011, and amounted to
approximately NIS 4 million (net of tax).
For further details, see Note 4 to the Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 291 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
6. Establishing the Fair Value of Financial Instruments
The Bank adopted FAS 157 (ASC 820-10) for the first time on January 1, 2011, in a limited
format of retroactive implementation. At the initial implementation date, the effect of the
retroactive implementation on the balance of retained earnings is immaterial. The standard was
therefore implemented prospectively at the Bank. The new disclosure requirements, including
the disclosure required in annual financial statements only, were implemented in the first quarter
of 2011, with no obligation to apply these disclosure requirements to financial statements for
periods presented prior to the initial implementation of the standard. For further details, see
Note 20 A-C to the Financial Statements.
FAS 157 (ASC 820-10) defines fair value and establishes a consistent working framework for
the measurement of fair value by defining techniques for the assessment of fair value for assets
and liabilities and establishing a fair-value hierarchy and detailed implementation instructions.
Fair value is defined as the amount or price that would be obtained from the sale of an asset, or
that would be paid to extinguish a liability, in a transaction between a willing seller and a
willing buyer, at the date of measurement. Among other matters, in order to assess fair value,
the standard requires the maximum possible use of observable inputs, and minimum use of
unobservable inputs. Observable inputs represent information available in the market and
received from independent sources, whereas unobservable inputs reflect the assumptions of the
Bank. FAS 157 specifies a hierarchy of measurement techniques, based on the question whether
the inputs used to establish fair value are observable or unobservable. These types of inputs
form the following fair-value hierarchy:
Level 1 data: Prices quoted (unadjusted) in active markets for identical assets or
liabilities.
Level 2 data: Prices quoted in active markets for similar assets or liabilities; prices
quoted in inactive markets for identical assets or liabilities; prices quoted in inactive
markets for identical assets or liabilities; prices derived from evaluation models in
which all significant inputs are observed in the market or supported by observed market
data.
Level 3 data: Unobservable inputs regarding the asset or liability, arising from
evaluation models in which one or more of the significant inputs is unobservable.
The hierarchy requires the use of observable market inputs, when such information is available.
When possible, the Bank considers relevant observable market information in its evaluation.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 292 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
6. Establishing the Fair Value of Financial Instruments (cont'd)
The volume and frequency of transactions, ask-bid spread, and size of the adjustment necessary
in comparing similar transactions are all factors taken into consideration when determining the
liquidity of markets and the relevance of prices observed in such markets.
The implementation of the rules set forth in FAS 157 requires the cessation of use of the
blockage factor in calculating fair value, and replaces the instructions of EITF 02-3 (ASC 815-
10). Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and risk Management Activities, which prohibit the
recognition of day one profits and require that the fair value of derivative instruments not traded
on an active market be determined according to the transaction price.
Securities
The fair value of securities held for trading and of securities available for sale is determined
based on market prices quoted in the primary market. When the security is traded in several
markets, the evaluation is performed according to the market price quoted in the most beneficial
market. In such cases, the fair value of the Bank's investment in the securities is the number of
units multiplied by the quoted market price. The quoted price used to determine fair value is not
adjusted for the size of the Bank's holding or for the size of the position relative to the trading
volume (the holding size factor). If no quoted market price is available, the fair-value estimate is
based on the best available information, with maximum use of observable inputs, taking into
consideration the risks inherent in the financial instrument (market risk, credit risk, non-
tradability, etc).
Derivative Financial Instruments
Derivative financial instruments with an active market were evaluated according to the market
value established in the primary market, or in the absence of a primary market, according to the
market price quoted on the most beneficial market (the market in which the price for
transferring an asset is the maximal price or the price for transferring a liability is the minimal
price, net of transaction cost). Derivative financial instruments that are not traded were
evaluated using models that take the risks inherent in the derivative instrument into
consideration (market risk, credit, risk, etc.). For further details, see the methodology for
assessment of credit risk and nonperformance risk, below.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 293 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
6. Establishing the Fair Value of Financial Instruments (cont'd)
Additional non-derivative financial instruments
A "market price" cannot be quoted for most of the financial instruments in this category (such as
credit to the public and credit to the government, deposits from the public and deposits with
banks, subordinated notes, and nontradable loans), because there is no active market in which
they are traded. Fair value is therefore estimated using prevalent pricing models, such as the
present value of future cash flows capitalized by a discounting interest rate reflecting the risk
level inherent in the financial instrument. For this purpose, future cash flows of impaired debts
and other debts were calculated after deducting the effects of accounting write-offs and of
allowances for credit losses in respect of the debts. In addition, in certain cases, in order to
measure the fair value of nontradable financial liabilities, the Bank applies the instructions set
forth in ASU 2009-05, Measuring Liabilities at Fair Value. Specifically, the Bank assesses the
fair value using quoted prices of liabilities (or similar liabilities) traded as assets. These
instruments are presented at fair value under the note on balances and fair value estimations of
financial instruments only, and their effect does not apply to balance-sheet balances and/or to
profit and loss. For further details with regard to the main methods and assumptions used to
estimate the fair value of financial instruments, see Note 20 on balances and fair value
estimations of financial instruments.
Assessment of credit risk and nonperformance risk (credit valuation adjustment – CVA)
The standard requires the banking corporation to reflect credit risk and nonperformance risk in
measuring the fair value of derivative instruments. The Bank assesses fair value based on
indications from transactions in an active market of the credit quality of the counterparty, to the
extent that such indications are available with reasonable effort. The Bank derives these
indications, among other sources, from prices of debt instruments of the counterparty traded in
an active market, and from prices of credit derivatives based on the credit quality of the
counterparty. If no such indications are present, the Bank calculates the adjustments based on
internal ratings (such as estimated default rates and rates of credit losses in the event of default).
For counterparties who have signed netting agreements, credit risk is calculated based on the
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 294 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
6. Establishing the Fair Value of Financial Instruments (cont'd)
total portfolio of derivative instruments of the counterparty, at the level of net exposure. For
counterparties who have not signed such agreements, the calculation is performed separately on
the asset side and on the liability side, without offsetting. When the exposure is the Bank's
liability to a counterparty, the Bank reflects the probability of default by the Bank in the fair
value (the risk of the Bank is derived from the Bank's rating). The transitional directives of the
Supervisor of Banks for 2011 state that in quarterly and annual financial statements for 2011,
banking corporations are not required to use complex models including various scenarios of
potential exposure in order to measure the credit-risk component included in the fair value of
derivative instruments. The Bank adopted the aforesaid transitional directives, which eased
requirements regarding the method of calculation of the credit-risk component of fair value of
derivative financial instruments for 2011 only, and used an internal methodology based on
internal ratings, if no indication of the credit quality of the counterparty could be found in the
market. Note that at the end of 2011, the Supervisor of Banks extended these eased
requirements to 2012 as well.
Disclosure Requirements
FAS 157 expands the disclosure requirements for measurements of fair value. In addition, ASU
2010-06 - Improving Disclosures about Fair Value Measurements, requires the inclusion of
additional disclosures, such as disclosure of amounts of significant transitions from Level 2 fair-
value measurements to Level 1 measurements and vice versa, and the inclusion of explanations
for such transitions. Disclosure is also required for gross amounts of changes in Level 3 fair-
value measurements resulting from transactions of acquisition, sale, issuance, and maturation.
The new disclosures are required on a quarterly basis. The aforesaid required disclosures are
included in these financial statements. However, there is no requirement to apply the aforesaid
disclosure requirements to financial statements for periods presented before the initial
implementation of the standard. Accordingly, these financial statements do not include
comparative figures for the new disclosures. See Notes 20.a-c in the financial statements.
7. The Fair Value Option for Financial Assets and financial Liabilities FAS 159 (ASC 825-10)
FAS 159 (ASC 825-10) allows banking corporations to choose, at defined dates, to measure
financial instruments and certain other items (the eligible items) at fair value, which under
Public Reporting Directives are not required to be measured at fair value.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 295 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
7. The Fair Value Option for Financial Assets and financial Liabilities FAS 159 (ASC 825-
10) (cont'd)
Unrealized profits and losses in respect of changes in the fair value of the items for which the
fair value option is selected are reported in the statement of profit and loss for each subsequent
reporting period. In addition, prepaid costs and fees relate to the items for which the fair value
option is selected are recognized in profit and loss upon formation.
The choice to apply the fair value option, as noted above, is made instrument by instrument, and
cannot be cancelled.
In addition, the FAS 159 (ASC 825-10) establishes presentation and disclosure requirements
aimed at facilitating comparisons between banking corporations that choose different
measurement bases for similar types of assets and liabilities.
Despite the aforesaid, the directives of the Supervisor of Banks on the implementation of this
standard clarify that a banking corporation shall not choose the fair value option unless the
banking corporation has developed knowledge, systems, procedures, and controls at a high
level, in advance that enable it to measure the item at a high degree of reliability. Thus, the
Bank is not permitted to choose the fair value option with regard to any asset appropriate to be
classified in Level 2 or Level 3 of the fair-value hierarchy, or with regard to any liability, unless
it receives advance approval to do so form the Supervisor of Banks. FAS 159 applies as of
January 1, 2011. At that point, the Bank decided not to chose the fair value option, so the first
time implementation as no effect on the Bank.
8. Offsetting Financial Instruments
(a) The Bank offsets assets and liabilities arising from the same counterparty and states the net
balance thereof in the balance sheet, when the following cumulative conditions are fulfilled:
An enforceable legal right to offset liabilities from assets exists in respect of the liabilities;
There is intention to settle the liabilities and realize the assets on a net basis or
simultaneously.
(b) The Bank offsets deposits whose repayment to the depositor is conditional upon the extent of
collection of the credit, and the credit granted out of these deposits, when there is no risk to the
Bank of a loss from the credit.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 296 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
9. Derivates financial instruments
(a) The Bank enters into transactions in derivative financial instruments. Such financial instruments
include forward contracts, financial swaps, options etc.
(b) Pursuant to the directives of the Supervisor of Banks regarding "Accounting for derivative
instruments and hedging activities," all derivatives are presented as assets or liabilities in the
balance sheet at fair value. Changes in fair value of derivative instruments not used for accounting
hedges are allocated immediately to the statement of profit and loss. The Bank does not apply
hedge accounting at all (either fair value or cash flows).
(c) Embedded derivatives – Embedded derivatives which have been separated are presented in the
balance sheet together with the host contract; changes in the fair value of embedded derivatives
which have been separated are allocated immediately to profit and loss.
10. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
The Bank implements the measurement and disclosure rules set forth in the American accounting
standard FAS 140 (ASC 860-10), transfer and Servicing of Financial Assets and Extinguishment
of Liabilities, as revised in FAS 166, transfer and servicing of Financial Assets (ASC 860-10), for
the purpose of the handling transfer of financial assets and extinguishment of liabilities.
Pursuant to these rules, transfers of financial assets are accounted for as sales if and only if all of
the following conditions are met: (1) the financial asset transferred is isolated from the transferring
party, including in situations of bankruptcy or other receivership; (2) any recipient (or, if the
recipient is an entity whose sole purpose is to engage in securitization or in asset-backed financing
activity, and that entity is barred from pledging or exchanging the financial assets it receives – any
third party holding beneficiary rights) may pledge or exchange the assets (or the beneficiary
rights) received, and there is no term that restricts the recipient (or the third party holding
beneficiary rights) from exercising the right to pledge or exchange, and also grants the transferring
party a benefit that is more than trivial; (3) the transferring party, or consolidated companies
included in its financial statements, or its agents, do not retain effective control of the financial
assets or of the beneficiary rights referring to the transferred assets.
In addition, in order for the transfer of part of a financial asset to be considered a sale, the
transferred part must comply with the definition of participatory rights. Participatory rights must
meet the following criteria: the right must represent proportional rights relative to the full
financial asset; all cash flows obtained from the assets are distributed between the participatory
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 297 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
10. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (cont'd)
rights in a manner proportional to their share of the ownership; the rights are not subordinated to
other rights; there is no right of return to the transferring party or to other holders of
participatory rights (except in cases of the breach of representations or commitments, current
contractual commitments to service a financial asset in its entirety and manage the transfer
contract, and contractual commitments to share the offsets of any benefits received by any
holder of participatory rights); and the transferring party and the holder of participatory rights
have no right to pledge or exchange the financial asset in its entirety, unless all of the holders of
participatory rights agree to pledge or exchange the financial asset in its entirety.
If the transaction meets the conditions for treatment of a transaction as a sale, the transferred
financial assets are derecognized in the balance sheet of the Bank. If the conditions for a sale are
not met, the transfer is considered a secured debt. The sale of part of a financial asset that is not a
participatory right is treated as a secured debt; i.e., the transferred assets continue to be recorded in
the balance sheet of the Bank, and the consideration from the sale is recognized as a liability of the
Bank.
Therefore, securities sold under repurchasing terms or purchased under resale terms, securities
borrowed or lent, and other financial instruments transferred or received by the Bank, in which
the Bank has not lost control of the transferred asset or has not acquired control of the asset
received, are treated as secured debt. In addition, pursuant to the instructions of the Supervisor
of Banks, certain securities sold under repurchase terms to the Bank of Israel are treated as
secured debt. Financial instruments transferred in such transactions are measured using the same
measurement principles applied prior to the transfer. In other words, such securities are not
subtracted from the balance sheet; against the securities, the deposit the repayment of which the
securities were pledged to secure is stated under the item “securities lent or sold in repurchase
agreements.” Securities received in such transactions are recorded according to the amount of
cash received by the Bank, under the item “securities borrowed or purchased in resale
agreements.”
The Bank monitors the fair value of securities lent and borrowed and of securities transferred in
repurchase and resale agreements on a daily basis, and demands collateral in the appropriate
cases. Interest received or paid in respect of such securities is reported as financing income or
expenses, respectively.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 298 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
10. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (cont'd)
The Bank subtracts a liability only if the liability has been extinguished; i.e., if one of the
following conditions has been fulfilled: (A) The Bank has paid the lender and has been released
from its obligation in respect of the liability; or (B) the Bank has been legally released in a legal
proceeding, or with the consent of the lender, from being the principal debtor in respect of the
liability.
11. Taxes on Income
Expenses for taxes on income include current and deferred taxes. Current and deferred taxes are
allocated to the statement of profit and loss, unless the tax arises from a transaction or event
recognized directly in shareholders' equity. In such cases, the expense for taxes on income is
allocated to shareholders' equity.
(a) Current taxes
Current tax is the amount of tax expected to be paid (or received) on the taxable income for
the year, calculated according to the applicable tax rates under laws legislated or legislated
in practice at the balance sheet date, including changes in tax payments referring to
previous years.
The provision for taxes on the income of the Bank and its consolidated companies which
are financial institutions for the purposes of value added tax includes a profit tax imposed
on income under the Value Added Tax Law. The value added tax applied to wages at
financial institutions is included under item "salaries and related expenses".
(b) Deferred taxes
The Bank recognizes deferred taxes with reference to temporary differences between the
book value of assets and liabilities for the purposes of financial reporting and their value
for tax purposes. However, the Bank does not recognize deferred taxes with respect to the
following temporary differences: first-time recognition of goodwill; first-time recognition
of assets and liabilities in a transaction that does not constitute a combination of businesses
and does not affect accounting profit or profit for tax purposes; and differences arising
from investments in subsidiaries and in equity-basis investee companies, if they are not
expected to be reversed in the foreseeable future. The deferred taxes are measured
according to the tax rates expected to apply to the temporary differences at the date when
they are realized, based on laws legislated or legislated in practice at the balance-sheet date.
The Bank offsets deferred tax assets and
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 299 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
11. Taxes on Income (cont'd)
liabilities in the event that an enforceable legal right exists to offset current tax assets and
liabilities, and they are attributed to the same taxable income item taxed by the same tax
authority for the same taxed company, or in different companies in the Group which intend to
settle current tax assets and liabilities on a net basis, or the tax assets and liabilities are settled
simultaneously.
Deferred tax asset in respect of losses carried forward and in respect of rights carried forward to
offset tax is recognized in the books in cases in which the realization of the said tax in the
foreseeable future is not in doubt. A deferred tax asset is recognized in respect of temporary
differences when it is probable that a tax saving will be created in respect thereof at the reversal
date. The creation of net deferred tax assets shall not exceed the current taxes in the accounting
period, except in special cases in which the realization of the tax in the foreseeable future is not
in doubt.
The Bank may be obligated to add taxes in the case of dividend distribution in respect of
investee companies. This added tax is not included in the financial statements, due to the policy
of the investee companies not to cause dividend distribution involving added taxes for the Bank
in the foreseeable future. In cases where an investee company is expected to distribute dividends
from profits involving added taxes for the Bank, the Bank creates a reserve for tax in respect of
the added tax which it is likely to incur.
12. Buildings and equipment
The Bank has implemented IAS 16, Fixed Assets as of January 1, 2011. There was no significant
effect on Bank's results of activity.
(a) Recognition and measurement
Fixed-asset items are measured at cost, less accrued depreciation and losses from
impairment. The cost includes expenses directly attributable to the acquisition of the asset.
The cost of self-constructed assets includes the cost of materials and direct labor costs, any
additional cost directly attributable to bringing the asset to the location and condition
necessary in order for it to function in the manner intended by management, and discounted
credit costs. The cost of software purchased constituting an inseparable part of the
operation of the related equipment is recognized as part of the cost of such equipment.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 300 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
12. Buildings and equipment (cont'd)
In addition, pursuant to the Public Reporting directives, the Bank classifies costs in respect
of software assets acquired or costs capitalized as an asset in respect of software developed
in-house for internal use under the item "buildings and equipment". With regard to the
accounting treatment of software costs, see Section 15 below.
When significant parts of a fixed asset (including costs of significant periodic tests) have
different lifetimes, they are treated as separate items (significant components) of the fixed
asset.
Gains or losses from the subtraction of an item of fixed assets are determined by comparing
the consideration from the subtraction of the asset to its book value, and recognized net,
under the item “profit from extraordinary transactions after taxes” in the statement of profit
and loss.
(b) Subsequent costs
The replacement costs of part of a fixed asset are recognized as part of the book value of that
item, if the future economic benefit inherent in the item is expected to flow to the Bank, and
if its cost can be measured reliably. The book value of the replaced part is subtracted. Routine
maintenance costs of fixed assets and items are allocated to profit and loss as incurred.
(c) Depreciation
Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life. The depreciable amount is the cost of the asset, or another amount substituted
for the cost, net of the residual value of the asset.
Depreciation is allocated to the statement of profit and loss using the straight-line method,
over the estimated useful life of each part of the fixed-asset items, because this method best
reflects the predicted consumption pattern of the future economic benefits inherent in the
asset. Leased assets are depreciated over the shorter of the lease period or the period of use
of the assets. Land owned by the bank is not depreciated.
Estimates regarding the depreciation method, duration of useful life, and residual value are
reexamined at least at the end of each fiscal year and adjusted when necessary.
(d) Regarding impairment of non-financial assets see section 16 below.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 301 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
13. Investment Property
The Bank has implemented IAS 40, Investment Property as of January 1, 2011. There was no
significant effect on Bank's results of activity.
Investment property is property (land or buildings, or part of a building, or both) held (by the
Bank as an owner or through financial lease) for the purpose of obtaining rent income, or capital
appreciation, or both, and not for the purposes of:
a. Use in delivery of services or for administrative purposes; or
b. Sale during the ordinary course of business.
The investment property is measured for the first time at cost, with the addition of transaction
costs. In subsequent periods, the investment property is stated at cost, net of accrued
depreciation and net of losses from decline in value.
14. Leases
The Bank has implemented IAS 17, Leases, as of January 1, 2011. There was no significant
effect on Bank's results of activity.
Leases, including leases of land from the Israel Land Administration or from other third parties,
in which the Bank materially bears all of the risks and returns from the asset, are classified as
financing leases. At initial recognition, leased assets are measured at an amount equal to the
lower of the fair value and the present value of the minimum future leasing fees.
Future payments for the exercise of an option to extend the term of the lease from the Israel
Land Administration are not recognized as part of the asset and the related liability, as they
constitute contingent leasing fees, which are derived from the fair value of the land at the future
renewal dates of the leasing agreement. After the initial recognition, the asset is treated in
accordance with the accounting policy customarily applied to that asset.
Other leases are classified as operational leases. The leased assets are not recognized in the
balance sheet of the Bank. Payments in operational leases are allocated to profit and loss using
the straight-line method, over the period of the lease. Leasing incentives received are recognized
as an inseparable part of the total leasing expenses, using the straight-line method, over the
period of the lease.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 302 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
15. Intangible assets
The Bank has implemented IAS 38, Intangible Assets as of January 1, 2011. There was no
significant effect on Bank's results of activity.
Software costs
(a) Software acquired by the Bank is measured at cost, less accrued depreciation and losses from
decline in value.
(b) Costs related to the development of software or adjustment for own use are capitalized if and
only if: the development costs can be measured reliably; the software is feasible in technical and
commercial terms; future economic benefit is expected; and the Bank has sufficient intent and
resources to complete the development and to use the software.
The costs recognized as intangible asset include direct costs of material, services and direct
salary for employees. These costs are measured at cost, less accrued depreciation and losses
from decline in value. Overhead costs that cannot be directly attributed to software development
and research costs are recognized as expenses, as incurred.
(c) Subsequent costs
Subsequent costs are recognized as an intangible asset only when they increase the future
economic benefits inherent in the asset in respect of which they are expended. Other costs,
including costs related to goodwill or self developed brands, are charged to the statement of
profit and loss as incurred.
(d) Amortization
Amortization is allocated to the statement of profit and loss, using the straight-line method, over
the estimated useful life of intangible assets, including software assets, starting on the date when
the assets are available for use.
Intangible assets with an indeterminate lifetime are not amortized systematically, but are
examined for impairment at least once a year.
Intangible assets created at the Bank (such as software under development) are not amortized
systematically as long as they are not available for use. Accordingly, these intangible assets are
examined for impairment at least once a year until they become available for use.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 303 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
16. Impairment assets
The Bank has implemented for first time IAS 36, Impairment of Assets, as of January 2011. The
first time implementation has no effect on the Bank's activity results.
Impairment of Non-Financial assets
The consolidated book value of non-monetary assets, excluding deferred tax assets, and including
investments treated using the equity method, is examined at each reporting date in order to
determine whether signs exist to indicate impairment. If such signs exist, an estimate of the
recoverable amount of the asset is calculated.
The recoverable amount of an asset or of a cash generating unit is the higher of the use value and
the net sale value (fair value net of selling expenses). In determining use value, the Bank
capitalized the estimated future cash flows according to a pretax capitalization rate reflecting
market estimates regarding the time value of the money and the specific risks related to the asset.
For the purpose of examining impairment, assets which cannot be examined individually are
aggregated into the smallest group of assets that generates cash flows from ongoing use, which are
essentially non-dependent on other assets and groups (a "cash-generating unit").
Assets of the headquarters of the Bank do not generate separate cash flows, and serve more than
one cash-generating unit. Therefore, they are allocated to cash-generating units, on a reasonable
and consistent basis, and examined for impairment as part of the examination of impairment in
respect of the cash-generating units to which they are allocated. Other headquarters assets that
cannot be allocated to cash generating units on in a clear and consistent manner are allocated to
a group of cash-generating units, if there are indications that impairment has commenced in an
assets belonging to the headquarters of the Bank, or when there are indications of impairment in
the group of cash-generating units. In such cases, the recoverable amount of the group of cash-
generating units served by headquarters is determined.
Losses from impairment are recognized when the book value of the asset or of the cash-generating
unit to which the asset belongs exceeds the recoverable value, and are charged to profit and loss.
As for other assets losses from impairment recognized in previous periods are reexamined each
reporting period, in order to test for signs that the losses have decreased or no longer exist. Losses
from impairment are cancelled if a change has occurred in the estimates used to determine the
recoverable amount, only if the book value of the asset, after cancellation of the loss from
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 304 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
16. Impairment assets (cont'd)
impairment, does not exceed the book value net of amortization or depreciation that would have
been determined if no loss from impairment had been recognized.
Impairment of In-House Software Development Costs In addition to the indications of impairment established in IAS 36, Impairment of Assets, test of
impairment of in-house software development costs shall also be performed when the signs
listed in GAAP for US banks, SOP 98-1; Accounting for the Costs of Computer software
Developed or Obtained for Internal Use (ASC 350-40), are preset:
(1) The software is not excepted to provide significant potential services
(2) The manner or volume of use or expected use of the software has changed
substantially;
(3) The software has been or will be substantially changed.
(4) Costs of the development or conversion of the software designed for internal use
significantly exceed the expected amounts;
(5) It is not longer expected that development will be completed and the software will be
used.
If one or more of the signs listed above exists, an examination for impairment must be
performed, in accordance with the rules set forth in IAS 36, Impairment of Assets.
17. Share-based payments
Fair value at the grant date of share-based payment grants to employees is allocated as a wage
expense, concurrent with the increase in shareholders’ equity over the period in which
unconditional entitlement to the grants is obtained. The amount allocated as an expense in respect
of share-based payment grants conditional upon vesting terms which are service terms or
execution terms other than market terms is adjusted in order to reflect the number of grants
expected to vest.
The first time implementation of IFRS2, Share-Based Payment, as of January 1, 2011 has no
effect on the Bank's activity results.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 305 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
18. Contingent liabilities
The financial statements include sufficient provisions for legal claims, according to the
assessment of the Board of Management and based on the opinion of its legal counsels.
Disclosure standard based on directives of the Supervisor of Banks in a manner that the
claims were classified in accordance with the probability of occurrence of the exposure to
risk as follows:
(a) Probable - when the probability is over 70% - required full provision.
(b) Reasonably possible - when the probability is over 20% and less than or equal to 70% - not
required provision. If the claims sum up to a material amount, a disclosure has required.
(c) Remote - when the probability is less than or equal to 20% - not required provision. If the
maximal loss is extremely material, a disclosure is required.
In rare cases the Bank states in the financial statements that on the basis of the opinion of its
legal counsel, management of the Bank is unable to evaluate the probability of occurrence of
exposure to risk in respect of an ordinary claim and a claim that was certified as a class
action, in the four financial statements that were published after the filing of the claim
includes the request to have it certified as a class action.
Note 18.C(17)(E) separately presents the contingent liabilities in respect of which the risk of
occurrence of the exposure cannot be reasonable estimated.
The Bank has provided disclosure with respect to material legal proceedings pending against
the Bank and subsidiaries.
Note 18 on contingent liabilities and special commitments includes quantitative disclosure of
the total exposures with a probability of realization that is not remote for which no provisions
were made, the amount of each of which (or the aggregate amount of several claims
concerning similar matters), according to the claim statement, exceeds an amount constituting
approximately 1% of the capital of the Bank.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 306 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
19. Earnings per share
The Bank presents basic and diluted earnings per share data with regard to its common share
capital. Basic earnings per share are calculated by dividing the profit or loss attributed to the
holders of the common shares of the Bank by the weighted average number of common shares in
circulation during the period. Diluted earnings per share are determined by adjusting the profit or
loss attributed to the holders of common shares and adjusting the weighted average of the
common shares in circulation in respect of the effects of all diluted potential common shares,
including, among other things, notes convertible into shares and options for shares granted to
employees.
The first time implementation of IAS 33, Earnings Per Share, as of January 1, 2011, has no
effect on the way of earnings per share calculation.
20. Statement of cash flows
The statement of cash flows is presented as classified to cash flows generated by operating
activities, activities in assets and activities in liabilities and capital.
Cash flows generated by activities in assets, liabilities and capital are stated net, excluding
transaction in securities for investment and non-monetary assets.
The item cash includes cash on hand, deposits from banks, tradable deposit certificates and
deposits in central banks for an initial period of up to three months.
21. Employee benefits
(a) Appropriate provisions in accordance with the law, agreements, customary practice, and
management expectations exist in respect of all liabilities related to employer-employee
relations. Future liabilities for pensions and Jubilee bonuses are calculated by an actuary
specializing in the method for evaluation of accrued benefits, taking into consideration
probabilities and past experience, among other factors. The discounting rate of the
provisions is 4%, in accordance with the directives of the Supervisor of Banks. The
mortality rate is based on the current directives of the Supervisor of the Capital Market,
Insurance, and Savings. The rate of future wage increases is estimated by management.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 307 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
21. Employee benefits (cont'd)
(b) The commitment for severance pay and pensions is mainly covered by deposits in provident
funds for pension allowances and compensation. Due to sums of uncovered liabilities as
aforesaid, provision was included in the financial statement - see Note 15.
(c) Profits and losses accumulated in respect of provident funds for pension allowances and
compensation are recorded to profit and loss statement.
Instructions of the Supervisor of Banks concerning the reinforcement of internal control over
financial reporting on employee benefits
As of April 1, 2011, the Bank has implemented the instructions of the Supervisor of Banks
concerning compensation beyond contractual obligations, as published on March 27, 2011 in the
circular, “Reinforcing Internal Control over Financial Reporting on Employee Benefits”
(hereinafter: “Excess Compensation”).
According to the circular, a banking corporation that expects a group of employees to be paid
benefits beyond the contractual terms shall take into consideration the expected departure rate of
employees (including employees expected to retire under voluntary-retirement plans or upon
receiving other preferred terms) and the benefits that these employees are expected to receive upon
departure. The liability in respect of severance pay for this group of employees shall be presented
in the financial statements as the higher of the amount of the liability calculated on an actuarial
basis, taking into consideration the additional cost expected to be incurred by the banking
corporation due to the aforesaid benefits, and the amount of the liability calculated by multiplying
the employee's monthly salary by the number of years of the employee's service, as required in
Opinion Statement 20 of the Institute of Certified Public Accountants in Israel.
Note that according to estimates by the Bank and its legal advisors, the Bank has no legal
obligation, either direct or implied, to pay Excess Compensation.
For the purposes of the actuarial calculation of Excess Compensation, the actuary of the Bank
conducted a survey, at the initial implementation date, of data on retirees in 2007-2010, the
relevant years as a basis for the aforesaid actuarial calculation according to management's
assessment.
Based on the findings of the survey, taking into consideration the characteristic size of population
groups at the Bank, the actuary estimated future rates of departure before retirement age, with
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 308 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
21. Employee benefits (cont'd)
ordinary compensation and with Excess Compensation. The management of the Bank also
estimated the rates of the Excess Compensation.
Main effects of the initial implementation of the directive on Excess Compensation:
o A new reserve was created in respect of Excess Compensation for the group of managers
(who are not entitled to pensions) and permanent clerks of the Bank.
Beyond the aforesaid estimates of departure rates and of the rate of Excess Compensation,
the additional assumptions used to calculate this reserve (such as the forecast future real
increase in wages, mortality rates, capitalization rates) are identical to the assumptions used
until now for the calculation of actuarial reserves at the Bank. This surplus reserve, beyond
the provision for compensation pursuant to Opinion Statement 20, amounts to
approximately NIS 56 million as at the initial implementation date, June 30, 2011.
o The actuarial reserve in respect of pension rights, which refers to the group of long-standing
managers and authorized signatories of the Bank who are entitled to budget-based pensions
upon retirement (hereinafter: "Active Employees"), was updated to include the aforesaid
estimates regarding departure rates and rates of Excess Compensation (departure rates of
2% per year were used in the past). This surplus reserve, beyond the provision for
compensation pursuant to Opinion Statement 20, amounts to approximately NIS 68 million
as at the initial implementation date, June 30, 2011.
o The actuarial reserve in respect of long-service bonuses was updated to reflect the new
departure rates used for the purposes of Excess Compensation (as at March 31, 2011,
departure rates prevalent in the banking industry were used). This reserve amounted to
approximately NIS 21 million as at the initial implementation date, June 30, 2011.
The effect of the initial implementation was included by retroactive implementation.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 309 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
21. Employee benefits (cont'd)
The effect of the retroactive implementation on each of the reporting periods for which data is included
in the financial statements is set out below:
For the year ended December 31, 2010 For the year ended December 31, 2009
As previously
reported
Effect of retroactive
implementation As reported in
this report As previously
reported
Effect of retroactive
implementation As reported in
this report
NIS millions Effect on the statement of
profit and loss:
Salary and related expenses 405 (9) 396 360 2 362
Operating profit before taxes 209 9 218 214 (2) 212
Provision for taxes on operating profit 68 2 70 97 *4 101
Operating profit after taxes 141 7 148 117 (6) 111
Net profit 142 7 149 115 (6) 109
Basic and diluted profit per share 1.94 0.08 2.02 1.73 (0.09) 1.64
* Additionally, as a result of change in the tax rate in 2009 - See note 28.C.
As at December 31, 2010
As previously reported
Effect of retroactive implement
ation
As reported in this report
NIS millions Effect on balance sheet items:
Other assets 537 19 556
Other liabilities 1,044 64 1,108
Total equity 2,051 (45) 2,006
Effect on capital ratio:
Ratio of tier I capital to risk adjusted assets 8.48% (0.19%) 8.29%
Ratio of total capital to risk adjusted assets 14.63% (0.21%) 14.42%
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 310 -
Note 1 - Principal Accounting Policies (cont'd)
F. New Accounting Standards and Directives of the Supervisor of Banks in Period before
Implementation
(1) Directives Concerning the Format of the Statement of Profit and Loss of a Banking
Corporation and the Adoption of GAAP for US Banks on Interest Income Measurement
A circular of the Supervisor of Banks was issued on December 29, 2011, with the aim of
adjusting the Public Reporting Directives for the purpose of:
Establishing the manner of presentation of the statement of profit and loss – The directive
adjusts the format of the statement of profit and loss to the prevalent manner of presentation
globally and in the United States. The new format changes the manner of presentation of the
components of financing profit in the statement of profit and loss itself and in the accompanying
notes; cancels the distinction between fees from financing business and operational fees;
changes the classification of linkage differentials on principal as part of "interest"; and changed
the classification and names of other items of the statement of profit and loss. In addition, the
directive cancels the item "profit from extraordinary transactions" and adopts the customary
approach in the United States, according to which special items are defined as items that are
"unusual" and "infrequent", and states that the classification of any event as a special item shall
only be possible with advance approval for the Supervisor of Banks. The directive also
establishes changes in the format of additional notes to the financial statements.
The directives with regard to the format of the statement of profit and loss will be implemented
beginning with the financial statements for the first quarter of 2012, retroactively. The initial
implementation of the directives is expected to have no effect, other than the change in
presentation.
Adoption of the rules established in US GAAP regarding nonrefundable fees and other costs -
The directive establishes rules for the treatment of loan origination fees and direct loan
origination costs. The eligible fees and costs, according to the criteria established at the
directive, shall not be recognized immediately in the statement of profit and loss, but shall be
taken into account in calculating the effective interest rate of the loan. In addition, the directive
changes the treatment of commitments fees and commitments costs which related to
commitments for allocate credit, including credit-card transactions. The directive also sets forth
rules regarding the treatment of changes in the terms of debt that do not constitute restructuring
of problematic debt, treatment of early repayment of debts, and treatment of other credit
granting transactions, such as syndication transactions.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 311 -
Note 1 - Principal Accounting Policies (cont'd)
F. New Accounting Standards and Directives of the Supervisor of Banks in Period before
Implementation (cont'd)
(1) Directives Concerning the Format of the Statement of Profit and Loss of a Banking
Corporation and the Adoption of GAAP for US Banks on Interest Income Measurement
(cont'd)
The rules established in the directive represent a significant change relative to the existing
rules in the Public Reporting Directives. The preparations for the implementation of the rules
established in the directive are complex; the Supervisor of Banks intends to guide the banking
corporations in the preparatory process, especially in the area of identifying eligible costs. The
circular states that the rules on this matter will be implemented from January 1, 2013, forward.
The directives concerning the change in the definition of "interest" in respect of impaired debts
will be implemented, with regard to debts classified as impaired, only from January 1, 2012
forward.
The Bank is examining the expected implications of the initial implementation of the
directives.
(2) Accounting Standard No. 23, “Accounting Treatment of Transactions between an Entity
and its Controlling Party” -
In December 2006, the Israel Accounting Standards Board issued Accounting Standard No.
23, “Accounting Treatment of Transactions between an Entity and its Controlling Party”. The
Standard replaces the Securities Regulations (Statement of Transactions between a
Corporation and its Controlling Party in Financial Statements) - 1996, as adopted in the Public
Reporting Directives of the Supervisor of Banks. The Standard stipulates that assets and
liabilities in respect of which a transaction has been executed between an entity and its
controlling party shall be measured at the date of the transaction at fair value, with the
difference between the fair value and the consideration allocated in the transaction to be
allocated to shareholders' equity. A negative difference essentially constitutes a dividend and
therefore reduces the balance of surpluses. A positive difference essentially constitutes an
owner’s investment, and is therefore stated in a separate item under shareholders’ equity:
“capital fund from a transaction between the entity and its controlling party”.
The standard addresses three issues related to transactions between an entity and its controlling
party, as follows: (I) transfer of an asset to the entity from the controlling party, or
alternatively, transfer of an asset from the entity to the controlling party; (2) undertaking of a
liability of the entity towards a third party, in full or in part, by the controlling party, or
indemnification of the entity by its controlling party for expenses, or a waiver by the
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 312 -
Note 1 - Principal Accounting Policies (cont'd)
F. New Accounting Standards and Directives of the Supervisor of Banks in Period before
Implementation (cont'd)
(2) Accounting Standard No. 23, “Accounting Treatment of Transactions between an Entity
and its Controlling Party” (cont'd)
controlling party of a debt owed by the entity, in full or in part; and (3) loans given to or
received from the controlling party. In addition, the standard stipulates the disclosure to be
made in the financial statements with regard to transactions between an entity and its
controlling party during the period.
On November 30, 2011, the Supervisor of Banks issued a circular on the adoption of certain
IFRS. Among other matters, the circular states that as of January 1, 2012, for the purposes of
accounting treatment for transactions between a banking corporation and its controlling party
or a company controlled by the banking corporation, GAAP for US banks should be
implemented. In situations where these rules do not address the treatment method, the rules
established in Standard 23 shall be applied, in a manner consistent with the principles of the
adoption of IFRS on matters not related to the core business of banking.
The initial implementation of this standard is not expected to have a material effect.
(3) Certain IFRS which address matters not related to the core business of banking:
In July 2006 the Israel Accounting Standards Board published Accounting Standard No. 29,
“Adoption of International Financial Reporting Standards (“IFRS”)”. The Standard establishes
that entities subject to the Securities Law - 1968 that are required to report according to the
regulations of this law, should prepare their financial statements for periods beginning as from
January 1, 2008 according to IFRS. The aforementioned does not apply to banking corporations,
the financial statements of which are prepared in accordance with directives and guidelines of the
Supervisor of Banks.
In June 2009, the Supervisor of Banks issued a letter concerning "Reporting by Banking
Corporations and Credit-Card Companies in Israel in Accordance with International Financial
Reporting Standards (IFRS)", which establishes the expected manner of adoption of IFRS by
banking corporations.
It was further clarified that subsequent to the completion of the process of adjusting the
directives to the international standards, the Supervisor of Banks will retain the authority to set
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 313 -
Note 1 - Principal Accounting Policies (cont'd)
F. New Accounting Standards and Directives of the Supervisor of Banks in Period before
Implementation (cont'd)
(3) Certain IFRS which address matters not related to the core business of banking (cont'd)
forth binding clarifications with regard to the manner of implementation of the requirements of
the international standards, and to set forth additional directives in cases in which it is
necessary due to the requirements of the supervisory agencies in developed countries globally,
or on matters not addressed by the international standards. In addition, the Supervisor of
Banks will retain the authority to establish disclosure and reporting requirements.
Pursuant to the circular, the deadlines for reporting by banking corporations according to IFRS
are as follows:
(a) On matters related to the core business of banking – as of January 1, 2013. During 2011, the
Supervisor of Banks intends to reach a final decision on this matter. The final decision will
be made taking into consideration the schedule established in the United States and the
progress of the convergence process between international and American standards.
A final decision has not yet been made regarding the issue.
(b) On matters not related to the core business of banking - January 1, 2011. However, the
IFRS listed below have not yet taken effect, and will be adopted in accordance with the
directives of the Supervisor of Banks, when such directives are published, with regard to
the timing and manner of the initial implementation of the standards:
IAS 7, Statement of Cash Flows;
IAS 12, Income Taxes;
IAS 19, Employee Benefits;
IAS 23, Borrowing Costs;
IAS 24, Related Party Disclosures.
A circular concerning the adoption of certain IFRS was issued on November 30, 2011. Among
other matters, the circular states that these IFRS, with the exception of IAS 19, Employee
Benefits, shall be implemented by banking corporations as of January 1, 2012. Upon initial
implementation of these IFRS, banks are required to act in accordance with the transitional
directives set forth in the standards, including retroactive amendment of comparison figures if
required. The Bank examine the excepted effect of the first time implementation.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 314 -
Note 1 - Principal Accounting Policies (cont'd)
F. New Accounting Standards and Directives of the Supervisor of Banks in Period before
Implementation (cont'd)
(3) Certain IFRS which address matters not related to the core business of banking (cont'd)
Additional details regarding the standards to be adopted as of January 1, 2012 are set out below:
IAS 7, Statement of Cash Flows
The Standard states that information should be provided regarding changes in cash and cash
equivalents during the reporting period through the statement of cash flows. Changes have been
established in the Public Reporting Directives of the Supervisor of Banks in the present format of
the statement of cash flows, to adjust this format to the requirements of the standard and to the
reporting requirements established in certain other IFRS. Specifically, cash flows shall be
classified into cash flows from operating activities, investing activities, and financing activities. In
addition, a determination was made regarding the activities that shall be considered principal
revenue-producing activities for the Bank, and that consequently shall be classified as operating
activities. Guidelines were also established with regard to the presentation of cash flows in gross
and net amounts. The effect of changes in exchange rates on cash and cash equivalents held in
foreign currency or due for settlement in foreign currency shall be stated separately from other
changes in cash and cash equivalents. Cash flows from interest and dividends received or paid
and cash flows arising from taxes on income shall be given separate disclosure. In addition, the
cash flow statement was adjusted to other changes that have occurred in the Public Reporting
Directives, pursuant to the adoption of certain IFRS.
The initial implementation of this standard is expected to have no effect, other than the change in
presentation.
IAS 12, Taxes on Income.
The standard establishes the accounting treatment of taxes on income. Pursuant to the
standard, deferred taxes shall be recognized with reference to temporary differences between
the book value of assets and liabilities and the value of the assets and liabilities for tax
purposes, with the exceptions stipulated in the standard, according to which deferred taxes
shall not be recognized in respect of temporary differences. The deferred taxes shall be
measured in accordance with the tax rates expected to apply during the period in which the
temporary differences will be realized, based on tax rates and tax laws legislated, or the
legislation of which has been essentially completed, by the end of the reporting period.
Current tax liabilities or assets in respect of the current period and in
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 315 -
Note 1 - Principal Accounting Policies (cont'd)
F. New Accounting Standards and Directives of the Supervisor of Banks in Period before
Implementation (cont'd)
(3) Certain IFRS which address matters not related to the core business of banking (cont'd)
respect of previous periods shall be measured according to the estimated amount to be paid to
the tax authorities or refunded by the tax authorities, using the tax rates and tax laws
legislated, or the legislation of which has been essentially completed, by the end of the
balance-sheet period.
The standard further states that deferred tax assets shall be recognized in the books in respect
of losses forward, tax credit, and deductible temporary differences when it is probable that
taxable income against which they can be used will exist in the future. In accordance with the
rules set forth in the standard, as adopted in the Public Reporting Directives of the Supervisor
of Banks, the term "probable" shall be defined consistently with the application of the phrase
"more likely than not", instead of the translation of the term "probable" in the Public Reporting
Directives implemented today, in which the threshold is established as "beyond any reasonable
doubt".
In addition, in situations of uncertainty with regard to taxes on income, banking corporations
shall be required to implement the rules set forth in FIN 48, Accounting for Uncertainty in
Income Taxes, as long as these rules do not contradict IFRS, by establishing policies and
procedures and implementing documentation requirements with respect to tax positions of
various degrees of uncertainty.
The initial implementation of this standard is expected to have no material effect.
IAS 23, Borrowing Costs
The standard states that entities must capitalize borrowing costs attributable directly to the
acquisition, construction, or production of a qualifying asset. A qualifying asset is an asset that
requires a substantial period of time to prepare for its designated use or sale, including fixed
assets, software assets, and other assets where a long period is necessary in order to bring the
asset to a condition in which it can fulfill its designated function or be sold. However, it has
been clarified in the directives of the Supervisor of Banks that banking corporations shall not
capitalize borrowing costs without establishing clear policies, procedures, and controls with
regard to the criteria for recognition of assets as qualifying assets and with regard to the
borrowing costs that are capitalized.
Accordingly, the initial implementation of this standard is expected to have no effect, other
than the change in presentation.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 316 -
Note 1 - Principal Accounting Policies (cont'd)
F. New Accounting Standards and Directives of the Supervisor of Banks in Period before
Implementation (cont'd)
(3) Certain IFRS which address matters not related to the core business of banking (cont'd)
IAS 24, Related Party Disclosures
The standard establishes the required disclosures by an entity regarding its relationship with
related party and regarding transactions and unsettled balances with a related party.
In addition, disclosure is required for compensation to key management personnel. Key
management personnel are those persons having authority and responsibility for planning,
directing, and controlling the activities of the entity, directly or indirectly, including any
directors (whether executive or otherwise) of the entity.
As part of the expected adoption of the standard by the Supervisor of Banks, the format of the
required disclosure in the financial statements will be adjusted, in order to comply with the
disclosure requirements of IAS 24 as well as the additional disclosures required under the
Securities Regulations, 2010.
The initial implementation of this standard is expected to have no effect, other than the change
in presentation.
(4) Effective Control for Repurchase Agreements FAS 166(ASC 860)
In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for
Repurchase Agreements, an update of the rules established in FAS 166 (ASC 860).
The update requires a change in the manner of assessing the existence of effective control by a
transferor in repurchase transactions. The assessment of effective control shall focus on
contractual rights and contractual obligations of the transferor, and therefore shall not take into
consideration (I) a criterion requiring the transferor to have the ability to acquire the transferred
securities even in the event of default by the transferee, or (2) instructions regarding collateral
requirements in connection with the aforesaid criterion. Additional criteria for the assessment of
effective control were not changed by the ASU. These criteria indicate that the transferor retains
effective control of the transferred assets (and the transfer of the assets shall therefore be treated
as a secured debt) if all of the following conditions are fulfilled:
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 317 -
Note 1 - Principal Accounting Policies (cont'd)
F. New Accounting Standards and Directives of the Supervisor of Banks in Period before
Implementation (cont'd)
(4) Effective Control for Repurchase Agreements FAS 166(ASC 860) (cont'd)
The assets to be repurchased or redeemed are identical or essentially identical to the assets
transferred;
The agreement is to repurchase or redeem the assets before the maturity date, at a fixed or
fixable price;
The agreement is executed simultaneously with the transfer.
The update will apply to periods beginning after December 15, 2011 (i.e. starting January 1, 2012),
and will be implemented prospectively with regard to new transactions and existing transactions
changed at the beginning of the first quarterly or annual period after the inception date. Early
implementation is not permitted.
The initial implementation of this standard is not expected to have a material effect.
(5) A New system of new financial reporting standards concerning the consolidation of
financial statements and related matters
In May 2011, the IASB published a new system of standards, which is part of the consolidation
project conducted jointly by the IASB and the FASB, and essentially replaces the exiting
standards concerning the consolidation of financial statements and joint transaction, and
includes a number of changes with regard to equity-basis investee. Pursuant to the directives of
the Supervisor of Banks, banking corporations shall routinely update the accounting treatment
of matters adopted in the Public Reporting Directives. Such update is required prior to the
inception date and according to the transitional directives established in new IFRS to be
published on this matters, and in accordance with the adoption principles and clarifications of
the Supervisor of Banks. In light of the foregoing, the implementation of the rules established in
the new system of standards concerning the consolidation of financial statements and related
matters shall be performed subject to the guidelines set forth in the Public Reporting Directives,
among other matters regarding which specific rules were established or adopted in the Public
Reporting Directives that differ from the rules set forth in the standard and/or in the guidelines
referring to the standard.
IFRS 10, Consolidated Financial Statements
This Standard replaces the instructions of IAS 27, Consolidated and Separate Financial
Statements, and SIC 12, Consolidation - Special Purpose Entities, with regard to the
consolidation of financial statements, so that the instructions in IAS 27 will continue to apply
only to separate financial statements.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 318 -
Note 1 - Principal Accounting Policies (cont'd)
F. New Accounting Standards and Directives of the Supervisor of Banks in Period before
Implementation (cont'd)
(5) A New system of new financial reporting standards concerning the consolidation of
financial statements and related matters (cont'd)
The standard presents a new control model to be used in determining whether an investor
controls an affiliate and must therefore consolidate it. The standard requires application of this
model to all
affiliated entities, both those currently covered by IAS 27 and those currently covered by SIC
12. Under the model, an investor controls an affiliate when the investor is exposed or entitled to
variable returns deriving from the involvement in the affiliate, and has the ability to influence
such returns through power over the affiliate.
"DE facto" circumstances are to be taken into consideration in evaluating control; thus, the
standard essentially provides a model of effective control. In other words, if effective control
exists, the consolidation of financial statements is required. In addition, in testing for control, all
significant potential voting rights shall be taken into consideration, even if they cannot be
exercised immediately. With regard to potential voting rights, the structure of the rights, the
reasons for the existence of the rights, and the terms of the rights should be examined.
The standard will be implemented in annual periods beginning January 1, 2013 or later, by
retroactive implementation. Early implementation is possible, subject to disclosure, and subject
to early adoption of the two additional standards published concurrently; IFRS 11, Joint
Arrangements, and IFRS 12, Disclosure of Interests in Other Entities.
The Bank has not yet begun to examine the effect of the standard adoption on the financial
statements.
In light of the fact that at this stage the Supervisor of Banks has not established specific
instructions regarding the manner of implementation of the new system of IFRS concerning the
consolidation of financial statements and related matters, at this stage it is not possible to
estimate the expected effect of the implementation thereof.
(6) Fair value measurement FAS 157 (ASC 820)
In May 2011 the FASB published an Accounting Standard Update – ASU 2011-04, regarding
the manner of measuring fair value set forth in FAS 157 (ASU 820-10). The updates in the ASU
include clarifications by the FASB of its intentions regarding the manner of implementation of
fair value measurement rules and the current disclosure requirements, as well as updates that
establish principles or specific requirements regarding fair value measurement and regarding the
disclosure requirements regarding to fair value measurement.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 319 -
Note 1 - Principal Accounting Policies (cont'd)
F. New Accounting Standards and Directives of the Supervisor of Banks in Period before
Implementation (cont'd)
(6) Fair value measurement FAS 157 (ASC 820) (cont'd)
Among other matters, these updates include additional clarifications and specific instructions
with regard to the measurement of fair value of financial instruments managed within a
portfolio; rules for the measurement of fair value instruments classified in equity by the
reporting entity; and clarifications regarding the application of premiums for discounts in
calculating the fair value of
an accounting unit of an asset or liability. In addition, the standard sets forth additional
disclosure requirements, as follows:
A. With regard to fair value measurements classified as Level 3 in fair value hierarchy:
The assessment process implemented by the reporting entity;
Analysis of the sensitivity of fair value measurement to changes in unobservable inputs
and interaction between such unobservable inputs, if any.
B. Use of nonfinancial asset in a manner different from the highest and best use, when the
asset is measured at fair value in the balance sheet or when its fair value is included in the
disclosures according to the assumption of highest and best use.
C. Classification into levels, within the fair value hierarchy, for items not measured at fair
value in the balance sheet, but for which the disclosure of fair value is required.
The standard will be implemented in annual periods beginning January 1,2012. Early
implementation is not permitted. The updates established in the ASU shall be implemented
prospectively.
The initial implementation of this standard is expected to have no effect, other than the change
in presentation.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 320 -
Note 2 - Cash on Hand and Deposits with Banks
Reported amounts
Consolidated composition (1):
Consolidated December 31, December 31, 2011 2010 NIS millions
Cash and deposits with Bank of Israel 5,788 5,774
Deposits with commercial banks (2) 1,031 *1,177
Deposits with specialized banking corporations in Israel 142 *181
Total 6,961 7,132
Of which - cash on hand, deposits with banks and deposits with Bank of Israel for an initial period of up to three months 6,750 6,874
(1) See Note 1.A(2).
(2) Of which: the balance of deposits with Bank of Israel as at December 31, 2011 totaled NIS 43 million
(as at December 31, 2010 - NIS 354 million), and the remaining balance in respect of the Banks'
clearing house totals approximately NIS 99 million (as at December 31, 2010 - NIS 192 million).
(3) With regard to liens - See Note 14.
* Reclassified.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 321 -
Note 3 - Securities
Reported amounts
Consolidated composition (1): December 31, 2011
Book value
Adjusted cost (for
shares-cost)
Cumulative other comprehensive
profit
Profits
Losses Fair value (3)
NIS millions
A. Available for sale securities
Bonds and loans: Of Israel government 3,778 3,736 48 (6) 3,778 Of foreign government 3 4 - (1) 3 Of financial institutions in Israel 828 837 8 (17) 828 Of foreign financial institutions 230 237 1 (8) 230 Asset backed securities (ABS) 62 59 6 (3) 62 Of others in Israel 688 732 9 (53) 688 Of foreign others 16 16 - - 16 5,605 (4)5,621 72 (88) 5,605 Shares and other securities 125 (5)116 12 (3) (6)125 Total available for sale securities 5,730 5,737 (7)84 (7) (91) 5,730
December 31, 2011
Cumulative other comprehensive
profit
Book value
Adjusted cost (for
shares-cost) Profits Losses Fair value(3) NIS millions B. Securities held for trading: Bonds and loans: Of Israel government 1,004 1,002 2 - 1,004 Of financial institutions in Israel 1 1 - - 1 Asset backed securities (ABS) *- *- - - *- Of others in Israel 21 26 - (5) 21 1,026 1,029 2 (5) 1,026 Shares and other securities 29 35 - (6) 29 Total trading securities 1,055 1,064 (8)2 (8)11 1,055
Total securities 6,785 6,801 6,785
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 322 -
Note 3 - Securities (cont'd)
Reported amounts
As at December 31,
2011
NIS millions C. Data regarding impaired bonds and bonds in arrear Recorded debt balances of - Impaired bonds accruing interest income 1 Impaired bonds not accruing interest income 40
Total recorded debt balances 41
* Less than NIS 500 thousand.
(1) See Note 1.A.(2).
(2) See Note 22.E. for details of results of activities in investment in bonds.
See Note 24 for details of results of activities in shares.
(3) The fair value of securities is generally based on Stock Exchange prices, which do not necessarily reflect the price obtained in
the event of sale of securities in large quantities.
(4) After a cumulative provision for a decline in value of an investment as at December 31, 2011 in the amount of NIS 66 million.
(5) After a cumulative provision for a decline in value of an investment as at December 31, 2011 in the amount of NIS 22 million.
(6) Including shares and other securities for which there is no ready fair value and which are stated at cost, in the amount of NIS
53 million.
(7) Included in equity in the category "adjustments to fair value of available for sale securities”.
(8) Reflected in the statement of profit and loss.
(9) For bonds pledged as collateral, see Note 14.
(10) Israeli bonds and foreign bonds are differentiated according to the country of residence of the Issuer entity.
See management review, appendix F - Exposure to Foreign Countries.
(11) On November 15, 2011, the Supervisor of Banks issued a circular concerning disclosure of investments in securities and
description of the business of banking corporations, which established new disclosure requirements with regard to securities.
Accordingly, the Bank reclassified the data as at December 31, 2010 to match the item headings and presentation method of
the current period.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 323 -
Note 3 - Securities (cont’d)
Reported amounts
Consolidated composition (1): December 31, 2010
Book value
Adjusted cost (for
shares-cost)
Cumulative other comprehensive
profit
Profits
Losses Fair value (3)
NIS millions
A. Available for sale securities Bonds and loans: Of Israel government 1,832 1,793 43 (4) 1,832 Of foreign government 4 4 - - 4 Of financial institutions in Israel 847 840 9 (2) 847 Of foreign financial institutions 229 229 2 (2) 229 Asset backed securities (ABS) 61 57 7 (3) 61 Of others in Israel 660 626 40 (6) 660 Of foreign others 9 9 *- - 9 3,642 (4)3,558 101 (17) 3,642 Shares and other securities 137 (5)99 38 *- (6)137
Total available for sale securities 3,779 3,657 (7)139 (7) (17) 3,779
December 31, 2010
Cumulative other comprehensive
profit
Book value
Adjusted cost (for
shares-cost) Profits Losses Fair value(3) NIS millions B. Securities held for trading Bonds and loans: Of Israel government 742 743 *- (1) 742 Of foreign government - - - - - Of financial institutions in Israel 6 6 *- *- 6 Of foreign financial institutions - - - - - Of others in Israel 7 7 *- *- 7 Of foreign others - - - - - 755 756 *- (1) 755 Shares and other securities 19 22 1 (4) 19 Total trading securities 774 778 (8)1 (8)(5) 774
Total securities 4,553 4,435 4,553
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 324 -
Note 3 - Securities (cont’d)
Reported amounts
As at December 31,
2010
NIS millions C. Data regarding bonds Recorded debt balances of - Impaired bonds accruing interest income 4 Impaired bonds not accruing interest income 54
Total recorded debt balances 58
* Less than NIS 500 thousand.
(1) See Note 1.A.(2).
(2) See Note 22.E. for details of results of activities in investment in bonds.
See Note 24 for details of results of activities in shares.
(3) The fair value of securities is generally based on Stock Exchange prices, which do not necessarily reflect the price obtained in
the event of sale of securities in large quantities.
(4) After a cumulative provision for a decline in value of an investment as at December 31, 2010 in the amount of NIS 48 million.
(5) After a cumulative provision for a decline in value of an investment as at December 31, 2010 in the amount of NIS 19 million.
(6) Including shares and other securities for which there is no ready fair value and which are stated at cost, in the amount of NIS
54 million.
(7) Included in equity in the category "adjustments to fair value of available for sale securities”.
(8) Reflected in the statement of profit and loss.
(9) For bonds pledged as collateral, see Note 14.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 325 -
Note 3A - Asset-Backed Financial Instruments
Reported amounts
Consolidated composition:
The Bank has asset-backed bonds (ABS) the settlement of which is based on cash flows from a specific
group of assets and presented in the available for-sale portfolio:
The following table shows information regarding the depreciated cost and fair value of asset-backed
bonds in the available-for-sale portfolio:
December 31, 2011
Adjusted cost Cumulative other
comprehensive profit Book value (for shares–cost) Profits Losses (3) Fair value
NIS millions
ABS - Asset-Backed Bonds Backed by bank deposits (1) 5 6 - (1) 5 Others (2) 57 53 6 (2) 57
Total ABS available for sale 62 59 6 (3) 62
(1) NIS 5 million - bond rated AAA in 2010, the proceeds of the offering were invested by the issuers in deposits with banks abroad.
(2) Of which:
- NIS 18 million - non-marketable bonds rated AA in 2011, backed by cash flows from payment of municipal tax.
- NIS 22 million - bonds rated AAA in 2010, backed by assets which are USD - denominated bonds of the state of Israel.
- NIS 12 million - non-marketable bonds rated A - in 2010, backed by cash flows from sales homes.
- NIS 2 million - non-marketable bonds rated AA- in 2011, backed by cash flows from property rentals.
- NIS 1 million - bonds rated AA in 2010, backed by cash flow from bonds issued by an infrastructure company.
- NIS 1 million - bonds rated AA- in 2011, backed by cash flow from water desalination.
- NIS 1 million - bonds rated A+ in 2011, backed by CLN transactions.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 326 -
Note 3A - Asset-Backed Financial Instruments (cont'd)
Reported amounts (3) Additional details regarding asset-backed securities available for sale in an unrealized loss
position:
December 31, 2011
Up to 12 months 12 months or more
fair value Unrealized
losses fair value Unrealized
losses
NIS millions
ABS - Asset-Backed Bonds Backed by bank deposits *- *- 5 (1) Others 9 *- 12 (2) Total ABS available for sale 9 *- 17 (3)
In the opinion of the Bank these losses are of a temporary nature; unrealized losses were therefore
allocated to equity.
* Less then NIS 500 thousand.
December 31, 2010
Adjusted cost Cumulative other
comprehensive profit Book value (for shares–cost) Profits Losses (3) Fair value
NIS millions
ABS - Asset-Backed Bonds Backed by bank deposits (1) 4 5 - (1) 4Others (2) 57 52 7 (2) 57
Total ABS available for sale 61 57 7 (3) 61
(1) NIS 4 million - bonds rated AAA in 2010, the proceeds of the offering were invested by the issuers in
deposits with banks abroad.
(2) Of which:
- NIS 10 million - non-marketable bonds rated A- in 2010, backed by cash flows from sales of
homes.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 327 -
Note 3A - Asset-Backed Financial Instruments (cont'd)
Reported amounts (2) (cont'd)
- NIS 17 million - bonds rated AAA in 2010, backed by assets which are USD - denominated
bonds of the state of Israel.
- NIS 1 million - non-marketable bonds rated AA in 2008, backed by cash flows from vehicle
leasing.
- NIS 19 million - non-marketable bonds rated AA- in 2010, backed by cash flows from payment
of municipal tax.
- NIS 2 million - non-marketable bonds rated A+ in 2010, backed by cash flows from property
rentals.
- NIS 5 million - non-marketable bonds rated BBB- in 2010, (During January, 2011 updated to
BB+) backed by cash flows from gas sales.
- NIS 1 million - bonds rated AA- in 2010, backed by cash flow from water desalination.
- NIS 1 million - bonds rated AA- in 2010, (During February, 2011 updated to A+) backed by CLN
transactions.
- NIS 1 million - bonds rated AA in 2010, backed by cash flow from bonds issued by an
infrastructure company.
(3) Additional details regarding asset-backed securities available for sale in an unrealized loss
position:
December 31, 2010
Up to 12 months 12 months or more
Fair value Unrealized
losses Fair value Unrealized
losses
NIS millions
ABS - Asset-Backed Bonds Backed by bank deposits - - 4 (1) Others 1 *- 10 (2) Total ABS available for sale 1 *- 14 (3)
In the opinion of the Bank these losses are of a temporary nature; unrealized losses were therefore allocated to equity.
* Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 328 -
Note 4 - Credit to the public and allowance for credit losses
Reported amounts As of January 1, 2011, the Bank has implemented the new directive of the Supervisor of Banks
concerning the measurement and disclosure of impaired debts, credit risk, and credit loss provisions
(hereinafter - "The new directive"). The financial statements include disclosure adjusted to reporting
directives according to the directive aforesaid. In light of the fact that the new directive was implemented
prospectively, without restatement of comparative figures, data for the current period are presented below,
for the purpose of comparability of the disclosure, in relation to the relevant balances as at December, 31
2010 (pro-forma data), as they would have been if the directive had been implemented for the first time
that year.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 329 -
Note 4 - Credit to the public and allowance for credit losses (cont'd) Reported amounts The effect of first time implementation of the directive concerning the provision for credit losses in
respect of debts and in respect of off-balance-sheet credit instruments and the movement at the balance of
the allowance to the year ended December 31, 2011 are set out below:
Consolidated composition: Allowance for credit losses
On a group basis ***
Individual **** By extent of
arrears
Other
Total
(NIS millions) Allowance for credit losses as at December 31, 2010 940 (2) 22 (3) 78 (4) (1)1040 Year ended on December 31, 2010: Net accounting write-offs recognized as at 1.1.2011(a) *(813) - - (813) Other changes in the provision for credit losses as at 1.1.2011 (allocated to equity) (a)(b)
8 22 95 125
Provision for credit losses 13 (2) 16 27 Accounting write-offs (97) (3) - (100) Collection of debts written off in accounting in previous years 37 - - 37 Net accounting write-offs (60) (3) - (63) Other **- - - **- Allowance for credit losses as at December 31, 2011 88 39 189 316
Of which: provision for credit losses in respect of off-balance credit instruments 7 - 37 44 * Reclassified (See Note 1.C.5) ** Less than NIS 500 thousand. *** Including provisions on a group basis in respect of debts examined individually and found to be unimpaired. **** Including accounting write-offs of a debt, or part of it, that has been examined on a group basis.
(a) As a result of the initial implementation of the new directive as of January 1, 2011. (b) The changes include an amount totaled NIS 7 million deriving from the first time implementation of circular
of the Supervisor of Banks regarding to treatment of problematic debt, which has expanded the inclusion of calculation of the provision, using the formula of the extent of the arrears for all housing loans.
(c) Pursuant to the new directive as of January 1, 2011 banking corporation is not required to maintain a general, supplementary and extraordinary provision for doubtful debts. However, it continues to calculate the additional provision (using the conversion factors) and verifies that the sum of the group provision at the end of each reporting period will not be less than the sum of the general and additional provision which would be calculated for the same period, gross of tax.
(1) This amount was presented under the item "provision for doubtful debts" before January 1, 2011. (2) This amount was presented under the item "other specific provision" before January 1, 2011. (3) This amount was presented under the item "specific provision by extent of arrears" before January 1, 2011 (4) This amount was presented under the item "supplementary provision" before January 1, 2011
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 330 -
Note 4 - Credit to the public and allowance for credit losses (cont'd)
Reported amounts A. Credit to the public
Pro-formula data
As at December 31, 2011 As at December 31, 2010
Recorded
debt balance
Allowance for credit
losses Net debt balance
Recorded debt balance
Allowance for credit
losses Net debt balance
(NIS millions) (NIS millions) Credit to the public examined on an individual basis (1) 13,576 216 13,360 **13,449 **259 13,190Credit to the public examined on a group basis (2) 9,564 56 9,508 **8,466 **43 8,423 Total credit to the public 23,140 272 22,868 21,915 302 21,613 Of which: Customers' liabilities for acceptances 33 *- 33 19 *- 19 (1) Including credit examined on an individual basis and found to be unimpaired. The allowance for credit losses
in respect of such credit was calculated on a group basis. For more details in respect of credit examined on an individual basis – See Note 4.B.
(2) Credit for which the allowance for credit losses in assessed on a group basis using the method of the extent of arrears, pursuant to the appendix to Proper Conduct of Banking Business Directive No. 314, and other credit not individually examined for which the provision for credit losses was calculated on a group basis. For more details – See Note 4.C.
(3) For more details regarding the credit categories examined on an individual basis and credit categories examined on a group basis - See Note 1.e.5.
* Less than NIS 500 thousand.
** Reclassified (See Note 1.C.5).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 331 -
Note 4 - Credit to the public and allowance for credit losses (cont'd)
Reported amounts
B. Credit to the public examined on an individual basis:
1. Credit to the public examined on an individual basis includes:
Pro-formula data
As at December 31, 2011 As at December 31, 2010
Recorded debt
balance Allowance for credit losses
Net debt balance
Recorded debt balance
Allowance for credit losses
Net debt balance
(NIS millions) (NIS millions) Impaired credit to the public (a) 524 81 443 **662 **138 524Unimpaired credit to the public, 90 days or more in arrears (b) - - - - - -Unimpaired credit to the public, 30 to 89 days in arrears (b) 35 *- 35 125 *- 125Other unimpaired credit to the public (b) 13,017 135 12,882 **12,662 **121 12,541 Total unimpaired credit to the public (b) 13,052 135 12,917 12,787 121 12,666
Total individual examined credit to the public 13,576 216 13,360 13,449 259 13,190
(a) Impaired credit does not accrue interest income, with the exception of certain credit in restructuring, as noted in sub-section 4 below.
(b) Credit examined individually and found to be unimpaired. The allowance for credit losses in respect of this credit was calculated on a group basis.
* Less than NIS 500 thousand.
** Reclassified (See Note 1.C.5). Additional information regarding impaired credit to the public examined individually:
Pro-formula
data December 31,
2011 December 31,
2010 Recorded debt balance
(NIS millions)
2. Impaired credit to the public for which an individual credit loss allowance exists
298 **403
Impaired credit to the public for which an individual credit loss allowance does not exists 226 **259
Total impaired credit to the public 524 662
3. Impaired credit to the public measured at the current value of cash flows
499 **655
Impaired credit to the public measured by the value of collateral 25 **7
Total impaired credit to the public 524 662
** Reclassified (See Note 1.C.5).
*** Credit contingent upon collateral
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 332 -
Note 4 - Credit to the public and allowance for credit losses (cont'd)
Reported amounts
B. Credit to the public examined on an individual basis (cont'd):
4. Problematic credit in restructuring where the terms of the credit has been changed:
Pro-formula data
December 31, 2011 December 31, 2010
Recorded
debt balance
Allowance for credit
losses Net debt balance
Recorded debt balance
Allowance for credit
losses Net debt balance
(NIS millions) (NIS millions) Not accruing interest income 101 2 99 **111 17 94Accruing interest income, in arrears of 90 days or more - - - - - -Accruing interest income, in arrears of 30 to 89 days - - - - - - Accruing interest income 17 - 17 **23 **7 16
Total credit (included in impaired credit to the public) 118 2 116 134 24 110 There are no commitments to grant additional credit to debtors whose problematic credit has been restructured with changes to the terms of the credit as at December 31, 2011 (December 31, 2010: NIS 2 million).
** Reclassified (See Note 1.C.5)
5.
For the year ended on
December 31, 2011
(NIS millions) Average recorded debt balance of impaired credit to the public in the reported period 551 Total interest income recorded in the reported period in respect of this credit, during the period of time in which it was classified as impaired* 19 Total interest income that would have been recorded in the reported period, if this credit had accrued interest according to its original terms 34 * Of which: interest income recorded according to the cash base accounting method 10
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 333 -
Note 4 - Credit to the public and allowance for credit losses (cont'd)
Reported amounts
C. Credit to the public examined on a group basis includes: Consolidated composition:
1. Housing loans in respect of which a minimum provision for credit losses was performed based on the extent of arrears, pursuant to the Appendix of Proper Conduct to Banking Business Directive No. 314:
As at December 31, 2011
Extent of arrears
In arrear of 30 to 90
days In extent of More than 90 days
Over a month, up
to 3 months
Over 3 months, up to 6 months
Over 6 months, up to 15 months
Over 15 months, up to 33 months
Over 33 months
Total over 3 months
Balances in respect to refinanced
loans in arrears (3) Total
(NIS millions)
Amount of arrears 1 - 1 1 33 35 5 41Of which: Allowance for interest (1) - - - - 15 15 - 15Recorded debt balance 49 11 8 3 27 49 11 109Allowance for credit losses(2) - - 1 2 22 25 5 30 Net debt balance 49 11 7 1 5 24 6 79
As at December 31, 2010 – Pro-forma data
Extent of arrears
In arrear of 30 to 90
days In extent of More than 90 days
Over a month, up
to 3 months
Over 3 months, up to 6 months
Over 6 months, up to 15 months
Over 15 months, up to 33 months
Over 33 months
Total over 3 months
Balances in respect to refinanced
loans in arrears (3) Total
(NIS millions) Amount of arrears -* -* 1 1 21 23 2 25Of which: Allowance for interest (1) -* -* -* -* 8 8 -* 8Recorded debt balance 34** 8 6 6 19 39 8 81Allowance for credit losses(2) -* - 1 3 16 20 2 22 Net debt balance 34 8 5 3 3 19 6 59
(1) In respect of interest on amounts in arrears. (2) Includes individual allowance, beyond the extent of arrears; does not include the balance of the allowance for
interest and the balance of the group allowance beyond the level required under the method of the extent of arrears.
(3) Loans in which an arrangement has been signed for repayment of the arrears of the borrower, where the amortization schedule has been changed on respect of the balance of the loan that has yet matured.
* Less than NIS 500 thousand.
** Reclassified (See Note 1.C.5).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 334 -
Note 4 - Credit to the public and allowance for credit losses (cont'd)
Reported amounts
C. Credit to the public examined on a group basis includes (cont'd):
2. Other credit not individually examined, for which the credit loss allowance was calculated on a group basis: Pro-formula data
As at December 31, 2011 As at December 31, 2010 Recorded debt
balance Allowance for credit losses
Net debt balance
Recorded debt balance
Allowance for credit losses
Net debt balance
(NIS millions) (NIS millions)
Impaired credit to the public - - - - - - Unimpaired credit to the public, 90 days or more in arrears 9 1 8 7 2 5 Unimpaired credit to the public, 30 to 89 days in arrears 25 - 25 16 *- 16 Other unimpaired credit the public 2,950 16 2,934 **2,596 **11 2,585
Total 2,984 17 2,967 2,619 13 2,606
* Less than NIS 500 thousand. ** Reclassified (See Note 1.C.5).
D. Allowance for credit losses in respect of debts and in respect of off-balance-sheet credit instruments:
Consolidated composition: For year ended on December 31, 2011
1. Allowance for credit losses
On a group basis**
Individual By extent of
arrears Other* Total (NIS millions)
Allowance for credit losses as at December 31, 2010 (pro-forma data) 135 44 173 352 Provision (income) for credit losses 13 (2) 16 27Accounting write-offs (97) (3) - (100)Collection of debts written off in accounting in previous years 37 - - 37Net accounting write-offs (60) (3) - (63)Other - - - -Allowance for credit losses as at December 31, 2011 88 39 189 316
* Less than NIS 500 thousand. ** Including provisions on a group basis in respect of debts examined individually and found to be unimpaired.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 335 -
Note 4 - Credit to the public and allowance for credit losses (cont'd)
Reported amounts
D. Allowance for credit losses in respect of debts and in respect of off-balance-sheet credit instruments (cont'd):
Consolidated composition:
2. As at December 31, 2011
On a group basis *
Individual By extent of
arrears Other* Total (NIS millions)
Composition of the allowance as at December 31, 2011: In respect of credit to the public 81 39 152 272In respect of debts other then credit to the public - - - -In respect of off-balance-sheet items (included in the "other liabilities" item) 7 - 37 44
Allowance for credit losses as at December 31, 2011 88 39 189 316
As at December 31, 2010 – Pro-forma Data
On a group basis *,**
Individual By extent of
arrears Other* Total (NIS millions)
Composition of the allowance as at December 31, 2010 In respect of credit to the public **138 30 **134 302In respect of debts other then credit to the public - - - -In respect of off-balance-sheet items (included in the "other liabilities" item) 4 - **39 43
Allowance for credit losses as at December 31, 2010 142 30 173 345
* Includes the provision on a group basis in respect of debts examined individually and found to be unimpaired.
** Reclassified (See Note 1.C.5). *** The pro-forma data does not include an amount totaled NIS 7 million deriving from the first time implementation of circular of the Supervisor of
Banks regarding to treatment of problematic debt, which has expanded the inclusion of calculation of the provision, using the formula of the extent of the arrears for all housing loans.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 336 -
Note 4 - Credit to the public and allowance for credit losses (cont'd)
Reported amounts
E. Additional details regarding housing loans and the manner of calculation of the allowance for credit losses:
Consolidated composition:
As at December 31, 2011
Housing loans
Housing loans – impaired or more than 90 days in
arrears (1) Allowance for credit losses
Recorded debt balance
Amount in arrears(3)
Recorded debt balance
By extent of arrears
Other
Total On a group
basis On an
individual basis (NIS millions)
Housing loans requiring calculation of allowance for credit losses based on extent of arrears (6) 6,580 40 60 38 - - 38 Other housing loans 183 - *- - 1 - 1 Total (5)6,763 40 60 (4)38 1 - 39 Of which: In respect of housing loans granted to purchasing groups currently in the process of construction 515 - - - - - -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 337 -
Note 4 - Credit to the public and allowance for credit losses (cont'd) Reported amounts
E. Additional details regarding housing loans and the manner of calculation of the allowance for credit losses (cont'd):
Consolidated composition:
As at December 31, 2010 Pro-forma data
Housing loans
Housing loans – impaired or more than 90 days in
arrears(1) Allowance for credit looses
Recorded debt balance
Amount in arrears(3)
Recorded debt balance
By extent of arrears
Other
Total On a group
basis On an
individual basis (NIS millions)
Housing loans requiring calculation of allowance for credit losses based on extent of arrears(6) 4,372 25 47 **30 - - 30 "Big" loans 1,475 5 7 - *- 3 3 Other housing loans (2) 154 13 16 - *- 9 9 Total (5)6,001 43 70 (4)30 *- 12 42 Of which: In respect of housing loans granted to purchasing groups currently in the process of construction 352 - - - - - -
(1) Impaired housing loans and housing loans in arrear of more than 3 months. (2) Housing loans for which the balance of each exceeds NIS 893 thousand. (3) Including interest on the amount in arrears. (4) Includes the allowance beyond the requirement based on the extent of arrears in the amount of NIS 12 million (December 31, 2010: NIS 11 million). (5) Of which: floating-rate housing loans In the amount of NIS 4,579 million (December 31, 2010: NIS 3,871 million). (6) Of which: all purpose loans against liens of homes in the amount of NIS 99 million (December 31, 2010: NIS 113 million).
* Less than NIS 500 thousand.
** Reclassified (See Note 1.C.5)
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 338 -
Note 4 - Credit to the public and allowance for credit losses (cont'd)
Reported amounts
F. Classification of credit to the public and off-balance-sheet credit risk according to the size of debt per borrower: Consolidated composition (3):
Consolidated Consolidated December 31, 2011 December 31, 2010(6)
Credit limit per borrower (in thousands of NIS) Number of
borrowers(2) Credit (1) Off-Balance-sheet
credit risk (4) Number of
borrowers(2) Credit(1)
Off-Balance- sheet credit
risk (4) From To (NIS millions) (NIS millions)
0 10 22,903 141 32 24,698 39 3810 20 13,515 100 93 12,123 82 9220 40 17,608 334 183 14,031 248 15540 80 16,782 601 344 14,083 474 31180 150 8,401 567 338 7,973 532 320150 300 5,883 1,092 203 5,868 1,076 188300 600 6,490 2,636 236 5,929 2,330 230600 1,200 3,584 2,676 282 3,244 2,265 3391,200 2,000 850 1,133 231 834 986 2702,000 4,000 566 1,215 426 584 1,083 5314,000 8,000 298 1,157 598 318 1,164 6308,000 20,000 240 2,014 1,040 258 1,989 1,29720,000 40,000 126 2,081 1,526 125 1,799 1,75240,000 200,000 128 5,562 4,900 149 5,873 5,762200,000 400,000 9 1,758 624 11 1,766 1,042400,000 466,000 2 (5)713 192 1 (5)447 2
97,385 23,780 11,248 90,229 22,153 12,959
(1) Credit and off-balance-sheet credit risk are presented before the effect of allowance for credit losses and deductible collateral for purposes of the indebtedness of a borrower and a borrower groups. In 2010, risk and credit risk are presented net of provision for credit losses. Following the amendment of indebtedness directive, comparative figures for previous year were not restated therefore they are not comparable.
(2) Number of borrowers according to total credit and off-balance-sheet credit risk. (3) See Note 1.A.2. (4) Credit risk in off-balance-sheet financial instruments as calculated for purposes of borrower credit limitations.
(5) Credit balances as at December 31, 2011 and December 31, 2010 are mostly covered by eligible collateral. (6) Comparative figures for previous year were not restated following amendment Proper Conduct of Banking Business No. 313 – Limits on the indebtedness of Borrower and Borrower Groups,
therefore they are not comparable.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 339 -
Note 5 - Investments in Investee Companies and Details on such Companies Reported amounts Details of principal investee companies (1):
Investments on equity basis as at December 31 Share in Dividend received Other items equity and Profit (loss) since since date of accumulated in the Bank's equity in the voting Cost of acquisition date of acquisition acquisition equity (2) profits (losses) of investee companies
2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2009
Company name Main activity % NIS millions NIS millions NIS millions NIS millions NIS millions Union Investments and Enterprise Real (A.S.Y) Ltd. (3) (8) Investments 100 149 149 15 ***8 - - 10 26 7 7 9 Impact Union Investment Portfolios (4) Management of investment portfolios 100 10 10 13 11 - - 1 1 2 2 2 Union Finances Ltd. (5) 100 2 2 36 36 - - - - *- *- *- Union Balances Ltd. (6) 100 1 1 39 38 - - - - 1 *- *- Union Issuances Ltd. (7) Issuance of liability deeds 100 16 16 2 *- - - - - 2 *- (1) Carmel Union - Mortgages and Operating services to Investments Ltd. the bank 100 138 138 40 35 (59) (52) - - 5 5 3 Livluv Insurance Agency (1993) Ltd. Real estate insurance 100 11 11 22 20 - - - - 2 2 2 Union Leasing Ltd. Leasing 100 1 1 49 **43 - - - - 8 7 8 Union Bank Trust Company Ltd. Trustee services 100 2 2 21 18 - - - - 3 5 2 * Less than NIS 500 thousand. ** On January 1, 2011, the Bank adopted the new directive of the Supervisor of Banks concerning the measurement and disclosure of impaired debts, credit risk and provisions for credit losses. Comparable figures for previous years
were not restated; therefore they are not comparable to data as at December 31, 2011. *** Reclassified. (1) The data on the subsidiaries reflects the investment of the Bank in them less the investments of each company in other principal investee companies of the Bank Group, and the Bank’s equity in their results of operations less each
company’s equity in the results of operations of other principal investee companies of the Bank Group. (2) Including mainly adjustments to of the presentation of available for sale securities of the subsidiaries according to fair value, net. (3) The investment in the subsidiary includes capital notes in the amount of NIS 139 million (as at December 31, 2010 - NIS 139 million). Regarding undertakings of the subsidiary, see Note 18.C.(3) below. (4) The investment in the subsidiary includes capital notes in the amount of NIS 5 million (December 31, 2010 - NIS 5 million). See Note 18.C.(9).a regarding guarantees provided by the Bank to the subsidiary’s customers. (5) Formerly - Union Mutual Funds (U.M.F.) Ltd. The mutual funds activity was sold in 2006. (6) Formerly - Union Provident Funds Management Ltd. See. The provident fund activity was sold in 2006. (7) The investment in the subsidiary includes capital notes in the amount of NIS 16 million (December 31, 2010 - NIS 16 million). See Note 10 regarding the issuance of subordinated notes by Union Issuances Ltd. (8) Union financial underwriting (2010) Ltd. (Henceforth Union Underwriting) was established on January 10, 2010 as a subsidiary of Union Capital Markets (a subsidiary of A.S.Y company). On November 9, 2010 Union
underwriting was registered in the underwriters registration, the Company cooperates with reputed professionals in its field. Within this cooperation certain holdings were allocated to these service providers which constitute a minority of the aforementioned company's stock that does not exceed 30% of this proportion 15% were allocated to a service provider that made an alliance with the company. On January 1, 2012 another 5% allocated to a company controlled by the CEO, so he indicately hold 20% of Union Underwriting shares. On January 2012, Union Underwriting committed itself to the allocation of another 5% of its shares to another service provider that connected with the company if certain conditions that were set up in agreement with the additional provider are met, he may be allocated with an additional 5% of Union Underwriting shares.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 340 -
Note 6 - Buildings and Equipment
Reported amounts
A. Consolidated and the Bank - Composition:
Buildings and real estate (including
installations and leasehold
improvements)
Equipment, furniture
and vehicles**
Software costs**,*** Total
NIS millions
Cost of assets:
Balance as at December 31, 2010 404 320 278 1,002 Additions 12 13 62 87 Subtractions (9) - - (9) Balance as at December 31, 2011 407 333 340 1,080
Depreciation and losses from impairment
Balance as at December 31, 2010 *176 281 165 622 Additions 11 11 36 58 Subtractions (8) - - (8) Balance as at December 31, 2011 *179 292 201 672
Book value
As at December 31, 2010 228 39 113 480 As at December 31, 2011 228 41 139 408 Weighted average depreciation rates as at December 31, 2011 3.41% 13.8% 21.3% Weighted average depreciation rates as at December 31, 2010 3.3% 14.5% 20.8%
B. Buildings and real estate include leasehold rights in real estate in the amount of NIS 132 million
(December 31, 2010 - NIS 134 million).
C. Rights in real estate in the depreciated amount of NIS 86 million have not yet been registered in the
Bank's name at the Land Registry Office (December 31, 2010 - NIS 88 million).
D. Buildings and real estate include property which is not occupied by the Bank in the amount (net of
accumulated depreciation and provision for deterioration) of NIS 9 million, of which a total of NIS 1
million in respect of Buildings and real estate designated for sale. (December 31, 2010 - NIS 11 million,
of which a total of NIS 3 million was due to Buildings and real a state designated for sale).
E. A Building with a depreciated cost of NIS 9 million, that was mainly used by the Bank, has been sold
after the balance sheet date.
* Includes provision for deterioration in the amount of NIS 6 million (2010 - NIS 7 million).
** Comparative data were reclassified in order to match the items headings and the presentation method in the
current period (See Note 1.E.12).
*** Capitalized expenses in 2011- NIS 51 million. See Note 1.E.15 regarding the issuance of software cost
capitalization policy.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 341 -
Note 7 - Other Assets Reported amounts
Consolidated - composition (1): December 31, December 31, 2011 2010 NIS millions
Net deferred tax assets (See Note 28.g) 219 111
Assets in respect of Maof market transactions (2) 739 385
Other receivables and debit balances (3), (4) 83 60 Total other assets 1,041 556
(1) See Note 1.A.2. (2) Assets which does not meet the definition of derivatives. See Note 11 – Debit in respect of Maof Market
transactions. (3) Includes NIS 13 million in respect of a loan with no scheduled maturity date, which was granted to Hof Hathelet
(Tel Aviv-Herzlyia) Development Company Ltd., in whose shares the Bank holds a 14% interest. The Bank and other shareholders in the company made loans for coverage of development expenses, which are to be returned out of the amounts the company will receive upon realization of its assets. (December 31, 2010 - NIS 13 million).
(4) a. Including prepaid expenses in amount of NIS 0.2 millions in respect of operating lease in which the Bank is the Lessee.
b. The Bank and its subsidiaries lessee buildings and equipments in operating lease with lease agreements linked to CPI.
c. The Bank paid leasing fees in respect of the buildings, totaled NIS 24 million (2010- NIS 22 Million, 2009 – NIS 19 Million).
For rent in the future years - See Note 18.C.1.
Note 8 - Deposits from the Public
Reported amounts
Consolidated - composition (1): December 31, December 31, 2011 2010 NIS millions
Deposits on demand 6,653 7,355
Limited time deposits 24,443 *21,417
Deposits in savings plans 62 72 Total deposits of the public 31,158 28,844
(1) See Note 1.A.2.
* Reclassified against Deposits from Banks.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 342 -
Note 9 - Deposits from Banks
Reported amounts
Composition: Consolidated and the Bank December 31, December 31, 2011 2010 NIS millions
Commercial banks:
Deposits on demand 67 49 Limited time deposits 292 *200 Acceptances 33 19
Special banking corporations: Deposits on demand - 3
Total deposits from banks 392 271
See Note 14 regarding liens.
* Reclassified against Deposits from the public.
Note 10 - Deferred Liability Deeds Deposit Certificates
Reported amounts
A. Composition:
Consolidated Internal rate Average life (1) of return (2) December 31, December 31, December 31, 2011 2011 2010 Years % NIS millions
Deferred liability deeds (3), (5) Deferred liability deeds: In NIS unlinked 6.3 4.5 644 434 In NIS linked to the CPI 4.9 4.4 1,470 1,272 Deposit certificates: In NIS unlinked to the CPI 2.4 5.0 332 332 In NIS linked to the CPI 1.5 1.3 315 306
Total deferred liability deeds and deposit certificates 2,761 2,344
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 343 -
Note 10 - Deferred Liability Deeds Deposit Certificates (cont'd)
Reported amounts
A. Composition (cont'd)
The Bank Internal rate Average life (1) of return (2) December 31, December 31, December 31, 2011 2011 2010 Years % NIS millions
Deferred liability deeds (3), (4)
In NIS linked to the CPI 3.0 5.0 222 267 Total deferred liability deeds 222 267 (1) The average life is the weighted average period of the payments based on the cash flow
capitalized at the internal rate of return.
(2) The internal rate of return is the interest rate at which the anticipated future payments are
discounted to arrive at the amount included in the financial statements.
(3) The deferred liability deeds and deposit certificates are not convertible into shares.
(4) The deferred liability deeds will be settled until 2022.
(5) Including deferred liabilities deeds in amount of NIS 2,538 million (December 31, 2010 – NIS
2,077 million).
B. Shelf Prospectuses:
1. On August 31, 2009 a subsidiary of the Bank Union Issuances LTD, published a shelf Prospectus for
the issuance of new series of liability certificate and expansion of exist series.
According to the shelf prospectus, the Company can issue -
Up to 12 series of bonds (Series E through P) at a regular repayment priority ranking, which shall be
equal to the repayment priority ranking of all deposits deposited with the Bank from time to time, and
up to 12 series of deferred liability deeds (Series Q through BB) at a repayment priority ranking
subordinated to all other liabilities of the Bank and of the Company which have not been assigned a
repayment priority ranking equal to and/or inferior to that of the notes of that series.
2. On March 10, 2011, the subsidiary Union Issuances Ltd. (hereinafter: "Union Issuances" published
an amendment to the prospectus dated August 31, 2009 (hereinafter: the "Prospectus Amendment").
In the Prospectus Amendment, the company requests permission to offer subordinated notes to the
public through an exchange purchase offer, such that each holder of the company's Subordinated
Notes (Series A) shall be entitled to sell all or part of their Subordinated Notes (Series A) to the
company, in consideration for Subordinated Notes (Series Q) of the company.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 344 -
Note 10 - Deferred Liability Deeds Deposit Certificates (cont'd)
B. Shelf Prospectuses (cont'd)
3. On August 29, 2011, Union Issuances Ltd., a wholly owned subsidiary of the Bank (hereinafter: the
"Company"), published a shelf prospectus dated August 30, 2011, for the issuance of the following
series:
- Up to 11 series of bonds (Series F-P) at an ordinary repayment rank, equal to the repayment rank
of all deposits deposited with the Bank from time to time; and up to 11 series of subordinated
notes (Series 20-30), at a repayment rank subordinated to all other liabilities of Union Bank and of
the Company that have not been assigned a repayment rank equal and/or inferior to the repayment
rank of the subordinated notes of that series, with the exception of rights of creditors who hold
instruments included in tier I capital and in upper tier II capital of the Bank (hereinafter, in this
section, the subordinated notes and the bonds, jointly: the "Notes").
Each of the series of Notes shall have a par value of up to NIS 1,000,000,000; the Notes in each
series issued as noted above shall be registered in a name, and shall be repaid in several equal
payments (with the exception of the final payment, which may be different), as established in the
initial offering report, but no more than one payment per quarter.
The linkage base and the type of interest borne by the principal of the Notes in each series to be
issued shall be determined in the offering report according to which each series is issued for the
first time. The interest rate borne by the principal of the Notes in each series to be issued under
this prospectus, or the spread above or below the basic interest rate, as relevant, borne by the
principal of the Notes, shall be determined in an auction, according to which the initial offering of
the Notes in that series shall be performed; or shall be established in the initial shelf offering
report of the Notes in that series. The interest shall be paid at a frequency and at dates as
determined by the Company prior to the initial offering of the Notes in the relevant series
(hereinafter: the "Initial Offering of the Notes"), but no more than one payment per quarter, and as
detailed in the offering report published by the Company.
- Up to NIS 1,000,000,000 par value in Subordinated Notes (Series B) registered in a name, to be
offered through the expansion of a marketable series initially issued through the shelf offering
report dated January 17, 2007, published in accordance with the shelf prospectus of the Company
dated January 7, 2007 (hereinafter: the "2007 Prospectus"). The Subordinated Notes (Series B)
will be repaid in three equal annual payments, on January 21 of each of the years 2015-2017
(inclusive), bearing a CPI-linked annual interest rate of 4.3%, paid semi-annually on January 21
and July 21, from July 21, 2007, to January 21, 2017 (inclusive). The principal and interest are
linked to the consumer price index published on January 15, 2007 in respect of December 2006.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 345 -
Note 10 - Deferred Liability Deeds Deposit Certificates (cont'd)
B. Shelf Prospectuses (cont'd)
3. (cont'd)
- Up to NIS 1,000,000,000 par value in Subordinated Notes (Series C) registered in a name, to be
offered through the expansion of a marketable series initially issued through the shelf offering
report dated January 17, 2007, published in accordance with the 2007 Prospectus. The
Subordinated Notes (Series C) will be repaid in three equal annual payments, on January 21 of
each of the years 2015-2017 (inclusive), bearing an unlinked annual interest rate of 6.2%, paid
semi-annually on January 21 and July 21, from July 21, 2007, to January 21, 2017 (inclusive). The
principal and interest are not linked to any currency or index.
- Up to NIS 1,000,000,000 par value in Subordinated Notes (Series D) registered in a name, to be
offered through the expansion of a marketable series initially issued through the shelf offering
report dated March 8, 2007, published in accordance with the 2007 Prospectus. The Subordinated
Notes (Series D) will be repaid in three equal annual payments, on March 13 of each of the years
2013-2015 (inclusive), bearing an unlinked annual interest rate of 5.95%, paid semi-annually on
March 13 and September 13, from September 13, 2007, to March 13, 2015 (inclusive). The
principal and interest are not linked to any currency or index.
- Up to NIS 1,000,000,000 par value in Subordinated Notes (Series E) registered in a name, to be
offered through the expansion of a marketable series initially issued through the shelf offering
report dated June 17, 2010, published in accordance with the shelf prospectus of the Company
dated August 31, 2009, as amended on March 10, 2011 (hereinafter: the "2009 Prospectus"). The
Subordinated Notes (Series E) will be repaid in three equal annual payments, on June 21 of each of
the years 2012-2014 (inclusive), bearing a CPI-linked annual interest rate of 1.3%, paid annually
on June 21, from June 21, 2011, to June 21, 2014 (inclusive). The principal and interest are linked
to the consumer price index published on June 15, 2010 in respect of May 2010.
- Up to NIS 1,000,000,000 par value in Subordinated Notes (Series Q) registered in a name, to be
offered through the expansion of a marketable series initially issued through the shelf offering
report dated September 20, 2010, published in accordance with the 2009 Prospectus. The
Subordinated Notes (Series Q) will be repaid in one payment, on September 26, 2017, bearing an
annual interest rate of 3.1%, paid annually on September 26, from September 26, 2011, to
September 26, 2017 (inclusive). The principal and interest are linked to the consumer price index
published on September 15, 2010 in respect of August 2010.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 346 -
Note 10 - Deferred Liability Deeds Deposit Certificates (cont'd)
B. Shelf Prospectuses (cont'd)
3. (cont'd)
- Up to NIS 1,000,000,000 par value in Subordinated Notes (Series R) registered in a name, to be
offered through the expansion of a marketable series initially issued through the shelf offering
report dated December 21, 2010, published in accordance with the 2009 Prospectus. The
Subordinated Notes (Series R) will be repaid in one payment, on December 1, 2019, bearing an
annual interest rate at the interest rate of Floating Rate Government Bond 520, plus a spread of
1.4%, paid four times annually, on March 1, June 1, September 1, and December 1 of each of the
years 2011-2019 (inclusive), from March 1, 2011 to December 1, 2019 (inclusive). The principal
and interest are not linked to any currency or index.
- Up to NIS 1,000,000,000 par value in Subordinated Notes (Series S) registered in a name, to be
offered through the expansion of a marketable series initially issued through the shelf offering
report dated September 30, 2011, published in accordance with the 2009 Prospectus. The
Subordinated Notes (Series S) will be repaid in three payments, on July 4 of each of the years
2019-2021 (payments in respect of 2019 and 2020 will be in the amount of 33.3333% of the
principal each, while the payment in respect of 2021 will be in the amount of 33.3334% of the
principal), bearing a fixed annual interest rate of 4.15%, paid each year on July 4, in each of the
years 2012-2021 (inclusive), from July 4, 2012 to July 4, 2021 (inclusive). The principal and
interest are linked to the consumer price index published on June 15, 2011 in respect of May 2011.
- Up to 12 series of commercial securities (Series 1-12) (hereinafter: the "Commercial Securities")
registered in a name, to be repaid in a number of equal payments to be determined in the initial
offering report, as this term is defined below, but no more than one payment per quarter; the
linkage base and the type of interest borne by the principal of the Commercial Securities to be
issued shall be determined in the offering report according to which each series is issued for the
first time; each series of Commercial Securities shall have a par value of up to NIS 1,000,000,000;
the interest rate to be borne by the principal of the Commercial Securities to be issued under this
prospectus, or the spread above or below the basic interest rate, as relevant, borne by the principal
of the Commercial Securities, shall be determined in an auction, according to which the initial
offering of the Commercial Securities in that series shall be performed, or shall be established in
the initial shelf offering report of the Commercial Securities in that series; the interest shall be paid
at a frequency and at dates as determined by the Company immediately prior to the initial offering
of the Commercial Securities in the relevant series (hereinafter: the "Initial Offering of the
Commercial Securities"), but no more than one payment per quarter, and as detailed in the offering
report published by the Company.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 347 -
Note 10 - Deferred Liability Deeds Deposit Certificates (cont'd)
B. Shelf Prospectuses (cont'd)
3. (cont'd)
Union Bank granted the trustees of the holders of the Notes included in the shelf prospectus consent
in principle to fulfill all of the terms of the Notes offered under the shelf prospectus to be held by the
public, subject to a separate specific commitment to be made by the Bank in advance with respect to
each offering of Notes in the issued series, in which the Bank will undertake a commitment to fulfill
the terms of the Notes in that series. In each offering report, the Company shall include the specific
commitment of the Bank, as noted, with regard to the Notes to be issued under the offering report.
Inasmuch as the aforesaid commitment of Union Bank applies to subordinated notes, it has a
subordinated standing relative to the other obligations of Union Bank that have not been assigned an
equal or inferior repayment rank, with the exception of the rights of creditors who hold instruments
included in tier I capital and in upper tier II capital, as these terms are defined in the Proper Conduct
of Banking Business Directives.
In accordance with the trust statements, the Notes to be offered under the offering report
(hereinafter: the "Offered Notes") are not secured by any collateral. The consideration from the
issuance of the Offered Notes under this shelf prospectus shall be deposited by the Company in
deposits with Union Bank (hereinafter: the "Deposits"), which shall have repayment and linkage
terms similar to the terms of the Offered Notes, and interest terms identical or preferable thereto,
allowing full repayment of the Notes, on time, plus a spread of 0.05%, or a spread at another rate to
be agreed upon between the Bank and the Company. The Company shall be entitled to issue
additional series of Notes of various types, at a preferable, identical, or inferior degree of security
relative to the Notes offered under this shelf prospectus.
C. Offerings under shelf prospectuses:
1. On June 30, 2011, Union Issuances published a shelf offering report pursuant to a shelf prospectus of
Union Issuances published on August 31, 2009, and the amendment thereto of March 10, 2011.
Pursuant to the shelf offering report, 300,895 units of Subordinated Notes (Series S) were issued on
July 4, 2011, via auction on the interest rate. Each unit is composed of NIS 1,000 par value. The gross
consideration in respect thereof amounted to approximately NIS 301 million. Issuance costs totaled
NIS 2.5 million. The effective interest rate was 4.263%.
2. On April 11, 2011, Union Issuances published a shelf offering report, pursuant to a shelf prospectus
published on August 31, 2009, and the aforesaid amendment thereto of March 10, 2011. Pursuant to
the shelf offering report, 210,176 units of Subordinated Notes (Series R) were issued, via auction on
the unit price, by expansion of a marketable series. Each unit is composed of NIS 1,000 par value. The
gross consideration in respect thereof amounted to approximately NIS 214 million. Issuance costs
totaled NIS 1.8 million. The effective interest rate was 4.9%.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 348 -
Note 10 - Deferred Liability Deeds Deposit Certificates (cont'd)
C. Shelf Prospectuses: (cont'd)
3. On December 21, 2010, Union Issuance published a shelf offer report under a shelf prospectus of
Union Issuance publish on August 31, 2009. 235,000 units of Series R subordinated notes issued
(through an interest-rate auction) according to the shelf offer report. Each unit consists of a par value
of NIS 1,000. The gross consideration in respect of these units totaled NIS 235 million.
Total flotation cost totaled NIS 2.9 million. Effective interest rate is 5.17%.
4. On September 20, 2010 Union Issuance published a shelf offer report under a shelf prospectus of
Union Issuances published on August 31, 2009. 115,000 units of Series Q subordinated notes were
issued (through an interest-rate auction) according to the shelf offer report. Each unit consist of a par
value of NIS 1,000. The gross consideration in respect of these units to these units totaled NIS 115
million.
Flotation costs totaled NIS 0.8 million. Effective interest rate is 3.218%.
5. On June 17, 2010, Union Issuance published a shelf offer report under a shelf prospectus of Union
Issuances published on August 31, 2009. According to the shelf offer report 300,000 units of Series E
bonds were issued (through an interest-rate auction). Each unit consists of a par value of NIS 1,000.
The gross consideration in respect of these units totaled NIS 300 million.
Flotation costs totaled NIS 1.8 million. Effective interest rate is 1.5%
6. On March 24, 2010, Union Issuance published a shelf offer under a prospectus, according to which
(Series D) bonds were issued (by auction), through the expansion of a tradable series, in which 80,000
units of NIS 1,000 par value were issued in consideration for approximately NIS 84 million.
Flotation costs totaled NIS 0.4 million. Effective interest rate is 4.82%
D. With regard to the capital notes included in Tier II, See Note 13.
E. During 2011, the Bank did not issue non-tradable subordinated notes (in 2010 - the Bank issued non-
tradable subordinated notes in the amount of NIS 25 million.
F. On December 16, 2010, Midroog announced that the rating and rating horizon of the Bank had remained
unchanged relative to the preceding year, as follows: long-term deposits of the Bank - Aa3; short-term
deposits- P-1; subordinated notes - A1; deferred capital notes - A2; rating borazon - Stable.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 349 -
Note 11 - Other Liabilities
Reported amounts
Composition:
Consolidated The Bank December 31, December 31, December 31, December 31, 2011 2010 2011 2010 NIS millions NIS millions
Excess of provision for severance pay, retirement, and pensions over amounts funded
(see Note 15.A.7) 272 *231 272 *231 Excess of current provision for Income tax over advances paid 4 5 3 4 Income received in advance 16 17 15 16 Employees - in respect of salaries and related benefits 88 81 87 80 Obligation in respect of maof market transactions (1) 739 385 739 385 Payables in respect of credit cards 318 283 318 283 Net clearing balance in respect of transactions in securities 13 5 13 5 Short sale of securities 123 10 123 10 Other payables and credit balances 137 91 287 239 Total other liabilities 1,710 1,108 1,857 1,253
(1) Liabilities which does not meet the definition of derivatives. See Note 7 –Assets in respect of Maof market
transactions. * Restated following the retroactive implementation of the directive regarding employee benefits - See Note
1.E.21.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 350 -
Note 12 - Shareholders' Equity
A. Composition of share capital
In nominal values December 31, 2011 2010
Registered share capital Ordinary shares of NIS 0.01 each 90,000,000 90,000,000 Issued and paid-up share capital Ordinary shares of NIS 0.01 each 73,583,024 73,583,024
The shares are registered for trade on the Tel Aviv Stock Exchange. Each share confers upon its holder one
vote in the general shareholders’ meeting of the Bank. Each share confers upon its holder the right to
participate in earnings, and in the event of liquidation in the remaining assets of the Bank according to its
proportionate par value.
B. On October 31, 2010, the board of directors of the Bank resolved to adopt a dividend distribution policy for
2011-2013, according to which the Bank will distribute an amount each year equal to at least 40% of the net
operating profit of the Bank in the year preceding the distribution, provided that the return of the Bank in the
year preceding the distribution is at least 6%, subject to legal directives regarding “distribution,” and subject
to the Bank’s compliance, after such distribution, with the regulatory directives (including directives arising
from the requirements of the Supervisor of Banks, such as they shall be from time to time) and with the limits
set by the board of directors from time to time with regard to the risk appetite and risk tolerance of the Bank,
all to the extent that no changes for the worse occur in the Bank’s profits and/or its business position and/or
economic conditions and/or the regulatory environment that may have a negative effect on the Bank. The
foregoing shall not detract from the authority of the board of directors of the Bank to decide, from time to
time, taking into account business considerations, legal directives, and the regulatory directives applicable to
the Bank, on a change of policy or a change of the rate of the dividend to be distributed in respect of a
particular period, or to decide not to distribute a dividend. It is hereby clarified that any actual dividend
distribution is subject to compliance with all of the conditions required of the Bank by law, the restrictions
applicable to the Bank with regard to such distribution, and the specific resolutions of the board of directors.
In all of these matters, actual dividend distribution is subject, among other things, to the limits set by the
Supervisor of Banks regarding dividend distribution which include a prohibition on dividend distribution if
the non-monetary assets of the Bank exceed its shareholders’ equity, or if the distribution of the dividend
would cause such excess, and a prohibition on distribution of dividends from capital reserves, or when one or
more of the last three calendar years ended in a loss, and to compliance with the requirements of Section 23A
of the Banking (Licensing) Law, 1981, which sets a limit on the rate of capital which a banking corporation
is permitted to invest in non-financial corporations, and to compliance with the limits set by the
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 351 -
Note 12 - Shareholders' Equity (Cont'd) B. (Cont'd)
Supervisor of Banks on credit granting as a percentage of capital. According to the permit for acquisition of
means of control of the Bank from 1993, the Bank is prohibited from distributing dividends from profits
accrued in the period prior to the acquisition, except by advance written approval of the Supervisor of
Banks. The amount of accrued profits in respect of which dividends cannot be distributed, as of December
31, 2010, is NIS 463 million. In addition, note that according to the terms of issuance of upper tier II capital
notes issued by Union Issuances Ltd., on September 10, 2009, and according to the shelf prospectus of
Union Issuances of August 31, 2009, as amended on March 10, 2011, as long as there is unpaid interest, the
settlement of which has been postponed, in respect of hybrid capital notes that have been issued, the Bank
cannot distribute dividends or perform distributions, as these terms are defined in the Companies Law.
Note that due to the policy of supervisor of Banks with regard to the Capital Adequacy required in the
banking system, the Board of Directors decided on the gradual increase of capital objectives, which can
limit the dividend distribution with accordance to the aforesaid policy.
C. On December 29, 2010 dividend in cash in the amount of NIS 60 million was distributed, this follows the
approval of the General Meeting from December 7, 2010 as recommended by the Board of Directors, on
October 31, 2010. The dividend was distributed based on the balance of the Bank's profits (as defined in
paragraph 302(B) of the Companies Law, 1999), according to the financial statements of the Bank as at
June 30, 2010 (the dividend in respect of each ordinary share NIS 0.01 par value of the bank is in the
amount of NIS 0.8154, the amounts above are before any taxes, including tax at source).
D. See Note 15A regarding options that issued to the chief executive officer.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 352 -
Note 13 - Capital Adequacy under Directives of the Supervisor of Banks
Reported amounts A. Consolidated data:
December 31, December 31, 2011 2010 NIS millions
1. Capital for the purpose of calculating the capital
ratio
Tier I capital, after deductions 1,986 *1,924
Tier II capital, after deductions 1,408 *1,424
Tier III capital - - Total capital 3,394 3,348
NIS millions
2. Weighted balances of risk assets
Credit risks 22,664 *21,382
Market risks 208 249
Operational risk 1,680 1,589 Total weighted balances of risk assets 24,552 23,220
Percentage Percentage
3. Ratio of capital to risk assets
Ratio of Tier I capital to risk assets 8.09% *8.29%
Total ratio of capital to risk assets 13.82% **,*14.42%
Total minimum ratio of capital as required by the supervisor of banks 9.0% 9.0%
* The comparative data were restated following the retroactive implementation of the directive regarding employee benefits - See Note 1.E.21.
** The data as at December 31, 2010 include the effect of issuance of capital notes at the volume of approximately NIS
235 million on December 21, 2010.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 353 -
Note 13 - Capital Adequacy under Directives of the Supervisor of Banks (1) (Cont'd)
Reported amounts B. Components of capital for the purpose of calculating the capital ratio (consolidated data):
December 31, December 31, 2011 2010 NIS millions
1. Tier I capital
Equity attributable to shareholders of a bank ***1,985 *2,005 Non-Controlling interests in the equity of consolidated companies 1 1 Hybrid capital instruments - - Other Tier I capital components - - Less: Goodwill - - Less: Net profits in respect of adjustments to fair value of securities available for sale - 82 Less: Investments in supervisory capital components of banking corporations and their subsidiaries in Israel, and cross-investments overseas - - Less: Investments in financial companies in which the Bank has material influence - - Less: Other tier I capital deductions - - Total Tier I capital 1,986 1,924 Of which: Tier I capital allocated to market risks 17 20
2. Tier II capital
A. Upper Tier II capital 45% of the total net profits before the effect of related taxes in respect of adjustments to fair value of securities available for sale - 56 General provision for doubtful debts 52 52 Hybrid capital instruments - - Other upper Tier II capital components 371 364 B. Lower Tier II capital Subordinated notes 985 *952 Other lower Tier II capital components - - C. Tier II capital deductions Investments in supervisory capital components of banking corporations and their subsidiaries in Israel, and cross-investments overseas - - Investments in financial companies in which the bank has material influence - - Other Tier II capital deductions - - Total Tier II capital 1,408 1,424
* Comparative data were restated following the retroactive implementation of the directive regarding employee benefits.
See Note 1.E.21. ** The date as at December 31, 2010 include the effect of issuing capital notes totaling approximately NIS 235 million
on December 21, 2010. *** From which paid-up common share capital - NIS 952 million, retained earnings - NIS 1,012 million, capital reserves -
NIS 21 million (including the deduction of negative capital reserve from adjustments in respect of presentation of securities available for sale at fair value which amounted to NIS 5 million) - See Statement of Changes in Equity.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 354 -
Note 14 - Liens
(1) In order to secure the clearance of intraday credit allocated or to be allocated by the Bank of Israel to the
Bank from time to time in connection with its activity on the Zahav RTGS (real-time gross settlement)
system, operating in the banking system since late July 2007, the Bank created a current lien in July 2007
in favor of the Bank of Israel, in an unlimited amount, on the inventory of State bonds and short-term notes
(Makams) held by the Bank. Under the terms of the lien, the lien is in effect as long as such bonds or
short-term notes exist in the account in the name of and on behalf of the Bank of Israel maintained at the
TASE Clearing House and designated for deposits and/or registration of collateral for the Bank of Israel,
or in the Bank’s account at the Bank of Israel which is designated for monetary debits and credits of the
TASE Clearing House.
(2) To secure credit of any kind, in foreign or Israeli currency, received by the banks, including Union Bank,
from time to time, from the Bank of Israel, insofar as credit is extended by the Bank of Israel, and the
Bank’s consequent liabilities towards the Bank of Israel, in August 2010 the Bank entered into an
agreement to place a first-rank permanent pledge and an assignment by way of a pledge, with no amount
limit, on all assets and rights in all accounts maintained at the TASE Clearing House Ltd. and at the
Euroclear Bank (hereinafter: the “Collateral Accounts”) in favor of and in the name of the Bank of Israel,
which are designated for deposit and/or recording of collateral by the Bank in favor of the Bank of Israel,
including on money and securities deposited or recorded, or to be deposited or recorded, in the Collateral
Accounts, including the profits thereof and the monetary consideration of the sale or realization thereof.
For reasons of caution, the assets pledged in the collateral account at Euroclear Bank or in any other
collateral account maintained with a clearing house outside Israel, shall also be pledged, in addition to the
first-rank permanent pledge, in a first-rank floating pledge, with no amount limit.
The pledges described above shall serve as a continual and renewing guarantee for the liabilities secured
by such pledges, and shall remain in effect until such time as the Bank of Israel approves the cancellation
thereof, in writing. In addition to the aforesaid, the Bank has granted the right to offsets and liens of all
assets owed to it by the Bank of Israel, to secure the settlement of the secured liabilities. The management
of the pledged assets, including with regard to the execution of deposits and withdrawals of money and
securities in the Collateral Accounts, and the revaluation thereof, are as stipulated in the collateral
management documents of the clearing house where the collateral account is maintained. The system of
agreements required in order to operate the pledge includes consent to the operation of the system of
collateral by the TASE Clearing House for the Bank of Israel, in accordance with an agreement signed
between them, and the authorization of the TASE Clearing House to execute the orders of the Bank of
Israel in connection with the Israeli securities deposited, and/or to be deposited from time to time, in the
relevant collateral account designated for the deposit of collateral by the Bank, and an agreement to
regularize the operational aspects of the management of the collateral (foreign securities) at Euroclear
Bank. As at December 31, 2011, no collateral was provided.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 355 -
Note 14 - Liens (cont'd)
(3) The Bank is a member of the Euroclear clearinghouse Bank Brussel, which clears securities traded on
international markets. For the Bank's operations through the said clearinghouse, and to secure the credit
effectively utilized by the Bank with the said clearinghouse from time to time, the Bank registered a charge
on moneys and securities. The credit facility against which the Bank registered a charge on securities is in the
amount of USD 6 million (December 31, 2010 - USD 6 million).
(4) In accordance with the Bank’s agreement with the Maof Clearing House and the TASE Clearing House,
and pursuant to the resolutions of the board of directors of the Maof Clearing House and the bylaws and
guidelines of the Maof Clearing House, the Bank deposits securities in an account in the name of the Maof
Clearing House as collateral for the Maof Clearing House, as well as cash in an account opened in the
name of the clearing house at another bank, which will constitute payment to the clearing houses for any
amount which the Bank may owe them in respect of transactions in Maof and in Israeli securities for
which the Bank is liable towards them, against a commitment by the clearing houses to remit this amount
to the Bank, pursuant to the agreement. To secure these charges, on March 31,2004 the Bank created a
first-rank permanent and floating lien in an unlimited amount on these accounts in favor of the Maof
Clearing House.
The value of the collateral deposited in favor of the clearing houses as at December 31, 2011 is NIS 870
million (December 31, 2010: NIS 927 million); the average during 2011 was NIS 781 million. The
maximum balance deposited is NIS 905 million. For further details, see Note 18.C, 11, and 18.C.12.
Customers of the Bank place liens on various types of assets in respect of their overall activity at the Bank,
including Maof activity.
Note 15 - Employee Benefits
A. Severance pay and pension
(1) The liability of the Bank and its subsidiaries for severance pay and pensions to their employees is
partially covered by appropriate provisions which, are funded with recognized severance pay funds
and by insurance policies. The provision for severance pay and pensions included in the balance sheet
represents the balance of the provision which is not so funded.
(2) The contractual liability for severance pay to the employees has been calculated on the basis of one
month's salary for each year of service.
See also Note A.(3) below, regarding the surplus of severance pay beyond the contractual terms.
In 1996, the Bank signed a special agreement with those clerks of the Bank who are members of the
basic pension fund "Amit Pension and Provident Fund Limited" (hereinafter - “Amit”), according to
which, as from April 1, 1995, payments of the Bank to the said pension fund will relieve the Bank
from any liability for payment of severance indemnities to which such employees may be entitled
under the law for that period.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 356 -
Note 15 - Employee Benefits (cont'd)
A. Severance pay and pension (cont'd)
(2) (cont'd)
As from the above-mentioned date, the provision for severance pay does not include amounts in
respect of severance pay to the said clerks and, as at the same time, amounts paid to the said pension
fund does not include the amounts funded in Amit.
(3) As of April 1, 2011, the Bank implements the instructions of the Supervisor of Banks concerning
compensation beyond contractual obligations, as published on March 27, 2011, in the circular,
“Reinforcing Internal Control over Financial Reporting on Employee Benefits” (hereinafter:
“Excess Compensation”). According to the circular, a banking corporation that expects a group of
employees to be paid benefits beyond the contractual terms shall take into consideration the
expected departure rate of employees (including employees expected to retire under voluntary-
retirement plans or upon receiving other preferred terms) and the benefits that these employees are
expected to receive upon departure. The liability in respect of severance pay for this group of
employees shall be presented in the financial statements as the higher of the amount of the liability
calculated on an actuarial basis, taking into consideration the additional cost expected to be incurred
by the banking corporation due to the aforesaid benefits, and the amount of the liability calculated
by multiplying the employee's monthly salary by the number of years of the employee's service, as
required in Opinion Statement 20 of the Institute of Certified Public Accountants in Israel. Note that
according to estimates by the Bank and its legal advisors, the Bank has no legal obligation, either
direct or implied, to pay Excess Compensation.
For the purposes of the actuarial calculation of Excess Compensation, the actuary of the Bank
conducted a survey of data on retirees in 2007-2010, the relevant years, according to management's
assessment, as a basis for the aforesaid actuarial calculation. Based on the findings of the survey,
and taking into consideration the characteristic size of population groups at the Bank, the actuary
estimated future rates of departure before retirement age, with ordinary compensation and with
Excess Compensation. As at December 31, 2011, rates of departure with Excess Compensation
according to the aforesaid survey were used as of 2019 only, due to the change in policy in the
retirement plan, according to which retirement with preferred terms will not be possible until the end
of 2018 – for details, see Section A(5) below. The management of the Bank also estimated the rates
of the Excess Compensation. The present value of the liability was calculated by the actuary using
the method of "evaluation of expected accrued benefits," which reflects the total benefit accrued
until the balance-sheet date, with the total expected benefit at the time of the future entitlement
spread linearly over the period of employment. Additional assumptions used in calculating the
provision for Excess Compensation: a capitalization rate of 4%, in accordance with the directives of
the Supervisor of Banks; a future increase in real wages at a rate of 3% annually, according to an
estimate by the management of the Bank; mortality rates – see details in Section A(4) below.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 357 -
Note 15 - Employee Benefits (cont'd)
A. Severance pay and pension (cont'd)
(3) (cont'd)
Assumptions regarding the implications of the retirement plan were also used – see details in
Section A(5) below. With regard to the effect of initial implementation and retroactive
implementation of the Supervisor's instructions concerning employee benefits, see Note 1.E.21.
(4) The group of executives and senior authorized signatories of the Bank are entitled to choose, upon
retirement from the Bank, either to receive a pension while waiving their rights to compensation and
provident funds, or to receive retirement compensation and provident fund payments. In February
1997, an agreement was signed between the union of executives and authorized signatories of the
Bank and the Bank, referring to authorized signatories who are members of the pension fund Amit.
Pursuant to the agreement, during the period of employment until the date on which an authorized
signatory joins Amit, the terms that were customary at the Bank until the signing date of the
agreement shall apply to the authorized signatory. With regard to the period of membership in Amit,
in the event of retirement on a compensation track, the authorized signatory shall receive the money
in Amit, but no less than the severance pay to which the Bank is obligated by law. In the event of
retirement on a pension track, the authorized signatory shall receive, as a pension, the money
accrued on his or her behalf at Amit in respect of retirement pay, but no less than the Bank's
obligation according to the terms that were customary until that time, as well as a pension in respect
of money accrued by the authorized signatory at Amit in respect of compensation, up to the Bank's
total obligation to pay a pension derived from severance pay. The aforesaid shall apply to senior
authorized signatories (as defined in the agreement) only. New authorized signatories (anyone who
is not a senior authorized signatory) are not entitled to a pension, and the Bank's payments to Amit
shall replace the full severance pay to which the authorized signatory would have been entitled by
law.
The liability for pensions to senior authorized signatories is calculated on an actuarial basis, based
on the present value of the liability that exceeds the amount of the liability for compensation and the
balances in the provident funds. The actuarial provision also includes a calculation of Excess
Compensation beyond the contractual terms – see details in Section A (3) above.
The actuarial liability was calculated according to a capitalization rate of 4% (the same rate applied
in 2010), in accordance with the directives of the Supervisor of Banks. The calculation of the
present value takes into consideration a factor of the real future increase in wages, up to the
expected date of retirement of the employees from the Bank, at a rate of 2% annually (the same rate
applied in 2010), in accordance with an estimate by the management of the Bank. A forecast
regarding the rate of utilization of pension rights is also used: 72% choose pensions; these
employees utilize 61% of their pension rights, based on data at the Bank in recent years.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 358 -
Note 15 - Employee Benefits (cont'd)
A. Severance pay and pension (cont'd)
(4) (cont'd)
In addition, the actuarial calculations include assumptions regarding mortality tables. An Israeli
mortality table was used, with a future improvement in life expectancy, and a margin in respect of
life-expectancy risk, in accordance with the instructions of the Capital Market Division of the
Ministry of Finance, of 2007. Rates of departure with ordinary compensation and with Excess
Compensation and the rates of Excess Compensation were adjusted to the new departure rates used
to calculate Excess Compensation, as described in Section A(3) above. The effect of initial
implementation was included through retroactive implementation, along with other effects of the
implementation of Excess Compensation. (A departure rate of 2% annually was used until March
31, 2011.) Assumptions regarding the implications of the retirement plan were also used – see
details in Section A(5) below.
(5) Retirement plan and change in retirement policy
On February 26, 2012, the board of directors of the Bank approved a format for a preferred-terms
retirement plan (hereinafter: the "Plan"), within a defined period of time. The Plan is targeted to all
employees aged 57 to 64.
Pursuant to the Plan, relevant employees may declare within a defined period of time whether they
wish to retire under the Plan. The management of the Bank has sole discretion to approve retirement
under the terms of the Plan. The actual retirement process of employees approved for early
retirement under the Plan shall be gradual and spread over approximately two years. The board of
directors of the Bank also affirmed that along with the approval of the format for the Plan, a policy
would take effect under which early retirement with preferred terms would not be possible for the
coming seven years (through the end of 2018).
According to estimates by the management of the Bank, approximately 40 employees will retire
within this program. The total cost of Excess Compensation to be paid to the employees who retire
under the Plan (beyond the compensation required by law), according to average calculations, is
estimated at approximately NIS 50 million.
The financial statements include estimates of the consequences of the Plan. The effect on wage
expenses in the fourth quarter of 2011 amounted to an increase of approximately NIS 15 million. On
the one hand, the reserve for compensations (not on an actuarial basis) increased by a total of
approximately NIS 55 million. On the other hand, actuarial reserves decreased by approximately
NIS 40 million. Details:
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 359 -
Note 15 - Employee Benefits (cont'd)
A. Severance pay and pension (cont'd)
(5) (cont'd)
‐ Actuarial calculations as at December 31, 2011 (pensions, Excess Compensation, and long-service
grants) take into consideration the estimate by the management of the Bank that approximately 40
employees will retire under the expected retirement Plan. The actuarial calculations also encompass
the change in policy for 2012 through 2018, whereby early retirement with preferred terms will not
be possible. Rates of departure with Excess Compensation starting in 2019 are based on the survey
performed for 2007-2010 (as described in Section A(3) above). Of the group of executives and
senior authorized signatories who are entitled to pensions, those approved for retirement under the
Plan will be permitted a choice between early pension and increased compensation. This is included
in the financial statements within the reserve for Excess Compensation, with the working
assumption that the present value of the early pension is equivalent to the increased compensation.
Note that for the purposes of the aforesaid actuarial calculation, assumptions were made according
to estimates by the management of the Bank with regard to the volume of retirement, the manner of
retirement, and the characteristics of the population of retirees; thus, actual materialization differing
from these assumptions will require an adjustment of actuarial reserves in the future, based on actual
materialization.
As a result of all of the consequences described above, the aforesaid actuarial reserves decreased by
approximately NIS 40 million.
‐ The balance of the reserve for compensation as at December 31, 2011 (not on an actuarial basis)
covers the estimated monetary cost of the aforesaid Plan, in the amount of approximately NIS 50
million. The reserve also includes a special fund for a small number of exceptional cases over the
coming seven years, in the amount of approximately NIS 5 million.
The total increase in these reserves as a result of the consequences of the Plan amounted to
approximately NIS 55 million.
(6) Pension liabilities in respect of executives and authorized signatories entitled to pensions who retire
and choose a pension are covered by a pension reserve calculated according to the present value of
the liability, as calculated by the actuary, according to a capitalization rate of 4%, in accordance
with the directives of the Supervisor of Banks (the same rate applied in 2010), and mortality tables
as described in Section A(4) above.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 360 -
Note 15 - Employee Benefits (cont'd)
A. Severance pay and pension (cont'd)
(7) The amounts of the provisions and funding relating to employee severance benefits included in the
balance sheet are as follows:
Consolidated and the Bank December 31, December 31, 2011 2010 NIS millions NIS millions
Net provisions 367 *332
Funding** 95 101 Net excess of provisions over funding *** 272 231
The Bank may not withdraw funded amounts other than for the purpose of making severance payments. * The comparative data were restated following the retroactive implementation of the directive regarding
employee benefits. See Note 1.E.21. ** The amount of funding recorded in accordance with balance confirmation received from external substances
in which the money deposited. *** Included in "Other liabilities" (See Note 11).
B. Long service bonuses
Employees of the Bank, upon attaining 20, 30 and 40 years of service, are entitled to long service bonuses
("Jubilee Grant") amounting to a specified number of monthly salaries as well as to a special vacation
period. In the balance sheet as at December 31, 2011, the accumulated provision amounted to NIS 23
million, December 31, 2010 - NIS 19 million (Comparison data restated following the retroactive
implementation of the directive regarding employee benefits). The provision is included in "other
liabilities".
The calculation of the liability performed on an actuarial basis. The calculation based on capitalization rate
of 4% (the same as in 2010), in accordance with the instructions of the Supervisor of Banks. In calculating
the current value, the factor of the future increase in real wages, at a rate of 3% (the same as in 2010),
according to the bank management estimation. The future rates of departure before the retirement age, were
adjusted to the new departure rates which used for the calculation of surplus of severance pay - as detailed in
note A(3) above, while the influence of the initial implementation was included trough the retrospective
implementation together with the effects of the surplus of severance pay implementation (until March 31,
2011, departure rates that used for the calculation were as is customary in the banking industry). In addition,
the provision for the end of 2011 includes the assumption based on the Bank's management estimation,
according to which there will be retirement of approximately 40 employees as a part of the retirement plan.
The provision also includes the influence of the amendment in the retirement policy - as detailed in note
A(5) above.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 361 -
Note 15 - Employee Benefits (cont'd)
C. Vacation
Employees of the Bank and its subsidiaries are entitled to a paid annual vacation as provided by the Annual
Vacation Law - 1951, subject to a special labor contract with the Bank's employees, and according to the
limits detailed in this contract. The liability is calculated on the basis of latest salary plus social benefits. The
financial statements include a provision of NIS 24 million (December 31, 2010 - NIS 22 million) for
unutilized vacation and special vacation entitlement (see B. above) which has already vested. The liability
is included under "other liabilities".
D. Senior Executives' Bonus Plan
On April 10, 2011, following approval by the audit committee on February 6, 2011, and after receiving a
recommendation from the remuneration committee of the Board of Directors, as detailed below, the
board of directors of the Bank approved a long-term bonus plan (hereinafter: the "Bonus Plan") for senior
executives of the Bank: the chairman of the board (subject to approval by the general assembly), the chief
executive officer, the members of management of the Bank, the legal advisor, and the auditor of the Bank
(the "Senior Executives").
1. The Bonus Plan
1.1. General
The Bonus Plan establishes the manner of determining the annual bonus for Senior Executives in
respect of 2010 and 2011, and will be reexamined subsequent to implementation by the board of
directors of the Bank. The Bonus Plan is based, among other factors, on the annual rate of
operating return after tax on equity ("Return on Equity") and on the Bank's annual performance
relative to the targets set by the board of directors of the Bank and relative to the Return on
Equity of the other banking groups ("Other Banks"), and is also influenced by the capital
adequacy ratio of the Bank. The plan and the components thereof will be reexamined by the
board of directors after the first year of implementation.
1.2. Establishing the Total Bonus According to the Bonus Plan – General Description
The total bonus for Senior Executives shall be determined in the following manner:
The volume of the total annual bonus for Senior Executives (the "Total Bonus") shall be
determined based on a standardized rate of return derived by multiplying the actual rate of Return
on Equity by the weighted score of the Bank (divided by 100), as detailed in Section 1.2.5 below
(the "Standardized Return").
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 362 -
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
1. (cont'd)
1.2.1. A Standardized Return equal to or greater than 6% (subject to the provisions of Section
1.2.2 below) creates entitlement to a positive bonus. If the Standardized Return is 6%, the
volume of the Total Bonus shall be up to NIS 3 million. If the Standardized Return is 7%,
the volume of the Total Bonus shall be up to NIS 4 million; if the Standardized Return is
8%, the volume of the Total Bonus shall be up to NIS 5 million; if the Standardized Return
is 9%, the volume of the Total Bonus shall be up to NIS 6 million; and if the Standardized
Return is greater than 9%, the board of directors of the Bank is entitled to establish a
special addition to the volume of the Total Bonus. Note that the board of directors of the
Bank is entitled to change the volume of the Total Bonus by 10% at its discretion.
When the Standardized Return is in a range between the values listed above, the Total
Bonus shall be set between the two values in a linear calculation.
1.2.2. In the event of a Standardized Return lower than 6%, when the Return on Equity is greater
than 6%, the following will apply:
1.2.2.1. If the Standardized Return is lower than 6% but greater than or equal to 5.5%,
and the Return on Equity is greater than 6%, the volume of the Total Bonus shall
be NIS 1 million.
1.2.2.2. If the Standardized Return is lower than 5.5% and the Return on Equity is
greater than 6%, the remuneration (if any) shall be determined at the discretion
of the board of directors.
1.2.3. Notwithstanding the provisions of Section 1.2 above, if the Return on Equity in the
relevant year is lower than 6%, or if the Bank fails to comply with the ratio of capital to
risk-adjusted assets according to the risk appetite established by the board of directors of
the Bank, in any of these cases, the Senior Executives shall not be entitled to a positive
bonus under this plan, even if the Standardized Return is greater than 6%.
1.2.4. The Total Bonus shall be distributed among the Senior Executives as described in Section
1.2.6 below. It is hereby clarified that in the event that a balance remains and the total
bonus is not distributed in full1, the board of directors of the Bank shall be entitled to
decide upon the manner of distribution of all or part of the remainder of the Total Bonus, if
at all, among all or some of the Senior Executives.
1 For example, when some of the Senior Executives do not attain full entitlement (because they do not reach a weighted personal score of 110), or due to retirement of a Senior Executive during the year.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 363 -
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
1. (cont'd)
1.2.5. Establishing the weighted score of the Bank for the purpose of calculating the Standardized
Return:
The performance of the Bank shall be measured based on three parameters, for each of
which scores will be assigned on a scale of 70-130. In extreme cases of failure to attain
threshold objectives, a score of zero will be assigned. The parameters and weights are the
following: (A) Return on Equity – 40%; (B) the Bank's BSC (Balanced Score Card) score2
– 40%; (C) the Bank's capital adequacy (ratio of capital to risk-adjusted assets) – 20%.
The following parameters are used to establish the Bank's BSC score: compliance and
control, stability, efficiency, growth, and a comparison to the banking system.
1.2.6. Calculation of the personal bonus for each Senior Executive:
1.2.6.1. Chairman of the board of directors – The amount of the bonus for the chairman
of the board is determined based on: (1) a weighted personal score composed of
the weighted score of the Bank (70%) and the personal evaluation score assigned
by the board of directors (30%); and (2) the maximum normative proportional
share3 of the chairman in the total volume of the bonus predefined by the board
of directors, at a rate of 25%.
1.2.6.2. CEO – The amount of the bonus for the CEO is determined based on: (1) a
weighted personal score composed of the weighted score of the Bank (70%) and
the personal evaluation score assigned by the board of directors (30%); and (2)
the maximum normative proportional share in the total volume of the bonus
predefined by the board of directors, at a rate of 28%.
2 The BSC is a scorecard combining measurements of quantitative and qualitative factors to assess the performance of the Bank and of Bank units.
3 Normative proportional share – The maximum share of a Senior Executive in the Total Bonus upon attaining a weighted personal score of 110 or more. Scores for each parameter on which Senior Executives are examined range from 0 to 130. Outperformance on a particular criterion can compensate for underperformance on another criterion.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 364 -
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
1. (cont'd)
1.2.6 (cont'd)
1.2.6.3. Chief accountant, legal advisor, internal auditor, and chief risk officer – The
amount of the bonus for each of the aforesaid Senior Executives shall be
determined based on: (1) a weighted personal score composed of the personal
BSC score (60%), the weighted score of the Bank (10%), and a personal
evaluation score4 (30%); and (2) the maximum normative proportional share of
all of the aforesaid Senior Executives in the total volume of the bonus predefined
by the board of directors, at a rate of 22% (in this section: the "Maximum
Normative Share for Senior Executives"). The volume of the maximum bonus
for the internal auditor, out of the Maximum Normative Share for Senior
Executives, shall be determined by the audit committee and the chairman of the
board. The volume of the maximum bonus for each of the other Senior
Executives in this group (the chief accountant, the legal advisor, and the chief
risk officer) out of the Maximum Normative Share for Senior Executives shall be
determined by the chairman of the board and the CEO.
Other members of management – The amount of the bonus for other members of
management who are Senior Executives shall be determined based on: (1) a
weighted personal score composed of the personal BSC score (60%), the
weighted score of the Bank (10%), and the personal evaluation score assigned by
the board of directors (30%); and (2) the maximum normative proportional share
of the other members of management in the total volume of the bonus predefined
by the board of directors, at a rate of 25%. The volume of the maximum bonus
for each Senior Executive of the other members of management shall be
determined by the CEO.
4 The personal evaluation score shall be determined as follows: For the internal auditor – Based on a personal evaluation by the audit
committee and the chairperson of the board; for the chief risk officer – based on a personal evaluation by the CEO and the chairperson of the board; for the chief accountant and legal advisor – based on a personal evaluation by the CEO.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 365 -
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
1. (cont'd)
1.3. Negative bonuses
1.3.1. If the Standardized Return of the Bank is lower than 3%, a negative bonus shall be charged
to the Senior Executives, as follows: if the Standardized Return is 2%, the volume of the
total negative bonus shall be up to NIS 0.83 million; if the Standardized Return is 1%, the
volume of the total negative bonus shall be up to NIS 1.66 million; if the Standardized
Return is equal to or lower than 0%5, the volume of the total negative bonus shall be up to
NIS 2.5 million. It is hereby clarified that the maximum volume of the total negative bonus
shall be no more than NIS 2.5 million. When the Standardized Return is in a range between
the values listed above, the bonus shall be set between the two values in a linear
calculation. In accordance with the foregoing, it is hereby clarified that if the Standardized
Return is 3%, the volume of the total bonus shall be NIS 0; in other words, the Senior
Executives will not be charged a negative bonus. But if the Standardized Return is lower
than 3% but greater than or equal to 2%, the negative bonus will increase in a linear
manner, up to NIS 0.83 million, and so forth, as noted above, up to a maximum negative
bonus of NIS 2.5 million.
1.3.2. Subject to the provisions of Section 1.2.2 above, the Senior Executives shall not be entitled
to a positive bonus and shall not be charged with a negative bonus when the Standardized
Return of the Bank for the relevant year is lower than 6% and greater than or equal to 3%.
1.3.3. Establishing the volume of the personal negative bonus for each Senior Executive:
The proportional distribution of the negative bonus among the Senior Executives and the
weighted personal score of each Senior Executive shall be determined in accordance with
the provisions of Section 1.2.6 above. The volume of the negative bonus for each Senior
Executive relative to that executive's normative proportional share shall be determined
according to the following formula:
5 The return shall not be standardized when the "accounting" return is negative.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 366 -
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
1. (cont'd)
1.3 Negative bonuses (cont'd)
(B)*70/(A)
Where:
A = The Senior Executive's weighted personal score.
B = The Senior Executive's share of the negative bonus.
In other words: 70 divided by the Senior Executive's weighted personal score (A),
multiplied by the Senior Executive's share of the negative bonus (B). For the purpose of the
calculation of the negative bonus, the weighted personal score (A) shall not be less than
706. Thus, at a score of 70 or less, the Senior Executive shall be charged with his or her full
share of the total negative bonus (B). Based on the calculation method of the negative
bonus, the lower the Senior Executive's score, the greater his or her share of the negative
bonus.
1.3.4. The maximum negative bonus for each Senior Executive shall be, at the most, the amount
of the accrued credit balance in the executive's Notional Account (as detailed below) in
respect of the share of the bonuses to which the executive was entitled and which were
deferred from earlier years. It is hereby clarified that a negative bonus can only reduce, or
lower to zero, the accrued balance in the Notional Account in respect of deferred
compensation from previous years. If a negative bonus balance remains, the balance shall
be adjusted to zero and shall not be allocated to the following year. In addition, if a
negative bonus is established in the first year of the implementation of this plan, no
negative bonus shall be charged to the Senior Executives and no negative balance shall be
recorded in the Notional Account.
6 The scores range from 70 to 130.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 367 -
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
1. (cont'd)
1.4. Spreading bonus payments over the long term
The amount of the annual bonus payment for each Senior Executive under this plan in the
relevant year shall be calculated and distributed as follows:
1.4.1. A "Notional Account" shall be managed for each Senior Executive, representing the
executive's rights to bonuses under this plan.
1.4.2. For each year, a positive bonus owed to the Senior Executive or a negative bonus charged
to the Senior Executive shall be calculated, according to the specifications of this plan. The
positive or negative bonus shall be credited or debited, as relevant, to the Notional
Account, so that the balance of rights of the Senior Executive to bonuses is accrued in the
Notional Account over the years.
1.4.3. Following the calculation of the amount of the bonus in respect of the last year and the
allocation of this amount to the Notional Account, the Senior Executive shall be paid an
actual bonus at a rate of 50% of the accrued balance in the Notional Account, provided that
the account contains an accrued balance. The amount remaining in the Notional Account
after payment of the aforesaid actual bonus shall be referred to hereinafter as the "Accrued
Notional Account Balance." The Accrued Notional Account Balance shall be linked to the
consumer price index, from the date of payment of the bonus to the Senior Executive to the
date of the following payment.
1.5. Retirement of Senior Executives
1.5.1. Subject to the terms of this plan, the bonus to which Senior Executives retiring from the
Bank are entitled shall be calculated as follows:
1.5.1.1. The Senior Executive shall be entitled to a proportional bonus only in respect of
the year of retirement. The calculation of the proportional bonus shall take the
duration of the Senior Executive's actual service at the Bank into consideration
(the "Proportional Bonus").
1.5.1.2. The calculation of the Proportional Bonus shall be performed in the year
subsequent to the year of retirement. Following the calculation, the Proportional
Bonus shall be allocated to the Notional Account.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 368 -
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
1. (cont'd)
1.5 (cont'd)
1.5.1.3. The entire balance accrued in the Notional Account, including the Proportional
Bonus (subject to the provisions of Section 1.5.2 below), shall be paid to the
Senior Executive in the year subsequent to the retirement year, when the bonuses
are paid to the other Senior Executives of the Bank in respect of that year.
1.5.2. A Senior Executive who retires voluntarily or resigns from the Bank (before retirement
age) – Notwithstanding the provisions of Section 1.5.1 above, in the event that a Senior
Executive (with the exception of the CEO7) retires voluntarily or resigns from the Bank
(before retirement age), the board of directors of the Bank shall determine the rate of the
departing Senior Executive's entitlement (if any) to the Proportional Bonus in respect of the
year of retirement. Subject to the foregoing, the other provisions of Section 1.5.1 above
shall apply to this matter, with the necessary changes.
1.5.3. Notwithstanding the provisions of Sections 1.5.1-1.5.2 above, a Senior Executive who
retires or who is dismissed due to an event that makes it possible to dismiss the Senior
Executive without compensation shall not be entitled to a positive annual bonus in respect
of the year of retirement, and shall not be entitled to receive the unpaid balance of the
positive bonus in respect of previous years.
1.5.4. A Senior Executive who departs due to illness, disability, or death – Notwithstanding the
provisions of Section 1.5.1 above, a Senior Executive who departs due to illness, disability,
or death shall be entitled (or the Senior Executive's heirs shall be entitled, as relevant) to a
Proportional Bonus in respect of the year of retirement. This Proportional Bonus shall be
calculated and paid in the year subsequent to retirement, when the bonus in respect of that
year is calculated and paid to all other Senior Executives of the Bank. In addition, the
Senior Executive shall be entitled to payment of the full amount accrued in the Notional
Account, immediately following retirement.
7 With the exception of the CEO, who according to the terms of his employment at the Bank is entitled to a bonus upon retirement, whether voluntary or involuntary (with the exception of retirement under circumstances that invalidate the entitlement to compensation).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 369 -
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
1. (cont'd)
1.6. Amount of bonus for a new Senior Executive appointed during the calendar year
1.6.1. An employee of the Bank who is promoted and appointed to the position of a Senior
Executive of the Bank during a calendar year shall be entitled to a Proportional Bonus
pursuant to this plan in respect of the months during which he or she served as a Senior
Executive at the Bank in that calendar year. In respect of the period preceding the
appointment as a Senior Executive, during which the employee held another position at the
Bank, the Senior Executive shall be entitled to proportional remuneration, in accordance
with the terms established for that position under the collective agreement or any other
agreement, taking into account the duration of the service.
1.6.2. A new employee appointed to the position of a Senior Executive of the Bank during a
calendar year shall be entitled to a Proportional Bonus pursuant to this plan in respect of
the months during which he or she served as a Senior Executive at the Bank in that
calendar year.
1.7. The Bonus Plan encompasses the years 2010-2011, and shall be reexamined following its
implementation by the board of directors of the Bank. This examination will address, among other
matters, the volume of the Total Bonus, remuneration levels, the various parameters, and the
weights assigned to each parameter.
1.8. The Bonus Plan does not constitute a commitment by the Bank to give bonuses, and shall not create
an obligation and/or a right assigned to any of the Senior Executives to receive bonuses in respect of
2010 or in any other year. In highly exceptional situations of an economy-wide or systemic crisis, to
be described in the decision, the board of directors is entitled to determine that bonuses shall not be
granted to the members of management in the relevant year, or to reduce the amount to which the
members of management are entitled under the Bonus Plan and to determine the extent of the
reduction.
1.9. The bonuses granted to Senior Executives under this Bonus Plan, inasmuch as the Senior Executives
are entitled to bonuses under the Bonus Plan, do not constitute part of the wage paid to any of the
Senior Executives and shall not be taken into account in calculating employer contributions to social
benefits, compensation, or retirement allowances, and shall not be considered a related term of any
kind or type for any of the Senior Executives. It is hereby clarified that tax will be deducted,
according to law, from all actual payments to Senior Executives under the Bonus Plan.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 370 -
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
1. (cont'd)
1.10. This resolution does not refer to bonuses in respect of special transactions. The board of directors
retains the right, at its discretion, to grant or not to grant special bonuses in respect of special
transactions. It is further clarified that the board of directors is entitled to grant special bonuses, at its
discretion, in respect of special excellence of a particular member of management or of management
as a whole, in connection with a specific project or in connection with outstanding achievements in
specific fields or due to "profit from extraordinary transactions."
1.11. It is hereby clarified that the board of directors of the Bank, at its discretion, shall be entitled to
approve and adopt a plan for the grant of option notes to Senior Executives of the Bank, as a means
of remuneration in addition to the Bonus Plan. It is further clarified that the Bonus Plan shall not
detract from the options granted to the CEO under the personal employment agreement signed with
him.
2. The amounts of the bonuses provided for in the financial statements in respect of 2011 for the
chairman of the board, the CEO, the members of management of the Bank, and the legal advisor and
internal auditor of the Bank are based on the Bonus Plan described in Section D.1 above
(hereinafter: the "Bonus Plan"), and as detailed below.
On February 29, 2012, the board of directors of the Bank discussed and approved the amounts of the
bonuses1 for the senior offices mentioned above, after receiving a recommendation from the wages
and remuneration committee of the board of directors, and after the audit committee discussed and
approved the estimated amounts of the bonuses2 for the senior officers on February 23, 2012. The
bonus for the chairman of the board is also subject to approval by the general assembly of the Bank.
1 The amounts approved by the board of directors are not final, as the parameter concerning the comparison of the data of the Bank to the data of Other Banks was calculated based on data for the first three quarters of 2011. Upon publication of the financial statements of the Other Banks, at the end of March 2012, a final calculation for this parameter will be performed and the calculation of the amounts of the bonuses will be adjusted accordingly.
2 The committee's decisions were based on non-final data (including data from the financial statements) that were known at the time of the discussion in the committees of the board of directors. The results of the bonus amounts, as presented in the committees, did not diverge materially from the results presented to the board of directors.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 371 -
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
2. (cont'd)
The data and parameters relevant to the establishment of the bonus for Senior Executives in respect
of 2011, in accordance with the Bonus Plan, were presented to the board of directors and to the
committees of the board of directors, as described above. Among other matters, the data presented to
the board of directors and its committees included the business results of the Bank for 2011, the
annual operating return of the Bank after taxes, the Bank's annual performance relative to the
objectives approved by the board of directors, the capital adequacy ratio of the Bank, and public
comparative data and information regarding the banking groups in the banking system.
Among other matters, the discussion by the board of directors and its committees addressed the
individual distribution of the total annual bonus among the senior officers mentioned above (and with
regard to the chairman of the board, subject to approval by the general assembly), according to the
Bonus Plan, and following a discussion of each Senior Executive's performance evaluation,
functioning, and contribution to the activity of the Bank in 2011. As part of the data examined, as
noted, the personal evaluation score assigned to each Senior Executive was presented, as well as the
personal BSC (Balanced Score Card) score.
The wages and employment committee, the audit committee, and the board of directors of the Bank
were of the opinion that the volume of the bonuses paid to the Senior Executives under the Bonus
Plan is reasonable and consistent with the business position of the Bank.
Note that the payment of half of the bonus is conditional (see Section D.1 above).
E. Personal contracts
(1) All management members are employed under personal contracts. Three of the management
members have a personal contract providing them with enhanced severance pay should they be
dismissed by the Bank. The maximum amount of the Bank’s additional expense is NIS 6.9 million
(December 31, 2010 - NIS 7.4 million), which was not recorded on the books of the Bank as the
Bank has no intention of dismissing abovementioned management members.
(2) Mr. Haim Freilichman, appointed Chief Executive Officer of the Bank (hereinafter - "CEO"), is
employed under a personal contract as of April 2, 2006, that is automatically extended for
additional periods of one year each, unless one of the parties has given notice six months in
advance of its wish to terminate the agreement. In the event of the termination of the contractual
engagement, the CEO is entitled to an adjustment bonus in the amount of six monthly salaries.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 372 -
Note 15 - Employee Benefits (cont'd)
E. Personal contracts (cont'd)
2. (cont'd)
Furthermore, the agreement provides that the Bank will issue, within 30 days from the signing of the
agreement, options for Bank shares - See Note 15A.
On September 8, 2011, following approval by the audit committee of the board of directors on July
18, 2011, the board of directors of the Bank approved an amendment of the employment agreement
with the CEO of the Bank (hereinafter: the "Amendment"). Pursuant to the Amendment, upon
termination of the employment of the CEO of the Bank for any reason, other than under
circumstances in which the CEO may be denied severance pay by law, the CEO shall be entitled to
severance pay at a rate of 100% of his gross monthly salary at the date of termination of his
employment, multiplied by the number of years of his work at the Bank (including part of a year,
proportionally), in addition to his entitlement to the employer contributions for the compensation
component made by the Bank for the CEO pursuant to Section 14 of the Severance Pay Law, 1963,
and the general approval of employer contributions to a pension fund and insurance fund in place of
the severance pay owed to him under his existing employment agreement. In addition, pursuant to
the Amendment, the duration of the advance notice which the CEO is obligated to give the Bank in
the event of the termination of his work at the Bank at his initiative shall be shortened from six
months to three months.
In accordance with Section D.2 above, the estimated bonus in respect of 2011 for the CEO of the
Bank, Mr. Haim Freilichman, is in the amount of NIS 1,071 thousand.
Pursuant to the Bonus Plan described in Section D.1 above on April 10, 2011, following approval by
the audit committee on April 4, 2011, and the recommendation of the wages and employment
committee of the board of directors of the Bank, the board of directors of the Bank approved the
payment of a bonus in respect of 2010 to the CEO of the Bank, Mr. Haim Freilichman, in the
amount of NIS 1,334 thousand.
On June 30, 2010, following approval by the audit committee on June 21, 2010, and the
recommendation of the wages committee of the board of directors of the Bank on June 20, 2010, the
board of directors of the Bank approved the payment of a bonus in respect of 2009 to the CEO of the
Bank in the amount of NIS 1,200 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 373 -
Note 15 - Employee Benefits (cont'd)
E. Personal contracts (cont'd)
(3) (Cont'd):
(3) Mr. Zeev Abeles, Chairman of Board of Directors, employed under personal contract, as of
November 1, 1999.
In accordance with section D.2 above, the estimated bonus in respect of 2011 for the chairman of the
Board of Directors, Mr. Zeev Abeles, is in the amount of NIS 956 thousand.
Pursuant to the Bonus Plan described in Section D.1 above, following approval by the audit
committee on April 4, 2011, and approval by the board of directors of the Bank on April 10, 2011,
the general assembly of shareholders of the Bank approved the grant of a bonus in respect of 2010
to the chairman of the board of directors of the Bank, in the amount of NIS 1,191 thousand.
On August 16, 2010, following approval by the board of directors at its meeting on July 6, 2010,
and following approval by the audit committee on June 21, 2010, and the recommendation of the
wages committee of the board of directors on June 20, 2010, the general assembly of shareholders
of the Bank approved the grant of a bonus in respect of 2009 to the chairman of the board of
directors of the Bank, in the amount of NIS 1,200 thousand.
F. In 1997, the bank signed an agreement with authorized signatories and managers, which determine among
the other things that the managers and senior authorized signatories of the Bank eligible for budget-based
pensions in a certain format used at the Bank until that time (hereinafter: the “Binding Pension”) shall
receive pensions from the "Amit" pension funds with which the Bank and employees of the Bank entered
into an agreement, in an integrated manner, with the integration formula established in the agreement. A
dispute exists over this integration formula between the union of managers and authorized signatories,
and the Bank. The Bank’s position is that the Bank’s indebtedness to retirees is in the amount of the
difference between the amount of the first pension which the retiree receives from "Amit" upon
retirement and the amount of the Binding Pension (to the extent that such a difference exists at that time),
and which the Bank must pay to the retiree each month, fully linked to the consumer price index. The
position of the managers is that the Bank’s indebtedness to retirees is in the amount of the difference (to
the extent that it exists) between the amount of the pension which the retiree receives from "Amit" and
the amount of the Binding Pension, as the difference stands each month (the amounts of the aforesaid
differences which the Bank must pay, hereinafter: the “Supplementary Amounts”). In 2008 the managers’
union and the Bank conducted a procedure with regard to this matter in order to settle the dispute through
arbitrator. The procedure was suspended by the parties. In July 2009, the pension paid by Amit was
reduced by 10%; the pension has remained at the reduced values
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 374 -
Note 15 - Employee Benefits (cont'd)
F. (cont'd)
established at that time until the present date. The amount in dispute as a result of this reduction is
immaterial. In July 2011, the Bank received a letter from the Executive Board demanding a renewal of the
arbitration proceeding.
In the opinion of the management of the Bank, based on the opinion of its legal advisors, it is not
currently possible to quantify the extent and volume of risk regarding possible indebtedness of the Bank
for the payment of the Supplementary Amounts, both due to the existence of the dispute described above
in connection with the interpretation of the integration formula, and because it is not possible to anticipate
the frequency or volume of situations in which difference will arise between the amount of the Binding
Pension and the amount of the pension paid by the "Amit" fund, which could require the payment of the
aforesaid Supplementary Amount.
Note 15A - Share-Based Payment Transactions
A. Details of Share-Based Payment Transactions
On September 14, 2008, the Audit Committee and the Board of Directors approved the allocation of
620,456 non-tradable and non-transferable options (not registered for trading) to the Chief Executive
Officer (the "Options"), each exercisable into one ordinary share registered in name of par value NIS 0.01
of the bank (the "Ordinary Shares"). The approvals for the aforesaid allocation of the Options were granted
further to the approval of the agreement for the employment of the CEO and of his terms of employment
in March 2006, as detailed in Note 15E(2) above, in which the bank made a commitment, among other
matters, to issue options for the purchase of shares of the bank to the CEO at no cost, subsequent to which
all of the procedures for the allocation of the Options were not performed in practice, including the fact
that no resolution to allocate the Options in practice was passed, and no application was filed with the
TASE for approval for the allocation of the Options (and no private offering report was published, in
accordance with the regulations). The financial statements of the bank as of December 31, 2007 noted, due
to a good-faith error, that the Options were allocated in 2006. In addition, as of the second quarter of 2006,
an expense was recorded against the recording of a capital reserve in respect of the aforesaid Options,
instead of the adjustment of this expense each period according to the fair value of the Options at the
relevant cutoff dates (due to the failure to pass the resolution to allocate the Options in practice).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 375 -
Note 15A - Share-Based Payment Transactions (cont'd)
A. Details of Share-Based Payment Transactions (cont'd)
The effect on the financial statements of the bank of the failure to perform the aforesaid adjustments is
immaterial.
The exercise price and the exercise dates of the Options approved on September 14, 2008, as noted, are
identical to the terms established in the original employment agreement of the CEO, subject to changes,
wherein the "vesting periods" of the Options granted are, with regard to half of the options, upon
allocation, while the second half of the Options vest on March 31, 2009. The exercise period for the first
portion of Options shall be from the date of allocation of the Options to June 30, 2012, and for the second
portion of Options, from the end of their vesting period to October 15, 2012.
The shares generated for the CEO from the exercise of the Options will constitute approximately 1.04%
of the issued and paid-up capital of the bank and of its voting rights as of September 14, 2008. The
Options were granted to the CEO at no cost on October 23, 2008. Each option shall be exercisable into
one ordinary share in consideration for the payment of an exercise price equal to NIS 21.087, linked to
the consumer price index, with the last known CPI at the date on which the CEO took office at the bank
(April 2, 2006) as the base index, and the last known CPI on the date of actual payment of the exercise
price as the new index.
The Options were allocated in accordance with the directives for capital gains tracks set forth in Article
102(B)(2) of the Income Tax Ordinance (New Version), 1961 (the "Ordinance"), and subject to the
Income Tax Rules (Tax Relief in the Allocation of Shares to Employees), 2003. The Options were
deposited in trust with a trustee, who will hold them in trust during the periods established in Article 102
of the Ordinance (24 months from the date on which the Options were granted and deposited with the
trustee), in order for the benefit arising from the option to be considered as a capital gain under the capital
gains track and taxed accordingly. The fair value of the aforesaid option plan amounted to NIS 1.2
million, as detailed in Section B below. The bank recorded income in the amount of approximately NIS
0.6 million in 2008 against a decrease in the capital reserve due to the approval of the aforesaid option
plan. The bank recorded expense in an amount lower than NIS 0.1 million in 2009 against capital reserve.
B. Estimated Fair Value
The theoretical amount of the benefit inherent in the aforesaid option notes, calculated according to the
Black & Scholes method, totals approximately NIS 1.2 million. The calculation of the amount of the
benefit is based on the following main parameters:
a. Standard deviation of the annual return of the Bank’s shares - for the first portion - 32.93% and for the
second portion - 29.84%.
b. Risk-free CPI-linked interest rate for the first portion - 2.48% and for the second portion - 2.44%.
c. The share price is determined according to the closing price on September 11, 2008 - NIS 14.72.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 376 -
Note 15A - Share-Based Payment Transactions (cont'd)
C. Share-Based Payment Transactions - Share Options
Consolidated and the Bank
Number of
options
Weighted average
exercise price
NIS
thousands NIS
In circulation as of January 1, 2010 620 22.99In circulation as of December 31, 2010 620 23.51In circulation as of December 31, 2011 620 24.11
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 377 -
Note 16 - Assets and Liabilities According to Linkage Basis Reported amounts Consolidated - composition(1):
December 31, 2011 Israeli currency Foreign currency (2)
Unlinked
Linked to the Consumer Price Index U.S. dollars Euro Other
Non-monetary items (3) Total
NIS millions
Assets Cash on hand and deposits with banks 5,798 155 628 339 41 - 6,961 Securities 4,620 973 663 368 7 154 6,785 Securities borrowed 5 - - - - - 5 Credit to the public, net 15,109 4,311 2,315 354 676 103 22,868 Investment in investee companies - - - - - 1 1 Buildings and equipment - - - - - 408 408 Assets in respect of derivative instruments 101 - 557 35 62 91 846 Other assets 846 2 1 - - 192 1,041 Total assets 26,479 5,441 4,164 1,096 786 949 38,915 Liabilities Deposits from the public 21,760 2,697 4,952 1,138 496 115 31,158 Deposits from banks 283 1 75 25 8 - 392 Deposits from Government 1 - - - - - 1 Deferred liability deeds and deposit certificates 975 1,786 - - - - 2,761 Liabilities in respect of derivative instruments 120 - 594 55 63 75 907 Other liabilities 1,036 120 - 5 1 548 1,710 Total liabilities 24,175 4,604 5,621 1,223 568 738 36,929 Difference 2,304 837 (1,457) (127) 218 211 1,986
Non - hedging derivative instruments: Derivative instruments (excluding options) (883) (425) 1,371 147 (210) In the money options, net (in base asset terms) 24 - 34 (54) (4) Out of the money options, net (in base asset terms) 4 - (35) 35 (4) Total 1,449 412 (87) 1 -
In the money options, net (in capitalized stated amounts) 97 - 25 (112) (10) Out of the money options, net (in capitalized stated amounts) 217 - (203) (10) (4)
(1) See Note 1.A.(2). (2) Including linked to foreign currency. (3) Including derivative instruments which their underlying asset relates to a non-monetary item.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 378 -
Note 16 - Assets and Liabilities According to Linkage Basis (cont'd) Reported amounts Consolidated - composition (1):
December 31, 2010 Israeli currency Foreign currency (2)
Unlinked
Linked to the Consumer Price Index U.S. dollars Euro Other
Non-monetary items(4) Total
NIS millions
Assets Cash on hand and deposits with banks 5,881 162 789 221 79 - 7,132 Securities 2,420 1,073 560 333 11 156 4,553 Securities borrowed 415 - - - - - 415 Credit to the public (3) 14,446 3,840 2,445 341 509 132 21,713 Investment in investee companies - - - - - 1 1 Buildings and equipment - - - - - 380 380 Assets in respect of derivative instruments* 160 5 158 21 88 130 562 Other assets*,** 490 - - - - 66 556 Total assets 23,812 5,080 3,952 916 687 865 35,312 Liabilities Deposits from the public *19,780 2,472 4,725 1,291 435 141 28,844 Deposits from banks *239 3 23 5 1 - 271 Deposits from Government 2 - - - - - 2 Deferred liability deeds and deposit certificates 766 1,578 - - - - 2,344 Liabilities in respect of derivative instruments* 219 140 170 13 91 104 737 Other liabilities*,** 684 100 - - - 324 1,108 Total liabilities 21,690 4,293 4,918 1,309 527 569 33,306 Difference 2,122 787 (966) (393) 160 296 2,006
Non - hedging derivative instruments: Derivative instruments (excluding options) (329) (472) 888 42 (129) In the money options, net (in base asset terms) (211) - (23) 245 (11) Out of the money options, net (in base asset terms) (190) - 93 120 (23)
Total 1,392 315 (8) 14 (3)
In the money options, net (in capitalized stated amounts) (332) - 10 340 (18) Out of the money options, net (in capitalized stated amounts) (648) - 147 623 (122)
(1) See Note 1.A.(2). (2) Including linked to foreign currency. (3) The general and supplementary provisions for doubtful debts have been deducted proportionately from the various linkage bases in this category. (4) Including derivative instruments which their underlying asset relates to a non-monetary item. * Reclassified (See Note 1.C.(5)) ** Restated (See Note 1.E.21)
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 379 -
Note 17 - Assets and Liabilities according to Linkage Basis and Maturity Date (1) Reported amounts Consolidated - composition (2):
December 31, 2011
Future expected contractual cash flows
Balance-sheet balance (4) Upon From one From From two From From ten With no demand month to three From one years to three From four From five years to Over fixed Contractual and up to three months to year to three years to years to years to twenty twenty Total cash repayment return one month months one year two years years four years five years ten years years years flows period (5) Total rate (6) NIS millions
Israeli currency unlinked Assets 11,394 1,730 4,726 1,633 1,312 830 1,035 4,185 2,250 339 29,434 465 26,479 5.15% Liabilities 17,235 2,387 2,506 872 371 211 86 734 11 3 24,416 189 24,175 4.40% Difference (5,841) (657) 2,220 761 941 619 949 3,451 2,239 336 5,018 276 2,304
Derivative instruments (excluding options) (1,502) 340 76 203 - - - - - - (883) - (883) Options (in terms of the underlying asset) (94) 2 120 - - - - - - - 28 - 28 Israeli currency linked to the Consumer Price Index Assets 63 605 596 873 648 619 372 1,537 1,062 147 6,522 10 5,441 3.67% Liabilities 85 617 1,281 984 418 226 226 1,123 50 9 5,019 3 4,604 3.26% Difference (22) (12) (685) (111) 230 393 146 414 1,012 138 1,503 7 837 Derivative instruments (excluding options) - - (222) (203) - - - - - - (425) - (425) Options (in terms of the underlying asset) - - - - - - - - - - - - - Foreign currency (3) Assets 2,130 553 1,506 363 271 329 212 1,054 205 24 6,647 14 6,046 5.08% Liabilities 4,395 1,376 1,407 29 33 25 22 213 - - 7,500 - 7,412 1.58% Difference (2,265) (823) 99 334 238 304 190 841 205 24 (853) 14 (1,366) Derivative instruments (excluding options) 1,502 (340) 146 - - 1,308 - 1,308 Options (in terms of the underlying asset) 94 (2) (120) - (28) - (28) Non-monetary items Assets 272 105 3 8 1 - - - - - 389 563 949 Liabilities 71 121 1 - - - - - - - 193 548 738 Difference 201 (16) 2 8 1 - - - - - 196 15 211 Total Assets 13,859 2,993 6,831 2,877 2,232 1,778 1,619 6,776 3,517 510 42,992 1,052 38,915 4.92% Liabilities 21,786 4,501 5,195 1,885 822 462 334 2,070 61 12 37,128 740 36,929 3.67% Difference (7,927) (1,508) 1,636 992 1,410 1,316 1,285 4,706 3,456 498 5,864 312 1,986
(1) Presented in this note are future expected cash flows in respect of assets and liabilities according to linkage base, according to the outstanding expected maturity periods of each cash flow. The data is presented net of accounting write-offs and allowance for credit loss.
(2) See Note 1.A.2. (3) Included linkage to foreign currency. (4) As included in Note No. 16 “Assets and Liabilities according to Linkage Basis”, including off-balance sheet amounts in respect of derivatives. (5) Assets with no fixed repayment period including past due assets totaling NIS 166 million. (6) Contractual return rate is the interest rate that deducts the future expected cash flows presented in this note in respect of monetary items over its balance-sheet balance.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 380 -
Note 17 - Assets and Liabilities according to Linkage Basis and Maturity Date (1) (cont'd) Reported amounts Consolidated - composition (2):
December 31, 2010*
Future expected contractual cash flows
Balance-sheet balance (3)
Upon From one From From two From From ten With no demand month to three From one years to three From four From five years to Over fixed Contractual and up to three months to year to three years to years to years to twenty twenty Total cash repayment return one month months one year two years years four years five years ten years years years flows period (4) Total rate(5) NIS millions
Total Assets 12,534 3,489 6,213 2,313 2,219 1,553 1,441 5,404 3,079 463 38,708 991 *35,312 4.98% Liabilities 21,856 3,684 3,468 1,585 726 558 383 1,366 98 26 33,750 295 *33,306 3.57% Difference (9,322) (195) 2,745 728 1,493 995 1,058 4,038 2,981 437 4,958 696 2,050
* Reclassified. See Note 1.C(5)b. Restated due to retroactive implementation of the directives regarding employee benefits. See Note 1.E.(21).
(1) Presented in this note are future expected cash flows in respect of assets and liabilities according to linkage base, according to the outstanding expected maturity periods of each cash flow. The data is presented net of accounting write offs and provision for credit loss.
(2) See Note 1.A.(2). (3) As included in Note No. 16 “Assets and Liabilities according to Linkage Basis”, including off-balance sheet amounts in respect of derivatives. (4) Assets with no fixed repayment period including past due assets totaling NIS 126 million. (5) Contractual return rate is the interest rate that deducts the future expected cash flows presented in this note over to its balance sheet balance.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 381 -
Note 18 - Contingent Liabilities and Commitments Reported amounts A. Off-balance-sheet financial instruments:
Consolidated and the Bank December 31 December 31 2011 2010 NIS millions NIS millions
Balance of Contracts*
Balance of Allowance for
credit loss** Balance of Contracts*
Transactions where the balance reflects credit risk: Documentary credit 110 ***- 148 Guarantees securing loans 500 11 484 Guarantees to dwelling purchasers 2,193 9 2,317 Other liabilities and guarantees 621 3 565 Unutilized credit card limits 853 ***- 823 Unutilized revolving credit and on-call limits 695 1 883 Unutilized loan and revolving credit facilities of diamond dealers 1,056 3 900 Irrevocable credit approvals not yet utilized 5,415 12 6,540 Commitments to issue guarantees 1,110 5 811
* The contract balances on their par values prior to the effect of allowance for credit loss. ** Mainly group provision. *** Less than NIS 500 thousand.
B. Off-balance-sheet undertakings with respect to activities based on the extent of collection (1): Balance of credit from deposits based on the extent of collection (2)
Consolidated and the Bank December 31 December 31 2011 2010 NIS millions
Israeli currency linked to the CPI 420 485
Cash flows with respect to collection commission and interest margins for activities based on the extent of collection
As at December As at December 31, 2011 31, 2010 Up to
1 year 1 year to
3 years 3 years to
5 years 5 years to
10 years 10 years to
20 years Over
20 years Total Total NIS millions Linked Segment Future contractual cash flows 4 7 6 13 3 1 34 40 Expected future cash flows after Management's estimate of Early repayments 4 6 5 8 1 *- 24 28 Discounted future cash flows after Management's estimate of early repayments (3) 4 6 5 7 1 *- 23 26
2011 2010 NIS millions
Information about loans extended during the year
Loans out of deposits based on the extent of collections *- 1 Standing loans 1 *-
(1) Credit and deposits the return of which to the depositor depends on collection of the credit (or deposits) with a margin or collection commission (instead of a margin).
(2) Standing loans and government deposits made in respect thereof, in the amount of NIS 32 million (2010 - NIS 42 million) are not included in this table.
(3) The discount was made at the rate of 2.28% (2010 - 2.44%). * Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 382 -
Note 18 - Contingent Liabilities and Commitments (cont'd) C. Contingent liabilities and commitments:
Consolidated and the BankDecember 31 December 31
2011 2010NIS millions
(1) Rentals for bank premises
and equipment payable
in future years:
First year 20 17
Second year 20 16
Third year 18 15
Fourth year 15 13
Fifth year 13 10
Over five years 39 31 Total 125 102
(2) As at December 31, 2011, commitments to purchase bank premises and equipment totaled NIS 3
million – consolidated and Bank, (December 31, 2010 - NIS 4 million - consolidated and Bank).
(3) A subsidiary committed to invest NIS 11 million (December 31, 2010 - NIS 9 million) in additional
non-banking corporations and in a hedge fund, this being upon fulfillment of certain conditions
provided in agreements with those corporations.
(4) Agreement to receive computing services from Bank Leumi L'Israel Ltd. (hereinafter -
"Leumi") -
On September 29, 2001, an operating and computing agreement was signed with Leumi for a period
of 11 years, beginning in 1998, pursuant to which Leumi renders operating services to the Bank in
respect of banking infrastructure services, in addition to the Bank's entitlement to receive the
majority of information systems in operation in Leumi, most of which have been assimilated by the
Bank (hereinafter - the "Agreement").
The services which Leumi committed to provide through their operating and administration system
or any entity replacing them (hereinafter - "Matam") are based on computing services that Matam
renders to Matam clients in addition to other services set forth in detail in the agreement. Leumi also
renders to the Bank complete ongoing support and maintenance services, and training services
concerning the systems used to provide services, and operating services. Operating, maintenance and
systems development services are rendered by Leumi at a standard of service that is similar to that
rendered to Leumi's units and branches.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 383 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(4) (cont'd)
Under the agreement Leumi undertakes to transfer operating information concerning the system to
the Bank, maintain a level of information security for Bank data and, subject to the receipt of a
special consideration, prepare the foundation for systems conversion and migration to independent
computing systems in the event that the Bank decides to implement these. Furthermore, Leumi
undertook a contractual commitment to maintain confidentiality of Bank data. The Bank's database is
maintained separately from Leumi's database.
On December 31, 2007, after the bank has initiated a review of alternatives, the Bank and Leumi
signed an addendum to the agreement in which the term of the agreement was extended for ten years,
starting January 1, 2007; the terms of the agreement were improved on the monetary level, via a
decrease in the cost of routine services and the reduction of uncertainty related to uncontrolled
increases in the cost of services in the future, as well as on the service-quality level, by the signing of a
service-level agreement (SLA). Pursuant to the addendum to the agreement, the annual price of
routine services is set at NIS 37-40 million in the first two years, rising gradually to NIS 42-45 million
starting in the sixth year, according to the range of services to which the Bank is entitled under the
agreement. These sums are linked to the consumer price index of December 2006, and may change in
accordance with changes in the volume of activity of the Bank.
The addendum to the agreement covers systems that have not yet been transferred to the Bank’s use,
and which can assist the Bank in complying with various regulatory requirements, among other
things.
(5) On July 1, 2010, an agreement was signed between the Bank and Cartisei Ashrai LeIsrael Ltd.
(hereinafter: “CAL”), and an additional agreement was signed between the Bank and Diners Club
Israel Ltd. (hereinafter: “Diners”), a company controlled by CAL (hereinafter: “the Agreements”).
The term of the Agreements is ten years, subject to the right to cancel the Agreements, which is
available to each of the parties under the provisions of the law. The Agreements replace and
substitute for the contractual engagements between the Bank and CAL, and between the Bank and
Diners, ended on that date. Under the Agreements, CAL and Diners will issue credit cards, bank
cards, and combined cards to customers of the Bank, and will provide the customers with the
services involved in the issuance and use of the cards. The Agreements establish the rights of the
parties as well as arrangements with regard to the operation and provision of services by CAL and/or
Diners for charge cards to be issued pursuant to the agreement, and the additional relevant terms.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 384 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(5) (cont'd)
Under the agreement with CAL, subject to the contingent terms detailed below, the Bank was
granted a nontransferable option to buy from CAL, 32,934 common shares of NIS 0.0001 of CAL,
which as of the date of signing of the agreement constitute 3% of the issued and paid-up common
share capital of CAL, subject to adjustment events specified in the agreement, at the date of
completion of the offering to the public of securities of CAL, and subject to the completion of such
offering (insofar as shall be executed). The exercise price of the options reflects a discount of 25%
on the gross price of the share, as established in the prospectus for the public offering. CAL has the
right, at its discretion, to exchange the option shares for a one-time payment, in an amount equal to
the exercise price, according to the total number of option shares, as if the option had been exercised
in full. The shares arising from the exercise of the option, insofar as it shall be exercised, shall not be
transferable to a competitor of CAL. The validity of the option during the term of the agreement is
contingent upon a series of business terms, as established in the agreement. The option shall take
effect when an exemption from a restrictive arrangement is received from the Antitrust
Commissioner with regard to the provisions of the agreement that concern the terms of the option,
and when approval is received from the Supervisor of Banks referring to the Bank and CAL, to the
extent that such approvals shall be required.
In December 2010, the Bank received a decision of the Antitrust Commissioner to grant an
exemption from the approval of a restrictive arrangement, for five years, to the option granted by
CAL within the contractual engagement between the Bank and CAL, and with regard to the
agreement between the Bank and CAL and the additional agreement between the Bank and Diners, a
company under the control of CAL. The reasons noted in the decision, on which the Commissioner’s
decision was based, include the consideration that the exclusivity stipulation contained in the
agreement with regard to the option does not cause substantial damage to competition. It was further
established that when the five-year period has elapsed, it will be possible to request another
extension of the period of the exemption.
In May 2011, the Bank was notified about the position of the Supervisor of Banks according to
which no supervisory authorization is required in connection with the option that was granted to the
Bank within the agreement. These circumstances meet the contingent terms required for the validity
of the option.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 385 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(6) On February 3, 2011, the Bank entered into an agreement with Isracard Ltd., for a period of five
years, for the issuance of charge cards under the brands Isracard and MasterCard. Among other
matters, the agreement sets forth provisions with regard to the division of responsibility between
Poalim Express Ltd. and the Bank, in view of the directives of the Charge Cards Law and the
relevant business, operational, and legal terms for such issuance. The period of the agreement will be
extended automatically for additional periods of two years each, unless either of the parties notifies
the other, in the ways specified in the agreement, that it is not interested in such an extension.
On the same date, the Bank entered into an agreement with Poalim Express Ltd., for a period of four
years, for the issuance of charge cards under the brand American Express. Among other matters, the
agreement sets forth provisions with regard to the division of responsibility between Poalim Express
Ltd. and the Bank, in view of the directives of the Charge Cards Law and the relevant business,
operational, and legal terms for such issuance. The period of the agreement will be extended
automatically for additional periods of two years each, unless either of the parties notifies the other,
in the ways specified in the agreement, that it is not interested in such an extension.
(7) In accordance with the business strategy of the Bank, which includes an emphasis on retail banking,
on February 6, 2011, the Bank entered into a framework agreement with Mimun Yashir, of the
Yashir (2006) Group Ltd. (hereinafter: “Mimun Yashir”), pursuant to which the Bank will acquire,
from Mimun Yashir, through the assignment of rights and obligations by way of a sale, portfolios of
loans extended by Mimun Yashir to private customers for purchases of motor vehicles, as well as all
collateral provided to secure such loans, up to a maximum amount of NIS 180 million (hereinafter:
the “Framework Agreement”); This agreement is in pursuance of a framework agreement for a
matching sum from 2010, which was fully assigned.
This framework agreement which the Bank entered on February 6, 2011 became in effect for a
period of twelve months from the signing date, or until the assignment of the Maximum Amount as
noted above, whichever is earlier. The execution of the assignment transactions under the
Framework Agreement is subject to the fulfillment of the terms agreed upon in the agreement, and to
all laws.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 386 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(7) (cont'd)
In March and July 2011, loans in the amount of NIS 74 million and NIS 103 million, respectively,
were assigned via sale, in accordance with the framework agreement. Further to the framework
agreements described above, it was agreed between the Bank and Mimun Yashir that the maximum
amount of the principal of the loans to be acquired by the Bank from Mimun Yashir, under all of the
agreements between them, would stand at NIS 500 million (hereinafter: the "Ceiling Amount"). The
execution of each transaction between the parties in the sale of the aforesaid loan portfolio shall be
subject to the fulfillment of suspending conditions agreed upon in the agreements between the
parties, and to all laws. Concurrent with this agreement, an assignment agreement was executed by
the parties, on December 28, 2011, in the amount of approximately NIS 50 million. In addition, on
January 26, 2012, an additional assignment agreement in the amount of NIS 100 million was
executed by the parties. The execution of additional assignment agreements, subject to the Ceiling
Amount, is contingent upon approval by the Bank, in advance and in writing. In any event, the
period of the acquisition of the loans has been limited, subject to the foregoing and to the terms of
the agreement, up to December 27, 2012, unless extended by agreement of the parties.
At the date of the purchase of the loans from Mimun Yashir, upon fulfillment of the terms for the
recognition of a financial asset (pursuant to FAS 166), the Bank records the acquired loans in its
books, at the amount of the consideration, i.e. at fair value, with the exception of loans where the
Bank has a right of return for a period defined in the agreement, which are recorded as secured debt
to Mimun Yashir. Financing income in the transaction is recorded according to the effective interest
rate of the acquired loans.
(8) Guarantees to courts and others as at December 31, 2011 amounted to NIS 12 million, (December
31, 2010 - NIS 20 million) - consolidated and Bank.
(9) a. Pursuant to the Joint Trust Investment Regulations (Equity Capital and Insurance of Fund
Managers and Trustees and Terms for Qualifications of Directors and Employees), 1995, the
consolidated company deposited an amount of NIS 7 million (December 31, 2010 - NIS 7
million) in favor of owners of units of mutual funds for which a consolidated company of the
Bank serves as a trustee.
b. As demanded on Investment Management and Advice Activities and Management of Investment
Portfolios Regulations (Shareholders’ Equity and Insurance) - 1997, a consolidated company
which serves as manager of investment portfolios, is covered by professional liability insurance.
c. A consolidated company engaged in underwriting is covered by professional liability
insurance, as required on Securities Regulations (Underwriting) - 2007.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 387 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(10) Pursuant to the agreement signed on December 18, 2006 between a consolidated company and the
Bank, the Bank undertook a commitment towards the trustees of the subordinated notes and the
certificates of deposit issued by the consolidated company to fulfill all terms of payments noted in
the subordinated notes and in the certificates of deposit. In accordance to the Bank commitment
with shelf prospectus published by consolidated company- see Note 10.B
(11) The Bank, which is a member of the TASE Clearing House, has undertaken, together with the other
members of the Stock Exchange, to indemnify the TASE Clearing House in the event that it suffers
losses deriving from insufficient securities holdings or insufficient financial cover by any one of the
members. A risk fund was founded by TASE Clearing House for this purpose in which all members
of the Clearing House, including the Bank will participate. In November 2008, the board of
directors of the clearing house decided to amend the article dealing with the provision of collateral
by members in respect of the risk fund of the clearing house. Pursuant to the amendment, each
member shall deposit at least 25% collateral in cash to secure its share of the risk fund. As at
December 31, 2011 the Bank’s share in the risk fund amounted to NIS 61 million (December 31,
2010 - NIS 27 million).
(12) The Ma'of Clearing House Ltd. is operated by the Tel Aviv Stock Exchange Ltd. Its main activities
are the issuance of options, providing clearinghouse facilities for transactions in options and their
exercise and providing related services to members of the Clearing House and to the trade in options.
The Bank, as a member of the Clearing House, is responsible, jointly with the other members of the
Clearing House for any financial indebtedness towards the Clearing House resulting from
transactions in options executed on the Stock Exchange. For this purpose, the Clearing House
founded a risk fund. Each member of the Clearing House is responsible for his share of the Fund,
which is determined based on the relative share of his activities in options or the total amount of the
collateral which it is required to provide to the Clearing House and based on the terms set by the
Board of Directors of the Clearing House from time to time.
In November 2008, the Ma'of Clearing House board of directors of decided to amend the article
dealing with the provision of collateral by members in respect of the risk fund of the Clearing
House. Pursuant to the amendment, each member shall deposit at least 25% collateral in cash to
secure its share of the risk fund.
As at the balance sheet date, the Bank's share of the Fund is NIS 112 million (December 31, 2010 -
NIS 83 million). The Bank's share at the Fund may increase in the event of one or more of the other
members of the Clearing House does not meet their obligations.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 388 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(12) (cont'd)
The Bank committed to the Clearing House to pay any monetary obligation deriving from
transactions executed for its customers in connection with the writing of options traded within the
framework of the Clearing House. As at December 31, 2011, the amount of the guarantees relating
to transactions executed for customers, totaled NIS 414 million (December 31, 2010 - NIS 190
million).
See also Note 14 regarding the aforementioned liens.
(13) Letter of commitment to indemnify an officer of the Bank:
On December 29, 2005, the general assembly of shareholders of the Bank approved a resolution
pursuant to which the Bank shall grant a commitment to persons serving, from time to time, as
officers of the Bank and of its subsidiaries (hereinafter: the “Officers”) for indemnification in
respect of monetary indebtedness to be imposed upon any of them and in respect of reasonable
litigation costs related to the list of events attached to the letter of commitment. The maximum
amount of the indemnity to be granted to all of the Officers in aggregate shall not exceed a total of
USD 35 million. The indemnification is contingent upon the fulfillment of conditions specified in
the letter of commitment.
On June 22, 2009, the general assembly of the Bank approved a transaction to increase the amount
of the commitment to indemnify the Officers, within the indemnification commitment letter
approved by the general assembly of the Bank on December 29, 2005 (hereinafter: the
“Commitment Letter”), with regard to the offering and/or issuance of securities through a
prospectus, with all implications, as detailed in Section (1) of Appendix A of the Commitment
Letter, in an additional amount of USD 15 million (hereinafter: the “Additional Indemnity
Amount”), beyond the commitment to indemnification in the amount of USD 35 million stated in
the aforesaid Commitment Letter. The Additional Indemnity Amount is devoted exclusively to the
event detailed in Section (1) of Appendix A of the Commitment Letter (which concerns the
offering and/or issuance of securities through a prospectus). It is hereby clarified that the
indemnity related to the events included in Section (1) of Appendix A of the Commitment Letter
shall first be given out of the Additional Indemnity Amount (USD 15 million), and to the extent
that indemnity is required in respect of an event of the aforesaid type in excess of the Additional
Indemnity Amount, the officers shall also be indemnified from the existing indemnity commitment
in the amount of USD 35 million.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 389 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(14) On June 30, 2009, the board of directors of the Bank approved the granting of irrevocable and
unconditional indemnification letters to the consolidated companies: Union Capital Markets Ltd.,
Union Issuance Ltd., Unions Insurance Agency (1995) Ltd., Union Bank Trust Company Ltd.,
Impact Investment Portfolio Management Ltd., Carmel Union Mortgages and Investments Ltd.,
and Livluv Insurance Agency (1993) Ltd. (further to indemnification letters granted in the past to
Unions Ltd., Union Systems Ltd., Union Investments and Enterprises Ltd., and Union Leasing
Ltd.; with regard to the indemnification letter for Union Leasing, the board of directors of the
Bank approved the omission of conditions from the indemnification letter, in effect as of June 30,
2009), in respect of all of their liabilities (with no amount limit), including but not limited to in
respect of credit and loans granted to these companies by the Bank or by any third party, and in
respect of any other liability which the consolidated companies may have, in accordance with
Proper Conduct of Banking Business Directive No. 311 (Minimum Capital Ratio) and 313 (Limits
on Indebtedness of a Borrower and a Group of Borrowers), and in accordance with the proper
Conduct of Banking Business Directive No. 23 concerning the working and measurement
framework for capital adequacy – standard approach credit risk (Basel II).
(15) A deposits agreement was signed between the Bank and Union Issuances Ltd. on August 28, 2011
(hereinafter: the "Updated Agreement"). The Updated Agreement will apply to offerings of bonds
and/or notes and/or commercial securities (hereinafter: the "Offered Securities") executed under the
shelf prospectus published on August 29, 2011 (hereinafter: the "Shelf Prospectus"). Pursuant to the
Updated Agreement, the Bank shall cover all of the direct issuance costs of the company for the
Offered Securities, immediately upon actual payment. The Updated Agreement further states that the
consideration from the issuance of the Offered Securities under the Shelf Prospectus shall be
deposited by the company in deposits with the Bank, at settlement and linkage terms similar to the
terms of the Offered Securities, and at interest terms identical or preferable thereto, as agreed with
the Bank from time to time, allowing full settlement of the Offered Securities, on time, with the
addition of a margin of 0.05% or a margin at another rate as determined by the Bank and the
company, which is likely to approximately cover the routine expenses of the company in connection
with the Offered Securities to be issued as described above. The Updated Agreement shall not
detract from the validity of previous deposit agreements contracted by the company with the Bank,
which apply to offerings performed pursuant to earlier prospectuses of the company, as detailed
below:
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 390 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(15) (cont'd)
On April 12, 2005, a deposit agreement was signed between the Bank and Union Issuance Ltd.
(hereinafter: the “Subsidiary”) in connection with the shelf prospectus published by the Subsidiary
on April 13, 2005, on December 18, 2006, a deposit agreement was signed between the Bank and
the Subsidiary (as amended on January 1, 2007) in connection with the shelf prospectus published
by the Subsidiary on January 7, 2007, on August 27, 2009, an additional deposit agreement was
signed between the Bank and the Subsidiary in connection with the shelf prospectus published by
the Subsidiary on August 31, 2009 and in connection with the proceeds of the issuance, pursuant
to the shelf offering reports for the issuance of certificates under the aforesaid prospectuses, in
which the following was stipulated, among other matters:
A. The consideration from the issuance of the certificates to be issued under the aforesaid
prospectuses shall be deposited by the Subsidiary in deposits with the Bank (hereinafter: the
“Deposits”). Each of the Deposits shall have maturity and linkage terms similar to the terms
of the certificates offered under the aforesaid prospectuses and the shelf offering reports, and
interest terms identical and/or preferable thereto, plus a margin of 0.12%.
B. Each deposit shall have a repayment priority rank equal to the repayment priority rank of the
certificates the consideration for which was deposited in the deposit.
C. The Bank granted its consent in principle to fulfill all of the terms of the certificates to be
offered, which will be held by the public. The commitment of the Bank cannot be cancelled
or changed, as third-party rights are dependent upon it, i.e. the rights of the holders of the
certificates and the trustees of the certificates.
D. The agreements shall remain in effect as long as the certificates are in circulation.
(16) On October 31, 2011, the general assembly of the Bank approved the purchase of a directors’ and
officers’ (D&O) insurance policy (including in respect of directors who are controlling shareholders
of the Bank or relatives thereof), with liability limits of USD 85 million per event and per period,
along with the purchase of a banking insurance policy, with liability limits in the same amount per
event and per period, for a period of twelve months, from September 15, 2011 to September 14,
2012. The policies will be purchased from a consortium of insurers in London. The Phoenix
Insurance Company Ltd. will provide front-office services to the Bank in respect of the policies. The
total premium to be paid by the Bank for the purchase of the D&O policy (including the payment for
the front-office services) is in an amount not to exceed USD 275,300. The general assembly
approved the transaction, following approval by the audit committee on September 8, 2011, and
subsequently by the board of directors of the Bank, on September 12, 2011.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 391 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(17) A. Various claims for damages are pending against the Bank and subsidiaries. Adequate provision
has been made in respect of claims, which on the basis of legal opinions, management of the
Bank believes will not be dismissed or withdrawn, even though it denies such claims. No
provision has been made with respect to claims which in the opinion of management of the
Bank and its legal adviser their chances are remote. The additional amount of exposure in
respect of contingent claims the chances of which are not remote is NIS 9 million.
B. In December 2007, a payment demand in a total amount of USD 10 million was submitted to
the Bank in connection with the activity in the capital market of a holder of power of attorney
in an account (the “Demand”). The Demand was filed by the trustee in bankruptcy of the
assets of the holder of the power of attorney. The main arguments specified in the Demand
concern the conduct of the holder of the power of attorney in the relevant bank accounts.
According to the trustee, the Bank violated the trust of the customers of the Bank and the
duty of caution towards the customers of the holder of the power of attorney, and violated
legislated duties which allowed the holder of the power of attorney to perform the alleged
acts of fraud against the customers of the holder of the power of attorney. After the Bank
denied the Demand, the trustee in bankruptcy of the holder of the power of attorney
submitted a report to the court in which arguments are made against the Bank with regard to
the management of the accounts, including that the Bank violated the duties of caution and
fidelity incumbent upon it as a bank, and violated directives related to the prohibition of
money laundering and/or to taxation. In the aforesaid report, no monetary remedy is
requested against the Bank; instead, the Bank is asked to respond to the report and to provide
various specific reports and documents. The Bank submitted its response, and subsequently
repeated responses were submitted both by the trustee and by the Bank. According to a recent
ruling by the court, the Bank must provide reports and documents to the trustee related to the
account of the holder of the power of attorney (to the extent that these exist) and not to any
other accounts. In the opinion of the management of the bank, based on the opinions of its
legal advisors, in the absence of a foundation for liability of the Bank and in the absence of
details and/or quantification of the arguments and the manner in which they form the basis of
the right to a remedy, it is not yet possible to assess the probability of materialization of
exposure to risk with respect to this matter.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 392 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(17) (B) (cont'd)
In late October 2011, a monetary claim in the amount of NIS 12 million was filed against the
Bank with the Central District Court, by two claimants who are not customers of the Bank,
who claim that they incurred damage due to the actions of the aforesaid holder of power of
attorney. In the opinion of the management of the Bank, based on the opinion of the legal
advisors of the Bank, because this claim is still in its earliest stages, it is not possible to
estimate its outcome at this point. In December 2011, an additional claim in the amount of
NIS 6 million was filed against the Bank with the District Court of Tel Aviv, in connection
with an account opened in the name of the claimant under a power of attorney granted to the
aforesaid holder of power of attorney, in which the claimant states that he incurred damage
due to these actions. In the opinion of the management of the Bank, based on the opinion of
the legal advisors of the Bank, because this claim is still in its earliest stages, and a statement
of defense has not yet been filed, it is not possible to estimate its outcome at this point.
C. On October 29, 2009, a claim was filed with the Central District Court by Zeevi
Communications Holdings Ltd. (in receivership) and Zeevi Communications – Financing and
Management Ltd. (in receivership) for declaratory relief against the Bank and against six
other banks, concerning the alleged attempt by the banks to collect differences from the
plaintiffs in respect of “violation interest,” as it is called in the claim, on a loan extended to
them by the banks, for which shares of Bezeq The Israel Communications Corporation Ltd.
served as collateral. The accrued differences, according to the claim, as of the filing date of
the claim, amount to approximately NIS 840 million for all of the banks (hereinafter: the
“Amount of the Difference in Respect of the Violation Interest”) beyond the contractual
interest, as defined in the claim. The claimants request declaratory orders stating as follows:
‐ That the banks are not entitled to charge the claimants with differences in respect of the
violation interest, as it is defined in the claim.
‐ That the Amount of the Difference in Respect of the Violation Interest shall be reduced
to a total of approximately NIS 37 million.
‐ That in accordance with the foregoing, the total debt of the claimants is in the amount of
approximately NIS 176 million, as of the filing date of the claim (rather than a total of
approximately NIS 981 million, as claimed by the banks).
‐ Alternatively, that the banks are entitled to charge the claimants for the period from
May 2003 forward for differences in respect of interest, pursuant to the Adjudication of
Interest and Linkage Law, 1961, only, in relation to the debt of the claimants accrued up
to that date; and that accordingly, the total debt of the claimants is in the amount of
approximately NIS 459 million, as of the filing date of the claim.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 393 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
17. C. (cont'd)
The claim is based on several main causes, including the arguments that the “violation
interest” actually constitutes “agreed compensation,” which the court is permitted to reduce;
and that the examination of the circumstances of the case necessitate the conclusion that there
is justification to reduce the amount; that the reduction of the violation interest differences is
also mandated by the interpretation of the loan agreement, in accordance with the estimated
opinion of the parties; that charging the claimants with violation interest would constitute
unjust enforcement of the loan agreement; that the banks’ insistence on charging the
claimants with violation interest constitutes bad faith; and that the collection thereof would
constitute unjust enrichment of the banks. The claim does not refer to the “share” of each of
the banks in the Amount of the Difference in respect of the Violation Interest, but notes the
percentage of the participation of the banks in the financing; the Bank’s share is 4%.
In January 2010, the court ruled that the claim would be examined as an ordinary monetary
claim, in respect of which the plaintiff must pay the full fee within the timeframe allotted by
the court; this was submitted to the court in February 2010.
According to the opinion of the legal advisors of the Bank, it can be assumed that the share of
each of the banks in the alleged difference is proportional to its participation in the financing.
In the opinion of the management of the Bank, based on the opinion of its external legal
advisors handling this claim, based on the information and data known to them, the
probability of acceptance of the claim is estimated to be remote.
D. In December 2011, a claim was filed against the Bank with the District Court of Tel Aviv,
and a petition was filed to certify the claim as a class action, in a total amount of
approximately NIS 5.4 million. The claim statement alleges that in transactions of
withdrawal, deposit, or conversion into smaller denominations of cash in amounts exceeding
NIS 10 thousand, the Bank is entitled to collect a fee as a percentage derived only from the
difference between the amount handled and NIS 10 thousand, rather than from the full
amount of cash handled. It is further alleged that if several transactions of the same type are
executed on the same day, the Bank calculates the fee according to the total aggregate
amount, in contradiction of the directives of the law. In the opinion of the management of the
Bank, because the aforesaid claim is still in its earliest stages, and the petition for certification
of the claim as a class action has not yet been discussed, the management of the Bank, based
on the opinion of its legal advisors, is not able to estimate the outcome of the claim at this
stage.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 394 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(17) (cont'd)
E. (1) Claims against Carmel Union Mortgages and Investments Ltd. (hereinafter - the
"Company")
On November 2, 1997, a petition was filed in the District Court of Tel Aviv against Carmel
Union Mortgages and Investments Ltd. (formerly Carmel Bank), (a wholly owned
subsidiary of the Bank), and three other mortgage banks in an aggregate amount of NIS 500
million, along with a plea for various forms of declaratory relief. In addition, a request was
filed for approval of the petition as a class action. In the petition it was alleged, among other
things, that the banks improperly collected from the borrowers and the guarantors,
commissions in respect of borrowers' life insurance and assets pledged to the Bank, and that
they are entitled to a return of the amounts of these commissions. The Company, as well as
the other defendants, filed requests to summarily dismiss the request to confirm the claim as
a class action. This request has not yet been heard. During a preliminary hearing held in
the District Court it was decided to delay the hearing on the case until a final decision is
made with respect to the disposition of another request to certify a claim as a class action,
which is being tried in the Supreme Court concerning a similar matter and regarding
which the Company is not a party (hereinafter - the "other request"). No ruling has as yet
been made on the other request. In addition, it was decided to “freeze” the proceedings
and the claim until the Supreme Court hands down an in-principle ruling on the matter of
Regulation 29 of the Civil Procedural Regulations - 1984. The Supreme Court has
recently handed down such an in-principle ruling by which Regulation 29 does not allow
the filing of class actions. It should be noted that the claimants are petitioning for
certification of the claim as a class action, also under other laws that establish
arrangements for the filing of class-action suits.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 395 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd):
(17) E. (1) (cont'd)
With regard to the proceedings in the claim which rely on other causes, the suspension
stands until further determination. In addition to the above mentioned, in the opinion of
the Company’s legal advisor certain causes of action of the plaintiffs, who are borrowers
of the Company, come under the law of limitation, the size of the group the plaintiffs
request to represent in the class action cannot be evaluated and estimated, and the relief
requested in the class action including the method of calculating the damages is unclear
and indefinable, including the question which part of the amount is attributed to the
Company. The legal advisors believe that under these circumstances, the range of
uncertainty concerning the proceeding, factual and legal, is wide to the extent that it is
impossible to evaluate the risk in respect of the claim. Since the aforesaid claim is still in
its very early stages, and the request for certification of the claim as a class action has not
yet been tried, the management of the company and the Bank, based on an opinion of its
legal advisors, is unable, at this stage, to estimate the results of the claim.
(2) Claim against Union Bank Trust Company Ltd. (hereinafter: the “Company”)
On June 22, 2009, an amended claim in the amount of NIS 10 million was filed with the
District Court against the Bank and its wholly owned subsidiary Union Bank Israel Trust
Company Ltd. (jointly: the “Bank”), by Red-Rock Holdings Ltd., an American company,
and its subsidiary, Red Rock Commodities (“Commodities”), which is an American
company currently undergoing liquidation in Israel (jointly: the “Claimants”). The
amount stated in the claim statement prior to the amendment was approximately USD 178
million (hereinafter: the “Original Amount”). The Claimants applied for an exemption
from the payment of a fee in respect of the Original Amount, but this application was
denied. Subsequently, the Claimants petitioned to amend the claim statement to the
amount of NIS 10 million (for fee purposes) (hereinafter: the “Amended Amount”), and
this petition was approved. The Claimants also petitioned to reduce the fee payment and
to pay a fee according to the Amended Amount, despite the fact that it was ruled in the
previous ruling that they must pay a far higher fee. This petition was approved;
subsequently, the fee was paid and the aforesaid claim was filed. In the amended claim
statement, the Claimants note that the amount of the claim is approximately USD 155
million, and NIS 10 million for the purposes of the fee.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 396 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(17) E. (2) (cont'd)
In brief, the Claimants’ arguments concern events from 1992, alleging that the Bank
allowed the release to a third party of steel cargoes imported to Israel for it, without
payment for the steel cargoes by the third party. The Claimants state that the Bank
thereby violated a trust agreement signed between it and the American company, in
which the Bank undertook a commitment to check and ensure that the steel cargoes were
stored and safeguarded at the port. Because, according to the Claimants, the Bank failed
to fulfill this obligation, it must pay the Claimants the amount which they were owed by
that third party for the steel bars, plus interest. Alternatively, the Claimants allege that the
Bank made negligent misrepresentations to them, violated alleged duties of caution
towards them, violated duties under the Guards Law, violated duties under the Banking
Law (Service to Customers), and violated its obligation to insure the steel cargoes. A
renewed petition was recently filed to increase the sum of the claim to approximately
USD 22 million, plus interest from August 7, 1992, at a rate which according to the
claimants was established in an agreement between the claimants and the Bank and Union
Bank Trust Company Ltd., which are the defendants, and to grant an exemption from fees
for the enlarged amount.
In the opinion of the management of the Bank, based on the opinion of the external legal
advisors handling this claim, which relies on the facts known to them, the probability of
acceptance of this claim is estimated as remote. In addition, the Bank has an arrangement
with its insurers with regard to the coverage of a principal part of the amounts that may be
paid by the Bank in respect of this claim, including legal expenses for the administration
of the claim.
(18) As part of an audit performed by the Israel Tax Authority (VAT Audit Department) at a subsidiary
of the bank, Union Systems Ltd., a private company providing computer services to the bank
(hereinafter - the "Company"), an investigation was conducted with regard to the Company's status
as a dealer for VAT purposes. On June 18, 2008, the Company received a transaction tax
assessment for the tax periods of September 2005 to March 2008. The tax assessment claims that
the Company delivered equipment (computer hardware and software) to the bank, and transaction
tax in the amount of the depreciable balance of the input tax claimed upon the acquisition of the
equipment, plus 10%, with linkage differentials and interest (approximately NIS 7 million) was
added.
On July 17, 2008 the Company filed an appeal of this tax assessment. In June 2009, the Company
received a decision of the Tax Authority regarding the rejection of the objection. In January 2010,
the Company appealed this decision and the pre-trial has been set for the first quarter of 2011.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 397 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(18) (cont'd)
In the opinion of management, based on an evaluation by the legal advisors of the Company, the
appeal has a reasonable probability of acceptance. It is hereby clarified that because timing
differences are the issue, even if the appeal is denied, no material effect on the results of
operations of the Company or of the Bank is expected.
On August 18, 2011, the company received a letter from the Israel Tax Authority, stating that the
ITA had decided to change the company's classification from "business" to "financial institution,"
effective September 1, 2011. The significance of the change in classification is a "notional sale"
of the company's assets (computer equipment), in respect of which input tax was deducted upon
purchase, and the imposition of VAT in respect thereof. The date of the "sale" shall be according
to the date of the change in classification, and the selling price shall be according to the market
value of the company's assets. In the opinion of the legal advisors of the company, the change in
classification, if implemented, is expected to be performed according to the adjusted
undepreciated balance of the assets that were acquired from April 2008 forward and were not
included in the aforesaid tax assessment. The company disputes the decision to change the
classification, and submitted a statement of its objection on December 1, 2011. According to
estimates by the Bank, if the Bank's objection is not accepted, no material effect is expected on
the Financial Statements as at December 31, 2011.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 398 -
Note 19 - Derivative Financial Instruments
Reported amounts
A. Volume of activity on a consolidated basis
(1) Stated amounts of derivative instruments
December 31, 2011
Interest contracts Foreign
currency Shares related Commodity and NIS-CPI Other contracts contracts other contracts NIS millions
a. ALM DERIVATIVES (1)(2) Forward contracts 876 - 16,334 - - Other options contracts: options written - 802 2,467 232 - options bought - 802 2,352 232 - Swaps - 2,489 - - - Total 876 4,093 21,153 464 -
Of which interest rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 1,718 - - -
b. Other derivatives (1) Futures contracts - - - 1 - Option contracts traded on the stock exchange: Options written - - 1,205 7,131 - Options bought - - 1,205 7,105 - Other options contracts: Options written - - 5,814 - 825 Options bought - - 5,817 140 826 Total - - 14,041 14,377 1,651
c. CREDIT DERIVATIVES AND SPOT SWAP FOREIGN CURRENCY CONTRACTS
Credit derivatives for which the banking corporation is a beneficiary - - - - 134
Spot swap foreign currency contracts - - 2,895 - -
(1) Except for credit derivatives and foreign currency spot swap contracts. (2) Derivatives constituting part of the Bank’s asset and liabilities management that have not been designated for hedging.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 399 -
Note 19 - Derivative Financial Instruments (cont’d)
Reported amounts
A. Volume of activity on a consolidated basis (cont’d)
(2) Gross fair value of derivative instruments
December 31, 2011
Interest contracts Foreign
currency Shares related Commodity and NIS-CPI Other contracts contracts other contracts NIS millions
a. ALM (2)(3) DERIVATIVES Gross positive fair value 6 192 244 12 - Gross negative fair value 2 281 230 12 - b. OTHER (3) DERIVATIVES Gross positive fair value - - 201 152 39 Gross negative fair value - - 201 154 39 c. CREDIT DERIVATIVES Credit derivatives for which the the banking corporation is the beneficiary Gross negative fair value - - - - 2 (1) Except for credit derivatives and spot swap foreign currency contracts. (2) Derivatives constituting part of the Bank’s assets and liabilities management that have not been
designated for hedging relationships. (3) Except for credit derivatives.
B. Credit risk in respect of derivative instruments, according to counterparty on a consolidated basis
December 31, 2011 Governments Dealers/ and central Exchanges Banks Brokers banks Others Total NIS millions
Positive gross fair value of derivative instruments (1) 79 320 1 - 446 846 Off-balance-sheet credit risk in respect of derivative instruments (2) - 199 37 - 293 529 Total credit risk in respect of derivative instruments 79 519 38 - 739 1,375
(1) Of which the balance sheet balance of freestanding derivative instruments in the amount of NIS 846
million. (2) Off-balance-sheet credit risk in respect of derivative instruments (including in respect of derivative
instruments with negative fair value) as computed for the purpose of per borrower credit limitations.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 400 -
Note 19 - Derivative Financial Instruments (cont’d)
Reported amounts
C. Repayment schedule - stated amounts: year-end balances on a consolidated basis
December 31, 2011 Up to 3 From 3 months From 1 year to months to 1 year 5 years Over 5 years Total NIS millions
Interest rate contracts
NIS-CPI 100 626 150 - 876 Other 38 352 1,132 2,571 4,093 Foreign currency contracts 30,439 7,632 18 - 38,089 Shares related contracts 14,194 143 391 113 14,841 Commodities and other contracts 1,627 24 134 - 1,785 Total 46,398 8,777 1,825 2,684 59,684
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 401 -
Note 19 - Derivative Financial Instruments (cont’d) Reported amounts
A. Volume of activity on a consolidated basis
(1) Stated amounts of derivative instruments
December 31, 2010
Interest contracts Foreign
currency Shares related Commodity and NIS-CPI Other contracts contracts other contracts NIS millions
a. ALM DERIVATIVES (1)(2) Forward contracts 710 - 11,299 - - Other options contracts: options written - 852 4,316 121 - options bought - 852 4,396 121 - Swaps - 1,329 - - - Total 710 3,033 20,011 242 -
Of which interest rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 1,141 - - -
b. Other derivatives (1) Futures contracts - - 3 1 - Option contracts traded on an exchange: Options written - - 358 9,630 - Options bought - - 358 9,630 2
Other options contracts Options written - - 3,212 - 775 Options bought - - 3,104 118 684 Total - - 7,035 19,379 1,461
c. CREDIT DERIVATIVES AND SPOT SWAP FOREIGN CURRENCY CONTRACTS
Credit derivatives for which the banking corporation is a beneficiary - - - - 124
Spot swap foreign currency contracts - - 2,824 - -
(1) Except for credit derivatives and foreign currency spot swap contracts. (2) Derivatives constituting part of the Bank’s asset and liabilities management that have not been
designated for hedging.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 402 -
Note 19 - Derivative Financial Instruments (cont’d)
Reported amounts
A. Volume of activity on a consolidated basis (cont’d)
(2) Gross fair value of derivative instruments December 31, 2010
Interest contracts Foreign
currency Shares related Commodity and NIS-CPI Other contracts contracts other contracts NIS millions
a. ALM (2)(3) DERIVATIVES Gross positive fair value 5 102 155 9 - Gross negative fair value 2 137 300 9 - b. OTHER (3) DERIVATIVES Gross positive fair value - - 65 225 7 Gross negative fair value - - 65 225 7 (1) Except for credit derivatives and spot swap foreign currency contracts. (2) Derivatives constituting part of the Bank’s assets and liabilities management that have not been
designated for hedging. (3) Except for credit derivatives.
B. Credit risk in respect of derivative instruments, according to counterparty (on a consolidated basis) December 31, 2010 Governments Dealers/ and central Exchanges Banks Brokers banks Others Total NIS millions
Positive gross fair value of derivative instruments (1) (2) 103 163 2 - 300 568 Off-balance-sheet credit risk in respect of derivative instruments (3) - 1,695 23 - 853 2,571 Total credit risk in respect of derivative instruments 103 1,858 25 - 1,153 3,139
(1) Of which positive gross fair value of embedded derivatives instruments in the amount of NIS 6 million. (2) Of which the balance sheet balance of freestanding derivative instruments in the amount of NIS 562
million, which is included in other assets. (3) Off-balance-sheet credit risk in respect of derivative instruments (including in respect of derivative
instruments with negative fair value) as computed for the purpose of per borrower credit limitations.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 403 -
Note 19 - Derivative Financial Instruments (cont’d) Reported amounts
C. Repayment schedule - stated amounts: year-end balances on a consolidated basis
December 31, 2010 Up to 3 From 3 months From 1 year to months to 1 year 5 years Over 5 years Total NIS millions
Interest rate contracts
NIS-CPI 150 460 100 - 710 Other 368 - 290 2,375 3,033 Foreign currency contracts 23,595 5,793 482 - 29,870 Shares related contracts 19,212 28 260 121 19,621 Commodities and other contracts 1,447 14 53 71 1,585 Total 44,772 6,295 1,185 2,567 54,819
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 404 -
Note 20 - Balances and fair value estimations of financial instruments
Reported amounts
A. Balances on a consolidated basis
December 31, 2011 Balance sheet value Fair value (1) (2) Total NIS millions
Financial assets Cash on hand and deposits with banks 2,162 4,799 6,961 6,955 Securities 6,785 - 6,785 6,785 Borrowed securities 5 - 5 5 Credit to the public 1,041 21,827 22,868 22,698 Assets in respect of derivative instruments 846 - 846 846 Other financial assets 793 - 793 793 Total financial assets 11,632 26,626 38,258 38,082
Financial liabilities Deposits from the public 1,005 30,153 31,158 31,247 Deposits from banks 27 365 392 394 Deposits from the Government - designated 1 - 1 1 Subordinated notes and deposit certificates - 2,761 2,761 2,770 Liabilities in respect of derivative instruments 907 - 907 907 Other financial liabilities 1,265 - 1,265 1,265 Total financial liabilities 3,205 33,279 36,484 36,584
December 31, 2010 Balance sheet value Fair value (1) (2) Total NIS millions
Financial assets Cash on hand and deposits with banks **859 **6,273 7,132 7,127 Securities 4,553 - 4,553 4,553 Borrowed securities 415 - 415 415 Credit to the public 1,542 20,171 21,713 **21,587 Assets in respect of derivative instruments * 562 - 562 562 Other financial assets* 395 - 395 395 Total financial assets 8,326 26,444 34,770 34,639
Financial liabilities Deposits from the public 1,052 **27,792 28,844 **28,968 Deposits from banks 34 **237 271 **271 Deposits from the Government - designated 1 1 2 2 Subordinated notes and deposit certificates - 2,344 2,344 **2,473 Liabilities in respect of derivative instruments * 737 - 737 737 Other financial liabilities* 748 - 748 748 Total financial liabilities 2,572 30,374 32,946 33,199
* The data was reclassified in order to match the headings and the presentation method in the current period see Note 1.C.5.
** Reclassified - see Note 1.C.5.b. (1) Financial instruments regarding which the balance sheet value is an estimate of the fair value and
financial instruments in the balance-sheet at market value. (2) Other financial instruments regarding which fair value was calculated (fair value also calculated for
instruments with original maturity up to 3 months or on the basis of variable market interest rate at up to 3 month revision frequencies).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 405 -
Note 20 - Balances and Estimates of Fair Financial Instruments (cont'd)
B. Fair value of financial instruments
The note includes general information concerning assessment of the fair value of financial instruments.
With regard to financial instruments measured in the balance sheet and/or in profit and loss at fair value,
see details in Notes 1.E.6 and 20.A. A "market price" cannot be quoted for the other financial
instruments because there is no active market in which they are traded.
Therefore, their fair value is estimated by means of accepted pricing models, such as the present value
of future cash flow capitalized by interest rate that reflects the level of risk inherent in the financial
instrument. An estimate of fair value by means of assessment of future cash flow and the setting of a
capital interest rate is subjective. For the majority of financial instruments, therefore, the following
assessment of fair value is not necessarily an indication of the disposal value of the financial instrument
on the balance-sheet date. The fair value is assessed on the basis of the interest rates close to the
balance-sheet date, and does not take interest rate fluctuation into account. Under the assumption of
other interest rates, fair values would be obtained that may differ materially. This mainly applies to
financial instruments that bear fixed rate of interest or that do not bear interest.
In addition, commissions to be received or paid in the course of business activity were not taken into
account in determining the fair values, nor the tax effect. Moreover, the difference between the balance-
sheet balance and fair-values balances may not be realized, because in the majority of cases the
financial instrument may be held to maturity. Due to all of this factors, it should be emphasized that the
data included in this note are insufficient to indicate the value of the Bank as a going concern. In
addition, due to broad spectrum of assessment techniques and estimates that can be applied in assessing
fair value, caution should be exercised when comparing fair values between different banking groups.
C. Main methods and assumptions for the purpose of estimating the fair value of financial
instruments
1. Cash on hand - balance-sheet balance represents fair value.
2. Deposits in banks - capitalization of the future cash flows is based on interest rates used by the
Bank in similar transactions close to the balance-sheet date.
3. Securities- marketable securities estimated using market values. Non-marketable securities were
estimated using pricing models used by the Bank, except non-tradable shares which presented by
nominal cost (represent an estimate to fair value) - See also Notes 1.E.6, 20A.
4. Credit to the public - the fair value of the credit to the public is estimated using the method of the
present value of future cash flows using interest rates which the Bank executed similar transactions
close to the balance-sheet date. Each group was broken down into categories based on linkage basis
and repayment periods. In addition, for each category the value of the future receipts (principal and
interest) was computed. Such receipts were capitalized using interest rates at which the Bank
executed similar transactions close to the balance-sheet date.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 406 -
Note 20 - Balances and Estimates of Fair Financial Instruments (cont'd)
C. Main methods and assumptions for the purpose of estimating the fair value of financial instruments
(cont'd)
4. (cont'd)
In addition, a breakdown into several additional categories was made which reflect the level of risk
implicit in the credit granted to different borrower groups, and which are reflected in the different
capitalization rates based on the level of risk. The fair value of problematic debts was computed
using discount rates reflecting the high level of credit risk latent therein. In any case, the discount
rates applied were not less than the highest interest rate used by the Bank in execution of its
transactions at the report date. The future cash flows from problematic debts were computed after
deduction of the provisions for credit losses. Additional disclosure was not made regarding the
range of fair values in relation to the range of discount rates which, in Management’s opinion,
would properly reflect the level of risk contained in the debt. In addition, the sensitivity of the
estimated fair value of the problematic debts to the discount interest rates was also tested. This test
indicated that the addition of 1% to the discount interest rate would add a total of NIS 4 million to
the estimated fair value of the problematic debts at the end of 2011.
5. Deposits from the public, from banks and from the Government - using the capitalization of future
cash flows method based on the interest rate which the Bank pays on similar deposits on the date
of the report.
6. Non negotiable Subordinated notes - using the capitalization of future cash flows method based on
the interest rate at which the Bank is able to raise funds through similar subordinated notes at the
report date.
7. Negotiable subordinated notes-based on the market trade value.
8. Off-balance-sheet financial instruments where the balance reflects credit risk, contingent liabilities
and extraordinary commitments - fair value was not computed. The balance-sheet balance
presented at Note 20 the financial statements represents approximation to fair value.
9. Derivative financial instruments - derivative financial instruments for which there is an active
market were valued at their market value which determined in the main market. When a number of
markets exist in which the instruments are traded, the evaluation is based on the most efficient
market. Derivative financial instruments which are not traded in an active market were valued
based on models which the Bank uses in its regular operations which take into account the risks
intrinsic in the particular financial instrument (market risk, credit risk, etc.) See also Note 1.E.6.19.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 407 -
Note 20A – Items measured at fair value on a recurrent basis
Reported amounts
Balances on a consolidated basis As at December 31, 2011 Fair-value measurements using
Prices quoted in an active
market (level 1)
Other significant observable
inputs (level 2)
Significant unobservable
inputs (level 3)
Effect of offseting
agreements
Balance Sheet
balance NIS millions
Assets Credit to the public*** 1,041 - - - 1,041
Security available for sale: Governments bonds – Israeli government 3,142 634 2 - 3,778 Governments bonds – Foreign governments - 3 - - 3 Bonds of financial institutions in Israel 826 2 - - 828 Bonds of foreign financial institutions - 94 136 - 230 Asset backed securities (ABC) 28 20 14 - 62 Bonds of others in Israel 337 295 56 - 688 Bonds of foreign others - 8 8 - 16 Shares** 72 - - - 72
Securities held for trading: Governments bonds – Israeli government 1,002 2 - - 1,004 Bonds of financial institutions in Israel 1 - - - 1 Asset backed securities (ABC) *- *- - - *- Bonds of others in Israel 21 - - - 21 Shares 29 - - - 29
Assets in respect of derivatives instruments: NIS-CPI contracts - 2 4 - 6 Other interest contracts - 192 - - 192 Foreign-currency contracts 21 424 - - 445 Share contracts 152 - 12 - 164 Commodity and other contracts - 39 - - 39 Assets in respect of activity in the Maof market 739 - - - 739 Total Assets 7411 1715 232 - 9,358
Liabilities
Deposits from the public*** 1,005 - - - 1,005 Liabilities in respect of derivate instrument NIS-CPI contracts - *- 2 - 2 Other interest contracts - 281 - - 281 Foreign-currency contracts 21 410 - - 431 Share contracts 152 - 14 - 166 Commodity and other contracts - 39 - - 39 Liabilities in respect of activity in the Maof market 739 - - - 739 Total Liabilities 1,917 730 16 - 2,663
* Less than NIS 500 thousand. ** Total shares and securities for which no fair value is available, which are presented at cost total NIS 53
millions. *** Lending of marketable securities.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 408 -
Note 20B - Changes in items measured at fair value on a recurrent basis included in level 3 Reported amounts
Balances on a consolidated basis Year ended December 31, 2011
Fair value
as at December
31, 2010
Net profit (losses) which realized and not yet realized and included in:
Acquisitions Issuance ExtinguishmentTransfer
to level 3(3)
Transfer from level
3(3)
Fair value as at
December 31, 2011
Unrealized profit (losses) in respect of
instruments held as at December
31, 2011
statement of profit and loss
Other comprehensive
income in equity
NIS millions
Assets Securities available for sale:
Government bonds – Israeli government - *- *- 1 - *- 1 - 2 *- Government bonds – Foreign governments 125 9 (4) - - (2) 8 - 136 4 Asset backed securities (ABC) 12 2 *- 1 - (1) - - 14 1 Bonds of others in Israel 47 6 (5) 8 - (2) 14 (12) 56 *- Bonds of foreign others 8 *- - - - - - - 8 *-
Assets in respect of derivatives instruments (2):
NIS-CPI contracts 5 4 - - - (5) - - 4 4 Share contracts 9 )4( - 7 - - - - 12 (4)
Total Assets 206 17 (9) 17 - (10) 23 (12) 232 5
Liabilities
Liabilities in respect of derivate instruments NIS-CPI contracts 2 3 - - - (3) - - 2 2 Foreign-currency contracts 138 (35) - - - (103) - - - - Share contracts 9 )2( - 7 - - - - 14 (2)
Total Liabilities 149 (34) - 7 - (106) - - 16 -
(1) Realized profits (losses) are included in the statement of profit and loss, under the item "profit from financing activity before provision for credit losses".
Unrealized profits (losses) are included in equity, under the item "adjustments in respect of the presentation of securities available for sale at fair value", under other comprehensive income.
(2) Realized and unrealized profits (losses) are included in the statement of profit and loss, under the item "profit from financing activity before provision of credit losses". (3) Transfers from level 2 to level 3 derive from the lack of observable market data in the measurement period, against the existence of observable market data in the previous period.
Transfers from level 3 to level 2 derives from reverse situation. * Less than NIS 500 thousand. Note 20C - Transfers from level 1 to level 2, in the fair value hierarchy. During the period there were no transfers from level 1 to 1evel 2 and vice versa
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 409 -
Note 21 - Interested and related Parties Reported amounts A. Balances with related parties
Consolidated: December 31, 2011 Interested parties Related parties held by the Bank Shareholders Directors and CEO Others(5) Interested parties at time Controlling shareholders Others of transaction Investee companies Balance Highest Balance Highest Balance Highest Balance Highest Balance Highest Balance Highest at balance balance at balance balance at balance balance at balance balance at balance balance at balance balance sheet during the sheet during the sheet during the sheet during the sheet during the sheet during the date year (1) date year (1) date year (1) date year (1) date year (1) date year (1)
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Assets - Deposits with banks - - - - - - - - - - - - Securities - - - - - - 38 64 - - - - Net credit to the public 49 87 - - 1 1 89 89 - - - - Investments in investee companies (2) - - - - - - - - - - 1 1 Assets in respect of derivative instruments - - - - - - 2 2 - - - - Other assets - - - - - - 1 1 - - - -
Liabilities - Deposits from the public *- *- - - 1 2 647 753 - - 1 3 Deposits from banks - - - - - - - - - - - - Liabilities in respect of derivative instruments - - - - - - 1 1 - - - - Other liabilities - - - - - - *- *- - - - - Deferred liabilities deeds - - - - - - 75 99 - - - - Shares (included in shareholders' equity)(4) 1,401 1,415 - - - - 83 84 - - - - Credit risk on off- balance-sheet financial instruments(3) 46 46 - - 1 1 17 113 - - - -
* Less than NIS 500 thousand. (1) Based on quarter-end balances. (2) See Note 5. (3) Credit risk on off-balance-sheet financial instruments as calculated for purposes of per borrower credit limitations. (4) Holdings of interested parties and related parties in the Bank's equity. (5) Balances of corporation which interested party holds 25% or more of its issued share capital or voting rights, or entitled to appoint 25% or more of its directors.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 410 -
Note 21 - Interested and related Parties (cont'd) Reported amounts A. Balances with related parties (cont'd)
Consolidated: December 31, 2010 Interested parties Related parties held by the Bank Shareholders Directors and CEO Others(5) Interested parties at time Controlling shareholders Others of transaction Investee companies Balance Highest Balance Highest Balance Highest Balance Highest Balance Highest Balance Highest at balance balance at balance balance at balance balance at balance balance at balance balance at balance balance sheet during the sheet during the sheet during the sheet during the sheet during the sheet during the date year (1) date year (1) date year (1) date year (1) date year (1) date year (1)
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Assets - Deposits with banks - - - - - - - - - - - - Securities - - - - - - 64 71 - - - - Net credit to the public 23 88 - - 1 1 71 79 - - - - Investments in investee companies (2) - - - - - - - - - - 1 1 Assets in respect of derivative instruments (6)
- - - - - - *- 1 - - - -
Other assets(6) - - - - - - *- *- - - - -
Liabilities - Deposits from the public *- *- - - 1 2 448 583 - - 3 3 Deposits from banks - - - - - - - - - - - - Liabilities in respect of derivative instruments(6) - - - - - - 1 1 - - - - Other liabilities(6) - - - - - - *- *- - - - - Deferred liabilities deeds - - - - - - 99 99 - - - - Shares (included in shareholders' equity)(4) 1,446 1,480 - - - - 86 88 - - - - Credit risk on off- balance-sheet financial instruments(3) - - - - 1 1 113 113 - - - -
* Less than NIS 500 thousand. (1) Based on quarter-end balances. (2) See Note 5. (3) Credit ris5 on off-balance-sheet financial instruments as calculated for purposes of per borrower credit limitations. (4) Holdings of interested parties and related parties in the Bank's equity. (5) Balances of corporation which interested party holds 25% or more of its issued share capital or voting rights, or entitled to appoint 25% or more of its directors. (6) Reclassified to adjust the method of presentation in the current period, See Note 1.C.5.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 411 -
Note 21 - Interested and related Parties (cont'd)
Reported amounts
B. Summarized results of transactions with interested and related parties:
Consolidated: Year ended December 31, 2011
Related parties
held by the Interested parties Bank Interested Shareholders parties
Controlling Directors
and at the time of Investee
shareholders Others CEO Others the
transaction companies NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Results of financing activities before provision for credit losses (1) 3 - *- (18) - *- Operating commissions Other income *- - *- 5 - *- Operating and other expenses (2) *- - (12) (6) - - Total 3 - (12) (19) - *-
Year ended December 31, 2010
Related parties
held by the Interested parties Bank Interested Shareholders parties
Controlling Directors
and at the time of Investee
shareholders Others CEO Others the
transaction companies NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Results of financing activities before provision for credit losses (1) 3 - *- (7) - *- Operating commissions *- - *- 2 - *- Operating and other expenses (2) (1) - (10) (7) *- - Income from extraordinary activities - - - 1 - - Total 2 - (10) (11) *- *-
* Less than NIS 500 thousand. (1) See C. below. (2) See D. below.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 412 -
Note 21 - Interested and related Parties (cont'd)
Reported amounts
B. Summarized results of transactions with interested and related parties (cont'd):
Consolidated: Year ended December 31, 2009 Related
parties held by the Interested parties Bank Interested Shareholders parties
Controlling Directors
and at the time of Investee
shareholders Others CEO Others the
transaction companies NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Results of financing activities before provision for credit losses (1) 1 - *- 4 9 *- Operating commissions *- - *- 2 - *- Other income - - - - - - Operating and other expenses (2) *- - (7) (4) (24) - Income from extraordinary activities - - - - - - Total 1 - (7) 2 (15) *-
* Less than NIS 500 thousand. (1) See C. below. (2) See D. below. (3) See Note 18.C.(4).
C. Results of financing activities, before provision for credit losses, with interested and related parties:
Consolidated:
Year ended Year ended Year endedDecember 31 December 31 December 31
2011 2010 2009NIS millions NIS millions NIS millions
In respect of assets - From credit to the public 8 6 5 From deposits with banks - - *-
From debentures 3 5 7 Net income (expenses) from ALM derivatives (1) 2 10
In respect of liabilities - On deposits from the public (21) (12) (8) On deposits from banks - - *- On deferred liabilities deeds (4) (5) - (15) (4) 14
* Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2010
- 413 -
Note 21 - Interested and related Parties (cont'd)
Reported amounts
D. Payments to interested parties (from the Bank and its investee companies):
Consolidated: Year ended December 31, 2011 Interested parties at the Shareholders Directors and CEO time of the transaction Others
Controlling shareholders Others Total Number of Total Number of Total Number of Total Number of Total Number of NIS millions Recipients NIS millions recipients NIS millions recipients NIS millions recipients NIS millions recipients
Interested parties employed by or on behalf of the Bank - - - - 9 2 - - - - Directors who are not Bank employees *- 2 - - 3 8 - - - - Other interested parties who are not Bank employees - - - - - - - - 6 7 Total *- 2 - - 12 10 - - 6 7
Consolidated: Year ended December 31, 2010 Interested parties at the Shareholders Directors and CEO time of the transaction Others
Controlling shareholders Others Total Number of Total Number of Total Number of Total Number of Total Number of NIS millions recipients NIS millions recipients NIS millions recipients NIS millions recipients NIS millions recipients
Interested parties employed by or on behalf of the Bank - - - - 8 2 - - - - Directors who are not Bank employees 1 2 - - 2 7 *- 1 - - Other interested parties who are not Bank employees - - - - - - - - 7 9 Total 1 2 - - 10 9 *- 1 7 9
* Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2010
- 414 -
Note 21 - Related Parties (cont'd)
Reported amounts
D. Payments to interested parties (from the Bank and its investee companies) (cont'd): Consolidated: Year ended December 31, 2009 Interested parties at the Shareholders Directors and CEO time of the transaction Others
Controlling shareholders Others Total Number of Total Number of Total Number of Total Number of Total Number of NIS millions recipients NIS millions recipients NIS millions recipients NIS millions recipients NIS millions recipients
Interested parties employed by or on behalf of the Bank - - - - 5 2 - - - - Directors who are not Bank employees *- 2 - - 2 7 *- 1 - - Other interested parties who are not Bank employees - - - - - - 24 3 4 9 Total - 2 - - 7 9 24 4 4 9
* Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 415 -
Note 21 - Related Parties (cont'd)
E. Further details:
1. On February 8, 2010, the general assembly of the Bank approved identical remuneration for the
external directors of the Bank and for the other members of the board of directors of the Bank, with
the exception of the chairman of the board of directors, in the following amounts: annual
remuneration in the amount of NIS 95,000, and remuneration for participation in a meeting in the
amount of NIS 3,500. These amounts will be updated on February 1 and August 1 each year
(hereinafter: the "Date of Change"), according to the rate of increase in the CPI published most
recently prior to the Date of Change, relative to the CPI published most recently prior to the date of
approval of the remuneration. The remuneration for participation in a meeting shall be paid to the
members of the board of directors in return for their participation in meetings of the board of
directors and of the committees of the board of directors. In respect of resolutions of the board of
directors or of its committees which are passed without converting in person, the directors shall be
paid remuneration for a meeting at a rate of 50% of the remuneration for participation in an ordinary
meeting. Directors are entitled to remuneration for participation in a meeting if they participate in all
or most of the meeting.
Dates of payment shall remain in accordance with the existing practice at the Bank, subject to the
provisions of the Companies Regulations (Rules Regarding Remuneration and Expenses for External
Directors), - 2000 (hereinafter: the "External Directors Remuneration Regulations").
The remuneration for directors, as detailed above, was approved by the audit committee and the
board of directors on January 3, 2010.
2. With regard to resolution of shareholders meeting of the Bank in a respect of approved the
acquisition of a directors' liability (D&O) - see not 18.C.16.
3. With regard to resolution of shareholders meeting of the Bank in a respect of indemnity commitment
granted to officers of the Bank - see not 18.C.14.
4. With regard to chairman and CEO of the bank agreements - see Note 15.E. above.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 416 -
Note 22 - Profit from Financing Activities before provision for credit losses
Reported amounts
Composition:
Consolidated The Bank Year ended Year ended Year ended Year ended Year ended Year ended December 31 December 31 December 31 December 31 December 31 December 31 2011 2010 2009 2011 2010 2009 NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
A. In respect of assets From credit to the public 1,428 590 762 1,413 577 748 From credit to the government - 4 (4) - 4 (4) From cash on hand and deposits with Bank of Israel 165 54 99 165 54 99 From deposits with banks 34 (95) 9 34 (95) 9 From bonds 232 109 176 231 105 173 From borrowed securities 9 5 3 9 5 2 B. In respect of Liabilities On deposits from the public (1,155) **114 **(488) (1,308) **2 **(577) On deposits from the Government *- *- *- *- *- *- On deposits from Bank of Israel - - - - - - On deposits from banks (26) **7 **8 (26) **7 **8 On subordinated notes and deposit certificates (155) (126) (114) (18) (26) (36) C. In respect of Derivative financial instruments Net income (expenses), in respect of ALM derivative Instruments 78 (133) 29 78 (133) 29 Net income in respect of other derivative instruments 18 13 22 18 13 22 D. Other Commissions from financing transactions 40 37 30 40 37 30 Other financing income (1) 21 137 88 21 137 88 Other financing expenses *- *- *- *- *- *- Total profit from financing activities before provision for credit losses 689 716 620 657 687 591
Including exchange rate differences, net 134 55 32 134 55 32
* Less than NIS 500 thousand.
** Reclassified.
(1) In 2010 and 2009 - including collections on account of provisions for interest with respect to doubtful debts, in the
amount of NIS 23 million and NIS 21 million respectively.
From 2011, following the initial implementation of the directive concerning the impaired debts, interest income from
previous years in respect of debts which a provision was made for them in the past, are presented net of the provision
for credit losses.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 417 -
Note 22 - Profit from Financing Activities before provision for credit losses (cont’d)
Reported amounts
Composition (cont'd):
Consolidated The Bank Year ended Year ended Year ended Year ended Year ended Year ended December 31 December 31 December 31 December 31 December 31 December 31 2011 2010 2009 2011 2010 2009
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
E. Results of investment activities in bonds Financing income from bonds, on accrual basis: Available for sale 203 79 161 202 75 158 Trading 29 30 15 29 30 15 Total included in profit from financing activities in respect of assets 232 109 176 231 105 173 Gains on sales of available for sale bonds 44 98 74 44 98 74 Losses on sales of available for sale bonds * (26) (7) (24) (26) (7) (24) Realized and unrealized gains (losses) from adjustments to fair value of trading securities, net (9) 5 7 (9) 5 7 Total included in other financing income 9 96 57 9 96 57 Total from investments in bonds 241 205 233 240 201 230
* Including provisions for decline in value.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 418 -
Note 23 - Operating Commissions
Reported amounts Composition:
Consolidated The Bank Year ended Year ended Year ended Year ended Year ended Year ended December 31 December 31 December 31 December 31 December 31 December 31 2011 2010 2009 2011 2010 2009
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Account management 64 68 69 64 68 69 Credit cards 17 18 17 17 18 17 Securities and certain derivative instruments activity 63 67 68 63 67 68 Financial products distribution commissions 15 14 11 12 10 9 Management, operation and trust to institutional entities 8 7 4 - - - Credit handling 34 34 27 31 31 25 Conversion differences 37 34 37 37 34 37 Foreign trade activity 15 14 12 15 14 12 Net income from credit portfolios services 4 4 5 4 4 5 Other commissions 10 10 9 10 10 9 Total operating commissions 267 270 259 253 256 251
** Reclassified. Note 24 - Gains (Losses) on Investments in Shares, net Reported amounts
Composition:
Consolidated The Bank Year ended Year ended Year ended Year ended Year ended Year ended December 31 December 31 December 31 December 31 December 31 December 31 2011 2010 2009 2011 2010 2009 NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Gains on sales of available for sale shares(a) 9 6 41 1 3 34 Losses on sales of available for sale shares(b) (5) (4) (5) - - *- Realized and unrealized gains (losses) from adjustment to fair value of trading shares, net (3) 3 11 (3) 3 11 Dividend from available for sale shares(c) 5 8 19 1 1 12 Total from investment in shares, net 6 13 66 (1) 7 57
(a) In 2009, including gain on sale of Bezeq shares in the amount of NIS 34 million. (b) Including provision for decline in value.
(c) Including dividend from Bezeq shares in the amount of NIS 11 million for each of the years 2009. * Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 419 -
Note 25 - Other Income Reported amounts Composition:
Consolidated The Bank Year ended Year ended Year ended Year ended Year ended Year ended December 31 December 31 December 31 December 31 December 31 December 31 2011 2010 2009 2011 2010 2009
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Profits from severance pay funds* - - 3 - - 3 Others 4 4 4 1 1 1 Total other income 4 4 7 1 1 4
* Excess income from amounts funded over the amounts from previous years that required for the completion of the
appropriate provision. Note 26 - Salaries and Related Expenses Reported amounts Composition:
Consolidated The Bank Year ended Year ended Year ended Year ended Year ended Year ended December 31 December 31 December 31 December 31 December 31 December 31 2011 2010 2009 2011 2010 2009 NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Salaries 291 271 259 284 264 253 Expense (income) arising from share- based payment Transactions (A) - - *- - - *- Severance pay, advanced study fund, compensation, pensions and vacation (B) 74 51 39 73 51 39 National Insurance and VAT on salaries 65 61 53 65 61 53 Other related expenses 14 13 11 14 13 11 Voluntary EARLY retirement (C) 15 - - 15 - - Total salaries and related expenses 459 396 362 451 389 356
* Less than NIS 500 thousand. (A) Deriving from transactions treated as share-based payment transactions cleared by capital instruments -
See Note 15A. (B) Restated following the retroactive implementation of the directives regarding employee benefits - See
Note 1.E.21. (C) See details in Note 15.A.5.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 420 -
Note 27 - Other Expenses Reported amounts Composition:
Consolidated The Bank Year ended Year ended Year ended Year ended Year ended Year ended December 31 December 31 December 31 December 31 December 31 December 31 2011 2010 2009 2011 2010 2009
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions Computer 83 71 64 83 71 64 Professional services 32 34 30 32 35 32 Marketing and advertising 18 15 13 18 15 13 Office expenses 10 12 11 10 11 11 Communications 9 9 9 9 9 9 Insurance 6 6 6 6 6 6 Commissions 14 11 10 14 11 10 Directors' fees and reimbursement of expenses 4 3 2 3 3 2 Staff training and advanced study 3 3 2 3 3 2 Others 14 11 20 13 9 13 193 175 167 191 173 162
Note 28 - Provision for Taxation on Operating Profit Reported amounts A. Composition:
Consolidated The Bank Year ended Year ended Year ended Year ended Year ended Year ended December 31 December 31 December 31 December 31 December 31 December 31 2011 2010 2009 2011 2010 2009 NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Current taxes - Relating to current year 36 96 155 24 85 146 Relating to previous years (5) (4) - (5) (4) -
Total current taxes 31 92 155 19 81 146 Deferred taxes - Relating to current year 15 **(22) **(45) 15 **(22) **(48) Change in tax rate (26) -* (9) (26) *- (7) Total deferred taxes (11) (22) (54) (11) (22) (55) Total provision for taxes on operating profit 20 70 101 8 59 91
* Less than NIS 500 thousand.
** Restated following the retroactive implementation of the directives regarding employee benefits - See Note
1.E.21.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 421 -
Note 28 - Provision for Taxation on Operating Profit (cont'd)
Reported amounts
B. Reconciliation between the theoretical tax that would have resulted if the operating profit would be subject
to tax at the statutory rate applying to banks in Israel, and the actual tax provision on operating profit in the
statement of profit and loss:
Consolidated The Bank Year ended Year ended Year ended Year ended Year ended Year ended December 31 December 31 December 31 December 31 December 31 December 31 2011 2010 2009 2011 2010 2009 NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Statutory tax rate applying to banks in Israel 34.48% 35.34% 36.21% 34.48% 35.34% 36.21% Theoretical tax at the statutory rate 52 *77 *77 38 *63 *64
Tax (tax savings)
resulting from:
General provision and
supplementary provision
for doubtful debts - **- 3 - **- 3
Unrecognized expenses, net of tax-exempt income and income at a different tax rate (1) (3) 2 1 **- 2
Effect of change in tax rate*** (26) *,**- *14 (26) *,**- *13
Utilization of losses from prior
years in respect of which
deferred taxes were not created - - (3) - - -
Adjustment differences in
Depreciation and amortization 1 **- **- 1 **- (1)
Prior years’ taxes (5) (4) (1) (5) (4) -
Others (1) **- 9 (1) **- 10 Provision for taxes on income 20 70 101 8 59 91
* Restated following the retroactive implementation of the directives regarding employee benefits - See Note 1.E.21.
** Less than NIS 500 thousand.
*** See Section C below.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 422 -
Note 28 - Provision for Taxation on Operating Profit (cont'd)
C. On July 14, 2009, the Knesset passed the Economic Efficiency Law for the tax years 2009 and 2010.
Within this law, directives were approved including with regard to the gradual reduction of the
corporation tax rate in 2011 through 2016, to a tax rate of 18%. Under Amendment 147 to the
Ordinance, which is currently in effect, corporation tax is at a rate 25% in 2010. According to the
amendment to the Income Tax Ordinance set forth in the Economic Efficiency Law, as noted above, the
following tax rates will apply: 25% in the tax year 2010, 24% in the tax year 2011, 23% in the tax year
2012, 22% in the tax year 2013, 21% in the tax year 2014, 20% in the tax year 2015, and corporation
tax rates of 18% from 2016 forward. On December 31, 2009, the Knesset approved an amendment to
the aforesaid, according to which the VAT rate for the period from January 1, 2010 to December 31,
2010 would be 16%, rather than 16.5%. Following the amendment, the balance of deferred tax assets
decreased, and tax expenses in the amount of approximately NIS 10 million were recorded in 2009.
On December 29, 2010 the Knesset plenum approved in the frame of the biennial budget that the VAT
rate shall remain at the rate of 16% for the years 2011 and 2012. In addition the tax rate on salaries and
profit that applies on financial institutions of 16%, until the end of 2012, was approved following the
amendment, the balance of deferred tax assets decreased, and tax expenses in the amount of
approximately NIS 1 million were recorded in 2010.
The Law for Change in the Tax Burden (Legislative Amendments), 2011, was passed by Knesset on
December 5, 2011. Pursuant to this law, the tax reduction established in the Economic Efficiency Law, as
noted above, will be cancelled, and the rate of corporation tax will stand at 25% from 2012 forward.
Following the aforesaid amendment, the statutory tax rate applicable to banking corporations stands at
34.48% in 2011. The statutory tax rate applicable to banking corporations is 35.34% in the tax year 2012
and 35.06% from the tax year 2013 forward. Following the amendment of December 5, 2011, the deferred
tax asset balance increased, and tax revenues in the amount of approximately NIS 29 million were
recorded in the fourth quarter of 2011.
D. The Bank has final tax assessments up to and including the tax year 2007. Its consolidated companies
have final tax assessments (or assessments considered to be final) up to and including the tax years
2007-2008.
E. The subsidiary is completely transparent for tax purposes and accordingly its revenues and/or receipts
and/or expenses are considered revenues and/or receipts and/or expenses of the Bank.
In accordance with the arrangement, such company is to have no activity other than the issuance and/or
sale of subordinated notes to the Bank. Therefore the subsidiary will not have any earnings or losses for
tax purposes of any kind whatsoever. Furthermore, the subsidiary is not allowed to hold assets or
liabilities other than the subordinated notes and/or a deposit.
The subsidiary will not engage in any activity and will not purchase subordinated notes on the stock
exchange in Israel.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 423 -
Note 28 - Provision for Taxation on Operating Profit (cont'd)
Reported amounts
F. In the matter of audit performed by the Israel Tax Authority (VAT Audit Department) at a subsidiary of
the bank, Union Systems Ltd. See note 18.C.18.
G. Balances of deferred tax assets, net, in respect of:
Consolidated The Bank December 31 December 31 December 31 December 31 2011 2010 2011 2010
Balance Average tax rate Balance
Average tax rate Balance
Average tax rate Balance
Average tax rate
NIS
millions % NIS
millions % NIS
millions % NIS
millions %
Excess of provision for severance pay and pension over amounts funded 96 35.06 *68 29.00 96 35.06 *68 29.00
Provision for vacation pay and long service bonuses 17 35.20 13 32.11 17 35.20 13 32.11
Provision for credit losses 112 35.20 43 34.48 110 35.20 43 34.48
Adjustment of depreciable non- monetary assets (6) 25.00 (4) 18.80 (6) 25.00 (4) 18.80
Securities (4) 35.34 (12) 34.48
Others 4 35.20 3 33.52 3 35.20 3 33.52
Total 219 111 220 123
Realization of the deferred taxes is based on a forecast of that there will be taxable income in the foreseeable
future.
* Restated following the retroactive implementation of the directives regarding employee benefits - See Note
1.E.21.
H. An agreement was signed in February 2012, led by the Association of Banks, between the banks and the
tax authorities, for implementation of the directive on impaired debts for tax purposes. According to the
main principles of the agreement, allowances for credit losses assessed on an individual basis will be
recognized in the year in which they are recorded, and allowances for credit losses assessed on a group
basis that have been written off will be recognized in the year following the year of the write-off. The
effect of the implementation of this agreement on the provision for tax in 2011 is immaterial.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 424 -
Note 29 - After-tax Income (Loss) from Extraordinary Activities:
Reported amounts
Composition: Consolidated The Bank Year ended Year ended Year ended Year ended Year ended Year ended December 31 December 31 December 31 December 31 December 31 December 31 2011 2010 2009 2011 2010 2009
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions Profit from sale of share of trust services - 1 - - - - Loss from impairment of buildings and equipment - - (4) - - (4) Gain from sales of buildings and equipment *- *-
2 *- *-
2
Gain (loss) before taxes *- 1 (2) *- - (2) Current taxes *- *- *- *- *- *- Gain (loss) from extraordinary activities, after taxes, before attributing to non controlling interests *- 1 (2) *- *- (2)
* Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 425 -
Note 29A - Profit per Ordinary Share
Reported amounts
Composition:
Consolidated
For the year ended December 31
2011 2010 2009
NIS millions
Basic profit
Net operating profit attributed to shareholders of the bank 132 *148 *111
Extraordinary profit (loss), net of related taxes attributed to shareholders of the bank **- 1 (2)
Total 132 149 109
Diluted profit
Net operating profit attributed to shareholders of the bank 132 *148 *111
Extraordinary profit (loss), net of related taxes attributed to shareholders of the bank **- 1 (2)
Total 132 149 109
Consolidated
For the year ended December 31
2011 2010 2009
Weighted average number of shares
Weighted average number of ordinary shares used to calculate basic profit 73,583 73,583 66,104
Weighted average number of ordinary shares used to calculate diluted profit 73,583 73,583 66,104
* Restated following the retroactive implementation of the directive regarding employee benefits - See Note 1.E.21.
** Less than NIS 500 thousand.
Note 30 - Report on Business Segments
The management of the Bank uses the division into segments to make decisions on business policy and
analyze the banks business results. The characteristics of the segments are mainly based on the types of
customers activity areas included in each segment.
The Bank’s activities are focused on the following business segments:
Private segment - This segment provides a range of banking services and financial products to households
and private customers having financial wealth, including investment advisory services. Furthermore, the
segment includes small business having an obligo of up to NIS 400,000 which managed as part of retail
division and housing financing activity.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 426 -
Note 30 - Report on Business Segments (cont'd)
Business segment - This segment provides a range of banking services and financial products to business
customers from a variety of economic sectors, including construction, real estate, and the capital market.
Diamonds segment - This segment includes customers active in the diamond industry, the most of which are
members of the Ramat Gan Diamond Exchange.
Financial management segment - This segment includes the Banks’ own activity in the area of securities,
assets and liabilities management, market, liquidity and clearing risk management, dealing room activity and
the activity of Union Investments and Enterprise (A.S.Y), a subsidiary which serves as the non-financial
investment arm of the Bank. In addition the segment results include the effect of registration of financial
instruments as fair value.
Others and adjustments - This segment includes activities which could not be specifically allocated to
segments.
The main principles that were applied in order to split the results of operations between the various segments
are as follows:
Profit from financing activities - In the customers' focused segments this item includes a financial margin
on loans/deposits of customers. The margin is usually calculated above a transitional price that represents the
cost of sources in accordance with the average life and the relevant linkage basis.
This item also includes risk-free interest on the weighted capital calculated for the purpose of the return on
equity attributed to the segment. Shareholders’ equity is attributed based on the risk assets assigned to each
segment (according to Basel I rules) in 2009. According to Basel II rules – in 2010).
Operating and other income - These are attributed to the segment to which the customer belongs.
Provision for credit losses - attributed to the segment to which the customer, regarding whom the provision
was recorded, belongs.
Operating and other expenses - The direct expenses are attributed to the specific segment. The rest of the
expenses are attributed according to parameters based on various estimates.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 427 -
Note 30 - Report on Business Segments (cont'd)
Taxes on income - The provision for tax on the business results of each business segment was usually
calculated according to the effective tax rate, with the exception of certain cases where a specific attribution
could be made.
Return on capital - The ratio between the net profit of each segment and the shareholders’ equity attributed
to the segment. The shareholders’ equity attributed to each segment is the relative average balance of risk
components in each segment multiplied by the ratio of the core capital.
Database and methodology that used to report the results of the Bank's segments is in the continuous process
of cleaning, and accordingly, reclassification of the results is applied, as much as possible for comparison
periods. The Bank is preparing for the installation of the Bachan (Banking, Accounting, Administration)
system of Bank Leumi Le Israel Ltd., which includes, inter alia, the adjustment of data in information
systems to book data, starting on the transaction level.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 428 -
Note 30 - Report on Business Segments (cont’d)
Reported amounts
Information on business segments - consolidated
For the year ended December 31, 2011 Private Business Diamonds Financial Amounts not Total segment segment segment management allocated segment and adjustments
NIS millions Profit from financing activities before provision for credit losses: - From outsiders 262 373 39 15 - 689 - Inter-segment 2 22 **- (24) - - Operating and other income: - From outsiders 142 111 16 8 - 277 - Inter-segment - - - - - -
Total income 406 506 55 (1) - 966 Provision for credit losses 13 12 2 - - 27 Operating and other expenses: - From outsiders 358 352 34 43 - 787 - Inter-segment - - - - - - Operating profit (loss) before taxation 35 142 19 (44) - 152 Provision for taxation on operating profit 4 19 3 (6) - 20 Operating profit (loss) after taxation 31 123 16 (38) - 132 The Bank's share in operating profits of investee companies - - - **- - **-
Net operating profit (loss) 31 123 16 (38) - 132 After-tax profit from extraordinary activities - - - **- - **-
Net profit (loss) 31 123 16 (38) **- 132 Return on equity 7.1% 10.1% 14.1% (19.6%) - 6.7% Average balance of assets 8,033 13,775 1,395 13,516 394 37,113 Including: investments in affiliated companies - - - 1 - 1 Average balance of liabilities 15,841 17,461 357 1,459 - 35,118 Average balance of risk assets 5,390 15,136 1,409 2,399 - 24,334 Average balance of securities 11,318 29,666 36 - - 41,020 Average balance of managed Securities 308 338 - - - 646 Components of profit from financing activities before provision for credit losses: Margin from credit granting activities 119 256 25 Margin from deposit receipt activities 144 60 2 Other 1 79 12 Total profit from financing activities before provision for
Credit losses 264 395 39
* Reclassified (See Note 1.C.5.B). Restated (See Note 1.E.21).
** Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 429 -
Note 30 - Report on Business Segments (cont’d)
Information on business segments – consolidated (cont'd)
For the year ended December 31, 2010*
Private Business Diamonds Financial Amounts not Total segment segment segment management allocated segment and adjustments
NIS millions Profit (loss) from financing activities before provision for credit losses: - From outsiders 219 343 35 119 - 716 - Inter-segment 1 15 **- (16) - - Operating and other income: - From outsiders 145 113 16 13 - 287 - Inter-segment - - - - - -
Total income 365 471 51 116 - 1,003 Provision for credit losses 13 72 2 - - 87 Operating and other expenses: - From outsiders 323 302 34 39 **- 698 - Inter-segment - - - - - - Operating profit (loss) before taxation 29 97 15 77 **- 218 Provision for taxation on operating profit 9 31 5 25 **- 70 Operating profit (loss) after taxation 20 66 10 52 **- 148 The Bank's share in operating profits of investee companies - - - **- - **-
Net operating profit (loss) 20 66 10 52 **- 148 After-tax profit from extraordinary activities **- 1 - - **- 1
Net profit (loss) 20 67 10 52 **- 149 Return on equity 5.2% 5.4% 8.2% 32.0% - 7.6% Average balance of assets 6,588 13,073 1,455 11,572 363 33,051 Including: investments in affiliated companies - - - 1 - 1 Average balance of liabilities 15,006 14,742 346 940 - 31,034 Average balance of risk assets 4,481 14,392 1,426 2,700 - 22,999 Average balance of securities 10,484 23,622 29 - - 34,135 Average balance of managed securities 402 324 - - - 726 Components of profit from financing activities before provision for credit losses: Margin from credit granting activities 97 247 23 Margin from deposit receipt activities 105 36 1 Other 18 75 11 Total profit from financing activities before provision for
Credit losses 220 358 35
* Reclassified (See Note 1.C.5.B). Restated (See Note 1.E.21). ** Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 430 -
Note 30- Report on Business Segments (cont’d)
Information on business segments - consolidated (cont'd)
For the year ended December 31, 2009* Private Business Diamonds Financial Amounts not Total segment segment segment management allocated segment and adjustments
NIS millions Profit from financing activities before provision for credit losses: - From outsiders 194 284 38 104 - 620 - Inter-segment **- 9 **- (9) - - Operating and other income: - From outsiders 141 149 13 29 - 332 - Inter-segment **- (3) **- 3 - -
Total income 335 439 51 127 - 952 Provision for credit losses 12 61 22 - - 95 Operating and other expenses: - From outsiders 303 266 25 48 3 645 - Inter-segment - - - - - - Operating profit (loss) before taxation 20 112 4 79 (3) 212 Provision for taxation on operating profit 9 58 2 34 (2) 101 Operating profit (loss) after taxation 11 54 2 45 (1) 111 The Bank's share in operating profits of investee companies - - - **- - **-
Net operating profit (loss) 11 54 2 45 (1) 111 After-tax profit (loss) from extraordinary activities - - - - (2) (2)
Net profit (loss) 11 54 2 45 (3) 109 Return on equity 3.3% 5.2% 2.4% 14.7% - 6.3% Average balance of assets 5,399 12,374 1,545 11,663 354 31,335 Including: investments in affiliated companies - - - 5 - 5 Average balance of liabilities 15,554 12,751 268 1,369 - 29,942 Average balance of risk assets (1) 3,853 12,012 1,143 3,594 - 20,602 Average balance of securities 7,140 22,083 31 - - 29,254 Average balance of managed securities 318 271 - - - 589 Components of profit from financing activities before provision for credit losses: Margin from credit granting Activities 73 235 30 Margin from deposit receipt Activities 88 34 1 Other 33 24 7 Total profit from financing activities before provision for
credit losses 194 293 38
* Reclassified (See Note 1.C.5.B). Restated (See Note 1.E.21).
** Less than NIS 500 thousand.
(1) Year 2009 - according to Basel I directives.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 431 -
Note 31 - Data in Nominal Values - The Bank
A. The accounting principles used to present the data in nominal historical values for tax purposes are as
follows:
(1) These financial statements were prepared on the basis of historical cost.
(2) These financial statements include data regarding the Bank, and two subsidiary companies that
constitutes Auxiliary Corporation.
(3) These financial statements do not include provisions for the impairment of fixed assets.
B. Nominal balance sheet as at December 31
2011 2010 NIS millions NIS millions
Assets Cash on hand and deposits with banks 6,961 7,131 Securities 6,650 4,397 Lended securities 5 415 Credit to the public 23,082 * 22,687 Provision for credit losses (269) *(1,030) Net credit to the public 22,813 21,657 Investments in investee companies 514 521 Buildings and equipment 385 354 Assets in respect of derivative instruments 846 * 562 Other assets 1,038 *,**549 Total assets 39,212 35,586
Liabilities and shareholders' equity Deposits from the public 33,873 *31,080 Deposits from banks 392 *271 Deposits from the Government 1 2 Subordinated notes and deposit certificates 222 267 Liabilities in respect of derivative instruments 907 *737 Other liabilities 1,857 *,**1,253 Total liabilities 37,252 33,610 Shareholders' equity 1,960 1,976 Total liabilities and shareholders' equity 39,212 35,586
* Comparative data were reclassified in order to match the item headings and presentation method in the
current period (See Note 1.C.5).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 432 -
Note 31 - Data in Nominal Values - The Bank (cont’d) C. Statement of profit and loss for the year ended December 31
2011 2010 2009 NIS millions NIS millions NIS millions
Profit from financing activities before provision for credit losses 657 687 591 Provision for credit losses 25 84 93 Profit from financing activities after provision for credit losses 632 603 498 Operating and other income Operating commissions 253 256 251 Profit from investments in shares, net (1) 7 57 Other income 1 1 4 Total operating and other income 253 264 312 Operating and other expenses Salaries and related expenses 451 **389 **356 Maintenance and depreciation of buildings and equipment 133 125 115 Other expenses 191 173 162 Total operating and other expenses 775 687 633 Operating profit before taxation 110 180 177 Provision for taxation on operating profit 6 **62 **90 Operating profit after taxation 104 118 87 The Bank's share in net after-tax operating profits of investee companies 31 29 26 Net operating profit: Attributable to shareholders of the bank 135 147 113 After-tax profit from extraordinary activities, before attributing for noncontroling interests 1 *- 1 Net profit: Attributable to shareholders of the bank 136 147 114
* Less than NIS 500 thousand.
** Restated following the retroactive implementation of the directives regarding employee benefits - See Note
1.E.21.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
- 433 -
Note 31 - Data in Nominal Values - The Bank (cont’d) D. Statement of changes in shareholders' equity
Benefits in Share capital Adjustments Respect of Retained Total and premium to fair value of share-based earnings(2) available for payment sale securities(1) transactions
NIS millions NIS millions NIS millions NIS millions NIS millions
Balance as at January 1, 2009 501 (53) 24 1,065 1,537 Effect of the initial implementation of directives regarding employee benefits - - - *(46) (46) Balance at the beginning of the year after the retroactive implementation
501 (53) 24 1,019 1,491
Net profit for the year - - - *114 114 Share issue 149 - - - 149 Benefits in respect of share-based payment transactions (3) - - *- - *- Adjustments to fair value of available for sale securities - 266 - - 266 Adjustments in respect of presentation of securities available for sale that were reclassified for profit and loss statement - (90) - - (90) Related tax effect - (64) - - (64) Balance as at December 31, 2009 650 59 24 1,133 1,866 Net profit for the year - - - **147 147 Dividend Paid - - - (60) (60) Adjustments to fair value of available for sale securities - 130 - - 130 Adjustments in respect of presentation of securities available for sale that were reclassified for profit and loss statement - (97) - - (97) Related tax effect - (10) - - (10) Balance as at December 31, 2010 650 82 24 1,220 1,976 Cumulative effect net of tax of the first implementation on 1.1.2011 of directive concerning the measurement of impaired debts and provision for credit losses and amendment regarding the treatment of problematic debt***
- - - ***(65) (65)
Balance as at December 31, 2010, after the adjustment of the initial implementation of new regulations 650 82 24 1,155 1,911 Net profit for the year - - - 136 136 Adjustments to fair value of available for sale securities - (105) - - (105) Adjustments in respect of presentation of securities available for sale that were reclassified for profit and loss statement - (27) - - (27) Related tax effect - 45 - - 45 Balance as at December 31, 2011 650 (5) 24 1,291 1,960
(1) See Note 1.E.4.A.3. (2) See Note 12.B regarding restrictions in dividend distribution. (3) See Note 15.A.
* Less than NIS 500 thousand.
** Restated following the retroactive implementation of the directives regarding employee benefits - See Note 1.E.21.
*** See Note 1.E.5
- 434 -
Union Bank of Israel Limited
Financial Statements December 31, 2011
This report does not constitute a periodic report in accordance with the Securities Regulations (Periodic
and Immediate Reports) - 1970. The periodic report and the valuation of Taya Investments Company Ltd. can be found on the Magna System of the Israel Securities Authority -
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