union bank of israel ltd. annual report 2012mr. haim almog mr. alberto garfunkel mr. uzi vardy-zer...
TRANSCRIPT
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UNION BANK OF ISRAEL LTD.
ANNUAL REPORT
2012
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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. Haim Almog
Mr. Alberto Garfunkel
Mr. Uzi Vardy-Zer
Mr. Izhak Zisman
Dr. Yaacov Lifshitz
Mr. Yigal Landau
Ms. Miri Lent–Sharir
Mr. Giora Morag
Dr. Zalman Segal
Bank of Israel Interest Ratepercent
0
1
2
3
12.11 3.12 6.12 9.12 12.12
Rate of GDP Growthpercent
0
1
2
3
Q1.12 Q2.12 Q3.12 Q4.12
54
109
149
132127
0
20
40
60
80
100
120
140
160
2008 2009 2010 2011 2012
Development of Net Operating profitNIS Million
11.5
13.714.4
13.8
14.9
7.68.6 8.3 8.1
8.7
0
2
4
6
8
10
12
14
16
* 31.12.08 ** 31.12.09 ** 31.12.10 ** 31.12.11 ** 31.12.12
Overall Initial
Ratio of Capital Adequacypercent
Development of Credit to the PublicNIS Billion
0
5
10
15
20
25
31.12.08 31.12.09 31.12.10 31.12.11 31.12.12
Breakdown of Problematic Debts as at the End of 2012
percent
15%57%
28%Impaired credit risk
Substandard creditrisk
Credit risk underspecial supervision
Development of Income from Retail SectorNIS Million
0
50
100
150
200
250
300
350
400
450
2008 2009 2010 2011 2012
Development of Mortgage PerformanceNIS Million
0
500
1,000
1,500
2,000
2008 2009 2010 2011 2012
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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 255 Board of Directors’ and Senior Management’s Report About the Internal Control over Financial Reporting 257 Financial Statements for the Year Ended December 31, 2011 258 This is a translation from the Annual Report for 2012 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 16
6. Objectives and Business Policy 24
7. Controlling Interests in the Bank 25
8. Investments in the Bank’s Capital and Transactions in its Shares 26
9. Dividend Distribution 29
10. Material Agreements 30
11. Licenses, permits and approvals 31
12. Activity with Overseas Entities 33
13. Legal Proceedings and Contingent Liabilities 34
14. Fixed Assets and Facilities 34
15. Activity of Investee Companies 38
16. Human Capital 47
17. Description of Tax Situation 55
18. Description of the Bank’s Business by Activity Segments 56
19. Capital Adequacy 83
20. Risk Exposure and Management 104
21. Critical Accounting Policies and Estimates 156
22. Legislative Developments 173
23. Transaction with Controlling Shareholders 185
24. Community activity and Donations 192
25. Disclosure Regarding the Internal Auditor 193
26. The Board of Directors 198
27. Members of Management and Senior Officials 217
28. Disclosure Regarding the Process of Approval of the Financial Statements 221
29. Controls and Procedures 223
30. Details of compensations for High Wage Recipients at the Bank 226
31. Remuneration of Auditors 234
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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 28, 2013, it was resolved to approve the
financial statements of the Bank and its subsidiaries as at December 31, 2012. 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 2013. 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
Even though four years have passed since the eruption of the global economic crisis, the global economic data for
2012 continues to show weakness. Although, like in the past, developing economies were the main engine for
global growth during 2012, their contribution weakened. In comparison, developed economies struggled during the
year with the increasing concerns regarding the debt crisis and fiscal distress. At the end of November 2012, the
OECD announced that the growth forecasts for 2013 regarding member states were updated downwards from 2.2%
to 1.4%. The growth forecast for the United States was updated from 2.6% to 2.0%. Concurrently, during January,
The World Bank lowered the global growth forecast to 2.4% compared to 3.0% in the last forecast. This was done
after the global economy displayed 2.3% growth during 2012 and amid concerns from the "fiscal cliff" influence on
the United States' economy and the prolonging of the crisis in Europe.
In the United States the government managed to slightly decline the realization of the "fiscal cliff" after reaching an
agreement regarding taxes. Nonetheless, the subject of debt reduction has been left open and with that, the concern
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for deceleration. Concurrently, the American economic data for the last quarter of 2012, indicates, for the first time
since 2009, an annual rate shrinkage of 0.1%, especially due to reduction in investments in inventory in the private
sector and in the public expense. This is after a 3.1% annual growth rate during the third quarter. Concurrently, The
American Central Bank announced the increase of the quantitative expansion plan by 45 billion dollars each month
for purchasing government bonds in addition to 40 billion dollars each month for purchasing mortgage-backed
bonds.
In Europe a 0.4% shrinkage was recorded during 2012 in the product, and in October, the unemployment rate in the
Eurozone countries reached a 11.7% record. On the basis of forecasts for an additional shrinkage of 0.1% during
2013, the question regarding debt recycling is bound to be a main issue in the global economy. The uncertainty
regarding the possible implications from the eruption of the debt crisis, harms the economic activity and the debt
rating of the stronger Eurozone countries such as France and Germany, which absorb the effects of the recession in
Eurozone countries such as Spain, Italy, Portugal and Greece. The bond purchasing plans, meant to prevent the
financial collapse of the weak Eurozone countries, do not solve the problem the budget issues which are bound to
continue to restrain the demands in the Eurovision even more.
In Israel, the economic indicators for the third quarter of 2012, support the evaluation that the growth rate of the
economy has moderated and is declining. The estimation for growth in the gross domestic product during the
second half of 2012 points to an annual growth rate of 2.8% (the lowest rate since 2009), after a 2.9% growth in the
previous half, a 3.3% growth in the corresponding half year and a 4.6% growth during 2011. The moderate growth
rate and the low and even negative indexes in the last few months reflect the weakness in demands and the
slowdown in the economy lately. The updated growth forecast of The Bank of Israel is 3.3% in 2012 and 3.8% in
2013 assuming that the gas production from drilling "Tamar" will begin in the second quaderent of the year.
Without the effect of the gas, the production growth rate in 2013 is expected to be 2.8%. The growth in 2013 is
expected to be effected mainly by the moderate global growth, by the need for restraining fiscal policy and on the
other hand, by the effect of the beginning of the flowing of gas during the year.
Employment and Private Consumption
According to the manpower survey of the central bureau of statistics, the rate of unemployed during the last
quarter of 2012 was 6.9% compared to 6.8% during the third quarter of 2012 and 7.0% in the second quarter of
2012. Data regarding acquisitions by credit cards indicate the continuing of the growth trend – data regarding
the fourth quarter of the year amount to a 6.4% increase in an annual calculation further to a 4.9% increase in
the an annual calculation during the third quarter of the year. The revenue data of all marketing chains
(including food chains) indicates a 2.6% decline in the annual calculation of the fourth quarter of the year,
further to a 2.6% decline in the annual calculation during the third quarter of the year. After a record year for the
number of departures in 2011, the data for 2012 indicates a 1.0% decline in the number of departures compared
to the previous year, still, the number of people departing stayed similar.
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Foreign Trade, Capital Movements, and Exchange Rates
The trade deficit totaled to NIS 70.2 billion in 2012 compared to a deficit of NIS 52.2 billion during all of 2011.
The data regarding 2012 indicates a 6.3% increase in importing of goods (excluding diamonds, ships, airplanes
and fuels) in an annual calculation. The increase in importing derived mainly from a 10% increase in the scope
of raw material import (excluding diamonds and fuels) parallel to a slight growth in import of consuming
products and investment products. During 2012, a 4.5% increase in the annual calculation in exporting goods
(excluding ships, airplanes and diamonds) was recorded. The industrial export, which is a significant part of all
export (excluding diamonds), increased during 2012 by 4.4%. Most of the increase in the industrial export is
from the increase of export of high technology, at the rate of 5.5% in the annual calculation which was based on
a 19.3% increase in an annual calculation in export of electronic components and 9.0% increase in the annual
calculation in the export of equipment for control and supervision.
During 2012, the NIS weakened (average rate) in comparison to most of the currencies traded in Israel. In
comparison to the USD, the EURO and the YEN, the NIS rate became stronger during 2012, by 2.4%, 0.3% and
13.8% respectively, regarding end of the period rates. In comparison to the GBP and the CHF, the NIS
weakened during 2012, by 2.4% and 0.4% respectively, regarding end of period rates.
Fiscal Policy
The actual performance data regarding the state budget indicates that the local deficit in 2012 totaled NIS 39.0
billion. The deficit for December was a negative surprise and amounted to NIS 12.8 billion. The deficit as a
percent of the production was 4.2% in comparison to the budget deficit target of NIS 18.3 billion which is 2.0%
of the production. The deficit deviation in relation to the original budget, is mainly due to lower than expected
income from taxes in the amount of NIS 18.5 billion and somewhat higher expenses than the original budget
(wage agreements, security expenses etc.) in the amount of NIS 2.2 billion. Nonetheless, the governments'
decisions to raise taxes and VAT as of September are expected to increase the states' revenue by NIS 9 billion.
The elections delayed the treatment of the budget for 2013, therefore the expected reduction scope as well as the
target of the deficit for 2013, aren't clear at this stage. The delay in the approval of the budget for 2013 restricts
the governments' monthly expense scope to 1/12 of the budget for 2012.
Prices and Monetary Policy
On December, the Bank of Israel decided to lower the interest by 0.25 percentage points to a level of 1.75%, for
the fourth time during 2012 in light of the negative trend in the global economy and the forecasts regarding its
continuation, and in order to give additional support to the economic activity in the absence of inflationary
pressure. This was done continuing to the interest lowering trend as of the second half of 2011.
During 2012 the annual inflation rate was 1.6%. According to the trend data for the last quarter of 2012, the
annual growth rate of the CPI reached 1.4%.
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Capital Market
The year of 2012 was characterized by a significant decline of 37% in daily trade turnovers in shares and
convertibles compared with the average turnover last year, and by a 46% decline in the average daily trade
turnover in short-term loans. Despite the decline in trade turnovers, most of the indicators increased since the
beginning of the year. During the second half of 2012 there was an increase in security rates against the low
point in June but still in low rates compared with the global increase trend. Overall in 2012 the TA 25 and TA
100 indices rose by 9.2% and 7.2% respectively. Overall in 2012 a positive trend in all indices was recorded
excluding the trading and service stock index which recorded a decline of 11.3% in leading communication
companies and given the impacts of the social protest on the big marketing chains. The indices of bank stocks
and insurance stocks were particularly noteworthy with an increase rate of 25.4% and 15.1% respectively.
Among the main positive factors that affected the trading trend in the local capital market, were the following:
reduction of interest by the Bank of Israel and the increase trend in the global markets in general and in the U.S.
in particular.
In the initial stock market the slowdown in activity continued, and from the beginning of the year only NIS 3.4
billion was raised in comparison to NIS 5.1 billion last year and compared to NIS 13 billion during 2010, a 33%
decrease compared with the parallel period last year.
The bond market in 2012 was characterized by rate increases in all types of bonds. From the beginning of the
year an 8.8% and 9.9% increase in rates was recorded in the general index of bonds and in the CPI linked bonds'
index respectively, at the same time, the foreign currency linked bonds' index increased by 7.3%.
From the beginning of 2012 the Tel Bond 20 index of corporate bonds rose by 7.9% in compared to 0.7% during
2011. From the beginning of the year the average daily turnover in bonds amounted to NIS 4.1 billion, 8.7%
higher than the average daily turnover for 2011, contrary to the trend of trade volumes of securities. The
increase in turnovers is due to an increase in trade turnovers in linked government bonds and to a 14% increase
in trade turnovers in corporate bonds, which peaked at NIS 1.0 billion a day. In contrast, in the short-term loan
activity a sharp decline occurred and since the beginning of 2012 the average daily turnover was NIS 0.6 billion.
During 2012 the business sector raised NIS 39.7 billion from the public and from institutional investors by
issues and allocations of bonds, slightly lower than the amount raised in 2011.
Against the growing deficit in the government budget, the money raising and the activity in the government
bond market increased, when during 2012 the net money raising amounted to NIS 22 billion compared to a NIS
3 billion during all of 2011.
Construction and Real Estate
The high level of demand for new apartments and the high volume of mortgages continued also during the
fourth quarter of 2012. Yet the supply of apartments remained on the lowest level in months following a
decrease in the construction starts data.
This trend followed the continuous effect of the steps taken by the Bank of Israel regarding mortgages and the
governments efforts to market lands. On the other hand, the increase in requirements regarding capital adequacy
from the banking system, affects the scope of credit, including in the real estate sector. During the last quarter of
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the year the decrease in the interest of the Bank of Israel continued which contributed to the increase in demand
for apartments especially by the buyers buying the apartments as an investment.
On February 2013, the Bank of Israel published a guidelines draft regarding the raise of the weighted rate of
housing loans by a financing rate higher than 45% for capital allocation and for increasing the group allowance
for credit losses regarding housing loans to a minimal rate of 0.35%. on the other hand, the Bank of Israel eased
the requirement for required capital regarding the Sales Law guarantee in case that the apartment was already
given to the resident. These directives are in continuation to the directive of the Bank of Israel from November
2012, which includes restrictions on the financing rate the banks give for housing loans, and their purpose is to
burden mortgage loaners for investment purposes in apartments so that the financing rate for such an investment
won't exceed 50% of the apartments value. In addition, the directive states that a banking corporation will not
permit a housing loan by a higher than 70% financing rate, excluding a housing loan for the purchasing of a first
apartment, for which the maximum financing rate will be 75%. It's still too early to assess the impact of the
directives on the housing market.
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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. On October 29, 2012, Shlomo Eliyahu
Holdings Ltd. Ceased to be part of the controlling interest following the completion of the acquisition of control
of Migdal Insurance and Financial Holdings Ltd. By Mr. Shlomo Eliyahu through Eliyahu Insurance Company
Ltd., as detailed in section "Investments in the Bank’s Capital and Transactions in its Shares".
The Banks shares are registered for trade in Tel Aviv stoke Exchange.
The Bank has 36 branches and extensions 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, 2012, 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 *2012 2011 2010 % % % Credit to the public 2.7 2.8 2.8 Public deposits 3.0 3.3 3.4 Shareholders' equity 2.6 2.6 2.8 Net income 1.9 1.9 2.2
* Relates to the first nine months of 2012. 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 March 18, 2012, "Midroog" announced that the rating and rating horizon of the Bank had remained
unchanged relative to the preceding year, as follows:
Long-term deposits and bonds Aa3
Short-term deposits P-1
Subordinated notes (lower Tier II capital) A1
Subordinated notes (upper Tier II capital) A2
Rating horizon Stable
"Midroog" also announced an A1 rating for the recruitment framework of subordinated notes (bottom secondary
capital) in up to the amount of NIS 500 million par value.
On July 18, 2012, "Midroog" reaffirmed the Banks' rating as described above and approved an Aa3 rating in a
stable horizon for the recruitment framework of bonds (series f) in up to the amount of NIS 400 million par
value which will be carried out by Union Issuance Ltd. Regarding the issuance of bonds (series f) see section
"Activity of Investee Companies"..
Set below is a diagram of the Bank's main investee companies as at December 31, 2012:
_______________ (1) 100% holding, except for union underwriting & finances Ltd – see (3) below. (2) Held by Union Investments and Enterprise (A.S.Y.) Ltd. (3) Held by union capital Markets and Investments Ltd at a rate of 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 (1995) 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, 2012:
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 (36)
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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 classifying and 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 the foreign currency execution unit, 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 the financial reports of the Bank and its subsidiaries (to the
public, to the board of directors, to management, and to the various supervisory agencies); financial
analysis, including oversight of the Bank’s work plans and budgets; for capital planning, for 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
over trading units, operational risk management, and monitoring exposures to foreign banks.
G. Legal Counsel – Responsible for the Banks' legal risk management, provides support and an answer to all
legal aspects of the Banks' and its subsidiaries activities. Legal support takes the form of routine legal
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advice, preparation of legal opinions, formulation and preparation of documents and agreements, and
concentration of prosecutions against the Bank and the supervision of professional authorities handling
them on behalf of the bank. Compliance and public inquiries branch, consisting of the prohibition of money
laundering unit, the compliance unit and the public inquiries unit, is subject to the legal counsel
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. The secretariat is also responsible for the secretarial services of
the Banks' subsidiaries.
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.
Profit and Profitability (Consolidated)
Net profit totaled NIS 127 million in 2012, compared with net profit of NIS 132 million in 2011, a 3.8% decrease.
Net return on equity (based on average capital base) reached 6.2% in 2012, compared with 6.7% in 2011.
The return on equity was affected also by the increase in capital, both as a result of the increase in the capital target (as
detailed in section " Capital Adequacy" and the increase in the capital reserve from the available for sale portfolio.
Set below are the main changes in the net profit, in 2012 compared with 2011:
An increase of NIS 10 million of the net interest income before provision for credit losses.
An increase of NIS 41 million of non-interest income.
An increase of NIS 38 million of provision for credit losses.
An increase of NIS 13 million of operating and other expenses.
An increase in tax provision rate from 13.2% to 16.4% (see further details below).
The profit before taxes totaled NIS 152 million in 2012 similar to the profit before taxes in 2011.
The return on equity of net profit before taxes (based on an average capital base) was 7.4% in 2012 compared to
7.7% in 2011.
Developments in Income, Expenses and Provisions for Taxes
Profit from net interest income totaled NIS 660 million in 2012, compared with NIS 650 million in 2011, a
1.5% increase.
Following is a brief analysis of the interest gaps (the gap between interest income on assets and interest
expenses on liabilities) by linkage basis (for detailed information see appendix C to the management review –
- 15 -
note that the presentation format, according to the directives of the Supervision of Banks, hasn't been adapted to
the implementation of the directive regarding the new format of profit and loss statement):
The unlinked shekel segment – the interest spread including the effect of derivatives in 2012 is 1.18% compared
to 1.41% in 2011.
The CPI-linked shekel segment – the interest spread including the effect of derivatives in 2012 is 0.77%
compared to 1.02% in 2011. The decrease is affected by the measurement of the derivative instruments at fair
value.
Foreign currency – the interest spread including the effect of derivatives in 2012 is 0.45% compared to 0.36% in
2011. The increase is affected by the measurement of the derivative instruments at fair value.
Provision for credit losses (net after collection) totaled NIS 65 million in 2012, compared to NIS 27 million in
2011 a 140.7% increase. In 2012, the individual allowance, before offsetting debt collection provided in the
past, totaled NIS 142 million (NIS 41 million of that is in respect of one client) compared to NIS 67 million in
2011. The collection of debts which were provided in the past totaled NIS 66 million in 2012 compared to NIS
56 million in 2011. Also, a decrease in the group allowance in the amount of NIS11 million was recorded in
2012 compared to an increase of NIS 16 million in 2011.
The ratio of expenses in respect of provision for credit losses to the total credit to the public stood at 0.3% in
2012, compared to 0.1% in 2011.
See more details in the sub-section " Development of Assets and Liabilities" further on.
Net interest income after provision for credit losses – totaled NIS 595 million in 2012 compared to NIS 623
million in 2011, a decline of 4.5%.
Non-interest income – totaled NIS 357 million in 2012 compared to NIS 316 million in 2011, an increase of
13.0%.
Non-interest financing income totaled NIS 65 million in 2012 compared to NIS 4 million in 2011. The increase
is mainly due to an increase of NIS 64 million in profit from realization and value adjustment of bonds. This
increase was partly offset as a result of the effect of income (expenses) in respect of derivative financial
instruments.
The adjustment of derivative financial instruments according to their fair value (as required by accounting
principals) resulted in expenses in the amount of NIS 13 million in 2012 compared to NIS 22 million in 2011.
Income from fees totaled NIS 288 million in 2012 compared to NIS 310 million in 20ll, a 7.1% decrease, the
decrease is mainly due to a decrease in fees from customers' security transactions due to a significant decrease
in the stock markets' activity turnovers and to a decrease in commissions from foreign currency exchange
differences.
The other income totaled NIS 4 million in 2012 compared to NIS 2 million in 2011. Other income includes
mainly profit from the sale of fixed assets.
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Operating and other expenses totaled NIS 800 million in 2012, compared with NIS 787 million in 2011, an
increase of 1.7%.
Payroll expenses in 2012 totaled NIS 455 million, compared with NIS 459 million in 2011, a 0.9% decrease.
There was a decrease in salary expenses as a result of the actual implementation of the retirement plan and the
change in the retirement policy (see details in section "Human Capital"). Likewise, there was a decline because
profit from the main compensation fund was registered this year compared to losses in the previous year. Some
of these decreases were offset mainly as a result of the implications of the update of the mortality tables (see
details in section "Critical Accounting Policies and Estimates") and an increase in payroll tax (see details in section "
Description of Tax Situation"). Also, in 2011 expenses in the amount of NIS 15 million were recorded in respect of the
retirement plan, compared to expenses in the amount of NIS 20 million recorded in 2012 in respect of its expansion (see
details in section "Human Capital").
Maintenance expenses and depreciation of buildings and equipment amounted in 2012 to NIS 147 million,
compared with NIS 135 million in 2011, an increase of 8.9% due mainly to an increase in depreciation (especially
computerization depreciation).
Other expenses amounted to NIS 198 million in 2012, compared with NIS 193 million in 2011, an increase of 2.6%.
The ratio of the operating and other expenses to the total income (net interest income and non-interest income) was
78.7% in 2012 and 81.5% in 2011.
The provision for taxes in 2012 was 16.4%, compared with a statutory tax rate of 35.53% mainly due to the
effect of the closure of tax assessments in respect of previous years and following an update of the VAT order
regarding payroll tax and capital gains tax. In 2011 the tax provision was 13.2% compared with a statutory tax
rate of 34.48%, mostly due to the effect of annulment of the future tax rate reduction on the balance of the long
term deferred tax asset. See details in note 28.C.
The fourth quarter of 2012 resulted in a net profit of NIS 27 million, compared to a net profit of NIS 34
million during the same quarter of last year-a decrease of 20.6%. The decrease is mainly due to an increase in
provision for credit losses which was partly offset by profit from realization and value adjustment of bonds.
Developments in Balance-Sheet Items
The balance sheet of the Bank totaled NIS 38,825 million on December 31, 2012, compared with NIS 38,915
million at the end of 2011, a 0.2% decrease.
Net credit to the public (after deduction of allowance for credit losses) totaled NIS 23,573 million as at
December 31, 2012, compared with NIS 22,868 million at the end of 2011, an increase of 3.1%. The average
balance of credit to the public stood at NIS 23,432 million in 2012, compared with NIS 23,191 million in 2011,
an increase of 1.0%.
The allowance for credit losses totaled NIS 285 million as at December 31, 2012 compared with NIS 272
million at the end of 2011. In addition, as at December 31, 2012 there is an allowance for credit losses of NIS 49
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million due to off-balance-sheet credit, presented within the other liabilities item compared with NIS 44 million
at the end of 2011.
A. Total problematic credit risk*:
Balance as at December 31, 2012 December 31, 2011 NIS millions
Problematic commercial credit risk 1,066 997
Problematic credit risk in respect of private individuals 69 79 Total problematic credit risk 1,135 1,076
* The data presented after the deduction of accounting write-offs and before the deduction of allowance for credit losses and do not
include deduction of collaterals deductible for the purposes of the indebtedness of borrower and group of borrowers.
B. Problematic credit risk 1 :
December 31, 2012 December 31, 2011
Balance sheet
Off-balance
sheet Total Balance
sheet
Off- balance
sheet Total NIS millions NIS millions Impaired credit risk 635 17 652 565 3 568
Substandard credit risk 2 146 25 171 69 39 108
Credit risk under special supervision 202 110 312 329 71 400 Total 983 152 1,135 963 113 1,076 From this: unimpaired debts with arrears of 90 days or more 62 69
1 Impaired credit risk, substandard credit risk or credit risk under special suoervision. 2 Including in respect of housing loans for which the provision is calculated according to the extent of the arrears and housing loans for
which there is no provision according to the extent of the awears, which are in arrears of 90 days or more.
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C. Risk indices:
December 31,
2012 December 31,
2011
Balance of impaired credit to the public as a percentage of the balance of credit to the public 2.4% 2.3%
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% 0.3%
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% 1.2%
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 48.8% 51.9%
Problematic credit risk in respect of the public, as a percentage of the total credit risk in respect of the public 3.0% 2.8%
Ratio of provision for credit losses to the average recorded balance of credit to the public 0.3% 0.1%
Ratio of net accounting write-offs in respect of credit to the public to the average balance of credit to the public 0.2% 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 16.5% 23.2%
Balance as at December 31,
2012
Balance as at December 31,
2011 NIS millions NIS millions Nonperforming assets:
Impaired debts 634 564
Assets received in respect of credit repaid
Deposits from the public totaled NIS 30,890 million as at December 31, 2012, compared with NIS 31,158
million at the end of 2011, a 0.9% decrease. The average balance of deposits from the public stood at NIS
30,764 million in 2012, compared with NIS 29,741 million in 2011, an increase of 3.4%.
Securities totaled NIS 4,940 million as at December 31, 2012, compared with NIS 6,785 million at the end of
2011, a 27% decrease.
The balance of securities as at December 31, 2012 is distributed as follows:
Approximately 61% of the securities portfolio is invested in government bonds, approximately 18% is invested
in bonds of banks, and approximately 13% is invested in corporate bonds, mainly of Israeli companies and
approximately 6% in government companies.
Approximately 92% 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
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the exception of declines in value of other than temporary impairment, which are not allocated to a capital
reserve but to the statement of profit and loss.
In 2012, other than temporary impairments in the amount of approximately NIS 18 million in respect of bonds
and in the amount of approximately NIS 3 million in respect of shares were charged to profit and loss, versus
NIS 23 million and NIS 5 million in 2011, respectively.
The net positive capital reserve as at December 31, 2012, stands at approximately NIS 112 million (before tax
effect), consisting of a positive capital reserve in the amount of NIS 132 million, offset by a negative capital
reserve in the amount of NIS 20 million.
At the end of 2011, the net negative capital reserve stood at approximately NIS 7 million (before tax effect),
consisted 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.
The following table shows the distribution of the capital reserve and of fair value in the available-for-sale portfolio as of December 31, 2012 (in NIS millions):
Balance sheet value
(constituting fair value)
Negative capital fund (unrealized
losses)
Positive capital fund (unrealized
gains) Net capital
fund Shares (1) 100 (2) 13 11
Bonds of Israeli government 2,687 - 63 63
Bonds of financial institutions in Israel (2) 726 (1) 12 11
Bonds of foreign financial institutions (3) 166 - 2 2
Corporate bonds: (4)
Government companies (5) 261 (5) 9 4
The real estate industry (6) 150 (4) 9 5
Others (7) 473 (8) 24 16
Total corporate bonds 884 (17) 42 25
Total available-for-sale portfolio 4,563 (20) 132 112*
* 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 74 million; see the report on changes in equity - adjustments in respect of the statement of securities available-for-sale at fair value.
1 Including 25 issuers; the highest balance is NIS 30 million. 2 Including 13 issuers; the highest balance is NIS 573 million in respect of Bank Hapoalim Bonds. 3 Including 11 issuers. The issuers are Banks mainly from US, Britain, Holland, Germany and France; the highest
balance is NIS 75 million. 4 All corporate bonds are of Israeli companies, with the exception of a balance on NIS 23 million issued by a foreign
issuer. 5 Including 3 issuers; the highest balance is NIS 214 million. 6 Including 54 issuers; the highest balance is NIS 15 million. 7 Including 55 issuers; the highest balance is NIS 58 million.
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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 as of December
31, 2012 (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% (2) (1) - (14) (17)
20%-30% - - - (1) (1) Total (2) (1) - (15) (18) Shares:
up to 20% - (1) - (1) (2) - (1) - (1) (2) Total (2) (2) - (16) (20)
* 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.”
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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 828 (17) 8 (9)
Bonds of foreign financial institutions 230 (8) 1 (7)
Corporate bonds:
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 losses 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 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, Germany, Holland, 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.
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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 as of December
31, 2011 (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 following table shows more details in respect of the tradable portfolio as at (in NIS millions):
Balance sheet value
(constitutes fair value)
December 31,
2012 December 31,
2011
Shares (1):
Israeli companies 14 20
Foreign companies 4 9
18 29 Israeli Government bonds 337 1,004
Other bonds 22 22
359 1,026 Total tradable portfolio 377 1,055
(1) Mainly exchange traded Funds.
- 23 -
Assets in respect of derivatives as at December 31, 2012 totaled NIS 476 million, compared to NIS 846 million at the end of 2011. Liabilities in respect of derivatives as at December 31, 2012 totaled NIS 592 million compared to NIS 907 million at the end of 2011. The decrease in the fair value of derivative instruments is mainly the result of activity in foreign currency contracts and transactions in Maof derivatives. Other assets totaled NIS 1,123 million as at December 31, 2012, compared to NIS 1,041 million at the end of 2011. Other liabilities totaled NIS 1,978 million as at December 31, 2012, compared to NIS 1,710 million at the end of 2011. 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 and from a short sale of securities. The Bank's equity totaled NIS 2,191 million as at December 31, 2012, compared with NIS 1,986 million at the end of 2011. The increase in equity is the result of the Banks' profits and of an increase in the net adjustments in respect of presentation of securities available for sale at fair value item (capital reserve). . Ratio of Capital to Risk-Weighted Assets December 31,
2012 December 31,
2011 Ratio of Tier I capital to risk-weighted assets 8.66% 8.09% Ratio of overall capital to risk-weighted assets 14.94% 13.82%
For further details regarding the risk-weighted 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".
- 24 -
Objectives and Business Policy
The Bank operates under a three-year ahead strategic plan, which gets updated near the end of every year.. 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”). When determining the strategy for
2013-2015 the economic slowdown was taken into account. The economic slowdown is expressed, among other
forms, by a very low interest rate environment and by the continuation of the capital market slowdown, which
might effect the risk level in the various economic sectors.
In October 2012, the Board of Directors approved the three-year ahead strategic plan for these years.
The main issues covered by the three-year strategy of the Bank are:
Retail - Continued focus on the expansion of retail activity by recruitment new customers, concurrent with
customer retention and expansion of activity with existing customers, while fostering the customers' loyalty,
by the way of integrated marketing moves, unique product development, focusing on domains in which it's
possible to accelerate the growth rate and leveraging of upgraded infrastructure of direct channels. Another
focus was put on preserving the mortgage portfolio volume, considering the markets' condition, limitation of
the risk-weighted assets and the spread and concurrently on detection of potential domains for increasing
the volume of consumer credit, in appropriate spreads, directly, and through joint ventures with financial
factors. In addition, emphasis was placed on building ongoing processes for increasing awareness and
strengthening the brand status.
Commercial Credit – Maintaining the activity level in the core sectors and the enhancement of activity in
the rest of the sectors, alongside detecting additional potential domains, 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 while expanding the advised customers infrastructure and
increasing the activity among existing customers, including through expansion and leverage of consulting
activity, use of advanced trading systems, and increasing the existing product portfolio, subject to the
regulatory requirements and the condition of the market. .
Liquidity and dispersing of depositors – Continued improvement of the structure of the resources and
treatment of the concentration of the depositors while extending the average duration by raising retail
deposits and reducing the dependence on large depositors, in accordance with the regulatory directives and
the board of directors limitations for an effective management of the liquidity risk in the changing market
conditions.
Continued integration of corporate governance rules based on Basel rules, with emphasis on risk
management and control processes.
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Continued establishment of the Banks' reputation and the positioning of its status, especially among the
retail customer segment.
The work plan for 2013 is derived from the aforesaid three-year strategic plan. The objectives of the work plan
are based, among other factors, on the requirements for gradual increase of the capital ratio over the coming
years, and on the derived capital planning for 2013; for details, see the section "Capital Adequacy." For details
regarding the main points in the Banks' work plan, see 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 continued slowdown in growth; 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.
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. (**) 21.65%
Yeshayahu Landau Properties (1998) Ltd
David Lubinski Properties (Holdings) 1993 Ltd. (**)
3.12%
16.5%
Cheroudar Properties Ltd. 6.36%
Eliyahu Insurance Company Ltd. 4.20%
(*) On October 29, 2012 Shlomo Eliyahu Holdings Ltd. ceased to be part of the controlling interest of the bank
following the completion of the acquisition of control of Migdal Insurance and Financial Holdings Ltd. By
Mr. Shlomo Eliyahu through Eliyahu Insurance Company Ltd., as detailed in section "Investments in the
Bank’s Capital and Transactions in its Shares"
(**) Constitute the controlling shareholders of the Bank, broken down equally among the members.
- 26 -
Investments in the Bank's Capital and Transactions in its Shares
A. On October 29, 2012, the Bank received a message on behalf of Shlomo Eliyahu Holdings Ltd. (hereinafter:
"Eliyahu Holdings") and Eliyahu Insurance Company Ltd. (hereinafter together with Eliyahu Holdings: "Eliyahu
Group"), according to which, the acquisition of control of Migdal Insurance and Financial Holdings Ltd.
(hereinafter: "Migdal"; hereinafter: "Migdal acquisition") was completed on 29.10.2012 by Eliyahu Insurance
Company Ltd. (controlled by Mr. Shlomo Eliyahu).
After the acquisition of Migdal, the following became valid:
1) The non-circular deed of trust and deed of permission to the trustee Mr. Boaz Okon (a retired judge)
(hereinafter: "the trustee"), signed by the Eliyahu Group on 23.10.2012 (hereinafter: "deed of trust"),
2) The agreement signed on 23.10.2012 between Eliyahu Holdings and Yeshayahu Landau Holdings
(1993) Ltd. (hereinafter: "Landau Holdings") and David Lubinski Properties (Holdings) 1993 Ltd.
(hereinafter: Lubinsky Holdings"; hereinafter: "the agreement");
3) The permit to hold the Bank, given by the Bank of Israels' governor to Mr. Shlomo Eliyahu and Mrs.
Chaya Eliyahu on 23.10.2012 (hereinafter: "the permit to hold the Bank's controlling interest");
4) The Banks' revised control permit, given by the Bank of Israels' governor to Mrs. Ruth Manor and
Dr.Yael Almog and to Mr. Yeshayahu Landau and Mrs. Devorah Landau on 23.10.2012 (hereinafter:
"The Banks' revised control permit").
According to the deed of trust and to the agreement, Mr. Shlomo Eliyahu (who controls the Eliyahu Group) entered
into an agreement (by himself and/or by corporations in his control) to purchase the controlling interest of Migdal
which controls Migdal Insurance Company Ltd.(hereinafter: Migdal Insurance) which is an "insurer corporation"
which controls directly and indirectly "management companies" (meaning provident and pension funds) and "the
manager of a mutual trust fund" (meaning mutual fund manager), among other entities. In light of the directives of
the Banking (Licensing) Law 1981, prohibiting entity that controls a banking corporation to hold more than 5% of
any particular type of means of control in a "management company" or in a "mutual fund manager" and shall not
hold more than 10% of any particular type of means of control in another corporation that controls one of the
foregoing (hereinafter: "the directives of the Banking (Licensing) Law"), the completion of the acquisition of
Migdal required Mr. Shlomo Eliyahu and Mrs.Chaya Eliyahu to retire from the Banks' controlling interest and to
receive "a permit to hold a controlling interest" in the Bank from the governor of the Bank of Israel.
Therefore, according to the deed of trust, the agreement and the maintenance and control permit mentioned above,
as of the completion of the acquisition of Migdal (hereinafter: "the effective date"), the Eliyahu Group ceased to be
a party to the controlling and voting agreements system between the controlling shareholders of the Bank.
Furthermore, as of the effective date, and due to the retirement of Eliyahu Holdings from the agreements system
between the controlling shareholders of the Bank, the following directives apply:
1. Regarding the Eliyahu Group shares that were deposited in accounts in the name of the trustee on 1.8.2012,
and in total 27.12% of the Banks' issued share capital and paid-up share capital (hereinafter: the Eliyahu
Groups' Bank shares), the deed of trusts' terms, attached to the Banks' immediate report from 24.10.2012
(reference 2012-01-262731) will apply.
- 27 -
2. Eliyahu Holdings will cease to be a party to the control arrangements between the controlling shareholders
of the Bank in the framework of the agreements system among controlling shareholders. Eliyahu Holdings'
rights, according to the agreements system among controlling shareholders of the Bank are considered
"frozen" regarding all intents and purposes, and it won't be possible to activate them and/or to make any
use of them, all, subject to the terms and directives listed in the deed of trust and in the agreement. Without
diminishing the aforesaid, during the trust periods (as detailed below and as defined in the deed of trust),
the Eliyahu Group and/or the trustee:
a. Will not participate or vote in the general meetings of the Bank or in the separate meetings by
virtue of the shares of the trust, that will be held by the trustee from time to time. And
b. Will not suggest any candidates for Union Banks' Board of Directors, but the Eliyahu Groul
companies will be entitled to receive any dividends distributed by the Bank, and to receive
apposition for the sale of the shares in the trust.
3. As of the effective date, the instructions of the Banks' revised control permit apply and refer only to
individuals controlling Landau Holdings and Lubinski Holdings (and not to individuals controlling the
Eliyahu Group), when the continuation of the Eliyahu Groups' holding of Union Banks' means of control,
is by virtue of "permit to hold the Banks' means of control", as described above.
4. Landau Holdings and Lubinski Holdings, increased their share in the Banks' controlling interest shares, as
defined in the agreement and in the deed of trust, (Landau Holdings on one hand and Lubinski Holdings on
the other hand, in equal shares between them) by turning part of their free shares, as defined in the
agreement and in the deed of trust for controlling shares, while the controlling interest, as of the effective
date, is 33% (thirty three from one hundred), of the Banks' issued share capital and paid-up share capital, in
a manner in which Landau Holdings, on one hand, and Lubinski Holdings, on the other hand, hold 16.5%
(sixteen and a half from one hundred) of the Banks' issued share capital and paid-up share capital, each, and
all as detailed in the deed of trust, in the agreement and in the revised control permit of the Bank. Despite
the aforesaid, it should be noted that according to the amendment of the Banks' revised control permit, Dr.
Yael Almog and Mrs. Ruth Manor through Lubinski Holdings and Yeshayahu Landau and Mrs. Devorah
Landau through Landau Holdings, are each entitled to pledge (Dr. Yael Almog and Mrs. Ruth Manor
together and Mrs. Devorah Landau and Yeshayahu Landau together) no more than 2.5% of any kind of
means of control of the Bank, held by them which is part of the controlling share, and it's permitted to agree
to the unlimited sale of all or part of the means of control, as part of the process of realizing the pledge (and
subject to repurchasing the sold shares within 3 years, as aforesaid, so that Lubinski Holdings' and/or
Landau Holdings' holding rate, will return to 16.5%). The revised control permit also states that the total
cumulative holdings of the members of the Banks' control group must not exceed 61% of the Banks' means
of control (the holding rates are of the Banks' issued share capital and paid-up share capital, without
considering the freezing of part of the privileges in the Banks' shares held by the Eliyahu Group).
Furthermore, according to the permit to hold the Bank's controlling interest, Mr. Shlomo Eliyahu and Mrs. Chaya
Eliyahu were permitted to hold together 32.12% of the Banks' means of control of any kind, up to 27.12% of which
(hereinafter: the relevant means of control) are held by the trustee according to deed of trusts' directives and up to
- 28 -
an additional 5% of any means of control of the Bank will be held indirectly by them through Migdal and/or
through corporations directly or indirectly controlled by Migdal (hereinafter: "Migdal Group").
Mr. and Mrs. Shlomo and Chaya Eliyahu are not permitted to purchase additional means of control of the Bank,
excluding a purchase through the Migdal Group within the aforesaid condition, even if their holding rate of the
means of control will be less than 27.12% for any reason whatsoever.
The relevant means of control will be sold by Mr. and Mrs. Shlomo and Chaya Eliyahu in the stock market or to an
unrelated third party, subject to receiving permission from the governor of the Bank of Israel, as required by the
law, until the end of a period of three years which began on the day in which the permit to hold the Banks' means
of control became valid (hereinafter: the first trust period"). Up to the end of an additional year, which began on the
day that the first trust period ended, all of the remaining relevant means of control that won't be sold until then, will
be sold by the trustee in the stock market or to an unrelated third party, and all in accordance with the directives of
the deed of trust.
The holders won't be permitted to commit any transaction or activity in the relevant means of control and/or won't
be permitted to grant any kind of right to a third party in connection with them, excluding selling, as aforesaid, or
encumbering, subject to receiving an approval in writing, in advance, from the Supervisor of Banks. This is in
addition to the prohibition to attend the Banks' general meetings, to use the voting rights and to suggest candidates
for the Board of Directors, as described above.
The holding permit will expire after four years from the date of commencement or at the time when the selling of
the relevant means of control is complete, whichever comes first.
It is further noted that within the framework of the agreement defined above, directives were determined regarding
the use of voting rights by the Banks' current controlling shareholders in the Banks' general meetings. See more
details in the Banks' immediate reports from 24.10.2012 (reference 2012-01-262731) and from 29.10.2012
(reference 2012-01-266469).
Following the amendment of the Bank control permit, as described above, and in order to bring Lubinski Holdings'
hold of the Banks' controlling interest to 16.5% of the Banks' issued share capital, as required by the conditions of
the Banks' revised control permit, on 29.10.2012, Cheroudar Properties Ltd. Sold 983,318 ordinary shares par
value NIS 0.01 to Lubinski Holdings, and consequently its holding rate of the Banks' shares decreased from 7.69%
to 6.36%, all as detailed in the Banks' immediate report from 30.10.2012 (reference 2012-01-266601).
B. On August 2, 2012 the Bank received a letter from the representatives of Mrs. Ruth Manor (who belongs to the
Banks' controlling group). The letter, which regards a former letter that was sent to Mrs. Manor from the
Supervisor of Banks on August 10, 2011, was referred to her by the Supervisor of Banks (See details regarding the
Supervisors' letter from August 10, 2011 in the Banks' immediate report from August 11, 2001 reference number
2011-01-237771). According to the content of the letter from August 2, 2012, Mr. Manor must operate as follows:
1) In light of the fact that during the time that has passed since the letter from August 10, 2011, all of the
proposed layouts for the separation regarding her parallel holdings of the Bank and of IDB Holdings
Ltd., a corporation that controls management companies, couldn't be realized, the Supervisor of Banks,
- 29 -
within his authority pursuant to Sections 27H and 27(A) of the Banking (Licensing) Law, 1981
(hereinafter: the Law), instructs Mrs. Manor to do the following:
1.1) To sale the means of control held by Mrs. Ruth Manor in IDB Holdings Ltd. So that no
later than September 10, 2012, her holding rate together with her relatives, according to
the definition of "relative" in the Law, including through a controlled corporation, will
not exceed 10% of any means of control. As reported to the Bank, Mrs. Ruth Manors'
holding rate of IDB Holdings Ltd. Was reduced to 10% on 3.9.2012.
1.2) To exit the controlling interest of IDB Holdings Ltd. or the controlling interest of the
Bank until August 10, 2013 (hereinafter: "the additional period").
2) The continuation of Mrs. Ruth Manors' holding and controlling, along with others, of IDB until
executing the aforesaid section 1.2, will be stipulated upon:
2.1) The 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, Izhak Zisman, Adv. will still be valid even during the
additional period, and won't be changed or cancelled, unless the approval of the
Supervisor of Banks is given in advance and in writing.
2.2) Mrs. Ruth Manor and her relatives will not be permitted to function as directors of the Bank
also in the additional period, or to appoint a director in any way. 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 (excluding an
affinity arising from the granting of power of attorney to the holder of power of attorney).
2.3) Mrs. Ruth Manor is required to submit a written report to the supervisor, immediately upon
completion of the steps in order to comply with the instructions of the letter from August 2,
2012.
The Supervisor of Banks clarified that if the allegedly opposed cross holding ceases in any way,
including sale of control of the Bank, or the exiting of Mrs. Ruth Manor from the controlling interest; or if
the corporation controlling the management companies as aforesaid, holds a rate that will bring its
indirect holding to a rate permitted by the law, the sale will be unnecessary as aforesaid. In addition, he
clarified that the conditions set in section 2 above, will continue to apply as long as the allegedly against
the law cross holding hasn't ceased, even if the additional period has ended.
Dividend Distribution
See details in note 12 b and c
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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 and the employees wages are regulated in collective labor agreements with the employees, the
banks' employees committee, the management committee and the officials committee. The wage of the Bank
employees is subject to labor agreements – see details in section "Human Capital".
Agreement to receive computer services
Regarding the agreement to receive computer services from Bank Leumi Le-Israel Ltd. From December 31,
2007, see section "Fixed Assets and Facilities" sub-section "The Banks' Computing and Information Systems" as
well as note 18.C.(4).
Indemnification of directors and senior officers
A. Letter of commitment to indemnify an officer of the Bank – for details, see Note 18.C.(14) and section
"Transaction with Controlling Shareholders" as well as the immediate report dated October 31, 2012
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 31, 2012 – see
the section “Transactions with Controlling Parties,” Paragraph D(1) and Note 18.C.(17)
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.
For more details regarding the agreements signed on July 1, 2010 with "CAL" and "Diners" see note
18.C.(5), and for more details regarding an agreement signed on February 3, 2011 with "Isracard" see
note 18.C.(6).
B. Market making – The Bank serves as a market maker for government bonds, under the State Loans
Law.
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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, from time to time (as of 2010) the Bank enters
agreements with Mimun Yashir of the Yashir (2006) Ltd. Group (hereinafter: “Mimun Yashir”). In
these agreements, the Bank purchases 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 collateral provided to secure such loansThe last agreement
signed by both sides on 7.2.2013 is valid until 31.12.2013.
See immediate reports of the Bank from 15.2.2010 (reference 2010-01-383442); 7.2.2011 (reference
2011-01-040254); 28.12.2011 (reference 2011-01-378021) and 7.2.2013 (reference 2013-01-033624).
E. For agreements related to the Bank’s overseas operations, including in foreign capital markets, see the
section “ Activity with Overseas Entities.”
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.
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
- 32 -
Regulations (Underwriting) – 2007 of an underwriting company in full control of the Bank, which is an
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.”
Within the conditions to complete the acquisition of Migdal by Eliyahu Insurance Company Ltd., on October
25, 2012 the antitrust commissioner approved the move considered as a merger in the antitrust laws, between
David Lubinski Properties (Holdings) 1993 Ltd., Cheroudar Properties Ltd., Yeshayahu Landau Holdings
(1993) Ltd.. and Union Bank of Israel Ltd. (the acquired party according to the Restrictive Trade Practices Law
1988) – See section" Investments in the Bank’s Capital and Transactions in its Shares".
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
- 33 -
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
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, see
note 18.C.(5).
Activity with Overseas Entities
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, for banks and financial
institutions according to various criteria for the assessment of risk in the activity with those.. 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.
- 34 -
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
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.
See section " Legislative Developments" regarding the letter concerning the adoption of the recommendations of the
Inter-Ministerial Committee for the regulation of custody services.
Legal Proceedings and Contingent Liabilities
See details in note 18.C.(18).
Fixed Assets and Facilities
Real estate assets by ownership and by rent
The Bank owns a number of real estate assets, which it holds himself or through its' subsidiary Igudim Ltd. (a
wholly owned subsidiary whose financial statements consolidated with those of the Bank). These assets serve the
Banks' management and the various administrative units, the subsidiaries' offices and part of its' branches. Part of
the branches operate in assets rented by the Bank (or by Igudim Ltd.) for different periods. The Banks' real estate
locations (by ownership or by rent) are operated through Igudim Ltd.
The depreciated cost of buildings and equipment as of December 31, 2012 amounted to NIS 398 million, compared
with NIS 408 million at the end of 2011. For information pertaining to the composition of the investment in
buildings and equipment, see Note 6 to the financial statements.
- 35 -
The total area of the land owned by the Bank, or rented by the Bank for its use, is approximately 33,430 sq.m. as
of December 31, 2012, 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 9,459 8,552 18,011
Headquarters (including warehouse) 7,427 3,891 11,318
Subsidiaries offices and other properties 2,652 1,449 4,101
Total 19,538 13,892 33,430 *including leasing from the Israel Land Administration. Information Systems and Information Technology at the Bank
The banking activity at the Bank is heavily reliant and dependent upon the information systems and technology
tailored to its needs.. The Bank precisely maintains the quality of the systems and their proper functioning. The
Bank, , invests extensive resources in building and adapting information systems and technologies (software,
hardware, communication etc.) which it uses for the growing needs of its activity and subject to the regulatory
requirements, as well as in managing an appropriate system of information security, in emergency preparedness
and in business continuity. The Bank regularly tracks innovations and updates in the different areas regarding
information technology, 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
Bank Leumi provides the Bank with the main computer and operation services by outsourcing – for more details
see note 18.C.(4). In addition the Bank operates independent computing systems self-developed or developed by
software houses.
The Banks' investments and expenses regarding information technology (IT) array during 2012:
a) The expenses recorded in the Profit and Loss Statement amounted to NIS 157 million, from this: NIS 25
million recorded in "Salaries and Related Expenses", NIS 47 million in "Depreciation and Amortization
Expenses" and NIS 85 million in "Other Expenses" (mainly outsourcing). Expenses allocated to profit
and loss are mainly expenses that don't add future economic benefits to the software and expenses
regarding equipment maintenance service agreements (computers, servers, terminals etc.)
b) The IT array costs that were not recoded in the Profit and Loss Statement as an expense, but recorded
during the reported year as assets in the financial report, amounted to NIS 47 million (before
depreciation), the Bank implements IAS 38 regarding Intangible Assets. Software development costs
and self-use software adjustment costs are capitalized only if the development costs are reliably
measurable, if the software is technically and commercially applicable, if future economic benefits are
expected and if the bank has sufficient intention and sources to complete the development and to use the
software. The costs that were recognized as an intangible asset include direct costs of materials, services
and employees' wages. These costs are measured at cost less accumulated depreciation and impairment
- 36 -
losses. Overhead costs that can not be attributed directly to the development of the software and
research costs are recognized as an expense with their formation. Subsequent costs regarding software
are recognized as an asset only if they increase the future economic benefits embodied in the asset for
which they were spent. The rest of the costs are charged to Profit and Loss Statement with their
formation.
c) The balance of the assets in the balance sheet regarding IT array, for the end of the reporting year,
amount to NIS 140 million – see note 6.
Framework for Activity in the IT 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 directive of the Supervisor of Banks (Directive No. 357).
As aforesaid, 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.
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 integrated in the
operational services provided by Leumi to the Bank, examinations are performed by the Bank, by Leumi and by
independent professionals.
Control actions on Leumis' activity regarding the agreement, are performed as part of the ISAE 3402 TYPE 2
process – report on controls integrated in Leumis' operational system and tests of the effectiveness of the the
controls (relating to controls on information systems' operation services in Bank Leumi given to Union Bank).
Within the framework of the AUP process (relating to tests performed within procedures agreed upon the Bank,
regarding computerization for Union Bank)..
The Bank operates additional computing 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
- 37 -
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 works regularly and continuously to upgrade the IT array, the quality and control array, the security of
information and the emergency preparedness and business continuation. Among other means, the Bank is
working in this area to provide advanced software. Hardware and communication 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 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 on the basis of cost/benefit considerations.
The Bank operates in this field while implementing quality in the work processes, in accordance with the quality
standard requirements ISO 9001:2008. Nonetheless, despite the resources that the Bank invests in this field,
since the systems are complex, it isn't possible to completely prevent the risks arising from malfunctions in
them.
On the matter of backup systems and business continuity programs see section "Risk Management" sub
section "Operational Risk"
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.
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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:
Union Investments and Enterprise (A.S.Y.) Ltd. (“ASY”) 1
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 76 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. 2), described
below. ASY’s profits (excluding the subsidiary's profits) in 2012 and 2011 were NIS 7,184 thousand and NIS
9,338 thousand, respectively, before provision for taxes; and NIS 9,410 thousand and NIS 6,300 thousand,
respectively, after provision for taxes.
Union Capital Markets and Investments Ltd. (“Union Capital Markets”)3
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.
1 The Bank holds 8,622,075 ordinary shares, par value NIS 1.00 each. On share is held by the trust company of Union Bank Ltd. 2 A.S.Y holds 20% of CuKier man & Co. Investment House Ltd. whose business is investment, banking and issuance advising. The balance of the investment in the Company as of December 31, 2012, amounts of NIS 1 million. 3 The Bank holds 1,750,002 ordinary shares, par value NIS 1.00 each. Holding through A.S.Y. (1,750,001 shares) and Union Bank
of Israel (1 share).
- 39 -
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 2012 and 2011 were NIS 162
thousand and NIS 105 thousand, respectively, before provision for tax; and NIS 118 thousand and NIS 89
thousand, respectively, after provision for tax.
Union Underwriting and Finance Ltd. ("Union Underwriting")4
A subsidiary of Union Capital Markets and Investments Ltd., engages in providing distribution and underwriting
services as defined in Securities Regulations (Underwriting) - 2007 (hereinafter - "Underwriting Regulations").
Union Underwriting 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 Union Underwriting. So far, approximately 20% of that rate, 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, of which an additional 5% have been allocated on January 1, 2012 added
to the 15% held by the company controlled by the CEO of Union Underwriting earlier.
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 Union Underwriting; 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 919 thousand in 2012, before provision for
taxes, and NIS 686 thousand after provision for taxes.
Impact Investment Portfolio Management Ltd. (“Impact Management”) 5
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 2012 and 2011
were NIS 1,282 thousand and NIS 2,599, thousand, respectively, before provision for tax; and NIS 880 thousand
and NIS 1,942 thousand, respectively, after provision for tax.
Union Bank Trust Company Ltd. (“Trust Company”)6
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). The company is negotiating with a third party for the purpose of expanding its scope of
activity in the trust field with respect to funds, joint investments in trusts and ETFs, according to the business
target of the company. Profits of the Trust Company in 2012 and 2011 were NIS 4,410 thousand and NIS 4,432
thousand, respectively, before provision for tax; and NIS 2,845 thousand and NIS 2,905 thousand, respectively,
after provision for tax.
4 The bank holds 2,550,000 ordinary shares, par value NIS 1.00 each. Held through Union Capital Markets at a rate of 75% (up until January 1, 2012, the holding rate was 85%). 5 The Bank holds 2,999,999 ordinary shares, par value NIS 1.00 each. 6 The Bank holds 9,599,999 ordinary shares, par value NIS 1.00 each.
- 40 -
Union Leasing Ltd. (“Union Leasing”)7
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, 2012 amounted to NIS 309 million, versus NIS 303 million at the end of 2011.
Profits of Union Leasing in 2012 and 2011 were NIS 11,713 thousand and NIS 10,228 thousand, respectively,
before provision for tax; and NIS 8,682 thousand and NIS 7,888 thousand, respectively, after provision for tax. Union Issuances Ltd. (“Union Issuances”)8
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 July 31, 2012, Union Issuance published a shelf offer report under a shelf prospectus of Union Issuances
from August 30, 2011 365,974 units of (Series F) bonds were issued on August 2, 2012 (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 amounted NIS 366 million.
See section "Activity of the Bank and Description of Business Developments" regarding an announcement of Midroog
from July 18, 2012.
An updated deposits agreement was signed between the Bank and the company on August 28, 2011 see the
subsection "Agreements, Transactions, and Payments between Group Companies," below.
Profit of Union Issuances in 2012 and 2011 were NIS 1,651 thousand and NIS 1,539 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”) 9
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 2012 and 2011 were NIS 9,874 thousand and NIS 10,878 thousand, respectively, before provision
for tax; and NIS 6,560 thousand and NIS 7,390 thousand, respectively, after provision for tax. Carmel does not
engage in new activities; it maintains the loan portfolio acquired by the Bank.
7 The Bank holds 999,999 ordinary shares, par value NIS 1.00 each. 8 The Bank holds 100 ordinary shares, par value NI(S 1.00 each. 9 The bank holds 11,625,041 ordinary share, par value NIS 1.00 each.
- 41 -
Igudim Insurance Agency (1995) Ltd. (“Igudim Insurance Agency”)10
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 2012 and 2011 were NIS 549 thousand and NIS 542 thousand, respectively, before
provision for tax; and NIS 454 thousand and NIS 412 thousand, respectively, after provision for tax.
Livluv Insurance Agency (1993) Ltd. (“Livluv”) 11
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”) 12)
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”)13
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”) 14
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
2012 and 2011 were NIS 732 thousand and NIS 933 thousand, respectively, before provision for tax; and NIS
1,332 thousand and NIS 611 thousand, respectively, after provision for tax. After the balance sheet date, the
Company announced a dividend of NIS 37 million.
10 The Bank holds 99 ordinary shares, par value NIS 1.00 each. 11 The Bank holds 100 ordinary shares, par value NIS 1.00 each. Holding trough Carmel Union Mortgages and Investments Ltd. (99
hares) and through a trust company of Unions Bank Ltd. (1 share) a wholly owned subsidiary. 12 The Bank holds 15,978,087 ordinary shares, par value NIS 0.0001 each. 13 The Bank holds 99 ordinary shares, par value NIS 1.00 each. 14 The Bank holds 1,699,999 ordinary shares, par value NIS 1.00 each. The mutual funds activity was sold in 2006.
- 42 -
Union Balances Ltd. (formerly Union Provident Funds Management Ltd.) (“Union Balances”)15
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 2012 and 2011 were NIS 751 thousand and
NIS 961 thousand, respectively, before provision for tax; and NIS 549 thousand and NIS 745 thousand,
respectively, after provision for tax.
Union Bank Israel Records Ltd.16
Established in 1954. At the report date, no business activity is conducted by this company.
Kikar Zion 23 Netanya Ltd.17
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. The company is in the process of
voluntary liquidation.
Ahuzat Yehuda Ltd.18
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 Company19
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 during 2012 was 6.6%, compared with 6.1% in
2011.
15 The Bank holds 850,000 ordinary shares, par value NIS 1.00 each. The provident funds activity was sold in 2006. 16 The Bank holds 98 ordinary shares, par value old Shekel) 0.0001 each. 17 The Bank holds 2 redeemable preferred shares, par value (old shekel) 0.0001 each. An additional share of the 3 existing shares of the
Company is held by Union Bank of Israel Ltd. 18 The Bank holds 1,000 ordinary shares, par value (old shekel) 0.0001 each. Held through Union Bank Ltd. (999 ordinary shares) and through
Igudim Ltd. (1 ordinary share). 19 The Bank holds 150,000 ordinary B shares, par value NIS 0.01 each.
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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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Dividends, Interest, and Management Fees Received by the Bank
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 2012 and
2011, in NIS thousands.
Name of company Dividend
Management fees and participation in
expenses Financing income
(expenses), net 2012 2011 2012 2011 2012 2011 Union Investments and Enterprise (A.S.Y.) - - 54 54 (1,145) (1,735)Union Capital Markets and Investments Ltd. * - - 12 48 (119) (141)Union Bank Trust company - - 90 90 (624) (638)Impact Union Investments Portfolios - - 90 90 (92) (99)Union Leasing - - 42 42 7,232 9,401Carmel Union Mortgages and Investments 7,390 6,985 2,701 2,683 (9,014) (10,091)Union Issuances - - 45 42 (132,006) (138,321)Union Underwriting and Finance** - - 48 48 (14) (16)Igudim Insurance Agency - - 2,978 2,927 (45) (20)Igudim Consolidated with the “solo” reports of the Bank Union Systems Consolidated with the “solo” reports of the Bank Union Balances Ltd. - - - - (772) (948)Union Finances Ltd. - - - - (756) (953)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
The Bank and Union Issuances Ltd. Signed deposit agreements which will apply to offerings of bonds
and/or notes and/or commercial securities. For details see note 18.C.16.
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:
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.
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.
Impact Management investment portfolios – It was agreed that the capital note was issued against
an amount of NIS 5 million, 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.15.
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, 2012, the Bank provided credit facilities to subsidiaries in the amount of approximately
NIS 313 million, either in the form of financing or of financial guarantees.
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Human Capital
1. Labor relations at the Bank are based on the labor constitution, collective agreements updated from time to
time, and various arrangements primarily formulated through discussions between the management of the
Bank and representatives of the employees.
2. The Bank's regular employees are divided into three categories, in functional terms as well as in terms of
the applicability of labor agreements: clerks, managers and authorized signatures, and employees under
personal contracts. Labor relations at the Bank are based on the labor constitution, collective agreements
updated from time to time, and various arrangements primarily formulated through discussions between the
management of the Bank and representatives of the employees.
The Bank's regular employees are divided into three categories, in functional terms as well as in terms of
the applicability of labor agreements: clerks, managers and authorized signatures, and employees under
personal contracts.
The principal agreements signed with the representatives of the clerks and with the representatives of the
managers and authorized signatories are summarized below:
A. Clerks
Labor relations with the clerks are based on a special collective agreement for employees of the
Bank (the "Labor Constitution"), which is updated by routine wage agreements. The Labor
Constitution was formed between the Bank and the Histadrut General Labor Federation in 1990, and
establishes the infrastructure for labor relations with the clerks, such as the procedure for hiring of
employees, workplace discipline, procedure for promotion of employees, rights to vacation and sick
days, various increments paid to employees and terms for such payments, benefits, procedures for
resignation and dismissal, severance pay, etc.
The Constitution is in effect as long as neither party gives notice of its desire to revoke or amend it.
A special collective agreement with regard to the clerks joining the Amit pension fund was signed on
August 22, 1996. Under this agreement, the Bank's payments to the pension fund starting April 1,
1995 shall replace the obligation to pay the full severance pay to which a clerk may be entitled by
law for a given period.
In addition to the foregoing, periodic agreements are formulated to address updates of clerks' wages
and related terms according to their ranks, as well as other localized issues requiring arrangement.
The Histadrut New General Labor Federation and the Labor Federation of Clerks – Bank Workers
Division are a party to all of the agreements.
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B. Managers and authorized signatories
Labor relations with managers and authorized signatories are organized in a special collective
agreement from 1979, which links the wage terms of the managers and authorized signatories to the
wage terms of managers and authorized signatories at Bank Leumi (hereinafter: the "Implementation
Agreement"). The Implementation Agreement also refers to managers' and authorized signatories'
right to choose, when they reach retirement age and have accumulated 15 years of work at the Bank
(or, in the event of disability or death, 5 years of work at the Bank), between receiving severance pay
and the savings in the compensation fund or receiving a pension from the Bank.
Pursuant to a special collective agreement of February 24, 1997, the insurance benefits of managers
and authorized signatories at the Bank were transferred to the pension fund Amit, as of April 1,
1995, as was also done for the clerks, as noted above. This agreement organizes the pension rights of
long-standing managers and authorized signatories, according to the terms at Bank Leumi, integrated
with the pension from Amit. Pension rights of new managers and authorized signatories are
accumulated at Amit only. The agreement also states that payments to Amit in respect of new
managers and authorized signatories replace the payment of full severance pay to such managers and
authorized signatories.
In addition to the foregoing, agreements on localized issues are executed from time to time.
In February 2011, Bank Leumi LeIsrael 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 salary terms for this group to the salary
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 addressed three main areas: In the area of management – the "executive track" ranks
were 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.
C. Employees under personal contracts
The chairperson of the board of directors, the chief executive officer, all members of management,
and other employees have personal employment contracts with the Bank.
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Details regarding developments in manpower are set out below:
Employee positions* as of December 31
Average annual number of positions*
2012 2011 2012 2011 The Bank 1,248 1,237 1,248 1,219
Consolidated companies 36 37 36 37
**1,284 **1,274 1,284 1,256 * Position - A full-time position including specific overtime, working hours of contractors and others.
** Of which, managers and authorized signatories, as of December 31, 2012 - 266 (December 31, 2011 - 253).
In 2012, 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 3 million in 2012.
Training focused on the following main areas in 2012: Compliance and enforcement, 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
business customers; and training sessions on various regulatory issues.
There is an ethical code in the Bank which was formulated 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.
In 2012 the bank continued the 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.
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.
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Pursuant to the Plan, relevant employees will be permitted to declare, within a specified timeframe (from
May 8, 2012 through June 10, 2012, as determined in the first quarter of 2012), 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).
The Banks' managements' first assessment was that approximately 40 employees will retire within the
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, was estimated at
approximately NIS 50 million. This estimated cost was reflected in the financial statements of 2011.
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.
In 2012 additional expenses of approximately NIS 20 million were included in the profit and loss
statement, in respect of the expansion of the retirement plan for additional employees. In total, within the
program 66 employees are expected to retire, most of which retired during 2012, and the rest are expected
to retire during 2013. For details see immediate reports of the Bank from February 27, 2012 (reference
2012-01-052683) and from June 28, 2012 (reference 2012-01-170274).
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.
See further detail in section "Critical Accounting Policies", sub-section "Employee rights" and in note
15.A.5.
The Bank implements a remuneration policy subject to salary agreements applicable to the Bank and
subject to agreements with the employees and the managers of the Bank. This policy is 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.
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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.
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On April 29, 2012, following approval by the audit committee on April 24, 2012, and following the
recommendation of the committee on remuneration of the board of directors (an ed-hoc committee that
consists of external directors and independent external directors which was appointed in order to determine
remuneration for the Banks' senior officers), and following the recommendation of the salary and benefits
committee, the board of directors of the Bank approved that the long-term bonus plan for the senior
executives of the Bank: the chairman of the Board of Directors (subject to the approval of the general
meeting), the chief executive officer, the members of management, the legal advisor, and the internal
auditor of the Bank (a total of 10 managers) ("the bonus program"), as was approved on April 10, 2011 by
the board of directors regarding 2010-2011, shall apply to 2012-2013 as well. Note that when the bonus
program was approved for 2010-2011, the Banks' board of directors decided that the bonus program would
be re-examined after its implementation in 2010-2011. The re-examination would examine the total extent
of the bonus, the remuneration steps, the different parameters and the weight that each parameter was
given, among other things. According to that, the board of directors' remuneration committee, which
formulated the program to begin with, re-examined the bonus program after its implementation in 2010-
2011 and recommended to extend the program and apply it to 2012-2013. On June 11, 2012 the Banks'
general meeting decided to approve the application of the bonus program from 2010-2011 on to 2012-2013
in respect to the chairman of the board of directors, Mr. Zeev Abeles. For further details, including the
rationales for the approving of the program for 2012-2013, see the Banks' immediate report from April 30,
2012 (reference 2012-01-110784). In addition, see the Banks' immediate report from April 11, 2011
(reference 2011-01-116199) regarding the detailed terms of the bonus program, the manner in which the
program was approved and the explanations of the board of directors and its committees for the approval of
the program.
Amendment 20 of the Companies Law (conditions of service and employment in public companies and in
bonds) see section "Legislative Developments".
See note 15.E.3. regarding the amendment of the employment conditions of the Chairman of the Banks' Board
of Directors, Mr. Zeev Abeles. Also for further details regarding the overall employment conditions of the
Chairman of the Banks' Board of Directors (including a bonus in respect of 2011 as was approved in the
Banks' general meeting on June 11, 2012) and for details regarding the main reasons for the updates see the
Banks' immediate report from April 30, 2012 (reference 2012-01-110784).
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."
See details in note 15.F. regarding the disagreement between the board and the authorized signatories
and the Bank regarding the unfunded pension calculation formula.
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
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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 2012 and 2011, as well as details of the
change in "amounts funded" in the same years.
Change in current value of actuarial liabilities - 2012 (NIS millions)
Pensions and surplus
compensation Jubilee bonuses Total Current value of liability, Jan. 1, 2012 184.4 23.4 207.8
Current service cost(1) 9.8 2.6 12.4
Financial expenses(2) 16.9 1.1 18.0
Net benefits paid (including benefits expected to be paid)(3) (31.2) (1.1) (32.3)
Expected return on program assets(4) (7.5) - (7.5)
Net actuarial loss (profit)(5) 15.4 1.3 16.7 Current value of liability, Dec. 31, 2012 187.8 27.3 215.1 Change in current value of actuarial - 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
(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. The main decrease in 2012 compared to 2011 arises from the implications of the retirement program and the change in the retirement policy.
(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. The main decrease in 2012 compared to 2011 arises from the implications of the retirement program and the change in the retirement policy.
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(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 payments that were paid and that are expected to be paid in respect of the retirement program (in 2011 an estimation of the expected payments was included) - 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.
(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. The main decrease in 2012 compared to 2011 arises from the implications of the retirement program and the change in the retirement policy.
(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). Most of the losses in 2012 resulted from the expansion of the retirement program for other employees. In 2012 the effect of the update of the mortality tables, which amounted to NIS 3 million (see note 1.C.(4)) and the effect of the 1% increase in the payroll tax rate which amounted to NIS 4 million (see note 28.C.) were also included. On the other hand, profit from the increase in value of the programs' assets beyond the expected yield was included.
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Change in amounts funded for the year ended December 31, 2012 (in NIS millions)
2012 2011
Opening balance 95 101
Deposits *- *-
Withdrawals (12) (1)
Profit (loss)** 7 (5) 90 95 * 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. For details regarding an audit performed by the Israel Tax Authority (VAT Audit Department)
at a subsidiary of the bank, Union Systems Ltd. and regarding the decision of the Israel Tax
Authority to change the classification of the company from "business" to "financial institution"
– see note 18.C.(19).
B. For details regarding the VAT rate from August 2012 and its effect on the Bank see note 28.C.
C. The Bank has final tax assessments up to, and including, the tax year 2010. Its consolidated
companies have final tax assessments (or assessment considered to be final) up to, and
including, the tax years 2007-2008.
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. On March 2010 the Employment Hiring Incentives to Restore Act law was legislated. Its
objective is to encourage employment in the U.S.A. The fourth chapter of the law is Foreign
Account Tax Compliance Act (FATCA) which broadens the existing reporting requirement
within the QI (Qualified Intermediary) arrangement that exists today. The regulations that
regulate the implementation of the law were published on January 2013 whilst the beginning
of the implementation of the law is January 2014 and gradually. The law and the regulations
apply to Foreign Financial Institutions (FFI's), including Israeli banks, and they contain
documentation reporting and tax deduction requirements in connection with a "financial
- 56 -
account" of whomever is defined as a U.S. Person. These clients will be asked to sign the
required documentation within the framework of the law and the regulations and in case of a
refusal, the financial institution will be required to deduct withholding tax to those account
holders, regarding the assets entrusted in their accounts in his institution, and that are defined in
the law and regulations as assets of a U.S. source. The relevant factors in the Bank study and
monitor developments in the law and regulations within the Banks' preparations for the
implementation of the law and regulations.
F. For additional information regarding the Bank's policy for recording taxes and the provision for
taxes, see Notes 1.E.10 and 28 to the financial statements.
Description of the Bank's Business by Activity Segments
The characterization of the segments is derived mainly from the customers line of business. 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:1
Private segment - provides banking services and financial products to households and people who are financially
secure, including investment consulting services, including housing financing activity and credit financing for
vehicles. In addition, the segment includes small businesses, 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 - whilst the core sectors that the sector specializes in are
construction and real estate (with an emphasis on escorting residential construction) and clients who are active
in 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 – This segment coordinates all of the Banks' assets and liabilities management in
NIS and in foreign currency. The segment includes the Bank’s activity for itself in securities (in the available for
sale portfolio and the trading portfolio) and in derivative financial instruments, including interest and currency
positions. Also, on this segment, costs arising from the need to maintain business liquidity level and an adequate
level of dispersion of the depositors, which are expressed by a gap in transfer prices between credits and deposits,
are loaded.
1 Note that due to the fact that every bank classifies its customers according to different parameters and allocates income
and expenses to segments according to different parameters, when comparing between different banks, this issue must
be addressed and the comparison should be performed with due caution, according to the aforesaid.
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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:
Net interest income – In segments in which activity focuses on customers, this item includes a financial spread on
customers’ loans and deposits. The spread is calculated against a transitional price determined for each loan and
deposit, according to average duration, to relevant type of linkage and according to the consideration of the Bank's
strategic objectives. This item also includes risk-free interest on capital calculated on the basis of the risk-weighted
assets associated with each segment. In the Financial Management segment, this item includes income from interest
in respect of bonds and expenses arising from the need to maintain a business liquidity level and an adequate level
of dispersion of the depositors, which are expressed by a gap in transfer prices between credits and deposits
Non-interest income – are attributed to the segment to which the customer belongs. In the Financial Management
segment this item includes: income (expenses) in respect of fair value of derivative instruments (as required by the
accounting rules), income from the Banks' actions in derivatives for himself, income from realization and
adjustment of bonds and income from realization and adjustments of shares.
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 that can be identified with a specific segment are attributed to that
segment. The rest of the expenses are classified to the different segments according to an allocation methodology
based on 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, with the exception of certain cases in which specific attributions can be made.
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-weighted
assets of each segment (according to the directives of the Bank of Israel in accordance with the 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.
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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
2012 **2011 Segment NIS millions Private customers 32 31
Corporate 88 123
Diamonds 10 16
Financial management (3) (38)
Others and Adjustments - *- Total 127 132
B. Total Assets (Average Balance) for the year ended December 31
2012 **2011 Segment NIS millions Private Customers 8,651 8,002
Corporate 13,672 13,322
Diamonds 1,419 1,394
Financial Management 13,429 13,203
Others and adjustments 1,304 1,193 Total 38,475 37,113
* Less than NIS 500 thousand.
** Reclassified.
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Private Segment
Segment Structure
The Private Segment of the Bank
provides banking services and financial products including advisory services to all households and financially wealthy
private customers, including retail and private banking and housing finance activity. The segment also includes small
businesses which are managed in the Retail Division (until December 31, 2011 with total indebtedness of up to NIS 400
thousand and as of January 1, 2012 up to NIS 500 thousand).
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, securities
investments, deposits, structured products, credit including credit for vehicles, 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 regarding private customers and small businesses.
Objectives and Business Strategy
According to the strategic plan for 2013-2015, 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, considering the state of the market, the risk-weighted assets limitations and the spread.
The following activities and objectives are planned for 2013:
To continue consolidating the status and positioning of the Bank and strengthening the awareness to him in the
retail field.
To increase the weight of the Banks' retail customers while maximizing the revenue potential compared to the
risk-weighted assets, while continuing to develop and improve the branch layout.
To expand activity in the area of the various client asset ("passiva") products, including with the aim of
increasing diversification in the resources domain and to extend the average duration, while improving the
Banks' spreads, and to expand the advised customer infrastructure and to intensify the activity among the capital
market activists and thus, to expand income sources that don't consume risk-weighted assets. .
To expand the volume of retail credit, with an emphasis on loans backed by collateral, while maintaining the
planned limit on risk-weighted assets, by means including the expansion and creation of collaborations in credit
projects (see also section "Material Agreements" regarding the Banks' engagement with "Mimun Yashir").
To maintain the volume of the mortgage portfolio, maintaining level of spreads, and strengthening the
connection of mortgage product clients with other banking products.
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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 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.
In accordance with the recommendation of the Trachtenberg Committee, the Committee for Increasing Competition
was appointed by the Governor of the Bank of Israel and the Minister of Finance in December 2011. The
committee's conclusions included recommendations for increasing competition in the banking system, particularly
in the area of banking services for small businesses and households, with the aim of increasing competition over
households' short-term savings, improving the ability to compare terms with regard to securities activity, increasing
fairness, and providing bank customers with more extensive and accessible information regarding the fees collected
from the public. As part of the measures aimed at implementing the committee's recommendations, the Banking Rules were
amended in November 2012. For details, see the section "Legislative Updates," including with regard to the
amendment of the Banking Rules (Service to Customers) (Fees) (Amendment), 2012.
The adoption of the committee's recommendations should reduce barriers to customers' transition from bank to
bank, and improve information available regarding potential customers, thereby improving the infrastructure for
competition among banks in areas in which the committee believes it is insufficient. However, the Bank's revenues
may be impaired due to the imposition of supervision over fees and the reduction of rates or cancellation of existing
fees.
In addition, see the section "Legislative Updates" with regard to the letter of the Supervisor of Banks concerning
restriction of the financing rate of housing loans, of November 2012, and the draft update of guidelines concerning
residential real estate of February 2013.
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Developments in the segment's markets
The slowdown in economic growth in Israel continued during 2012. The growth in 2013 is expected to be
affected mainly by the moderate global growth and the need to maintain a restrained fiscal policy (see also
section "Economic Developments"). The trade in the financial markets was characterized by a reduction in cycles but
concurrently by an increase in indices and an increase in the publics' part in the capital market. In light of the negative
trend in the global economy and the forecasts regarding the continuation of the trend, and in order to give additional
support to the economic activity in the absence of inflationary pressures, since the beginning of the year, the Bank of
Israel adopted a slow and gradual policy of lowering the interest rate by a total of 1 percentage points to a level of 1.75%
at the end of January 2013. This process negatively affects the Banks' spreads from deposits.
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.
Technological Changes with a Potential Material Effect on the Segment
In 2012, the Bank continued the implementation of advanced IT systems related to most of its core banking
activities in order to improve processes with customers and reduce paperwork at the branches. During 2013, the
Bank expects to continue building advanced infrastructures to integrate additional applications to address
advanced services and sale processes while deepening direct channel solutions.
Additional tools were added to the customer relationship management system during 2012, to improve and
streamline sales processes in order to reduce the transition barriers to the Bank. During 2013 the use of the
system will be expanded as an operational tool to support the various aspects of customer care (recruitment,
expansion of activity and conservation), and in addition the integration of the system with the mortgage system
will continue.
The expansion of the range of services offered by the Bank through direct channels is expected to continue also
in 2013 with the integration of the marketing campaign system into the website. In addition, during 2013, a
closed system for depositing deposits is expected to available for use subject to regulatory restrictions and
economic viability.
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.
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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.
● Competitive prices.
● 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.
As mentioned above, the implementation of the recommendations of the competitiveness increasing team will
begin during 2013. This move is expected to increase the services provided in a non-banking framework,
especially regarding financial services given to small businesses and households, as well as improving small
banks' ability to compete.
Structure of competition in the segment
Competition in the private customers segment has grown in recent years and it's mainly due to the competition
between the banks and non-bank entities, (insurance companies, investment house etc.) which offer retail
products, as mentioned above. Steps taken by the various entities include the opening of new branches and
providing varied benefits and the expansion of services given in the direct channels among other things as a
means to increase access and availability to 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. The assessment is that this trend will intensify during 2013 also
as a result of the implementation of the competitiveness increasing team whose objective is to ease customers'
transition barriers between banks, to improve the existing information regarding potential clients and to increase
the competitive infrastructure between the banks, which two of them hold the main market share.
During the last years the Bank has been using 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.
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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 and households:
Branch deployment - The bank continues to implement the branch policy.
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 professional solutions to the full
range of customers’ needs, In providing service to customers in this sector, special emphasis is placed on forging
close long-term relationships. Customer Focus project - In 2012, the Bank continued the development and implementation of customer
relationship management system which is a significant element in supporting the sales and marketing
processes. In this framework, a campaign system that enables to provide marketing offers to the customer,
at a telephone or frontal request, was implemented. The Bank continues to thicken the sales, maintenance
and service processes, further to the implementation of the service tracking surveys routine, which is one
of the tools used to examine the level of service and its improvement. In addition, various controls are
implemented and computerized tools are developed in order to help focus on the target population that was
defined in the work plan. Websites and trading systems – During 2012 the marketing support continued the assimilation and the
expansion of the digital banking web and mobile services, concurrently to the continued upgrading of the
trade infrastructure. In 2013, more applications will be implemented alongside the use of the existing
digital infrastructure (websites, cellular and trading systems) as an additional tool for strengthening loyalty
and recruiting customers, in part by increasing usability.
Products development
The Bank develops and markets innovative products in the different areas of banking activity for private
customers, including the area of deposits allowing the customers to diversify investments and spread risks.
The Bank is continuing a large-scale effort to recruit private customers. As part of this drive, the Bank
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started a new process of recruiting new customers, at the center of this process is a "Reverse Account"
which offers clients who join Union Bank to enjoy preferred conditions in the management of their account
during the benefit period. Concurrently, the implementation of the benefits package for existing clients,
which includes banking benefits in the current account management for those who transfer their salary to
the Bank, is continuing. The Bank believes that the "Reverse Account" package gives an optimal solution
for the needs of the salary receiving clients: exemption from compulsory interest, automatic credit interest,
high interest rates on deposits and exemption from the main current account fees – clerk fee and direct
channel fee. The benefits are given to new clients who transfer their salary to the Bank. The "Free
Account" track enables old clients to enjoy 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. This process is unique and addresses the core activity of the private client with the Bank and
constitutes another step in the implementation of the Banks' business strategy.
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, the degree of success of the Bank in realizing its intra-organizational plans and the implementing
of the technological systems.
Marketing and Distribution
In 2012, 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 2013, 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 and accessibility of the Bank's services.
Marketing is performed through advertising in various media: 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, 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 2012, 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, all while increasing
efficiency and optimum utilization of human resources. The Bank plans to continue this development during
2013, while striving to improve the service and the availability to customers and as backup for branches during
an emergency.
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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.
Human Capital
Ongoing training and instruction are provided in the areas of sales, marketing, and service, as well as in other
professional fields.
In 2012, 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 2012, the average number of employee positions was 611; the cost of these positions was charged to the segment.
In 2013, the Bank intends to continue the establishment of the human capital infrastructure, with an emphasis
on its streamlining and reclamation, in part as a result of the implemented retirement program (for details see
section "Human Capital"), while concurrently, developing the administrative reserve data base.
Legal Proceedings
For further details regarding legal proceedings related to private clients and housing-finance activity in particular, 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, 2012 for the year ended December 31, 2011* Private Business Household Total Private Business Household Total Customers Checking(1) Financing Customers Checking(1) Financing NIS million NIS million Net interest income: - From outsiders 178 27 77 282 172 29 67 268 - Inter-segment - - - - - - - -
Non-interest income: - From outsiders 99 15 13 127 105 16 15 136 - Inter-segment 1 - - 1 2 - - 2 Total income 278 42 90 410 279 45 82 406 Provision for credit losses 4 3 3 10 5 3 5 13 Operating and other expenses - From outsiders 261 36 65 362 255 39 63 357 - Inter-segment - - - - - - - -
Profit before taxes 13 3 22 38 19 3 14 36 Provision for taxes on profit 2 1 3 6 3 **- 2 5 Net profit 11 2 19 32 16 3 12 31
Return on equity 4.3% 6.0% 8.8% 6.3% 7.8% 10.3% 6.4% 7.1% Average balance of assets 1,464 294 6,893 8,651 1,370 93 6,539 8,002 Average balance of liabilities 14,355 1,677 291 16,323 12,784 2,740 245 15,769 Average balance of risk-weighted assets 3,051 395 2,573 6,019 2,550 360 2,337 5,247 Average balance of securities 8,483 3,324 - 11,807 7,907 3,411 - 11,318 Average balance of managed securities 246 - - 246 308 - - 308 Net interest income: Margin from credit granting activities 57 6 68 131 54 6 59 119 Margin from deposit granting activities 127 13 - 140 128 16 - 144 Other (6) 8 9 11 (10) 7 8 5 Total net interest income 178 27 77 282 172 29 67 268
* The comparative figures were reclassified due to the implementation of the directives of the Supervisor of Bank concerning the format for statements of profit and loss. For details see note 1.C.5.A. ** Less than NIS 500 thousand (In 2011 - less than NIS 400 thousand). (1) Business customers having frameworks of up to NIS 500 thousand (In 2011 - up to NIS 400 thousand).
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Changes in the Volume of Activity and Net Profit of the Segment
Net profit totaled NIS 32 million in 2012, compared with NIS 31 million in 2011. Net return of profit on equity
was 6.3% in 2012, compared with 7.1% in 2011.
The segment’s revenues totaled NIS 410 million in 2012, compared with NIS 406 million in 2011, an increase of
approximately 1%.
Net interest income totaled NIS 282 million, versus NIS 268 million, an increase of approximately 5.2%, which
mainly resulted from an increase in interest income in the area of credit, mainly as a result of an increase in
volumes and an increase in spreads. The non-interest income totaled NIS 128 million compared with NIS 138
million in 2011. The decrease is mainly a result of a decrease in the income from security related fees, due to
low trading volumes in the markets.
The expenses totaled NIS 362 million, versus NIS 357 million in 2011, an increase of approximately 1.4%.
Provision for credit losses totaled NIS 10 million in 2012, compared with NIS 13 million in 2011. The rate of the
provision for taxes in 2012 was 15.8% compared with 13.8% in 2011.
The average volume of segment liabilities (primarily deposits from the public) totaled approximately NIS 16.3 billion in
2012, compared with approximately NIS 15.8 billion in 2011. The average volume of segment assets (primarily credit to
the public) totaled approximately NIS 8.7 billion in 2012, compared with approximately NIS 8.0 billion in 2011.
Household financing -the net profit totaled NIS 19 million in 2012, compared with NIS 12 million in 2011. Revenues
totaled NIS 90 million in 2012, compared with NIS 82 million in 2011, an increase of approximately 9.8%, 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 spread. Oppositely there was an increase of approximately 3.2% in the expenses. The
provision for credit losses in 2012 totaled NIS 3 million compared with approximately NIS 5 million in 2011.
The balance of balance-sheet credit in housing loans totaled approximately NIS 6.9 billion on December 31,
2012 (including mortgage to buying groups), an increase of approximately 6.6%, versus December 31, 2011.
Total new loans granted in 2012 amounted to approximately NIS 1,605 million, compared with NIS 1,752 million in
2011.
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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 2012 2011 NIS millions
Bank funds 1,487 1,641
Finance Ministry funds 2 2
Standing loans *- *- Total new loans 1,489 1,643
Refinanced loans 116 109 Total loans granted 1,605 1,752
* 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.
Private customers - net profit totaled NIS 11 million in 2012, versus NIS 16 million in 2011. The income
totaled NIS 278 million in 2012, versus NIS 279 in 2011, while at the same time there was an increase in
interest income, mainly due to an increase in credit and deposits volume and an increase in the credit spread
which was partly offset by a decrease in the deposits spread. In contrast, a decrease in non-interest income was
recorded, due to a decrease in the income from security related fees, as mentioned above. Concurrently, there
was an increase of expenses at the rate of approximately 2.4%. .
Provision for credit losses totaled approximately NIS 4 million, versus approximately NIS 5 million in 2011.
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Corporate Segment
Segment Structure
The Bank's business segment 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 500,000 (up until 31.12.2011 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) and customers engaged in the capital market.
The segment also includes subsidiaries' activities regarding business customers (including trust services for funds).
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.
Objectives and Business Strategy
Within its strategic plan for 2013-2015, the Bank intends to continue to maintain the activity level of its core sectors
and to deepen its activity in the other sectors while identifying additional potential fields, , including through
collaborations with other entities, while maintaining the high quality of the credit portfolio and increasing its
diversification, both in sectorial terms and in terms of borrower size. Concurrently, the Bank will ensure the
connection between returns and the totality of risks arising from the various activities, while maintaining the limit
on risk-weighted 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 2013:
To adjust the volume of the business credit portfolio and its composition, in order to comply with the
risk appetite and risk tolerance that were determined, including the capital objectives set, while adapting
the risk margin to the client.
To continue to specialize in core areas, while expanding into additional business sectors, in order to
reduce sectorial concentration and borrower concentration, among other reasons, while maintaining the
high quality of the credit portfolio.
To implement the credit policy and to adjust it to the updated regulatory requirements.
To continue to improve and streamline the work processes based on the restructuring of the division. To
continue to improve the management and control of rating processes.
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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 exceeds the rate of 10% of the bank capital, 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. In addition the permitted credit rate is limited in each sector of the economy relative to
the Bank's total 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 sensitive to exogenous
changes, such as: the global and local growth rate, crises in sectors, changes in 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 etc.
The volume of activity in this segment is also affected by the Banks' capital objectives and capital planning (for
details see section "Capital Adequacy") and also by the risk appetite and risk capacity (for details see section
"Risk Exposure and Management"), as established by the board of directors of the Bank.
During 2012 the organizational change in the business division continued. The change is meant to improve the
approval processes, the management and control of the Banks' credit and to support the updating of authority
regarding credit approval, as approved by the Board of Directors of the Bank, in part, following the
implementation of the amendment to Proper Conduct of Banking Business Directive No. 301, "The Board of
Directors" (regarding the involvement of a banking corporations' Board of Directors in the approval of credit).
The implementation of the credit policy, updating of rules, indices, the parameters and other processes regarding
the approval of credit, for managing credit processes and for controlling it in the Bank, will continue in 2013.
For further legislative restrictions - see details at the section "Legislation Updates".
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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 continued slowdown in the global growth during 2012 took its toll also on the slowdown in the
growth of the Israeli economy as reflected in the key economic parameters, including the increase rate in GDP,
private consumption, fixed-asset investments, exports of goods and services, concurrently to the depreciation of
the Shekel against the US dollar. . As a result, the macro-economic forecasts by the Bank of Israel was updated
for 2013, according to which, the GDP growth will stand on 3%. For further details see section "Economic
Developments".
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.
A continuous process of improvement and reclamation of the information systems exists in the Bank. Its objective is to
improve the service, while allowing a tighter management option of the risk-weighted assets in the credit field and
tracking the adjustment of the credit spread and the return on risk-weighted assets. Within this framework, a new system
for ranking borrowers was also implemented in the branches.
The Bank is in the process of examination, characterization and development of tools for the utilization of the business
potential by examining the correlation between the ranking, spread and total yield from the customer. During 2013 an
assimilation, improvement of tools and upgrading of additional systems that are meant to support control and regulation
processes, are expected.
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. An absorption and assimilation of a new control system meant to
improve the tracking, the supervision and the control of the activity of these customers, is expected during 2013.
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. For additional details see section "Economic Developments"
sub-section "The Capital Market".
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. In 2012 there was a reduction in the supply of the business
credit, in light of the banking systems' preparation for the future implementation of the Basel III rules and the
required increase in the capital targets and the risk-weighted assets (for details see section "Capital Adequacy"
sub-section "Basel III"). Against this background an increase was created in the interest margins, and this trend
is expected to continue in 2013.
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.
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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. During the year the joint operation of the business division and the marketing system has
continued in order to recruit new business clients in various areas of activity, with an emphasis on non-core
sectors, in order to increase diversification. The activity has focused on the achievement of three main
objectives:
To recruit new business clients, which aren't from the core sectors;
To expand the activity among the target populations that were determined;
To expand activity with existing clients identified as having potential for such expansion.
Human Capital
In 2012, the average number of employee positions in the segment was 495; Employees regularly receive
appropriate professional training at the Bank, including training in business areas as well as 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 business 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 to the business segment clients and the Trust Company, 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, 2012 for the year ended December 31, 2011* Businesses Construction Capital Total Businesses Construction Capital Total & Real estate(1) Market (2) & Real estate(1) Market (2) NIS Million NIS Million Net interest income: - From outsiders 223 88 44 355 200 83 58 341 - Inter-segment - - - - - - - - Non-interest income: - From outsiders 64 33 36 133 67 38 38 143 - Inter-segment 3 - 23 26 3 - 19 22 Total income 290 121 103 514 270 121 115 506 Provision for credit losses 19 (8) 41 52 2 8 2 12 Operating and other expenses: - From outsiders 227 66 64 357 219 66 67 352 - Inter-segment - - - - - - - - Profit before taxes 44 63 (2) 105 49 47 46 142 Provision for taxes on profit 7 10 **- 17 6 6 7 19 Net profit 37 53 (2) 88 43 41 39 123
Return on equity 5.6% 14.4% (1.2%) 7.5% 6.8% 10.5% 20.8% 10.2% Average balance of assets 8,193 3,347 2,133 13,673 7,922 3,113 2,286 13,321 Average balance of liabilities 8,809 2,153 6,173 17,135 8,181 2,220 6,239 16,640 Average balance of risk-weighted assets 8,138 4,388 1,968 14,494 7,795 4,882 2,317 14,934 Average balance of securities 4,089 906 28,804 33,799 3,993 1,205 24,468 29,666 Average balance of managed securities - - 258 258 - - 338 338 Net interest income: Margin from credit granting activities 175 78 21 274 156 70 30 256 Margin from deposit granting activities 37 9 19 65 31 10 19 60 Other 11 1 4 16 13 3 9 25 Total net interest income 223 88 44 355 200 83 58 341 * The comparative figures were reclassified due to the implementation of the directives of the Supervisor of Bank concerning the format for statements of profit and loss. For details see note
1.C.5.A. ** 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 profit totaled NIS 88 million in 2012, compared with NIS 123 million in 2011. Net return of profit
on equity was 7.5% in 2012, compared with 10.2% in 2011.
The segment’s revenues totaled NIS 514 million in 2012, compared with NIS 506 million in 2011, an
increase of 1.6%. Net interest income totaled NIS 355 million, versus NIS 341 million in 2011, an
increase of approximately 4.1%, which resulted from an increase in interest income in the area of
credit and deposits, mainly as a result of an increase in credit margins, as mentioned below.
Non-interest income totaled NIS 159 million, compared with NIS 165 million in 2011 the decrease is
mainly as a result of a decrease in fees income on securities, due to low trading turnovers in the
markets. The segment's expenses totaled NIS 357 million in 2012, compared with NIS 352 million in 2011,
an increase of approximately 1.4%,
Provision for credit losses (net less collections) totaled NIS 52 million in 2012 (from this a provision of NIS
41 million in respect of one client) , compared with NIS 12 million in 2011. The rate of provision for taxes in
2012 was 16.2% compared with 13.4% in 2011.
The average balance of assets in the segment (primarily credit to the public) totaled NIS 13.7 billion in 2012,
compared with NIS 13.3 billion in 2011. The average balance of liabilities in the segment (primarily deposits
from the public) totaled NIS 17.1 billion in 2012, compared with NIS 16.6 billion in 2011.
Customers that operating in the construction and real-estate sector - net profit from activity in the
construction and real-estate sector totaled NIS 53 million in 2012, compared with NIS 41 million in 2011.
Revenues totaled NIS 121 million in 2012, similar to 2011. Interest income totaled NIS 88 million in 2012,
compared with NIS 83 million in 2011, mainly as a result of an increase in the credit margin which was
partially offset by a decrease in volume. In contrast, a decrease in non-interest income was recorded as a result
of a decrease in project escorting fees, due to a decrease in the number of projects that the Bank escorts
compared with the corresponding period. The expenses remained the same as the previous year. In 2012 a
negative expense was recorded regarding credit losses in the amount of NIS 8 million compared with
expenses in the amount of NIS 8 million in 2011.
Balance-sheet credit for construction and real estate totaled NIS 3.4 billion on December 31, 2012, compared
with NIS 3.3 billion on December 31, 2011 (except for credit to buying groups). The balance of guarantying
totaled NIS 1.9 billion on December 31, 2012, compared with NIS 2.2 billion on December 31, 2011.
The Bank routinely monitors the condition of credit in general, and the credit condition in the real-estate
industry in particular. The Banks' management holds quarterly discussions regarding escorting real estate
projects in an extensive professional forum headed by the CEO. In these discussions all of the Banks'
escorting projects are reviewed on an individual basis with an emphasis on the status of the projects from the
sales and the project stages aspect, fulfillment of the forecast and the exposure condition. Projects, which the
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parameters that require tracking exist in them, are transmitted to the Monitored Borrowers Committee for
discussion and are reported in the Board of Directors' various committees.
Customers that that are active in the capital market sector - In 2012 a loss of NIS 2 million was
recorded, compared with a net profit of NIS 39 million in 2011. The transition to loss is mainly a result of the
registration of a provision for credit losses in the amount of NIS 41 million, in respect of a single client
compared with only NIS 2 million in the corresponding period. The segment's revenues totaled NIS 103
million, compared with 115 million in 2011, a decrease of 10.4%. The decrease is mainly a result of a
decrease in interest income as a result of a decrease in credit income.
The expenses totaled NIS 64 million, versus NIS 67 million in 2011, a decrease of approximately 4.5%,
mainly due to a decrease in expenses related to customers' activity in securities.
Other corporate customers - net profit totaled NIS 37 million in 2012, compared with NIS 43 million in
2011. The segment's revenues totaled NIS 290 million compared with NIS 270 million in 2011, an increase of
approximately 7.4% mainly as a result of an increase in interest income, mainly due to the increase in credit
margins. On the other hand, there was an increase in expenses at the rate of 3.7%. In 2012 provision for credit
losses amounted to NIS 19 million, compared with NIS 2 million in 2011.
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.
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, and with regard to foreign currency
funding sources.
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 2012, 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.
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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 2012, a decrease in the activity cycles of the industry was recorded, as prices of both raw and
polished diamonds decreased, 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 slowly and gradually increase in 2013 and simultaneously a similar
increase in prices will occur.
The decrease 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 decreased by
approximately 21.3% and 19.7% respectively, as compared to 2011.
Part of the information in this section is forward-looking information, as defined in the Securities Law,
which is based in part on the import and export data in the diamond industry during 2012, on the
relevant macro-economic estimates of the worlds' International Monetary Fund (IMF) and the global
economic recovery, and on the estimates of the business entities according to the Banks' accumulated
experience in this area. This information may not materialize, in full or in part, or may materialize in a
manner materially different than expected if material changes in the macro-economic conditions
occur.
The decrease in the global activity in this industry is expressed also in the activity of the Israeli
diamond industry so that in the annual summary, so that compared with 2011, there was a decrease at
the rate of 18.3% in exports and 19.9% in imports of raw and polished diamonds.
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.
Acquaintance with the client and a long-term experience with working with him.
● 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.
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Alternatives to the segment's products and services and changes thereto
There are no non-bank credit alternatives in the segment.
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 2012 assumed to
be in the amount of USD 1.5 billion, compared with USD 1.6 billion at the end of 2011. The Bank’s
share in credit to the diamond industry, out of total credit in the banking system, is 25% at the end of
2012, similar to the end of 2011.
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 was determined by the
Bank's board of directors in a respect of the segment's composition of the Bank's credit portfolio and
the cost of foreign currency sources. As of the end of December 2012, the rate of total credit for
diamonds out of total credit at the Bank was approximately 3.2%, versus approximately 5.2% in
December 2011.
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 2012, the average number of employee positions in the segment was 53; 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.
The workers who specialize in this area receive appropriate training, as well as on business and regulatory
issues as detailed in the Business Segment above.
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Changes in the Volume of Activity and Net Profit of the Segment
Net profit totaled NIS 10 million in 2012, compared with NIS 16 million in 2011. Net return of profit on
equity was 9.4% in 2012, compared with 14.0% in 2011.
The segment’s revenues totaled NIS 52 million in 2012, compared with NIS 55 million in 2011. The decrease
is mainly a result of a decrease in import and export fees and from foreign currency fees, due to a decline in
the activity of the industry. 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 2012 provision for credit losses was
recorded, and totaled NIS 3 million compared with NIS 2 million in 2011.
The segment's expenses totaled approximately NIS 36 million compared with NIS 35 million in 2011.
The rate of provision for taxes rate in 2012 was 15.4% compared with 11.1% in 2011.
Balance-sheet credit for diamonds totaled NIS 1.2 billion on December 31, 2012, compared with, NIS 1.3
billion on December 31, 2011. Off-balance sheet credit risk totaled NIS 0.7 billion on December 31, 2012,
compared with NIS 1.0 billion on December 31, 2011.
Financial Management Segment
Segment Structure
This segment centralizes all asset and liability management at the Bank, in local and foreign currency. The
segment includes the Banks' activity in securities for itself (in the available for sale portfolio and the trading
portfolio) and in derivative financial instruments. On the other hand, costs are loaded on this segment. These
costs arise from the need to maintain an appropriate business liquidity level and a dispersing level of the
depositors, which are expressed, among other ways, by a gap in transfer prices between credits and deposits.
The segment also includes the activity of deposits in conjunction with banks, market making, market
exposures and liquidity management and the activity of the subsidiary Union Investments and Enterprises
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 2013:
To continue managing, examining and current tracking of the concentration level while
increasing the dispersing of depositors.
To continue 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
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reference to preparation of future implementation of the Basel III directives and the required
changes for implementation following the 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 and creating a long-term income anchor, while
complying with the risk appetite and risk tolerance determined by the Board of Directors..
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'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
In 2012 the worlds' capital markets started to recover and as of the second half of the year this trend
was also evident in the local market, in light of, among other things, the process in which the Bank of
Israel lowered the interest rate throughout the year. Aside of all of this the local trade volumes still
remained at a low level. For details see section "Economic Developments" sub section "The Capital
Market"
Regarding foreign currency, the global economic crisis caused the 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".
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Technological Changes with a Potential Material Effect on the Segment
During 2012, liquidity command and control systems were improved; during 2013, the development
of management and control mechanisms is expected to continue. In addition, during 2013 more
changes will be made to the securities trading and clearing systems.
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
● Recruitment and training of suitable personnel.
● 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.
As a consequence of the economic and financial crisis of 2008, which exposed the vulnerability of the
global economy in general and of the US economy in particular to systemic risks arising from failures of
risk management at financial institutions, the G20 countries reached an agreement to carry out a wide-
ranging reform of the global derivatives market, aimed at increasing transparency and supervision over
this activity. The reform is part of the more general Dodd Frank reform addressing the activity of the US
banking system. The reform is slated to take effect in the US, incrementally, starting in the second half of
2013. The formulation of the reform, specifically the part concerned with derivatives, has not yet been
completed; substantial lack of clarity still exists with regard to some areas.
As the Bank's derivatives activity is primarily conducted with entities in Europe, the implementation of
the reform in the US is not expected to have any immediate impact.
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Human Capital
In 2012, the average number of employee positions in the segment was 69; 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 2013 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 is signed on most of these
agreements with the banks he works with and 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 big
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. On January 16, 2013 the
Supervisor of Banks announced the adoptions of recommendations of the international committee for
regulating custody services that were published on January 2012 in order to determine basic norms in
this area of activity. For further details see section "Legislative Developments".
Changes in the volume of activity and net profit of the segment
A loss of approximately NIS 3 million was recorded in 2012, compared with a loss of
approximately NIS 38 million in 2011.
Income increased by NIS 41 million, mainly due to the increase in profit from realization and value
adjustment of bonds.
The effect of the adjustment of derivative financial instruments at fair value (as required by GAAP)
caused expenses at the amount of NIS 13 million in 2012 compared with NIS 22 million in 2011.
The average balance of the Bank's securities totaled approximately NIS 5.3 billion in 2012, compared
with NIS 4.9 billion in 2011.
Amounts not allotted and adjustments
The segment includes activities that cannot be classified to any specific segment. These amounts are
negligible – in 2012 all of the Banks' income was allocated to the various activity segments and in 2011
amounted to a negligible amount lower than NIS 500 thousand.
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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 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, as adopted by the Bank of Israel, permit three approaches to the allocation
of capital in respect of credit risks: the standardized approach, and two internal ratings-based
approaches: fundamental (FIRB) and advanced (AIRB).
In the standardized 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 standardized 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 standardized approach in the
area of credit risk and market risk, and the basic indicator approach for operational risks.
The Basel II directives are 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 standardized 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 for establishing the appropriateness of the 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, and capital management. The ICAAP is integrated into the Bank’s three-year strategy
for 2013-2015 and in its work plan for 2013.
As part of the implementation process, according to the instructions of the Supervisor of Banks, a draft
ICAAP report based on consolidated data as at the end of 2011 was submitted to the Bank of Israel in
April, 2012. 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 October 28, 2012,
the Bank of Israel issued a letter addressing this report and a letter addressing the SREP. The Bank
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will address the topics raised in the letter in its ICAAP document, to be submitted to the Supervisor of
Banks by April 30, 2013, based on the financial statements as at December 31, 2012.
The disclosure policy under Pillar III is discussed and approved by the management and board of
directors of the Bank once a year. This policy includes a reference 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
84-85
Structure of capital
Terms and conditions of capital instruments
Board of directors’ report
Capital adequacy
The capital ratio according to Basel II 90-91
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 91
Risk exposure and assessment
Risk management policy for each separate risk area
Board of directors’ report
Exposure to risks and risk management
104
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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
107
Credit risk Portfolios handled according to the standardized approach
Board of directors’ report
Capital adequacy
Basel II
92
Credit risk mitigation (CRM)
Board of directors’ report
Capital adequacy
Credit risk in the standardized approach
99
Counterparty credit risk
Board of directors’ report
Capital adequacy
Credit risk in the standardized approach
98
Market risk General qualitative disclosure
Board of directors’ report
Exposure to risks and risk management
Market risks
125
Operational risk General qualitative disclosure,
Board of directors’ report
Exposure to risks and risk management
Operational risk
141 including the use of insurance to risk mitigation
Shares in the
General qualitative disclosure
Board of directors’ report
Exposure to risks and risk management
Positions in shares in the banking book
136
banking book Accounting policy for valuation
Board of directors’ report
Critical accounting policies and estimates
Investments in non-financial corporations
171
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 131
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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 90-91
capital of capital structure
Financial statement
Note 13 – Minimum capital ratio
342
Capital adequacy
Risk-weighted assets and capital requirements
Board of directors’ report
Capital adequacy
The capital ratio according to Basel II
90-91
Credit risk
Total exposures and average exposure
Board of directors’ report
Capital adequacy
Credit risk in the standardized approach
94
Portfolio distribution by counterparty / remaining contractual period for redemption
Board of directors’ report
Capital adequacy
Credit risk risk in the standardized approach
93-94
Portfolio distribution by geographical region
Financial Statements
Appendix F – Management Review
250
Iinformation regarding problematic debts
Board of directors’ report
Development of assets and liabilities
16
Credit risk mitigation in the standardized approach
Board of directors’ report
Capital adequacy
Credit risk in the standardized approach
98-99
Counterparty credit risk
Board of directors’ report
Capital adequacy
Credit risk in the standardized approach
98-99
Market risk Capital requirement
Board of directors’ report
Capital adequacy
The capital ratio according to Basel II
90-91
Shares in the banking book
Balance of investment, including capital requirement
Board of directors’ report
Capital adequacy
Credit risk in the standardized approach
101
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 130
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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 of exposures, an expansion of risk management methods, and more.
On November 30, 2011, the Supervisor of Banks issued a draft translation of the original document "A
global regulatory framework for more resilient banks and banking systems" (hereinafter: "Basel III").
On May 28, 2012, the Supervisor of Banks issued an additional document entitled "Basel III – the
position of the Supervisor of Banks," which contains clarifications regarding the implementation of
Basel III in Israel. Based on these documents, as well as on documents concerning the additions to
Basel II (the addition was defined by the Bank of Israel as the "Basel 2.5" directive), on June 15, 2012,
the Bank submitted a Quantitative Impact Study (QIS) based on data as of December 31, 2011,
examining the quantitative impact of the implementation of the new directives.
On December 30, 2012, the Bank of Israel issued an additional draft of Directive 202, "Supervisory
Capital," and of the transitional directives for 2013-2018. The draft sets forth the capital-adequacy
requirements for the banking system, and states that banking corporations in Israel are required to
maintain a minimum Tier 1 capital ratio of 9% (in Basel III terms) by January 1, 2015. This ratio
includes a capital conservation buffer at a rate of 2.5%, as defined in Basel III. Large banking
corporations whose total consolidated balance-sheet assets constitute at least 20% of the total balance-
sheet assets in the banking system in Israel will be required to maintain a minimum core capital ratio
of 10% by January 1, 2017. This requirement will replace the current requirement for a minimum core
capital ratio of 7.5% (in Basel II terms). The Bank of Israel is also examining the need to establish a
minimum Tier 1 capital ratio, to be implemented in the future. Note that the implementation of some
parts of the directive is still unclear. This publication postponed the inception of the directive to an
unknown date. The Bank's work plan for 2013 was based on the assumption that the Basel III
directives would take effect on January 1, 2013, as stated in earlier publications.
The Basel III directives also refer to the various capital components, including debt instruments
recognized in the capital base. The new guidelines include additional minimum requirements,
according to which capital instruments included in Tier 1 or Tier 2 capital will include a mechanism
for the absorption of losses whereby conversion to shares will be performed under certain conditions.
These changes in definitions will cause debt instruments currently recognized not to be recognized
under the Basel III directives. Under the transitional directives, the nominal balance of capital notes
recognized on the transition date will be fixed, and will serve as the ceiling for recognition of these
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capital instruments. This ceiling will be reduced by 10% annually, starting at the inception date of the
directive.
According to calculations based on the Bank's understanding of the aforesaid directives, the Tier 1
capital ratio that would have been obtained as of December 31, 2012, under Basel III is 8.75%. This
ratio was mainly influenced by the addition of risk-weighted assets required in the directives and by
the large positive capital reserve generated by adjustments in respect of the presentation of securities
available for sale at fair value. Excluding the effects of the capital reserve, the Tier 1 capital ratio
would be 8.45%.
Capital Adequacy Targets
In March 2012, during the discussions of the Bank's ICAAP document, the board of directors
determined that the core capital ratio would stand at 8.25%-8.39% (in Basel II terms) at the end of
2012, 8.60%-8.75% (in Basel III terms) at the end of 2013, and 9.10%-9.25% (in Basel III terms) at
the end of 2014.
In October 2012, during the discussions of the strategic plan for 2013-2015, the board of directors
resolved that the core capital ratio would stand at 9.10%-9.25% in 2015. This ratio is higher than the
supervisory requirement specified in Directive 202 of December 31, 2012, as noted above. In addition,
it was resolved that the target total capital ratio in 2013-2015 would be no lower than 13%, and the
core capital ratio under extreme scenarios would be in the range of 6.00%-6.50%.
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.
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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, 2012
December 31, 2011
Tier I capital 2,117 1,986
Tier II capital1 1,537 1,408
Tier III capital2 - - Total capital 3,654 3,394 Credit risk assets2 22,494 22,664
Market risk assets 213 208
Operational risk assets 1,751 1,680 Total risk-weighted assets 24,458 24,552
1 For more details, see Note 13.
2. 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, 2012 December 31, 2011
Risk-weighted assets
Capital requirements (9%)
Risk-weighted assets
Capital requirements (9%)
Credit risk Sovereign debt 65 6 135 12 Debts of public sector entities 209 19 213 19 Debts of banking corporations 857 77 880 79 Debts of corporations1 16,053 1,445 16,675 1,501 Debts secured by commercial real estate 418 37 275 25 Retail exposure to individuals 1,532 138 1,273 115 Small businesses 2 85 7 78 7 Housing mortgages 2,509 226 2,344 211 Other assets 766 69 791 71
22,494 2,024 22,664 2,040 Market risks
Interest-rate risk 86 8 92 9 Share risk 49 4 57 5 Foreign currency exchange rate risk 70 6 46 4 Option risk 8 1 13 1
213 19 208 19 Operational risk 1,751 157 1,680 151
Total risk-weighted assets in respect of the different risks 24,458 2,201 24,552 2,210 Total capital base 3,654 3,394 Ratio of overall capital to risk components 14.94% 13.82% Ratio of tier I capital to risk components 8.66% 8.09%
1. Prior to deduction of a general allowance totaling NIS 52 million.
2. Small businesses managed by the Retail Division (until 12.31.2011 with total indebtedness of up to NIS 400
thousand and as of 1.1. 2012 up to NIS 500 thousand).
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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, 2012, deferred capital notes totaling NIS 375 million.
Lower tier II capital - As at December 31, 2012, subordinated notes totaling NIS 1,058 million,
distributed as follows:
1. Marketable subordinated notes in the amount of NIS 985 million issued in several series by Union
Issuances.
2. Non-marketable subordinated notes in the amount of NIS 73 million issued in several series by
the Bank.
These notes have been approved in the past by the Supervisor of Banks for inclusion in the tier II
capital of the Bank. See reference to the approval of the Bank of Israel of the deferred capital notes
issued on July 2011 in the chapter "Activities of Investee Companies" sub-chapter "Union Issuances
Ltd." Also see reference to the effects of the application of Basel III directives in sub-chapter "Basel
III" previously mentioned.
Credit Risk in the Standardized 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 standardized approach. Concentration of credit risk and collateral, as well as the credit quality risk
are estimated within the Tier II.
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 "Critical Accounting Policies and Estimates".
In order to meet pillar I of Basel II directives according to the standardized 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 maturity:
As at December 31, 2012
Less than 1
year
More than 1 year less
than 5 years More than 5
years1 Total NIS millions Credit and deposits with banks and government 19,543 4,222 8,192 31,957
Securities2 908 1,475 2,080 4,463
Derivative financial instruments3 222 19 40 281
Unutilized credit facilities 7,613 1,289 31 8,933
Other off-balance sheet exposures4 1,323 309 2,078 3,710
Other assets 624 - 398 1,022
Total 30,233 7,314 12,819 50,366 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 17,730 4,169 8,060 29,959
Securities2 1,254 1,300 3,051 5,605
Derivative financial instruments3 292 64 214 570
Unutilized credit facilities 7,184 1,900 31 9,115
Other off-balance sheet exposures4 1,398 265 2,291 3,954
Other assets 629 - 408 1,037
Total 28,487 7,698 14,055 50,240
* Exposure in terms of recorded debt balance, meaning after accounting write-offs and before allowance for credit losses.
1. Including balances with no repayment period .
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. As calculated according to Appendix C of Proper Conduct of Banking Business Directive 203.
4. Including customers' activity in the Maof market that does not meet the definition of a derivative.
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The following is the distribution of exposures* of the portfolio by products and counter-party:
As at December 31, 2012 Credit1 Securities2 Derivatives3 Unutilized Other off- Other assets Gross credit Average gross
credit balance sheet exposure credit facilities exposures4
exposure5 NIS Million Sovereignties 7,223 2,687 - - - - 9,910 9,278 Public sector entities 129 292 2 80 26 - 529 494 Banking corporations 1,173 878 165 - 62 - 2,278 2,325 Corporations 14,226 606 114 7,343 3,524 - 25,813 26,476 Secured commercial real-estate 629 - - - 21 - 650 479 Individual retail 1,830 - - 1,049 45 - 2,924 2,805 Small businesses 94 - - 125 32 - 251 248 Housing mortgages 6,653 - - 336 - - 6,989 6,774 Other assets - - - - - 1,022 1,022 1,013 Total 31,957 4,463 281 8,933 3,710 1,022 50,366 49,892
As at December 31, 2011 Credit1 Securities2 Derivatives2 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
* Exposure in terms of recorded debt balance, meaning after accounting write-offs and before allowance for credit losses.
1. Including credit to the public, deposits with banks and government deposits.
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
The credit risk regarding transactions in derivative financial instruments presented in terms of credit equivalent (after the netting effect and multiplication by Add-on)
3. Including customers' activity in the Maof market that does not meet the definition of a derivative.
5. Quarterly average for the period.
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Set out below is the credit exposure*1 according to the standardized approach by weights of risk (in NIS millions):
As at December 31, 2012
0% 20% 35% 50% 75% 100% 150%,2 Total Sovereignties 9,584 326 - - - - - 9,910 Public sector entities - - - 529 - - - 529 Banking corporations - 1,008 - 1,264 - 6 - 2,278 Corporations - - - - - 25,397 133 25,530 Secured commercial real-estate - - - - - 649 - 649 Individual retail - - - - 2,403 508 3 2,914 Small businesses - - - - 248 1 1 250 Housing mortgages - - 6,331 - 486 132 1 6,950 Other assets 262 - - - - 748 12 1,022 Total before credit risk mitigation 9,846 1,334 6,331 1,793 3,137 27,441 150 50,032
Credit risk mitigation 36 60 - (27) (202) (3,334) (28) (3,495) Total after credit risk mitigation 9,882 1,394 6,331 1,766 2,935 24,107 122 46,537
As at December 31, 2011 0% 20% 35% 50% 75% 100% 150% Total Sovereignties 8,698 675 - - - - - 9,373 Public sector entities - - - 456 - - - 456 Banking corporations - 1,362 - 1,176 - 10 - 2,548 Corporations - - - - - 26,667 172 26,839 Secured commercial veal-estate - - - - - 317 - 317 Individual retail - - - - 2,278 304 6 2,588 Small businesses - - - - 226 - - 226 Housing mortgages - - 6,060 - 398 82 - 6,540 Other assets 252 - - - - 772 13 1,037 Total before credit risk mitigation 8,950 2,037 6,060 1,632 2,902 28,152 191 49,924
Credit risk mitigation - 43 - (2) (220) (3,597) (1) (3,777)
Total after credit risk mitigation 8,950 2,080 6,060 1,630 2,682 24,555 190 46,147
* Exposure after accounting write-offs and before allowance for credit losses
1. Not including the portfolio held for trading. Presentation of derivative financial instruments according to the standardized approach, before multiplying by conversion coefficients of off-balance-sheet exposures.
2. Including loans in arrears of 90 days or more, or investments in hedge/ venture-capital/ private equity funds (see also subsection "shares in the banking book" in this chapter).
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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 pledged 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; the 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 pledged
security, 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 is implemented by the Bank , 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 other
cases, 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
pledge, 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 mitigation 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, 2012
Total gross exposure
Total exposure covered by subtracted guaranties1
Total added amounts1
Total exposure covered by eligible financial collateral2
Net total exposure
NIS millions Sovereign debts 9,910 - 36 - 9,946
Debts of public sector entities 529 (36) - (6) 487
Debts of banking corporations 2,278 - 75 - 2,353
Debts of corporations 25,530 (73) - (3,063) 22,394
Debts secured by commercial real estate 649 (2) - (223) 424
Retail exposure to individuals 2,914 - - (166) 2,748
Small businesses 3 250 - - (37) 213
Housing mortgages 6,950 - - - 6,950
Other assets 1,022 - - - 1,022 Total 50,032 (111) 111 (3,495) 46,537
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As at December 31, 2011
Total gross exposure
Total exposure covered by reducted guaranties1
Total added amounts1
Total exposure covered by eligible financial collateral2
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 businesses3 226 - - (30) 196
Housing mortgages 6,540 - - - 6,540
Other assets 1,037 - - - 1,037 Total 49,924 (48) 48 (3,777) 46,147
* Exposure after accounting write-offs, less provision for credit losses and before converting off-balance sheet
components to credit.
1. The amount of exposure covered by guarantees transferred to the counterparty that gave the guarantee.
2. After multiplication by safety coefficients (haircuts), including positive adjustments added to the exposure.
3. Small businesses with obligo which does not exceed NIS 400 million that are managed as part of the retail
department
Counterparty credit risk - The Bank is exposed to credit risk, resulting from a market risk of the
counterparty, as a result of the activity of its customers in over-the-counter derivatives and stock-
exchange derivatives (for further details, see the section “Risk Exposure and 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 on data from 31.12.2011 and
according to the operation of general scenarios that take into account the joint variability of the various
underlying assets in foreign currency and the counterpartys' position composition. According to the
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exposure of the counterparty in these scenarios, the additional capital allocation, regarding this risk,
was defined.
The following table lists counterparty credit risk exposures under the standardized approach.
As of December 31, 2012
As of December 31, 2011
NIS millions NIS millions Positive gross fair value 306 680
Par value (after conversion to credit) 265 310
Deduction offsetting benefits 290 420 Total credit exposures after offsetting 281 570 Deducting collateral:
Cash and deposits 40 113
Government bonds - 1
Shares (including convertible bonds) 15 9 Total credit derivatives (par value) 226 447
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The following table lists counterparty credit risk exposures arising from the sale or purchase of credit
protections:
As of December 31, 2012 As of December 31, 2011 Protections
purchased Protections sold
Protections purchased
Protections sold
NIS millions NIS millions Alm:
Credit linked notes (CLN) / credit default swaps (CDS) - *131 - *134
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) - *131 - *134 * Arising from CLN (Credit Linked Note) only, in which protection was sold against risk of the state of
Israel.
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Offsetting - As at December 31, 2012, the volume of balance-sheet offsets (offsets between assets and
liabilities) is immaterial (similarly to December 31, 2011).
Shares in the banking book - The Bank has holdings in shares in the banking book, as detailed in the
section “Risk Exposure and Management” The following are the positions in shares in the banking
book:
As at December 31, 2012 As at December 31, 2011 Balance-
sheet balance Fair value
Capital requirements (9%)
Balance-sheet balance Fair value
Capital requirements (9%)
NIS millions NIS millions
Shares 64 64 6 73 73 7
Index certificates on shares - - - - - -
Index certificates on index funds - - - - - -
Hedge funds/venture-capital funds/private-equity funds - - - - - -
Others - - - - - - Traded by the public 64 64 6 73 73 7 Shares 15 15 1 17 17 2
Index certificates on shares - - - - - -
Index certificates on index funds - - - - - -
Hedge funds/venture-capital funds/private-equity funds1 20 20 2 35 35 4
Others2 1 1 - 1 1 - Private holdings3 36 36 3 53 53 6
1. 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.
2. Investment in an equity-basis investee company in the amount of NIS 1 million.
3. Non-tradable
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Capital Planning
Capital planning for 2013 was established within the discussions of the work plan for 2013 held by the
Board of Directors in late December 2012. The annual capital planning is derived from capital targets
established in the three-year strategic plan for 2013-2015 (for further details, see the subsection
"Capital Adequacy Targets").
Capital planning for 2013 was mainly influenced by the following parameters:
- An increase in the capital targets of the Bank, as determined by the board of directors, and in
accordance with the draft of Directive 202 specifying capital-adequacy requirements for the
banking system under Basel III.
- An increase in the Bank's risk-weighted assets as a result of the implementation of the Basel III
directives, arising from two main items: deferred taxes are weighted at 250% under the draft
Basel III directives, versus 100% under Basel II; and the group allowance is included in Tier 2
capital, versus inclusion in risk-weighted assets.
- An increase in Tier 1 capital due to an expected increase in the retained earnings item.
- An increase in Tier 2 capital as a result of the inclusion of the group allowance (which is higher
than the general allowance, which until the implementation of the Basel III directives is part of
capital), concurrently with a decrease in notes, due to the reduction of the ceiling for recognition
of notes by 10% annually, starting on the inception date of the Basel III directives (when the
notes will be recognized at 90% of their value).
- The assumption that there will be no need for the issuance of Tier 2 capital recognized under
Basel III during 2013 (see details in the subsection "Basel III" above).
On December 30, 2012, the Supervisor of Banks issued another draft of the Basel III directives, in
which the definition of "loans in arrears" was expanded to include loans classified as impaired debt not
accruing interest income. This change is also expected to increase the Bank's risk-weighted assets.
The capital planning described above indicates that following the implementation of the Basel III
directives, which were planned to take effect on January 1, 2013, and the expected increase in core
capital ratios as a result of the directives of the Supervisor of Banks, the Bank will not be able to
increase the volume of its risk-weighted assets. In order to minimize the impact of the implementation
on its business operations, the Bank plans to continue the process of optimizing the ratio of exposures
to risk-weighted assets (reducing credit facilities and increasing recognized collateral).
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In addition, the Bank has prepared a plan for the reduction of risk-weighted assets, which may be
necessary in order to cope with possible changes, as a result of the potential effects of economic
conditions on the Bank's capital base (profitability and capital reserve), as well as regulatory
uncertainty arising from possible effects that are uncertain at this stage, including in connection with
new accounting directives that may be adopted, and which may have a material effect on future capital
planning.
On February 18, 2013, the Supervisor of Banks issued a draft update of the instructions concerning
residential real estate, including stricter risk weighting in respect of housing loans with a financing rate
of more than 45% and eased credit conversion coefficients for guarantees under the Sale Law
following the transfer of the home to the buyer; see details in the section "Legislative Developments"
As noted, in October 2012 the board of directors adopted a three-year business strategy for 2013-2015,
which included a discussion of key guidelines for capital planning for those years (also see the
subsection "Capital Adequacy Targets"). The full three-year capital planning for 2013-2015 will be
determined in the discussions of the ICAAP document as at December 31, 2012. This process will also
encompass an examination of the Bank's compliance with the capital targets under extreme scenarios.
The Bank measures its capital-adequacy ratios, risk-weighted assets, and capital base on a monthly
basis in the capital planning forum headed by the CEO, members of which include senior executives
of the Bank. The forum convenes at least once each month, with the aim of efficiently managing risk-
weighted assets. A summary of the forum's discussions is reported to management and to the board of
directors. In addition, each quarter, a test is performed of compliance with capital targets under an
extreme scenario defined by the board of directors of the Bank as part of the ICAAP.
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.
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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, compliance 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, and compliance with risk appetite and tolerance set by the board of directors. For this, suitable
operating report systems and control and monitoring mechanisms are operated.
Corporate Governance
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 strategy and business policy, and guides the Bank's
Management 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 definition of risk appetite and
risk tolerance, and in additional specific policy documents. The racking of the development of risks is
done by the ICAAP document and the quarterly exposures document.
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 different exposures 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.
The first line of defense of Risk managers and generators of exposures are separate from the second
line of defense of 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 the exposure
to 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 Environmental risks and credit concentration risk are managed by the Head of
the Corporate Division, Mrs. Shevy 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 Press-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
Bank’s investments in corporate bonds, as well as of credit risks in respect of countries and banks
and clearing risks.
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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. On December
2012, the Bank of Israel published Proper Conduct of Banking Business Directive No. 310 "Risk
Management'. This directive defines in detail, differently than the current definition, the role and the
responsibility of the Chief Risk Officer. The Bank is prepared to implement the directive. (See an
expansion of the subject in section '"Legislative Developments ").
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.
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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.
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.
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:
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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. Within the credit authority, limits were established regarding the amount of credit
without collateral that any person in authority may approve.
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 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 contains 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.
- As part of the Bank's preparations for the implementation of this directive, during 2011
and 2012, 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.
Concurrently, in order to reduce the board of directors' involvement in the fluent credit
management, the Board of directors' means of control and supervision of the Banks' credit
portfolio were increased by the thickening of the array of reports to them concerning this
matter. Executive-level processes were also changed in order to increase their supervision.
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
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 (see details in item
treatment of problematic credit and debt collection further on).
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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..
Credit risk in housing loans
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 in this type of credit, 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. 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, business criterias,
limits, and mortgage pricing from time to time. n.
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.
Control tools and risk management – include detailed definitions of the components of risk
management and their control, determining risk appetite and risk tolerance to the different
activity components, implementation of automated systems that support the branch level and
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the headquarters level, designated training activity and a reporting and monitoring format in
all levels of the Bank.
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, loan-to-value
ratio (LTV) and the borrower's ability to comply with the terms of the transaction. These
criteria take into account regulative instructions and market conditions that vary from time to
time.
Within the credit application process, parameters which are established and updated from time
to time are examined, as well as compliance with regulatory restrictions, 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
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,
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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
extreme 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, 2012, 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 tolerance to the economic environment in
which the Bank operates and by addressing problematic credit adequately, as detailed below:
- Adjustment of risk appetite – In light of the development of risks in the residential real-
estate market, within the framework of the credit policy for 2012, the following risk limits
were added:
1. An annual execution rate limit for given mortgages at a rate greater than 75%.
However, as of 1.11.2012, following the directives of the Bank of Israel, the Bank
does not approve new loans at a financing rate greater than 75%.
2. An annual execution rate limit for mortgages given to apartments for investment.
- Addressing problematic housing credit and collecting debts - Addressing this type of credit
requires special focus and expertise. Accordingly, work with these customers is centralized
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in a separate sector, 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
2012 2011 2010* Volume of credit 7,233 6,763 6,001
An increase from preceding period 6.9% 12.7% 21.4%
* Pro-forma data following the implementation of the "impaired debts" directive.
Notes: 1. The volume of housing credit includes purchasing groups in the process of construction.
The development of Union Bank's share of the overall banking system is set out below (in NIS
millions):
As at December 31
2012 2011 2010* Volume of credit 7,233 6,763 6,001
Volume of credit overall system 246,070 224,914 200,317
The rate of the Bank from the overall system 2.9% 3.0% 3.0%
* Pro-forma data following the implementation of the "impaired debts" directive.
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:
7-12/2012 1-6/2012 7-12/2011 Executions for period at a financing rate greater than 60% 174 152 186
Total executions of housing loans for period 755 731 794
The rate of executions for housing greater than 60% from total executions of housing 23% 21% 23%
As at December 31, 2012, from mortgages granted at a financing rate greater than 60% most
were at rates between 60% and 70%. The rate of executions with a financing rate greater than
70% is immaterial.
In the "Legislative Developments" section there's a reference to the Supervisor of Banks' letter
regarding the limitation of the financing rate for housing loans from November 2012 and a
reference to the draft of a guidelines update on the subject of residential real estate from
February 2013 concerning the rigorousness of risk weight for housing loans at a financing rate
greater than 45%
Long-term loans - In general, the Bank customarily does not grant loans with repayment
periods longer than 25 years, excluding exceptional cases approved by the mortgage system,
for up to 30 years.
Floating-rate loans - As at the end of 2012, the balance of floating-rate housing loans
constituted 69.1% of all housing loans at the Bank. (68.8% as of 31.12.2011)
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
2009 17.86% 7.32% 5.39% 5.25% 62.58% 1.60% 2010 18.26% 9.39% 3.77% 1.58% 62.64% 4.36% 2011 15.68% 30.45% 11.15% - 40.70% 2.02%
31.12.2012 12.73% 23.02% 18.34% 0.18% 44.17% 1.56%
* As of 2011, 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. Note
that the increase in 2012 in execution of loans based on the Prime interest rate, is due to an
increase in the rate of credit extended to purchasing groups of all the executions during the
period, for which the credit was approved before the guidance of the Bank of Israel on the
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matter. In addition, the displayed executions include loans for a business objective and
refinanced loans which the directive doesn't apply to.
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
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.
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Developments in balances in arrears and in allowance for credit losses across periods are set
out below (in NIS millions):
As at December 31
2012 2011 20101 Gross balance in arrears (including interest in arrears) 36 40 43 Rate from the portfolio 0.5% 0.59% 0.72% Balance of allowance according to the extent of arrears 29 302 22 Balance of a group allowance 15 14 8 Balance of an individual allowance - -3 12 Total balance of allowance for credit losses 44 44 42
Rate from the portfolio 0.61% 0.65% 0.70%
1. Pro-forma-data following the implementation of the "impaired debts" directive.
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. 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 0.93% as of the end of
2009 to approximately 0.5% as of the end of 2012. As part of the examination of the overall
adequacy of the allowance for credit losses, as required by the Bank of Israel's 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. See in section "Legislative Developments" a
reference to the draft of the updated guidelines regarding residential real estate concerning a
requirement to increase group provisions for housing loans.
Collateral
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
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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,
which their objective is to frequently examine and treat an extensive as possible customer population,
and to monitor and properly treat these customers.. The first processes use an automated system to
detect potential problems with borrowers of up to a certain amount, according to different
parameters. Customers flagged by the system are thoroughly investigated and discussed by an
internal -forum, which considers the measures required in dealing with these customers and
examines the need for follow ups or forclassification as problematic debts, including the need
to perform allowance for credit losses in respect of those customers. In the second process an
automated system is used to elevate borrowers of a certain amount with a potential to include them in
a watch list. 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 within routine reports of the 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 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
audit committee.
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.A to the financial statements.
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For more details about the directive and its implementation – See Note 1.(E).(5) to the
financial statements. Also, see a reference to Proper Conduct of Banking Business Directive No.
311 regarding credit risk management in section "Legislative Developments".
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-weighted 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 changes in the growth
rates on the quality of the credit portfolio and as a result, on the rates of provisions for credit
losses (at the overall level of the Bank and by sector) were examined. Also, the Bank
examines the probability of the results of the extreme scenarios against various benchmarks.
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.
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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 credit risk in respect of a market 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
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:
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Counterparty: “Banks,” as at December 31, 2012:
The total balance in respect of the counterparty “Banks” is in the amount of NIS 236
million; the highest balance for a single entity is in the amount of NIS 86 million.
Counterparty: “Others,” as at December 31, 2012:
The total balance in respect of the counterparty “Others” is in the amount of NIS 179
million; the highest balance for a single entity is in the amount of NIS 29 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 in derivatives mainly 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.
Credit exposure to foreign financial institutions
Credit exposure to foreign financial institutions1 on a consolidated basis as of December 31, 2012
(in NIS millions):
External credit rating*
Balance-sheet credit
risk 2
Off-balance-sheet credit
risk 3 Credit
exposure AAA - AA- 60 88 148
A + - A- 625 12 637
BBB + - BBB- 16 - 16
Unrated 13 - 13
Total exposure 4 714 100 814
Credit exposure to foreign financial institutions1 on a consolidated basis as at 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
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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.
For details regarding the extent of the exposure to a group of bank borrowers see sub-
section "borrowing concentration"
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 3.A 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 19.B to
the financial statements.
The institutions included in the table above are banks and brokers operating in OECD countries.
Most of the exposures as of December 31, 2012 are to institutions operating in the United States,
Swiss, 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 1.9 million to Banks and financial
institutions operating in Italy.
There is no exposure to foreign financial institutions exceeding 15% of the Banks' capital, as
defined in Proper Conduct of Banking Business Directive No. 202, Constituents of Capital.
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 at least once a year, and 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
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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 in 2012 on an additional adjustment of the exposure to various banks.
The Bank frequently examines the exposure policy to banks and countries according to the
various developments and makes adjustments if necessary.
In Appendix E - Overall Credit Risk to the Public by Economic Sectors, 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. This credit is granted
subject to regulatory limits and to the Banks' policy.
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The following table shows the distribution of the exposure for leveraged financing transactions by
economic sector and geographical region (in NIS millions):
December 31, 2012 December 31, 2011*
Balance sheet (1)
Off-balance
sheet Total (2) Balance sheet (1)
Off-balance sheet Total (2)
Israel:
Construction and real estate - - - - - -
Trade 250 - 250 345 - 345
Communication 117 - 117 135 - 135
Financial services 200 - 200 156 - 156
Total 567 - 567 636 - 636
Europe(3):
Construction and real estate 72 2 74 72 2 74 Total leveraged financing ** 639 2 641 708 2 710
(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.
* Reclassification.
** There are no customers granted by credit finance to the acquisition of means of control, which are
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, 2012
Governments Banks Public Total In NIS million
Impaired credit to the public - - 584 584
Unimpaired credit to the public, in arrears of 90 days or more - - 62 62 Unimpaired credit to the public, in arrears of 30 days to 89 days - - 158 158
Allowance for credit losses (balance- sheet and off-balance- sheet) - - 334 334 Individual provision for credit losses at the statements of Profit and Loss - - 74 74 Net accounting write-offs during the period - - 47 47
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-weighted 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.
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
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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.
Sectorial 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 at least once a year within the
discussion concerning credit policy, regarding credit to certain sectors, particularly sectors
sensitive to fluctuations and sectors in which sectorial 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 sectorial
concentration metrics.
See also Appendix C 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. According to Proper Conduct of Banking Business Directive No. 313,
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% each, of the capital of the Bank shall not
exceed 120% of the capital of the Bank. The 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 limitations are lower than the limits established in Proper Conduct of Banking
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Business Directive No. 313. The Bank routinely monitors the borrowers business situation,
especially the big borrowers. However, due to the recent economic events and developments in
the real and financial markets in the world, and due to the increase in uncertainty in these
markets, the Bank conducted at the end of 2011 and on June 2012 examinations of the condition
of the large borrower groups of the Bank. In addition, the possible implications of insolvency of
one of the Banks' top ten largest borrowers are being examined. The conclusions of the
examinations did not reveal exceptional findings.
There are no Balances of credit to the public and off-balance-sheet credit risk as at December 31,
2012, 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.
There is an exposure to a group of borrowers of the Bank in the amount of NIS 582 million,
mainly due to bonds.
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, 2012 in NIS millions:
Sector Number of borrowers
Balance-sheet
credit*
Off-balance-sheet credit
risk Total
Industry 1 - 220 220
Construction and Real Estate 4 525 535 1,060
Financial services 5 1,602 - 1,602 other 2 290 163 453 Total 12 2,417 918 3,335
* 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.
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
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portfolio of the Bank on a small number of specific assets or types of collateral. This risk was
analyzed as part of the implementation of the second pillar of Basel II, and included in the annual
ICAAP document and in the quarterly exposure 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.
For more details regarding the exposures by geographical region see also Appendix F to the
Managements' Review regarding the exposure to country risk.
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 approved on August 2012 the policy of market risks management, in
which, among other things, the limits of exposure to market risks was updated, which includes also risk
appetite and the risk capacity for market risks (linkage base, interest rate, options, and shares) in purpose to
limit the potential loss that can be derived from those risks. The total market risk endurance is 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 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
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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 and by the person in charge of publishing the transitional prices
(benchmark) in foreign currency.
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 and deviations, if exist, are reported to the
board of directors.
The risk-management system is responsible for identifying, defining, and mapping market risks,
including the development of internal models for risk measurement in all sectors of market risk, and
for creating a risk overview and reporting on it to the management’s Forum on Financial Matters. 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.
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It is emphasized that all VAR tests are performed on a daily level and in certain areas (including
options), the compliance with the VAR limits is measured at an intraday resolution. During 2012, no
immaterial deviations from the VAR limits were observed.
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.
The Bank routinely applies four 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).
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).
During 2012, no deviations from the values of extreme case scenarios were observed, compared to the
limitations that were set. The list of scenarios is examined at least once annually, and is also updated
from time to time based on developments in the markets. 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.
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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 endurance 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.
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, 2012, was a value at risk
of NIS 2.1 million (December 31, 2011 - NIS 0.3 million). The highest value at risk (at the end of
the business day) in 2012 was NIS 8.6 million (2011 - NIS 4.3 million). The Bank's activity in
foreign currencies is carried out mainly in U.S. Dollar, Euro, Yen, Sterling and CHF.
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, according to the decision of the Bank: USD, EUR, GBP,
CHF, JPY).
B. CPI-linked exposure: The limit on CPI linkage base exposure in terms of value at risk is NIS 10
million. In addition, there's a quantitative limit on the surplus of assets over liabilities in the
amount of NIS +1000/-750 million. As at December 31, 2012, a negligible deviation, compared
with the quantitative limit on the surplus of assets over liabilities, was recorded and treated
immediately after the period of the report. Actual exposure as at December 31, 2012 was a value at
risk of NIS 7.1 million (December 31, 2011 - NIS 1.42 million). The highest value at risk (at the end of
the business day) in 2012 was NIS 7.8 million (2011 - NIS 5.2 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, 2012 CPI USD EUR GBP JPY CHF Other FX 5% increase 41.3 2.3 1.7 1.3 (0.2) (0.4) 1.1 10% increase 82.6 2.9 5.9 2.6 (0.4) (0.8) 2.1 5% decrease (41.3) (2.8) (0.3) (1.3) 0.2 0.4 (1.1) 10% decrease (82.6) (5.9) (2.2) (2.6) 0.4 0.8 (2.1)
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)
The following table shows the condensed linkage balance-sheets:
As at December 31, 2012
Unlinked CPI-linked
Foreign currency, including foreign currency linked
Non-monetary items Total
Assets 27,862 5,890 4,259 814 38,825 Liabilities 23,624 4,876 7,056 1,078 36,634
4,238 1,014 (2,797) (264) 2,191 Forward transactions, net (2,601) (3) 2,604 Options (delta value) (144) - 144 1,493 1,011 (49)*
* Of which, USD - NIS (37) million; EUR - NIS (2) million, other currencies – NIS (10) million.
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; other currencies - NIS (-) million.
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 endurance of the Maof index, the Israeli index certificates and the Israeli shares is NIS
15 million. Actual utilization as at December 31, 2012 was a value at risk of NIS 4.2 million
(December 31, 2011 - NIS 6.2 million).
The risk appetite for the index certificates and ETFs in foreign markets was updated during the
third quarter of 2012 to a value at risk of NIS 12 million. Actual utilization as at December 31,
2012 was a value at risk of NIS 0.9 million (December 31, 2011 - NIS 4.15 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 endurance for exposure to shares in the markets and instruments approved by the
board of directors is 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 of 2011, according to the validation results, the
assurance level of GBP currency was set at 99.99%. In addition, due to an additional validation during
the third quarter of 2012, an assurance level of CPI linked shekel and euro currencies was also 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, working assumptions
regarding withdrawal rates at departure points of saving programs 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 risk management committee of 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, 2012 was a value at risk (VAR including correlation) of NIS 12.2 million
(December 31, 2011 - NIS 18.3 million). The highest value at risk (at the end of the business day) in 2012 was
NIS 25.6 million (2011 - NIS 29 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
31.12.2012 31.12.2012 31.12.2011 Total VAR interest offset * 60 12.2 18.3
CPI-linked VAR 40 4.1 5.5
DV1% 60 32.8 37.8
Unlinked VAR 30 10.2 13.9
DV1% 90 42 39.9
Foreign currency VAR for all currencies 20 2.6 3.9
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.
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, 2012 Israeli currency Foreign Currency2
Unlinked CPI-
Linked USD EUR Other Total In NIS million Financial assets 1 27,711 5,872 3,114 446 450 37,593
Amounts receivable in respect of derivative and off-balance-sheet financial instruments3 10,359 490 14,250 2,821 7,793 35,713
Financial liabilities1 24,159 5,020 5,021 1,214 487 35,901
Amounts payable in respect of derivative and off-balance-sheet financial instruments3 13,294 494 12,214 2,021 7,819 35,842 Net fair value of financial instruments 617 848 129 32 (63) 1,563
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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
* Reclassified.
For more details regarding the assumptions used to calculate the fair value of the financial instruments,
see Note 20.C to the Financial Statements.
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, 2012
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 581 827 131 34 (66) - 1,507 (56) (3.6%)
0.1% immediate parallel increase 616 847 130 31 (64) - 1,560 (3) (0.2%)
1% immediate parallel decrease 664 874 131 29 (64) - 1,634 71 4.5%
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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%
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.
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.
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,
2012 (the face value totaled NIS 3,551 million, and the balance of the fair value totaled NIS 28
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, 2012.
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The following table shows the distribution of the portfolio by currency, as of December 31, 2012 (in
NIS millions):
Face value EUR/NIS USD/NIS Other Total Purchased options 122 635 428 1,185
Written options 100 830 442 1,372
Total 222 1,465 870 2,557 Fair value EUR/NIS USD/NIS Other Total Purchased options 1 4 5 10
Written options 1 9 4 14
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 99 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 approved by the board of directors for the management of
the option portfolio at the end of the third quarter of 2012 is NIS 7.5 million. The actual exposure on
December 31, 2012, was a VAR of USD 0.6 million (December 31, 2011 - USD 0.3 million). The
highest value at risk (at the end of the business day) in 2012 was USD 1.1 million (USD 2 million in
2011). In addition, a limit of USD 1.5 million in terms of VAR was approved for activity in exotic
options, and a limit of USD 2 million for activity in foreign currency / foreign currency options. There
was no exposure of exotic options in the portfolio as at the end of 2012. The value at risk in respect of
foreign currency / foreign currency options is zero. The highest value at risk (at the end of the business
day) in 2012 was USD 0.1 million (USD 0.5 million in 2011) in respect of activity in exotic options
and USD 0.2 million (USD 0.9 million in 2011) in respect of foreign currency/foreign currency
options.
Positions in Shares in the Banking Portfolio
As at December 31, 2012, 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, 2012 at a total of NIS 25 million (December 31, 2011: NIS 25 million).
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B. Investments through the subsidiary Union Investments and Enterprise (A.S.Y.), which serves as the
non-financial investment arm of the Bank. A.S.Y. 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 certain period (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 120 million.. In addition,
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,
2012 totaled NIS 1 million similar to the balance as of December 31, 2011. The balance-sheet
balance of the investment in other companies through A.S.Y. as of December 31, 2012 totaled NIS
75 million (December 31, 2011 - NIS 100 million). These investments are classified as shares in the
available-for-sale portfolio.
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 In accordance
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with the draft directive in the BIS documents and with respect to the findings arising from the internal
and external audit reports.
On January 2013 the Supervisor of Banks issued an updated directive of Proper Conduct of Banking
Business Directive 342, "Liquidity Risk Management", and the date of its implementation was set to
July 1, 2013.
On August 2012, further to the supervisions' request from the banking system, the Bank reported to the
Bank of Israel on the quantitative impact estimation of the directive regarding the Banks' liquidity
ratios (QIS).
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.
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
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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.
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,
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, the risk
management committee 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 and the
risk management committee 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 from credit
card companies upon request, 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
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concentration and significant changes in the liquidity situation. In addition, compliance with the limits
for stress scenarios is tested.
In the third quarter of 2012, 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 liquidity ratios were established for the Banks' overall activity and separately
for its activity in shekels and foreign currency, both in a routine scenario and in an extreme scenario,
so that the risk appetite is 1.1 liquidity month in NIS and 1.18 in foreign currency and the minimal
ratios are at a level of at least one liquidity month. During 2012, the liquidity ratio did not fall below
the established limits, other than a few immaterial deviations which were resolved within a few days.
The Bank routinely examines its exposure limits, 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
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. During the first quarter of 2012 a few
immaterial deviations were viewed in two types of limitations.
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. The scenarios 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 daily 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
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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.
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 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, general security, and backups, it has been established that the Resources Division
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has direct responsibility for the management of risks in these activities. In addition, the head legal
council is responsible for the legal risk management and the compliance risk.
The board of directors of the Bank has approved an operational risk management policy document,
which includes the risks of embezzlement and fraud, on the basis of Proper Conduct of Banking
Business Directive No. 350, which was published on February 2012 by the Bank of Israel. The policy
defines risk-management principles and the distribution of roles and authority in mapping and
minimizing operational risks at the Bank including the use of tools for reducing the risks, in case the
internal controls don't give an appropriate solution for the risk, and leaving the risk isn't a reasonable
option, such as insurance policies. 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. 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
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, during 2009-2010 a
comprehensive survey 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. The Bank is preparing to update the survey.
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
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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.
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 2012, 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. After that the Bank handled the reduction of the amount of high
and medium level risks, in the IT systems and in the general management quality of the information
technology array. In addition to this survey, the results of a survey of information security risks in the
Bank’s independent systems were approved during 2009. Since the conduction of the information
security survey, other review processes are performed frequently, with an emphasis on high-risk
systems, and these processes update the risk mapping. This is done in addition to gap closing
processes regarding risks identified in the past. The management of the quality of the information
systems 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. During the second quarter of the year, the Bank completed
through a professional consulting company, a thorough survey regarding information security threats
in the cyberspace. The survey examined the compliance between the information security management
system and the dynamics of the outline of cyberspace threats and it was found suitable for the
professional needs and the regulatory requirements.
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.
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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 examines the exposure to operating risk also by extreme scenarios which were updated in
order to address a variety of events while relying on the internal data history and report of realization
of operational failure events in the local and international banking system.
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
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. 355 and 357 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.
Mr. Hami Morag, senior VP and head of the Resources Division, was appointed to be in charge of
activity in emergencies, and as such, he is the head of a crisis management team, which consists of
management members of the Bank. The business continuity management, emergency preparedness
and the contact with the different regulatory factors are conducted within the Information Security,
Purchasing and Logistics System in the Resources Division. Within this process, a specialized unit
was established to address the treatment of the business continuity. The unit is working to implement
the new requirements of the Supervisor of Banks, regarding management of business continuity, as
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detailed in the Proper Conduct of Banking Business Directive No. 355, and to prepare the Bank for
certification under the international standard on business continuity management.
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.
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.
During the second quarter of 2012 a business continuity strategy was formulated, 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. Within this framework, banking services were prioritized, and recovery objectives
were established, with reference to parameters of time and volume.
During the second half of 2012, the Bank formulated recovery plans according to the emergency
scenarios that were defined in the business continuity strategy. The plans describe the manner of
operation of the services during an emergency, and the necessary resources to do so.
Currently, gaps are being completed in order to adapt them to the plans, in the existing back-up
systems. While the recovery plans are being written, a comprehensive drill framework was
established, with the aim of achieving absorption of the emergency plans by the employees of the
Bank and examining their effectiveness
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. This includes the
protection of buildings at the Bank's core branches and other branches and the adjustment to working
continuously during times of emergency. In addition, the Bank is prepared with vendors who support
services and processes essential to ensuring the survivability of services they provide during
emergencies; in addition, the protection of the Bank's central computer is being examined.
The board of directors of the Bank has granted the management of the Bank approval to enter into an
agreement with regard to the rental of space for the Bank's backup computer, in a protected facility at
a distance from the Bank's headquarters, and the rental of an additional space for the Bank's
emergency headquarters.
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The Bank intends to transfer its headquarters and central computer to another building, as part of the
plan for business continuity in emergencies, in order to reduce the gaps between the existing
preparations and the requirements under the new threat scenarios.
The Bank has initiated a process of formulating a program to map and specify the amount of space
necessary; relevant sites are being examined.
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.
Periodic examination of the ability of the Bank's information systems to withstand various types of
cybernetic attacks, and update of the protective systems as necessary. This examination includes
safety surveys, penetrability tests, and consultation with professionals, to ensure technological
precedence.
Further to an examination performed by an external expert, the management of the Bank decided to
establish an information security operations center (SOC). The establishment of the SOC will
improve the Bank's capabilities in this area, as another element in enhancing its preparedness to
prevent cybernetic attacks.
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The number and intensity of attempted attacks of various types has increased recently, including
cybernetic attacks on information systems of business organizations, financial organizations, and
others, aimed at obtaining unauthorized access to computerized systems in order to make illegal use of
assets or of sensitive information, damage information, disrupt activity, and more. The Bank of Israel
therefore issued instructions aimed at protecting against cybernetic attacks and strengthening control
and security mechanisms, in order to prevent or identify the penetration of systems by hostile code as
early as possible, and report to the public, when the issue is material, on the implications of such risks
for the Bank.
Potential negative consequences for banking corporations as a result of cybernetic attacks include,
among others: theft of financial assets, intellectual property, or other sensitive information of the bank,
its customers, or its business partners; disruption of the activity of the banking corporation; recovery
costs; increased costs of protection and information security; loss of income due to unauthorized use
of proprietary information or due to the failure to retain or recruit customers as a result of the
cybernetic attacks; legal claims; damage to reputation.
The Bank relies on two types of information systems:
1. Information systems received from Bank Leumi, through outsourcing, which support most of its
core business activities (hereinafter: "Leumi Systems").
2. Independent information systems, some of which were developed by internal means, while others
were developed by various suppliers under the management of the Bank (hereinafter:
"Independent Systems").
With regard to the Independent Systems, the Bank has prepared to protect against cybernetic attacks
and has reinforced its control and security systems, including the performance of the actions requested
by the Bank of Israel. These measures were aimed at reducing potential exposures and strengthening
protection against the penetration of its independent IT systems by hostile code. The Bank routinely
carries out safety surveys and risk assessments for its Independent Systems. The surveys and risk
assessments are performed at a frequency and on a cyclical schedule congruent with the requirements
of the Proper Conduct of Banking Business Directives of the Bank of Israel concerning information
technology management. A supplementary risk assessment survey was conducted in 2012, with the
assistance of external consultants, with reference to the cyber threats known at that time. The findings
indicated that the safety surveys, risk assessments, and consequent actions provided coverage for
cybernetic attacks, at the date of the survey.
According to the estimates of the Bank, based on the opinion of the external consultants, among other
factors, the Bank routinely acts to implement the controls and means necessary in order to identify
risks, assess the potential effect of the risks, and mitigate the risks to the extent possible.
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However, new cybernetic risks appear continually; therefore, at any point in time, the safety surveys
and risk assessments performed by the Bank are current for such risks and exposures that are known at
the date of the surveys. Gaps between the threats present at the date of the supplementary survey in
2012 and the threats known at the date of the surveys performed at the Bank were not large, and it
appears, at a high level of probability, that these gaps do not have a material effect on the risk
assessment of the Bank, including in the area of cybernetic attacks.
The Bank continues to work to identify potential exposures in all of its Independent Systems, and
continues to upgrade its security and control measures, in order to be able to identify cybernetic
attacks close to, during, or prior to the event, at a high level of probability.
The Bank is not aware of the occurrence of any material information-security or cyber incident,
including any cybernetic event or events that substantially affected its Independent Systems, and
consequently the activity segments supported by these systems. Furthermore, the Bank has not
identified any event that would prevent it from adequately recording, processing, summarizing, or
reporting information. In the opinion of the Bank, information security and cybernetic attacks in the
context of its Independent Systems had no material effect on the financial statements for 2012.
With regard to the Leumi Systems, we have been informed by Leumi that no material information-
security or cyber events occurred at Leumi during 2012.
According to estimates by Leumi, as communicated to us, new technologies integrated into core
banking as well as end systems at Leumi as well as by clients have created uncertainties and raised the
level of risk of cyber-attacks.
In addition, in the opinion of Leumi it is an attractive target for various attackers. Its computer
systems, communication networks, and customers' devices have been attacked, and are likely to
continue to come under cyber-attacks and attacks via viruses and malware, phishing attacks, and
additional exposures aimed at damage to service, theft, or damage to data.
As we have been informed by Leumi, Leumi is investing efforts in implementing control and
protection mechanisms and processes, monitoring global cyber events, and updating its preparations
accordingly.
Union Bank receives a report from Leumi Bank at the end of each year regarding controls integrated
into Leumi's operational system (including IT) and regarding tests of the effectiveness of the controls
(ISAE 3402 type 2). Among other matters, the report includes an accountant's opinion (hereinafter: the
"Opinion") as to whether the controls and control objectives set by Bank Leumi were properly planned
and whether they operate with sufficient effectiveness in order to provide reasonable assurance that the
control objectives were achieved during the year for which the report is produced. In addition,
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exceptional events relevant to Union Bank or to the Leumi control environment serving Union Bank
only are noted. According to the Opinion on the report for 2012, the controls examined which the
accountant believed were essential to the achievement of the control objectives established operated
effectively during 2012. Among other matters, the Opinion addresses the controls applied in order to
reduce potential exposures and strengthen protection against cybernetic attacks on the information
systems of Leumi through which Leumi provides services to Union Bank and to its customers.
Compliance - 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 taking the necessary steps according to the
law, concerning these activities.
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.
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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 Bank replied to the report within the schedule set and presented an outline for the
required subjects. In July 18 2012 a petition was filed with the Committee on the Imposition of
Monetary Sanctions for Banking Corporations at the Bank of Israel to impose a monetary
sanction on the Bank, pursuant to Section 14 of the Money Laundering Prohibition Law, 2000.
The committee's decision, issued on December 30, 2012, imposed a monetary sanction on the
Bank in the amount of NIS 2.1 million. An appropriate provision was recorded in the annual
report for 2012, as detailed in the immediate report of the Bank of December 31, 2012 (reference
no. 2012-01-191487).
Disclosure of risks and restrictions to which the Bank is exposed due to its direct or indirect
connections with Iran, or with the enemy, which may have a material impact on the
corporation – Within its routine operations, the Bank is subject to various prohibitions
established in various legal directives, such as the Trade with the Enemy Order, 1939, the Trade
with the Enemy Order (Enemy for the Purpose of the Ordinance), 2011, the Law for the
Prohibition of Investment in Corporations that Maintain Business Relationships with Iran, 2008,
and the derived regulations, and the circular of the Supervisor of Banks of December 26, 2011,
regarding the prevention of money laundering and terrorism financing and customer
identification, primarily a prohibition on economic or commercial relations with Iran or with
entities declared on international lists as entities involved in or assisting its nuclear program and
related plans.
Pursuant to these legal directives, the Bank has integrated the list of entities declared on the
aforesaid international lists into its automated systems, and placed an automatic block on banking
activity with such entities. These actions, as well as other preparations performed by the Bank,
such as the update of the board of directors' policy document in this area, the update of the Bank's
relevant procedures, and the development of controls that support the creation of a compliance
infrastructure congruent with these requirements, have brought the Bank's exposure to these
entities to a low level.
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
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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.
On March 29, 2012, the board of directors of the Bank approved the compliance risk exposure
management policy in the area of securities, which also includes an internal enforcement plan for
securities laws (primarily the Securities Law, 1968; the Regulation of Occupations of Investment
Advising, Investment Marketing, and Investment Portfolio Management Law, 1995; the Joint
Trusts Investment Law, 1994; and the derived directives and binding guidelines of government
agencies). In November 2012, the boards of directors of the subsidiaries of the Bank engaged in
portfolio management, underwriting, trust, and securities issuance, as relevant, adopted a
compliance management policy in the areas of securities relevant to each company and an
internal enforcement plan in the area of securities, and appointed the head of enforcement at the
Bank as the head of internal enforcement at the subsidiaries. The internal enforcement plan in the
area of securities is a voluntary mechanism designed, among other purposes, to identify and
prevent violations and offenses in the areas of the securities laws, to address violations and
violators, and to encourage and ensure the compliance of the Bank and its subsidiaries, their
officers, and their individual employees with the securities laws, thereby minimizing the risks
involved in violations of the legal directives in the area of securities laws. The internal
enforcement plan in the area of securities constitutes an element of appropriate corporate
governance at the Bank and at its subsidiaries; it is integrated with the existing supervision and
control mechanisms, and is formulated and adopted based on the "Criteria for recognition of an
internal enforcement plan in the area of securities and investment management" issued by the
Israel Securities Authority in August 2011.
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.
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The Banks' legal risk management policy was discussed and approved in the Banks' Board of
Directors at the beginning of 2011. According to the procedure of the board of directors, each year, the
document is presented for discussion, and this year, the document was ratified and updated according
to the updated operational risk management policy document.
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
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.
A Legal Risk Management Committee convening periodically, exists within the legal counsel system.
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
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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 sectorial, 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.
The Banks' board of directors adopts a three year strategic plan each year, addressing the capital
objectives of the Bank and its risk appetite and risk tolerance with regard to the 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 discussed based on internal discussions held by the Strategy Forum, headed by
the CEO, with the participation of representatives of most of the Banks' divisions.. 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.
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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
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. The aspects of environmental risks involving the operation of
the Bank 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.
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Below are the details of the Bank Management's evaluation of the effect of risk factors in the
Bank as at December 31, 2012:
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
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, 2012 relative to September 30, 2012.
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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 directive").
The allowance for 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.
While updating the credit policy, the Bank updated the methodology for detection and identification
of problematic debts, for their classification and for the measurement of allowance for credit losses
in respect of these debts. This is in order to maintain an allowance at an appropriate level to cover
estimated credit losses in respect of its credit portfolio and in respect of expected 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 these matters, based on the directive
and the accompanying interpretations.
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.
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The Bank routinely examines its credit portfolio in order to identify, as early as possible, borrowers
for which the risk level has increased. In addition, a number of processes are applied by the Bank in
order to identify potentially problematic borrowers, to include them in the watch list and to
determine how to handle them. 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
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 debts 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 audit committee and the plenum of the board of directors.
The balance of individual allowance for credit losses as at December, 31, 2012 is NIS 118 million.
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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 shall be added to the group allowance formula. 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. In light of the markets' condition, the Bank continues to regularly track
the credit condition in general and in the real estate branch in particular. According to the Banks'
policy regarding group allowances, the Bank uses higher coefficients in order to calculate group
allowances in respect of the extent of the exposure to credit that isn't classified as problematic, for
escorting domicile construction projects – sub sector general construction and for yielding real
estate. The coefficient for the calculation of the group allowance faithfully represents, in the
opinion of the Bank, the potential for risk in the sector at that time.
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 Standardized 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, beyond what is necessary based on the extent of the arrears.. ,
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, which are in the final stages of treatment.
The balance of group allowance for credit losses as at December 31, 2012 (including allowance by
extent of arrears) is NIS 216 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
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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. The difference between the debt balance and the fair value of
the collateral was immediately written-off in respect of debts whose collection is contingent upon
collateral.
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.
Interest income in respect of a debt classified as a restructuring, is recognized only after repayment
of 6 consecutive payments without arrears, regarding loans repaid in monthly payments, or after
the repayment of a material part of the debts' principal (20%), regarding loans repaid in non-
monthly payments.
For further details on allowances and write-offs, see Note 4 to the financial statements.
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Provision for other-than-temporary impairment 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 impairment 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%.
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%.
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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 other than temporary impairment in 2012 amounted to NIS 18 million,
allocated as an expense to non-interest financing income (2011 - NIS 23 million).
B. 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
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
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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.
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Following are the balances of financial instruments measured at fair value, included in the
balance sheet as at December 31, 2012:
December 31, 2012
Fair value measurements using:
Price quoted in the active market (level 1)
Other significant observed inputs (level 2)
Significant unobservab
le inputs (level 3)
Balance sheet
balance
Financial assets
Credit to the public 1,192 - - 1,192
Total securities available for sale 3,621 721 185 4,527
Total securities held for trade 375 2 - 377
Total assets in respect of
derivative instruments 169 211 96 476
Assets in respect of activity in the Maof market 789 - - 789 Total financial assets 6,146 934 281 7,361
Financial liabilities
Deposits of the public 1,135 - - 1,135
Liabilities regarding derivative
instruments 170 417 18 605
Liabilities in regard of activity in
the Maof market 789 - - 789
Other liabilities 334 - - 334
Total financial liabilities 2,428 417 18 2,863
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December 31, 2011
Fair value measurements using:
Price quoted in the active market (level 1)
Other significant observed
inputs (level 2)
Significant unobservab
le inputs (level 3)
Balance sheet
balance
Financial assets
Credit to the public 1,041 - - 1,041
Total securities available for sale 4,405 1,056 216 5,677
Total securities held for trade 1,053 2 - 1,055
Total assets in respect of derivative instruments 173 657 16 846
Assets in respect of activity in the Maof market 739 - - 739 Total financial assets 7,411 1,715 232 9,358
Financial liabilities
Deposits of the public 1,005 - - 1,005
Liabilities in respect of derivative instruments 173 730 16 919
Liabilities in respect of activity in the Maof market 739 - - 739 Other liabilities 123 - - 123
Total financial liabilities 2,040 730 16 2,786
The rate of assets whose fair value is defined as level 3 of the total assets measured at fair
value on a recurring basis in the balance sheet or in the profit and loss is 3.8%. For further
details see note 20A to the financial statements.
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 of the Controls Section.
Determining fair value by composite pricing:
The risk-management system determines pricing methodology and calculates fair values. The
risk-management system takes into account the risks inherent in the financial instrument such
as market risks, credit risks and lack of liquidity (dependence on the financial instruments'
tradability volume). The methodology is examined 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. The pricing
methodology of the non-tradable Israeli corporate bonds, is based, whenever possible, on
recent market transactions, and subsequently on recent transactions of similar bonds. If such
transactions do not exist, the Bank uses the pricing services of the company "Interest Rates" in
order to calculate the fair values. As at December 31, 2012, the fair value that the Bank used
in these pricing services amounted to NIS 96 million (December 31, 2011 – NIS 144 million).
The fair values calculated according to the methodology above by the risk-management
system, are 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, 2012,
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
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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 Audit Committee
when discussing fair value.
‐ The policies and work process described above, including the internal models in use, were
approved by the Audit Committee 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 Audit Committee 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 liquid
collaterals that the Bank requires from a counterparty aren't attributed specifically to activity with
a single derivative instrument but to all of the activity of the counterparty, therefore the Bank
must make adjustments to the fair value in respect of the quality of the counterparty. The Bank
derives the indications regarding the quality of the counterparty, 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. As at December 31, 2012 the adjustment of assets and liabilities in respect of
the credit risk to derivative financial instruments is immaterial. The transitional directives of the
Supervisor of Banks for 2011 state that 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. These transitional directives were
later on axtended to 2012-2013 as well. The Bank adopted the aforesaid transitional directives.
On June 28, 2012, the Bank of Israel published a clarification according to which, the fair value
of a derivative instrument will be considered as a level 3 measurement of fair value when there
are no quoted prices, no liquid collaterals or offsetting agreements sufficiently promising the
credit quality of the derivative and no market data regarding the counterpartys' credit quality such
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as: CDS or counterparty bonds – see note 20.C. to the financial statements. The Bank received a
postponement from the Bank of Israel of the implementation of this directive regarding the
disclosure of the changes in fair value of the derivative instruments, excluding IRS derivatives –
for the first quarter of 2013 and IRS derivatives for the annual report of 2013.
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 regarding the real rate of increase in
wages, mortality tables, disability rates, departure rates with regular and excess
compensation, rates of excess compensation, percentages of employees choosing a
pension, pension utilization rates, etc. The relatively low number of employees of the
Bank occasionally makes it impossible to draw statistical conclusions for use in an
actuarial model. Accordingly, in certain cases the actuary relies on management's
assumptions, or exercises judgment using adjustments to the surveys that have been
performed. Although these assumptions are established conservatively and with the
appropriate professional skill, change in any or some of the assumptions and/or a change
in the discounting rate would lead to a change in the amount of the Bank's liabilities.
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- On February 26, 2012, the board of directors of the Bank approved a framework for a
preferred-terms retirement program. The board of directors of the Bank also affirmed that
concurrently with the approval of the framework for the retirement program, a policy
would take effect according to which early retirement with preferred terms will not be
possible during 2012 to 2018. In 2011, management estimated that approximately 40
employees would retire within the retirement program, at an added cost of approximately
NIS 15 million.
In 2012, additional expenses in the amount of approximately NIS 20 million were
included in the statement of profit and loss with respect to the expansion of the retirement
program to additional employees. Overall, 66 employees are expected to retire within the
program; most of these employees have retired, as of the end of 2012, and the others are
expected to retire during 2013. For details, see the immediate reports of the Bank of
February 27, 2012 (2012-01-052683) and June 28, 2012 (2012-01-170274). Also see
additional details in the section "Human Capital" and in Note 15.A.5.
Note that retirees from the group of long-standing managers and authorized signatories
who are entitled to pensions are given a choice at retirement between an early pension
and increased severance pay. A liability in respect of these employees is included in the
financial statements within the reserve for excess compensation (rather than an actuarial
reserve), with the working assumption that the present value of the early pension is
equivalent to the increased compensation. By the end of 2013, with the conclusion of the
retirements, the actuarial reserves are expected to be updated according to the actual
materialization of employees' choice of the early pension option.
- On July 11, 2012, the Capital Market, Insurance, and Savings Division at the Ministry of
Finance issued a draft position paper concerning an update of the series of demographical
assumptions in pension funds and in life insurance, which includes a possible update of
mortality tables (as a result of new research indicating an increase in life expectancy).
According to the instructions of the Supervisor of Banks, in measuring liabilities in
respect of employee benefits, assumptions with regard to mortality and disability in the
reports for the second quarter of 2012 must be updated according to the best information
available to the banking corporation, using the aforesaid draft, among other sources.
Accordingly, in its financial statements for June 30, 2012, the Bank updated the mortality
tables used to calculate its actuarial liabilities, based on the aforesaid draft position paper.
The Bank used an Israeli mortality table with a future improvement in life expectancy and
a safety margin in respect of longevity risk (parallel to the use of such a margin in
previous tables). Consequently, salary expenses in the second quarter of 2012 increased
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by a total of approximately NIS 3 million (before tax), against an increase in actuarial
reserves. Note that additional changes may occur when the final estimates in this area are
published (as noted, at this stage the document is a draft). Prior to the publication of this
draft position paper, 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.
- 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 2012 accordingly by approximately NIS
23 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 2012 by approximately NIS 14 million.
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. This
forecast is based on a survey conducted by the Banks' actuary at the beginning of
2011, on data regarding people who retired in the relevant years according to the
managements' assessment as a basis to the actuary calculation of excess compensation
(years 2007-2010). Based on the findings of this survey and based on size of the
populations typical for the Bank, the actuary assessed the future rates of departure
before retirement age with regular and excess compensation. Regarding excess
compensation, the rates of departure are relevant only from 2019 because according to
the Banks' policy it won't be possible to retire on preferential terms until the end of
2018. Note that according to the managements; estimation, as of 2019 the retirement is
expected to be in accordance with the retirement policies during 2007-2010. . 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
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decrease/increase the liability for late 2012 by approximately NIS 3 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 according to the estimation of
the Banks' management. For example, an increase/decrease of 10% in the rate of
increased compensation would increase/decrease the reserves of late 2012 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 2012 respectively
by approximately NIS 3 million.
The amounts of the actuarial calculations are also sensitive to mortality tables. See
details above regarding the effect of the implementation of the new mortality tables
draft in 2012.
- See details on balances and changes of these liabilities during the years 2011-2012 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).
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.
As of January 1, 2012 the Bank implements fair value hedge accounting. The changes in the fair
value of both the derivative financial instrument designated for hedging and the hedged item are
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attributed to the profit and loss statement (see note 1.D.2.). As at December 31, 2012 the Banks'
hedge accounting activity is immaterial.
The Bank’s activity in derivative financial instruments within its asset and liability management
policy and which is not treated in accounting terms by way of fair value hedging 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.
During 2012 these measurement gaps created expense of NIS 13 million compared to expenses
of NIS 22 million in 2011.
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.18.A. to the financial statements.
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.18(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.).Investment in companies in which the Bank holds less than 20% are
presented on a fair value basis and in cases in which there is no available fair value, they're 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. 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 and if
necessary, impairment is recorded. For more details, see Note 1.E.14 to the financial statements.
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Provision for other than temporary impairment totaled NIS 3 million in 2012, allocated as loss from
share investment (NIS 5 million in 2011). For more information see note 23 to the financial
statements.
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.11 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.14 to the financial statements with
regard to the implementation of IAS 36 (Impairment of Assets). During the years 2012 and 2011 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
receivable are recorded, the Bank is required to perform estimates and evaluations regarding the
possible future materialization thereof.
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As of January 1, 2012, the Bank implements the international financial reporting standard IAS 12
(Taxes on Income), including the required interpretations and updates that have been published.
For details, see Note 1.E.10 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. For further details see note 28.C.On August 30, 2012, a VAT decree was published
which updates the VAT rate to 17%, regarding a transaction or the import of goods, as of
September 1, 2012. For further details see note 28.D.
The net balance of deferred taxes as of December 31, 2012 is in the amount of approximately NIS
213 million, versus NIS 219 million as of December 31, 2011. For further details, see Note 28.H.
Legislative Developments
Statements in this section 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 2012 and published in the financial
statements as of 2011 are not appearing in this chapter.
Legislative Developments and proper banking conduct in the banking system
Letter of the Supervisor of Banks Concerning the Adoption of the Recommendations of the
Inter-ministerial Committee on the Regularization of Custody Services
On January 16, 2013, the Supervisor of Banks announced the adoption of the recommendations of the
Interministerial Committee on the Regularization of Custody Services, issued in January 2012, with
the aim of establishing basic norms for this area of activity.
Main areas addressed by the recommendations:
1. Definition of custody services and custody service providers.
2. Definition of basic duties of custody service providers, such as ensuring the ownership rights of
the client's assets and cash, and ensuring the related rights for ownership of assets.
3. Definition of duties connected with the separation of clients' assets, monitoring of the existence of
the assets, and recording ownership rights of the assets.
4. Imposition of duties on mediators with regard to the arrangement of custody of assets for the
client with a third party.
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5. Formalization of the legal relationship between the mediator and the custodian in a written
agreement.
6. Establishment of an external independent audit, at the custodian or mediator, to be performed at
least once annually.
Most of the directives in the Supervisor's letter will take effect on October 1, 2013, while some take
effect on July 1, 2014. The Bank is studying this directive and has started to prepare for its
implementation.
Update of Proper Conduct of Banking Business Directive No. 342, "Liquidity Risk
Management"
On January 13, 2013, the Supervisor of Banks updated Proper Conduct of Banking Business Directive
No. 342 concerning liquidity risk.
The update addresses the following matters, among others:
1. Clarification of existing definitions, including addition of the term "liquidity cushion" and added
clarifications with regard to qualitative requirements for liquid assets.
2. Clarification of the requirement to monitor the liquidity position in three segments: shekel and
foreign currency in aggregate, shekel, and foreign currency.
3. Addition of a requirement for monitoring, management, and control of intraday liquidity
positions.
4. It has been determined that banking corporations must maintain a minimum liquidity ratio equal
to or greater than 1, at all times, as calculated according to the definitions and instructions in the
directive.
5. A further requirement is to monitor the stable financing ratio.
6. Tools and metrics are specified which banking corporations must apply in order to maintain a
mechanism for routine measurement and control of the liquidity position.
7. Only a banking corporation that has received the Supervisor's permission in advance and in
writing may refrain from fulfilling the minimum liquidity ratio requirement.
The inception date of the amendments to the directive has been set at July 1, 2013, with the exception
of the requirement to monitor the stable financing ratio (Section 16 of the directive), which takes
effect on December 31, 2013. The Bank is preparing to implement this directive.
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Proper Conduct of Banking Business Directive No. 310, "Risk Management"
On December 27, 2012, the Supervisor of Banks established Proper Conduct of Banking Business
Directive 310, aimed at regularizing risk management from a corporation-wide perspective. The
directive is primarily based on the Basel risk management principles.
The directive sets forth five fundamental principles in the area of risk management at banking
corporations: a cross-organization, corporation-wide perspective; routine and group-based; forward-
looking; dynamic; and comprehensive.
The directive also specifies procedures for instilling an appropriate organizational culture of risk
management.
In addition, the directive clarifies the processes required of the board of directors, senior management,
the board of directors' risk management committee, and the risk management function headed by the
chief risk officer.
The directive states that the chief risk officer should have standing and independence reflected in the
following ways: possessing experience in banking with regard to a wide range of risks; as a rule,
refraining from engaging in additional positions related to the business lines or headquarters. Chief
risk officers should also have sufficient standing and authority within the banking corporation to
reflect their ability to influence the decisions of the banking corporation that affect its exposure to risk;
they have the duty to report directly and regularly to the chief executive officer and to the board of
directors on risk concentrations or situations that may violate the established risk appetite.
The directive further states that the role of the risk management function to be established by
management shall be to identify risks, assess the risks based on a lateral view of the organization, and
ensure that risks are addressed fully, efficiently, and consistently. This function is also required to
provide professional assistance with the development of methodologies, tools, and working methods
for risk management, including involvement in material credit exposure approval processes, approval
of new products, evaluation of risks in mergers and acquisitions, and examination of the implications
of material organizational changes at the banking corporation.
The directive establishes instructions for maintaining an effective system for reporting on risks,
including a requirement for a risk document concisely presenting the risk profile, in order to enable the
board of directors to monitor management's activities and ensure that they are congruent with the
approved risk appetite and risk limits.
The amendments to the directive take effect on January 1, 2014. The Bank is preparing to implement
this directive.
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Proper Conduct of Banking Business Directive No. 311, "Credit Risk Management"
On December 27, 2012, the Supervisor of Banks established Proper Conduct of Banking Business
Directive 311, which is primarily based on the document "Principles for the Management of Credit
Risk" of the Basel Committee, of September 2000.
The directive defines the credit risk management structure required of a banking corporation and the
division of authority with regard to credit risk management among the various parties within the bank,
based on 16 guiding principles. Among other matters, the directive states that responsibility for
classifying credit and determining allowances for credit losses shall be imposed on a party within the
management of the banking corporation who is not responsible for business activity.
The inception date of the directive has been set at January 1, 2014.
By July 1, 2013, the Bank is required to present an implementation plan to the Supervisor of Banks,
including schedules and detailed work plans with regard to the necessary adjustments to credit risk
management (such as in organizational structure, information systems, analysis methods, reports, and
strategy documents). The Bank is preparing to implement this directive.
Regulations on Equal Rights for Persons with Disabilities (Adjustments for Accessibility of
Service), 2008
The regulations were approved by the Labor and Welfare Committee of the Knesset on December 18,
2012, but have not yet been published in the Official Gazette of the Israeli Government.
The regulations specify the required manner of accessibilization and adaptation of service in public
locations for persons with various disabilities; these regulations apply to the Bank.
The regulations will take effect six months after publication, and will be put into practice gradually,
between 2014 and 2018, as established therein.
The Bank is preparing to act in all required aspects in accordance with the regulations.
Banking Rules (Service to Customers) (Fees) (Amendment), 2012
The amendment to the rules was published in the Official Gazette of the Israeli Government on
November 28, 2012.
The amendment is one of the measures applied by the Bank of Israel to implement the
recommendations of the committee for the examination of competition in the banking industry, and is
aimed at increasing competition over households' short-term savings, improving households' ability to
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compare terms with regard to securities activity, increasing fairness, and providing bank customers
with more extensive and accessible information regarding the fees collected from the public.
The amendment addresses the following matters, among others:
1. Cancellation and change of various fees – e.g. the information card fee and cash withdrawal card
fee; credit and collateral processing fees – exemption increased from a ceiling of NIS 50,000 to a
ceiling of NIS 100,000; management fees for small businesses.
2. Customers' securities transactions – differential pricing of securities activity conducted through
different channels, cancellation of minimum fees for securities deposit management, and
expansion of the supervision of securities deposit transfer fees to cover transfers outside the
banking system.
3. Amendment of the definition of a "senior citizen" – customers will no longer be required to
present a senior citizen card in order to receive four clerk-assisted transactions per month at the
price of a transaction through a direct channel. Customers who reach the age specified by law will
be entitled to the benefit.
4. Publication of a fee list on the website of the banking corporation – a requirement to publish a
direct link on the bank's homepage to its fee lists. The amendment to the rules took effect on
January 1, 2013, with the exception of certain matters, which take effect on March 1, 2013.
The Bank is preparing to act in accordance with these rules.
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Companies Law (Amendment No. 20) (Terms of Service and Employment at Public Companies
and at Bond Companies), 2012
The amendment to the law was published in the Official Gazette of the Israeli Government on
November 12, 2012. Among other matters, the amendment to the law states that public companies and
bond companies shall be required to adopt a policy with regard to the terms of service and
employment of the chief executive officer, the directors, and the other officers (hereinafter:
"Remuneration Policy"). The Remuneration Policy shall be formulated and established by a
remuneration committee, the majority of which shall consist of external directors. The remuneration
committee shall submit its recommendations to the board of directors; final approval of the
Remuneration Policy shall be performed by a majority of the minority shareholders at the general
assembly. The amendment to the law requires a series of considerations and standards to be taken into
consideration in establishing the Remuneration Policy, including the promotion of the company's
goals; the creation of appropriate incentives for officers, taking the risk-management policy into
account; the size of the company and the nature of its activity; and the officer's education and
professional experience. The law took effect 30 days from the date of its publication in the Official
Gazette, and companies are required to establish a Remuneration Policy for the first time within 9
months of the inception date of the amendment.
The Bank is preparing to act in accordance with the directives of this law.
Letter of the Supervisor of Banks to Banking Corporations Concerning Restriction of the
Financing Rate in Housing Loans
On November 1, 2012, the Supervisor of Banks sent a letter to banking corporations concerning the
restriction of the financing rate in housing loans. The letter states that banking corporations shall not
approve housing loans with financing rates higher than 75% for a sole residence, or 50% for a
residence acquired as an investment. Other housing loans shall not be approved at a financing rate
higher than 70%.
The letter applies to housing loans granted approval in principle starting November 1, 2012.
The Bank acts in accordance with the directives of this letter.
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Law for Fighting the Iranian Nuclear Program, 2012
This law, which concerns the fight against Iran's nuclear program, was published in the Official
Gazette of the Israeli Government on August 5, 2012. The law formalizes and expands the sanctions to
be imposed in Israel on entities that conduct dissemination activities, as defined in the law, with Iran,
and establishes increased sanctions for corporations that maintain business relations with Iran. Among
other matters, the law states that persons who conduct economic activity with entities in the list of
entities declared as engaged in dissemination of the Iranian nuclear project shall be subject to three
years' imprisonment. The law also imposes the reporting regimen established in the Money
Laundering Prohibition Law, 2000, on all types of prohibited activities under the law. These reporting
requirements also obligate banking corporations to report the possible existence of economic activity
with entities declared as specified in the law; banking corporations will be required to establish an
internal enforcement regime in this area. Furthermore, the law imposes the regimen of monetary
sanctions established in the Money Laundering Prohibition Law, 2000, on the applicable reporting
regimen with respect to those who fail to fulfill their duties pursuant to the law and the derived duties.
It should be emphasized that the Governor of the Bank of Israel and the Minister of Justice have been
authorized to issue guiding orders to banking corporations regarding the examination of identifying
information of parties to economic activity against identifying information of entities declared to be
engaged in dissemination. The law also prohibits investment in corporations declared to maintain
"business relations with Iran," as defined in the law; this prohibition also applies to banking
corporations. The inception date of most parts of the law was set as the date when the Minister of
Finance, who is responsible for implementation of the law, enacts regulations regarding the manner of
execution and implementation of the law.
Uniform Contracts Law (Amendment No. 4) (Establishment of Minimum Linkage Rate as a
Depriving Condition), 2012
The law was passed in a second and third reading by the Knesset plenum on July 9, 2012, and
published in the Official Gazette of the Israeli Government on July 12, 2012.
The amendment states that a condition establishing linkage of a price or other payment under a
contract to any index, such that a decrease or increase of the index does not benefit the customer, is a
depriving condition. For the banking system, contracts such as contracts for loans, mortgages,
guarantees, etc. that contain a linkage mechanism including a floor rate shall be considered contracts
that contain a depriving condition. The inception date of the law has been set at November 12, 2012.
The Bank is preparing to implement this law.
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Regulations for Regularization of Engagement in Investment Advising, Investment Marketing,
and Investment Portfolio Management (Reports), 2011
The regulations were published in the Official Gazette of the Israeli Government on June 14, 2012.
The regulations expand the existing reporting requirements in the areas of advising, marketing, and
management of investment portfolios, to the customer, to the public, and to the Israel Securities
Authority. The regulations establish an obligation for portfolio managing corporations to issue a
quarterly report to their customers containing various information and data, as detailed in the
regulations (including data regarding returns, expenses, management fees, exposure, etc.).
Portfolio managers are also required to submit an annual report to the general public, which serves as a
brief prospectus regarding the portfolio manager, to include data on the portfolio management method,
incentive structure, management fees collected, fee refunds, management rate for institutional clients,
customer departure rate, and more.
A third group of reports required under the regulations are reports submitted to the Israel Securities
Authority only, which are not disclosed to the public. These reports include immediate reports,
quarterly reports, annual reports, and, for banking corporations, also monthly reports containing data
regarding all transactions executed during the preceding month in securities and financial assets,
through the investment advisors employed at the bank, in the accounts of customers who have signed
an advising agreement.
The regulations took effect on December 14, 2012. The Bank acts in accordance with these
regulations.
Non-sufficient Funds Check Law (Amendment No. 9), 2012
An amendment to the law issued on May 14, 2012. Pursuant to the amendment, banks will be required
to notify a person added to an existing account, as an owner or as a holder of power of attorney, if
checks were drawn on the account with insufficient funds over the year preceding his or her addition.
The report shall include the number and amounts of such checks as well as the information whether
the Bank of Israel imposed restrictions on the account or its owners in the three years preceding the
addition. This law took effect on September 14, 2012. The Bank acts in accordance with the directives
of this law.
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Money Laundering Prohibition Law (Amendment No. 10), 2012
An amendment to the law issued on May 14, 2012. The amendment mainly concerns traders in
gemstones (primarily diamonds) whose transactions are conducted anonymously, based on a tradition
of personal trust. The new law imposes an obligation on the traders to report transactions executed in
cash, with identification of the parties to the transaction and recording of the parties' information.
These reporting requirements will not take effect until the publication of an order concerning
gemstone traders; such an order has not yet been published. The Bank is monitoring the publication of
this order, and will subsequently consider its implications and effects on its working procedures in the
diamonds sector, for which the Bank provides banking services.
Update of Decision No. 99-4, Guidelines for Examination of Materiality of Errors in Financial
Statements and Instructions for Restatement of Financial Statements
On March 12, 2012, the Israel Securities Authority issued an update of Decision No. 99-4 of
December 2005 concerning materiality in the correction of errors in financial statements, which sets
forth guidelines for the examination of such materiality. Main points of the updates:
A. An increase of the quantitative threshold for examination of the error relative to capital, and
equalization with the quantitative threshold for examination of the error relative to profit and loss
(the threshold has been set at 5%).
B. Addition of guidelines for examination of the qualitative aspect, with regard to the examination of
an error below the quantitative threshold that may be material, and with regard to the examination
of an error above the quantitative threshold that may not be material to correct.
C. Addition of guidelines for the examination of materiality of errors in financial statements for the
interim period.
D. Addition of guidelines for the manner of correcting financial statements due to the existence of a
material error.
On March 11, 2012, the ISA issued a guideline with regard to disclosure in respect of the restatement
of financial statements in the event of a material error in the financial statements that requires
correction, in order to create uniformity in the details of the disclosure that companies must provide in
their reports on the correction of such errors. The presence of a material error in the financial
statements requiring correction constitutes an "event or matter" that must be reported in an immediate
report, pursuant to Regulation 36(A) of the Periodic and Immediate Reports Regulations. This
immediate report shall include all information that is important in order for investors to understand the
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material error, its impact on the financial statements, and the effect of its correction, including
information regarding the date when the corporation first became aware of the error, identification of
all periods the financial statements for which contain a material error, and a description of the
correction of the error, including the amounts of the correction and the method of correcting the
financial statements that contain a material error, with detailed schedules for publication. According to
the guideline, the corrected reports shall be republished no later than ten business days from the date
on which the obligation arises to publish an immediate report regarding the existence of the material
error. In addition, the corporation shall include, in the board of directors' report attached to the
periodic or quarterly report in which the material error is corrected, the board of directors' comments
on the restatement of the financial statements, including the conclusions of the board of directors and
the management of the corporation regarding the effectiveness of the internal control over financial
reporting and disclosure, as well as details of mechanisms which the board of directors has decided to
apply and tools that it has decided to use subsequent to the error, in order to prevent the recurrence of
errors in financial reporting.
The Bank is studying the key points of these directives and preparing accordingly.
Banking Law (Legislative Amendments), 2012
On March 12, 2012, the Knesset plenum passed the Banking Law (Legislative Amendments), 2012, in
a second and third reading. The law includes amendments to the Banking Law (Licensing) and the
Banking Order; its primary goal is to complete the arrangements established in the aforesaid laws with
regard to the manner of proposing candidates for service as directors in a banking corporation without
a controlling core, and the appointment and service of such directors, with the aim of preventing de
facto control over such a banking corporation without a control permit from the Bank of Israel.
The law also includes several amendments applicable to all banking corporations that are public
companies, such as a prohibition for the board of directors of the banking corporation to appoint
directors to the board of directors. Additional amendments were made to the Fit & Proper process.
The Bank, which is a banking corporation with a controlling core and a public company, is prepared to
act in accordance with the new directives.
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Legislation and regularization initiatives:
Bill for Increased Tax Collection and Enforcement (Legislative Amendment and Temporary
Order), 2012
A government bill published in the Official Gazette of the Israeli Government on November 5, 2012.
Among other matters, the bill proposes amending the Money Laundering Prohibition Law, 2000, to
add tax offenses with a mental foundation of intent according to the various tax laws to the original
offenses listed therein. The bill further proposes amending the law to allow direct transfers of
information from the Money Laundering Prohibition Authority to the Tax Authority. The goal of the
amendment is to improve the efficiency of and increase enforcement, and to reduce the volume of
"hidden capital" in Israel.
The Bank is following the progress of the legislative proceedings connected with this bill.
Draft Update of Guidelines on Housing Loans
On February 18, 2013, the Supervisor of Banks issued draft guidelines, with the following main
points:
A. With regard to the calculation of capital adequacy:
- The risk weighting for loans secured by a mortgage on a residential property with a financing
rate of up to 45% shall remain unchanged at 35%.
- The risk weighting for loans secured by a mortgage on a residential property, executed from
January 1, 2013 forward, with a financing rate greater than 45% and up to 60%, shall be 50%
(instead of 35%).
- The risk weighting for loans secured by a mortgage on a residential property, executed from
January 1, 2013 forward, with a financing rate greater than 60% , shall be 75% (instead of
35% or 100%).
The Supervisor of Banks' letter of October 28, 2010 entitled "Floating-rate leveraged
housing loans" will not apply to loans executed as of January 1, 2013 (the Supervisor of
Banks' main requirement in October 2010 was to apply 100% weighting to loans with a
financing rate of more than 60%, in an amount of more than NIS 800,000, with a floating-
rate component of 25%).
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- The credit conversion coefficient for guarantees under the Sale Law after the residence is
transferred to the owner shall be reduced from 20% to 10%. This amendment will apply
retroactively.
The Bank will examine the need to change its policies in the area of housing loans.
B. Starting with the report for the first quarter of 2013, the collective allowance for credit losses
maintained in respect of housing loans shall not fall below 0.35% of the balance of such loans at
the reporting date. According to an initial estimate, the effect is estimated at an increase of
approximately NIS 12 million in the collective allowance.
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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 the directives of the
Supervisor of Banks, 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).
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
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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.
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
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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
Data as at December 31, 2012 (in NIS thousand) 1
Details
Balance of balance-sheet
credit Unutilized
credit facility
Risk-weighted 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 Yeshayahu Landau group and private companies under its control 111,631 - - - - 111,631 44,231
Total Yeshayahu Landau group 111,631 - - - 111,631 44,231
Manor group and private companies under her control - - - - 5,208 5,208 -
Public companies under her
control (IDB group) 1,041** 18,836 1,548 95 58,131 79,651 -
Total Manor group 1,041 18,836 1,548 95 63,339 84,859 -
* Including off-balance sheet exposure in respect of derivative instruments. ** After allowance for credit losses in the amount of NIS 5 million. - 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. - The data listed above is in accordance with the definition of “indebtedness” in Directive 313.
1 As of 29.10.12 Mr. Shlomo Eliyahu and Mrs. Chaya Eliyahu ceased to have control of the Bank - see section
"Investments in the Banks" Capital and Transactions in its shares".
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2. Transactions in deposits
The balances of deposits with the Bank of all controlling shareholders totaled NIS 366 million
on December 31, 2012. The highest balance during 2012 was as follows: Group I – NIS 757
million; Group II – 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, 2012 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, 2012
Maximum annual interest
December 31, 2012
Weekly fixed-rate deposit in NIS 0.47% 3.055%
Daily fixed-rate deposit in NIS 1.92% 2.4%
Variable interest short-term deposits 1.96% 1.96%
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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
100% 0%
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. For details regarding the acquisition of a directors' and officers' liability (D&O) insurance
policy in the Bank and in subsidiaries on October 31, 2012 – see immediate reports
published by the Bank on September 10, 2012 (reference 2012-01-235236), immediate
report regarding the summon of a general meeting from September 11, 2012 (reference
2012-01-235350) and an immediate report regarding the outcome of the meeting from
October 31, 2012 (reference 2012-01-268728) and note 18.C.(17) to the financial reports.
2. On June 22, 2009, the general meeting 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. For further details regarding this transaction see note 18.C.(14) and see
immediate report from May 14, 2009 and immediate report regarding the outcome of the
meeting from June 22, 2009.
- 192 -
3. On October 31, 2012 the Banks' general meeting approved an amendment of the version of
the liability deed for indemnity for officers of the Bank and its subsidiaries, including
directors, whom controlling shareholders might have a personal interest in giving them a
commitment to indemnity, directors who hold office today, held office in the past or will
hold office in the Bank or its subsidiaries. For details see note 18.C.13 and immediate reports
from, August 5, 2012 (reference 2012-01-201465). Likewise, for further details regarding the
amendment of the liability deed for indemnity and the amendment of the regulations see
immediate report regarding the summon of the general meeting from September 11, 2012
(reference 2012-01-235350) and immediate report regarding the outcome of the meeting
from October 31, 2012 (reference 2012-01-268728) and immediate report regarding the
change in the Banks' regulations from November 1, 2012 which includes different
corrections, and among other corrections, the corrections listed above (reference 2012-01-
268998). Likewise, see immediate report regarding the outcome of the meeting from
February 6, 2013 (reference 2013-01-032061) and immediate report on the change in the
Banks' regulations from February 7, 2013 (reference 2013-01-032415).
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 an importance in the Banks'
involvement in the community and are 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 through the Banks' 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.
Also, the board of directors of the Bank 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.
During 2012, the Banks' donation budget doubled and amounted to NIS 1 million. The budget addition
enabled the Bank to deepen into the community orientated activities it dealt with in the past and to add
more activities to that.
The Bank supported various foundations and organizations, local ones and those operating nationwide
who donate to the needy.
- 193 -
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, which include the
involvement of employees and managers of all levels. 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 the Bank
assisted outstanding students from a pour socioeconomic backround..
Another key area to which the Bank devotes extensive attention, for the past several years, 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.
In 2012, the Bank joined forces with the foundation "Zionism 2000" for a long-term planning of
institutionalized activity in the community. The Bank joined forces with a foundation that nurtures
leadership among disadvantaged populations and built a long term plan to help promote leadership in
the society while incorporating the employees in the activity.
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 2012 amounted, as aforesaid, to NIS 1 million,
Disclosure Regarding the 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 audits on behalf of the auditing CPA 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
- 194 -
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 information technology audit published by the Open University in 2012. 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.
The internal auditor operates by virtue of the Banks' board of directors' letter of appointment (charter). The
letter of appointment regulates his job and authority.
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 derived from the
Internal Audit Unit’s multi-year work plan; the annual 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. Other areas are integrated into the multi-year work plan of
internal auditing (mainly those related to corporate governance).
The work plan is discussed and 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 Audit Committee.
- 195 -
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.
Average Number of Positions in 2012
Chief Internal Auditor 1
Employees of the Internal Audit Unit at the Bank 17
Outsourcing 1.25
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. Likewise, audit reports that the
Auditing Committee believes are important to be presented in the plenum of the board of directors, after
receiving the internal auditors' recommendation, are presented to the board of directors' plenum. Following
conclusion of the discussion in the audit committee, the Chief Internal Auditor monitors any faults
- 196 -
until resolution. As part of the monitoring process, the uncorrected defects are examined
approximately once every six months by the management of the Bank, and subsequently by the audit
committee, in order to make sure that the defects are repaired correctly and in appropriate periods of
time. In addition, in accordance with the Proper Conduct of Banking Business Directive No. 307 , 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 2012 were held on July 19, 2012 and February
18, 2013.
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.
Remuneration
The following table lists payments to the Chief Internal Auditor in 2012, in accordance with the details
required in the table of high wage recipients at the Bank:
NIS thousands Remuneration for services(1), (2): Salaries - wages 821
Compensation, pension, advanced-study fund, vacation, National Insurance and usage value 193
Supplement of provisions for incidental expenses due to changes in wages in the accounting year 15
Bonus (3) 139 Total salaries 1,168
(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) 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.
- 197 -
(3) An estimated bonus in respect of 2012 was included – see details in Section F(4) of the chapter
"Remuneration of Interested Parties and Senior Officers." Note that bonuses that were paid during
2012 on behalf of previous years (2010-2011) according to spread payments in accordance with
the remuneration plan, were not included in the number above. The total bonus in respect of 2010
which was determined according to the bonus plan, amounted to NIS 210 thousand. During 2011,
half of it was paid, and during 2012 another quarter was paid. The last quarter is conditioned as of
December 31, 2012 – see note 15.D. The total bonus in respect of 2011which was determined
according to the bonus plan, amounted to NIS 195 thousand. During 2012, half of the amount was
paid. The other half is conditioned as of December 31, 2012 – see note 15.D.4.
(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
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 2011, in addition to linkage Mr. Orban received a bonus of 3.4%. In 2012, beyond this linkage
there was no change in Mr. Orbans' salary.
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.
- 198 -
The Board of Directors
Information regarding the Directors of the Bank is set out below:
Name of Director: Zeev Abeles Yeshayahu Landau Haim Almog
Identification No.: 4333126 4968657 50708684
Date of Birth: 8.3.1947 8.8.1929 19.7.1951
Address for court
documents:
Sokolov 15, Raanana Daniel Freish 4, Tel-
Aviv
Beit Tzarfat Delder,
Toval 5, Tel-Aviv
citizenship Israeli Israeli Israeli
Role: Chairman of the Board of Directors Director,Vice
Chairman of the Board
of Directors
Director
Membership in
committees of the
Board of Directors:
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.
Chairman of the Fixed
Assets Transactions
Committee, Member of
the following
committees: Board of
Directors' Credit
Committee, Urgent
Credit Approval
Committee, Budgetary
Follow-up Committee,
Payroll and
Remunerations
Committee
Member of the
following committees:
Board of Directors'
Credit Committee,
Insurance Committee,
the Budgetary Follow-
up Committee, and
Compliance and
Regulation Committee.
External director
under the proper
conduct of business
directives
and/or under the
provisions of the
companies law:
No No No
- 199 -
Independent director
under the provisions
of the companies law:
No No No
Has an accounting
and financial
expertise or a
professional
qualification:
Has accounting and financial
expertise. Has professional
qualification.
Has accounting and
financial expertise.
Employee of the
Bank, its subsidiary,
a related company or
an
interested party:
Employed on the corporation as
Chairman of the Board
No No
The day he began
serving as a director
of the bank:
November 1, 1999 June 15, 1993 September 25, 2001
Education: CPA; B.A. in Economics, Hebrew
University of Jerusalem; B.A. in
Accounting, Tel Aviv University.
High-school graduate.
B.A. in Economics, Tel
Aviv University.
Occupation during
the last five years: Chairman of the Board of Union
Israel Bank Ltd.
Director at the following
companies: Zofnat Consulting
Assets and Management (2002)
Ltd.; Tchelet (Tel Aviv-Herzliya)
Coast Development Co. Ltd.;
Edgar Investments and
Development Ltd.; Melisron Ltd.
(until 31.3.12); Tel Aviv-Jaffa
Economic Development
Authority Ltd. Chairman of the
Administrative Board of the Open
University (voluntarily).
Manager of companies
and Vice Chairman of
the Board of Union
Israel Bank Ltd.
Chairman of the Board
of Hiram Landau Ltd.;
CEO and Director at
the following
Companies: Yeshayahu
Landau Holdings
(1993) Ltd.; Yeshayahu
Landau Properties
(1998) Ltd.; Riverton
Corporation
(Switzerland) Ltd.;
Carlton Trading
Manager of businesses
and
Director at the
following companies:
Director at the
following companies:
David Lubinski
Properties (Holdings)
1993 Ltd.; Cheroudar
Properties Ltd.;
Almozlino Ltd.
- 200 -
(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.
Other corporations
in which he serves as
a director or officer:
Director at the following
companies: Zofnat Consulting
Assets and Management (2002)
Ltd.; Tchelet (Tel Aviv-Herzliya)
Coast Development Co. Ltd.; Z
Edgar Investments and
Development Ltd.; Tel Aviv-Jaffa
Economic Development
Authority Ltd. Chairman of the
Administrative Board of the Open
University (voluntarily).
Chairman of the Board
of Hiram Landau Ltd.;
CEO 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
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
- 201 -
Management (2002)
Ltd.; Langat
Development Ltd;
Hiram- Epsilon Ltd.;
Ratio Oil Ltd.;
Member of the Board
of Governors of the
Technion.
A family member of
an interested party of
the Bank:
No Yes No
A director that the
bank sees as
possessing an
accounting and
financial expertise in
order to meet the
minimum number
that
the board of directors
determined
according to section
92(a)(12) of the
companies Law-1999
"The Companies
Law"):
Yes No Yes
- 202 -
Name of Director: Uzi Vardi-Zer Yigal Landau Miri Lent-Sharir
Identification No.: 010019156 56467665 054075239
Date of Birth: 11.11.1938 13.5.1960 28.8.1956
Address for: Adam Hacohen 3, TelAviv Daniel Freish 4, Tel-
Aviv
Tzvia Lovtkin 2, Kfar
Saba
citizenship Israeli Israeli Israeli
Role: Director Director Director
Membership in
committees of the
Board of Directors:
Member of the following
committees: Board of Directors'
Credit Committee; Audit
Committee; Financial Statement
Review Committee (until 31.12.12);
the Urgent Credit Approval
Committee, the Non-Financial
Investments Committee and the
Remuneration Committee.
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.
Member of the following
committees: Budgetary
Follow-up Committee,
Financial Statement
Review Committee (until
31.12.12), Insurance
Committee, Compliance
and Regulation
Committee, Risk
Management
Committee, Non-
Financial Investments
Committee and
Remuneration
Committee.
External director
under the proper
conduct of business
directives
and/or under the
provisions of the
companies law:
External director under Proper
Conduct of Banking Business
Directive No. 301.
No External director under
Proper Conduct of
Banking Business
Directive No. 301
Independent director
under the provisions
of the companies law:
Yes No Yes
Has an accounting
and financial Has accounting and financial
expertise.
Has accounting and
financial expertise.
Has accounting and
financial expertise.
- 203 -
expertise or a
professional
qualification:
Employee of the
Bank, its subsidiary,
a related company or
an
interested party:
No General Manager of
Hiram Landau Ltd. and
of Ratio Oil
Exploration Ltd.,
companies which
Yeshayahu Landau, a
controlling interest of
the Bank, is of interest
in them.
No
The day he began
serving as a director
of the bank:
August 21, 2005 June 15, 1993 January 31, 2006
Education: B.A. in Economics and International
Relations, Hebrew University of
Jerusalem; Diploma in Business
Administration, Hebrew University
of Jerusalem.
M.B.A. in Business
Administration, Tel Aviv
University; B.Sc. in Civil
Engineering, Technion,
Haifa.
B.A. in Economics,
M.B.A. in Finance and
Accounting, Tel Aviv
University.
Occupation during
the last five years: Chairman of the following
companies: Ligat Holdings Ltd.;
Ligat Industries Ltd.
Director at the following
companies: Gmul Investments
Company Ltd.; Gmul Real Estate
Ltd.; A. Dori Ltd. Group, A Dori
Construction Ltd. and Rom Geves
Casing and Covering (1997) Ltd.,
in Hiron - Trade Investment and
Industrial Building Ltd. and a
member of the Investment
Committee of Reality fund of
Egged Investments. Member of
Engineer, manager of
companies. Director at
the following
companies: Proceed
Venture Capital Fund
Ltd.; Ratio Oil
Exploration Ltd.,
Proseed Management
Venture Capital (1999)
Ltd., Hotam Hiram
Management (2002)
Ltd.; Hiram-Epsilon
Ltd.; .; Langat Ltd.;
Landlan Ltd. and Dalia
Director at various
companies; investment
activities as a private
investor.
- 204 -
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.
Power Energies Ltd
Other corporations
in which he serves as
a director or officer:
Chairman of the following
companies: Ligat Holdings Ltd.;
Ligat Industries Ltd.
Director at the following
corporations: A Dori Construction
Ltd. and Rom Geves Casing and
Covering (1997) Ltd., Hiron -
Trade Investment and Industrial
Building Ltd. and a member of
the Investment Committee of
Reality fund of Egged
Investments. 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,
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.,
Proseed Management
Venture Capital (1999)
Ltd., Hotam Hiram
Management (2002)
Ltd.; Hiram-Epsilon
Ltd.; .; Langat Ltd.;
and Landlan Ltd.
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.
A family member of
an interested party of
the Bank:
No Yes No
A director that the
bank sees as
possessing an
accounting and
financial expertise in
order to meet the
Yes Yes Yes
- 205 -
minimum number
that
the board of directors
determined
according to section
92(a)(12) of the
companies Law-1999
"The Companies
Law"):
- 206 -
Name of Director: Dr. Yaacov Lifshitz Giora Morag Dr. Zalman Segal
Identification No.: 007848047 0109606709 01387596
Date of Birth: 16.7.1944 27.2.1945 23.2.1937
Address for: Hameri 49, Givataim Avshalom Haviv 4,
Tel-Aviv
Adam Hacohen 3, Tel-
Aviv
Citizenship Israeli Israeli Israeli
Role: Director Director Director
Membership in
committees of the
Board of Directors:
Chairman of the financial
Statements Review Committee
(until 31.3.12) and Member and of
the following committees: Risk
Management Committee; Audit
Committee; Insurance Committee;
credit to the diamond industry and
Remunerations Committee ;
Member of the following
committees: Audit
Committee; Budgetary
Follow-up Committee;
Financial Statement
Review Committee (until
31.12.12); Payroll and
Remunerations
Committee and
Compliance and
Regulation Committee.
Chairman of the Audit
Committee and
chairman of the
Remuneration
Committee and
member of the following
Committees: Financial
Statement Review
Committee (until
31.12.12), Credit to the
Diamond Industry
Committee, Insurance
Committee, Compliance
and Regulation
Committee and Payroll
and Remunerations
Committee.
External director
under the proper
conduct of business
directives
and/or under the
provisions of the
companies law:
External director under the
Companies Law.
External director under
Proper Conduct of
Banking Business
Directive No. 301.
External director under
the Companies Law.
Independent director
under the provisions
of the companies law:
Yes Yes Yes
- 207 -
Has an accounting and
financial expertise or a
professional
qualification:
Has accounting and financial
expertise.
Has accounting and
financial expertise.
Has accounting and
financial expertise.
Employee of the Bank,
its subsidiary, a
related
company or an
interested party:
No No No
The day he began
serving as a director of
the bank:
November 2, 2008 October 29, 2006 February 8, 2010
Education: 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
Studied Economics and
Political Science at the
Hebrew University of
Jerusalem.
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 during the
last five years:
Director at the following
companies: Carmel Investment
Group Ltd.; Elbit Systems Ltd.;
Kali-Management of Pension
Agreements Insurance Agency
Ltd.; Poalim I.B.I. – Management
& Underwriting Ltd.; Member of
the Appointment Committee of the
Company for Location and
Restitution of Holocaust Victims'
Assets 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
Director of Delta
Textiles Ltd..
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.
- 208 -
and the Economics Department of
the College Of Management.
Other corporations in
which he serves as a
director or officer:
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) and Guest lecturer at
Ben-Gurion University in
Economics and Public Policy.
None Director and Chairman
of the Audit Committee
of Alon USA
{NYSEC};
A family member of
an interested party of
the Bank:
No No No
A director that the
bank sees as
possessing an
accounting and
financial expertise in
order to meet the
minimum number that
the board of directors
determined according
to section 92(a)(12) of
the companies Law-
1999
"The Companies
Law"):
Yes Yes Yes
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Name of Director: Alberto Garfunkel Izhak Zisman
Identification No.: 012592424 10605103
Date of Birth: 7.9.1955 12.10.1937
Address for: Shapira 11/69 Ramat-Gan Berkovitch 4, museum tower, Tel-
Aviv
citizenship Israeli Israeli
Role: Director Director
Membership in
committees of the Board of
Directors:
Member of the following
committees: Board of Directors’
Credit Committee, Urgent
Credit Approval Committee,
Audit Committee, Risk
Management Committee; Fixed
Asset Transactions Committee,
Non-Financial Investments
Committee and Remuneration
Committee.
Member of the Credit to the
Diamond Industry Committee and
Remuneration Committee.
External director under the
proper conduct of business
directives
and/or under the
provisions of the
companies law:
External director under the
Companies Law.
No
Independent director
under the provisions of the
companies law:
Yes No
Has an accounting and
financial expertise or a
professional qualification:
Has accounting and financial
expertise.
Has professional qualification.
Employee of the Bank, its
subsidiary, a related
company or an
interested party:
No No
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The day he began serving as
a director of the bank:
December 7, 2010 January 30, 2012
Education: Holds a B.A. degree in
Economics from Ben-Gurion
University.
Holds a degree in Law, the
Hebrew University of Jerusalem.
Occupation during the
last five years:
Financial Advisor,
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.,
Partner at Shibolet & Co. Law
Firm.
- 211 -
Other corporations in
which he serves as a
director or officer:
None Director at the company: Zisman
Izhak Lawyer.
A family member of an
interested party of the Bank:
No No
A director that the bank sees
as possessing an
accounting and
financial expertise in
order to meet the
minimum number that
the board of directors
determined according to
section 92(a)(12) of the
companies Law-1999
"The Companies Law"):
Yes No
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During 2012, the Board of Directors held 18 meetings in plenary session and 107 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 in the Banks' credit policy.
b. Credit to the Diamond Industry Committee - deals with approvals of credit to diamond
merchants based on the authority it was granted in the Banks' credit policy.
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
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. Likewise, as of 2013 and as required by Proper Conduct
of Banking Business Directive No. 301, the Audit Committees' roles include an
examination of the Banks' annual and quarterly reports to the public and the transfer of
its recommendations regarding their approval to the Banks' board of directors.
d. The Balance Sheet Committee - which up until the end of 2012 held deliberations on
the gamut of issues relating to the financial statements and submits its recommendation
regarding the approval of the financial statements, was cancelled as of January 1, 2013.
This happened within the implementation of Proper Conduct of Banking Business
Directive No. 301, according to which, the Audit Committee will serve as a committee
which discusses the Banks' financial statements and recommends approval of the board
of directors.
e. Remuneration Committee – was established on November 29, 2012. The powers and
roles of the Remuneration Committee are the roles defined in section 118 of the
Companies Law – 1999 (hereinafter: the Companies Law), including advising the
Board of Directors about the reprisal policy for officers and updating it as required by
the Companies Law. This committee also decides whether or not to approve
transactions regarding the service and employment terms of officers which are subject
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to the approval of the Remuneration Committee, or decides whether or not to approve
the exemption of a transaction from the approval of the general meeting, all in
accordance to the guidelines set by the Companies Law.
The Payroll and Remunerations Committee - holds deliberations on the policy and
decisions concerning wages and employment, which are in the Board of Directors'
authority according to the board of directors' work procedure or according to the law,
and which are not included in the Remuneration Committees' roles as detailed
above..
f. The Insurance Committee - holds deliberations on insurance proposals received by the
Bank and officers of the Bank.
g. Urgent Credit Approval Committee – Handles the approval of credit applications
classified as urgent, according to authority levels set by the Banks' credit policy.
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. 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.
k. The Fixed Asset Transactions Committee – Approves transactions in fixed assets
executed by the Bank or by companies under its control in amounts exceeding the
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amount established by the board of directors of the Bank from time to time, subject to
the Proper Conduct of Banking Business Directives.
l. 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.
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 all members of the Audit Committee
shall have the ability to read and understand financial reports and that at least two of its members
will have financial and accounting expertise. 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.
- 215 -
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
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
- 216 -
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 Audit Committee in its role as a Financial Statements
Examination Committee have accounting and financial expertise, and nine of the members
of the Board of Directors have accounting and 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.
- 217 -
Members of Management and Senior Officers
Members of Management
Mr. Haim Freilichman President & C.E.O.
Mrs. Edna Press-Lachisch 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. Menachem Morag Senior Deputy General Manager; Head of Resources Division
Mrs. Shevy Shemer Deputy General Manager; Head of Business Division
Other Senior Officers:
Dr. Moriah 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
- 218 -
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 Press-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.
- 219 -
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 Control and Risk Management Division and Chief Risk
Office of the Corporation.
Mr. Menachem 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: Head of Resources Division of the corporation.
- 220 -
Mrs. Shevy 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, in charge of the prohibition of
money laundering and in charge of enforcement in the securities domain.
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.
- 221 -
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 (as needed), 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 Audit committee(1) 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 Audit
committee (1) 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-temporary nature of
- 222 -
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 (a quarterly discussion on this
subject is held when changes have occurred).
The Audit Committee(1) 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 Audit Committee 1(1) 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 Audit Committee(1); 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. In the annual statements, Mr. Landau is authorized within
his role as Vice Chairman of the Board of Directors.
1 Until the end of 2012 - the financial statements review committee.
- 223 -
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.
- 224 -
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.
- 225 -
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
During the quarter that ended on December 31, 2012, there was no change in the Banks' internal
control regarding financial report, which materially affected, or is likely to materially affect the Banks
internal control regarding financial report.
226
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 2012, in thousands of NIS:
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
Z. Abeles Chairman of the Board of Directors (A) 75% 0.01%4 2,208 733 112 529 3,582 - 3,582
H. Freilichman President & C.E.O. (B) 100% 5 2,230 834 41 592 3,697 - 3,697
E. Peres-Lachish Deputy general manager, Head of Retail Division, Client Assets and Bank Counseling(C) 100% - 1,148 364 115 189 1,816 5 1,821
A. Sternberg Deputy general manager, head of controls and risk management division (D) 100% - 1,074 424 80 177 1,755 2 1,757
H. Morag Senior Deputy General Manager; Head of Resources Division (E) 100% - 1,031 349 15 212 1,607 3 1,610
(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 2012 – see details in Section (F)(4) below. Note that bonuses paid during 2012 in respect of previous years (2010-2011), according to the compensation plans' payment schedule,
are not included in the table above. For details regarding these bonuses see sections (1), (2) and (3) below.
(4) Holder in 3,500 ordinary shares.
(5) See note 15A to the financial statements with regard to options, which expired during 2012, granted to the CEO.
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. According to the decision of the Banks' general
meeting from June 11, 2012, upon the conclusion of his employment at the Bank (excluding
cases in which his eligibility for severance pay is denied) , Mr. Abeles shall be entitled to severance
pay, as determined by law, at a rate of 100% of the last salary of the chairman at the date of termination
of his employment, multiplied by the number of years of his work as a chairman at the Bank (including
part of a year, proportionally, hereinafter: "100% severance pay"), instead of the amounts that should
have been deposited for him personally in a severance pay provident fund on his name according to
section 14 of the Severance Pay Law 1964. Therefore, upon termination of the chairmans'
employment, Mr. Abeles shall be entitled to all the funds and rights that accumulated and will
accumulate in the personal severance fund, and the Bank will continue to pay him money equal to the
difference between his right to 100% severance pay and between the funds and rights in the personal
severance fund. In addition, upon termination of his employment at the Bank, Mr. Abeles is entitled to
additional severance pay at a rate of 100% of his last salary multiplied by the number of years of his
work at the Bank (including part of a year, proportionally) as approved in the Banks' general meeting on
April 30, 2006. 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 2011 and
2012, 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 2, 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
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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 2012 and 2011. With
regard to entitlement to bonuses, see details in Section F below. With regard to options granted to the
CEO, which expired during 2012, see Note 15A to the Financial Statements.
C. Mrs. Edna Press-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 2011, in addition to the linkage, Mrs. Edna Press-Lachish received a
salary increase of 3.9%. In 2012, beyond the linkage, there was no change in Mrs. Edna Press-
Lachishs' salary.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
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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 2011, in addition to the linkage Dr. Sternberg received a salary increase of 4%. In
2012, beyond the linkage there was no change in Dr. Sternbergs' salary. With regard to
entitlement to bonuses, see details in Section F below.
E. Mr. Menachem Morag – Employed at the Bank under a personal employment agreement as of
May 23, 2006, in effect as of June 1, 2006, for an unlimited period. Each of the parties to the
employment agreement is entitled to terminate the contractual engagement pursuant to the
agreement at any time, for any reason, with six months' advance written notice, in accordance
with the terms established in the employment agreement (which include three months' advance
notice followed by three months of restricted competition, as detailed below). Upon termination
of his employment at the Bank, whether through dismissal or resignation, Mr. Morag is entitled
to receive ownership of his senior executives' insurance policy and to the release of all sums
accrued to his credit in the study fund, except if the termination of his employment occurred
under circumstances in which severance pay may be fully or partially denied, by law; in such a
case, Mr. Morag shall be entitled to the release of the compensation amounts arising from his
payments into the policy and study fund only, and to the relative share of the Bank's payments (if
any, as relevant) into severance pay, compensation, and the study fund. All of the payments
performed by the Bank towards severance pay, including all profits borne by such payments,
shall be at the expense of the severance pay, if Mr. Morag is owed such severance pay under the
Severance Pay Law, 1963. With regard to the restriction of competition (in the case of either
dismissal or resignation), Mr. Morag is entitled to three monthly payments in the amount of his
monthly salary, starting at the beginning of the second month immediately following the month
of the end of the advance notice period, provided that he complied with the restriction of
competition in the preceding month. Under circumstances in which the employment relationship
is terminated at the initiative of the Bank, Mr. Morag shall also be entitled, in respect of the
restriction of competition, to all payments (and deductions) into his senior executives' insurance
policy and study fund. The monthly salary of Mr. Morag is linked to the consumer price index. In
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2011, beyond this linkage, Mr. Morag received a pay raise of 4%. In 2012, beyond this linkage,
there was no change in Mr. Morag's salary. With regard to entitlement to bonuses, see details in
Section F below.
F. Bonuses:
(1) Bonus Plan:
Regarding the approved bonus plan for the Banks' senior managers see details in note
15.D.1 and 15.D.2 to the financial statements. Likewise, see the Immediate Report issued by
the Bank on April 11, 2011 (reference no. 2011-01-116199).
(2) Bonuses in respect of 2010:
Pursuant to this Bonus Plan, 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 Press Lachish – NIS 335 thousand, Dr. Akiva Sternberg – NIS 300 thousand, Mr.
Efraim Avraham – NIS 220 thousand.
In addition, on April 10, 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 and during 2012 another quarter was paid. The
payment of the last quarter as of December 31, 2012 is conditional according to the bonus
plan - see Note 15.D.2.
(3) Bonuses in respect of 2011:
In accordance with this bonus plan, following approval by the audit committee on April 24,
2012 and the recommendations received from the wage and employment committee of the
board of directors, on April 29, 2012, the board of directors of the Bank approved the
payment of bonuses in respect of 2011 to the CEO of the Bank, Mr. Haim Freilichman, in
the amount of NIS 1,071 thousand, and to the members of management, legal advisor, and
auditor of the Bank. Amounts of bonuses for the three reported senior officers: Ms. Edna
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Press-Lachish – NIS 245 thousand; Dr. Akiva Sternberg – NIS 245 thousand; Mr. Efraim
Avraham – NIS 190 thousand.
Further, following approval by the audit committee on April 24, 2012 and approval by the
board of directors at its meeting on April 29, 2012, and after receiving the recommendation
of the wage committee of the board of directors, on June 11, 2012, the general assembly of
the Bank approved a bonus for the chairman of the board of directors of the Bank, Mr. Zeev
Abeles, in the amount of NIS 956 thousand.
Note that half of the aforesaid bonuses were paid during 2012. As of December 31, 2012,
payment of the second half of the bonuses is contingent, in accordance with the bonus plan
– see Note 15.D.2.
(4) Bonuses in respect of 2012:
On February 28, 2013, the Board of Directors of the Bank discussed and approved the
amounts of bonuses1 for the senior officers mentioned in Section 1 above with respect to
2012, after receiving the recommendation of the remuneration committee of the board of
directors, which discussed and approved the amounts of the bonuses2 for the senior officers
on February 18, 2013, in accordance with the bonus plan approved by the authorized organs
of the Bank in 2011. As noted above, the application of this plan to 2012-2013 as well was
approved in 2012 by the Audit Committee, following the recommendation of the
Remuneration committee, and subsequently by the board of directors of the Bank (with
regard to the plan for the chairman of the board, also by the general assembly).
The data and parameters relevant to establishing the bonus for officers in respect of 2012,
according to the bonus plan (see details in the description of the bonus plan for senior
officers in Note 15.D.2 to the Financial Statements), were presented to the board of directors
and to the remuneration committee. Among other matters, the data presented to the board of
directors and the committee included the business results of the Bank for 2012, the annual
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 2012. Upon publication of the financial statements of the other banks, at the end of March 2013, a final calculation for this parameter will be performed and the calculation of the amounts of the bonuses will be adjusted accordingly.
2 The Remuneration 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 committee. The results of the bonus amounts, as presented in the committee, did not diverge materially from the results presented to the board of directors.
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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 system1. In
addition, the remuneration committee and the board of directors were presented with the
overall terms of employment of the officers and with data regarding the performance of the
officers in 2012, according to the parameters established in the bonus plan.
The amounts of the bonuses were approved after the remuneration committee and the board
of directors resolved that the calculation and approval of the bonus amounts in respect of
2012 pursuant to the bonus plan for the CEO and the chairman of the board would be carried
out based on scores for only the measurable parameters of the Bank's BSC (balanced score
card), as determined and approved in advance within the bonus plan, excluding any
discretionary components of the bonus plan. Accordingly, the personal evaluation
component, at a rate of 30% of the amount of the bonus allocated to the chairman of the
board (25%) and to the CEO (28%), out of the total bonus for all officers of the Bank, was
assigned a score of 0 for the purposes of the calculation and implementation of the bonus
plan for the CEO and the chairman in respect of 2012, and was deducted, in practice, from
the aforesaid amounts of the bonuses allocated to the CEO and to the chairman.
Consequently, the amounts of the bonuses for the CEO and the chairman were calculated
based only on the scores of the measurable parameters included in the Bank's BSC.
The calculation and approval of the amounts of the bonuses in respect of 2012 for officers
other than the CEO and the chairman of the board were performed based on the parameters
established and approved within the bonus plan for each such officer, including the personal
evaluation score for each such officer, and each officer's personal BSC score. This was
performed after the remuneration committee and the board of directors examined and
considered the considerations and matters to be reviewed pursuant to Amendment 20 to the
Companies Law, including the considerations listed in Section 267B(A) of the Companies
Law, 1999 (the "Companies Law"); considered the matters specified in Section A of the first
addendum to the Companies Law; and ensured that the directives in Section B of the
aforesaid addendum to the Companies Law were fulfilled, to the extent possible, in
accordance with the transitional directives in Amendment 20 to the Companies Law.
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The remuneration committee and the board of directors of the Bank concluded that in light of
the evaluation of the performance, functioning, and contribution to the Bank of each of the
officers, as well as their overall terms of employment, the volume of bonuses paid to the
senior officers within the bonus plan is reasonable, and is congruent with the business
position of the Bank; and they approved the amounts of the bonuses1, among other matters,
after examining the performance, functioning, and contribution to the activity of the Bank of
each of the officers as well as the officers' overall terms of employment.
(5) See the section "Legislative Amendments" – Companies Law (Amendment No. 20) (Terms
of Service and Employment at Public Companies and at Bond Companies), 2012.
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, 2012
Average term to maturity - in years
benefit granted during the year
guarantees granted under ordinary terms
Z. Abeles - - - -
H. Freilichman - - - 1,119
E. Peres-Lachish 127 2 5 29
A. Sternberg 132 2 2 1,001
M. Morag 49 1 3 4
* Including mortgages and credit cards.
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 2012:
Total payment received by all directors of the Bank amounted to NIS 3,757 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
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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 320
thousand.
(2) To Mr. Yigal Landau (Yeshayahu Landau's son, a controlling shareholder of the Bank) - an
amount of NIS 195 thousand.
Remuneration of Auditors The following table provides details of the remuneration of the external auditors of the Bank:
Consolidated The Bank 2012 2011 2012 2011 NIS
thousandsNIS
thousandsNIS
thousands NIS
thousands For the audit activity: (1)(2)(3)
The external auditors 4,511 4,430 4,264 4,175
Other auditor 170 178 - - Total 4,681 4,608 4,264 4,175
For additional services: (3)
For audit related services:
The external auditors 425 664 425 664
Tax services:
The external auditors 177 253 114 161
Other services:
The external auditors 188 (4)151 188 93
Other auditor 6 16 - - Total 796 1,084 727 918 5,477 5,692 4,991 5,093 (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.
- 235 -
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 28, 2013
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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 2008 - 2012 Appendix B Consolidated Statements of Profit and Loss for 2008 - 2012 Appendix C Rates of Income and Expenses Appendix D Exposure to Interest Rate Fluctuations Appendix E Credit risk by economic sectors 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
2012 2011 %
Profitability
Net interest income 660 650 1.5
Provision for credit losses 65 27 140.7
Net interest income after provision for credit losses 595 623 (4.5)
Non-interest income 357 316 13.0
Of which: Non-interest financing income 65 4 1,525.0
Operating and other expenses 800 787 1.7
Net profit 127 132 (3.8)
Net return of the net profit on the average equity 6.2% 6.7%
December 31 December 31 Change 2012 2011 %
Balance sheet
Credit to the public, net 23,573 22,868 3.1
Securities 4,940 6,785 (27.2)
Deposits from the public 30,890 31,158 (0.9)
Total equity 2,191 1,986 10.3
Total balance sheet 38,825 38,915 (0.2)
% %
Financial ratios
Equity to total balance sheet 5.6 5.1
Operating and other expenses to total incomes (net interest income and non-interest income) 78.7 81.5
Provision for credit losses to net credit to the public 0.3 0.1
Total capital ratio to risk components 14.9 13.8
Tier I (core) capital ratio to risk components 8.7 8.1
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Appendix A Year-End Consolidated Balance Sheets
Reported amounts 2012 2011 2010 2009 2008 NIS millions
Assets Cash on hand and
deposits with banks 8,246 6,961 7,132 4,188 5,146 Securities 4,940 6,785 4,553 5,545 6,920 Borrowed securities 68 5 415 274 11 Credit to the public(1) 23,858 23,140 22,749* 20,054* 19,535* Provision for credit losses(1) (285) )272( *(1,036) *(1,002) *(996) Credit to the public, net 23,573 22,868 21,713 19,052 18,539 Credit to the government - - - 188 - Investment in investee companies 1 1 1 1 16 Buildings and equipment 398 408 380 364 356 Assets in respect of derivative instruments (B) 476 846 562 521 2,528 Other assets 1,123 1,041 556 210 612 Total assets 38,825 38,915 35,312 30,343 34,128 Liabilities and equity Deposits from the public 30,890 31,158 28,844 24,884 27,799 Deposits from banks 244 392 271 276 177 Deposits from the government 1 1 2 2 1 Subordinated notes and deposit certificates 2,929 2,761 2,344 1,709 1,323 Liabilities in respect of derivatives 592 907 737 611 2,677 Other liabilities(1) 1,978 1,710 1,108* 968* 628* Total liabilities 36,634 36,929 33,306 28,450 32,605 Equity attributed to the shareholders of the Bank 2,191 1,985 2,005 1,893 1,523 Non-controlling interests(2) - 1 1 - - Total equity 2,191 1,986 2,006 1,893 1,523
Total liabilities and equity 38,825 38,915 35,312 30,343 34,128 (1) 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 and December 31, 2012 are not comparable to the data to the data as at December 31, 2008 – December31, 2010.
(2) Initial implementation of the letter from Bank of Israel concerning the treatment of put options given to the non-controlling interest – see note 1.e.1.b.
- 239 -
Appendix B Year-End Statement of Consolidated Profit and Loss Reported amounts 2012 2011 * * 2010 * 2009 * 2008 NIS millions Interest income 1,416 1,488 1,128 1,010 1,625 Interest expenses 756 838 525 504 1,099 Net interest income 660 650 603 506 526 Provision for credit losses 65 27 **87 **95 **94 Net interest income after provision for credit losses 595 623 516 411 432 Non-interest income: Non-interest financing income 65 4 88 150 24 Fees 288 310 311 292 276 Other income 4 2 2 2 5 Total non-interest income 357 316 401 444 305 Operating and other expenses: Salaries and related expenses 455 459 396 362 361 Maintenance and depreciation of buildings and equipment 147 135 127 116 105 Other expenses 198 193 175 167 163 Total operating and other expenses 800 787 698 645 629 Profit before taxes 152 152 219 210 108 Provision for taxes on profit 25 20 70 101 56 Profit after taxes 127 132 149 109 52 Share in net, after taxes profits of investee companies ****- ****- ****- ****- 2
Net profit: Before attribution to non- controlling interests 127 132 149 109 54
Attributed to non-controlling interests *** - ****- ****- - -
Attributed to shareholders of the bank 127 132 149 109 54
Earning per ordinary share (NIS)
Basic and diluted earnings:
Net profit attributed to shareholders of the bank 1.73 1.79 2.02 1.64 0.86
* The comparative figures were reclassified due to the implementation of the directives of the Supervisor of Banks concerning the format for statements of profit and
loss. For details see note 1.C.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 at December 31, 2011 and December 31, 2012 are not comparable to the data as at December 31, 2008 – December31, 2010.
*** Initial implementation of the letter from Bank of Israel concerning the treatment of put options given to the non-controlling interest – see note 1.e.1.b.
**** Less than NIS 500 thousand.
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Appendix C Rates of Income and Expenses by Linkage Bases - Consolidated (1) Reported amounts
2012 *2011 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) 26,446 973 3.68 - 25,124 1,029 4.10 Effect of derivates (3) 4,431 97 - - 2,676 71 Total 30,877 1,070 - 3.47 27,800 1,100 3.96
Liabilities 23,144 (532) (2.30) - 22,580 (567) (2.51) Effect of derivates (3) 5,947 (134) - - 2,986 (84) Total 29,091 (666) - (2.29) 25,566 (651) (2.55) Financial margin 1.38 1.18 1.59 1.41 Israeli currency - CPI linked Assets (4) 5,649 284 5.03 - 5,493 303 5.52 Effect of derivates (3) 337 19 - - 184 50 Total 5,986 303 - 5.06 5,677 353 6.22
Liabilities 4,542 (203) (4.47) - 4,350 (223) (5.13) Effect of derivates (3) 628 (19) - - 763 (43) Total 5,170 (222) - (4.29) 5,113 (266) (5.20) Financial margin(7) 0.56 0.77 0.39 1.02 Foreign currency (5) Assets (4) 4,998 45 0.90 - 5,496 536 9.75 Effect of derivates (3) Hedging derivatives 9 - - - Embedded derivatives and ALM 12,028 285 **14,725 **407 Total 17,035 330 1.94 20,221 943 4.66
Liabilities 6,791 36 0.53 6,402 (546) 8.53 Effect of derivates (3) Hedging derivatives 10 - - - Embedded derivatives and ALM 10,196 (289) **13,973 **(330) Total 16,997 (253) - (1.49) 20,375 (876) (4.30) Financial margin(7) 1.43 0.45 1.22 0.36
- 241 -
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) 2012 2011 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) 1,305 45 3.45 1,544 41 2.66 Effect of derivatives (3) Hedging derivatives 2 - - - Embedded derivatives and ALM 3,123 58 **4,098 **45 Total 4,430 103 2.33 5,642 86 1.52 Liabilities 1,764 (13) (0.74) 1,796 (14) (0.78) Effect of derivatives (3) Hedging derivatives 3 - - - Embedded derivatives and ALM 2,734 (63) **3,887 )56**( Total 4,501 (76) (1.69) 5,683 (70) (1.23) Financial margin(7) 2.71 0.64 1.88 0.29
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. (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, 2012, an amount of NIS 14.7 million was deducted from the unlinked segment, an amount of NIS 5.2 million was added from the CPI linked segment and an amount of NIS 20.5
million was deducted to the foreign currency segment (in the year ended December 31, 2011, an amount of NIS 8 million was added 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 subtracted to the foreign currency segment).
b) Except for derivative instruments.
(5) Including Israeli currency linked to foreign currency. (6) Average balance sheet balances of derivative instruments (not including average off-balance sheet balances of derivative instruments). (7) The volatility is partially the result of measurement of derivative instruments by fair value.
- 242 -
Appendix C (cont'd)
Rates of Income and Expenses by Linkage Bases - Consolidated (1) Reported Amounts 2012 *2011 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) 37,093 1,302 3.51 36,113 1,868 5.17 Effect of derivates (3) Hedging derivatives 9 - - - - Embedded derivatives and ALM 16,796 401 17,585 528 Total assets 53,898 1,703 3.16 53,698 2,396 4.46
Monetary liabilities generating financing expenses 34,477 (699) (2.03) 33,332 (1,336) (4.01) Effect of derivates (3) Hedging derivatives 10 - - - Embedded derivatives and ALM 16,771 (442) 17,722 (457) Total liabilities 51,258 (1,141) (2.23) 51,054 (1,793) (3.51) Financial margin 1.48 0.93 1.16 0.95
Total Monetary assets generating financing income (4) 37,093 36,113 Assets deriving from derivative instruments (6) 461 556 Other monetary assets 874 154 Allowance for credit losses (275) (309) Total monetary assets 38,153 36,514
Total Monetary liabilities generating financing expenses 34,477 33,332 Liabilities deriving from derivative instruments (6) 568 689 Other monetary liabilities 1,605 1,059 Total monetary liabilities 36,650 35,080
Total excess of monetary assets over monetary liabilities 1,503 1,434 Non-monetary assets 728 720 Non-monetary liabilities 193 218 Total capital resources 2,038 1,936
* The format of rates of income and expenses was not adjusted to the initial implementation of the directive concerning the format for the statement of profit and loss, therefore the reclassification was not included in the
format. Some of the data are not comparable to the data included in profit and loss statement. ** Reclassified, see note 1.C.5.B.
- 243 -
Appendix D Exposure to Interest Rate Fluctuations as at December 31, 2012 - Consolidated Reported amounts Three As at December 31, 2012 As at December 31, 2011
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) 22,139 2,292 1,149 776 329 476 154 3 393 27,711 4.44 0.4 26,474 5.45 0.3 Derivative financial instruments (except options) 1,649 814 1,106 11 - - - - - 3,580 0.2 3,791 0.2 Options (in terms of the underlying asset) 6,103 626 48 1 1 - - - - 6,779 *- 6,595 *- Total fair value 29,891 3,732 2,303 788 330 476 154 3 393 38,070 (b)0.3 36,860 (b)0.2 Financial liabilities and amounts payable in respect of derivative instruments
Financial liabilities(a) 18,562 2,107 1,477 1,425 331 122 10 - 125 24,159 2.29 0.1 24,367 2.70 0.2 Derivative financial instruments (except options) 3,279 1,064 1,908 62 51 - - - - 6,364 0.2 4,685 0.2 Options (in terms of the underlying asset) 6,140 672 116 1 1 - - - - 6,930
*- 6,566
*-
Total fair value 27,981 3,843 3,501 1,488 383 122 10 - 125 37,453 (b)0.1 35,618 (b)0.2 Financial instruments, net Exposure to interest rate fluctuations in the segment 1,910 (111) (1,198) (700) (53) 354 144 3 Cumulative exposure in the segment 1,910 1,799 601 (99) (152) 202 346 349
* Less than 0.05 years.
- 244 -
Appendix D (cont'd)
Exposure to Interest Rate Fluctuations as at December 31, 2012 - Consolidated
Reported amounts
Three As at December 31, 2012 As at December 31, 2011
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) 103 730 986 1,833 1,075 883 213 35 14 5,872 3.49 3.0 5,359 4.10 3.0 Derivative financial instruments (except options) - 101 338 - 51 - - - - 490 *- 227 *- Options (in terms of the underlying asset) - - - - - - - - - - - - - Total fair value 103 831 1,324 1,833 1,126 883 213 35 14 6,362 (b)2.8 5,586 (b)2.9 Financial liabilities and amounts payable in respect of derivative instruments
Financial liabilities (a) 227 592 441 1,452 937 1,334 37 - - 5,020 1.64 3.4 4,593 2.81 2.9 Derivative financial instruments (except options) 52 - 442 - - - - - - 494 *- 652 *- Options (in terms of the underlying asset) - - - - - - - - - - - - - Total fair value 279 592 883 1,452 937 1,334 37 - - 5,514 (a)3.1 5,245 (b)2.5 Financial instruments, net Exposure to interest rate fluctuations in the segment )176( 239 441 381 189 (451) 176 35 Cumulative exposure in the segment )176( 63 504 885 1,074 623 799 834
* Less than 0.05 years.
- 245 -
Appendix D (cont'd.)
Exposure to Interest Rate Fluctuations as at December 31, 2012 - Consolidated
Reported amounts Three As at December 31, 2012 As at December 31, 2011
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 2,648 598 318 98 39 212 10 - 87 4,010 4.08 0.6 5,405 4.17 0.8 Derivative financial instruments (a) (except options) 12,011 6,168 3,173 119 169 598 - - - 22,238 0.4 18,512 0.3 Options (in terms of the underlying asset) 1,835 336 454 1 - - - - - 2,626 *- 9,182 *- Total fair value 16,494 7,102 3,945 218 208 810 10 - 87 28,874 (b)0.4 33,099 (b)0.3 Financial liabilities and amounts payable in respect of derivative instruments
Financial liabilities (a) 4,304 1,184 1,224 10 - - - - - 6,722 0.53 0.1 6,705 1.26 0.2 Derivative financial instruments (except options) 9,988 5,398 2,637 347 343 859 - - - 19,572 0.5 17,268 0.5 Options (in terms of the underlying asset) 1,799 293 389 1 - - - - - 2,482 *- 9,211 *- Total fair value 16,091 6,875 4,250 358 343 859 - - - 28,776 (b)0.4 33,184 (b)0.3 Financial instruments, net Exposure to interest rate Fluctuation in the segment 403 227 )305( )140( (135) (49) 10 - Cumulative exposure in the segment 403 630 325 185 50 1 11 11
- 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
Aggregate exposure to interest rate fluctuations Financial assets and amounts receivable in respect of derivative instruments
Financial assets(a),(c) 24,890 3,620 2,453 2,707 1,443 1,571 377 38 494 37,593 4.25 0.8 37,238 5.06 0.8 Derivative financial instruments (except options) 13,660 7,083 4,617 130 220 598 - - - 26,308 0.3 22,530 0.2 Options (in terms of the underlying asset) 7,938 962 502 2 1 - - - - 9,405 *- 15,777 *- Total fair value 46,488 11,665 7,572 2,839 1,664 2,169 377 38 494 73,306 (b)0.5 75,545 (b)0.5 Financial liabilities and amounts payable in respect of derivative instruments
Financial liabilities (a),(c) 23,093 3,883 3,142 2,887 1,268 1,456 47 - 125 35,901 1.87 0.6 35,665 2.43 0.6 Derivative financial instruments (except options) 13,319 6,462 4,987 409 394 859 - - - 26,430 0.4 22,605 0.4 Options (in terms of the underlying asset) 7,939 965 505 2 1 - - - - 9,412 *- 15,777 *- Total fair value 44,351 11,310 8,634 3,298 1,663 2,315 47 - 125 71,743 (b)0.5 74,047 (b)0.4 Financial instruments, net Exposure to interest rate fluctuations in the segment 2,137 355 (1,062) )459( 1 (146) 330 38 Cumulative exposure in the segment 2,137 2,492 1,430 971 972 826 1,156 1,194
* Less than 0.05 years.
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.
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.
- 247 -
Appendix E Credit Risk by Economic Sector - Consolidated Reported amounts As at December 31, 2012 Overall credit risk )1( Debts and off-balance sheet credit risk (3)
Credit losses (4)
Total Problematic(5) Total Of which:
debts (2) Problematic (5) Of which: impaired
Provision for credit losses
Net accounting
write off
Balance of allowance for
credit losses
NIS Millions Activity in Israel: Public - commercial Agriculture 242 7 242 207 7 - 2 *- 3 Industry 2,721 85 2,573 1,361 84 39 (11) 22 54 Diamonds 1,959 49 1,958 1,211 49 16 3 13 16 Constructions and real estate - constructions 6,840 351 6,840 2,369 338 90 (13) (3) 70 Constructions and real estate - real estate activities 1,853 31 1,695 1,270 31 20 6 3 9 Electricity and water 363 - 120 28 - - *- *- *- Commerce 3,019 39 2,904 2,194 33 2 2 (5) 16 Hotels, hospitality and food services 295 77 295 246 77 76 2 *- 1 Transportation and storage 364 11 354 191 11 11 (1) 2 1 Communication and computer services 370 27 364 267 27 4 2 *- 3 Financial services 5,506 345 4,786 4,355 336 330 65 17 81 Other business services 1,436 35 1,253 999 13 3 *- (8) 4 Public and community services 764 9 697 455 9 - *- *- 22 Total commercial 25,732 1,066 24,081 15,153 1,015 591 57 41 280 Private individuals - residential loans 6,979 58 6,979 6,652 58 - 3 3 39 Private individuals - other 3,341 11 3,329 2,037 11 10 5 3 15
Total public – activity in Israel 36,052 1,135 34,389 23,842 1,084 601 65 47 334
Banks in Israel 9,278 - 7,737 7,737 - - - - - Government of Israel 2,690 - - - - - - - -
Total activity in Israel 48,020 1,135 42,126 31,579 1,084 601 65 47 334
Borrower activity abroad: commercial -Public 22 - 19 16 - - - - -
Total public – activity abroad 22 - 19 16 - - - - - Banks abroad 825 - 319 319 - - - - - Governments abroad - - - - - - - - - Total activity abroad 847 - 338 335 - - - - - Total 48,867 1,135 42,464 31,914 1,084 601 65 47 334 * Less than NIS 500 thousand. (1) Balance sheet risk and off-balance sheet risk, as calculated for the purpose of the limits on indebtedness of a borrower including:
debts in the amount of NIS 31,914 million, bonds in the amount of NIS 4,487 million, assets in respect of derivative instruments and other in amount of NIS 1,265 million, credit risk in respect of off-balance sheet financial instruments in the amount of NIS 11,201 million.
(2) Credit to the public, credit to the governments, deposits with banks. (3) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of the limits on indebtedness of a borrower, except in respect of derivative instruments. (4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item "other liabilities"). (5) Balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which a provision based on the extent of arrears exists, and housing loans for which a provision based on the
extent of arrears does not exist, which are in arrears of 90 days or more.
- 248 -
Appendix E (cont'd) Credit Risk by Economic Sector - Consolidated (cont'd) Reported amounts As at December 31, 2011 Overall credit risk )1( Off-balance sheet debts and credit risk (3)
Credit losses(4)
Total Problematic (5) Total Of which:
debts(2) Problematic (5) Impaired
Provision (income) for credit losses
Net accounting
write off
Balance of allowance for
credit losses
NIS Millions Activity in Israel: Public - commercial Agriculture 235 - 235 183 - - *- *- 1 Industry 2,954 166 2,616 1,545 166 66 7 38 82 Diamonds 2,335 94 2,333 1,277 94 27 2 8 22 Constructions and real estate -constructions 6,555 170 6,555 2,434 150 55 18 (1) 80 Constructions and real estate- real estate activities
1,782 30 1,646 1,304 29 20 (1) 10 6
Electricity and water 264 - 81 5 - - - - - Commerce 2,481 12 2,376 1,605 11 6 (2) (3) 10 Hotels, hospitality and food services 339 79 339 318 79 1 (7) *- 19 Transportation and storage 442 15 436 372 15 5 1 - 4 Communication and computer services 452 30 448 230 30 4 *- *- 1 Financial services 6,011 378 5,063 4,437 359 325 *- (1) 33 Other business services 1,454 12 1,293 917 12 6 *- *- 3 Public and community services 683 11 636 385 11 1 3 - 3 Total commercial 25,987 997 24,057 15,012 956 516 21 51 264 Private individuals - residential loans 6,489 61 6,489 6,248 61 - *- 3 39 Private individuals - other 3,329 18 3,297 1,857 18 11 6 9 13
Total public – activity in Israel 35,805 1,076 33,843 23,117 1,035 527 27 63 316
Banks in Israel 7,771 - 6,215 6,215 - - - - -
Government of Israel 4,656 - - - - - - - - Total activity in Israel 48,232 1,076 40,058 29,332 1,035 527 27 63 316
orrower activity abroadB commercial -Public
Total public – activity abroad 29 - 24 22 - - - - - Banks abroad 1,176 - 545 545 - - - - - Governments abroad 3 - - - - - - - - Total activity abroad 1,208 - 569 567 - - - - - Total 49,440 1,076 40,627 29,899 1,035 527 27 63 316
- 249 -
* Less than NIS 500 thousand. (1) Balance sheet and off-balance sheet, as calculated for the purpose of the limits on indebtedness of a borrower including:
debts in the amount of NIS 29,899 million, bonds in the amount of NIS 6,508 million, assets in respect of derivative instruments and other in amount of NIS 1,585 million, credit risk in respect of off-balance sheet financial instruments in the amount of NIS 11,448 million.
(2) Credit to the public, credit to the governments, deposits in banks. (3) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of the limits on indebtedness of a borrower, except in respect of derivative instruments. (4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item "other liabilities"). (5) Balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which a provision based on the extent of arrears exists, and housing loans for
which a provision based on the extent of arrears does not exist, which are in arrears of 90 days or more. )6( Reclassified – the disclosure format adjusted to the format established on March 25, 2012 concerning the "Disclosure about the credit quality of debts and the allowance for credit losses".
- 250 -
Appendix F
Exposures to Foreign Countries as of December 31, 2012 – 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(4)
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
Italy(7)(8) - *- 8 - - - 8 - - 1 - 3 5 Others (7) - 803 605 - - - 1,408 21 12 343 - 898 510 Total exposures to foreign countries - 803 613 - - - 1,416 21 12 344 - 901 515 Total exposure to LDC countries - 6 68 - - - 74 1 1 54 - 57 17
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 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) As at December 31, 2012 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.
- 251 -
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 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 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, 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.
- 252 -
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(3)
As at 31 December 2012:
Country of exposure: USA.
The aggregate balance sheet exposure in this section totals NIS 304 million (Of which a total of NIS 241
million for banks).
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).
C. Information regarding balance-sheet exposure to foreign countries with liquidity problems (1), (2): Balance-sheet balances
As at December, 31 2012
As at December, 31 2011
Turkey India Turkey India
Amount of exposure at start of reporting period 2 42 2 48
Net changes in amount of short-term exposure 1 20 - )3(
Other changes -* )3( -* )3( Amount of exposure at year end 3 59 2 42
(1) The aforesaid disclosure includes countries meeting the criteria listed below:
- Countries that have received aid from the International Monetary Fund (IMF).
- Countries rated CCC or lower by the international rating agency S&P.
- Countries classified by the World Bank in the low or medium income level group.
(2) 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.
(3) Capital as defined in Proper Conduct of Banking Business Directive No. 202 in respect of "Measurement
and Adequacy of Capital - Capital Components".
(4) As at 31 December 2012 and as at December 31, 2011 - the Bank has no exposure to the countries:
Greece, Portugal, Ireland and Spain.
* Less than NIS 500 thousand.
- 253 -
Appendix G Condensed Consolidated Balance Sheet at the End of Each Quarter for the Years 2011 - 2012 Reported amounts Year 2012 2011
Quarter 4 3 2 1 4 3 2 1 NIS millions NIS millions Assets
Cash on hand and deposits with banks 8,246 7,067 7,644 6,833 6,961 8,123 9,567 5,708 Securities 4,940 4,927 6,313 6,044 6,785 5,383 4,231 5,519 Borrowed securities 68 51 86 5 5 335 347 405 Credit to the public 23,858 22,979 24,329 24,087 23,140 23,095 22,749 23,018 Allowance for credit losses (285) (265) (278) (272) (272) (267) (300) (315) Credit to the public, net 23,573 22,714 24,051 23,815 22,868 22,828 22,449 22,703
Credit to the government - - - - - 1 - - Investment in investee companies 1 1 1 1 1 1 1 1 Buildings and equipment 398 387 386 388 408 381 376 373 Assets in respect of derivative instruments 476 480 544 514 846 1,050 508 596 Other assets 1,123 769 706 893 1,041 487 290 293 Assets held for sale - 9 9 9 - - - -
Total assets 38,825 36,405 39,740 38,502 38,915 38,589 37,769 35,598 Liabilities and Equity Deposits from the public 30,890 29,076 32,643 31,131 31,158 30,954 30,722 28,825
Deposits from banks 244 107 278 202 392 432 618 384 Deposits from the government 1 - 1 7 1 - 8 1 Subordinated notes and bonds 2,929 2,925 2,572 2,750 2,761 2,757 2,464 2,320 Liabilities in respect of derivative instruments 592 571 609 586 907 1,108 645 717 Other liabilities 1,978 1,617 1,590 1,775 1,710 1,388 1,353 1,395
Total liabilities 36,634 34,296 37,693 36,451 36,929 36,639 35,810 33,642
Equity attributed to the shareholders of the Bank 2,191 2,109 2,047 2,051 1,985 1,949 1,958 1,955 Non controlling Interest * - - - - 1 1 1 1 Total equity 2,191 2,109 2,047 2,051 1,986 1,950 1,959 1,956 Total liabilities and equity 38,825 36,405 39,740 38,502 38,915 38,589 37,769 35,598
* Initial implementation of the letter from Bank of Israel concerning the treatment of put options given to the non-controlling interest – see note 1.e.1.b.
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Appendix H Condensed Consolidated Statements of Profit and Loss for Each Quarter for the Years 2011 - 2012 Reported amounts 2012 2011
4 3 2 1 * 4 3 * 2 * * 1 NIS millions NIS millions
Interest income 285 373 410 348 355 **392 **404 337 Interest expenses 128 205 235 188 196 230 235 177 Net interest income 157 168 175 160 159 162 169 160 Provision for credit losses 49 3 5 8 26 **(9) )8**( 18
Net interest income after provision for credit losses 108 165 170 152 133 171 177 142 Non-interest income: Non-interest financing income (expenses) 27 23 )10( 25 4 (22) )8( 30 Fees 73 72 70 73 74 77 79 80 Other income 3 ***- 1 - 1 ***- )1( 2 Total non-interest income 103 95 61 98 79 55 70 112
Operating and other expenses: Salaries and related expenses 113 114 116 112 128 112 107 112 Maintenance and depreciation of buildings and equipment 38 37 35 37 35 34 32 34 Other expenses 56 46 50 46 52 45 51 45 Total operating and other expenses 207 197 201 195 215 191 190 191
Profit before taxes 4 63 30 55 (3) 35 57 63 Provision for taxes on profit (23) 19 9 20 (37) 11 22 24 Profit after taxes 27 44 21 35 34 24 35 39 Share in net, after taxes profits of investee companies ***- ***- ***- ***- ***- ***- ***- ***- Net profit: Before attribution to non-controlling interests 27 44 21 35 34 24 35 39
Attributed to non-controlling interests*** - - - - ***- ***- ***- ***- Attributed to shareholders of the bank 27 44 21 35 34 24 35 39
Earning per ordinary share (NIS): Basic and diluted earnings:
Net profit attributed to shareholders of the bank 0.37 0.60 0.28 0.48 0.45 0.33 0.47 0.54
* The comparative figures were reclassified due to the implementation of the directives of the Supervisor of Banks concerning the format for statements of profit and loss. For details see note 1.C.5.A. ** Reclassified in respect of collection of debts written-off in accounting in the previous years between the interest income and the allowance for credit losses. *** Less than NIS 500 thousand. **** Initial implementation of the letter from Bank of Israel concerning the treatment of put options given to the non-controlling interest – see note 1.e.1.b.
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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 2012 (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 28, 2013
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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 2012 (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 28, 2013
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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, 2012, 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, 2012 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, 2012.
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 28, 2013
- 258 -
Financial Statements as at December 31, 2012 Contents Page Auditors’ Reports to the Shareholders 259 Financial Statements Balance Sheets 263 Statements of Profit and Loss 265 Statements of Changes in Equity 266 Statements of Cash Flows 267 Notes to the Financial Statements 269
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.
- 259 -
Report of the Independent Auditors to the Shareholders of Union Bank of Israel Limited.-In accordance with the public reporting directive of the Supervisor of Banks regarding Internal Controls over Financial Reporting We have audited the internal control over financial reporting of Union Bank of Israel Ltd. (hereinafter –the "Bank”) as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (hereinafter: "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 the attached 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 United States Public Company Accounting Oversight Board (PCAOB), regarding audit 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 respects. 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. The internal control of a bank 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 generally accepted accounting principles in Israel (Israeli GAAP) and directives and guidelines of the Supervisor of Banks. The internal control of a bank over financial reporting 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 Bank’s assets (including disposal thereof); (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in Israel (Israeli GAAP) and directives and guidelines of the Supervisor of Banks, and that the Bank’s receipts and expenditures are being made only in accordance with authorizations of the Bank’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition (including disposal) 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
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.
- 260 -
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 respects, effective material control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by COSO. We also have audited, in accordance with accepted auditing standards in Israel and certain auditing standards applied in the audit of banking corporations as determined by directives and guidelines of the Supervisor of Banks, the Bank’s accompanying financial statements and consolidated financial statements as of December 31, 2012 and 2011 and for each of the three years in the period ended on December 31, 2012, and our report dated February 28, 2013, expressed an unqualified opinion on these consolidated financial statements as well as calling attention to Note 18C.(18)e of the financial statements in respect of contingent liabilities. Somekh Chaikin Certified Public Accountants (ISR) February 28, 2013
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.
- 261 -
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, 2012 and December 31, 2011, and the consolidated balance sheets of the Bank and its subsidiaries as such dates and the related statements of income, statements of changes in shareholders’ equity and statements of cash flows - of the Bank and consolidated - for each of the three years in the period ended December 31, 2012. 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 audit. We conducted our audit in accordance with Generally Accepted Auditing Standards in Israel, including those prescribed under the Israeli Auditors’ Regulations (Auditor’s Mode of Performance), 1973 and certain auditing standards applied in the audit of banking corporations as determined by directives and guidelines of the Supervisor of Banks. Those 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 examination, on a test basis, of 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 Bank’s Board of Directors and Management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of the other auditors provides a reasonable basis for our opinion. We did not audit the financial statements of consolidated subsidiaries, whose assets constitute approximately 0.24% and 0.23%, respectively, of the total consolidated assets as at December 31, 2012 and 2011, and whose net interest income before provision for credit losses constitutes approximately 1.01%, 1.13% and 1.21% of the net consolidated income from interest before provision for credit losses for the three years, which ended December 31, 2012, 2011 and 2010 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.
- 262 -
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 respects, the financial position- of the Bank and consolidated- as at December 31, 2012 and 2011, and the results of operations, the changes in shareholders’ equity and cash flows - of the Bank and consolidated –for each of the three-years in the period ended December 31,2012, according to generally accepted accounting principles in Israel (Israeli GAAP). Furthermore, in our opinion, the abovementioned financial statements were prepared in accordance with the directives and guidelines of the Supervisor of Banks. Without qualifying our above opinion, we call attention to Note 18C.(18)e to the financial statements in respect of contingent liabilities. We have also audited in accordance with standards prescribed by the United States Public Company Accounting Oversight Board (PCAOB) regarding the audit of internal control over financial reporting, as adopted by the Institute of Certified Public Accountants in Israel, the internal control of the Bank over financial reporting as of December 31, 2012, 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 28, 2013, included an unqualified opinion on the effectiveness of internal control over financial reporting of the Bank. Somekh Chaikin Certified Public Accountants (Isr.) February 28, 2013
- 263 -
Balance Sheets as at December 31 Reported amounts Consolidated The Bank
2012 2011 2012 2011
Note NIS millions Assets Cash on hand and deposits with banks 2 8,246 6,961 8,246 6,961 Securities (1) 3 4,940 6,785 4,862 6,651 Securities which were borrowed 68 5 68 5 Credit to the public 4 23,858 23,140 23,795 23,082 Allowance for credit losses (285) (272) (282) (269) Net credit to the public 23,573 22,868 23,513 22,813 Investment in equity-basis companies 5 1 1 545 519 Buildings and equipment 6 398 408 398 408 Assets in respect of derivative instruments 19 476 846 476 846 Other assets (2) 7 1,123 1,041 1,119 1,034 Total assets 38,825 38,915 39,227 39,237
_____________________________________________ 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 28, 2013 The accompanying notes are an integral part of the financial statements.
- 264 -
Balance Sheets as at December 31 (cont'd) Consolidated The Bank
2012 2011 2012 2011
Note NIS millions
Liabilities and Equity Deposits from the public 8 30,890 31,158 33,876 33,873 Deposits from banks 9 244 392 244 392 Deposits from the government 1 1 1 1 Debentures and subordinated notes 10 2,929 2,761 197 222 Liabilities in respect of derivative instruments 19 592 907 592 907 Other liabilities (3),(4) 11 1,978 1,710 2,126 1,857 Total liabilities 36,634 36,929 37,036 37,252 Equity attributed to the Shareholders of the Bank 12 2,191 1,985 2,191 1,985 Noncontrolling Interests (5) - 1 - - Total equity 2,191 1,986 2,191 1,985 Total liabilities and equity 38,825 38,915 39,227 39,237
(1) Of which: securities pledged to Stock Exchange and Maof Clearing in the amount of NIS 690 million
(December 31, 2011: NIS 837 million). )2( Of which: other assets at fair value in the amount of NIS 789 million (December 31, 2011: NIS 739
million). )3( Of which: other liabilities at fair value in the amount of NIS 1,123 million (December 31, 2011: NIS 862
million). (4) Of which: Allowance for credit losses in respect of off-balance-sheet credit instruments in the amount of
NIS 49 million (December 31, 2011: NIS 44 million). )5( Initial implementation of the letter from Bank of Israel concerning the treatment of put options given to the
non-controlling interest – see note 1.e.1.b.
- 265 -
Statements of Profit and Loss for the Year Ended December 31 Reported amounts Consolidated The Bank 2012 2011 2010 2012 2011 2010 Note NIS millions
Interest income 22 1,416 1,488 1,128 1,402 1,473 1,113 Interest expenses 22 756 838 525 772 855 537 Net interest income 660 650 603 630 618 576 Provision for credit losses 4 65 27 **87 63 25 **84 Net interest income after provision for credit losses 595 623 516 567 593 492 Non-interest income: Non-interest financing income (expenses) 23 65 4 88 59 (2) 80 Fees 24 288 310 311 272 293 294 Other income 25 4 2 2 3 1 1 Total non-interest income 357 316 401 334 292 375
Operating and other expenses: Salaries and related expenses 26 455 459 396 448 451 389 Maintenance and deprecation of buildings and equipment 147 135 127 146 134 126 Other expenses 27 198 193 175 194 191 173 Total operating and other expenses 800 787 698 788 776 688 Profit before taxes 152 152 219 113 109 179 Provision for taxes on profit 28 25 20 70 19 8 59 Profit after taxes 127 132 149 94 101 120 Share in net, after taxes profits of investee companies 5 ****- ****- ****- 33 31 29
Net profit: Before attribution to non-controlling interest 127 132 149 127 132 149
Attributed to non-controlling interests*** - ****- ****- - ****- ****- Attributed to shareholders of the bank 127 132 149 127 132 149 Earning per ordinary share (NIS) 29 Basic and diluted earnings:
Net profit attributed to shareholders of the bank 1.73 1.79 2.02 1.73 1.79 2.02
* The comparative figures were reclassified due to the implementation of the directives of the Supervisor of Banks concerning the format for statements of profit and loss. For details see note 1.C.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 at December 31, 2010 are not comparable to the data as at December 31, 2012 and 2011. *** Initial implementation of the letter from Bank of Israel concerning the treatment of put options given to the non-controlling interest – see note 1.e.1.b. **** Less than NIS 500 thousand.
The accompanying notes are an integral part of the financial statements.
- 266 -
Statements of Changes in Equity For the year ended December 31, 2012 Reported amounts
Adjustments in Benefits in respect of Share respect of presentation of capital share-based securities and payment available for sale Noncontrolling premium transactions at fair value (1) Surplus (2) Total Interests Total equity
NIS millions NIS millions Balance as at January 1, 2010 952 26 59 856 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 - - 130 - 130 - 130 Adjustments in respect of presentation of securities available for sale which were reclassified to profit and loss statement - - (97) - (97) - )97( Related tax effect - - (10) - (10) - )10( Balance as at December 31, 2010 952 26 82 945 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, 2011 after the adjustments deriving from the Initial implementation of new directives 952 26 82 880 1,940 1 1,941 Net profit for the year - - - 132 132 - 132 Adjustments to fair value of available for sale securities - - )105( - )105( - )105( Adjustments in respect of presentation of securities available for sale which were reclassified to profit and loss statement - - )27( - )27( - )27( Related tax effect - - 45 - 45 - 45 Balance as at December 31, 2011 952 26 )5( 1,012 1,985 1 1,986 Put options written on non-controlling interests** - - - - - )1( )1( Net profit for the year - - - 127 127 - 127 Adjustments to fair value of available for sale securities - - 203 - 203 - 203 Adjustments in respect of presentation of securities available for sale which were reclassified to profit and loss statement -
- )81( - )81( - )81(
Related tax effect - - )43( - )43( - )43(
Balance as at December 31, 2012 952 26 74 1,139 2,191 - 2,191
(1) See Note 1.(E).(4)(a)(2). (2) With respect to the restriction on a dividend distribution, see Note 12.B. * Less than NIS 500 thousand. ** Initial implementation of the letter from Bank of Israel concerning the treatment of put options given to the non-controlling interest – see note 1.e.1.b. The accompanying notes are an integral part of the financial statements.
- 267 -
Statements of Cash Flows for the Year Ended December 31 Reported amounts
Consolidated The Bank 2012 *2011 *2010 2012 *2011 *2010 NIS millions NIS millions
Net profit for the year 127 132 149 127 132 149 Adjustments: The Banks' share in the undistributed losses (profits) of equity-basis investees **- **- **- )33( )31( (29) Depreciation of buildings and equipment (including impairment) 65 58 51 65 58 51 Provision for credit losses 65 27 87 63 25 84 Profit from sale of securities available for sale, net )80( )22( (93) (79) )19( (94) Realized and unrealized loss (profit) from adjustments to fair value of securities held for trading, net (4) 12 (8) (4) 12 (8) Profit from sale of buildings and equipment (2) )1( - (2) )1( - Deferred taxes, net 6 )48( )16( 5 )45( (16) Retirement compensation - increase (decrease) in excess accrued reserve over prepaid assets (7) 41 7 (7) 41 7 Adjustment differences included in investment and financing activities 69 19 64 47 )25( 37 Adjustments in respect of exchange - rate differences on cash balances (1) (8) (65) (1) (8) (65) Net change in current assets: Deposits with banks (140) 47 20 (140) 46 20 Credit to the public (749) (1,469) (2,773) (742) (1,468) (2,780) Credit to the government - - 188 - - 188 Decrease (increase) in securities which were borrowed (63) 410 (141) (63) 410 (141) Decrease (increase) in assets in respect of derivative instruments 370 (284) (41) 370 (284) (41) Securities held for trading 682 (293) 210 682 (293) 210 Decrease (increase) in other assets (131) (332) (340) (133) (326) (343) Net change in current liabilities: Net deposits from banks (148) 121 (5) (148) 121 (5) Net deposits from the public (268) 2,314 3,960 3 2,793 4,802 Net deposits from the government - (1) - - (1) - Increase (decrease) in net liabilities in respect of derivative instruments (315) 170 126 (315) 170 126 Increase (decrease) in net other liabilities 284 559 120 286 561 115 Net cash flows from (used in) operating activities (240) 1,452 1,500 (19) 1,868 2,267
Cash flows from investment activities
Acquisition of securities available for sale (10,617) )5,916( (4,345) (10,608) )5,862( (4,299) Proceeds from sale of securities available for sale 7,386 3,639 4,734 7,332 3,593 4,705 Proceeds from redemption of securities available for sale 4,536 400 493 4,521 394 434 Acquisition of buildings and equipment (74) )85( (53) (74) )85( (53) Proceeds from sale of buildings and equipment 11 2 **- 11 2 -** Dividend received from subsidiary - - - 7 7 9 Net cash for investment activities 1,242 (1,960) 829 1,189 (1,951) 796
* Due to the initial implementation of IAS 7, the comparative data were reclassified to match the new definitions, item headings and presentation in the current reporting period (see note 1.c.5.a).
** Less than NIS 500 thousand.
- 268 -
Statements of Cash Flows for the Year Ended December 31 (cont’d) Reported amounts
Consolidated The Bank 2012 *2011 *2010 2012 *2011 *2010 NIS millions NIS millions
Cash flows from financing activity
Issuance of subordinated notes and deposit certificates 366 515 759 - - 25 Redemption of subordinated notes and deposit certificates )224( )139( (129) )26( )49( (129) Dividend paid to shareholders - - (60) - - (60)
Net cash from financing activity
142 376 570 )26( )49( )164( Increase (decrease) in cash 1,144 )132( 2,899 1,144 )132( 2,899 Balance of cash at the beginning of year 6,750 6,874 3,910 6,750 6,874 3,910 Effect of changes in exchange rates on cash balances 1 8 65 1 8 65 Balance of cash at end of year 7,895 6,750 6,874 7,895 6,750 6,874 Interest and taxes paid and/or received:
Interest received 1,270 1,600 1,134 1,270 1,600 1,134 Interest paid )832( )900( )506( )728( )804( )438(Dividends received 5 5 8 -** 1 1 Income tax paid )111( )83( )127( )98( )44( )110( Income tax received 54 20 16 44 14 9
Appendix A - Non-cash activities in assets and liabilities: Year 2012 A. Securities in the amount of NIS 21 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 12 million were purchased against commitment to suppliers.
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.
* Due to the initial implementation of IAS 7, the comparative data were reclassified to match the new definitions, item headings and presentation in the current reporting period (see note 1.c.5.a).
** Less than NIS 500 thousand. The accompanying notes are an integral part of the financial statements.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 269 -
Note 1 - Principal Accounting Policies A. General
1. Union Bank Ltd. (hereinafter: the "Bank") is an Israeli corporation. The consolidated financial
statements of the Bank and its subsidiary companies for December 31, 2012 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.
2. The notes to the financial statements refer to the financial statements of the Bank and to the
financial statements of the Bank and its subsidiary companies, except for cases in which the note
indicates that it refers only to the financial statements of the Bank or only to the consolidated
financial statements.
3. The publication of the financial statements approved by the Board of Directors of the Bank on
February 28, 2013. 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, 2012
- 270 -
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 IAS 24, Related Party Disclosures, 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, 2012
- 271 -
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 Bank 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 Bank 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 Bank 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 Bank 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, 2012
- 272 -
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.
For details regarding the mortality tables that the Bank uses when measuring its' actuary liabilities
- see note 15.A.3
5. Change in Classification
(a) Due to the initial 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 including in the relevant notes, in order to
match the item headings and reporting requirements for the current period. Specifically, the
following items were reclassified:
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 273 -
Note 1 - Principal Accounting Policies (cont'd)
C. Financial statements in reported amounts (cont'd)
5. Change in Classification (cont'd)
(a) (cont'd)
Items included in Profit and Loss Statements - initial implementation of the directives
regarding profit and loss format
According to the circular of the Supervisor of Banks from December 29, 2011 regarding
profit and loss format for banking corporations and adoption of GAAP for US Banks on
interest income measurement, the bank implements the profit and loss presentation
directives (see paragraph f. 1 regarding adoption of interest income measurement rules).
According to the directives, the bank correlated the presentation of the profit and loss
statement and the accompanying notes as follows:
"Profit from financing activities before provision for credit losses" was divided to
three separate clauses: "Interest income", "Interest expense" and "Non-interest
financing income".
The components of "Profit from financing activities before provision for credit
losses" that are not from interest and the components of "Profits (losses) from
investments in shares" were classified as "Non-interest financing income" and
distinguished between activities for commerce purposes and activities for non
commerce purposes.
The distinction between "Fees from financing transactions", which was included in
"Profit from financing activities before provision for credit losses", and between
"Operational fees", was cancelled. Therefore all of the fees income, excluding
commitment fees, were presented in "Fees" in the Profit and Loss Statement
("Operational Fees" in the past).
"Profit from extraordinary activities" was cancelled and the acceptable approach in
the US, in which the extraordinary activities are defined as "unusual" and
"infrequent", was adopted. Therefore in order to classify an activity as an unusual
activity in the Profit and Loss Statement, the Supervisor of Banks must confirm it in
advance.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 274 -
Note 1 - Principal Accounting Policies (cont'd)
C. Financial statements in reported amounts (cont'd)
5. Change in Classification (cont'd)
(a) (cont'd)
The bank implemented the instructions regarding the format of Profit and Loss Statement as
of January 1, 2012 retroactively. Because of that, the following reclassifications were made
in the financial statements for the years ended December 31, 2011 and December 31, 2010:
The following items that used to be classified as "Profit from financing activities before
provision for credit losses" were re-classified as "Non-interest financing income" as
part of the non trading activities:
o Financing income (expenses) from foreign currency exchange rate differences
accrued in respect of financial assets or financial liabilities that are not measured
at fair value through profit and loss (such as: credit to the public and to
governments, deposits with banks, bonds available for sale, deposits from the
public, deposits from banks or from the government, bonds).
o Income (expenses) from derivative instruments that were used for ALM activity.
o Profit (loss) from selling available for sale bonds.
The following items that used to be classified as "Profit from financing activities before
provision for credit losses" were reclassified as "Non-interest financing income" as part
of the trading activities:
o Profit (loss) which was realized and which has not yet been realized from
commerce bonds adjustments to fair value.
o Income (expenses) from other derivative instruments (that are not used for
financial hedging or ALM activities).
Income from fees from financing transactions that used to be included in "Profit from
financing activities before provision for credit losses", excluding commitment fees,
were reclassified to "Fees" (which used to be "Operational Fees").
As a result of the mentioned re-classifications, income (expenses) in the amount of
NIS (2) million and NIS 75 million, which were included in "Profit from financing
activities before provision for credit losses" as at December 31, 2011 and 2010,
respectively, were presented in "Non-interest financing income". Likewise, NIS 40
million and NIS 37 million as at December 31, 2011 and 2010, respectively, were
presented in "Fees".
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 275 -
Note 1 - Principal Accounting Policies (cont'd)
C. Financial statements in reported amounts (cont'd)
5. Change in Classification (cont'd)
(a) (cont'd)
Profit (loss) which was included in "Net Profit (loss) from investments in shares"
was presented in "Non-interest financing income" as part of the trading activities or
as part of the non-trading activities according to the shares' classification (held for
trading or available for sale). As a result of the mentioned reclassifications, "Net
profit (loss) from investments in shares" in the amount of NIS 6 million and NIS 13
million as at December 31, 2011 and 2010, respectively, were classified to "Non-
interest financing income".
Profit (loss) which were included in "Profit (loss) from extraordinary activity, after
taxes" were reclassified. As a result of the mentioned reclassifications an amount of
NIS 1 million as at December 31, 2010 which was included in “Profit from
extraordinary transactions after taxes”, was presented in "Other income".
Items included in Statement of Cash Flow – initial implementation of IAS 7 regarding Cash Flow
Statement
Following the initial implementation of IAS 7 regarding Cash Flow Statement, which determines
classification rules for the different items in the statement according to the essence of the activity,
the following reclassifications were made:
‐ Net changes in the cash flow in respect of current assets (such as: deposits with banks,
credit to the public, securities held for trading) which were included in the past in
investment activity (previously activity in assets) in the amount of NIS (1,305) million
and NIS (2,496) million as at December 31, 2011 and 2010, respectively, were
presented in current activity.
‐ Net changes in the cash flow in respect of current liabilities (such as: deposits from
banks, deposits from the public, government deposits) which were included in the past
in financing activity (previously activity in liabilities and in capital) in the amount of
NIS 2,434 million and NIS 3,955 million as at December 31, 2011 and 2010,
respectively, were presented in current activity.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 276 -
Note 1 - Principal Accounting Policies (cont'd)
C. Financial statements in reported amounts (cont'd)
5. Change in Classification (cont'd)
(b) Other classification changes include the following, among other matters:
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.
In note 19, a reclassification was made in the comparison figures between the derivative
instruments, which are part of the Banks' ALM, and the other derivatives. The
reclassification is of the volume of the derivative instruments and of the fair value.
In note 6, a reclassification in the comparison figures of the cost balance and the
amortized cost between hardware costs (exhibited in the equipment, furniture and
vehicle item) and software costs due to reclamation of data.
D. Initial Implementation of Accounting Standards, Accounting Standards updates and
Directives of the Supervisor of Banks
1. As of January 1, 2012 the bank implements the following financial standards and directives:
(a) Directives regarding the Profit and Loss Statement format that were determined in the
circular of the Supervisor of Banks regarding Banking corporations format of Profit and
Loss Statement and adoption of GAAP for US Banks – see clause 1.c.5.a. furthermore with
regard to the interest income measurement rules - see clause 1.f.1.
(b) Certain International Financial Reporting Standards (IFRS), and interpretations of the IFRS
Interpretations Committee (IFRIC) regarding the implementation of the following
standards:
IAS 7, Statement of Cash Flows - see 1-c-5-a;
IAS 12, Income Taxes - see 1-e-10;
IAS 23, Borrowing Costs;
IAS 24, Related Party Disclosures – see note 1-e-21;
(c) The clarifications of the Supervision of Banks regarding the implementation of certain
International Financial Reporting Standards (IFRS) - the treatment of put options given to
the non-controlling interest - see 1-e-1-b.
(d) Directives of the Supervisor of Banks regarding accounting treatment of actions between a
banking corporation and its' controlling shareholders and between a banking corporation
and a company controlled by the banking corporation - see 1-e-20.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 277 -
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)
1. (cont'd)
(e) ASU 2011-03 regarding Reconsideration of Effective Control in Repurchase Agreements,
which is an update of rules that were determined in FAS 166 (ASC 860) - see 1-e-9.
(f) Directives of the Supervisor of Banks regarding fair value measurement, which combine the
ASU 2011-04 regarding Fair Value Measurement (ASC 820) in the Public Reporting
Directives: Amendments to Achieve Fair Value Measurement and Disclosure Requirements
in US GAAP and the IFRS - see 1-e-6.
(g) Directives of the Supervisor of Banks regarding the update of the Disclosures about the
Credit Quality of Debts and the Allowance for Credit Losses for adoption of ASU 2010-20
– see 1-e-5.
2. Since January 1, 2012 the Bank has been implementing fair value hedging accounting. The Bank
holds derivative financial instruments in order to hedge interest risks among other reasons. If an
instrument was designated for hedging, the Bank formally documents the hedging ratios, when
the hedge is created, between the hedging instrument and the item being hedged. The
documentation includes the Banks' risk management objective and its' hedging strategy and the
way the Bank will evaluate the effectiveness of the hedging ratios. The Bank evaluates the
effectiveness of the hedging ratios both at the beginning of the hedging and on a continuous basis.
Changes in the fair value of a derivative financial instrument designated for hedging the fair
value, are attributed to the Profit and Loss. The hedged item is also displayed by fair value, with
regard to the hedged risks, and the changes in the fair value are attributed to the Profit and Loss. If
the hedging instrument stops meeting the financial hedging criteria, or if it's expired, sold,
cancelled, realized or if the Bank cancels the fair value hedging objective, then the hedging
accounting treatment is abolished. During 2012, the influence of hedging accounting
implementation is immaterial.
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, 2012
- 278 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements
1. Consolidation Base
The Bank implements the international standards IFRS 3 (2008), Business Combination, IAS 27,
(2008) Consolidated and Separate Financial Statements, IAS 28, Investments in Associates.
(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. The separate financial statements of the Bank
include by consolidation the financial statements of assets and service companies that are
wholly controlled by the Bank.
(b) Non-controlling interest
Non-controlling interests represent the share of the equity of a subsidiary that cannot be
directly or indirectly attributed to the parent company.
Non-controlling 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. Profit or loss and any component of other
comprehensive income are attributed to the owners of the Bank and to non-controlling
interests (the attribution is performing even if the balance of non-controlling interests is
negative).
Put options for non-controlling interest – accordingly to the letter of the Supervisor of
Banks from March 18, 2012 regarding the treatment of put options given to non-
controlling interest, since January 1, 2012 the Bank has been implementing the IFRS
guidelines on the subject. Therefore put options, settled by cash or by another financial
instrument (including the options issued before January 1 2012), issued to non-controlling
interest are recognized as a liability at the sum of the present value of the exercise
supplement. In addition, the groups' share in the subsidiary's equity includes the non-
controlling interests' share, to whom the group issued the put options. The initial
implementation of the guidelines didn't have a material effect.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 279 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
1. Consolidation Base (cont'd)
(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.
Regarding decline in value of investments in affiliates – see section 1.E.14 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 Bank 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, 2012
- 280 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
2. Foreign currency and linkage
The Bank implements IAS 21 regarding The Effects of Changes in Foreign Exchange Rates.
(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. Non monetary items denominated in foreign
currency and measured by historical cost are translated using the exchange rates which are
in effect on the dates of the transactions.
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.
(b) Details of the representative rates of exchange and the Consumer Price Index are as follows:
December 31, Rate of change during 2012 2011 2010 2012 2011 2010 NIS NIS NIS % % %
Rate of exchange of the: U.S. dollar 3.733 3.821 3.549 (2.3) 7.7 (6.0)
Euro 4.921 4.938 4.738 (0.3) 4.2 (12.9)
Points Points Points Consumer Price Index for the month of November (index "known”) 111.94 110.34 107.6 1.5 2.5 2.3
December (index "in respect of") 112.15 110.34 108.0 1.6 2.2 2.7
CPI-linked assets and liabilities were included according to the linkage terms established for each balance.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 281 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
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.
In the periods following other than temporary impairment, interest income from
investments in debt instruments is recognized on a cash basis.
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
(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.
(c) According to circular of the Supervisor of Banks from December 29, 2011 regarding profit
and loss format for banking corporations and adoption of GAAP for US Banks on interest
income measurement, the term "interest" was updated and now includes consumer price
index linkage differences on interest, exchange rate differences on the interest and consumer
price index linkage differences on the principal (a component which didn't use to be part of
the interest). The directives regarding the change in the term "interest" were implemented
retroactively as of January 1, 2012. Nonetheless, the rules regarding the change in the term
"interest" regarding impaired debt were implemented only on debts that were classified as
impaired as of January 1, 2012.
For details regarding the rules of the presentation format of profit and loss and the
reclassifications that the Bank made as a result of this in the Statement of Profit and Loss see
note 1-c-5.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 282 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
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 were 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.
(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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 283 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
4. Securities (cont'd)
(c) (cont'd)
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, 2012
- 284 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
4. Securities (cont'd)
(c) (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) In the calculation of profit from the realization of securities, the cost is calculated according
to Moving weighted average base.
(f) 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
As of January 1, 2011 the Bank has implemented the American accounting standards regarding
impaired debts, credit risk, and provision for credit losses (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. Likewise, as of January 1, 2012 the Bank has implemented the Directives of
the Supervisor of Banks regarding the update of the disclosure of the credit quality of debts and
the allowance for credit losses.
The directive is applied to all debt balances, such as credit to the public, deposits with banks,
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 285 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risk and provision for credit losses (cont'd)
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.
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 (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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 286 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risk and provision for credit losses (cont'd)
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 debt is contingent upon collateral, or when the Bank determines that an asset
foreclosure is expected, the individual allowance is assessed based on the fair value of the
collateral pledged to secure the debt, after activating cautious and consistent coefficients that
reflect the fluctuation in the collaterals' fair value, the time until the actual realization and the
expected costs of selling the collateral among other things.
On this matter, the Bank defines a debt as a contingent upon collateral debt when its' payment is
expected to be exclusively from the pledged collateral in favor of the Bank or when the Bank is
expected to be paid with the asset held by the borrower, even if there is no specific collateral on
the asset, but only when the borrower doesn't have any other essential available and reliable
repayment sources.
The Bank has a methodology for measuring the cash flow of a debt not contingent upon
collateral, based on criteria for examining the certainty level of money receiving and on the
coefficient required for this certainty level. The coefficient depends on the certainty level and on
the estimated time for receiving the money. Determining the sum of the provision for credit
losses and updating past provisions is done continuously and based upon new quarterly
evaluations of the Banks' impaired borrowers.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 287 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risk and provision for credit losses (cont'd)
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
(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 formula is based on historical loss rates in different economic sectors,
with a distinction between problematic credit and non-problematic credit, over the years 2008-
2010. Starting in 2011, the average rate of net accounting write-offs actually recorded shall be
added to the group allowance formula. The use of net accounting write-off rates as of 2011,
combined 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 solely 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. Due to the state of the markets, the Bank continuously follows up on the credit state
in general and in the real estate sector particularly. According to the Banks' policy concerning
group allowance, as of the second quarter of 2011, it was decided to use a higher coefficient for
the calculation of the group allowance regarding the extent of the exposures to credit which isn't
classified as problematic for escorting domicile construction projects – sub sector general
construction. The coefficient used by the Bank for the calculation of group allowance faithfully
represents, in the opinion of the Bank, the potential for risk in the sector during the examined
period.
The required allowance regarding the off-balance sheet credit instruments is assessed according
to FAS 5 (ASC 450). 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 realization rate of expected credit 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 Standardized Approach.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 288 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risk and provision for credit losses (cont'd)
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 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, which are in final stages of treatment.
Pursuant to the directives of the temporary order, as of January 1, 2011, the Bank does not
maintain a general and supplementary provision, but continues to calculate the supplementary
provision, 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 289 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risk and provision for credit losses (cont'd)
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. As long as there is doubt regarding the collection of the recorded
balance of an impaired debt, all payments received shall be used to reduce the principal, and
subsequently recognized as interest income and recorded as "Interest Income".
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. Interest income from a debt classified as a reorganization are recognized only
after repayment of 6 consecutive payments with no delay regarding loans redeemed by monthly
payments or after repayment of a material part of the debt's principal (20%) regarding loans
redeemed not by monthly payments.
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 290 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risk and provision for credit losses (cont'd)
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
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 and any other
change in the repayment terms, which the Bank sees as a concession.
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 291 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risk and provision for credit losses (cont'd)
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
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.
We immediately write-off the difference between the debt balance and the collaterals' fair value
regarding debts whose repayment is contingent upon collateral. 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".
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 292 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
5. Impaired debts, credit risk and provision for credit losses (cont'd)
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.
Effect of initial implementation of the directives of the Supervisor of Banks regarding the
update of the disclosure of credit quality of debts and of the allowance for credit losses, on
adopting ASU 2010-20 - The Supervisor of Banks' circular regarding the update of the
disclosure of credit quality of debts and of the allowance for credit losses on adopting ASU
2010-20, was published On March 25, 2012. ASU 2010-20 requires a broader disclosure
regarding debt balances, movement in allowance for credit losses' balance, material acquisitions
and sales of debts during the reporting period and disclosures concerning credit quality. The
Bank implements the directives as of January 1, 2012, in a "from here on" manner, regarding
balance related data initially required according to this directive, while reclassifying comparison
figures as much as possible. According to the Supervisor of Banks' transitional directives for
2012, it is determined that financial statements of 2012 aren't required to exhibit new
disclosures regarding restructuring of a problematic debt. The other disclosures required by this
directive, will be implemented as of the financial statements of March 31, 2013. The initial
implementation of the directive had no effect other than a change in the presentation.
6. Establishing the Fair Value of Financial Instruments
As of January 1, 2011 the Bank has been implementing FAS 157 (ASC 820-10), which 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 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)
Likewise, as of January 1, 2012, the bank has been implementing the Supervisor of Banks'
directives regarding the measurement of fair value combining in the Public Reporting
Directives, the directives determined in ASU 2011-04 regarding Fair Value Measurement (ASC
820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRS.
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 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.
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 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)
In addition, the fair value of financial instruments is measured without taking into account the
blockage factor regarding both financial instruments assessed by level 1 data and financial
instruments assessed by level 2 or 3 data, excluding cases in which other market participants
would have taken into account premium or discount while measuring fair value, when level 1
data lacked.
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, as
mentioned above, 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, 2012
- 295 -
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, deposits from the public and deposits with banks and subordinated notes),
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. 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 liquid collaterals that the
Bank requires from a counterparty, are not attributed specifically to activity in a single
derivative instrument but to all of the activity of the counterparty, therefore the Bank is required
to make adjustments to the fair value according to the quality of the counterparty. The
indications of the credit quality of the counterparty derive, 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 296 -
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)
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 banking corporations are not required to use
complex models including various scenarios of potential exposure in order to measure the
credit-risk component. These transitional directives have later on been extended to 2012 and
2013. The Bank adopted these transitional directives.
Disclosure Requirements
On November 20, 2012 a circular of the Supervisor of Banks for the amendment of Public
Reporting Directives regarding measurement of fair value, was published. The amendments
detailed in the circular are meant to match the Public Reporting Directives regarding
measurement of fair value to the updated version of the accepted accounting principles in the
U.S. on this issue. In particular, the amendment combines the fair value measurement
instruction stated in ASU 2011-04, in the Public Reporting Directives. Furthermore, the circular
states a new unified disclosure format regarding certain disclosure requirements regarding fair
value that were included in ASU 2011-04.
The update states more significant disclosure requirements regarding the following in particular:
‐ Regarding fair value measurements classified in the fair value hierarchy as level 3:
o A quantity disclosure regarding significant unobservable inputs and a description of
the evaluating technique applied by the Bank regarding items measured by fair value
both on a recurring basis and on a non-recurring basis.
o A quality discussion regarding sensitivity analysis of fair value measurement to
changes in significant unobservable inputs and a description of the interaction
between these unobservable inputs, if such data exists.
o Classification according to levels of the fair value hierarchy regarding items that are
not measured by fair value at the balance sheet but must disclose their fair value.
‐ Regarding each transfer from level 1 to level 2 and vice versa of items measured on a
recurring basis by fair value, it is necessary to describe the item, the amount transferred,
the reason for the transformation and the Banking corporations' policy.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 297 -
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 use of an nonfinancial asset in an other than highest and best use, when the asset is
measured by fair value in the balance sheet or when its fair value is included in the
disclosures according to the highest and best use assumption.
‐ The giving of a detailed segmentation to the fair value hierarchy (division to 3 levels)
regarding fair value estimations and balances of financial instruments.
The Bank implements the amendments stated in ASU 2011-04 and in the circular of the
Supervisor of Banks as of January 1, 2012 in a "from here on" manner. Considering, these
financial statements do not include comparison figures to the new disclosures. The initial
implementation of ASU 2011-04 and of the circular of the Supervisor of Banks did not have a
material effect on the financial statements, except for a change in presentation in light of the
new disclosure requirements.
On June 28, 2012 the Bank of Israel published a clarification that the fair value of a derivative
instrument, which has no quoted prices, has no liquid collaterals or offsetting agreements
promising in satisfying manner the credit quality of the derivative and has no market data
regarding the counterparty's credit quality such as: CDS or counterparty bond, will be
considered as a level 3 fair value measurement. The Bank addressed the Bank of Israel and
received a postponement for the implementation of this directive regarding the disclosure of the
changes in fair value (note 20b) of all the level 3 derivative instruments, except for IRS
derivatives – for the first quarter of 2013 and IRS derivatives for the annual financial
statements of 2013.
7. 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, 2012
- 298 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
8. Derivates financial instruments
(a) The Bank enters into transactions in derivative financial instruments in order to hedge foreign
currency risks and interest risks, and also derivatives for non-hedging purposes, including
embedded derivatives. 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 including
derivative instruments used for accounting hedges (fair value hedging) are allocated
immediately to the statement of profit and loss.
(c) See item D2 above regarding initial implementation of hedging accounting. This hedging
accounting isn't applied to derivative instruments that are used as part of the Banks' ALM.
(d) Embedded derivatives - Embedded derivatives instruments are separated from the host
contract and dealt with separately if: (a) There is no clear and tight connection between the
economic characteristics and the risks of the host contract, and the embedded derivative
instrument, including credit risks derived from certain embedded credit derivatives; (b) a
separate instrument with the same terms as the embedded derivative instrument would have
been included in the definition of a derivative; and (c) the combined instrument isn't
measured at fair value through profit and loss.
An embedded derivative that was separated is displayed in the balance sheet with the host
contract, changes in the fair value of embedded derivatives that were separated are
allocated immediately to profit and loss.
9. 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 299 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
9. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (cont'd)
Pursuant to these rules, transfers of financial assets are accounted for as sales if and only if all of
the conditions, stated in the standard, are met. The Bank implements specific directives stated in
the Public Reporting Directives regarding the treatment of lending or borrowing transactions of a
security in which the lending depends on the general credit quality and the general collaterals of
the borrower, when the borrower doesn't give the lender liquid instruments specifically regarding
the security borrowing transaction, which the lender may sale or pledge, as a collateral. Lending
and borrowing, as mentioned above, are treated as credit or as a deposit, measured at fair value of
the related security.
As of January 1, 2012 the Bank implements ASU 2011-03 regarding Reconsideration of Effective
Control for Repurchase Agreements, which is an update of the directives stated in FAS 166 (860
ASC). The assessment of the existence of effective control focuses on the contractual rights and
the contractual liabilities of the transferor, therefore the following, isn't taken into account:
‐ A criteria demanding that the transferor will be able to buy transferred securities even in
case the transferee fails.
‐ Instructions regarding demand of the collaterals regarding the above mentioned criteria,
In financial assets transfer transactions, the Bank states that the transferor remains in
effective control over the transferred assets (therefore the assets transfer will be
handled as a secured debt) if all of the following conditions subsist:
The assets that will be repurchased or redeemed are identical or identical in essence to
the transferred assets.
The agreement is to repurchase or to redeem them before the maturity date, by a fixed
cost or by a fixable price.
The agreement is executed at the time of the transfer.
The Bank implements the directives as of January 1, 2012 in a "from here on" manner.
At the time of the transition there was no affect on the financial statements.
10. 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 300 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
10. Taxes on Income (cont'd) (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 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 subsidiaries which intend to settle current tax assets and liabilities on a net basis,
or the tax assets and liabilities are settled simultaneously.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 301 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
10. Taxes on Income (cont'd)
(c) Uncertain tax positions
The Bank acknowledges the affect of tax positions only if it is more likely than not that the
tax authorities or the court of law will accept the tax positions. Acknowledged tax positions
are measured at the maximum sum which has more than 50% realization probability. Changes
in recognition or measurement are recognized during the period, in which changes in
circumstances that led to a change in judgment, occurred.
11. Buildings and equipment
The Bank implements IAS 16, regarding Fixed Assets.
(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, and
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. 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.
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 13 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 “Other Income” in the statement of profit and loss.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 302 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
11. Buildings and equipment (cont'd)
(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.
Useful life estimation for the current period and for the comparison periods is as follows:
- Buildings and real estate 50 years (owned land isn't depreciated)
- Furniture and equipment 6.7-14.3 years
- Improvements in rented property and in ownership 10-15.4 years
- Software expenses 4-7 years
- Hardware expenses 3-4 years
(d) Regarding impairment of non-financial assets see section 14 below.
12. Leases
The Bank implements IAS 17.
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 303 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
12. Leases (cont'd)
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.
The rest of the leases are classified as operational leases. The leased assets are not recognized in
the balance sheet of the Bank. For details regarding prepaid operational leasing fees see note
18.C.1.
13. Software costs
The Bank implements IAS 38, Intangible Assets.
(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 a software 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 304 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
13. Software costs (cont'd)
(c) Subsequent costs
Subsequent costs are recognized as software costs 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 software assets, starting on the date when the
assets are available for use.
Software under development are not amortized systematically as long as they are not
available for use. Accordingly, these software assets are examined for impairment at least
once a year until they become available for use.
The useful life estimation for the current period and for comparison periods is 7 years regarding
software costs recognized as core systems and 4 years regarding other software costs.
The estimations regarding the amortization method, the useful life and the residual value are
reexamined at the end of every reporting year, at least, and are adapted if necessary.
14. Impairment of nonfinancial assets
The Bank implements IAS 36, Impairment of 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 305 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
14. Impairment of nonfinancial assets (cont'd)
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
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 306 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
14. Impairment of nonfinancial assets (cont'd)
(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 the need of impairment must
be performed, in accordance with the rules set forth in IAS 36, Impairment of Assets.
15. Share-based payments
The Bank implements IFRS 2 regarding Share-Based Payment. 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.
16. 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, therefore no provision was required, 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 307 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
16. Contingent liabilities (cont'd)
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.
17. Earnings per share
The Bank implements IAS 33 regarding Earnings Per Share and 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, options for shares granted to employees.
18. Statement of cash flows
The statement of cash flows is presented as classified to cash flows generated by operating
activities, investing activities (in the past -activities in assets) and financing activities (in the past -
activities in liabilities and capital). Cash flows in respect of the Banks' main activities are
classified to operating activities. The item cash includes cash on hand, deposits from banks,
tradable deposit certificates and deposits with central banks for an initial period of up to three
months.
The Bank implements directives of the Supervisor of Banks regarding Statement of Cash Flow
retroactively as of January 1, 2012. The first time implementation of the directives has no effect
excluding a change in presentation. For details regarding the reclassifications see note 1.C.5.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 308 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
19. 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, excess compensation and Jubilee bonuses are
calculated by an actuary specializing in the method for evaluation of accrued benefits,
taking into consideration probabilities, past experience and the managements' assessment,
among other factors. For details regarding actuary assumptions see note 15.
(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 a central compensation fund and of provident
funds for pension allowances and compensation are recorded to profit and loss statement.
(b) Instructions of the Supervisor of Banks concerning the reinforcement of internal control over
financial reporting on employee benefits
The Bank has implemented the instructions of the Supervisor of Banks concerning compensation
beyond contractual obligations, according to the detectives in the Bank of Israel's' 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 309 -
Note 1 - Principal Accounting Policies (cont'd)
E. Accounting Policies applied preparing financial statements (cont'd)
20. Transactions between an Entity and its Controlling Party
The Bank implements the accepted accounting standards in the U.S. regarding the
accounting treatment of activities between banking corporations and their controlling party
and between a company controlled by the Bank. In cases in which in the mentioned
standards don't address the treatment method, the Bank implements the directives stated in
the Israel Accounting Standards Board issued Accounting Standard No. 23, “Accounting
Treatment of Transactions between an Entity and its Controlling Party”.
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. Due to
the fact that the transaction is on an equity level, the Bank attributes the difference between
the fair value and the consideration allocated in the transaction to equity. As of January 1,
2012 the Bank implements the instructions stated in the directives in a "from here on"
manner regarding all transactions as of January 1, 2012, between the Bank and its
controlling party and regarding a given loan or an accepted deposit from the controlling
party, before the beginning of the implementation of the directive as of the date of
commencement. The initial implementation of the directive had no effect on the financial
statements.
21. Related Party Disclosures
IAS 24 regarding Related Party Disclosures establishes the required disclosures by the Bank
regarding its relationship with related party and regarding transactions and unsettled balances
with a related party. In addition, disclosure is required for remuneration to key executives. Key
executives are those persons having authority and responsibility for planning, directing, and
controlling the activities of the Bank, or indirectly, including any directors (whether active or
inactive) of the Bank. As part of the adoption of the standard by the Supervisor of Banks, the
format of the required disclosure in the financial statements has been adjusted, in order to
comply with the disclosure requirements of IAS 24 as well as the additional disclosures
required under the Securities Regulations, 2010.
As of January 1, 2012 the Bank adopted IAS 24 retrospectively. In order to implement the
standard, the Bank mapped its related parties. The initial implementation of this standard had
no effect, other than the change in presentation.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 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 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.
According to the circular that was published on July 25, 2012 this directive shall be
implemented as of January 1, 2014. The Bank is examining the implications of the adoption of
the directives on the financial statements.
(2) International Financial Reporting Standards (IFRS)
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 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)
(2) International Financial Reporting Standards (IFRS) (cont'd)
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 –the Supervisor of Banks intends to reach a
final decision. 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.
(b) On matters not related to the core business of banking - gradually adopted during 2011-2012.
However, IAS 19 Employee Benefits isn't valid yet, and it will be adopted according to the
directives of the Supervisor of Banks when such directives will be published.
(3) 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.
(a) IFRS 10, Consolidated Financial Statements – The standard presents a new control model to
be used for all affiliated entities, in determining whether an affiliated must be consolidated.
According to the directives of the Supervisor of Banks, banks implemented IFRS 10
excluding the instructions regarding the treatment of VIE's, which will continue to be treated
according to FAS 167. Likewise, it was clarified that at this stage, the revised IAS 27 will not
be implemented in the Public Reporting Directives.
(b) IFRS 11, Joint arrangements and the amendment to IAS 28 Investments in Associates and
Joint Ventures – The standard classifies joint arrangements as joint operations or joint
ventures based on the rights and the obligations of the arrangements' sides. In addition, the
standard amends IAS 28 Net Investments in Associates. According to the amendment, the
reevaluation to fair value in the transition from material influence to joint control and vice
versa, of the existing interest or the remaining interest in the investment was cancelled. It
was also determined that IFRS 5 applies to an investment or part of an investment meeting
the criteria of being classified as available for sale.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 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)
(3) A New system of new financial reporting standards concerning the consolidation of
financial statements and related matters (cont'd)
(b) (cont'd)
According to the mentioned Supervisors' directives, banks will implement the rules
established in IFRS 11 and in the amended IAS 28 as of 2013.
(c) IFRS 12 Disclosure of Interest in Other Entities – The standard contains comprehensive
disclosure demands regarding interest in subsidiary companies, joint arrangements in
associates and in structured entities which are not consolidated. This standard is to be
implemented as of 2013.
According to the Bank's evaluation, the implementation of the standards is not expected to
have a material effect on the financial statements.
(4) A directive regarding the Comprehensive Income Statement
An amending circular of the Public Reporting Directives of the Supervisor of Banks regarding
Comprehensive Income Statement, was published on December 9, 2012. The circulars'
objective is to match the presentation of the Comprehensive Income Statement to the U.S
GAAP requirements (ASU 2011-12 and ASU 2011-05) and to the accepted presentation
format of the Comprehensive Income Statement of banking corporations' financial reports in
the U.S. The circular changes the presentation of Other Comprehensive Income items in the
financial statements (including Net Profit and adjustments regarding the presentation of
securities available for sale measured at fair value less the related tax effect) so that the
Comprehensive Income items will be reported in a separate statement named " Comprehensive
Income Statement" which will be presented right after Profit and Loss Statement. In addition,
the details of the composition and the movement of "Accumulated Other Comprehensive
Income" will be presented in a new note regarding accumulated other comprehensive income.
The amendments in this directive will apply to the statements starting from the first quarter of
2013 and will be implemented retroactively. The initial implementation of the standard isn't
expected to have a material effect on the financial statements, excluding a change in
presentation.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 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)
(5) A directive regarding assets and liabilities offset
An amending circular of the Public Reporting Directives of the Supervisor of Banks regarding
assets and liabilities offset, was published on December 12, 2012. The amendments detailed in
this circular are meant to match section 15a in the Public Reporting Directives to the U.S. GAAP.
It's determined that a banking corporation will offset assets and liabilities arising from the same
counterparty, regarding offset of derivate instruments, and will present their net balance in the
Balance Sheet, under the following cumulative conditions:
(1) An enforceable legal right to offset liabilities from assets exists, in respect of the liabilities.
(2) There is intention to settle the liabilities and realize the assets on a net basis or
simultaneously.
(3) Both the banking corporation and the counterparty owe each other determinable amounts.
In addition, it's determined that under certain circumstances, a banking corporation may
offset fair value amounts recognized in respect of derivative instruments and fair value
amounts recognized in respect of the right to reclaim a collateral in cash (accounts
receivable) or the commitment to return a collateral in cash (accounts payable) derived
from derivative instruments executed with the same counterparty according to the master
netting arrangement, even if the realization on a net basis condition does not exist. A
banking corporation must determine an accounting policy that will be implemented
consistently regarding offset of aforesaid fair value amounts. In the circular, certain
considerations that the banks must take into account, were clarified, in order to determine if
there's a doubt regarding the existence of the offset conditions. Regarding the right to
offset, amongst other requirements, a new requirement was added: the auditor of a banking
corporation must examine if there's an enforceable legal right (for offsetting), under the
necessary changes, in the same manner in which today he examines if transferred financial
assets were isolated from the conveyers' and his creditors reach (for subtraction of financial
assets).
In addition, the circular includes broad disclosure requirements, including a disclosure
regarding the banking corporations' policy which determines whether or not to offset
derivative instruments.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 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)
(5) A directive regarding assets and liabilities offset (cont'd) The amendments in this directive will apply to financial statements of reporting periods
beginning on January 1, 2013 and will be implemented retrospectively. Nonetheless, in the
quarterly statements of 2013, banking corporations may not disclose what's initially
demanded as a result of the implementation of this directive, regarding comparison figures
for parallel quarters of 2012.
There is no influence on the Bank from the implementation of this circular.
(6) A directive regarding disclosure of deposits
An amending circular of the Public Reporting Directives of the Supervisor of Banks regarding
disclosure of deposits, was published on January 13, 2013. The circulars' objective is to match
the disclosure requirements of deposits to the accepted disclosure requirements of banking
corporations' financial statements in the U.S.
According to the circular, broader disclosure requirements were determined regarding deposits
from the public, deposits from banks and deposits from the government such as: a requirement
for disclosure regarding deposits raised in Israel separate from deposits raised abroad, subject to
materiality.
In addition, in the note regarding deposits from the public:
‐ A disclosure requirement was added regarding the balance of interest-bearing deposits
apart from the balance of non interest-bearing deposits.
‐ The requirement for disclosure of deposits in a saving program and other deposits, was
cancelled.
‐ The disclosure of deposits from the public will include a disclosure regarding limited time
deposits and demand deposits.
‐ A requirement to report according to size, was added; and
‐ A requirement to report the identity of the depositors of deposits in Israel, with a
distinction between private people, institutions and other corporations.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 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)
(5) A directive regarding disclosure of deposits
The amendments in this directive circular were implemented retroactively as of the Public
Report of 2013, excluding the demand for disclosure regarding the balance of institutions'
deposits which were included in deposits from the public recruited in Israel, which will apply
as of the Public Report for 31.3.2013. In addition, in the quarterly reports of 2013, the Bank
may not disclose comparison figures for the end of each quarter in 2012, regarding the
mentioned deposits of institutions. No impact is expected, on the financial statements, due to
the initial implementation, excluding a presentation change.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
316
Note 2 - Cash on Hand and Deposits with Banks
Reported amounts
Consolidated composition (1):
Consolidated December 31, December 31, 2012 2011 NIS millions
Cash and deposits with Bank of Israel 7,345 5,788
Deposits with commercial banks (2) 751 1,031
Deposits with specialized banking corporations in Israel 150 142
Total 8,246 6,961
Of which - cash on hand, deposits with banks and
deposits with Bank of Israel for an initial period
of up to three months 7,895 6,750
(1) See Note 1.A(2).
(2) Of which: the balance of deposits with Bank of Israel as at December 31, 2012 totaled NIS 425
million (as at December 31, 2011 - NIS 43 million), and the remaining balance in respect of the
Banks' clearing house totals approximately NIS 158 million (as at December 31, 2011 - NIS 99
million).
(3) With regard to liens - See Note 14.
* Reclassified.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
317
Note 3 - Securities
Reported amounts
Consolidated composition (1): December 31, 2012
Book value
Amortized 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 2,687 2,624 63 *- 2,678 Of financial institutions in Israel 726 715 12 (1) 726 Of foreign financial institutions 166 164 2 *- 166 Asset backed securities (ABS) 58 51 7 *- 58 Of others in Israel 821 803 35 (17) 821 Of foreign others 5 5 - - 5 4,463 (4)4,362 119 (18) 4,463 Shares and other securities 100 (5)89 13 (2) (6)100 Total available for sale securities 4,563 4,451 (7) 132 (7) (20) 4,563
December 31, 2012
Cumulative other comprehensive
profit
Book value
Amortized cost (for
shares-cost) Profits Losses Fair value(3) NIS millions B. Securities held for trading: Bonds and loans: Of Israel government 337 326 11 *- 337 Of financial institutions in Israel 8 8 - *- 8 Of others in Israel 14 17 - (3) 14 359 351 11 (3) 359 Shares and other securities 18 21 1 (4) 18 Total trading securities 377 372 (8)12 (8) (7) 377
Total securities 4,940 4,823 4,940
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
318
Note 3 - Securities (cont'd)
Reported amounts
As at December 31,
2012
NIS millions C. Data regarding impaired bonds and bonds in arrear Recorded debt balances of - Impaired bonds accruing interest income - Impaired bonds not accruing interest income 51
Total recorded debt balances 51
* Less than NIS 500 thousand.
(1) See Note 1.A.(2).
(2) See Note 22 and 23 for details of results of activities in investment in bonds and 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 impairment in value of an investment as at December 31, 2012 in the amount of NIS 60
million.
(5) After a cumulative provision for impairment in value of an investment as at December 31, 2012 in the amount of NIS 22
million.
(6) Including shares and other securities for which there is no readily available fair value and which are stated at cost, in the
amount of NIS 36 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.
Note:
(a) For bonds pledged as collateral, see Note 14.
(b) Israeli bonds and foreign bonds are differentiated according to the country of residence of the Issuer entity.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
319
Note 3 - Securities (cont’d)
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, 2012
320
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 and 23 for details of results of activities in investment in bonds and 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 impairment in value of an investment as at December 31, 2011 in the amount of NIS 66
million.
(5) After a cumulative provision for impairment 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 readily available 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.
Note:
(a) For bonds pledged as collateral, see Note 14.
(b) Israeli bonds and foreign bonds are differentiated according to the country of residence of the Issuer entity.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
321
Note 3A - Asset-Backed Financial Instruments
Reported amounts
Consolidated composition:
The following table shows information regarding the depreciated cost and fair value of asset-backed
bonds in the available-for-sale portfolio:
December 31, 2012
Depreciated
cost Cumulative other
comprehensive profit Book value (for shares–cost) Profits Losses (3) Fair value
NIS millions
ABS - Asset-Backed Bonds Others (1) 58 51 7 *- 58
Total ABS available for sale 58 51 7 *- 58
Of which:
- NIS 22 million - bonds rated AAA in 2010, backed by assets which are USD - denominated bonds of the state of Israel.
- NIS 17 million - bonds rated AA in 2011, backed by cash flows from payment of municipal tax of local authorities.
- NIS 14 million - non-marketable bonds rated A - in 2012, backed by cash flows from apartment sales homes.
- NIS 2 million - non-marketable bonds rated AA- in 2012, backed by cash flows from property rentals.
- NIS 1 million - bonds rated AA in 2011, backed by cash flows from bonds issued by an infrastructure company.
- NIS 1 million - bonds rated A+ in 2011, backed by CLN transactions.
- NIS 1 million - bonds rated AA- in 2011, backed by cash flows from water desalination.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
322
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, 2012
Up to 12 months 12 months or more
fair value Unrealized
losses fair value Unrealized
losses
NIS millions
ABS - Asset-Backed Bonds Others - - 15 *- Total ABS available for sale - - 15 *-
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, 2011
Depreciated
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 - bonds 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 of local authorities.
- 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 apartment
sales.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
323
Note 3A - Asset-Backed Financial Instruments (cont'd)
Reported amounts (2) (cont'd)
- 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.
(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 than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
324
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses Reported amounts Consolidated composition: A. Debts (1) and off-balance sheet credit instruments - Allowance for credit losses
1. Change in allowance for credit losses
Year ended December 31, 2012
Credit to the public
Commercial Housing Other private Total
Banks and government Total
(NIS millions)
Allowance for credit losses at beginning of year 264 39 13 316 - 316 Provision for credit losses 57 3 5 65 - 65Accounting write-offs (78) (3) (15) (96) - (96)Recoveries of debts written-off in previous years 37 - 12 49 - 49Net accounting write-offs (41) )3( (3) (47) - (47)Allowance for credit losses at end of year 280 39 15 334 - 334
Of which: In respect of off-balance
sheet credit instruments 49 - *- 49 - 49
Year ended December 31, 2011 (2)
Credit to the public
Commercial Housing Other private Total
Banks and government Total
(NIS millions)
Allowance for credit losses at beginning of year 294 42 16 352 - 352 Provision for credit losses 21 -* 6 27 - 27Accounting write-offs (80) )3( (17) (100) - (100)Recoveries of debts written-off in previous years 29 - 8 37 - 37Net accounting write-offs (51) (3) (9) (63) - (63)Allowance for credit losses at end of year 264 39 13 316 - 316
Of which: In respect of off-balance sheet credit instruments 44 - *- 44 - 44
(1) Credit to the public, credit to governments, deposits with banks, and other debts, excluding bonds and
securities borrowed or purchased under agreements to resell. (2) Starting with the report for 2012, the Bank implemented for the first time, the directives of the Supervisor of
Banks concerning the update of the disclosure regarding credit quality of debts and regarding the allowance for credit losses, and the transitional directives for 2012 on the subject.Comparison figures for the preceding year were reclassified, to the extent possible, for adjustment to the required format under the aforesaid directive. For details, see note 1(E)(5) above.
* Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
325
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported amounts Consolidated composition: A. Debts (1) and off-balance sheet credit instruments - Allowance for credit losses (cont'd.)
2. Additional information regarding the method of calculating the allowance for credit losses in respect of debts and underlying debts: Recorded debt balance of debts:
Year ended December 31, 2012 (2)
Credit to the public
Commercial Housing Other private Total
Banks and government Total
(NIS millions) Recorded debt balance of debts: Examined on an individual basis 13,671 62 290 14,023 7,737 21,760Examined on a collective basis 1,498 6,590 1,747 9,835 - 9,835Of which: Allowance calculated according to the extent of arrears 322 6,401 - 6,723 - 6,723Total debts 15,169 6,652 2,037 23,858 7,737 31,595 Allowance for credit losses in respect of debts: Examined on an individual basis 274 1 6 281 - 281Examined on a collective basis 6 38 9 53 - 53Of which: Allowance calculated according to the extent of arrears - **37 - 37 - 37Total allowance for credit losses 280 39 15 334 - 334
Year ended December 31, 2011 (2)
Credit to the public
Commercial Housing Other private Total
Banks and government Total
(NIS millions) Recorded debt balance of debts: Examined on an individual basis 13,267 38 271 13,576 6,215 19,791Examined on a collective basis 1,767 6,210 1,587 9,564 - 9,564Of which: Allowance calculated according to the extent of arrears 207 6,065 - 6,272 - 6,272Total debts 15,034 6,248 1,858 23,140 6,215 29,355 Allowance for credit losses in respect of debts: Examined on an individual basis 255 - 2 257 - 257Examined on a collective basis 9 39 11 59 - 59Of which: Allowance calculated according to the extent of arrears - **38 - 38 - 38Total debts 264 39 13 316 - 316(1) Credit to the public, credit to governments, deposits with banks, and other debts, excluding bonds and securities borrowed. (2) Starting with the report for 2012, the Bank implemented for the first time, the directives of the Supervisor of Banks concerning the update
of the disclosure regarding credit quality of debts and regarding the allowance for credit losses, and the transitional directives for 2012 on the subject.Comparison figures for the preceding year were reclassified, to the extent possible, for adjustment to the required format under the aforesaid directive. For details, see note 1(E)(5) above.
* Less than NIS 500 thousand. ** Includes the allowance beyond the amount required according to the method of the extent of arrears, calculated on an individual basis in
the amount of NIS 5 million (December 31, 2011: NIS 4 million), and calculated on a collective basis in the amount of NIS 10 million (December 31, 2011: NIS 9 million).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
326
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported amounts Consolidated composition: B. Debts )1(
1. Credit quality and arrears:
December 31, 2012
Problematic )2( Unimpaired debts additional
information
Non problematic Unimpaired Impaired (3) Total
In arrears of 90 days or more (4)
In arrears of 30 to 89 days )5(
(NIS millions) Borrower activity in Israel public - commercial
Construction and real estate - construction 2,156 138 75 2,369 - 37Construction and real estate - real- estate activities 1,239 11 20 1,270 - 14Financial services 4,022 3 330 4,355 - 7Commercial - other 6,873 137 149 7,159 1 31
Total commercial 14,290 289 574 15,153 1 89Private individuals - housing loans 6,593 (6)59 - 6,652 58 62Private individuals - others 2,027 - 10 2,037 3 7
Total public - activity in Israel 22,910 348 584 23,842 62 158 Banks in Israel 7,737 - - 7,737 - -Total activity in Israel 30,647 348 584 31,579 62 158 Borrower activity abroad public - commercial 16 - - 16 - - Banks abroad 319 - - 319 - -Total activity abroad 335 - - 335 - - Total public 22,926 348 584 23,858 62 158Total banks 8,056 - - 8,056 - -
Total 30,982 348 584 31,914 62 158
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
327
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported amounts Consolidated composition: B. Debts )1( (cont'd.)
1. Credit quality and arrears (cont.)
December 31, 2011 (7)
Unimpaired debts - additional information
Unimpaired Impaired )3( Total
In arrears of 90 days or more (4)
In arrears of 30 to 89 days )5(
(NIS millions) Credit to the public Examined on an individual basis 13,052 524 13,576 - 35Housing loans based on the extent of arrears 6,580 - 6,580 60 49Examined on a collective basis - other 2,984 - 2,984 9 25
Total 22,616 524 23,140 69 109
(1) Credit to the public, credit to governments, deposits with banks and other debts, excluding bonds and
securities borrowed. (2) Credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans
for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more.
(3) In general, impaired debts do not accrue interest income. For information regarding certain impaired debts restructured in restructuring, see note 4(b)(2)(3)(2) below.
(4) Classified as unimpaired problematic debts, accruing interest income. (5) Accruing interest income. Debts in arrears of 30 to 89 days, in the amount of NIS 2 million were classified as
unimpaired problematic debts. (6) Includes a balance of housing loans, in the amount of NIS 10 million with allowance based on the extent of
arrears, for which an arrangement has been signed for the borrower's repayment of the amounts in arrears, where a change has been made in the repayment schedule with regard to the balance of the loan not yet due for repayment.
(7) Starting with the report for 2012, the Bank implemented for the first time, the directives of the Supervisor of Banks concerning the update of the disclosure regarding credit quality of debts and regarding the allowance for credit losses, and the transitional directives for 2012 on the subject. Comparative figures for the preceding year were reclassified, to the extent possible, for adjustment to the required format under the aforesaid directives. For details, see Note 1(e)(5) above.
Note: The condition of the arrears situation is handled on an ongoing basis and is one of the main indications of credit quality – for further information regarding the Banks' treatment of arrears see note 1.E.5.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
328
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported amounts Consolidated composition: B. Debts )1( (cont'd.)
2. Additional information regarding impaired debts: 2.1 Impaired debts and the individual allowance:
December 31, 2012
Balance of impaired debts for which an individual allowance exists (2)
Individual allowance for credit losses
Balance of impaired debts for which no individual allowance exists (2)
Total balance of impaired debts(2)
Balance of contractual principal of impaired debts
(NIS millions)Borrower activity in Israel pubic - commercial
Construction and real estate - construction 14 5 61 75 832Construction and real-estate activities 15 6 5 20 117Financial services 105 56 225 330 516Commercial - other 104 36 45 149 1,341
Total commercial 238 103 336 574 2,806Private individuals - housing loans - - - - 9Private individuals - others 5 4 5 10 262
Total 243 107 341 584 3,077 Of which: Measured at the present value of cash flows 123 84 139 262 Debts in troubled debts restructuring 90 34 78 168
December 31, 2011 (3)
Balance of impaired debts for which an individual allowance exists to credit losses (2)
Individual allowance for credit losses
Balance of impaired debts for which no individual allowance exists to credit losses(2)
Total balance of impaired debts(2)
Balance of contractual principal of impaired debts
(NIS millions)
Total public 298 81 226 524 2,914Total banks - - - - -Total governments - - - - -
Total 298 81 226 524 2,914 Of which: Measured at the present value of cash flows 292 81 215 507 Debts in troubled debts restructuring 12 2 106 118 (1) Credit to the public, credit to the governments, deposits with banks, and other debts, excluding bonds borrowed. (2) Recorded debts balance. (3) Starting with the report for 2012, the Bank implemented for the first time the directives of the Supervisor of Banks
concerning the update of the disclosure regarding credit quality of debts and regarding the allowance for credit losses, and the transitional directives for 2012 on the subject. Comparative figures for the preceding year were reclassified, to the extent possible, for adjustment to the required format under the aforesaid directives. For details, see Note 1(e)(5) above.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
329
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported amounts Consolidated composition: B. Debts )1( (cont'd.)
2. Additional information regarding impaired debts (cont'd.) 2.2 Average balance and interest income
December 31, 2012
December 31, 2011
(NIS millions)
Average recorded debt balance of impaired debts in the reporting period 565 551
Total interest income during reporting period, in respect of these debts, in the period of time in which they were classified as impaired 7 19
Total interest income that would have been recorded during the reported period if these debts accumulated interest, according to their original terms, 30 34Of this: interest income recorded in accordance with the cash basis accounting method. 7 19*
(1) Credit to the public, credit to the governments, deposits with banks, and other debts, excluding bonds borrowed
* Reclassified.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
330
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported amounts Consolidated composition: B. Debts )1( (cont'd.)
2. Additional information regarding impaired debts (cont'd.) 2.3 Restructuring of problematic debts:
December 31, 2012 Not
accruing interest income
Accruing in arrears of 90 days or more (2)
Accruing in arrears of 30 to 89 days (2)
Accruing not in arrears (2) Total
(NIS millions)Borrower activity in Israel pubic - commercial
Construction and real-estate - construction 18 - - 30 48Construction and real estate - real estate activities 2 - - 1 3Financial services 67 - - - 67Commercial - other 36 - - 9 45Total commercial 123 - - 40 163Private individuals - housing loans - - - - -Private individuals - others 5 - - - 5
Total public 128 - - 40 168Total banks - - - - -Total governments - - - - -Total 128 - - 40 168
December 31, 2011(4) Recorded debts balance Not
accruing interest income
Accruing in arrears of 90 days or more (2)
Accruing in arrears of 30 to 89 days (2)
Accruing not in arrears (2) Total
(NIS millions)Total public 101 - - 17 118Total banks - - - - -Total governments - - - - -Total 101 - - 17 118
(1) Credit to the public, credit to governments, deposits with banks and other debts, excluding bonds and securities borrowed or purchased under agreements to resell.
(2) Accruing interest income. (3) Included in impaired debts. (4) Starting with the report for 2012, the Bank implemented for the first time, the directives of the Supervisor of Banks
concerning the update of the disclosure regarding credit quality of debts and regarding the allowance for credit losses, and the transitional directives for 2012 on the subject. Comparative figures for the preceding year were reclassified, to the extent possible, for adjustment to the required format under the aforesaid directives. For details, see Note 1(e)(5) above.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
331
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported amounts Consolidated composition: B. Debts )1( (cont'd.)
3. Additional information regarding housing loans Year-end balances by financing ratio (LTV) )3( repayment type, and interest type:
December 31, 2012 Balance of housing loans
Of which: Off-balance Of which: floating sheet credit Total bullet and balloon interest rate risk-total
(NIS millions)
First lien: financing rate: up to 60% 4,617 265 3,103 417 over 60% 2,616 101 1,883 235Secondary lien or no lien - - - -
Total 7,233 366 4,986 652
December 31, 2011(2) Balance of housing loans
Of which: Of which: Off-balance bullet and Floating sheet credit Total balloon interest rate risk-total (NIS millions)
Total 6,763 183 4,579 828
(1) Credit to the public, credit to the governments, deposits with banks and other debts, excluding bonds and
securities borrowed. (2) Starting with the report for 2012, the Bank implemented for the first time, the directives of the Supervisor of Banks
concerning the update of the disclosure regarding credit quality of debts and regarding the allowance for credit losses, and the transitional directives for 2012 on the subject. Comparative figures for the preceding year were reclassified, to the extent possible, for adjustment to the required format under the aforesaid directives. For details, see Note 1(e)(5) above.
(3) Proportion of the approved facility as compared to the asset value, as approved by the bank when the facility was provided.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
332
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported amounts C. Credit to the public and off-balance-sheet credit risk according to the size of debt per borrower: Consolidated composition (3):
December 31, 2012 December 31, 2011
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 (1), (4) From To (NIS millions) (NIS millions)
0 10 23,374 171 32 22,903 141 3210 20 14,738 138 95 13,515 100 9320 40 22,098 431 211 17,608 334 18340 80 18,735 657 381 16,782 601 34480 150 8,477 575 349 8,401 567 338150 300 5,659 1,044 201 5,883 1,092 203300 600 6,446 2,657 254 6,490 2,636 236600 1,200 3,923 2,921 332 3,584 2,676 2821,200 2,000 908 1,235 197 850 1,133 2312,000 4,000 566 1,244 397 566 1,215 4264,000 8,000 271 1,275 539 298 1,157 5988,000 20,000 213 1,701 1,020 240 2,014 1,04020,000 40,000 102 1,631 1,207 126 2,081 1,52640,000 200,000 141 6,004 4,929 128 5,562 4,900200,000 400,000 12 2,417 918 9 1,758 624400,000 466,000 - - - 2 (5)713 192
105,663 24,101 11,062 97,385 23,780 11,248(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 with the addition of the fair value of
derivative instruments in the amount of NIS 243 million and NIS 640 million for December 31, 2012 and December 31, 2011, respectively. (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) Mostly covered by eligible collateral. (6) See Note 18.A. – note (3)
D. Information regarding debts purchases:
The following table details the consideration paid for purchases of loans: 2012 2011 (NIS millions) Private individuals - others
Loans purchased* 394 227
* For further information regarding loan purchase transactions. See note 18.C.7.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
333
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
2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2010
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 25 15 - - 11 10 10 7 7 Impact Union Investment Portfolios (4) Management of investment portfolios 100 10 10 14 13 - - 1 1 1 2 2 Union Leasing Ltd. Leasing 100 1 1 58 49 - - - - 9 8 7 Union Bank Trust Company Ltd. Trustee services 100 2 2 24 21 - - - - 3 3 5 Carmel Union - Mortgages and Operating services to Investments Ltd. the bank 100 138 138 45 40 (66) (59) - - 5 5 5 Livluv Insurance Agency (1993) Ltd. Real estate insurance 100 11 11 23 22 - - - - 1 2 2 Union Finances Ltd. (5) 100 2 2 37 36 - - - - 1 *- *- Union Balances Ltd. (6) 100 1 1 40 39 - - - - 1 1 *- Union Issuances Ltd. (7) Issuance of liability deeds 100 16 16 3 2 - - - - 1 2 *- * Less than NIS 500 thousand. (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 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, 2011 - 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, 2011 - 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. After the balance sheet date the company announced a dividend distribution of NIS 37 million. (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, 2011 - NIS 16 million). See Note 10 regarding the issuance of subordinated notes by Union Issuances Ltd. (8) Including a subsidiary of A.S.Y. – Union Capital Markets held 100% by A.S.Y. and Union Underwriting & Finances (2010) Ltd. (hereinafter: "Union Underwriting") held 75% by A.S.Y. (as at 31.12.2011 – 85%). Union
Underwriting 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 Union Underwriting stock that does not exceed 30% of its capital. From this rate 20% were issued to a company controlled by the CEO of Union Underwriting (as at 31.12.2011 – 15%) and 5% to another service provider engaged with the Company (as at 31.12.2011 – 0).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
334
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 *289 *309 1,002 Additions 12 14 **61 87 Subtractions (9) - - (9) Balance as at December 31, 2011 407 303 370 1,080 Additions 7 10 **47 64 Subtractions (23) (3) - (26) Balance as at December 31, 2012 391 310 417 1,118
Depreciation and impairment losses
Balance as at December 31, 2010 176 *246 *200 622 Additions 11 11 36 58 Subtractions (8) - - (8) Balance as at December 31, 2011 179 257 236 672 Additions 12 12 41 65 Subtractions (15) (2) - (17) Balance as at December 31, 2012 176 267 277 720
Book value
As at December 31, 2010 228 43 109 380 As at December 31, 2011 228 46 134 408 As at December 31, 2012 215 43 140 398 Weighted average depreciation rates as at December 31, 2012 3.7% 14.6% 20.6% Weighted average depreciation rates as at December 31, 2011 3.4% 13.8% 21.3%
B. Buildings and real estate include capitalized financing leasehold rights in real estate in the amount of
NIS 132 million, similar to the corresponding period last year.
1. Following are details regarding real estate rights:
As at December 31
The date of the termination of the
lease (in years) 2012 2011
Ownership rights 51 61 Leased rights in a capitalized financing lease 37-45 132 132
183 193
2. Rights in real estate in the depreciated amount of NIS 70 million have not yet been registered in the
Bank's name at the Land Registry Office (December 31, 2011 - NIS 86 million).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
335
Note 6 - Buildings and Equipment (cont'd) Reported amounts C. Buildings and real estate include property unoccupied by the Bank in the amount (net of accumulated
depreciation and impairment) of NIS 9 million, of which a total of NIS 0.3 million in respect of
Buildings and real estate designated for sale (December 31, 2011 - NIS 9 million, of which a total of NIS
1 million was in respect of Buildings and real estate designated for sale).
D. During 2012 a building owned by the Bank was sold in exchange for NIS 11 million and as a result of
the sale the Bank recorded a profit of NIS 2 million. Part of the building that was sold, was leased by the
Bank under an operating lease.
* Reclassified. ** Including expenses that were capitalized in 2012 regarding costs of software development for own
use, which amounted to NIS 47 million (in 2011 – NIS 61 million). Regarding the policy of capitalization of software costs – see note 1.E.13.
*** Including a provision for impairment in the amount of NIS 2 million (as at December 31, 2011 - NIS 6
million). Note 7 - Other Assets Reported amounts Consolidated - composition (1): December 31, December 31, 2012 2011 NIS millions
Net deferred tax assets (See Note 28.h) 213 219
Assets in respect of Maof market transactions (2) 789 739
Other receivables and debit balances (3), (4) 121 83 Total other assets 1,123 1,041
(1) See Note 1.A.2. (2) Assets not meeting the definition of derivatives. See Note 11 – Liabilities in respect of Maof Market
transactions. (3) Includes NIS 13 million in respect of a loan with no scheduled maturity date, 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 to cover development expenses, which are to be returned out of the amounts the company will receive upon realization of its assets. (December 31, 2011 - NIS 13 million).
(4) Following are additional details regarding operating lease agreements: a. The Bank and its subsidiaries lease buildings and equipment under operating leases with lease agreements
linked to CPI. b. The Bank paid leasing fees in respect of the buildings, totaling NIS 25 million (2011- NIS 24 Million, 2010
– NIS 22 Million). For rent payable future years - See Note 18.C.1.
c. Balance of other receivables and debit balances : Including prepaid expenses in amount of NIS 0.2 million in respect of operating leases (December 31, 2011 - NIS 0.2 million)
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
336
Note 8 - Deposits from the Public
Reported amounts
Consolidated - composition (1): December 31, December 31, 2012 2011 NIS millions
Deposits on demand 7,302 6,653
Limited time deposits 23,546 24,443
Deposits in savings plans 42 62 Total deposits of the public 30,890 31,158
(1) See Note 1.A.2. Note 9 - Deposits from Banks
Reported amounts
Composition:
Consolidated and the Bank December 31, December 31, 2012 2011 NIS millions
Commercial banks: Deposits on demand 131 67 Limited time deposits 64 292 Acceptances 49 33
Total deposits from banks 244 392
Note 10 - Subordinate notes and deposit certificates
Reported amounts
A. Composition:
Consolidated Internal rate Average life (1) of return (2) December 31, December 31, December 31, 2012 2012 2011 Years % NIS millions
Deferred liability certification (3), (5)
Deferred liability certification : In NIS unlinked 5.5 4.4 645 644 In NIS linked to the CPI 4.8 4.0 1,371 1,470 Deposit certificates: In NIS unlinked to the CPI 1.5 4.5 331 332 In NIS linked to the CPI 3.2 1.7 582 315
Total deferred liability and deposit certificates 2,929 2,761
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
337
Note 10 – Subordinate Notes and 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, 2012 2012 2011 Years % NIS millions
Deferred liability certification
(3), (4)
In NIS linked to the CPI 2.5 4.9 197 222 Total deferred liability certification
197 222
(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 and deposit certificates are not convertible into shares.
(4) The deferred liability certification will be settled until 2022.
(5) Including deferred liability certification in the amount of NIS 2,732 million (December 31, 2011 –
NIS 2,537 million).
B. Shelf Prospectus Publication:
1. On August 29, 2011 a subsidiary of the Bank Union Issuances LTD, published a shelf Prospectus
bearing the date August 30, 2011, for the issuance of a new series of liability certificates and
expansion of existing series.
According to the shelf prospectus, the Company can issue -
Up to 11 series of bonds (Series F 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 11 series of deferred liability certification (Series K through L) 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 and except for
the rights of creditors, holding the instruments included in the Banks' Tier 1 capital and in upper Tier
2 capital.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
338
Note 10 - Subordinate Notes and Deposit Certificates (cont'd)
C. Shelf prospectus fond raising:
1. On July 31, 2012 Union Issuances published a shelf offering according to a shelf prospectus of
Union Issuances from August 30, 2011. According to the shelf offering report, on August 2, 2012
365,974 units of (Series F) bonds were issued and each unit consists of a par value of NIS 1,000 and
the gross consideration amounted NIS 366 million, payable in three payments on August 2 of each of
the years 2016-2018 (including) [the first two payments are 33.333% each from the par value of the
(Series F) bonds and the last payment is 33.334% from the par value of the (Series F) bonds]. the
(Series F) bonds bear interest at the rate of 1.6% linked to the CPI which will be paid on August 2 of
each of the years 2013 until 2018 (including). According to the announcement of Midroog Ltd. from
July 18, 2012, the (Series F) bonds were given an Aa3 rating in a stable horizon.
2. On June 30, 2011, Union Issuances published a shelf offering 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, 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%.
3. 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%.
D. With regard to the capital notes included in Tier II, See Note 13.
E. During 2012 and 2011, the Bank did not issue non-tradable subordinated notes.
F. On March 18, 2012, 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.
Midroog also announced an A1 rating for the recruitment framework of subordinated notes (bottom
secondary capital) in up to the amount of NIS 500 million par value.
On July 18, 2012, Midroog reaffirmed the Banks' rating as described above and approved an Aa3 rating
in a stable horizon for the recruitment framework of bonds (series f) in up to the amount of NIS 400
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
339
million par value which will be carried out by Union Issuance Ltd. Regarding the issuance of bonds
(series f) see section C.1. above.
Note 11 - Other Liabilities
Reported amounts
Composition:
Consolidated The Bank December 31, December 31, December 31, December 31, 2012 2011 2012 2011 NIS millions NIS millions
Excess of provision for severance pay, retirement, and pensions over amounts funded
(see Note 15.A.7) 265 272 265 272 Income received in advance 16 16 16 15 Employees - in respect of salaries and related benefits 86 88 85 87 Liabilities in respect of maof market transactions (1) 789 739 789 739 Payables in respect of credit cards 346 318 346 318 Net clearing balance in respect of transactions in securities - 13 - 13 Short sale of securities 334 123 334 123 Other payables and credit balances 142 141 291 290 Total other liabilities 1,978 1,710 2,126 1,857
(1) Liabilities not meeting the definition of derivatives. See Note 7 –Assets in respect of Maof market
transactions.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
340
Note 12 - Shareholders' Equity
A. Composition of share capital
In nominal values December 31, 2012 2011
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 Bank's yield 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, 2012
341
Note 12 - Shareholders' Equity (Cont'd) B. (Cont'd)
Supervisor of Banks on the grant of credit 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, 2012, is NIS 463 million from retained earnings of NIS 2, 192 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.
C. Against the background of the Supervisor of Banks' determination that the banking system must reach a
tier 1 capital ratio target of 9% at the end of 2014, the Board of Directors decided to gradually increase
the capital targets, so that at this stage it will not be possible to distribute dividends in accordance to the
aforementioned policy.
D. On December 29, 2010 a 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), 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).
E. See Note 15A regarding options issued to the chief executive officer.
F. On October 29, 2012 Shlomo Eliyahu Holdings became part of the controlling interest of the Bank
following the completion of the acquisition of control of Migdal Insurance and Financial Holdings Ltd.
by Mr. Shlomo Eliyahu through an Insurance Company Ltd. For further details, including the freezing of
voting rights, see note 21.E.1.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
342
Note 13 - Capital Adequacy under Directives of the Supervisor of Banks (1)
Reported amounts A. Consolidated data:
December 31, December 31, 2012 2011 NIS millions
1. Capital for the purpose of calculating the capital
ratio
Tier I capital, after deductions 2,117 1,986
Tier II capital, after deductions 1,537 1,408
Tier III capital - - Total capital 3,654 3,394
NIS millions
2. Weighted balances of risk assets
Credit risks 22,494 22,664
Market risks 213 208
Operational risk 1,751 1,680 Total weighted balances of risk assets 24,458 24,552
Percentage Percentage
3. Ratio of capital to risk components
Ratio of Tier I capital to risk components 8.66% 8.09%
Total ratio of capital to risk components 14.94% 13.82%
Total minimum ratio of capital as required by the supervisor of banks 9.0% 9.0%
(1) Capital adequacy was calculated in accordance with the directives of Basel 2.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
343
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, 2012 2011 NIS millions
1. Tier I capital
Equity attributable to shareholders of a bank 2,191 ***1,985 Non-Controlling interests in the equity of consolidated companies - 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 74 - 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 2,117 1,986
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 52 - General provision for doubtful debts 52 52 Hybrid capital instruments - - Other upper Tier II capital components 375 371 B. Lower Tier II capital Subordinated notes 1,058 985 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 1,537 1,408
(2) From which paid-up common share capital - NIS 952 million, retained earnings - NIS 1,139 million, capital reserves -
NIS 100 million - See Statement of Changes in Equity. (3) Initial implementation of a letter from the Bank of Israel regarding the treatment of put options given to non-controlling
interest, for details see note 1.E.1.B. (4) See note 18.A. – comment (3).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
344
Note 14 - Liens
(1) In order to secure the clearance of daily 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
(Makam) 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 further security, 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, 2012, no collateral was provided.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
345
Note 14 - Liens (cont'd)
(3) The Bank is a member of the Euroclear Clearinghouse Bank Brussels, 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 monies and securities. The credit facility against which the Bank registered a charge on securities is in the
amount of USD 6 million (December 31, 2011 - 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, 2012 is NIS 719
million (December 31, 2011: NIS 870 million); the average during 2012 was NIS 740 million. The
maximum balance deposited was NIS 888 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.
(5) Sources of securities received which the Bank may sell or pledge at fair value.
December 31 2012
December 31, 2011
NIS millions
Securities received in borrowing transactions of securities for cash 68 5
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
346
Note 15 - Employee Benefits (cont.)
A. Severance pay and pension (cont.)
(2) The contractual liability for severance pay to 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 actuarial calculation of the surplus of severance pay in excess
of 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.
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 do 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.
Liabilities are calculated by the Bank on an actuarial basis in an "expected accrued benefits
evaluation" method which reflects the total benefit accrued until the balance sheet date, when the
total expected future benefit is spread on a straight line basis over the work period. The small size of
the Banks' population sometimes does not enable to the utilization of statistical conclusions for the
use of an actuarial model. Accordingly, in some cases the actuary relies on managements'
assumptions and in some cases exercises judgment while using adjustments to the surveys he
performs.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
347
Note 15 - Employee Benefits (cont'd)
A. Severance pay and pension (cont'd)
(3) (cont'd)
For the purposes of the actuarial calculation of Excess Compensation, at the beginning of 2011 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 of excess
compensation. 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. The departure rate
regarding excess compensation is relevant only as of 2019 because according to the Banks' policy it
will not be possible until the end of 2018 – for details, see Section A(5) below. Note that according
to the managements' assessment as of 2019, retirement is expected to be in accordance with the
retirement policy of 2007-2010 . 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;
During July 2012, the Capital Markets, Insurance and Savings Department in the Finance Ministry
published a position paper draft regarding the update of the demographic assumptions in pension
funds and life insurance, which includes a possible update of the mortality tables (as a result of new
research indicating an increase in life expectancy). According to the directives of the supervision of
banks, when measuring liabilities in regard of employee rights, mortality and disability assumptions
must be updated according to the best information the Bank has. For this purpose, one must be
assisted by the mortality table draft and by assumptions that were recently published by the Finance
Ministry. According to the above, the Bank updated the mortality tables that are used to calculate
the actuarial liabilities, on the basis of the aforesaid position paper draft. An Israeli mortality table
with a future improvement in life expectancy and a safety interval in respect of longevity risk, was
used. As a result, there was an increase of NIS 3 million (before tax) in salary expenses against an
increase in actuarial reserves. Note that there may be more changes after the publication of the final
estimates (as aforesaid, at this stage only a draft has been published). Before the publication of this
position paper draft an Israeli mortality table with a future improvement in life expectancy and
safety interval in respect of longevity risk was used, according to the guidelines of the Capital
Market in the Finance Ministry from 2007. The liability as of the end of 2011 also includes
assumptions according to the Bank managements' evaluation, regarding retirement of employees
within the planned retirement plan and the impact of the change in the retirement policy – as
detailed in Section A.(5). below.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
348
Note 15 - Employee Benefits (cont'd)
A. Severance pay and pension (cont'd)
(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, by the
Banks' actuary, 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. Regarding the small size of the Banks' population see Section A.(3). above.
The actuarial liability was calculated according to a capitalization rate of 4% (the same rate applied
in 2011), 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 2011), 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, 2012
349
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 – see Section
A.(3). above. Rates of departure with ordinary compensation and with Excess Compensation and the
rates of Excess Compensation according to the departure rates used to calculate Excess
Compensation, as described in Section A(3) above are relevant as of 2019, as aforesaid. The liability
as of the end of 2011 also includes assumptions according to the Bank managements' evaluation,
regarding retirement of employees within the planned retirement plan and the impact of the change
in the retirement policy – as detailed 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 for
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).
During 2011the Bank's management estimated that approximately 40 employees will retire within
this program with an additional cost of NIS 15 million while 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 are as
following:
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
350
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) took 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 have 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.
It should be noted that for the purposes of the aforesaid actuarial calculation as at December 31,
2011, assumptions were made according to estimates by the management of the Bank with regard to
the scope 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 for compensation 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 at this date, as a result of the consequences of the Plan amounted
to approximately NIS 55 million.
During 2012, additional expenses in the amount of NIS 20 million were included in the profit and
loss statement regarding the expansion of the retirement plan for additional employees. According to
the plan, 66 employees in total are expected to retire, most of them retired during 2012 and the rest
will retire during 2013. The balance of the reserve for compensation as of December 31, 2012 in the
amount of NIS 28 million (not on an actuarial basis) covers the estimated financial cost of the
payment for the employees who will retire in 2013. The reserve for compensation also includes a
special fund for isolated and exceptional cases during the next seven years, in the amount of NIS 5
million. Until the end of 2013, with the end of the retirements, the actuarial reserves are expected to
be updated according to actual realization of the early pension choice.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
351
Note 15 - Employee Benefits (cont'd)
A. Severance pay and pension (cont'd)
(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 2011), and mortality tables
as described in Section A(4) above.
(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, 2012 2011 NIS millions NIS millions
Net provisions 355 367
Funding* 90 95 Net excess of provisions over funding ** 265 272
The Bank may not withdraw funded amounts other than for the purpose of making severance payments. * The amount of funding recorded in accordance with balance confirmation received from external sources in
where the money is 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, 2012, the accumulated provision amounted to NIS 28
million, December 31, 2011 - NIS 23 million. The provision is included in "other liabilities".
The calculation of the liability is performed on an actuarial basis by the Banks' actuary. The calculation is
based on a capitalization rate of 4% (the same as in 2011), in accordance with the instructions of the
Supervisor of Banks. In calculating the current value, the factor of the future increase in real wages is at a
rate of 3% (the same as in 2011), according to the bank management estimation. The future rates of
departure before retirement age, are according to departure rates which were used for calculation of surplus
of severance pay - as detailed in note A(3) above. In addition, the provision for the end of 2011 also
includes the assumption based on the Bank's management estimation, regarding retirement of 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, 2012
352
Note 15 - Employee Benefits (cont'd)
C. Vacation
Employees of the Bank and its subsidiaries are entitled to 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 23 million (December 31, 2011 - NIS 24 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
1. On April 29, 2012, following approval by the audit committee on April 24, 2012, and after receiving
a recommendation from the remuneration committee of the Board of Directors (an ad-hoc committee
composed of external directors and independent external directors that was appointed in order to
determine remuneration for the Banks' senior officers), and recommendations from the wages and
remuneration committee the Banks' board of directors approved that the bonus plan for senior
executives of the Bank: the chairman of the board (subject to approval by the general meeting), the
chief executive officer, the members of management of the Bank, the legal advisor, and the internal
auditor of the Bank (10 managers in total) ("the bonus plan"), as approved by the Banks' board of
directors on April 10, 2011 regarding 2010-2011 (as detailed in section 2 below), will apply to 2012-
2013 as well. Note that when the bonus program was approved for 2010-2011, the Banks' board of
directors decided that the bonus program would be re-examined after its implementation in 2010-
2011. The re-examination would examine the total extent of the bonus, the remuneration steps, the
different parameters and the weight that each parameter was given, among other things. According to
that, the board of directors' remuneration committee, which formulated the program to begin with,
re-examined the bonus program after its implementation in 2010-2011 and recommended to extend
the program and apply it to 2012-2013. On June 11, 2012 the Banks' general meeting decided to
approve the application of the bonus program from 2010-2011 on to 2012-2013 in respect of the
chairman of the board of directors, Mr. Zeev Abeles.
2. The 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").
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
353
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
2. (cont'd)
2.1 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.
2.2 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").
2.2.1 A Standardized Return equal to or greater than 6% (subject to the provisions of Section
2.2.2.1 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
354
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
2. (cont'd)
2.2.2 In the event of a Standardized Return lower than 6%, when the Return on Equity is
greater than 6%, the following will apply:
2.2.2.1 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.
2.2.2.2 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.
2.2.3 Notwithstanding the provisions of Section 2.2.2.1 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-weighted 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%.
2.2.4 The Total Bonus shall be distributed among the Senior Executives as described in Section
2.2.6 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.
2.2.5 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-weighted 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 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.
2 The BSC is a scorecard combining measurements of quantitative and qualitative factors to assess the performance of the Bank and of Bank units.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
355
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
2. (cont'd)
2.2.6 Calculation of the personal bonus for each Senior Executive:
2.2.6.1 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%.
2.2.6.2 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%.
2.2.6.3 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.
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.
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, 2012
356
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
2. (cont'd)
2.2.6 (cont'd)
2.2.6.4 (cont'd)
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.
2.3 Negative bonuses
2.3.1 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.
2.3.2 Subject to the provisions of Section 2.2.2 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%.
5 The return shall not be standardized when the "accounting" return is negative.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
357
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
2. (cont'd)
2.3.3 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 2.2.6 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:
(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.
2.3.4 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 was 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, 2012
358
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
2. (cont'd)
2.4 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:
2.4.1 A "Notional Account" shall be managed for each Senior Executive, representing the
executive's rights to bonuses under this plan.
2.4.2 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.
2.4.3 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.
2.5 Retirement of Senior Executives
2.5.1 Subject to the terms of this plan, the bonus to which Senior Executives retiring from
the Bank are entitled shall be calculated as follows:
2.5.1.1 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").
2.5.1.2. 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, 2012
359
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
2. (cont'd)
2.5 (cont'd)
2.5.1.3 The entire balance accrued in the Notional Account, including the Proportional
Bonus (subject to the provisions of Section 2.5.2 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.
2.5.2 A Senior Executive who retires voluntarily or resigns from the Bank (before
retirement age) – Notwithstanding the provisions of Section 2.5.1 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 2.5.1 above shall apply to this matter, with the necessary
changes.
2.5.3 Notwithstanding the provisions of Sections 2.5.1-2.5.2 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.
2.5.4 A Senior Executive who departs due to illness, disability, or death – Notwithstanding
the provisions of Section 2.5.1 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, 2012
360
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
2. (cont'd)
2.6 Amount of bonus for a new Senior Executive appointed during the calendar year
2.6.1 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.
2.6.2 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.
2.7 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.
2.8 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 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.
2.9 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, 2012
361
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
2. (cont'd)
2.10 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."
2.11 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.
3. 3.1 Bonuses in respect of 2012
The amounts of the bonuses provided for in the financial statements in respect of 2012 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.2
above (hereinafter: the "Bonus Plan"), and as detailed below.
On February 28, 2013, the board of directors of the Bank discussed and approved the amounts
of the bonuses1 for the senior offices mentioned in section 1 above, in respect of 2012, after
receiving a recommendation from the wages and remuneration committee of the board of
directors, which discussed and approved the amounts of the bonuses2 for the senior officers on
February 18, 2013 according to the bonus plan that was approved by the authorized organs of
the Bank in 2011. The application of this plan on 2012-2013 was approved, as mentioned
above, in 2012, by the audit committee after the recommendation of the remuneration
committee and after that by the Banks' board of directors (and regarding the program for the
chairman of the board of the directors, by the general meeting as well).
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 2012. Upon publication of the financial statements of the Other Banks, at the end of March 2013, 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, 2012
362
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
3. (cont'd)
3.1 (cont'd)
The data and parameters relevant to the establishment of the bonus for Senior Executives in
respect of 2012, in accordance with the Bonus Plan, were presented to the board of directors
and to the remuneration committee (see details within the description of the bonus plan for
seniors in note 15.D.2. to the financial statements). Among other matters, the data presented to
the board of directors and the committee included the business results of the Bank for 2012, the
annual 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 yields of the banking groups in the banking
system1. In addition, the assemblage of the employment conditions of officers and data
concerning the performance of officers during 2012 according to parameters determined in the
bonus plan, were presented to the remuneration committee and to the board of directors.
The bonus amounts were approved after the remuneration committee and the board of directors
decided that the calculation and approval of the bonus amounts in respect of 2012, according to
the bonus plan of the CEO and the chairman of the board of directors, will be based only on the
measurable parameter scores, which are included in the Banks' BSC (Balance Score Card) as
determined and approved in advance in the bonus plan and while neutralizing each component
of discretion existing in the bonus plan. Accordingly, the personal evaluation component at the
rate of 30% out of the bonus amount assigned to the chairman of the board of directors (25%)
and to the CEO (28%) out of the total bonus to all officers of the Bank received the score 0 for
the calculation and implementation of the bonus plan for the CEO and the chairman of the
board of directors in respect of 2012, and was actually reduced from the bonus amounts that
were assigned to the CEO and the chairman of the board of directors as aforesaid. As a result,
the bonus amounts to the CEO and the chairman were calculated on the basis of the measurable
parameter scores included only in the Banks BSC. The calculation and approval of bonus
amounts for officers who are not the CEO or the chairman of the board of directors, in respect
of 2012, is based on the parameters that were determined and approved in the bonus plan
regarding each of the stated officers, including personal evaluation score of each of the
aforesaid officers and their personal BSC.
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 2012. Upon publication of the financial statements of the Other Banks, at the end of March 2013, a final calculation for this parameter will be performed and the calculation of the amounts of the bonuses will be adjusted accordingly.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
363
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
3. (cont'd)
3.1 (cont'd)
However, this is after the remuneration committee and the board of directors examined and
addressed considerations and issues that need to be addressed according to amendment 20 of
the Companies Law, which include the considerations listed in section 267.B.(A) of the
Companies Law 1999 ("Companies Law"), and addressed issues detailed in part 1 to the first
appendix of the Companies Law, and ensured that the detailed instructions in part 2 to the
aforesaid appendix to the Companies Law were fulfilled, according to the transition
instructions of amendment 20 to the Companies Law. The remuneration committee and the
Banks' board of directors thought that in light of the assessment of the performance, the
contribution to the Bank and the functioning of each of the officers, as well as the totality of
the employment conditions, that the extent of the bonuses paid to the seniors in the bonus plan
were reasonable and consistent with the Banks' business condition, and they approved the
extent of the bonuses1, after examining the performance, contribution, functioning and
contribution to the Banks' activity of each of the officers, and in light of the totality of their
employment conditions.
3.2 Bonuses in respect of 2011:
According to the bonus plan, on April 29, 2012 after the Audit Committees' approval from
April 24, 2012 and after receiving a recommendation from the Wages and Employment
Committee of the board of directors, the Banks' board of directors approved the payment of
bonuses in respect of 2011 to the senior officers mentioned above. Likewise, the general
meeting of the Bank from June 11, 2012, approved granting a bonus to the chairman of the
Banks' board of directors, Mr. Zeev Abeles, after the approval of the Audit Committee from
April 24, 2012 and the approval of the board of directors from their meeting on April 29, 2012
and after receiving the recommendation of the board of directors' wages committee. Note that
during 2012, half of these bonuses were paid, and as of 31.12.12 the other half is conditioned
according to the bonus plans as detailed in section D.2 above.
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 2012. Upon publication of the financial statements of the Other Banks, at the end of March 2013, a final calculation for this parameter will be performed and the calculation of the amounts of the bonuses will be adjusted accordingly.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
364
Note 15 - Employee Benefits (cont'd)
D. Senior Executives' Bonus Plan (cont'd)
3. (cont'd)
3.3 Bonuses in respect of 2010:
According to the bonus plan, on April 10, 2011, after the Audit Committees' approval from
April 4, 2011 and after receiving a recommendation from the Wages and Employment
Committee of the board of directors, the Banks' board of directors approved the payment of
bonuses in respect of 2010 to the senior officers mentioned above. Likewise, the general
meeting of the Bank from May 22, 2011, approved granting a bonus to the chairman of the
Banks' board of directors, Mr. Zeev Abeles, after the approval of the Audit Committee from
April 4, 2011 and the approval of the board of directors from their meeting on April 10, 2011
and after receiving the recommendation of the board of directors' wages committee. Note that
during 2011, half of these bonuses were paid, and during 2012 another quarter was paid. As of
31.12.12 the last quarter is conditioned according to the bonus plans as detailed in section D.2
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 6.2 million
(December 31, 2011 - NIS 6.9 million), which was not recorded on the books of the Bank as of
December 31, 2012, 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 was updated on September 8, 2011
according to the board of directors' approval, that was given after the approval of the Audit
Committee of the Bank from July 18, 2011. The agreement is automatically extended each year,
unless one of the parties has given notice six months in advance of its wish not to extend the
agreement.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
365
Note 15 - Employee Benefits (cont'd)
E. Personal contracts (cont'd)
(2) (cont'd)
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. 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 is three months.
Upon termination of his employment, the CEO shall be entitled to an adjustment grant in the
amount of six monthly salaries. With regard to options granted to the CEO which expired as at the
balance sheet date, see Note 15A.
According to the bonus plan detailed in section D.2. and D.3. above:
‐ The bonus for the CEO of the Bank for 2012, Mr. Freilichman is estimated at NIS 592 thousand
(the bonus is paid alternately as described above).
‐ The bonus approved in respect of 2011 totaled NIS 1,071 thousand. Half of it was paid in 2012 and
half of it is conditioned as detailed above.
‐ The bonus approved in respect of 2010 totaled NIS 1,334 thousand. Half of it was paid in 2011,
another quarter was paid in 2012 and the last quarter is conditioned, as detailed above.
(2) Mr. Zeev Abeles, Chairman of Board of Directors, employed under personal contract, as of
November 1, 1999.
On June 11, 2012, after the approval of the board of directors from April 29, 2012 and after the
approval of the Audit Committee of the board of directors from April 24, 2012 and according to the
recommendation of the Wages and Remuneration Committee from April 22, 2012, the Banks' board
of directors decided to approve the amendment to the employment conditions of the chairman of the
board of directors, Mr. Zeev Abeles, as follows:
‐ the Bank will pay an additional 2.5 % of the monthly salary of the chairman of the board of
directors, as it shall be from time to time, in order to insure the chairman of the board of directors
against work disability. Note that the chairman relinquished, after the approval of the general
meeting, the realization of this right.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
366
Note 15 - Employee Benefits (cont'd)
E. Personal contracts (cont'd)
(3) (cont'd)
Upon termination of the employment of the Banks' board of directors' chairman (excluding circumstances
in which he may be denied severance pay), the chairman shall be entitled to severance pay as determined
by law at a rate of 100% of his gross monthly salary at the date of termination of his employment at the
Bank, multiplied by the number of years of his work at the Bank (including part of a year, proportionally,
hereinafter: "100% compensation"). This is instead of the amounts that should have been deposited for him
in a personal compensation provident fund in his name pursuant to section 14 of the Severance Pay Law,
1964. Therefore, upon termination of the employment as the Banks' chairman, he will be entitled to all the
money and rights accumulated and accrued in the personal compensation fund, and the Bank will continue
to pay money to the chairman at the amount of the difference between his entitlement to 100%
compensation and the money and rights in the personal compensation fund (there's no influence on the
allowances in the financial statements at the reporting date).
For the avoidance of doubt, it is clarified that upon termination of his employment at the Bank, the
chairman of the board of directors is entitled in addition to this 100%, to additional compensation in the
amount of 100% of his last salary multiplied by the number of years of his work at the Bank (including part
of a year, proportionally), as approved by the Banks' general meeting from February 28, 2006.
‐ To allow the chairman of the board of directors to choose, regarding the transfer of the
employers amounts of deposits (for the compensation component) above the tax limit,
regarding the recognition of the deposit to the savings provident fund, as a direct payment
"compensation alternative" that will be paid to the chairman of the board of directors. The
payment of the "compensation alternative" will not be a basis for any other payment, including
not to severance pay.
If the chairman chooses the detailed alternative, employee provisions to compensation will not
be deducted concurrently from his salary. The right to choose will apply provided that the Bank
won't have any additional cost due to the utilization of the alternative. If the chairman chooses
the aforesaid arrangement, he will no longer have the right to switch to an arrangement that
secretes remuneration to a remuneration fund or to switch to any other arrangement. Despite
the foregoing, the Bank has a right to cancel the arrangement if a regulatory change might
occur, according to which the Bank will have an additional cost, in respect to the
implementation of the aforesaid arrangement or if there will be any prevention from
implementing the arrangement or part of it. After the approval of the general meeting, the
chairman chose the arrangement in which he is paid "compensation alternative" according to
the conditions that were approved by the general meeting as detailed above.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
367
Note 15 - Employee Benefits (cont'd)
E. Personal contracts (cont'd)
(3) (cont'd)
According to the bonus plan detailed in section D.2. and D.3.above:
‐ The bonus for the chairman of the Board of Directors of the Bank for 2012, Mr. Zeev Abeles is
estimated at NIS 529 thousand (the bonus is paid alternately as described above).
‐ The bonus approved in respect of 2011 totaled NIS 956 thousand. The bonus was approved also in
the general meeting of the Bank. Half of it was paid in 2012 and half of it is conditioned as detailed
above.
‐ The bonus approved in respect of 2010 totaled NIS 1,191 thousand. The bonus was approved also
in the general meeting of the Bank. Half of it was paid in 2011, another quarter was paid in 2012
and the last quarter is conditioned, as detailed above. -
F. In 1997, the bank signed an agreement with authorized signatories and managers and the union, which
determine among other things that the managers and senior authorized signatories of the Bank, who are
entitled to choose to retire with a budget-based pension in a certain format used at the Bank until that
time (hereinafter: the “Binding Pension”), and who choose this pension (instead of receiving
compensation and remuneration, which is their other option), 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”). The aforesaid dispute is irrelevant to those veteran managers
and authorized signatories who choose to receive compensation and remuneration upon their retirement
instead of receiving pension. 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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
368
Note 15 - Employee Benefits (cont'd)
F. (cont'd)
In July 2011, the Bank received a letter from the Executive Board demanding a renewal of the arbitration
proceeding. The procedures for the renewal of the arbitration have not been completed as of the date of
the financial statements.
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 if the managers' opinion will be accepted. The reason for
this is because it isn't possible to predict the frequency and volume of the situations in which a difference
will arise between the Binding Pension amount and the pension amount paid by the "Amit" pension
funds, which might require the payment of the aforesaid Supplementary Amounts.
Note that as of the date of the financial statements, there is no material gap between the actuarial
provision balance regarding the retirees according to the Banks' position and the balance according to the
managers' position, This is based on the assessment of the Bank's actuary (relevant to a population of 35
people).
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).
On October 15, 2012, 310,228 options (not listed for trade) expired, each option exercisable to an
ordinary share of the Bank, par value NIS 0.01. These options that expired constitute the second half of a
total of 620,456 options (not listed for trade), each option exercisable to an ordinary share of the Bank, par
value NIS 0.01, that were issued to the CEO of the Bank on September 14, 2008, the first half of which
expired on June 30, 2012.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
369
Note 16 - Assets and Liabilities According to Linkage Basis Reported amounts Consolidated - composition(1):
December 31, 2012 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 7,431 150 521 89 55 - 8,246 Securities 3,237 968 537 68 12 118 4,940 Securities borrowed 68 - - - - - 68 Credit to the public, net (4) 15,964 4,771 2,047 288 382 121 23,573 Investment in investee companies - - - - - 1 1 Buildings and equipment - - - - - 398 398 Assets in respect of derivative instruments 110 - 106 66 86 108 476 Other assets 1,052 1 2 - - 68 1,123 Total assets 27,862 5,890 3,213 511 535 814 38,825 Liabilities Deposits from the public 21,401 2,799 4,887 1,187 481 135 30,890 Deposits from banks 86 - 126 26 6 - 244 Deposits from Government 1 - - - - - 1 Deferred liability deeds and deposit certificates 976 1,953 - - - - 2,929 Liabilities in respect of derivative instruments 185 - 190 67 83 67 592 Other liabilities 975 124 3 - - 876 1,978 Total liabilities 23,624 4,876 5,206 1,280 570 1,078 36,634 Difference 4,238 1,014 (1,993) (769) (35) (264) 2,191
Non - hedging derivative instruments: Derivative instruments (excluding options) (2,601) (3) 1,807 724 73 In the money options, net (in base asset terms) (75) - 92 (17) - Out of the money options, net (in base asset terms) (69) - 57 60 (48) Total 1,493 1,011 (37) (2) (10)
In the money options, net (in capitalized stated amounts) (84) - 118 (33) (1) Out of the money options, net (in capitalized stated amounts) (74) - 33 245 (204)
(1) See Note 1.A.(2). (2) Including linked to foreign currency. (3) Including derivative instruments where the underlying asset relates to a non-monetary item. (4) After deduction of allowances for credit losses which were attributed to the linkage bases.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
370
Note 16 - Assets and Liabilities According to Linkage Basis (cont'd) 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 (4) 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 where the underlying asset relates to a non-monetary item. (4) After deduction of allowances for credit losses which were attributed to the linkage bases.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2011
371
Note 17 - Assets and Liabilities according to Linkage Basis and Maturity Date (1) Reported amounts Consolidated - composition (2):
December 31, 2012
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 13,201 2,244 3,819 1,813 1,045 1,145 1,037 3,383 2,223 292 30,202 487 27,862 3.65% Liabilities 17,463 2,103 1,968 639 480 86 306 753 20 3 23,821 169 23,624 2.86% Difference (4,262) 141 1,851 1,174 565 1,059 731 2,630 2,203 289 6,381 318 4,238
Derivative instruments (excluding options) (1,808) (336) (406) - - - (51) - - - (2,601) - (2,601) Options (in terms of the underlying asset) (36) (43) (65) - - - - - - - (144) - (144) Israeli currency linked to the Consumer Price Index Assets 81 805 897 1,023 867 477 417 1,404 804 103 6,878 14 5,890 3.85% Liabilities 286 670 719 1,118 362 139 624 1,378 74 12 5,382 7 4,876 3.16%
Difference (205) 135 178 (95) 505 338 (207) 26 730 91 1,496 7 1,014 Derivative instruments (excluding options) (52) 101 (103) - - - 51 - - - (3) - (3) Options (in terms of the underlying asset) - - - - - - - - - - - - Foreign currency (3) Assets 1,505 522 1,035 285 145 187 142 556 169 15 4,561 97 4,259 5.00% Liabilities 4,377 1,242 1,301 40 31 26 22 59 - - 7,098 - 7,056 1.22% Difference (2,872) (720) (266) 245 114 161 120 497 169 15 (2,537) 97 (2,797) Derivative instruments (excluding options) 1,860 235 509 - - - - - - - 2,604 - 2,604 Options (in terms of the underlying asset) 36 43 65 - - - - - - - 144 - 144 Non-monetary items Assets 130 129 12 1 - - - - - - 272 517 814 Liabilities 933 155 13 - - - - - - - 1,101 - 1,078 Difference (803) (26) (1) 1 - - - - - - (829) 517 (264) Total Assets 14,917 3,700 5,763 3,122 2,057 1,809 1,596 5,343 3,196 410 41,913 1,115 38,825 3.80% Liabilities 23,059 4,170 4,001 1,797 873 251 952 2,190 94 15 37,402 176 36,634 2.50% Difference (8,142) (470) 1,762 1,325 1,184 1,558 644 3,153 3,102 395 4,511 939 2,191
(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 254 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
372
Note 17 - Assets and Liabilities according to Linkage Basis and Maturity Date (1) (cont'd) 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
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 *4.30% Liabilities *22,334 4,501 5,195 1,885 822 462 334 2,070 61 12 37,676 *192 36,929 *2.71% Difference (8,475) (1,508) 1,636 992 1,410 1,316 1,285 4,706 3,456 498 5,316 860 1,986
* The balance sheet balance was reclassified. The expected rate of return was updated after the reclassification.
(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) Including 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 over to its balance sheet balance.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 373 -
Note 18 - Contingent Liabilities and Special Commitments Reported amounts A. Off-balance-sheet financial instruments:
Consolidated and the Bank December 31 December 31 2012 2011 NIS millions NIS millions
Balance of
Contracts (1)
Balance of Allowance for
credit loss(2) Balance of
Contracts(1)
Balance of Allowance for
credit loss(2) Transactions where the balance reflects credit risk: Documentary credit 115 *- 110 *- Guarantees securing loans 482 14 500 11 Guarantees to dwelling purchasers 1,928 10 2,193 9 Other liabilities and guarantees 732 3 621 3 Unutilized credit card limits 899 *- 853 *- Unutilized revolving credit and on-call limits 730 1 695 1 Unutilized loan and revolving credit facilities of diamond dealers
743 2 1,056 3
Irrevocable credit approvals not yet utilized(3) 5,475 12 5,415 12 Commitments to issue guarantees 1,074 7 1,110 5 (1) The contract balances or their face amount prior to the effect of allowance for credit losses. (2) Mainly group allowance. (3) On February 2013, the Bank received the supervision of Banks' position, according to which, as of the financial
statements for the first quarter of 2013, the Bank must include unused ceilings regarding activity with capital market customers such as unused credit limits. These ceilings are internal limitations that the Bank determined in order to manage current activity with these customers, and which constitutes the maximum business exposure that the Bank is willing to take according to its exclusive judgment. These ceilings do not give the customers an automatic right to utilize the credit. As of 31.12.2012 the volume of the un-utilized ceilings amounts to NIS 2.4 billion and the influence on the volume of the risk-weighted assets is estimated at an increase of NIS 200 million (an influence of 0.08 percentage points on the tier 1 capital ratio and 0.15 percentage points on the total capital ratio).
* Amounts lower 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 2012 2011 NIS millions
Israeli currency linked to the CPI 360 420
Cash flows with respect to collection commission and interest margins for activities based on the extent of collection- consolidated and the bank
As at December As at December 31, 2012 31, 2011 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 3 6 6 10 2 1 28 34 Expected future cash flows after Management's estimate of early repayments 3 6 5 6 1 1 22 24 Discounted future cash flows after Management's estimate of early repayments (3) 3 6 5 6 1 1 22 23
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 374 -
Note 18 - Contingent Liabilities and Special Commitments (cont'd) B. (cont'd)
2012 2011 NIS millions
Information about loans extended during the year
Loans out of deposits based on the extent of collections 1 *- Standing loans 1 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 24 million (2011 - NIS 32 million) are not included in this table.
(3) The discount was made at the rate of 1.41% (2011 - 2.28%). * Less than NIS 500 thousand.
C. Contingent liabilities and commitments: Consolidated and the Bank
December 31 December 312012 2011
NIS millions (1) Rentals for bank premises
and equipment payable
in future years:
First year 22 20
Second year 20 20
Third year 18 18
Fourth year 15 15
Fifth year 13 13
Over five years 46 39 Total 134 125
(2) As at December 31, 2012, commitments to purchase bank premises and equipment totaled NIS 7
million – consolidated and Bank, (December 31, 2011 - NIS 3 million - consolidated and Bank).
(3) A subsidiary committed to invest NIS 13 million (December 31, 2011 - NIS 11 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 infrastructure
concerning the systems used to provide services, and operating services.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 375 -
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.
On December 31, 2007, after the bank initiated a review of alternatives for the computerization, 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).
Following the signing of the addendum to the agreement, the Bank realized its right to use the
additional information systems of Bank Leumi, which substantially contributes to the upgrading of the
operation, management, control and risk management systems.
(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 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, 2012
- 376 -
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 this will 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 this will 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 of 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, 2012
- 377 -
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,
from time to time (as of 2010) the Bank enters into agreements with Mimun Yashir, of the Yashir
(2006) Group Ltd. (hereinafter: “Mimun Yashir”), pursuant to which the Bank acquires 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, the validity of the last agreement signed by the parties on 7.2.2013 is until 31.12.2012.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 378 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(7) (cont'd)
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, 2012 amounted to NIS 12 million, (December
31, 2011 - NIS 12 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, 2011 - 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, 2012
- 379 -
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 Union Issuance Ltd. a
consolidated company and the Bank, the Bank undertook a commitment towards the trustees of the
subordinated notes and the bonds issued by the consolidated company to comply with all terms of
payments noted in the subordinated notes and in the bonds.
(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, 2012 the Bank’s share in the risk fund amounted to NIS 50 million (December 31,
2011 - NIS 61 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
established 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 62 million (December 31, 2011 -
NIS 112 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 do not meet their obligations.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 380 -
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, 2012, the amount of the guarantees relating
to transactions executed for customers, totaled NIS 576 million (December 31, 2011 - NIS 414
million). See also Note 14 regarding the aforementioned liens.
(13) The amendment of the liability deed for the indemnification of the officers of the Bank and its
subsidiaries and the amendment of the directions of the Banks' regulations that deal with
indemnity and insurance of officers:
On October 31, 2012, following the Audit Committees' approval from September 6, 2012 and the
Banks' Board of Directors' approval from September 10, 2012, the Banks' general meeting
approved the amendment of the liability deed version for the indemnification of officers of the
Bank and its subsidiaries, including directors whom controlling shareholders might have a
personal interest in giving them a commitment to indemnity, directors who hold office today, held
office in the past or will hold office in the Bank or its subsidiaries in the future. This is in part due
to various legislative amendments, including the Companies Law, 1999, the Streamlining of Law
Enforcement of the Israel Securities Authority 2011, the Antitrust Law (amendment no. 13) 2012,
the Supervision on Financial Services Law (Insurance) 1981 and the Supervision on Financial
Services Law (Provident Funds) (hereinafter: "legislative developments") and to update the
attached events appendix to the liability deed for indemnification, taking into account the changes
and developments in the nature and volume of the legal risks that apply to the Bank and its
subsidiaries (hereinafter: "the amendment of the liability deed for indemnification" or
"employment").
Controlling shareholders whose names are listed below have a personal interest or had a personal
interest in the transaction when it was approved, according to the following: Mr. Yeshayahu
Landau, regarding an approval of amendments to the liability deed for indemnification for Mr.
Yeshayahu Landau and Mr. Yigal Landau [Yeshayahu Landau Holdings (1993) Ltd. in which Mr.
Yeshayahu Landau (Yigal Landaus' father) is the controlling shareholder, is part of the controlling
interest of the Bank] and this is since the aforesaid decision will apply to the controlling
shareholder or to his relative mentioned above, by virtue of their service as directors at the Bank.
Mrs. Ruth Manor regarding the decision making of the amendments of the liability deed for
indemnification of Mr. Isaac Manor who served as a director at the Bank up until 10.8.2011 (Mr.
Isaac Manor is the husband of Mrs. Ruth Manor who controls along with Dr. Yael Almog David
Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd., who are part of the
controlling shareholders of the Bank).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 381 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(13) (cont'd)
Also, and for the clarification it should be noted that Mrs. Ruth Manor might have a personal
interest in the amendments of the liability deed for indemnification of Izhak Zisman adv. (the
attorney Izhak Zisman is Mrs. Ruth Manors' power of attorney for the operation of voting rights or
other rights granted to Mrs. Ruth Manor by virtue of her control and indirect holding of the Banks'
shares, as required by the Supervisor of Banks' letters from 10.8.2011 and from 2.8.2012). Also,
and for the clarification it should be noted that Dr. Yael Almog and/or David Lubinski Properties
(Holdings) 1993 Ltd. and/or Cheroudar Properties Ltd. might have a personal interest in the
amendments of the liability deed for indemnification of Mr. Haim Almog, who serves as a director
at the Bank on behalf of Dr. Yael Almog and/or David Lubinski Properties (Holdings) 1993 Ltd.
and Cheroudar Properties Ltd.
For approval of amending the liability deed for indemnification, on October 31, 2012 the general
meeting of the Bank (following the approval of the Audit Committee from September 6, 2012 and
the approval of the Board of Directors of the Bank from September 10, 2012) approved the
amending of regulations 127 and 129 of the Banks' regulations, regarding indemnification and
insurance of officers, and this among other things, was done in order to match the version of the
aforesaid regulations for the legislative amendments (hereinafter: "amendment of the regulations").
Also note that on February 6, 2013 the Banks' regulations were amended so that they include a
limitation to the maximum amount of indemnity that the Bank paid within the advanced
commitment to indemnify officers.
(14) On June 22, 2009 the general meeting of the Bank approved a transaction to increase the liability
to indemnify those who will serve as officers of the Bank and its subsidiaries, from time to time
(hereinafter: the officers"), within the liability deed for indemnification, which was approved by
the Banks' general meeting from December 29, 2005 (hereinafter: "the liability deed"), regarding
an offer and/or an issuing of securities by a prospectus, with all that results from it, as detailed in
section (1) to appendix A to the liability deed, and this is an additional amount of USD 15 million
(hereinafter: "additional indemnity amount"), beyond the liability to indemnify in the amount of
USD 35 million, stipulated in the aforesaid commitment. The additional indemnity amount is
devoted exclusively to the event detailed in section (1) to appendix A to the aforementioned
liability deed (concerning an offer and/or an issuing of securities by a prospectus). It is clarified
that the indemnification regarding the events included in section (1) to appendix A to the liability
deed will initially be given from the additional indemnity amount (USD 15 million) and, the
officers will be indemnified also from the existing indemnification in amount of USD 35 million,
but only if the required indemnification exceeds the amount of the additional indemnity, and only
in respect of the aforesaid kind of event.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 382 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(14) (cont'd)
The increase in the indemnification amount, as detailed above, was approved by the Audit
Committee on April 27, 2009 and by the Banks' Board of Directors on April 30, 2009. The
controlling shareholders whose names are listed below, have a personal interest in the transaction
or had a personal interest in the transaction at the time of its approval, according to the detailed
below, as a result of the increase in the indemnification amount concerning themselves and/or their
relatives serving as directors in the company: Mr. Yeshayahu Landau while controlling Yeshayahu
Landau Holdings (1993) Ltd., which belongs to the Banks' controlling shareholders – in relation to
the increase in the commitment to indemnification of himself and for his son, Mr. Yigal Landau;
Mrs. Ruth Manor and Mrs. Drora Zachai, the controlling shareholders at the time of the approval
of the transaction with David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties
Ltd., who belong to the Banks' controlling shareholders – in relation to the increase in the
commitment to indemnification to Mr. Isaac Manor (Ruth Manors' husband) and to Mr. Haim
Almog (Mrs. Drora Zachais' son in law at the time of the approval of the indemnification).
(15) 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. 203 concerning the working and measurement
framework for capital adequacy – standardized approach credit risk (Basel II).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 383 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(16) 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:
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 384 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(16) (cont'd)
C. The Bank granted its consent in principle to comply with 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.
(17) On October 31, 2012, following the approval of the Audit Committee from September 6, 2012 and
the approval of the Board of Directors of the Bank from September 10, 2012, the general assembly
of the Bank approved the purchase of a directors’ and officers’ (D&O) insurance policy in the Bank
and its subsidiaries, with liability limits of USD 100 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, 2012 to September 14, 2013. 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 250,000.
The policy applies under the same conditions regarding officers who are controlling shareholders of
the Bank or their relatives [Mr. Yeshayahu Landau – regarding the purchase of the insurance policy
for Mr. Yeshayahu Landau and Mr. Yigal Landau who serve as directors at the Bank (Yeshayahu
Landau Holdings Ltd. 1993 of which Mr. Yeshayahu Landau (Yigal Landaus' father) is the
controlling shareholder, is among the controlling shareholders of the Bank) and Mrs. Ruth Manor
regarding the purchase of the insurance policy for Mr. Issac Manor who served as a director of the
Bank until August 10, 2011 (Mr. Issac Manor is the husband of Mrs. Ruth Manor, who controls
together with Dr. Yael Almog, David Lubinski Properties (Holdings) 1993 Ltd and Cheroudar
Properties Ltd., who are among the controlling shareholders of the Bank] and regarding the Banks'
other officers.
(18) A. Various claims for damages are pending against the Bank and subsidiaries. With regard to the
claims, that, in the Bank's management opinion, on the basis of legal opinions as for the
chances of the outcome of these claims, including requests to approve class actions, there are
adequate provisions, in accordance with generally accepted accounting principles in respect of
all the expected losses from pending claims against the Bank. No provision has been made in
respect of claims where, in the opinion of management of the Bank and its legal adviser, their
chances of success are remote. The additional amount of exposure, in respect of contingent
claims whose chances of realization are not remote, and which no provision has been made
regarding exposure, is NIS 9 million.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 385 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(18) (cont'd)
B. In December 2007, a payment demand in a total amount of USD 10 million was submitted to
the Bank in connection with 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 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, 2012
- 386 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(18) 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. Also, 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. This claim was summarily rejected, however an appeal was filed. These two claims
were treated in accordance with generally accepted accounting principles, in the opinion of the
Banks' management, based on their legal advisors' opinion.
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 as for the period from
May 2003 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, 2012
- 387 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
18. 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. 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, however, in the opinion of the Banks' management, based on the opinion of their
external legal advisors, who handle the legal claim, on the basis of the information and data
known to them at this point, the chances of the legal claim being accepted are remote.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 388 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(18) (cont'd)
E. (1) On August 9, 2012 the Bank received a statement of claim and a request to approve and
manage it as a class action lawsuit according to the Class Action Law 2006 (hereinafter:
"the claim and request"). The claim was filed to the District Court in Beer Sheva. The
grounds of the claim and request is the breach of the good faith obligation, in respect of
the fact that the Bank allegedly hid from the applicants and the rest of the group (as
defined below), a significant document to the loan agreement – which is a "transaction
permit", and the alleged imposed obligations on the Bank by virtue of this document,
contrary to the Contract Law (General Part) 1973, and contrary to sections 3-4 in the
Banking Law (Customer Service) 1981. The applicants also claim that the Bank was
unjustly enriched allegedly, in respect of collection of interest on arrears from the
applicants and the rest of the group, although the applicants claim that the use of charging
interest as a punishment towards the borrower is not included in the definition of a
transaction permit. The group which the applicants seek to represent, was defined as
every person and/or other legal entity contracted with the Bank, which took a loan and/or
received credit based on the existence of a transaction permit that the Bank received from
the "Memonot" justice court, and which was allegedly damaged by the failure of the Bank
to comply with the transaction permit. The applicants astimated their claim, for all
members of the group, to a total of NIS 1,177.4 million. In addition, the applicants want
to be awarded a special retribution, in respect of their effort, at a rate of 7.5% of the total
compensation and fees for their attorneys' professional service at a rate of 15% of the
total compensation. Recently, the court ordered to transfer the proceedings to the District
Court in Tel Aviv. In the Banks' managements' opinion, based on their legal counsels,
since the aforesaid legal claim is still in its earliest stages, and the request to approve the
claim as a class action lawsuit not yet been discussed, at this point the results cannot yet
evaluated.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 389 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(18) (cont'd)
E. (2) 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.
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 390 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(18) (cont'd)
E. (3) 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.
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.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 391 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(18) E. (3) (cont'd)
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.
F. On February 21, 2013, the Bank received a draft of an urgent request that the special
manager of Heftziba Group (in liquidation) wishes to submit to the court. The draft
requests that the court order the special manager on behalf of the temporary trustee/the
liquidator/the temporary liquidator to submit a claim in the amount of NIS 45 million, in
the name of one of the groups' companies, Heftziba Hofim Ltd. (in liquidation)
(hereinafter: "Hofim") against Bank Leumi Le-Israel Ltd., Israel Discount Bank Ltd., the
Bank and 4 additional defendants.
According to the draft claim that was attached to the request, as of March 2006 and until
the collapse of Heftziba Group in the beginning of August 2007, over NIS 45 million
were taken out of Heftziba Hofims' bank account, which were transferred illegally to
other entities, including contracting companies from the Heftziba Group and other private
companies that were controlled by Boaz Yona and/or another defendant. The aforesaid
actions were, according to the argument, in part through Heftziba Hofims' bank accounts
that were conducted in each of the defendant banks, which each of them also served as
the bank of the mentioned contracting companies. It's argued that the banks allowed the
extraction of money according to improper instructions, although the actions and the
related circumstances should have aroused suspicion, and that the banks knew, or at least
should have known that instructions that were granted required additional approval from
the organs of Heftziba Hofin itself.
It was also claimed that the banks knew, or should have known, that most of the funds are
taken out of Heftziba Hofim not for their benefit, and that the banks themselves were
infected with a conflict of interest, because part of the improper financial transfers,
allegedly, were to the accounts of the contracting companies, in which there were debit
balances or exceptions from the approved debit balances. One of the defendants, and
according to his claim, all of the banks indebtedness for damages is jointly and severally.
At this early stage the Bank can not address the content of the mentioned document.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 392 -
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(19) 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 sold 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.
In light of the announcement of the VAT manager from August 2012 regarding the cancelation of
the tax assessment, the predicate of the appeal, the court also canceled the appeal concerning the
tax assessment.
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. The Company disputes the decision to change the
classification, and submitted a statement of its objection on December 1, 2011.
On July 2012 the Tax Authority informed the Company of the rejection of the appeal that they
filed. On October 2012 the Company submitted an appeal to the District Court regarding the Tax
Authority's decision regarding the appeal and this is still pending. The Bank estimates that the
reclassification will not materially affect the Banks' financial situation.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 393 -
Note 19 – Activity of Derivative Instruments – Volume, Credit Risks and Maturity Dates
Reported amounts A. Volume of activity on a consolidated basis
(1) Stated amounts of derivative instruments December 31, 2012
Interest contracts Foreign
currency Shares related Commodity and NIS-CPI Other contracts contracts other contracts NIS millions
a. Hedging derivatives(1) Swaps - 72 - - - Total - 72 - - -
Of which interest rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 72 - - -
b. ALM
DERIVATIVES (1)(2) Forward contracts 980 - 9,873 - - Option contracts - - - - - traded on the stock exchange: Options written - - - - - options bought - - - - - Other options contracts: options written - - 1,379 185 - options bought - - 1,185 185 - Swaps - 3,154 - - -
Total 980 3,154 12,437 370 -
Of which interest rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 2,035 - - -
c. Other derivatives (1)
Futures contracts - - 1 1 - Forward contracts - - 8,520 - - Option contracts - - - - - traded on the stock exchange: Options written - - 647 8,529 - Options bought - - 647 8,477 - Other options contracts: Options written - 763 1808 - 639 Options bought - 763 1,760 102 642
Total - 1,526 13,383 17,109 1,281
d. CREDIT DERIVATIVES AND SPOT SWAP FOREIGN CURRENCY CONTRACTS Credit derivatives for which the banking corporation is a beneficiary - - - - 131 Spot swap foreign currency contracts - - 3,061 - -
(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, 2012
- 394 -
Note 19 – Activity of Derivative Instruments - Volume, Credit Risks and Maturity
Dates (cont’d)
Reported amounts
A. Volume of activity on a consolidated basis (cont’d)
(2) Gross fair value of derivative instruments
December 31, 2012
Interest contracts Foreign
currency Shares related Commodity and NIS-CPI Other contracts contracts other contracts NIS millions
a. Hedging derivatives(1)
Gross negative fair value - 3 - - - b. ALM (1)(2) DERIVATIVES Gross positive fair value 5 58 132 13 - Gross negative fair value 4 154 155 13 - c. OTHER (1) DERIVATIVES Gross positive fair value - 3 90 160 15 Gross negative fair value - 3 95 163 15 d. CREDIT DERIVATIVES Credit derivatives for which the the banking corporation is the beneficiary Gross positive fair value - - - - -
(1) Except for credit derivatives. (2) Derivatives constituting part of the Bank’s assets and liabilities management that have not been
designated for hedging relationships.
B. Credit risk in respect of derivative instruments, according to counterparty on a consolidated basis
December 31, 2012 Governments Dealers/ and central Exchanges Banks Brokers banks Others Total NIS millions
Positive gross fair value of derivative instruments (1) 61 236 8 - 171 476 Off-balance-sheet credit risk in respect of derivative instruments (2) - 139 208 - 240 587 Total credit risk in respect of derivative instruments 61 375 216 - 411 1,063 (1) Of which the balance sheet balance of freestanding derivative instruments in the amount of NIS 476
million. (2) Off-balance-sheet credit risk in respect of derivative instruments (including is 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, 2012
- 395 -
Note 19 – Activity of Derivative Instruments - Volume, Credit Risks and Maturity Dates (cont’d) Reported amounts
C. Repayment schedule - stated amounts: year-end balances on a consolidated basis
December 31, 2012 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 150 780 50 - 980 Other 1,526 845 876 1,505 4,752 Foreign currency contracts 23,583 5,281 17 - 28,881 Shares related contracts 16,542 707 153 77 17,479 Commodities and other contracts 1,281 - 131 - 1,412 Total 43,082 7,613 1,227 1,582 53,504
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 396 -
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, 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 - *11,400 - - Other options contracts: Options written - - 2,467 232 - Options bought - - 2,352 232 - Swaps - 2,489 - - - Total 876 2,489 16,219 464 -
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 - Forward contract - - *4,934 - - Option contracts traded on the stock exchange: Options written Options bought - - 1,205 7,131 - Other options - - 1,205 7,105 - contracts: Options written - *802 5,814 - 825 Options bought - *802 5,817 140 826 Total - 1,604 18,975 14,377 1,651
c. Credit derivatives and spot swap foreign currency contracts
Credit derivatives for which the banking corporation is a beneficiary
Spot swap foreign - - - - 134 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, 2012
- 397 -
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 *38 *168 12 - Gross negative fair value 2 *127 *156 12 - b. Other (3) derivatives Gross positive fair value - *154 *277 152 39 Gross negative fair value - *154 *275 154 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. (3) Except for credit derivatives. * Reclassified, see note 1.C.5.B.
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, 2012
- 398 -
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, 2012
- 399 -
Note 20 - Balances and fair value estimations of financial instruments
Reported amounts
A. Balances on a consolidated basis December 31, 2012 Balance Fair value* sheet value Level (1) Level (2) Level (3) Total NIS millions Financial assets Cash on hand and deposits with banks 8,246 1,745 - 6,492 8,237 Securities (a) 4,940 3,996 723 221 4,940 Borrowed securities 68 68 - - 68 Net credit to the public 23,573 1,192 - 22,284 23,476 Assets in respect of derivative instruments 476 169 211 96 476 Other financial assets (b) 872 789 - 83 872 Total financial assets 38,175 7,959 934 29,176 38,069
Financial liabilities Deposits from the public 30,890 1,135 - 29,860 30,995 Deposits from banks 244 79 - 165 244 Deposits from the Government 1 - - 1 1 Subordinated notes and 2,929 2,924 209 - 3,133 deposit certificates Liabilities in respect of derivative instruments 592 170 417 5 592 Other financial liabilities (b) 1,541 1,123 - 418 1,541 Total financial liabilities 36,197 5,431 626 30,449 36,506
December 31, 2011 Balance Fair value* sheet value Level (1) Level (2) Level (3) Total NIS millions Financial assets Cash on hand and deposits with banks 6,961 2,162 - 4,793 6,955 Securities 6,785 5,458 1,058 269 6,785 Borrowed securities 5 5 - - 5 Credit to the public 22,868 1,041 - 21,657 22,698 Assets in respect of derivative instruments 846 173 657 16 846 Other financial assets (b) 793 739 - 54 793 Total financial assets 38,258 9,578 1,715 26,789 38,082
Financial liabilities Deposits from the public 31,158 1,005 - 30,242 31,247 Deposits from banks 392 27 - 367 394 Deposits from the Government - designated 1 1 - - 1 Subordinated notes and deposit certificates 2,761 2,539 231 - 2,770 Liabilities in respect of derivative instruments 907 173 730 4 907 Other financial liabilities (b) 1,265 862 - 403 1,265 Total financial liabilities 36,484 4,607 961 31,016 36,584
* Level 1 – Fair value measurements using prices quoted in an active market. Level 2 - Fair value measurements using other significant observed inputs. Level 3 - Fair value measurements using significant unobserved inputs.
(a) For further details regarding a balance sheet balance and the fair value of the securities – see note 3.
(b) From this: Assets totaled NIS 789 million (December 31, 2011 – NIS 739 million), Liabilities totaled NIS 1,123 million (December 31, 2011 – NIS 862 million) whose balance sheet balance is the same as their fair value (instuments presented at fair value in the balance sheet). For additional information regarding instruments measured at fair value on a recurring basis and on a non-recurring basis see notes 20.A.-20.C.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 400 -
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 Note 20.A. A "market price" cannot be quoted for the other financial instruments because
there is no active market in which they are traded (excluding negotiable subordinated notes).
Therefore, their fair value is estimated by means of accepted pricing models, such as the present value
of future cash flows capitalized by an 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 flows 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 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 these factors, it should be emphasized that
the data included in this note is insufficient to indicate the value of the Bank as a going concern. In
addition, due to a 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 where 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, 2012
- 401 -
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 inherent 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 reduce a total of NIS 2 million
of the estimated fair value of the problematic debts at the end of December 2012.
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 market trade value.
8. Off-balance-sheet financial instruments where the balance reflects credit risk, contingent liabilities
and extraordinary commitments – the balance sheet balance is an approximation of fair value,
because the terms of the transactions in the balance sheet are not materially different from the
terms of similar transactions on the reporting date.
9. Derivative financial instruments - derivative financial instruments for which there is an active
market were valued at their market value 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
inherent in the particular financial instrument (market risk, credit risk, etc.) See also Note 19.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 402 -
Note 20A –Items measured at fair value in the balance sheet
Reported amounts
Balances on a consolidated basis As at December 31, 2012
Fair-value measurements using
A. Items measured at fair value on a recurrent basis
Prices quoted in an active
market (level 1)
Other significant observable
inputs (level 2)
Significant unobservable
inputs (level 3)
Balance Sheet balance
NIS millions Assets
Credit to the public (1) 1,192 - - 1,192
Security available for sale: Governments bonds – Israeli government 2,383 302 2 2,687 Governments bonds – Foreign governments - - - - Bonds of financial institutions in Israel 725 1 - 726 Bonds of foreign financial institutions - 30 136 166 Asset backed securities (ABC) 22 35 1 58 Bonds of others in Israel 427 353 41 821 Bonds of foreign others - - 5 5 Shares (2) 64 - - 64
Securities held for trading: Governments bonds – Israeli government 335 2 - 337 Bonds of financial institutions in Israel 8 - - 8 Asset backed securities (ABC) - - - - Bonds of others in Israel 14 - - 14 Shares 18 - - 18
Assets in respect of derivatives instruments: NIS-CPI contracts - - 5 5 Other interest contracts - 54 7 61 Foreign-currency contracts 9 150 63 222 Share contracts 160 - 13 173 Commodity and other contracts - 7 8 15 Assets in respect of activity in the Maof market 789 - - 789 Total Assets 6,146 934 281 7,361
Liabilities
Deposits from the public (1) 1,135 - - 1,135 Liabilities in respect of derivate instrument: NIS-CPI contracts - 1 3 4 Other interest contracts - 160 - 160 Foreign-currency contracts 9 241 - 250 Share contracts 161 - 15 176
Commodity and other contracts - 15 - 15 Liabilities in respect of activity in the Maof market 789 - - 789 Other liabilities (3) 334 - - 334 Total Liabilities 2,428 417 18 2,863
* Less than NIS 500 thousand. (1) Lending of tradable securities. (2) Shares and securities for which no fair value is available, which are presented at cost total NIS 36 million.
(31.12.11 - NIS 53 millions). (3) Short sale of securities.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 403 -
Note 20A – Items measured at fair value in the balance sheet (Cont'd)
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)
Balance Sheet balance
NIS millions Assets
Credit to the public (1) 1041 - - 1,041
Security available for sale: Governments bonds – Israeli government 3142 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 (2) 72 - - 72
Securities held for trading: Governments bonds – Israeli government 1002 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 7,411 1715 232 9,358
Liabilities
Deposits from the public (1) 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 Other liabilities (3) 123 - - 123 Total Liabilities 2,040 730 16 2,786
* Less than NIS 500 thousand. (1) Lending of tradable securities. (2) Shares and securities for which no fair value is available, which are presented at cost total NIS 36 million
(31.12.11 - NIS 53 million). (3) Short sale of securities. B. Items measured at fair value not on a recurrent basis
Impaired credit whose collection is contingent upon collateral as at December 31, 2012 is NIS 322 million in comparison to NIS 17 million as at December 31, 2011, and it is classified at level 3.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 404 -
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, 2012
Fair value
as at December
31, 2011
Net profit (losses) realized and non-realized and included in:
Acquisitions Issuance ExtinguishmentTransfer
to level 3(4)
Transfer from level
3(3)
Fair value as at
December 31, 2012
Unrealized profit (losses) in respect of
instruments held as at December
31, 2012
Sstatement of profit and loss
Other comprehensive
income in equity
NIS millions
Assets Securities available for sale: (1)
Government bonds – Israeli government 2 *- *- - - *- - - 2 *- Government bonds – Foreign governments 136 2 5 - - )3( 3 (7) 136 5 Asset backed securities (ABC) 14 *- *- *- - -* - (13) 1 (1) Bonds of others in Israel 56 2 (2) - - )2( - (13) 41 (2) Bonds of foreign others 8 - - - - )7( 4 - 5 -
Assets in respect of derivative instruments (2):
NIS-CPI contracts 4 5 - - - )4( - - 5 5 Other interest contracts - - - - - - 7 - 7 - Foreign currency contracts - - - - - - 63 - 63 - Share contracts 12 3 - 1 - )3( - - 13 3 Commodity and other contracts - - - - - - 8 - 8 -
Total Assets 232 12 3 1 - )19( 85 )33( 281 10
Liabilities
Liabilities in respect of derivative instruments (2) 2 2 - - - )1( - - 3 3 NIS-CPI contracts Share contracts 14 3 - 1 - )3( - - 15 3
Total Liabilities 16 5 - 1 - )4( - - 18 6
(1) Net realized profits (losses) are included in the statement of profit and loss, under the item "Non-interest financing income".
Net 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) Net realized and unrealized profits (losses) are included in the statement of profit and loss, under the item "Non-interest financing income". (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 derive from reverse situation. (4) The Bank first implemented the clarification of the Bank of Israel, detailed in section 1.E.6. In cases in which there was no observable market data regarding the quality of the
counterpartys' credit, the Banks' exposure to that same counterparty was classified as required according to the level 3 grading guidelines. Less than NIS 500 thousand *
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 405 -
Note 20B - Changes in items measured at fair value on a recurrent basis included in level 3 (Cont'd) Reported amounts
Balances on a consolidated basis Year ended December 31, 2011
Fair value
as at December
31, 2010
Net profit (losses) realized and non-realized and included in:
Acquisitions Issuance ExtinguishmentTransfer
to level 3(4)
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: (1)
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 derivative 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 derivative instruments (2) 2 3 - - - )3( - - 2 2 NIS-CPI contracts 138 )35( - - - )103( - - - - Share contracts 9 )2( - 7 - - - - 14 )2(
Total Liabilities 149 )34( - 7 - )106( - - 16 -
(1) Net realized profits (losses) are included in the statement of profit and loss, under the item "Non-interest financing income".
Net 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) Net realized and unrealized profits (losses) are included in the statement of profit and loss, under the item "Non-interest financing income". (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 derive from reverse situation. (4) The Bank first implemented the clarification of the Bank of Israel, detailed in section 1.E.6. In cases in which there was no observable market data regarding the quality of the
counterpartys' credit, the Banks' exposure to that same counterparty was classified as required according to the level 3 grading guidelines
* Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 406 -
Note 20C - Additional information regarding significant unobservable inputs and assessment techniques in the measurement of the fair value of items classified level 3 Reported amounts A. Item measured at fair value on a recurrent basis Consolidated:
Fair value as at December 31, 2012
Weighted average
Range of data* Unobservable inputs
Assessment technique
NIS millions
Assets Securities available for sale:
1.22% 1.67%-1.72% Capitalization rate Capitalization of cash flow 132
Bonds of foreign financial institutions
Assets in respect of derivatives instruments:
)0.01%( 2.3%- )0.9%(
Counter party credit risk (CVA) discounted rate
Capitalization of cash flow 5 NIS - CPI contracts
1.7%0.3%-5.3%
1.3% 0.9%-5% Counter party credit risk (CVA)
Discounted cash flow option pricing model 7 Other interest contracts
3.7% 0.3%-5% Counter party credit risk (CVA)
Discounted cash flow option pricing model 63 Foreign currency contracts
0.8% 0.5%-0.8% Counter party credit risk (CVA) Option pricing model 13 Share contracts
3.3% 3.3% Counter party credit risk (CVA) Option pricing model 8
Commodity and other contracts
228 Total Assets **
Liabilities Liabilities in respect of derivative instruments: )0.4%(1.5%- )1.0%( Discount rate Discounted cash flow 3NIS - CPI contracts
28.5% 28.5% Standard deviation Option pricing model 2 Share contracts 5Total liabilities **
B. Item measured at fair value not on a recurrent basis
Fair value as at December 31, 2012 Assessment technique NIS million
Evaluations including coefficients for quick realization 322
Impaired credit whose collection is contingent upon collateral
C. Qualitative information regarding fair value measurement at level 3
The main evaluation technique that the Bank uses in order to measure fair value of assets and liabilities at level 3 is capitalization of cash flow. The future cash flow of the instrument is taken from the agreement with the counterparty while the capitalization rate embodies the risk inherent in the instrument. The capitalization rate which is use to capitalize the cash flow is a combination of a risk-free interest which is observable data from the market such as: the interest of the Bank of Israel, LIBOR or interest from bonds of the state of Israel combined with the evaluation of the risk premium according to the Banks assumptions. A significant increase in the risk premium compared with the Banks' assumptions might cause a reduction in the fair value of the instrument and a reduction in the Banks' capital.
The capitalization rate of bonds of foreign financial institutions includes a weighted assessment of the state of Israel and the issuing banks' failure probability.
In shekel contracts – the capitalization rate index includes a component of inflation expectations up to a year. The bank implements the clarification of the Bank of Israel detailed in section 1.E.6 according to which, in cases where there was no observable market inputs found regarding the credit quality of the counterparty, the Banks' exposure to that counterparty will be classified as level 3 rating.
* When the row includes a number of instruments, the range between the instruments is displayed with the minimum and maximum datum regarding the instrument.
** In addition, there are assets totaling NIS 53 million and liabilities totaling NIS 13 million (non-tradable bonds and contracts in respect of shares) which were assessed by an external quote factor (including an immaterial amount which was assessed by the issuing factor) and the Bank does not have the significant non-observable inputs which were used for the pricing of the fair value.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 407 -
Note 21 - Interested and related Parties Reported amounts A. Balances with related parties
Consolidated: December 31, 2012 Interested parties Related parties held by the Bank Shareholders Key executives(3) Others(3) Interested parties at time Controlling shareholders(8) Others(1) 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 (4) date year (4) date year (4) date year (4) date year (4) date year (4)
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 (5) - - - - - - 42 46 - - - - Credit to the public 23 49 36 73 2 2 149 149 - - - *- Provision for credit losses *- *- *- *- *- *- 5 5 - - - *- Net credit to public 23 49 36 73 2 2 144 144 - - - - Investments in investee companies (5) - - - - - - - - - - 1 1 Assets in respect of derivative instruments - - - - - - 4 4 - - - - Other assets - - - - - - 1 1 - - - -
Liabilities - Deposits from the public *- *- - - 5 5 768 797 - - - - Deposits from banks - - - - - - - - - - - - Liabilities in respect of - - - - derivative instruments - - - - - - *- 1 - - - - Other liabilities - - - - - - *- *- - - - - Deferred liabilities deeds - - - - - - 357 365 Shares (included in shareholders' equity)(5) 1044 1044 502 502 *- *- 92 92 - - - - Credit risk on off- balance-sheet financial instruments(7) - - 37 45 2 2 36 36 - - - -
* Less than NIS 500 thousand (1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (2) Including their close relatives as defined in IAS 24. Note that key management personnel are defined as interested party in the Public Reporting Directives of the Supervision of Banks only for disclosure in this note. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds joint control over them, has material influence over them or holds 25% or more of their issued share capital or voting
power or may appoint 25% or more of their directors. (4) Based on quarter-end balances. (5) Details regarding these items are included also in note 3 "Securities" and note 5 "Investments in investee companies". (6) Holdings of the Banks' capital by interested parties and related parties. (7) Credit risk on off-balance-sheet financial instruments as calculated for purposes of per borrower credit limitations. (8) On October 29, 2012 Shlomo Eliyahu Holdings Ltd. ceased to be part of the controlling interest of the Bank as the result of the completion of the acquisition of control of Migdal Insurance and Financial Holdings Ltd. by Mr.
Shlomo Eliyahu through Eliyahu Insurance Company Ltd. Therefore he is no longer included as an interested party who is a controlling shareholder group but in the other interested party group – for details see section E below.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 408 -
Note 21 - Interested and related Parties (cont'd) Reported amounts A. Balances with related parties (cont'd)
Consolidated: December 31, 2011** Interested parties Related parties held by the Bank Shareholders Key executives(3) Others(3) Interested parties at time Controlling shareholders Others(1) 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 (4) date year (4) date year (4) date year (4) date year (4) date year (4)
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(5) - - - - - - 38 64 - - - - Credit to the public 49 87 - - 2 2 89 89 - - - - Provision for credit losses *- *- - - *- *- *- *- - - - - Net credit to the public 49 87 - - 2 2 89 89 - - - - Investments in investee companies (5) - - - - - - - - - - 1 1 Assets in respect of derivative instruments - - - - - - 2 2 - - - - Other assets - - - - - - 1 1 - - - -
Liabilities - Deposits from the public *- *- - - 5 5 647 753 - - 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)(5) 1,401 1,415 - - - - 83 84 - - - - Credit risk on off- balance-sheet financial instruments(3) 46 46 - - 3 3 17 113 - - - -
* Less than NIS 500 thousand. ** Restated – for details see note 1.E.21. (1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (2) Including their close relatives as defined in IAS 24. Note that key management personnel are defined as interested party in the Public Reporting Directives of the Supervision of Banks only for disclosure in this note. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds joint control over them, has material influence over them or holds 25% or more of their issued share capital or voting
power or may appoint 25% or more of their directors. (4) Based on quarter-end balances. (5) Details regarding these items are included also in note 3 "Securities" and note 5 "Investments in investee companies". (6) Holdings of the Banks' capital by interested parties and related parties. (7) Credit risk on off-balance-sheet financial instruments as calculated for purposes of per borrower credit limitations.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 409 -
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, 2012
Related parties
held by the Interested parties Bank Interested Shareholders parties Controlling at the time of Investee Key the shareholders Others (1) executives(2) Others (3) transaction companies NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Net interest income (expenses) (4) 1 - *- (21) - - Provision for credit losses *- - - (5) - - Non interest income (expenses) *- *- *- (1) - - Of which: Management fees and services *- - *- 6 - - Operating and other expenses (5) *- - (21) (4) - -
Total 1 - (21) (31) - -
Year ended December 31, 2011**
Related parties
held by the Interested parties Bank Interested Shareholders parties Controlling at the time of Investee Key the shareholders Others (1) executives(2) Others (3) transaction companies NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Net interest income (expenses) (4) 3 - *- (17) - *- Provision for credit losses - - - - - - Non interest income (expenses) *- - *- 4 - *- Of which: Management fees and services *- - *- 4 - *- Operating and other expenses (5) *- - (24) (6) - -
Total 3 - (24) (19) - *-
* Less than NIS 500 thousand. ** Restated – for details see note 1.E.21. (1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (2) Including their close relatives as defined in IAS 24. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them,
holds joint control over them, has material influence over them or holds 25% or more of their issued share capital or voting power or may appoint 25% or more of their directors.
(4) See C. below. (5) See D. below.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 410 -
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, 2010**
Related parties
held by the Interested parties Bank Interested Shareholders parties at the time of Controlling Key the Investee shareholders Others (1) executives(2) Others (3) transaction companies NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Net interest income (expenses) (4) 3 - *- (9) - *- Provision for credit losses - - - - - - Non interest income (expenses) *- - *- 5 - *- Of which: management fees and services *- - *- 2 - *- Operating and other expenses (4) (1) - (20) (7) *- -
Total 2 - (20) (11) *- *-
* Less than NIS 500 thousand.
** Restated, as a result of implementation of IAS 24 in 2012 – for details see note 1.E.21. (1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (2) Including their close relatives as defined in IAS 24. Note that key management personnel are defined as interested
party in the Public Reporting Directives of the Supervision of Banks only for disclosure in this note. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds
joint control over them, has material influence over them or holds 25% or more of their issued share capital or voting power or may appoint 25% or more of their directors.
(4) See C. below.
(5) See D. below.
C. Net interest income from transactions of the Bank and its subsidiaries with interested and related parties concolidated:
Year ended Year ended Year endedDecember 31 December 31 December 31
2012 2011 2010NIS millions NIS millions NIS millions
In respect of assets - From credit to the public 8 8 6 From deposits with banks - - -
From debentures 2 3 5 In respect of liabilities - On deposits from the public (13) (21) (12) On deposits from banks - - - On deferred liabilities deeds (17) (4) (5) (20) (14) (6)
Restated as a result of the implementation of IAS 24 in 2012 – for details see note 1.E.21.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 411 -
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, 2012 Interested parties at the Shareholders Key executives (2) time of the transaction Others(3)
Controlling shareholders Others(1)
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 - - - - ***18 9 - - - - Directors who are not Bank employees *- 1 - - 3 9 - - - - Other interested parties who are not Bank employees - - - - - - - - 4 7 Total *- 1 - - 21 18 - - 4 7
Consolidated: Year ended December 31, 2011** Interested parties at the Shareholders Key executives (2) time of the transaction Others(3)
Controlling shareholders Others(1) 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 - - - - ***21 9 - - - - Directors who are not Bank employees *- 2 - - 3 8 - - - - Other interested parties who are not Bank employees - - - - - - - - 6 7 Total *- 2 - - 24 17 - - 6 7
* Less than NIS 500 thousand. ** Restated – for details see note 1.E.21. *** Constitutes salary and benefits, from this: short-term employee benefits: NIS 15 million (in 2011 – NIS 16 million and in 2010 – NIS 15 million), benefits upon termination of employment: NIS 3 million (in 2011 – NIS 5 million and in 2010 – NIS 3 million).
(1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. 1( (2) Including their close relatives as defined in IAS 24. Note that key management personnel are defined as an interested party in the Public Reporting Directives of the Supervision of Banks only for disclosure in this note. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds joint control over them, has material influence over them or holds 25% or more of their issued share capital or voting
power or may appoint 25% or more of their directors.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 412 -
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, 2010** Interested parties at the Shareholders Key executives (2) time of the transaction Others(3)
Controlling shareholders Others(1) 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 - - - - ***18 8 - - - - Directors who are not Bank employees 1 2 - - 2 7 *- 1 - - Other interested parties who are not Bank employees - - - - - - - - 7 9 Total 1 2 - - 20 15 *- 1 7 9
* Less than NIS 500 thousand. ** Restated – for details see note 1.E.21. *** Constitutes salary and benefits, from this: short-term employee benefits: NIS 15 million (in 2011 – NIS 16 million and in 2010 – NIS 15 million), benefits upon termination of employment: NIS 3 million (in 2011 – NIS 5 million and in 2010 – NIS 3 million).
(1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. 1( (2) Including their close relatives as defined in IAS 24. Note that key management personnel are defined as an interested party in the Public Reporting Directives of the Supervision of
Banks only for disclosure in this note. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds joint control over them, has material influence over them or holds 25%
or more of their issued share capital or voting power or may appoint 25% or more of their directors.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 413 -
Note 21 - Related Parties (cont'd)
E. Further details:
1. On October 29, 2012, the Bank received a notice on behalf of Shlomo Eliyahu Holdings Ltd. (hereinafter:
"Eliyahu Holdings") and Eliyahu Insurance Company Ltd. (hereinafter together with Eliyahu Holdings:
"Eliyahu Group"), according to which, the acquisition of control of Migdal Insurance and Financial
Holdings Ltd. (hereinafter: "Migdal"; hereinafter: "Migdal acquisition") was completed on 29.10.2012
by Eliyahu Insurance Company Ltd. (controlled by Mr. Shlomo Eliyahu).
Following the acquisition of Migdal, the following became valid:
A) The non-circular deed of trust and deed of permission to the trustee Mr. Boaz Okon (a retired judge)
(hereinafter: "the trustee"), signed by the Eliyahu Group on 23.10.2012 (hereinafter: "deed of trust"),
in relation to the shares of the Eliyahu Group as specified below.
B) The agreement signed on 23.10.2012 between Eliyahu Holdings and Yeshayahu Landau Holdings
(1993) Ltd. (hereinafter: "Landau Holdings") and David Lubinski Properties (Holdings) 1993 Ltd.
(hereinafter: Lubinsky Holdings"; hereinafter: "the agreement");
C) The permit to hold the Bank, given by the Bank of Israels' governor to Mr. Shlomo Eliyahu and
Mrs. Chaya Eliyahu on 23.10.2012 (hereinafter: "the permit to hold the Bank's controlling
interest");
D) The Banks' revised control permit, given by the Bank of Israels' governor to Mrs. Ruth Manor and Dr.
Yael Almog and to Mr. Yeshayahu Landau and Mrs. Devorah Landau on 23.10.2012 (hereinafter:
"The Banks' revised control permit").
According to the deed of trust, the agreement and the maintenance and control permit mentioned above,
as of the completion of the acquisition of Migdal (hereinafter: "the effective date"), the Eliyahu Group
ceased to be a party to the controlling and voting agreements system between the controlling
shareholders of the Bank.
Furthermore, as of the effective date, and due to the retirement of Eliyahu Holdings from the
agreements system between the controlling shareholders of the Bank, the following directives apply:
1. Regarding the Eliyahu Group shares that were deposited in accounts in the name of the trustee on
1.8.2012, and in total 27.12% of the Banks' issued share capital and paid-up share capital
(hereinafter: the Eliyahu Groups' Bank shares), the deed of trusts' terms, will apply.
2. Eliyahu Holdings will cease to be a party to the control arrangements between the controlling
shareholders of the Bank in the framework of the agreements system among controlling
shareholders. Eliyahu Holdings' rights, according to the agreements system among controlling
shareholders of the Bank are considered "frozen" regarding all intents and purposes, and it can not
be activated and/or any use made of them, all, subject to the terms and directives listed in the deed
of trust and in the agreement. Without diminishing the aforesaid, during the trust periods (as
detailed below and as defined in the deed of trust), the Eliyahu Group and/or the trustee:
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 414 -
Note 21 - Related Parties (cont'd)
E. Further details (cont'd)
1. (cont'd)
D) (cont'd)
2. (cont'd)
a. Will not participate or vote in the general meetings of the Bank or in the separate meetings by
virtue of the shares of the trust, that will be held by the trustee from time to time. And
b. Will not suggest any candidates for Union Banks' Board of Directors, but the Eliyahu Group
companies will be entitled to receive any dividends distributed by the Bank, and to receive
apposition for the sale of the shares in the trust.
3. As of the effective date, the instructions of the Banks' revised control permit apply and refer only to
individuals controlling Landau Holdings and Lubinski Holdings (and not to individuals controlling
the Eliyahu Group), when the continuation of the Eliyahu Groups' holding of Union Banks' means of
control, is by virtue of "permit to hold the Banks' means of control", as described above.
4. Landau Holdings and Lubinski Holdings, increased their share in the Banks' controlling interest
shares, as defined in the agreement and in the deed of trust, by conventing part of their free shares, as
defined in the agreement and in the deed of trust into controlling shares, while the controlling interest,
as of the effective date, is 33% (thirty three from one hundred), of the Banks' issued share capital and
paid-up share capital, in a manner in which each of Landau Holdings, on one hand, and Lubinski
Holdings, on the other hand, hold 16.5% (sixteen and a half from one hundred) of the Banks' issued
share capital and paid-up share capital, and all as detailed in the deed of trust, in the agreement and in
the revised control permit of the Bank. According to the revised control permit of the Bank, the total
cumulative holdings of the members of the Banks' control group must not exceed 61% of the Banks'
means of control (the holding rates are of the Banks' issued share capital and paid-up share capital,
without considering the freezing of part of the privileges in the Banks' shares held by the Eliyahu
Group).
Furthermore, according to the permit to hold the Bank's controlling interest, Mr. Shlomo Eliyahu and
Mrs. Chaya Eliyahu were permitted to hold together 32.12% of the Banks' means of control of any
kind, up to 27.12% of which (hereinafter: the relevant means of control) are held by the trustee
according to deed of trusts' directives and up to an additional 5% of any means of control of the Bank
will be held indirectly by them through Migdal and/or through corporations directly or indirectly
controlled by Migdal (hereinafter: "Migdal Group").
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 415 -
Note 21 - Related Parties (cont'd)
E. Further details (cont'd)
1. (cont'd)
D) (cont'd)
4. (cont'd)
The relevant means of control will be sold by Mr. and Mrs. Shlomo and Chaya Eliyahu in the stock
market or to an unrelated third party, subject to receiving permission from the governor of the Bank
of Israel, as required by the law, until the end of a period of three years which began on the day in
which the permit to hold the Banks' means of control became valid (hereinafter: the first trust
period"). Up to the end of an additional year, which began on the day that the first trust period
ended, all of the remaining relevant means of control that remain unsold then, will be sold by the
trustee in the stock market or to an unrelated third party, and all in accordance with the directives of
the deed of trust.
The holding permit will expire after four years from the date of commencement or at the date of sale
of the relevant means of control, whichever comes first.
It is further noted that as part of the agreement defined above, directives were determined regarding
the use of voting rights by the Banks' current controlling shareholders in the Banks' general
meetings.
Following the amendment of the Bank control permit, as described above, and in order to bring
Lubinski Holdings' holding of the Banks' controlling interest to 16.5% of the Banks' issued share
capital, as required by the conditions of the Banks' revised control permit, on 29.10.2012,
Cheroudar Properties Ltd. sold 983,318 ordinary shares par value NIS 0.01 to Lubinski Holdings,
and consequently its holding rate of the Banks' shares decreased from 7.69% to 6.36%
2. With regard to a resolution of the shareholders meeting of the Bank in a respect of approved the
acquisition of a directors' liability (D&O) - see note 18.C.17.
3. With regard to a resolution of the shareholders meeting of the Bank in a respect of indemnity
commitment granted to officers of the Bank - see note 18.C.13. and 18.C.14.
4. With regard to agreement with the chairman and CEO of the bank - see Notes 15.E.(2) and 15.E.(3).
above.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 416 -
Note 22 - Interest income and 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 2012 **2011 **2010 2012 **2011 **2010
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
A. Interest income *** From credit to the public 1,073 1,117 873 1,061 1,104 860 From credit to the government - - 1 - - 1 From cash on hand and deposits with Bank of Israel 137 157 62 137 157 62 From deposits with banks 11 15 15 11 15 15 From borrowed securities 2 9 5 2 9 5 From bonds 189 190 161 188 188 160 From other assets 4 - 11 3 * - 10 Total interest income 1,416 1,488 1,128 1,402 1,473 1,113 B. In respect of Liabilities On deposits from the public 612 676 395 757 829 508 On deposits from the Government *- *- *- *- *- *-On deposits from banks 1 7 3 1 7 3 On subordinated notes and deposit certificates 143 155 127 14 19 26 Interest expenses 756 838 525 772 855 537 Total interest income, net 660 650 603 630 618 576
C. Details of net effect of hedging derivative instrument on interest income and expenses ***
Interest income - - - - - - Interest expenses 3 - - 3 - -
3 - - 3 - - D. Details of interest income
from bonds on a cumulative basis
Available for sale 174 168 131 173 166 130 Held for trading 15 22 30 15 22 30 Total included in interest income 189 190 161 188 188 160
* Less than NIS 500 thousand.
** Reclassified due to the initial implementation of the directives of the supervision of bank concerning the format for
statements of profit and loss of banking corporations. For further details, see Note 1.2.5.A.
*** Including effective component in hedging relation.
**** Details of effect of hedging derivative instruments on subsections (A) and (B).
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 417 -
Note 23 - Non-interest financing income Reported amounts Consolidated - composition:
Consolidated The Bank Year ended December 31 Year ended December 31 2012 *2011 *2010 2012 *2011 *2010 NIS millions NIS millions
A. Non interest financing income in respect of non-trading activities A.1 From activity in derivative
instruments Net income (expenses) in respect of ALM derivative instruments (1) (39) 71 (133) (39) 71 (133)
Total from activity in derivative instruments (39) 71 (133) (39) 71 (133)
A.2 From investment in bonds Gain from sale of bonds available for sale 95 44 98 95 44 98Losses from sale of bonds available for sale (2) (18) (26) (7) (18) (26) (7)
Total from investment in bond 77 18 91 77 18 91
A3. Net exchange differences (12) (109) 99 (12) (108) 97 A4. Gains (losses) from investment
in shares Gains from sale of shares available for sale 6 9 6 2 1 3Losses from sale of shares available for sale(3) (3) (5) (4) - - -Dividend from shares available for sale 5 5 8 **- 1 1
Total from investment in shares 8 9 10 2 2 4 Total non-interest financing income in respect of non-trading activities 34 (11) 67 28 (17) 59 B. Non-interest financing income in respect
of trading activities ***
Net income in respect of other derivative instruments 27 27 13 27 27 13Net realized and unrealized gains (losses) from adjustments to fair value of bonds held for trading 1 (9) 5 1 (9) 5Net realized and unrealized gains (losses) from adjustments to fair value of share hold for trading 3 (3) 3 3 (3) 3Dividends from shares held for trading **- **- - **- **- -
Total from trading activities **** 31 15 21 31 15 21 Total 65 4 88 59 (2) 80
(1) Derivative instruments constituting part of the asset and liability management of the bank, which are not
designated for hedging purposes. (2) Including a provision for impairment in the amount of NIS 18 million for the year ended December 31, 2012 (NIS
23 million and NIS 4 million for the years ended December 31, 2011 and 2010, repspectively). (3) Due to provision impairment. * Reclassified due to the initial implementation of the directives of the supervision of banks concerning the format
for statements of profit and loss of banking corporation. For further details, see Note 1.C.5.A. ** Less than NIS 500 thousand. *** Including exchange differences arising from trading activity.
It should be noted that most of the income from trading activity derived from back to back transactions in derivative instruments.
****With regard to interest income from investment in bonds held for trading - see Note 22.b.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 418 -
Note 24 - Fees
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 2012 *2011 *2010 2012 *2011 *2010
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Account management 64 64 68 64 64 68 Credit cards 17 17 18 17 17 18 Securities and certain derivative instruments activity 55 63 67 55 63 67 Financial products distribution commissions 14 15 14 12 12 10 Management, operation and trust to institutional entities 8 8 7 - - - Credit handling 32 34 34 29 31 31 Conversion differences 31 37 34 31 37 34 Foreign trade activity 14 15 14 14 15 14 Financing transaction fees 36 40 37 36 40 37 Net income from credit portfolios services 4 4 4 4 4 4 Other fees 13 13 14 10 10 11 Total operating fees 288 310 311 272 293 294
* Reclassified due to the initial implementation of the directives of the supervision of bank concerning the format for
statements of profit and loss of banking corporations. For further details, see Note 1.2.5.A.
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 2012 *2011 *2010 2012 *2011 *2010 NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Others **4 2 2 **3 1 1 Total other income 4 2 2 3 1 1
* Reclassified due to the initial implementation of the directives of the supervision of bank concerning the format for
statements of profit and loss of banking corporations. For further details, see Note 1.2.5.A. ** In 2012 mainly income from the sale of a real estate asset – see note 3.6
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 419 -
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 2012 2011 2010 2012 2011 2010
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Salaries 301 291 271 294 284 264 Severance pay, advanced study fund, compensation, pensions and vacation 47 74 51 47 73 51 National Insurance and VAT on salaries 73 65 61 73 65 61 Other related expenses 14 14 13 14 14 13 Voluntary early retirement (A) 20 15 - 20 15 - Total salaries and related expenses 455 459 396 448 451 389
(A) See details in Note 15.A.5. 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 2012 2011 2010 2012 2011 2010
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions Computer 85 83 71 85 83 71 Professional services 36 32 34 36 32 35 Marketing and advertising 16 18 15 15 18 15 Office expenses 10 10 12 10 10 11 Communications 9 9 9 9 9 9 Insurance 5 6 6 5 6 6 Commissions 12 14 11 12 14 11 Directors' fees and reimbursement of expenses 4 4 3 3 3 3 Staff training and advanced study 3 3 3 3 3 3 Others 18 14 11 16 13 9 198 193 175 194 191 173
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 420 -
Note 28 - Provision for Taxation on 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 2012 2011 2010 2012 2011 2010
NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Current taxes - Relating to current year 75 36 96 66 24 85 Relating to previous years (17) (5) (4) (13) (5) (4) Total current taxes 58 31 92 53 19 81 Plus (less) Deferred taxes - Relating to current year (28) 15 (22) (29) 15 (22) Change in tax rate (5) (26) -* (5) (26) *- Total deferred taxes** (33) (11) (22) (34) (11) (22) Total provision for taxes on operating profit** 25 20 70 19 8 59
* Less than NIS 500 thousand.
** Details regarding the movement of deferred taxes:
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 2012 2011 2010 2012 2011 2010 NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Creation and utilizationof temporary differences**
15 (30) (12) 14 (30) (12)
Change in tax rates (5) (26) - (5) (26) -
Deferred taxes reclassified from capital to profit and loss
(43) 45 (10) (43) 45 (10)
Total deferred taxes (33) (11) (22) (34) (11) (22)
* Mainly as a result of the creation and utilization of temporary differences in respect of credit losses.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 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 profit would be subject to tax at
the statutory rate applying to banks in Israel, and the actual tax provision on 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 2012 2011 2010 2012 2011 2010 NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions
Statutory tax rate applying to banks in Israel 35.53% 34.48% 35.34% 35.53% 34.48% 35.34% Theoretical tax at the statutory rate 54 52 77 40 38 63
Tax (tax savings)
resulting from:
Unrecognized expenses, net of tax-exempt income and income at a different tax rate (9) (1) (3) (5) 1 *-
Effect of change in tax rate** (5) (26) *- (5) (26) *-
Utilization of losses from prior
years in respect of which
deferred taxes were not created - - - - -
Adjustment differences in
depreciation and amortization 2 1 *- 2 1 *-
Prior years’ taxes (17) (5) (4) (13) (5) (4)
Others - (1) *- - (1) *- Provision for taxes on income 25 20 70 19 8 59
* Less than NIS 500 thousand.
** See Section C and D below.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 422 -
Note 28 - Provision for Taxation on Operating Profit (cont'd)
C. The value added tax order published in the official Gazette of the Israeli Government on August 30,
2012, amends the rate of value added tax in respect of transaction and import of goods to 17% as of
September 1, 2012.
As a result of the aforesaid change, the statutory tax rate applicable to banking corporations will rise
from 35.34% to 35.53% in 2012, and 35.9% from 2013 forward. In addition, the rate of wage tax
applicable to the financial institutions will rise to 17% for wages paid from work from September
2012 forward, instead of 16% for 2012 and 15.5% from 2013 forward.
In addition the law for reduction of the deficit and change of the tax burden (Legislative amendments).
2012 (hereinafter "the Law") was issued on August 13, 2012. Pursuant to the Law, as of January 2013,
the rate of national insurance fees collected from employers in respect of the component of wages
exceeding 60% of the average wage in Israel will rise from the current 5.9% to 6.5%. This rate will
increase again in January 2014 and January 2015, to 7% and 7.5% respectively. The effect of the
change in tax rates described above is reflected in the financial statements and is immaterial (salary
expenses increased by NIS 4 million but were offset by a decrease of NIS 5 million of the tax on
income expenses).
D. On July 14, 2009, the Knesset passed the Economic Efficiency Law (Legislative Amendments for the
Implementation of the Economic Plan for the years 2009 and 2010) 2009, which determined, inter alia,
the gradual reduction of corporate tax rates up to 18% in the tax year 2016 and onwards. According to
the aforesaid amendments, the corporate tax rates applicable to the tax years 2010 and 2011, are 25%
and 24% respectively .
The Law for Change in the Tax Burden (Legislative Amendments), 2011, was passed by the Knesset on
December 5, 2011. According 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 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.
E. The Bank has final tax assessments up to and including the tax year 2010. Its consolidated companies
have final tax assessments (or assessments considered to be final) up to and including the tax years
2007-2008.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 423 -
Note 28 - Provision for Taxation on Operating Profit (cont'd)
F. Union Issuance Ltd.,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.
G. For details regarding the audit performed by the Israel Tax Authority (VAT Audit Department) at a
subsidiary of the bank, Union Systems Ltd. and regarding the decision of the Israel Tax Authority to
change the classification of the company from "dealer" to "financial institution" see note 18.C.19.
H. Balances of deferred tax assets, net, in respect of:
Consolidated The Bank December 31 December 31 December 31 December 31 2012 2011 2012 2011
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 95 35.90 96 35.06 95 35.90 96 35.06
Provision for vacation pay and long service bonuses 18 35.90 17 35.20 18 35.90 17 35.20
Provision for credit losses 107 35.90 112 35.20 105 35.90 110 35.20
Adjustment of depreciable non- monetary assets (7) 25.00 (6) 25.00 (7) 25.00 (6) 25.00
Securities (4) 35.90 (4) 35.34 - -
Others 4 35.90 4 35.20 4 35.90 3 35.20
Total 213 219 215 220
Realization of the deferred taxes is based on a forecast that there will be taxable income in the foreseeable
future.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 424 -
Note 29 - Profit per Ordinary Share
Reported amounts
Composition:
Consolidated
For the year ended December 31
2012 2011 2010
NIS millions
Basic and diluted profit
Net operating profit attributed to shareholders of the bank 127 132 149
Total 127 132 149
Consolidated
For the year ended December 31
2012 2011 2010
Weighted average number of shares
Weighted average number of ordinary shares used to calculate basic profit 73,583 73,583 73,583
Weighted average number of ordinary shares used to calculate diluted profit 73,583 73,583 73,583
Note 30 - Report on Business Segments
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(1):
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 businesses which are managed as part of the retail division (until 31.12.2011 having
an obligo of up to NIS 400,000, as from 1.1.2012 up to NIS 500,000) and housing financing activity.
(1) It is emphasized that due to the fact that each Bank classifies its customers to segments according to
different parameters and also allocates income and expenses to segments according to different
parameters, when comparing between different banks, this must be addressed and the comparison should
be made with due caution.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 425 -
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, most of whom are
members of the Ramat Gan Diamond Exchange.
Financial management segment - This segment coordinates the Banks' management of assets and
liabilities in shekels and in foreign currency. The segment includes the Banks' activity in securities
for itself (in the available for sale portfolio and the trading portfolio) and in derivative financial
instruments, including currency and interest positions. Likewise, costs are allocated to this segment
arising from the need to preserve a business liquidity level and an adequate level of diversification of
depositors, as expressed in part, by a gap in transfer prices between credits and deposits.
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:
Net interest income - In the customers focused segments this item includes a financial margin on net interest
income loans/deposits of customers. The margin is calculated above the transfer price which is determined
for each kind of loan and deposit in respect of the average duration, the relevant linkage channel and taking
into account the Banks' strategic objectives. This item also includes risk-free interest on the capital which is
calculated on the basis of the risk-weighted assets ascribed to each segment. In the Financial Management
segment this item includes income from interest on bonds and expenses arising from the need to preserve a
business liquidity level and an adequate level of diversification of depositors, as expressed in part, by a gap
in transfer prices between credits and deposits.
Non - interest income – are attributed to the segment to which the customer belongs. In the Financial
Management segment this item includes: income (expenses) in respect of the fair value of derivative
financial instruments (as required by accounting principles), income from the Banks' actions in derivatives
for itself, income from realization and adjustment of bonds and income from realization and adjustment of
shares.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 426 -
Note 30 - Report on Business Segments (cont'd)
Provision for credit losses - attributed to the segment to which the customer, regarding whom the provision
was recorded, belongs.
Operating and other income - These are attributed to the segment to which the customer belongs.
Operating and other expenses – Direct expenses that can be granted to a specific segment, are attributed to
that segment. The rest of the expenses are attributed to the different segments according to allocation
methodology based on various parameters.
Taxes on income - The provision for tax on the business results of each business segment is 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 capital means attributed to the
segment. The capital means are allocated to the segments based on the average risk-weighted assets of each
sector (according to the directives of the Bank of Israel in accordance with Basel 2).
The database and methodology used to report the results of the Bank's segments is in the continuous process
of improvement, and accordingly, reclassification of the results is applied, as much as possible for
comparison periods. The Bank is in the process of installing 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, 2012
- 427 -
Note 30 - Report on Business Segments (cont’d)
Reported amounts
Information on business segments - consolidated
For the year ended December 31, 2012 Private Business Diamonds Financial Amounts not Total segment segment segment management allocated segment and adjustments
NIS millions Net interest income: - From outsiders 282 355 36 (13) - 660 - Inter-segment - - - - - - Non - interest income - From outsiders 127 133 16 81 - 357 - Inter-segment 1 26 -* (27) - -
Total income 410 514 52 41 - 1,017 Provision for credit losses 10 52 3 - - 65 Operating and other expenses 362 357 36 45 - 800 Profit (loss) before taxation 38 105 13 (4) - 152 Provision for taxation on profit 6 17 3 (1) - 25
Net profit (loss) 32 88 10 (3) - 127 Return on equity 6.3% 7.5% 9.4% (2.3%) - 6.2% Average balance of assets 8,651 13,673 1,419 13,429 1,304 38,476 Average balance of liabilities 16,323 17,135 374 751 1,816 36,399 Average balance of risk-weighted assets 6,019 14,494 1,264 2,106 741 24,624 Average balance of securities 11,807 33,799 41 - - 45,647 Average balance of managed Securities 246 258 - - - 504 Net - interest income: Margin from credit granting activities 131 274 28 - Margin from deposit receipt activities 140 65 3 - Other 11 16 5 13
Total interest income, net 282 355 36 (13)
* Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 428 -
Note 30 - Report on Business Segments (cont’d)
Information on business segments – consolidated (cont'd)
For the year ended December 31, 2011* Private Business Diamonds Financial Amounts not Total segment segment segment management allocated segment and adjustments
NIS millions Net interest income: - From outsiders 268 341 33 8 - 650 - Inter-segment - - - - - - Non - interest income - From outsiders 136 143 22 15 **- 316 - Inter-segment 2 22 **- (24) - -
Total income 406 506 55 (1) **- 966 Provision for credit losses 13 12 2 - - 27 Operating and other expenses 357 352 35 43 787 Profit (loss) before taxation 36 142 18 (44) - 152 Provision for taxation on profit 5 19 2 (6) **- 20
Net profit (loss) 31 123 16 (38) **- 132 Return on equity 7.1% 10.2% 14.0% (20.5%) - 6.7% Average balance of assets 8,002 13,321 1,394 13,203 1,193 37,113 Average balance of liabilities 15,769 16,640 357 896 1,456 35,118 Average balance of risk-weighted assets 5,247 14,934 1,417 2,293 443 24,334 Average balance of securities 11,318 29,666 36 - - 41,020 Average balance of managed Securities 308 338 - - - 646 Net interest income Margin from credit granting activities 119 256 25 - Margin from deposit receipt activities 144 60 2 - Other 5 25 6 8
Total interest income, net 268 341 33 8
* Reclassified due to the initial implementation of the directives of the supervision of bank concerning the format for
statements of profit and loss of banking corporations. For further details, see Note 1.2.5.A.
** Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 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 Net interest income: - From outsiders 226 305 33 39 - 603 - Inter-segment 1 15 - (16) - - Non - interest income - From outsiders 138 152 18 93 **- 401 - Inter-segment - - **- - - - Total income 365 472 51 116 **- 1,004 Provision for credit losses 13 72 2 - - 87 Operating and other expenses 323 302 34 39 **- 698 Profit (loss) before taxation on profit 29 98 15 77 - 219 Provision for taxation on profit 9 31 5 25 **- 70
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 Average balance of liabilities 15,006 14,742 346 940 - 31,034 Average balance of risk-weighted 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 Net interest income Margin from credit granting activities 97 247 23 Margin from deposit receipt activities 105 36 1 Other 25 37 9
Total interest income, net 227 320 33
* Reclassified due to the initial implementation of the directives of the supervision of bank concerning the format for
statements of profit and loss of banking corporations. For further details, see Note 1.2.5.A.
** Less than NIS 500 thousand.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 430 -
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
constituting ancillary corporation.
(3) These financial statements do not include provisions for the impairment of fixed assets.
B. Nominal balance sheet as at December 31
2012 2011 NIS millions NIS millions
Assets Cash on hand and deposits with banks 8,246 6,961 Securities 4,860 6,650 Lended securities 68 5 Credit to the public 23,795 23,082 Provision for credit losses (282) (269) Net credit to the public 23,513 22,813 Investments in investee companies 540 514 Buildings and equipment 374 385 Assets in respect of derivative instruments 476 846 Other assets 1,125 1,038 Total assets 39,202 39,212
Liabilities and shareholders' equity Deposits from the public 33,876 33,873 Deposits from banks 244 392 Deposits from the Government 1 1 Subordinated notes and deposit certificates 197 222 Liabilities in respect of derivative instruments 592 907 Other liabilities 2,126 1,857 Total liabilities 37,036 37,252 Shareholders' equity 2,166 1,960 Total liabilities and shareholders' equity 39,202 39,212
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 431 -
Note 31 - Data in Nominal Values - The Bank (cont’d) C. Statement of profit and loss for the year ended December 31
2012 *2011 NIS millions NIS millions
Interest income 1,402 1,473 Interest expenses 772 855 Net interest income 630 618 Provision for credit losses 63 25 Net interest income after provision for credit losses 567 593 Non - interest income: Non - interest financing income and expenses 59 (2) Commissions 272 293 Other income 2 2 Total non- interest income, net 333 293 Operating and other expenses: Salaries and related expenses 448 451 Maintenance and depreciation of buildings and equipment 145 133 Other expenses 194 191 Total operating and other expenses 787 775 Profit before taxation 113 111 Provision for taxation on profit 19 6 Profit after taxation 94 105 The Bank's share in after-tax operating profits of investee companies 33 31 Net profit: Attributable to shareholders of the bank 127 136
* Reclassified due to the initial implementation of the directives of the supervision of bank concerning the format for
statements of profit and loss of banking corporations. For further details, see Note 1.2.5.A.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 432 -
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 transactions
NIS millions NIS millions NIS millions NIS millions NIS millions
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 initial implementation adjustments of new directives
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 Balance as at December 31, 2011, after the adjustment of the initial implementation of new regulations Net profit for the year - - - 127 127 Adjustments to fair value of available for sale securities - 203 - - 203 Adjustments in respect of presentation of securities available for sale that were reclassified for profit and loss statement - (81) - - (81) Related tax effect - (43) - - (43) Balance as at December 31, 2012 650 74 24 1,418 2,166
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012
- 433 -
Union Bank of Israel Limited
Financial Statements December 31, 2012
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 -