Bank Leumi (TASE: LUMI) is likely to sell 4.5% of Israel Corporation (TASE: ILCO) next year. The current value of the shares on the stock exchange is over NIS 900 million. Sources inform "Globes" that, last week, the Bank of Israel issued a draft directive to the banks on the way that the Basel 3 rules will be adopted.
Under the draft directive, the permissible exposure of a bank to a non-financial corporation will be reduced from 15% of its total capital to 5% of its tier 1 capital. Leumi's holdings in Israel Corp. are recorded in its books at a value of NIS 1.81 billion, representing 7.3% of its tier 1 capital. The excess holding is estimated at NIS 450 million of the bank's capital.
Since it exceeds the maximum permissible holding under the Basel 3 rules, Leumi has two possible courses of action open to it. The first is to sell the excess holding in Israel Corp. shares. Leumi currently owns 17.96% of the company, worth NIS 3.63 billion. Given current figures, the bank will have to sell about 4.5% of Israel Corp., currently worth NIS 910 million.
Another possibility is to deduct the excess from the capital, that is to say, not to recognize about NIS 450 million of the bank's equity. If, however, the bank chooses this option, then in order to meet the Bank of Israel's capital adequacy targets, it will have to tighten its belt even more when it comes to streamlining and credit. It is therefore deemed unlikely that it will prefer to keep the holding in Israel Corp. and absorb an accounting write-down of its capital. At the end of September, Leumi's core capital adequacy ratio was 8.6%. The bank needs to reach a target of 9% by 2015, and 10% by 2017.
Furthermore, whereas remaining with the Israel Corp. holding would reduce the bank's capital, selling the shares would substantially strengthen its capital. The shares are worth double their book value, and so selling them would enable the bank to post a handsome capital gain, helping it reach the Bank of Israel's capital adequacy targets faster.
Leumi may decide to sell the shares on the market over several years. The limitation on non-financial holdings will come into force gradually over a period of years, so the bank may decide not to sell the whole 4.5% at current price levels, which are considered low, but to sell the excess portion each year. Assuming that Leumi continues to generate profits, its capital will grow accordingly, and so the excess holding will become smaller over time.
Published by Globes [online], Israel business news - www.globes-online.com - on December 3, 2012
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