Bank Leumi (TASE: LUMI) has obtained a concession from the Bank of Israel in calculating its liabilities for employees entitled to unfunded pensions. Bank Leumi yesterday notified the Tel Aviv Stock Exchange (TASE) that calculation of the capitalization interest on liabilities for first generation employees at the bank entitled to an unfunded pension would be conducted according to the average yield during the past eight quarters on government bonds, plus the spread of the yields on AA-rated corporate bonds in the US.
The capitalization interest is currently based solely on quarterly figures. The purpose of changing this calculation is to reduce the fluctuations in pension liabilities, which weighs on the bank's capital. This change will already apply to the bank's next financial statements, and for the next four years.
Bank Leumi emphasized that the change was relevant only to the bank's capital adequacy item. The bank did not say how the concession would affect the bank's capital adequacy in its second quarter financial statements, slated for publication next month. It stated, however, that had the change been applied in its last financial statements, its capital would have been NIS 250 million higher, thereby raising its capital adequacy ratio 0.08% to 10.04%, Bank Leumi's target for the end of the year.
Bank Leumi is the only bank with an unfunded pension for its workers. The liability for it amounts to NIS 16 billion for 7,000 employees. Furthermore, the method of calculating this pension liability is very sensitive to bond market changes, making it difficult for the bank to manage its capital and meet Bank of Israel's increasingly stringent capital requirements.
The difficulty in managing capital also affects Bank Leumi's credit capabilities. Reducing fluctuations by changing the liabilities formula will alleviate uncertainty and make it easier for the bank to manage its capital, thereby enabling it to grant more credit.
Published by Globes [online], Israel business news - www.globes-online.com - on July 12, 2016
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