Where will it end?

The effects of the sub-prime crisis on Israeli banks are just beginning to emerge.

Bank Hapoalim can absorb a $30 million loss, and even a loss several times this amount, without worrying. The problem is with the uncertainty as to where will it end.

In July, Bank Hapoalim said that there was no problem. Its entire mortgage backed securities (MBS) portfolio comprised of AAA rated assets, and there were no sub-prime assets in it, but the write-offs have nevertheless not stopped coming. In August, the bank wrote off $35 million from the MBS portfolio's value. In November, the write-off rose to $59 million. Then, out of the blue, the bank has made a $61 million write-off for its $365 million structured investment vehicle (SIV) portfolio in New York and reported a loss of $12 million.

Bank Hapoalim claims that the provision was based on a conservative valuation of its portfolio. Today, two weeks later, the bank has become even more conservative, and written off another $18 million. The loss has grown to $30 million, and the drop in value has reached $142 million.

What next? Bank Hapoalim says, "The provision reflects what we know today." However, in recent months, it seems as if the bank does not know everything, and every new piece of information, increases the write-offs. All that distinguishes a write-off of $30 million and a write-off of $142 million is an accounting decision relating the classification of the securities.

By our reckoning, this will not be the last write-off, and we will not be surprised if SIVs will have a prominent place in the banks' 2007 annual financial reports, which will be published in March 2008.

Published by Globes [online], Israel business news - www.globes-online.com - on November 21, 2007

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