Israel Discount Bank (TASE: DSCT) is mulling selling Israel Discount Bank of New York. Market sources believe that Israel Discount Bank and its CEO Reuven Spiegel will give Israeli banks first refusal and will only then attempt to sell to US banks. Another bank that could be a potential candidate to buy Israel discount Bank of New York is HSBC Holding plc (LSE: HSBA; HKSE: 005; NYSE, Paris: HBC).
Israel Discount Bank will ask for the bank's shareholders' equity value which is about $830 million. It should be stressed that a decision has yet to be officially taken on selling the New York bank, but if the sale goes ahead then the Israeli bank is likely to succeed in obtaining the equity value of Discount Bank of New York.
Discount Bank of New York is one of the largest overseas Israeli banks. The bank reported profits of $36 million in the first nine months of 2012. Return on capital was only 5.9%. This low return on capital stems from the bank's high liquidity. The New York bank's capital adequacy is 15.2%, which is very high. The bank has a credit portfolio worth $4.1 billion and deposits of $6.7 billion. Spiegel himself is a former CEO of Discount Bank of New York and knows the bank well. Dramatic change
If the sale of the bank goes ahead, the capital structure of Israel Discount Bank itself will be dramatically changed. In the past four years, Israel Discount Bank has invested major resources to improve its capital adequacy, having suffered from the lowest capital adequacy among Israel's largest banks. The bank's controlling shareholders, the Bronfman-Schron Group, have not injected capital into the bank, and only through streamlining and reducing activities has the bank's core capital adequacy been significantly improved. At the end of September it stood at 8.4%.
According to the Bank of Israel's regulations, the bank must reach core capital adequacy of 9% by the end of 2014. The bank could reach this target without the sale of Discount Bank of New York, but Discount's management anticipates that there will be further regulatory demands that will set the core capital adequacy requirement even higher.
Israel Discount Bank is loath to be forever chasing capital targets (as they have been doing for the past four years) and therefore the dramatic step of selling the New York bank is being considered. This would considerably improve the bank's capital and allow it to expand business activities and increase its credit portfolio without being continually concerned about meeting regulatory demands.
Back in 2002, Israel Discount Bank underwent a severe crisis during the recession in Israel and considered selling Discount Bank of New York, but the Bank of Israel opposed such a step. However, this time banking sources believe that the Bank of Israel would not stand in the way of such a sale. Bank of Israel officials believe that Discount Bank of New York is too big for Israel Discount Bank, and its sale might be desirable to improve its capital situation significantly.
Published by Globes [online], Israel business news - www.globes-online.com - on December 2, 2012
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