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2012 Annual Report

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2012 Annual Report 1 2012 Annual Report Table of Contents Report of the Board of Directors to the General Meeting of Shareholders 2 Management Discussion of Group Business and Operating Results 241 Certifications 269 Report of the Board of Directors and Management as to Internal Control of Financial Reporting 271 Financial Statements 273 This translation of the financial statement is for convenience purposes only. The only binding version of the financial statement is the Hebrew version WorldReginfo - f59f5423-21a3-4e0f-8f8b-50fa9bceda27 2 Report of the Board of Directors to the General Meeting of Shareholders Table of Contents The General Environment and Effect of External Factors on the Bank Group 3 Key data for Bank group 8 Bank Group Operations and Description of its Businesses Development 10 Holding Structure – Major Companies 12 Control of the Bank Group 13 Investments in Bank Capital and Transactions in Bank Shares 16 Profit and profitability – Business results 18 Major Investees 37 Branch deployment and Direct Channels 40 Fixed assets and installations 43 Investments and expenses with respect to IT 48 Off balance sheet activity 49 Description of Businesses of the Bank Group by Operating Segment 50 International operations 87 Human Resources 91 Bank remuneration policy 101 Bank organizational structure 102 Tax Laws Applicable to the Bank Group 105 Legislation and Supervision of Bank Group Operations 107 Significant Agreements 125 Legal Proceedings 126 Events outside the Normal Course of Bank Group Business 129 Business Strategy 130 Forecasts and Assessments with Regard to Bank Group Business 130 Marketing Operations 132 Sources and financing 135 Risk management - Basel II: Pillar 3 138 Social involvement and charitable donation 188 Disclosure concerning the Internal Auditor 191 Accounting Policy on Critical Matters 195 Certification process of the financial statements 201 Independent Auditors' report 203 Controls and Procedures 203 The Code of Ethics 205 Executive Management 207 Senior Officers 208 Transactions with controlling shareholders 225 Independent auditors’ fees 230 Board of Directors 231 WorldReginfo - f59f5423-21a3-4e0f-8f8b-50fa9bceda27 3 Report of the Board of Directors to the General Meeting of Shareholders At the meeting of the Board of Directors held on March 17, 2013, it was resolved to approve and publish the consolidated financial statements of Mizrahi Tefahot Bank Ltd. and its investees as of December 31, 2012. The financial statements were prepared in accordance with the directives and guidelines issued by the Supervisor of Banks. The General Environment and Effect of External Factors on the Bank Group Developments in Israel's Economy in 2012 Real Developments Economic growth continued in 2012, but at a more moderate pace compared to the previous year. According to estimates by the Central Bureau of Statistics, GDP growth in 2012 was at 3.2%, following a 4.6% growth rate in the previous year. Business GDP grew in 2012 by 3.2%, compared to 5.1% growth in 2011. The growth rate slowed down during the year, impacted by lower growth rate of private consumption and of exports of goods and services - against the backdrop of the global slow-down. The lower growth rate was particularly noticeable in the fourth quarter of 2012, in which GDP grew at an annualized rate of 2.5%. Total uses (export, private and public consumption and gross domestic investment) increased in 2012 by 3.2%, compared to 6.3% growth in 2011. Imports of goods and services grew by 3.2%, compared to 11.1% growth last year. Exports of goods and services slowed down, with only 0.5% growth in 2012, compared to 5.5% growth in the previous year. WorldReginfo - f59f5423-21a3-4e0f-8f8b-50fa9bceda27 4 In 2012, the trade deficit grew by 24.9% in USD terms, primarily due to a USD 4 billion decrease in exports. Private consumption growth slowed down to 2.8% in 2012, compared to 3.6% growth in the previous year. Total domestic investments slowed significantly in 2012, to 10.4% - compared to 23.5% in the previous year - primarily due to slower growth of investment in fixed assets, from 16.0% in 2011 down to 3.4% in 2012. Unemployment remained stable during the year: In the fourth quarter of 2012 unemployment was at 6.9%, compared to 6.8% in the previous quarter and to 6.8% in the year-ago period. Inflation and exchange rates In 2012, the Consumer Price Index increased by 1.6%, compared to an increase of 2.2% in 2011. The increase was primarily due to housing and house maintenance prices and to food prices. In the fourth quarter of this year, inflation was further moderated. In 2012, the USD was devalued by 2.3% against the NIS, reaching NIS 3.733 per USD 1 at the end of 2012, compared to NIS 3.821 at the end of 2011. During the year, the trend was mixed. The devaluation trend, which started in February, reached a zenith in July, with the USD trading at NIS 4.084. Since the end of July, the NIS was revalued vs. the USD. The Euro was devalued against the NIS in this period by 0.4%, reaching NIS 4.921 per Euro at the end of 2012, compared to NIS 4.938 per Euro at the end of 2011. On March 11, 2013, the USD/NIS exchange rate was 3.690 and the EUR/NIS exchange rate was 4.796. In 2012, the Bank of Israel avoided buying foreign currency, after buying foreign currency valued at USD 4 billion in 2011 and at NIS 12 billion in 2010. WorldReginfo - f59f5423-21a3-4e0f-8f8b-50fa9bceda27 5 Monetary and fiscal policy In 2012, the Bank of Israel lowered its interest rate three times, from 2.75% at year start to 2.00% at year end. This against the backdrop of expectations of relatively stable inflation. The Bank of Israel interest rate for January 2013 was once again lowered, to 1.75%. In 2012, the Government budget deficit amounted to NIS 39.0 billion, or 4.2% of GDP, compared to a NIS 28.6 billion deficit last year (3.3 of GDP). Tax revenues increased in 2012 by only 3.5% over 2011, and were 6.3% lower than expected. Expenditures by Government ministries increased in this period by 7.1%, compared to planned increase of 4.9%. In late January 2013, the Governor of the Bank of Israel, Professor Stanley Fisher, announced his intended resignation on June 30, 2013, after more than 8 years in office. Residential construction and the mortgage market According to data from the Central Bureau of Statistics, in 2012, demand for new apartments (apartments sold and apartments constructed not for sale) was 39,370 apartments - similar to demand in 2011 - a decrease of 2.7% compared to 2010. The Jerusalem region posted a 28% increase, and the Central District, with the highest demand compared to other regions, decreased by 7.5%. The stable demand for housing was reflected by a modest 4.4% increase in housing loan origination; in 2012, housing loans to the public amounted to NIS 47.2 billion, compared to NIS 45.0 billion in 2011. Mortgage origination in the second half of 2012 was 27% higher than in the first half of this year. The pace of housing construction starts slowed down, with construction started on an annualized 37,500 residential units in January-September 2012, compared to 45,600 residential units in 2011. However, this is still a high pace compared to the annual average over the past decade, which was 34,500 housing construction starts. The slow-down in housing construction starts resulted in stable inventory of new apartments for sale from private development, which at the end of December was at 15,300 apartments, similar to the end of 2011. Based on the average pace of sales in the six months ended December 2012, this inventory would account for 11.8 months' sales - compared to 12.9 months at the end of 2011. According to data from the Central Bureau of Statistics, in 2012 housing prices continued to rise and at a faster pace. Housing prices, on nation-wide average basis, were 5.6% higher in October 2012 compared to the end of 2011, following 4.0% growth for all of 2011. On November 1, 2012, the Supervisor of Banks issued a letter instructing banking corporations to limit the loan-to-value ratios approved for housing loans. For details, see the chapter on Legislation and Supervision of Bank Group Operations. Capital market In 2012, markets were higher, as opposed to the sharp declines in 2011, along with lower trading volumes. Support from international markets on the one hand, and concerns about a slow-down and sharply larger Government deficit on the other hand, eventually resulted in the Israeli stock market lagging behind overseas equity markets. The picture at the outset of 2013 is similar. Equity market - The leading benchmarks, Tel Aviv 25 and Tel Aviv 100, were higher in 2012 by 9.2% and 7.2%, respectively, compared to decrease of 18.2% and 20.1% in 2011. The Tel Aviv 75 Index was up 4.8%, compared to an increase of 25.9% in 2011. The Real Estate 15 Index was up by 14.1%, compared to a decrease of 23.2% in 2011. The WorldReginfo - f59f5423-21a3-4e0f-8f8b-50fa9bceda27 6 YETER Stock Index rose by an impressive 21.6%, compared to a 25.7% decline in the previous year. Financials sector shares were also sharply higher: The Banking and Financials 15 indices were up by 22.9% and 23.1%, respectively, compared to decreases of 34.6% and 34.0% in 2011.
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