Isracard Ltd. and Its Consolidated Companies Annual Report for the Year Ended December 31, 2017

Translated from Hebrew original Isracard Ltd. and its Consolidated Companies Annual Report For the year ended December 31, 2017 Annual Report as at December 31, 2017 Table of Contents Subject Page Forward-Looking Information 4 Message from the Chairman of the Board of Directors 5 Report of the Board of Directors and the Management 8 General Review, Targets and Strategy 10 Summary Description of the Company and Main Areas of Operation 10 Separation of Credit Card Companies from Banks with a Wide Scope of Activity 12 Principal Condensed Financial Information 13 Main Risks to which the Company is Exposed 16 Targets and Business Strategy 17 Explanation and Analysis of Results and Financial Position 27 Trends, Phenomena, Developments and Significant Changes 27 Significant Developments in Income, Expenses and Other Comprehensive Income 36 Developments of Assets and Liabilities, Capital and Capital Adequacy 42 Operating Segments 48 Activity of Principal Investee Companies 60 Review of Risks 62 General Description of Risks and Methods of Risk Management 62 Credit Risk 67 Market Risk and Liquidity 80 Operating Risk 91 Other Risks 92 Accounting Policy and Critical Estimates, Controls and Procedures 98 Accounting Policies and Critical Estimates 98 Disclosure regarding Controls and Procedures 99 Certification of the Chief Executive Officer 101 Certification of the Chief Accountant 103 Report of the Board of Directors and the Management regarding Internal Control on Financial Reporting 105 Financial Statements 106 Corporate Governance Report, Additional Details and Appendices to the Financial Statements 260 The Board of Directors and the Management 262 Internal Audit 275 Auditors' Fees 277 Salary and Benefits of Office-holders 278 Further Details 281 Description of the Company's Business according to Operating Segments 290 Appendices to the Financial Statements 297 Isracard Ltd. and its consolidated companies - 3 - Report of the Board of Directors and Management Annual Report as at December 31, 2017 Forward-Looking Information In this document, NIS is reffering to New Israeli Shekels. (Cont.) reefering to Continiued. Some of the information set forth in these reports, which does not relate to historical facts (even if it is based on the processing of historical facts), constitutes forward-looking information, as defined in the Securities Law, 1968 ("the Securities Law"). Actual results may be materially different from the assessments and estimates included in the context of forward-looking information, as a result of a number of factors, including, inter alia, the result of changes in the capital markets in Israel and around the world, macroeconomic changes, changes in the geopolitical situation, regulatory changes, accounting changes and changes in taxation rules, as well as other changes which are not under the Company's control, and which could cause a failure to realize the assessments and/or to changes in the Company's business plans and/or their realization differently, and even materially, from forecast. Forward-looking information is characterized by words or phrases, such as "forecast", "plan", "target", "estimate of risk", "scenario", "stress scenario", "risk assessment", "correlation", "distribution", "we believe", "expected", "predicted", "assess", "intend", "likely", "liable to change", "need", "can", "will be", "according to the Company's assessment" and similar expressions. These forward-looking information and expressions are subject to risks and uncertainty, as they are based on estimates of the management at the date of signing the report with regard to future events, which include, inter alia, changes in the following parameters: the state of the economy, the tastes of the public, rates of interest in Israel and overseas, rates of inflation, new legislative provisions and regulations in the area of banking and the capital market, exposure to financial risks, the financial solvency of borrowers, the behavior of competitors, aspects related to the Company's image, technological developments and the area of manpower, as well as other areas which have an impact on the Group's activities and upon the environment in which it operates, and for which, in the nature of things, their realization is uncertain, Furthermore, the information presented below relies, inter alia, on information based on publications of various external entities, such as: the Central Statistical Bureau, the Ministry of Finance, data from the Bank of Israel and other entities. Isracard Ltd. and its consolidated companies - 4 - Report of the Board of Directors and Management Annual Report as at December 31, 2017 Message from the Chairman of the Board of Directors On behalf of the Board of Directors and the Management, I am pleased to submit to you the Annual Financial Report of Isracard Ltd. (hereinafter "Isracard" or "the Company") for 2017. Isracard finishes 2017 with a net profit of NIS 252 million, compared with a net profit of NIS 229 million in 2016. The overall capital ratio to risk components in 2017 was 20.9%. The payments market in Israel in 2017 was characterized by continued intensification of competition, which places the Company in direct competition with longstanding and new players from the financial arena as well as from other new arenas. The payments market faces a significant change in the business environment, arising from two main trends. The first trend is the technological developments in the areas in which the Company operates, which are changing the market worldwide and in Israel and present the Company with the need to adapt itself to the future business environment. A further material trend is a wide variety of new regulatory directives which are changing the rules of the game in the world of payments and financial services and alter the equilibrium which has shaped the market for years. During 2017, there was a significant intensification in the volume of regulatory directives which have implications for the Company's activity, principally, the Law for the Increase in Competition and the Reduction of Concentration in the Banking Market in Israel ("the Strum Law"). In light of this, we estimate that 2018 will be a key year in shaping the market and as a leading and central entity providing financial services, we are constantly and carefully examining the significance of the changes in the market, and promoting the opportunities at the Company's disposal as a result of them, while adapting the business model to the "new world". The Strum Law, which was approved in January 2017, has a massive impact on the Company. The law includes the provision for separating the Company from its current owners in the near future, and additionally, contains a large number of regulations relating to the modus operandi of the various players in the payments market, some of which have already begun to affect the Company’s activity this year. In view of this, the Company is making preparations for separation and is currently in the process of preparing a prospectus, and preparations for a possible sale. In addition, the Company is taking steps in all of the relevant aspects to preserve, strengthen and expand its capabilities to operate as an independent company in the coming year. 2018 will be a year of preparation for separation, while keeping the Company's main assets. It is clear that implementation of the legislation, including the separation of Isracard from Bank Hapoalim, has implications, some of which have a material effect on the Company, on the structure of the market and on the companies operating in it. The Company is taking steps to adapt its business model to the new market structure as a result of the implementation of the law, while utilizing the business opportunities inherent in it. However, it is important to note that the large amount of changes outlined above poses great uncertainty regarding the way in which the market and the business environment will develop. The Company is, as noted above, in the midst of preparations for the changing reality, while continuing to strive to provide high value to its private and business customers, to anchor and expand its core activities, and to strengthen cooperation with other players in the markets in which we operate. Isracard serves a wide and diverse range of customers and meets individual and corporate customers in the various channels. In 2017, we continued to feel the growing trend in which the customers raise the level of demand from financial service providers to a service they consider appropriate which meets the requirements of each customer in the channel and at the time appropriate to it. We consider this trend to be a business opportunity since the Company has a loyal customer base that sees the "Isracard" brand as strong, stable and reliable. In Isracard, we place the customer at the center and the Company is focused on the customer's requirements and the experience of the customer who uses our services. In 2018 and thereafter, too, we will continue to invest in expanding the range of our products and services and making them accessible to new and existing customers in the various channels, while maintaining operating and process excellence, continuously examining our customers' needs and improving service. In view of this, we have invested in recruiting new customers and in deepening our relationships with existing customers. As the largest credit card company in Israel, we continue to lead the payments market, even in light of Isracard Ltd. and its consolidated companies - 5 - Report of the Board of Directors and Management Annual Report as at December 31, 2017 the challenges of the new era, technological developments and consumers' expectations, and from an understanding of the importance of leading in the digital domain and in innovation. For this purpose, the Company is constantly taking steps to become proficient in these worlds. As part of our desire to provide advance and diverse options to make the services and transactions accessible to a wide range of customers, the Company launched a range of new and advanced digital services for its customers last year.

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