Union Bank of Israel Ltd. Financial Statements December 31, 2016

Union Bank of Israel Ltd. Financial Statements December 31, 2016 - 1 - Letter from the Chairman of the Board of Directors - 2 - Letter from the Chairman of the Board Dear Stakeholders, I am honored to present to you the financial statements of the Bank for 2016. Strategic Plan and Performance of the Bank In 2016 the Bank continued to expand the retail infrastructure while focusing on the consumer credit field. The consumer credit portfolio grew by approximately 16% and contributed to the increase in the financing income despite a low interest environment. Within this framework, the Bank put an emphasis on increasing the recruitment rate of new active customers alongside implementing moves to deepen and increase the activity of old customers and also worked diligently to develop the direct banking. At the same time, the Bank's direct banking center continued to grant consumer credit to the customers of all banks. In addition, the Bank is in the process of implementing an efficiency plan which is mostly voluntary retirement of employees in order to improve the efficiency ratio and to establish a leaner expenses infrastructure which will strengthen the Bank's competitiveness. Although the financial results of the Bank in 2016 amounted to a loss, the loss was mainly generated as a result of a full allocation of all of the operational streamlining cost in 2016 although it is supposed to be carried out during 2017-2019 (the fruits of which, the Bank is expected to harvest in the following years), from the reduction of tax assets and from exceptional allowances for credit losses. Despite the loss, the capital ratios as at December 31, 2016 were 9.67% Tier 1 capital ratio and 14.03% total capital ratio. These ratios are higher than the threshold of the requirement of the Bank of Israel. These days the Bank is preparing a strategic plan for the following five years. The plan is based on the risk appetite, and the capital ratios determined by the Board of Directors in the various activity fields of the Bank, and the main targets of the plan are increasing the Bank's profitability alongside reducing the credit portfolio's concentration. The plan defines the Bank's objectives in each of the years until 2021 in terms of profit, yield, credit concentration, liquidity ratio, capital ratio and more, while determining milestones for the Bank's development in 2017-2021 in the various fields of activity and their adjustment to the market challenges, the competition and the regulation. - 3 - The Local and Global Economy The economic activity in 2016 was characterized by a 4% growth rate. Alongside a negative price index of 0.2%, which was among the factors for the continuation of the expansionary monetary policy, which was expressed by a low interest rate of the Bank of Israel at a rate of 0.1%. The average rate of unemployed as at December 2016 among 15 year olds and up was 4.3% and the rate of participants in the labor force was 64%. The real-estate market in 2016, similar to the previous year, was characterized by the continuation of the upward trend of the housing prices. Despite the efforts of the government to stabilize the market and to decrease the prices, the housing prices increased in 2016 by an average rate of approximately 9%. Global economy: the results of the U.S. elections, the intention of Britain to disengage from the European Union, as well as the emerging political trends in Europe, create uncertainty in the global economy and cause concern for the development of a trade war which will harm the efforts and the steps taken so far in order to stimulate the global economy. The monetary policy in most of the central economies remained very expansionary and on the other hand, the Central Bank in the U.S. began the process of increasing the interest in light of the performance of the American economy. The Banking Regulation This year, similar to the previous year, was characterized by many significant regulatory initiatives in the banking branch. These initiatives have an effect on the revenues and expenses of the banking segment in general and of the Bank specifically, and they are a significant challenge to the Bank, which due to its size, is more affected than bigger banks. At the end of the year, the enactment of the Law for increasing competition and reducing concentration in the banking market in Israel, was completed. The law is based on the recommendations of "Strom Committee". Among the recommendations that were accepted, is the separation of credit card companies from the two largest banks and the reduction of entry barriers for new and independent players, which will be able to compete with the existing banking system, thus increasing competition in the financial and banking services market to the retail segment. - 4 - Future Glance The following years will be no less challenging than the past year. Burdensome regulation, continuation of a low interest environment and of the volatility in the markets due to political uncertainty mainly in the European and American markets constitute significant challenges to the Bank. However, the Bank's strategic directions of action such as: optimal management of the Bank's infrastructure from both the capital aspect and the computer systems aspect, expansion of consumer credit, implementation of an efficiency plan and establishment of a leaner expense infrastructure, will enable the Bank to successfully handle these challenges. One of the significant challenges that will accompany the Bank in the following years is locating and assimilating an alternative computer system to the computer system of Bank Leumi which served the Bank many years. This is in light of the decision of the Bank and Bank Leumi to gradually terminate the engagement between them. The Bank is in the process of examining alternatives on this matter. The information above is forward-looking information, as defined in the Securities Law. This information is based on the corporate strategy and work plan of the Bank, which have been adapted to the Israeli and global economic environment, in view of the continued deceleration of growth; on estimates of business functions within the bank regarding the probabilities and possibility of achieving goals and executing activities; and on the regulatory and intra-organizational environment in which the Bank operates. This information also relies on the macro-economic forecasts of the Bank of Israel and of the Research and Products Division of the Bank. Work plans and objectives based on the corporate strategy that has been established by the Bank, may not materialize, in full or in part, or may materialize in a significantly different manner than expected, under the influence of the following main potential factors: changes in macro conditions in the markets, in comparison to current estimates; severe volatility in the capital markets and commodity markets; and regulatory changes that affect the activity of the Bank. Fulfillment of the strategic plan also depends on the success of marketing efforts, on competition, on the success of planned technological improvements, and on the degree of the Bank's success in implementing its intra-organizational plans. Corporate Responsibility The Bank has undertaken a commitment to uphold the value of fairness, as its guiding principle in its interaction with all stakeholders. - 5 - In addition, the Board of Directors, management, and employees of the Bank accord high importance to the Bank's involvement in the community, and are committed to social and community activity. This commitment is expressed in a wide range of community activities, as well as initiatives devoted to community involvement and contribution to the advancement of disadvantaged groups in Israeli society. We believe that corporate responsibility and excellence, together with values-driven fair behavior and contribution to society, provide the foundation and are an essential condition for the achievement of objectives and success of the Bank's operations. Finally, I would like to express my appreciation to my colleagues on the Board of Directors of the Bank, to the members of management, and to the employees of the bank, for their devotion, excellence and contribution to the Bank, to our customers, who are loyal to us, and to all of those who joined us in recent years. Sincerely yours, Zeev Abeles Chairman of the Board of Directors March 29, 2017 - 6 - The Board of Directors Mr. Zeev Abeles, Chairman of the Board of Directors Mr. Yeshayahu Landau, Vice Chairman of the Board of Directors Haim Almog Adv. Mr. Alberto Garfunkel Mr. Meir Dayan Ms. Nira Dror Dr. Yaacov Lifshitz Mr. Yigal Landau Mr. Izaac Manor Mrs. M. Marom Brikman Dr. Zalman Segal - 7 - Report of the Board of Directors and the Management - 8 - Table of Contents of the Board of Directors' and Managements' Report The Board of Directors' and the Managements' Report to the Shareholder's General Meeting 11 Forward-looking Information 11 General Overview, Objectives and Strategy 11 The Bank's Organizational Structure 13 Description of Areas of Activity 14 Selected Financial Data - Consolidated 16 Multi Period Data – Consolidated Statement of Profit and Loss 18 Multi Period Data – Consolidated Balance Sheet 19 Summary Description of Principle Risks 20 Objectives and Business Strategy 21 Explanation and Analysis of the Results of the Business Situation 25 Trends, Phenomena, Developments and Material Changes 25 Developments and Material Changes in Israel's Economy 25 Developments and Material Changes at the Bank

Load more