Accelerated Growth Israel Discount Bank at a Glance

Company Overview for 2007 Accelerated Growth Israel Discount Bank At a Glance

Israel Discount Bank (“Discount Bank” or the “Bank”) standards and client satisfaction, while strengthening the is the third largest bank and a leading financial group bank’s franchise in both the corporate and middle-market in Israel. With nation-wide coverage and a strong and sectors. growing domestic franchise, Discount Bank provides a full spectrum of corporate and retail financial products Abroad, the bank operates through a network of and services to its clients, both in Israel and in key financial subsidiaries, branches and representative offices in North centers around the world. America, Europe and Latin America, with a focus primarily on private banking and commercial finance. Israel Discount Domestically, the Group is comprised of commercial Bank New York (IDBNY) is the largest Israeli-owned bank banks and financial services companies active in credit operating outside of Israel. cards, investment banking, portfolio management, trustee services and leasing. In addition to its traditional branch In terms of corporate social responsibility, Discount system, Discount Bank is leading the retail market with is recognized for its particularly active community new and innovative concept branches, internet and call- involvement – bank employees volunteer extensively within center based banking, and is the only local bank currently the communities in which the bank operates. offering extended evening branch hours. The bank is a member of the Tel-Aviv Stock Exchange As part of its long-term strategy, Discount Bank intends to (TASE:DSCT) and acts as a domestic securities dealer lead the domestic retail sector in terms of improved service and broker.

This document has been prepared by Israel Discount Bank solely for use of the company’s presentation and strategic update at various investor forums. The information contained herein is partial and may include information that has not been independently verified by any outside entity. It is further emphasized that this presentation does not constitute an offer or invitation to purchase any securities and/or investments whatsoever. This presentation should not be relied upon in connection with any transaction, contract, commitment or investment. For full and complete overview of the Bank’s financial position and results of operations please view the Bank’s annual report for 2007. Neither the Bank nor any of its employees or representatives shall have any liability whatsoever for any loss and/or damages howsoever arising, directly or indirectly, from any use of this presentation. It is hereby emphasized that no representation or warranty whatsoever is given as to the achievement or fulfillment of any forecasts about the future prospects of the Bank and the actual results of the Bank may differ materially from those contemplated taking into account the various risk factors, changing economic conditions and uncertainties which exist regarding the Bank’s business and the result of various operations. For further details see “Forward Looking Information” section in the Bank’s financial statements. Evolution of Net Income Evolution of Net Income Interest Income and Margin, and ROE and ROE (Adjusted) Before Loan Provisions NIS millions NIS millions NIS millions 1.81 10.9 10.7 14.7 9.4 1.77 1.71 11.7 924 1,265 4,225 3,697 3,790 7.2 693 672 836

458

‘05 ‘06 ‘07 ‘05 ‘06 ‘07 ‘05 ‘06 ‘07

Net Income ROE Net Income (adj.) ROE Interest Income Net Interest Margin

2007 Financial Highlights A Year of Financial Growth

million NIS 2007 2006 2005 Interest Income, before loan provisions 4,225 3,790 3,697 Loan Provisions 447 570 691 Interest Income, net of loan provisions 3,778 3,220 3,006 Operating & Other Income 2,572 2,359 2,406 Commissions 2,216 1,911 1,863 Operating & Other Expenses 5,066 5,020 4,729 Total Income, before tax 1,284 559 683 Net Income 1,265 836 458 Net Income (adj.) 924 672 693 ROE 14.7% 11.7% 6.8% ROE (adj.) 10.7% 9.4% 10.3%

Key Ratios

2007 2006 2005 Capital Adequacy Ratio 10.9 10.5 9.38 Loans/ Total Assets 0.60 0.55 0.55 Loans/ Customer Deposits 0.75 0.69 0.67 Customer Deposits/ Total Assets 0.81 0.80 0.82 Operating Income/ Operating Expenses 0.51 0.47 0.51 Non-Financing Expenses/ Total Income 0.75 0.82 0.77

Shareholding Breakdown as at December 31, 2007

26% 49%

25%

Bronfman/Schron Purchaser Group* State of Israel Public

* Purchaser Group has a three year option ending December 31, 2008 to purchase from the State of Israel its 25% holdings.

Letter from the Chairman

Dear Shareholders, At the beginning of 2007, the Board of Directors approved The 2007 annual report represents the Bank’s first full year a long term strategic plan for “Accelerated Growth”, of activity post privatization. During the year we continued which included setting an ROE target of at least 13% by to implement many measures, initiated at the time of 2010, double digit growth in annualized net income and privatization, clearly positioning the Bank as one of Israel’s positioning the Bank as a retail banking leader. We are leading and influential players, generating considerable already seeing the fruit of our labor in our growth rates shareholder value. across the board.

A Year of Building a Leading, Competitive, A Year of Rapid Economic Growth Privatized Company The stable macro-economic environment and rapidly During 2007, we successfully reorganized the Group’s growing Israeli economy, as well as the strong fiscal structure including nominating key managers in Israel and discipline, tax reductions, lower public debt, and abroad, making the Bank think and operate as a Group. unemployment decrease - have all contributed to an upgrade in the State of Israel’s external and internal credit During this period, we maintained a mutual understanding rating by both Fitch Ratings and Standard & Poor’s. This, in with our labor unions, signing new compensation turn, positively impacted the Israeli banking sector’s results agreements, creating a clearer relationship between - and Discount Bank in particular. performance and compensation. Looking ahead on this front, we will work together to formulate future long term During the second half of 2007, we witnessed a credit plans permitting higher managerial flexibility, paired with crisis in overseas markets, particularly in the United States, suitable compensation for each employee. and its subsequent far-reaching effects on the financial sector. The direct exposure of the Israeli banking system to We are especially pleased this year with the steady the sub-prime mortgage market is not significant (Discount increase in the Bank’s capital structure. This, in effect, had no exposure at all to sub-prime mortgages) and, from has opened a “bottleneck”, enabling us to expand our that aspect, the direct damage to the economy is expected banking activity, while increasing our involvement in large to be relatively mild. corporate financing transactions. Furthermore, given the recent challenges in the financial markets, we place great Although, at the beginning of 2008, we are still in the importance on strengthening our capital, and have set the midst of this crisis, to date, the domestic market exposure target of achieving a 12% capital adequacy ratio by the end has not been significant, mainly as we are less exposed of 2009. on the investment banking front, and, to a large degree,

Discount Bank Share Price Vs. TA Banking Index Earnings per Share NIS 20% 15% 10% 5% 1.29 0%

-5% 0.85 -10% -15% Discount Bank 0.47 -20% TA Banking Index -25% ‘05 ‘06 ‘07 01/06 02/06 03/06 04/06 05/06 06/06 07/06 08/06 09/06 10/06 11/06 12/06 01/07 02/07 03/07 04/07 05/07 06/07 07/07 08/07 09/07 10/07 11/07 12/07

have maintained adequate levels of liquidity. This further its shareholding in Israel Credit Cards to 72% in 2007. attests to the need to maintain a strong domestic banking We believe that the true value of Discount Group lies in the system, serving as security for Israel’s economic strength. Bank’s diversified franchise with a number of subsidiaries However, these macro events, together with domestic operating in various financing fields. changes in exchange rates, are expected to adversely Our geographic mix – in the main financial centers in the impact the continued growth of the Israeli economy, as well US, Europe and South America – enable us to provide as its ability to withstand the forces of a currently growing accessible, professional and high quality services in those recession. countries, while serving as a strong global platform. Strategically, we intend to further expand on the existing A Year of Structural Reforms in the Local platform in these countries. Banking Sector 2007 was a year of continued change in classical bank Furthermore, throughout the year, our focus on our Israeli brokerage in Israel. Firstly, due to the Bachar reform, a subsidiaries continued to draw a higher contribution, growing portion of assets under management have been particularly in the retail sector. diverted to the capital markets, away from the Banks. During 2007, we completed the sale of all our financial In Summary - A Year of Achievements assets – mutual and provident funds - allowing for our entry Our achievements in 2007 serve as the basis for continuing into pension advisory services in 2008. to realize the Discount vision in the coming years. We intend to continue implementing our strategic plan calling Secondly, bank sector credit grew by only 7%, as opposed for accelerated growth in the local market, while expanding to the continuing growth in non-bank credit - primarily our existing platform abroad. By doing so, we will develop resulting from the issue of corporate bonds. a dividend policy that, on the one hand, will balance During the year we increased our share of credit in the the requirement to increase our capital to support our banking system in general, and this despite a 25% increase accelerated growth, while, on the other hand, will enable us in non-bank credit throughout the year. to reward our shareholders with a dividend yield. We trust that these measures will continue to generate even higher A Year of Enhanced Focus levels of return for our shareholders in the year ahead. 2007 was a year of enhancing focus, primarily in New York, as evident in the decrease in IDBNY’s investment Sincerely, portfolio and the shift to higher-yield assets - such as loans to our existing clients - in line with our long-term strategy. Furthermore, in order to better leverage the double-digit Shlomo Zohar growth in consumer non-bank credit, Discount increased Chairman of the Board Letter from the CEO

Dear Shareholders, levels of liquidity - the highest in the domestic banking 2007 was a major year of accelerated growth here at Israel sector - have lead to our currently being well positioned to Discount Bank. continue to effectively compete, despite the challenges in both credit and liquidity in global markets. This was also a year of record financial performance, further solidifying our position as one of the top three A Year of Continued Expansion and Leveraging commercial and one of the fastest growing banks active in our Core Assets Israel today. During 2007, driven by our fast growing Retail Banking, we continued to meet and exceed our strategic goals. During A Year of Accelerated Growth the year, we won two major government tenders, granting Interest income for the year reached NIS 4.2 billion, up us the exclusive rights to provide government subsidized 11% over last year. Net income increased by 51% to NIS loans and other financial products and services to both the 1.3 billion. Furthermore, we continued to enhance our public sector employees, as well as teachers and student retail market penetration with retail banking contributing teachers throughout Israel – all in all, a material retail NIS 3.9 billion to total income . footprint of some 270,000 potential clients.

A Year of Enhanced Capital Resources and Furthermore, we continued to focus on our clients’ needs, Strong Liquidity and expanded our hours in certain branches. We opened Throughout 2007 the bank raised substantial capital from smaller neighborhood concept branches in the evening the local market, with a view to strengthening its financial hours, bringing us closer to our customers’ at times more position. These resources, coupled with our already high convenient for them.

Shareholders Equity Tier-1/ Risk Weighted Core Tier-1/ Risk Weighted Capital Adequacy Ratio NIS millions Assets Assets

9,204 8.14% 10.9% 7.91% 10.5% Minimum 7,965 9.38% 7.22% 7.29% Regulated 9% 6,718 6.67% 6.67%

‘05 ‘06 ‘07 ‘05 ‘06 ‘07 ‘05 ‘06 ‘07 ‘05 ‘06 ‘07

This past year, we also expanded our mortgage activities, in credit granted by this sector in 2007. Leveraging our completing the acquisition of the publicly held shares capabilities, market understanding and strong asset of Discount Mortgage Bank, and launched an innovative base, we are back in the game of corporate finance campaign, contributing more than NIS 1 billion in new credit, which will continue to serve as a strong growth driver for while increasing our market share from 5.6% in 2006 to our business. 15.2% at year-end 2007, and at the same time, promising a better retail banking experience to these new clients. On the international front, we are starting to see the first signs of recovery of the New York operation – this after The first quarter of 2008 heralds our entrance into pension two long and challenging years. Bottom-line net income and long-term savings advisory – yet another important for 2007 improved materially and we expect this positive niche in which we expect to make substantive inroads and momentum to be maintained through 2008. We have lead in the years to come; moreover, an area of activity continued to expand our operations in the main financial that complements our retail focus, and serves as a platform centers of New York, London, and Switzerland. for our recruiting new clients as well as deriving fee income on an annual basis from these advisory services. 2007 was also a year of progress in positioning the bank to be on a par with our global peers in terms of corporate In corporate banking, we continued to reposition governance and risk management. Throughout the year, ourselves as a major player and partner, by financing much effort and resources were devoted in preparing the large scale transactions with both a number of our long Bank to meet the new Basel II requirements, due to be standing relationship clients, as well as new corporate implemented in 2009, and the Bank is now well on track clients, recognizing that we are back in the game. The towards implementing and meeting these deadlines. success of this strategy is clearly visible in the increase

Total Loans and Loan Ratio Total Customer Deposits Loans/ Customer Deposits NIS millions and Deposits Ratio Ratio NIS millions 0.82 0.60 0.81 0.55 0.55 0.80 136,413 0.75 0.69 101,899 130,285 130,517 0.67 87,778 90,097

‘05 ‘06 ‘07 ‘05 ‘06 ‘07 ‘05 ‘06 ‘07 Loans Loans/ Total Assets Deposits Deposits/ Total Assets

Letter from the CEO - Cont.

A Year of Prudent Cost Management with our shares traded on the CSR index on the Tel-Aviv In order to lay the true foundations for future accelerated Stock Exchange, comprising Israel’s 20 leading socially growth, 2007 was characterized by substantial investments responsible corporations. Our social commitment includes in both our retail infrastructure as well as preparation for numerous projects, especially education related projects our entrance into pension advisory services. We continue in peripheral areas of the country, as well as in the fields to closely monitor and seek to reduce our overhead going of arts and culture, sponsorships, donations, educational forward, while laying the core foundations for future scholarships and funding of sporting initiatives. growth. This year saw a decline in our operating expense as a percent of total income. Furthermore, we are already Looking Ahead seeing the first fruits of these investments, with the strong Altogether 2007 has been a true year of growth, accelerated increase in interest income and bottom line profitability. at that, in all levels of the group, cementing our position as one of the fastest growing and premier banks in our A Year of Giving Back to the Community sector. We are particularly proud of our employees and the personal time they have freely devoted toward volunteering in a Looking ahead to 2008, we aim to continue solidifying our wide variety of community related projects. We continue position as one of Israel’s top three commercial banks, while to be ranked among the Top 10 Israeli companies in terms continuing to leverage our understanding of our customers’ of social responsibility and community involvement, needs and by offering a truly different banking experience;

we aim to leverage our experience and financial resources, to become a leading partner in all major corporate financing transactions in Israel; and to continue to expand our global operations, primarily in North America.

I would like to thank our shareholders, managers, employees and customers for their hard work, support and ongoing dedication to the company.

Sincerely,

Giora Offer President & Chief Executive Officer

strategic plan 2007-2011 Our Strategy for Accelerated Growth

Our Accelerated Growth strategic plan for the years The Foundations of our Accelerated Growth Strategy 2007-2011 determines a measurable strategic framework Personalized and Dedicated Banking. The Bank driving value by both leveraging the Banks assets and will continue to operate under the guiding principle of promoting growth in the Bank’s current operations. banking with a human touch, while continuing to be socially responsible. During 2006 the Bank laid the foundations for the strategic plan by changing the core infrastructure of the Retail Banking. Focus on differentiation and leadership Bank’s computer system (the Ofek Project). Furthermore, while expanding the Bank’s unique retail service model: increased capital levels have given the ability and tens of branches open country-wide 10-12 hours a flexibility to grow and expand its operations. day, offering new service norms in Israel; Intensifying the Bank’s customer interaction by improving the Our Strategic Targets for the Years 2007-2011 personalized banking offering; steadily improve the • Double digit annual growth in net income Bank’s Information Management Systems, including • Return on equity of at least 13% as from 2010 measuring customer profitability. • Consistent improvement in operational ratios • Capital Adequacy Ratio of 12% by year-end 2009 Corporate Banking. Focus on positioning the bank as one of the top three bank’s providing corporate credit, as well as further expanding our client base of middle market customers.

Financial Management. Established a Global Treasury, which will include management of the Group’s assets, liabilities, and dealing rooms. This will leverage our global presence to drive value, by bringing under unified group management, the Bank’s dealing rooms, risk management and the asset and liability management.

strategic plan 2007-2011 Our Strategy for Accelerated Growth

Following the Bank’s steadily improving capital adequacy “Our accelerated growth plan for the ratio, we will seek to gradually and prudently diversify our investments to increase rates of return. next five years determines a strategic framework for increasing the value Bank Investment Portfolio. To centrally manage the of the Bank, by leveraging our strong Bank’s own investment portfolio executed through the and diverse internal growth drivers.” Bank and through a wholly owned subsidiary, Israel Discount Capital Markets and Investments Ltd.

Pension Advisory Services. As of first quarter 2008 the Bank has received a license to begin providing pension and long term savings and advisory services Expanding Global Banking. To initially focus on in the domestic market. We are currently in the first expanding the private banking activities in Switzerland stages of this initiative, and intend to leverage the through the acquisition of a local bank, while initiative to recruit new retail clients. expanding activities and driving higher profitability at IDB New York and in the London Branch. Cost Management. To prudently manage the Bank’s overheads, while continuing to drive total income, at a Corporate Governance. To prepare for corporate faster rate. governance adoption to maintain a Group-wide “best practice” policy. The code will be formulated based on Information Technology. To focus on developing the the rules and regulations applying to the Bank as a banking Bank’s Information Systems, driving improved corporation, the Goshen Commission recommendations productivity, while supporting the business through and practices adopted in other countries, while adapting the Ofek Project (the core infrastructure of the Bank the policy to the Bank’s unique characteristics and which has been replaced). requirements.

Forward-looking information. The strategic plan includes evaluations that constitute forward-looking information, such as the estimate of return to equity, earnings and targets set, etc. These evaluations are based on the currently available information and assessments available to the Bank on the date of the issue of the Report. The strategic plan is based on assumptions regarding the continued growth of the economy, the stability of the regulatory environment and the stability of the banking industry. Material changes in the state of the economy and in the position of customers, changes in regulation having a significant effect, or material changes in the structure of competition may affect the extent of achieving the targets of the strategic plan. An additional uncertainty factor derives from the limited ability to forecast precisely the implications of certain of the future processes and their impact on profitability. Operating & Other Income Commissions Income Operating & Other Expenses (incl. commisions) NIS millions NIS millions NIS millions

5,020 5,066 2,216 4,729 2,572 1,139 1,217 2,406 2,359 1,863 1,911 1,092 670 679 819 2,967 3,202 3,030

‘05 ‘06 ‘07 ‘05 ‘06 ‘07 ‘05 ‘06 ‘07 Salaries Depreciation & Maintanance Other Expenses

2007 Highlights A Year of Driving Activity

March May July September • NIS 350 million raised in subordinated notes • Increased holding in Israel Credit Cards (ICC) to 72% • Completed sale of Supplementary Education Fund • Investing up to €70 million in Mayer Group, a • NIS 250 million raised under Hybrid Tier-1 Program, as to Migdal Insurance – capital Gain NIS 69 million European real-estate & transportation conglomerate April an addition to the NIS 750 million raised in December • Won tender to provide government subsidized • Won tender to provide government subsidized 2006, bringing Hybrid Tier-1 to NIS 1 billion financing to 120,000 teachers and 25,000 student December financing to 150,000 public sector employees • Purchase Offer for all publicly held shares in teachers (with a 5 year exclusivity period) • Completed sale of 51% of Provident Funds of (with a 7 year exclusivity period) Discount Mortgage Bank Mercantile Discount Bank to Sitton Group – • Declared for all employees performance-based August Capital Gain NIS 49 million compensation June • AGM approves compensation package to • Acquired Arzi Bank in Zurich for SFR 40.5 million • Completed sale of Provident Funds to Clal Chairman & CEO • Completed investment in Kardan Financial Services Insurance – Capital Gain NIS 394 million • Completed private placement of NIS 800 million (KFS) in Europe in subordinated notes

10 Salary Expenses Non-Financing Non-Financing NIS millions Income/Expenses Expenses/Total Income

3,202 3,030 2,967 0.51 0.51 0.82 0.47 0.77 0.75

‘05 ‘06 ‘07 ‘05 ‘06 ‘07 ‘05 ‘06 ‘07

2007 Highlights A Year of Driving Activity

11 2007 Loans Breakdown 2007 Customer Deposits Breakdown Total: NIS 101,899 million Total: NIS 136,413 million

2% 4% 22% 25% 28% 39%

12% 39% 9% 12% 8%

Retail - Households Retail - Households Retail - SME Retail - SME Corporate - Corporate Market Corporate - Corporate Market Corporate - Middle Market Corporate - Middle Market Private Banking Private Banking Other

Main activities A Year of Driving Group Performance

Net Income by Contributing Sector

Net Income Net Income (Adj.)

million NIS 2007 2006 2007 2006

Israel Discount Bank 415 95 228 )29( Mercantile Discount Bank 166 60 166 60 First International Bank of Israel 25 133 25 133 Overseas Activities* )60( )138( 127 )14( Discount Mortgage Bank 22 23 22 23 Israel Credit Cards 87 55 87 55 Other Financial Services 52 87 52 87 One-time Net Income 558 521 558 521 Total 1,265 836 1,265 836

(*) The Bank created surplus foreign currency liability to cover the Bank’s foreign activities in order to limit exposure to exchange rate fluctuations. Under the Bank of Israel’s Statement of Income, income and expenses arising from exchange rate differentials on the surplus of liabilities mentioned above are presented under the item “income from financing activities before provision for doubtful debts”. This income and expenditure is taken into account in the calculation of provision for taxes. Income and expenses arising from exchange rate differentials on overseas investments are presented under the item “Bank’s share in operating income of investee companies, net of tax effect”.

12 2007 Interest Income Breakdown 2007 Net Income Breakdown Total: NIS 4,225 million Total: NIS 1,265 million

3% 8% 7% 7% 29% 17% 25% 48%

17% 22% 17%

Main activities A Year of Driving Group Performance

Areas of Activity

Retail Corporate Financial International Other Banking Banking Management Activities Activities

Households Large Global Israel Assets under Corporate Treasury Discount Bank Management SMEs New-York Middle Bank Construction Discount Market Investment Israel & Real Estate Mortgage Portfolio Discount Bank Bank Switzerland Private Banking Mercantile Israel Discount Discount Bank Bank London Branch

Israel Credit Representative Cards Offices

13 “We are here to offer our customers personalized retail banking by identifying their specific needs, and meeting them in the most innovative, differentiated and economic way – with a smile.”

RETAIL Changing the Norms of Retail Banking

Retail Banking Retail Banking encompasses the household and small business segment, providing banking services to households, high net-worth individuals, small businesses, foreign residents, private banking clients and customers of direct banking. As of the end of 2007, Discount operated 200 branches nationwide.

Retail Strategy – A Differentiated and Leading Approach We view our Retail banking as one of our core strategic growth drivers for the coming years, offering truly differentiated retail banking services for clients, through leveraging our experience and strong capabilities. In order to meet this target, throughout the past five years, we have undertaken a comprehensive strategic program to reposition Discount as a pioneer in the area of retail banking.

“Our ability to win the substantial tender to exclusively offer government subsidized loans for seven years to 150,000 public sector employees, and for the next five years, to 120,000 teachers and 25,000 education students, creates a platform for additional revenue opportunities through the offering of the entire retail suite to these new clients. This further attests to our growing strength in the retail sector, while serving as a platform to further enhance and expand 14 our share in the dynamic retail banking sector.” Total Income Net Income Net Income (Adj.) NIS millions NIS millions NIS millions

3,884 3,377 1,094 881 445 185 867 227 2,790 2,510 654 218 260 287 74 46 144 241

‘06 ‘07 ‘06 ‘07 ‘06 ‘07

Households SME Households SME Households SME

RETAIL Changing the Norms of Retail Banking

Main Developments in Retail in 2007 • Established unique, customer focused, • Won tender to exclusively offer government concept branches subsidized loans to 150,000 state employees In order to further enhance our differentiated approach In April 2007, Discount Bank won the tender to to banking, throughout 2007, we opened additional exclusively offer, over the next seven years, starting neighborhood concept branches offering efficient, January 1st, 2008; government subsidized loans, as tailored services. well as other financial services, to 150,000 public sector employees and pensioners. We opened new branches • Expanded service hours to better cater in Government offices and HMOs in order to meet the to customers' needs increase in demand, and by year-end we already recruited During 2007, we expanded the service hours of certain several thousand new public sector retail clients. branches to offer services late in the evening to better meet our customer needs. • Won tender to exclusively offer government subsidized loans to 120,000 teachers and 25,000 • Generated healthy financial growth, driven student teachers by expanded customer base In July 2007, Discount Bank won the tender to exclusively Retail revenues increased 15%, while net income offer, over the next five years, government subsidized (adjusted) increased by a substantial 104%. loans, as well as other financial services to 120,000 teachers and 25,000 student teachers. Discount Bank is the only bank entitled to grant government subsidized loans to teachers and education students. We are also expanding our operations to service other teaching personnel employed by other institutions, offering them preferred terms.

15 Net Income NIS millions

35.3 33.6

26.2 20.9

‘06 ‘07 Net Income (adj., excl FAS133) Net Income

RETAIL - Discount MORTGAGE Bank Combining Assets to Increase the Sum of Parts

This activity includes the mortgage operations of the Main Developments in 2007 Discount Group in Israel (Discount Mortgage Bank and • Launched innovate mortgage marketing campaigns. Mercantile Discount Bank), including loans for housing In order to attract new customers and maintain long- purposes, business loans and loans secured by a mortgage standing customers, in July 2007, the Bank launched on property. During 2007, Discount Bank acquired, by a campaign marketing mortgages at attractive interest means of a public tender offer, the entire outstanding share rates for customers complying with predetermined capital of Discount Mortgage Bank, making the company a conditions. The campaign drew unprecedented success wholly owned subsidiary of the Bank. resulting in thousands of new clients, with mortgage credit reaching NIS 9,285 million in 2007, an increase of Strategy 20.8% from 2006. 1. To leverage mortgages as an anchor product to draw in new customers - cross and up-sell 2. To reach a mortgage market share comparable to the overall market share of the commercial bank of approximately 15% 3. To offer a differentiated service to maintain “We intend to combine our strong financial current customers “We intend to combine our strong financial resources with a deep understanding of our customercustomer needs, needs, to offer to offer a comprehensive a comprehensive service encompassingservice encompassing long term long mortgages term mortgages at attractive at rates,achievable paired rates,with a paired broad withretail a servicesbroad retail suite, servicesdriving suite, a mutuallydriving a beneficialmutually beneficial long longterm term relationship.” relationship.”

16 Mortgage Market Share

15.2%

13.6%

5.6% 5.6%

Q1/07 Q2/07 Q3/07 Q4/07

RETAIL - Discount MORTGAGE Bank Combining Assets to Increase the Sum of Parts

17 RETAIL - Mercantile Discount Bank Targeting Niche Domestic Communities

Over the years Mercantile Discount Bank has developed a core presence and capability in serving niche communities.

Strategy To continue to leverage our understanding and experience in the management of specialized, niche, communities with a focus on ultra-orthodox Jewish communities and Israeli Arab communities.

Main Developments in 2007 • Continued growth in net income with deposits up 8.6% over 2006 reaching NIS 15.7 billion, with credit increasing further 3.5% over 2006 reaching NIS 13 billion.

18 Number of Cards Issued Revenues Net Income In thousands NIS millions NIS millions

1,406 946 184 1,347 811 126

‘06 ‘07 ‘06 ‘07 ‘06 ‘07

RETAIL - Israel Credit Cards Driving Growth through Partnerships

Our credit card activity is conducted both through Israel Strategy Credit Cards Ltd (72%), and through the issue of credit 1. To continue to forge new domestic strategic cards to Bank customers. Israel Credit Cards (“ICC”) partnerships and Diners Club Israel issue and market “VISA”, “Diners” 2. To leverage up activities internationally and “MasterCard” credit cards, both for domestic and overseas use. The Bank’s credit card income includes Main Developments in 2007 various commissions related to ICC’s credit cards and • Growth in non-banking credit. Non-bank credit the financing income generated on credit granted on continues to be a major growth driver, increasing by non-banking credit cards. 28% to NIS 1.25 billion in 2007. • Strong Growth in all Main Parameters. Generated Credit card transactions increase annually in volume as a 46% increase in net income to NIS 184 million in 2007. result of population growth and the existence of a younger Continue to increase number of issued credit cards – population that is accustomed to using credit cards as part reached record 1.41 million by December 2007. Return of its consumer culture. on Equity increased substantially reaching 44.1% for the year, up from 39.3% in 2006.

“We continue to focus on developing and increasing the non-bank credit, alone, and through strategic partnerships, as well as expanding our global operations, this, while, at the same time, identifying and developing new complementary growth drivers.”

19 Loan Portfoilio Loan Provisions Non-Performing Loans Total: NIS 101.9 billions NIS millions NIS millions

0.74

0.59 18.3% 2,710 691 0.41 2,529 570 2,230 47.2% 447 34.5%

NIS Unlinked ‘05 ‘06 ‘07 FX or NIS Linked FX ‘05 ‘06 ‘07 CPI Linked Loan Provisions Loan Provisions/ Total Loans

Corporate Banking Back in the Game

“During 2007 we repositioned ourselves as a major player in the corporate banking arena in Israel, by becoming the financiers of some of Israel’s largest corporate finance transactions.”

20 Problem Loans Total Income Net Income Net Income (Adj.) NIS millions NIS millions NIS millions NIS millions

7,878 450 447 2,082 7,056 1,930 103 93 924 6,412 848 331 347 354 70 226 1,158 9 261 1,082 217

‘05 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07 ‘06 ‘07

Corporate Market Middle Market Corporate Market Middle Market Corporate Market Middle Market

Corporate Banking Overview evolving high tech sector, as well as the financing of local Corporate Banking conducts business with large and capital market institutional players and global institutions medium sized enterprises and provides services to a wide seeking to expand operations within Israel. range of industrial and service related companies. • Supported Prominent Corporate Finance Transactions. Corporate Banking Strategy – Back in the Game, Offering Led and participated in some of the major corporate Services to Premier Players finance transactions which took place in the Israeli • To generate additional business from the existing client market. base, while establishing and expanding relationships to • Expanded our Project Finance Capabilities by major corporates, which currently do not have a banking Establishing a Dedicated Unit. Established a project relationship with the Bank, leveraging the newly merged finance department, which has already led the financing corporate and middle market segments of one of Israel’s major infrastructure projects. • To take advantage of our strong group financial resources • Generated strong financial growth. Credit from and liquidity to lead major corporate transactions, while corporate banking increased 10% in 2007 to NIS 62.3 enhancing our position as a key participant in transactions billion, consequently contributing to a 35% increase in led by others, in order to become a leading player in the income (adjusted) for the year. fast growing corporate finance sector • Combined Segments to Enhance Risk Management Capabilities. In 2007, we completed the merger of Main Developments in 2007 our corporate and middle market segments. This • Broadened and Expanded Client Base. Targeted merger enhances the Bank’s ability to focus on risk broader client base to include major corporate clients management, increase system efficiency while that were not clients of the Bank, especially in Israel’s expediting the decision making process.

“We intend to leverage our broad financial resources, as well as our understanding of financial transactions and market trends, in order to enhance our position as a major partner in the fast growing Israeli corporate finance arena.” 21 Financial Management Diversifying and Globalizing our Investment Portfolio

Financial Management Overview Financial Management includes activities that are characterized as banking operations, but do not involve Bank customers. These activities mainly include the commercial Bank, Mercantile Discount Bank and IDB New York businesses involving trading securities for their own account, as well as risk and liquidity management and back- office operations.

This business segment also includes the Bank’s share in the income of the First International Bank (“FIBI”), in which the bank holds 26.4%, and its share in the income of its affiliated companies which operate in a supporting capacity. The segment also includes the non-financial corporations’ sub-segment, which includes the Discount Group’s activity in non-financial investments undertaken by Israel Discount Capital Markets and Investments Ltd. (“DCMI”), direct investments by the Bank itself and investments by Mercantile Discount Bank.

Financial Management Strategy – Diversifying Globally • To establish a Global Treasury structure so as to leverage activity in assets, liabilities, and dealing room trading across the entire group in Israel, New York, Switzerland and London

22 “During 2007, we diversified our financial management and investment portfolio to take advantage of our understanding of certain markets, primarily capital markets, real estate and private equity, leveraging our strong Financial Management financial resources and global network.” Diversifying and Globalizing our Investment Portfolio

• To prudently diversify and expand our investment • Non Financial Investments Overseas. Committed portfolio to increase rates of return, as well as managing to invest in two companies owned by Mayer Cars and the Bank's investment under DCMI Trucks Co. (“Mayer Group”). The Bank, through DCMI, committed to invest € 40 million in Mayer (Kesher) Real Bank Portfolio - Investment Strategy Estate, and to invest up to € 30 million in Mayer Europe • 60% will be in Israel and 40% overseas Ltd., a holding company centralizing the leasing, trading, • The global investments will focus on - rental and import activities of new and used private Real estate – in strategic partnerships with real estate vehicles of the Mayer Group in European countries. companies and specialized real estate investment Mayer Europe holds the Hertz leasing franchise in groups Hungary and might enter similar operations in additional Private equity – such as investment in the First Israel countries in the near-future. The Bank’s commitment is Mezzanine Fund (FIMI) in which the bank has committed subject to the Mayer Group committing to invest € 160 to invest $89 million in three funds. million in Mayer Real Estate and € 120 million in Mayer Other high yield investments Europe. • Investment in Karden Financial Services. Signed an Main Developments in 2007 investment agreement with Karden Financial Services • Global Treasury. Established a Global Treasury in Tel N.V. (“KFS”), the operating arm of the Karden Group Aviv which amalgamates the Bank’s trading, asset in the financial market – banking, insurance, pension and liabilities’ management. The Global Treasury is funds etc., in eight countries in Central and Eastern responsible for the trade in currencies, Israeli and Europe. DCMI acquired 11% of KFS for € 55.6 million foreign, as well as interest rates, foreign securities, and established a € 225 million credit facility for KFS. liquidity management. The Bank was one of the largest market makers, among the 18 banks, local and foreign, in Israeli Government Bonds.

23 “We are actively growing our banking platform internationally in the key financial centers with a view to leveraging our strong global presence, unique differentiated customer approach, and by expanding our offering to our customers in New York, Switzerland and London.”

International Activities Growing the Platform Internationally

International Activities Overview United Kingdom. Discount Bank maintains a branch in The Bank’s international activities are mainly carried out London, which provides commercial and private banking by its wholly-owned subsidiaries in the United States, services. South America (including the Bank’s representative offices) and Switzerland, and by the Bank’s branch in the United Other International Offices. The Bank also maintains Kingdom. The international operations are characterized representative offices in Paris, France, Buenos Aires and mainly by commercial and private banking. Santiago.

New York. IDB New York (“IDBNY”) is the largest Israeli International Activities Strategy – Globally Growing bank operating overseas. This bank maintains two branches the Platform in New York, three branches in Florida, two branches in To focus on expanding the international banking activities California and one branch in the Cayman Islands. IDBNY and driving higher profitability by enhancing activities in has a Uruguayan banking subsidiary, Discount Bank (Latin each of the main business centers. America), and representative offices located in various • by expanding the private banking activities in centers in South America. Switzerland, following the acquisition of a local bank • by expanding activities and services offered at IDBNY Switzerland. Israel Discount Bank (Switzerland), located and in the London Branch in Geneva, focuses on offering exclusive private banking operations. The Bank’s Swiss office provides advanced private banking and investment management services to existing and potential customers of the Group, both foreign residents and residents of Israel, at an international financial center.

24 IDBNY Net Income IDBNY Total Loans USD millions USD billions

38 3.8 “We are actively growing our banking platform 3.2 28 internationally in the key financial centers with a view to leveraging our strong global presence, unique differentiated customer approach, and by expanding our offering to our customers in New

York, Switzerland and London.” ‘06 ‘07 ‘06 ‘07

International Activities Growing the Platform Internationally

Main Developments in 2007 • IDB New York. Continued to implement company-wide reorganization measures in order to enable the company to further expand its service offering. The bank, which currently offers commercial lending and factoring to the middle market, is currently expanding its offering to include private banking and wealth management services.

• Switzerland. The Bank continued to expand its operations in Switzerland by signing an agreement to acquire Zurich-based Arzi Bank for approx. SF 40.5 million, with a view to further building its service offering. The transaction is due to be completed during 2008.

• London. Following approval of the UK regulatory authorities, the London branch is currently offering private banking services, investment advisory services and investment portfolio management, to its clientele.

25 Social Responsibility Giving Back to Our Community

26 “Here at Discount Bank, social responsibility is an integral part of our business culture. We believe in giving back to the communities in which we operate, clearly understanding our responsibility as one of Israel’s leading banks, supporting both with our financial resources as well as through the dedicated hard work of our volunteering employees. As such we are Social Responsibility currently ranked among the 10 leading socially Giving Back to Our Community responsible publicly traded companies in Israel.”

Since establishment, Israel Discount Bank has placed “DISCOUNT START-UP” (Discount Heznek) – Assist utmost importance on giving back to the community Challenged School Children through High School through a wide variety of projects, both financially and The Bank is a member of the “Sprint for the Future” with the ongoing volunteer work of the Bank’s dedicated Association, assisting school age children from peripheral employees. regions, with study difficulties. The program assists the school children graduate high school, with a full The Bank was one of the founding partners in Maala- matriculation certificate, offering them the possibility to Business for Social Responsibility, Israel’s leading continue to higher education. The Bank both financially advocate on corporate values and citizenship. Furthermore, supports the program and promotes its activities. the Bank’s shares are traded on the CSR index on the Tel-Aviv Stock Exchange, comprising Israel’s 20 leading “Discount Fund” at the “Ezra LeMarpe” Association socially responsible corporations. Our social commitment The Fund was established in August 2007 in order to includes numerous projects in the fields of arts and culture, provide financial assistance in exceptional cases, by sponsorships, donations, educational scholarships and collaborating with the “Ezra LeMarpe” Association. funding of sporting initiatives. “Artist Wall” “LEMA’AN” Project – Discount Employees for The Artist Wall project encourages Israeli art and creativity the Community by making available bank facilities to serve as a platform Volunteering at various associations aiding youth at risk for artists to exhibit their works to the public. Furthermore, and in distress and in assisting various associations the Bank committed to purchasing one work from each supporting the needy. exhibition, while the exhibiting artist also commits to donating one work. Once completed, the Bank holds an exhibition presenting all purchased and donated works and will offer the works for sale, with the proceeds being used to finance projects aiding children and youth.

27 Condensed Consolidated Balance Sheet as at December 31

Reported Amounts

2007 2006 in NIS millions Assets Cash and deposits with banks 19,850 25,100 * Securities 37,278 38,977 * Borrowed securities 346 - Credit granted to the public 101,899 90,097 * Credit granted to Governments 374 324 * Investment in affiliated companies 2,008 1,367 * Buildings and equipment 2,780 2,614 Other assets 4,275 4,044 * Total assets 168,810 162,523

Liabilities and Shareholders’ Equity Deposits from the public 130,518 130,517 * Deposits from banks 5,072 8,099 Deposits from the Government 125 119 Securities loaned or sold under buy-back arrangements 5,895 - Debentures and subordinated capital notes 7,437 6,302 Other liabilities 10,412 9,119 * Total liabilities 159,459 154,156 Minority interest 147 402 Shareholders’ equity 9,204 7,965 Total liabilities and shareholders’ equity 168,810 162,523

* Reclassified

28 The notes to the financial statements are an integral part thereof Condensed Consolidated Statement of Income for the Year Ended December 31

Reported Amounts

2007 2006 2005 in NIS millions Financing Income Income from financing activities before provision for doubtful debts 4,225 3,790 3,697 Provision for doubtful debts 447 570 691 Income from financing activities after provision for doubtful debts 3,778 3,220 3,006 Non-Financing Income Operating Commissions 2,216 1,911 1,863 Net income on investment in shares 58 65 3 Other income 298 383 540 Total non-financing income 2,572 2,359 2,406

Non-Financing Expenses Salaries and related expenses 3,030 3,202 * 2,967 * Maintenance and depreciation of buildings and equipment 819 679 670 Other expenses 1,217 1,139 * 1,092 * Total non-financing expenses 5,066 5,020 4,729 Operating income before taxes 1,284 559 683 Provision for taxes on operating income 566 350 324 Operating income after taxes 718 209 359 Bank’s share in operating income of affiliated companies, net of tax effect 45 188 174 Net operating income, before minority interest 763 397 533 Minority interest, after taxes, in the operating income of consolidated subsidiaries (56) (82) (75) Net operating income 707 315 458 Net cumulative effect as of the beginning of the year of change in accounting - - (4) Net income, before extraordinary income after tax 707 315 454 Cancellation of provision for impairment in value of investment in affiliated company - 173 - Net income from extraordinary items, net of taxes 558 348 4 Net Income 1,265 836 458

Earnings per share of NIS 0.1 (in NIS): Net operating income 0.85 0.32 0.47 Net income from extraordinary items, net of taxes(1) 0.44 0.53 - Net income 1.29 0.85 0.47 Total number of shares used for the above computation (in thousands) 980,639 980,639 980,639

* Reclassified (1) December 31, 2006: Including a cancellation of provision for impairment in value of investment in an affiliated company. ** December 31, 2005: Including net cumulative effect as of the beginning of the year of change in accounting.

The notes to the financial statements are an integral part thereof 29 Corporate Directory

Board of Directors Executive Management

Shlomo Zohar Chairman Giora Offer President & CEO Betzalel Eiger Director Ehud Arnon EVP, Corporate Banking Itshak Forer Director Dorit Ben Simon EVP, Finance Division & Risk Ittamar Givton Director Manager Ben-Zion Granit Director Joseph Beressi Senior EVP, Chief Accountant and Head of the Accounting Tsippi Samet Outside Director Amnon Gideon EVP, Human Resources Dr. Dafna Schwartz Director Israel David Senior EVP, Retail Banking Tida Shamir Director Noam Hanegbi Senior EVP, Operations & Prof. Eytan Sheshinsky Director Information Systems Joseph Singer Outside Director Eli Hoter Senior EVP, Marketing and Zvi Streigold Director Strategic Planning Jorge Zafran Director Esther Deutsch, Advocate EVP, Legal Advisor Prof. Ben-Zion Zilberfarb Director Dr. Yitzhak Sharir Director Shlomo Pitchon Senior EVP, Internal Auditor Ruth Moshkovitz Corporate Secretary

30 External Auditors KPMG Somekh Chaikin BDO Ziv Haft

Trading Information Israel Discount Bank’s ordinary shares are traded on the Tel Aviv Stock Exchange under the ticker symbol DSCT.

Investor Relations Contact For investor relations inquiries please contact: Barry Simon Tel. +972 3 514 6593 Fax +972 3 514 5150 or by sending an email request to: [email protected]

31 Offices in Israel and Abroad

Head Office International Banking Facility: Tel Aviv, Israel: 23 Yehuda halevi Street. 511 Fifth Avenue, New York Tel. 972-3-5145555 Representative Offices of Israel Discount Bank of New York: Tel Aviv, Israel; Paris, France; Overseas Branch Santiago, Chile; Sao Paolo, Brazil; Lima, Peru London, United Kingdom: 65 Curzon Street Discount Bank Latin America, Uruguay Representative Offices Montevideo Head Office: Rincon 390 Paris, France: 33 Rue Galilee Other Branches in Uruguay: Montevideo; Punta Buenos Aires, Argentina: Corrientes 447 6˚ Del Este Israel Discount Bank (Switzerland) SA Santiago, Chile: Av. Vitacura 2771 Of. 804 Geneva, Switzerland Head Office: 100 Rue du Rhone Subsidiary Banks Abroad Israel Discount Bank of New York: Subsidiaries in Israel website: http://www.idbbank.com Banking: Main New York Office: Mercantile Discount Bank; Discount Mortgage Bank 511 Fifth Avenue. New York Branch: 1350 Broadway Capital Market: Beverly Hills, CA Branch: Israel Discount Capital Markets and Investments; 9401 Wilshire Boulevard, Suite 600 Tachlit Investment House Downtown Los Angeles, CA Branch: Financial: 888 South Figueroa Street, Suite 550 Israel Credit Cards; Diners Club Israel; Discount Leasing; Aventura, FL Branch: Discount Manpikim Harbour Center, 18851 NE 29th Avenue, Suite 600 Trust Services: Discount Trust Miami, FL Branch: 1000 Brickell Avenue Grand Cayman (B.W.I.) Branch: P.O. Box 694GT, 11 Dr. Roy’s Drive Website: www.discountbank.co.il

32 Relations GK Investor Text: Design: Portnov-Mishan.com www.discountbank.co.il