Bank Hapoalim Condensed Quarterly Financial Statements as at March 31, 2018

Q 1 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the and Board of Management as at March 31, 2018

Contents

A. Report of the Board of Directors and Board of Management 5 1. General review, objectives, and strategy 11 2. Explanation and analysis of results and business position 17 3. Review of risks 53 4. Critical accounting policies and estimates; controls and procedures 103 B. Declarations of Internal Control Over Financial Reporting 105 C. Condensed Financial Statements as at March 31, 2018 109 Auditors' Review Report to the Shareholders of Hapoalim B.M. 113 Notes to the Condensed Financial Statements 122 D. , Additional Information, and Appendices 245 5. Corporate governance 248 6. Additional information regarding the business of the corporation and the management thereof 249 7. Appendices 272

Glossary 282 Index 286

This is a translation of the Hebrew report and has been prepared for convenience only. In case of any discrepancy, the Hebrew version will prevail.

3 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Bank Hapoalim Report of the Board of Directors and Board of Management as at March 31, 2018

Q 1 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Contents

1. General review, objectives, and strategy 11 1.1. Forward-looking information 11 1.2. Condensed financial information 12 1.3. Condensed description of the principal risks to which the Bank is exposed 15 1.4. Objectives and business strategy 15 2. Explanation and analysis of results and business position 17 2.1. Trends, events, developments, and material changes 17 2.2. Material developments in income, expenses, and other comprehensive income 20 2.3. Structure and development of assets, liabilities, capital, and capital adequacy 27 2.4. Description of the Bank Group’s business by supervisory activity segments 42 2.5. Description of the Bank Group’s business by segment of activity based on the management approach 48 2.6. Principal subsidiary and affiliated companies 50 3. Review of risks 53 3.1. General description of risks and risk management 53 3.2. Credit risk 54 3.3. Market risk 82 3.4. Liquidity and refinancing risk 94 3.5. Operational risk 96 3.6. Compliance risk 96 3.7. Legal risk 96 3.8. Reputational risk 97 3.9. Regulatory and legislative risk 97 3.10. Economic risk 97 3.11. Strategic risk 97 3.12. Environmental risk 98 3.13. Legal and other proceedings 98 3.14. Material regulatory initiatives with an effect on the activity of the Bank 99 4. Critical accounting policies and estimates; controls and procedures 103 4.1. Critical accounting policies and estimates 103 4.2. Controls and procedures 104

7 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

List of Tables

Table 1-1: Condensed financial information and principal performance indicators over time 12 Table 2-1: Changes in the CPI and in exchange rates 19 Table 2-2: Condensed statement of profit and loss 20 Table 2-3: Composition of net financing profit 21 Table 2-4: Principal data regarding interest income and expenses 22 Table 2-5: Cumulative provision for credit losses in respect of debts and in respect of off-balance sheet credit instruments 23 Table 2-6: Details of fees and other income 24 Table 2-7: Details of operating and other expenses 24 Table 2-8: Comprehensive income 26 Table 2-9: Developments in principal balance sheet items 27 Table 2-10: Development of net balance sheet credit to the public, by principal economic sector 27 Table 2-11: Problematic credit risk 28 Table 2-12: Developments in principal off-balance sheet items 29 Table 2-13: Securities balances 30 Table 2-14: Details of corporate bonds by economic sector 31 Table 2-15: Developments in balances of deposits 31 Table 2-16: Developments in balances of off-balance sheet monetary assets held by the Bank Group’s customers for which the Bank Group provides custody, management, operational, and advisory services 32 Table 2-17: Details of bonds and subordinated notes 32 Table 2-18: Derivative instruments 33 Table 2-19: Details of dividends paid 34 Table 2-20: Calculation of the capital-adequacy ratio 38 Table 2-21: Composition of capital for the purpose of calculating the ratio of capital to risk components 39 Table 2-22: Risk components and regulatory capital requirements in respect of credit risk, market risk, and operational risk 40 Table 2-23: Leverage ratio 41 Table 2-24: Results of operations and principal data of the supervisory activity segments 42 Table 2-25: Results of operations and principal data of the segments of activity based on management approach 48 Table 3-1: Problematic credit risk 55 Table 3-2: Nonperforming assets 55 Table 3-3: Additional information regarding changes in problematic debts in respect of credit to the public and in the individual allowance 56 Table 3-4: Credit risk indicators 58 Table 3-5: Composition of the allowance for credit losses 59 Table 3-6: Credit risk by economic sector 60 Table 3-7: Segmentation of credit risk of the Bank Group in the construction and real-estate sectors, by principal area of activity 66 Table 3-8: Balances of balance sheet credit risk and off-balance sheet credit risk to borrowers whose indebtedness exceeds NIS 1,200 million, by sector of the economy 66 Table 3-9: Credit risk balances for each group of borrowers whose net indebtedness on a consolidated basis exceeds 15% of the capital of the banking corporation (as defined in Directive 313) as at March 31, 2018 67 Table 3-10: Principal exposures to foreign countries 69 Table 3-11: Changes in amount of balance sheet exposure to foreign countries with liquidity problems 71 Table 3-12: Exposure of the Bank Group to foreign financial institutions 73

8 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-13: Balance of credit to private individuals in 75 Table 3-14: Distribution of risk of balance sheet credit to private individuals at the Bank, by average income and loan size 75 Table 3-15: Distribution of risk of balance sheet credit to private individuals at the Bank, by borrowers’ financial asset portfolio balance 76 Table 3-16: Distribution of risk of balance sheet credit to private individuals at the Bank, by type of interest and remaining repayment period 76 Table 3-17: Information regarding problematic debts in respect of private individuals in Israel 76 Table 3-18: Risks in the housing loan portfolio 77 Table 3-19: Development of amounts in arrears in housing loans and allowance for credit losses 78 Table 3-20: Development of the balance in the housing credit portfolio, by linkage base and as a percentage of the balance in the credit portfolio of the Bank 78 Table 3-21: Developments in housing credit balances, last five quarters 79 Table 3-22: Characteristics of housing credit granted by the Bank 80 Table 3-23: The Bank’s exposures in respect of leveraged financing, by economic sector of the borrower 81 Table 3-24: Details of the fair value of the Bank and its consolidated companies, by linkage segment 82 Table 3-25: Effect of hypothetical changes in interest rates on the net fair value of financial instruments of the Bank and its consolidated companies, excluding non-monetary items 83 Table 3-26: Exposure of the Bank and its consolidated companies to changes in unlinked interest rates 84 Table 3-27: Exposure of the Bank and its consolidated companies to changes in CPI-linked interest rates 86 Table 3-28: Exposure of the Bank and its consolidated companies to changes in foreign-currency interest rates 88 Table 3-29: Exposure of the Bank and its consolidated companies to changes in interest rates – total exposure to changes in interest rates 90 Table 3-30: Data regarding the sensitivity of the capital of the Bank, including subsidiaries with exposure significant for the Group, to parallel changes in interest-rate curves (theoretical change in economic value as a result of each scenario, including internal models) 92 Table 3-31: Sensitivity of the Bank to changes in the exchange rates of foreign currencies with a significant volume of activity at the Bank and to the consumer price index 94 Table 3-32: Liquidity coverage ratio 95 Table 3-33: Balance of total deposits of the three largest groups of depositors 95

9 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

1. General review, objectives, and strategy At the meeting of the Board of Directors held on May 23, 2018, it was resolved to approve and publish the unaudited consolidated financial statements of Bank Hapoalim B.M. and its consolidated subsidiaries for the period of January-March 2018.

1.1. Forward-looking information Some of the information in these reports that does not refer to historical facts (even if it is based on processing of historical data) constitutes forward-looking information, as defined in the Securities Law, 1968. The actual results of the Bank may differ materially from those included in forward-looking information, including, among other factors, as a result of changes in capital markets in Israel and globally, macro-economic changes, changes in geopolitical conditions, regulatory changes, accounting changes, changes in taxation rules, and other changes not under the Bank’s control, which may lead to the failure of estimates to materialize and/or changes in the Bank’s business plans. Forward-looking information is marked by words or phrases such as “forecast,” “plan,” “objective,” “risk estimate,” “scenario,” “stress scenario,” “risk assessment,” “correlation,” “distribution,” “we believe,” “expect,” “predict,” “estimate,” “intends,” “plans,” “aims,” “may change,” “should,” “can,” “will,” or similar expressions. Such forward-looking expressions involve risk and uncertainty, because they are based on management’s estimates regarding future events, which include changes in the following parameters, among others: economic conditions, public tastes, interest rates in Israel and overseas, inflation rates, new legislation and regulation in the area of banking and the capital market, exposure to financial risks, the financial stability of borrowers, the behavior of competitors, aspects related to the Bank’s image, technological developments, manpower-related matters, and other areas that affect the activity of the Bank and the environment in which it operates, the materialization of which is uncertain by nature. The information presented below is based, among other things, on information known to the Bank and based, among other things, on publications by various entities, such as the Central Bureau of Statistics, the Ministry of Finance, the , the Ministry of Housing, and other entities that publish data and estimates regarding the Israeli and global capital markets. This information reflects the Bank’s current viewpoint with regard to future events, which is based on estimates, and is therefore subject to risks and uncertainty, as well as to the possibility that expected events or developments may not materialize at all or may only partially materialize, or even that actual developments may be the opposite of expectations.

11 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

1.2. Condensed financial information Table 1-1: Condensed financial information and principal performance indicators over time

For the three months ended For the year ended December 31 March 31, December 31, September 30, June 30, March 31, 2017 2016 2018 2017 2017 2017 2017 Main performance indicators Return of net profit on equity attributed to shareholders of the Bank(1) 7.16% 6.96% 5.31% 9.51% 9.22% 7.50% 7.72% Return of net profit on equity attributed to shareholders of the Bank excluding extraordinary items(1)(2) 7.86% 10.45% 9.91% 9.51% 9.22% 9.44% *10.04% Return on average assets(1) 0.56% 0.54% 0.41% 0.72% 0.69% 0.59% 0.60% Efficiency ratio – cost-income ratio 63.75% 70.42% 71.62% 59.28% 61.55% 65.73% 64.47% Efficiency ratio – cost-income ratio excluding extraordinary items(2) 62.12% 62.43% 60.85% 59.28% 61.55% 61.03% 60.95% Financing margin from regular activity(1)(3) 2.21% 2.21% 2.20% 2.24% 2.07% 2.16% 2.09% Liquidity coverage ratio(4) 119% 122% 123% 127% 128% 122% 124%

As at As at December 31 March 31, December 31, September 30, June 30, March 31, 2017 2016 2018 2017 2017 2017 2017 Ratio of common equity Tier 1 capital to risk components(5) 11.05% 11.26% 11.26% 11.35% 11.21% 11.26% 11.01% Ratio of total capital to risk components(5) 14.06% 14.64% 14.85% 14.99% 14.90% 14.64% 15.11% Leverage ratio(5) 7.38% 7.37% 7.37% 7.36% 7.30% 7.37% 7.25%

For the three months ended For the year ended December 31 March 31, December 31, September 30, June 30, March 31, 2017 2016 2018 2017 2017 2017 2017 Main credit quality indicators Allowance for credit losses as a percentage of credit to the public 1.38% 1.36% 1.39% 1.40% 1.45% 1.36% 1.49% Impaired debts and debts in arrears of 90 days or more as a percentage of credit to the public 1.23% 1.27% 1.29% 1.48% 1.55% 1.27% 1.76% Net charge-offs as a percentage of average credit to the public(1) 0.14% 0.13% 0.06% 0.36% 0.39% 0.23% 0.19% Provision for credit losses as a percentage of average credit to the public(1) 0.35% 0.03% 0.04% 0.24% 0.16% 0.12% 0.10% * Restated for inclusion of the effects of the reduction of corporate tax as part of profit excluding extraordinary items in 2016. In the Periodic Report for 2017 (and the subsequently published presentation for 2017), net profit and return on equity for 2016 and 2017 were presented excluding expenses in respect of the update of the provision in connection with the investigation of the Bank Group's business with American clients and the discontinuation of activity in only. In 2016, net profit and return on equity for 2016 were presented also excluding the effects of the reduction of corporate tax (in addition to the exclusion of the update of the provisions in respect of the investigation, as noted). Within the process of preparation for filing a shelf prospectus of Hapoalim Hanpakot Ltd. (the issuance arm of the Bank, which is a company under full ownership), the Israel Securities Authority requested that the Bank present these data for 2016 in a manner that consistently applies the aforesaid excluded components. (1) Calculated on an annualized basis. (2) Does not include expenses in respect of the update of the provision in connection with the Bank Group’s business with American clients, and costs in respect of the discontinuation of activity in Switzerland. (3) Financing profit from regular activity (see the Report of the Board of Directors and Board of Management, in the section “Material developments in income, expenses, and other comprehensive income”) divided by total financial assets after allowance for credit losses, net of non-interest bearing balances in respect of credit cards. (4) For additional information, see the section “Liquidity and refinancing risk,” below. (5) For additional information, see the section “Capital, capital adequacy, and leverage,” below.

12 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 1-1: Condensed financial information and principal performance indicators over time (continued)

For the three months ended For the year ended December 31 March 31, December 31, September 30, June 30, March 31, 2017 2016 2018 2017 2017 2017 2017 NIS millions Main profit and loss data Net profit attributed to shareholders of the Bank 628 612 469 812 767 2,660 2,628 Net profit attributed to shareholders of the Bank excluding extraordinary items(1) 688 908 861 812 767 3,348 ***3,417 Net interest income 2,158 2,228 2,163 2,233 2,073 8,697 8,193 Provision (income) for credit losses 250 24 25 167 107 323 269 Net financing profit** 2,384 2,395 2,315 2,369 2,255 9,334 9,345 Non-interest income 1,533 1,474 1,477 1,453 1,529 5,933 6,528 Of which: fees 1,280 1,271 1,284 1,254 1,302 5,111 5,216 Operating and other expenses 2,353 2,607 2,607 2,185 2,217 9,616 9,490 Of which: salaries and related expenses 1,130 *1,115 *1,126 *1,132 *1,182 *4,555 *4,571 Total income 3,691 3,702 3,640 3,686 3,602 14,630 14,721

Net earnings per ordinary share (in NIS) Basic net earnings per share in NIS attributed to shareholders of the Bank 0.47 0.46 0.36 0.60 0.58 2.00 1.98

* Reclassification of certain actuarial cost components of employee benefits from salary expenses to other expenses. For further details, see Note 1C(3) to the Condensed Financial Statements. ** Net financing profit includes net interest income and non-interest financing income (expenses). *** Restated for inclusion of the effects of the reduction of corporate tax as part of profit excluding extraordinary items in 2016. In the Periodic Report for 2017 (and the subsequently published presentation for 2017), net profit and return on equity for 2016 and 2017 were presented excluding expenses in respect of the update of the provision in connection with the investigation of the Bank Group's business with American clients and the discontinuation of activity in Switzerland only. In 2016, net profit and return on equity for 2016 were presented also excluding the effects of the reduction of corporate tax (in addition to the exclusion of the update of the provisions in respect of the investigation, as noted). Within the process of preparation for filing a shelf prospectus of Hapoalim Hanpakot Ltd. (the issuance arm of the Bank, which is a company under full ownership), the Israel Securities Authority requested that the Bank present these data for 2016 in a manner that consistently applies the aforesaid excluded components. (1) Does not include expenses in respect of the update of the provision in connection with the Bank Group’s business with American clients, and costs in respect of the discontinuation of activity in Switzerland.

13 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 1-1: Condensed financial information and principal performance indicators over time (continued)

As at As at December 31 March 31, December 31, September 30, June 30, March 31, 2017 2016 2018 2017 2017 2017 2017 NIS millions Main balance sheet data Total assets 448,195 454,424 449,815 449,734 445,847 454,424 448,105 Of which: Cash and deposits with 78,148 86,114 85,606 81,959 77,088 86,114 80,378 Securities 61,538 65,442 64,196 70,499 74,894 65,442 71,449 Net credit to the public 284,103 278,663 275,505 272,949 269,982 278,663 271,957 Net problematic credit risk 7,249 7,092 7,430 7,469 8,018 7,092 7,600 Net impaired balance sheet debts 2,056 2,121 2,283 2,522 2,749 2,121 3,110 Total liabilities 411,979 418,420 414,070 414,105 410,769 418,420 413,880 Of which: Deposits from the public 344,810 347,351 342,747 340,768 337,518 347,351 338,502 Deposits from banks 3,602 4,149 3,544 4,329 4,199 4,149 4,377 Bonds and subordinated notes 26,214 29,058 29,411 30,736 31,171 29,058 33,560 Shareholders’ equity 36,084 35,863 35,591 35,458 34,909 35,863 34,047 Nonperforming asset balances (NPL) 2,015 2,110 2,209 2,601 2,997 2,110 3,507 Additional data Share price at end of period (in NIS) 24.0 25.6 24.7 23.5 22.1 25.6 22.9

For the three months ended For the year ended December 31 March 31, December 31, September 30, June 30, March 31, 2017 2016 2018 2017 2017 2017 2017 Total dividend per share (in agorot)* 18.35 14.08 24.37 22.98 3.10 64.53 51.44 Ratio of fees to average assets 0.28% 0.28% 0.28% 0.28% 0.29% 1.14% 1.18%

* According to the date of declaration.

The following are details of the principal developments and changes that occurred during the reported period. Net profit of the Bank Group attributed to shareholders of the Bank totaled NIS 628 million in the first quarter of 2018, compared with profit in the amount of NIS 767 million in the same period last year. The decrease in profit resulted from an increase in the allowance for credit losses, and from an increase in operating and other expenses, mainly due to the provisions and legal expenses related to the investigation of the Bank Group's business with American clients. This decrease was offset by an increase in financing profit, due to an increase in the volume of regular financing activity. The rate of net return on equity attributed to shareholders of the Bank was 7.2% in the first quarter of 2018, compared with 9.2% in the same period last year. The common equity Tier 1 capital ratio as at March 31, 2018 was 11.05%, compared with 11.26% on December 31, 2017. This ratio is higher than the capital targets required by the Bank of Israel. For further details, see Section 2 below.

14 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

1.3. Condensed description of the principal risks to which the Bank is exposed The activity of the Bank involves the following financial risks: credit risks, market risks, and liquidity risk. Other non-financial risks are mainly compliance risk, legal risk, and operational risk, which includes information-technology risks and cyber risks. Other risks to which the Bank is exposed are handled directly as part of the management of its business: reputational risk, competitive risk, regulatory and legislative risk, strategic risk, economic risk, and environmental risk. For more extensive information, see Section 1.4 in the Report of the Board of Directors and Board of Management as at December 31, 2017. For information regarding risks, see the section “Review of Risks,” below; the section “Review of Risks” in the Report of the Board of Directors and Board of Management as at December 31, 2017; the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017; and the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at March 31, 2018.

1.4. Objectives and business strategy The Board of Management and the Board of Directors of the Bank approved a three-year strategic plan (for 2018-2020) at the end of 2017. The global and Israeli banking systems are influenced by a matrix of factors, primarily changes in customers’ habits, tightened regulation, and the growing impact of technology. These shifts have led to more intense competition, from traditional players as well as a multitude of varied new players, which requires the Bank to prepare for the future with the aim of offering its customers an advanced, excellent service experience and creating value for its customers and its other stakeholders. Concurrently, the Bank implements the directives of the Bank of Israel concerning compliance with capital-adequacy targets, which were a consideration in formulating the strategic plan. The Bank’s multi-year strategic plan takes the caution necessitated by the risks in the global economy and the Israeli market into account, and balances risk and return considerations. The goal of the strategic plan is to enable the Bank to continue to pursue a trajectory of stable growth, despite the challenges and instability in the global economy and financial system, while continuing to solidify its leadership in the Israeli banking system and maximizing value for its shareholders and all of its stakeholders. The strategic plan is examined each year and adjusted to changes in the business environment in Israel and globally, and to changes in the competitive environment in which the Bank operates. The plan is focused on five key themes, which were updated and approved at the end of 2016: 1. Value-creating leadership in target customer segments and activities in Israel – Deeper connections and activities with the Bank’s customers based on innovation in services and optimization of channels of activity, enhanced added value, creation of solutions adapted to different customers’ needs, and strengthening of the focus of the business on high-potential activities. 2. Enhancement of value for customers through a combination of personal, human, and technological connections – Adapted, accessible, intuitive banking service, integrating advanced digital services with human service and advice in complex activities and at decision points.

15 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3. Building tomorrow: construction of infrastructures, innovation, and focused international growth – Strengthening infrastructures for future growth and developing advanced technological capabilities, in collaboration with the business environment, while developing the commercial banking business in the . 4. Sustainable shared value with stakeholders – Promoting business processes that generate shared value for the public and for the Bank, while increasing transparency and cultivating dialogue with all stakeholders. 5. Ongoing operational simplification and excellence – Optimizing all resources, while simplifying and redesigning processes from end to end in order to enhance value for customers, and implementing a multi-year efficiency plan.

In addition to the five key strategic themes described above, the Bank operates in accordance with three themes in the area of resources and infrastructures, which were also updated and approved at the end of 2016: • The Bank will continue to emphasize the nurturance and management of human resources and the creation of a supportive, agile organizational infrastructure. • The Bank will work to promote excellence in financial management and dynamic, advanced capital management. • These activities will be conducted while applying rigorous risk management congruent with the trajectory for the operations of the Bank. The Bank will continue to act on the basis of its fundamental values and in congruence with the principles of sustainability, as defined in its vision. In this context, the Bank will work to continue to lead the financial industry in the areas of corporate social responsibility and contribution to the community, as it has in recent years. For more extensive information regarding the strategy of the Bank and its expression in the various areas of the Bank’s activity, see the section “Objectives and business strategy” in the Report of the Board of Directors and Board of Management for 2017.

The Bank’s approved work plans and the working assumptions on which they are based refer to the Bank’s future activities; therefore, the above information in this section with regard to the Bank’s action plans and intentions is “forward-looking information.” The strategic plan sets ambitious goals for each of the Bank’s activities, yet in any planning, especially in planning several years ahead, and all the more so during a period of changes and turmoil in the global economy and in the world financial system, a considerable degree of uncertainty must be taken into consideration. Various diverse factors may prevent the assumptions on which the strategic plan is based from materializing, or may prevent them from materializing in full, and may prevent the realization or full realization of future plans. Notable such factors are the business environment in Israel and globally, as well as macro conditions. Special importance should be accorded to the condition of the global economy; to the economic, political, and security situation in Israel and in the region; and to regulatory changes.

16 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

2. Explanation and analysis of results and business position 2.1. Trends, events, developments, and material changes 2.1.1. Economic and financial review Developments in the global economy Two significant developments with long-term economic implications took center stage during the first quarter of 2018. The first is political in nature: fears of a trade war, primarily between the United States and China. The second is economic: a steep rise in the yield curve in the United States. Both may have a substantial impact on non-financial variables, such as global growth and trade, as well as on prices of financial assets, from stocks to real estate. Economic data in the developed countries during the first quarter of 2018 were slightly lower than in the preceding quarter. By contrast, growth rates in the emerging countries appear to have risen. Inflation in the developed countries began to rise. In contrast to the past, rather than being concentrated in prices of services, inflation has been apparent in prices of products as well. The central bank in the United States raised the interest rate to 1.50%-1.75% in March 2018. The European Central Bank maintained the interest rate on deposits of commercial banks at the central bank at -0.4%, and maintained its bond purchases at EUR 30 billion per month.

Economic activity in Israel Indicators of economic activity point to continued expansion of economic activity in the first quarter. The Central Bureau of Statistics has adjusted the growth figure for the second half of 2017 upward, to an annualized rate of 3.9%. According to the estimates of the Bank of Israel, this growth rate is higher than the growth potential of the economy, as reflected in an ongoing decrease in the unemployment rate, to 3.6% in March, and increased upward pressure on wages. Growth appears to be balanced, rather than based primarily on an increase in private consumption, as was the case in recent years. Private consumption continued to grow in the first quarter, though apparently at a slightly lower rate than last year. The rapid expansion of global trade has a positive effect on exports of goods and services. Most of the increase has occurred in services, but exports of goods are trending up as well, mainly due to an increase in exports of electronic components and chemicals. Activity in the residential construction industry continued to cool, in both demand and supply. The number of new homes sold in January-February was 16% lower than last year. Measures applied by the Ministry of Finance led to higher sales than purchases of homes by real-estate investors. The Ministry of Housing has continued to market land mostly through the Mechir Lamishtaken (“Tenant Price”) project. The survey of prices of homes by the Central Bureau of Statistics indicates a cumulative decrease of 2.7% in prices from September 2017 to March 2018.

Fiscal and monetary policy The Bank of Israel interest rate has stood at 0.1% since March 2015. The appreciation of the shekel and the low inflation support the highly expansionary monetary policy, in contrast to the trend at central banks around the world, which have begun to raise interest rates or reduce quantitative expansion policies. The Bank of Israel has maintained its guidance according to which the policy will remain expansionary until inflation stabilizes within the target range. In light of the rise in the inflation environment and the reining in of the appreciation of the shekel over the last few months, the capital market is currently pricing in one increase in the Bank of Israel interest rate over the coming year.

17 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

The budget deficit in the first quarter totaled NIS 2.1 billion, compared with NIS 2.3 billion in the same period last year. Government expenditures grew at a high rate of 9.3%, while tax revenues increased by 6.3%. As the tax-revenue trajectory is similar to advance planning, the Ministry of Finance has not lowered taxes, as it has stated it would in the event of surplus collection.

Inflation and exchange rates The “known” consumer price index fell by 0.3% in the first quarter. In March 2018, the index rose by 0.3%. Inflation over the last year stood at 0.2%. The low inflation was influenced by the government’s policy of lowering the cost of living, by growing competition from online purchases, and by the weakening of the shekel. The housing component, measured based on rent prices, rose by 1.8% over the last year, constituting the main contribution to the price gains. Note that while inflation remained low, inflation expectations rose gradually over this period, likely due to the effect of the depreciation of the shekel, the increase in oil prices, and the increases in wages. At the beginning of May, one-year inflation expectations derived from interbank trading stood at approximately 0.8%. The shekel depreciated by 1.4% against the US dollar and by 4.2% against the euro in the first quarter of 2018. The shekel depreciated by 2.8% against the currency basket. The shekel continued to weaken in April, with an additional depreciation of 0.8% against the currency basket. The Bank of Israel acquired foreign currency at a volume of USD 2.3 billion in the first quarter; of that amount, USD 0.45 billion was part of the acquisition plan aimed at offsetting the effect of natural-gas production in Israel on the exchange rate.

Financial and capital markets Global capital markets experienced a shock in late January and the first week of February 2018. A sharp drop in stock indices (approximately 10% on average), an increase in volatility, and an increase in long-term bond yields were the dominant market trends. The background for these developments was investors’ worry over an acceleration of inflation and more rapid increases in interest rates by central banks. Most of the declines occurred in late January and early February, as noted; the drop in prices was checked in March 2018. Overall in the first quarter, the S&P 500 index fell by 1.2%, the Stoxx Europe 60 index fell by 6.7%, and the TA-125 index fell by 4.1% (in terms of local currency). In contrast to the trend seen in the developed economies, the EEM index for the emerging markets rose by 2.5%. Daily turnovers in shares and convertibles in fell to NIS 1,590 million in the first quarter of 2018, compared with NIS 1,653 million in the same quarter last year. The global and Israeli bond markets showed high volatility, due to investors’ concerns over rapid increases in the interest rate anticipated in the United States. The yield of United States government ten-year bonds rose to 2.95% during the quarter, and the yield of Israeli government bonds rose to approximately 2.1%. Yields of government bonds in the United States and in Israel decreased in March 2018. The increase in yields renewed with even greater vigor in April. Overall in the first quarter, the unlinked government bond index rose by 0.2%; the CPI-linked government bond index rose by 0.3%. The Tel Bond 60 index of corporate bonds fell by 0.4% in the first quarter of 2018, while yield spreads against government bonds expanded slightly as compared to the end of 2017. In the non-financial corporate market, issues totaled approximately NIS 21 billion, similar to the quarterly average for 2017. Approximately 54% of the issues were in the real-estate sector.

18 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 2-1: Changes in the CPI and in exchange rates

For the three months ended For the year March 31 2018 2017 2017 Rate of increase (decrease) in “known” CPI )0.3%( )0.20%( 0.3% Rate of increase (decrease) in USD exchange rate 1.4% )5.5%( )9.8%( Rate of increase (decrease) in GBP exchange rate 5.6% )4.2%( )0.9%( Rate of increase (decrease) in CHF exchange rate 3.4% )3.7%( )5.6%( Rate of increase (decrease) in EUR exchange rate 4.2% )4.0%( 2.7% Rate of increase (decrease) in TRY exchange rate )4.1%( )8.2%( )15.4%(

Data regarding the Bank of Israel interest rate:

March 31, December 31, September 30, June 30, March 31, 2018 2017 2017 2017 2017 Interest rate at end of period 0.10% 0.10% 0.10% 0.10% 0.10%

2.1.2. Top and emerging risks Based on the recommendations of the FSB (Financial Stability Board), a top risk is defined as a development currently occurring in the business environment of the Bank that may adversely affect the Bank’s results over the course of the coming year. By contrast, with respect to an emerging risk, there is greater uncertainty regarding the timing of materialization of the risk as an occurrence with a material effect on the strategy of the Bank. For details, see the Report of the Board of Directors and Board of Management as at December 31, 2017. For details regarding legal proceedings, see Section 3.13 below.

2.1.3. Disclosure regarding emphasis of matters by the external auditors Occasionally, the external auditor finds it appropriate to diverge from the uniform format by including an emphasis- of-matter paragraph, directing attention to a particular matter that has a significant effect on the financial statements and is included in a note to the financial statements. The external auditors have emphasized the section in Note 10B concerning exposure to class-action suits filed against the Bank Group, Note 10C concerning the investigation of the Bank Group’s business with American clients, and Note 10D concerning the investigation regarding FIFA.

19 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

2.2. Material developments in income, expenses, and other comprehensive income Net profit attributed to shareholders of the Bank totaled NIS 628 million in the first three months of 2018, compared with profit in the amount of NIS 767 million in the same period last year. Net return on equity attributed to shareholders of the Bank was approximately 7.2% in the first three months of 2018, compared with approximately 9.2% in the same period last year.

Table 2-2: Condensed statement of profit and loss

For the three months ended Change

March 31, March 31,

2018 2017 NIS millions Interest income 2,601 2,518 3.3% Interest expenses )443( )445( )0.4%( Net interest income 2,158 2,073 4.1% Non-interest financing income 226 182 24.2% Net financing profit* 2,384 2,255 5.7% Provision (income) for credit losses 250 107 133.6% Net financing profit after provision for credit losses 2,134 2,148 )0.7%( Fees 1,280 1,302 )1.7%( Other income 27 45 )40.0%( Fees and other income* 1,307 1,347 )3.0%( Operating and other expenses 2,353 2,217 6.1% Profit before taxes 1,088 1,278 )14.9%( Provision for taxes on profit 473 522 )9.4%( The Bank’s share in profits of equity-basis investees, after taxes 4 4 0.0% Net profit Before attribution to non-controlling interests 619 760 )18.6%( Loss (profit) attributed to non-controlling interests 9 7 28.6% Attributed to shareholders of the Bank 628 767 )18.1%( Return of net profit 7.2% 9.2% )22.3%(

* The profit and loss items above are presented in a different format than in the condensed statement of profit and loss, in order to allow better analysis of the financial results. This change is expressed in the reclassification of non-interest financing income, from the item of non-interest income (expenses) to the item of net financing profit.

20 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

2.2.1. Developments in income and expenses Net financing profit In order to analyze profit from financing activity, in addition to interest income and expenses, non-interest financing income and expenses must also be included in profit. This income includes financing income in respect of derivative instruments – exchange-rate differences and profit from the sale of securities, among other things – which serve as an integral element of the Bank’s exposure management. Income from derivatives includes, among other things, the effects of the time value in the fair value of derivatives, which offset balance sheet interest exposures, as well as the effects of the rate of change in the known CPI on derivatives balances, which offset CPI exposures in respect of balance sheet balances.

Table 2-3: Composition of net financing profit

For the three months ended Change March 31

2018 2017 NIS millions Interest income 2,601 2,518 3.30% Interest expenses )443( )445( )0.45%( Net interest income 2,158 2,073 4.10% Non-interest financing income 226 182 24.18% Total reported financing profit 2,384 2,255 5.72% Excluding effects not from regular activity: Income from realization and adjustments to fair value of bonds 68 49 38.78% Profit from investments in shares 49 65 )24.62%( Gains in respect of loans sold 18 4 Adjustments to fair value of derivative instruments(1) )38( )13( Financing income from tax hedging of investments overseas(2) )2( 29 )106.90%( Total effects not from regular activity 95 134 )29.10%( Total income from regular financing activity(3) 2,289 2,121 7.92%

(1) The effect of the measurement of profit and loss in derivative instruments constituting part of the Bank’s asset and liability management strategy on a fair-value basis, versus measurement on an accrual basis. (2) The effect of hedging the asymmetry in the tax liability in respect of exchange-rate differences in investments in subsidiaries overseas, which are not included in the income base for the calculation of the provision for tax, in contrast to exchange-rate differences in respect of financing sources. The Bank hedges against tax exposure in respect of investments overseas by establishing surplus financing sources against such investments. (3) Financing profit excluding extraordinary effects, and excluding effects arising mainly from the timing of recording in accounting. Of which in respect of the effects of changes in the CPI: an expense of NIS 34 million in the first quarter of 2018, compared with an expense of NIS 24 million in the first quarter of 2017.

21 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Income from regular financing activity totaled NIS 2,289 million in the first quarter of 2018, compared with a total of NIS 2,121 million in the same period last year. The increase mainly resulted from an increase in the volume of activity in retail credit and housing credit, as well as from an increase in business activity. Total reported financing income amounted to NIS 2,384 million in the first quarter of 2018, compared with a total of NIS 2,255 million in the same period last year. The increase mainly resulted from an increase in profit from regular activity, as noted above. This increase was offset by a decrease in financing income arising from tax hedges in respect of investments overseas, and a decrease as a result of a change in the differences between the fair value of derivatives that are part of the asset and liability management of the Bank and the measurement of the same assets on an accrual basis.

Table 2-4: Principal data regarding interest income and expenses

For the three months ended March 31 2018 2017 Interest income Rate of income Interest income Rate of income (expenses) (expense) (expenses) (expense) NIS millions/percent Interest income 2,601 2.66% 2,518 2.60% Interest expenses )443( )0.72%( )445( )0.71%( Net interest income 2,158 1.94% 2,073 1.89% Net interest income as a percentage of the balance of interest-bearing assets 2.20% 2.13%

Interest income increased, mainly as a result of an increase in the volume of credit, and as a result of an increase in the rate of income on interest-bearing assets due to an increase in the dollar interest rate. An analysis of the changes in interest income and expenses, in a comparison of the first quarter of 2018 to the same period last year, indicates that changes in the volume of average balance sheet balances caused an increase in the amount of approximately NIS 84 million, and changes in interest rates caused an increase in the amount of approximately NIS 1 million in net interest income.

The provision for credit losses totaled NIS 250 million in the first quarter of 2018, compared with a total of NIS 107 million in the same period last year. Income in the amount of NIS 100 million was recorded in the net individual allowance in the first quarter of 2018, compared with income in the amount of NIS 81 million in the same period last year, mainly due to a decrease in the individual provision. The net provision in respect of the collective allowance totaled NIS 350 million in the first quarter of 2018, compared with a provision in the amount of NIS 188 million in the same period last year. The increase in the collective provision in the first quarter of 2018, compared with the same period last year, mainly resulted from an increase in balances of corporate credit. For further information regarding the development of balances of credit to the public, see the section “Structure and development of assets, liabilities, capital, and capital adequacy” in the Report of the Board of Directors and Board of Management. For further information regarding the change in the allowance for credit losses, see Note 6 to the Condensed Financial Statements.

22 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 2-5: Cumulative provision for credit losses in respect of debts and in respect of off-balance sheet credit instruments**

For the three months ended March 31, March 31, 2018 2017 NIS millions Individual provision for credit losses 156 170 Decrease in individual allowance for credit losses and recovery of charged off debts )256( )251( Net individual provision (income) for credit losses )100( )81( Net provision in respect of the collective allowance for credit losses and net charge-offs 350 188 Total provision (income) for credit losses* 250 107 * Of which: Net provision (income) for credit losses in respect of commercial credit risk 95 )24( Net provision (income) for credit losses in respect of housing credit risk 5 )5( Net provision for credit losses in respect of other private credit risk 150 136 Total provision (income) for credit losses 250 107

% Provision (income) as a percentage of total credit to the public: Percentage of individual provision (income) for credit losses 0.22% 0.25% Gross provision (income) for credit losses as a percentage of the average recorded balance of credit to the public*** 0.71% 0.52% Provision (income) for credit losses as a percentage of the average recorded balance of credit to the public 0.35% 0.16% Net charge-offs in respect of credit to the public as a percentage of the average recorded balance of credit to the public 0.14% 0.39% Net charge-offs in respect of credit to the public as a percentage of the allowance for credit losses in respect of credit to the public 10.29% 26.93%

** Including in respect of housing loans examined according to the extent of arrears. *** The gross provision for credit losses is the total provision for credit losses, excluding the decrease in the individual allowance for credit losses and recovery of charged-off debts.

Fees and other income totaled NIS 1,307 million in the first quarter of 2018, compared with NIS 1,347 million in the same period last year. The decrease mainly resulted from a decrease in income from the capital market, due to the reduction of private-banking activity overseas, and from a decrease in credit-handling fees, and was offset by an increase in income from credit cards. Other income totaled NIS 27 million, compared with NIS 45 million in the same period last year.

23 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 2-6: Details of fees and other income

For the three months ended Change

March 31, March 31, 2018 2017 NIS millions Fees Account management fees 230 243 )5.3%( Securities activity 189 203 )6.9%( Credit cards, net 487 461 5.6% Credit handling 56 80 )30.0%( Financing transaction fees 145 144 0.7% Other fees 173 171 1.2% Total fees 1,280 1,302 )1.7%( Other income 27 45 )40.0%( Total fee income and other income 1,307 1,347 )3.0%(

Operating and other expenses totaled NIS 2,353 million in the first quarter of 2018, compared with NIS 2,217 million in the same period last year, an increase of approximately 6.1%.

Table 2-7: Details of operating and other expenses

For the three months ended March 31, March 31, 2018 2017 NIS millions Salary expenses Wages 1,041 *1,070 Bonuses and share-based compensation 89 112 Total wages 1,130 *1,182 Maintenance and depreciation of buildings and equipment 365 361 Other expenses 858 *674 Total operating and other expenses 2,353 2,217

* Reclassification of certain actuarial cost components of employee benefits from salary expenses to other expenses. For further details, see Note 1C(3) to the Condensed Financial Statements.

24 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Salary expenses totaled NIS 1,130 million in the first quarter of 2018, compared with NIS 1,182 million in the same period last year, a decrease of 4.4%. The decrease in salary expenses resulted from continued cost savings due to efficiency processes, and from a decrease in the provision for bonuses, due to the allocation of the surplus provision in respect of a previous year to profit and loss, and due to a decrease in profitability. Expenses for maintenance and depreciation of buildings and equipment totaled NIS 365 million in the first quarter of 2018, compared with NIS 361 million in the same period last year, an increase of 1.1%. Other expenses totaled NIS 858 million in the first quarter of 2018, compared with NIS 674 million in the same period last year. The increase resulted from an increase in legal expenses, and from the effect of changes in exchange rates on provisions in connection with the investigation of the Bank Group’s business with American clients, as well as from an increase in marketing and advertising and a provision for legal claims filed by customers. The provision for taxes on profit totaled NIS 473 million in the first quarter of 2018, compared with a total of NIS 522 million in 2017. The effective tax rate for the Bank reached 43.5% in the first quarter of 2018, compared with a statutory tax rate of 34.2%, due to unrecognized expenses and taxes in respect of previous years, as a result of the recovery of charged-off debts. Non-controlling interests’ share in net results of consolidated companies totaled a share in loss in the amount of NIS 9 million in the first quarter of 2018, compared with a share in loss in the amount of NIS 7 million in the same period last year. Net profit attributed to shareholders of the Bank totaled NIS 628 million in the first quarter of 2018, compared with a total of NIS 767 million in the same period last year. Basic net profit per share of par value NIS 1 amounted to NIS 0.47 in the first quarter of 2018, compared with NIS 0.58 in the same period last year.

25 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

2.2.2. Developments in comprehensive income Table 2-8: Comprehensive income

For the three months ended March 31, March 31, 2018 2017 NIS millions Net profit before attribution to non-controlling interests 619 760 Net loss (profit) attributed to non-controlling interests 9 7 Net profit attributed to shareholders of the Bank 628 767 Other comprehensive income (loss) before taxes: Net adjustments for presentation of securities available for sale at fair value )339( 194 Net adjustments from translation of financial statements*, after hedge effects** )5( 2 Adjustments of liabilities in respect of employee benefits*** 79 11 Net gains in respect of cash-flow hedges - 1 Other comprehensive income (loss) before taxes )265( 208 Effect of related tax 99 )72( Other comprehensive income (loss) before attribution to non-controlling interests, after taxes )166( 136 Net of other comprehensive loss (income) attributed to non-controlling interests - )1( Other comprehensive income (loss) attributed to shareholders of the Bank, after taxes )166( 135 Comprehensive income (loss) before attribution to non-controlling interests 453 896 Comprehensive loss (income) attributed to non-controlling interests 9 6 Comprehensive income attributed to shareholders of the Bank 462 902

* Adjustments from the translation of financial statements of a foreign operation whose functional currency differs from the functional currency of the Bank. ** Hedges – net gains (losses) in respect of net hedges of investments in foreign currency. *** Mainly reflects adjustments in respect of actuarial estimates of defined benefit pension plans at the end of the period, and deduction of amounts previously recorded in other comprehensive income.

Comprehensive income totaled NIS 462 million in the first quarter of 2018, compared with a total of NIS 902 million in the same period last year. Beyond the change in net profit, the decrease in comprehensive income mainly resulted from a decrease in the balance of adjustments of securities available for sale, due to a decrease in prices of securities on stock markets in Israel and overseas and on bond markets in the first quarter of 2018, compared with an increase in prices in the same period last year. This decrease was offset by changes in adjustments of liabilities in respect of employee benefits.

26 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

2.3. Structure and development of assets, liabilities, capital, and capital adequacy The consolidated balance sheet as at March 31, 2018 totaled NIS 448.2 billion, compared with NIS 445.8 billion at the end of 2017.

Table 2-9: Developments in principal balance sheet items

Balance as at Change

March 31, December 31,

2018 2017

NIS millions Total assets 448,195 454,424 )1.4%( Net credit to the public 284,103 278,663 2.0% Cash and deposits with banks 78,148 86,114 )9.3%( Securities 61,538 65,442 )6.0%( Deposits from the public 344,810 347,351 )0.7%( Bonds and subordinated notes 26,214 29,058 )9.8%( Shareholders’ equity 36,084 35,863 0.6%

2.3.1. Structure and development of assets and liabilities Credit to the public Table 2-10: Development of net balance sheet credit to the public, by principal economic sector

As at Change

March 31, December 31,

2018 2017

NIS millions Private individuals – housing loans 65,873 64,843 1.6% Private individuals – other 54,288 54,072 0.4% Construction and real estate 48,452 46,144 5.0% Commercial 28,740 26,741 7.5% Industry 16,996 17,439 )2.5%( 18,125 17,864 1.5% Other 51,629 51,560 0.1% Total 284,103 278,663 2.0%

For further information regarding the development of credit and credit risks by economic sector, see the chapter “Credit risk” in Section 3.2.2, “Classification and analysis of credit risk by economic sector,” in the “Review of risks,” in the Report of the Board of Directors and Board of Management.

27 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Problematic debts Table 2-11: Problematic credit risk(1)

March 31, 2018 December 31, 2017 Balance Off-balance Total Balance Off-balance Total sheet sheet sheet sheet NIS millions Impaired credit risk 2,592 559 3,151 2,666 620 3,286 Substandard credit risk 1,525 221 1,746 1,463 200 1,663 Credit risk under special supervision(2) 3,014 640 3,654 2,560 825 3,385 Total problematic credit risk* 7,131 1,420 8,551 6,689 1,645 8,334 Net problematic credit risk 5,970 1,279 7,249 5,597 1,495 7,092 * Of which, unimpaired debts in arrears of 90 days or more(2) 939 - 939 913 - 913

Note: Balance sheet and off-balance sheet credit risk are presented before the effect of the allowance for credit losses, and before the effect of deductible collateral for the purpose of the indebtedness of borrowers and of groups of borrowers. (1) Credit risk – impaired, substandard, or under special supervision. (2) Including in respect of housing loans for which an allowance based on the extent of arrears exists, and in respect of housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more.

Total problematic debts increased by 3% in the first quarter of 2018, due to an increase in debts under special supervision, partly offset by a decrease in impaired credit risk. For further information regarding the analysis of the credit portfolio and problematic credit risk, see the chapter “Credit risk” in Section 3.2.1, “Problematic debts,” in the “Review of risks,” in the Report of the Board of Directors and Board of Management.

28 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Off-balance sheet credit Table 2-12: Developments in principal off-balance sheet items

Balance as at Change March 31, December 31, 2018 2017 NIS millions Documentary credit 1,649 1,825 )9.6%( Guarantees and other commitments*,** 53,452 53,240 0.4% Unutilized credit-card credit facilities under the Bank’s responsibility 25,279 25,618 )1.3%( Unutilized credit-card credit facilities under other banks’ responsibility 10,933 10,762 1.6% Unutilized revolving overdraft and other credit facilities in on-demand accounts 38,724 37,604 3.0% Irrevocable commitments to grant credit approved but not yet provided, and commitments to provide guarantees 50,002 44,359 12.7%

* Includes the Bank’s liabilities in respect of its share in the risk fund of the Maof Clearing House, in the amount of NIS 311 million (March 31, 2017: NIS 294 million; December 31, 2017: NIS 311 million). ** Includes off-balance sheet credit risk in the amount of approximately NIS 12,808 million, in respect of which insurance was acquired from foreign insurers for the portfolio of Sale Law guarantees (December 31, 2017: NIS 13,705 million).

Securities The Bank has investments in government and corporate bonds, as well as investments in tradable and non-tradable shares, broadly diversified. Securities totaled approximately NIS 61.5 billion on March 31, 2018, compared with approximately NIS 65.4 billion at the end of 2017, a decrease of approximately 6.0%, which mainly resulted from the sale of Israeli government bonds and United States government bonds in the portfolio available for sale, partly offset by purchases of Israeli government bonds in the trading book. Details of the Bank Group’s activity in securities are set out below.

29 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 2-13: Securities balances

Trading book Available for sale Held to maturity Total Balance % of total Balance % of total Balance % of total Balance % of total sheet securities sheet securities sheet securities sheet securities value value value value NIS millions/percent March 31, 2018 Israeli government bonds 8,876 14.4% 31,986 52.0% - - 40,862 66.4% US government bonds 64 0.1% 9,548 15.5% - - 9,612 15.6% Government bonds – other foreign countries 5 0.0% 964 1.6% - - 969 1.6% Total government bonds 8,945 14.5% 42,498 69.1% - - 51,443 83.6% Corporate bonds – Israel - - 351 0.6% 421 0.7% 772 1.3% Corporate bonds – foreign countries 2 0.0% 7,212 11.7% - - 7,214 11.7% Total corporate bonds 2 0.0% 7,563 12.3% 421 0.7% 7,986 13.0% Shares 44 0.1% 2,065 3.4% - - 2,109 3.4% Total securities 8,991 14.6% 52,126 84.7% 421 0.7% 61,538 100.0% December 31, 2017 Israeli government bonds 5,069 7.7% 35,528 54.3% - - 40,597 62.0% US government bonds 66 0.1% 11,973 18.3% - - 12,039 18.4% Government bonds – other foreign countries 5 0.0% 1,124 1.7% - - 1,129 1.7% Total government bonds 5,140 7.9% 48,625 74.3% - - 53,765 82.2% Corporate bonds – Israel - - 475 0.7% 423 0.6% 898 1.4% Corporate bonds – foreign countries 3 0.0% 8,550 13.1% - - 8,553 13.1% Total corporate bonds 3 0.0% 9,025 13.8% 423 0.6% 9,451 14.4% Shares 67 0.1% 2,159 3.3% - - 2,226 3.4% Total securities 5,210 8.0% 59,809 91.4% 423 0.6% 65,442 100.0%

For further details regarding amounts measured at fair value, see Note 15B.

30 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 2-14: Details of corporate bonds by economic sector

March 31, 2018 December 31, 2017 Balance sheet Percentage of Balance sheet Percentage of value total corporate value total corporate bonds bonds NIS millions NIS millions Mining and quarrying 383 4.8% 470 5.0% Industry 456 5.7% 1,026 10.9% Information and communications 155 1.9% 246 2.6% Financial services 82 1.0% 203 2.1% Banks and financial institutions 6,257 78.3% 6,821 72.2% Others 653 8.2% 685 7.2% Total corporate bonds 7,986 100.0% 9,451 100.0%

For details regarding unrealized loss from adjustments to fair value of securities in the portfolio available for sale, see Note 5.

Deposits Table 2-15: Developments in balances of deposits

Balance as at Change March 31, December 31, 2018 2017 NIS millions Deposits from the public 344,810 347,351 )0.7%( Deposits from banks 3,602 4,149 )13.2%( Deposits from the government 385 320 20.3% Total 348,797 351,820 )0.9%(

The balance of deposits totaled approximately NIS 349 billion as at March 31, 2018, compared with a total of approximately NIS 352 billion at the end of 2017. The decrease resulted from a decrease in deposits of institutional entities, offset by an increase in deposits of private individuals.

31 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Off-balance sheet activity in securities held by the public Table 2-16: Developments in balances of off-balance sheet monetary assets held by the Bank Group’s customers for which the Bank Group provides custody, management, operational, and advisory services

Balance as at Change March 31, December 31, 2018 2017 NIS millions Securities(1) 861,541 863,842 )0.3%( Assets of provident funds receiving operational services(2) 87,614 98,568 )11.1%( Mutual fund assets(3) 82,434 84,627 )2.6%( Pension advisory balances(4) 47,832 45,698 4.7%

(1) Including securities balances of provident funds and mutual funds for which the Bank Group provides custody services. (2) The Bank has decided to discontinue the activity of providing provident fund and study fund operational services to the management companies for which it provides operational services. Rather than immediate cessation, the activity will be discontinued through a gradual process conducted with all of the relevant parties. For additional details, see “Financial Management Segment” in the section “Segments of activity based on management approach” in the Corporate Governance Report. (3) Value of assets of mutual funds receiving services related to account management at various volumes. (4) Balances of pension products and study funds with respect to which pension advisory services were provided.

Bonds and subordinated notes totaled NIS 26.2 billion as at March 31, 2018, compared with NIS 29.1 billion at the end of 2017, a decrease of approximately 9.8%, which resulted from maturities of bonds and subordinated notes.

Table 2-17: Details of bonds and subordinated notes

March 31, 2018 December 31, 2017 Balance sheet Of which: Balance sheet Of which: value tradable value tradable NIS millions Subordinated notes 13,368 10,085 14,820 11,538 Bonds 12,845 12,540 14,238 13,847 Total bonds and subordinated notes 26,213 22,625 29,058 25,385

Issuance of bonds and senior capital instruments is performed according to the needs of the Bank, primarily in order to support the work plan of the Bank (including growth of its activity) and management of capital resources, while complying with capital adequacy and liquidity ratio targets, with safety margins, and also taking into consideration refinancing needs and the replacement of old capital and debt instruments with new instruments.

32 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Within a facility approved by the Board of Directors of the Bank for raising debt instruments and secondary capital in the amount of NIS 6 billion in 2018, Hapoalim Hanpakot (a wholly owned subsidiary that serves as the issuance arm of the Bank) performed a private offering for institutional investors, on April 26, 2018, of subordinated notes with a mechanism for principal loss absorption, through partial or full write-off of principal in the event that the capital adequacy of the Bank falls below 5%, or in accordance with a decision of the Banking Supervision Department; the notes will constitute part of the Tier 2 capital of the Bank, linked to the CPI and bearing annual interest at a rate of 1.42%, with principal in a total amount of approximately NIS 1.06 billion, maturing in 2028. Hapoalim Hanpakot will be permitted to list the aforesaid subordinated notes for trading on the primary list on the stock exchange. Until the date of listing on the primary list on the stock exchange, if performed, the subordinated notes will bear annual interest at the rate noted above, plus an annual rate of 0.2%.

Table 2-18: Derivative instruments

March 31, 2018 December 31, 2017 Positive fair Negative fair Notional Positive fair Negative fair Notional value value value value value value NIS millions Interest contracts 7,068 7,124 834,218 6,739 7,071 697,737 Currency contracts 4,277 3,397 262,798 4,348 4,088 231,527 Share-related contracts 913 908 45,064 914 904 45,470 Commodity and service contracts (including credit derivatives) 15 14 938 12 11 697 Total 12,273 11,443 1,143,018 12,013 12,074 975,431

2.3.2. Capital, capital adequacy, and leverage (1) Capital Investments in the capital of the Bank and transactions in its shares The issued and paid-up share capital of the Bank, as at March 31, 2018, is NIS 1,333,065,159 par value, composed of ordinary shares of par value NIS 1 each. This is the issued capital excluding 3,101,627 ordinary shares purchased by the Bank (“Treasury Shares”).

Dividends As of the first quarter of 2017, the dividend distribution policy of the Bank is to distribute up to 40% of quarterly net operating profit. Any distribution is subject to a specific resolution of the Board of Directors of the Bank, based on its judgment at the date of the distribution, taking into account business considerations, the directives of all laws, and any limits on distribution.

33 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

In addition to restrictions under the Companies Law, dividend distribution by banking corporations is subject to regulation applicable to banking corporations in Israel, pursuant to which no dividends shall be distributed: (a) if the cumulative balance of retained earnings of the bank (net of negative differences included in accumulated other comprehensive income) according to its last published financial statements is not positive, or if the payout would lead to a negative balance; (b) when one or more of the last three calendar years ended in a loss or in a comprehensive loss; (c) when the cumulative result of the three quarters ended at the end of the interim period for which the last financial statement has been released indicates a loss or a comprehensive loss; (d) if the forecast is that in the year following the payout the bank’s ratio of capital to risk-adjusted assets will fall below the required rate; (e) from capital reserves or positive differences resulting from the translation of financial statements of foreign operations; (f) if after the payout the bank’s non-monetary assets would exceed its shareholders’ equity; or (g) if the bank does not comply with the requirements of Section 23A of the Banking Law, which establishes a limit on the percentage of capital that a banking corporation may invest in non-financial corporations. Notwithstanding the above, in certain cases the Bank can distribute dividends even if the aforesaid circumstances apply, if it obtains prior written approval from the Banking Supervision Department for such distribution, up to the amount thus approved. For details regarding the capital-adequacy target of the Bank, see the section “Capital adequacy,” below. Pursuant to the terms of the subordinated notes, if interest payments in respect of these notes are suspended, the Bank shall not pay dividends to its shareholders until all of the suspended interest payments are paid in full, whether such dividends are declared prior to the Bank’s announcement regarding the formation of circumstances for suspension, or whether the dividends are declared after such an announcement. The permission granted by the Governor of the Bank of Israel to the Arison Group to acquire a controlling interest in the Bank states that no dividend shall be distributed from profits accrued at the Bank up to June 30, 1997 (the day prior to the acquisition of the controlling interest), unless the Banking Supervision Department has consented in advance and in writing. The balance of retained earnings of the Bank as at March 31, 2018 totaled NIS 28,849 million, of which a total of approximately NIS 2,734 million cannot be distributed as dividends, as noted.

Details regarding distribution of an unpaid dividend in respect of the first quarter of 2018 The Board of Directors resolved on May 23, 2018, to distribute a dividend at a rate of approximately 40% of the profits of the first quarter of 2018, in the amount of approximately NIS 251 million, which constitutes 18.825 agorot per share of par value NIS 1. The Board of Directors set the record date for payment of the dividend at June 4, 2018, and the date of payment at June 12, 2018.

Table 2-19: Details of dividends paid

Date of declaration Date of payment Dividend per share Dividend paid in cash Agorot NIS millions March 25, 2018 April 11, 2018 18.345 245 November 27, 2017 December 14, 2017 14.08 188 August 14, 2017 August 31, 2017 24.365 325 May 23, 2017 June 13, 2017 22.980 307 March 29, 2017 April 18, 2017 3.105 41

34 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

(2) Capital adequacy The Bank’s approach to capital adequacy assessment The Bank applies the capital measurement and adequacy directives based on the Basel directives, as published by the Banking Supervision Department and as integrated into Proper Conduct of Banking Business Directives 201-211 and the file of questions and answers. The capital measurement and adequacy directives are based on three pillars: • Pillar 1 – Includes the manner of calculation of the supervisory minimum capital requirements in respect of credit risks, operational risk, and market risk. • Pillar 2 – Sets forth internal processes (the ICAAP – Internal Capital Adequacy Assessment Process) to be used by banks to assess the required capital in respect of risks in aggregate, including those not covered by Pillar 1 (such as credit concentration, interest-rate risk in the banking book, liquidity risks, settlement risks, and strategic risks), as well as a review process to be performed by the Banking Supervision Department. • Pillar 3 – Market discipline; establishes the type and extent of information to be presented in reporting to the public on the risks to which banks are exposed. This pillar requires the disclosure of both quantitative and qualitative information, in order to enable the market to estimate the extent of the bank’s exposure to risk factors.

Basel 3 directives The Basel 3 directives took effect on January 1, 2014. Implementation is gradual, in accordance with the transitional directives established in Proper Conduct of Banking Business Directive 299, “Capital Measurement and Adequacy – Supervisory Capital – Transitional Directives.” Pursuant to the transitional directives, the supervisory adjustments and deductions from capital, as well as non-controlling interests that do not qualify for inclusion in supervisory capital, were deducted from capital gradually, at a rate of 20% per annum, from January 1, 2014 to January 1, 2018. Capital instruments that no longer qualify as supervisory capital were recognized as of January 1, 2014, up to a ceiling of 80% of their balance in the supervisory capital as at December 31, 2013; this ceiling is being lowered by an additional 10% in each subsequent year, until January 1, 2022. Accordingly, in 2017, the rate of deductions from supervisory capital was 80%, and the ceiling for instruments qualifying as supervisory capital was 50%. In 2018, the rate of deductions from supervisory capital is 100%, and the ceiling for instruments qualifying as supervisory capital is 40%.

Capital adequacy target Pursuant to the circular of the Banking Supervision Department concerning minimum capital ratios, the Bank, as a banking corporation of significant importance (a banking corporation whose total balance sheet assets on a consolidated basis constitute at least 20% of the total balance sheet assets of the banking system in Israel), is required to maintain a minimum common equity Tier 1 capital ratio of 10%, and a minimum total capital ratio of 13.5%, beginning January 1, 2017. In addition, beginning January 1, 2015, a capital requirement was added to these minimum ratios at a rate representing 1% of the balance of housing loans at the dates of the financial statements. This requirement was implemented gradually, over eight quarters, up to January 1, 2017. Accordingly, the minimum common equity Tier 1 capital ratio and the minimum total capital ratio of the Bank required by the Banking Supervision Department, on a consolidated basis, based on data as at March 31, 2018, stand at 10.23% and 13.73%, respectively.

35 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Capital planning and capital-adequacy objectives established by the Bank Capital planning at the Bank is based on the work plan of the Bank and on regulatory directives, which are translated into risk-adjusted assets and changes in the various tiers of capital, while maintaining safety margins. Various sensitivity tests are applied within the planning of capital and capital ratios. The Bank also routinely monitors actual results as compared to planning, and the gaps between results and planning, and, accordingly, considers taking the actions necessary in order to maintain the established capital targets. The policy of the Bank is to maintain capital adequacy at a level higher than the minimum ratio required by the Banking Supervision Department, and not lower than the level of capital adequacy required to cover the risks, as assessed in the Internal Capital Adequacy Assessment Process (ICAAP). Within the ICAAP, the Bank also examines the effect of stress scenarios on capital-adequacy ratios; accordingly, a plan is in place for a return to regulatory capital adequacy in the case of a such a stress event. Further to the foregoing, and pursuant to a resolution of the Board of Directors of the Bank, the target common equity Tier 1 capital ratio is 10.75% as of December 31, 2017. For additional information regarding the ICAAP and the capital-adequacy targets, see the Report on Risks.

Improving operational efficiency In January 2016, the Banking Supervision Department issued a letter on the subject, “Improving the operational efficiency of the banking system in Israel” (the “Efficiency Directive”). Pursuant to the Efficiency Directive, the boards of directors of banking corporations shall formulate a multi-year plan to improve efficiency. Banking corporations that meet the conditions established in the directive will be granted a relief allowing them to spread the effects of the plan over a period of up to five years in a straight line, for the purposes of the calculation of capital-adequacy ratios and of the leverage ratio. In October 2016, the Board of Directors of the Bank approved an efficiency plan at an estimated cost in the amount of NIS 762 million, net of tax effect, which was allocated to capital. The effect of the costs of the efficiency plan on capital-adequacy ratios, estimated at approximately 0.2% as at March 31, 2018, are being allocated in equal parts over five years, beginning in 2017. Further to the Efficiency Directive, in June 2017, the Banking Supervision Department issued a letter entitled, “Improving the operational efficiency of the banking system in Israel – efficiency in the area of real estate,” which encourages banking corporations to also examine, in addition to improved efficiency in personnel expenses, the possibility of reducing real-estate and maintenance costs of headquarters and management units, including through a reexamination of the geographical location of such units (hereinafter: “Real-Estate Efficiency”). In order to encourage the implementation of a plan for Real-Estate Efficiency, the Banking Supervision Department will approve reliefs for the banks in the area of capital adequacy. Pursuant to the additional letter, the term of the original letter has been extended until June 30, 2018.

36 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Capital requirements in respect of debts secured by residential properties On March 15, 2018, the Banking Supervision Department issued an update of Proper Conduct of Banking Business Directive 203 concerning debts secured by residential properties, pursuant to which loans fully secured by mortgages on residential properties at a financing rate higher than 60% would be weighted at a rate of 60%. The directive took effect on the date of its publication, and applies to loans secured by residential properties granted as of March 15, 2018.

Private offering of contingent convertible (CoCo) notes and bonds Within a facility approved by the Board of Directors of the Bank for raising debt instruments and secondary capital in the amount of NIS 6 billion in 2018, on April 26, 2018, Hapoalim Hanpakot (a wholly owned subsidiary that serves as the issuance arm of the Bank) performed a private offering for institutional investors of subordinated notes with a loss-absorption mechanism, in accordance with Proper Conduct of Banking Business Directive 202, which will constitute part of the Tier 2 capital of the Bank, linked to the CPI and bearing annual interest at a rate of 1.42%, with principal in a total amount of approximately NIS 1.06 billion, maturing in 2028. Hapoalim Hanpakot will be permitted to list the aforesaid subordinated notes for trading on the primary list on the stock exchange. Until the date of listing on the primary list on the stock exchange, if performed, the subordinated notes will bear annual interest at the rate noted above, plus an annual rate of 0.2%.

37 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 2-20: Calculation of the capital-adequacy ratio

March 31, March 31, December 31, 2018 2017 2017 NIS millions 1. Capital for the calculation of the capital ratio after supervisory adjustments and deductions Common equity Tier 1 capital(1) 36,637 35,731 36,582 Additional Tier 1 capital 977 1,221 1,221 Total Tier 1 capital(1) 37,614 36,952 37,803 Tier 2 capital 9,016 10,538 9,728 Total overall capital(1) 46,630 47,490 47,531

2. Weighted balances of risk-adjusted assets Credit risk(2) 303,068 290,010 295,986 Market risks 4,692 5,174 5,114 Operational risk 23,779 23,517 23,672 Total weighted balances of risk-adjusted assets(2) 331,539 318,701 324,772

% 3. Ratio of capital to risk components Ratio of common equity Tier 1 capital to risk components 11.05% 11.21% 11.26% Ratio of Tier 1 capital to risk components 11.35% 11.59% 11.64% Ratio of total capital to risk components 14.06% 14.90% 14.64% Minimum common equity Tier 1 capital ratio required by the Banking Supervision Department(3) 10.23% 10.20% 10.23% Minimum total capital ratio required by the Banking Supervision Department(3) 13.73% 13.70% 13.73%

(1) The data are presented in accordance with Proper Conduct of Banking Business Directive 202, “Capital Measurement and Adequacy – Supervisory Capital,” and in accordance with the transitional directives established in Proper Conduct of Banking Business Directive 299. The data also include adjustments in respect of the efficiency plan, established based on the letter of the Banking Supervision Department of January 12, 2016, “Improvement of the operational efficiency of the banking system in Israel” (hereinafter: Efficiency Plan Adjustments), allocated in equal parts over five years, beginning in 2017. For additional details regarding the effect of the transitional directives and the Efficiency Plan Adjustments, see Note 9 to the Condensed Financial Statements. (2) A total of NIS 800 million as at March 31, 2018, NIS 853 million as at December 31, 2017, and NIS 1,013 million as at March 31, 2017, was deducted from the total weighted balances of risk-adjusted assets, due to Efficiency Plan Adjustments, which, in accordance with the approval of the Banking Supervision Department, are allocated gradually over five years, beginning in 2017. (3) The minimum required common equity Tier 1 capital ratio and the minimum required total capital ratio are 10% and 13.5%, respectively. A capital requirement at a rate representing 1% of the balance of housing loans at the dates of the financial statements was added to these ratios.

38 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 2-21: Composition of capital for the purpose of calculating the ratio of capital to risk components

March 31, March 31, December 31, 2018 2017 2017 NIS millions Tier 1 capital Paid-up common share capital and premium 8,148 8,146 8,124 Retained earnings 28,849 27,392 28,465 Non-controlling interests in equity of consolidated subsidiaries 49 81 70 Unrealized profits from adjustments of securities available for sale to fair value 287 495 510 Other capital instruments )628( )323( )531( Amounts deducted from Tier 1 capital )68( )60( )56( Total common equity Tier 1 capital 36,637 35,731 36,582 Innovative hybrid instruments 977 1,221 1,221 Total Tier 1 capital 37,614 36,952 37,803

Tier 2 capital Hybrid capital instruments and subordinated notes 136 242 148 Collective allowances for credit losses before the effect of related tax 3,788 3,625 3,700 Tier 2 capital instruments issued by subsidiaries of the banking corporation to third-party investors 5,092 6,671 5,880 Total Tier 2 capital 9,016 10,538 9,728 Total qualifying capital 46,630 47,490 47,531

For further details, see Note 9 to the Condensed Financial Statements.

39 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 2-22: Risk components and regulatory capital requirements in respect of credit risk, market risk, and operational risk

March 31, 2018 March 31, 2017 December 31, 2017 Risk-adjusted Capital Risk-adjusted Capital Risk-adjusted Capital assets requirements(1) assets requirements(1) assets requirements(1) NIS millions Credit risk Sovereign debts 1,407 193 1,477 202 1,440 198 Debts of public-sector entities 3,069 421 2,835 388 3,171 435 Debts of banking corporations 5,577 766 7,044 965 6,505 893 Debts of corporations 115,891 15,912 116,368 15,942 112,952 15,508 Debts secured by commercial real estate 53,016 7,279 45,796 6,274 49,263 6,764 Retail exposures to individuals 50,172 6,889 47,934 6,567 49,767 6,833 Loans to small businesses 8,255 1,133 7,859 1,077 8,107 1,113 Housing loans 42,460 5,830 38,751 5,309 41,536 5,703 Securitization 88 12 91 12 87 12 Other assets 19,125 2,626 17,806 2,439 19,466 2,673 CVA risk 4,008 550 4,049 555 3,692 507 Total in respect of credit risk 303,068 41,611 290,010 39,730 295,986 40,639 Market risks 4,692 644 5,174 709 5,114 702 Operational risk 23,779 3,265 23,517 3,222 23,672 3,250 Total risk-adjusted assets in respect of the various risks 331,539 45,520 318,701 43,661 324,772 44,591 Common equity Tier 1 capital 36,637 35,731 36,582 Tier 1 capital 37,614 36,952 37,803 Total capital 46,630 47,490 47,531

(1) The capital requirements were calculated in accordance with the minimum total capital ratio required by the Banking Supervision Department, at 13.73% as at March 31, 2018; 13.73% as at December 31, 2017; and 13.7% as at March 31, 2017. The following approaches are used at the Bank to calculate supervisory capital, with respect to the main risk categories: standardized approach (used for credit risks, market risks, operational risk, and securitization risk); present exposure approach (for counterparty credit risk); and calculation based on risk weights established in the Proper Conduct of Banking Business Directives (used in the calculation of other assets).

40 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

(3) Leverage ratio The Bank applies Proper Conduct of Banking Business Directive 218, “Leverage Ratio” (hereinafter: the “Directive”). The Directive establishes a simple, transparent, non-risk-based leverage ratio, which serves as a reliable measurement complementary to risk-based capital requirements, and which is designed to limit the accumulation of leverage at banking corporations. The leverage ratio is expressed as a percentage, and is defined as the ratio of the capital measurement to the exposure measurement. Capital, for the purpose of measurement of the leverage ratio, is Tier 1 capital, as defined in Proper Conduct of Banking Business Directive 202, taking into consideration the transitional arrangements that have been established. The total exposure measurement is the total of balance sheet exposures, exposures to derivatives and to securities financing transactions, and off-balance sheet items.

Table 2-23: Leverage ratio

March 31, March 31, December 31, 2018 2017 2017 NIS millions Consolidated data Tier 1 capital* 37,614 36,952 37,803 Total exposures* 509,845 506,326 513,037

% Leverage ratio 7.38% 7.30% 7.37% Minimum leverage ratio required by the Banking Supervision Department 6.00% 6.00% 6.00%

* These data also include Efficiency Plan Adjustments, established based on the letter of the Banking Supervision Department of January 12, 2016, “Improvement of the operational efficiency of the banking system in Israel.” The effect of the costs of the efficiency plan on the leverage ratio as at March 31, 2018, estimated at approximately 0.12%, is allocated in equal parts over five years, beginning in 2017.

41 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

2.4. Description of the Bank Group’s business by supervisory activity segments The reporting on segments of activity is in accordance with the format and classifications established in the Public Reporting Directives of the Banking Supervision Department. This reporting is fundamentally different from the activity segments used at the Bank, according to the approach of its management, which are described in Section 2.5 and in Note 12A to the Financial Statements. Supervisory activity segments are reported in the uniform format established by the Banking Supervision Department for the entire banking system. The segments are based on customer characteristics, such as asset portfolio volume with respect to private customers, or annual revenue of a business with respect to business customers. For the definitions of the supervisory segments and for details regarding the main points of the guidelines, estimates, and reporting principles, see Note 12 to the Financial Statements.

Table 2-24: Results of operations and principal data of the supervisory activity segments

For the three months ended March 31, 2018 Activity in Israel Activity Total overseas Households Private Small Mid-sized Large Institutional Financial Other Total Total banking businesses and businesses businesses entities management activity in activity microbusinesses Israel overseas NIS millions Total net financing profit 814 34 597 170 256 28 354 - 2,253 131 2,384 Fees and other income 563 49 316 85 157 42 24 46 1,282 25 1,307 Total income 1,377 83 913 255 413 70 378 46 3,535 156 3,691

Provision (income) for credit losses 155 - 80 6 )8( 2 - - 235 15 250 Operating and other expenses 1,063 52 515 98 148 43 102 86 2,107 246 2,353 Profit (loss) before taxes 159 31 318 151 273 25 276 )40( 1,193 )105( 1,088 Provision for taxes (tax benefit) on profit (loss) 55 10 112 53 97 9 117 8 461 12 473 Net profit (loss) attributed to shareholders of the Bank 100 21 206 98 176 16 169 )48( 738 )110( 628

Balance of gross credit to the public at the end of the reported period 119,264 1,986 65,945 27,867 55,427 2,574 - - 273,063 15,004 288,067 Balance of deposits from the public at the end of the reported period 125,659 32,391 60,446 18,822 36,198 49,464 - - 322,980 21,830 344,810

42 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 2-24: Results of operations and principal data of the supervisory activity segments (continued)

For the three months ended March 31, 2017* Activity in Israel Activity Total overseas Households Private Small Mid-sized Large Institutional Financial Other Total Total activity banking businesses and businesses businesses entities management activity in overseas microbusinesses Israel NIS millions Total net financing profit 761 29 553 162 273 25 334 - 2,137 118 2,255 Fees and other income 548 50 298 93 178 37 28 56 1,288 59 1,347 Total income 1,309 79 851 255 451 62 362 56 3,425 177 3,602

Provision (income) for credit losses 113 - 126 )45( )81( )4( - - 109 )2( 107 Operating and other expenses 1,055 53 501 101 150 46 101 15 2,022 195 2,217 Profit (loss) before taxes 141 26 224 199 382 20 261 41 1,294 )16( 1,278 Provision for taxes (tax benefit) on profit (loss) 53 10 81 77 144 6 116 39 526 )4( 522 Net profit (loss) attributed to shareholders of the Bank 87 16 143 122 238 14 157 2 779 )12( 767

Balance of gross credit to the public at the end of the reported period 113,334 1,797 59,162 28,008 52,915 1,818 - - 257,034 16,928 273,962 Balance of deposits from the public at the end of the reported period 124,999 32,236 44,866 18,481 38,902 50,463 - - 309,947 27,571 337,518

* Reclassified. For additional information, see Note 28 to the Annual Financial Statements for 2017.

Principal changes in net profit and balance sheet balances Household Segment Net profit attributed to shareholders of the Bank in the Household Segment totaled NIS 100 million in the first quarter of 2018, compared with net profit in the amount of NIS 87 million in the same quarter last year. The increase resulted from an increase in net interest income and in income from fees, partly offset by an increase in the allowance for credit losses. Net financing profit totaled NIS 814 million in the first quarter of 2018, compared with NIS 761 million in the same quarter last year. The increase mainly resulted from an increase in average balances of housing credit and consumer credit, along with an increase in financial spreads on housing credit. Fees and other income totaled NIS 563 million in the first quarter of 2018, compared with NIS 548 million in the same quarter last year. The increase resulted from an increase in income from credit cards. The provision for credit losses totaled NIS 155 million in the first quarter of 2018, compared with a provision in the amount of NIS 113 million in the same quarter last year. The increase mainly resulted from an increase in the collective allowance, due to an increase in automatic charge-offs and in the volume of problematic credit. This increase was partly offset by a decrease in the individual allowance.

43 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Operating and other expenses of the segment totaled NIS 1,063 million in the first quarter of 2018, compared with NIS 1,055 million in the same quarter last year. Credit to the public totaled approximately NIS 119.3 billion as at March 31, 2018 (of which: consumer credit in the amount of approximately NIS 38.9 billion and housing credit of approximately NIS 65.3 billion), compared with approximately NIS 118.1 billion as at December 31, 2017 (of which: consumer credit in the amount of approximately NIS 38.7 billion and housing credit of approximately NIS 64.3 billion). Deposits from the public totaled approximately NIS 125.7 billion as at March 31, 2018, compared with approximately NIS 123.8 billion as at December 31, 2017.

Private Banking Segment Net profit attributed to shareholders of the Bank in the Segment totaled NIS 21 million in the first quarter of 2018, compared with net profit in the amount of NIS 16 million in the same quarter last year. The increase resulted from an increase in net financing profit. Net financing profit totaled NIS 34 million in the first quarter of 2018, compared with NIS 29 million in the same quarter last year. The increase mainly resulted from an increase in average credit balances between the periods. Fees and other income totaled NIS 49 million in the first quarter of 2018, similar to the same quarter last year. Operating and other expenses of the segment totaled NIS 52 million in the first quarter of 2018, similar to the same quarter last year. Credit to the public totaled approximately NIS 2.0 billion as at March 31, 2018, compared with approximately NIS 1.8 billion as at December 31, 2017. Deposits from the public totaled approximately NIS 32.4 billion as at March 31, 2018, compared with approximately NIS 31.8 billion as at December 31, 2017.

Small Business and Microbusiness Segment Net profit attributed to shareholders of the Bank in the Small Business and Microbusiness Segment totaled NIS 206 million in the first quarter of 2018, compared with NIS 143 million in the same quarter last year. The increase mainly resulted from an increase in net financing profit, along with an increase in income from fees and a decrease in the provision for credit losses. Net financing profit totaled NIS 597 million in the first quarter of 2018, compared with NIS 553 million in the same quarter last year. The increase mainly resulted from an increase in credit and deposit volumes. Fees and other income totaled NIS 316 million in the first quarter of 2018, compared with NIS 298 million in the same quarter last year. The increase mainly resulted from an increase in credit-card activity and in securities activity. The provision for credit losses totaled NIS 80 million in the first quarter of 2018, compared with NIS 126 million in the same quarter last year. The decrease mainly resulted from a decrease in the individual allowance. Operating and other expenses of the segment totaled NIS 515 million in the first quarter of 2018, compared with NIS 501 million in the same quarter last year. Credit to the public totaled approximately NIS 65.9 billion as at March 31, 2018, compared with approximately NIS 63.3 billion as at December 31, 2017. Deposits from the public totaled approximately NIS 60.4 billion as at March 31, 2018, compared with approximately NIS 57.4 billion as at December 31, 2017.

44 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Mid-sized Business Segment Net profit attributed to shareholders of the Bank in the Mid-Sized Business Segment totaled NIS 98 million in the first quarter of 2018, compared with NIS 122 million in the same quarter last year. The decrease mainly resulted from an increase in the provision for credit losses. Net financing profit totaled NIS 170 million in the first quarter of 2018, compared with NIS 162 million in the same quarter last year. Fees and other income totaled NIS 85 million in the first quarter of 2018, compared with NIS 93 million in the same quarter last year. The decrease mainly resulted from a decrease in credit-handling fees. The provision for credit losses totaled NIS 6 million in the first quarter of 2018, compared with income in the amount of NIS 45 million in the same quarter last year. The increase in the provision mainly resulted from an increase in the collective allowance for sound credit, compared with the same quarter last year, in which income was recorded due to a decrease in the rate of the allowance. In addition, the collective allowance for substandard debts increased. Operating and other expenses of the segment totaled NIS 98 million in the first quarter of 2018, compared with NIS 101 million in the same quarter last year. Credit to the public totaled approximately NIS 27.9 billion as at March 31, 2018, compared with approximately NIS 28.4 billion as at December 31, 2017. Deposits from the public totaled approximately NIS 18.8 billion as at March 31, 2018, compared with approximately NIS 20.7 billion as at December 31, 2017.

Large Business Segment Net profit attributed to shareholders of the Bank in the Large Business Segment totaled NIS 176 million in the first quarter of 2018, compared with NIS 238 million in the same quarter last year. The decrease mainly resulted from a decrease in income in respect of credit losses. Net financing profit totaled NIS 256 million in the first quarter of 2018, compared with NIS 273 million in the same quarter last year. The decrease mainly resulted from a decrease in interest income, due to a decrease in financial spreads on credit. Fees and other income totaled NIS 157 million in the first quarter of 2018, compared with NIS 178 million in the same quarter last year. The decrease resulted from a decrease in credit-handling fees and in fees from financing transactions. Income in respect of credit losses totaled NIS 8 million in the first quarter of 2018, compared with income in the amount of NIS 81 million in the same quarter last year. The decrease in income resulted both from an increase in the collective allowance for sound credit, due to an increase in credit volumes, and from a decrease in income recorded on an individual basis, due to a decrease in recovery of charged-off debts. By contrast, the provision for credit losses in respect of substandard debts decreased, which offset the overall decrease in this income. Operating and other expenses of the segment totaled NIS 148 million in the first quarter of 2018, compared with NIS 150 million in the same quarter last year. Credit to the public totaled approximately NIS 55.4 billion as at March 31, 2018, compared with approximately NIS 53.3 billion as at December 31, 2017. Deposits from the public totaled approximately NIS 36.2 billion as at March 31, 2018, compared with approximately NIS 36.7 billion as at December 31, 2017.

45 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Institutional Entity Segment Net profit attributed to shareholders of the Bank in the Institutional Entity Segment totaled NIS 16 million in the first quarter of 2018, compared with NIS 14 million in the same quarter last year. Net financing profit totaled NIS 28 million in the first quarter of 2018, compared with NIS 25 million in the same quarter last year. Fees and other income totaled NIS 42 million in the first quarter of 2018, compared with NIS 37 million in the same quarter last year. Operating and other expenses of the segment totaled NIS 43 million in the first quarter of 2018, compared with NIS 46 million in the same quarter last year. Credit to the public totaled approximately NIS 2.6 billion as at March 31, 2018, compared with approximately NIS 2.4 billion as at December 31, 2017. Deposits from the public totaled approximately NIS 49.5 billion as at March 31, 2018, compared with approximately NIS 56.2 billion as at December 31, 2017. The increase resulted from an increase in deposits of large institutional investors.

Financial Management Segment Net profit attributed to shareholders of the Bank in the Financial Management Segment totaled NIS 169 million in the first quarter of 2018, compared with NIS 157 million in the same quarter last year. Net financing profit totaled NIS 354 million in the first quarter of 2018, compared with NIS 334 million in the same quarter last year. The increase mainly resulted from an increase in profits from sales of loans. Fees and other income totaled NIS 24 million in the first quarter of 2018, compared with NIS 28 million in the same quarter last year. Operating and other expenses of the segment totaled NIS 102 million in the first quarter of 2018, compared with NIS 101 million in the same quarter last year.

Other Segment (activity in Israel) The loss attributed to the shareholders of the Bank in the Other Segment in activity in Israel totaled NIS 48 million in the first quarter of 2018, compared with profit in the amount of NIS 2 million in the same quarter last year. The loss in the first quarter of 2018 mainly resulted from an increase in the provision for the investigation of the Bank Group’s business with American clients, which was allocated in Israel, and in the related legal expenses.

International Activity Segment The loss attributed to shareholders of the Bank in the International Activity Segment totaled NIS 110 million in the first quarter of 2018, compared with a loss in the amount of NIS 12 million in the same quarter last year.

46 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

The principal changes in the results of international activity are set out below: • The net profit of activity in the middle-market sector at the New York branch totaled approximately NIS 42 million in the first quarter of 2018, compared with net profit in the amount of NIS 25 million in the same quarter last year. The increase mainly resulted from an increase in net interest income, as a result of an increase in the volume of credit. • The loss of Bank Hapoalim Switzerland totaled approximately NIS 121 million in the first quarter of 2018, compared with a loss in the amount of approximately NIS 6 million in the same quarter last year. The change resulted from a decrease in profitability due to the decision to discontinue the activity of Hapoalim Switzerland, and from an increase in the provision for the investigation of the Bank Group's business with American clients at Bank Hapoalim Switzerland and in the related legal expenses, compared with the same period last year. • The loss of the Bank Pozitif Group totaled approximately NIS 17 million in the first quarter of 2018, compared with break-even in the same quarter last year. The loss mainly resulted from the first-time implementation of International Financial Reporting Standard 9 (IFRS-9). Following the implementation of this standard, an allowance for credit losses in the amount of approximately TRY 21 million was recognized.

Total credit to the public in international activity amounted to approximately NIS 15.0 billion as at March 31, 2018, compared with approximately NIS 15.2 billion at the end of 2017. • Credit to the public in the middle-market sector at the New York branch totaled approximately NIS 9.7 billion as at March 31, 2018 (approximately USD 2.7 billion), similar to December 31, 2017. • Credit to the public at Bank Hapoalim Switzerland totaled approximately NIS 1.4 billion as at March 31, 2018, similar to the balance as at December 31, 2017. • Credit to the public in the area of syndication at the New York branch totaled approximately NIS 0.7 billion as at March 31, 2018, compared with approximately NIS 0.8 billion as at December 31, 2017. • Credit to the public at Bank Pozitif in Turkey totaled approximately NIS 0.8 billion as at March 31, 2018, compared with approximately NIS 0.9 billion as at December 31, 2017.

Total deposits from the public in international activity amounted to approximately NIS 21.8 billion as at March 31, 2018, compared with approximately NIS 20.9 billion at the end of 2017. • The balance of deposits from the public in the middle-market sector at the New York branch totaled approximately NIS 6.8 billion as at March 31, 2018, compared with approximately NIS 6.7 billion as at December 31, 2017. • The balance of deposits from the public at Bank Hapoalim Switzerland totaled approximately NIS 4.2 billion as at March 31, 2018, compared with approximately NIS 4.4 billion as at December 31, 2017. • The balance of brokered CD deposits from the public at the New York branch totaled approximately NIS 8.6 billion as at March 31, 2018, compared with approximately NIS 7.6 billion as at December 31, 2017. • Deposits from the public at the Global Private Banking Center in Tel Aviv totaled approximately NIS 2.2 billion as at March 31, 2018, compared with approximately NIS 2.1 billion as at December 31, 2017.

47 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

2.5. Description of the Bank Group’s business by segment of activity based on the management approach The Bank Group operates in Israel and abroad, and provides a wide range of banking and financial services to its customers. The division into segments of activity according to the management approach is based on types of products and services or on types of customers. The chief operating decision maker of the Bank uses this division to make decisions and to analyze the Group’s business results. Customers’ assignments to the segments of activity are based on the actual assignment of customers to the organizational units that serve them, which is performed in accordance with various criteria established by the Board of Management of the Bank. For details regarding the criteria used in this classification and the rules for the distribution of the results of operations among the segments, see Note 12A to the Financial Statements.

Table 2-25: Results of operations and principal data of the segments of activity based on management approach

For the three months ended March 31, 2018 Retail activity Business activity Private Small Housing Commercial Corporate International Financial Others and Total customers businesses loans activity Group management adjustments NIS millions Total net financing profit 678 400 160 244 356 131 70 337 8 2,384 Fees and other income 377 144 15 107 123 31 494 37 )21( 1,307 Total income 1,055 544 175 351 479 162 564 374 )13( 3,691

Provision (income) for credit losses 110 95 5 21 )30( 15 34 - - 250 Operating and other expenses 868 306 60 141 178 252 423 123 2 2,353 Profit (loss) before taxes 77 143 110 189 331 )105( 107 251 )15( 1,088 Provision for taxes (tax benefit) on profit (loss) 27 51 39 67 120 12 34 105 18 473 Net profit (loss) attributed to shareholders of the Bank 50 92 71 122 211 )110( 69 157 )34( 628

Net credit to the public at the end of the reported period 40,005 30,899 75,606 34,847 68,627 12,356 20,292 1,471 - 284,103 Deposits from the public at the end of the reported period 174,453 38,810 - 24,284 41,209 21,830 107 44,117 - 344,810

48 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 2-25: Results of operations and principal data of the segments of activity based on management approach (continued)

For the three months ended March 31, 2017* Retail activity Business activity Private Small Housing Commercial Corporate International Isracard Financial Others and Total customers businesses loans activity Group management adjustments NIS millions Total net financing profit 631 377 118 223 371 118 63 335 19 2,255 Fees and other income 372 141 16 108 144 65 466 41 )6( 1,347 Total income 1,003 518 134 331 515 183 529 376 13 3,602

Provision (income) for credit losses 83 129 - 4 )131( )2( 24 - - 107 Operating and other expenses 864 320 58 137 178 201 401 125 )67( 2,217 Profit before taxes 56 69 76 190 468 )16( 104 251 80 1,278 Provision for taxes on profit 22 27 27 74 183 )5( 36 120 38 522 Net profit (loss) attributed to shareholders of the Bank 34 42 49 116 285 )11( 67 143 42 767

Net credit to the public at the end of the reported period 38,145 29,354 69,662 32,567 65,346 13,935 19,105 1,868 - 269,982 Deposits from the public at the end of the reported period 169,906 36,710 - 22,881 35,159 27,571 - 45,291 - 337,518

* Reclassified. For additional information, see Note 28A to the Annual Financial Statements for 2017.

For additional information regarding the segments of activity and analysis of the segments’ results, see Section 6.1 of the Corporate Governance Report.

49 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

2.6. Principal subsidiary and affiliated companies 2.6.1. Subsidiaries in Israel Isracard Group The Group includes the following companies: Isracard Ltd., Poalim Express Ltd., Europay (Eurocard) Israel Ltd., Isracard Mimun Ltd., Isracard (Nechasim) 1994 Ltd., Tzameret Mimunim Ltd., and Global Factoring Ltd. The core activity of the Isracard Group is issuance, clearing, and financing in Isracard credit cards, a private brand under its ownership, as well as in MasterCard, Visa, and American Express credit cards, under licensing agreements. The Group also has activities in the following areas: granting consumer credit other than through credit cards, check payment guarantees and check discounting, direct sales-slip discounting, and factoring (receivables discounting). The contribution of the Isracard Group to the net profit of the Bank amounted to NIS 77 million in the first quarter of 2018, compared with NIS 75 million in the same period last year. The Bank’s investment in the Isracard Group totaled NIS 3,147 million as at March 31, 2018, compared with NIS 3,065 million at the end of 2017. In accordance with the accounting principles applicable to the Bank concerning income taxes, in view of the expectation of separation from the Isracard Group, a liability for deferred taxes was recorded in the books of the Bank, based on the assumption of realization of the holdings of the Bank in the Isracard Group in consideration for its balance sheet value. It should be noted that as the balance sheet value of Isracard is primarily composed of distributable profits, the provision for deferred taxes included in the financial statements totals approximately NIS 22 million. In addition, the Bank has included a liability for deferred taxes in the amount of approximately NIS 82 million in respect of tax that may be imposed under the assumption of distribution of part of the balances of retained earnings as a dividend to the Bank immediately prior to the separation. Realization at a price exceeding the balance sheet value of the Isracard Group would be taxed at the combined tax rate applicable to the Bank. If the position of the Tax Assessment Officer is accepted (as presented in Note 8C(3) to the Annual Financial Statements for 2017), pursuant to which profit tax should also be applied to distributable profits exempt from corporate tax under the Income Tax Ordiance, it would result in an increase in the tax liability imposed upon the Bank in this regard. For additional details pertaining to the Isracard Group, see the Isracard Group Segment in the section “Segments of activity based on management approach” in the Corporate Governance Report for 2017, and below. For details regarding legal claims in connection with the Isracard Group, see Note 10B. The Board of Management of the Bank, with the guidance of the Board of Directors, has continued to prepare for the separation of the Isracard Group from the Bank, as required pursuant to the Law for Increasing Competition and Reducing Concentration in the Banking Market in Israel (Legislative Amendments), 2017. Within this process, the Board of Directors and the Board of Management of the Bank are examining several alternatives for the transfer of the Bank’s holdings in the Isracard Group, including: a. Sale of the holdings in the Isracard Group to an investor or group of investors; b. A public offering of the holdings in the Isracard Group; c. Distribution of a dividend in kind of the holdings in the Isracard Group to the shareholders of the Bank; d. A combination of any of the foregoing alternatives.

50 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Given the alternatives under consideration, as described, the Board of Management of the Bank, with the guidance of the Board of Directors, resolved, in April 2017, to begin preparing a prospectus with regard to the Isracard Group. In October 2017, the Bank decided to retain the services of the investment bank Citi to guide the Bank in choosing and promoting the best alternative for separation from the Isracard Group. The investment bank will assist in the advancement of any of the alternatives that is selected (sale, issuance to the public and/or a dividend in kind, or a combination of several of these). As part of the preparations for the separation, the Bank and Isracard are conducting negotiations for the acquisition of Poalim Express by Isracard from the Bank. At the current time, the alternatives are under examination, and there is no certainty with regard to the realization of any of these possibilities. Within the examination of alternatives by the Bank, the controlling shareholder Arison Holdings (1998) Ltd. (“Arison”) notified the Bank that if and inasmuch as the Bank decides to apply a trajectory of distribution in kind of Isracard shares (the “Trajectory”), Arison will commit to acting in accordance with the rules and restrictions that will apply in connection with its holdings in shares of Isracard, as detailed below: (a) Arison will act to sell the shares that it receives within the Trajectory on the or outside it, such that upon completion of such sales it does not retain shares of Isracard at a rate of more than 5% (the “Transitional Period”); (b) during the Transitional Period, Arison will not acquire additional shares of Isracard, with the exception of shares received from the Bank through distribution in kind; (c) beginning on the date of the receipt of the Isracard shares by Arison within the Trajectory, in any event, Arison will not vote in Isracard shares at a rate of more than 5% of the voting interests in Isracard; (d) Arison will not propose or appoint a director to serve on its behalf on the board of directors of Isracard. As long as Isracard is controlled by the Bank, all decisions concerning the manner of operation of the control over Isracard and the appointment of directors at Isracard on behalf of the Bank shall be made solely by the authorized organs of the Bank; (e) in the event that Arison executes an off-market sale transaction at a price per share that reflects a premium over the price of the share on the stock exchange at the relevant date, such that the other shareholders of the Bank are unable to benefit from this premium, Arison shall take measures to ensure that the other public shareholders of Isracard benefit from the premium. The Banking Supervision Department and the Israel Securities Authority were also notified accordingly. The Bank submitted a request to the Israel Securities Authority for preliminary guidance pursuant to which the controlling shareholder of the Bank and her representatives on the Board of Directors should not be considered to have a personal interest in the distribution of shares of Isracard as a dividend in kind to the shareholders of the Bank. The Israel Securities Authority gave notice that it would not intervene in this position, particularly in light of the commitment of the controlling shareholder to undertake the rules and limits detailed above. Members of the Board of Management, officers of the Bank, and employees of the Bank involved in strategy or in the management of business activity at the Bank no longer serve on the boards of directors of the companies in the Isracard Group; employees of the Bank shall not constitute a majority on the boards of directors of the companies in the group; and limits apply to directors on the board of directors of Isracard who are employees of the Bank with regard to the transfer of information from the board of directors of Isracard to the management of the Bank. The aforesaid changes were performed in accordance with the request of the Banking Supervision Department, in connection with the Law for Increasing Competition and Reducing Concentration in the Banking Market in Israel, the process of separation from the Isracard Group mandated by this law, and the reduction of potential conflicts of interest.

51 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

2.6.2. Activity of the Bank Group abroad For details regarding additional companies and further information concerning the international operations of the Bank, see the International Activity Segment in the section “Segments of activity based on management approach” in the Corporate Governance Report for 2017, and below.

Bank Hapoalim (Switzerland) Ltd. (hereinafter: “Hapoalim Switzerland”) A banking subsidiary, wholly owned by the Bank, incorporated in Switzerland, mainly engaged in the provision of private-banking services through branches in Zurich and ; it also operates through an investment consulting firm in Israel, and through a representative office in Israel. In September 2017, the Bank decided to act to discontinue the activity of Hapoalim Switzerland, through the sale of its assets or by other means. The resolution was passed in view of the Bank’s risk-management policy, which aims to minimize compliance risks in the Bank Group, including such risks as emerged in connection with the investigation by the United States authorities, and in view of the changes in the global regulatory environment and their effect on such risks. As part of the realization of the decision to discontinue the activity of Hapoalim Switzerland, and further to the statements in Note 36B to the Financial Statements of the Bank as at December 31, 2017, regarding the binding memorandum of understanding signed for the sale of the global private banking client asset portfolio of Hapoalim Switzerland, on April 11, 2018, Bank Hapoalim Switzerland signed a detailed agreement with Bank J. Safra AG and Safra Sarasin (Luxembourg) SA (jointly, “Safra Sarasin”) for the sale of most of the global private banking client asset portfolio of Bank Hapoalim Switzerland at its branches in Switzerland and Luxembourg to Bank Safra Sarasin. As at that date, the expected consideration in respect of the transaction (subject to adjustments, mainly dependent upon the volume of client accounts transferred) is approximately 20-23 million Swiss francs (NIS 73-85 million). Completion of the transaction, planned for execution in 2018, is subject, among other matters, to approvals by regulatory authorities. The loss of Bank Hapoalim Switzerland in the first quarter of 2018 totaled CHF 31 million, compared with profit in the amount of CHF 1 million in the same quarter last year. The loss mainly resulted from a provision in connection with the investigation of the Bank Group's business with American clients, in the amount of approximately CHF 12.5 million, and from legal expenses connected with this investigation, in the amount of approximately CHF 12 million. For details regarding the investigation of the Bank Group’s business with American clients, see Note 10C to the Condensed Financial Statements. For details regarding the investigation of the Fédération Internationale de Football Association (FIFA), see Note 10D to the Condensed Financial Statements.

Bank Pozitif Kredi Ve Kalkinma Bankasi Anonim Sirketi (hereinafter: “Bank Pozitif”) The Bank Group currently operates in Turkey through Bank Pozitif, which specializes in corporate banking. Deposit taking is subject to local regulation, and is permitted up to the amount of credit of each borrower. The Bank is examining possibilities for the sale of its full holdings in Bank Pozitif, further to the Bank’s strategic plan, in which a decision was made to gradually reduce the credit portfolio at Bank Pozitif. The business results of the Bank Pozitif Group amounted to a loss of TRY 25 million in the first quarter of 2018, compared with profit of approximately TRY 1.2 million in the same quarter last year. The loss mainly resulted from the first-time implementation of International Financial Reporting Standard 9 (IFRS-9). Following the implementation of this standard, an allowance for credit losses in the amount of approximately TRY 21 million was recognized.

52 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

The Bank Pozitif Group’s contribution to the Bank’s operating results, excluding exchange-rate differences and after supplementary taxes in Israel, amounted to a negative contribution of approximately NIS 23 million in the first quarter of 2018, compared with a negative contribution of approximately NIS 16 million in the same quarter last year. The Bank’s investment in the Bank Pozitif Group totaled NIS 192 million as at March 31, 2018, compared with approximately NIS 215 million at the end of 2017.

3. Review of risks Some of the information in this section, even if it is based on processing of historical data, constitutes forward-looking information, as defined in the Securities Law and as detailed in Section 1.1 above. Additional information regarding risks is available on the Bank’s website, in the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at March 31, 2018, hereinafter the “Report on Risks.” This review should be perused in conjunction with the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017, and with the Annual Financial Statements for 2017 and the accompanying Notes.

3.1. General description of risks and risk management The Bank’s activity is accompanied by the following financial risks: credit risks (including concentration risk and counterparty risk), market risks (including exchange-rate risk and interest-rate risk in the banking book), investment risk (share and credit spread risk), and liquidity risk (including refinancing risk). Other non-financial risks are mainly compliance risk, legal risk, and operational risks. Additional risks to which the Bank is exposed are handled directly as part of the management of its business: reputational risk, competitive risk, regulatory and legislative risk, economic risk, strategic risk, and environmental risk. The Bank has defined the following risks as material risks: credit risk, market risk, investment risk, compliance risk, operational risk, concentration risk, counterparty risk, interest-rate risk in the banking book, liquidity risk, reputational risk, strategic risk, and regulatory and legislative risk. Risk management is performed based on a global view of the Bank’s activity in Israel and of activity at the Bank’s branches abroad, with due attention to the activity of subsidiaries with exposure significant for the Group. Risks are managed separately by each subsidiary in the Bank Group, according to policy formulated by each company’s board of directors and presented to the Board of Directors of the Bank. The Bank manages the various risks while using hedges for some risks. Risk control and the assessment of financial risks and operational risks are performed based on a uniform methodology at the Group level, under the direction of the Risk Management Area, taking into account the unique characteristics of the activity of each subsidiary. The Chief Risk Officer (CRO) and the member of the Board of Management responsible for the Risk Management Area until March 2018 was Mr. T. Cohen. Since March, Ms. R. Tal-Avrahami serves as acting Chief Risk Officer. In April 2018, the Board of Directors of the Bank resolved to appoint Dr. A. Bachar to the position of Chief Risk Officer and member of the Board of Management responsible for the Risk Management Area. This appointment will take effect subject to the approval of the Supervisor of Banks, when such approval is received.

53 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Financial risks are managed by designated members of the Board of Management and under their responsibility. The principal members of the Board of Management responsible for managing credit risks until March 2018 were Mr. J. Orbach, Head of Corporate Banking, and Mr. R. Stein, Head of . As of March 2018, the member of the Board of Management responsible for the Corporate Banking Area is Mr. T. Cohen. The member of the Board of Management responsible for managing market, investment, and liquidity risks is Mr. D. Koller, Head of Financial Markets and International Banking. In April 2018, the Board of Directors of the Bank resolved to appoint Mr. Y. Antebi to the position of Head of Financial Markets and International Banking. This appointment will take effect subject to the approval of the Supervisor of Banks. Legal risk was managed by the Chief Legal Advisor Attorney I. Mazur until March 2018, and is managed by Attorney Y. Almog since March 2018. Technological risk is managed by Ms. E. Ben-Zeev, Head of Information Technology. Operational risk, excluding legal risk and technological risk, is managed by each member of the Board of Management in the area of activity for which he or she is responsible. For details and more extensive information regarding risk management governance, including the control approach, the responsible parties, and the committees of the Board of Directors and Board of Management relevant to risk management, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017.

3.2. Credit risk Credit risk is the risk that a borrower or debtor may default on obligations to the Bank under a credit agreement. The credit portfolio is a major component of the asset portfolio of the Bank Group; therefore, deterioration in the stability of the various borrowers may have an adverse effect on the Group’s asset value and profitability. For more extensive information regarding credit risk and the management thereof, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017; the section “Review of risks” in the Annual Financial Statements for 2017 and the accompanying Notes; and the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at March 31, 2018.

54 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.2.1. Problematic debts Table 3-1: Problematic credit risk(1)

March 31, 2018 December 31, 2017 Balance Off-balance Total Balance Off-balance Total sheet sheet sheet sheet NIS millions Impaired credit risk 2,592 559 3,151 2,666 620 3,286 Substandard credit risk 1,525 221 1,746 1,463 200 1,663 Credit risk under special supervision(2) 3,014 640 3,654 2,560 825 3,385 Total problematic credit risk* 7,131 1,420 8,551 6,689 1,645 8,334

Net problematic credit risk 5,970 1,279 7,249 5,597 1,495 7,092 * Of which, unimpaired debts in arrears of 90 days or more(2) 939 - 939 913 - 913

Note: Balance sheet and off-balance sheet credit risk are presented before the effect of the allowance for credit losses, and before the effect of deductible collateral for the purpose of the indebtedness of borrowers and of groups of borrowers. (1) Credit risk – impaired, substandard, or under special supervision. (2) Including in respect of housing loans for which an allowance based on the extent of arrears exists, and in respect of housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more.

Table 3-2: Nonperforming assets*

Balance as at March 31, December 31, 2018 2017 NIS millions Impaired credit to the public not accruing interest income (NPL) 2,015 2,110 Assets received upon settlement of debts 86 91 Total nonperforming assets 2,101 2,201 NPL as a percentage of total credit to the public 0.70% 0.75%

* Nonperforming assets include assets of the Bank that do not accrue interest income. This information is similar to the balance of nonperforming assets presented in the financial statements of banking corporations in the United States. This figure is presented in order to provide disclosure of the part of the Bank’s assets included in the financial statements that does not accrue interest income.

55 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-3: Additional information regarding changes in problematic debts in respect of credit to the public and in the individual allowance

For the three months ended March 31, 2018 Commercial Private Total NIS millions Change in balance of impaired debts in respect of credit to the public Balance of impaired debts at beginning of year 1,896 768 2,664 Debts classified as impaired during the period 73 76 149 Debts returned to unimpaired classification )8( )5( )13( Impaired debts charged off )70( )48( )118( Impaired debts repaid )51( )41( )92( Balance of impaired debts at end of period 1,840 750 2,590

Change in balance in troubled debt restructuring Balance in troubled debt restructuring at beginning of year 672 637 1,309 Restructured during the period 53 80 133 Debts in restructuring charged off )21( )42( )63( Debts in restructuring repaid )67( )55( )122( Balance in troubled debt restructuring at end of period 637 620 1,257

Change in balance sheet allowance for credit losses in respect of impaired debts Allowance for credit losses in respect of impaired debts at beginning of year 318 227 545 Provision for credit losses – increase in allowance 99 59 158 Provision for credit losses – reduction of allowance )19( )32( )51( Recoveries of debts charged off in previous years )175( )30( )205( Allocated to P&L – allowance for credit losses )95( )3( )98( Charge-offs during the period )70( )48( )118( Recovery of charged off debts 175 30 205 Other 1 1 2 Allowance for credit losses in respect of impaired debts at end of period 329 207 536

56 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-3: Additional information regarding changes in problematic debts in respect of credit to the public and in the individual allowance (continued)

For the three months ended March 31, 2017 Commercial Private Total NIS millions Change in balance of impaired debts in respect of credit to the public Balance of impaired debts at beginning of year 3,229 746 3,975 Debts classified as impaired during the period 105 116 221 Debts returned to unimpaired classification )36( )5( )41( Impaired debts charged off )222( )63( )285( Impaired debts repaid )382( )32( )414( Balance of impaired debts at end of period 2,694 762 3,456

Change in balance in troubled debt restructuring Balance in troubled debt restructuring at beginning of year 1,333 615 1,948 Restructured during the period 63 *124 *187 Debts in restructuring charged off )32( )48( )80( Debts in restructuring repaid )282( *)68( *)350( Balance in troubled debt restructuring at end of period 1,082 623 1,705

Change in balance sheet allowance for credit losses in respect of impaired debts Allowance for credit losses in respect of impaired debts at beginning of year 749 145 894 Provision for credit losses – increase in allowance 88 70 158 Provision for credit losses – reduction of allowance )18( )13( )31( Recoveries of debts charged off in previous years )192( )28( )220( Allocated to the statement of profit and loss – allowance for credit losses )122( 29 )93( Charge-offs during the period )222( )63( )285( Recovery of charged off debts 192 28 220 Allowance for credit losses in respect of impaired debts at end of period 597 139 736

* Reclassified.

57 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-4: Credit risk indicators

As at March 31, December 31, 2018 2017 Balance of impaired credit to the public, as a percentage of the balance of credit to the public* 0.90% 0.94% Balance of unimpaired credit to the public, in arrears of 90 days or more, as a percentage of the balance of credit to the public* 0.33% 0.32% Allowance for credit losses in respect of credit to the public, as a percentage  of the balance of credit to the public* 1.38% 1.36% Collective allowance for credit losses, as a percentage of the balance of credit to the public* 1.25% 1.21% Allowance for credit losses in respect of credit to the public, as a percentage of the balance of impaired credit to the public* 153.05% 144.29% Allowance for credit losses in respect of credit to the public, as a percentage of the balance of impaired credit to the public plus the balance of credit to the public in arrears of 90 days or more* 112.33% 107.46% Problematic credit risk in respect of the public, as a percentage of total credit risk in respect of the public* 1.91% 1.91%

Provision (income) for credit losses as a percentage of the average recorded balance of credit to the public 0.35% 0.12% Net charge-offs in respect of credit to the public as a percentage of the average recorded balance of credit to the public 0.14% 0.23% Net charge-offs in respect of credit to the public as a percentage of the allowance for credit losses in respect of credit to the public 10.29% 17.04%

* Before deduction of the allowance for credit losses.

Portfolio quality analysis Indicators of changes in the quality of the portfolio in the first quarter of 2018 are mixed, as detailed below. A few indicators of credit risk decreased in the first quarter of 2018: • The balance of impaired credit to the public, as a percentage of the balance of credit to the public. • Net charge-offs in respect of credit to the public as a percentage of the average recorded balance of credit to the public. • NPL as a percentage of total credit to the public. A few indicators showed stability or minor changes: • The balance of unimpaired credit to the public, in arrears of 90 days or more, as a percentage of the balance of credit to the public. • The allowance for credit losses in respect of credit to the public, as a percentage of the balance of credit to the public. • Problematic credit risk in respect of the public, as a percentage of total credit risk in respect of the public. A few indicators increased: • The collective allowance for credit losses, as a percentage of the balance of credit to the public. • The provision (income) for credit losses as a percentage of the average recorded balance of credit to the public.

58 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-5: Composition of the allowance for credit losses

Allowance for credit losses Individual Collective Total According to the Other* extent of arrears NIS millions Composition of the allowance as at March 31, 2018: In respect of credit to the public 536 399 3,029 3,964 In respect of debts other than credit to the public - - 6 6 In respect of off-balance sheet credit instruments (included in the item “other liabilities”) 101 - 555 656 Allowance for credit losses as at March 31, 2018 637 399 3,590 4,626 Composition of the allowance as at December 31, 2017: In respect of credit to the public 545 397 2,902 3,844 In respect of debts other than credit to the public - - 6 6 In respect of off-balance sheet credit instruments (included in the item “other liabilities”) 103 - 524 627 Allowance for credit losses as at December 31, 2017 648 397 3,432 4,477

* Including a collective allowance in respect of debts examined individually and found to be unimpaired.

Each quarter, a process is conducted to identify customers with problematic potential, based on defined criteria, and all borrowers on watch lists and/or classified as problematic are reviewed. The adequacy of the classification and allowance for these customers is examined. In cases in which the customer’s situation has changed, changes have occurred in collateral, and/or collection has been performed, the classification is updated accordingly; for impaired customers, the recoverable amount and the allowance are updated. The allowance for credit losses increased by NIS 149 million in the first quarter of 2018, mostly due to credit examined on a collective basis. The allowance for credit losses in respect of credit to the public, as a percentage of the balance of credit to the public, increased by 0.02% in the first quarter of 2018.

Method for determining rates of collective allowance With regard to sound credit or unimpaired problematic credit (substandard or under special supervision), a “collective allowance” is calculated based on the economic sector to which the customer belongs. In order to calculate the collective allowance, the Bank sets two allowance rates for each economic sector, for problematic and sound credit risk, on a quarterly basis, based on an analysis of historical credit losses, net charge-offs, the quality of the credit portfolio in the sector, and an analysis of market trends, in accordance with the instructions of the Bank of Israel. For more extensive information, see the section “Credit” in the Report of the Board of Directors and Board of Management as at December 31, 2017.

59 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.2.2. Classification and analysis of credit risk by economic sector Table 3-6: Credit risk by economic sector

March 31, 2018 Total credit risk(1) Debts(2) and off-balance sheet credit risk (excluding derivatives)(3) Total Credit Problematic(6) Total Of which: Problematic(6) Impaired Credit losses for the period execution debts(2) ended March 31, 2018(4) rating(5) Provision Net Allowance (income) for charge-offs for credit credit losses losses NIS millions In respect of borrower activity in Israel Public – commercial Agriculture 2,925 2,832 88 2,916 2,240 86 13 )4( )10( 23 Mining and quarrying 2,776 2,744 16 2,526 2,141 16 15 - - 23 Industry 32,944 31,734 1,025 32,172 15,128 1,025 264 )14( )9( 315 Construction and real estate – construction(7) 63,384 61,786 1,249 63,295 24,016 1,247 628 - )52( 586 Construction and real estate – real-estate activities 22,682 22,268 489 22,587 19,101 485 291 )32( )32( 293 Electricity and water supply 10,336 10,265 761 8,453 4,635 741 4 3 - 95 Commercial 38,279 36,409 1,444 38,007 27,495 1,428 264 54 34 945 Hotels, hospitality, and food services 11,500 10,774 401 11,378 9,712 401 211 17 9 102 Transportation and storage 9,374 8,987 125 9,260 7,218 125 82 14 5 60 Information and communications 6,517 6,038 338 6,456 4,118 338 278 24 13 212 Financial services 32,929 32,794 95 26,366 14,839 95 36 2 )3( 170 Other business services 15,571 15,038 121 15,524 11,379 121 68 10 13 128 Public and community services 7,971 7,744 50 7,963 6,396 50 22 4 6 53 Total commercial(8) 257,188 249,413 6,202 246,903 148,418 6,158 2,176 78 )26( 3,005 Private individuals – housing loans 69,272 68,301 589 69,272 65,740 589 - 5 2 334 Private individuals – other 85,840 80,573 1,118 85,824 54,875 1,118 715 150 129 1,092 Total public – activity in Israel 412,300 398,287 7,909 401,999 269,033 7,865 2,891 233 105 4,431 Banks in Israel(9) 3,029 3,029 - 428 96 - - - - - Israeli government 42,813 42,813 - 1,245 1,140 - - - - - Total activity in Israel (1)458,142 444,129 7,909 403,672 270,269 7,865 2,891 233 105 4,431

(1) Balance sheet credit risk and off-balance sheet credit risk, including in respect of derivative instruments. Includes debts(2), bonds, securities borrowed or purchased under agreements to resell, assets in respect of derivative instruments, and credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness, in the amount of NIS 270,269, 41,617, 608, 6,603, and 139,045 million, respectively. (2) Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (3) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness (excluding unutilized credit-card facilities under the responsibility of other banks, in the amount of approximately NIS 10,933 million), excluding in respect of derivative instruments. (4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item “other liabilities”). (5) Credit risk for which the credit rating at the date of the report is congruent with the credit rating for the execution of new credit, according to the policy of the Bank. (6) Balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist which are in arrears of 90 days or more. (7) Including balance sheet credit risk in the amount of approximately NIS 322 million and off-balance sheet credit risk in the amount of approximately NIS 489 million extended to certain purchasing groups, which are currently in the process of construction. Also includes off-balance sheet credit risk in the amount of approximately NIS 12,808 million, in respect of which insurance was acquired from foreign insurance companies for the portfolio of Sale Law guarantees. (8) The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 9,735 million, of commercial borrowers, or extended to purchasing groups currently in the process of construction. (9) Excluding cash balances of the Bank and deposits with the Bank of Israel, and before deducting the allowance for credit losses. 60 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-6: Credit risk by economic sector (continued)

March 31, 2018 Total credit risk(1) Debts(2) and off-balance sheet credit risk (excluding derivatives)(3) Total Credit Problematic(6) Total Of which: Problematic(6) Impaired Credit losses for the period execution debts(2) ended March 31, 2018(4) rating(5) Provision Net Allowance (income) charge-offs for credit for credit losses losses NIS millions In respect of borrower activity overseas Public – commercial Agriculture 414 412 - 414 201 - - - - 1 Mining and quarrying 1,276 1,213 61 1,073 65 61 - - - 1 Industry 4,232 3,983 71 3,874 2,125 71 18 1 2 16 Construction and real estate 8,989 8,719 207 8,795 5,970 207 69 2 )3( 52 Electricity and water supply 1,010 1,002 9 767 412 9 - - - 2 Commercial 2,648 2,207 99 2,534 2,100 99 19 1 - 17 Hotels, hospitality, and food services 2,021 1,763 32 2,021 1,874 32 31 7 )1( 19 Transportation and storage 442 379 25 369 284 25 25 4 )1( 7 Information and communications 1,082 1,012 43 927 533 43 - )1( - 3 Financial services 8,880 8,860 20 4,963 3,447 20 20 2 1 19 Other business services 769 768 - 672 500 - - - - 2 Public and community services 814 782 32 702 589 32 32 1 - 11 Total commercial(7) 32,577 31,100 599 27,111 18,100 599 214 17 )2( 150 Private individuals – housing loans 482 475 4 482 469 4 - - - 2 Private individuals – other 1,254 1,201 39 1,225 465 39 39 - )1( 36 Total public - activity overseas 34,313 32,776 642 28,818 19,034 642 253 17 )3( 188 Banks overseas(8) 34,621 34,621 - 22,034 21,390 - - - - 4 Governments overseas 11,920 11,920 - 1,339 1,339 - - - - 3 Total activity overseas (1)80,854 79,317 642 52,191 41,763 642 253 17 )3( 195 Total in Israel and overseas 538,996 523,446 8,551 455,863 312,032 8,507 3,144 250 102 4,626

(1) Balance sheet credit risk and off-balance sheet credit risk, including in respect of derivative instruments. Includes debts(2), bonds, securities borrowed or purchased under agreements to resell, assets in respect of derivative instruments, and credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness, in the amount of NIS 41,763, 17,812, 0, 5,669, and 15,610 million, respectively. (2) Credit to the public, credit to governments, and deposits with banks, excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (3) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness, excluding in respect of derivative instruments. (4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item “other liabilities”). (5) Credit risk for which the credit rating at the date of the report is congruent with the credit rating for the execution of new credit, according to the policy of the Bank. (6) Balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist which are in arrears of 90 days or more. (7) The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 61 million, of commercial borrowers, or extended to purchasing groups currently in the process of construction. (8) Excluding cash balances of the Bank, and before deducting the allowance for credit losses.

61 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-6: Credit risk by economic sector (continued)

March 31, 2017 Total credit risk(1) Debts(2) and off-balance sheet credit risk (excluding derivatives)(3) Total Credit Problematic(6) Total Of which: Problematic(6) Impaired Credit losses for the period execution debts(2) ended March 31, 2017(4) rating(5) Provision Net Allowance (income) charge-offs for credit for credit losses losses NIS millions In respect of borrower activity in Israel (continued) Public – commercial Agriculture 2,850 2,592 21 2,841 2,222 21 10 1 3 17 Mining and quarrying 3,154 2,971 167 2,830 2,196 167 156 )2( - 82 Industry 34,291 32,576 1,149 33,438 15,513 1,133 379 21 17 376 Construction and real estate – construction(7) 55,214 53,128 1,290 55,152 19,059 1,267 703 )12( 10 571 Construction and real estate – real-estate activities 23,250 22,245 608 23,136 19,214 608 440 )40( )12( 363 Electricity and water supply 8,712 8,615 735 7,053 4,577 712 5 57 1 103 Commercial 37,142 33,539 1,742 36,773 27,018 1,726 552 32 130 1,045 Hotels, hospitality, and food services 10,879 9,801 410 10,806 9,339 410 225 23 12 88 Transportation and storage 8,461 7,730 121 8,267 6,647 121 71 7 6 44 Information and communications 5,793 4,917 550 5,685 3,546 550 485 )1( 1 170 Financial services 28,322 27,686 297 23,998 13,904 297 82 )99( )112( 180 Other business services 13,581 12,453 113 13,517 9,947 113 65 16 19 113 Public and community services 7,625 7,352 63 7,618 5,938 63 23 - )2( 58 Total commercial(8) 239,274 225,605 7,266 231,114 139,120 7,188 3,196 3 73 3,210 Private individuals – housing loans 64,327 63,279 571 64,327 62,004 571 - )5( 20 340 Private individuals – other 84,764 79,233 1,056 84,724 52,799 1,056 737 137 121 924 Total public – activity in Israel 388,365 368,117 8,893 380,165 253,923 8,815 3,933 135 214 4,474 Banks in Israel(9) 4,614 4,614 - 1,325 97 - - - - - Israeli government 53,917 53,917 - 1,010 864 - - - - - Total activity in Israel )1(446,896 426,648 8,893 382,500 254,884 8,815 3,933 135 214 4,474

(1) Balance sheet credit risk and off-balance sheet credit risk, including in respect of derivative instruments. Includes debts(2), bonds, securities borrowed or purchased under agreements to resell, assets in respect of derivative instruments, and credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness, in the amount of NIS 254,884, 53,975, 144, 5,529, and 132,364 million, respectively. (2) Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (3) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness (excluding unutilized credit-card facilities under the responsibility of other banks, in the amount of approximately NIS 10,897 million), excluding in respect of derivative instruments. (4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item “other liabilities”). (5) Credit risk for which the credit rating at the date of the report is congruent with the credit rating for the execution of new credit, according to the policy of the Bank. (6) Balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist which are in arrears of 90 days or more. (7) Including balance sheet credit risk in the amount of approximately NIS 752 million and off-balance sheet credit risk in the amount of approximately NIS 314 million extended to certain purchasing groups, which are currently in the process of construction. Also includes off-balance sheet credit risk in the amount of approximately NIS 13,717 million, in respect of which insurance was acquired from foreign insurance companies for the portfolio of Sale Law guarantees. (8) The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 7,485 million, of commercial borrowers, or extended to purchasing groups currently in the process of construction. (9) Excluding cash balances of the Bank and deposits with the Bank of Israel, and before deducting the allowance for credit losses.

62 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-6: Credit risk by economic sector (continued)

March 31, 2017 Total credit risk(1) Debts(2) and off-balance sheet credit risk (excluding derivatives)(3) Total Credit Problematic(6) Total Of which: Problematic(6) Impaired Credit losses for the period execution debts(2) ended March 31, 2017(4) rating(5) Provision Net Allowance (income) charge-offs for credit for credit losses losses NIS millions In respect of borrower activity overseas (continued) Public – commercial Agriculture 359 358 - 359 157 - - - 1 2 Mining and quarrying 454 454 91 210 55 91 - - - - Industry 5,913 5,785 99 4,882 3,224 99 8 2 1 13 Construction and real estate 7,870 7,814 52 7,638 4,822 52 23 )17( 1 58 Electricity and water supply 1,087 1,087 - 906 396 - - - - 2 Commercial 2,542 2,492 61 2,354 1,889 61 6 )2( )2( 13 Hotels, hospitality, and food services 2,226 2,109 119 2,226 2,019 119 35 4 1 15 Transportation and storage 554 472 99 388 364 99 4 - - 3 Information and communications 1,207 1,186 - 958 471 - - - - 2 Financial services 9,905 9,825 71 5,488 3,857 71 15 )12( 53 13 Other business services 1,186 1,185 1 1,046 819 1 1 )1( - 4 Public and community services 990 978 11 854 648 11 11 )1( - 12 Total commercial(7) 34,293 33,745 604 27,309 18,721 604 103 )27( 55 137 Private individuals – housing loans 509 491 6 509 497 6 - - - 1 Private individuals – other 1,216 1,171 33 1,208 821 33 31 )1( )1( 31 Total public - activity overseas 36,018 35,407 643 29,026 20,039 643 134 )28( 54 169 Banks overseas(8) 41,087 41,087 - 27,450 26,593 - - - - 4 Governments overseas 10,576 10,576 - 1,404 1,404 - - - - 3 Total activity overseas )1(87,681 87,070 643 57,880 48,036 643 134 )28( 54 176 Total in Israel and overseas 534,577 513,718 9,536 440,380 302,920 9,458 4,067 107 268 4,650

(1) Balance sheet credit risk and off-balance sheet credit risk, including in respect of derivative instruments. Includes debts(2), bonds, securities borrowed or purchased under agreements to resell, assets in respect of derivative instruments, and credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness, in the amount of NIS 48,036, 18,633, 0, 6,732, and 14,280 million, respectively. (2) Credit to the public, credit to governments, and deposits with banks, excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (3) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness, excluding in respect of derivative instruments. (4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item “other liabilities”). (5) Credit risk for which the credit rating at the date of the report is congruent with the credit rating for the execution of new credit, according to the policy of the Bank. (6) Balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist which are in arrears of 90 days or more. (7) The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 67 million, of commercial borrowers, or extended to purchasing groups currently in the process of construction. (8) Excluding cash balances of the Bank, and before deducting the allowance for credit losses.

63 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-6: Credit risk by economic sector (continued)

December 31, 2017 Total credit risk(1) Debts(2) and off-balance sheet credit risk (excluding derivatives)(3) Total Credit Problematic(6) Total Of which: Problematic(6) Impaired Credit losses for the year execution debts(2) ended December 31, 2017(4) rating(5) Provision Net Allowance (income) charge-offs for credit for credit losses losses NIS millions In respect of borrower activity in Israel (continued) Public – commercial Agriculture 2,853 2,601 26 2,841 2,235 26 13 )9( )9( 17 Mining and quarrying 2,709 2,654 27 2,450 2,176 27 26 )101( )42( 23 Industry 32,175 30,468 1,012 31,372 15,163 1,012 267 )123( )71( 319 Construction and real estate – construction(7) 60,347 56,913 1,104 60,309 22,866 1,104 678 )172( )111( 535 Construction and real estate – real-estate activities 22,497 21,418 466 22,420 18,904 461 313 )209( )99( 293 Electricity and water supply 9,479 9,129 793 7,396 4,646 765 41 48 2 91 Commercial 37,127 33,631 1,576 36,870 25,516 1,563 297 253 466 919 Hotels, hospitality, and food services 11,225 10,158 395 11,131 9,800 395 208 58 48 93 Transportation and storage 9,117 8,429 82 8,989 7,242 82 42 29 17 50 Information and communications 6,307 5,527 361 6,241 4,050 361 301 133 104 202 Financial services 31,192 29,231 88 26,026 14,343 88 31 )264( )260( 167 Other business services 15,185 13,736 126 15,157 11,194 126 73 72 54 135 Public and community services 7,938 7,621 45 7,931 6,346 45 24 )2( )3( 55 Total commercial(8) 248,151 231,516 6,101 239,133 144,481 6,055 2,314 )287( 96 2,899 Private individuals – housing loans 67,586 64,326 595 67,586 64,703 595 - )14( 19 333 Private individuals – other 85,718 78,839 1,073 85,697 54,655 1,073 738 645 479 1,071 Total public – activity in Israel 401,455 374,681 7,769 392,416 263,839 7,723 3,052 344 594 4,303 Banks in Israel(9) 3,400 3,400 - 535 193 - - - - - Israeli government 42,554 42,554 - 1,109 998 - - - - - Total activity in Israel )1(447,409 420,635 7,769 394,060 265,030 7,723 3,052 344 594 4,303 (1) Balance sheet credit risk and off-balance sheet credit risk, including in respect of derivative instruments. Includes debts(2), bonds, securities borrowed or purchased under agreements to resell, assets in respect of derivative instruments, and credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness, in the amount of NIS 265,030, 41,495, 684, 5,935, and 134,265 million, respectively. (2) Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (3) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness (excluding unutilized credit-card facilities under the responsibility of other banks, in the amount of approximately NIS 10,762 million), excluding in respect of derivative instruments. (4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item “other liabilities”). (5) Credit risk for which the credit rating at the date of the report is congruent with the credit rating for the execution of new credit, according to the policy of the Bank. (6) Balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist which are in arrears of 90 days or more. (7) Including balance sheet credit risk in the amount of approximately NIS 243 million and off-balance sheet credit risk in the amount of approximately NIS 506 million extended to certain purchasing groups, which are currently in the process of construction. Also includes off-balance sheet credit risk in the amount of approximately NIS 13,705 million, in respect of which insurance was acquired from foreign insurance companies for the portfolio of Sale Law guarantees. (8) The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 9,285 million, of commercial borrowers, or extended to purchasing groups currently in the process of construction. (9) Excluding cash balances of the Bank and deposits with the Bank of Israel, and before deducting the allowance for credit losses.

64 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-6: Credit risk by economic sector (continued)

December 31, 2017 Total credit risk(1) Debts(2) and off-balance sheet credit risk (excluding derivatives)(3) Total Credit Problematic(6) Total Of which: Problematic(6) Impaired Credit losses for the year execution debts(2) ended December 31, 2017(4) rating(5) Provision Net Allowance (income) charge-offs for credit for credit losses losses NIS millions In respect of borrower activity overseas (continued) Public – commercial Agriculture 406 406 2 406 171 2 - - 1 1 Mining and quarrying 439 379 62 148 51 62 - - - - Industry 4,838 4,562 68 4,008 2,535 68 68 6 2 19 Construction and real estate 7,567 7,366 142 7,381 4,978 142 16 )43( )22( 52 Electricity and water supply 1,027 1,018 9 775 384 9 - - - 2 Commercial 2,634 2,151 88 2,535 2,044 88 19 - )5( 16 Hotels, hospitality, and food services 2,029 1,740 32 2,029 1,766 32 31 2 1 11 Transportation and storage 437 359 41 365 332 41 26 16 16 2 Information and communications 1,240 1,132 28 994 563 28 - - - 3 Financial services 9,734 7,580 21 5,373 3,674 21 21 4 70 16 Other business services 884 883 - 788 580 - - )7( )4( 2 Public and community services 963 928 34 835 658 34 9 )3( - 9 Total commercial(7) 32,198 28,504 527 25,637 17,736 527 190 )25( 59 133 Private individuals – housing loans 486 456 2 486 473 2 - - - - Private individuals – other 1,320 1,166 36 1,320 459 36 36 4 2 34 Total public - activity overseas 34,004 30,126 565 27,443 18,668 565 226 )21( 61 167 Banks overseas(8) 37,337 37,337 - 24,536 23,915 - - - - 4 Governments overseas 14,465 14,465 - 1,297 1,297 - - - - 3 Total activity overseas )1(85,806 81,928 565 53,276 43,880 565 226 )21( 61 174 Total in Israel and overseas 533,215 502,563 8,334 447,336 308,910 8,288 3,278 323 655 4,477

(1) Balance sheet credit risk and off-balance sheet credit risk, including in respect of derivative instruments. Includes debts(2), bonds, securities borrowed or purchased under agreements to resell, assets in respect of derivative instruments, and credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness, in the amount of NIS 43,880, 21,721, 0, 6,078, and 14,127 million, respectively. (2) Credit to the public, credit to governments, and deposits with banks, excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (3) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on borrower indebtedness, excluding in respect of derivative instruments. (4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item “other liabilities”). (5) Credit risk for which the credit rating at the date of the report is congruent with the credit rating for the execution of new credit, according to the policy of the Bank. (6) Balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist which are in arrears of 90 days or more. (7) The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 60 million, of commercial borrowers, or extended to purchasing groups currently in the process of construction. (8) Excluding cash balances of the Bank, and before deducting the allowance for credit losses.

65 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.2.3. Construction and real estate Overall credit risk in the construction and real-estate sectors totaled approximately NIS 95 billion as at March 31, 2018.

Table 3-7: Segmentation of credit risk of the Bank Group in the construction and real-estate sectors, by principal area of activity

Balance as at March 31, 2018 Balance as at December 31, 2017 Balance sheet Off-balance Total Balance sheet Off-balance Total credit risk sheet credit risk credit risk credit risk sheet credit risk credit risk NIS millions Construction for commerce and services 1,770 953 2,723 1,681 917 2,598 Construction for industry 299 136 435 302 134 436 Housing construction 14,864 *31,769 46,633 14,062 *29,954 44,016 Yield-generating properties 22,312 5,528 27,840 21,368 5,262 26,630 Other 9,903 7,521 17,424 9,371 7,360 16,731 Total construction and real-estate sectors 49,148 45,907 95,055 46,784 43,627 90,411

* Includes off-balance sheet credit risk in the amount of approximately NIS 12,808 million, in respect of which insurance was acquired from foreign insurers for the portfolio of Sale Law guarantees (December 31, 2017: NIS 13,705 million).

3.2.4. Credit risk in respect of exposure to major borrowers Table 3-8: Balances of balance sheet credit risk and off-balance sheet credit risk to borrowers whose indebtedness exceeds NIS 1,200 million, by sector of the economy

March 31, 2018 Number of Balance sheet Off-balance Total borrowers credit risk sheet credit risk NIS millions Economic sector Industry 2 699 4,074 4,773 Construction and real estate – construction 1 391 1,050 1,441 Construction and real estate – real-estate activities 1 497 778 1,275 Electricity and water supply 1 1,428 2,088 3,516 Information and communications 1 1,188 22 1,210 Financial services 4 5,129 2,724 7,853 Total 10 9,332 10,736 20,068

66 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-8: Balances of balance sheet credit risk and off-balance sheet credit risk to borrowers whose indebtedness exceeds NIS 1,200 million, by sector of the economy (continued)

December 31, 2017 Number of Balance sheet Off-balance Total borrowers credit risk sheet credit risk NIS millions Economic sector Industry 2 858 3,877 4,735 Construction and real estate – construction 1 431 902 1,333 Construction and real estate – real-estate activities 1 552 752 1,304 Electricity and water supply 1 1,540 1,677 3,217 Financial services 4 3,376 3,771 7,147 Total 9 6,757 10,979 17,736

3.2.5. Credit risk in respect of exposure to borrower groups The Bank conducts monitoring and control processes in order to examine compliance with the limits set forth in Directive 313 with regard to exposure to the indebtedness of borrower groups. As at the reporting date, the Bank is in compliance with the limits. One borrower group has an indebtedness of 16.26%, versus the Bank of Israel limit of 25% of capital. The definition of capital in this context includes Tier 1 capital, plus Tier 2 capital, as published in the Financial Statements as at December 31, 2015. Tier 2 capital is being reduced in equal installments over twelve quarters, until it reaches zero on December 31, 2018.

Table 3-9: Credit risk balances for each group of borrowers whose net indebtedness on a consolidated basis exceeds 15% of the capital of the banking corporation (as defined in Directive 313) as at March 31, 2018

Balance sheet Off-balance Of which: Gross Deductions(4) Net Percentage credit risk(1) sheet credit off-balance indebtedness(3) indebtedness(5) of regulatory risk(1) sheet credit capital risk in respect of derivative instruments(2) NIS millions Borrower group A 4,117 2,713 317 6,837 99 6,738 16.26%

(1) After deduction of the balance of charge-offs and the allowance for credit losses calculated on an individual basis. (2) Off-balance sheet credit risk in respect of derivative instruments, as calculated for the purposes of the limits on indebtedness of borrowers and of borrower groups. (3) This amount includes third-party guarantees outside the group. (4) Deductions permitted under Directive 313, mainly including deposits deposited at the Bank, bonds issued by the State of Israel, and deductible indemnity letters of the State of Israel or financial institutions. (5) The data presented above represent exposure to borrower groups, and are stated after the permitted deductions pursuant to Directive 313, and after deduction of the allowance for credit losses calculated on an individual basis. These data are therefore not comparable with data regarding borrowers’ indebtedness provided in other disclosures in the report.

67 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.2.6. Credit exposure to foreign countries Credit exposure to foreign countries reflects the risk that an economic, political, or other event in a foreign country may have a negative effect on the ability of debtors of the various kinds (governments, banks, and others) to meet their obligations to the Bank Group, or may impair the value of the Group’s assets, including the possibility that actions taken by foreign governments may eliminate the ability to convert currency and/or transfer currency outside the country (transfer risk). The risk of exposure to foreign countries is managed at the Bank by individually examining the risks arising from the various countries, taking into consideration the countries’ ratings by the international rating agencies S&P, Moody’s, and Fitch. The total exposure to foreign countries includes balance sheet exposures in respect of balance sheet debt balances, net of local liabilities, securities, and other investments attributed to countries other than Israel. The balance sheet exposure was adjusted based on the final risk, taking into account credit reinforcements, which include guarantees, tangible and liquid collateral, insurance contracts, participations in risk, and credit derivatives. The Bank routinely monitors and examines the macro-economic situation in countries in which it conducts activity.

68 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Information regarding total exposures to foreign countries, and exposures to countries total exposure to each of which constitutes more than 1% of total balance sheet assets or 20% of capital, whichever is lower: Table 3-10: Principal exposures to foreign countries(1)

March 31, 2018 Balance sheet exposure(4) Off-balance sheet exposure(2)(4)(5) Cross-border Balance sheet exposure of the Total Problematic Impaired Total Of which: Cross-border balance sheet exposure banking corporation’s branches/ balance balance debts(4) off-balance problematic balance sheet subsidiaries in foreign countries sheet sheet credit sheet off-balance exposure to local residents exposure risk(4) exposure sheet credit risk(4) To To To Balance Deduction Net Maturity Maturity governments(3) banks others sheet in respect balance up to one over one exposure of local sheet year year before liabilities exposure deduction after of local deduction liabilities of local liabilities NIS millions Country United States 8,545 1,574 2,272 24,306 12,547 11,759 24,150 327 35 7,505 186 946 11,445 Switzerland - 630 51 3,667 - 3,667 4,348 - - 3,637 - 238 443 England 81 4,897 3,322 43 1 42 8,342 - - 4,226 - 1,466 6,834 Germany 97 480 359 - - - 936 - - 3,923 - 444 492 France 14 1,517 284 - - - 1,815 9 5 3,847 - 160 1,655 Others 1,161 5,273 5,396 871 128 743 12,573 110 76 3,494 - 4,703 7,127 Total exposures to foreign countries 9,898 14,371 11,684 28,887 12,676 16,211 52,164 446 116 26,632 186 7,957 27,996 Of which: total exposure to PIIGS (Portugal, Ireland, Italy, Greece, and Spain) - 106 123 - - - 229 - - 253 - 60 169 Of which: total exposure to LDCs 21 545 683 856 128 728 1,977 74 41 778 - 335 914

The line “total LDCs” includes the total exposure to countries defined as Less Developed Countries (LDCs) in Proper Conduct of Banking Business Directive 315, “Supplementary Provision for Doubtful Debts.” Balance sheet exposure to a foreign country includes cross-border balance sheet exposure and balance sheet exposure of the branches/subsidiaries of the banking corporation in the foreign country to local residents. Cross-border balance sheet exposure includes balance sheet exposure of the branches/subsidiaries of the banking corporation in Israel to residents of the foreign country, and balance sheet exposure of the overseas branches/subsidiaries of the banking corporation to non-residents of the country in which the branch/subsidiary is located. Balance sheet exposure of the banking corporation’s branches/subsidiaries in a foreign country to local residents includes balance sheet exposure of the branches/subsidiaries of the banking corporation in that foreign country to the residents of the country, less liabilities of those branches/subsidiaries (the deduction is performed up to the level of the exposure). (1) Based on the final risk, after the effect of guarantees, liquid collateral, and credit derivatives. (2) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limits on indebtedness of a borrower, according to Proper Conduct of Banking Business Directive 313. (3) Governments, official institutions, and central banks. (4) Balance sheet and off-balance sheet credit risk, problematic credit risk, and impaired debts are presented before the effect of the allowance for credit losses, and before the effect of collateral deductible for the purposes of the indebtedness of a borrower and of a group of borrowers. (5) The balance of the off-balance sheet exposure to foreign countries includes a total of NIS 12,808 million in respect of the acquisition of insurance for the portfolio of Sale Law guarantees from international reinsurers.

69 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-10: Principal exposures to foreign countries(1) (continued)

December 31, 2017 Balance sheet exposure(4) Off-balance sheet exposure(2)(4)(5) Cross-border Balance sheet exposure of the Total Problematic Impaired Total Of which: Cross-border balance sheet exposure banking corporation’s branches/ balance balance debts(4) off-balance problematic balance sheet subsidiaries in foreign countries sheet sheet credit sheet off-balance exposure to local residents exposure risk(4) exposure sheet credit risk(4) To To To Balance Deduction Net Maturity Maturity governments(3) banks others sheet in respect balance up to over one exposure of local sheet one year year before liabilities exposure deduction after of local deduction liabilities of local liabilities NIS millions Country United States 11,107 2,500 2,223 26,541 11,562 14,979 30,809 254 123 7,610 188 1,630 14,200 Switzerland - 575 41 3,617 - 3,617 4,233 - - 3,897 - 129 487 England 80 4,568 3,269 45 1 44 7,961 - - 3,679 - 1,621 6,296 Germany 131 493 396 - - - 1,020 - - 4,155 - 493 527 France 49 1,691 305 - - - 2,045 7 5 4,062 - 311 1,734 Others 1,223 5,085 5,566 1,122 617 505 12,379 105 88 2,342 - 4,435 7,439 Total exposures to foreign countries 12,590 14,912 11,800 31,325 12,180 19,145 58,447 366 216 25,745 188 8,619 30,683 Of which: total exposure to PIIGS (Portugal, Ireland, Italy, Greece, and Spain) - 98 104 - - - 202 - - 134 - 75 127 Of which: total exposure to LDCs 53 608 721 1,106 617 489 1,871 70 53 757 - 396 986

The line “total LDCs” includes the total exposure to countries defined as Less Developed Countries (LDCs) in Proper Conduct of Banking Business Directive 315, “Supplementary Provision for Doubtful Debts.” Balance sheet exposure to a foreign country includes cross-border balance sheet exposure and balance sheet exposure of the branches/subsidiaries of the banking corporation in the foreign country to local residents. Cross-border balance sheet exposure includes balance sheet exposure of the branches/subsidiaries of the banking corporation in Israel to residents of the foreign country, and balance sheet exposure of the overseas branches/subsidiaries of the banking corporation to non-residents of the country in which the branch/subsidiary is located. Balance sheet exposure of the banking corporation’s branches/subsidiaries in a foreign country to local residents includes balance sheet exposure of the branches/subsidiaries of the banking corporation in that foreign country to the residents of the country, less liabilities of those branches/subsidiaries (the deduction is performed up to the level of the exposure). (1) Based on the final risk, after the effect of guarantees, liquid collateral, and credit derivatives. (2) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limits on indebtedness of a borrower, according to Proper Conduct of Banking Business Directive 313. (3) Governments, official institutions, and central banks. (4) Balance sheet and off-balance sheet credit risk, problematic credit risk, and impaired debts are presented before the effect of the allowance for credit losses, and before the effect of collateral deductible for the purposes of the indebtedness of a borrower and of a group of borrowers. (5) The balance of the off-balance sheet exposure to foreign countries includes a total of NIS 13,705 million in respect of the acquisition of insurance for the portfolio of Sale Law guarantees from international reinsurers.

70 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-11: Changes in amount of balance sheet exposure to foreign countries with liquidity problems(1)

For the three-month period ended March 31, 2018 Ireland Portugal Italy Spain Total NIS millions Total exposure at beginning of period 33 2 55 112 202 Net changes in amount of short-term exposure )4( - )14( 3 )15( Changes in other exposures: Added exposures 69 - 6 12 87 Accrued interest income - - - 1 1 Amounts collected )28( - )4( )14( )46( Total exposure at end of period 70 2 43 114 229

For the three-month period ended March 31, 2017 Ireland Portugal Italy Spain Total NIS millions Total exposure at beginning of period 85 - 39 226 350 Net changes in amount of short-term exposure )29( - - )11( )40( Changes in other exposures: Added exposures - - 1 - 1 Accrued interest income - - - 1 1 Amounts collected )1( - )3( )25( )29( Total exposure at end of period 55 - 37 191 283

For the year 2017 Ireland Portugal Italy Spain Total NIS millions Total exposure at beginning of period 85 - 39 226 350 Net changes in amount of short-term exposure )50( - 20 )2( )32( Changes in other exposures: Added exposures 4 2 6 35 47 Accrued interest income - - - 5 5 Amounts collected )6( - )10( )152( )168( Total exposure at end of period 33 2 55 112 202

(1) Based on the final risk, after the effect of guarantees, liquid collateral, and credit derivatives.

71 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.2.7. Credit exposure to foreign financial institutions In the course of its routine business operations, the Bank Group is exposed to risk arising from credit exposures to foreign financial institutions. This risk arises from the range of activities conducted with the financial institutions, such as transactions carried out at the Bank’s dealing rooms (deposits of foreign-currency balances and derivatives), purchases of bonds issued by such institutions, foreign-trade transactions, capital-market activity, and account management. The exposure to foreign financial institutions is influenced both by the financial robustness of each institution and by the risk in the political and economic environment in which it operates. It is emphasized that most of the credit exposures of the Bank Group are to financial institutions located in developed markets in Western Europe and North America, rated investment grade or higher. In the ordinary course of its business, the Bank regularly applies monitoring and controls with respect to developments that may affect the ability of the financial institutions with which it conducts activity to meet their obligations. Concurrently, measures are applied in order to minimize credit risk.

72 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-12: Exposure of the Bank Group to foreign financial institutions(1)

March 31, 2018 December 31, 2017 Balance sheet Present Total present Balance sheet Present Total credit risk(2) off-balance credit risk credit risk(2) off-balance present sheet credit sheet credit credit risk risk(3) risk(3) NIS millions External credit rating(5) AAA to AA- 3,168 10,174 13,342 3,755 10,939 14,694 A+ to A- 13,207 3,644 16,851 14,540 3,834 18,374 BBB+ to BBB- 1,568 297 1,865 1,476 288 1,764 BB+ to B- 16 67 83 80 69 149 Lower than B------Unrated** 120 92 212 285 65 350 Total present credit exposures to foreign financial institutions* 18,079 14,274 32,353 20,136 15,195 35,331 Of which: problematic credit risk(4) ------Of which: balance of impaired debts ------Individual allowance for credit losses ------Total credit exposure to foreign financial institutions after deduction of the individual allowance for credit losses 18,079 14,274 32,353 20,136 15,195 35,331 Collective allowance for credit losses 7 1 8 7 1 8

* The balances include the exposure of the Bank Group to financial institutions in the following countries: Spain – Total exposure of approximately NIS 109 million, of which a total of NIS 75 million rated A-, a total of NIS 8 million rated BBB+, and the remaining amount of NIS 26 million rated BBB- (total exposure at the end of 2017 was approximately NIS 98 million, of which a total of NIS 65 million rated A-, a total of NIS 11 million rated BBB+, and a total of NIS 22 million rated BBB-). Ireland – Exposure to financial institutions is minimal, in the amount of less than NIS 1 million (at the end of 2017, exposure to financial institutions was minimal, in the amount of less than NIS 1 million). Italy – Total exposure of approximately NIS 102 million, of which a total of NIS 91 million rated BBB and the remaining amount of NIS 9 million rated BBB- (total exposure at the end of 2017 was approximately NIS 102 million, of which a total of NIS 85 million rated BBB and the remaining amount of NIS 16 million rated BBB-). There is no exposure to financial institutions in Greece and in Portugal. ** Of which, clearing houses overseas constitute 31% of the balance. The remaining amount is distributed among a long list of banks and financial institutions (December 31, 2017: 71% of the balance). (1) Foreign financial institutions include: banks, investment banks, broker/dealers, insurance companies, institutional entities, and entities controlled by such entities. However, credit exposure to foreign financial institutions backed by government guarantees is not included. (2) Deposits with banks, credit to the public, investments in bonds, securities borrowed or purchased in agreements to resell, and other assets in respect of derivative instruments. (3) Mainly guarantees and commitments to grant credit. Does not include credit risk in off-balance sheet financial instruments, as calculated for the purposes of the limits on indebtedness of a borrower. (4) Credit risk that is impaired, substandard, or under special supervision. (5) According to the lowest of the long-term foreign-currency credit ratings assigned by any of the major rating agencies: S&P, Moody’s, and Fitch.

73 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

The exposure of the Bank Group to foreign financial institutions totaled approximately NIS 32.4 billion on March 31, 2018, a decrease of approximately NIS 3.0 billion, compared with approximately NIS 35.3 billion at the end of 2017. This decrease resulted from a decrease in balance sheet exposure in the amount of approximately NIS 2 billion, and a decrease in off-balance sheet exposure in the amount of approximately NIS 1 billion. Approximately 93.32% of the exposure to foreign financial institutions is to financial institutions rated A- or higher. The Bank Group’s exposure to foreign financial institutions is distributed as follows: 57.49% in banks and bank holding companies, 42.01% in insurance companies, and 0.5% in another financial institution. Most of the Bank Group’s exposure is to foreign financial institutions operating in the United States (17.24%) and in Western European countries (71.86%). The sector “banks overseas” in the disclosure of credit risk by economic sector in the section “Review of Risks” includes only exposures in respect of banks abroad, including central banks. Financial institutions are mainly presented in the “financial services” sector. “Total credit risk” also includes balance sheet and off-balance sheet balances in respect of derivatives. The table above does not include exposure in respect of central banks, or off-balance sheet balances in respect of derivatives. The total of “debts and off-balance sheet credit risk” in the disclosure of credit risk by economic sector in the section “Review of Risks” includes credit to the public and deposits with banks, but does not include bonds and securities borrowed or purchased under agreements to resell, which are included in the table above. Balance sheet and off-balance sheet credit in respect of derivatives is not included in the total of “debts and off-balance sheet credit risk.” However, the table above includes balance sheet balances in respect of derivatives.

3.2.8. Credit to private customers (excluding housing) Credit is granted to private customers in accordance with the credit and collateral policies and procedures, including with respect to the purpose of the credit and the appropriateness of this purpose for the customer’s needs, the amount of credit requested, and the appropriateness of the amount for the customer’s repayment capability. Credit applications of private customers in the Retail Banking Area, which are approved at the branches, are executed using automated systems, models, and tools that support decision making by the authorized personnel. Credit applications of private customers are submitted and examined at the level of risk groups, as required in the directives of the Bank of Israel. Credit applications are examined with an emphasis on the matters noted above. For details and more extensive information, see Section 3.2.9 in the Report of the Board of Directors and Board of Management as at December 31, 2017.

74 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-13: Balance of credit to private individuals in Israel

Balance as at Change March 31, December 31, 2018 2017 NIS millions Balance sheet Negative balance in current accounts 3,399 3,525 )126( )3.57%( Loans(1) 33,478 33,677 )199( )0.59%( Of which: bullet and balloon loans 128 147 )19( )12.93%( Credit for purchases of motor vehicles(2) 4,802 4,756 46 0.97% Debtors in respect of credit-card activity 13,196 12,697 499 3.93% Total balance sheet credit risk 54,875 54,655 220 0.40% Off-balance sheet Off-balance sheet credit risk 30,965 31,063 )98( )0.32%( Total credit risk 85,840 85,718 122 0.14%

(1) Excluding loans for purchases of motor vehicles. (2) Including loans granted for the purchase of motor vehicles or with a lien on a motor vehicle.

In the first quarter of 2018, the balance of loans to private individuals in Israel, including credit for the purchase of motor vehicles, decreased by 0.4%. Total balance sheet credit risk increased by 0.4%.

Table 3-14: Distribution of risk of balance sheet credit to private individuals at the Bank, by average income(1) and loan size

March 31, 2018 December 31, 2017 Account income Total Account income Total Up to NIS 10 Over Up to NIS 10 Over NIS 10 to 20 NIS 20 NIS 10 to 20 NIS 20 thousand thousand thousand thousand thousand thousand NIS millions Credit per borrower in NIS thousands Up to 20 1,185 373 273 1,831 1,214 378 277 1,869 20 to 40 1,921 719 552 3,192 1,968 716 555 3,239 40 to 80 4,247 2,218 1,677 8,142 4,341 2,206 1,683 8,230 80 to 150 4,568 4,664 3,926 13,158 4,593 4,670 3,912 13,175 150 to 300 1,321 3,313 5,976 10,610 1,375 3,328 5,950 10,653 Over 300 180 241 1,934 2,355 202 253 2,031 2,486 Total 13,422 11,528 14,338 39,288 13,693 11,551 14,408 39,652

(1) Account income was calculated based on the average income over a period of twelve months.

75 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-15: Distribution of risk of balance sheet credit to private individuals at the Bank, by borrowers’ financial asset portfolio balance

March 31, December 31, 2018 2017 Balance sheet credit risk NIS millions Size of financial asset portfolio, in NIS thousands Up to 10 23,438 26,768 10 to 50 7,126 5,392 50 to 200 4,882 3,968 200 to 500 1,955 1,716 Over 500 1,887 1,808 Total 39,288 39,652

Table 3-16: Distribution of risk of balance sheet credit to private individuals at the Bank, by type of interest and remaining repayment period

March 31, 2018 December 31, 2017 Loans at Loans at Total Loans at Loans at Total floating fixed interest floating fixed interest interest rates rates interest rates rates NIS millions Repayment period Up to one year 5,081 452 5,533 5,443 453 5,896 1 to 3 years 7,957 92 8,049 7,867 94 7,961 3 to 5 years 15,625 118 15,743 15,707 116 15,823 Over 5 years 9,867 96 9,963 9,880 92 9,972 Total 38,530 758 39,288 38,897 755 39,652

Table 3-17: Information regarding problematic debts in respect of private individuals in Israel

Change Percentage of total balance sheet credit risk Balance as at As at March 31, December 31, March 31, December 31, 2018 2017 2018 2017 NIS millions Problematic credit risk 1,118 1,073 4.19% 2.04% 1.96% Of which: impaired credit risk 715 738 )3.12%( 1.30% 1.35% Debts in arrears of more than 90 days 92 97 )5.15%( 0.17% 0.18% Net charge-offs 129 479 )1(7.72% )1(0.94% 0.88% Allowance for credit losses 1,092 1,071 1.96% 1.99% 1.96%

(1) Calculated on an annualized basis.

76 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

The percentage of problematic credit risk rose in the first quarter of 2018, while impaired credit risk decreased, due, among other factors, to the initial implementation of the automatic classification of debts lower than NIS 1 million as under special supervision, based on established fixed criteria, which led to an increase in the balance of problematic debts in respect of private individuals. The rate of debts in arrears of more than 90 days decreased moderately. The rate of net charge-offs and the rate of the allowance for credit losses are higher than in December 2017. These data, particularly the rate of net charge-offs, indicate a decrease in the quality of this portfolio, which was also apparent in 2017 and 2016. The Bank has taken several measures to improve the quality of underwriting in credit to private individuals, and is examining the application of additional measures. The balances of credit risk to private individuals include balances at Isracard and Poalim Express, which are primarily engaged in the issuance and clearing of credit cards. Isracard is also active in the area of credit, but its share of the total loan portfolio is low, constituting approximately 6.40% of the balance of loans in March 2018, compared with approximately 6.17% in December 2017.

3.2.9. Risks in the housing loan portfolio Table 3-18: Risks in the housing loan portfolio

Balance as at March 31, March 31, December 31, 2018 2017 2017 NIS millions Credit balances Loans from Bank funds 76,005 70,053 74,521 Loans from Finance Ministry funds* 1,418 1,653 1,480 Grants from Finance Ministry funds* 78 85 76 Total 77,501 71,791 76,077

For the three months ended For the year ended March 31, March 31, December 31, 2018 2017 2017 NIS millions Execution of housing loans Loans from Finance Ministry funds Loans 19 6 50 Grants 8 - 10 Total from Finance Ministry funds 27 6 60 Total loans from Bank funds 3,761 3,015 13,437 Total new loans 3,788 3,021 13,497 Old loans refinanced from Bank funds 334 157 709 Total loans extended 4,122 3,178 14,206

* This amount is not included in balance sheet balances to the public.

77 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Volume of problematic debt The moderate downward trend in amounts in arrears as a percentage of credit balances, and in the rate of the allowance for credit losses based on the extent of arrears, continued in the first quarter of 2018.

Table 3-19: Development of amounts in arrears in housing loans and allowance for credit losses

Recorded Amount in Rate of Allowance for credit Rate of Problematic Rate of debt arrears of arrears losses based on extent allowance for debt in NIS problematic balance in more than of arrears (including credit losses millions debt NIS millions 90 days collective allowance) based on extent in NIS millions of arrears March 31, 2018 76,005 135 0.2% 399 0.5% 1,110 1.5% December 31, 2017 74,521 140 0.2% 397 0.5% 1,055 1.4%

Development of housing credit balances Table 3-20: Development of the balance in the housing credit portfolio, by linkage base and as a percentage of the balance in the credit portfolio of the Bank

Unlinked segment CPI-linked segment Foreign-currency Total Rate of segment change during the Fixed interest Floating interest Fixed interest Floating interest Floating interest Recorded period rate rate rate rate rate debt

balance Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate in NIS in NIS in % in NIS in % in NIS in % in NIS in % in NIS in % millions millions millions millions millions millions March 31, 2018 13,026 17.1% 28,834 37.9% 12,975 17.1% 20,751 27.3% 419 0.6% 76,005 2.0% Dec. 31, 2017 12,455 16.7% 28,022 37.6% 12,988 17.4% 20,619 27.7% 437 0.6% 74,521 7.6%

Risk quantification and measurement – housing credit portfolio The Bank routinely monitors developments in the housing credit portfolio, and applies various measures to manage risk. Housing credit risks are examined individually, based on the policies and objectives established in the risk appetite set for housing credit, from the level of the individual transaction to an overview of the housing credit portfolio of the Bank. Risk hedging: The Bank manages and hedges risk, among other means, through limits on various segments, as established in policy discussions of the Board of Management and the Board of Directors, overseen and led by the Risk Management Area. The limits address LTV rates, repayment capability, distribution of credit products in the portfolio, volume of problematic debt, loan durations, geographical distribution, rate of arrears, etc. These indicators are also monitored in comparison to the data of the banking system as a whole. The Bank tracks conditions and changes in macro-economic indicators in general, and in the business environment of the industry in particular. Some events require a reexamination of policy, such as a sharp increase in the floating interest rate or in inflation, an increase in unemployment in the Israeli economy, and a material change in housing prices.

78 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Data are reported on a monthly basis in an Area-level risk forum headed by the Head of Retail Banking, and on a quarterly basis as part of the report on developments in the credit portfolio and in credit risk to the Board of Management and Board of Directors. The Bank uses a statistical model to measure the probability of default and the expected loss in the mortgage portfolio. In addition, stress scenarios are applied to the mortgage portfolio, and the effect on the portfolio and on the Bank as a whole is analyzed. These scenarios include a sharp decline in prices of homes, an increase in the interest rate, and an increase in the unemployment rate. In addition, insurance arrangements are in place (life insurance and building insurance).

Table 3-21: Developments in housing credit balances, last five quarters

2018 2017 Q1 Q4 Q3 Q2 Q1 NIS millions Balances at end of period 76,005 74,521 72,884 71,462 70,053 Change in balances 2.0% 2.2% 2.0% 2.0% 1.2% Execution of new loans 3,761 3,609 3,667 3,146 3,015

The increase in balances continued in the first quarter of 2018, similarly to 2017. Housing loans are approved based on a hierarchy of authorizations reflecting the nature of the credit application and its inherent risk. Housing credit risk is quantified and measured on several levels, including the level of the individual customer and the level of the overall credit portfolio of the Bank. For that purpose, quantification and measurement processes have been developed and implemented, combining assessments by housing credit experts with statistical models. As part of the quantification of risk, a focused examination of repayment capability is performed, including a test of sensitivity to possible changes in repayment capability as a result of possible changes in the interest rate.

79 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Housing loan data – percentage of total new loans executed Table 3-22: Characteristics of housing credit granted by the Bank

For the three months ended March 31, December 31, September 30, December 31, March 31, 2018 2017 2017 2017 2017 Characteristics Financing rate over 60% 29.6% 28.5% 28.2% 26.6% 26.1% Ratio of repayment to income greater than 40% (for acquisition and in monthly payments) 0.0% 0.0% 0.0% 0.0% 0.0% Percentage with floating interest rates varying at a frequency of less than 5 years 31.5% 31.2% 32.2% 31.5% 30.7% Percentage with floating rates 58.1% 56.5% 57.5% 57.8% 56.8% Percentage of all-purpose loans 6.2% 7.7% 6.3% 6.2% 5.9% Loans for investment purposes as a percentage of acquisition 10.8% 10.3% 11.5% 11.5% 11.3% Principal planned for repayment after age 67 (excluding investments) 7.1% 7.0% 6.6% 6.4% 6.5% Average new credit facility for purchases of homes, in NIS thousands 734 732 720 704 697 Average original term to maturity of loans for purchases of homes, in years (excluding bridge loans) 23.9 23.6 23.7 23.9 23.8

Note that financing rates were calculated pursuant to Reporting Directive 876 of the Banking Supervision Department, “Report on Housing Loans.”

The upward trend in the percentage of credit granted with a financing rate greater than 60% continued in the first quarter of 2018. In addition, loans for investment as a percentage of acquisitions increased, and the percentage of principal scheduled for repayment above the age of 67 (excluding investments) increased. The percentage of loans granted with payments higher than 40% of income remains near zero; the rate of all-purpose loans granted decreased. The average term to maturity of loans for purchases of homes (excluding bridge loans) has continued to increase.

3.2.10. Leveraged financing Leveraged financing is managed and defined at the Bank in accordance with the directives of the Bank of Israel, and in particular, with Proper Conduct of Banking Business Directive 311 (Credit Risk Management), Proper Conduct of Banking Business Directive 323 (Limits on Financing of Equity Transactions), and Proper Conduct of Banking Business Directive 327 (Management of Leveraged Loans). Data regarding credit risks in respect of leveraged financing follow. The disclosure focuses on exposures of leveraged borrowers/transactions where the credit balance exceeds the amount of 0.5% of Tier 1 capital.

80 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-23: The Bank’s exposures in respect of leveraged financing, by economic sector of the borrower

March 31, 2018 Number of Balance sheet Off-balance Total borrowers credit balance sheet credit balance NIS millions Economic sector of the borrower Construction and real estate – construction 1 385 - 385 Construction and real estate – real-estate activities 1 521 498 1,019 Hotels, hospitality, and food services 1 - 200 200 Mining and quarrying 2 1,490 26 1,516 Commerce 2 722 137 859 Industry 1 211 - 211 Total 8 3,329 861 4,190

December 31, 2017 Number of Balance sheet Off-balance Total borrowers credit balance sheet credit balance NIS millions Economic sector of the borrower Construction and real estate – construction 1 387 - 387 Construction and real estate – real-estate activities 1 551 467 1,018 Hotels, hospitality, and food services 1 - 200 200 Mining and quarrying 2 1,481 19 1,500 Commerce 2 602 340 942 Industry 1 208 - 208 Total 8 3,229 1,026 4,255

81 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.3. Market risk Market risk is the risk of loss or decline in value as a result of change in the economic value of a financial instrument, or of a particular portfolio, due to changes in prices, rates, spreads, and other market parameters. For more extensive information regarding market risks, including interest-rate risk, exchange-rate risk, and investment risk (share and credit spread risk), see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017; the section “Review of risks” in the Annual Financial Statements for 2017 and the accompanying Notes; and the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at March 31, 2018.

3.3.1. Interest-rate risk Interest-rate risk is the risk of loss or decline in value due to changes in interest rates in the various currencies.

Fair value sensitivity analysis Table 3-24: Details of the fair value of the Bank and its consolidated companies, by linkage segment

March 31, 2018 Israeli currency Foreign currency** Total Unlinked CPI-linked USD EUR Other NIS millions Financial assets* 304,150 47,912 61,079 6,715 5,795 425,651 Amounts receivable in respect of derivative and off-balance sheet financial instruments*** 375,368 23,316 525,831 32,198 20,130 976,843 Financial liabilities* 259,474 40,506 78,162 12,960 3,836 394,938 Amounts payable in respect of derivative and off-balance sheet financial instruments*** 395,159 23,843 510,815 26,295 19,896 976,008 Net fair value of financial instruments 24,885 6,879 )2,067( )342( 2,193 31,548

December 31, 2017 Israeli currency Foreign currency** Total Unlinked CPI-linked USD EUR Other NIS millions Financial assets* 306,733 46,143 67,783 5,943 5,293 431,895 Amounts receivable in respect of derivative and off-balance sheet financial instruments*** 366,773 24,985 411,674 27,430 15,333 846,195 Financial liabilities* 263,118 41,180 79,494 12,329 4,405 400,526 Amounts payable in respect of derivative and off-balance sheet financial instruments*** 384,034 24,865 401,466 21,245 14,627 846,237 Net fair value of financial instruments 26,354 5,083 )1,503( )201( 1,594 31,327

* Includes hybrid financial instruments. Does not include balance sheet balances of derivative financial instruments and fair value of off-balance sheet financial instruments. ** Including Israeli currency linked to foreign currency. *** Amounts receivable (payable) in respect of derivative financial instruments and in respect of off-balance sheet financial instruments, capitalized by the interest rates used to calculate the fair value.

82 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-25: Effect of hypothetical changes in interest rates on the net fair value of financial instruments of the Bank and its consolidated companies, excluding non-monetary items

March 31, 2018 Net fair value of financial instruments, Change in fair value after the effect of changes in interest rates** Israeli currency Foreign currency* Total Total Unlinked CPI-linked USD EUR Other NIS millions Change in interest rates Immediate parallel increase of 1% 23,948 6,522 )2,407( )387( 2,139 29,815 )1,733( )5.5%( Immediate parallel increase of 0.1% 24,786 6,834 )2,106( )347( 2,192 31,359 )189( )0.6%( Immediate parallel decrease of 1% 25,897 7,271 )1,712( )297( 2,258 33,417 1,869 5.9%

March 31, 2017 Net fair value of financial instruments, Change in fair value after the effect of changes in interest rates** Israeli currency Foreign currency* Total Total Unlinked CPI-linked USD EUR Other NIS millions Change in interest rates Immediate parallel increase of 1% 25,364 4,828 )1,818( )243( 1,533 29,664 )1,663( )5.3%( Immediate parallel increase of 0.1% 26,286 5,054 )1,536( )203( 1,589 31,190 )137( )0.4%( Immediate parallel decrease of 1% 27,502 5,373 )1,165( )156( 1,659 33,213 1,886 6.0%

* Including Israeli currency linked to foreign currency. ** The net fair value of financial instruments presented in each linkage segment is the net fair value in that segment, assuming that the noted change has occurred in all interest rates in that linkage segment. The total net fair value of financial instruments is the net fair value of all financial instruments (excluding non-monetary items), assuming that the noted change has occurred in all interest rates in all linkage segments.

For further information regarding the assumptions used to calculate the fair value of financial instruments, see Note 15 to the Condensed Financial Statements as at March 31, 2018.

83 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Exposure of the Bank and its consolidated companies to changes in interest rates Table 3-26: Exposure of the Bank and its consolidated companies to changes in unlinked interest rates

March 31, 2018 March 31, 2018 March 31, 2017 December 31, 2017 On Over 1 Over 3 Over 1 Over 3 Over 5 Over 10 Over 20 No Total fair Internal rate Effective Total fair Internal rate Effective Total fair Internal rate Effective demand up month up months up year up years up years up years up years maturity value of return average value of return average value of return average to 1 month to 3 months to 1 year to 3 years to 5 years to 10 years to 20 years period duration duration duration NIS millions NIS millions % Years NIS millions % Years NIS millions % Years Israeli currency unlinked Financial assets, amounts receivable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial assets Financial assets(1)(3) 229,571 18,030 20,830 13,380 10,353 6,665 2,556 288 2,477 304,150 3.01 0.55 293,862 2.97 0.49 306,733 2.85 0.55 Derivative financial instruments (excluding options) 69,733 119,846 47,693 65,560 37,055 29,139 440 - - 369,466 1.26 347,014 1.20 362,128 1.26 Options (in terms of underlying asset) 1,011 1,440 2,166 47 662 576 - - - 5,902 1.25 6,671 1.31 4,645 1.62 Total fair value 300,315 139,316 70,689 78,987 48,070 36,380 2,996 288 2,477 679,518 (2)0.94 647,547 )2(0.88 673,506 )2(0.94 Financial liabilities, amounts payable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial liabilities Financial liabilities(1) 224,475 7,277 14,348 7,926 3,603 1,327 444 1 73 259,474 1.09 0.21 249,098 1.33 0.22 263,118 0.99 0.20 Derivative financial instruments (excluding options) 71,058 131,344 55,988 64,425 37,199 31,696 272 - - 391,982 1.25 369,165 1.17 381,785 1.23 Options (in terms of underlying asset) 821 954 1,399 3 - - - - - 3,177 0.27 4,293 0.31 2,249 0.27 Total fair value 296,354 139,575 71,735 72,354 40,802 33,023 716 1 73 654,633 (2)0.83 622,556 )2(0.78 647,152 )2(0.81 Financial instruments, net Exposure to changes in interest rates in the segment 3,961 )259( )1,046( 6,633 7,268 3,357 2,280 287 2,404 24,885 24,991 26,354 Cumulative exposure in the segment 3,961 3,702 2,656 9,289 16,557 19,914 22,194 22,481 24,885

(1) Excluding balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of hybrid financial instruments. (2) Average weighted by fair value of effective average duration. (3) The data include assumptions regarding early repayment in respect of housing loans. The effect of these assumptions on fair value is an increase of the fair value by NIS 40 million, and a reduction of the duration of the assets and of the difference in the duration by 0.02 years.

General notes A. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the various balance sheet items, will be provided upon request. B. In this table, data by periods represent the present value of future cash flows of each financial instrument, capitalized by the interest rate used for discounting to the fair value included in respect of the financial instrument in Note 15 to the Condensed Financial Statements, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used to calculate the fair value of financial instruments, see Note 15 to the Condensed Financial Statements. C. The internal return rate is the interest rate for discounting of the expected cash flows from the financial instrument to the fair value included in respect thereof in Note 15 to the Condensed Financial Statements. D. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments. E. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

84 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Exposure of the Bank and its consolidated companies to changes in interest rates Table 3-26: Exposure of the Bank and its consolidated companies to changes in unlinked interest rates

March 31, 2018 March 31, 2018 March 31, 2017 December 31, 2017 On Over 1 Over 3 Over 1 Over 3 Over 5 Over 10 Over 20 No Total fair Internal rate Effective Total fair Internal rate Effective Total fair Internal rate Effective demand up month up months up year up years up years up years up years maturity value of return average value of return average value of return average to 1 month to 3 months to 1 year to 3 years to 5 years to 10 years to 20 years period duration duration duration NIS millions NIS millions % Years NIS millions % Years NIS millions % Years Israeli currency unlinked Financial assets, amounts receivable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial assets Financial assets(1)(3) 229,571 18,030 20,830 13,380 10,353 6,665 2,556 288 2,477 304,150 3.01 0.55 293,862 2.97 0.49 306,733 2.85 0.55 Derivative financial instruments (excluding options) 69,733 119,846 47,693 65,560 37,055 29,139 440 - - 369,466 1.26 347,014 1.20 362,128 1.26 Options (in terms of underlying asset) 1,011 1,440 2,166 47 662 576 - - - 5,902 1.25 6,671 1.31 4,645 1.62 Total fair value 300,315 139,316 70,689 78,987 48,070 36,380 2,996 288 2,477 679,518 (2)0.94 647,547 )2(0.88 673,506 )2(0.94 Financial liabilities, amounts payable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial liabilities Financial liabilities(1) 224,475 7,277 14,348 7,926 3,603 1,327 444 1 73 259,474 1.09 0.21 249,098 1.33 0.22 263,118 0.99 0.20 Derivative financial instruments (excluding options) 71,058 131,344 55,988 64,425 37,199 31,696 272 - - 391,982 1.25 369,165 1.17 381,785 1.23 Options (in terms of underlying asset) 821 954 1,399 3 - - - - - 3,177 0.27 4,293 0.31 2,249 0.27 Total fair value 296,354 139,575 71,735 72,354 40,802 33,023 716 1 73 654,633 (2)0.83 622,556 )2(0.78 647,152 )2(0.81 Financial instruments, net Exposure to changes in interest rates in the segment 3,961 )259( )1,046( 6,633 7,268 3,357 2,280 287 2,404 24,885 24,991 26,354 Cumulative exposure in the segment 3,961 3,702 2,656 9,289 16,557 19,914 22,194 22,481 24,885

(1) Excluding balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of hybrid financial instruments. (2) Average weighted by fair value of effective average duration. (3) The data include assumptions regarding early repayment in respect of housing loans. The effect of these assumptions on fair value is an increase of the fair value by NIS 40 million, and a reduction of the duration of the assets and of the difference in the duration by 0.02 years.

General notes A. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the various balance sheet items, will be provided upon request. B. In this table, data by periods represent the present value of future cash flows of each financial instrument, capitalized by the interest rate used for discounting to the fair value included in respect of the financial instrument in Note 15 to the Condensed Financial Statements, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used to calculate the fair value of financial instruments, see Note 15 to the Condensed Financial Statements. C. The internal return rate is the interest rate for discounting of the expected cash flows from the financial instrument to the fair value included in respect thereof in Note 15 to the Condensed Financial Statements. D. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments. E. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

85 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Exposure of the Bank and its consolidated companies to changes in interest rates (continued) Table 3-27: Exposure of the Bank and its consolidated companies to changes in CPI-linked interest rates

March 31, 2018 March 31, 2018 March 31, 2017 December 31, 2017 On Over 1 Over 3 Over 1 Over 3 Over 5 Over 10 Over 20 No Total fair Internal rate Effective Total fair Internal rate Effective Total fair Internal rate Effective demand up month up months up year up years up years up years up years maturity value of return average value of return average value of return average to 1 month to 3 months to 1 year to 3 years to 5 years to 10 years to 20 years period duration duration duration NIS millions NIS millions % Years NIS millions % Years NIS millions % Years Israeli currency CPI-linked Financial assets, amounts receivable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial assets Financial assets(1)(3) 2,876 2,035 7,488 14,201 11,494 5,789 3,027 946 56 47,912 2.42 3.67 45,416 3.55 3.19 46,143 2.57 3.36 Derivative financial instruments (excluding options) 742 3,251 5,981 5,620 2,555 5,155 12 - - 23,316 2.06 21,985 2.70 24,985 2.06 Total fair value 3,618 5,286 13,469 19,821 14,049 10,944 3,039 946 56 71,228 (2)3.14 67,401 )2(3.03 71,128 )2(2.90 Financial liabilities, amounts payable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial liabilities Financial liabilities(1) 2,700 782 6,075 13,809 10,319 5,339 1,011 471 - 40,506 0.74 3.14 38,955 0.90 3.40 41,180 0.73 2.90 Derivative financial instruments (excluding options) 454 3,885 4,445 6,669 2,166 5,981 243 - - 23,843 2.44 24,484 2.80 24,865 2.25 Total fair value 3,154 4,667 10,520 20,478 12,485 11,320 1,254 471 - 64,349 (2)2.88 63,439 )2(3.17 66,045 )2(2.66 Financial instruments, net Exposure to changes in interest rates in the segment 464 619 2,949 )657( 1,564 )376( 1,785 475 56 6,879 3,962 5,083 Cumulative exposure in the segment 464 1,083 4,032 3,375 4,939 4,563 6,348 6,823 6,879

(1) Excluding balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of hybrid financial instruments. (2) Average weighted by fair value of effective average duration. (3) The data include assumptions regarding early repayment in respect of housing loans. The effect of these assumptions on fair value is a decrease of the fair value by NIS 6 million, and a reduction of the duration of the assets and of the difference in the duration by 0.14 years.

General notes A. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the various balance sheet items, will be provided upon request. B. In this table, data by periods represent the present value of future cash flows of each financial instrument, capitalized by the interest rate used for discounting to the fair value included in respect of the financial instrument in Note 15 to the Condensed Financial Statements, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used to calculate the fair value of financial instruments, see Note 15 to the Condensed Financial Statements. C. The internal return rate is the interest rate for discounting of the expected cash flows from the financial instrument to the fair value included in respect thereof in Note 15 to the Condensed Financial Statements. D. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments. E. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

86 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Exposure of the Bank and its consolidated companies to changes in interest rates (continued) Table 3-27: Exposure of the Bank and its consolidated companies to changes in CPI-linked interest rates

March 31, 2018 March 31, 2018 March 31, 2017 December 31, 2017 On Over 1 Over 3 Over 1 Over 3 Over 5 Over 10 Over 20 No Total fair Internal rate Effective Total fair Internal rate Effective Total fair Internal rate Effective demand up month up months up year up years up years up years up years maturity value of return average value of return average value of return average to 1 month to 3 months to 1 year to 3 years to 5 years to 10 years to 20 years period duration duration duration NIS millions NIS millions % Years NIS millions % Years NIS millions % Years Israeli currency CPI-linked Financial assets, amounts receivable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial assets Financial assets(1)(3) 2,876 2,035 7,488 14,201 11,494 5,789 3,027 946 56 47,912 2.42 3.67 45,416 3.55 3.19 46,143 2.57 3.36 Derivative financial instruments (excluding options) 742 3,251 5,981 5,620 2,555 5,155 12 - - 23,316 2.06 21,985 2.70 24,985 2.06 Total fair value 3,618 5,286 13,469 19,821 14,049 10,944 3,039 946 56 71,228 (2)3.14 67,401 )2(3.03 71,128 )2(2.90 Financial liabilities, amounts payable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial liabilities Financial liabilities(1) 2,700 782 6,075 13,809 10,319 5,339 1,011 471 - 40,506 0.74 3.14 38,955 0.90 3.40 41,180 0.73 2.90 Derivative financial instruments (excluding options) 454 3,885 4,445 6,669 2,166 5,981 243 - - 23,843 2.44 24,484 2.80 24,865 2.25 Total fair value 3,154 4,667 10,520 20,478 12,485 11,320 1,254 471 - 64,349 (2)2.88 63,439 )2(3.17 66,045 )2(2.66 Financial instruments, net Exposure to changes in interest rates in the segment 464 619 2,949 )657( 1,564 )376( 1,785 475 56 6,879 3,962 5,083 Cumulative exposure in the segment 464 1,083 4,032 3,375 4,939 4,563 6,348 6,823 6,879

(1) Excluding balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of hybrid financial instruments. (2) Average weighted by fair value of effective average duration. (3) The data include assumptions regarding early repayment in respect of housing loans. The effect of these assumptions on fair value is a decrease of the fair value by NIS 6 million, and a reduction of the duration of the assets and of the difference in the duration by 0.14 years.

General notes A. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the various balance sheet items, will be provided upon request. B. In this table, data by periods represent the present value of future cash flows of each financial instrument, capitalized by the interest rate used for discounting to the fair value included in respect of the financial instrument in Note 15 to the Condensed Financial Statements, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used to calculate the fair value of financial instruments, see Note 15 to the Condensed Financial Statements. C. The internal return rate is the interest rate for discounting of the expected cash flows from the financial instrument to the fair value included in respect thereof in Note 15 to the Condensed Financial Statements. D. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments. E. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

87 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Exposure of the Bank and its consolidated companies to changes in interest rates (continued) Table 3-28: Exposure of the Bank and its consolidated companies to changes in foreign-currency interest rates

March 31, 2018 March 31, 2018 March 31, 2017 December 31, 2017 On Over 1 Over 3 Over 1 Over 3 Over 5 Over 10 Over 20 No Total fair Internal rate Effective Total fair Internal rate Effective Total fair Internal rate Effective demand up month up months up year up years up years up years up years maturity value of return average value of return average value of return average to 1 month to 3 months to 1 year to 3 years to 5 years to 10 years to 20 years period duration duration duration NIS millions NIS millions % Years NIS millions % Years NIS millions % Years Foreign currency(3) Financial assets, amounts receivable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial assets Financial assets(1)(4) 39,682 6,712 5,215 7,765 9,044 4,084 233 91 763 73,589 3.25 1.18 81,984 2.80 1.21 79,019 2.83 1.28 Derivative financial instruments (excluding options) 76,108 149,323 122,858 157,284 17,841 46,001 553 49 - 570,017 0.87 351,064 1.10 447,910 0.78 Options (in terms of underlying asset) 1,735 2,862 3,377 162 6 - - - - 8,142 0.31 10,775 0.25 6,527 0.25 Total fair value 117,525 158,897 131,450 165,211 26,891 50,085 786 140 763 651,748 (2)0.90 443,823 )2(1.10 533,456 )2(0.85 Financial liabilities, amounts payable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial liabilities Financial liabilities(1) 64,475 12,691 15,145 1,792 509 315 17 - 17 94,961 2.25 0.20 103,952 1.46 0.17 96,228 1.86 0.20 Derivative financial instruments (excluding options) 77,357 133,485 110,037 156,959 18,299 49,234 764 194 - 546,329 0.92 327,232 1.21 428,713 0.86 Options (in terms of underlying asset) 1,887 3,340 4,128 205 602 512 - - - 10,674 0.80 12,920 0.73 8,625 0.90 Total fair value 143,719 149,516 129,310 158,956 19,410 50,061 781 194 17 651,964 (2)0.81 444,104 )2(0.95 533,566 )2(0.74 Financial instruments, net Exposure to changes in interest rates in the segment )26,194( 9,381 2,140 6,255 7,481 24 5 )54( 746 )216( )281( )110( Cumulative exposure in the segment )26,194( )16,813( )14,673( )8,418( )937( )913( )908( )962( )216(

(1) Excluding balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of hybrid financial instruments. (2) Average weighted by fair value of effective average duration. (3) Including Israeli currency linked to foreign currency. (4) The data include assumptions regarding early repayment in respect of housing loans. The effect of these assumptions is negligible.

General notes A. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the various balance sheet items, will be provided upon request. B. In this table, data by periods represent the present value of future cash flows of each financial instrument, capitalized by the interest rate used for discounting to the fair value included in respect of the financial instrument in Note 15 to the Condensed Financial Statements, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used to calculate the fair value of financial instruments, see Note 15 to the Condensed Financial Statements. C. The internal return rate is the interest rate for discounting of the expected cash flows from the financial instrument to the fair value included in respect thereof in Note 15 to the Condensed Financial Statements. D. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments. E. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

88 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Exposure of the Bank and its consolidated companies to changes in interest rates (continued) Table 3-28: Exposure of the Bank and its consolidated companies to changes in foreign-currency interest rates

March 31, 2018 March 31, 2018 March 31, 2017 December 31, 2017 On Over 1 Over 3 Over 1 Over 3 Over 5 Over 10 Over 20 No Total fair Internal rate Effective Total fair Internal rate Effective Total fair Internal rate Effective demand up month up months up year up years up years up years up years maturity value of return average value of return average value of return average to 1 month to 3 months to 1 year to 3 years to 5 years to 10 years to 20 years period duration duration duration NIS millions NIS millions % Years NIS millions % Years NIS millions % Years Foreign currency(3) Financial assets, amounts receivable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial assets Financial assets(1)(4) 39,682 6,712 5,215 7,765 9,044 4,084 233 91 763 73,589 3.25 1.18 81,984 2.80 1.21 79,019 2.83 1.28 Derivative financial instruments (excluding options) 76,108 149,323 122,858 157,284 17,841 46,001 553 49 - 570,017 0.87 351,064 1.10 447,910 0.78 Options (in terms of underlying asset) 1,735 2,862 3,377 162 6 - - - - 8,142 0.31 10,775 0.25 6,527 0.25 Total fair value 117,525 158,897 131,450 165,211 26,891 50,085 786 140 763 651,748 (2)0.90 443,823 )2(1.10 533,456 )2(0.85 Financial liabilities, amounts payable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial liabilities Financial liabilities(1) 64,475 12,691 15,145 1,792 509 315 17 - 17 94,961 2.25 0.20 103,952 1.46 0.17 96,228 1.86 0.20 Derivative financial instruments (excluding options) 77,357 133,485 110,037 156,959 18,299 49,234 764 194 - 546,329 0.92 327,232 1.21 428,713 0.86 Options (in terms of underlying asset) 1,887 3,340 4,128 205 602 512 - - - 10,674 0.80 12,920 0.73 8,625 0.90 Total fair value 143,719 149,516 129,310 158,956 19,410 50,061 781 194 17 651,964 (2)0.81 444,104 )2(0.95 533,566 )2(0.74 Financial instruments, net Exposure to changes in interest rates in the segment )26,194( 9,381 2,140 6,255 7,481 24 5 )54( 746 )216( )281( )110( Cumulative exposure in the segment )26,194( )16,813( )14,673( )8,418( )937( )913( )908( )962( )216(

(1) Excluding balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of hybrid financial instruments. (2) Average weighted by fair value of effective average duration. (3) Including Israeli currency linked to foreign currency. (4) The data include assumptions regarding early repayment in respect of housing loans. The effect of these assumptions is negligible.

General notes A. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the various balance sheet items, will be provided upon request. B. In this table, data by periods represent the present value of future cash flows of each financial instrument, capitalized by the interest rate used for discounting to the fair value included in respect of the financial instrument in Note 15 to the Condensed Financial Statements, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used to calculate the fair value of financial instruments, see Note 15 to the Condensed Financial Statements. C. The internal return rate is the interest rate for discounting of the expected cash flows from the financial instrument to the fair value included in respect thereof in Note 15 to the Condensed Financial Statements. D. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments. E. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

89 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Exposure of the Bank and its consolidated companies to changes in interest rates (continued) Table 3-29: Exposure of the Bank and its consolidated companies to changes in interest rates – total exposure to changes in interest rates

March 31, 2018 March 31, 2018 March 31, 2017 December 31, 2017 On Over 1 Over 3 Over 1 Over 3 Over 5 Over 10 Over 20 No maturity Total fair Internal rate Effective Total fair Internal rate Effective Total fair Internal rate Effective demand up month up months up year up years up years up years up years period value of return average value of return average value of return average to 1 month to 3 months to 1 year to 3 years to 5 years to 10 years to 20 years duration duration duration NIS millions NIS millions % Years NIS millions % Years NIS millions % Years Total exposure to changes in interest rates Financial assets, amounts receivable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial assets Financial assets(1)(3)(4) 272,129 26,777 33,533 35,346 30,891 16,538 5,816 1,325 7,001 429,356 2.85 0.95 425,038 3.15 0.91 435,598 2.74 0.98 Derivative financial instruments (excluding options) 146,583 272,420 176,532 228,464 57,451 80,295 1,005 49 734 963,533 1.02 720,776 1.20 835,839 0.99 Options (in terms of underlying asset) 2,746 4,302 5,543 209 668 576 - - - 14,044 0.71 17,446 0.66 11,172 0.82 Total fair value 421,458 303,499 215,608 264,019 89,010 97,409 6,821 1,374 7,735 1,406,933 (2)1.03 1,163,260 )2(1.09 1,282,609 )2(1.01 Financial liabilities, amounts payable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial liabilities Financial liabilities(1) 291,650 20,750 35,568 23,527 14,431 6,981 1,472 472 1,687 396,538 0.97 0.51 393,495 1.06 0.52 402,005 0.92 0.48 Derivative financial instruments (excluding options) 148,869 268,714 170,470 228,053 57,664 86,911 1,279 194 736 962,890 1.06 721,589 1.19 836,175 1.04 Options (in terms of underlying asset) 2,708 4,294 5,527 208 602 512 - - - 13,851 0.68 17,213 0.63 10,874 0.77 Total fair value 443,227 293,758 211,565 251,788 72,697 94,404 2,751 666 2,423 1,373,279 (2)0.92 1,132,297 )2(0.98 1,249,054 )2(0.88 Financial instruments, net Exposure to changes in interest rates in the segment )21,769( 9,741 4,043 12,231 16,313 3,005 4,070 708 5,312 33,654 30,963 33,555 Cumulative exposure in the segment )21,769( )12,028( )7,985( 4,246 20,559 23,564 27,634 28,342 33,654

(1) Excluding balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of hybrid financial instruments. (2) Average weighted by fair value of effective average duration. (3) Includes shares presented in the “no maturity period” column. (4) The data include assumptions regarding early repayment in respect of housing loans. In the unlinked and CPI-linked segment: the effect of these assumptions on fair value is an increase of the fair value by NIS 40 million and a decrease by NIS 6 million, respectively, and a reduction of the duration of the assets and of the difference in the duration by 0.02 and 0.14 years, respectively. In the foreign-currency segment: the effect of these assumptions is negligible.

General notes A. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the various balance sheet items, will be provided upon request. B. In this table, data by periods represent the present value of future cash flows of each financial instrument, capitalized by the interest rate used for discounting to the fair value included in respect of the financial instrument in Note 15 to the Condensed Financial Statements, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used to calculate the fair value of financial instruments, see Note 15 to the Condensed Financial Statements. C. The internal return rate is the interest rate for discounting of the expected cash flows from the financial instrument to the fair value included in respect thereof in Note 15 to the Condensed Financial Statements. D. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments. E. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

90 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Exposure of the Bank and its consolidated companies to changes in interest rates (continued) Table 3-29: Exposure of the Bank and its consolidated companies to changes in interest rates – total exposure to changes in interest rates

March 31, 2018 March 31, 2018 March 31, 2017 December 31, 2017 On Over 1 Over 3 Over 1 Over 3 Over 5 Over 10 Over 20 No maturity Total fair Internal rate Effective Total fair Internal rate Effective Total fair Internal rate Effective demand up month up months up year up years up years up years up years period value of return average value of return average value of return average to 1 month to 3 months to 1 year to 3 years to 5 years to 10 years to 20 years duration duration duration NIS millions NIS millions % Years NIS millions % Years NIS millions % Years Total exposure to changes in interest rates Financial assets, amounts receivable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial assets Financial assets(1)(3)(4) 272,129 26,777 33,533 35,346 30,891 16,538 5,816 1,325 7,001 429,356 2.85 0.95 425,038 3.15 0.91 435,598 2.74 0.98 Derivative financial instruments (excluding options) 146,583 272,420 176,532 228,464 57,451 80,295 1,005 49 734 963,533 1.02 720,776 1.20 835,839 0.99 Options (in terms of underlying asset) 2,746 4,302 5,543 209 668 576 - - - 14,044 0.71 17,446 0.66 11,172 0.82 Total fair value 421,458 303,499 215,608 264,019 89,010 97,409 6,821 1,374 7,735 1,406,933 (2)1.03 1,163,260 )2(1.09 1,282,609 )2(1.01 Financial liabilities, amounts payable in respect of derivative instruments and in respect of off-balance sheet financial instruments, and hybrid financial liabilities Financial liabilities(1) 291,650 20,750 35,568 23,527 14,431 6,981 1,472 472 1,687 396,538 0.97 0.51 393,495 1.06 0.52 402,005 0.92 0.48 Derivative financial instruments (excluding options) 148,869 268,714 170,470 228,053 57,664 86,911 1,279 194 736 962,890 1.06 721,589 1.19 836,175 1.04 Options (in terms of underlying asset) 2,708 4,294 5,527 208 602 512 - - - 13,851 0.68 17,213 0.63 10,874 0.77 Total fair value 443,227 293,758 211,565 251,788 72,697 94,404 2,751 666 2,423 1,373,279 (2)0.92 1,132,297 )2(0.98 1,249,054 )2(0.88 Financial instruments, net Exposure to changes in interest rates in the segment )21,769( 9,741 4,043 12,231 16,313 3,005 4,070 708 5,312 33,654 30,963 33,555 Cumulative exposure in the segment )21,769( )12,028( )7,985( 4,246 20,559 23,564 27,634 28,342 33,654

(1) Excluding balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of hybrid financial instruments. (2) Average weighted by fair value of effective average duration. (3) Includes shares presented in the “no maturity period” column. (4) The data include assumptions regarding early repayment in respect of housing loans. In the unlinked and CPI-linked segment: the effect of these assumptions on fair value is an increase of the fair value by NIS 40 million and a decrease by NIS 6 million, respectively, and a reduction of the duration of the assets and of the difference in the duration by 0.02 and 0.14 years, respectively. In the foreign-currency segment: the effect of these assumptions is negligible.

General notes A. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the various balance sheet items, will be provided upon request. B. In this table, data by periods represent the present value of future cash flows of each financial instrument, capitalized by the interest rate used for discounting to the fair value included in respect of the financial instrument in Note 15 to the Condensed Financial Statements, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used to calculate the fair value of financial instruments, see Note 15 to the Condensed Financial Statements. C. The internal return rate is the interest rate for discounting of the expected cash flows from the financial instrument to the fair value included in respect thereof in Note 15 to the Condensed Financial Statements. D. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments. E. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

91 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

In the management of interest-rate risk, the Bank focuses on the management of value sensitivity, which is based on changes in the discounted value of the total assets and liabilities in the Bank’s balance sheet with the change in the interest rate (internal models are used for the calculation); income sensitivity is monitored using limits. Income sensitivity differs from value sensitivity in that unlike the latter, income sensitivity does not take into account changes in the discounted value of long-term assets and liabilities that are not measured in the statement of profit and loss on a fair-value basis, but does fully take into account changes in spreads of deposits and current accounts. The Bank measures the sensitivity of economic value to a range of scenarios, on a monthly basis, a frequency congruent with the characteristics of the banking book, with more frequent measurements for the purposes of exposure management. The sensitivities of the trading book are measured several times a day.

Table 3-30: Data regarding the sensitivity of the capital of the Bank, including subsidiaries with exposure significant for the Group, to parallel changes in interest-rate curves (theoretical change in economic value as a result of each scenario, including internal models)

March 31, 2018 Maximum in 2018 Minimum in 2018 1% increase 1% decrease 0.1% increase 1% increase 1% decrease 1% increase 1% decrease NIS millions Scenario: Change in CPI-linked interest rate: Bank )502( 587 )54( )502( 587 )383( 449 Of which: Banking book )485( 568 )52( )485( 568 )370( 435 Trading book )17( 18 )2( )18( 20 )13( 14 Change in unlinked interest rate: Bank )70( 92 )7( )219( 274 )70( 92 Of which: Banking book )66( 111 )8( )208( 255 )66( 111 Trading book )4( )19( 1 25 )36( )4( 18 Change in foreign-currency interest rates: Bank 40 )43( 4 40 )43( 8 )7( Of which: Banking book 65 )68( 7 65 )69( 1 1 Trading book )25( 25 )3( )25( 25 - -

92 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-30: Data regarding the sensitivity of the capital of the Bank, including subsidiaries with exposure significant for the Group, to parallel changes in interest-rate curves (theoretical change in economic value as a result of each scenario, including internal models) (continued)

December 31, 2017 Maximum in 2017 Minimum in 2017 1% increase 1% decrease 0.1% increase 1% increase 1% decrease 1% increase 1% decrease NIS millions Scenario: Change in CPI-linked interest rate: Bank )422( 493 )45( )422( 493 )257( 315 Of which: Banking book )406( 477 )43( )406( 476 )257( 315 Trading book )16( 16 )2( )22( 23 - - Change in unlinked interest rate: Bank )269( 322 )29( )269( 322 )68( 88 Of which: Banking book )260( 311 )28( )260( 311 )54( 92 Trading book )9( 11 )1( )43( 26 - 3 Change in foreign-currency interest rates Bank )3( 7 - )45( 49 )1( 6 Of which: Banking book - 3 - )38( 41 - 2 Trading book )3( 4 - 31 )29( 2 )2(

The above table presents an analysis of the sensitivity of the Bank’s economic value to changes in interest-rate curves, based, among other factors, on the discounting of expected cash flows by interest-rate curves that do not take into account the credit risk spread of the counterparty, with the use of internal models for some products. This differs from a fair-value calculation, which is based on factors including the discounting of expected cash flows by interest rates reflecting the risk levels, according to the accepted practice in financial statements, without the use of internal models for some products.

93 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.3.2. Exchange-rate risk Currency risks (also known as linkage-base exposure) include exposure to exchange rates of the various currencies against the shekel, and exposure to the consumer price index, at the Bank as a whole.

Table 3-31: Sensitivity of the Bank to changes in the exchange rates of foreign currencies with a significant volume of activity at the Bank and to the consumer price index

March 31, 2018 December 31, 2017 10% increase 10% decrease 10% increase 10% decrease NIS millions USD 103.3 )9.1( 100.4 )68.2( EUR 51.7 )69.3( )1.8( )26.8(

3% increase 3% decrease 3% increase 3% decrease CPI 227.6 )227.6( 187.1 )187.1(

The table above presents an analysis of the sensitivity of the economic value of the Bank to changes in exchange rates, based on revaluation of all balance sheet and off-balance sheet instruments in the risk-management system, using prevalent models for revaluation of each instrument and representative rates as the baseline exchange rate. For the purposes of the calculation, the portfolio is revalued again at an exchange rate reflecting an increase/decrease at the presented rate, with no additional assumptions. Sensitivity to the consumer price index is calculated according to the exposure of the Bank to the index, as detailed in Note 14 to the Condensed Financial Statements as at March 31, 2018.

3.4. Liquidity and refinancing risk Liquidity risk – Liquidity risk is defined as present or future risk to the stability and profits of the Bank arising from an inability to sustain the cash flow required for its needs. Liquidity risk at the Bank is examined from a broader perspective, encompassing the ability to repay liabilities on schedule, including during times of stress, without damage to routine operations within the business plans of the Bank and without incurring exceptional losses. Refinancing risk – The risk of inability to raise new resources to replace resources that have matured, or the risk that the reissue may be performed at durations and terms that damage the Bank’s net interest income. This risk is managed as part of liquidity risk.

No material changes have occurred in liquidity risk management policy and in resource raising policy since the beginning of this year. For more extensive information regarding liquidity risk and the management thereof, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017; the section “Review of risks” in the Annual Financial Statements for 2017 and the accompanying Notes; and the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at March 31, 2018.

94 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Table 3-32: Liquidity coverage ratio

For the three For the three For the three months ended months ended months ended March 31, March 31, December 31, 2018 2017 2017 % A. Consolidated data(1) Liquidity coverage ratio 119% 128% 122% Minimum liquidity coverage ratio required by the Banking Supervision Department 100% 100% 100% B. Bank data(2) Liquidity coverage ratio 116% 122% 120% Minimum liquidity coverage ratio required by the Banking Supervision Department 100% 100% 100%

(1) Beginning January 1, 2017, the consolidated ratio is calculated on a daily basis, and reported as the average of the daily observations. (2) The stand-alone ratio of the banking corporation is calculated on a daily basis, and reported as the average of the daily observations. Pursuant to the file of questions and answers published by the Bank of Israel on September 29, 2016, concerning inclusion in the stand-alone reporting of a banking corporation, with regard to subsidiaries that hold liquid assets for the corporation, as of July 1, 2017, the calculation of the stand-alone liquidity coverage ratio includes these subsidiaries.

The Bank is in compliance with all regulatory and internal liquidity limits. These include, among others, short-term models such as the LCR and an internal thirty-day model, medium-term models such as the NSFR-like internal model (financing sources stable for over a year divided by financing needs stable for over a year, as defined at the Bank, in the vein of the recommendations of the Basel Committee), and limits that refer to the long term. In accordance with Proper Conduct of Banking Business Directive 221, as at March 31, 2018, the Bank holds consolidated liquid assets (primarily reserves at central banks, tradable securities backed by sovereigns and central banks, and coins and bills) for times of crisis (after haircuts) in the amount of NIS 103,047 million, in addition to liquid bonds not recognized for the purposes of the calculation of liquid assets. Part of the liquid assets are held by the Bank, and part are held by the subsidiaries. The Bank takes into consideration possible restrictions on the transfer of liquidity between some subsidiaries and the Bank itself, particularly banking subsidiaries overseas. Accordingly, some of the subsidiaries hold liquid assets for times of crisis (or a credit line from the parent company), according to need, and the Bank does not rely on these assets. In light of the assumptions regarding rollover of deposits in the ordinary course of business, and other assumptions, the Bank does not foresee liquidity problems that would necessitate the use of the liquid assets; however, it is prepared for the required scenarios.

Table 3-33: Balance of total deposits of the three largest groups* of depositors**

March 30, December 31, 2018 2017 NIS millions Group A 15,223 16,828 Group B 6,298 7,229 Group C 3,173 4,031

* “Group” – A depositor, including a controlling party thereof (including others under its control), and a party under its control. ** The three largest groups of depositors at that report date.

95 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.5. Operational risk Operational risk is defined as the risk of loss that may be caused by failed or faulty internal processes, human actions, system malfunctions, or external events. The definition includes legal risk, but does not include strategic risk or reputational risk. Failures related to one of the aforesaid factors may cause damage to profitability. The Bank operates control units, including Information Systems Security and Cyber Defense, Business Continuity, Security, the Compliance Officer, and Anti-Money Laundering and Terrorism Financing Prevention, as well as comprehensive procedures and systems in areas related to banking activity, management of human resources, process control, emergency operation, and more. For additional information regarding operational risk and the management thereof, including information-technology risk, information security and cyber risks, cloud-computing risks, emergency preparedness, and insurance, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017 and the Annual Financial Statements for 2017.

3.6. Compliance risk Compliance risk is the risk of imposition of a legal or regulatory sanction, material financial loss, or reputational damage which the banking corporation may suffer as a result of a failure to comply with the compliance directives, as defined in Proper Conduct of Banking Business Directive 308. Pursuant to Proper Conduct of Banking Business Directive 308, compliance risk also includes risks related to the fairness of the Bank towards its customers, conduct risk, conflicts of interest, the prohibition of money laundering and financing of terrorism, provision of advice to customers, protection of privacy (excluding information-technology aspects), and taxation aspects relevant to products or services for customers. In addition, the risks arising from the investigations by United States authorities, as described in Notes 10C and 10D to the Condensed Financial Statements as at March 31, 2018, are also to be noted. For additional information regarding compliance risk and the management thereof, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017 and the Annual Financial Statements for 2017.

3.7. Legal risk Risk to the Group’s income and capital resulting from unexpected events such as legal claims, including class-action suits, inability to enforce contracts, or rulings against the Group, which may cause damage to the Group’s profitability. The Group has a structure of internal and external legal counsel. For additional information regarding legal risk and the management thereof, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017; Note 26 to the Annual Financial Statements for 2017; and Note 10 to the Condensed Financial Statements as at March 31, 2018.

96 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.8. Reputational risk Reputational risk is defined as present or future risk of damage to income or capital as a result of a negative image in the eyes of relevant stakeholders, such as customers, parties to transactions, shareholders, investors, or regulatory agencies. For additional information regarding reputational risk and the management thereof, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017, and the Annual Financial Statements for 2017.

3.9. Regulatory and legislative risk Regulatory risk is risk to the Group’s income and/or capital arising from legislative processes and/or draft directives of various regulatory agencies that cause changes in the Group’s business environment. Such changes may occasionally influence the Group’s ability to offer certain services and/or may obligate the Group to carry out technological and other investments at considerable cost, while disrupting schedules for development of other planned services. For additional information regarding regulatory and legislative risk and the management thereof, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017 and the Annual Financial Statements for 2017. For details regarding material regulatory initiatives with an effect on the activity of the Bank during the reported period, see Note 16 to the Condensed Financial Statements as at March 31, 2018, and Section 3.14 below.

3.10. Economic risk Risk factors in the economic environment are identified by the Economics Department, which tracks current economic and financial data in Israel and worldwide and professionally evaluates the implications of the data. The department maps potential risks in the economy and in the financial markets, and reports to the relevant teams and committees. For additional information regarding economic risk and the management thereof, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017 and the Annual Financial Statements for 2017. For details regarding conditions in the Israeli and global economy, see the section “Economic review” in the Report of the Board of Directors and Board of Management as at March 31, 2018.

3.11. Strategic risk Strategic risk is material present or future risk to profits, capital, reputation, or status that may be caused by changes in the business environment; faulty business decisions; improper implementation of strategy or business decisions; or failure to respond to changes in the industry (e.g. competitors’ actions), the economy, or technology. Strategic risk is a function of the congruence of the organization’s strategic objectives with its environment, adaptation of the business plans that it develops to achieve these objectives, resource allocation, and quality of implementation. For additional information regarding strategic risk and the management thereof, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017 and the Annual Financial Statements for 2017.

97 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.12. Environmental risk Environmental risk to the Bank is the risk of loss as a result of directives related to the protection of the environment and the enforcement thereof, which may materialize if the Bank bears direct responsibility for an environmental hazard, including the possibility that the Bank may be required to remove an environmental hazard, or may be liable to a third party in respect of an environmental hazard, or as a result of the impairment of realized collateral. This risk may also materialize indirectly as a result of the deterioration of the financial condition of another entity due to environmental costs stemming from directives related to the protection of the environment. Reputational risk may also materialize as a result of the association of the Bank to a party causing environmental damage. For additional information regarding environmental risk and the management thereof, see the Report on Risks: Pillar 3 Disclosure and Additional Information Regarding Risks as at December 31, 2017, and the Annual Financial Statements for 2017.

3.13. Legal and other proceedings A. Legal proceedings The Bank Group (the Bank and its consolidated subsidiaries) is a party to legal proceedings, including petitions to certify class actions, taken against it by its customers, former customers, and various third parties, who deem themselves injured or harmed by the Bank Group’s operations during the normal course of its business. The causes of the claims against the Bank Group are varied and wide-ranging. In the opinion of the Bank’s Board of Management, based on legal opinions with regard to the likely outcome of these claims, the financial statements include sufficient provisions, in accordance with generally accepted accounting principles, to cover possible damages resulting from these claims, where such provisions are necessary. For details regarding legal claims and petitions to certify class actions in material amounts to which the Bank Group is a party, see Note 10B to the Condensed Financial Statements as at March 31, 2018.

B. Other proceedings For details regarding other proceedings, see Section 3.13 of the Report of the Board of Directors and Board of Management as at December 31, 2017. As at the date of publication of the financial statements, no material changes have occurred relative to the aforesaid Section 3.13, with the following exceptions: Further to the petition described in Section 1 of Section 3.13 of the aforesaid report (a petition for disclosure and perusal of documents prior to filing a petition for a derivative claim in connection with the manner of approval of the retirement agreement of a former employee of the Bank, against the background of the complaint she filed against the former CEO of the Bank regarding sexual harassment), a hearing of the petition was held on April 24, 2018, in which the petitioner consented to the recommendation of the court to expunge the petition.

98 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

3.14. Material regulatory initiatives with an effect on the activity of the Bank Further to the description in Section 3.14 of the Report of the Board of Directors, in the Report of the Board of Directors and Board of Management for 2017, the following additional matters were addressed during the first quarter of 2018.

Regulatory reforms for increased competition in the banking system Several regulatory initiatives have been formulated over the last few years, with the primary aim of increasing competition in the banking system in Israel; several additional regulatory initiatives are in the process of being generated.

Law for Increasing Competition and Reducing Concentration in the Banking Market in Israel The Law for Increasing Competition and Reducing Concentration in the Banking Market in Israel (Legislative Amendments), 2017, was published in January 2017, on the basis of the report of the public committee appointed by the Minister of Finance and the Governor of the Bank of Israel (the Strum Committee). • The credit-card companies shall be separated from the two largest banks (the Bank and ) within three to four years of January 2017. The sale period will be extended to four years if the Bank issues at least 25% of the credit-card companies under its ownership within three years and also falls to a holding rate of 40%. • Beginning in July 2018, the banks will be required to transmit daily current-account balances to financial entities to be approved, subject to approval by the customer. • The Bank will be obligated to allow the transfer of information regarding customers’ accounts to third parties providing consulting, cost comparison, and financial information summation services. Such transfer shall be subject to the customer’s approval, and shall be performed using open API. By the end of 2018, the Bank is expected to be required to transfer customers’ Banking ID to third parties, and possibly additional information as well. A draft of the directives has not yet been published; publication is expected in the coming months. • The Bank will be obligated to sell holdings in ABS (Automatic Bank Services Ltd., an operator of technological systems that allow, among other things, transfers of approvals for transactions in charge cards and transfers of approvals for cash-withdrawal transactions). The Bank currently holds 34.5% of ABS, and will be obligated to sell holdings exceeding 10% within four years; voting rights in respect of such holdings above the noted rate are dormant as of June 1, 2017. • The Bank will be required to present detailed information regarding the use of non-bank credit cards on its website for its customers. The Bank is preparing to implement this law in accordance with the established schedule. For additional details regarding the Bank’s preparations for separation from the Isracard Group, see Section 2.6.1, above.

Parliamentary Inquiry Committee on Credit Allocation in the Economy In July 2017, the Knesset resolved to establish a parliamentary inquiry committee to examine credit allocation in the economy and debt agreements. The committee is headed by MK Eitan Cabel. The committee will examine the conduct of the Bank of Israel, the Banking Supervision Department, the banks, institutional entities, insurance companies, and the various types of credit providers; draw conclusions; and present its recommendations on this subject. The Bank is preparing for the discussions of the committee, and will cooperate with the committee as necessary and in accordance with the law.

99 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

Material directives and initiatives in the first quarter of 2018 • Regulatory reliefs of the Supervisor of Banks for credit-card companies: In April 2018, the Banking Supervision Department published draft amendments to directives containing adjustments and easing of the directives with regard to credit-card companies and activity involving charge cards, which will facilitate the operations of these companies after their separation from the banks. For the purpose of measurement and capital adequacy – the banks shall assign weights to credit granted to credit-card companies similarly to credit granted to banks. With regard to single borrower indebtedness limits – the indebtedness of a credit-card company to a bank shall be subject to a limit of 15% of the capital of the bank, similar to the limit applicable to the indebtedness of a bank to another bank. However, a transitional period will be established for implementation of the directive. In addition, during a transitional period of five years, no limits will apply to credit granted by a credit-card company to banks arising from the activity of customers of the bank using bank cards during the month. On the subject of liquidity risk management – credit-card companies will be required to manage their liquidity risk based on an internal model, but will not be obligated to comply with the supervisory liquidity coverage ratio. Operational agreements between the banks and the credit-card companies shall be presented to the Banking Supervision Department for its information or for approval, in order to ensure that such agreements are consistent with the spirit of the law. • In April 2018, the Bank of Israel issued a circular concerning the conduct of banks with providers of regulated financial services (such as P2P companies, currency service providers, and others), stating, among other matters, that a clear risk-management policy must be established with respect to such entities, and that refusals to open accounts shall be performed with justifications and within a short period of time. In addition, it has been determined that when opening a trust account with multiple beneficiaries, the trustee’s declaration of the list of beneficiaries in the account may be considered sufficient. • The Bank of Israel has issued a draft directive concerning the conduct of banks in the area of outsourcing, establishing directives regarding the conduct of a bank with third parties; the directive includes a prohibition on marketing of credit by banks through third parties. • The law for the establishment of an automatic bank account mobility system, based on the CASS (Current Account Switch Service) established in England, was passed by Knesset as part of the economic plan (the Arrangements Law) for 2018. According to the proposal, banks shall allow secure online transfers for customers, within seven business days, at no cost to the customer. The law will takes effect within three years, with the option for an extension of one additional year. Since the publication of this bill, meetings of the committee for implementation of the law have been held at the Bank of Israel. • In April 2018, within the terms for approval of the restrictive arrangement for cross-clearing between credit-card companies, the Antitrust Authority stated that the companies would be required to transition to daily clearing for businesses. This requirement will take effect in July 2021. • In April 2018, the Bank of Israel published an outline for reduction of the rate of the interchange fee for credit cards from 0.7% to 0.5%, in four incremental steps, with the first step scheduled for January 2019 and the last step for January 2023. The Supervisor is also seeking to reduce the interchange fee in immediate debit transactions from 0.3% to 0.25%, in two increments, beginning in January 2021 and ending in January 2023.

100 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

• In May 2018, the Bank of Israel issued a final procedure concerning the supervision of overseas offices. The new directive requires banks to reexamine and define their strategy for operations overseas, such that activity is focused and reduced to a small number of countries and offices, in a manner that allows appropriate resource allocation for management of the risks that arise from the activity, including compliance aspects. With regard to the continued operation of offices, the requirement is to strengthen and reinforce risk management, resources, and control in respect of such activity. • The Ministerial Committee for Legislation has passed the government bill for regularization of payment services, according to the principles of the PSD2 directive. The Constitution Committee is expected to discuss preparation of the bill for a second and third reading in the coming Knesset session. This law, which is expected to replace the Charge Cards Law, regulates the contractual relationship between payment service providers and payers, and establishes procedures regarding responsibility in the event of abuse. Another memorandum of law on this subject, establishing the duties that apply to an applicant seeking to serve as a payment service provider, is expected to be released for comments from the public in the coming months. • The Stock Exchange Structure Change Law, passed by the Knesset in April 2017, establishes duties of reporting to the stock exchange on fees collected by exchange members and clearing-house members from their customers, including trading fees and clearing fees, and on any change in such fees, as of July 2018.

101 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

• Amendment 63 to the Securities Law, 1968, which concerns a change in the structure of the Tel Aviv Stock Exchange Ltd., was published on April 6, 2017. Further to the aforesaid amendment, on September 7, 2017, the District Court of Tel Aviv approved an arrangement for a change in the structure of the stock exchange, pursuant to which the means of control of the stock exchange and the rights to its issued and paid-up capital were allocated at a rate of approximately 11.6% to the Bank and approximately 1.6% to Poalim Sahar (a company under the full ownership of the Bank), totaling approximately 13.2% for the Bank Group. Pursuant to the amendment, within five years of the date of approval of the arrangement, or by the date of issuance of shares of the stock exchange to the public and listing of the shares for trading, whichever is earlier, the Bank must sell its holdings in the stock exchange, such that it does not hold more than 4.99% of the means of control thereof. Until the date of the sale, the aforesaid means of control shall not grant the Bank rights (other than rights to capital), beyond the rights accorded by a holding at a rate of 4.99% of the total means of control of the stock exchange. In addition, pursuant to the amendment to the law, the members of the stock exchange who sell their holdings shall transfer, to the stock exchange, the full difference between the consideration that they receive for the sale and the value of the holdings that they sell, in accordance with the shareholders’ equity of the stock exchange based on its financial statements for 2015 (approximately NIS 508 million). On January 18, 2018, the Bank submitted a proposal to the stock exchange for the sale of its holdings in the stock exchange in excess of 4.99%, and Poalim Sahar submitted a proposal to the stock exchange for the sale of all of its holdings, in response to the request addressed by the stock exchange to the shareholders on December 28, 2017 to acquire their shares. According to the proposal of the stock exchange, the total consideration offered for the acquisition of all of the shares of the stock exchange will stand at NIS 500 million. According to the proposal, the stock exchange is permitted to announce the acquisition of all or part of the shares, and to transfer the right of the shareholder to sell its rights to a third party chosen by the stock exchange. On April 17, 2018, the Bank received notification of acceptance of the proposal of the Bank and of the proposal of Poalim Sahar for the sale and transfer of the full holdings that they proposed to sell, as noted, to a transferee or to several transferees (the “Acceptance Notice”). The Acceptance Notice states, among other matters, that the consideration for the offered shares will exceed the consideration stated in the proposals of the Bank and Poalim Sahar (by a total amount of approximately NIS 41 million), but the surplus amount to be received will be transferred to the stock exchange, as mandated by Amendment 63 to the Securities Law, 2017; that completion of the transaction is subject to regulatory approvals; and that if the required approvals are not received, or the transaction is not completed, by June 19, 2018, or a later date to be agreed upon, the transaction will be canceled. • A private bill for the cancellation of the early repayment fee has been submitted to the Knesset for discussion of preparation of the law for the first reading. • The Credit Data Law is scheduled to take effect in October 2018. The credit data repository will begin to operate at that time. • The Insolvency and Economic Rehabilitation Bill was passed by the Knesset plenum in early March 2018. The directives in this bill are expected to impair the ability of the Bank to collect its debts, with respect to both business and private customers. This law will take effect in September 2018.

102 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

• The Ministerial Committee for Legislation has approved a draft of the Competition Law – an amendment to the Restrictive Trade Practices Law, which would expand the authority of the Antitrust Authority. Among other matters, the proposal would allow the Authority to cancel the ceiling amount applied to the maximum monetary sanction it is currently permitted to impose. Pursuant to the proposal, there would be no ceiling limiting this amount, and the Authority would be permitted to collect up to 8% of annual revenue. In addition, according to the proposal, the Authority would be able to declare that a company is a monopoly even if its market share is lower than 50%, if it proved that the company possesses significant market power.

These regulatory initiatives have an adverse effect on the revenues and expenses of the Bank, and may have an adverse effect on the business of the Bank Group in the future. At this stage, the Bank is reviewing the overall implications of the foregoing for the Bank’s revenues, as well as additional long-term business and operational implications. These effects cannot be quantified at this stage, and depend on customers’ behavior, additional regulatory changes, and the activity of competitors, among other factors.

For additional details concerning additional key reforms, see the section “Principal subsidiary and affiliated companies,” “Isracard Group,” above, and Note 35 to the Annual Financial Statements for 2017.

4. Critical accounting policies and estimates; controls and procedures 4.1. Critical accounting policies and estimates The financial statements of the Bank are prepared in accordance with accounting principles and rules, the main points of which are described in Note 1 to the Annual Financial Statements as at December 31, 2017. In implementing the accounting principles, the Board of Management of the Bank uses various assumptions, estimates, and evaluations that affect the reported amounts of assets and liabilities (including contingent liabilities) and the results reported by the Bank. Actual future results may differ from such estimates and evaluations made when preparing the financial statements. Some of these estimates and evaluations involve a considerable degree of uncertainty, and can be affected by possible future changes. Such estimates and evaluations in which changes may have a material effect on the financial results presented in the financial statements are considered by the Bank to be estimates and evaluations on “critical” matters. The Bank’s Board of Management is of the opinion that the estimates and evaluations applied during the preparation of the financial statements are fair, and were made to the best of its knowledge and professional judgment. The management estimates and principal assumptions used in the implementation of the Group’s accounting policies are consistent with those used in the preparation of the Annual Financial Statements as at December 31, 2017.

103 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Report of the Board of Directors and Board of Management as at March 31, 2018

4.2. Controls and procedures In accordance with the Public Reporting Directives of the Supervisor of Banks, the Chief Executive Officer, the Chief Financial Officer, and the Chief Accountant of the Bank must each separately sign a declaration regarding their responsibility for the establishment and application of controls and procedures concerning disclosure and the Bank’s internal control over financial reporting, including an assessment of the effectiveness of these controls, pursuant to the provisions of Sections 302 and 404 of the law known as the “Sarbanes-Oxley Act,” enacted in the United States. The provisions of these two sections of the law were consolidated by the Supervisor of Banks in a Proper Conduct of Banking Business Directive (Directive 309) in September 2008, and integrated into the Public Reporting Directives in June 2009. The directive in Section 302 regarding the existence of controls and procedures concerning disclosure is implemented at the Bank on a quarterly basis. The directive in Section 404 regarding the Bank’s internal control over financial reporting is implemented at the end of each year, as required in the directives. As part of the implementation of the directives of Section 404, the Bank, with the assistance of a consulting firm, mapped and documented all material control processes, based on the directives of the SEC (the Securities and Exchange Commission in the United States), using the prevalent methodologies, based on criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In addition, in accordance with the requirements, the Bank carried out a test of the effectiveness of the procedures for internal control over financial reporting, through an examination of the effectiveness of the main controls in practice. The Bank is updating the documentation of the material control processes for 2018, as in every year, according to the prevalent methodologies, with the assistance of a consulting firm, and examining the effectiveness of the procedures for internal control over financial reporting, through a renewed examination of the main controls for the current year. The main part of this process is planned to be completed during the second half of the year.

Evaluation of controls and procedures concerning disclosure The Board of Management of the Bank, in cooperation with the Chief Executive Officer, the Chief Financial Officer, and the Chief Accountant of the Bank, has assessed the effectiveness of the controls and procedures concerning disclosure at the Bank as at March 31, 2018. Based on this assessment, they have concluded that, as at the end of this period, the controls and procedures concerning disclosure at the Bank are effective in order to record, process, summarize, and report the information that the Bank is required to disclose in its financial statement, in accordance with the Public Reporting Directives of the Supervisor of Banks, on the date stipulated in these directives.

Changes in internal control During the quarter ended on March 31, 2018, there was no change in the Bank’s internal control over financial reporting that had a material impact, or could reasonably be expected to have a material impact, on the Bank’s internal control over financial reporting.

Oded Eran Ari Pinto Chairman of the Board of Directors President and Chief Executive Officer

Tel-Aviv, May 23, 2018

104 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Declarations of Internal Control Over Financial Reporting as at March 31, 2018

CEO Declaration

I, Ari Pinto, declare that: 1. I have reviewed the quarterly report of Bank Hapoalim B.M. (hereinafter: the “Bank”) for the quarter ended on March 31, 2018 (hereinafter: the “Report”). 2. Based on my knowledge, the Report contains no incorrect presentation of a material fact, and there is no presentation of a material fact missing from the Report that is necessary so that the presentations included therein, in light of the circumstances under which such presentations were included, are not misleading with regard to the period covered by the Report. 3. Based on my knowledge, the financial statements and other financial information included in the Report fairly reflect the financial condition, results of operations, changes in equity, and cash flows of the Bank, in all material aspects, for the dates and periods presented in the Report. 4. I, and others at the Bank making this declaration, are responsible for the establishment and application of controls and procedures with regard to the Bank’s disclosure and internal control over financial reporting (as defined in the Public Reporting Directives concerning the “Board of Directors’ Report”); furthermore: a. We have established such controls and procedures, or caused such controls and procedures to be established under our supervision, aimed at ensuring that material information pertaining to the Bank, including its consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in particular during the preparation of the Report; b. We have established such internal control over financial reporting, or caused such internal control over financial reporting to be established under our supervision, intended to provide a reasonable degree of assurance with regard to the reliability of the financial reporting, and that the financial reports for external purposes are prepared in accordance with generally accepted accounting principles and with the directives and guidelines of the Supervisor of Banks; c. We have assessed the effectiveness of the controls and procedures concerning disclosure at the Bank, and we have presented our findings with regard to the effectiveness of the controls and procedures concerning disclosure in the Report, as at the end of the period covered in the Report, based on our assessment; and d. We have disclosed in the Report any change in the internal control over financial reporting at the Bank that occurred during this quarter, and that had a material effect, or could reasonably be expected to have a material effect, on the internal control over financial reporting at the Bank; and 5. I, and others at the Bank making this declaration, have disclosed to the auditors, to the Board of Directors, and to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the internal control over financial reporting: a. Any significant deficiencies or material weaknesses in the establishment or application of internal control over financial reporting that can reasonably be expected to impair the Bank’s ability to record, process, summarize, and report financial information; and b. Any fraud, whether material or immaterial, in which the Board of Management was involved, or in which other employees were involved who have a significant role in the internal control over financial reporting at the Bank.

The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.

Ari Pinto President and Chief Executive Officer Tel-Aviv, May 23, 2018

105 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Declarations of Internal Control Over Financial Reporting as at March 31, 2018

CFO Declaration

I, Yadin Antebi, declare that: 1. I have reviewed the quarterly report of Bank Hapoalim B.M. (hereinafter: the “Bank”) for the quarter ended on March 31, 2018 (hereinafter: the “Report”). 2. Based on my knowledge, the Report contains no incorrect presentation of a material fact, and there is no presentation of a material fact missing from the Report that is necessary so that the presentations included therein, in light of the circumstances under which such presentations were included, are not misleading with regard to the period covered by the Report. 3. Based on my knowledge, the financial statements and other financial information included in the Report fairly reflect the financial condition, results of operations, changes in equity, and cash flows of the Bank, in all material aspects, for the dates and periods presented in the Report. 4. I, and others at the Bank making this declaration, are responsible for the establishment and application of controls and procedures with regard to the Bank’s disclosure and internal control over financial reporting (as defined in the Public Reporting Directives concerning the “Board of Directors’ Report”); furthermore: a. We have established such controls and procedures, or caused such controls and procedures to be established under our supervision, aimed at ensuring that material information pertaining to the Bank, including its consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in particular during the preparation of the Report; b. We have established such internal control over financial reporting, or caused such internal control over financial reporting to be established under our supervision, intended to provide a reasonable degree of assurance with regard to the reliability of the financial reporting, and that the financial reports for external purposes are prepared in accordance with generally accepted accounting principles and with the directives and guidelines of the Supervisor of Banks; c. We have assessed the effectiveness of the controls and procedures concerning disclosure at the Bank, and we have presented our findings with regard to the effectiveness of the controls and procedures concerning disclosure in the Report, as at the end of the period covered in the Report, based on our assessment; and d. We have disclosed in the Report any change in the internal control over financial reporting at the Bank that occurred during this quarter, and that had a material effect, or could reasonably be expected to have a material effect, on the internal control over financial reporting at the Bank; and 5. I, and others at the Bank making this declaration, have disclosed to the auditors, to the Board of Directors, and to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the internal control over financial reporting: a. Any significant deficiencies or material weaknesses in the establishment or application of internal control over financial reporting that can reasonably be expected to impair the Bank’s ability to record, process, summarize, and report financial information; and b. Any fraud, whether material or immaterial, in which the Board of Management was involved, or in which other employees were involved who have a significant role in the internal control over financial reporting at the Bank.

The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.

Yadin Antebi Senior Deputy Managing Director, Chief Financial Officer Tel-Aviv, May 23, 2018

106 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Declarations of Internal Control Over Financial Reporting as at March 31, 2018

Chief Accountant Declaration

I, Ofer Levy, declare that: 1. I have reviewed the quarterly report of Bank Hapoalim B.M. (hereinafter: the “Bank”) for the quarter ended on March 31, 2018 (hereinafter: the “Report”). 2. Based on my knowledge, the Report contains no incorrect presentation of a material fact, and there is no presentation of a material fact missing from the Report that is necessary so that the presentations included therein, in light of the circumstances under which such presentations were included, are not misleading with regard to the period covered by the Report. 3. Based on my knowledge, the financial statements and other financial information included in the Report fairly reflect the financial condition, results of operations, changes in equity, and cash flows of the Bank, in all material aspects, for the dates and periods presented in the Report. 4. I, and others at the Bank making this declaration, are responsible for the establishment and application of controls and procedures with regard to the Bank’s disclosure and internal control over financial reporting (as defined in the Public Reporting Directives concerning the “Board of Directors’ Report”); furthermore: a. We have established such controls and procedures, or caused such controls and procedures to be established under our supervision, aimed at ensuring that material information pertaining to the Bank, including its consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in particular during the preparation of the Report; b. We have established such internal control over financial reporting, or caused such internal control over financial reporting to be established under our supervision, intended to provide a reasonable degree of assurance with regard to the reliability of the financial reporting, and that the financial reports for external purposes are prepared in accordance with generally accepted accounting principles and with the directives and guidelines of the Supervisor of Banks; c. We have assessed the effectiveness of the controls and procedures concerning disclosure at the Bank, and we have presented our findings with regard to the effectiveness of the controls and procedures concerning disclosure in the Report, as at the end of the period covered in the Report, based on our assessment; and d. We have disclosed in the Report any change in the internal control over financial reporting at the Bank that occurred during this quarter, and that had a material effect, or could reasonably be expected to have a material effect, on the internal control over financial reporting at the Bank; and 5. I, and others at the Bank making this declaration, have disclosed to the auditors, to the Board of Directors, and to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the internal control over financial reporting: a. Any significant deficiencies or material weaknesses in the establishment or application of internal control over financial reporting that can reasonably be expected to impair the Bank’s ability to record, process, summarize, and report financial information; and b. Any fraud, whether material or immaterial, in which the Board of Management was involved, or in which other employees were involved who have a significant role in the internal control over financial reporting at the Bank.

The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.

Ofer Levy Senior Deputy Managing Director, Chief Accountant Tel-Aviv, May 23, 2018

107 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Bank Hapoalim Condensed Financial Statements as at March 31, 2018

Q 1 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Condensed Financial Statements as at March 31, 2018

Contents

Auditors' Review Report to the Shareholders of Bank Hapoalim B.M. 113 Condensed Consolidated Statement of Profit and Loss 114 Condensed Consolidated Statement of Comprehensive Income 115 Condensed Consolidated Balance Sheet 116 Condensed Statement of Changes in Equity 117 Condensed Consolidated Statement of Cash Flows 119 Notes to the Condensed Financial Statements 122 Note 1 Significant Accounting Policies 122 Note 2 Interest Income and Expenses 127 Note 3 Non-Interest Financing Income 128 Note 4 Accumulated Other Comprehensive Income (Loss) 130 Note 5 Securities 133 Note 6 Credit Risk, Credit to the Public, and Allowance for Credit Losses 140 Note 7 Deposits from the Public 144 Note 8 Employee Benefits 145 Note 9 Capital, Capital Adequacy, Leverage, and Liquidity 152 Note 10 Contingent Liabilities and Special Commitments 161 Note 11 Activity in Derivative Instruments – Volume, Credit Risks, and Maturity Dates 168 Note 12 Supervisory Activity Segments 182 Note 12A Segments of Activity Based on Management Approach 194 Note 13 Additional Information Regarding Credit Risk, Credit to the Public, and Allowance for Credit Losses 198 Note 14 Assets and Liabilities by Linkage Base 220 Note 15 Balances and Fair-Value Estimates of Financial Instruments 223 Note 16 Regulatory Initiatives 240 Note 17 Reduction of the Activity of Bank Hapoalim Switzerland 244

111 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Auditors’ Review Report to the Shareholders of Bank Hapoalim B.M.

Introduction We have reviewed the accompanying financial information of Bank Hapoalim B.M. and its subsidiaries (hereinafter - “the Bank”) comprising of the condensed consolidated interim balance sheet as of March 31, 2018 and the related condensed consolidated interim statements of profit and loss, comprehensive income, changes in equity and cash flows for the three month period then ended. The Board of Directors and Management are responsible for the preparation and presentation of this interim financial information in accordance with generally accepted accounting principles in Israel (Israeli GAAP) for interim reporting and in accordance with the directives and guidelines of the Supervisor of Banks. Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of Review We conducted our review in accordance with Standard on Review Engagements I, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” of the Institute of Certified Public Accountants in Israel and a review standard applied in the review of banking institutions according to the directives and guidelines of the Supervisor of Banks. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial information was not prepared, in all material respects, in accordance with generally accepted accounting principles in Israel (Israeli GAAP) for interim reporting and in accordance with the directives and guidelines of the Supervisor of Banks.

Emphasis of a Matter Without qualifying our above conclusion, we draw attention to that mentioned in Note 10B(b) regarding exposure to class actions that were filed against the Bank Group, to Note 10C regarding the investigation of the business of the Bank Group with American customers and to Note 10D regarding the investigation with respect to FIFA.

Somekh Chaikin Ziv Haft Certified Public Accountants (Isr) Certified Public Accountants (Isr)

Tel Aviv, May 23, 2018

Somekh Chaikin, an Israeli partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Ziv Haft Cooperative ("KPMG International"), a Swiss entity is a member of BDO. WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Condensed Financial Statements as at March 31, 2018

Condensed Consolidated Statement of Profit and Loss NIS millions for the period ended March 31, 2018

For the three months ended For the March 31 year ended December 31 2018 2017 2017 Note Unaudited Audited Interest income 2 2,601 2,518 10,889 Interest expenses 2 )443( )445( )2,192( Net interest income 2,158 2,073 8,697 Provision (income) for credit losses 6(2) 250 107 323 Net interest income after provision for credit losses 1,908 1,966 8,374 Non-interest income Non-interest financing income 3 226 182 637 Fees 1,280 1,302 5,111 Other income 27 45 185 Total non-interest income 1,533 1,529 5,933 Operating and other expenses Salaries and related expenses 1,130 *1,182 *4,555 Maintenance and depreciation of buildings and equipment 365 361 1,475 Other expenses 858 *674 *3,586 Total operating and other expenses 2,353 2,217 9,616 Profit before taxes 1,088 1,278 4,691 Provision for taxes on profit 473 522 2,077 Profit after taxes 615 756 2,614 The Bank’s share in profits of equity-basis investees, after taxes 4 4 17

Net profit Before attribution to non-controlling interests 619 760 2,631 Loss (profit) attributed to non-controlling interests 9 7 29 Attributed to shareholders of the Bank 628 767 2,660 Earnings per ordinary share in NIS Basic earnings Net profit attributed to shareholders of the Bank 0.47 0.58 2.00 Diluted earnings Net profit attributed to shareholders of the Bank 0.47 0.57 1.99

* Reclassification of certain actuarial cost components of employee benefits from salary expenses to other expenses. For further details, see Note 1C(3). The accompanying notes are an integral part of the condensed financial statements.

Oded Eran Ari Pinto Yadin Antebi Ofer Levy Chairman of the Board President and Chief Senior Deputy Managing Director, Senior Deputy Managing of Directors Executive Officer Chief Financial Officer Director, Chief Accountant

Tel-Aviv, May 23, 2018

114 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Condensed Financial Statements as at March 31, 2018

Condensed Consolidated Statement NIS millions of Comprehensive Income for the period ended March 31, 2018

For the three months ended For the March 31 year ended December 31 2018 2017 2017 Note Unaudited Audited Net profit before attribution to non-controlling interests 619 760 2,631 Net loss (profit) attributed to non-controlling interests 9 7 29 Net profit attributed to shareholders of the Bank 628 767 2,660 Other comprehensive income (loss) before taxes: 4 Net adjustments for presentation of securities available for sale at fair value )339( 194 212 Net adjustments from translation of financial statements*, after hedge effects** )5( 2 4 Adjustments of liabilities in respect of employee benefits*** 79 11 )122( Net gains in respect of cash-flow hedges - 1 1 Other comprehensive income (loss) before taxes )265( 208 95 Effect of related tax 99 )72( )39( Other comprehensive income (loss) before attribution to non-controlling interests, after taxes )166( 136 56 Net of other comprehensive loss (income) attributed to non-controlling interests - )1( )2( Other comprehensive income (loss) attributed to shareholders of the Bank, after taxes )166( 135 54 Comprehensive income (loss) before attribution to non-controlling interests 453 896 2,687 Comprehensive loss (income) attributed to non-controlling interests 9 6 27 Comprehensive income attributed to shareholders of the Bank 462 902 2,714

* Adjustments from the translation of financial statements of a foreign operation whose functional currency differs from the functional currency of the Bank. ** Hedges – net gains (losses) in respect of net hedges of investments in foreign currency. *** Mainly reflects adjustments in respect of actuarial estimates at the end of the period, and deduction of amounts previously recorded in other comprehensive income.

The accompanying notes are an integral part of the condensed financial statements.

115 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Condensed Financial Statements as at March 31, 2018

Condensed Consolidated Balance Sheet NIS millions as at March 31, 2018

March 31 December 31 2018 2017 2017 Note Unaudited Audited Assets Cash and deposits with banks 78,148 77,088 86,114 Securities(1)(2) 5 61,538 74,894 65,442 Securities borrowed or purchased under agreements to resell 608 144 684 Credit to the public 288,067 273,962 282,507 Allowance for credit losses )3,964( )3,980( )3,844( Net credit to the public 6, 13 284,103 269,982 278,663 Credit to governments 2,476 2,265 2,292 Investments in equity-basis investees 106 157 203 Buildings and equipment 3,326 3,303 3,392 Assets in respect of derivative instruments 11 12,273 12,262 12,013 Other assets(1) 5,617 5,752 5,621 Total assets 448,195 445,847 454,424

Liabilities and capital Deposits from the public 7 344,810 337,518 347,351 Deposits from banks 3,602 4,199 4,149 Deposits from the government 385 489 320 Securities lent or sold under agreements to repurchase 6 98 367 Bonds and subordinated notes 26,214 31,171 29,058 Liabilities in respect of derivative instruments 11 11,436 12,815 12,049 Other liabilities (of which: 656; 663; 627, respectively, allowance for credit losses in respect of off-balance sheet credit instruments)(1) 25,526 24,479 25,126 Total liabilities 411,979 410,769 418,420

Shareholders’ equity 9 36,084 34,909 35,863 Non-controlling interests 132 169 141 Total capital 36,216 35,078 36,004 Total liabilities and capital 448,195 445,847 454,424

(1) With regard to amounts measured at fair value, see Note 15B. (2) For details regarding securities pledged to lenders, see Note 5.

The accompanying notes are an integral part of the condensed financial statements.

116 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Condensed Financial Statements as at March 31, 2018

Condensed Statement of Changes in Equity Unaudited for the period ended March 31, 2018 NIS millions

For the three months ended March 31, 2018 Share Capital Total capital Accumulated Retained Total Non-controlling Total capital and reserves from and capital other earnings shareholders’ interests capital premium* benefit due to reserves comprehensive equity share-based income payment transactions Balance as at January 1, 2018 8,124 59 8,183 )786( 28,466 35,863 141 36,004 Net profit (loss) for the period - - - - 628 628 )9( 619 Dividends - - - - )245( )245( - )245( Adjustments and changes arising from: Benefit due to share-based payment transactions - 4 4 - - 4 - 4 Realization of options into shares 24 )24( ------Net other comprehensive income (loss) after tax effect - - - )166( - )166( - )166( Balance as at March 31, 2018 8,148 39 8,187 )952( **28,849 36,084 132 36,216

* Excluding a balance of 3,101,627 treasury shares. ** Includes a total of NIS 2,734 million that cannot be distributed as dividends.

For the three months ended March 31, 2017 Share Capital Total capital Accumulated Retained Total Non-controlling Total capital and reserves from and capital other earnings shareholders’ interests capital premium* benefit due to reserves comprehensive equity share-based income payment transactions Balance as at January 1, 2017 8,146 74 8,220 )840( 26,667 34,047 178 34,225 Net profit (loss) for the period - - - - 767 767 )7( 760 Dividends - - - - )41( )41( - )41( Adjustments and changes arising from: Benefit due to share-based payment transactions - 1 1 - - 1 - 1 Net other comprehensive income (loss) after tax effect - - - 135 - 135 1 136 Increase in non-controlling interests ------1 1 Dividend for non-controlling interests in a consolidated company ------)4( )4( Balance as at March 31, 2017 8,146 75 8,221 )705( 27,393 34,909 169 35,078

* Excluding a balance of 3,826,495 treasury shares.

The accompanying notes are an integral part of the condensed financial statements.

117 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Condensed Financial Statements as at March 31, 2018

Condensed Statement of Changes in Equity Audited for the period ended March 31, 2018 (continued) NIS millions

For the year ended December 31, 2017 Share Capital Total capital Accumulated Retained Total Non-controlling Total capital and reserves from and capital other earnings shareholders’ interests capital premium* benefit due to reserves comprehensive equity share-based income payment transactions Balance as at January 1, 2017 8,146 74 8,220 )840( 26,667 34,047 178 34,225 Net profit (loss) for the period - - - - 2,660 2,660 )29( 2,631 Dividends - - - - )861( )861( - )861( Buyback of shares )39( - )39( - - )39( - )39( Adjustments and changes arising from: Benefit due to share-based payment transactions - 2 2 - - 2 - 2 Realization of options into shares 17 )17( ------Net other comprehensive income (loss) after tax effect - - - 54 - 54 2 56 Increase in non-controlling interests ------2 2 Dividend for non-controlling interests in a consolidated company ------)12( )12( Balance as at December 31, 2017 8,124 59 8,183 )786( 28,466 35,863 141 36,004

* Excluding a balance of 4,311,952 treasury shares.

The accompanying notes are an integral part of the financial statements.

118 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Condensed Financial Statements as at March 31, 2018

Condensed Consolidated Statement of Cash Flows NIS millions for the period ended March 31, 2018

For the three months ended For the March 31 year ended December 31

2018 2017* 2017

Unaudited Audited Cash flows from (for) operating activity Net profit for the period 619 760 2,631 Adjustments necessary to present cash flows from operating activity The Bank’s share in losses (profits) of equity-basis investees )4( )4( )17( Depreciation of buildings and equipment 166 142 602 Amortizations 5 5 21 Provision (income) for credit losses 250 107 323 Gain from realization of securities available for sale and held to maturity )111( )99( )255( Realized and unrealized loss (gain) from adjustments to fair value of securities held for trading )1( )9( )24( Gain from realization of buildings and equipment )13( )21( )51( Change in benefit due to share-based payment transactions )83( 9 )2( Net change in liabilities in respect of employee benefits 5 12 )65( Deferred taxes, net 73 )21( 22 Loss (gain) from sale of credit portfolios )18( )4( )4( Adjustments in respect of exchange-rate differences )107( 751 1,930 Accumulation differentials included in investing and financing activities )992( 533 968 Net change in current assets Assets in respect of derivative instruments )260( )351( )103( Securities held for trading )3,780( 571 3,375 Other assets 67 140 211 Net change in current liabilities Liabilities in respect of derivative instruments )641( 275 )468( Other liabilities 259 441 1,188 Net cash from (for) operating activity )4,566( 3,237 10,282

* Restated due to the implementation of US GAAP concerning the statement of cash flows, as noted in the directives of Codification Topic 230. See also Note 1C(2) below.

The accompanying notes are an integral part of the condensed financial statements.

119 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Condensed Financial Statements as at March 31, 2018

Condensed Consolidated Statement of Cash Flows NIS millions for the period ended March 31, 2018 (continued)

For the three months ended For the March 31 year ended December 31

2018 2017* 2017

Unaudited Audited Cash flows for investing activity Deposits with banks )801( )2,624( )1,248( Credit to the public )2,543( **3,551 1,677 Credit to governments )184( 294 267 Securities borrowed or purchased under agreements to resell 76 231 )309( Acquisition of bonds held to maturity - - )130( Proceeds from redemption of bonds held to maturity 5 5 131 Acquisition of securities available for sale )6,042( )12,188( )38,829( Proceeds from sale of securities available for sale 8,899 2,448 12,559 Proceeds from redemption of securities available for sale 4,933 4,971 27,795 Acquisition of credit portfolios )3,169( **)1,991( )9,110( Proceeds from sale of credit portfolios 119 190 190 Dividends received from equity-basis investees 20 1 10 Investment in equity-basis investees - )1( )3( Acquisition of buildings and equipment )104( )95( )662( Proceeds from realization of buildings and equipment 17 33 80 Net cash from (for) investing activity 1,226 )5,175( )7,582(

* Restated due to the implementation of US GAAP concerning the statement of cash flows, as noted in the directives of Codification Topic 230. See also Note 1C(2) below. ** Reclassified.

The accompanying notes are an integral part of the condensed financial statements.

120 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Condensed Financial Statements as at March 31, 2018

Condensed Consolidated Statement of Cash Flows NIS millions for the period ended March 31, 2018 (continued)

For the three months ended For the March 31 year ended December 31

2018 2017* 2017

Unaudited Audited Cash flows from (for) financing activity Deposits from banks )586( )162( )174( Deposits from the public )2,688( )599( 9,367 Deposits from the government 65 144 )25( Securities lent or sold under agreements to repurchase )374( )375( )89( Issuance of bonds and subordinated notes 96 96 316 Redemption of bonds and subordinated notes )2,174( )2,107( )4,399( Dividend paid to shareholders of the Bank - - )861( Buyback of shares - - )39( Dividend paid to minority interests in consolidated companies - 4 )12( Net cash from (for) financing activity )5,661( )2,999( 4,084 Increase (decrease) in cash )9,001( )4,937( 6,784 Balance of cash at beginning of period 82,877 78,328 78,328 Effect of changes in exchange rates on cash balances 223 )942( )2,235( Balance of cash at end of period 74,099 72,449 82,877

Interest and taxes paid and/or received Interest received 2,667 2,790 11,391 Interest paid )882( )927( )2,525( Dividends received 25 **35 42 Income tax paid )857( )1,955( )1,533( Income tax received - 1 178

* Restated due to the implementation of US GAAP concerning the statement of cash flows, as noted in the directives of Codification Topic 230. See also Note 1C(2) below. ** Reclassified.

The accompanying notes are an integral part of the condensed financial statements.

121 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 1 Significant Accounting Policies

A. General information The Condensed Financial Statements as at March 31, 2018 were prepared in accordance with generally accepted accounting principles in Israel (Israeli GAAP) concerning interim financial reporting and in accordance with the directives and guidelines of the Supervisor of Banks. The accounting principles used in the preparation of these condensed financial statements were implemented consistently with the accounting principles used in the preparation of the audited financial statements as at December 31, 2017, with the exceptions noted in Section C below. The Condensed Financial Statements do not include all of the information required in the aforesaid Annual Financial Statements; these reports should be perused in conjunction with the Annual Financial Statements as at December 31, 2017, and the accompanying Notes. The Condensed Financial Statements were approved for publication by the Board of Directors of the Bank on May 23, 2018.

B. Use of estimates In preparing the Condensed Financial Statements, the Board of Management of the Bank uses various assumptions, estimates, and evaluations that affect the implementation of policies, the reported amounts of assets and liabilities (including contingent liabilities), and the results reported by the Bank. Actual future results may differ from such estimates and evaluations made when preparing the financial statements. The judgment and management estimates used in the implementation of the Bank’s accounting policies, and the principal assumptions used in evaluations involving uncertainty, are consistent with those used in the preparation of the Annual Financial Statements as at December 31, 2017. The estimates and the underlying assumptions are reviewed routinely. Changes in accounting estimates are recognized in the period in which the estimates are amended and in every affected future period.

C. First-time implementation of accounting standards, updates of accounting standards, and directives of the Banking Supervision Department (1) Recognition of revenue from contracts with customers A circular concerning the adoption of an update of GAAP regarding revenue from contracts with customers was issued on January 11, 2015. The circular updates the Public Reporting Directives, in light of the publication of ASU 2014-09, which adopts a new standard on revenue recognition in US GAAP. The standard states that revenue shall be recognized in the amount expected to be received in consideration for the transfer of goods or provision of services to a customer. Banks are required to implement the amendments to the Public Reporting Directives beginning January 1, 2018. Among other matters, the new standard does not apply to financial instruments and to contractual rights or liabilities covered by Codification Topic 310. In addition, the directives of the Bank of Israel have clarified that in general, the directives of the new regulation will not apply to the accounting treatment of interest income and expenses, or of non-interest financing income. With regard to income to which the new standard applies, primarily income from fees, no material change has occurred in the timing or measurement of such income. In light of the foregoing, the effect of the adoption of the aforesaid directives on the condensed interim financial statements is immaterial.

122 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 1 Significant Accounting Policies (continued)

(2) Circular concerning reporting by banking corporations in Israel according to US GAAP on the following subjects: non-current assets held for sale and discontinued operations; fixed assets and investment property; earnings per share; statement of cash flows; interim reporting; capitalization of interest; and guarantees A circular concerning reporting by banking corporations and credit-card companies in Israel according to US GAAP was issued on October 13, 2016. The circular updates the Public Reporting Directives and adopts US GAAP on the following subjects: • GAAP for US banks in Codification Topic 205-20, Discontinued Operations; • GAAP for US banks in Codification Topic 360, Property, Plant, and Equipment; • GAAP for US banks in Codification Topic 260, Earnings Per Share; • GAAP for US banks in Codification Topic 230-10, Statement of Cash Flows; • GAAP for US banks in Codification Topic 270, Interim Reporting; • GAAP for US banks in Codification Topic 835-20, Capitalization of Interest; • GAAP for US banks in Codification Topic 460, Guarantees. The directives established according to the circular apply from January 1, 2018, prospectively. Initial implementation is to be performed in accordance with the transitional directives established in the United States, with the necessary changes. The implementation of these directives had no material effect on the financial statements. The reporting format for the statement of cash flows, including comparative figures for previous periods, was adjusted to the required reporting format. In light of the implications of the Strum Committee, as detailed in Note 16 below, and the need to separate from the Isracard Group, the Bank is preparing to implement the law according to the established schedule. Near the date of publication of the financial statements, the Bank examined the fulfillment of the criteria for classification of the Isracard Group as an operation held for sale and as a discontinued operation, pursuant to ASC 360-10 and ASC 205-20. Given that, at this stage, there is no strong expectation that the sale will be completed within one year of the reporting date, the Bank’s investment in the Isracard Group does not fulfill the conditions for classification as held for sale, or as a discontinued operation. According to the estimates of the Bank, if and when the Isracard Group is classified as held for sale, it will affect the manner of presentation in the financial statements.

123 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 1 Significant Accounting Policies (continued) Unaudited NIS millions

Set out below are details of the principal items attributed to the Isracard Group, as included in the consolidated financial statements of the Bank as at March 31, 2018: A. Composition of assets and liabilities attributed to the Isracard Group*

March 31, 2018 Net credit to the public 13,310 Buildings and equipment 282 Others 393 Total assets of the Isracard Group 13,985

Other liabilities 14,669 Others 607 Total liabilities of the Isracard Group 15,276

B. Profit and loss attributed to the Isracard Group*

For the three months ended March 31, 2018 Income Net interest income 76 Fees 488 Others 3 Expenses Provision for credit losses 34 Salaries and related expenses 86 Other expenses 245 Others 23 Profit before taxes 179 Provision for taxes on profit 48 Net profit 131

* Excluding mutual balances with the Bank.

124 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 1 Significant Accounting Policies (continued)

(3) Update concerning improved presentation of expenses in respect of pensions and other post-retirement benefits – ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” On January 1, 2018, the Banking Supervision Department issued a circular regarding Codification Update 2017-07, which concerns improvement of the presentation of expenses in respect of pensions and other post-retirement benefits. The amendment clarifies that benefit cost components included in salary expenses in the statement of profit and loss should be separated, such that only the service cost component remains in salary expenses, while other cost components should be presented in non-operating expenses (other expenses). It was further clarified that only the service cost component is eligible for capitalization, in cases where salary expense capitalization is possible, and that other benefit cost components are not eligible for capitalization. Implementation of the directives established according to the circular is required from January 1, 2018, forward. Initial implementation is to be performed in accordance with the transitional directives established in the United States, with the necessary changes. The implementation of the directives had no effect on the financial statements, other than on the manner of presentation and disclosure. The effect of the reclassification in the year ended December 31, 2017, and in the period ended March 31, 2017, is NIS 288 million and NIS 68 million, respectively, reclassified from the item “salaries and related expenses” to the item “other expenses.”

(4) Update of materiality threshold for capitalization of software costs Further to Note 1E(11) to the Annual Financial Statements as at December 31, 2017, beginning January 1, 2018, the Bank updated the materiality threshold for the capitalization of software costs to NIS 750 thousand (instead of NIS 1 million).

125 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 1 Significant Accounting Policies (continued)

D. New accounting standards and new directives of the Supervisor of Banks in the period prior to implementation On March 28, 2018, the Banking Supervision Department issued a letter on the subject, “Adoption of updates of generally accepted accounting principles for banks in the United States – allowances for credit losses and additional directives.” The letter requires the implementation of GAAP for US banks on the following subjects:

Subject Main points Inception date and Effect on the Bank transitional directives

Amendment concerning The main objective of this update is to provide more useful information January 1, 2021. The Bank is in the financial instruments – regarding expected credit losses on financial instruments and commitments In general, the initial stages of credit losses: ASU 2016-13, to extend credit. Towards that end, the amendments in this update replace new rules will be preparation for the “Financial Instruments – the method of allowance for credit losses based on incurred losses with a applied by recording implementation of Credit Losses” method that reflects expected credit losses over the life of the credit and the cumulative this directive. At requires consideration of a broader range of forward-looking information effect in retained this stage, the Bank to reflect reasonable forecasts of future economic events. The new rules earnings at the initial cannot estimate the for the calculation of the allowance for credit losses will apply to credit implementation date. effect of the standard (including housing loans), bonds held to maturity, and certain off-balance on its financial sheet credit exposures. In addition, the manner in which impairments of statements. bonds in the portfolio available for sale are recorded will change, and the disclosure of the effect of the date of extending credit on the credit quality of the credit portfolio will be expanded.

Amendment concerning Main changes expected due to the implementation of this update: in January 1, 2019. The Bank is preparing presentation and general, equity investments will be measured at fair value through the Upon initial to implement this measurement of financial statement of profit and loss, instead of the current measurement, which implementation, standard. instruments: ASU 2016-01, generally requires unrealized adjustments of fair value to be recorded in unrealized profits “Financial Instruments – other comprehensive income. However, investments in equity securities in respect of Overall: Recognition and that do not have readily determinable fair values can be measured at shares available for Measurement of Financial cost minus impairment, with adjustments for observable price changes in sale included in a Assets and Financial ordinary transactions for an identical or similar investment of the same capital reserve will Liabilities” issuer. All adjustments of the investment cost are allocated to profit and be reclassified to loss. In addition, the manner of presentation of financial instruments in the retained earnings. balance sheet will be updated. Amendment concerning The update facilitates and simplifies the application of accounting guidelines January 1, 2019. The Bank is preparing derivative instruments concerning hedging, mainly by easing requirements for testing the to implement this and hedge accounting: effectiveness of hedges and documenting hedges. The update also expands standard. ASU 2017-12, “Derivatives the ability of banks to hedge certain risk components, thereby creating and Hedging: Targeted congruence between the manner of recording hedging instruments and Improvements to Accounting hedged items in the financial statements. for Hedging Activities”

Leases: ASU 2016-02, The main objective of the new rules is to fully reflect, in the financial January 1, 2020. The Bank is “Leases” statements, the level of leverage created by long-term lease contracts. examining the effect The main changes following the application of these rules are: banks that of this update on its lease assets for a period exceeding twelve months shall recognize them financial statements. in the balance sheet, even if the lease is classified as an operating lease. An asset shall be recorded in the balance sheet in respect of operating lease transactions reflecting the right to use the leased asset, and conversely, the liability for payment for the lease shall be recorded.

126 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 2 Interest Income and Expenses Unaudited NIS millions

For the three months ended March 31 2018 2017 A. Interest income* From credit to the public 2,342 2,300 From credit to governments 16 13 From deposits with banks 73 51 From deposits with the Bank of Israel and from cash 11 10 From bonds 159 144 Total interest income 2,601 2,518

B. Interest expenses** On deposits from the public )288( )236( On deposits from the government )1( )2( On deposits from banks )7( )4( On securities lent or sold under agreements to repurchase 1 - On bonds and subordinated notes )148( )202( On other liabilities - )1( Total interest expenses )443( )445( Total net interest income 2,158 2,073

C. Details of net effect of hedging derivative instruments on interest income and expenses** Interest income )16( )24( Interest expenses )3( )3(

D. Details of interest income from bonds on a cumulative basis Held to maturity 3 3 Available for sale 153 136 Held for trading 3 5 Total included in interest income 159 144

* Including the effective component in hedges. ** Details of the effect of hedging derivative instruments on subsections A and B.

127 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 3 Non-Interest Financing Income Unaudited NIS millions

A. Non-interest financing income (expenses) in respect of non-trading activities

For the three months ended March 31 2018 2017 1. From activity in derivative instruments Ineffective part of hedges (see C below)(1) )1( 11 Net income (expenses) in respect of ALM derivative instruments(2) 683 )1,037( Total from activity in derivative instruments 682 )1,026(

2. From investment in bonds Gains from sale of bonds available for sale(3) 85 52 Losses from sale of bonds available for sale(3) )18( )10( Total from investment in bonds 67 42

3. Net exchange-rate differences )595( 1,088

4. Gains (losses) from investment in shares Gains from sale of shares available for sale(3) 52 83 Losses from sale of shares available for sale(3)(4) )8( )26( Dividend from shares available for sale 5 6 Total from investment in shares 49 63

5. Net gains (losses) in respect of securitization transactions - -

6. Net gains in respect of loans sold 18 4

Total non-interest financing income (expenses) in respect of non-trading activities 221 171

(1) Excluding the effective component of hedges. (2) Derivative instruments constituting part of the asset and liability management system of the Bank, which are not designated for hedging. (3) Reclassified from accumulated other comprehensive income. (4) Including a provision for impairment in the amount of approximately NIS 8 million for the three-month period ended March 31, 2018 (approximately NIS 26 million for the three-month period ended March 31, 2017).

128 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 3 Non-Interest Financing Income (continued) Unaudited NIS millions

B. Non-interest financing income in respect of trading activities*

For the three months ended March 31 2018 2017 Net income in respect of other derivative instruments 4 2 Net realized and unrealized gains (losses) from adjustments to fair value of bonds held for trading(1) 1 7 Net realized and unrealized gains (losses) from adjustments to fair value of shares held for trading(2) - 2 Total non-interest financing income (expenses) in respect of trading activities** 5 11 Total non-interest financing income (expenses) 226 182 Details of non-interest financing income in respect of trading activities, by risk exposure: Interest rate exposure 1 8 Foreign currency exposure - 1 Share exposure 4 2 Total 5 11

C. Ineffective part of hedges – further details***

1. Fair-value hedges Ineffectiveness of hedges 2 )1( 2. Cash-flow hedges Ineffectiveness of hedges )5( 9 Gain component in respect of derivative instruments excluded for the evaluation of the effectiveness of the hedge 2 3 Total )1( 11

* Includes exchange-rate differences arising from trading activity. ** With regard to interest income from investment in bonds held for trading, see Note 2. *** For a disclosure of the net effect of hedging derivative instruments on interest income and expenses, see Note 2. (1) Of which, the part of gains (losses) associated with bonds held for trading still held at the balance sheet date, in the amount of approximately NIS 4 million for the three-month period ended March 31, 2018 (approximately NIS 5 million for the three-month period ended March 31, 2017). (2) Of which, the part of gains (losses) associated with shares held for trading still held at the balance sheet date, in the amount of approximately NIS 0 million for the three-month period ended March 31, 2018 (approximately NIS 2 million for the three-month period ended March 31, 2017).

129 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 4 Accumulated Other Comprehensive Income (Loss) NIS millions

A. Changes in accumulated other comprehensive income (loss), after tax effect 1. Changes in accumulated other comprehensive income (loss) for the three-month periods ended March 31, 2018 and 2017

Other comprehensive income before attribution Other Other to non-controlling interests comprehensive comprehensive income income Adjustments Net Net gains Adjustments Total attributed to attributed to for adjustments (losses) in in respect of non-controlling shareholders presentation from respect of employee interests of the Bank of securities translation* cash-flow benefits available for after hedge hedges sale at fair effects** value Balance as at January 1, 2018 513 )53( )1( )1,242( )783( 3 )786( Net change during the period )223( 5 - 52 )166( - )166( Balance as at March 31, 2018 290 )48( )1( )1,190( )949( 3 )952( Balance as at January 1, 2017 356 )33( )2( )1,160( )839( 1 )840( Net change during the period 141 )14( 1 8 136 1 135 Balance as at March 31, 2017 497 )47( )1( )1,152( )703( 2 )705(

2. Changes in accumulated other comprehensive income (loss) in 2017

Other comprehensive income before attribution Other Other to non-controlling interests comprehensive comprehensive income income Adjustments Net Net gains Adjustments Total attributed to attributed to for adjustments (losses) in in respect of non-controlling shareholders presentation from respect of employee interests of the Bank of securities translation* cash-flow benefits available for after hedge hedges sale at fair effects** value Balance as at January 1, 2017 356 )33( )2( )1,160( )839( 1 )840( Net change during the year 157 )20( 1 )82( 56 2 54 Balance as at December 31, 2017 513 )53( )1( )1,242( )783( 3 )786(

* Adjustments from the translation of financial statements of a foreign operation whose functional currency differs from the functional currency of the Bank. ** Net gains (losses) in respect of net hedging of investments in foreign currency.

130 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 4 Accumulated Other Comprehensive Income (Loss) (continued) Unaudited NIS millions

B. Changes in components of accumulated other comprehensive income (loss), before and after tax effect 1. Changes in accumulated other comprehensive income (loss) for the three-month periods ended March 31, 2018 and 2017

For the three months ended March 31, 2018 March 31, 2017 Before tax Tax effect After tax Before tax Tax effect After tax Changes in components of other comprehensive income (loss) before attribution to non-controlling interests Adjustments for presentation of securities available for sale at fair value Net unrealized gains (losses) from adjustments to fair value )234( 84 )150( 259 )73( 186 (Gains) losses in respect of securities available for sale reclassified to the statement of profit and loss(1) )105( 32 )73( )65( 20 )45( Net change during the period )339( 116 )223( 194 )53( 141 Adjustments from translation* Adjustments from translation of financial statements 23 - 23 )44( - )44( Hedges** )28( 10 )18( 46 )16( 30 Net change during the period )5( 10 5 2 )16( )14( Hedges of cash flows Net (gains) losses in respect of cash-flow hedges reclassified to the statement of profit and loss(1) - - - 1 - 1 Net change during the period - - - 1 - 1 Employee benefits Net actuarial profit (loss) during the period 36 )13( 23 )19( 8 )11( Net (gains) losses reclassified to the statement of profit and loss(2) 43 )14( 29 30 )11( 19 Net change during the period 79 )27( 52 11 )3( 8 Total net change during the period )265( 99 )166( 208 )72( 136 Changes in components of other comprehensive income (loss) attributed to non-controlling interests Total net change during the period - - - 1 - 1 Changes in components of other comprehensive income (loss) attributed to shareholders of the Bank Total net change during the period )265( 99 )166( 207 )72( 135

* Adjustments from the translation of financial statements of a foreign operation whose functional currency differs from the functional currency of the Bank. ** Net gains (losses) in respect of net hedging of investments in foreign currency. (1) The amount before tax is reported in the statement of profit and loss, under the item “non-interest financing income.” For further details, see Note 3 – Non-Interest Financing Income. (2) The amount before tax is reported in the statement of profit and loss, under the item “salaries and related expenses.”

131 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 4 Accumulated Other Comprehensive Income (Loss) (continued) Audited NIS millions

B. Changes in components of accumulated other comprehensive income (loss), before and after tax effect (continued) 2. Changes in accumulated other comprehensive income (loss) in 2017

For the year ended December 31, 2017 Before tax Tax effect After tax Changes in components of other comprehensive income (loss) before attribution to non-controlling interests Adjustments for presentation of securities available for sale at fair value Net unrealized gains (losses) from adjustments to fair value 389 )107( 282 (Gains) losses in respect of securities available for sale reclassified to the statement of profit and loss(1) )177( 52 )125( Net change during the year 212 )55( 157 Adjustments from translation* Adjustments from translation of financial statements )65( - )65( Hedges** 69 )24( 45 Net change during the year 4 )24( )20( Hedges of cash flows Net (gains) losses in respect of cash-flow hedges reclassified to the statement of profit and loss(1) 1 - 1 Net change during the year 1 - 1 Employee benefits Net actuarial profit (loss) during the period )268( 90 )178( Net (gains) losses reclassified to the statement of profit and loss(2) 146 )50( 96 Net change during the year )122( 40 )82( Total net change during the year 95 )39( 56 Changes in components of other comprehensive income (loss) attributed to non-controlling interests Total net change during the year 2 - 2 Changes in components of other comprehensive income (loss) attributed to shareholders of the Bank Total net change during the year 93 )39( 54

* Adjustments from the translation of financial statements of a foreign operation whose functional currency differs from the functional currency of the Bank. ** Net gains (losses) in respect of net hedging of investments in foreign currency. (1) The amount before tax is reported in the statement of profit and loss, under the item “non-interest financing income.” For further details, see Note 3 – Non-Interest Financing Income. (2) The amount before tax is reported in the statement of profit and loss, under the item “salaries and related expenses.”

132 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 5 Securities Unaudited NIS millions

March 31, 2018 Balance sheet Depreciated Unrecognized Unrecognized Fair value* value cost gains from losses from adjustments to adjustments to fair value fair value 1) Bonds held to maturity Bonds and debentures Financial institutions in Israel 421 421 4 - 425 Total bonds held to maturity 421 421 4 - 425

Balance sheet Depreciated Accumulated other Fair value* value cost comprehensive income (in shares – cost) Gains Losses 2) Securities available for sale Bonds and debentures Israeli government 31,986 31,756 231 )1( 31,986 Foreign governments 10,512 10,714 17 )219( 10,512 Financial institutions in Israel 44 42 2 - 44 Foreign financial institutions 5,797 5,831 24 )58( 5,797 Others in Israel 307 303 6 )2( 307 Foreign others 1,415 1,405 16 )6( 1,415 Total bonds and debentures available for sale 50,061 50,051 296 )286( 50,061 Shares Others 2,065 1,752 325 )12( )1(2,065 Total securities available for sale 52,126 51,803 )2(621 )2()298( )1(52,126

* Fair-value data are usually based on stock-exchange prices, which do not necessarily reflect the price that would be obtained from a large-volume sale of securities. (1) Including shares and options for which no fair value is available, which are stated at cost, in the amount of NIS 970 million. (2) Included in equity in the item “adjustments for presentation of securities available for sale at fair value” within other comprehensive income.

Notes: A. For details of the results of activity in investments in bonds and in shares, see Note 2 and Note 3. B. Israeli bonds and foreign bonds are differentiated according to the country of residence of the issuing entity.

133 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 5 Securities (continued) Unaudited NIS millions

March 31, 2018 Balance sheet Depreciated Unrealized Unrealized Fair value* value cost gains from losses from (in shares - cost) adjustments to adjustments to fair value fair value 3) Securities held for trading Bonds and debentures Israeli government 8,876 8,865 11 - 8,876 Foreign governments 69 68 1 - 69 Foreign others 2 2 - - 2 Total bonds and debentures held for trading 8,947 8,935 12 - 8,947 Shares Others 44 47 - )3( 44 Total securities held for trading 8,991 8,982 )2(12 )2()3( 8,991 Total securities(3) 61,538 61,206 637 )301( )1(61,542

March 31, 2018 Less than 12 months 12 months or more Fair value Unrealized losses Total Fair value Unrealized losses Total 0-20% 20-40% 0-20% 20-40% 4) Fair value and unrealized losses, by duration and rate of impairment, of securities available for sale in an unrealized loss position Bonds and debentures Israeli government 2,188 )1( - )1( - - - - Foreign governments 8,980 )203( - )203( 923 )16( - )16( Foreign financial institutions 3,826 )55( - )55( 301 )3( - )3( Others in Israel 67 )2( - )2( - - - - Foreign others 298 )4( - )4( 184 )2( - )2( Total bonds and debentures available for sale 15,359 )265( - )265( 1,408 )21( - )21( Shares Others 839 )12( - )12( - - - - Total securities available for sale 16,198 )277( - )277( 1,408 )21( - )21(

* Fair-value data are usually based on stock-exchange prices, which do not necessarily reflect the price that would be obtained from a large-volume sale of securities. (1) Including shares and options for which no fair value is available, which are stated at cost, in the amount of NIS 970 million. (2) Charged to the statement of profit and loss. (3) Of which: securities in the amount of approximately NIS 3.8 billion were pledged to lenders.

Notes: A. For details of the results of activity in investments in bonds and in shares, see Note 2 and Note 3. B. Israeli bonds and foreign bonds are differentiated according to the country of residence of the issuing entity.

134 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 5 Securities (continued) Unaudited NIS millions

March 31, 2017 Balance sheet Depreciated Unrecognized Unrecognized Fair value* value cost gains from losses from adjustments to adjustments to fair value fair value 1) Bonds held to maturity Bonds and debentures Financial institutions in Israel 411 411 4 - 415 Total bonds held to maturity 411 411 4 - 415

Balance sheet Depreciated Accumulated other Fair value* value cost comprehensive income

(in shares - cost) (1) Gains Losses 2) Securities available for sale Bonds and debentures Israeli government 44,892 44,628 269 )5( 44,892 Foreign governments 9,094 9,146 27 )79( 9,094 Financial institutions in Israel 94 92 2 - 94 Foreign financial institutions 6,835 6,813 42 )20( 6,835 Others in Israel 713 704 10 )1( 713 Foreign others 2,626 2,601 30 )5( 2,626 Total bonds and debentures available for sale 64,254 63,984 380 )110( 64,254 Shares Others 2,225 1,851 380 )6( )1(2,225 Total securities available for sale 66,479 65,835 )2(760 )2()116( )1(66,479

* Fair-value data are usually based on stock-exchange prices, which do not necessarily reflect the price that would be obtained from a large-volume sale of securities. (1) Including shares and options for which no fair value is available, which are stated at cost, in the amount of NIS 850 million. (2) Included in equity in the item “adjustments for presentation of securities available for sale at fair value” within other comprehensive income.

Notes: A. For details of the results of activity in investments in bonds and in shares, see Note 2 and Note 3. B. Israeli bonds and foreign bonds are differentiated according to the country of residence of the issuing entity.

135 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 5 Securities (continued) Unaudited NIS millions

March 31, 2017 Balance sheet Depreciated Unrealized Unrealized Fair value* value cost gains from losses from (in shares - cost) adjustments to adjustments to fair value fair value 3) Securities held for trading Bonds and debentures Israeli government 7,862 7,860 6 )4( 7,862 Foreign governments 78 77 1 - 78 Others in Israel 3 3 - - 3 Total bonds and debentures held for trading 7,943 7,940 7 )4( 7,943 Shares Others 61 63 1 )3( 61 Total securities held for trading 8,004 8,003 )2(8 )2()7( 8,004 Total securities(3) 74,894 74,249 772 )123( )1(74,898

4) Information regarding impaired bonds Recorded debt balance of: Impaired bonds accruing interest income 23

* Fair-value data are usually based on stock-exchange prices, which do not necessarily reflect the price that would be obtained from a large-volume sale of securities. (1) Including shares and options for which no fair value is available, which are stated at cost, in the amount of NIS 850 million. (2) Charged to the statement of profit and loss. (3) Of which: securities in the amount of approximately NIS 5.4 billion were pledged to lenders.

Notes: A. For details of the results of activity in investments in bonds and in shares, see Note 2 and Note 3. B. Israeli bonds and foreign bonds are differentiated according to the country of residence of the issuing entity.

136 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 5 Securities (continued) Unaudited NIS millions

March 31, 2017 Less than 12 months 12 months or more Fair value Unrealized losses Total Fair value Unrealized losses Total 0-20% 20-40% 0-20% 20-40% 5) Fair value and unrealized losses, by duration and rate of impairment, of securities available for sale in an unrealized loss position Bonds and debentures Israeli government 5,389 )3( - )3( 73 )2( - )2( Foreign governments 4,242 )75( - )75( 404 )4( - )4( Foreign financial institutions 1,805 )15( - )15( 636 )5( - )5( Others in Israel 195 )1( - )1( - - - - Foreign others 240 )3( - )3( 386 )2( - )2( Total bonds and debentures available for sale 11,871 )97( - )97( 1,499 )13( - )13( Shares Others 720 )6( - )6( - - - - Total securities available for sale 12,591 )103( - )103( 1,499 )13( - )13(

Notes: A. For details of the results of activity in investments in bonds and in shares, see Note 2 and Note 3. B. Israeli bonds and foreign bonds are differentiated according to the country of residence of the issuing entity.

137 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 5 Securities (continued) Audited NIS millions

December 31, 2017 Balance sheet Depreciated Unrecognized Unrecognized Fair value* value cost gains from losses from adjustments to adjustments to fair value fair value 1) Bonds held to maturity Bonds and debentures Financial institutions in Israel 423 423 5 - 428 Total bonds held to maturity 423 423 5 - 428

Balance sheet Depreciated Accumulated other Fair value* value cost comprehensive income (in shares - cost) Gains Losses 2) Securities available for sale Bonds and debentures Israeli government 35,528 35,193 335 - 35,528 Foreign governments 13,097 13,233 14 )150( 13,097 Financial institutions in Israel 73 68 5 - 73 Foreign financial institutions 6,327 6,298 47 )18( 6,327 Others in Israel 402 396 8 )2( 402 Foreign others 2,223 2,194 34 )5( 2,223 Total bonds and debentures available for sale 57,650 57,382 443 )175( 57,650 Shares Others 2,159 1,765 406 )12( )1(2,159 Total securities available for sale 59,809 59,147 )2(849 )2()187( )1(59,809

* Fair-value data are usually based on stock-exchange prices, which do not necessarily reflect the price that would be obtained from a large-volume sale of securities. (1) Including shares and options for which no fair value is available, which are stated at cost, in the amount of NIS 848 million. (2) Included in equity in the item “adjustments for presentation of securities available for sale at fair value” within other comprehensive income.

Notes: A. For details of the results of activity in investments in bonds and in shares, see Note 2 and Note 3. B. Israeli bonds and foreign bonds are differentiated according to the country of residence of the issuing entity.

138 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 5 Securities (continued) Audited NIS millions

December 31, 2017 Balance sheet Depreciated Unrealized Unrealized Fair value* value cost gains from losses from (in shares - cost) adjustments to adjustments to fair value fair value 3) Securities held for trading Bonds and debentures Israeli government 5,069 5,066 3 - 5,069 Foreign governments 71 70 1 - 71 Foreign others 3 3 - - 3 Total bonds and debentures held for trading 5,143 5,139 4 - 5,143 Shares Others 67 70 - )3( 67 Total securities held for trading 5,210 5,209 )2(4 )2()3( 5,210 Total securities(3) 65,442 64,779 858 )190( )1(65,447

December 31, 2017 Less than 12 months 12 months or more Fair value Unrealized losses Total Fair value Unrealized losses Total 0-20% 20-40% 0-20% 20-40% 4) Fair value and unrealized losses, by duration and rate of impairment, of securities available for sale in an unrealized loss position Bonds and debentures Foreign governments 9,085 )72( - )72( 3,184 )78( - )78( Foreign financial institutions 2,029 )8( - )8( 784 )10( - )10( Others in Israel 86 )1( - )1( 50 )1( - )1( Foreign others 218 )2( - )2( 378 )3( - )3( Total bonds and debentures available for sale 11,418 )83( - )83( 4,396 )92( - )92( Shares Others 702 )12( - )12( - - - - Total securities available for sale 12,120 )95( - )95( 4,396 )92( - )92(

* Fair-value data are usually based on stock-exchange prices, which do not necessarily reflect the price that would be obtained from a large-volume sale of securities. (1) Including shares and options for which no fair value is available, which are stated at cost, in the amount of NIS 848 million. (2) Charged to the statement of profit and loss. (3) Of which: securities in the amount of approximately NIS 4.3 billion were pledged to lenders.

Notes: A. For details of the results of activity in investments in bonds and in shares, see Note 2 and Note 3. B. Israeli bonds and foreign bonds are differentiated according to the country of residence of the issuing entity.

139 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 6 Credit Risk, Credit to the Public, and Allowance Unaudited for Credit Losses NIS millions

1. Debts*, credit to the public, and allowance for credit losses

March 31, 2018 Credit to the public Banks and Total governments Commercial** Housing Other Total private Recorded debt balance Debts examined on an individual basis 126,965 - 1,324 128,289 23,965 152,254 Debts examined on a collective basis(1) 39,553 66,209 54,016 159,778 - 159,778 (1) Of which: according to the extent of arrears 9,796 65,996 - 75,792 - 75,792 Total(2) 166,518 66,209 55,340 288,067 23,965 312,032 (2) Of which: Debts in restructuring 637 - 620 1,257 - 1,257 Other impaired debts 1,203 - 130 1,333 - 1,333 Total impaired debts 1,840 - 750 2,590 - 2,590 Debts in arrears of 90 days or more 256 591 92 939 - 939 Other problematic debts 3,275 2 310 3,587 - 3,587 Total problematic debts 5,371 593 1,152 7,116 - 7,116 Allowance for credit losses in respect of debts* In respect of debts examined on an individual basis 2,072 - 208 2,280 6 2,286 In respect of debts examined on a collective basis(3) 504 336 844 1,684 - 1,684 (3) Of which: according to the extent of arrears*** 63 336 - 399 - 399 Total(4) 2,576 336 1,052 3,964 6 3,970 (4) Of which: in respect of impaired debts 329 - 207 536 - 536

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 9,796 million, of commercial borrowers, or granted to purchasing groups in the process of construction (March 31, 2017: NIS 7,552 million; December 31, 2017: NIS 9,345 million). *** Includes the allowance beyond the amount required according to the method of the extent of arrears, calculated on a collective basis, in the amount of approximately NIS 265 million (March 31, 2017: NIS 244 million; December 31, 2017: NIS 259 million).

140 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 6 Credit Risk, Credit to the Public, and Allowance Unaudited for Credit Losses (continued) NIS millions

1. Debts*, credit to the public, and allowance for credit losses (continued)

March 31, 2017 Credit to the public Banks and Total governments Commercial** Housing Other Total private Recorded debt balance Debts examined on an individual basis 125,291 - 2,000 127,291 28,958 156,249 Debts examined on a collective basis(1) 32,550 62,501 51,620 146,671 - 146,671 (1) Of which: according to the extent of arrears 7,552 62,263 - 69,815 - 69,815 Total(2) 157,841 62,501 53,620 273,962 28,958 302,920 (2) Of which: Debts in restructuring 1,082 - 623 1,705 - 1,705 Other impaired debts 1,612 - 139 1,751 - 1,751 Total impaired debts 2,694 - 762 3,456 - 3,456 Debts in arrears of 90 days or more 162 551 81 794 - 794 Other problematic debts 3,404 26 239 3,669 - 3,669 Total problematic debts 6,260 577 1,082 7,919 - 7,919 Allowance for credit losses in respect of debts* In respect of debts examined on an individual basis 2,284 - 147 2,431 7 2,438 In respect of debts examined on a collective basis(3) 460 341 748 1,549 - 1,549 (3) Of which: according to the extent of arrears*** 50 341 - 391 - 391 Total(4) 2,744 341 895 3,980 7 3,987 (4) Of which: in respect of impaired debts 597 - 139 736 - 736

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 9,796 million, of commercial borrowers, or granted to purchasing groups in the process of construction (March 31, 2017: NIS 7,552 million; December 31, 2017: NIS 9,345 million). *** Includes the allowance beyond the amount required according to the method of the extent of arrears, calculated on a collective basis, in the amount of approximately NIS 265 million (March 31, 2017: NIS 244 million; December 31, 2017: NIS 259 million).

141 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 6 Credit Risk, Credit to the Public, and Allowance Audited for Credit Losses (continued) NIS millions

1. Debts*, credit to the public, and allowance for credit losses (continued)

December 31, 2017 Credit to the public Banks and Total governments Commercial** Housing Other Total private Recorded debt balance Debts examined on an individual basis 123,065 - 1,451 124,516 26,403 150,919 Debts examined on a collective basis(1) 39,152 65,176 53,663 157,991 - 157,991 (1) Of which: according to the extent of arrears 9,345 64,940 - 74,285 - 74,285 Total(2) 162,217 65,176 55,114 282,507 26,403 308,910 (2) Of which: Debts in restructuring 672 - 637 1,309 - 1,309 Other impaired debts 1,224 - 131 1,355 - 1,355 Total impaired debts 1,896 - 768 2,664 - 2,664 Debts in arrears of 90 days or more 222 594 97 913 - 913 Other problematic debts 2,852 3 237 3,092 - 3,092 Total problematic debts 4,970 597 1,102 6,669 - 6,669 Allowance for credit losses in respect of debts* In respect of debts examined on an individual basis 1,961 - 229 2,190 6 2,196 In respect of debts examined on a collective basis(3) 508 333 813 1,654 - 1,654 (3) Of which: according to the extent of arrears*** 64 333 - 397 - 397 Total(4) 2,469 333 1,042 3,844 6 3,850 (4) Of which: in respect of impaired debts 318 - 227 545 - 545

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 9,796 million, of commercial borrowers, or granted to purchasing groups in the process of construction (March 31, 2017: NIS 7,552 million; December 31, 2017: NIS 9,345 million). *** Includes the allowance beyond the amount required according to the method of the extent of arrears, calculated on a collective basis, in the amount of approximately NIS 265 million (March 31, 2017: NIS 244 million; December 31, 2017: NIS 259 million).

142 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 6 Credit Risk, Credit to the Public, and Allowance NIS millions for Credit Losses (continued)

2. Change in allowance for credit losses

For the three months ended March 31, 2018 Credit to the public Banks and Total governments Commercial Housing Other Total private Allowance for credit losses at beginning of year (audited) 3,032 333 1,105 4,470 7 4,477 Provision for credit losses(1) 95 5 150 250 - 250 Charge-offs )161( )2( )212( )375( - )375( Recoveries of debts charged off in previous years 189 - 84 273 - 273 Net charge-offs 28 )2( )128( )102( - )102( Adjustments from translation of financial statements - - 1 1 - 1 Allowance for credit losses as at March 31, 2018(2) (unaudited) 3,155 336 1,128 4,619 7 4,626 (1) Of which: in respect of off-balance sheet credit instruments 16 - 13 29 - 29 (2) Of which: in respect of off-balance sheet credit instruments 579 - 76 655 1 656

For the three months ended March 31, 2017 Credit to the public Banks and Total governments Commercial Housing Other Total private Allowance for credit losses at beginning of year (audited) 3,499 366 939 4,804 7 4,811 Provision for credit losses(1) )24( )5( 136 107 - 107 Charge-offs )334( )20( )203( )557( - )557( Recoveries of debts charged off in previous years 206 - 83 289 - 289 Net charge-offs )128( )20( )120( )268( - )268( Allowance for credit losses as at March 31, 2017(2) (unaudited) 3,347 341 955 4,643 7 4,650 (1) Of which: in respect of off-balance sheet credit instruments *)23( - *9 *)14( - *)14( (2) Of which: in respect of off-balance sheet credit instruments 603 - 60 663 - 663

* Restated.

143 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 7 Deposits from the Public NIS millions

A. Types of deposits, by location of deposit taking and by type of depositor

March 31 December 31 2018 2017 2017 Unaudited Audited In Israel On demand Non-interest bearing 129,032 119,506 125,959 Interest bearing 84,384 80,911 89,075 Total on demand 213,416 200,417 215,034 Fixed term 111,747 112,456 113,608 Total deposits from the public in Israel* 325,163 312,873 328,642 Outside Israel On demand Non-interest bearing 4,425 6,609 3,575 Interest bearing 3,579 7,563 4,640 Total on demand 8,004 14,172 8,215 Fixed term 11,643 10,473 10,494 Total deposits from the public outside Israel 19,647 24,645 18,709 Total deposits from the public 344,810 337,518 347,351 * Of which: Deposits of private individuals 160,233 157,235 157,695 Deposits of institutional entities 49,464 50,463 56,173 Deposits of corporations and others 115,466 105,175 114,774

B. Deposits from the public by size

March 31 December 31 2018 2017 2017 Unaudited Audited Deposit ceiling Up to 1 119,588 115,142 117,257 Over 1 up to 10 83,817 85,521 81,942 Over 10 up to 100 51,323 51,618 52,425 Over 100 up to 500 35,463 32,447 35,600 Over 500 54,619 52,790 60,127 Total 344,810 337,518 347,351

144 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 8 Employee Benefits NIS millions

A. Employee benefits

March 31 December 31 2018 2017 2017 Unaudited Audited Early retirement and severance pay Amount of liability 7,624 7,672 **7,727 Fair value of plan assets )3,941( )3,893( )3,963( Surplus liability over plan assets (included in other liabilities) 3,683 3,779 **3,764

Grant for non-utilization of sick days Amount of liability 374 367 379 Fair value of plan assets - - - Surplus liability over plan assets (included in other liabilities) 374 367 379

25-year service grant Amount of liability 38 35 37 Fair value of plan assets - - - Surplus liability over plan assets (included in other liabilities) 38 35 37

Other benefits at end of employment and post-employment Amount of liability 617 593 617 Fair value of plan assets - - - Surplus liability over plan assets (included in other liabilities) 617 593 617

Total Surplus liabilities in respect of employee benefits over plan assets included in the item “other liabilities”* 4,712 4,774 **4,797 * Of which: in respect of benefits for employees overseas 44 44 48

** Reclassified.

145 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 8 Employee Benefits (continued) NIS millions

B. Post-retirement benefit plan (1) Commitments and financing status a. Net change in commitment in respect of forecast benefit**,***

For the three months ended For the March 31 year ended December 31 2018 2017 2017 Unaudited Audited Net commitment in respect of forecast benefit at beginning of period 4,760 4,753 4,753 Service cost 36 39 152 Interest cost 34 38 153 Actuarial loss )37( 22 273 Changes in foreign-currency exchange rates 1 )3( )5( Benefits paid )120( )110( *)566( Net commitment in respect of forecast benefit at end of period 4,674 4,739 *4,760 Net commitment in respect of cumulative benefit at end of period 4,448 4,539 *4,531

* Reclassified. ** Includes post-retirement benefits, including a sick day grant paid at retirement. *** The amounts presented are net of plan assets. For further details, see Section (4) below.

146 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 8 Employee Benefits (continued) NIS millions

B. Post-retirement benefit plan (continued) (1) Commitments and financing status (continued) b. Amounts recognized in the consolidated balance sheet

March 31 December 31 2018 2017 2017 Unaudited Audited Early retirement and severance pay Amounts recognized in the item “other liabilities” 4,674 4,739 *4,760 * Reclassified. c. Amounts recognized in accumulated other comprehensive income (loss), before tax effect

March 31 December 31 2018 2017 2017 Unaudited Audited Net actuarial loss 1,798 1,744 1,877 Closing balance in accumulated other comprehensive income 1,798 1,744 1,877 d. Plans in which the commitment in respect of the cumulative and forecast benefit exceeds the plan assets

March 31 December 31 2018 2017 2017 Unaudited Audited Commitment in respect of forecast benefit 8,615 8,632 *8,723 Commitment in respect of cumulative benefit 8,389 8,432 *8,494 Fair value of plan assets )3,941( )3,893( )3,963( * Reclassified.

147 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 8 Employee Benefits (continued) NIS millions

B. Post-retirement benefit plan (continued) (2) Expense for the period a. Components of net benefit cost recognized in profit and loss

For the three months ended For the March 31 year ended December 31 2018 2017 2017 Unaudited Audited Service cost 36 39 152 Interest cost 34 38 153 Subtraction of unrecognized amounts: Net actuarial loss (profit) 43 30 146 Net total benefit cost 113 107 451 b. Changes in plan assets and in benefit commitments recognized in other comprehensive income (loss), before tax effect

For the three months ended For the March 31 year ended December 31 2018 2017 2017 Unaudited Audited Net actuarial loss (profit) for the period )37( 22 273 Subtraction of actuarial profit (loss) )43( )30( )146( Changes in foreign currency exchange rates 1 )3( )5( Total recognized in other comprehensive income )79( )11( 122 Net total benefit cost 113 107 451 Total recognized in net benefit cost for the period and in other comprehensive income 34 96 573 c. Estimate of amounts included in accumulated other comprehensive income and expected to be subtracted from accumulated other comprehensive income to the statement of profit and loss as an expense (as income) in 2018, before tax effect

Net actuarial loss 143

148 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 8 Employee Benefits (continued)

B. Post-retirement benefit plan (continued) (3) Assumptions* a. Assumptions based on a weighted average used to determine the commitment in respect of the benefit and to measure the net cost of the benefit 1. Principal assumptions used to determine the commitment in respect of the benefit

March 31 December 31 2018 2017 2017 Unaudited Audited Capitalization rate 1.32% 1.73% 1.25% Rate of increase in the CPI 2.0% 2.0% 2.0% Rate of increase in remuneration(1) 0.0%-7.5% 0.0%-7.5% 0.0%-7.5%

Departure rates vary by age and gender, and reflect a weighted departure rate of approximately 7.5% per annum.

2. Principal assumptions used to measure net benefit cost for the period

For the three months ended For the March 31 year ended December 31 2018 2017 2017 Unaudited Audited Capitalization rate 1.25% 1.71% 1.48% Rate of increase in remuneration(1) 0.0%-7.5% 0.0%-7.5% 0.0%-7.5% b. Effect of a one-percentage-point change on the commitment in respect of the forecast benefit, before tax effect

Increase of one percentage point Decrease of one percentage point March 31 December 31 March 31 December 31 2018 2017 2017 2018 2017 2017 Unaudited Audited Unaudited Audited Capitalization rate )375( )363( )381( 444 428 451

* The assumptions refer to the stand-alone data of the Bank. (1) The rate of increase in remuneration is influenced by several processes leading to an increase in the cost of wages, which reflect an average growth rate of approximately 1.5% per annum, in real terms. These processes include promotions and changes in job descriptions, seniority, and rank.

149 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 8 Employee Benefits (continued) NIS millions

B. Post-retirement benefit plan (continued) (4) Plan assets The Bank’s liability for employee benefits is calculated based on an actuarial calculation. Among other factors, this calculation takes into account the probability of early retirement with beneficial terms, in each of the relevant tracks (enlarged severance pay or early retirement); the amounts of the liability at retirement; and the value of amounts funded at that date. In addition, in light of the existing labor agreements at the Bank and the nature of the retirement agreements at the Bank, the Bank’s exposure to (positive or negative) changes in the value of amounts funded is limited, due to Section 14 of the Severance Pay Law, pursuant to which in the event of an employee’s departure, reaching the retirement age established by law, or taking early retirement, the Bank is not required to supplement amounts funded, and customarily does not do so, if their value has decreased or does not cover the increase that has occurred in wages. The Bank’s liability for severance pay to its employees is primarily covered by amounts funded deposited in severance-pay funds in the employees’ names.

Balances of the liability for severance pay and amounts funded for severance pay:

March 31 December 31 2018 2017 2017 Unaudited Audited Liability for severance pay 3,707 3,701 3,731 Amounts funded for severance pay )3,582( )3,568( )3,604( Net liability 125 133 127

It is emphasized that the net liability exposure of the Bank to changes in the value of amounts funded, weighted by the probability of retirement in a compensation track, is immaterial. Thus, for example, in the case of a 10% decrease in the fair value of the amounts funded for severance pay, the net liability would increase by a total of approximately NIS 20 million. Amounts funded for severance pay are deposited in severance-pay funds in the employees’ names. Approximately 45% of the total balances of amounts funded for severance pay are deposited with the Central Retirement Fund of Workers Ltd. (KGM). The remaining amounts are deposited with a large number of severance-pay provident funds, according to employees’ choice.

150 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 8 Employee Benefits (continued) NIS millions

C. Cash flows (1) Deposits

Forecast Actual deposits For the three months ended For the March 31 year ended December 31 2018* 2018 2017 2017 Unaudited Audited Deposits 186 43 43 185

* Estimated deposits which the Bank expects to pay to pension plans for a defined benefit during 2018.

(2) Future benefit payments expected by the Bank

Year 2018 399 2019 488 2020 368 2021 343 2022 312 2023-2027 1,245 2028 forward 2,253 Total 5,408

The wage agreement between the Board of Management of the Bank and the board of the Employee Union of the Bank, which was in effect in 2013-2017 and applied to employees of the Bank who are not under personal contracts, concluded at the end of 2017. The parties are preparing to begin negotiations over a new agreement.

151 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 9 Capital, Capital Adequacy, Leverage, and Liquidity

A. Dividends As of the first quarter of 2017, the dividend distribution policy of the Bank is to distribute up to 40% of quarterly net operating profit. Any distribution is subject to a specific resolution of the Board of Directors of the Bank, based on its judgment at the date of the distribution, taking into account business considerations, the directives of all laws, and any limits on distribution.

B. Dividend payments The Board of Directors resolved on May 23, 2018, to distribute a dividend at a rate of approximately 40% of the profits of the first quarter of 2018, in the amount of approximately NIS 251 million, which constitutes 18.825 agorot per share of par value NIS 1. The Board of Directors set the record date for payment of the dividend at June 4, 2018, and the date of payment at June 12, 2018.

Details of dividends paid:

Date of declaration Date of payment Dividend per share Dividend paid in cash Agorot NIS millions March 25, 2018 April 11, 2018 18.345 245 November 27, 2017 December 14, 2017 14.08 188 August 14, 2017 August 31, 2017 24.365 325 May 23, 2017 June 13, 2017 22.980 307 March 29, 2017 April 18, 2017 3.105 41

C. Basel 3 directives The Bank applies the capital measurement and adequacy directives based on the Basel directives, as published by the Banking Supervision Department and as integrated into Proper Conduct of Banking Business Directives 201-211 and the file of questions and answers. The Basel 3 directives took effect on January 1, 2014. Implementation is gradual, in accordance with the transitional directives established in Proper Conduct of Banking Business Directive 299, “Capital Measurement and Adequacy – Supervisory Capital – Transitional Directives.” Pursuant to the transitional directives, the supervisory adjustments and deductions from capital, as well as non-controlling interests that do not qualify for inclusion in supervisory capital, were deducted from capital gradually, at a rate of 20% per annum, from January 1, 2014 to January 1, 2018. Capital instruments that no longer qualify as supervisory capital were recognized as of January 1, 2014, up to a ceiling of 80% of their balance in the supervisory capital as at December 31, 2013; this ceiling is being lowered by an additional 10% in each subsequent year, until January 1, 2022. Accordingly, in 2017, the rate of deductions from supervisory capital was 80%, and the ceiling for instruments qualifying as supervisory capital was 50%. In 2018, the rate of deductions from supervisory capital is 100%, and the ceiling for instruments qualifying as supervisory capital is 40%.

152 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 9 Capital, Capital Adequacy, Leverage, and Liquidity (continued)

D. Capital adequacy in consolidated data

March 31, March 31, December 31, 2018 2017 2017 Unaudited Audited NIS millions 1. Capital for the calculation of the capital ratio after supervisory adjustments and deductions Common equity Tier 1 capital(1) 36,637 35,731 36,582 Additional Tier 1 capital 977 1,221 1,221 Total Tier 1 capital(1) 37,614 36,952 37,803 Tier 2 capital 9,016 10,538 9,728 Total overall capital(1) 46,630 47,490 47,531

2. Weighted balances of risk-adjusted assets Credit risk(2) 303,068 290,010 295,986 Market risks 4,692 5,174 5,114 Operational risk 23,779 23,517 23,672 Total weighted balances of risk-adjusted assets(2) 331,539 318,701 324,772

% 3. Ratio of capital to risk components Ratio of common equity Tier 1 capital to risk components 11.05% 11.21% 11.26% Ratio of Tier 1 capital to risk components 11.35% 11.59% 11.64% Ratio of total capital to risk components 14.06% 14.90% 14.64% Minimum common equity Tier 1 capital ratio required by the Banking Supervision Department(3) 10.23% 10.20% 10.23% Minimum total capital ratio required by the Banking Supervision Department(3) 13.73% 13.70% 13.73%

(1) The data are presented in accordance with Proper Conduct of Banking Business Directive 202, “Capital Measurement and Adequacy – Supervisory Capital,” and in accordance with the transitional directives established in Proper Conduct of Banking Business Directive 299. The data also include adjustments in respect of the efficiency plan, established based on the letter of the Banking Supervision Department of January 12, 2016, “Improvement of the operational efficiency of the banking system in Israel” (hereinafter: Efficiency Plan Adjustments), allocated in equal parts over five years, beginning in 2017. For additional details regarding the effect of the transitional directives and Efficiency Plan Adjustments, see section F below. (2) A total of NIS 800 million as at March 31, 2018, NIS 853 million as at December 31, 2017, and NIS 1,013 million as at March 31, 2017, was deducted from the total weighted balances of risk-adjusted assets, due to Efficiency Plan Adjustments, which, in accordance with the approval of the Banking Supervision Department, are allocated gradually over five years, beginning in 2017. (3) The minimum required common equity Tier 1 capital ratio and the minimum required total capital ratio are 10% and 13.5%, respectively. A capital requirement at a rate representing 1% of the balance of housing loans at the dates of the financial statements was added to these ratios.

153 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 9 Capital, Capital Adequacy, Leverage, and Liquidity (continued)

D. Capital adequacy in consolidated data (continued)

March 31, March 31, December 31, 2018 2017 2017 Unaudited Audited % 4. Significant subsidiaries Isracard Ratio of common equity Tier 1 capital to risk components 19.80% 19.17% 19.83% Ratio of Tier 1 capital to risk components 19.80% 19.17% 19.83% Ratio of total capital to risk components 20.86% 20.23% 20.89% Minimum common equity Tier 1 capital ratio required by the Banking Supervision Department(1) 8.00% 8.00% 8.00% Minimum total capital ratio required by the Banking Supervision Department(1) 11.50% 11.50% 11.50% Bank Hapoalim Switzerland(3) Ratio of common equity Tier 1 capital to risk components 22.69% 24.25% 15.93% Ratio of Tier 1 capital to risk components 22.69% 24.25% 15.93% Ratio of total capital to risk components 22.77% 24.32% 16.00% Minimum common equity Tier 1 capital ratio required by local regulation 8.00% 8.00% 8.00% Minimum total capital ratio required by local regulation 11.20% 11.20% 11.20%

Basel 2(2) Bank Pozitif(3) Ratio of Tier 1 capital to risk components 29.04% 22.98% 25.56% Ratio of total capital to risk components 29.04% 23.36% 25.81% Minimum total capital ratio required by local regulation 12.00% 12.00% 12.00%

(1) The required rates are in accordance with Proper Conduct of Banking Business Directive 472, which includes a relief for clearers with respect to shareholders’ equity requirements, and have been in effect since June 2016. (2) Bank Pozitif has not implemented the Basel 3 directives; the data are therefore presented according to the Basel 2 directives. (3) As reported to the local regulator.

154 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 9 Capital, Capital Adequacy, Leverage, and Liquidity (continued) NIS millions

E. Capital components for the calculation of the capital ratio

March 31, March 31, December 31, 2018 2017 2017 Unaudited Audited Common equity Tier 1 capital Total capital 36,216 35,078 36,004 Differences between total capital and common equity Tier 1 capital )83( )11( 24 Total common equity Tier 1 capital, before supervisory adjustments and deductions 36,133 35,067 36,028 Supervisory adjustments and deductions: Deferred tax assets )40( )35( )32( Investments in capital of financial corporations not consolidated in the reports to the public - - - Other supervisory adjustments and deductions – common equity Tier 1 capital )28( )25( )24( Total supervisory adjustments and deductions, before Efficiency Plan Adjustments – common equity Tier 1 capital )68( )60( )56( Total Efficiency Plan Adjustments – common equity Tier 1 capital* 572 724 610 Total common equity Tier 1 capital, after supervisory adjustments and deductions 36,637 35,731 36,582 Additional Tier 1 capital Additional Tier 1 capital – instruments, before deductions 977 1,221 1,221 Additional Tier 1 capital – total deductions - - - Total additional Tier 1 capital, after deductions 977 1,221 1,221 Total Tier 1 capital, after supervisory adjustments and deductions 37,614 36,952 37,803 Tier 2 capital Tier 2 capital – instruments, before deductions 5,228 6,913 6,028 Tier 2 capital – allowance for credit losses, before deductions 3,788 3,625 3,700 Total Tier 2 capital, before deductions 9,016 10,538 9,728 Deductions: Total deductions – Tier 2 capital - - - Total Tier 2 capital 9,016 10,538 9,728 Total overall capital 46,630 47,490 47,531

* The Efficiency Plan Adjustments, established in accordance with the letter of the Banking Supervision Department of January 12, 2016, on the subject “Improving the operational efficiency of the banking system in Israel,” are allocated in equal parts over five years, beginning in 2017.

155 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 9 Capital, Capital Adequacy, Leverage, and Liquidity (continued)

F. Effect of transitional directives and Efficiency Plan Adjustments on the common equity Tier 1 capital ratio

March 31, March 31, December 31, 2018 2017 2017 Unaudited Audited % Ratio of capital to risk components Ratio of common equity Tier 1 capital to risk components before the effect of the transitional directives in Directive 299 and before the effect of the Efficiency Plan Adjustments 10.85% 10.91% 11.01% Effect of the transitional directives - 0.04% 0.04% Ratio of common equity Tier 1 capital to risk components before the effect of the Efficiency Plan Adjustments 10.85% 10.95% 11.05% Effect of Efficiency Plan Adjustments* 0.20% 0.26% 0.21% Ratio of common equity Tier 1 capital to risk components 11.05% 11.21% 11.26%

* The Efficiency Plan Adjustments, established in accordance with the letter of the Banking Supervision Department of January 12, 2016, on the subject “Improving the operational efficiency of the banking system in Israel,” are allocated in equal parts over five years, beginning in 2017.

G. Capital components subject to volatility The Bank manages its capital-adequacy ratio with the aim of complying with the minimum capital requirements of the Banking Supervision Department. The capital of the Bank and the volume of risk-adjusted assets are subject to changes, due to the following factors, among others: • Actuarial changes resulting from changes in the interest rate for the calculation of the Bank’s liabilities, or other actuarial assumptions, such as mortality and departure rates. • Effects of changes in the interest rate on capital reserves from securities available for sale. • Effects of changes in the CPI and in exchange rates on asset balances.

Scale of effect of a decrease in capital and an increase in risk-adjusted assets on the common equity Tier 1 capital ratio as at March 31, 2018

Effect of decrease Effect of increase of of NIS 100 million NIS 1 billion in total in common equity risk-adjusted assets Tier 1 capital % Bank in consolidated data )0.03%( )0.03%( Isracard )0.71%( )1.32%(

156 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 9 Capital, Capital Adequacy, Leverage, and Liquidity (continued)

H. Capital adequacy target Pursuant to the circular of the Banking Supervision Department concerning minimum capital ratios, the Bank, as a banking corporation of significant importance (a banking corporation whose total balance sheet assets on a consolidated basis constitute at least 20% of the total balance sheet assets of the banking system in Israel), is required to maintain a minimum common equity Tier 1 capital ratio of 10%, and a minimum total capital ratio of 13.5%, beginning January 1, 2017. In addition, beginning January 1, 2015, a capital requirement was added to these minimum ratios at a rate representing 1% of the balance of housing loans at the dates of the financial statements. This requirement was implemented gradually, over eight quarters, up to January 1, 2017. Accordingly, the minimum common equity Tier 1 capital ratio and the minimum total capital ratio of the Bank required by the Banking Supervision Department, on a consolidated basis, based on data as at March 31, 2018, stand at 10.23% and 13.73%, respectively. Pursuant to a resolution of the Board of Directors of the Bank, the common equity Tier 1 capital ratio stands at 10.75% as of December 31, 2017.

I. Capital requirements in respect of debts secured by residential properties On March 15, 2018, the Banking Supervision Department issued an update of Proper Conduct of Banking Business Directive 203 concerning debts secured by residential properties, pursuant to which loans fully secured by mortgages on residential properties at a financing rate higher than 60% would be weighted at a rate of 60%. The directive took effect on the date of its publication, and applies to loans secured by residential properties granted as of March 15, 2018.

J. Improving operational efficiency The effect of the costs of the efficiency plan on capital-adequacy ratios, estimated at approximately 0.2% as at March 31, 2018, are being allocated in equal parts over five years, beginning in 2017. In June 2017, the Banking Supervision Department issued a letter entitled, “Improving the operational efficiency of the banking system in Israel – efficiency in the area of real estate,” which encourages banking corporations to also examine, in addition to improved efficiency in personnel expenses, the possibility of reducing real-estate and maintenance costs of headquarters and management units, including through a reexamination of the geographical location of such units (hereinafter: “Real-Estate Efficiency”). In order to encourage the implementation of a plan for Real-Estate Efficiency, the Banking Supervision Department will approve reliefs for the banks in the area of capital adequacy. Pursuant to the additional letter, the term of the original letter has been extended until June 30, 2018.

157 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 9 Capital, Capital Adequacy, Leverage, and Liquidity (continued)

K. Private offering of contingent convertible (CoCo) notes and bonds Within a facility approved by the Board of Directors of the Bank for raising debt instruments and secondary capital in the amount of NIS 6 billion in 2018, on April 26, 2018, Hapoalim Hanpakot (a wholly owned subsidiary that serves as the issuance arm of the Bank) performed a private offering for institutional investors of subordinated notes with a loss-absorption mechanism, in accordance with Proper Conduct of Banking Business Directive 202, which will constitute part of the Tier 2 capital of the Bank, linked to the CPI and bearing annual interest at a rate of 1.42%, with principal in a total amount of approximately NIS 1.06 billion, maturing in 2028. Hapoalim Hanpakot will be permitted to list the aforesaid subordinated notes for trading on the primary list on the stock exchange. Until the date of listing on the primary list on the stock exchange, if performed, the subordinated notes will bear annual interest at the rate noted above, plus an annual rate of 0.2%.

L. Leverage ratio The Bank applies Proper Conduct of Banking Business Directive 218, “Leverage Ratio” (hereinafter: the “Directive”). The Directive establishes a simple, transparent, non-risk-based leverage ratio, which serves as a reliable measurement complementary to risk-based capital requirements, and which is designed to limit the accumulation of leverage at banking corporations. The leverage ratio is expressed as a percentage, and is defined as the ratio of the capital measurement to the exposure measurement. Capital, for the purpose of measurement of the leverage ratio, is Tier 1 capital, as defined in Proper Conduct of Banking Business Directive 202, taking into consideration the transitional arrangements that have been established. The total exposure measurement is the total of balance sheet exposures, exposures to derivatives and to securities financing transactions, and off-balance sheet items. Pursuant to the Directive, banking corporations shall maintain a leverage ratio of no less than 5% on a consolidated basis. Banking corporations whose total balance sheet assets on a consolidated basis constitute 20% or more of the total balance sheet assets in the banking system shall maintain a leverage ratio of no less than 6%. Based on the foregoing, the minimum required leverage ratio for the Bank is 6%. The leverage ratio of the Bank and of significant subsidiaries in Israel is calculated according to Proper Conduct of Banking Business Directive 218, “Leverage Ratio.” The leverage ratio of banking subsidiaries overseas is stated according to the regulatory directives and required ratios in each jurisdiction, where applicable.

158 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 9 Capital, Capital Adequacy, Leverage, and Liquidity (continued)

L. Leverage ratio (continued)

March 31, March 31, December 31, 2018 2017 2017 Unaudited Audited NIS millions a. Consolidated data Tier 1 capital* 37,614 36,952 37,803 Total exposures* 509,845 506,326 513,037

% Leverage ratio 7.38% 7.30% 7.37% Minimum leverage ratio required by the Banking Supervision Department 6.00% 6.00% 6.00% b. Significant subsidiaries Isracard Leverage ratio 12.37% 11.86% 12.52% Minimum leverage ratio required by the Banking Supervision Department 5.00% 5.00% 5.00% Bank Hapoalim Switzerland** Leverage ratio 7.65% 10.40% 7.04% Bank Pozitif Leverage ratio 22.60% 18.96% 14.29% Minimum required leverage ratio according to local regulation 3.00% 3.00% 3.00%

* These data also include Efficiency Plan Adjustments, established based on the letter of the Banking Supervision Department of January 12, 2016, “Improvement of the operational efficiency of the banking system in Israel.” The effect of the costs of the efficiency plan on the leverage ratio as at March 31, 2018, estimated at approximately 0.12%, is allocated in equal parts over five years, beginning in 2017. ** Local regulation in Switzerland does not impose a minimum leverage ratio requirement.

Effect of decrease Effect of increase of NIS 100 million of NIS 1 billion in in Tier 1 capital total exposures % c. Effects on the leverage ratio as at March 31, 2018 Bank in consolidated data )0.02%( )0.01%( Isracard )0.45%( )0.53%(

159 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 9 Capital, Capital Adequacy, Leverage, and Liquidity (continued)

M. Liquidity coverage ratio The Bank calculates its stand-alone and consolidated liquidity ratios daily, with a division into NIS and foreign currency, and monitors this ratio at its subsidiaries (which are required to comply with internal liquidity limits adapted to the nature of their activity). These ratios are reported as an average of the daily observations. The number of observations used to calculate the averages in the reported quarter is 62. Credit-card companies are exempt from independent calculations, but are included in the consolidated data.

For the three For the three For the three months ended months ended months ended March 31, March 31, 2017 December 31, 2018 2017 % a. Consolidated data(1) Liquidity coverage ratio 119% 128% 122% Minimum liquidity coverage ratio required by the Banking Supervision Department 100% 100% 100% b. Bank data(2) Liquidity coverage ratio 116% 122% 120% Minimum liquidity coverage ratio required by the Banking Supervision Department 100% 100% 100% c. Significant subsidiaries* Bank Hapoalim Switzerland Liquidity coverage ratio according to local regulation 207% 226% 200% Minimum liquidity coverage ratio required by local regulation** 90% 80% 80%

* At this stage, credit-card companies are not required to comply with the circular, and shall continue to fulfill the requirements of Proper Conduct of Banking Business Directive 342. At a later date, credit-card companies will be required to comply with a supervisory quantitative model adapted to the characteristics of their operations. Bank Pozitif is not subject to a liquidity coverage ratio directive in Turkey. ** The minimum required liquidity coverage ratio according to local regulation is increasing by 10% annually, up to 100% in 2019. (1) Beginning January 1, 2017, the consolidated ratio is calculated on a daily basis, and reported as the average of the daily observations. (2) The stand-alone ratio of the banking corporation is calculated on a daily basis, and reported as the average of the daily observations. Pursuant to the file of questions and answers published by the Bank of Israel on September 29, 2016, concerning inclusion in the stand-alone reporting of a banking corporation, with regard to subsidiaries that hold liquid assets for the corporation, as of July 1, 2017, the calculation of the stand-alone liquidity coverage ratio includes these subsidiaries.

160 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 10 Contingent Liabilities and Special Commitments NIS millions

A. Contingent liabilities and other special commitments

March 31 December 31 2018 2017 2017 Unaudited Audited (1) Commitment to purchase securities 374 440 397 (2) Construction and acquisition of buildings and equipment 35 58 4 (3) Long-term rent contracts – rent for buildings and equipment in commitments payable in future years: First year 154 161 154 Second year 144 160 148 Third year 120 140 121 Fourth year 110 108 110 Fifth year 102 98 102 Over five years 573 539 576 Total rent on buildings and equipment 1,203 1,206 1,211

(4) Credit selling activity The following table summarizes the credit selling activity of the Bank:

For the three months ended For the March 31 year ended December 31 2018 2017 2017 Unaudited Audited Book value of credit sold 101 186 186 Consideration received in cash 119 190 190 Total net profit (loss) from sale of credit 18 4 4

161 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 10 Contingent Liabilities and Special Commitments (continued)

B. Legal Claims The Bank Group (the Bank and its consolidated subsidiaries) is a party to legal proceedings, including petitions to certify class actions, taken against it by its customers, former customers, and various third parties, who deem themselves injured or harmed by the Bank Group’s operations during the normal course of its business. The causes of the claims against the Bank Group are varied and wide-ranging. In the opinion of the Bank’s Board of Management, based on legal opinions with regard to the likely outcome of pending claims, including petitions to certify class actions, the financial statements include sufficient provisions, in accordance with generally accepted accounting principles, to cover possible damages resulting from all claims, where such provisions are necessary. The additional exposure in respect of claims filed against the Bank Group on various matters, as at March 31, 2018, that have a “reasonably possible” probability of materialization amounts to approximately NIS 165 million. a. For details concerning claims and petitions to certify claims as class actions in material amounts, see Note 25C(a) to the Financial Statements as at December 31, 2017 (hereinafter: the “2017 Annual Note”). As at the date of publication of the Financial Statements, there have been no material changes with regard to claims against the Bank Group relative to the description in the 2017 Annual Note, with the exceptions noted below: 1. With regard to the claim described in Section 7 of the 2017 Annual Note, a mediation proceeding between the parties began in May 2018. 2. In April 2018, a schedule was established for resolution of an appeal proceeding opened at the District of Columbia Court of Appeals in the United States regarding a verdict of the Federal Court of Washington DC, which dismissed the claim filed by several Palestinian claimants against a long list of defendants, including the Bank. According to the claimants, the claim concerns the activities of Israel in East Jerusalem, in the Judea and Samaria region, and in the Gaza Strip, and assistance granted by the defendants for these activities. With respect to the Bank, the allegation is that this assistance takes the form, among other matters, of monetary transfers performed through the Bank’s branches in the United States, financing of activity in Judea and Samaria, etc. The Bank has not yet been informed of the arguments in the appeal of the original claimants. The dismissed claim was in the amount of USD 1 billion, against all of the defendants. 3. In March 2018, an appeal was filed with the Supreme Court of the verdict of the District Court denying the petitions to file class actions against several banks and credit-card companies (including Isracard and Poalim Express), described in Section 6 and Section 8 of the 2017 Annual Note, concerning excessive collection of fees in foreign-currency conversion and sending activities. The amount of the appeal has been determined to be NIS 11 billion. 4. With regard to the petition to file a class action described in Section 2 of the 2017 Annual Note, filed against five banks, including the Bank, concerning the fee charged for transfers of foreign currency, the court denied the petition in March 2018. 5. With regard to the appeal to the Supreme Court described in Section 10 of the 2017 Annual Note, filed concerning a verdict denying a petition to file a class action against three banks, including the Bank, regarding compound interest charged for housing loans, the appeal was denied in March 2018.

162 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 10 Contingent Liabilities and Special Commitments (continued)

B. Legal Claims (continued) b. Also pending against the Bank Group are claims, including petitions to certify class actions, as detailed below, the probable outcome of which cannot be assessed at this stage, in the opinion of the Bank’s Board of Management, based on legal opinions; accordingly, no provision has been made in respect thereof: 1. A claim statement and a petition to certify the claim as a class action were filed against the Bank and an additional bank with the Center-Lod District Court on May 7, 2018. The claim does not state an amount, but the claimant estimates that the amount is high, at a level of millions of NIS or possible more. The petition concerns the allegation that the Bank charges a fee for deposits of postdated checks using self-service devices or smartphone applications based on the fee for deposits of postdated checks at a teller station, whereas it should charge a fee based on the price for a deposit of a postdated check through transmission, the rate of which is lower. 2. A claim statement and a petition to certify the claim as a class action were filed against the Bank with the Center-Lod District Court on May 1, 2018. The claim does not specify an amount, but the petitioner estimates that the amount of the claim is greater than NIS 2.5 million. The petition concerns a fee charged by the Bank for printing or producing documents that exist in the computerized database of the Bank at the request of the customer, in contradiction of the law and of the Bank’s fee list. 3. A claim statement and a petition to certify the claim as a class action were filed against the Bank and against Isracard Ltd. and Poalim Express Ltd., both subsidiaries of the Bank (hereinafter, jointly: the “Defendants”), with the Central District Court on December 4, 2017. The amount of the claim noted in the claim statement is NIS 180 million. The petition concerns the allegation that in December 2013, the Defendants raised the rate of the card fee for customers of the Bank by changing the categories of discounts and exemptions from card fees, in bad faith, gaining unjust enrichment. 4. A claim statement and a petition to certify the claim as a class action were filed against the Bank with the Center-Lod District Court on June 27, 2017. The claim does not state an amount. The petition concerns the allegation that the Bank collected a financing fee in an illegal manner from individuals or small businesses when it calculated this fee as a percentage of the total cost of construction of a residence plus the cost of the land, instead of as a percentage of the amount of credit extended to the customer by the Bank. In a hearing held on February 13, 2018, the court ruled to accept the position of the Supervisor of Banks regarding the dispute between the parties.

163 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 10 Contingent Liabilities and Special Commitments (continued)

C. During 2011, following a notification from the Swiss authorities to Bank Hapoalim (Switzerland) Ltd. (hereinafter: “Hapoalim Switzerland”) that a number of Swiss banks, including Hapoalim Switzerland, were under investigation by the United States authorities in relation to a suspicion or concern of assistance to American customers in evading taxes from the United States authorities, Hapoalim Switzerland provided statistical information to the Swiss authorities regarding its business dealings with American customers, in order for this information to be conveyed to the United States authorities. On August 29, 2013, it was announced that the United States and Swiss authorities had reached an agreement (the “Swiss Arrangement”), whereby Category 2 Swiss banks who would elect to join the Swiss Agreement and to comply with its terms (including the payment of a fine and the submission of extensive information regarding the accounts of their American customers, funds received from other banks, and more) will not be prosecuted in the United States in connection with the matters covered by the arrangement. The Swiss Arrangement defines “Category 2” as a category relating to banks that are not under investigation and can join the arrangement and sign a Non-Prosecution Agreement. On the same day, the U.S. Department of Justice sent a letter to Hapoalim Switzerland’s counsel notifying it that, pursuant to the provisions of the arrangement, Hapoalim Switzerland would not be included in the Swiss Arrangement, as it is subject to an investigation. The aforementioned letter did not specify any claims or demands whatsoever. Starting from the beginning of 2015, following demands and requests received at the Bank from the U.S. Department of Justice (DOJ), the New York Department of Financial Services (the NYDFS), and the Federal Reserve, the Bank Group, assisted by its legal counsels, has provided the aforesaid United States authorities with data, information, and documents from the Bank Group in relation to the activities of the Bank Group vis à vis its American customers, to the extent possible and permitted by law. The investigation and the information and document gathering, as well as the update and validation of the quantitative database of the American customers of the Bank and of Hapoalim Switzerland (including the branch in Luxembourg, and the branch in Singapore which was closed in 2012), have not yet been completed. As part of the investigation quantitative data and information about American customers of the Bank and of Hapoalim Switzerland were provided to the United States authorities, even though the update of the database has not yet been completed. Moreover, at the request of the DOJ, the quantitative data, the methodology, and the investigation methods undertaken by the Bank Group are being examined and validated in parallel by third parties (Independent Examiner). This process has also not been completed. At this stage, as the investigation of the United States authorities has not ended, no agreement has yet been reached with the United States authorities regarding the type, character, and format of the resolution or resolutions that might be reached (if reached), including whether there will be a comprehensive resolution for the Bank Group or whether there will be separate and different resolutions for the Bank and for Hapoalim Switzerland. There is a range of possibilities for the level of severity of resolutions and the level of culpability for offenses under United States laws that Bank Hapoalim and Hapoalim Switzerland will be required to assume in the framework of the resolution or resolutions (if reached). Such resolution or resolutions with the DOJ may be in the form of a Non-Prosecution Agreement, Deferred Prosecution Agreement, or Plea Agreement. An array of considerations may adversely affect the resolution or resolutions (if reached), including possible arguments with respect to certain activities of former senior employees of Hapoalim Switzerland that have emerged in the framework of the investigation, the nature and scope of the cooperation with the DOJ, and the findings with respect to the severity of the acts and the scope of the activities.

164 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 10 Contingent Liabilities and Special Commitments (continued)

At this stage, negotiations have not yet commenced between representatives of the Bank and the United States authorities regarding the amounts that the Bank Group will be required to pay to the United States authorities in the framework of the possible resolution or resolutions with them and the methodologies for calculating such amounts have not yet been defined. Therefore, it is not possible to know at this stage whether the calculation of some of the elements of a possible resolution will be based on the methodology set forth in the United States Sentencing Guidelines or whether, alternatively, based on the methodology implemented in resolutions under Category 2 of the Swiss Arrangement (which, to the best of the Bank’s knowledge, was not previously implemented in relation to financial institutions in respect of activities outside of Switzerland). Also, the criteria for determining the population of customers in respect of which the Bank Group may be required to make payments to the United States authorities have not yet been agreed upon, and neither have the elements on which a calculation of the payments will be based under a possible resolution with regard to the relevant customer population. The elements on which resolutions in similar cases with the DOJ have been based include, inter alia, a payment element in respect of the amount of the tax loss caused to the United States tax authorities in respect of American customers (hereinafter: the “Tax Loss Element”), the element of the income derived to the Bank Group from American customers (hereinafter: the “Income from American Customers Element”), and a punitive fine element (hereinafter: the “Fine Element”). Even though these are separate and different elements under United States law, to the best of the Bank’s knowledge, there is certain interplay between them, which makes it difficult to predict which elements will be included in any future resolution, to the extent reached. Moreover, an assessment of the public information available in relation to resolutions in relation to similar DOJ cases with other banks that were not eligible to be included in Category 2 of the Swiss Arrangement reveals considerable variation between the methodologies implemented in each resolution, which makes it difficult to rely on these resolutions in order to determine the methodologies that will be used to calculate the amounts that the Bank Group will be required to pay the DOJ. Before the American customers database is fully updated and validated and agreements are reached with the United States authorities regarding the criteria for determining the population of customers relevant for the calculation, the periods relevant for the calculation, the elements of calculation, and the calculation methods, the Bank Group and its legal counsel are unable to reasonably estimate the extent or range of the exposure. Nevertheless, as emerges from the resolutions of other banks and from conversations that have been held with the DOJ during recent months during which certain aspects relating to the method of calculating the amounts that the Bank Group may be required to pay were discussed, concurrent to the data and information gathering process, which is still underway, the Bank estimates that the amounts that the Bank Group will be required to pay the DOJ will include, at least, restitution of the amounts of the Tax Loss Element caused to the United States tax authorities by certain American customers who received certain services from the Bank Group (for example, inter alia, coded accounts, back-to-back loans, or accounts held by companies incorporated in off-shore jurisdictions). The provision included by the Bank in its statements is based on this element and was calculated based on the quantitative information available to the Bank Group in respect of these customers, as of the date of publication of the financial statements. The information on the basis of which the provision was made is still subject to update and validation. Therefore, it is possible that the Bank Group will be required to make payments also in respect of additional American customers. Nevertheless, it is possible that the arguments of the Bank Group in relation to certain customers will be accepted and that they will be excluded from the population relevant for the payment.

165 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 10 Contingent Liabilities and Special Commitments (continued)

The provision included in the financial statements in relation to the DOJ exposure relates to the Tax Loss Element only (which, in the estimation of the Bank, is higher than the amount of the Income from American Customers Element) and does not include a punitive Fine Element or an Income from American Customers Element. The provision is also not based on the possibility of the Category 2 formula being implemented in relation to the activities of Hapoalim Switzerland in Switzerland. The financial implication of adding all or some of these elements or of the implementation of the aforementioned formula could be significant. Even though the Bank estimates that it is likely to also pay amounts to the NYDFS in the framework of a resolution with the NYDFS, once reached, and it is possible that these amounts will be significant, at this stage the Bank Group and its legal counsels do not know to reasonably estimate the extent of the exposure in this regard. During the period since the publication of the Annual Financial Statements of the Bank for 2017, the Bank Group has continued to update and improve the quantitative database of the American customers of the Bank and of Hapoalim Switzerland. Based on the foregoing and on the updated quantitative information regarding the American customers population available to the Bank Group as of the date of publication of this statement – information that is subject to update and validation, as mentioned – the Bank increased the provision in relation to the exposure stemming from the investigation of the United States authorities by approximately USD 17 million (approximately NIS 60 million) during the first quarter of 2018, and this was added to the previous provisions totaling approximately USD 348 million. Accordingly, as of March 31, 2018, the total provision in this regard is equal to an amount of approximately USD 365 million (approximately NIS 1,283 million). This amount also includes a provision in respect of exposure to the amounts towards other United States authorities (that are not the DOJ) in an amount of 30% of the provision in connection with the DOJ. This, in accordance with instruction provided to the Bank by the Supervision of Banks in relation to the Bank’s financial statements for December 31, 2016, after the Supervision of Banks assessed the relevant circumstances and for reasons of professional conservatism. At this stage, based, among others, on the position of its legal and professional counsels, the Bank is unable to reasonably estimate the extent or range of the exposure in this regard, both on the financial level and on the level of other possible implications. Nevertheless, the Bank estimates that the total aggregate exposure is greater than the amount of the provision included by the Bank in its statements, such that the total amounts that the Bank Group will pay in the framework of resolutions (if any) with the United States authorities will be significantly higher than the amount of the provision, even though it is unable, as mentioned above, to estimate these amounts. In accordance with the accounting principles applying to the Bank, in order to include the provision in the financial statements, the Bank Group ran a number of scenarios in relation to the loss expected to arise from the investigation. Since the Bank is unable to determine which of these scenarios constitutes the best estimate of the expected loss, the provision included by the Bank was calculated on the basis of the minimum one of the aforementioned scenarios based on the quantitative information available to the Bank Group as of the date of publication of this statement. It is emphasized that the legal counsels of the Bank are unable to assess the probability of any of the scenarios, which were run, as aforementioned, for accounting reasons for the purpose of including a provision in the statements, and other scenarios may also be possible. It is also possible that, in the framework of a resolution with the United States authorities, the Bank Group will be allowed to exclude certain customers from the population relevant for payments or make other deductions to the payment amount. Such exclusions or deductions were not implemented in the calculation of the provision, as well as possible additions to the relevant population.

166 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 10 Contingent Liabilities and Special Commitments (continued)

It is emphasized that including the provision or specifying the level of the exposure, as aforementioned, does not constitute admission of any claim that may be directed at the Bank Group by the United States authorities or by any other party.

D. During 2015, the Department of Justice in the United States filed an indictment with the Federal Court in New York, charging high-ranking officials of the Fédération Internationale de Football Association (FIFA) and others with allegations of committing bribery, fraud, and related offenses. A superseding indictment was published in December 2015, replacing the original indictment. According to the original indictment and the superseding indictment, certain defendants held accounts at Bank Hapoalim (Switzerland) Ltd. and executed financial transactions allegedly related to the affair in these accounts. According to reports, as part of this affair, the American authorities are also investigating various financial institutions. As part of this process, the DOJ is investigating whether the Bank Group violated criminal statutes relating to fraud and money laundering in connection with bank accounts held at the Bank Group by certain defendants involved in the affair. Within this framework, the Bank was served with orders for discovery of documents and other various requests for data and information. Subject to the directives of the relevant laws that apply to the various entities within the Bank Group, information and documents with a significant volume were submitted to the authorities. The United States Department of Justice also conducted interviews with some employees of the Bank. The Bank Group is making significant progress in an internal investigation that it is performing in connection with this matter, through external attorneys, and is cooperating with the authorities. According to the opinion of the legal advisors of the Bank Group, at this stage it is not possible to estimate whether the Bank Group will bear any liability on the criminal, civil, or regulatory plane with regard to this matter; accordingly, no provision was included in the financial statements.

E. Variable interest entities (VIE) The Bank supplies liquidity lines to securitization entities in which third parties serve as the sponsors. The lines supplied by the Bank constitute a relatively small share of the total liquidity lines of these securitization entities. The Bank does not supply credit reinforcement to these entities. The total liquidity lines supplied to securitization entities, as described above, as at March 31, 2018, amounted to NIS 176 million (USD 50 million), compared with NIS 173 million (USD 50 million) at the end of 2017. No withdrawals were performed on any of these lines up to March 31, 2018. Taking into consideration the fact that the Bank usually supplies a relatively small share of the total liquidity lines to these securitization entities and does not provide them with other types of support, the Bank has determined that it does not hold variable interests that would make it the primary beneficiary in any VIE of these securitization entities.

167 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Unaudited and Maturity Dates NIS millions

A. Nominal amount of derivative instruments

March 31, 2018 Interest contracts Foreign-currency Share-related Commodity Total contracts contracts and other NIS-CPI Other contracts 1. Hedging derivatives* Forward contracts - - 1,731 - - 1,731 Swaps - 8,441 - - - 8,441 Total hedging derivatives - 8,441 1,731 - - 10,172 Of which: interest-rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 6,302 - - - 6,302

2. ALM derivatives*,** Future contracts - 141 - - - 141 Forward contracts 21,488 15,700 156,071 - 157 193,416 Other option contracts: Options written - 31,305 19,685 2,646 320 53,956 Options bought - 30,145 18,898 881 288 50,212 Swaps 8,018 718,919 44,361 10,932 - 782,230 Total ALM derivatives 29,506 796,210 239,015 14,459 765 1,079,955 Of which: interest-rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate 7,250 360,149 - - - 367,399

* Excluding credit derivatives and foreign currency spot swap contracts. ** Derivatives constituting part of the asset and liability management system of the Bank, which are not designated for hedging.

168 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Unaudited and Maturity Dates (continued) NIS millions

A. Nominal amount of derivative instruments (continued)

March 31, 2018 Interest contracts Foreign-currency Share-related Commodity Total contracts contracts and other NIS-CPI Other contracts 3. Other derivatives* Future contracts - - - 10,039 - 10,039 Option contracts traded on the stock exchange: Options written - - 4,425 10,283 - 14,708 Options bought - - 4,425 10,283 - 14,708 Swaps - 61 - - - 61 Total other derivatives - 61 8,850 30,605 - 39,516 Of which: interest-rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 61 - - - 61

4. Credit derivatives and foreign-currency spot swap contracts Credit derivatives for which the banking corporation is a guarantor - - - - 123 123 Credit derivatives for which the banking corporation is a beneficiary - - - - 50 50 Foreign-currency spot swap contracts - - 13,202 - - 13,202 Total nominal amount 29,506 804,712 262,798 45,064 938 1,143,018

* Excluding credit derivatives and foreign currency spot swap contracts.

169 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Unaudited and Maturity Dates (continued) NIS millions

A. Nominal amount of derivative instruments (continued)

March 31, 2017 Interest contracts Foreign-currency Share-related Commodity Total contracts contracts and other NIS-CPI Other contracts 1. Hedging derivatives* Forward contracts - - 2,465 - - 2,465 Swaps - 8,936 - - - 8,936 Total hedging derivatives - 8,936 2,465 - - 11,401 Of which: interest-rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 6,286 - - - 6,286

2. ALM derivatives*,** Future contracts - 1,693 - - - 1,693 Forward contracts 19,827 20,419 140,817 - 26 181,089 Other option contracts: Options written - 48,270 20,169 3,011 250 71,700 Options bought - 47,273 20,568 1,444 234 69,519 Swaps 7,731 469,116 44,592 9,573 - 531,012 Total ALM derivatives 27,558 586,771 226,146 14,028 510 855,013 Of which: interest-rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate 6,819 239,133 - - - 245,952

* Excluding credit derivatives and foreign-currency spot swap contracts. ** Derivatives constituting part of the asset and liability management system of the Bank, which are not designated for hedging.

170 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Unaudited and Maturity Dates (continued) NIS millions

A. Nominal amount of derivative instruments (continued)

March 31, 2017 Interest contracts Foreign-currency Share-related Commodity Total contracts contracts and other NIS-CPI Other contracts 3. Other derivatives* Future contracts - - - 5,713 - 5,713 Option contracts traded on the stock exchange: Options written - - 2,959 7,955 - 10,914 Options bought - - 2,959 7,955 - 10,914 Swaps - 125 - - - 125 Total other derivatives - 125 5,918 21,623 - 27,666 Of which: interest-rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 63 - - - 63

4. Credit derivatives and foreign-currency spot swap contracts Credit derivatives for which the banking corporation is a guarantor - - - - 127 127 Credit derivatives for which the banking corporation is a beneficiary - - - - 50 50 Foreign-currency spot swap contracts - - 11,641 - - 11,641 Total nominal amount 27,558 595,832 246,170 35,651 687 905,898

* Excluding credit derivatives and foreign-currency spot swap contracts.

171 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Audited and Maturity Dates (continued) NIS millions

A. Nominal amount of derivative instruments (continued)

December 31, 2017 Interest contracts Foreign-currency Share-related Commodity Total contracts contracts and other NIS-CPI Other contracts 1. Hedging derivatives* Forward contracts - - 2,076 - - 2,076 Swaps - 9,922 - - - 9,922 Total hedging derivatives - 9,922 2,076 - - 11,998 Of which: interest-rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 7,843 - - - 7,843

2. ALM derivatives*,** Future contracts - 3,221 - - - 3,221 Forward contracts 23,371 14,065 140,233 - 157 177,826 Other option contracts: Options written - 20,752 14,212 2,712 193 37,869 Options bought - 19,689 14,230 941 176 35,036 Swaps 8,580 598,078 42,737 9,073 - 658,468 Total ALM derivatives 31,951 655,805 211,412 12,726 526 912,420 Of which: interest-rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate 7,757 298,671 - - - 306,428

* Excluding credit derivatives and foreign-currency spot swap contracts. ** Derivatives constituting part of the asset and liability management system of the Bank, which are not designated for hedging.

172 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Audited and Maturity Dates (continued) NIS millions

A. Nominal amount of derivative instruments (continued)

December 31, 2017 Interest contracts Foreign-currency Share-related Commodity Total contracts contracts and other NIS-CPI Other contracts 3. Other derivatives* Future contracts - - - 10,752 - 10,752 Option contracts traded on the stock exchange: Options written - - 3,723 10,996 - 14,719 Options bought - - 3,723 10,996 - 14,719 Swaps - 59 - - - 59 Total other derivatives - 59 7,446 32,744 - 40,249 Of which: interest-rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 59 - - - 59

4. Credit derivatives and foreign-currency spot swap contracts Credit derivatives for which the banking corporation is a guarantor - - - - 121 121 Credit derivatives for which the banking corporation is a beneficiary - - - - 50 50 Foreign-currency spot swap contracts - - 10,593 - - 10,593 Total nominal amount 31,951 665,786 231,527 45,470 697 975,431

* Excluding credit derivatives and foreign-currency spot swap contracts.

173 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Unaudited and Maturity Dates (continued) NIS millions

B. Gross fair value of derivative instruments

March 31, 2018 Interest contracts Foreign-currency Share-related Commodity Total contracts contracts and other NIS-CPI Other contracts 1. Hedging derivatives* Positive gross fair value - 109 9 - - 118 Negative gross fair value - 110 11 - - 121

2. ALM derivatives*,** Positive gross fair value 424 6,535 4,224 220 14 11,417 Negative gross fair value 348 6,666 3,341 213 14 10,582

3. Other derivatives* Positive gross fair value - - 44 693 - 737 Negative gross fair value - - 45 695 - 740

4. Credit derivatives Credit derivatives for which the banking corporation is a guarantor: Positive gross fair value - - - - 1 1 Total positive gross fair value(3) 424 6,644 4,277 913 15 12,273 Fair-value amounts offset in the balance sheet ------Balance sheet balance of assets in respect of derivative instruments(1) 424 6,644 4,277 913 15 12,273 (1) Of which: balance sheet balance of assets in respect of derivative instruments not subject to a netting arrangement or similar arrangements*** 87 113 1,358 894 11 2,463

Total negative gross fair value(4) 348 6,776 3,397 908 14 11,443 Fair-value amounts offset in the balance sheet ------Balance sheet balance of liabilities in respect of derivative instruments(2) 348 6,776 3,397 908 14 11,443 (2) Of which: balance sheet balance of liabilities in respect of derivative instruments not subject to a netting arrangement or similar arrangements*** - 94 556 738 10 1,398

* Excluding credit derivatives. ** Derivatives constituting part of the asset and liability management system of the Bank, which are not designated for hedging. *** For this purpose, a netting arrangement is an arrangement that meets the legal and operational conditions established with regard to offsets in Appendix C to Proper Conduct of Banking Business Directive 203, “Capital Measurement and Adequacy.” (3) Of which, positive gross fair value of embedded derivative instruments in the amount of NIS 0 million. (4) Of which, negative gross fair value of embedded derivative instruments in the amount of NIS 7 million.

174 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Unaudited and Maturity Dates (continued) NIS millions

B. Gross fair value of derivative instruments (continued)

March 31, 2017 Interest contracts Foreign-currency Share-related Commodity Total contracts contracts and other NIS-CPI Other contracts 1. Hedging derivatives* Positive gross fair value - 44 53 - - 97 Negative gross fair value - 234 - - - 234

2. ALM derivatives*,** Positive gross fair value 428 6,346 4,461 171 11 11,417 Negative gross fair value 492 6,450 4,752 160 11 11,865

3. Other derivatives* Positive gross fair value - - 38 708 - 746 Negative gross fair value - - 38 708 - 746

4. Credit derivatives Credit derivatives for which the banking corporation is a guarantor: Positive gross fair value - - - - 2 2 Total positive gross fair value(3) 428 6,390 4,552 879 13 12,262 Fair-value amounts offset in the balance sheet ------Balance sheet balance of assets in respect of derivative instruments(1) 428 6,390 4,552 879 13 12,262 (1) Of which: balance sheet balance of assets in respect of derivative instruments not subject to a netting arrangement or similar arrangements*** - 164 760 769 7 1,700

Total negative gross fair value(4) 492 6,684 4,790 868 11 12,845 Fair-value amounts offset in the balance sheet ------Balance sheet balance of liabilities in respect of derivative instruments(2) 492 6,684 4,790 868 11 12,845 (2) Of which: balance sheet balance of liabilities in respect of derivative instruments not subject to a netting arrangement or similar arrangements*** 1 99 1,478 866 1 2,445

* Excluding credit derivatives. ** Derivatives constituting part of the asset and liability management system of the Bank, which are not designated for hedging. *** For this purpose, a netting arrangement is an arrangement that meets the legal and operational conditions established with regard to offsets in Appendix C to Proper Conduct of Banking Business Directive 203, “Capital Measurement and Adequacy.” (3) Of which, positive gross fair value of embedded derivative instruments in the amount of NIS 0 million. (4) Of which, negative gross fair value of embedded derivative instruments in the amount of NIS 30 million.

175 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Audited and Maturity Dates (continued) NIS millions

B. Gross fair value of derivative instruments (continued)

December 31, 2017 Interest contracts Foreign-currency Share-related Commodity Total contracts contracts and other NIS-CPI Other contracts 1. Hedging derivatives* Positive gross fair value - 50 57 - - 107 Negative gross fair value - 199 7 - - 206

2. ALM derivatives*,** Positive gross fair value 445 6,244 4,250 147 11 11,097 Negative gross fair value 465 6,407 4,040 137 11 11,060

3. Other derivatives* Positive gross fair value - - 41 767 - 808 Negative gross fair value - - 41 767 - 808

4. Credit derivatives Credit derivatives for which the banking corporation is a guarantor: Positive gross fair value - - - - 1 1 Total positive gross fair value(3) 445 6,294 4,348 914 12 12,013 Fair-value amounts offset in the balance sheet ------Balance sheet balance of assets in respect of derivative instruments(1) 445 6,294 4,348 914 12 12,013 (1) Of which: balance sheet balance of assets in respect of derivative instruments not subject to a netting arrangement or similar arrangements*** 90 125 797 797 9 1,818

Total negative gross fair value(4) 465 6,606 4,088 904 11 12,074 Fair-value amounts offset in the balance sheet ------Balance sheet balance of liabilities in respect of derivative instruments(2) 465 6,606 4,088 904 11 12,074 (2) Of which: balance sheet balance of liabilities in respect of derivative instruments not subject to a netting arrangement or similar arrangements*** 1 109 884 877 8 1,879

* Excluding credit derivatives. ** Derivatives constituting part of the asset and liability management system of the Bank, which are not designated for hedging. *** For this purpose, a netting arrangement is an arrangement that meets the legal and operational conditions established with regard to offsets in Appendix C to Proper Conduct of Banking Business Directive 203, “Capital Measurement and Adequacy.” (3) Of which, positive gross fair value of embedded derivative instruments in the amount of NIS 0 million. (4) Of which, negative gross fair value of embedded derivative instruments in the amount of NIS 25 million.

176 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Unaudited and Maturity Dates (continued) NIS millions

C. Credit risk in respect of derivative instruments, by contract counterparty

March 31, 2018 Stock Banks Dealers/ Governments Others Total exchanges brokers and central banks Positive gross fair value of derivative instruments(1) 56 5,661 1,594 57 4,905 12,273 Gross amounts not offset in the balance sheet: Credit risk mitigation in respect of financial instruments - )5,130( )1,364( - )1,031( )7,525( Credit risk mitigation in respect of cash collateral received - )404( )48( )53( )697( )1,202( Net total assets in respect of derivative instruments 56 127 182 4 3,177 3,546 Off-balance sheet credit risk in respect of derivative instruments(2) 263 4,311 1,637 41 4,572 10,824 Off-balance sheet credit risk mitigation - )2,295( )725( - )996( )4,016( Net off-balance sheet credit risk in respect of derivative instruments 263 2,016 912 41 3,576 6,808 Total credit risk in respect of derivative instruments 319 9,972 3,231 98 9,477 23,097 Balance sheet balance of liabilities in respect of derivative instruments(3) 359 6,257 2,369 4 2,454 11,443 Gross amounts not offset in the balance sheet: ------Financial instruments - )5,130( )1,364( - )1,031( )7,525( Net total liabilities in respect of derivative instruments 359 1,127 1,005 4 1,423 3,918

(1) Of which, positive gross fair value of embedded derivative instruments in the amount of NIS 0 million (March 31, 2017: NIS 0 million; December 31, 2017: NIS 0 million). (2) Off-balance sheet credit risk in respect of derivative instruments (including derivative instruments with negative fair value) as calculated for the purpose of restrictions on the indebtedness of a borrower. (3) Of which, negative gross fair value of embedded derivative instruments in the amount of NIS 7 million (March 31, 2017: NIS 30 million; December 31, 2017: NIS 25 million).

177 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Unaudited and Maturity Dates (continued) NIS millions

C. Credit risk in respect of derivative instruments, by contract counterparty (continued)

March 31, 2017 Stock Banks Dealers/ Governments Others Total exchanges brokers and central banks Positive gross fair value of derivative instruments(1) 47 6,741 2,057 65 3,352 12,262 Gross amounts not offset in the balance sheet: Credit risk mitigation in respect of financial instruments - )5,396( )1,690( - )714( )7,800( Credit risk mitigation in respect of cash collateral received - )942( )172( - )56( )1,170( Net total assets in respect of derivative instruments 47 403 195 65 2,582 3,292 Off-balance sheet credit risk in respect of derivative instruments(2) 1 3,787 1,448 88 3,860 9,184 Off-balance sheet credit risk mitigation - )1,770( )678( - )811( )3,259( Net off-balance sheet credit risk in respect of derivative instruments 1 2,017 770 88 3,049 5,925 Total credit risk in respect of derivative instruments 48 10,528 3,505 153 7,212 21,446 Balance sheet balance of liabilities in respect of derivative instruments(3) 439 6,116 2,379 53 3,858 12,845 Gross amounts not offset in the balance sheet: Financial instruments - )6,191( )2,060( )8( )618( )8,877( Net total liabilities in respect of derivative instruments 439 )75( 319 45 3,240 3,968

(1) Of which, positive gross fair value of embedded derivative instruments in the amount of NIS 0 million (March 31, 2017: NIS 0 million; December 31, 2017: NIS 0 million). (2) Off-balance sheet credit risk in respect of derivative instruments (including derivative instruments with negative fair value) as calculated for the purpose of restrictions on the indebtedness of a borrower. (3) Of which, negative gross fair value of embedded derivative instruments in the amount of NIS 7 million (March 31, 2017: NIS 30 million; December 31, 2017: NIS 25 million).

178 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, Audited and Maturity Dates (continued) NIS millions

C. Credit risk in respect of derivative instruments, by contract counterparty (continued)

December 31, 2017 Stock Banks Dealers/ Governments Others Total exchanges brokers and central banks Positive gross fair value of derivative instruments(1) 79 6,019 1,872 83 3,960 12,013 Gross amounts not offset in the balance sheet: Credit risk mitigation in respect of financial instruments - )5,422( )1,600( - )626( )7,648( Credit risk mitigation in respect of cash collateral received - )407( )128( )36( )513( )1,084( Net total assets in respect of derivative instruments 79 190 144 47 2,821 3,281 Off-balance sheet credit risk in respect of derivative instruments(2) 270 3,924 1,616 82 4,074 9,966 Off-balance sheet credit risk mitigation - )2,067( )632( - )828( )3,527( Net off-balance sheet credit risk in respect of derivative instruments 270 1,857 984 82 3,246 6,439 Total credit risk in respect of derivative instruments 349 9,943 3,488 165 8,034 21,979 Balance sheet balance of liabilities in respect of derivative instruments(3) 456 6,261 2,420 44 2,893 12,074 Gross amounts not offset in the balance sheet: Financial instruments - )5,422( )1,600( - )626( )7,648( Net total liabilities in respect of derivative instruments 456 839 820 44 2,267 4,426

(1) Of which, positive gross fair value of embedded derivative instruments in the amount of NIS 0 million (March 31, 2017: NIS 0 million; December 31, 2017: NIS 0 million). (2) Off-balance sheet credit risk in respect of derivative instruments (including derivative instruments with negative fair value) as calculated for the purpose of restrictions on the indebtedness of a borrower. (3) Of which, negative gross fair value of embedded derivative instruments in the amount of NIS 7 million (March 31, 2017: NIS 30 million; December 31, 2017: NIS 25 million).

179 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, NIS millions and Maturity Dates (continued)

D. Details of maturity dates (nominal value amounts)

March 31, 2018 Up to Over 3 months Over 1 year Over Total 3 months up to 1 year up to 5 years 5 years Unaudited Interest contracts NIS-CPI 5,421 6,039 10,933 7,113 29,506 Other 91,652 168,424 415,244 129,392 804,712 Foreign-currency contracts 151,955 68,406 24,744 17,693 262,798 Share-related contracts 29,837 11,866 3,361 - 45,064 Commodity and other contracts (including credit derivatives) 582 244 112 - 938 Total 279,447 254,979 454,394 154,198 1,143,018

March 31, 2017 Unaudited Total 253,997 246,448 277,650 127,803 905,898

December 31, 2017 Audited Total 262,969 170,469 412,913 129,080 975,431

E. Derivative financial instruments – risk control (1) The Bank executes transactions in derivative financial instruments as part of its financial risk management (linkage base, interest rate, and liquidity exposures) and as a service to its customers. From time to time, the Bank designates some of the derivative instruments as hedging instruments in fair-value hedges or cash-flow hedges. The hedging derivative instruments are measured according to the rules detailed in Note 1(E)(6). (2) The principal types of transactions in which the Bank operates are: • Forward Contracts between two parties for the purchase and sale of a defined quantity of commodities, currencies, interest rates, or other financial instruments (hereinafter: underlying assets), to be transacted at a future date and at a predefined price. • Future A future contract traded on stock markets, for the purchase or sale of a quantity of standard units of underlying assets, to be transacted at a future date and at a predefined price.

180 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 11 Activity in Derivative Instruments – Volume, Credit Risks, and Maturity Dates (continued)

• Swap A contract for the exchange at the time of the transaction of a defined quantity of underlying assets, with a mutual obligation to re-exchange the exchanged items at a future date. • Option A contract that confers, for the payment of a premium, the right to purchase (call) or sell (put) underlying assets at a price, quantity, and time denoted in advance. • Spot An exchange transaction between two currencies on the basis of a pre-agreed rate, for transaction within two days. (3) Activity in derivative financial instruments involves a number of risks, as detailed below: Credit risk – The maximum amount of loss to the Bank if the counterparty does not fulfill the terms of the contract. Market risk – Risk arising from fluctuations in the value of a derivative financial instrument as a result of a change in market prices, such as exchange rates, interest rates, etc. Liquidity risk – Risk deriving from the inability to close a position rapidly by clearing in cash or by creating a reverse position. Operational risk – Risk deriving from the erroneous operation of transactions from the time that they are formed until the end of account settlement in respect thereof, due to human error or as a result of a mechanical failure in operation. Market and liquidity risks arising from this activity are managed and measured routinely in specialized automated systems known in the international markets for these purposes, such as Summit, Devon, and Algorithmics, and in automated systems developed by the Bank. Credit risk arising from transactions in derivative financial instruments with respect to the counterparty to the transactions is usually measured by applying conservative coefficients to the nominal amounts of the transactions, and using the scenarios approach. The operational issues arising from this activity are examined and controlled routinely by a specialized unit. The use of derivative instruments as part of the management of the Bank’s current (non-trading) activity is aimed at achieving objectives and complying with limits as approved by the Board of Directors (linkage base, interest rate, and liquidity exposures). The Bank provides comprehensive service to its customers for hedging and investing in derivative financial instruments via the dealing rooms. Activity in financial instruments in the areas of trading is designed to respond to customers’ needs while undertaking limited and controlled risk in accordance with authorizations. The authorizations for activity and risk are measured, as relevant, in terms of sensitivity to risk factors (such as vega); theoretical loss in different scenarios, including an extreme scenario; in terms of VaR; and in terms of nominal amounts. In certain cases, procedure also prescribes limiting losses by means of a stop-loss order.

181 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12 Supervisory Activity Segments

Assignment of customers to the supervisory activity segments The reporting on segments of activity is in accordance with the format and classifications established in the Public Reporting Directives of the Banking Supervision Department, as detailed in the Annual Financial Statements for 2017.

Information regarding supervisory activity segments

For the three months ended March 31, 2018 For the three months ended March 31, 2018 Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity in Total activity

banking businesses and businesses businesses entities management Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Interest income from externals 967 311 57 8 637 196 366 11 196 - 2,381 220 2,601 Interest expenses for externals )55( - - )34( )25( )16( )34( )80( )125( - )369( )74( )443( Net interest income: From externals 912 311 57 )26( 612 180 332 )69( 71 - 2,012 146 2,158 Inter-segmental )100( )175( - 60 )17( )14( )84( 90 94 - 29 )29( - Total net interest income 812 136 57 34 595 166 248 21 165 - 2,041 117 2,158 Non-interest income: Non-interest financing income 2 - - - 2 4 8 7 189 - 212 14 226 Fees and other income 563 15 283 49 316 85 157 42 24 46 1,282 25 1,307 Total non-interest income 565 15 283 49 318 89 165 49 213 46 1,494 39 1,533 Total income 1,377 151 340 83 913 255 413 70 378 46 3,535 156 3,691

Provision (income) for credit losses 155 5 28 - 80 6 )8( 2 - - 235 15 250 Operating and other expenses: For externals 1,079 52 231 38 381 93 138 31 158 189 2,107 246 2,353 Inter-segmental )16( - - 14 134 5 10 12 )56( )103( - - - Total operating and other expenses 1,063 52 231 52 515 98 148 43 102 86 2,107 246 2,353

Profit (loss) before taxes 159 94 81 31 318 151 273 25 276 )40( 1,193 )105( 1,088 Provision for taxes (tax benefit) on profit (loss) 55 33 28 10 112 53 97 9 117 8 461 12 473 Profit (loss) after taxes 104 61 53 21 206 98 176 16 159 )48( 732 )117( 615 The Bank’s share in profits of equity-basis investees ------4 - 4 - 4 Net profit (loss) before attribution to non-controlling interests 104 61 53 21 206 98 176 16 163 )48( 736 )117( 619 Loss (profit) attributed to non-controlling interests )4( - )4( - - - - - 6 - 2 7 9 Net profit (loss) attributed to shareholders of the Bank 100 61 49 21 206 98 176 16 169 )48( 738 )110( 628

182 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12 Supervisory Activity Segments Unaudited NIS millions Assignment of customers to the supervisory activity segments The reporting on segments of activity is in accordance with the format and classifications established in the Public Reporting Directives of the Banking Supervision Department, as detailed in the Annual Financial Statements for 2017.

Information regarding supervisory activity segments

For the three months ended March 31, 2018 For the three months ended March 31, 2018 Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity in Total activity

banking businesses and businesses businesses entities management Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Interest income from externals 967 311 57 8 637 196 366 11 196 - 2,381 220 2,601 Interest expenses for externals )55( - - )34( )25( )16( )34( )80( )125( - )369( )74( )443( Net interest income: From externals 912 311 57 )26( 612 180 332 )69( 71 - 2,012 146 2,158 Inter-segmental )100( )175( - 60 )17( )14( )84( 90 94 - 29 )29( - Total net interest income 812 136 57 34 595 166 248 21 165 - 2,041 117 2,158 Non-interest income: Non-interest financing income 2 - - - 2 4 8 7 189 - 212 14 226 Fees and other income 563 15 283 49 316 85 157 42 24 46 1,282 25 1,307 Total non-interest income 565 15 283 49 318 89 165 49 213 46 1,494 39 1,533 Total income 1,377 151 340 83 913 255 413 70 378 46 3,535 156 3,691

Provision (income) for credit losses 155 5 28 - 80 6 )8( 2 - - 235 15 250 Operating and other expenses: For externals 1,079 52 231 38 381 93 138 31 158 189 2,107 246 2,353 Inter-segmental )16( - - 14 134 5 10 12 )56( )103( - - - Total operating and other expenses 1,063 52 231 52 515 98 148 43 102 86 2,107 246 2,353

Profit (loss) before taxes 159 94 81 31 318 151 273 25 276 )40( 1,193 )105( 1,088 Provision for taxes (tax benefit) on profit (loss) 55 33 28 10 112 53 97 9 117 8 461 12 473 Profit (loss) after taxes 104 61 53 21 206 98 176 16 159 )48( 732 )117( 615 The Bank’s share in profits of equity-basis investees ------4 - 4 - 4 Net profit (loss) before attribution to non-controlling interests 104 61 53 21 206 98 176 16 163 )48( 736 )117( 619 Loss (profit) attributed to non-controlling interests )4( - )4( - - - - - 6 - 2 7 9 Net profit (loss) attributed to shareholders of the Bank 100 61 49 21 206 98 176 16 169 )48( 738 )110( 628

183 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12 Supervisory Activity Segments (continued)

Information regarding supervisory activity segments (continued)

For the three months ended March 31, 2018 For the three months ended March 31, 2018 Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity Total activity

banking businesses and businesses businesses entities management in Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Average balance of assets(1) 117,178 64,137 15,211 1,830 64,113 26,994 52,337 2,928 149,711 114 415,205 34,914 450,119 Of which: investments in equity-basis investees(1) ------155 - 155 - 155 Average balance of gross credit to the public(1) 117,803 64,479 14,741 1,824 64,966 27,456 52,859 2,532 - - 267,440 15,223 282,663 Balance of gross credit to the public at the end of the reported period 119,264 65,336 15,039 1,986 65,945 27,867 55,427 2,574 - - 273,063 15,004 288,067 Balance of impaired debts 713 - 23 - 889 446 297 - - - 2,345 245 2,590 Balance of debts in arrears of more than 90 days 668 587 - - 241 - - - - - 909 30 939 Average balance of liabilities(1) 124,018 - - 31,673 63,170 19,738 43,996 54,750 52,913 24 390,282 23,771 414,053 Of which: average balance of deposits from the public(1) 124,015 - - 31,667 58,214 18,543 34,952 53,563 - - 320,954 21,365 342,319 Balance of deposits from the public at the end of the reported period 125,659 - - 32,391 60,446 18,822 36,198 49,464 - - 322,980 21,830 344,810 Average balance of risk-adjusted assets(1)(2) 92,637 38,527 12,266 2,579 73,536 41,391 62,693 7,766 22,635 4,621 307,858 20,298 328,156 Balance of risk-adjusted assets at the end of the reported period(2) 92,034 39,081 11,805 2,617 74,654 42,109 63,636 8,691 22,198 5,461 311,400 20,139 331,539 Average balance of assets under management(1)(3) 73,450 - - 47,096 30,776 13,285 80,053 646,209 61,421 2,970 955,260 19,146 974,406

Segmentation of net interest income: Spread from credit granting activity 739 136 57 7 554 155 236 7 487 - 2,185 173 2,358 Spread from deposit taking activity 73 - - 27 41 11 12 12 )380( - )204( )92( )296( Other ------2 58 - 60 36 96 Total net interest income 812 136 57 34 595 166 248 21 165 - 2,041 117 2,158

(1) Average balances are calculated based on the balance at the beginning of a quarter or at the beginning of a month. (2) Risk-weighted assets – as calculated for the purposes of capital adequacy (Proper Conduct of Banking Business Directive 201). (3) Assets under management – including assets of provident funds, study funds, mutual funds, and securities of customers.

184 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Unaudited NIS millions

Information regarding supervisory activity segments (continued)

For the three months ended March 31, 2018 For the three months ended March 31, 2018 Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity Total activity

banking businesses and businesses businesses entities management in Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Average balance of assets(1) 117,178 64,137 15,211 1,830 64,113 26,994 52,337 2,928 149,711 114 415,205 34,914 450,119 Of which: investments in equity-basis investees(1) ------155 - 155 - 155 Average balance of gross credit to the public(1) 117,803 64,479 14,741 1,824 64,966 27,456 52,859 2,532 - - 267,440 15,223 282,663 Balance of gross credit to the public at the end of the reported period 119,264 65,336 15,039 1,986 65,945 27,867 55,427 2,574 - - 273,063 15,004 288,067 Balance of impaired debts 713 - 23 - 889 446 297 - - - 2,345 245 2,590 Balance of debts in arrears of more than 90 days 668 587 - - 241 - - - - - 909 30 939 Average balance of liabilities(1) 124,018 - - 31,673 63,170 19,738 43,996 54,750 52,913 24 390,282 23,771 414,053 Of which: average balance of deposits from the public(1) 124,015 - - 31,667 58,214 18,543 34,952 53,563 - - 320,954 21,365 342,319 Balance of deposits from the public at the end of the reported period 125,659 - - 32,391 60,446 18,822 36,198 49,464 - - 322,980 21,830 344,810 Average balance of risk-adjusted assets(1)(2) 92,637 38,527 12,266 2,579 73,536 41,391 62,693 7,766 22,635 4,621 307,858 20,298 328,156 Balance of risk-adjusted assets at the end of the reported period(2) 92,034 39,081 11,805 2,617 74,654 42,109 63,636 8,691 22,198 5,461 311,400 20,139 331,539 Average balance of assets under management(1)(3) 73,450 - - 47,096 30,776 13,285 80,053 646,209 61,421 2,970 955,260 19,146 974,406

Segmentation of net interest income: Spread from credit granting activity 739 136 57 7 554 155 236 7 487 - 2,185 173 2,358 Spread from deposit taking activity 73 - - 27 41 11 12 12 )380( - )204( )92( )296( Other ------2 58 - 60 36 96 Total net interest income 812 136 57 34 595 166 248 21 165 - 2,041 117 2,158

(1) Average balances are calculated based on the balance at the beginning of a quarter or at the beginning of a month. (2) Risk-weighted assets – as calculated for the purposes of capital adequacy (Proper Conduct of Banking Business Directive 201). (3) Assets under management – including assets of provident funds, study funds, mutual funds, and securities of customers.

185 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12 Supervisory Activity Segments (continued)

Information regarding supervisory activity segments (continued)

For the three months ended March 31, 2017* For the three months ended March 31, 2017* Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity Total activity

banking businesses and businesses businesses entities management in Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Interest income from externals 938 302 50 7 589 194 426 11 143 - 2,308 210 2,518 Interest expenses for externals )90( - - )29( )12( )5( )29( )88( )103( - )356( )89( )445( Net interest income: From externals 848 302 50 )22( 577 189 397 )77( 40 - 1,952 121 2,073 Inter-segmental )89( )196( - 51 )26( )30( )136( 97 152 - 19 )19( - Total net interest income 759 106 50 29 551 159 261 20 192 - 1,971 102 2,073 Non-interest income: Non-interest financing income 2 - - - 2 3 12 5 142 - 166 16 182 Fees and other income 548 16 265 50 298 93 178 37 28 56 1,288 59 1,347 Total non-interest income 550 16 265 50 300 96 190 42 170 56 1,454 75 1,529 Total income 1,309 122 315 79 851 255 451 62 362 56 3,425 177 3,602

Provision (income) for credit losses 113 )5( 15 - 126 )45( )81( )4( - - 109 )2( 107 Operating and other expenses: For externals 1,004 53 224 38 452 98 140 35 155 99 2,021 196 2,217 Inter-segmental 51 - - 15 49 3 10 11 )54( )84( 1 )1( - Total operating and other expenses 1,055 53 224 53 501 101 150 46 101 15 2,022 195 2,217

Profit (loss) before taxes 141 74 76 26 224 199 382 20 261 41 1,294 )16( 1,278 Provision for taxes (tax benefit) on profit (loss) 53 25 23 10 81 77 144 6 116 39 526 )4( 522 Profit after taxes 88 49 53 16 143 122 238 14 145 2 768 )12( 756 The Bank’s share in profits of equity-basis investees ------4 - 4 - 4 Net profit (loss) before attribution to non-controlling interests 88 49 53 16 143 122 238 14 149 2 772 )12( 760 Loss (profit) attributed to non-controlling interests )1( - )1( - - - - - 8 - 7 - 7 Net profit (loss) attributed to shareholders of the Bank 87 49 52 16 143 122 238 14 157 2 779 )12( 767

* Reclassified; for additional information, see Note 28 to the Annual Financial Statements for 2017.

186 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Unaudited NIS millions

Information regarding supervisory activity segments (continued)

For the three months ended March 31, 2017* For the three months ended March 31, 2017* Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity Total activity

banking businesses and businesses businesses entities management in Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Interest income from externals 938 302 50 7 589 194 426 11 143 - 2,308 210 2,518 Interest expenses for externals )90( - - )29( )12( )5( )29( )88( )103( - )356( )89( )445( Net interest income: From externals 848 302 50 )22( 577 189 397 )77( 40 - 1,952 121 2,073 Inter-segmental )89( )196( - 51 )26( )30( )136( 97 152 - 19 )19( - Total net interest income 759 106 50 29 551 159 261 20 192 - 1,971 102 2,073 Non-interest income: Non-interest financing income 2 - - - 2 3 12 5 142 - 166 16 182 Fees and other income 548 16 265 50 298 93 178 37 28 56 1,288 59 1,347 Total non-interest income 550 16 265 50 300 96 190 42 170 56 1,454 75 1,529 Total income 1,309 122 315 79 851 255 451 62 362 56 3,425 177 3,602

Provision (income) for credit losses 113 )5( 15 - 126 )45( )81( )4( - - 109 )2( 107 Operating and other expenses: For externals 1,004 53 224 38 452 98 140 35 155 99 2,021 196 2,217 Inter-segmental 51 - - 15 49 3 10 11 )54( )84( 1 )1( - Total operating and other expenses 1,055 53 224 53 501 101 150 46 101 15 2,022 195 2,217

Profit (loss) before taxes 141 74 76 26 224 199 382 20 261 41 1,294 )16( 1,278 Provision for taxes (tax benefit) on profit (loss) 53 25 23 10 81 77 144 6 116 39 526 )4( 522 Profit after taxes 88 49 53 16 143 122 238 14 145 2 768 )12( 756 The Bank’s share in profits of equity-basis investees ------4 - 4 - 4 Net profit (loss) before attribution to non-controlling interests 88 49 53 16 143 122 238 14 149 2 772 )12( 760 Loss (profit) attributed to non-controlling interests )1( - )1( - - - - - 8 - 7 - 7 Net profit (loss) attributed to shareholders of the Bank 87 49 52 16 143 122 238 14 157 2 779 )12( 767

* Reclassified; for additional information, see Note 28 to the Annual Financial Statements for 2017.

187 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12 Supervisory Activity Segments (continued)

Information regarding supervisory activity segments (continued)

For the three months ended March 31, 2017* For the three months ended March 31, 2017* Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity Total activity

banking businesses and businesses businesses entities management in Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Average balance of assets(1) 112,186 61,305 13,307 1,687 58,446 27,546 53,000 2,455 143,577 136 399,033 47,699 446,732 Of which: investments in equity-basis investees(1) ------153 - 153 - 153 Average balance of gross credit to the public(1) 111,838 61,299 12,983 1,673 58,194 27,525 52,951 2,043 - - 254,224 17,781 272,005 Balance of gross credit to the public at the end of the reported period 113,334 61,568 13,234 1,797 59,162 28,008 52,915 1,818 - - 257,034 16,928 273,962 Balance of impaired debts 731 - 19 1 910 403 1,293 - - - 3,338 118 3,456 Balance of debts in arrears of more than 90 days 632 548 - - 162 - - - - - 794 - 794 Average balance of liabilities(1) 124,582 6 - 32,615 49,105 21,679 46,329 50,261 54,490 20 379,081 33,290 412,371 Of which: average balance of deposits from the public(1) 124,571 - - 32,610 44,354 19,699 38,544 48,765 - - 308,543 29,287 337,830 Balance of deposits from the public at the end of the reported period 124,999 - - 32,236 44,866 18,481 38,902 50,463 - - 309,947 27,571 337,518 Average balance of risk-adjusted assets(1)(2) 91,651 37,905 12,504 2,932 66,415 37,582 59,836 4,926 29,628 2,925 295,895 22,646 318,541 Balance of risk-adjusted assets at the end of the reported period(2) 91,356 38,025 12,594 2,879 67,841 37,305 59,281 4,881 30,556 2,715 296,814 21,887 318,701 Average balance of assets under management(1)(3) 71,594 - - 45,843 18,903 15,809 87,113 642,903 57,029 2,448 941,642 28,544 970,186

Segmentation of net interest income: Spread from credit granting activity 694 106 50 5 528 150 250 6 517 - 2,150 163 2,313 Spread from deposit taking activity 62 - - 24 21 8 11 12 )316( - )178( )64( )242( Other 3 - - - 2 1 - 2 )9( - )1( 3 2 Total net interest income 759 106 50 29 551 159 261 20 192 - 1,971 102 2,073

* Reclassified; for additional information, see Note 28 to the Annual Financial Statements for 2017. (1) Average balances are calculated based on the balance at the beginning of a quarter or at the beginning of a month. (2) Risk-weighted assets – as calculated for the purposes of capital adequacy (Proper Conduct of Banking Business Directive 201). (3) Assets under management – including assets of provident funds, study funds, mutual funds, and securities of customers.

188 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Unaudited NIS millions

Information regarding supervisory activity segments (continued)

For the three months ended March 31, 2017* For the three months ended March 31, 2017* Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity Total activity

banking businesses and businesses businesses entities management in Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Average balance of assets(1) 112,186 61,305 13,307 1,687 58,446 27,546 53,000 2,455 143,577 136 399,033 47,699 446,732 Of which: investments in equity-basis investees(1) ------153 - 153 - 153 Average balance of gross credit to the public(1) 111,838 61,299 12,983 1,673 58,194 27,525 52,951 2,043 - - 254,224 17,781 272,005 Balance of gross credit to the public at the end of the reported period 113,334 61,568 13,234 1,797 59,162 28,008 52,915 1,818 - - 257,034 16,928 273,962 Balance of impaired debts 731 - 19 1 910 403 1,293 - - - 3,338 118 3,456 Balance of debts in arrears of more than 90 days 632 548 - - 162 - - - - - 794 - 794 Average balance of liabilities(1) 124,582 6 - 32,615 49,105 21,679 46,329 50,261 54,490 20 379,081 33,290 412,371 Of which: average balance of deposits from the public(1) 124,571 - - 32,610 44,354 19,699 38,544 48,765 - - 308,543 29,287 337,830 Balance of deposits from the public at the end of the reported period 124,999 - - 32,236 44,866 18,481 38,902 50,463 - - 309,947 27,571 337,518 Average balance of risk-adjusted assets(1)(2) 91,651 37,905 12,504 2,932 66,415 37,582 59,836 4,926 29,628 2,925 295,895 22,646 318,541 Balance of risk-adjusted assets at the end of the reported period(2) 91,356 38,025 12,594 2,879 67,841 37,305 59,281 4,881 30,556 2,715 296,814 21,887 318,701 Average balance of assets under management(1)(3) 71,594 - - 45,843 18,903 15,809 87,113 642,903 57,029 2,448 941,642 28,544 970,186

Segmentation of net interest income: Spread from credit granting activity 694 106 50 5 528 150 250 6 517 - 2,150 163 2,313 Spread from deposit taking activity 62 - - 24 21 8 11 12 )316( - )178( )64( )242( Other 3 - - - 2 1 - 2 )9( - )1( 3 2 Total net interest income 759 106 50 29 551 159 261 20 192 - 1,971 102 2,073

* Reclassified; for additional information, see Note 28 to the Annual Financial Statements for 2017. (1) Average balances are calculated based on the balance at the beginning of a quarter or at the beginning of a month. (2) Risk-weighted assets – as calculated for the purposes of capital adequacy (Proper Conduct of Banking Business Directive 201). (3) Assets under management – including assets of provident funds, study funds, mutual funds, and securities of customers.

189 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12 Supervisory Activity Segments (continued)

Information regarding supervisory activity segments (continued)

For the year ended December 31, 2017 For the year ended December 31, 2017 Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity Total activity

banking businesses and businesses businesses entities management in Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Interest income from externals 4,103 1,572 207 38 2,551 822 1,651 50 805 - 10,020 869 10,889 Interest expenses for externals )292( - - )125( )77( )49( )145( )348( )911( - )1,947( )245( )2,192( Net interest income: From externals 3,811 1,572 207 )87( 2,474 773 1,506 )298( )106( - 8,073 624 8,697 Inter-segmental )758( )1,095( )2( 211 )193( )112( )467( 377 1,061 - 119 )119( - Total net interest income 3,053 477 205 124 2,281 661 1,039 79 955 - 8,192 505 8,697 Non-interest income: Non-interest financing income 6 - - 1 9 14 37 18 491 3 579 58 637 Fees and other income 2,214 60 1,103 183 1,226 336 675 156 86 207 5,083 213 5,296 Total non-interest income 2,220 60 1,103 184 1,235 350 712 174 577 210 5,662 271 5,933 Total income 5,273 537 1,308 308 3,516 1,011 1,751 253 1,532 210 13,854 776 14,630

Provision (income) for credit losses 631 )14( 100 - 521 )396( )472( 2 - - 286 37 323 Operating and other expenses: For externals *3,952 213 901 150 1,805 360 544 140 687 *865 8,503 1,113 9,616 Inter-segmental *221 - - 49 214 19 43 40 )203( *)380( 3 )3( - Total operating and other expenses 4,173 213 901 199 2,019 379 587 180 484 485 8,506 1,110 9,616

Profit (loss) before taxes 469 338 307 109 976 1,028 1,636 71 1,048 )275( 5,062 )371( 4,691 Provision for taxes (tax benefit) on profit (loss) 192 124 133 39 370 379 604 27 397 53 2,061 16 2,077 Profit (loss) after taxes 277 214 174 70 606 649 1,032 44 651 )328( 3,001 )387( 2,614 The Bank’s share in profits of equity-basis investees ------17 - 17 - 17 Net profit (loss) before attribution to non-controlling interests 277 214 174 70 606 649 1,032 44 668 )328( 3,018 )387( 2,631 Loss (profit) attributed to non-controlling interests )4( - )4( - - - - - 12 - 8 21 29 Net profit (loss) attributed to shareholders of the Bank 273 214 170 70 606 649 1,032 44 680 )328( 3,026 )366( 2,660

* Reclassified.

190 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Audited NIS millions

Information regarding supervisory activity segments (continued)

For the year ended December 31, 2017 For the year ended December 31, 2017 Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity Total activity

banking businesses and businesses businesses entities management in Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Interest income from externals 4,103 1,572 207 38 2,551 822 1,651 50 805 - 10,020 869 10,889 Interest expenses for externals )292( - - )125( )77( )49( )145( )348( )911( - )1,947( )245( )2,192( Net interest income: From externals 3,811 1,572 207 )87( 2,474 773 1,506 )298( )106( - 8,073 624 8,697 Inter-segmental )758( )1,095( )2( 211 )193( )112( )467( 377 1,061 - 119 )119( - Total net interest income 3,053 477 205 124 2,281 661 1,039 79 955 - 8,192 505 8,697 Non-interest income: Non-interest financing income 6 - - 1 9 14 37 18 491 3 579 58 637 Fees and other income 2,214 60 1,103 183 1,226 336 675 156 86 207 5,083 213 5,296 Total non-interest income 2,220 60 1,103 184 1,235 350 712 174 577 210 5,662 271 5,933 Total income 5,273 537 1,308 308 3,516 1,011 1,751 253 1,532 210 13,854 776 14,630

Provision (income) for credit losses 631 )14( 100 - 521 )396( )472( 2 - - 286 37 323 Operating and other expenses: For externals *3,952 213 901 150 1,805 360 544 140 687 *865 8,503 1,113 9,616 Inter-segmental *221 - - 49 214 19 43 40 )203( *)380( 3 )3( - Total operating and other expenses 4,173 213 901 199 2,019 379 587 180 484 485 8,506 1,110 9,616

Profit (loss) before taxes 469 338 307 109 976 1,028 1,636 71 1,048 )275( 5,062 )371( 4,691 Provision for taxes (tax benefit) on profit (loss) 192 124 133 39 370 379 604 27 397 53 2,061 16 2,077 Profit (loss) after taxes 277 214 174 70 606 649 1,032 44 651 )328( 3,001 )387( 2,614 The Bank’s share in profits of equity-basis investees ------17 - 17 - 17 Net profit (loss) before attribution to non-controlling interests 277 214 174 70 606 649 1,032 44 668 )328( 3,018 )387( 2,631 Loss (profit) attributed to non-controlling interests )4( - )4( - - - - - 12 - 8 21 29 Net profit (loss) attributed to shareholders of the Bank 273 214 170 70 606 649 1,032 44 680 )328( 3,026 )366( 2,660

* Reclassified.

191 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12 Supervisory Activity Segments (continued)

Information regarding supervisory activity segments (continued)

For the year ended December 31, 2017 For the year ended December 31, 2017 Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity Total activity

banking businesses and businesses businesses entities management in Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Average balance of assets(1) 115,180 63,387 15,034 1,869 59,684 27,074 49,459 2,300 152,989 110 408,665 41,466 450,131 Of which: investments in equity-basis investees(1) ------174 - 174 - 174 Average balance of gross credit to the public(1) 115,559 63,744 14,585 1,865 60,529 27,617 50,348 1,904 - - 257,822 16,830 274,652 Balance of gross credit to the public at the end of the reported period 118,132 64,348 15,056 1,824 63,302 28,385 53,290 2,417 - - 267,350 15,157 282,507 Balance of impaired debts 733 - 19 - 943 389 380 - - - 2,445 219 2,664 Balance of debts in arrears of more than 90 days 686 591 - 1 218 - - - - - 905 8 913 Average balance of liabilities(1) 122,974 6 - 31,697 57,489 20,761 45,112 *53,832 54,849 16 386,730 28,065 414,795 Of which: average balance of deposits from the public(1) 122,963 - - *31,695 *52,560 19,561 *36,120 *52,422 - - 315,321 25,456 340,777 Balance of deposits from the public at the end of the reported period 123,759 - - 31,788 57,412 20,700 36,661 56,173 - - 326,493 20,858 347,351 Average balance of risk-adjusted assets(1)(2) 92,985 37,717 12,880 2,784 *67,955 39,386 61,788 5,936 25,358 2,801 298,993 21,760 320,753 Balance of risk-adjusted assets at the end of the reported period(2) 93,092 37,927 12,644 2,506 *72,114 40,650 61,858 6,802 23,020 3,819 303,861 20,911 324,772 Average balance of assets under management(1)(3) 71,519 - - 45,119 24,098 15,564 85,091 655,069 59,768 2,532 958,760 20,441 979,201

Segmentation of net interest income: Spread from credit granting activity 2,786 477 205 23 2,167 620 981 28 2,658 - 9,263 688 9,951 Spread from deposit taking activity 267 - - 101 114 41 57 41 )1,436( - )815( )322( )1,137( Other ------1 10 )267( - )256( 139 )117( Total net interest income 3,053 477 205 124 2,281 661 1,039 79 955 - 8,192 505 8,697

* Reclassified. (1) Average balances are calculated based on the balance at the beginning of a quarter or at the beginning of a month. (2) Risk-weighted assets – as calculated for the purposes of capital adequacy (Proper Conduct of Banking Business Directive 201). (3) Assets under management – including assets of provident funds, study funds, mutual funds, and securities of customers.

192 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Audited NIS millions

Information regarding supervisory activity segments (continued)

For the year ended December 31, 2017 For the year ended December 31, 2017 Activity in Israel Activity in Israel Activity Total overseas

Households Private Small Mid-sized Large Institutional Financial Other Total activity Total activity

banking businesses and businesses businesses entities management in Israel overseas microbusinesses Total Of which: Of which: housing loans credit cards Average balance of assets(1) 115,180 63,387 15,034 1,869 59,684 27,074 49,459 2,300 152,989 110 408,665 41,466 450,131 Of which: investments in equity-basis investees(1) ------174 - 174 - 174 Average balance of gross credit to the public(1) 115,559 63,744 14,585 1,865 60,529 27,617 50,348 1,904 - - 257,822 16,830 274,652 Balance of gross credit to the public at the end of the reported period 118,132 64,348 15,056 1,824 63,302 28,385 53,290 2,417 - - 267,350 15,157 282,507 Balance of impaired debts 733 - 19 - 943 389 380 - - - 2,445 219 2,664 Balance of debts in arrears of more than 90 days 686 591 - 1 218 - - - - - 905 8 913 Average balance of liabilities(1) 122,974 6 - 31,697 57,489 20,761 45,112 *53,832 54,849 16 386,730 28,065 414,795 Of which: average balance of deposits from the public(1) 122,963 - - *31,695 *52,560 19,561 *36,120 *52,422 - - 315,321 25,456 340,777 Balance of deposits from the public at the end of the reported period 123,759 - - 31,788 57,412 20,700 36,661 56,173 - - 326,493 20,858 347,351 Average balance of risk-adjusted assets(1)(2) 92,985 37,717 12,880 2,784 *67,955 39,386 61,788 5,936 25,358 2,801 298,993 21,760 320,753 Balance of risk-adjusted assets at the end of the reported period(2) 93,092 37,927 12,644 2,506 *72,114 40,650 61,858 6,802 23,020 3,819 303,861 20,911 324,772 Average balance of assets under management(1)(3) 71,519 - - 45,119 24,098 15,564 85,091 655,069 59,768 2,532 958,760 20,441 979,201

Segmentation of net interest income: Spread from credit granting activity 2,786 477 205 23 2,167 620 981 28 2,658 - 9,263 688 9,951 Spread from deposit taking activity 267 - - 101 114 41 57 41 )1,436( - )815( )322( )1,137( Other ------1 10 )267( - )256( 139 )117( Total net interest income 3,053 477 205 124 2,281 661 1,039 79 955 - 8,192 505 8,697

* Reclassified. (1) Average balances are calculated based on the balance at the beginning of a quarter or at the beginning of a month. (2) Risk-weighted assets – as calculated for the purposes of capital adequacy (Proper Conduct of Banking Business Directive 201). (3) Assets under management – including assets of provident funds, study funds, mutual funds, and securities of customers.

193 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12A Segments of Activity Based on Management Approach Unaudited NIS millions

The Bank Group operates in Israel and abroad, and provides a wide range of banking and financial services to its customers. The division into segments of activity according to the management approach is based on types of products and services or on types of customers. The chief operating decision maker of the Bank uses this division to make decisions and to analyze the Group’s business results. For details regarding the assignment of customers to segments based on the management approach and rules for the distribution of results of operations among the segments, see Note 28A to the Annual Financial Statements for 2017.

Information regarding activity segments

For the three months ended March 31, 2018 Retail activity Business activity Private Small Housing Commercial Corporate International Isracard Financial Adjustments(1) Total customers businesses loans activity Group management(2) Net interest income: From externals 514 394 353 257 427 146 76 )10( 1 2,158 Inter-segmental 161 5 )193( )15( )97( )29( )4( 172 - - Non-interest financing income 3 1 - 2 26 14 )2( 175 7 226 Total net financing profit 678 400 160 244 356 131 70 337 8 2,384 Fees and other income 377 144 15 107 123 31 494 37 )21( 1,307 Total income 1,055 544 175 351 479 162 564 374 )13( 3,691

Provision (income) for credit losses 110 95 5 21 )30( 15 34 - - 250 Operating and other expenses: From externals 780 260 60 133 168 246 354 161 191 2,353 Inter-segmental 88 46 - 8 10 6 69 )38( )189( -

Profit (loss) before taxes 77 143 110 189 331 )105( 107 251 )15( 1,088 Provision for taxes (tax benefit) on profit (loss) 27 51 39 67 120 12 34 105 18 473 Profit (loss) after taxes 50 92 71 122 211 )117( 73 146 )33( 615 The Bank’s share in profits of equity-basis investees, after taxes ------4 - 4 Net profit (loss): Before attribution to non-controlling interests 50 92 71 122 211 )117( 73 150 )33( 619 Attributed to non-controlling interests - - - - - 7 )4( 7 )1( 9 Attributed to shareholders of the Bank 50 92 71 122 211 )110( 69 157 )34( 628

Net credit to the public at the end of the reported period 40,005 30,899 75,606 34,847 68,627 12,356 20,292 1,471 - 284,103 Deposits from the public at the end of the reported period 174,453 38,810 - 24,284 41,209 21,830 107 44,117 - 344,810

(1) The Financial Management Segment includes, among other matters, activity with institutional entities, most of which are presented within information regarding supervisory activity segments as a separate segment. (2) This section includes the results of activities of the Bank Group with negligible volumes, each of which does not constitute a reportable segment.

194 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12A Segments of Activity Based on Management Approach (continued) Unaudited NIS millions

Information regarding activity segments (continued)

For the three months ended March 31, 2017* Retail activity Business activity Private Small Housing Commercial Corporate International Isracard Financial Adjustments(2) Total customers businesses loans activity Group management(1) Net interest income: From externals 453 383 330 247 574 121 68 )105( 2 2,073 Inter-segmental 175 )6( )212( )26( )226( )19( )2( 316 - - Non-interest financing income 3 - - 2 23 16 )3( 124 17 182 Total net financing profit 631 377 118 223 371 118 63 335 19 2,255 Fees and other income 372 141 16 108 144 65 466 41 )6( 1,347 Total income 1,003 518 134 331 515 183 529 376 13 3,602

Provision (income) for credit losses 83 129 - 4 )131( )2( 24 - - 107 Operating and other expenses: From externals 795 266 58 133 172 196 334 146 117 2,217 Inter-segmental 69 54 - 4 6 5 67 )21( )184( -

Profit before taxes 56 69 76 190 468 )16( 104 251 80 1,278 Provision for taxes on profit 22 27 27 74 183 )5( 36 120 38 522 Profit after taxes 34 42 49 116 285 )11( 68 131 42 756 The Bank’s share in profits of equity-basis investees, after taxes ------4 - 4 Net profit (loss): Before attribution to non-controlling interests 34 42 49 116 285 )11( 68 135 42 760 Attributed to non-controlling interests ------)1( 8 - 7 Attributed to shareholders of the Bank 34 42 49 116 285 )11( 67 143 42 767

Net credit to the public at the end of the reported period 38,145 29,354 69,662 32,567 65,346 13,935 19,105 1,868 - 269,982 Deposits from the public at the end of the reported period 169,906 36,710 - 22,881 35,159 27,571 - 45,291 - 337,518

* Reclassified. For additional information, see Note 28A to the Annual Financial Statements for 2017. (1) The Financial Management Segment includes, among other matters, activity with institutional entities, most of which are presented within information regarding supervisory activity segments as a separate segment. (2) This section includes the results of activities of the Bank Group with negligible volumes, each of which does not constitute a reportable segment.

195 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12A Segments of Activity Based on Management Approach (continued) Audited NIS millions

Information regarding activity segments (continued)

For the year ended December 31, 2017 Retail activity Business activity Private Small Housing Commercial Corporate International Isracard Financial Adjustments(2) Total customers* businesses* loans activity Group management(1) Net interest income: From externals 1,955 1,560 1,768 1,039 1,976 624 288 )526( 13 8,697 Inter-segmental 642 )12( )1,220( )111( )626( )119( )15( 1,460 1 - Non-interest financing income 13 1 - 6 69 58 )15( 443 62 637 Total net financing profit 2,610 1,549 548 934 1,419 563 258 1,377 76 9,334 Fees and other income 1,482 570 62 415 510 240 1,946 167 )96( 5,296 Total income 4,092 2,119 610 1,349 1,929 803 2,204 1,544 )20( 14,630

Provision (income) for credit losses 451 543 )3( )3( )824( 37 121 1 - 323 Operating and other expenses: From externals *3,078 1,036 233 511 666 1,113 1,364 678 *937 9,616 Inter-segmental *336 179 - 33 38 24 282 )131( *)761( -

Profit before taxes 227 361 380 808 2,049 )371( 437 996 )196( 4,691 Provision for taxes on profit 83 132 139 296 752 16 201 379 79 2,077 Profit after taxes 144 229 241 512 1,297 )387( 236 617 )275( 2,614 The Bank’s share in profits of equity-basis investees, after taxes ------17 - 17 Net profit: Before attribution to non-controlling interests 144 229 241 512 1,297 )387( 236 634 )275( 2,631 Attributed to non-controlling interests - - - - - 21 )4( 13 )1( 29 Attributed to shareholders of the Bank 144 229 241 512 1,297 )366( 232 647 )276( 2,660

Net credit to the public at the end of the reported period 40,279 31,217 74,124 33,859 65,494 12,902 19,564 1,224 - 278,663 Deposits from the public at the end of the reported period 171,518 38,227 - 24,653 42,207 20,858 7 49,881 - 347,351

* Reclassified. (1) The Financial Management Segment includes, among other matters, activity with institutional entities, most of which are presented within information regarding supervisory activity segments as a separate segment. (2) This section includes the results of activities of the Bank Group with negligible volumes, each of which does not constitute a reportable segment.

196 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 12A Segments of Activity Based on Management Approach (continued)

Pro-forma data regarding the effect of expenses pertaining to the business of the Bank Group in Israel with American clients on the segments of activity The expenses allocated at Bank Hapoalim Switzerland pertaining to the investigation of the Bank Group's business with American clients, in connection with the clients of Bank Hapoalim Switzerland, were allocated, within the disclosure of segments of activity based on the management approach, to the International Activity Segment. The expenses allocated in Israel pertaining to the Bank Group's business with American clients include a provision in respect of clients with certain American indications at the branches of the Bank in Israel, as well as a provision in respect of exposure to amounts for other United States authorities (other than the DOJ), at a rate of 30% of the amount of the provision in respect of the DOJ (in respect of clients in Israel and overseas). These expenses were allocated, within the disclosure of segments of activity based on the management approach, to the Adjustments Segment. If the expenses allocated in Israel, in the three months ended March 31, 2018, and in the year ended December 31, 2017, were allocated equally to the Retail Banking Segment and to the International Activity Segment (and not to the Adjustments Segment), the net profit of retail banking would total approximately NIS 200 million and approximately NIS 440 million, respectively; the net loss of the International Activity Segment would total approximately NIS 122 million and approximately NIS 539 million, respectively; and a loss in the amount of approximately NIS 9 million and net profit in the amount of approximately NIS 71 million, respectively, would be recorded in the Adjustments Segment.

197 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, NIS millions Credit to the Public, and Allowance for Credit Losses

A. Debts** and off-balance sheet credit instruments Allowance for credit losses 1. Change in allowance for credit losses

For the three months ended March 31, 2018 Credit to the public Banks and Total governments Commercial Housing Other Total private Allowance for credit losses at beginning of year (audited) 3,032 333 1,105 4,470 7 4,477 Provision for credit losses(1) 95 5 150 250 - 250 Charge-offs )161( )2( )212( )375( - )375( Recoveries of debts charged off in previous years 189 - 84 273 - 273 Net charge-offs 28 )2( )128( )102( - )102( Adjustments from translation of financial statements - - 1 1 - 1 Allowance for credit losses as at March 31, 2018(2) (unaudited) 3,155 336 1,128 4,619 7 4,626 (1) Of which: in respect of off-balance sheet credit instruments 16 - 13 29 - 29 (2) Of which: in respect of off-balance sheet credit instruments 579 - 76 655 1 656

For the three months ended March 31, 2017 Credit to the public Banks and Total governments Commercial Housing Other Total private Allowance for credit losses at beginning of year (audited) 3,499 366 939 4,804 7 4,811 Provision for credit losses(1) )24( )5( 136 107 - 107 Charge-offs )334( )20( )203( )557( - )557( Recoveries of debts charged off in previous years 206 - 83 289 - 289 Net charge-offs )128( )20( )120( )268( - )268( Allowance for credit losses as at March 31, 2017(2) (unaudited) 3,347 341 955 4,643 7 4,650 (1) Of which: in respect of off-balance sheet credit instruments *)23( - *9 *)14( - *)14( (2) Of which: in respect of off-balance sheet credit instruments 603 - 60 663 - 663

* Restated. ** Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”).

198 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

A. Debts* and off-balance sheet credit instruments (continued) Allowance for credit losses (continued) 2. Additional information regarding the method of calculating the allowance for credit losses in respect of debts* and regarding the underlying debts*

March 31, 2018 Credit to the public Banks and Total governments Commercial** Housing Other private Total Recorded debt balance of debts*: Examined on an individual basis 126,965 - 1,324 128,289 23,965 152,254 Examined on a collective basis(1) 39,553 66,209 54,016 159,778 - 159,778 Total debts* 166,518 66,209 55,340 288,067 23,965 312,032 (1) Of which: allowance for which was calculated according to the extent of arrears 9,796 65,996 - 75,792 - 75,792 Allowance for credit losses in respect of debts*: Examined on an individual basis 2,072 - 208 2,280 6 2,286 Examined on a collective basis(2) 504 336 844 1,684 - 1,684 Total allowance for credit losses 2,576 336 1,052 3,964 6 3,970 (2) Of which: allowance for which was calculated according to the extent of arrears*** 63 336 - 399 - 399

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 9,796 million, of commercial borrowers, or granted to purchasing groups in the process of construction (March 31, 2017: NIS 7,552 million; December 31, 2017: NIS 9,345 million). *** Includes the allowance beyond the amount required according to the method of the extent of arrears, calculated on a collective basis, in the amount of approximately NIS 265 million (March 31, 2017: NIS 244 million; December 31, 2017: NIS 259 million).

199 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

A. Debts* and off-balance sheet credit instruments (continued) Allowance for credit losses (continued) 2. Additional information regarding the method of calculating the allowance for credit losses in respect of debts* and regarding the underlying debts* (continued)

March 31, 2017 Credit to the public Banks and Total governments Commercial** Housing Other private Total Recorded debt balance of debts*: Examined on an individual basis 125,291 - 2,000 127,291 28,958 156,249 Examined on a collective basis(1) 32,550 62,501 51,620 146,671 - 146,671 Total debts* 157,841 62,501 53,620 273,962 28,958 302,920 (1) Of which: allowance for which was calculated according to the extent of arrears 7,552 62,263 - 69,815 - 69,815 Allowance for credit losses in respect of debts*: Examined on an individual basis 2,284 - 147 2,431 7 2,438 Examined on a collective basis(2) 460 341 748 1,549 - 1,549 Total allowance for credit losses 2,744 341 895 3,980 7 3,987 (2) Of which: allowance for which was calculated according to the extent of arrears*** 50 341 - 391 - 391

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 9,796 million, of commercial borrowers, or granted to purchasing groups in the process of construction (March 31, 2017: NIS 7,552 million; December 31, 2017: NIS 9,345 million). *** Includes the allowance beyond the amount required according to the method of the extent of arrears, calculated on a collective basis, in the amount of approximately NIS 265 million (March 31, 2017: NIS 244 million; December 31, 2017: NIS 259 million).

200 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Audited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

A. Debts* and off-balance sheet credit instruments (continued) Allowance for credit losses (continued) 2. Additional information regarding the method of calculating the allowance for credit losses in respect of debts* and regarding the underlying debts* (continued)

December 31, 2017 Credit to the public Banks and Total governments Commercial** Housing Other private Total Recorded debt balance of debts*: Examined on an individual basis 123,065 - 1,451 124,516 26,403 150,919 Examined on a collective basis(1) 39,152 65,176 53,663 157,991 - 157,991 Total debts* 162,217 65,176 55,114 282,507 26,403 308,910 (1) Of which: allowance for which was calculated according to the extent of arrears 9,345 64,940 - 74,285 - 74,285 Allowance for credit losses in respect of debts*: Examined on an individual basis 1,961 - 229 2,190 6 2,196 Examined on a collective basis(2) 508 333 813 1,654 - 1,654 Total allowance for credit losses 2,469 333 1,042 3,844 6 3,850 (2) Of which: allowance for which was calculated according to the extent of arrears*** 64 333 - 397 - 397

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** The balance of commercial debts includes the balance of housing loans, in the amount of approximately NIS 9,796 million, of commercial borrowers, or granted to purchasing groups in the process of construction (March 31, 2017: NIS 7,552 million; December 31, 2017: NIS 9,345 million). *** Includes the allowance beyond the amount required according to the method of the extent of arrears, calculated on a collective basis, in the amount of approximately NIS 265 million (March 31, 2017: NIS 244 million; December 31, 2017: NIS 259 million).

201 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts* 1. Credit quality and arrears

March 31, 2018 Non-problematic Problematic(1) Total Unimpaired debts** – additional information Unimpaired Impaired(2) In arrears In arrears of 90 days of 30 to or more(3) 89 days(4) Borrower activity in Israel Public – commercial Construction and real estate – construction 23,337 382 297 24,016 44 76 Construction and real estate – real-estate activities 18,645 193 263 19,101 37 61 Financial services 14,745 59 35 14,839 2 6 Commercial – other 86,734 2,697 1,031 90,462 157 229 Total commercial 143,461 3,331 1,626 148,418 240 372 Private individuals – housing loans(5) 65,151 589 - 65,740 587 440 Private individuals – other 53,762 402 711 54,875 92 276 Total public – activity in Israel 262,374 4,322 2,337 269,033 919 1,088 Banks in Israel 96 - - 96 - - Israeli government 1,140 - - 1,140 - - Total activity in Israel 263,610 4,322 2,337 270,269 919 1,088

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** For this purpose, “unimpaired debts” include non-problematic debts. (1) Credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more. (2) In general, impaired debts do not accrue interest income. For information regarding certain impaired debts restructured in troubled debt restructuring, see Note 13B(2)(c) below. (3) Classified as unimpaired problematic debts (with the exception of housing loans in arrears of up to 3 months), accruing interest income. (4) Accruing interest income. Debts in arrears of 30 to 89 days in the amount of approximately NIS 168 million (March 31, 2017: NIS 136 million; December 31, 2017: NIS 26 million) were classified as unimpaired problematic debts. (5) Includes a balance of housing loans, arranged in a settlement with the borrower, in the amount of approximately NIS 68 million (March 31, 2017: NIS 44 million; December 31, 2017: NIS 66 million).

202 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts* (continued) 1. Credit quality and arrears (continued)

March 31, 2018 Non-problematic Problematic(1) Total Unimpaired debts** – additional information Unimpaired Impaired(2) In arrears In arrears of 90 days of 30 to or more(3) 89 days(4) Borrower activity overseas Public – commercial Construction and real estate 5,886 15 69 5,970 15 15 Commercial – other 11,800 185 145 12,130 1 18 Total commercial 17,686 200 214 18,100 16 33 Private individuals 891 4 39 934 4 9 Total public – activity overseas 18,577 204 253 19,034 20 42 Banks overseas 21,390 - - 21,390 - - Governments overseas 1,339 - - 1,339 - - Total activity overseas 41,306 204 253 41,763 20 42 Total public 280,951 4,526 2,590 288,067 939 1,130 Total banks 21,486 - - 21,486 - - Total governments 2,479 - - 2,479 - - Total 304,916 4,526 2,590 312,032 939 1,130

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** For this purpose, “unimpaired debts” include non-problematic debts. (1) Credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more. (2) In general, impaired debts do not accrue interest income. For information regarding certain impaired debts restructured in troubled debt restructuring, see Note 13B(2)(c) below. (3) Classified as unimpaired problematic debts (with the exception of housing loans in arrears of up to 3 months), accruing interest income. (4) Accruing interest income. Debts in arrears of 30 to 89 days in the amount of approximately NIS 168 million (March 31, 2017: NIS 136 million; December 31, 2017: NIS 26 million) were classified as unimpaired problematic debts.

203 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts** (continued) 1. Credit quality and arrears (continued)

March 31, 2017 Non-problematic Problematic(1) Total Unimpaired debts*** – additional information Unimpaired Impaired(2) In arrears In arrears of 90 days of 30 to or more(3) 89 days(4) Borrower activity in Israel Public – commercial Construction and real estate – construction 18,364 338 357 19,059 32 62 Construction and real estate – real-estate activities 18,682 167 365 19,214 8 46 Financial services 13,619 204 81 13,904 1 1 Commercial – other 82,568 2,587 1,788 86,943 119 208 Total commercial 133,233 3,296 2,591 139,120 160 317 Private individuals – housing loans(5) 61,433 571 - 62,004 548 *396 Private individuals – other 51,750 318 731 52,799 81 241 Total public – activity in Israel 246,416 4,185 3,322 253,923 789 *954 Banks in Israel 97 - - 97 - - Israeli government 864 - - 864 - - Total activity in Israel 247,377 4,185 3,322 254,884 789 *954

* Restated. ** Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). *** For this purpose, “unimpaired debts” include non-problematic debts. (1) Credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more. (2) In general, impaired debts do not accrue interest income. For information regarding certain impaired debts restructured in troubled debt restructuring, see Note 13B(2)(c) below. (3) Classified as unimpaired problematic debts (with the exception of housing loans in arrears of up to 3 months), accruing interest income. (4) Accruing interest income. Debts in arrears of 30 to 89 days in the amount of approximately NIS 168 million (March 31, 2017: NIS 136 million; December 31, 2017: NIS 26 million) were classified as unimpaired problematic debts. (5) Includes a balance of housing loans, arranged in a settlement with the borrower, in the amount of approximately NIS 68 million (March 31, 2017: NIS 44 million; December 31, 2017: NIS 66 million).

204 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts** (continued) 1. Credit quality and arrears (continued)

March 31, 2017 Non-problematic Problematic(1) Total Unimpaired debts*** – additional information Unimpaired Impaired(2) In arrears In arrears of 90 days of 30 to or more(3) 89 days(4) Borrower activity overseas Public – commercial Construction and real estate 4,770 29 23 4,822 - 29 Commercial – other 13,578 241 80 13,899 2 116 Total commercial 18,348 270 103 18,721 2 145 Private individuals 1,279 8 31 1,318 3 30 Total public – activity overseas 19,627 278 134 20,039 5 175 Banks overseas 26,593 - - 26,593 - - Governments overseas 1,404 - - 1,404 - - Total activity overseas 47,624 278 134 48,036 5 175 Total public 266,043 4,463 3,456 273,962 794 *1,129 Total banks 26,690 - - 26,690 - - Total governments 2,268 - - 2,268 - - Total 295,001 4,463 3,456 302,920 794 *1,129

* Restated. ** Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). *** For this purpose, “unimpaired debts” include non-problematic debts. (1) Credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more. (2) In general, impaired debts do not accrue interest income. For information regarding certain impaired debts restructured in troubled debt restructuring, see Note 13B(2)(c) below. (3) Classified as unimpaired problematic debts (with the exception of housing loans in arrears of up to 3 months), accruing interest income. (4) Accruing interest income. Debts in arrears of 30 to 89 days in the amount of approximately NIS 168 million (March 31, 2017: NIS 136 million; December 31, 2017: NIS 26 million) were classified as unimpaired problematic debts.

205 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Audited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts* (continued) 1. Credit quality and arrears (continued)

December 31, 2017 Non-problematic Problematic(1) Total Unimpaired debts** – additional information Unimpaired Impaired(2) In arrears In arrears of 90 days of 30 to or more(3) 89 days(4) Borrower activity in Israel Public – commercial Construction and real estate – construction 22,282 246 338 22,866 49 59 Construction and real estate – real-estate activities 18,484 147 273 18,904 21 18 Financial services 14,257 56 30 14,343 2 11 Commercial – other 84,825 2,478 1,065 88,368 146 228 Total commercial 139,848 2,927 1,706 144,481 218 316 Private individuals – housing loans(5) 64,108 595 - 64,703 592 419 Private individuals – other 53,589 334 732 54,655 97 246 Total public – activity in Israel 257,545 3,856 2,438 263,839 907 981 Banks in Israel 193 - - 193 - - Israeli government 998 - - 998 - - Total activity in Israel 258,736 3,856 2,438 265,030 907 981

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** For this purpose, “unimpaired debts” include non-problematic debts. (1) Credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more. (2) In general, impaired debts do not accrue interest income. For information regarding certain impaired debts restructured in troubled debt restructuring, see Note 13B(2)(c) below. (3) Classified as unimpaired problematic debts (with the exception of housing loans in arrears of up to 3 months), accruing interest income. (4) Accruing interest income. Debts in arrears of 30 to 89 days in the amount of approximately NIS 168 million (March 31, 2017: NIS 136 million; December 31, 2017: NIS 26 million) were classified as unimpaired problematic debts. (5) Includes a balance of housing loans, arranged in a settlement with the borrower, in the amount of approximately NIS 68 million (March 31, 2017: NIS 44 million; December 31, 2017: NIS 66 million).

206 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Audited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts* (continued) 1. Credit quality and arrears (continued)

December 31, 2017 Non-problematic Problematic(1) Total Unimpaired debts** – additional information Unimpaired Impaired(2) In arrears In arrears of 90 days of 30 to or more(3) 89 days(4) Borrower activity overseas Public – commercial Construction and real estate 4,958 4 16 4,978 4 8 Commercial – other 12,441 143 174 12,758 - 14 Total commercial 17,399 147 190 17,736 4 22 Private individuals 894 2 36 932 2 12 Total public – activity overseas 18,293 149 226 18,668 6 34 Banks overseas 23,915 - - 23,915 - - Governments overseas 1,297 - - 1,297 - - Total activity overseas 43,505 149 226 43,880 6 34 Total public 275,838 4,005 2,664 282,507 913 1,015 Total banks 24,108 - - 24,108 - - Total governments 2,295 - - 2,295 - - Total 302,241 4,005 2,664 308,910 913 1,015

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** For this purpose, “unimpaired debts” include non-problematic debts. (1) Credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more. (2) In general, impaired debts do not accrue interest income. For information regarding certain impaired debts restructured in troubled debt restructuring, see Note 13B(2)(c) below. (3) Classified as unimpaired problematic debts (with the exception of housing loans in arrears of up to 3 months), accruing interest income. (4) Accruing interest income. Debts in arrears of 30 to 89 days in the amount of approximately NIS 168 million (March 31, 2017: NIS 136 million; December 31, 2017: NIS 26 million) were classified as unimpaired problematic debts.

207 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Credit to the Public, and Allowance for Credit Losses (continued)

Credit quality – the status of debts in arrears The status of debts in arrears is monitored routinely, and serves as one of the key indicators of credit quality. The status of debts in arrears is determined based on actual days of arrears. Debts are treated as nonperforming debts (debts not accruing interest income) after 90 days in arrears, as is any debt that has undergone troubled debt restructuring and has resumed accruing interest when it is 30 days in arrears relative to the new terms of the debt. With regard to debts evaluated on a collective basis, the status of arrears affects the classification of the debt (the classification is more severe for more extensive arrears); debts are charged off by the Bank after 150 days in arrears. With regard to housing loans, with the exception of loans without quarterly or monthly payments, the Bank establishes an allowance according to the method of the extent of arrears.

Concessions and troubled debt restructuring The policy of the Bank regarding concessions takes a range of factors into account in order to maximize repayment to the Bank: management of the relationship with the customer, maximization of opportunities, prevention of default, foreclosures, public aspects, etc. Concessions are granted only in cases where customers have demonstrated the intention to repay the loans and are expected to meet their obligations. In cases where, for economic or legal reasons related to financial difficulties of the borrower, the Bank grants a concession to a debtor that it would not consider granting under other conditions, the debt shall be considered a troubled debt restructuring. Troubled debt restructuring may be a change in the terms of the debt, leading to reduction or postponement of cash payments required of the debtor in the near future; a reduction of the rate of interest; a reduction of payments on principal; consolidation of debts; etc. The Bank can consent to receive assets or an interest in the equity capital of the debtor, in cash, as repayment of the debt, even if the value obtained is lower than the amount of the debt, if the Bank reaches the conclusion that this would maximize the recovery of its investment.

208 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts** (continued) 2. Additional information regarding impaired debts a. Impaired debts and individual allowance

March 31, 2018 Balance(1) of Individual Balance(1) of Total balance(1) Balance of impaired debts allowance(2) impaired debts of impaired contractual for which for which debts principal of an individual no individual impaired debts allowance exists(2) allowance exists(2) Borrower activity in Israel Public – commercial Construction and real estate – construction 217 42 80 297 3,111 Construction and real estate – real-estate activities 203 15 60 263 1,508 Financial services 5 3 30 35 382 Commercial – other 721 248 310 1,031 4,708 Total commercial 1,146 308 480 1,626 9,709 Private individuals – other 508 170 203 711 1,436 Total public – activity in Israel 1,654 478 683 2,337 11,145

Borrower activity overseas Public – commercial Construction and real estate - - 69 69 173 Commercial – other 40 21 105 145 374 Total commercial 40 21 174 214 547 Private individuals 39 37 - 39 41 Total public – activity overseas 79 58 174 253 588 Total public* 1,733 536 857 2,590 11,733 * Of which: Measured at the present value of cash flows 1,276 414 508 1,784 - Debts in troubled debt restructuring 807 200 450 1,257 -

** Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (1) Recorded debt balance. (2) Individual allowance for credit losses.

209 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts** (continued) 2. Additional information regarding impaired debts (continued) a. Impaired debts and individual allowance (continued)

March 31, 2017 Balance(1) of Individual Balance(1) of Total balance(1) Balance of impaired debts allowance(2) impaired debts of impaired contractual for which for which debts principal of an individual no individual impaired debts allowance exists(2) allowance exists(2) Borrower activity in Israel Public – commercial Construction and real estate – construction 235 96 122 357 3,384 Construction and real estate – real-estate activities 177 10 188 365 1,685 Financial services 17 1 64 81 639 Commercial – other 1,341 480 447 1,788 5,447 Total commercial 1,770 587 821 2,591 11,155 Private individuals – other 383 110 348 731 1,375 Total public – activity in Israel 2,153 697 1,169 3,322 12,530

Borrower activity overseas Public – commercial Construction and real estate 19 4 4 23 135 Commercial – other 57 6 23 80 389 Total commercial 76 10 27 103 524 Private individuals 31 29 - 31 34 Total public – activity overseas 107 39 27 134 558 Total public* 2,260 736 1,196 3,456 13,088 * Of which: Measured at the present value of cash flows 1,619 633 694 2,313 - Debts in troubled debt restructuring 787 207 918 1,705 -

** Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (1) Recorded debt balance. (2) Individual allowance for credit losses.

210 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Audited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts** (continued) 2. Additional information regarding impaired debts (continued) a. Impaired debts and individual allowance (continued)

December 31, 2017 Balance(1) of Individual Balance(1) of Total balance(1) Balance of impaired debts allowance(2) impaired debts of impaired contractual for which for which debts principal of an individual no individual impaired debts allowance exists(2) allowance exists(2) Borrower activity in Israel Public – commercial Construction and real estate – construction 217 53 121 338 3,177 Construction and real estate – real-estate activities 127 15 146 273 1,517 Financial services 4 1 26 30 397 Commercial – other 805 244 260 1,065 4,720 Total commercial 1,153 313 553 1,706 9,811 Private individuals – other 538 191 194 732 1,431 Total public – activity in Israel 1,691 504 747 2,438 11,242

Borrower activity overseas Public – commercial Construction and real estate 16 2 - 16 119 Commercial – other 41 3 133 174 406 Total commercial 57 5 133 190 525 Private individuals 36 36 - 36 39 Total public – activity overseas 93 41 133 226 564 Total public* 1,784 545 880 2,664 11,806 * Of which: Measured at the present value of cash flows 1,246 428 560 1,806 - Debts in troubled debt restructuring 750 218 559 1,309 -

** Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (1) Recorded debt balance. (2) Individual allowance for credit losses.

211 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts* (continued) 2. Additional information regarding impaired debts (continued) b. Average balance and interest income

For the three months ended For the three months ended March 31, 2018 March 31, 2017 Average Interest Of which: Average Interest Of which: balance** of income recorded on a balance** of income recorded on a impaired debts recorded***(1) cash basis impaired debts recorded***(1) cash basis Borrower activity in Israel Public – commercial Construction and real estate – construction 318 1 1 366 1 - Construction and real estate – real-estate activities 268 1 - 366 1 - Financial services 32 - - 130 1 1 Commercial – other 1,048 3 1 1,948 4 3 Total commercial 1,666 5 2 2,810 7 4 Private individuals – other 722 12 3 722 11 4 Total public – activity in Israel 2,388 17 5 3,532 18 8

Borrower activity overseas Public – commercial Construction and real estate 42 - - 38 - - Commercial – other 160 - - 114 - - Total commercial 202 - - 152 - - Private individuals 37 - - 31 - - Total public – activity overseas 239 - - 183 - - Total public 2,627 17 5 3,715 18 8

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). ** Average recorded debt balance of impaired debts in the reported period. *** Interest income recorded in the reported period in respect of the average balance of impaired debts, during the period in which the debts were classified as impaired. (1) Had the impaired debts accrued interest according to the original terms, interest income in the amount of NIS 57 million would have been recorded (March 31, 2017: NIS 76 million).

212 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts* (continued) 2. Additional information regarding impaired debts (continued) c. Troubled debt restructuring

March 31, 2018 Recorded debt balance Not accruing Accruing(1), Accruing(1), Total(2) interest income in arrears of not in arrears 30 to 89 days Borrower activity in Israel Public – commercial Construction and real estate – construction 26 - 19 45 Construction and real estate – real-estate activities 82 - 73 155 Financial services 4 - 1 5 Commercial – other 303 - 107 410 Total commercial 415 - 200 615 Private individuals – other 267 - 352 619 Total public – activity in Israel 682 - 552 1,234

Borrower activity overseas Public – commercial Commercial – other - 22 - 22 Private individuals - - 1 1 Total public – activity overseas - 22 1 23 Total public 682 22 553 1,257

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (1) Accruing interest income. (2) Included in impaired debts. Commitments to grant additional credit to debtors who have undergone troubled debt restructuring with changes to the terms of the credit totaled approximately NIS 24 million as at March 31, 2018 (March 31, 2017: NIS 23 million; December 31, 2017: NIS 21 million).

213 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts* (continued) 2. Additional information regarding impaired debts (continued) c. Troubled debt restructuring (continued)

March 31, 2017 Recorded debt balance Not accruing Accruing(1), Accruing(1), Total(2) interest income in arrears of not in arrears 30 to 89 days Borrower activity in Israel Public – commercial Construction and real estate – construction 55 - 19 74 Construction and real estate – real-estate activities 193 - 44 237 Financial services 14 - 2 16 Commercial – other 654 - 83 737 Total commercial 916 - 148 1,064 Private individuals – other 311 - 312 623 Total public – activity in Israel 1,227 - 460 1,687

Borrower activity overseas Public – commercial Commercial – other 4 14 - 18 Total public 1,231 14 460 1,705

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (1) Accruing interest income. (2) Included in impaired debts.

214 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Audited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts* (continued) 2. Additional information regarding impaired debts (continued) c. Troubled debt restructuring (continued)

December 31, 2017 Recorded debt balance Not accruing Accruing(1), Accruing(1), Total(2) interest income in arrears of not in arrears 30 to 89 days Borrower activity in Israel Public – commercial Construction and real estate – construction 26 - 24 50 Construction and real estate – real-estate activities 96 - 74 170 Financial services 3 - 1 4 Commercial – other 342 - 93 435 Total commercial 467 - 192 659 Private individuals – other 288 - 349 637 Total public – activity in Israel 755 - 541 1,296

Borrower activity overseas Public – commercial Commercial – other - 13 - 13 Total public 755 13 541 1,309

* Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”). (1) Accruing interest income. (2) Included in impaired debts.

215 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts** (continued) 2. Additional information regarding impaired debts (continued) c. Troubled debt restructuring (continued)

Debts restructured In the three months In the three months ended March 31, 2018 ended March 31, 2017 Number of Recorded debt Recorded debt Number of Recorded debt Recorded debt contracts balance before balance after contracts balance before balance after restructuring restructuring restructuring restructuring Borrower activity in Israel Public – commercial Construction and real estate – construction 62 9 7 43 8 7 Construction and real estate – real-estate activities 5 1 1 11 5 5 Financial services 3 4 4 4 - - Commercial – other 300 41 41 *303 61 51 Total commercial 370 55 53 *361 74 63 Private individuals – other 1,848 81 80 *2,579 *131 *124 Total public – activity in Israel 2,218 136 133 *2,940 *205 *187

Borrower activity overseas Public – commercial Commercial – other - - - 1 - - Private individuals 3 - - 3 - - Total public – activity overseas 3 - - 4 - - Total public 2,221 136 133 *2,944 *205 *187

* Restated. ** Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”).

216 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, Unaudited Credit to the Public, and Allowance for Credit Losses (continued) NIS millions

B. Debts*** (continued) 2. Additional information regarding impaired debts (continued) c. Troubled debt restructuring (continued)

Failed restructured debts** In the three months ended In the three months March 31, 2018 ended March 31, 2017 Number of Recorded debt Number of Recorded debt contracts balance contracts balance Borrower activity in Israel Public – commercial Construction and real estate – construction 30 4 27 4 Construction and real estate – real-estate activities 2 - 4 - Financial services 2 - 1 - Commercial – other 155 10 *93 7 Total commercial 189 14 *125 11 Private individuals – other 893 20 *838 *21 Total public – activity in Israel 1,082 34 *963 *32

Borrower activity overseas Public – commercial Private individuals 3 - 1 - Total public 1,085 34 *964 *32

* Restated. ** Debts that became debts in arrears of 30 days or more during the reported year, which underwent troubled debt restructuring during the 12 months preceding the date on which they became debts in arrears. *** Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”).

217 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, NIS millions Credit to the Public, and Allowance for Credit Losses (continued)

B. Debts** (continued) 3. Additional information regarding housing loans – private individuals Year-end balances by financing ratio (LTV)*, repayment type, and interest type

March 31, 2018 Balance of housing loans Off-balance sheet Total Of which: Of which: credit risk bullet and floating interest balloon rate Unaudited First lien: financing rate Up to 60% 42,521 1,683 26,805 1,033 Over 60% 23,061 321 16,036 587 Secondary lien or no lien 627 28 366 1,925 Total 66,209 2,032 43,207 3,545

March 31, 2017 Balance of housing loans Off-balance sheet Total Of which: Of which: credit risk bullet and floating interest balloon rate Unaudited First lien: financing rate Up to 60% 38,909 2,003 24,459 779 Over 60% 22,944 455 16,208 312 Secondary lien or no lien 648 38 362 1,244 Total 62,501 2,496 41,029 2,335

December 31, 2017 Balance of housing loans Off-balance sheet Total Of which: Of which: credit risk bullet and floating interest balloon rate Audited First lien: financing rate Up to 60% 41,627 1,775 26,194 917 Over 60% 22,907 355 15,995 467 Secondary lien or no lien 642 23 364 1,512 Total 65,176 2,153 42,553 2,896

* Ratio of the approved credit facility, when the facility was granted, to the value of the asset, as approved by the Bank when the facility was granted. ** Credit to the public, credit to governments, and deposits with banks (excluding deposits with the Bank of Israel), excluding bonds, securities borrowed or purchased under agreements to resell, and assets in respect of activity in the Maof market (presented under the item “other assets”).

218 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 13 Additional Information Regarding Credit Risk, NIS millions Credit to the Public, and Allowance for Credit Losses (continued)

Credit quality – LTV ratio The LTV ratio provides another indication of credit quality for the Bank. The LTV ratio is the ratio of the amount of the loan to the estimated value of the financed asset, as approved by the Bank when the credit facility was granted. The LTV ratio is calculated at the time of approval of the credit, with the following exceptions: 1. Granting of additional credit secured by the same asset. 2. Receiving a loan from another corporation with a joint pari-passu lien on the asset. 3. Transfer of a mortgage. 4. A part of a credit facility that has not been utilized. 5. Substantial early repayment (10 percent or more). The note presents balances of debt in respect of housing loans, with segmentation by ranges of LTV ratios and levels of liens.

C. Information regarding debt sales For information regarding loan sale transactions, see Note 10A(4).

D. Off-balance sheet financial instruments

March 31 December 31 March 31 December 31 2018 2017 2017 2018 2017 2017 Contract balances* Allowance for credit losses Contract balances or nominal amounts at year end – Transactions the balance of which represents a credit risk: (a) Documentary credit 1,649 1,126 1,825 8 7 7 (b) Credit guarantees 5,822 6,153 5,659 65 60 61 (c) Guarantees to purchasers of homes 24,261 23,406 24,511 72 70 68 (d) Other guarantees and liabilities** 23,369 22,830 23,070 186 215 185 (e) Unutilized credit facilities for credit cards under the responsibility of the Bank 25,279 26,121 25,618 52 48 49 (f) Unutilized credit facilities for credit cards under the responsibility of other banks 10,933 10,897 10,762 - - - (g) Unutilized revolving overdraft and other on-demand credit facilities 38,724 34,444 37,604 102 108 102 (h) Irrevocable commitments to grant credit approved but not yet drawn*** 27,848 24,809 24,634 90 79 87 (i) Commitments to issue guarantees 22,154 19,334 19,725 81 76 68

* Contract balances or the nominal amounts thereof at year end, before the effect of the allowance for credit losses. ** Includes the Bank’s liabilities in respect of its share in the risk fund of the Maof Clearing House, in the amount of NIS 311 million (March 31, 2017: NIS 294 million; December 31, 2017: NIS 311 million). *** Includes commitments to grant credit given to customers in loans “approved in principle with a hold on the interest rate,” under Proper Conduct of Banking Business Directive 451, “Procedures for Granting Housing Loans.”

219 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 14 Assets and Liabilities by Linkage Base Unaudited NIS millions

March 31, 2018 Israeli currency Foreign currency(1) Non-monetary Total items* Unlinked CPI-linked USD EUR Other Assets Cash and deposits with banks 56,303 - 17,692 617 3,536 - 78,148 Securities 35,712 1,490 20,824 971 432 2,109 61,538 Securities borrowed or purchased under agreements to resell 608 - - - - - 608 Net credit to the public(2) 211,029 45,155 20,953 4,051 1,948 967 284,103 Credit to governments 196 - 1,199 1,081 - - 2,476 Investments in equity-basis investees 55 - - - - 51 106 Buildings and equipment - - - - - 3,326 3,326 Assets in respect of derivative instruments(3) 6,538 929 3,015 690 367 734 12,273 Other assets 4,109 19 67 89 17 1,316 5,617 Total assets 314,550 47,593 63,750 7,499 6,300 8,503 448,195

Liabilities Deposits from the public 238,561 14,956 74,390 12,427 3,498 978 344,810 Deposits from banks 1,947 124 1,033 432 66 - 3,602 Deposits from the government 207 5 173 - - - 385 Securities lent or sold under agreements to repurchase - - - - 6 - 6 Bonds and subordinated notes 3,009 22,699 373 11 122 - 26,214 Liabilities in respect of derivative instruments(3) 6,019 1,132 2,840 537 182 726 11,436 Other liabilities 21,681 228 2,008 255 310 1,044 25,526 Total liabilities 271,424 39,144 80,817 13,662 4,184 2,748 411,979

Surplus assets (liabilities) 43,126 8,449 )17,067( )6,163( 2,116 5,755 36,216 Effect of hedging derivatives: Derivative instruments (excluding options) 856 - 5 - )861( - - Effect of non-hedging derivatives: Derivative instruments (excluding options) )23,635( )331( 19,593 6,237 )1,864( - - Options in the money, net (in terms of underlying asset) 2,591 - )2,046( )594( 49 - - Options out of the money, net (in terms of underlying asset) )105( - )601( 541 165 - - Overall total 22,833 8,118 )116( 21 )395( 5,755 36,216 Options in the money, net (nominal present value) 3,817 - )2,639( )1,378( 200 - - Options out of the money, net (nominal present value) )1,085( - )1,193( 1,651 627 - -

* Including derivative instruments whose underlying asset refers to a non-monetary item. (1) Including linked to foreign currency. (2) After deduction of allowances for credit losses attributed to the linkage base. (3) The Bank applies the directives of FAS 157 concerning fair-value measurements. Balances of assets and liabilities presented in this note are net amounts, after attribution of the effects of the implementation of the standard, in the amount of NIS (141) million.

220 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 14 Assets and Liabilities by Linkage Base (continued) Unaudited NIS millions

March 31, 2017 Israeli currency Foreign currency(1) Non-monetary Total items* Unlinked CPI-linked USD EUR Other Assets Cash and deposits with banks 50,228 5 22,093 380 4,382 - 77,088 Securities 49,057 720 20,780 1,060 991 2,286 74,894 Securities borrowed or purchased under agreements to resell 144 - - - - - 144 Net credit to the public(2) 194,231 45,185 22,377 4,153 3,156 880 269,982 Credit to governments 63 - 1,246 956 - - 2,265 Investments in equity-basis investees 42 - - - - 115 157 Buildings and equipment - - - - - 3,303 3,303 Assets in respect of derivative instruments(3) 7,711 846 2,422 152 418 713 12,262 Other assets 4,174 6 100 44 41 1,387 5,752 Total assets 305,650 46,762 69,018 6,745 8,988 8,684 445,847

Liabilities Deposits from the public 226,412 11,662 80,799 13,265 4,500 880 337,518 Deposits from banks 1,787 181 1,687 493 51 - 4,199 Deposits from the government 312 9 168 - - - 489 Securities lent or sold under agreements to repurchase - - - 78 20 - 98 Bonds and subordinated notes 4,884 25,071 1,067 14 135 - 31,171 Liabilities in respect of derivative instruments(3) 7,963 1,432 2,274 132 306 708 12,815 Other liabilities 21,674 )56( 1,418 108 263 1,072 24,479 Total liabilities 263,032 38,299 87,413 14,090 5,275 2,660 410,769

Surplus assets (liabilities) 42,618 8,463 )18,395( )7,345( 3,713 6,024 35,078 Effect of hedging derivatives: Derivative instruments (excluding options) 1,204 - - - )1,204( - - Effect of non-hedging derivatives: Derivative instruments (excluding options) )22,749( )1,956( 20,129 7,679 )3,103( - - Options in the money, net (in terms of underlying asset) 2,045 - )1,756( )329( 40 - - Options out of the money, net (in terms of underlying asset) 124 - )162( )71( 109 - - Overall total 23,242 6,507 )184( )66( )445( 6,024 35,078 Options in the money, net (nominal present value) 3,036 - )2,861( )503( 328 - - Options out of the money, net (nominal present value) )194( - 429 )602( 367 - -

* Including derivative instruments whose underlying asset refers to a non-monetary item. (1) Including linked to foreign currency. (2) After deduction of allowances for credit losses attributed to the linkage base. (3) The Bank applies the directives of FAS 157 concerning fair-value measurements. Balances of assets and liabilities presented in this note are net amounts, after attribution of the effects of the implementation of the standard, in the amount of NIS (136) million. These effects were presented in the unlinked segment.

221 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 14 Assets and Liabilities by Linkage Base (continued) Audited NIS millions

December 31, 2017 Israeli currency Foreign currency(1) Non-monetary Total items* Unlinked CPI-linked USD EUR Other Assets Cash and deposits with banks 61,920 - 20,698 451 3,036 9 86,114 Securities 37,119 54 24,345 1,108 590 2,226 65,442 Securities borrowed or purchased under agreements to resell 684 - - - - - 684 Net credit to the public(2) 206,620 44,915 21,094 3,392 1,791 851 278,663 Credit to governments 99 - 1,150 1,043 - - 2,292 Investments in equity-basis investees 55 - - - - 148 203 Buildings and equipment - - - - - 3,392 3,392 Assets in respect of derivative instruments(3) 7,747 1,041 1,544 648 217 816 12,013 Other assets 4,210 7 61 67 24 1,252 5,621 Total assets 318,454 46,017 68,892 6,709 5,658 8,694 454,424

Liabilities Deposits from the public 242,277 13,642 74,937 11,851 3,758 886 347,351 Deposits from banks 2,108 125 1,443 438 35 - 4,149 Deposits from the government 216 6 98 - - - 320 Securities lent or sold under agreements to repurchase - - - - 367 - 367 Bonds and subordinated notes 3,398 24,580 937 11 132 - 29,058 Liabilities in respect of derivative instruments(3) 7,621 1,347 1,635 437 222 787 12,049 Other liabilities 21,050 783 1,826 203 310 954 25,126 Total liabilities 276,670 40,483 80,876 12,940 4,824 2,627 418,420

Surplus assets (liabilities) 41,784 5,534 )11,984( )6,231( 834 6,067 36,004 Effect of hedging derivatives: Derivative instruments (excluding options) 1,015 - )17( - )998( - - Effect of non-hedging derivatives: Derivative instruments (excluding options) )20,436( 429 14,237 5,610 160 - - Options in the money, net (in terms of underlying asset) 1,705 - )1,827( 369 )247( - - Options out of the money, net (in terms of underlying asset) 451 - )683( 166 66 - - Overall total 24,519 5,963 )274( )86( )185( 6,067 36,004 Options in the money, net (nominal present value) 1,957 - )1,577( )120( )260( - - Options out of the money, net (nominal present value) 1,081 - )1,971( 682 208 - -

* Including derivative instruments whose underlying asset refers to a non-monetary item. (1) Including linked to foreign currency. (2) After deduction of allowances for credit losses attributed to the linkage base. (3) The Bank applies the directives of FAS 157 concerning fair-value measurements. Balances of assets and liabilities presented in this note are net amounts, after attribution of the effects of the implementation of the standard, in the amount of NIS (106) million.

222 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments

Fair value of financial instruments This note includes information concerning the assessment of the fair value of financial instruments. A “market price” cannot be quoted for the majority of financial instruments at the Bank because no active market exists in which they are traded. Fair value is therefore estimated by means of accepted pricing models, such as the present value of future cash flows discounted by a discounting interest rate that reflects the level of risk inherent in the financial instrument. An estimate of fair value by means of an assessment of future cash flows and the setting of a discounting interest rate is subjective. Therefore, for the majority of financial instruments, the following assessment of fair value is not necessarily an indication of the disposal value of the financial instrument on the reporting date. The fair value is assessed on the basis of the interest rates valid at the reporting date, and does not take interest-rate volatility into account. Under the assumption of different interest rates, fair values would be obtained that may differ materially. This mainly applies to financial instruments that bear a fixed rate of interest or that do not bear interest. In addition, the assessment of fair value does not take into consideration fees to be received or paid in the course of business activity, and does not include the effect of non-controlling interests or tax effects. Moreover, the difference between the balance sheet balance and fair value balances may not be realized, because in the majority of cases the financial instrument may be held to maturity by the Bank. Due to all of these factors, it should be emphasized that data included in this note are insufficient to indicate the value of the banking corporation as a going concern. In addition, due to the broad spectrum of assessment techniques and estimates that can be applied in assessing fair value, caution should be exercised when comparing fair values between different banks.

Principal methods and assumptions used to estimate the fair value of financial instruments Deposits with banks, nonmarketable bonds and loans, and credit to the government – By discounting future cash flows according to the interest rates at which the Bank executed similar transactions at the reporting date. Marketable securities – According to market value in the primary market. Credit to the public – The fair value of the balance of credit to the public is estimated using the method of the present value of future cash flows, discounted by a suitable discount rate. The balance of credit was segmented into homogeneous categories. In each category, the flow of future receipts (principal and interest) was calculated. These receipts were discounted by an interest rate reflecting the level of risk inherent in the credit in that category. This interest rate was usually determined according to the interest rate at which similar transactions were executed at the Bank at the reporting date. The fair value of impaired debts was calculated using discounting interest rates reflecting the high credit risk inherent in such debts. In any case, these discount rates were not lower than the highest interest rate used by the Bank in its transactions at the reporting date. Future cash flows for impaired debts and other debts were calculated after the deduction of the effects of charge-offs and of allowances for credit losses in respect of the debts. An increase of 1% in discounting interest rates of impaired debts would reduce their fair value by a total of NIS 9 million.

223 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments (continued)

Charge-offs and allowances for credit losses were attributed to the periods in which the debt was classified, where possible (e.g. when an allowance was calculated on an individual basis according to the present value of a cash flow). In the absence of these data, charge-offs and the allowance are attributed proportionally to the balance of credit, according to the term to maturity at the end of the period. The calculation of fair value includes assumptions regarding early repayment of housing loans, in accordance with the estimates of the Bank, based on an examination of the historical data regarding early repayment in relation to parameters that explain such repayment. The effect of these assumptions on fair value resulted in an increase of the fair value by NIS 34 million. Deposits, bonds, and notes – By discounting future cash flows according to the interest rates at which the corporation raises similar deposits or the Bank issues similar bonds and notes (if a price quoted in an active market is not available) on the reporting date. With regard to bonds and subordinated notes traded as an asset in an active market, fair value is based on quoted market prices or on quotes from traders for an identical liability traded as an asset in an active market. Inter-client lending – Presented as credit and deposits, and measured according to the value of the loaned securities on the stock market. Derivative financial instruments – Derivative financial instruments that have an active market were assessed at the market value established in the primary market. Derivative financial instruments not traded in an active market were assessed on the basis of models used by the Bank in its routine operations, taking into account the risks inherent in the financial instrument. The measurement of the fair value of derivative instruments takes the credit risk inherent in such transactions into account, among other factors. Estimates of the fair value of assets in respect of derivative instruments also reflect the credit risk of the counterparty, and estimates of the fair value of liabilities in respect of derivative instruments also reflect the credit risk of the Bank. Assets and liabilities for which fair value is measured based on Level 3 data – Items for which fair value is determined based on an indicative price from an independent entity, indicative price of a counterparty to the transaction, or evaluation models in which some of the significant inputs are unobservable; and items for which fair value is determined based on internal calculators or service bureaus in which some of the inputs are unobservable.

224 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Unaudited (continued) NIS millions

A. Balances and fair-value estimates of financial instruments

March 31, 2018

Balance sheet Fair value(1) Total balance Level 1 Level 2 Level 3 Financial assets Cash and deposits with banks 78,148 3,414 - 74,695 78,109 Securities* 61,538 39,208 20,725 1,609 61,542 Securities borrowed or purchased under agreements to resell 608 - - 608 608 Net credit to the public*** 284,103 5,129 - 280,113 285,242 Credit to governments 2,476 - - 2,477 2,477 Assets in respect of derivative instruments 12,273 741 6,431 5,101 12,273 Other financial assets 1,367 629 - 749 1,378 Total financial assets **440,513 49,121 27,156 365,352 441,629 Financial liabilities Deposits from the public*** 344,810 6,397 - 339,770 346,167 Deposits from banks 3,602 - - 3,617 3,617 Deposits from the government 385 - - 398 398 Securities lent or sold under agreements to repurchase 6 - - 6 6 Bonds and subordinated notes 26,214 23,841 2,107 1,631 27,579 Liabilities in respect of derivative instruments 11,436 740 6,489 4,207 11,436 Other financial liabilities 18,532 629 - 18,149 18,778 Total financial liabilities **404,985 31,607 8,596 367,778 407,981

* Includes shares and options for which no fair value is available, which are stated at cost, in the amount of NIS 970 million. For further details regarding the balance sheet balance and fair value of securities, see Note 5. ** Of which: assets and liabilities in the amount of NIS 81,592 million and in the amount of NIS 18,469 million, respectively, whose balance sheet balance is identical to their fair value (instruments presented at fair value in the balance sheet). For further information regarding instruments measured at fair value on a recurring basis and on a nonrecurring basis, see Sections B-F. *** Of which, amounts of NIS 0 million and NIS 7 million (respectively) were included in the balance of credit to the public and in the balance of deposits from the public, in respect of embedded derivative instruments. (1) Level 1 – Fair value measurements using quoted prices on an active market. Level 2 – Fair value measurements using other significant observable inputs. Level 3 – Fair value measurements using significant unobservable inputs.

225 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Unaudited (continued) NIS millions

A. Balances and fair-value estimates of financial instruments (continued)

March 31, 2017

Balance sheet Fair value(1) Total balance Level 1 Level 2 Level 3 Financial assets Cash and deposits with banks 77,088 2,639 - 74,438 77,077 Securities* 74,894 54,209 19,282 1,407 74,898 Securities borrowed or purchased under agreements to resell 144 - - 144 144 Net credit to the public*** 269,982 4,234 - 265,104 269,338 Credit to governments 2,265 - - 2,268 2,268 Assets in respect of derivative instruments 12,262 746 8,976 2,540 12,262 Other financial assets 1,302 628 - 685 1,313 Total financial assets **437,937 62,456 28,258 346,586 437,300 Financial liabilities Deposits from the public*** 337,518 4,428 - 334,112 338,540 Deposits from banks 4,199 - - 4,213 4,213 Deposits from the government 489 - - 505 505 Securities lent or sold under agreements to repurchase 98 - - 98 98 Bonds and subordinated notes 31,171 27,934 2,102 2,612 32,648 Liabilities in respect of derivative instruments 12,815 746 11,794 275 12,815 Other financial liabilities 17,480 628 - 16,893 17,521 Total financial liabilities **403,770 33,736 13,896 358,708 406,340

* Includes shares and options for which no fair value is available, which are stated at cost, in the amount of NIS 850 million. For further details regarding the balance sheet balance and fair value of securities, see Note 5. ** Of which: assets and liabilities in the amount of NIS 93,396 million and in the amount of NIS 17,901 million, respectively, whose balance sheet balance is identical to their fair value (instruments presented at fair value in the balance sheet). For further information regarding instruments measured at fair value on a recurring basis and on a nonrecurring basis, see Sections B-F. *** Of which, amounts of NIS 0 million and NIS 30 million (respectively) were included in the balance of credit to the public and in the balance of deposits from the public, in respect of embedded derivative instruments. (1) Level 1 – Fair value measurements using quoted prices on an active market. Level 2 – Fair value measurements using other significant observable inputs. Level 3 – Fair value measurements using significant unobservable inputs.

226 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Audited (continued) NIS millions

A. Balances and fair-value estimates of financial instruments (continued)

December 31, 2017

Balance sheet Fair value(1) Total balance Level 1 Level 2 Level 3 Financial assets Cash and deposits with banks 86,114 3,194 - 82,891 86,085 Securities* 65,442 40,236 23,723 1,488 65,447 Securities borrowed or purchased under agreements to resell 684 - - 684 684 Net credit to the public*** 278,663 5,205 - 274,566 279,771 Credit to governments 2,292 - - 2,302 2,302 Assets in respect of derivative instruments 12,013 809 7,270 3,934 12,013 Other financial assets 1,298 617 - 692 1,309 Total financial assets **446,506 50,061 30,993 366,557 447,611 Financial liabilities Deposits from the public*** 347,351 5,371 - 343,456 348,827 Deposits from banks 4,149 - - 4,166 4,166 Deposits from the government 320 - - 334 334 Securities lent or sold under agreements to repurchase 367 - - 368 368 Bonds and subordinated notes 29,058 26,176 2,114 2,209 30,499 Liabilities in respect of derivative instruments 12,049 809 6,886 4,354 12,049 Other financial liabilities 17,836 617 - 17,219 17,836 Total financial liabilities **411,130 32,973 9,000 372,106 414,079

* Includes shares and options for which no fair value is available, which are stated at cost, in the amount of NIS 848 million. For further details regarding the balance sheet balance and fair value of securities, see Note 5. ** Of which: assets and liabilities in the amount of NIS 85,209 million and in the amount of NIS 18,062 million, respectively, whose balance sheet balance is identical to their fair value (instruments presented at fair value in the balance sheet). For further information regarding instruments measured at fair value on a recurring basis and on a nonrecurring basis, see Sections B-F. *** Of which, amounts of NIS 0 million and NIS 25 million (respectively) were included in the balance of credit to the public and in the balance of deposits from the public, in respect of embedded derivative instruments. (1) Level 1 – Fair value measurements using quoted prices on an active market. Level 2 – Fair value measurements using other significant observable inputs. Level 3 – Fair value measurements using significant unobservable inputs.

227 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Unaudited (continued) NIS millions

B. Items measured at fair value on a recurring basis

March 31, 2018 Fair value measurements using – Total fair value Prices quoted in Other significant Significant an active market observable unobservable (Level 1) inputs (Level 2) inputs (Level 3) Assets Securities available for sale Israeli government bonds 27,864 4,122 - 31,986 Foreign government bonds 576 9,936 - 10,512 Bonds of financial institutions in Israel 44 - - 44 Bonds of foreign financial institutions 431 5,152 214 5,797 Bonds of others in Israel - 307 - 307 Bonds of foreign others 207 1,208 - 1,415 Tradable shares 1,095 - - 1,095 Securities held for trading Israeli government bonds 8,876 - - 8,876 Foreign government bonds 69 - - 69 Bonds of foreign others 2 - - 2 Tradable shares 44 - - 44 Total securities measured at fair value 39,208 20,725 214 60,147 Assets in respect of derivative instruments NIS-CPI contracts - 230 194 424 Other interest contracts - 3,712 2,932 6,644 Foreign-currency contracts 45 2,465 1,767 4,277 Share contracts 696 22 195 913 Commodity and other contracts - 2 13 15 Credit in respect of inter-customer lending 5,129 - - 5,129 Assets in respect of activity in the Maof market 629 - - 629 Total assets 45,707 27,156 5,315 78,178

228 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Unaudited (continued) NIS millions

B. Items measured at fair value on a recurring basis (continued)

March 31, 2018 Fair value measurements using – Total fair value Prices quoted in Other significant Significant an active market observable unobservable (Level 1) inputs (Level 2) inputs (Level 3) Liabilities Liabilities in respect of derivative instruments NIS-CPI contracts - 263 85 348 Other interest contracts - 4,153 2,624 6,777 Foreign-currency contracts 44 1,896 1,458 3,398 Share contracts 696 177 26 899 Commodity and other contracts - - 14 14 Liabilities in respect of embedded derivatives - 6 1 7 Deposits in respect of inter-customer lending 5,129 - - 5,129 Liabilities in respect of activity in the Maof market 629 - - 629 Liabilities in respect of securities lending 1,268 - - 1,268 Total liabilities 7,766 6,495 4,208 18,469

229 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Unaudited (continued) NIS millions

B. Items measured at fair value on a recurring basis (continued)

March 31, 2017 Fair value measurements using – Total fair value Prices quoted in Other significant Significant an active market observable unobservable (Level 1) inputs (Level 2) inputs (Level 3) Assets Securities available for sale Government bonds - Israeli government 41,144 3,748 - 44,892 Government bonds - foreign governments 909 8,185 - 9,094 Bonds of financial institutions in Israel 94 - - 94 Bonds of foreign financial institutions 1,273 5,420 142 6,835 Bonds of others in Israel 189 524 - 713 Bonds of foreign others 1,221 1,405 - 2,626 Tradable shares 1,375 - - 1,375 Securities held for trading Government bonds - Israeli government 7,862 - - 7,862 Government bonds - foreign governments 78 - - 78 Bonds of others in Israel 3 - - 3 Tradable shares 61 - - 61 Total securities measured at fair value 54,209 19,282 142 73,633 Assets in respect of derivative instruments NIS-CPI contracts - 327 101 428 Other interest contracts - 5,965 425 6,390 Foreign-currency contracts 38 2,549 1,965 4,552 Share contracts 708 125 46 879 Commodity and other contracts - 10 3 13 Credit in respect of inter-customer lending 4,234 - - 4,234 Assets in respect of activity in the Maof market 628 - - 628 Total assets 59,817 28,258 2,682 90,757

230 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Unaudited (continued) NIS millions

B. Items measured at fair value on a recurring basis (continued)

March 31, 2017 Fair value measurements using – Total fair value Prices quoted in Other significant Significant an active market observable unobservable (Level 1) inputs (Level 2) inputs (Level 3) Liabilities Liabilities in respect of derivative instruments NIS-CPI contracts - 450 42 492 Other interest contracts - 6,500 185 6,685 Foreign-currency contracts 38 4,715 40 4,793 Share contracts 708 116 10 834 Commodity and other contracts - 13 )2( 11 Liabilities in respect of embedded derivatives - - 30 30 Deposits in respect of inter-customer lending 4,234 - - 4,234 Liabilities in respect of activity in the Maof market 628 - - 628 Liabilities in respect of securities lending 194 - - 194 Total liabilities 5,802 11,794 305 17,901

231 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Audited (continued) NIS millions

B. Items measured at fair value on a recurring basis (continued)

December 31, 2017 Fair value measurements using – Total fair value Prices quoted in Other significant Significant an active market observable unobservable (Level 1) inputs (Level 2) inputs (Level 3) Assets Securities available for sale Israeli government bonds 31,593 3,935 - 35,528 Foreign government bonds 673 12,424 - 13,097 Bonds of financial institutions in Israel 73 - - 73 Bonds of foreign financial institutions 673 5,442 212 6,327 Bonds of others in Israel - 402 - 402 Bonds of foreign others 703 1,520 - 2,223 Tradable shares 1,311 - - 1,311 Securities held for trading Israeli government bonds 5,069 - - 5,069 Foreign government bonds 71 - - 71 Bonds of foreign others 3 - - 3 Tradable shares 67 - - 67 Total securities measured at fair value 40,236 23,723 212 64,171 Assets in respect of derivative instruments NIS-CPI contracts - 249 196 445 Other interest contracts - 4,072 2,222 6,294 Foreign-currency contracts 42 2,888 1,418 4,348 Share contracts 767 57 90 914 Commodity and other contracts - 4 8 12 Credit in respect of inter-customer lending 5,214 - - 5,214 Assets in respect of activity in the Maof market 617 - - 617 Total assets 46,876 30,993 4,146 82,015

232 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Audited (continued) NIS millions

B. Items measured at fair value on a recurring basis (continued)

December 31, 2017 Fair value measurements using – Total fair value Prices quoted in Other significant Significant an active market observable unobservable (Level 1) inputs (Level 2) inputs (Level 3) Liabilities Liabilities in respect of derivative instruments NIS-CPI contracts - 372 93 465 Other interest contracts - 4,679 1,927 6,606 Foreign-currency contracts 41 1,818 2,231 4,090 Share contracts 768 16 93 877 Commodity and other contracts - 1 10 11 Liabilities in respect of embedded derivatives - )4( 29 25 Deposits in respect of inter-customer lending 5,214 - - 5,214 Liabilities in respect of activity in the Maof market 617 - - 617 Liabilities in respect of securities lending 157 - - 157 Total liabilities 6,797 6,882 4,383 18,062

233 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments NIS millions (continued)

C. Items measured at fair value on a nonrecurring basis

March 31, 2018 Fair value measurements using – Total Total profit (loss) fair value in respect of Prices quoted in Other significant Significant changes in value in an active market observable unobservable the period ended (Level 1) inputs (Level 2) inputs (Level 3) March 31, 2018 Unaudited Assets measured at fair value on a nonrecurring basis Impaired credit the collection of which is contingent on collateral - - 806 806 )1(8 Investments in shares - - - - )2(- Total - - 806 806 8

March 31, 2017 Fair value measurements using – Total Total profit (loss) fair value in respect of Prices quoted in Other significant Significant changes in value in an active market observable unobservable the period ended (Level 1) inputs (Level 2) inputs (Level 3) March 31, 2017 Unaudited Assets measured at fair value on a nonrecurring basis Impaired credit the collection of which is contingent on collateral - - 1,143 1,143 )1(2 Investments in shares - - - - )2(- Total - - 1,143 1,143 2

December 31, 2017 Fair value measurements using – Total Total profit (loss) fair value in respect of Prices quoted in Other significant Significant changes in value in an active market observable unobservable the period ended (Level 1) inputs (Level 2) inputs (Level 3) December 31, 2017 Audited Assets measured at fair value on a nonrecurring basis Impaired credit the collection of which is contingent on collateral - - 858 858 )1()207( Investments in shares - - 48 48 )2()19( Total - - 906 906 )226(

(1) Losses included in the statement of profit and loss under the item “provision for credit losses.” (2) Losses included in the statement of profit and loss under the item “non-interest financing income.”

234 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Unaudited (continued) NIS millions

D. Changes in items measured at fair value on a recurring basis included in Level 3

For the three months ended March 31, 2018 Fair value as at Gains (losses) Gains Acquisitions Extinguishment Transfers Transfers Fair value Unrealized December 31, included in (losses) to Level 3 from as at gains (losses) 2017 statement included in Level 3 March 31, in respect of of profit and equity(2) 2018 instruments loss(1)(3) held as at March 31, 2018 Assets Securities available for sale Bonds of foreign financial institutions 212 - 2 - - - - 214 )2()1(2 Net balances in respect of derivative instruments NIS-CPI contracts 103 2 - - 4 - - 109 )3()1( Other interest contracts 295 )14( - 61 )34( - - 308 )3()1()13( Foreign-currency contracts )813( 1,025 - 5 92 - - 309 )3(878 Share contracts )3( 136 - )1( 37 - - 169 )3(164 Commodity and other contracts )2( - - - 1 - - )1( )3(- Embedded derivatives )29( 22 - - 6 - - )1( )3(23 Total )237( 1,171 2 65 106 - - 1,107 1,055

For the three months ended March 31, 2017 Fair value as at Gains (losses) Gains Acquisitions Extinguishment Transfers Transfers Fair value Unrealized December 31, included in (losses) to Level 3 from as at gains (losses) 2016 statement included in Level 3 March 31, in respect of of profit and equity(2) 2017 instruments loss(1)(3) held as at March 31, 2017 Assets Securities available for sale Bonds of foreign financial institutions 156 - )14( - - - - 142 )2()1()14( Net balances in respect of derivative instruments NIS-CPI contracts 78 )89( - - )8( 78 - 59 )3()89( Other interest contracts 589 )116( - 13 )64( 103 )285( 240 )3()1()95( Foreign-currency contracts 1,523 325 - 131 )11( 147 )190( 1,925 )3(656 Share contracts 25 12 - 1 )2( - - 36 )3(4 Commodity and other contracts 7 )2( - - - - - 5 )3()3( Embedded derivatives )16( )19( - )1( 6 - - )30( )3()18( Total 2,362 111 )14( 144 )79( 328 )475( 2,377 441

(1) Gains (losses) included in the statement of profit and loss under the item “interest income.” (2) Gains (losses) included in equity under the item “adjustments for presentation of securities available for sale at fair value.” (3) Gains (losses) included in the statement of profit and loss under the item “non-interest financing income.”

235 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Audited (continued) NIS millions

D. Changes in items measured at fair value on a recurring basis included in Level 3 (continued)

For the year ended December 31, 2017 Fair value as at Gains (losses) Gains Acquisitions Extinguishment Transfers Transfers Fair value as at Unrealized December 31, included in (losses) to Level 3 from December 31, gains (losses) 2016 statement included in Level 3 2017 in respect of of profit and equity(2) instruments loss(1)(3) held as at December 31, 2017 Assets Securities available for sale Bonds of foreign financial institutions 156 - )15( 73 )2( - - 212 )2()1()15( Net balances in respect of derivative instruments NIS-CPI contracts 78 23 - - )1( 3 - 103 )3()9( Other interest contracts 589 )49( - )28( )75( )116( )26( 295 )3()1()113( Foreign-currency contracts 1,523 )384( - 41 )405( )467( )1,121( )813( )3()848( Share contracts 25 )17( - 3 )14( - - )3( )3()33( Commodity and other contracts 7 )1( - - )6( - )2( )2( )3()1( Embedded derivatives )16( )20( - )3( 10 - - )29( )3()20( Total 2,362 )448( )15( 86 )493( )580( )1,149( )237( )1,039(

(1) Gains (losses) included in the statement of profit and loss under the item “interest income.” (2) Gains (losses) included in equity under the item “adjustments for presentation of securities available for sale at fair value.” (3) Gains (losses) included in the statement of profit and loss under the item “non-interest financing income.”

E. During the period, there were no transfers of items measured at fair value between Level 1 and Level 2.

F. During the period, there were no transfers of items measured at fair value from Level 3 measurement to Level 2 measurement, with the exception of transfers due to transaction counterparty risk. In accordance with the policy of the banking corporation, transfers from level to level are recognized as occurring at the end of the reported period.

236 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Unaudited (continued)

G. Additional information regarding significant unobservable inputs and assessment techniques used in the measurement of the fair value of items classified as Level 3

March 31, 2018 Fair value Assessment technique Unobservable inputs Range (weighted average) NIS millions 1. Items measured at fair value on a recurring basis Assets Bonds of foreign financial 214 Quote from transaction institutions counterparty Net balances in respect of derivative instruments NIS-CPI contracts 109 Currency and interest-rate Transaction 0.51%-2.93% )1.48%( derivatives pricing model counterparty risk Other interest contracts 308 Interest-rate derivatives Transaction 0.54%-14.97% )1.78%( pricing model counterparty risk Foreign-currency contracts 309 Option pricing model Transaction 0.51%-14.97% )1.72%( counterparty risk Share contracts 159 Share derivatives Transaction pricing model counterparty risk Share contracts 9 Option pricing model Quote from counterparty (1) Share contracts 1 Option pricing model Standard deviation 36.14%-41.95% )36.58%( Dividend yield - Unlinked NIS 0.11%-0.97% )0.17%( interest rate Commodity and other contracts )1( Currency derivatives Transaction 0.51%-14.97% )11.65%( pricing model counterparty risk Embedded derivatives(2) Option pricing model Quote from )1( counterparty 2. Items measured at fair value on a nonrecurring basis Investment in non-tradable shares - Valuation Impaired credit the collection of 806 Tradable assets – which is contingent on collateral market value less an appropriate safety coefficient Non-tradable assets – discounted cash flow less an appropriate safety coefficient

Sensitivity analysis of fair-value measurements classified as Level 3: (1) An increase (decrease) in the standard deviation would lead to a significantly higher (lower) fair value measurement. Conversely, an increase (decrease) in the dividend yield or in the discounting interest rate would lead to a significantly lower (higher) fair value measurement. (2) An increase (decrease) in the discounting interest rate would lead to a significantly lower (higher) fair value measurement.

237 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Unaudited (continued)

G. Additional information regarding significant unobservable inputs and assessment techniques used in the measurement of the fair value of items classified as Level 3 (continued)

March 31, 2017 Fair value Assessment technique Unobservable inputs Range (weighted average) NIS millions 1. Items measured at fair value on a recurring basis Assets Bonds of foreign financial 142 Quote from transaction institutions counterparty Net balances in respect of derivative instruments NIS-CPI contracts 59 Currency and interest-rate Transaction 0.48%-4.46% (2.20%) derivatives pricing model counterparty risk Other interest contracts 240 Interest-rate derivatives Transaction 0.48%-5.65% (3.19%) pricing model counterparty risk Foreign-currency contracts 1,925 Option pricing model Transaction 0.48%-5.65% (3.19%) counterparty risk Foreign-currency contracts - - Share contracts - Option pricing model Transaction - counterparty risk (1) Share contracts 6 Option pricing model Standard deviation 24.25%-42.72% (26.38%) Dividend yield 6.00%-6.00% (6.00%) Unlinked NIS 0.77%-0.77% (0.77%) interest rate Commodity and other contracts 6 Currency derivatives Transaction 2.28%-5.65% (5.50%) pricing model counterparty risk Embedded derivatives(2) - Option pricing model Unlinked NIS - interest rate 2. Items measured at fair value on a nonrecurring basis Investment in non-tradable shares - Valuation Impaired credit the collection of 1,143 Tradable assets – which is contingent on collateral market value less an appropriate safety coefficient Non-tradable assets – discounted cash flow less an appropriate safety coefficient

Sensitivity analysis of fair-value measurements classified as Level 3: (1) An increase (decrease) in the standard deviation would lead to a significantly higher (lower) fair value measurement. Conversely, an increase (decrease) in the dividend yield or in the discounting interest rate would lead to a significantly lower (higher) fair value measurement. (2) An increase (decrease) in the discounting interest rate would lead to a significantly lower (higher) fair value measurement.

238 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 15 Balances and Fair-Value Estimates of Financial Instruments Audited (continued)

G. Additional information regarding significant unobservable inputs and assessment techniques used in the measurement of the fair value of items classified as Level 3 (continued)

December 31, 2017 Fair value Assessment technique Unobservable inputs Range (weighted average) NIS millions 1. Items measured at fair value on a recurring basis Assets Bonds of foreign financial 212 Quote from transaction institutions counterparty Net balances in respect of derivative instruments NIS-CPI contracts 103 Currency and interest-rate Transaction 0.44%-2.77% (0.96%) derivatives pricing model counterparty risk Other interest contracts 295 Interest-rate derivatives Transaction 0.44%-14.85% (1.00%) pricing model counterparty risk Foreign-currency contracts )813( Option pricing model Transaction 0.44%-14.85% (1.20%) counterparty risk Foreign-currency contracts )33( Share derivatives Transaction 0.44%-14.85% (4.58%) pricing model counterparty risk Share contracts 28 Option pricing model Quote from - counterparty (1) Share contracts 2 Option pricing model Standard deviation 36.14%-41.81% (36.26%) Dividend yield - Unlinked NIS 0.06%-0.97% (0.13%) interest rate Commodity and other contracts )2( Currency derivatives Transaction 0.44%-14.83% (0.88%) pricing model counterparty risk Embedded derivatives(2) )29( Option pricing model Quote from - counterparty 2. Items measured at fair value on a nonrecurring basis Investment in non-tradable shares 48 Valuation Impaired credit the collection of 858 Tradable assets – which is contingent on collateral market value less an appropriate safety coefficient Non-tradable assets – discounted cash flow less an appropriate safety coefficient

Sensitivity analysis of fair-value measurements classified as Level 3: (1) An increase (decrease) in the standard deviation would lead to a significantly higher (lower) fair value measurement. Conversely, an increase (decrease) in the dividend yield or in the discounting interest rate would lead to a significantly lower (higher) fair value measurement. (2) An increase (decrease) in the discounting interest rate would lead to a significantly lower (higher) fair value measurement.

239 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 16 Regulatory Initiatives

Several regulatory initiatives have been formulated over the last few years, as well as in 2017, with the primary aim of increasing competition in the banking system in Israel; several additional regulatory initiatives are in the process of being generated.

Regulatory reforms for increased competition in the banking system Several regulatory initiatives have been formulated over the last few years, with the primary aim of increasing competition in the banking system in Israel; several additional regulatory initiatives are in the process of being generated.

Law for Increasing Competition and Reducing Concentration in the Banking Market in Israel The Law for Increasing Competition and Reducing Concentration in the Banking Market in Israel (Legislative Amendments), 2017, was published in January 2017, on the basis of the report of the public committee appointed by the Minister of Finance and the Governor of the Bank of Israel (the Strum Committee). • The credit-card companies shall be separated from the two largest banks (the Bank and Bank Leumi) within three to four years of January 2017. The sale period will be extended to four years if the Bank issues at least 25% of the credit-card companies under its ownership within three years and also falls to a holding rate of 40%. • Beginning in July 2018, the banks will be required to transmit daily current-account balances to financial entities to be approved, subject to approval by the customer. • The Bank will be obligated to allow the transfer of information regarding customers’ accounts to third parties providing consulting, cost comparison, and financial information summation services. Such transfer shall be subject to the customer’s approval, and shall be performed using open API. By the end of 2018, the Bank is expected to be required to transfer customers’ Banking ID to third parties, and possibly additional information as well. A draft of the directives has not yet been published; publication is expected in the coming months. • The Bank will be obligated to sell holdings in ABS (Automatic Bank Services Ltd., an operator of technological systems that allow, among other things, transfers of approvals for transactions in charge cards and transfers of approvals for cash-withdrawal transactions). The Bank currently holds 34.5% of ABS, and will be obligated to sell holdings exceeding 10% within four years; voting rights in respect of such holdings above the noted rate are dormant as of June 1, 2017. • The Bank will be required to present detailed information regarding the use of non-bank credit cards on its website for its customers. The Bank is preparing to implement this law in accordance with the established schedule.

Parliamentary Inquiry Committee on Credit Allocation in the Economy In July 2017, the Knesset resolved to establish a parliamentary inquiry committee to examine credit allocation in the economy and debt arrangements. The committee is headed by MK Eitan Cabel. The committee will examine the conduct of the Bank of Israel, the Banking Supervision Department, the banks, institutional entities, insurance companies, and the various types of credit providers; draw conclusions; and present its recommendations on this subject.

240 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 16 Regulatory Initiatives (continued)

The Bank is preparing for the discussions of the committee, and will cooperate with the committee as necessary and in accordance with the law.

Material directives and initiatives in the first quarter of 2018 • Regulatory reliefs of the Supervisor of Banks for credit-card companies: In April 2018, the Banking Supervision Department published draft amendments to directives containing adjustments and easing of the directives with regard to credit-card companies and activity involving charge cards, which will facilitate the operations of these companies after their separation from the banks. For the purpose of measurement and capital adequacy – the banks shall assign weights to credit granted to credit-card companies similarly to credit granted to banks. With regard to single borrower indebtedness limits – the indebtedness of a credit-card company to a bank shall be subject to a limit of 15% of the capital of the bank, similar to the limit applicable to the indebtedness of a bank to another bank. However, a transitional period will be established for implementation of the directive. In addition, during a transitional period of five years, no limits will apply to credit granted by a credit-card company to banks arising from the activity of customers of the bank using bank cards during the month. On the subject of liquidity risk management – credit-card companies will be required to manage their liquidity risk based on an internal model, but will not be obligated to comply with the supervisory liquidity coverage ratio. Operational agreements between the banks and the credit-card companies shall be presented to the Banking Supervision Department for its information or for approval, in order to ensure that such agreements are consistent with the spirit of the law. • In April 2018, the Bank of Israel issued a circular concerning the conduct of banks with providers of regulated financial services (such as P2P companies, currency service providers, and others), stating, among other matters, that a clear risk-management policy must be established with respect to such entities, and that refusals to open accounts shall be performed with justifications and within a short period of time. In addition, it has been determined that when opening a trust account with multiple beneficiaries, the trustee’s declaration of the list of beneficiaries in the account may be considered sufficient. • The Bank of Israel has issued a draft directive concerning the conduct of banks in the area of outsourcing, establishing directives regarding the conduct of a bank with third parties; the directive includes a prohibition on marketing of credit by banks through third parties. • The law for the establishment of an automatic bank account mobility system, based on the CASS (Current Account Switch Service) established in England, was passed by Knesset as part of the economic plan (the Arrangements Law) for 2018. According to the proposal, banks shall allow secure online transfers for customers, within seven business days, at no cost to the customer. The law will takes effect within three years, with the option for an extension of one additional year. Since the publication of this bill, meetings of the committee for implementation of the law have been held at the Bank of Israel. • In April 2018, within the terms for approval of the restrictive arrangement for cross-clearing between credit-card companies, the Antitrust Authority stated that the companies would be required to transition to daily clearing for businesses. This requirement will take effect in July 2021.

241 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 16 Regulatory Initiatives (continued)

• In April 2018, the Bank of Israel published an outline for reduction of the rate of the interchange fee for credit cards from 0.7% to 0.5%, in four incremental steps, with the first step scheduled for January 2019 and the last step for January 2023. The Supervisor is also seeking to reduce the interchange fee in immediate debit transactions from 0.3% to 0.25%, in two increments, beginning in January 2021 and ending in January 2023. • In May 2018, the Bank of Israel issued a final procedure concerning the supervision of overseas offices. The new directive requires banks to reexamine and define their strategy for operations overseas, such that activity is focused and reduced to a small number of countries and offices, in a manner that allows appropriate resource allocation for management of the risks that arise from the activity, including compliance aspects. With regard to the continued operation of offices, the requirement is to strengthen and reinforce risk management, resources, and control in respect of such activity. • The Ministerial Committee for Legislation has passed the government bill for regularization of payment services, according to the principles of the PSD2 directive. The Constitution Committee is expected to discuss preparation of the bill for a second and third reading in the coming Knesset session. This law, which is expected to replace the Charge Cards Law, regulates the contractual relationship between payment service providers and payers, and establishes procedures regarding responsibility in the event of abuse. Another memorandum of law on this subject, establishing the duties that apply to an applicant seeking to serve as a payment service provider, is expected to be released for comments from the public in the coming months. • The Stock Exchange Structure Change Law, passed by the Knesset in April 2017, establishes duties of reporting to the stock exchange on fees collected by exchange members and clearing-house members from their customers, including trading fees and clearing fees, and on any change in such fees, as of July 2018.

242 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 16 Regulatory Initiatives (continued)

• Amendment 63 to the Securities Law, 1968, which concerns a change in the structure of the Tel Aviv Stock Exchange Ltd., was published on April 6, 2017. Further to the aforesaid amendment, on September 7, 2017, the District Court of Tel Aviv approved an arrangement for a change in the structure of the stock exchange, pursuant to which the means of control of the stock exchange and the rights to its issued and paid-up capital were allocated at a rate of approximately 11.6% to the Bank and approximately 1.6% to Poalim Sahar (a company under the full ownership of the Bank), totaling approximately 13.2% for the Bank Group. Pursuant to the amendment, within five years of the date of approval of the arrangement, or by the date of issuance of shares of the stock exchange to the public and listing of the shares for trading, whichever is earlier, the Bank must sell its holdings in the stock exchange, such that it does not hold more than 4.99% of the means of control thereof. Until the date of the sale, the aforesaid means of control shall not grant the Bank rights (other than rights to capital), beyond the rights accorded by a holding at a rate of 4.99% of the total means of control of the stock exchange. In addition, pursuant to the amendment to the law, the members of the stock exchange who sell their holdings shall transfer, to the stock exchange, the full difference between the consideration that they receive for the sale and the value of the holdings that they sell, in accordance with the shareholders’ equity of the stock exchange based on its financial statements for 2015 (approximately NIS 508 million). On January 18, 2018, the Bank submitted a proposal to the stock exchange for the sale of its holdings in the stock exchange in excess of 4.99%, and Poalim Sahar submitted a proposal to the stock exchange for the sale of all of its holdings, in response to the request addressed by the stock exchange to the shareholders on December 28, 2017 to acquire their shares. According to the proposal of the stock exchange, the total consideration offered for the acquisition of all of the shares of the stock exchange will stand at NIS 500 million. According to the proposal, the stock exchange is permitted to announce the acquisition of all or part of the shares, and to transfer the right of the shareholder to sell its rights to a third party chosen by the stock exchange. On April 17, 2018, the Bank received notification of acceptance of the proposal of the Bank and of the proposal of Poalim Sahar for the sale and transfer of the full holdings that they proposed to sell, as noted, to a transferee or to several transferees (the “Acceptance Notice”). The Acceptance Notice states, among other matters, that the consideration for the offered shares will exceed the consideration stated in the proposals of the Bank and Poalim Sahar (by a total amount of approximately NIS 41 million), but the surplus amount to be received will be transferred to the stock exchange, as mandated by Amendment 63 to the Securities Law, 2017; that completion of the transaction is subject to regulatory approvals; and that if the required approvals are not received, or the transaction is not completed, by June 19, 2018, or a later date to be agreed upon, the transaction will be canceled. • A private bill for the cancellation of the early repayment fee has been submitted to the Knesset for discussion of preparation of the law for the first reading. • The Credit Data Law is scheduled to take effect in October 2018. The credit data repository will begin to operate at that time. • The Insolvency and Economic Rehabilitation Bill was passed by the Knesset plenum in early March 2018. The directives in this bill are expected to impair the ability of the Bank to collect its debts, with respect to both business and private customers. This law will take effect in September 2018.

243 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Notes to the Condensed Financial Statements as at March 31, 2018

Note 16 Regulatory Initiatives (continued)

• The Ministerial Committee for Legislation has approved a draft of the Competition Law – an amendment to the Restrictive Trade Practices Law, which would expand the authority of the Antitrust Authority. Among other matters, the proposal would allow the Authority to cancel the ceiling amount applied to the maximum monetary sanction it is currently permitted to impose. Pursuant to the proposal, there would be no ceiling limiting this amount, and the Authority would be permitted to collect up to 8% of annual revenue. In addition, according to the proposal, the Authority would be able to declare that a company is a monopoly even if its market share is lower than 50%, if it proved that the company possesses significant market power.

These regulatory initiatives have an adverse effect on the revenues and expenses of the Bank, and may have an adverse effect on the business of the Bank Group in the future. At this stage, the Bank is reviewing the overall implications of the foregoing for the Bank’s revenues, as well as additional long-term business and operational implications. These effects cannot be quantified at this stage, and depend on customers’ behavior, additional regulatory changes, and the activity of competitors, among other factors.

For additional details concerning additional key reforms, see the section “Principal subsidiary and affiliated companies,” “Isracard Group,” above, and Note 35 to the Annual Financial Statements for 2017.

Note 17 Reduction of the Activity of Bank Hapoalim Switzerland

In September 2017, the Bank decided to act to discontinue the activity of Hapoalim Switzerland, through the sale of its assets or by other means. The resolution was passed in view of the Bank’s risk-management policy, which aims to minimize compliance risks in the Bank Group, including such risks as emerged in connection with the investigation by the United States authorities, and in view of the changes in the global regulatory environment and their effect on such risks. As part of the realization of the decision to discontinue the activity of Hapoalim Switzerland, and further to the statements in Note 36B to the Financial Statements of the Bank as at December 31, 2017, regarding the binding memorandum of understanding signed for the sale of the global private banking client asset portfolio of Hapoalim Switzerland, on April 11, 2018, Bank Hapoalim Switzerland signed a detailed agreement with Bank J. Safra AG and Safra Sarasin (Luxembourg) SA (jointly, “Safra Sarasin”) for the sale of most of the global private banking client asset portfolio of Bank Hapoalim Switzerland at its branches in Switzerland and Luxembourg to Bank Safra Sarasin, with the exception of the customer groups as has been determined. As at that date, the expected consideration in respect of the transaction (subject to adjustments, mainly dependent upon the volume of client accounts transferred) is approximately 20-23 million Swiss francs (NIS 73-85 million). Within the deal, several customer relationship managers and other employees of Bank Hapoalim Switzerland from its branches in Switzerland and Luxembourg, its subsidiary in Israel, and its representative office in Israel are planned to transfer to Safra Bank. Completion of the transaction, planned for execution in 2018, is subject, among other matters, to approvals by regulatory authorities.

244 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Bank Hapoalim Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Q 1 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Contents

5. Corporate governance 248 5.1. Internal audit 248 5.2. Other matters 248 6. Additional information regarding the business of the corporation and the management thereof 249 6.1. Segments of activity based on management approach 249 6.2. Ratings of the Bank 270 6.3. Social involvement and contribution to the community; social responsibility 271 7. Appendices 272 7.1. Material developments in income and expenses by quarter 272 7.2. Rates of interest income and expenses 276

List of Tables

Table 6-1: Results of operations and principal data of the Private Customer Segment 250 Table 6-2: Results of operations and principal data of the Small Business Segment 252 Table 6-3: Results of operations and principal data of the Housing Loan Segment 254 Table 6-4: Management approach activity segments – results of operations and principal data of the Commercial Segment 256 Table 6-5: Management approach activity segments – results of operations and principal data of the Corporate Segment 257 Table 6-6: Results of operations and principal data of the International Activity Segment 260 Table 6-7: Management approach activity segments – results of operations and principal data of the Isracard Group 266 Table 6-8: Management approach activity segments – results of operations and principal data of the Financial Management Segment 269 Table 6-9: Ratings 270 Table 7-1: Quarterly developments in total net financing profit 272 Table 7-2: Cumulative provision for credit losses in respect of debts and in respect of off-balance sheet credit instruments, by quarter 273 Table 7-3: Details of fees and other income, by quarter 274 Table 7-4: Details of operating and other expenses, by quarter 274 Table 7-5: Details of effect of retrospective implementation on the statement of profit and loss with respect to pensions and other post-retirement benefits 275 Table 7-6: Rates of interest income and expenses of the Bank and its consolidated companies, and analysis of changes in interest income and expenses 276

247 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

5. Corporate governance 5.1. Internal audit Details regarding the Group’s internal auditing, including the professional standards under which internal audit operates and the considerations involved in formulating the annual and multi-year work plans, are provided in the Annual Report for 2017. No material changes occurred in this information during the reported period. In April 2018, a separate internal auditor was appointed for the companies in the Isracard Group, and Mr. Zeev Hayo, the Chief Internal Auditor of the Bank, ended his service as Internal Auditor of the Isracard Group.

5.2. Other matters With regard to the statements in the Periodic Report for 2017 (in the Corporate Governance section, p. 400) concerning the number of meetings of the Board of Directors and the Board Committees, it is clarified that 221 meetings of the Board of Directors in plenary session and of the Board Committees (of which 46 meetings of the plenum) were held during the course of 2017, rather than as originally noted. The term of service of Ms. Dafna Schwartz as an external director of the Bank pursuant to the directives of the Companies Law ended on April 5, 2018. At the annual general meeting of shareholders of the Bank, which convened on April 12, 2018, the following resolutions were discussed and passed: discussion of the audited annual financial statements of the Bank as at December 31, 2016, and the Report of the Board of Directors and Board of Management for the year ended on that date, and of the audited annual financial statements of the Bank as at December 31, 2017, and the Report of the Board of Directors and Board of Management for the year ended on that date; renewed appointment of Somekh Chaikin (KPMG), CPA (Isr.), and Ziv Haft (BDO), CPA (Isr.), as the joint auditors of the Bank, until the end of the next annual general meeting of the Bank; adoption of amendments to the Articles of the Bank; and appointment of Ms. Dalia Lev to serve as an external director of the Bank according to the directives of the Companies Law. On April 17, 2018, the Board of Directors of the Bank, at the recommendation of the CEO of the Bank, approved the following appointments to the Board of Management of the Bank: Yadin Antebi, currently Chief Financial Officer, will be appointed to the position of Head of Financial Markets and International Banking, replacing Dan Alexander Koller, who is leaving the bank after nineteen years (of which ten years as a member of the Board of Management); Mr. Ofer Koren, currently Head of the Banking Competition Reform Implementation Unit, will join the Board of Management of the Bank as CFO, replacing Yadin Antebi; and Dr. Amir Bachar, currently Head of the Consulting and Research Division, will join the Board of Management of the Bank as Head of Risk Management. These appointments will take effect subject to the approval of the Supervisor of Banks, when such approval is received. On April 28, 2018, Mr. Amnon Dick resigned from service as an external director of the Bank pursuant to Proper Conduct of Banking Business Directive 301. This resignation is aligned with the directives of the Law for the Promotion of Competition and Reduction of Concentration, 2013, and with Section 11A1 of the Banking Ordinance, 1941, upon the appointment of Mr. Dick as a director of The Israel Telecommunication Corp. Ltd., which is considered a significant non-financial corporation, while the Bank is a significant financial entity. Further to the resolution of the Board of Directors of April 17, 2018 (see the Immediate Report of the Bank of the same date), on May 1, 2018, Mr. Niv Polani began to serve as Head of Business Development, reporting to the CEO of the Bank.

248 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

On April 30, 2018, the Remuneration Committee (pursuant to Regulation 1B1 of the Companies Regulations (Reliefs for Transactions with Interested Parties), 2000) and the Board of Directors of the Bank approved the renewal of the directors’ and officers’ liability insurance policy of the Bank and its subsidiaries (the “Bank Group”), beginning June 1, 2018, for a period of one year. The policy will insure the liability of directors and officers of the Bank Group, and financial liabilities that may be imposed upon them due to their function as officers, and also includes coverage in respect of legal claims concerning securities. The liability limits of the new policy are in the amount of USD 400 million, per claim and cumulatively for the insurance period; the annual premium will stand at approximately USD 1.6 million. The controlling shareholder of the Bank, Arison Holdings Ltd. (“Arison Holdings”), has notified the Bank that Shikun & Binui Ltd. (“Shikun & Binui”), a company under the control of the controlling shareholder of Arison Holdings, may be included in the list of significant non-financial corporations, pursuant to the Law for the Promotion of Competition and Reduction of Concentration, 2013 (the “Concentration Law”), by the Antitrust Commissioner, in light of its sales turnover (as defined in the Concentration Law) in 2017. In this context, the Bank was notified that under the circumstances of Shikun & Binui, if and inasmuch as, at the end of 2019, i.e. at the end of a transitional period of six years from the date of publication of the Concentration Law (December 2013), Shikun & Binui is on the list of significant non-financial corporations, then, as of that date, the controlling shareholder of the Bank (a significant financial entity) will be unable to simultaneously control Shikun & Binui (a significant non-financial corporation), and in addition, directors serving at Shikun & Binui (if and inasmuch as it is considered a significant non-financial corporation at the end of 2019) will be prohibited from continuing to serve as directors of the Bank.

6. Additional information regarding the business of the corporation and the management thereof 6.1. Segments of activity based on management approach 6.1.1. Private Customer Segment General information and segment structure The Bank provides a wide range of services to private customers, including routine account-management services, granting credit for various purposes, deposits, savings plans, and capital-market activity. In addition, the Bank offers services and solutions to customers with complex financial needs, through advanced products, global asset management, and a professional service package, which includes proactively initiated meetings and telephone calls and an advanced advisory system aided by decision support tools. Services are provided to customers of the segment through a network of 229 branches, including advanced digital branches and a mobile branch, and through direct channels: self-service stations at branches and on customer premises, Poalim Online, Poalim Mobile, the Poalim by Telephone call center, contact through Facebook, and smartphone applications. As part of the Bank’s approach to service and social responsibility, the Bank considers accessibility to people with disabilities an essential issue and its duty as a business; accordingly, all of the Bank’s services have been made accessible to people with disabilities. There has been an ongoing trend of increasing banking activity through unstaffed channels (self-service automatic teller machines, the website, applications, the mobile site, and the automatic voice response at the Poalim by Telephone call center) over the last few years.

249 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Regulatory changes – legislative restrictions, standards, and special constraints applicable to the segment On March 14, 2018, the Knesset plenum passed the Banking Chapter of the Bank Switching System Law (the plan for increasing competition in the banking market through the removal of barriers to switching), in the second and third readings. Pursuant to the law, banks shall allow secure online transfers for customers, within seven business days, at no cost to the customer. The law will takes effect within three years. An update of Proper Conduct of Banking Business Directive 422, “Opening and Managing a Current Account with a Positive Balance,” was issued on March 26, 2018. The objective of the update is to improve the ability of customers experiencing financial difficulties to manage an account with a positive balance, using advanced digital tools, and to enable people with past or present financial difficulties to manage their accounts through a range of tools and services. The changes will take effect on October 1, 2018. For additional information regarding regulatory initiatives that may have an effect on the activity of the segment, including information regarding the Law for Increasing Competition and Reducing Concentration in the Banking Market in Israel (the “Strum Committee”), see Section 3.14 of the Report of the Board of Directors and Board of Management.

Table 6-1: Results of operations and principal data of the Private Customer Segment

For the three months ended March 31 2018 2017* NIS millions Total net interest income 675 628 Non-interest financing income 3 3 Total net financing profit 678 631 Fees and other income 377 372 Total income 1,055 1,003

Provision for credit losses 110 83 Total operating and other expenses 868 864 Profit (loss) before taxes 77 56 Provision for taxes (tax benefit) on profit (loss) 27 22 Net profit (loss) attributed to shareholders of the Bank 50 34

Net credit to the public at end of period 40,005 38,145 Deposits from the public at end of period 174,453 169,906

* Reclassified. For additional information, see Note 28A to the Annual Financial Statements for 2017.

250 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Principal changes in net profit and balance sheet balances Net profit attributed to shareholders of the Bank in the Private Customer Segment totaled NIS 50 million in the first quarter of 2018, compared with NIS 34 million last year. The increase resulted from an increase in net financing profit, offset by an increase in the provision for credit losses. Net financing profit totaled NIS 678 million in the first quarter of 2018, compared with NIS 631 million in the same quarter last year. The increase resulted from an increase in average credit balances. The provision for credit losses totaled NIS 110 million in the first quarter of 2018, compared with NIS 83 million in the same quarter last year. The increase resulted from an increase in the collective allowance, mainly in respect of substandard debts, as a result of a decrease in credit portfolio quality, and from an increase in automatic charge-offs. This increase was offset by a decrease in the individual allowance. Net credit to the public totaled approximately NIS 40.0 billion as at March 31, 2018, compared with approximately NIS 40.3 billion as at December 31, 2017. Deposits from the public totaled approximately NIS 174.5 billion as at March 31, 2018, compared with approximately NIS 171.5 billion as at December 31, 2017. For additional information regarding credit risk with respect to private individuals, see “Credit risk” in the section “Review of risks” in the Report of the Board of Directors and Board of Management.

6.1.2. Small Business Segment General information and segment structure The Bank provides a range of banking services and financial products to small businesses. The segment’s activities are conducted through the Bank’s nationwide branch network and through the direct channels (see the section “Private Customer Segment” above). The segment also provides necessary services to business customers of the Corporate and Commercial Segments. Services for the segment’s customers include routine account management, alongside extensive efforts aimed at supporting and growing this segment, including targeted credit tailored to customers’ needs through a wide range of products.

Regulatory changes – legislative restrictions, standards, and special constraints applicable to the segment See “Private Customer Segment,” above. The guideline of the Bank of Israel on the subject, “Tracks service – raising awareness and encouraging registration of small businesses” was published on November 26, 2017. Within this directive, small business customers that had not registered for the tracks service were identified and sent notices regarding the fees charged to their accounts and the annual savings they would gain by registering for the tracks. The directive was implemented, as required, by February 28, 2018.

251 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 6-2: Results of operations and principal data of the Small Business Segment

For the three months ended March 31 2018 2017* NIS millions Total net interest income 399 377 Non-interest financing income 1 - Total net financing profit 400 377 Fees and other income 144 141 Total income 544 518

Provision for credit losses 95 129 Operating and other expenses 306 320 Profit before taxes 143 69 Provision for taxes on profit 51 27 Net profit attributed to shareholders of the Bank 92 42

Net credit to the public at end of period 30,899 29,354 Deposits from the public at end of period 38,810 36,710

* Reclassified. For additional information, see Note 28A to the Annual Financial Statements for 2017.

Principal changes in net profit and balance sheet balances Net profit attributed to shareholders of the Bank in the Small Business Segment totaled NIS 92 million in the first quarter of 2018, compared with NIS 42 million in the same quarter last year. The increase resulted from a decrease in the provision for credit losses, an increase in net financing profit, and a decrease in operating and other expenses. Net financing profit totaled NIS 400 million in the first quarter of 2018, compared with NIS 377 million in the same quarter last year. The increase resulted from an increase in average credit balances, as a result of an increase in the volume of activity, and from an increase in financial spreads on credit. The provision for credit losses totaled NIS 95 million in the first quarter of 2018, compared with NIS 129 million in the same quarter last year. The decrease mainly resulted from a decrease in the individual allowance. Operating and other expenses of the segment totaled NIS 306 million in the first quarter of 2018, compared with NIS 320 million in the same quarter last year. Net credit to the public totaled approximately NIS 30.9 billion as at March 31, 2018, compared with approximately NIS 31.2 billion as at December 31, 2017. Deposits from the public totaled approximately NIS 38.8 billion as at March 31, 2018, compared with approximately NIS 38.2 billion as at December 31, 2017.

252 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

6.1.3. Housing Loan Segment General information and segment structure The Bank offers housing loans to private customers, from Bank funds as well as through government assistance programs, at Mishkan representative offices within branches located nationwide.

Competition Based on the reports of the Bank of Israel, the Bank’s share in current executions of loans (including purchasing groups) of the banking system as a whole stood at 25.0% in the first quarter of 2018.

Technological changes that may have a material impact on the segment Managing mortgages online A range of online applications were recently launched that enable customers to perform certain actions without visiting a branch, including: • Production of a mortgage information report (a 451 Report), including the option to save the report on a computer as a PDF file and print the report. • Request to use the Free Month benefit – a one-month hiatus from mortgage payments. • Notification of early repayment of a mortgage – an option to give advance notice of the intention to repay the mortgage and save early repayment fees.

Regulatory changes – legislative restrictions, standards, and special constraints applicable to the segment Extensive, dedicated regulation applies to housing loans, in addition to the general regulation applicable to credit granted by the Bank. • Draft directive of the Bank of Israel concerning simplification of agreements – The objective of the directive is to simplify banking agreements. In the first stage, the Banking Supervision Department is focusing on credit agreements, in accordance with the Fair Credit Law, 1993, which has been amended. The law and the draft directive concerning the simplification of documents also apply to housing loans. • On February 26, 2018, the Bank of Israel issued an update of Directive 329 (“Limits on Granting Housing Loans”) and a file of questions and answers concerning limits on granting housing loans: 1. Amendment of the definition of a “reduced-price residence” to also include a replacement residence acquired at a reduced price in projects such as Mechir Lamishtaken (“Tenant Price”). 2. The file of questions and answers includes clarifications on various subjects, such as the financing rate of a loan secured by another asset, loans for a “continuing heir,” and loans for renovation of a residence. • The Banking Bill (Service to Customers) (Amendment – Free Choice of a Land Appraiser in a Mortgage Procedure), 2018, submitted on February 19, 2018, proposes allowing borrowers in the early stage of an acquisition to choose a land appraiser, in accordance with the directives of the Land Appraiser Law, 2001, instead of choosing a land appraiser from the closed list of the bank. In order to maintain balance, the proposal would permit a bank to prepare a list of appraisers who are unacceptable to the bank, provided that reasons are given for its decision on this matter. A final decision regarding the inclusion of an appraiser in the list rejected by the bank would be made by the Council of Land Appraisers in the Ministry of Justice.

253 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 6-3: Results of operations and principal data of the Housing Loan Segment

For the three months ended March 31 2018 2017* NIS millions Total net interest income 160 118 Fees and other income 15 16 Total income 175 134

Provision (income) for credit losses 5 - Total operating and other expenses 60 58 Profit before taxes 110 76 Provision for taxes on profit 39 27 Net profit attributed to shareholders of the Bank 71 49

Net credit to the public at end of period 75,606 69,662

* Reclassified. For additional information, see Note 28A to the Annual Financial Statements for 2017.

Principal changes in net profit and balance sheet balances Net profit attributed to shareholders of the Bank in the Housing Loan Segment totaled NIS 71 million in the first quarter of 2018, compared with NIS 49 million in the same quarter last year. The increase mainly resulted from an increase in net financing profit. Net financing profit totaled NIS 160 million in the first quarter of 2018, compared with NIS 118 million in the same quarter last year. The increase resulted from an increase in the volume of credit and from an increase in financial spreads. Credit to the public totaled approximately NIS 75.6 billion as at March 31, 2018, compared with approximately NIS 74.1 billion as at December 31, 2017. For additional information regarding risks in the housing-loan portfolio, see Section 3.2.9 in the chapter “Review of risks” in the Report of the Board of Directors and Board of Management.

254 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

6.1.4. Commercial Segment General information and segment structure The Commercial Segment provides a wide range of banking services to middle-market business clients. The segment operates through business centers located throughout Israel, and through business branches, which provide operational services for the accounts of the segment’s customers. As part of the Bank’s strategic drive to deepen its activity with commercial clients experiencing growth, and to expand the services offered to these clients, the Commercial Banking Division began to implement a structural change and a change in its operational approach in the second half of 2017. Within these changes, several new business centers were established, and operational activities from the business branches will be centralized in a number of national service centers. This process will support the growth of the Commercial Segment, with the aim of providing better, more adapted service to customers.

Principal developments in the segment The main areas of activity of the segment’s customers are industry, commerce, and construction and real estate. These customers primarily operate in the domestic market; the segment also serves customers engaged in import and export activities. In the first quarter of 2018, customers of the segment were influenced by the positive trend in activity, globally and in Israel, particularly the strong condition of households, the considerable increase in incoming tourism, and financing costs, which remained low. In addition, the depreciation of the shekel against the currency basket in the first quarter supported the activity of exporter companies. In the housing market, the volume of activity continued to cool, as reflected in a relatively low level of sales of new homes and a slight decrease in prices of homes over the last few months. Most of the growth in this segment stemmed from the construction and real-estate sector and from the commerce sector. More extensive activity with these customers is part of the Bank’s strategy.

255 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 6-4: Management approach activity segments – results of operations and principal data of the Commercial Segment

For the three months ended March 31 2018 2017* NIS millions Total net interest income 242 221 Non-interest financing income 2 2 Total net financing profit 244 223 Fees and other income 107 108 Total income 351 331

Provision for credit losses 21 4 Total operating and other expenses 141 137 Profit before taxes 189 190 Provision for taxes on profit 67 74 Net profit attributed to shareholders of the Bank 122 116

Net credit to the public at end of period 34,847 32,567 Deposits from the public at end of period 24,284 22,881

* Reclassified. For additional information, see Note 28A to the Annual Financial Statements for 2017.

Principal changes in net profit and balance sheet balances Net profit attributed to shareholders of the Bank in the Commercial Segment totaled NIS 122 million in the first quarter of 2018, compared with NIS 116 million in the same quarter last year. Net financing profit of the segment totaled NIS 244 million in the first quarter of 2018, compared with NIS 223 million in the same quarter last year. The increase mainly resulted from an increase in credit and deposit balances. The provision for credit losses totaled NIS 21 million in the first quarter of 2018, compared with a provision in the amount of NIS 4 million in the same quarter last year. The increase mainly resulted from an increase in the collective allowance for sound credit, due to an increase in the volume of credit. This increase was partly offset by a decrease in the individual allowance. Net credit to the public totaled approximately NIS 34.8 billion as at March 31, 2018, compared with approximately NIS 33.9 billion as at December 31, 2017. Deposits from the public totaled approximately NIS 24.3 billion as at March 31, 2018, compared with approximately NIS 24.7 billion as at December 31, 2017.

256 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

6.1.5. Corporate Segment General information and segment structure The Corporate Segment specializes in the provision of financial services to large corporations in Israel. Credit granting constitutes its principal area of activity. The segment operates through three sectors, each of which contains specialist Customer Relationship Managers (CRMs): • Real estate; • Communications, commerce, and hotels; • Infrastructures and energy. The sector also specializes in complex financing products, including foreign-trade financing, financing of working capital, financing of assets overseas, complex financing transactions, syndication, and credit-risk sales. Another unit is responsible for the digital interface between business clients and the Bank. Also operating within the Corporate Banking Area is the Special Credit Division, which coordinates the handling of customers experiencing financial difficulties in the Corporate and Commercial Segments and endeavors to assist them in restructuring by providing business support.

Table 6-5: Management approach activity segments – results of operations and principal data of the Corporate Segment

For the three months ended March 31 2018 2017* NIS millions Total net interest income 330 348 Non-interest financing income 26 23 Total net financing profit 356 371 Fees and other income 123 144 Total income 479 515

Provision (income) for credit losses )30( )131( Total operating and other expenses 178 178 Profit before taxes 331 468 Provision for taxes on profit 120 183 Net profit attributed to shareholders of the Bank 211 285

Net credit to the public at end of period 68,627 65,346 Deposits from the public at end of period 41,209 35,159

* Reclassified. For additional information, see Note 28A to the Annual Financial Statements for 2017.

257 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Principal changes in net profit and balance sheet balances Net profit attributed to shareholders of the Bank in the Corporate Segment totaled NIS 211 million in the first quarter of 2018, compared with NIS 285 million in the same quarter last year. The decrease resulted from a decrease in income from credit losses, and from a decrease in financing profit. Net financing profit of the segment totaled NIS 356 million in the first quarter of 2018, compared with NIS 371 million in the same quarter last year. The decrease mainly resulted from a decrease in financial spreads on credit, partly offset by an increase in average credit balances between the periods. Fees and other income totaled NIS 123 million in the first quarter of 2018, compared with NIS 144 million in the same quarter last year. The decrease mainly resulted from a decrease in income from credit-handling fees and in fees from financing transactions. Income in respect of credit losses totaled NIS 30 million in the first quarter of 2018, compared with income in the amount of NIS 131 million in the same quarter last year. The decrease in income resulted from an increase in the collective allowance, mainly due to an increase in credit volumes, and from a decrease in income recorded on an individual basis, as a result of a decrease in recovery of charged-off debts. The decrease in income from credit losses was offset by a decrease in the collective allowance in respect of substandard debts. Net credit to the public totaled approximately NIS 68.6 billion as at March 31, 2018, compared with approximately NIS 65.5 billion as at December 31, 2017. Deposits from the public totaled approximately NIS 41.2 billion as at March 31, 2018, compared with approximately NIS 42.2 billion as at December 31, 2017.

6.1.6. International activity General information The international activity of the Bank Group is conducted through banking subsidiaries, financial companies, the Bank’s overseas branches, and representative offices, as well as through the Global Private Banking Center in Tel Aviv. The activity of the Bank Group overseas includes corporate banking, global private banking, and relationships with correspondent banks around the world. Corporate banking abroad includes granting credit to local and foreign borrowers, and investments in bonds. Activity with correspondent banks includes trading through dealing rooms, cooperation in foreign trade and international trade financing, project financing, clearing of payments, and capital-market services (see the section “Credit exposure to foreign financial institutions”). The Bank is acting to discontinue all of its activities overseas in the area of global private banking, and to close the subsidiaries that provide the related services. Among other matters, these actions have led to a decrease in the extent of assets of foreign residents deposited with the Bank Group.

Legislative restrictions, standards, and special constraints applicable to international activity In addition to the rules and limits imposed by the Bank of Israel on the international activity of the Bank Group, pursuant to legislation and regulations as well as the provisions of permits granted by the Bank of Israel for the acquisition of subsidiaries and/or opening of branches abroad, the activity of the international banking sector in the various countries is subject to standards relevant to the nature of activity of the Group in the countries in which its business is conducted (cross-border regulations) and to regulatory supervision by various government agencies in the countries in which the Bank’s overseas offices operate, including requirements concerning capital, holdings of liquid assets, compliance, the prohibition of money laundering, etc.

258 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

The Banking Supervision Department issued a directive concerning supervision of overseas offices in May 2018. The directive expresses the position of the Banking Supervision Department that banking corporations should concentrate their activity only in central offices, in a limited number of jurisdictions, and at a size that allows each banking corporation to allocate appropriate management resources, focus its activity, and attain expertise in managing the risks in such jurisdictions. Within the directive, the board of directors is required to consider the countries in which it is interested in operating, the activities to be permitted to each office, and the minimum size of an office that would enable it to maintain adequate auditing and control resources. If an activity exists that is not congruent with the strategy established, the banking corporation is required to prepare a plan for withdrawal from that country or office, and to implement the plan by December 31, 2020. The board of directors is also required to ensure that external audits are applied to the audit and control environment at the offices by independent external experts, at an appropriate professional standard and to an adequate extent, as determined by the management of the banking corporation. For details regarding the investigation of the Bank Group’s business with American clients, see Note 10C to the Condensed Financial Statements; for details regarding the investigation of the Bank in connection with senior FIFA officials, see Note 10D to the Condensed Financial Statements.

Bank Hapoalim (Switzerland) Ltd. (Hapoalim Switzerland) In September 2017, the Bank decided to act to discontinue the activity of Hapoalim Switzerland, through the sale of its assets or by other means. On April 11, 2018, the Bank signed an agreement with Bank J. Safra Sarasin AG and Banque J. Safra Sarasin (Luxembourg) S.A. for the sale of the global private banking client asset portfolio of Bank Hapoalim Switzerland at its branches in Switzerland and Luxembourg.

Branches in the United States New York branch corporate banking – Most of the Bank Group’s international business activity is conducted through the New York branch. The New York branch is focused on three areas of activity: • Providing comprehensive banking services to large Israeli companies operating in the United States, as well as to local companies and clients, including credit, foreign trade, investments, and dealing-room services. The New York branch also offers its customers FDIC deposit insurance. • Granting corporate credit to large companies in the US economy by acquiring participation in credit lines organized by leading banks (some 91% of the credit is provided to companies rated Investment Grade or secured by entities rated Investment Grade by the international rating agencies Standard & Poor’s or Moody’s). • Providing dealing-room services, including during hours in which dealing rooms in Israel are closed, as part of the global activity of the Bank’s dealing rooms. The branch has discontinued its activity in the area of global private banking. In February 2018, the Bank received regulatory approvals to close the Miami branch and open a representative office, which will operate in a format similar to that of the representative offices in Los Angeles and New Jersey.

259 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 6-6: Results of operations and principal data of the International Activity Segment

For the three months ended March 31 2018 2017* NIS millions Total net interest income 117 102 Non-interest financing income 14 16 Total net financing profit 131 118 Fees and other income 31 65 Total income 162 183

Provision (income) for credit losses 15 )2( Total operating and other expenses 252 201 Profit (loss) before taxes )105( )16( Provision for taxes on profit 12 )5( Net profit (loss): Before attribution to non-controlling interests )117( )11( Attributed to non-controlling interests 7 - Attributed to shareholders of the Bank )110( )11(

Net credit to the public at the end of the reported period 12,356 13,935 Deposits from the public at the end of the reported period 21,830 27,571

* Reclassified. For additional information, see Note 28A to the Annual Financial Statements for 2017.

Principal changes in net profit and balance sheet balances The loss attributed to shareholders of the Bank in the International Activity Segment totaled NIS 110 million in the first quarter of 2018, compared with a loss in the amount of NIS 11 million in the same quarter last year. The principal changes in the results of international activity are set out below: • The net profit of activity in the middle-market sector at the New York branch totaled approximately NIS 42 million in the first quarter of 2018, compared with net profit in the amount of NIS 25 million in the same quarter last year. The increase mainly resulted from an increase in net interest income, as a result of an increase in the volume of credit. • The loss of Bank Hapoalim Switzerland totaled approximately NIS 121 million in the first quarter of 2018, compared with a loss in the amount of approximately NIS 6 million in the same quarter last year. The change resulted from a decrease in profitability due to the decision to discontinue the activity of Hapoalim Switzerland, and from an increase in the provision for the investigation of the Bank Group's business with American clients at Bank Hapoalim Switzerland and in the related legal expenses, compared with the same period last year. • The loss of the Bank Pozitif Group totaled approximately NIS 17 million in the first quarter of 2018, compared with break-even in the same quarter last year. The loss mainly resulted from the first-time implementation of International Financial Reporting Standard 9 (IFRS-9). Following the implementation of this standard, an allowance for credit losses in the amount of approximately TRY 21 million was recognized.

260 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Total credit to the public in international activity amounted to approximately NIS 12.4 billion as at March 31, 2018, compared with approximately NIS 12.9 billion as at December 31, 2017. • Credit to the public in the middle-market sector at the New York branch totaled approximately NIS 9.7 billion as at March 31, 2018 (approximately USD 2.7 billion), similar to December 31, 2017. • Credit to the public at Bank Hapoalim Switzerland totaled approximately NIS 1.4 billion as at March 31, 2018, similar to the balance as at December 31, 2017. • Credit to the public in the area of syndication at the New York branch totaled approximately NIS 0.7 billion as at March 31, 2018, compared with approximately NIS 0.8 billion as at December 31, 2017. • Credit to the public at Bank Pozitif in Turkey totaled approximately NIS 0.8 billion as at March 31, 2018, compared with approximately NIS 0.9 billion as at December 31, 2017.

Total deposits from the public in international activity amounted to approximately NIS 21.8 billion as at March 31, 2018, compared with approximately NIS 20.9 billion as at December 31, 2017. • The balance of deposits from the public in the middle-market sector at the New York branch totaled approximately NIS 6.8 billion as at March 31, 2018, compared with approximately NIS 6.7 billion as at December 31, 2017. • The balance of deposits from the public at Bank Hapoalim Switzerland totaled approximately NIS 4.2 billion as at March 31, 2018, compared with approximately NIS 4.4 billion as at December 31, 2017. • The balance of brokered CD deposits from the public at the New York branch totaled approximately NIS 8.6 billion as at March 31, 2018, compared with approximately NIS 7.6 billion as at December 31, 2017. • Deposits from the public at the Global Private Banking Center in Tel Aviv totaled approximately NIS 2.2 billion as at March 31, 2018, compared with approximately NIS 2.1 billion as at December 31, 2017.

6.1.7. Isracard Group General information The Bank Group’s principal activities in the area of credit cards are conducted through companies operating in the area of means of payment under a single managerial and operational umbrella, referred to hereinafter as the “Isracard Group.” The core activity of the Isracard Group is the issuance and clearing of Isracard credit cards, a private brand under its ownership, as well as of MasterCard, Visa, and American Express cards under licensing agreements.

Principal developments in the segment Credit-card issuance The number of cards issued by the Isracard Group as at March 31, 2018 is 5.1 million, compared with 5.0 million cards issued as at December 31, 2017. The volume of activity in Isracard Group cards reached NIS 37.3 billion in the first quarter of 2018, compared with NIS 34.8 billion in the same period last year.

Regulatory changes The Strum Committee (the Committee for Examination of Increasing Competition in Common Banking and Financial Services), which was appointed by the Minister of Finance and the Governor of the Bank of Israel, released its recommendations in July 2016. Subsequently, the “Strum Law” was published on January 31, 2017.

261 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

On February 18, 2018, the Banking Supervision Department published the document, “Criteria and general terms for an applicant to control and hold means of control in a clearer or credit-card company,” along with a presentation containing emphases in the area of supervision for those interested in acquiring separated credit-card companies. Among other matters, the presentation provides detailed information regarding the companies, as well as the credit-card companies’ strengths and key challenges. For further details, see Note 35 to the Financial Statements as at December 31, 2017. Further to the statements in Section 2.5.1 of the Report of the Board of Directors and Board of Management and in Note 35 to the Financial Statements as at December 31, 2017, with regard to the Law for Increasing Competition and Reducing Concentration in the Banking Market in Israel (Legislative Amendments), 2017, the Board of Management of the Bank, with the guidance of the Board of Directors, has continued to prepare for the separation of the Isracard Group from the Bank, as required. On February 25, 2018, the Bank of Israel released the final outline for the reduction of the interchange fee. The interchange fee in deferred debit transactions will be reduced according to the following outline: a decrease in the interchange fee from 0.7% to 0.6% beginning January 1, 2019; a decrease in the interchange fee from 0.6% to 0.575% beginning January 1, 2020; a decrease in the interchange fee from 0.575% to 0.55% beginning January 1, 2021; a decrease in the interchange fee from 0.55% to 0.525% beginning January 1, 2022; and a decrease in the interchange fee from 0.525% to 0.5% beginning January 1, 2023. The Bank of Israel has determined that the fee paid for immediate debit transactions will stand at 0.3%; that the interchange fee will decrease from 0.3% to 0.275% beginning January 1, 2021; and the interchange fee will decrease from 0.275% to 0.250% beginning January 1, 2023. An agreement signed between the company, the credit-card companies Leumi Card and CAL, and the banks that are the controlling shareholders of Leumi Card and CAL, Bank Leumi Le-Israel Ltd., Ltd., and First International Bank of Israel Ltd., detailing the terms for the operation of the common technical interface, was submitted to the Antitrust Commissioner in order to receive an exemption from approval of a restrictive arrangement. On April 25, 2018, the Antitrust Authority announced its decision to grant the arrangement an exemption, with conditions, from approval of a restrictive arrangement. The exemption is in effect until December 31, 2023. Among other matters, the exemption addresses the requirement for credit-card companies to add to the agreement of principles signed between the banks and the credit-card companies on May 9, 2007 (including the appendices and changes thereof), equally and at no cost, any issuer, clearer, or entity acting on their behalf with activity relevant to the agreement that asks to join the agreement; to make all information necessary for the purpose of joining the agreement and acting in accordance with the agreement available to them; and to perform reasonable adjustments, as necessary, in such a manner as to enable new players to join the agreement and act in accordance with its directives. In addition, the company, Leumi Card, and CAL are prohibited from taking actions that may impede the entry of new competitors in the fields of issuance or clearing, or the penetration of means of payment that are alternatives to credit cards, such as debit cards, all as detailed in the terms of the exemption. The draft also includes a directive pursuant to which, beginning July 1, 2021, monetary transfers between issuers and clearers in respect of transactions executed with a single payment shall be performed no later than one day after the date of transmission of the transaction by the business (“immediate crediting”).

262 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

In April 2018, the Banking Supervision Department published drafts for comments from the public of several amendments to Proper Conduct of Banking Business Directives 470 (“Charge Cards”), 221 (“Liquidity Coverage Ratio”), 203 (“Credit Risk”), and 313 (“Limits on the Indebtedness of Borrowers and Groups of Borrowers”), which, as stated in the accompanying explanatory materials, will facilitate the activity of credit-card companies (as defined in the drafts) following their separation from the banks, as part of the measures taken by the Bank of Israel to promote the implementation of the reform for increasing competition. Note that the reliefs apply to credit-card companies (as defined in the drafts) in general, not only to the companies planned to separate from their parent banks. The following directives, among others, were established in the drafts: (1) Beginning February 1, 2019, a bank shall transfer monies in respect of transactions issued by the bank (including via joint issuance) to an issuance operator on the date on which the issuance operator is required to transfer these monies to a clearer, according to the date or dates established in the cross-clearing agreement, without dependence on the date of debiting of the customer, and without dependence on the identity of the clearer to which the issuance operator transfers the consideration. (2) New operating agreements between a bank issuer and an issuance operator signed until January 31, 2022, shall be submitted to the Supervisor of Banks. For this purpose, renewal of an existing agreement in which a material change has been performed, in the opinion of the bank or of the issuance operator, shall be considered a new agreement. If the bank issuer is a bank with extensive activity, the operating agreement shall be subject to approval by the Supervisor. (3) A credit-card company shall receive weighting for capital-adequacy purposes as if it is a banking corporation, even after its separation from a banking corporation. (4) The debt of a credit-card company shall be weighted for capital-adequacy purposes as if it is a banking corporation, including with regard to circumstances for more severe risk weighting, such as in the case of a rating lower than B. (5) Beginning July 1, 2018, a credit-card company that fulfills the terms specified in the draft will not be required to comply with a liquidity coverage ratio, but it will be required to hold liquid assets based on an internal model congruent with the characteristics of its activity. (6) The exposure of a banking corporation to a credit-card company borrower group, with deduction of the amounts permitted according to the directive, shall not exceed 15% of the capital of the banking corporation, similar to the limit applicable to exposure to a “banking borrower group.” (7) Exposure to a credit-card company shall be subject to the limit on borrowers/borrower groups and to the aggregate limit on large borrowers. (8) For five years from the date of the directive in binding form, the indebtedness of a banking borrower group to a credit-card company shall not be subject to the limit established in the directive. (9) In view of the current deviation from the directives of the draft, banking corporations will be required to reduce credit exposures to “credit-card company borrower groups” gradually, within three years of the date of separation of the credit-card company from the banking corporation, as defined in the “Strum Law.” Comments from the public regarding the drafts were accepted until May 6, 2018. In June 2015, the Banking Supervision Department issued a directive on implementation of the EMV security standard in both issuance and clearing, which has also been embedded in Proper Conduct of Banking Business Directive 470 and in additional guidelines. Among other matters, the directive and the guidelines subsequently provided by the Banking Supervision Department, which include amendments to Proper Conduct of Banking Business Directive 472, address schedules for the issuance of cards that support the EMV standard and for the connection of terminals that support the standard to the new charge-card system, as well as for inception of a mechanism for redirecting responsibility from the issuer to the clearer. The application of the liability shift mechanism has been scheduled for January 1, 2019.

263 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

In January 2018, the Banking Supervision Department issued an amendment to Proper Conduct of Banking Business Directive 470, in which, among other matters, directives were added, further to the Strum Law directives, concerning the infant competitor protections granted to the credit-card companies to be separated from the banks, and to other new issuers to be established, with regard to a bank with a large volume of activity contacting a customer, before the 45 business day period preceding the end date of the card contract, in cases of a material change in the financial condition of the customer, or in order to reduce the credit facility of a charge card. The aforesaid changes will take effect on April 21, 2018, but banking corporations are permitted to act according to the changes earlier. An amendment to the Banking (Licensing) Law was published in August 2011, pursuant to which, among other matters, entities engaged in clearing charge cards are required to receive a clearing license. Entities engaged in clearing activity at the inception date of the law were granted reliefs in this matter. Additional limits were also established, such as a requirement for an issuer with an extensive volume of activity, an issuer who issued ten percent or more of the number of charge cards issued in Israel, or an issuer of charge cards used to execute at least ten percent of the sum of transactions executed in Israel (as defined by law) to enter into contractual engagements with any clearer for cross-clearing, unless the refusal to enter into the contractual engagement was due to reasonable causes. In this context, note that the Banking (Licensing) Law authorized the Minister of Finance or the Supervisor of Banks (as relevant) to also consider additional corporations to be part of the clearer/issuer with an extensive volume of activity (a corporation in which the clearer/issuer is an interested party, a corporation that controls the clearer/issuer, and/ or a corporation in which the controlling shareholder of the clearer/issuer is an interested party). For example, it might be decided that Poalim Express was part of Isracard, for the purposes of its status as a clearer/issuer with an extensive volume of activity, and accordingly, the restrictions applicable to Isracard in this context would also apply to Poalim Express. With regard to this matter, in July 2017, the Ministry of Finance notified Poalim Express that, given that the fees it collects from merchants in local transactions, in a brand with exclusive clearing and issuance, would decrease, in an incremental trajectory, with a maximum fee of 2.95% by the end of December 2017, a maximum fee of 2.45% by the end of December 2018, a maximum fee of 2.10% by the end of December 2019, and stabilization of the maximum fee for merchants at 1.99% at the end of June 2020, at that time the Minister of Finance did not find it necessary to exercise his authority pursuant to Section 36M(a) of the Banking (Licensing) Law, or to support bills the significance of which is identical to the exercise of such authority, or that intervene directly and specifically in the brand fee beyond the aforesaid trajectory.

264 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

The recommendations of the final report of the Interministerial Committee for the Promotion of the Use of Means of Payment were published in October 2016. The objective of the committee was, among other matters, to promote the use of advanced means of payment, while adapting legal and technological infrastructures to this activity. The recommendations of the committee were based on the European PSD regulations, among other matters. As part of the recommendations of the committee: (1) In November 2017, the Bank of Israel issued a call for information regarding the establishment of infrastructure for clearing of immediate payments in Israel. The objective of the call for information, as described therein, was, among other matters, to receive proposals for the promotion of at least one form of infrastructure, centralized or decentralized, to support clearing of immediate payments in the Israeli economy. The establishment of such infrastructure is expected to increase competition in the payment system, through, among other matters, the entry of new players who will propose solutions for the performance of immediate payments throughout the chain of execution of the transaction. The infrastructure will allow clearing of existing and future advanced means of payment, and will allow clearing of payment orders executed through payment applications of various entities. Responses to the call for information were accepted until December 17, 2017. (2) In March 2018, the Ministerial Committee for Legislation approved the Memorandum of Law for Payment Service Contracts, 2018. Among other matters, the memorandum is aimed at the regulation of various aspects of the relationships between payment service providers (the issuer of a charge card) and payers (the holder of a charge card), and between payment service providers (the clearer) and beneficiaries (the merchant) in the use of means of payment, and to establish general directives regarding the execution of payment orders and the related liability arrangements. Within the memorandum of law, the Charge Card Law will be canceled upon the inception of the Payment Service Contracts Law, and matters mentioned in the Charge Card Law will be regulated therein. In March 2018, the Knesset plenum passed the Law for Reduction of the Use of Cash in the second and third reading, establishing, among other matters, restrictions on the use of cash and checks. In general, the law will take effect in January 2019.

Regulatory initiatives Isracard is an “Associate Member” of the Visa Organization. Europay (a subsidiary) is a “Principal Member” of the MasterCard Organization. In advance of the expected separation of the company from Bank Hapoalim, as required under the Strum Law, the company submitted a request to change its status in the Visa Organization to Principal Member. In August 2017, the company was contacted by MasterCard Inc. (hereinafter: “MC”) with regard to various matters (primarily technological and operational aspects) concerning which the Israeli market, including the company, is not in compliance with certain regulatory rules of MC. The main issues noted were, in the opinion of the company, market-wide and not dependent upon the company alone, and require organization by additional players in this sector. Following this communication, the company and the representatives of MC reached an agreement regarding the scope of issues to be addressed, of the issues included in the communication, and schedules for implementation of the action plan formulated, which the company is working to implement. According to the estimates of the company, the aforesaid communication of MC is not expected to have a material effect on the company. For information regarding the Law for Increasing Competition and Reducing Concentration in the Banking Market in Israel, and for information regarding the Law for Supervision of Financial Services, see Note 35 to the Financial Statements as at December 31, 2017.

265 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

The large number of regulatory procedures, to the extent that they are implemented, and the directives and changes in the credit-card market, including the trajectory for reduction of the interchange fee, immediate crediting, and the entry of clearers and aggregators, as well as market trends, may have a material negative effect on the activity of the Isracard Group. The regulatory reforms may have a material adverse effect on the Bank; however, at this stage it is not possible to estimate the extent of this effect. For additional details regarding regulatory changes also relevant to credit-card companies, see “Regulatory initiatives” in the section “Private Customer Segment,” above.

Additional activities In addition to activities related to the issuance and clearing of credit cards, as described above, the Isracard Group has the following additional activities: check settlement guaranteeing and check discounting; granting of consumer credit other than through credit cards; direct sale-slips discounting; and factoring, including factoring for purchasing.

Contribution of income from credit cards The contribution of income from credit cards to income from fees, included within operating income (before deducting related expenses), totaled NIS 487 million in the first quarter of 2018, compared with NIS 461 million in the same period last year, an increase of approximately 5.6%.

Table 6-7: Management approach activity segments – results of operations and principal data of the Isracard Group

For the three months ended March 31 2018 2017* NIS millions Total net interest income 72 66 Non-interest financing income (expenses) )2( )3( Total net financing profit 70 63 Fees and other income 494 466 Total income 564 529

Provision (income) for credit losses 34 24 Total operating and other expenses 423 401 Profit before taxes 107 104 Provision for taxes on profit 34 36 Net profit (loss): Before attribution to non-controlling interests 73 68 Attributed to non-controlling interests )4( )1( Attributed to shareholders of the Bank 69 67

Net credit to the public at the end of the reported period 20,292 19,105 Deposits from the public at the end of the reported period 107 -

* Reclassified. For additional information, see Note 28A to the Annual Financial Statements for 2017.

266 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Principal changes in net profit and balance sheet balances Net profit attributed to shareholders of the Bank at the Isracard Group totaled NIS 69 million in the first quarter of 2018, compared with NIS 67 million in the same quarter last year. Net financing profit of the segment totaled NIS 70 million in the first quarter of 2018, compared with NIS 63 million in the same quarter last year. The increase mainly resulted from an increase in interest-bearing credit balances. Fees and other income totaled NIS 494 million in the first quarter of 2018, compared with NIS 466 million in the same quarter last year. The increase mainly resulted from an increase in the volume of transactions using Isracard Group credit cards in Israel cleared by other clearers, and from an increase in clearing volumes of transactions executed with merchants that have clearing agreements with the Isracard Group; this increase was eroded by the decrease in the rate of the merchant fee. The provision for credit losses totaled NIS 34 million in the first quarter of 2018, compared with NIS 24 million in the same quarter last year. The increase in the provision mainly resulted from an increase in the balance of charge-offs, influenced by challenges in collection and by an increase in individual allowances. Operating and other expenses of the segment totaled NIS 423 million in the first quarter of 2018, compared with NIS 401 million in the same quarter last year. The increase mainly resulted from an increase in marketing and advertising expenses, and from renewals of agreements and new agreements contracted with non-bank business partners in the area of card issuance and benefits for credit-card holders. Net credit to the public totaled approximately NIS 20.3 billion as at March 31, 2018, compared with approximately NIS 19.6 billion as at December 31, 2017. The increase resulted from an increase in turnovers of credit-card transactions in respect of purchases.

6.1.8. Financial Management Segment General information and structure The activity of this segment includes: • Activity in the banking book – Management of assets and liabilities, including the management of market and liquidity risks (for details regarding these risks, see the section “Review of risks” in the Report of the Board of Directors and Board of Management), through the establishment of internal transfer prices (see below), investment portfolio management, issuance of bonds and notes, and the execution of transactions in derivative financial instruments. The segment’s activity in the banking book is mostly conducted through the Asset and Liability Management (ALM) units in Israel and abroad, and through the Nostro Investment Management Unit, which is responsible for managing the portfolio of government and corporate bonds and the portfolio of shares, and for coordination of activity at the group level. • Activity in the trading books – Market making and trading activity in the dealing rooms in the areas of foreign currency, interest rates, and OTC derivatives. • Activity with customers – Mainly includes the provision of services to the Bank’s customers for the execution of transactions in Israeli and foreign securities, financial instruments in Israeli shekels, foreign currency, and interest rates, through the dealing rooms, as well as support for the development and pricing of sophisticated financial products.

267 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

The Bank has decided to discontinue the activity of providing provident fund and study fund operational services to the management companies for which it provides operational services. Rather than immediate cessation, the activity will be discontinued through a process conducted with all of the relevant parties. Concurrently, in June 2017, the Bank entered into an agreement with Malam Provident and Pension Funds Ltd. for the sale of a license, unlimited in duration, for the use of the software used by the Bank for the purposes of the operational services. The implementation of the agreement is subject to the fulfillment of several conditions.

Regulatory changes The MiFID II (Markets in Financial Instruments Directive II) regulation, which concerns improvement of the efficiency, transparency, and robustness of the financial markets, took effect in Europe in January 2018. The effect of this regulation on the Bank is primarily indirect, as it applies to entities in Europe, including foreign brokers and custodians with which the Bank has relationships, which operate in these markets. Amendment 28 to the Joint Trust Investments Law is aimed at applying supervision by the Israel Securities Authority to exchange-traded notes. Pursuant to the amendment, passed in July 2017, exchange-traded notes will become exchange-traded funds, which are tradable funds that track the index, and which will be subject to the regulation imposed on mutual funds. The amendment will take effect when the standards on this subject are completed. The Israel Securities Authority announced a delay of the scheduled inception date of June 1, 2018, and stated that it intends to act towards inception of the amendment during the course of 2018. The Bank is preparing operationally for the changes expected as a result of this amendment.

268 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 6-8: Management approach activity segments – results of operations and principal data of the Financial Management Segment(1)

For the three months ended March 31 2018 2017* NIS millions Total net interest income 162 211 Non-interest financing income 175 124 Total net financing profit 337 335 Fees and other income 37 41 Total income 374 376

Provision (income) for credit losses - - Total operating and other expenses 123 125 Profit before taxes 251 251 Provision for taxes on profit 105 120 Profit (loss) after taxes 146 131 The Bank’s share in profits of equity-basis investees, after taxes 4 4 Net profit: Before attribution to non-controlling interests 150 135 Attributed to non-controlling interests 7 8 Net profit attributed to shareholders of the Bank 157 143

Net credit to the public at the end of the reported period 1,471 1,868 Deposits from the public at the end of the reported period 44,117 45,291

* Reclassified. For additional information, see Note 28A to the Annual Financial Statements for 2017. (1) The Financial Management Segment includes, among other matters, activity with institutional entities, most of which are presented within information regarding supervisory activity segments as a separate segment.

Principal changes in net profit and balance sheet balances Net profit attributed to shareholders of the Bank in the Financial Management Segment totaled NIS 157 million in the first quarter of 2018, compared with NIS 143 million in the same quarter last year. Net financing profit of the segment totaled NIS 337 million in the first quarter of 2018, compared with NIS 335 million in the same quarter last year. Net credit to the public totaled approximately NIS 1.5 billion as at March 31, 2018, compared with approximately NIS 1.2 billion as at December 31, 2017. Deposits from the public totaled approximately NIS 44.1 billion as at March 31, 2018, compared with approximately NIS 49.9 billion as at December 31, 2017.

269 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

6.1.9. Adjustments This section includes activities of the Bank Group with negligible volumes, each of which does not form a reportable segment. This includes, among other matters: (1) the results of the subsidiaries Poalim Sahar Ltd., Poalim Capital Markets Investment House Ltd., and Peilim Investment Portfolio Management Ltd.; (2) income from computer services for companies consolidated in the past, until the discontinuation of this activity during 2017; (3) legal and other provisions and expenses in connection with the investigation of the Bank Group’s business with American clients not attributed to international activity; (4) adjustments of inter-segmental activities.

Principal changes in net profit The loss attributed to shareholders of the Bank in the segment totaled NIS 34 million in the first quarter of 2018, compared with profit in the amount of NIS 42 million in the same quarter last year. The loss in the first quarter of 2018 mainly resulted from an increase in the provision for the investigation of the Bank Group's business with American clients in Israel, and in the related legal expenses.

6.2. Ratings of the Bank The following ratings have been assigned to the Bank by rating agencies in Israel and abroad.

Table 6-9: Ratings

Rating agency Long-term Short-term Rating outlook Last update foreign currency foreign currency Israel – sovereign rating Moody’s A1 P-1 Stable February 2018 S&P A+ A-1 Positive February 2018 Fitch Ratings A+ F1+ Stable April 2018 Bank Hapoalim Moody’s A2 P-1 Stable April 2018 S&P A- A-2 Positive December 2017 Fitch Ratings A F1 Stable May 2018

Rating agency Long-term Short-term Rating outlook Last update local currency local currency Local rating (in Israel) S&P Maalot AAA Stable October 2017 Midroog Aaa P-1 Stable December 2017

270 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

On April 8, 2018, Maalot S&P assigned a first-time rating of AA to subordinated notes of the Bank with a contractual loss-absorption mechanism (CoCo), which are recognized as Tier 2 capital in accordance with the Basel 3 directives. On the same date, Midroog also assigned a first-time rating of Aa3 with a Stable outlook for subordinated notes of the Bank with a contractual loss-absorption mechanism (CoCo), which are recognized as Tier 2 capital in accordance with the Basel 3 directives.

6.3. Social involvement and contribution to the community; social responsibility As part of the Bank Hapoalim Group’s vision, strategy, and corporate values, the Bank is committed to an active, leading role in the community, alongside its business leadership and economic initiatives. This involvement, implemented through “Poalim for the Community,” is part of an advanced managerial approach stating that an organization that operates within the community, and draws both its employees and customers from it, is an integral part of that community, and as a business leader, should strengthen the community and take a leading role in the advancement and improvement of conditions for all members of the community, especially those who are underprivileged. In the spirit of this business philosophy, the Bank conducts a varied and extensive range of community-oriented activities that take the form of social involvement, monetary donations, and large-scale volunteer activities in which both members of management and employees participate. In the first quarter of 2018, Poalim for the Community focused on projects in the area of education, aimed at children, adolescents, and specific population groups, with special emphasis on teaching astute financial behavior. The community engagement of Poalim for the Community in the first quarter of 2018 was expressed in a financial expenditure of approximately NIS 13 million. For further details regarding the activity of the Bank Group in the area of social engagement, contribution to the community, and social responsibility, see section 7.8 of the Report on Corporate Governance and Additional Information in the Annual Periodic Report of the Bank for 2017.

271 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

7. Appendices 7.1. Material developments in income and expenses by quarter Table 7-1: Quarterly developments in total net financing profit

2018 2017 Q1 Q4 Q3 Q2 Q1 NIS millions Interest income 2,601 2,819 2,539 3,013 2,518 Interest expenses )443( )591( )376( )780( )445( Net interest income 2,158 2,228 2,163 2,233 2,073 Non-interest financing income (expenses) 226 167 152 136 182 Total reported financing profit 2,384 2,395 2,315 2,369 2,255 Excluding effects not from regular activity: Income from realization and adjustments to fair value of bonds 68 2 26 49 49 Profit (loss) from investments in shares 49 49 39 32 65 Gains (losses) in respect of loans sold 18 - - - 4 Adjustments to fair value of derivative instruments(1) )38( 35 )25( )37( )13( Financing income (expenses) from tax hedging of investments overseas(2) )2( 13 )5( 12 29 Profit from regular financing activity(3) 2,289 2,296 2,280 2,313 2,121

(1) The effect of the measurement of profit and loss in derivative instruments constituting part of the Bank’s asset and liability management strategy on a fair-value basis, versus measurement on an accrual basis. (2) The effect of hedging the asymmetry in the tax liability in respect of exchange-rate differences in investments in subsidiaries overseas, which are not included in the income base for the calculation of the provision for tax, in contrast to exchange-rate differences in respect of financing sources. The Bank hedges against tax exposure in respect of investments overseas by establishing surplus financing sources against such investments. (3) Financing profit excluding extraordinary effects, and excluding effects arising mainly from the timing of recording in accounting. Of which, in respect of the effects of changes in the CPI: an expense of NIS 34 million in the first quarter of 2018; income of NIS 15 million in the fourth quarter of 2017; an expense of NIS 67 million in the third quarter of 2017; income of NIS 114 million in the second quarter of 2017; and an expense of NIS 24 million in the first quarter of 2017.

272 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 7-2: Cumulative provision for credit losses in respect of debts and in respect of off-balance sheet credit instruments, by quarter**

2018 2017 Q1 Q4 Q3 Q2 Q1 NIS millions Individual provision for credit losses 156 315 176 202 170 Decrease in individual allowance for credit losses and recovery of charged off debts )256( )340( )408( )258( )251( Net individual provision (income) for credit losses )100( )25( )232( )56( )81( Net provision in respect of the collective allowance for credit losses and net charge-offs 350 49 257 223 188 Total provision (income) for credit losses* 250 24 25 167 107 * Of which: Net provision (income) for credit losses in respect of commercial credit risk 95 )170( )118( - )24( Net provision (income) for credit losses in respect of housing credit risk 5 )5( )4( - )5( Net provision for credit losses in respect of other private credit risk 150 200 146 167 136 Net provision for credit losses in respect of risk of credit to banks and governments - )1( 1 - - Total provision (income) for credit losses 250 24 25 167 107

Provision as a percentage of total credit to the public***: Percentage of individual provision (income) for credit losses 0.22% 0.45% 0.25% 0.29% 0.25% Gross provision for credit losses as a percentage of the average recorded balance of credit to the public**** 0.71% 0.52% 0.62% 0.62% 0.52% Provision for credit losses as a percentage of the average recorded balance of credit to the public 0.35% 0.03% 0.04% 0.24% 0.16% Net charge-offs in respect of credit to the public as a percentage of the average recorded balance of credit to the public 0.14% 0.13% 0.06% 0.36% 0.39% Net charge-offs in respect of credit to the public as a percentage of the allowance for credit losses in respect of credit to the public 10.29% 9.78% 4.34% 25.83% 26.93%

** Including in respect of housing loans examined according to the extent of arrears. *** Annualized. **** The gross provision for credit losses is the total provision for credit losses, excluding the decrease in the individual allowance for credit losses and recovery of charged-off debts.

273 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 7-3: Details of fees and other income, by quarter

2018 2017 Q1 Q4 Q3 Q2 Q1 NIS millions Fees Account management fees 230 226 235 235 243 Securities activity 189 186 189 183 203 Credit cards, net 487 482 493 481 461 Credit handling 56 42 53 49 80 Financing transaction fees 145 144 144 143 144 Other fees 173 191 170 163 171 Total fees 1,280 1,271 1,284 1,254 1,302 Other income 27 36 41 63 45 Total fee income and other income 1,307 1,307 1,325 1,317 1,347

Table 7-4: Details of operating and other expenses, by quarter

2018 2017 Q1 Q4 Q3 Q2 Q1 NIS millions Salary expenses Salaries(1)(2) 1,041 1,009 1,022 1,035 1,070 Bonuses and share-based compensation 89 106 104 97 112 Total wages 1,130 1,115 1,126 1,132 1,182 Maintenance and depreciation of buildings and equipment 365 379 361 374 361 Others(1)(2)(3)(4) 858 1,113 1,120 679 674 Total 2,353 2,607 2,607 2,185 2,217

(1) In the first quarter of 2018, includes a total of approximately NIS 9 million in respect of the discontinuation of activity of Bank Hapoalim Switzerland (compared with a total of approximately NIS 110 million and approximately NIS 21 million in the third and fourth quarters of 2017, respectively). (2) In 2017, a total of approximately NIS 287 million was reclassified from salary expenses to other expenses, in accordance with ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (approximately NIS 67 million in the first quarter of 2017, approximately NIS 69 million in the second quarter of 2017, approximately NIS 73 million in the third quarter of 2017, and approximately NIS 78 million in the fourth quarter of 2017). (3) In the first quarter of 2018, includes an expense in the amount of NIS 87 million in respect of legal expenses in connection with the investigation of the Bank Group’s business with American clients and the investigation concerning FIFA (a total of NIS 22 million in the first quarter of 2017, a total of NIS 19 million in the second quarter of 2017, a total of NIS 10 million in the third quarter of 2017, and a total of NIS 38 million in the fourth quarter of 2017). (4) In the first quarter of 2018, includes an expense in the amount of NIS 61 million in respect of expenses in connection with the investigation of the Bank Group’s business with American clients and the investigation concerning FIFA (income in the amount of NIS 27 million in the first quarter of 2017, income in the amount of NIS 28 million in the second quarter of 2017, an expense in the amount of NIS 290 million in the third quarter of 2017, and an expense in the amount of NIS 268 million in the fourth quarter of 2017).

274 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 7-5: Details of effect of retrospective implementation on the statement of profit and loss with respect to pensions and other post-retirement benefits

For the year ended December 31, 2017 For the three months ended March 31, 2017 Before Effect of After Before Effect of After retrospective retrospective retrospective retrospective retrospective retrospective implementation implementation implementation implementation implementation implementation Audited Unaudited NIS millions Effect of retrospective implementation on the statement of profit and loss Salaries and related expenses 4,843 )288( 4,555 1,250 )68( 1,182 Other expenses 3,298 288 3,586 606 68 674

275 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

7.2. Rates of interest income and expenses Table 7-6: Rates of interest income and expenses of the Bank and its consolidated companies, and analysis of changes in interest income and expenses(1)

For the three months ended March 31 2018 2017 Average Interest Rate Average Interest Rate balance(2) income of income balance(2) income of income NIS millions % NIS millions % A. Average balances and interest rates Interest-bearing assets Credit to the public(3): In Israel 252,782 2,172 3.48% 239,706 2,126 3.60% Outside Israel 14,702 170 4.71% 17,764 174 3.98% Total 267,484 )4(2,342 3.55% 257,470 )4(2,300 3.62% Credit to governments: In Israel 2,775 16 2.33% 2,394 13 2.19% Outside Israel - - - 29 - - Total 2,775 16 2.33% 2,423 13 2.16% Deposits with banks: In Israel 6,522 36 2.23% 5,713 28 1.97% Outside Israel 440 )1( )0.91%( 1,273 )7( )2.18%( Total 6,962 35 2.03% 6,986 21 1.21% Deposits with central banks: In Israel 43,299 11 0.10% 37,836 10 0.11% Outside Israel 10,759 38 1.42% 14,318 30 0.84% Total 54,058 49 0.36% 52,154 40 0.31% Securities borrowed or purchased under agreements to resell: In Israel 593 - - 262 - - Outside Israel ------Total 593 - - 262 - -

(1) Data presented after the effect of hedging derivative instruments. (2) Based on monthly opening balances (in the unlinked Israeli currency segment, based on daily balances). (3) Before deduction of the average balance sheet balance of the allowance for credit losses. Includes impaired debts that do not accrue interest income. (4) Fees in the amount of NIS 131 million were included in interest income in the year ended March 31, 2018 (March 31, 2017: NIS 153 million).

276 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 7-6: Rates of interest income and expenses of the Bank and its consolidated companies, and analysis of changes in interest income and expenses(1) (continued)

For the three months ended March 31 2018 2017 Average Interest Rate Average Interest Rate balance(2) income of income balance(2) income of income NIS millions % NIS millions % A. Average balances and interest rates (continued) Interest-bearing assets (continued) Bonds held to maturity and available for sale(3): In Israel 51,254 130 1.02% 56,913 110 0.78% Outside Israel 4,964 26 2.11% 6,873 29 1.70% Total 56,218 156 1.11% 63,786 139 0.87% Bonds held for trading(3): In Israel 6,716 3 0.18% 8,090 5 0.25% Outside Israel 72 - - 85 - - Total 6,788 3 0.18% 8,175 5 0.24% Other assets: In Israel 289 - - 386 - - Outside Israel ------Total 289 - - 386 - - Total interest-bearing assets 395,167 2,601 2.66% 391,642 2,518 2.60% Non-interest-bearing debtors in respect of credit cards 15,179 - - 14,535 - - Other non-interest-bearing assets(4) 39,773 - - 40,555 - - Total assets 450,119 - - 446,732 - -

Total interest-bearing assets attributed to activities outside Israel 30,937 233 3.05% 40,342 226 2.26%

(1) Data presented after the effect of hedging derivative instruments. (2) Based on monthly opening balances (in the unlinked Israeli currency segment, based on daily balances). (3) The average balance of unrealized gains (losses) from adjustments to fair value of bonds held for trading and of gains (losses) from bonds available for sale, which are included in equity within accumulated other comprehensive income, in the amount of NIS 98 million for the three months ended March 31, 2018 (March 31, 2017: NIS 218 million), were deducted from (added to) the average balance of bonds available for sale and of bonds held for trading. (4) Includes derivative instruments and other non-interest-bearing assets; net of the allowance for credit losses.

277 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 7-6: Rates of interest income and expenses of the Bank and its consolidated companies, and analysis of changes in interest income and expenses(1) (continued)

For the three months ended March 31 2018 2017 Average Interest Rate Average Interest Rate balance(2) expenses of expense balance(2) expenses of expense NIS millions % NIS millions % A. Average balances and interest rates (continued) Interest-bearing liabilities Deposits from the public: In Israel 198,452 230 0.46% 194,387 194 0.40% On demand 85,473 24 0.11% 81,525 23 0.11% Fixed term 112,979 206 0.73% 112,862 171 0.61% Outside Israel 14,356 58 1.63% 19,166 42 0.88% On demand 4,207 12 1.15% 8,022 12 0.60% Fixed term 10,149 46 1.83% 11,144 30 1.08% Total 212,808 288 0.54% 213,553 236 0.44% Deposits from the government: In Israel 209 1 1.93% 282 2 2.87% Outside Israel ------Total 209 1 1.93% 282 2 2.87% Deposits from central banks: In Israel ------Outside Israel 267 1 1.51% - - - Total 267 1 1.51% - - - Deposits from banks: In Israel 3,138 1 0.13% 3,122 - - Outside Israel 324 5 6.32% 494 4 3.28% Total 3,462 6 0.70% 3,616 4 0.44% Securities lent or sold under agreements to repurchase: In Israel ------Outside Israel 187 )1( )2.12%( 292 - - Total 187 )1( )2.12%( 292 - -

(1) Data presented after the effect of hedging derivative instruments. (2) Based on monthly opening balances (in the unlinked Israeli currency segment, based on daily balances).

278 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 7-6: Rates of interest income and expenses of the Bank and its consolidated companies, and analysis of changes in interest income and expenses(1) (continued)

For the three months ended March 31 2018 2017 Average Interest Rate Average Interest Rate balance(2) expenses of expense balance(2) expenses of expense NIS millions % NIS millions % A. Average balances and interest rates (continued) Interest-bearing liabilities (continued) Bonds: In Israel 27,867 138 2.00% 31,483 189 2.42% Outside Israel 794 10 5.13% 1,268 13 4.16% Total 28,661 148 2.08% 32,751 202 2.49% Other liabilities: In Israel 797 - - 145 1 2.79% Outside Israel 2 - - 5 - - Total 799 - - 150 1 2.69% Total interest-bearing liabilities 246,393 443 0.72% 250,644 445 0.71% Non-interest-bearing deposits from the public 129,511 - - 124,277 - - Non-interest-bearing creditors in respect of credit cards 14,394 - - 14,042 - - Other non-interest-bearing liabilities(3) 23,755 - - 23,408 - - Total liabilities 414,053 - - 412,371 - - Total capital means 36,066 - - 34,361 - - Total liabilities and capital means 450,119 - - 446,732 - - Interest spread - - 1.94% - - 1.89% Net return on interest-bearing assets(4): In Israel 364,230 1,998 2.21% 351,300 1,906 2.19% Outside Israel 30,937 160 2.08% 40,342 167 1.67% Total 395,167 2,158 2.20% 391,642 2,073 2.13%

Total interest-bearing liabilities attributed to activities outside Israel 15,930 73 1.85% 21,225 59 1.12%

(1) Data presented after the effect of hedging derivative instruments. (2) Based on monthly opening balances (in the unlinked Israeli currency segment, based on daily balances). (3) Includes derivative instruments. (4) Net return – net interest income divided by total interest-bearing assets.

279 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 7-6: Rates of interest income and expenses of the Bank and its consolidated companies, and analysis of changes in interest income and expenses(1) (continued)

For the three months ended March 31 2018 2017 Average Interest Rate Average Interest Rate balance(2) income/ of income/ balance(2) income/ of income/ (expenses) (expense) (expenses) (expense) NIS millions % NIS millions % B. Average balances and interest rates – additional information regarding interest-bearing assets and liabilities attributed to activity in Israel Israeli currency unlinked Total interest-bearing assets 278,110 1,922 2.79% 267,477 1,826 2.76% Total interest-bearing liabilities 153,524 )124( )0.32%( 150,540 )133( )0.35%( Interest spread - - 2.47% - - 2.41% Israeli currency CPI-linked Total interest-bearing assets 45,709 201 1.77% 46,787 259 2.23% Total interest-bearing liabilities 38,942 )127( )1.31%( 38,915 )177( )1.83%( Interest spread - - 0.46% - - 0.40% Foreign currency (includes Israeli currency linked to foreign currency) Total interest-bearing assets 40,411 245 2.45% 37,036 207 2.25% Total interest-bearing liabilities 37,997 )119( )1.26%( 39,964 )76( )0.76%( Interest spread - - 1.19% - - 1.49% Total activity in Israel Total interest-bearing assets 364,230 2,368 2.63% 351,300 2,292 2.64% Total interest-bearing liabilities 230,463 )370( )0.64%( 229,419 )386( )0.67%( Interest spread - - 1.99% - - 1.97%

(1) Data presented after the effect of hedging derivative instruments. (2) Based on monthly opening balances (in the unlinked Israeli currency segment, based on daily balances).

280 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Corporate Governance, Additional Information, and Appendices as at March 31, 2018

Table 7-6: Rates of interest income and expenses of the Bank and its consolidated companies, and analysis of changes in interest income and expenses(1) (continued)

Three months ended March 31, 2018, versus three months ended March 31, 2017 Increase (decrease) Net change due to change(2) Quantity Price NIS millions C. Analysis of changes in interest income and expenses Interest-bearing assets Credit to the public: In Israel 112 )66( 46 Outside Israel )35( 31 )4( Total 77 )35( 42 Other interest-bearing assets: In Israel - 30 30 Outside Israel )25( 36 11 Total )25( 66 41 Total interest income 52 31 83 Interest-bearing liabilities Deposits from the public: In Israel 5 31 36 Outside Israel )19( 35 16 Total )14( 66 52 Other interest-bearing liabilities: In Israel )13( )39( )52( Outside Israel )5( 3 )2( Total )18( )36( )54( Total interest expenses )32( 30 )2( Total interest income less interest expenses 84 1 85

(1) Data presented after the effect of hedging derivative instruments. (2) The change attributed to change in quantity was calculated by multiplying the new price by the change in quantity. The change attributed to change in price was calculated by multiplying the old quantity by the change in price.

281 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Glossary

Active market A market in which transactions in an asset or liability are executed at a sufficient frequency and volume in order to provide pricing information on a regular basis. Auxiliary corporation A corporation that is not a banking corporation in its own right, and which engages only in an area of activity permitted to the banking corporation that controls it, excluding occupations permitted exclusively to banking corporations by law. B2B Business to business - A business activity in which a product is sold or a service is provided by an organization to another organization. B2C Business to consumer - A business activity in which a product is sold or a service is provided to an end consumer. Basel Basel 2/Basel 3 - Risk-management regulations for banks, established by the Basel Committee, which is engaged in supervision and setting standards for supervision of banks worldwide. Bid-ask spread The spread between a proposed buying and selling price. Essentially, the difference between the highest price that a buyer is willing to pay for an asset and the lowest price at which the seller is willing to sell it. Bond A security that constitutes a certificate of obligation to pay a debt, in which the issuer promises to pay the holder of the bond the amount of principal issued, plus interest/coupon payments, at fixed intervals or upon fulfillment of a particular condition; a financial instrument that can be used by the government and by firms to borrow money from the public. BOT Build Operate Transfer - A financing arrangement for public projects, in which a private entity receives a franchise from a public entity to finance, plan, build, and operate a public facility for a limited period, at the completion of which the ownership of the project is transferred to the government. Business continuity management An organization-wide approach encompassing policy guidelines, standards, and procedures aimed at protecting the Bank’s existence as an active, robust financial entity and its ability to continue to provide optimal service to its customers even during emergencies and significant operational disruptions. CPI Consumer price index - An index published by the Central Bureau of Statistics, measuring monthly changes in the prices of products and services that compose the “consumption basket” of an average family. CVA Credit valuation adjustment - Calculation of credit risk in derivatives reflecting the potential expected loss to the bank in the event of default by the counterparty.

282 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Glossary

Debt A contractual right to receive money on demand, or at fixed or fixable intervals, recognized in the balance sheet of the banking corporation as an asset (e.g. deposits with banks, bonds, securities purchased or sold in agreements to resell, credit to the public, credit to the government, etc.). Debts do not include deposits with the Bank of Israel or assets in respect of derivative instruments. Debt contingent on collateral Debt expected to be repaid exclusively from the collateral, where there are no other available and reliable repayment sources. Derivative instrument A financial instrument or future contract, the value of which is derived from the value of an underlying asset, for which a market exists wherein its value can be determined. Dodd-Frank Act Federal regulations passed by the United States Congress in 2010 with the aim of increasing stability, transparency, and efficiency in the US financial system, particularly in the market for OTC derivatives. Government agencies have been established in accordance with these regulations in order to supervise, enforce, and monitor the performance of large financial entities. Dormant shares Shares held directly by the company itself.These shares are denied rights to capital or voting in the company. Duration Weighted average term to maturity of the principal and interest payments on a bond. Emergency A period in which the economy is operated in emergency mode, in accordance with a government resolution, the declaration of a special situation on the home front, or declaration of a state of emergency by the Supervisor. EMIR European Market Infrastructure Regulation - Regulation adopted by the European Union in 2012 in order to increase stability, transparency, and efficiency in derivatives markets in the European Union, particularly in the market for OTC derivatives. FATCA Foreign Accounts Tax Compliance Act - An American law aimed at improving tax enforcement, pursuant to which financial entities outside the United States must report to the US tax authorities on accounts maintained with them and owned by anyone obligated to report to these authorities, even if not a resident of the United States. FDIC Federal Deposit Insurance Corporation - The Federal Deposit Insurance Corporation in the United States. Financial instrument Any contract that creates a financial asset in one entity and a financial liability or equity instrument in another entity. Fixed-term deposits Deposits in which the depositor does not have the right or authorization to withdraw funds for at least six days from the date of the deposit. GRI Global Reporting Initiative - An international standard for reporting on sustainability and corporate social responsibility.

283 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Glossary

ICAAP Internal Capital Adequacy Assessment Process - An internal process to assess capital adequacy and establish strategy to ensure the capital adequacy of banking corporations.The process is designed to ensure that banking corporations hold adequate capital to support all of the risks inherent in their activities, and that they develop and apply appropriate processes to manage risks. Among other elements, the process includes setting capital targets, performing capital planning processes, and examining the condition of capital under a variety of extreme scenarios. Indebtedness As defined in Proper Conduct of Banking Business Directive 313. LDC Less developed country - A country classified by the World Bank as having low or medium revenue. LTV Loan to value ratio - The amount of a loan (including an unutilized approved credit facility) as a percentage of the pledged asset (according to the banking corporation’s share in the pledge). Middle market Commercial activity conducted with mid-sized businesses, usually in the United States. MTM Mark to market - Revaluation of a derivative instrument based on price quotes from relevant markets, or in the absence thereof, based on alternative evaluation methods. NPL Non-performing loan - Impaired credit not accruing interest income. Obligo Total liabilities of the customer to the Bank. Off-balance sheet credit Instruments such as commitments to grant credit and guarantees (excluding derivative instruments). On-demand deposits Deposits other than fixed-term deposits. Option A contract between two parties (the option writer and the option buyer); the option writer grants the option buyer the right to buy or sell a particular asset for a predetermined price, usually at a predetermined time. OTC derivative Over-the-counter derivative - A derivative instrument in which financial institutions contract during the ordinary course of business, for which a market exists wherein its value can be determined. Phantom shares An instrument granting cash compensation based on the value of shares of the company, without entitlement to receive the share. Securitization Non-bank capital raising by a financial entity through special bonds, performed through the acquisition of expected cash flows aggregated via pooling and converted into issuable securities.

284 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Glossary

Subordinated notes Notes in which rights are subordinate to the claims of all other creditors of the banking corporation, excluding other notes and notes of the same type. Supervisory capital Supervisory capital comprises two tiers:Tier 1 capital and Tier 2 capital, as defined in Proper Conduct of Banking Business Directive 202. Syndication A transaction in which several lenders jointly grant a loan to a single borrower, but each lender provides a loan to the borrower in a specific amount and has the right to repayment by the borrower. Groups of lenders frequently finance loans together when the amount granted is higher than the amount that any one lender is willing to lend. Tier 1 capital Going-concern capital, including common equity Tier 1 capital and additional Tier 1 capital, as defined in Proper Conduct of Banking Business Directive 202. Tier 2 capital Gone-concern capital, as defined in Proper Conduct of Banking Business Directive 202. VaR Value at risk - A commonly used statistical model for the quantification of market risks.The model uses historical data to assess the maximum expected loss in respect of a particular position or portfolio, for a defined time horizon, at a defined significance level. Volcker Rule The Volcker Rule is American legislation applicable to certain banking corporations, which imposes prohibitions and restrictions related to proprietary trading and investment activity and/or sponsorship of covered funds, as defined in the Volcker Rule.

285 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Index

A Employee benefits 13, 24, 26, 27, 111, 113, 114, 118, Accounting policies 3, 7, 103, 104, 111, 121, 122, 123, 128, 129, 130, 143, 144, 145, 146, 147, 148, 149, 10, 124 21, 23, 25 Environmental risk 7, 15, 53, 98, 3, 8, 64 C Capitalization of software costs 123 F Collective allowance for credit losses 23, 58, 73, 271, Fair value 9, 21, 22, 26, 31, 33, 39, 42, 82, 83, 84, 86, 88, 19, 20 90, 114, 115, 118, 124, 127, 128, 129, 130, 131, 132, 133, Credit risk 7, 8, 14, 23, 28, 29, 38, 40, 41, 53, 54, 55, 56, 134, 135, 136, 137, 143, 145, 148, 172, 173, 174, 175, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 73, 74, 176, 177, 220, 221, 222, 223, 224, 225, 226, 227, 228, 75, 76, 77, 78, 79, 81, 93, 111, 124, 139, 140, 141, 151, 229, 230, 231, 232, 233, 234, 235, 236, 237, 270, 275, 175, 176, 177, 179, 195, 196, 197, 198, 199, 200, 201, 13, 14, 20, 21, 22, 23, 24, 25, 26, 34, 35, 37, 50, 55, 61 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 212, Fees 8, 13, 14, 20, 23, 24, 42, 43, 44, 45, 48, 49, 101, 102, 213, 214, 215, 216, 221, 223, 249, 261, 271, 280, 3, 5, 8, 113, 122, 160, 161, 180, 184, 188, 192, 193, 194, 220, 12, 14, 16, 20, 22, 24, 26, 29, 30, 31, 33, 34, 35, 36, 37, 38, 240, 245, 248, 249, 250, 251, 252, 254, 255, 256, 258, 40, 41, 42, 43, 45, 46, 47, 48, 49, 50, 51, 52, 54 262, 264, 265, 267, 272, 273, 274 Credit to the public 8, 12, 14, 22, 23, 27, 42, 43, 44, 45, Foreign countries 8, 30, 68, 69, 70, 71, 72, 5, 36, 37, 46, 47, 48, 49, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65, 38, 39 73, 74, 111, 115, 119, 124, 125, 138, 139, 140, 141, 182, 186, 190, 192, 193, 194, 195, 196, 197, 198, 199, 200, G 201, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, Goodwill and intangible assets 22, 24, 26 212, 213, 214, 215, 216, 217, 218, 219, 220, 222, 223, 224, 248, 249, 250, 252, 254, 255, 256, 258, 259, 264, H 265, 267, 271, 274, 279, 281, 19, 34, 35, 37, 39 Hedge 26, 114, 124, 127, 128, 20 Housing loans 9, 23, 27, 28, 35, 38, 40, 48, 49, 55, 60, D 61, 62, 63, 64, 65, 77, 78, 79, 80, 84, 86, 88, 90, 124, 138, Deposits from the public 14, 27, 31, 42, 43, 44, 45, 46, 139, 140, 151, 155, 161, 180, 182, 184, 186, 188, 190, 47, 48, 49, 111, 115, 120, 124, 125, 142, 182, 186, 190, 192, 193, 194, 196, 197, 198, 199, 200, 201, 202, 203, 192, 193, 194, 217, 218, 219, 222, 223, 224, 248, 249, 204, 205, 215, 216, 220, 221, 251, 271, 10, 12, 17, 29, 250, 254, 255, 256, 258, 259, 267, 268, 276, 277, 279, 20 34, 35, 38, 43, 45, 46, 47, 48, 49, 53, 55 Derivatives 12, 21, 22, 33, 60, 61, 62, 63, 64, 65, 69, 70, 71, 72, 74, 124, 156, 166, 167, 168, 169, 170, 171, 172, I 173, 174, 178, 217, 218, 219, 226, 228, 230, 232, 233, Impaired debts 12, 56, 57, 69, 70, 73, 138, 139, 140, 234, 235, 236, 265, 280, 281, 5, 33, 34, 35, 36, 37, 45, 46, 182, 186, 190, 199, 200, 201, 202, 203, 204, 206, 207, 47, 48, 49, 50, 51, 52, 59 208, 209, 210, 211, 212, 213, 214, 220, 221, 274, 36 Dividend 14, 33, 34, 35, 50, 51, 117, 120, 126, 150, 234, Impairment 98, 124, 126, 132, 135, 137, 64 235, 236, 21, 23, 25, 27 Individual allowance for credit losses 23, 73, 206, 207, 208, 271 E Interest-rate risk 35, 53, 82, 83, 92, 3, 8, 52, 53, 54 Earnings per share 13, 122

286 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796 Index

L S Legal proceedings 19, 98, 160, 11 Securities 8, 11, 14, 21, 24, 26, 27, 29, 30, 31, 32, 39, Leverage 8, 12, 33, 36, 41, 111, 124, 150, 151, 152, 153, 44, 51, 53, 60, 61, 62, 63, 64, 65, 68, 73, 74, 95, 102, 104, 154, 155, 156, 157, 158, 3, 5, 10, 12, 27, 32, 33, 34 111, 114, 115, 118, 119, 120, 124, 125, 128, 129, 130, Leveraged financing 9, 80, 82, 5, 44, 45 131, 132, 133, 134, 135, 136, 137, 138, 139, 140, 154, Liquidity 7, 8, 9, 12, 15, 33, 35, 53, 54, 72, 94, 95, 100, 156, 159, 182, 186, 190, 195, 196, 197, 198, 199, 200, 111, 150, 151, 152, 153, 154, 155, 156, 157, 158, 165, 201, 202, 203, 204, 206, 207, 208, 209, 210, 211, 212, 166, 178, 179, 238, 261, 265, 3, 5, 8, 9, 10, 11, 55, 56, 57, 213, 214, 215, 217, 218, 219, 220, 221, 222, 223, 224, 58, 59, 60, 62 225, 226, 227, 228, 229, 230, 232, 233, 240, 247, 265, Liquidity risk 15, 53, 94, 100, 179, 238, 3, 5, 8, 55, 56, 266, 272, 274, 276, 281, 282, 7, 13, 19, 20, 21, 23, 25, 27, 59, 62 32, 33, 34, 48, 49, 59, 61 Securitization 40, 126, 165, 167, 175, 282, 3, 10, 22, 24, M 26, 29, 34, 35, 45, 46, 47, 48, 49, 64 Management approach activity segments 245, 254, Share-based payment 116, 117, 118, 20, 21, 23, 25 255, 265, 267 Share capital 33, 39, 116, 117, 13, 14, 17, 19, 20, 21, Market risk 7, 8, 35, 41, 53, 82, 179, 3, 5, 8, 16, 30, 31, 22, 23, 24, 25, 26 52, 55 Strum Committee 99, 237, 248, 259 Money laundering 96, 257, 62 Supervisory activity segments 7, 8, 42, 43, 111, 180, 182, 184, 186, 188, 190, 192 O Operational risk 7, 8, 15, 35, 38, 40, 41, 53, 54, 96, 151, T 179, 3, 5, 8, 9, 12, 16, 29, 30, 31, 62 Trading book 30, 31, 92, 93, 53 Other assets 40, 60, 61, 62, 63, 64, 65, 73, 115, 118, 138, 139, 140, 195, 196, 197, 198, 199, 200, 201, 202, 203, 204, 206, 207, 208, 209, 210, 211, 212, 213, 214, 215, 217, 218, 219, 275, 19, 29, 34, 35, 37, 61 Other risks 15

P Provision for impairment 126

R Refinancing risk 7, 12, 53, 94, 8, 58 Remuneration 147, 247 Reputational risk 7, 15, 53, 96, 97, 98, 3, 8, 62, 63, 64 Risk-adjusted assets 34, 36, 38, 40, 151, 154, 182, 186, 190, 3, 5, 8, 12, 29, 30, 31, 32 Risk management policy 94

287 Bank Hapoalim B.M. and its Consolidated Subsidiaries WorldReginfo - 2710a5e4-0135-4c8d-b7fa-8c619b76d796