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2010 Annual Report

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2010 Annual Report 1 2010 Annual Report Table of Contents Report of the Board of Directors to the General Meeting of Shareholders and Description of Bank Group Business 3 Management Review of Group Business and Operating Results 210 Certifications 238 Report of the Board of Directors and Management as to Internal Control over Financial Reporting 240 Financial Statements 241 2 3 Report of the Board of Directors to the General Meeting of Shareholders Table of Contents The General Environment and the Effect of External Factors on the Bank Group 5 Bank Group Operations and Description of its Business Development 10 Holding Structure – Major Companies 12 Control of the Bank Group 13 Investments in Bank Capital and Transactions in Bank Shares 15 Profit and Profitability 17 Fixed assets and installations 37 Off balance sheet activity 42 Description of Businesses of the Bank Group by Operating Segment 43 International operations 79 Human Resources 83 Bank remuneration policy 93 Bank organizational structure 94 Tax Laws Applicable to the Bank Group 97 Legislation and Regulation of Bank Group Operations 99 Significant Agreements 108 Legal Proceedings 109 Events outside the Normal Course of Bank Group Business 112 Business Strategy 114 Forecasts and Assessments with Regard to Bank Group Business 115 Anticipated developments 116 Marketing Operations 117 Sources and financing 122 Risk management - Basle II: Pillar 3 126 Social involvement and charitable donation 167 Disclosure concerning the Internal Auditor 169 Accounting Policy on Critical Matters 173 Certification process of the financial statements 177 Independent Auditors' report 180 Controls and Procedures 180 The Code of Ethics 181 Executive Management 182 Senior Officers 183 Transactions with controlling shareholders 194 Independent auditors’ fees 199 Board of Directors 200 4 5 Report of the Board of Directors to the General Meeting of Shareholders At the meeting of the Board of Directors held on March 22, 2011, it was resolved to approve and publish the consolidated financial statements of Mizrahi Tefahot Bank Ltd. and its investees as of December 31, 2010. The financial statements were prepared in accordance with the directives and guidelines issued by the Supervisor of Banks. The General Environment and the Effect of External Factors on the Bank Group Developments in Israel's Economy in 2010 Real Developments In 2010, the economy recovered in continuation of the second half of 2009, following the recession of late 2008. According to estimates by the Central Bureau of Statistics, GDP grew in 2010 by 4.6%, compared to moderate growth of 0.8% in 2009. Seasonally-adjusted data indicate faster growth in the second half of 2010, at an annual pace of 5.6%, after 5.1% growth in the first half. Business GDP grew in 2010 by 5.3% after being unchanged in 2009. Industry and construction led this growth, with growth rates of 7.6% and 7.1%, respectively. Imported goods and uses rose sharply, by 12.4% in 2010, compared to a decline of 14.1% in 2009. Total uses grew by 6.5% in 2010, compared to a decline of 3.6% in 2009. Exports of goods and services recovered, growing by 13.6%, compared to a decline of 12.5% in 2009. The increase was primarily in export of goods, which grew by 17.4%, and in export of tourism services, which grew by 34.2%. Private consumption grew by 4.9% in 2010, following a decline of 1.7% in 2009. This growth was primarily in durable goods. Investment in fixed assets also recovered, growing by 12.4%, compared to a decline of 5.8% last year. Investment in residential construction grew by 11.7%, following growth by 5.5% last year. Public consumption grew by 3.1%, following growth by 2.5% last year. CHART 1 6 Unemployment, which rose due to the recession from an average 6.0% in 2008 to 7.5% in 2009, declined in 2010 to 6.7%. This decline in unemployment was achieved along with a rise in participation in the workforce as percentage of the population, with the number of those employed growing by 100 thousand. Inflation and exchange rates In 2010, the CPI rose by 2.7%. For the first time since 2005, inflation was within the target range (1%-3%), after being above the target range in the past three years, and below it in 2006. The CPI was primarily affected this year by higher housing prices as well as higher prices of fruits and vegetables. In 2010, the USD was devalued by 6.0% against the NIS, reaching NIS 3.549 per USD 1 at the end of 2010, compared to NIS 3.775 at the end of 2009. The EUR was devalued against the NIS in this period by 12.9%, reaching NIS 4.738 per EUR 1 at the end of 2010, compared to NIS 5.442 at the end of 2009. On March 11, 2011, the USD/NIS exchange rate was at 3.579. CHART 2 In support of the USD exchange rate, the Bank of Israel bought in 2010 foreign currency amounting to USD 12 billion, subsequent to buying USD 20 billion in 2009. In early 2011, the Bank of Israel expanded its intervention policy in the foreign currency market, issuing a transparency directive requiring disclosure of any foreign currency transaction over USD 10 million, and requiring disclosure by foreign residents of any MAKAM transactions over NIS 10 million, as well as requiring banks to allocate liquidity at 10% of swap and future conversion transactions. Monetary and fiscal policy The Bank of Israel's Monetary Policy in 2010 was marked by moderate increase in interest rates. In order to deal with inflationary expectations, which for most of the year were close to the upper limit of the target inflation, and with rapid price increases in the housing market (as detailed below) on the one hand, and with the negative impact of higher interest rates due to the growing interest rate gap vis-à-vis developed 7 economies (primarily as for exports) on the other hand, in 2010 the Bank of Israel raised interest rates by 1 percentage point, from 1.0% in late 2009 to 2.0% in late 2010. In early 2011, the Bank of Israel interest rate was raised again twice by 0.25 percentage point each time, to 2.50% in March 2011. In 2010, the Government budget recorded a deficit of NIS 30.2 billion, or 3.7% of GDP. This compares with a planned deficit of 5.5% of GDP, and compares with a NIS 39.3 billion deficit in 2009 (or 5.2% of GDP). The lower than expected deficit was primarily due to tax collection which was higher than expected at NIS 11.3 billion, and to lower than expected interest expenses. Total tax revenues increased in real terms by 6.6% in 2010, after declining for two years in a row. Direct tax revenues increased by 6.0% and indirect tax revenues - by 7.1%. Expenditure by Government ministries increased by 3.5% on nominal basis in 2010, compared to 3.1% budgeted. Budget utilization by Government ministries was at 100.8%, compared to 100.4% last year. Residential construction and the mortgage market According to data from the Central Bureau of Statistics, the number of transactions involving purchase of new apartments rose in 2010 by 6.2%, to reach 39,290 units. Sales of new apartments from private development show transition to an upward trend in early 2010, after declining in the second half of 2009. The sales pace accelerated in the second half of 2010. Based on Appreciation Tax data, the total number of transactions in 2010 was 103 thousand, an increase of only 0.6% over the number of transactions last year. The supply side also recorded growth: Along with growth in investment in residential construction, housing starts also increased to 38,000 apartments this year (first 11 months, annualized), compared to 34,700 last year - an increase of 10%. The higher demand was in line with higher supply of housing, which contributed to stable inventory of new apartments. The inventory of apartments for sale from private development at the end of 2010 was 10,070 units, similar to 10,129 at the end of 2009. According to date from the Central Bureau of Statistics, apartment prices continued to rise in 2010, by 17% (first 11 months, annualized), following an increase of 20% in 2009 and 11% in 2008. Higher prices were also reflected in the mortgage market: In 2010, new housing loans origination amounted to NIS 47.7 billion, an increase of 35% compared to total origination in 2009. Capital market The upward trend in capital markets, which started in 2009, continued in 2010 despite concerns about a recurring crisis, primarily in Europe. Capital markets in Israel responded to positive developments in global ones, to Israel entering the OECD and the MSCI Developed Markets Index, as well as to news about signs of large natural gas deposits. Equity market - the major indices, Tel Aviv 25 and Tel Aviv 100 rose in 2010 by 15.8% and 14.9%, respectively. The Tel Aviv 75 Index rose by 15.7%, while the Real Estate 15 Index rose similarly - by 15.4%. Small-cap shares 8 rose impressively: The Other Shares Index rose by 32.9%. On the other hand, financials rose at a lower rate: The Finance 15 Index and Tel Aviv Banks Index rose by 9.3% and 6.8%, respectively. Average daily trading volume in equities and convertible securities in 2010 amounted to NIS 2.0 billion, compared to NIS 1.7 billion in 2009.
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