BANK LEUMI LE-ISRAEL B.M. AND SUBSIDIARIES AND AFFILIATES Annual Report 2007 Bank Leumi le-Israel B.M. Head Office: 34 Yehuda Halevi Street, Tel Aviv 65546, Israel The Bank has received the consent of the Supervisor of Banks to the publication of the annual financial report on a consolidated basis only, with condensed statements of the Bank (not consolidated) in Note 30 to the Financial Statements. The figures of the Bank alone are available on request from the offices of the Bank at 34 Yehuda Halevi Street, Tel Aviv or on its website: www.bankleumi.com. This is a translation from the Hebrew and has been prepared for convenience only. In the case of any discrepancy, the Hebrew will prevail. Bank Leumi le-Israel B.M. and its Consolidated Companies Annual Report 2007 Index Page Directors' Report A. General Board of Directors 3 Management 4 B. General Developments in the Group's Business Description of the Leumi Group's Business Activities and their General Development 5 Business Strategy 10 Control of the Bank 13 Description of Operational Segments 14 Capital Resources and Transactions in the Shares of the Bank 19 Distribution of Dividends 23 Principal Five Year Data 25 C. Other Information Principal Developments in the Economy 26 General Environment and Effect of External Factors on Activities 31 Legislation Affecting the Banking System 36 Accounting Policy on Critical Subjects 44 Disclosure Regarding the Process of Approval of the Financial Statements 48 D. Description of the Group's Business according to Sectors and Spheres of Activity Development of Income, Expenses and Tax Provision 50 Structure and Development of Assets and Liabilities 65 Fixed Assets and Installations 87 Intangible Assets 90 Operational Segments and Profit Centers in the Group 91 Investments: - Activities of Major Subsidiaries and Affiliates 145 - Capital Market and Financial Services Activities 160 - Non-Banking Activities of Companies included on the Equity Basis 162 Exposure to Risk and Methods of Risk Management 162 Linkage Status, Repayment Periods and Liquidity Status 194 Preparations for Basel II 198 Legal Proceedings 200 Restrictions and Supervision of Activities of the Banking Corporation 203 Material Contracts 204 Description of the Taxation Position 205 Human Resources (Human Capital) 207 Organizational Structure 211 E. Additional Matters Leumi for the Community - Donations and Sponsorships 214 Internal Auditor 217 Evaluation of Disclosure Controls and Procedures for the Financial Statements 220 Remuneration of Senior Office Holders 222 Auditors’ Fees 225 Board of Directors 226 Report on Directors with Accounting and Financial Expertise 228 Management Review Consolidated Balance Sheets as at Year End 2003-2007 234 Consolidated Statements of Profit and Loss for the Years 2003-2007 235 Rates of Financing Income and Expenses 237 Exposure to Interest Rate Fluctuations 242 Credit to the Public - Risk by Economic Sector 244 Multi-quarter Data - Consolidated Balance Sheets 246 Multi-quarter Data - Consolidated Statements of Profit and Loss 247 1 Classification of Loan Balances to Less Developed Countries 249 Certification 250 Board of Directors and Management Report on Responsibility for the Annual Report 252 Financial Statements Joint Auditors’ Report 253 Balance Sheet – Consolidated 254 Statements of Profit and Loss – Consolidated 255 Statements of Changes in Shareholders' Equity - Consolidated 256 Statements of Cash Flow – Consolidated 258 Notes to the Financial Statements – Consolidated 261 Condensed Financial Statements of Major Subsidiaries in Israel and Abroad 422 2 Bank Leumi le-Israel B.M. Board of Directors _________________________________________________________________________ Eitan Raff, Chairman Doron Cohen Meir Dayan Moshe Dovrat1 Zipora Gal Yam Prof. Arieh Gans Prof. Israel Gilead Yaacov Goldman, C.P.A. (Isr.) Rami Avraham Guzman Zvi Koren Adv. Jacob Mashaal Vered Raichman Prof. Efraim Sadka Nurit Segal Moshe Vidman 1 Elected on 20 May 2007. Mr. S. Yanai served as a Director until 18 February 2007. 3 Bank Leumi le-Israel B.M. Members of Management and their Positions Galia Maor President and Chief Executive Officer Zeev Nahari, C.P.A. (Isr.) Senior Deputy Chief Executive Officer, Acting CEO in the absence of the President and CEO Chief Financial Officer, Head of Finance, Accounting and Capital Markets Head of Finance and Economics Division, Manager of Market Risks 1 Gideon Altman Acting Head of Commercial Banking Division David Bar Lev First Executive Vice President, Head of Human Resources Adv. Nahum Bitterman First Executive Vice President, Chief Legal Advisor, Head of Legal Division, Manager of Legal Risks Zvi Itskovitch First Executive Vice President, Head of International and Private Banking Division Baruch Lederman2 First Executive Vice President, Head of Banking Division Itzhak Malach First Executive Vice President, Head of Operations, Information Systems and Administration, Manager of Operating Risks Rakefet Russak-Aminoach, C.P.A. (Isr.) First Executive Vice President, Head of Corporate Division, Manager of Credit Risks Menachem Schwartz, C.P.A. (Isr.) Executive Vice President, Chief Accounting Officer, Head of Accounting Prof. Daniel Tsiddon Executive Vice President, Head of Capital Markets Division _______________________________________________________________ Joseph Horowitz First Executive Vice President, Chief Internal Auditor, Head of Internal Audit Division Adv. Jennifer Janes Executive Vice President, Group Secretary Kost Forer Gabbay & Kasierer, Certified Public Accountants (Isr.) Somekh Chaikin, Certified Public Accountants (Isr.) Joint Auditors of the Bank 1 Appointed Acting Head of the Commercial Banking Division as of 1 January 2008. Until 31 December 2007, Michael Bar-Haim served as a Member of Management and Head of the Commercial Banking Division. 2 Appointed Member of Management and Head of the Banking Division as of 1 October 2007. Until 30 September 2007, Yona Fogel served as a Member of Management and Head of the Banking Division. 4 Bank Leumi le-Israel B.M. and Subsidiaries and Affiliates Directors’ Report The following is the fifty-seventh annual report of Bank Leumi le-Israel B.M. and the one hundred and sixth report of the business founded in 1902. This report will be presented to the Bank’s fifty-seventh Annual General Meeting. This report is based on an analysis of the data included in the Bank’s Financial Statements and Management Review, and upon additional data as required. B. General Developments in the Group's Business Description of the Leumi Group's Business Activities and their General Development Bank Leumi and its subsidiary companies constitute one of the largest banking groups in Israel, continuing activities that began 106 years ago. The Bank's predecessor, The Anglo Palestine Company, was established in London in 1902 by Otsar Hityashvuth HaYehudim Jewish Colonial Trust Limited, the predecessor of Otsar Hityashvuth HaYehudim B.M.1 The Bank is defined as a banking corporation under the Banking (Licensing) Law, 1981, and holds a banking license under that law. As a "bank" and a "banking corporation" the Bank's activities are governed and delineated by a system of laws, orders and regulations, including inter alia the Banking Ordinance, the Bank of Israel Law, the Banking (Licensing) Law and the Banking (Service to Customer) Law, as well as directives, rules, instructions and position papers of the Supervisor of Banks. The Leumi Group is involved in a variety of banking, financial and non-banking activities, in Israel and overseas. The Group's activities are carried out through the Bank, subsidiary companies and companies included on the equity basis, through 242 branches located throughout Israel, and through 86 branches, agencies and representative offices in 21 countries throughout the world. The Group's policy, in Israel and overseas, is to provide comprehensive banking and financial solutions to its customers and a high level of professional service, to enable them to make use of varied distribution channels and to offer them a wide variety of products, adapted to their needs. As a leading banking group, aiming to achieve high levels of long-term profitability, Leumi constantly scrutinizes the trends and changes in the business environment in which it operates and formulates strategies to deal with these changes. To implement its strategy, the Bank is organized into five business lines, concentrating on different market segments, with each business line specializing in providing banking and financial services to a particular customer segment: Corporate banking concentrates on servicing major and international companies, commercial banking concentrates on servicing middle market companies, international and private banking is aimed at wealthy customers requiring investment solutions at a highly sophisticated level, retail banking concentrates on providing banking services mainly to households and small businesses, the Capital Markets Division and Financial Management coordinates the activities of all the dealing rooms and the nostro within one division, with a view to improving and widening the range of services to customers active in the capital and financial markets, including institutional customers. Some of the financial services are provided by means of subsidiary companies and/or companies included on the equity basis that operate in various fields, such as: credit cards, mortgages and underwriting. 1 Otsar Hityashvuth HaYehudim B.M. was the controlling shareholder of the