Bank Hapoalim Annual Report 2005 Scoring Strategic Results 5 200 In 2005, the Bank began to vigorously pursue its long-term strategy, achieving important milestones in profitability, shareholder value, international expansion and domestic leadership. In addition to taking bold, proactive measures designed to promote its global objectives, the Bank also began to adapt and respond to a dramatically changing regulatory environment in its home market. These measures will expand, and, in certain domains, redefine the Bank’s relationships and offerings. While it is determined to adhere to disciplined implementation of measurable strategic goals, the Bank is concurrently nurturing a corporate culture that welcomes flexibility and challenge. The excellent results achieved in 2005 bode well for the continued success of the Bank’s strategic drive. 5 The Bank Hapoalim Group Major Subsidiaries & Affiliates 200 Commercial Banks(1) Financial Companies Bank Hapoalim B.M. Isracard Ltd. Bank Otsar Hahayal Ltd. (2) Europay (Eurocard) Israel Ltd. Bank Yahav For Government Employees Ltd. Aminit Ltd. Bank Massad Ltd. Poalim American Express Ltd. Bank Hapoalim (Switzerland) Ltd. Sure-Ha International Ltd. Bank of New York – Inter-Maritime Bank, Geneva(3) Bank Hapoalim (Luxembourg) S.A. Non-Financial Companies Hapoalim (Latin America) S.A. Clal Insurance Enterprises Holdings Ltd. Bank Hapoalim (Cayman) Ltd. Industrial Building Corporation Ltd.(6) Sheraton Moriah (Israel) Ltd. Investment Banks Delek Real Estate Ltd.(7) Poalim Capital Markets - Investment Bank Ltd. Trust Companies (1) On December 13, 2005, an agreement was signed in Istanbul, Turkey, under which the Bank, through Tarshish Hapoalim Poalim Trust Services Ltd. Holdings and Investments Ltd., a wholly owned subsidiary, will acquire 57.55% of the means of control of C Kredi Ve Underwriting Companies Kalkinma Bankasi Anonim Sirketi (on January 1, 2006, the Poalim I.B.I. Managing & Underwriting Ltd. acquired bank changed its name to Bank Pozitif Kredi Ve Kalkinma Bankasi Anonim Sirketi (hereafter: “Bank Pozitif”), a bank incorporated and operating in Turkey. Provident and Further Study Funds (2) Letter of intent for sale signed on January 24, 2006. Companies for the Management of Provident Funds (3) Merged with Bank Hapoalim (Switzerland) Ltd. on January 1, 2006. (4) In March 2006, the Bank acquired Investec (US) Inc., and Portfolio Management the company’s name was changed to Hapoalim Securities Peilim-Portfolio Management Company Ltd. USA, Inc. Hapoalim Securities USA, Inc.(4) (5) On October 16, 2005, Poalim Mutual Funds, Ltd. (PKN), signed an agreement to sell all of its rights and obligations. The transaction will be concluded by March 31, 2006. Asset Management (6) Sold on January 26, 2006. Poalim Asset Management (UK) Ltd. (7) Purchased on January 26, 2006. Poalim Asset Management (Ireland) Ltd. Poalim Sahar Ltd. Mutual Funds Poalim Mutual Funds Ltd.(5) Lahak - Mutual Funds Management Ltd. Group Profile 2 3 Bank Hapoalim is Israel’s leading financial Regional business centers serve middle- engaged in trade, corporate finance, group. The Bank’s already significant market companies. In the Bank’s Head private banking and retail banking. presence in international financial centers Office, expert teams specializing in is now being expanded, and in 2005 the specific industries meet the needs of In Israel, the Bank Hapoalim Group Bank took active steps in this direction, large corporate customers. includes four commercial banking through merger and acquisition activity. subsidiaries, as well as financial companies In both retail and business banking, the involved in investment banking, credit In Israel, the Bank Hapoalim Group has web is accounting for a growing share cards, trust services and portfolio 321 full-service branches, many of which of transactions, enquiries and information management. The Group also has have Private Banking desks; eight regional sources. holdings in non-financial sectors. business centers, and special service industry desks for major corporate Overseas, Bank Hapoalim operates customers. The full service branches through 38 branches, subsidiaries and focus on households, professionals, small representative offices, in North and Latin businesses and mortgage banking. America, Europe, East Asia, Turkey and Following regulatory changes, the Australia. In these markets, the Bank is branches will soon begin offering advisory services for insurance and pension plans. Consolidated Financial Highlights 2005 2004 2005 2004 (NIS millions) (US$ millions)* Total Assets 273,265 262,042 59,367 56,929 Net Profit 2,908 2,107 632 458 Credit to the Public 185,133 182,470 40,220 39,642 Deposits from the Public 213,892 206,666 46,468 44,898 Shareholders’ Equity 16,278 15,166 3,536 3,295 * US dollar figures have been converted at the representative exchange rate prevailing on December 31, 2005, NIS 4.603 = US$1.00. 5 200 Letter from the Chairman and CEO Dear Shareholder, 2005 recorded substantial increases in the Bank’s net profit. Bank Hapoalim’s It is our pleasure to present the financial progress and performance during the results of Bank Hapoalim for 2005. year was a demonstration once again, of the intrinsic value of the Bank’s The year 2005 was one of considerable diversified income stream. achievement and remarkable growth for the Bank. The improvement in the Early in the year 2005, the Bank Israeli economy, combined with the announced that it expected to report implementation of our strategic plan, significant increases in the annual return delivered significant increases in revenues on equity. We are pleased to report and profitability. The Bank achieved its that the results have surpassed highest income levels ever recorded, expectations. Return on equity reached both in terms of Net Interest Income 20%, with return on equity from regular and Operating Income, as well as for banking activity reaching 16%, above Net Operating Profit and Total Net our initial target of 14%. The results Profit. reflect, among other factors, the expansion of the Bank’s global private Revenues were successfully increased banking operations, a significant upgrade in every line of business across the Bank, of our global treasury activities, growth while cost controls continued to be in our retail business in Israel and an executed. The healthy domestic and improvement in the quality of the overall international economic environment credit portfolio as the main contributors allowed for much lower provisions and to the Bank’s profitability. strong improvements in the credit quality of our portfolio. The Bank also benefited The Bank maintains a capital strategy from the considerable extraordinary squarely focused on generating contribution from the sale of Signature shareholder value. This strategy includes Bank in New York. As a result, the year a dividend payout policy of a minimum of 50% of net profit, which is paid each Shlomo Nehama 4 5 Chairman of the Board of Directors quarter. Dividends paid totalled our more active management of treasury 5. Among the Bank’s International NIS 1,648 million ($358 million) in 2005, produced remarkable results, and the Operations, Global Private Banking indicating an average dividend yield of improvement in the economy enabled (GPB) continued to show impressive 7.8% that is among the most attractive us to recover interest on loans that had organic growth throughout the year. in the international banking sector. This been provisioned in the past. Considerable extraordinary gains were dividend policy demonstrates our realized by the sale of our holdings in confidence in the long-term growth 3. Operating Income benefited from Signature Bank, five years after its potential of the Bank. the upturn in economic activity, which foundation. In addition, substantial contributed to the increase in the progress was attained in line with our Bank Hapoalim’s shares were the most number of income generating multi-year strategy of international actively traded on the Tel Aviv Stock transactions, such as traditional expansion: Exchange in 2005, with an average daily commissions and fees from credit card volume of more than NIS 80 million use. In addition, the buoyancy of the • On January 1, 2006, Bank of New providing shareholders with a high level capital market delivered exceptional York-Inter Maritime, the Swiss bank of liquidity. income from brokerage fees and that we acquired last year, was management fees from mutual funds successfully merged into Bank Some of the key highlights for the year and provident funds. Hapoalim Switzerland. This has 2005 include the following: increased our presence and our 4. The significant reduction in the competitive advantage in global 1. Net Profit rose 38% to NIS 2,908 Provision for Doubtful Debts reflected private banking. million ($632 million) for the year, as the continued strengthening of the compared to NIS 2,107 million ($458 domestic economy. Provision for • In September 2005, we announced million) in 2004. Net return on equity doubtful debts totalled NIS 1,268 million the signing of an agreement that will amounted to 20%, compared with 15.2% ($275 million), compared to NIS 1,768 lead to the acquisition of a controlling for 2004. million ($384 million) in 2004, a decrease stake (over 57%) in C Bank of Turkey. of 28.3%. The rate of specific provisions Recently renamed as Bank Pozitif, 2. Net Interest Income reached a as a percentage of balance sheet credit we intend to expand and develop record level due to three main factors: