(Bloomberg BNA) -- Israel’s Bank Hapoalim Ltd. delayed payment of its second-quarter dividend Aug. 16 over concerns that a $365 million provision will be far less than required to settle potential fines stemming from a U.S. investigation into tax evasion and money laundering.
Hapoalim was instructed by the Bank of Israel’s banking supervisor to withhold the dividend after the smaller Mizrahi-Tefahot Bank Ltd. said it would challenge a $342 million fine proposed by the U.S. Justice Department to settle its alleged role in the case. Hapoalim’s exposure is believed to be much greater than Mizrahi’s.
“The Bank is unable to reasonably estimate the extent or range of the exposure in this regard” at this stage, Hapoalim—one of the country’s largest banks—said in its financial statement for the second quarter, released Aug. 16.
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“The Bank estimates that the total aggregate exposure is greater than the amount of the provision included by the Bank in its financial 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,” Hapoalim said.
The statements are a red flag that the bank expects larger fines to come, which will impact overall profits. Already, the U.S. tax probes into Israel’s three largest banks have resulted in massive fines. Bank Leumi Le Israel BM settled its investigation by paying a $400 million fine in December 2014.
The lack of clarity over the bank’s U.S. legal exposure is “a serious problem,” said Alon Glazer, vice president of research at Leader Capital Markets in Tel Aviv. “I think they have enough capital and it’s not such a big problem for operating the bank but it’s a huge problem to deal with—the main problem in the bank right now.”
The probes—centered on whether Israeli banks used their Swiss branches to help U.S. clients skirt taxes—are part of a broader U.S. pursuit of offshore tax evasion. The Israeli lenders shuttered or scaled back their overseas operations as a result of the probe. The drawn-out dispute threatens long-term reputational damage, and a larger than expected fine or settlement could harm profitability.
The bank hasn’t set aside additional funds in connection with the U.S. investigation, Ofer Koren, chief financial officer, told investors on a conference call Aug. 16.
“To date the bank’s provision is a total of $365 million with respect to the investigation,” Koren said. “However, for reasons of conservatism and in coordination with the Bank of Israel, the board of directors of the bank did not declare a distribution of dividends from this quarter’s net profits.”
The bank said it spent 103 million shekels ($28 million) in legal fees relating to the U.S. probe in the second quarter of 2018, up from 87 million shekels in the first quarter. It spent 89 million shekels all of 2017, according to its financial statement. While future legal expenses are “difficult to forecast,” they are likely to rise in the near future, Koren said.
“We do think in the next quarter or two we will have relatively high expenses in that matter,” he said.
The legal expenses were recorded against the bank’s Swiss division, sending it to a loss of 59 million Swiss francs ($59 million) for the first half of 2018, compared with a profit of 1.6 million Swiss francs in the same period the previous year, according to the financial statement.
“In July 2018, the Bank invested CHF 50 million in the capital of Hapoalim Switzerland, due to concerns that Hapoalim Switzerland might be in violation of the regulatory total capital-adequacy ratio requirement in Switzerland,” Hapoalim said in the statement.