Israel's banks weaken in Q4, see difficult 2009

* Leumi Q4 net loss $288 mln, just missing forecasts

* Leumi omits 2008 dividend, not setting 2009 dividend

* Discount Q4 loss of 121 million shekels, at top of range

* Discount delays proposal on dividend policy to 2010

By Tova Cohen

TEL AVIV, March 31 (Reuters) - Israel's top three banks posted weak fourth quarter results weighed down by soaring bad debt provisions and declining investment portfolios, and the difficult times are expected to continue in 2009.

A worsening economy meant some of the banks cut dividends to boost capital adequacy ratios to the 12-percent minimum set by the central bank for the end of 2009.

Bank Leumi (LUMI.TA), which overtook Hapoalim (POLI.TA) in the quarter to become Israel's largest bank by assets, dropped its 2008 dividend and set no dividend policy for 2009.

Galia Maor, Leumi president and chief executive said the first half of 2009 was shaping up to be a continuation of the second half of 2008 and gave no clue to when the bank would return to profit.

"It is reasonable that some of our borrowers might have difficulties and this would be reflected in our (bad) debt provisions," she told a news conference on Tuesday.

Leumi lost 1.18 billion shekels ($282 million) in the quarter, from a 517 million shekel profit a year earlier, as doubtful debt provisions soared to 1.09 billion shekels.

Terence Klingman, an analyst at the Excellence Nessuah brokerage, said Leumi still carried an unrealised loss of 1.7 billion shekels on its capital account.

"At first glance the loan book looks worse than expected and the bank is still carrying significant unrealised losses on its securities portfolio," Klingman said.

Israel Discount Bank, (DSCT.TA), the third largest lender, said management decided to postpone its proposal to the board regarding a dividend policy until the beginning of 2010.

Discount recorded a loss of 121 million shekels in the quarter, from a profit of 41 million shekels a year earlier.

"We are assuming the recession will last throughout 2009," Discunt Chief Executive Giora Offer said. "The longer the recession lasts, the higher the risk of further provisions in the future."

Israel's economy is forecast to shrink 1.5 percent in 2009.

Preserving financing income will be a challenge in 2009 given low interest rates. The central bank earlier this mnoth cuts its key lending rate to a record low of 0.5 percent.

CREDIT TIGHT

The banks' difficulties come at a time when the non-banking credit market has all but dried up.

Offer predicted the rate of growth in credit will be 5 percent in 2009.

But banking leaders said there was simply not enough credit available to jump-start the economy.

"We need a solution for the credit problem," Discount Chairman Shlomo Zohar said as he called on the new government of Benjamin Netanyahu to take urgent measures, as other countries have already done.

"Israel entered this crisis last and at this rate we will exit the crisis last," Zohar said.

Last week, Hapoalim posted a larger-than-forecast fourth quarter loss of 363 million shekels due to higher debt provisions, but said it expects to return to profitability in the first quarter.[ID:nLQ136853]

Because the bank posted a loss for all of 2008, it said it will require approval from the central bank's supervisor of banks to distribute a dividend.

Leumi ended 2008 with a capital adequacy ratio little changed from 2007 at 11.49 percent while Hapoalim's ratio was 11.15 percent.

Discount's ratio was 10.3 percent at the end of 2008, but it said it had the tools to reach 12 percent by year end. On Sunday it raised 350 million shekels in an offering of capital notes.

Leumi shares were 1.6 percent higher in late trading while Discount was up 2.3 percent and Hapoalim 2.6 percent, outpacing gains of 1.8 percent in the broader market. (Editing by David Cowell) ($1 = 4.19 shekels)