UPDATE 1-Israeli bank Leumi's Q1 net profit falls sharply

(Adds more details, share price reaction)

TEL AVIV, May 29 (Reuters) - Bank Leumi (LUMI.TA), one of Israel's largest banks, reported a sharp drop in its first-quarter net profit, due to lower capital gains and higher bad debt provisions.

Leumi made a net profit of 470 million shekels ($143 million), or 0.33 shekels per share in the three months, down from 917 million shekels, or 0.65 shekels per share, in the same period last year, when it recorded capital gains of 259 million shekels.

Provisions for doubtful or bad debt in the quarter rose to 244 million shekels from 11 million shekels a year ago. Financing income before the bad debt provision rose to 1.96 billion shekels from 1.793 billion.

Leumi, Israel's largest bank in terms of market value, was forecast to post a net profit of 599 million shekels on financing income of 1.83 billion shekels.

Profits were also hit by a 139 million shekel reduction in operating and other income and a 162 million shekel increase in expenses.

Its shares were marginally lower in early trading in Tel Aviv.

Leumi said the impact from the U.S. credit crisis on its asset-backed securities portfolio remained very low, recording a $3 million loss after the amount had previously been recognised as a temporary decline.

The value of Leumi's ABS portfolio amounts to $1.5 billion, $1 billion of which is in mortgage-backed securities issued or guaranteed by U.S. federal agencies and are AAA-rated, it said.

The bank's net profit return on equity slid to an annualised 9.8 percent in the first quarter from a rate of 22.2 percent a year ago.

Its capital adequacy ratio of total shareholders' equity to risk assets, was largely flat at 11.77 percent. ($1=3.29 shekels) (Reporting by Steven Scheer and Tova Cohen; Editing by Greg Mahlich)