* Leumi plans to buy back up to 700 mln shekels of its shares
* Hedge funds betting on more buybacks
* Q1 net profit 730 mln shekels vs 769 mln forecast
* To pay dividend of 292 mln shekels (Adds details, background)
By Steven Scheer and Maiya Keidan
JERUSALEM/LONDON, May 24 (Reuters) - Bank Leumi, Israel’s second-largest lender, said on Thursday it would start next week the first share buyback programme by an Israeli bank in more than three decades.
Hedge funds are betting the landmark move by the Israeli financial regulator to permit buybacks will lead to further programmes from other banks.
The bank, which reported a smaller-than-expected 17 percent rise in first-quarter profit, said it planned to buy up to 700 million shekels ($196 million), or 2 percent, of its shares, by March 31, 2019, subject to meeting a Tier 1 equity ratio of no less than 10.9 percent.
It added that once the programme was completed, it would likely seek regulatory approval for another buyback round, which it believes is equivalent to a dividend payout of about 65 percent of profit.
Israel’s banking regulator currently allows bank dividends of up to 40 percent of profit and is in no hurry to allow banks to move to 50 percent as some wish, paving the way for buybacks.
Leumi received special central bank permission for the buyback and would likely be able to do more as long as it meets capital requirements.
“The Bank of Israel will move slow and it will depend on capital levels and credit performance, but I think there will be more share buybacks,” said Russell Echlov, portfolio manager at Mendon Capital, which has $1.2 billion in assets under management and is long Israeli banks.
In anticipation, foreign investors including hedge funds have been increasing their positions in Leumi, the head of research at a large Israeli brokerage said.
Leumi declared a 292 million shekel dividend for the first quarter.
It earned 730 million shekels in the quarter, up from 622 million a year earlier, helped by lower salary expenses. It had been forecast to earn 769 million shekels, according to a Reuters poll of analysts.
Net interest income rose 7.1 percent to 2 billion shekels, although non-interest income dipped 13.4 percent due to an appreciation of the shekel and weak capital markets.
Credit loss expenses grew 28.7 percent to 130 million shekels due to more risky loans.
Still, the bank said it had become more conservative in its lending policies, opting not to increase its retail activity.
Part of Leumi’s growth is coming from its recent launch of digital bank Pepper, which has tens of thousands of customers.
The bank’s Tier 1 ratio, which measures equity capital as a proportion of total risk-weighted assets, fell to 11.11 percent at the end of March from 11.43 percent at the end of 2017.
$1 = 3.5701 shekels Additional reporting by Tova Cohen and Ari Rabinovitch; Editing by Adrian Croft