Bank Hapoalim, Israel's largest bank, on Thursday posted weaker-than-expected second quarter earnings driven by higher-than-expected provisions.

Net profit for the second quarter of 2009 fell 36% to NIS 382 million from a profit of NIS 594 million in the same quarter last year but increased from a profit of NIS 42 million in the previous quarter.

Return on equity in the second quarter of 2009 dropped to 8.3%, on an annualized basis from 13.8% in the same quarter last year and 0.9% in the previous quarter.

The Bank's capital adequacy rose to 12.83% at the end of the second quarter of 2009 compared with 10.92% at the end of 2008. This rate exceeds the Board of Director's year-end 2009 objective of 12%. Tier 1 Capital rose to 7.84% at the end of the second quarter of 2009 compared with 7.44% at the end of 2008.

Profit from financing activity before provisions for doubtful debts, totaled NIS 1,955 million in the second quarter of 2009, compared with a profit of NIS 1,943 million in the same quarter last year and NIS 972 million in the first quarter.

Bank Hapoalim said that the increase in profit, in comparison to the previous quarter was mainly due to an exceptional accounting loss recorded in the previous quarter, related to the measurement of derivative instruments on a fair-value basis and from an increase in profits in respect of the credit-derivative portfolio during the reporting period.

The provision for doubtful debts was made on a conservative basis, with due regard for assessments of the risks in the credit portfolio, stated the bank. In the second quarter of 2009 the bank recorded provisions totaling NIS 538 million, compared with NIS 314million in the previous quarter and NIS 252 million in the same quarter last year. In the first half of 2009 the bank provided NIS 852 million compared with NIS 284 million in the same period last year.

The rate of the specific provision to total credit to the public, before the reduction in provisions and the collection of debts written off in the past, reached 0.80%, in the second quarter of 2009, compared with 0.49% in the previous quarter and 0.44% in the same quarter last year.

Operating and other income totaled NIS 1,231 million in the second quarter of 2009 compared with NIS 1,162 million in the previous quarter and NIS 1,205 million in the same quarter last year, an increase of 5.9% and 2.2%, respectively. The increase was mainly due to an increase in income from capital market activity, dividends and credit cards fees. In the first half of 2009 operating profit totaled NIS 2,393 million compared with NIS 2,489 million in the same period last year.