The privatization of the Bezeq phone company is stuck. The privatization of Bank Leumi is stuck and so is the privatization of the Zim shipping company. At least investment bankers will have something to do if

Israel Discount Bank

(TASE:DSCT) really does sell a chunk of its wholly-owned subsidiary,

Israel Discount Bank of New York


Discount Bank has liquidity problems. It still meets the liquidity requirements of the Bank of Israel, but its margin of safety is terrifyingly narrow. According to central bank figures, its minimum capital ratio at the end of the first quarter was 9.1%, the lowest among the five big banks.

To get further from the edge of its capital ratio, Discount must improve its liquidity. Theoretically, it could do so by offering shares, but the government has stamped out that possibility.

Another way would be to sell assets at more than their book value. It has in fact done so already, and tried to sell its mortgage arm, Discount Mortgage Bank, to Zur Shamir's Moshe (Mooky) Schneidman, but nothing came of it.

Bank Discount's No. 1 asset is the Israel Discount Bank of New York, which has been generating yields of 14% a year.

Bank Discount wouldnt have even dreamed of selling its crown jewel, in whole or in part, if its margins hadn't been so narrow, and its hedging costs so high.

The New York outlet's profits have made it a prime target for the other banks, and of others too: investment banks wouldn't mind having a crack at floating its shares.

Discount New York is Bank Discount's most important asset, and most alluring one, which places it squarely in the center of the parent company's attempts to improve its liquidity.

Discount New York could accomplish that in more than one way. It could offer stock, for instance, an option that has been and is being examined.

Meanwhile, all this doesn't mean Discount New York has no problems. One is naturally the dreadful state of the American primary market. Even if an offering were to take place, the pricing might be unattractive. Clearly, the closer it would be to Discount New York's equity value, the less the capital gains the parent company would make, and the lower its contribution to liquidity.

The price at offering might be sub-optimal for another reason, even if Discount were to retain control selling a chunk to a single buyer would probably get it a better price than by selling shares piecemeal on the market to thousands of investors.

Yes, Discount could sell Discount New York, in whole or in part. The latest candidate is reportedly Bank Hapoalim (TASE:POLI), but does Hapoalim really want it? Can it actually buy it?

Hapoalim, Israel's biggest bank, has long wanted to expand abroad, including under the stewardship of chairman Shlomo Nehama, who has routed much resources toward that aim. One such effort was the NIS 350 million investment in Signature Bank of New York.

But buying Discount New York would force Hapoalim to compromise on its own liquidity. Its liquidity is in pretty good shape: according to the Bank of Israel, its minimum capital ratio stood at 9.7% at the end of the first quarter. It helps that businessman Yossi Maiman stepped back from buying a chunk of Israel Salt Industries (TASE:SALT), which controls Hapoalim together with the Arison group. His withdrawal means less consultations.

Another option Discount has is to merge, but with who? It would need a partner with high liquidity, such as Bank Leumi which, with a 10.2% ratio, would be the best candidate.

Moreover, Leumi could convene its board at the drop of a hat, because it is controlled by the State of Israel. That in itself is an advantage, because so is Bank Discount. Of course, although the regulator has started to smile upon the idea of bank mergers, a union between Discount and Leumi might restore his frown, on the grounds of anticompetitiveness.

Mizrahi is a less attractive merger candidate: its credit portfolio quality is good but its ratio is a low 9.2%. Like Hapoalim, control over Mizrahi has been morphing, and the final direction is not clear.

First International Bank has good liquidity and its controlling structure is clearer, but its credit portfolio is much more worrisome.

Discount could even seek a merger partner outside Israel's borders, where the range of options is tremendous.

Lots of options, just as many problems but the motivation is there. Whether the deal is with Hapoalim or with somebody else, whether it's for all of Discount New York or only part we may assume that a deal at Discount is just a matter of time.