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The Gmul Sahar investment house today updated its research on

Bank Leumi (TASE:


), based on the bank's second-quarter results.

Analyst Ronit Halima maintained a Buy rating for Israel's second-biggest bank, but lowered its 12-month price target to NIS 7.33, from NIS 7.85. Her new target is 27% above Bank Leumi's current trading price.

On the bank's second-quarter results, Halima wrote that the effect of the index gap between the expected and actual consumer price index will ebb in the second half of 2002, when the CPI is expected to increase at a slower pace.

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The effect of the index gap is a technicality, Halima added, having no effect on the bank's cash flow.

She also added that Leumi's losses from its "saleable" bonds portfolio was unusually high in the second quarter, on the grounds that the prevailing economic conditions in the second quarter, including extreme interest rate changes, were irregular.

Leumi's provision for doubtful debt in the first half were lower than expected, Halima says, considering the economic conditions and financial status of several major borrowers. Bad-debt allowances are therefore likely to rise in the second half versus the preceding months, she predicts.

Of Israel's five biggest banks, Leumi has the best primary capital ratio 6.9%, she writes. Moreover, compared with the other banks, its capital adequacy ratio leaves it more room than its rivals to extend fresh credit, and in a powerful position with negotiating with problem debtors that need a lifeline, such as the Tevel cable TV company.

On the bank's downgrade by Standard & Poor's from A-minus to BBB+, Halima writes that Leumi can expect an increase in the price of capital at home and abroad. Another effect will be on its provision for doubtful debt.

Leumi's stock has been feeling pressure as the condition of its big borrowers worsens. It can be expected to lose ground as the state releases 6% to 7% of its total equity onto the Tel Aviv Stock Exchange, Halima notes. But there is no economic justification for the slump in its stock, she says, nor should the offering by the state affect the value of its performance.

She predicts that Bank Leumi will end 2002 with a net profit of NIS 933 million, about the same as achieved for 2001. Its provision for doubtful debt will be around NIS 1.47 billion, she estimates, 7% less than in 2001 and comprising 27% of its estimated profit from financing operations, which should climb to NIS 5.45 billion.