Bank Leumi Le-Israel(TASE:

LUMI

) should be setting aside greater provision for doubtful debt, warns the Ilanot Batucha investment house.

Analyst Alon Glazer set the bank a Neutral rating and price target of NIS 7.7, about 30% above Leumi's current price on the Tel Aviv Stock Exchange.

The sorry condition of Israel's economy, especially in the telecom sector, and the increasing trouble the bank's borrowers are encountering such as the Tevel cable TV company,

Gilat Satellite Networks

(Nasdaq:

GILTF

), and the Peled-Givony group make Leumi's relatively diminutive provision for doubtful debt for the second quarter suspect, Glazer says.

For the second quarter the bank set aside NIS 329 million, or 0.78% of its total credit to the general public, which was less than expected. The result may be higher provision for doubtful debt in the quarters to come, Glazer says, as additional borrowers succumb.

More grounds for the chilly rating are Bank Leumi's disappointing second-quarter results, Glazer continues. Brought down by one-time elements, among other things, Leumi reported netting NIS 77 million for the quarter, half the amount forecast NIS 144 million.

While certain nonrecurring elements had been expected, such as the gap between the expected and actual consumer price index Ilanot Batucha had not expected the dive in value of financial instruments not defined as hedging transactions, which totaled NIS 140 million in the second quarter. Losses from these instruments are expected to recur in the quarters to come.

Certain technical elements that hurt the bank's results in the second quarter are likely to reverse direction in the third quarter, Glazer says. But the increased provision for doubtful debt could offset that booster.

Deposits by the general public at Bank Leumi contracted by 4.1% during the second quarter, including through erosion of savings due to the recession. The analyst foresees more depositors transferring monies from the smaller banks, which are perceived as problematic after two collapsed in recent months, to the bigger banks such as Leumi.

On its share price, Glazer notes that Leumi stock has been pressured by the 26.7 million shares held by worker that were released from lock up and is likely to be pressured again the state's impending sale of a 6% to 7% interest on the TASE in October.