By Tova Cohen and Steven Scheer
TEL AVIV (Reuters) - Israel's top two banks reported fourth-quarter earnings on Monday that fell short of expectations, hurt by the impact of deflation on interest income.
Israel has been in a deflation trend since September 2014 amid lower global oil prices, with its annual inflation rate at -0.6 percent in January. Benign inflation has kept the benchmark interest rate at 0.1 percent a year.
As a result, net financing income at Hapoalim (TA:POLI), Israel's largest lender, slipped to 2.11 billion shekels ($540 million) in the fourth quarter from 2.15 billion a year earlier, while it fell to 1.73 billion shekels from 1.8 billion at No. 2 bank Leumi (TA:LUMI).
Hapoalim was also hit by a one-time tax cost of 50 million shekels, while Leumi had one-off gains and losses from the sale of assets.
Hapoalim and Leumi also blasted a government proposal to improve banking competition by requiring the two banks to divest their credit card subsidiaries. Hapoalim and Leumi would also be prohibited from issuing credit cards entirely, a plan opposed by the central bank.
Hapoalim Chairman Yair Seroussi said that credit to consumers and small businesses has been growing by over 10 percent annually in the past few years while Israeli credit card interest rates are low in comparison to Europe and the United States.
He said he hoped the committee would reevaluate the changes the banking system has undergone "and not attempt to enforce measures that will harm its stability and could cause irreversible damage to the Israeli economy".
Hapoalim posted quarterly net profit of 586 million shekels ($150 million), compared with 487 million a year earlier and below expectations of 731.5 million shekels in a Reuters poll of analysts.
Leumi earned 431 million shekels compared with a loss of 43 million a year and analysts' average forecast of 667 million.
Hapoalim declared a quarterly dividend of 117 million shekels, equal to 20 percent of 2015 profit, for a total annual payout of 616 million.
Hapoalim's shares were up 0.3 percent at 19.25 shekels in afternoon trade and are down 4.2 percent in 2016.
Leumi's shares are down 2.6 percent this year to 13.1 shekels. Citi analyst Michael Klahr said Leumi is a "buy as a reasonably priced low risk bank in a low risk economy with upside from higher rates and capital return".
Israel's third-largest bank, Discount (TA:DSCT), earned 60 million shekels, up from 4 million a year earlier but below a forecast for 152 million.
($1 = 3.9043 shekels)