Bank Hapoalim Condensed Financial Statement as at June 30, h2012

Description of the General Development of the Bank Group's Business 4 Activities of the Bank Group and Description of the Development of its Business 4 Principal Data of the Bank Hapoalim Group 5 Forward-Looking Information 7 Investments in the Capital of the Bank and Transactions in its Shares 7 Dividend Distribution 9 Capital and Capital Adequacy 10 Ratings of the Bank 11 Economic and Financial Review 12 Accounting Policies on Critical Matters 14 Disclosure Regarding the Procedure for Approval of the Financial Statements 15 Profit and Profitability 16 Composition and Development of the Bank Group's Assets and Liabilities 25 Description of the Bank Group's Business by Segments of Activity 41 Condensed Financial Information on Segments of Activity 41 The Households Segment 44 The Private Banking Segment 52 The Small Business Segment 58 The Commercial Segment 64 The Corporate Segment 70 The Financial Management Segment 76 Others and Adjustments 78 Additional Information Concerning Activity in Certain Products 79 Principal Subsidiary and Affiliated Companies 89 Activity of the Bank Group Abroad 91 General Information and Additional Matters 99 Liquidity and Raising of Sources of Funds at the Bank 99 Objectives and Business Strategy 100 Risk Management 102 Capital Adequacy 134 Disclosure Regarding the Internal Auditor 148 Poalim in the Community – Social Involvement and Contribution to the Community 148 Sustainability and Corporate Social Responsibility 151 Legal Proceedings 151 Other Matters 152 Controls and Procedures 153 Board of Management's Review 154 Appendix 1 - Rates of Financing Income and Expenses 154 Appendix 2 - Exposure of the Bank and its Consolidated Companies to Changes in Interest Rates 164 Appendix 3 - Total Credit Risk to the Public by Economic Sectors 172 Appendix 4 - Exposure to Foreign Countries 178 CEO Certification 186 Chief Accountant Certification 187 Financial Statements 189 Auditors' Report to the Shareholders of Bank Hapoalim B.M. 189 Condensed Consolidated Balance Sheet 190 Condensed Consolidated Statement of Profit and Loss 191 Condensed Statement of Changes in Equity 192 Condensed Statement of Cash Flows 202	Board of Directors' Report	4

















































	Notes to the Condensed Financial Statements	205

This is a translation of the Hebrew report and has been prepared for convenience only. In the case of any discrepancy, the Hebrew will prevail.

Board of Directors' Report As at June 30, 2012

At the meeting of the Board of Directors held on August 29, 2012, it was resolved to approve and publish the unaudited consolidated financial statements of Bank Hapoalim B.M. and its consolidated subsidiaries for the period of January-June 2012.

The following are details of the principal developments and changes that occurred during the reported period.

Description of the General Development of the Bank Group's Business

Activities of the Bank Group and Description of the Development of its Business Development of the Bank Group's Business

Net profit of the Bank Group attributed to shareholders of the Bank totaled approximately NIS 1,266 million in the first half of 2012, compared with NIS 1,603 million in the same period last year.

Net return on equity attributed to shareholders of the Bank was 10.6% in the first half of 2012, in annualized terms, compared with 14.8% in the same period last year.

Basic net profit per share of par value NIS 1 amounted to NIS 0.96 in the first half of 2012, compared with NIS 1.21 in the same period last year.

Net profit of the Bank Group attributed to shareholders of the Bank totaled approximately NIS 607 million in the second quarter of 2012, compared with NIS 712 million in the same quarter last year.

Net return on equity attributed to shareholders of the Bank was 10.2% in the second quarter of 2012, in annualized terms, compared with 13.2% in the same quarter last year.

Basic net profit per share of par value NIS 1 amounted to NIS 0.46 in the second quarter of 2012, compared with NIS 0.54 in the same quarter last year.

Total assets of the Bank Group as at June 30, 2012 amounted to approximately NIS 362.1 billion, compared with approximately NIS 356.7 billion at the end of 2011, an increase of 1.5%.

Net total credit to the public amounted to NIS 248.6 billion as at June 30, 2012, compared with NIS 246.5 billion at the end of 2011, an increase of 0.9%.

Total deposits from the public amounted to NIS 259.7 billion as at June 30, 2012, compared with NIS 256.4 billion at the end of 2011, an increase of 1.3%.

Total shareholders' equity amounted to NIS 24.9 billion as at June 30, 2012, compared with NIS 23.8 billion at the end of 2011, an increase of 4.6%.

The total capital adequacy ratio as at June 30, 2012 was 14.8%, compared with 14.1% at the end of 2011.

Principal Data of the Bank Hapoalim Group

	For the three months ended
	June 30, 2012	March 31, 2012	December 31, 2011	September 30, 2011	June 30, 2011
	NIS millions
Profit and Profitability
Net financing profit****	2,041	2,148	*1,963	*1,660	*2,091
Fees and other income	1,266	1,307	*1,272	*1,298	*1,276
Total income	3,307	3,455	*3,235	*2,958	*3,367
Provision for credit losses	344	303	363	498	327
Operating and other expenses	2,118	2,104	2,197	2,033	2,013
Net profit attributed to shareholders of the Bank	607	659	672	471	712

	For the six months ended		For the year ended
	June 30, 2012	June 30, 2011	December 31, 2011
Net financing profit****	4,189	*4,261	*7,884
Fees and other income	2,573	*2,634	*5,204
Total income	6,762	*6,895	*13,088
Provision for credit losses	647	341	1,202
Operating and other expenses	4,222	4,135	8,365
Net profit attributed to shareholders of the Bank	1,266	1,603	2,746

	June 30,	March 31,	December 31,	September 30,	June 30,
	2012	2012	2011	2011	2011
Balance Sheet – Principal Data
Total balance sheet	362,105	350,350	**356,662	**341,967	**323,782
Net credit to the public	248,614	244,804	246,495	244,577	234,069
Securities	40,728	36,903	34,411	27,789	27,701
Deposits from the public	259,668	251,576	256,417	242,931	233,237
Bonds and subordinated notes	35,679	34,422	32,933	32,050	29,962
Shareholders' equity	24,907	24,440	**23,819	**23,050	**22,706
Total problematic credit risk***	13,890	14,498	12,799	13,233	13,263
Of which: impaired balance sheet debts***	7,139	6,825	7,044	7,170	7,530

* The Bank adopted the directive of the Supervisor of Banks concerning the format for statements of profit and loss of banking corporations for the first time on January 1, 2012. The directives were adopted by retroactive implementation, with the exception of the cancellation of unpaid accrued CPI linkage differentials on principal in respect of debts classified as impaired prior to the initial implementation. Accordingly, the data included in the statement of profit and loss with regard to comparison periods last year were reclassified for adjustment to the new definition, item headings, and presentation method of the current reporting period. For details, see Note 1(C)(1) to the Condensed Financial Statements.

** Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes; see Note 1(C)(2.2) to the Condensed Financial Statements.

*** Net of the individual allowance and the allowance according to the extent of arrears.

**** Net financing profit includes net interest income and non-interest financing income. Comparison figures for previous periods were adjusted to this presentation format.

			For the three months ended
	June 30, 2012	March 31, 2012	December 31, 2011	September 30, 2011	June 30, 2011
Main Financial Ratios
Net loan to deposit ratio	95.7%	97.3%	96.1%	100.7%	100.4%
Net loan to deposit ratio including bonds and subordinated notes	84.2%	85.6%	85.2%	88.9%	88.9%
Shareholders' equity to total assets	6.9%	7.0%	6.7%	6.7%	7.0%
Core Tier I capital to risk-adjusted assets	8.3%	8.2%	7.9%	7.7%	7.9%
Tier I capital to risk-adjusted assets	9.1%	9.0%	8.7%	8.5%	8.7%
Total capital to risk-adjusted assets	14.8%	14.7%	14.1%	13.6%	14.1%
Financing margin from regular activity(1)(2)	2.38%	2.29%	*2.28%	*2.41%	*2.50%
Cost-income ratio	64.0%	60.9%	*67.9%	*68.7%	59.8%
Provision for credit losses as a percentage of the average recorded balance of credit to the public(1)	0.55%	0.49%	0.61%	0.84%	0.56%
Net return of profit attributed to shareholders of the Bank on equity(1)	10.2%	11.3%	11.9%	8.5%	13.2%
Basic net profit per share in NIS attributed to shareholders of the Bank	0.46	0.50	0.51	0.36	0.54
Diluted net profit per share in NIS attributed to shareholders of the Bank	0.46	0.49	0.50	0.35	0.53

Principal Data of the Bank Hapoalim Group (continued)

	For the six months ended		For the year ended
	June 30, 2012	June 30, 2011	December 31, 2011
Financing margin from regular activity(1)(2)	2.33%	*2.48%	*2.39%
Cost-income ratio	62.4%	60.0%	63.9%
Provision for credit losses as a percentage of the average recorded balance of credit to the public(1)	0.51%	0.29%	0.48%
Net return of profit attributed to shareholders of the Bank on equity(1)	10.6%	14.8%	12.0%
Basic net profit per share in NIS attributed to shareholders of the Bank	0.96	1.21	2.07
Diluted net profit per share in NIS attributed to shareholders of the Bank	0.95	1.20	2.05

(1) Calculated on an annualized basis.

(2) Calculation: Financing profit from regular activity is divided by monetary assets generating financing income. Financing profit from regular activity includes net interest income and non-interest financing income.

Forward-Looking Information

Some of the information in this report that does not refer to historical facts constitutes forward-looking information, as defined in the Securities Law. The Bank's actual results may differ materially from those included in forward-looking information, as a result of a large number of factors, including changes in capital markets in Israel and globally, macro-economic changes, changes in geopolitical conditions, regulatory changes, and other changes not under the Bank's control, which may lead to the failure of estimates to materialize and/or changes in the Bank's business plans. Forward-looking information is marked by words or phrases such as "we believe," "expect," "forecast," "estimate," "intend," "plan," "aim," "may change," and similar expressions, as well as words such as "plan," "target," "wish," "should," "can," or "will." Such forward-looking information and expressions involve risk and uncertainty, because they are based on management's estimates regarding future events, which include changes in the following parameters, among others: economic conditions, public tastes, interest rates in Israel and overseas, inflation rates, new legislation and regulation in the area of banking and the capital market, exposure to financial risks, the financial stability of borrowers, the behavior of competitors, aspects related to the Bank's image, technological developments, and manpower-related matters, and other areas that affect the activity of the Bank and the environment in which it operates, the materialization of which is uncertain by nature.

The information presented below is based, among other things, on information known to the Bank and based, among other things, on publications by various entities, such as the Central Bureau of Statistics, the Ministry of Finance, the Bank of Israel, the Ministry of Housing, and other entities that publish data and estimates regarding the capital markets in Israel and globally.

This information reflects the Bank's current viewpoint with regard to future events, which is based on estimates, and is therefore subject to risks and uncertainty, as well as to the possibility that expected events or developments may not materialize at all or may only partially materialize.

Investments in the Capital of the Bank and Transactions in its Shares

The issued and paid-up share capital of the Bank, as at June 30, 2012, is NIS 1,320,068,174 par value, composed of 1,320,068,174 ordinary shares of par value NIS 1 each. This is the issued capital following the subtraction of 10,523,853 ordinary shares purchased by the Bank, as detailed below.

The issued and paid-up capital of the Bank near the date of publication of the financial statements is NIS 1,319,239,655 par value, following the subtraction of 11,403,853 ordinary shares purchased by the Bank.

The principal developments related to the capital of the Bank, including investments in the capital of the Bank and transactions in the shares of the Bank, are detailed below.

Changes in the capital of the Bank from January 1, 2012, to near the date of publication of the financial statements:

Up to the date of publication of the financial statements, an increase of approximately 1,653,920 ordinary shares occurred in the issued and paid-up capital of the Bank, as a result of the conversion of 1,653,920 options allocated to employees of the Bank under the plan from May 2004. The remaining option notes granted to employees of the Bank under this program amount to 6,740,152 option notes.

The last packet of options pursuant to the extension plan of September 30, 2009, with a balance of 4,324,681 share option notes, was allocated in February 2012. Near the date of publication of the financial statements, 12,504,880 option notes had been allocated and not yet exercised; these options will be converted into shares, as described below, from the pool of shares to be purchased for this purpose.

For further details regarding the issuance of stock options to the Chairman of the Board of Directors, the CEO, senior executives, and employees of the Bank, see Note 16 to the Annual Financial Statements for 2011.

On February 28, 2012, the Board of Directors of the Bank, following approval by the Salaries and Remuneration Committee and the Audit Committee of the Board of Directors of the Bank, resolved to replace restricted phantom shares that have been granted, the restriction period of which is scheduled to end on December 31, 2013 or later, with restricted stock units ("RSU"), and to allocate RSU to executives who renew their employment agreement with the Bank, pursuant to the "Bank Hapoalim B.M. Secondary Plan for the Grant of Restricted Stock Units (RSU) to Senior Executives 2011", which represents the implementation of certain directives of the 2010 remuneration plan, and constitutes an integral part thereof. RSU are rights to shares of the Bank which, upon fulfillment of the appropriate vesting conditions (including completion of certain employment periods, and for some RSU also the attainment of a certain return by the Bank), are automatically exercised into ordinary shares of the Bank, which will be held by the Bank as dormant shares, without the payment of any exercise price. After the RSU vest, the shares of the Bank are restricted and cannot be sold for additional periods specified in the aforesaid plan. The vesting and restriction periods of the RSU shall be identical, as a rule, to those of the restricted phantom shares (and the contingent restricted phantom shares) that they are replacing. The RSU shall be allocated according to the capital gains track pursuant to Section 102(B)(2) of the Income Tax Ordinance [New Version], 1961. Near the date of publication of the financial statements, 6,117,120 RSU had been allocated (of which, 1,613,216 contingent RSU, which vest subject to attainment of a certain return by the Bank in the relevant fiscal years).

Buybacks of Shares of the Bank

On November 11, 2010, the Supervisor of Banks approved a buyback of 12,750,000 shares for the purpose of employee compensation under the extension plan of September 2009 (see Note 16(A)(1) to the Annual Financial Statements for 2011), as well as a buyback of up to 14,000,000 shares for the purpose of the senior executives' compensation plan (see Note 15 to the Annual Financial Statements for 2011). The Board of Directors approved a share purchase plan on March 30, 2011. Near the date of publication of the financial statements, the balance of the acquired shares amounts to 11,403,853 shares, at a cost of approximately NIS 165 million.
Pursuant to an approval of the Supervisor of Banks, in 2009, the Bank purchased 700,000 ordinary shares of par value NIS 1 each of the Bank through an external entity, with the aim of using the shares as a pool from which to transfer shares in the event of the exercise of options allocated to the former Chairman of the Board of Directors and the former Chief Executive Officer of the Bank, as detailed in Note 16(A)(4) to the Annual Financial Statements for 2011. The remaining shares, following the exercise by the former Chairman of the Board, as described above, amount to 653,853 ordinary shares at a cost of approximately NIS 10 million.

As the aforesaid remaining options expired unexercised, the shares purchased for this purpose pursuant to the approval by the Supervisor of Banks were transferred to the general pool of shares.

Dividend Distribution

The Board of Directors updated the Bank's policy on dividend distribution on May 30, 2011. Pursuant to the policy established, up to half of net operating profits will be distributed each year, subject to the capital targets of the Bank, as established by the Board of Directors. Dividends from nonrecurring profits will be distributed according to ad-hoc decisions by the Board of Directors.

In addition to restrictions under the Companies Law, dividend distribution by banking corporations is subject to regulation applicable to banking corporations in Israel, pursuant to which no dividends shall be distributed: (A) If the cumulative balance of retained earnings of the bank according to its last published financial statements is not positive, or if the payout would lead to a negative balance; (B) when one or more of the last three calendar years ended in a loss; (C) when the cumulative result of the three quarters ended at the end of the interim period for which the last financial statement has been released indicates a loss; (D) if the payout would cause the bank's ratio of capital to risk-adjusted assets to fall below the required rate; (E) from capital reserves or positive differences resulting from the translation of financial statements of autonomous units abroad; (F) if after the payout the bank's non-monetary assets would exceed its shareholders' equity; or (G) if the bank does not comply with the requirements of Section 23A of the Banking Law, which establishes a limit on the percentage of capital that a banking corporation may invest in non-financial corporations. Notwithstanding the above, in certain cases the Bank can distribute dividends even if the aforesaid circumstances apply, if it obtains prior written approval of the Supervisor of Banks for such distribution, up to the amount thus approved.

According to the circular of the Supervisor of Banks of June 2010, a banking corporation shall not distribute dividends unless it has a Core Tier 1 Capital ratio of at least 7.5%, or if such distribution would cause a failure to comply with the aforesaid ratio.

The circular of the Bank of Israel of March 28, 2012, concerning minimum Core Tier 1 capital ratios under Basel III, sets forth a requirement for banking corporations, including the Bank, to reach a minimum Core Tier 1 capital ratio of 9% by January 1, 2015, and for large banking corporations, including the Bank, a minimum Core Tier 1 capital ratio of 10% by January 1, 2017. It has been clarified that the Supervisor of Banks expects banking corporations to avoid distributing dividends if the payout would cause it to fail to meet the aforesaid requirements. For further details, see the section "Capital and Capital Adequacy," below.

In addition, pursuant to the terms of the Subordinated Notes (Series A), no dividends shall be distributed in the following cases: (A) If interest payments in respect of these notes are suspended, the Bank shall not pay dividends to its shareholders until all of the suspended interest payments are paid in full, whether such dividends are declared prior to the Bank's announcement regarding the formation of circumstances for suspension, or whether the dividends are declared after such an announcement; and (B) If the payout would cause the Bank's ratio of Core Tier 1 Capital to risk-adjusted assets to fall below 6.5%.

Furthermore, the permission granted by the Governor of the Bank of Israel to the Arison Group to acquire a controlling interest in Bank Hapoalim states that no dividend shall be distributed from profits accrued at the Bank up to June 30, 1997 (the day prior to the acquisition of the controlling interest), unless the Supervisor of Banks has consented in advance and in writing.

The Supervisor of Banks approved a buyback of the Bank's shares on November 11, 2010. For further details, see Note 13 to the Annual Financial Statements for 2011.

The balance of retained earnings at the Bank as at June 30, 2012 totaled approximately NIS 16,611 million, of which a total of approximately NIS 2,734 million cannot be distributed as dividends, as mentioned.

Capital and Capital Adequacy

Capital Adequacy Target

The capital target of the Bank is the appropriate level of capital required in respect of the various risks to which the Bank is exposed, as identified, assessed, and estimated by the Bank. This target total capital ratio is higher than the regulatory minimum capital requirement, and includes the capital requirement in respect of Pillar I risks, plus capital in respect of Pillar II risks, with the aim of allowing the Bank to comply with capital requirements in cases of external crisis events (extreme scenarios) while complying with regulatory minimum capital requirements. This target takes into consideration actions of the Board of Management of the Bank aimed at reducing the risk level and/or increasing the capital base.

A resolution of the Board of Directors of the Bank of December 30, 2010 established minimum targets of 7.5% for the Bank's Core Tier 1 Capital ratio and 12.5% for the Bank's total capital ratio.

In March 2012, the Supervisor of Banks issued a circular to all banking corporations regarding minimum Core Tier 1 capital ratios within the process of preparation for the implementation of Basel III directives. Pursuant to the circular, all banking corporations will be required to maintain a minimum Core Tier 1 capital ratio of 9%, by January 1, 2015. The Core Tier 1 capital ratio is to be calculated in accordance with the requirements of Basel III and the adjustments to be established by the Supervisor of Banks.

In addition, large banking corporations whose total balance sheet assets on a consolidated basis constitute at least 20% of the total balance sheet assets of the banking system in Israel will be required to maintain a minimum Core Tier 1 capital ratio of 10%, by January 1, 2017. This additional directive is applicable to the Bank.

The Bank is preparing to comply with the requirements to be established. The Bank's Core Tier 1 capital ratio as at June 30, 2012, calculated according to the Basel II directives, stands at 8.29%.

	June 30, 2012	December 31, 2011*
	NIS millions
1. Capital for the calculation of the capital ratio
Core Tier I capital	25,038	23,769
Tier I capital, after deductions	27,465	26,157
Tier II capital, after deductions	17,194	16,175
Total overall capital	44,659	42,332
2. Weighted balances of risk-adjusted assets
Credit risk	274,037	274,037
Market risks	6,881	7,018
Operational risk	20,955	20,047
Total weighted balances of risk-adjusted assets	301,873	301,102
	%
3. Ratio of capital to risk-adjusted assets
Ratio of Core Tier I capital to risk-adjusted assets	8.29%	7.89%
Ratio of Tier I capital to risk-adjusted assets	9.10%	8.69%
Ratio of total capital to risk-adjusted assets	14.79%	14.06%
Minimum total capital ratio required by the Supervisor of Banks	9.00%	9.00%

* Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements.

The ratio of total capital to risk-adjusted assets as at June 30, 2012 was 14.79%, compared with a capital ratio of 14.06% at the end of 2011.

The Core Tier 1 Capital ratio as at June 30, 2012 was 8.29%, compared with a Core Tier 1 Capital ratio of 7.89% at the end of 2011.

Total capital for the purpose of the calculation of the capital ratio as at June 30, 2012 amounted to approximately NIS 44,659 million, compared with NIS 42,332 million as at December 31, 2011. The increase in the capital base mainly resulted from net profit during the period and from issuance net increase of subordinated notes.

Risk-adjusted assets as at June 30, 2012 amounted to NIS 301.9 billion, compared with NIS 301.1 billion at December 31, 2011.

Ratings of the Bank

The following ratings have been assigned to the Bank by rating agencies in Israel and abroad. In Israel, in local currency, the Bank is rated AA+ by S&P Maalot Ltd. and Aaa by Midroog.

	Rating agency	Long-term foreign currency	Short-term foreign currency	Rating outlook	Last update
Israel – sovereign rating:
	Moody's	A1	P-1	Stable	April 2011
	S&P	A+	A-1	Stable	September 2011
	Fitch Ratings	A	F1	Stable	April 2012
Bank Hapoalim:
	Moody's	A2	P-1	Stable	June 2012
	S&P	BBB+	A-2	Stable	July 2012
	Fitch Ratings	A-	F2	Stable	May 2012

In early May 2012, the rating agency Moody's announced that in light of the expected slowdown in the Israeli economy, the uncertainty in the corporate bond market, and the high concentration of the banks' credit portfolios, it had changed the rating outlook for the entire banking system in Israel from Stable to Negative.

It should be noted that the agency's rating and rating outlook for the Bank remained unchanged.

In May 2012, the rating agency Fitch reaffirmed the Bank's rating, with no change. In June 2012, the rating agency Moody's reaffirmed the Bank's rating, with no change. In July 2012, the rating agency S&P reaffirmed the Bank's rating, with no change.

In August 2012, the rating agency Midroog stated that according to its assessment, economic challenges were expected to cause a certain deterioration in the risk indices in the Bank's credit portfolio, leading to an increase in the provision for credit losses. In Midroog's opinion, the Bank's current risk indices and their short-term and medium-term developments, and the depth of the Bank's safety cushions, impaired the Bank's asset quality and its future ability to recover profits. The agency therefore revised the Bank's rating outlook from Stable to Negative. Note that the agency's rating of the Bank remained unchanged.

Economic and Financial Review

Developments in the Global Economy

The deepening crisis in the Eurozone weighed on real and financial global economic activity during the second quarter, as 0.7% GDP contraction (in annualized terms) contributed to worsening conditions in the high-debt countries. The European crisis spilled over to the United States and the emerging economies, with manufacturing data in most economies pointing to a pervasive slowdown of economic growth. Spain stood out with exceptionally high government bond yields that impeded rollover of its large debt at reasonable terms. Spain's banking system and various districts also experienced financial deterioration. Conditions in Greece, which has already carried out a debt arrangement, are also complex. Greece is finding it difficult to meet the conditions for an additional aid package, and its continued membership in the Eurozone is in doubt. European leaders have agreed on a series of measures primarily aimed at reinforcement of the banking system and easing of the austerity measures, and have declared a willingness to do everything necessary to keep the Eurozone intact. The European Central Bank lowered the interest rate by 0.25 percentage points to a level of 0.75%.

Most economic data in the United States pointed to a halt to the recovery. Second-quarter growth was low at 1.5%, accompanied by a stable unemployment rate and a lower-than-expected rate of job creation. The central bank stated its intention to maintain a low interest rate until the end of 2014, but did not apply a policy of additional quantitative easing.

Signs of a slowdown in growth have been apparent in the emerging economies as well, particularly, Brazil, China, and India. Monetary policies have become expansive in the emerging economies as well. The slowdown in growth has heightened concerns over crises in the real estate and finance sectors, especially in China.

Economic Activity in Israel

The Israeli economy continued to grow in the first half, at an annualized rate of 3.0% relative to the preceding half. This growth level has been fairly stable over the last year, and is considerably lower than the growth rate of the first half last year. However, trends in the various sectors of the economy have been non-uniform: for example, in exports, the substantial increase in exports of electronic components has been notably positive, while other sectors have mostly trended down. Private-consumption indicators are pointing to continued growth, though at a slower pace than in previous years. Investments in industries and in residential construction contracted during the second quarter. Conditions in the labor market are still relatively favorable; although unemployment rose somewhat, to 7.2% in May, the number of employed persons continued to rise. In the housing market, the rebound in demand that began in the previous quarter seems to have continued: data from the Central Bureau of Statistics (CBS) indicate an increase in purchases of new homes, and a significant resurgence in mortgage taking. In addition to the effect of global factors, Israel's economy has been shadowed by domestic risk factors and uncertainties. In the fiscal arena, the government budget deficit grew as a result of deviation of the government's expenditures and tax revenues from the planned trajectory. This has obliged the government to apply certain measures aimed at restraint; however, the 2013 budget plan is currently lagging behind schedule and a great deal of uncertainty surrounds the additional changes in spending and taxes that the government will need to make in order to meet the deficit target set for next year – 3% of GDP. Another risk factor is the situation in the non-bank credit market and in the corporate bond market; many companies are finding it difficult to raise funds or refinance debt at relatively reasonable interest rates. Regulatory uncertainty is also at a significant level, influencing the planning and investment abilities of some Israeli companies. In the geopolitical sphere, the public discussion of the Iranian nuclear program has moved to a new level. The elections in Egypt have brought the Muslim Brotherhood party to power; and significant regime changes are expected in Syria. Due to all of these factors, the environment for economic activity in Israel will be especially challenging during the coming months and in 2013.

Inflation and Exchange Rates

The consumer price index rose by 0.6% in the second quarter of 2012. Over the twelve months ended in June, the CPI increased by only 1.0%. This points to some cooling of inflation, which may also have been influenced by the slowdown in economic growth. Rent prices rose by 3.4% over the last year, still higher than the overall increase in CPI, but lower than in the earlier part of the year. Prices of homes, which are not included in the CPI, rose by 2.1% over the last year. The pace of this increase actually accelerated slightly during the last few months measured. The government has approved a series of economic measures, including an increase in indirect taxes, which are expected to affect price indices during the third quarter. In the longer term, the slowdown in activity is likely to continue to support price stability.

The shekel depreciated by 5.6% against the US dollar and by 2.3% against the effective currency basket during the second quarter. The weakening of the shekel against the dollar mainly resulted from appreciation of the dollar against most other currencies during this period, but seems to have been supported by the economic slowdown and the worsening fiscal conditions as well. In addition, the trade deficit has been expanding, and foreign investors have significantly curtailed their financial investments in T-bills and government bonds in Israel, due to the restrictions imposed on such investments by the Bank of Israel.

Fiscal and Monetary Policy

The slowdown in economic growth and the legislative changes led to an increase in the budget deficit. A deficit of NIS 9.7 billion accumulated in the first half, compared with NIS 5.3 billion in the first half of 2011. Tax revenues during this period were lower than planned by NIS 3 billion. In July, the government decided on a series of measures designed to reduce the deficit this year and next year. These steps include an increase of one percentage point in value-added tax, increases of other indirect taxes, an increase in income-tax rates, and an added tax on high incomes. The deficit target for 2013 had already been raised previously to 3% of GDP. As noted above, further adjustments to the 2013 budget may be necessary, especially if the economic slowdown escalates.

The Bank of Israel interest rate remained stable during the second quarter, at a level of 2.5%. The rate was lowered to 2.25% in July. Overall, monetary policy can be said to be expansionary, as short-term real interest rates are negative. The reversal in the July interest rate stemmed from the multiplying signs of a slowdown and of low inflation. In August, the interest rate remained unchanged at 2.25%.

Financial and Capital Markets

Capital market trends in the second quarter were influenced by the global crisis, the emerging slowdown in growth, the reduced expectations for an increase in the interest rate, and changes in regulations that had a strong impact on several major companies in Israel. The Tel Aviv 100 index posted declines of 6.1% for the quarter and 1% from the beginning of the year. The TASE notably underperformed relative to overseas markets, especially in the United States. The declines were accompanied by extremely low turnovers, which reached a daily average of NIS 1,076 million, versus NIS 1,692 million in the same quarter last year.

The CPI-linked government bond index rose by 1.3% in the second quarter of 2012, while the unlinked government bond index rose by 2.3%. The corporate bond index fell by 2.5% in the second quarter, with the declines concentrated in low-rated or unrated bonds. Spreads of corporate bonds over government bonds expanded. The business sector (excluding banks and insurance companies) raised approximately NIS 7 billion in the capital market in the second quarter of 2012, versus NIS 6 billion in the preceding quarter, a similar pace to that of 2011.

Data regarding changes in the consumer price index and exchange rates are set out below:

	For the three months ended June 30		For the six months ended June 30		For the year
	2012	2011	2012	2011	2011
		%
Rate of increase in "known" CPI	1.3%	1.3%	1.3%	2.2%	2.6%
Rate of increase (decrease) in USD exchange rate	5.6%	)1.9%(	2.7%	)3.8%(	7.7%
Rate of increase (decrease) in GBP exchange rate	3.3%	)2.4%(	4.1%	)0.5%(	7.3%
Rate of increase (decrease) in CHF exchange rate	)0.1%(	7.6%	1.1%	8.1%	7.2%
Rate of increase (decrease) in EUR exchange rate	)0.4%(	)0.1%(	)0.1%(	4.4%	4.2%
Rate of increase (decrease) in TRY exchange rate	3.6%	)6.6%(	8.5%	)8.6%(	)13.4%(

Accounting Policies on Critical Matters

The financial statements of the Bank are prepared in accordance with accounting principles and rules, the main points of which are described in Note 1 to these Condensed Financial Statements and in Note 1 to the Financial Statements as at December 31, 2011. In implementing the accounting principles, when preparing the financial statements, the Board of Management of the Bank uses assumptions, estimates, and evaluations that affect the reported amounts of assets and liabilities (including contingent liabilities) and the results reported by the Bank. Actual future results may differ from such estimates and evaluations made when preparing the financial statements.

Some of these estimates and evaluations involve a considerable degree of uncertainty, and can be affected by possible future changes. Such estimates and evaluations in which changes may have a material effect on the financial results presented in the financial statements are considered by the Bank, in all matters connected with accounting policy, as estimates and evaluations on "critical" matters. The Bank's Board of Management is of the opinion that the estimates and evaluations used during the preparation of the financial statements are fair, and were made to the best of its knowledge and professional judgment.

The main areas detailed in the report for 2011 are: allowance for credit losses; fair value measurements; obligations for employee benefits; deferred taxes; contingent liabilities; and impairment of securities available for sale and securities held to maturity.

During the reported period, no changes occurred in the Bank's accounting policy on critical matters, as described in the Board of Directors' Report on the Financial Statements as at December 31, 2011, with the following exception:

Liabilities for Employee Benefits

In July 2012, the Supervisor of the Capital Market, Insurance, and Savings at the Ministry of Finance published a draft position paper regarding an update of the set of demographic assumptions used in pension funds and life insurance. Among other matters, the draft addresses the improvement in life expectancy and the difficulties involved in predicting possible future changes in this area. Pursuant to the instructions of the Supervisor of Banks regarding the measurement of liabilities in respect of employee benefits, assumptions regarding mortality and disability are to be adjusted, in reports for the second quarter of 2012, according to the best information available to the bank, using the draft mortality and disability tables recently published by the Ministry of Finance, among other means.

In accordance with the foregoing, the Bank adjusted its estimates regarding demographical variables, in the financial statements as at June 30, 2012, based on the updated longevity estimates in the draft position paper. As a result, the Bank increased its actuarial liability for employee benefits by approximately NIS 15 million. The increase in this liability was allocated to the statement of profit and loss, reducing profit before taxes by a total of approximately NIS 15 million, and profit attributed to shareholders of the Bank by a total of approximately NIS 10 million. Note that the aforesaid amounts may change following the release of the position paper containing the final estimates.

Disclosure Regarding the Procedure for Approval of the Financial Statements

The Board of Directors of the Bank is the organ charged with overarching control at the Bank, pursuant to the resolution of the Board of Directors of June 29, 2006, and with the approval of its financial statements, as required by Proper Conduct of Banking Business Directive 301, The Board of Directors ("Directive 301").

The Audit Committee of the Board of Directors discusses and examines the drafts of the financial statements presented to it and makes a recommendation to the Board of Directors with regard to the approval of the financial statements, as required by the Companies Regulations (Directives and Terms Regarding the Procedure for the Approval of Financial Statements), 2010, and in accordance with Directive 301.

The financial statements are also discussed by the Finance and Prospectus Committee of the Board of Directors, which mainly examines the business and economic aspects of the financial statements, including an examination of the reported results in comparison to a summary of the budget and work plans of the Bank.

The Audit Committee receives reports and holds discussions regarding deficiencies and material weaknesses in the internal control of the financial statements, if and as found, and receives reports of any fraud, whether material or immaterial, if and inasmuch as any exists, in which the Board of Management is involved, or in which other employees are involved who take part in the Bank's internal control of financial reporting, as required under Directive 645 of the Public Reporting Directives of the Supervisor of Banks – Disclosure Declaration.

The Audit Committee examines the material issues and critical estimates applied in the financial statements; the reasonableness of the data; the accounting policies applied and the changes thereto, if any; and the implementation of the due disclosure principle in the financial statements and in the accompanying information, through detailed presentation of the issues by officers and others at the Bank, including the Chief Executive Officer, the Chief Financial Officer, and the Chief Accountant.

As part of the discussion of the financial statements, the Audit Committee also discusses the problematic debts of the Bank, examines the value of the Bank's holdings in securities, and discusses the provisions for other than temporary impairment of securities and provision for credit losses of the Bank. In addition, the Audit Committee discusses and examines the Bank's exposure to risks, and the reflection and impact of such risks on the financial statements.

The Bank's external auditors, Ziv Haft CPA (Isr.) and Somekh Chaikin CPA (Isr.), are invited to the meetings of the Audit Committee and of the Board of Directors in which the financial statements are discussed and approved, and they attend all such meetings. The Bank's Internal Auditor is also invited to the discussions of the Audit Committee and the Board of Directors regarding the approval of the financial statements.

The names and qualifications of the members of the Audit Committee and of the Finance and Prospectus Committee are detailed in the section "The Board of Directors and the Discharge of its Functions" and in the section "Report on Directors with Accounting and Financial Expertise" in the Annual Financial Statements for 2011.

The Audit Committee and the Finance and Prospectus Committee held discussions regarding the financial statements as at June 30, 2012, as necessary. The Audit Committee presented its recommendations to the plenum of the Board of Directors prior to the discussion of the financial statements by the Board of Directors.

Profit and Profitability

Net profit attributed to the shareholders of the Bank totaled NIS 607 million in the second quarter of 2012, compared with profit in the amount of NIS 712 million in the same quarter last year.

Net return on shareholders' equity was 10.2% in the second quarter of 2012, in annualized terms, compared with 13.2% in the same quarter last year.

Net profit of the Bank Group attributed to the shareholders of the Bank totaled NIS 1,266 million in the first half of 2012, compared with NIS 1,603 million in the same period last year.

Net return on shareholders' equity was 10.6% in the first half of 2012, in annualized terms, compared with 14.8% in the same period last year.

	For the three months ended		Change vs. three months ended		For the six months ended		Change vs. six months ended
	June 30, 2012	March 31, 2012	June 30, 2011*	March 31, 2012	June 30, 2011	June 30, 2012	June 30, 2011*	June 30, 2011
		NIS millions		%		NIS millions		%
Interest income	4,146	3,374	4,110	22.9%	0.9%	7,520	7,655	)1.8%(
Interest expenses	)2,000(	)1,412(	)2,035(	41.6%	)1.7%(	)3,412(	)3,612(	)5.5%(
Net interest income	2,146	1,962	2,075	9.4%	3.4%	4,108	4,043	1.6%
Non-interest financing income (expenses)	)105(	186	16			81	218	)62.8%(
Net financing profit**	2,041	2,148	2,091	)5.0%(	)2.4%(	4,189	4,261	)1.7%(
Provision for credit losses	344	303	327	13.5%	5.2%	647	341	89.7%
Financing profit, net of provision for credit losses	1,697	1,845	1,764	)8.0%(	)3.8%(	3,542	3,920	)9.6%(
Fees and other income**	1,266	1,307	1,276	)3.1%(	)0.8%(	2,573	2,634	)2.3%(
Operating and other expenses	2,118	2,104	2,013	0.7%	5.2%	4,222	4,135	2.1%
Profit before taxes	845	1,048	1,027	)19.4%(	)17.7%(	1,893	2,419	)21.7%(
Provision for taxes on profit	227	368	333	)38.3%(	)31.8%(	595	836	)28.8%(
The Bank's share in profits (losses) of equity-basis investees, after taxes	2	)2(	1		100.0%	-	2
Net profit:
Before attribution to non-controlling interests	620	678	695	)8.6%(	)10.8%(	1,298	1,585	)18.1%(
Loss (profit) attributed to non-controlling interests	)13(	)19(	17	)31.6%(		)32(	18
Attributed to shareholders of the Bank	607	659	712	)7.9%(	)14.7%(	1,266	1,603	)21.0%(
Return on equity	10.2%	11.3%	13.2%			10.6%	14.8%

** The profit and loss items above were presented in a different format than in the condensed statement of profit and loss, in order to allow better analysis of the financial results. This change is expressed in the reclassification of non-interest financing income, from the item of non-interest income to the item of net financing profit.

Developments in Income and Expenses

Net financing profit:

In order to analyze profit from regular financing activity, an analysis of financing profit arising from all assets and liabilities of the Bank is required. Summation of such profit allows offsetting of exposures reflected in various items of financing income, consequently allowing a better examination of profit from regular financing activity. This profit includes net interest income and non-interest financing income. This amount includes financing income in respect of derivative instruments, which constitute an essential element of the Bank's exposure management. Income from derivatives includes, among other things, the effects of the time value in the fair value of derivatives, which offset balance sheet interest exposures, as well as the effects of the rate of increase in the known CPI on derivatives balances, which offset CPI exposures in respect of balance sheet balances.

	2012			2011
	Q2	Q1	Q4	Q3	Q2	Q1
			NIS millions
Interest income	4,146	3,374	3,326	3,812	4,110	3,545
Interest expenses	)2,000(	)1,412(	)1,437(	)1,647(	)2,035(	)1,577(
Net interest income	2,146	1,962	1,889	2,165	2,075	1,968
Non-interest financing income (expenses)	)105(	186	74	)505(	16	202
Total net financing profit	2,041	2,148	1,963	1,660	2,091	2,170

Set out below are details of the composition of total net financing profit:

	For the six months ended	Change vs. six months ended
	June 30, 2012	June 30, 2011	June 30, 2011
	NIS millions		%
Interest income	7,520	7,655	)1.8%(
Interest expenses	)3,412(	)3,612(	)5.5%(
Net interest income	4,108	4,043	1.6%
Non-interest financing income	81	218	)62.8%(
Total net financing profit	4,189	4,261	)1.7%(

Net financing profit totaled NIS 2,041 million in the second quarter of 2012, compared with NIS 2,091 million in the same period last year. The decrease in financing profit mainly resulted from a decrease in income from adjustment to fair value of derivatives and a decrease in profits from investments in shares. In addition, financing expenses arising from hedging of investments overseas increased.

Profit from regular financing activity increased, due to an increase in the volume of credit and deposit activity. In addition, income was recorded in the second quarter of 2012 as a result of the realization and adjustment to fair value of bonds. The quarterly development of total net financing profit is set out below:

	2012			2011
	Q2	Q1	Q4	Q3	Q2	Q1
			NIS millions
Profit from regular financing activity(1)	2,025	1,929	1,877	1,899	1,902	1,876
Income (expenses) from realization and adjustments to fair value of bonds	59	49	54	71	)7(	6
Profit (loss) from investments in shares	-	56	)26(	9	50	22
Adjustments to fair value of derivative instruments(2)	2	77	41	)255(	121	222
Interest income on problematic debts not previously recorded	31	19	42	37	38	22
Financing income (expenses) from hedging of investments overseas(3)	)76(	18	)25(	)101(	)13(	22
Net financing profit	2,041	2,148	1,963	1,660	2,091	2,170

Developments in total net financing profit during the period of January-June 2012, as compared to the same period last year, are set out below:

	For the six months ended June 30, June 30, 2012 2011		Change vs. six months ended
			June 30, 2011
	NIS millions		%
Profit from regular financing activity(1)	3,954	3,778	4.7%
Income (expenses) from realization and adjustments to fair value of bonds	108	)1(
Profits from investment in shares	56	72	)22.2%(
Adjustments to fair value of derivative instruments(2)	79	343	)77.0%(
Interest income on problematic debts not previously recorded	50	60	)16.7%(
Financing income (expenses) from hedging of investments overseas(3)	)58(	9
Net financing profit	4,189	4,261	)1.7%(

(1) Financing profit excluding exceptional effects, and effects arising mainly from the timing of recording in accounting.

(2) The effect of the measurement of profit and loss in derivative instruments constituting part of the Bank's asset and liability management strategy on a fair-value basis, versus measurement on an accrual basis. The volatility in this item mainly resulted from changes in interest rates in the CPI-linked segment.

(3) The effect of hedging the asymmetry in the tax liability in respect of exchange-rate differences in investments overseas, which are not taken into account in the income base for the purpose of the calculation of the provision for tax, in contrast to exchange-rate differences in respect of sources of financing. The Bank performs a hedge against the tax exposure in respect of investments overseas by providing surplus financing sources against such investments.

Set out below are the developments in total net financing profit, before provision for credit losses, by principal segments of activity(1):

		For the three months ended		Change vs. three months ended		For the six months ended		Change vs. six months ended
	June 30, 2012	March 31, 2012	June 30, 2011*	March 31, 2012	June 30, 2011	June 30, 2012	June 30, 2011*	June 30, 2011
		NIS millions		%		NIS millions		%
Activity in Israel:
Households Segment	553	551	577	0.4%	)4.2%(	1,104	1,111	)0.6%(
Private Banking Segment	253	275	270	)8.0%(	)6.3%(	528	519	1.7%
Small Business Segment	281	282	274	)0.4%(	2.6%	563	534	5.4%
Commercial Segment	164	160	161	2.5%	1.9%	324	303	6.9%
Corporate Segment	538	501	488	7.4%	10.2%	1,039	942	10.3%
Financial Management Segment	120	256	183	)53.1%(	)34.4%(	376	598	)37.1%(
Activity abroad	132	123	138	7.3%	)4.3%(	255	254	0.4%
Total net financing profit	2,041	2,148	2,091	)5.0%(	)2.4%(	4,189	4,261	)1.7%(

* Reclassified due to the initial implementation of the directives of the Supervisor of Banks concerning the format for statements of profit and loss of banking corporations. For further details, see Note 1(C)(1) to the Condensed Financial Statements.

(1) Net financing profit includes the sum of net interest income plus non-interest financing income, as noted above.

The decrease in net financing profit in all of the retail banking segments in Israel in the second quarter of 2012, in comparison to the same period last year, mainly resulted from a decrease in financial spreads and a decrease in the interest rate in Israel. The decrease was offset by an increase in the volume of credit and deposit activity.

The increase in net financing profit in the Commercial and Corporate Segments, in comparison to the same period last year, resulted from an increase in credit balances and an increase in financial spreads.

The decrease in income in the Financial Management Segment, in comparison to the same period last year, resulted mainly from a decrease in adjustments to fair value of derivative instruments and from a decrease in profits from investment in shares which were offset by an increase in profits from bonds.

The overall interest spread (balance sheet and off-balance sheet) in the second quarter of 2012 stood at 0.69%, compared with an overall interest spread of 1.22% in the same quarter last year.

The interest spread in the CPI-linked segment (including derivatives) stood at 0.48% in the second quarter of 2012, compared with 0.93% in the same quarter last year. The decrease in the interest spread mainly resulted from adjustments to fair value of derivative instruments.

The interest spread in the unlinked segment stood at 1.29% in the second quarter of 2012, compared with 1.61% in the same quarter last year. The decrease in the interest spread mainly resulted from an increase in the volume of activity in derivatives, which is executed at significantly lower spreads than balance sheet activity.

The overall interest spread in the foreign-currency segment stood at 0.66% in the second quarter of 2012, compared with 0.54% in the same quarter last year.

The provision for credit losses totaled NIS 344 million in the second quarter of 2012, compared with

NIS 327 million in the same quarter last year.

The provision in respect of debts examined on an individual basis increased by the amount of NIS 63 million while the provision for credit losses in respect of debts examined on a collective basis decreased by NIS 46 million in the second quarter of 2012.

With regard to the components of the provision for credit losses, see Note 3 to the Condensed Financial Statements.

Set out below are details of the provision for credit losses in respect of debts and in respect of off-balance sheet credit instruments*:

	For the six months ended
	June 30, 2012	June 30, 2011
	NIS millions
Provision for credit losses in respect of debts examined on an individual basis	976	684
Decrease in individual allowance for credit losses and collection of debts previously charged-off	)546(	)722(
Total net provision for credit losses in respect of debts examined on an individual basis	430	)38(
Total net provision in respect of the collective allowance for credit losses and net charge-offs of debts examined on a collective basis	217	379
Total provision for credit losses	647	341
Provision as a percentage of total credit to the public**:
Provision for credit losses as a percentage of the average recorded balance of credit to the public	0.51%	0.29%
Net charge-offs in respect of credit to the public as a percentage of the average recorded balance of credit to the public	0.57%	1.04%
Net charge-offs in respect of credit to the public as a percentage of the allowance for credit losses in respect of credit to the public	35.72%	49.45%

* Including in respect of housing loans examined according to the extent of arrears.

** Annualized.

Set out below is the quarterly provision for credit losses in respect of debts and in respect of off-balance sheet credit instruments*:

	2012			2011
	Q2	Q1	Q4	Q3	Q2	Q1
			NIS millions
Provision for credit losses in respect of debts examined on an individual basis	513	463	380	439	454	230
Decrease in individual allowance for credit losses and collection of debts previously charged-off	)252(	)294(	)213(	)219(	)256(	)466(
Total net provision (income) for credit losses in respect of debts examined on an individual basis	261	169	167	220	198	)236(
Total net provision in respect of the collective allowance for credit losses and net charge-offs of debts examined on a collective basis	83	134	196	278	129	250
Total provision for credit losses	344	303	363	498	327	14
Provision as a percentage of total credit to the public**:
Provision for credit losses as a percentage of the average recorded balance of credit to the public	0.55%	0.49%	0.61%	0.84%	0.56%	0.02%
Net charge-offs in respect of credit to the public as a percentage of the average recorded balance of credit to the public	0.57%	0.57%	0.37%	1.10%	1.50%	0.58%
Net charge-offs in respect of credit to the public as a percentage of the allowance for credit losses in respect of credit to the public	35.87%	35.38%	19.81%	50.93%	60.80%	25.36%

* Including in respect of housing loans examined according to the extent of arrears.

** Annualized.

Set out below is the development of the provision for credit losses by principal segments of activity:

		For the three months ended		For the six months ended
	June 30, 2012	March 31, 2012	June 30, 2011	June 30, 2012	June 30, 2011
	NIS millions
Households Segment	86	43	55	129	139
Private Banking Segment	12	3	22	15	45
Small Business Segment	56	14	54	70	62
Commercial Segment	13	38	11	51	65
Corporate Segment	177	205	185	382	30
Total	344	303	327	647	341

Set out below is the provision for credit losses, as a percentage of the average recorded balance of net credit to the public, by principal segments of activity(1):

		For the three months ended		For the six months ended
	June 30, 2012	March 31, 2012	June 30, 2011*	June 30, 2012	June 30, 2011*
	%
Households Segment	0.55%	0.28%	0.37%	0.42%	0.47%
Private Banking Segment	0.16%	0.04%	0.33%	0.10%	0.34%
Small Business Segment	0.97%	0.24%	0.97%	0.61%	0.56%
Commercial Segment	0.21%	0.62%	0.19%	0.41%	0.56%
Corporate Segment	0.69%	0.79%	0.74%	0.73%	0.06%
Total	0.55%	0.49%	0.56%	0.51%	0.29%

* Restated, in light of the calculation of the provision for credit losses as a percentage of the average balance of credit to the public.

(1) Annualized.

in the same quarter last year.

Set out below are details of fees and other income:

	For the three months ended			Change vs. three months ended		For the six months ended
	June 30, 2012	March 31, 2012	June 30, 2011*	March 31, 2012	June 30, 2011	June 30, 2012	June 30, 2011*	June 30, 2011
		NIS millions		%		NIS millions		%
Fees:
Account management fees	240	242	233	)0.8%(	3.0%	482	472	2.1%
Credit cards, net	395	381	390	3.7%	1.3%	776	756	2.6%
Securities activity	230	269	259	)14.5%(	)11.2%(	499	551	)9.4%(
Financial product distribution fees(1)	44	42	46	4.8%	)4.3%(	86	94	)8.5%(
Management, operations, and trust services for institutional entities(2)	14	14	17	0.0%	)17.6%(	28	38	)26.3%(
Credit handling	86	86	78	0.0%	10.3%	172	203	)15.3%(
Financing transaction fees	108	104	101	3.8%	6.9%	212	205	3.4%
Conversion differences	66	64	60	3.1%	10.0%	130	125	4.0%
Foreign trade activity	29	38	26	)23.7%(	11.5%	67	53	26.4%
Net income from credit portfolio services	9	10	13	)10.0%(	)30.8%(	19	26	)26.9%(
Life insurance and home insurance fees	11	12	13	)8.3%(	)15.4%(	23	26	)11.5%(
Other fees	15	12	17	25.0%	)11.8%(	27	32	)15.6%(
Total fees	1,247	1,274	1,253	)2.1%(	)0.5%(	2,521	2,581	)2.3%(
Other income	19	33	23	)42.4%(	)17.4%(	52	53	)1.9%(
Total fees and other income	1,266	1,307	1,276	)3.1%(	)0.8%(	2,573	2,634	)2.3%(

(1) Mainly mutual funds.

(2) Mainly in respect of management and operational services provided to provident funds.

Operating and other expenses totaled NIS 2,118 million in the second quarter of 2012, compared with

NIS 2,013 million in the quarter period last year.

Details of operating and other expenses are set out below:

	For the three months ended			Change vs. three months ended		For the six months ended		Change vs. six months ended
	June 30, 2012	March 31, 2012	June 30, 2011	March 31, 2012	June 30, 2011	June 30, 2012	June 30, 2011	June 30, 2011
		NIS millions		%		NIS millions		%
Salary expenses:
Wages	1,116	1,059	1,023	5.4%	9.1%	2,175	2,138	1.7%
Bonuses and share-based compensation	106	148	124	)28.4%(	)14.5%(	254	284	)10.6%(
Total salaries	1,222	1,207	1,147	1.2%	6.5%	2,429	2,422	0.3%
Maintenance and depreciation of buildings and equipment	397	381	386	4.2%	2.8%	778	755	3.0%
Write-downs and impairment of intangible assets and goodwill	2	3	11	)33.3%(	)81.8%(	5	14	)64.3%(
Other expenses	497	513	469	)3.1%(	6.0%	1,010	944	7.0%
Total operating and other expenses	2,118	2,104	2,013	0.7%	5.2%	4,222	4,135	2.1%

Salary expenses in the second quarter of 2012 increased year-on-year, as a result of an increase in current wages, which was offset by a decrease in expenses recorded in respect of share-based payments, due to a decrease in the share price of the Bank, and a decrease in the provision for bonuses.

The provision for taxes on profit amounted to NIS 227 million in the second quarter of 2012, compared with NIS 333 million in the same quarter last year. The provision for taxes on profit totaled NIS 595 million in the first half of 2012, compared with NIS 836 million in the same period last year. The effective tax rate in the first half of 2012 reached 31.4%, compared with a statutory tax rate of 35.3%.

The difference mainly resulted from translation differences between overseas subsidiaries not included in the tax base. For details regarding the change in the rate of value-added tax, see Note 13 to the Condensed Financial Statements. Net profit attributed to shareholders of the Bank totaled NIS 607 million in the second quarter of 2012, compared with NIS 712 million in the same quarter last year.

Basic net profit per share of par value NIS 1 attributed to shareholders of the Bank amounted to NIS 0.46 in the second quarter of 2012, compared with NIS 0.54 in the same quarter last year.

Composition and Development of the Bank Group's Assets and Liabilities

The consolidated balance sheet as at June 30, 2012 totaled NIS 362.1 billion, compared with NIS 356.7 billion at the end of 2011.

A. Set out below are the developments in the main balance sheet items:

		Balance as at			Change vs.
	June 30, 2012	March 31, 2012	December 31, 2011	March 31, 2012	December 31, 2011
		NIS millions		%
Total assets	362,105	350,350	*356,662	3.4%	1.5%
Net credit to the public	248,614	244,804	246,495	1.6%	0.9%
Cash on hand and deposits with banks	53,751	52,270	55,790	2.8%	)3.7%(
Securities	40,728	36,903	34,411	10.4%	18.4%
Deposits from the public	259,668	251,576	256,417	3.2%	1.3%
Bonds and subordinated notes	35,679	34,422	32,933	3.7%	8.3%
Shareholders' equity	24,907	24,440	*23,819	1.9%	4.6%

* Restated due to the initial implementation, in the first quarter of 2012, of International Standard No. 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements.

B. Set out below are the developments in the principal off-balance sheet items:

		Balance as at			Change vs.
	June 30, 2012	March 31, 2012	December 31, 2011	March 31, 2012	December 31, 2011
		NIS millions		%
1. Off-balance sheet financial instruments, excluding derivatives:
Documentary credit	2,002	2,127	2,627	)5.9%(	)23.8%(
Guarantees and other commitments	39,990	39,132	39,403	2.2%	1.5%
Unutilized credit-card credit facilities under the Bank's responsibility	32,927	32,779	32,924	0.5%	0.0%
Unutilized credit-card credit facilities under other banks' responsibility	10,555	10,542	10,163	0.1%	3.9%
Unutilized revolving overdraft and other credit facilities in on-demand accounts	36,802	34,772	34,515	5.8%	6.6%
Irrevocable commitments to grant credit approved but not yet provided, and commitments to provide guarantees	45,478	47,513	44,092	)4.3%(	3.1%
2. Derivative instruments (notional value amounts):
Interest contracts	325,246	305,152	294,092	6.6%	10.6%
Foreign-currency contracts	224,062	209,670	274,009	6.9%	)18.2%(
Contracts in respect of shares	21,636	22,170	20,480	)2.4%(	5.6%
Commodity and service contracts (including credit derivatives)	2,962	3,270	3,384	)9.4%(	)12.5%(
Total notional value of derivatives	573,906	540,262	591,965	6.2%	)3.1%(

C. Set out below are the developments in the balance of off-balance sheet monetary assets held by the Bank Group's customers for which the Bank Group provides management, operational, and/or custody services:

	Balance as at
	June 30, 2012	December 31, 2011	Change
	NIS millions	%
In securities portfolios(1)(2)	648,788	633,782	2.4%
In mutual funds	42,202	40,016	5.5%
Total assets of provident funds receiving operational services	75,567	76,617	)1.4%(
Total	766,557	750,415	2.2%

(1) Including securities balances of provident funds and mutual funds for which the Bank Group provides operational services. (2) Excluding mutual funds held by customers of the Bank.

Net Credit to the Public

Net credit to the public as at June 30, 2012 amounted to NIS 248.6 billion, compared with NIS 246.5 billion at the end of 2011, an increase of approximately 0.9%.

Set out below are data regarding the volume of credit to the public, by linkage segment:

	Balance as at				The segment's share of total credit to the public as at
	June 30, 2012	December 31, 2011	Change		June 30, 2012	December 31, 2011
	NIS millions		NIS millions	%	%
Israeli currency unlinked	144,347	142,503	1,844	1.3%	58.0%	57.8%
Israeli currency CPI-linked	56,816	56,718	98	0.2%	22.9%	23.0%
Foreign currency (including f. c. linked)	47,308	47,054	254	0.5%	19.0%	19.1%
Non-monetary items	143	220	)77(	)35.0%(	0.1%	0.1%
Total	248,614	246,495	2,119	0.9%	100.0%	100.0%

Credit in the unlinked shekel segment increased by NIS 1.8 billion in the first half of 2012, an increase of approximately 1.3%.

Credit in the CPI-linked shekel segment increased by NIS 0.1 billion in the first half of 2012, an increase of approximately 0.2%.

Credit in the foreign currency (including foreign-currency linked) segment increased by NIS 0.3 billion in the first half of 2012, an increase of approximately 0.5%. Excluding the effects of the depreciation of the NIS against the major currencies, a decrease of 1.2% occurred.

Net credit to the public by segment of activity:

		Balance as at			Change vs.
	June 30, 2012	March 31, 2012	December 31, 2011	March 31, 2012	December 31, 2011
		NIS millions		%
Households Segment	62,443	61,676	61,685	1.2%	1.2%
Private Banking Segment	29,782	28,496	28,509	4.5%	4.5%
Small Business Segment	23,239	23,069	22,911	0.7%	1.4%
Commercial Segment	25,316	24,770	24,405	2.2%	3.7%
Corporate Segment	103,604	102,575	104,839	1.0%	)1.2%(
Others and Adjustments	4,230	4,218	4,146	0.3%	2.0%
Total	248,614	244,804	246,495	1.6%	0.9%
Of which, consumer credit in Israel excluding housing loans:
Households Segment	27,041	26,771	26,814	1.0%	0.8%
Private Banking Segment	10,854	10,634	10,767	2.1%	0.8%
Small Business Segment	19,287	19,270	19,258	0.1%	0.2%
Total	57,182	56,675	56,839	0.9%	0.6%
Housing loans in Israel:
Households Segment	34,997	34,473	34,409	1.5%	1.7%
Private Banking Segment	11,861	11,173	10,806	6.2%	9.8%
Small Business Segment	3,952	3,799	3,653	4.0%	8.2%
Total	50,810	49,445	48,868	2.8%	4.0%

Set out below are data regarding the balance of housing loans and regarding execution (including refinanced loans), divided into loans from Bank funds and loans from Ministry of Finance funds, all with regard to activity in Israel:

		Balance as at
	June 30, 2012	December 31, 2011	June 30, 2011
		NIS millions
Credit balances
Loans from Bank funds	51,195	49,250	47,779
Loans from Finance Ministry funds*	4,748	5,098	5,391
Grants from Finance Ministry funds*	333	482	524
Total	56,276	54,830	53,694
	For the six months ended	For the twelve months ended	For the six months ended
	June 30, 2012	December 31, 2011	June 30, 2011
		NIS millions
Execution of housing loans
Loans from Finance Ministry funds:
Loans	13	20	9
Grants	3	8	5
Total from Finance Ministry funds	16	28	14
Total loans from Bank funds	4,917	11,303	6,694
Total new loans	4,933	11,331	6,708
Old loans refinanced from Bank funds	794	1,455	844
Total loans extended	5,727	12,786	7,552

* This amount is not included in balance sheet balances to the public.

Development of the balance in the housing credit portfolio, by linkage base and as a percentage of the balance in the credit portfolio of the Bank*:

	Unlinked segment						CPI-linked segment		Foreign currency segment		Total	Rate of change during the period
	Fixed rate Floating rate				Fixed rate		Floating rate	Floating rate
	Balance in NIS millions(1)	Rate in %	Balance in NIS millions(1)	Rate in %	Balance in NIS millions(1)	Rate in %	Balance in NIS millions(1)	Rate in %	Balance in NIS millions(1)	Rate in %	Recorded debt balance in NIS millions(1)
Dec.31, 2009	171	0.5%	10,504	28.4%	15,365	41.5%	9,928	26.8%	1,026	2.8%	36,994	9.7%
Dec.31, 2010	298	0.7%	14,870	34.3%	13,837	31.9%	13,361	30.9%	943	2.2%	43,309	17.1%
Dec.31, 2011	431	0.9%	16,403	33.3%	13,642	27.7%	17,464	35.4%	1,310	2.7%	49,250	13.7%
June 30, 2012	659	1.3%	16,535	32.3%	13,609	26.6%	19,123	37.3%	1,269	2.5%	51,195	3.9%

* Excluding balances in respect of subsidiaries overseas (as at June 30, 2012, a recorded debt balance in the amount of NIS 88 million; as at December 31, 2011, a recorded debt balance in the amount of NIS 94 million).

(1) The balance of the housing credit portfolio as at June 30, 2012 stands at NIS 51,195 million. The increase in the volume of housing credit in recent years stems from an increase in housing prices and a low interest-rate environment. As shown, the percentage of floating-rate unlinked credit rose from December 2009 to June 2012: from 28.4% in 2009 to 32.3%. The proportion of credit in the floating-rate CPI-linked segment also rose, from 26.8% to 37.3%. The increase occurred at the expense of a decrease in the proportion of fixed-rate CPI-linked credit.

Volume of Problematic Debt

A continual decrease has been apparent in the last few years in the volume of amounts in arrears and in the volume of the allowance for credit losses.

Development of amounts in arrears in housing loans and allowance for credit losses (excluding the collective allowance)*

	Recorded debt balance (NIS millions)	Amount in arrears of more than 90 days (NIS millions)	Rate of arrears	Allowance for credit losses based on extent of arrears (NIS millions)	Rate of allowance for credit losses based on extent of arrears	Problematic debt (NIS millions)	Rate of problematic debt
Dec. 31, 2009	36,994	246	0.7%	269	0.7%	1,058	2.9%
Dec. 31, 2010	43,309	157	0.4%	306	0.7%	1,028	2.4%
Dec. 31, 2011	49,250	151	0.3%	294	0.6%	990	2.0%
June 30, 2012	51,195	155	0.3%	289	0.6%	980	1.9%

* Excluding balances in respect of subsidiaries overseas (as at June 30, 2012, a recorded debt balance in the amount of NIS 88 million, and an allowance for credit losses based on the extent of arrears in the amount of NIS 6 million; as at December 31, 2011, a recorded debt balance in the amount of NIS 94 million and an allowance for credit losses based on the extent of arrears in the amount of NIS 5 million).

Risk Quantification and Measurement – Housing Credit Execution

Housing credit risk is quantified and measured on several levels: the level of the individual customer, the level of the product, and the level of the overall credit portfolio of the Bank. For that purpose, quantification and measurement processes have been developed and implemented, combining assessments by housing-credit experts with statistical models. As part of the quantification of risk, a focused examination of repayment capability is executed, including a test of sensitivity to possible changes in repayment capability as a result of possible changes in the interest rate.

The following table lists various characteristics of housing credit granted by the Bank on a quarterly basis:

	For the three	For the three	For the three	For the three	For the three
	months ended	months ended	months ended	months ended	months ended
	June 30,	March 31,	December 31,	September 30,	June 30,
Characteristics	2012	2012	2011	2011	2011
Financing rate over 75%	1.5%	1.2%	3.3%	9.8%	11.2%
Ratio of repayment to income
greater than 50%	10.6%	11.8%	14.5%	15.3%	16.7%
Financing rate over 60% and repayment
rates over 50%	4.6%	5.2%	6.9%	8.3%	8.8%
Financing rate over 75% and repayment
rates over 50%	0.1%	0.1%	0.5%	0.4%	0.9%
Percentage of execution of floating-rate
loans with interest varying at a frequency
of less than 5 years	30%	29%	30%	29%	55%
Percentage of loans for investment purposes	9.8%	11.1%	13.6%	12.4%	13.5%
Average loan balance (in thousands of NIS)	303	300	298	293	289
Average original term to maturity in years
(with monthly payments)*	16.9	17.5	17.3	18.4	18.5
Percentage of all-purpose loans	8.7%	13.5%	13.4%	10.2%	9.9%
Average loan for purchase
(in NIS thousands)*	612	565	588	592	578

Housing loan data – percentage of total new loans executed

* Restated.

Note that financing rates were calculated pursuant to Reporting Directive No. 876 of the Supervisor of Banks, "Report on Housing Loans."

Risk Quantification and Measurement – Housing Credit Portfolio

The Bank routinely monitors developments in the housing credit portfolio, with reference to many parameters, such as LTV distribution, repayment capability, distribution of credit products in the portfolio, volume of problematic debt, and rate of arrears.

The Bank uses a statistical model to measure the probability of default and the economic allowance required in the mortgage portfolio. In addition, stress scenarios are applied to the mortgage portfolio, and the effect on the portfolio and on the Bank as a whole is analyzed. These scenarios include steep declines in prices of homes, increases in the interest rate, and increases in the unemployment rate.

In addition, insurance arrangements are in place (life insurance and building insurance). The Bank also requires credit insurance for loans where the LTV ratio is greater than 75%.

Monthly Discussion of Housing Credit Risks

A monthly discussion is held regarding the development of the various indices, both on the level of the execution of credit and on the level of the overall portfolio, in accordance with the risk appetite defined by the Board of Management of the Bank.

Overall Credit Risk to the Public

Overall credit risk to the public consists of balance sheet credit risk, which comprises credit to the public, investments in corporate bonds, other debts of the public, and assets arising from derivative instruments transacted with the public as the counterparty; and off-balance sheet credit risk, which includes guarantees, transactions in off-balance sheet financial instruments, unutilized credit facilities, and commitments to grant credit.

For further details, see Appendix 3 to the Management's Review.

Overall credit risk to the public as at June 30, 2012 totaled NIS 409.8 billion.

Set out below is the development of overall credit risk to the public*, by principal sectors of the economy:

	June 30, 2012			March 31, 2012	December 31, 2011
	Overall credit risk to the public***	Percent of total	Overall credit risk to the public***	Percent of total	Overall credit risk to the public***	Percent of total	Rate of change vs. December 31, 2011
Economic sector:	NIS millions	%	NIS millions	%	NIS millions	%	%
Agriculture	2,946	0.7%	2,956	0.7%	2,864	0.7%	2.9%
Industry	47,793	11.7%	47,000	11.7%	47,351	11.7%	0.9%
Construction and real estate**	84,289	20.6%	84,638	21.0%	83,630	20.7%	0.8%
Electricity and water	10,075	2.4%	9,086	2.2%	9,574	2.4%	5.2%
Commerce	29,166	7.1%	28,682	7.1%	28,628	7.1%	1.9%
Hotels, hospitality and food services	10,085	2.4%	9,900	2.5%	9,981	2.5%	1.0%
Transportation and storage	8,566	2.1%	8,550	2.1%	8,559	2.1%	0.1%
Communications and computer services	11,700	2.9%	12,124	3.0%	12,377	3.1%	)5.5%(
Financial services	48,297	11.8%	46,267	11.5%	49,099	12.1%	)1.6%(
Other business services	14,543	3.5%	14,276	3.5%	14,305	3.5%	1.7%
Public and community services	8,544	2.1%	8,694	2.2%	8,948	2.2%	)4.5%(
Private individuals - housing loans	49,921	12.2%	48,180	12.0%	47,437	11.7%	5.2%
Private individuals - others	83,861	20.5%	82,730	20.5%	82,021	20.2%	2.2%
Total	409,786	100%	403,083	100%	404,774	100%	1.2%

* Data on overall credit risk are presented after deduction of the balance of charge-offs, and before deduction of the allowance for credit losses (on an individual and collective basis).

** Includes balance sheet credit risk in the amount of approximately NIS 487 million, and off-balance sheet credit risk in the amount of approximately NIS 2,225 million, in respect of loans granted to certain purchasing groups currently engaged in the process of construction (March 31, 2012: balance sheet credit risk in the amount of approximately NIS 441 million, and off-balance sheet credit risk in the amount of approximately NIS 1,996 million; December 31, 2011: balance sheet credit risk in the amount of approximately NIS 433 million, and off-balance sheet credit risk in the amount of approximately NIS 2,169 million).

*** Excluding unutilized credit facilities in credit cards under the responsibility of other banks in the amount of approximately NIS 10,555 million (March 31, 2012: NIS 10,542 million; December 31, 2011: NIS 10,163 million).

Construction and Real Estate

Overall credit risk in this sector totaled NIS 84.3 billion as at June 30, 2012.

Set out below is a breakdown of credit risk of the Bank Group in the construction and real-estate sector, by principal areas of activity:

	Balance as at June 30, 2012
	Balance sheet credit risk	Off-balance sheet credit risk
		NIS millions
Construction for commerce and services	1,696	434	2,130
Construction for industry	531	417	948
Construction for housing	9,875	21,714	31,589
Yield-generating properties	28,287	5,450	33,737
Other	8,084	7,801	15,885
Total construction and real-estate sector	48,473	35,816	84,289

Set out below are details of balances of credit to the public and off-balance sheet credit risk to borrowers whose balance of indebtedness exceeds NIS 1,200 million, by sectors of the economy, as at June 30, 2012:

	Number of borrowers	Balance sheet credit	Off-balance sheet credit	Total
Economic sector			NIS millions
Industry	4	1,449	8,667	10,116
Construction and real estate	4	3,986	2,143	6,129
Electricity and water	1	1,621	2,947	4,568
Commerce	1	201	1,188	1,389
Communications and computer services	2	3,641	82	3,723
Financial services	4	4,551	3,288	7,839
Hotels, hospitality and food services	1	1,060	145	1,205
Total	17	16,509	18,460	34,969

Credit Risk in Respect of Exposure to Borrower Groups

Set out below are details of credit risk balances for each group of borrowers with a net indebtedness, on a consolidated basis, pursuant to Proper Conduct of Banking Business Directive No. 313, "Limits on Indebtedness of a Borrower and of a Group of Borrowers" (hereinafter: Directive 313), exceeding 15% of the capital of the banking corporation (as defined in Directive 313) as at June 30, 2012:

	Balance sheet credit risk(1)	Off-balance sheet credit risk(1)	Of which: off-balance sheet credit risk in respect of derivative instruments(2)	Gross indebtedness(3)	Deductions(4)	Net indebtedness(5)	Percentage of regulatory capital
				NIS millions			%
Borrower group A	7,540	2,724	785	10,418	138	10,280	23.0
Borrower group B	5,191	2,980	281	8,229	85	8,144	18.2
Borrower group C	6,543	1,973	107	8,556	535	8,021	18.0
Borrower group D	2,552	4,391	1,681	6,946	127	6,819	15.3

(1) After deduction of the balance of charge-offs and the allowance for credit losses calculated on an individual basis.

(2) Off-balance sheet credit risk in respect of derivative instruments, as calculated for the purposes of the limits on indebtedness of borrowers and of borrower groups.

(3) This amount includes third-party guarantees outside the group.

(4) Deductions permitted under Directive 313, primarily including deposits deposited with the Bank, bonds issued by the State of Israel, deductible indemnification letters of the State of Israel or financial entities.

(5) The data presented above represent exposure to borrower groups, and are stated after the permitted deductions pursuant to Directive 313, and after deduction of the allowance for credit losses calculated on an individual basis. These data are therefore not comparable with data regarding borrowers' indebtedness provided in other disclosures in the report.

Pursuant to Proper Conduct of Banking Business Directive No. 313, "Limits on Indebtedness of a Borrower and of a Group of Borrowers," a limit is imposed on the Bank, among other matters, under which the rate of "indebtedness" of a "borrower" and of a "group of borrowers," as defined in the directive, after subtracting certain permitted amounts as specified in the directive, shall not exceed 15% and 25%, respectively, of the capital of the Bank, calculated according to Proper Conduct of Banking Business Directive No. 202, "Capital Components." The directive further states that the total indebtedness (after subtracting the permitted amounts) of the borrowers, borrower groups, and banking borrower groups, each of whose indebtedness exceeds 10% of the capital of the Bank, shall not exceed 120% of the capital of the Bank.

It is hereby clarified that for the purpose of calculation of the indebtedness, principles were adopted with regard to credit conversion coefficients and permitted deductions in accordance with Proper Conduct of Banking Business Directive No. 203, "Capital Measurement and Adequacy – The Standardized Approach – Credit Risk."

The Bank conducts monitoring and control processes in order to examine compliance with the limits set forth in Directive 313 with regard to exposure to the indebtedness of borrower groups. In addition, the Bank performs periodic surveys of credit risk in such borrower groups, with an individual examination of the borrowers belonging to the borrower group, the nature of these borrowers' activities, and the correlations between the borrowers that can affect group-level risk.

Information Regarding Problematic Debts for the Measurement and Disclosure of Impaired Debts, Credit Risk, and Allowance for Credit Losses

A. Segmentation of problematic debts

	June 30, 2012			December 31, 2011
	Balance sheet	Off-balance sheet	Total	Balance sheet	Off-balance sheet	Total
			NIS millions
Impaired credit risk	8,577	809	9,386	8,652	887	9,539
Substandard credit risk	1,903	159	2,062	1,643	141	1,784
Credit risk under special supervision	3,110	1,152	4,262	2,483	984	3,467
Total problematic credit risk	13,590	2,120	15,710	12,778	2,012	14,790
Net total problematic credit risk	11,857	2,033	13,890	10,871	1,928	12,799

	June 30, December 31,
	2012	2011
	NIS millions
Impaired balance sheet credit risk
Impaired credit to the public not accruing interest income:
Examined on an individual basis	7,871	8,252
Impaired debts under troubled debt restructuring (TDR), accruing interest income	663	357
Impaired bonds accruing interest income	43	39
Impaired bonds not accruing interest income	-	4
Total impaired credit risk	8,577	8,652

B. Problematic credit risk

	June 30, December 31,
	2012	2011
	NIS millions
Problematic commercial credit risk(1)
Balance sheet credit risk in respect of the public	11,364	10,540
Off-balance sheet credit risk in respect of the public(2)	2,086	1,980
Total problematic commercial credit risk in respect of the public	13,450	12,520
Balance sheet credit risk in respect of others	-	4
Off-balance sheet credit risk in respect of others(2)	26	26
Total problematic commercial credit risk	13,476	12,550
Problematic credit risk in respect of private individuals	2,234	2,240
Total problematic credit risk	15,710	14,790

(1) Balance sheet credit risk (credit, bonds, other debts recognized in the balance sheet, and assets in respect of derivative instruments) and off-balance sheet credit risk that is impaired, substandard, or under special supervision, excluding balance sheet and off-balance sheet credit risk in respect of private individuals.

(2) As calculated for the purposes of the limits on indebtedness of borrowers and borrower groups, except in respect of guarantees provided by a borrower to secure the indebtedness or a third party, prior to the effect of deductible collateral.

Note:

Balance sheet and off-balance sheet credit risk are presented prior to the effect of the allowance for credit losses and prior to the effect of collateral deductible for the purposes of the indebtedness of borrowers and borrower groups.

Nonperforming Assets

Nonperforming assets include assets of the Bank that do not accumulate interest income. This information is similar to the balance of nonperforming assets presented in the financial statements of banking corporations in the United States. This data is provided in order to give disclosure to the part of the Bank's assets included in the financial statements that does not accumulate interest income.

	Balance as at
	June 30, 2012	December 31, 2011
	NIS millions
C. Nonperforming assets
Impaired credit to the public not accruing interest income:
Examined on an individual basis	7,871	8,252
Impaired bonds not accruing interest income	-	4
Total impaired debts not accruing interest income	7,871	8,256
Assets received in respect of credit repaid	168	161
Total nonperforming assets	8,039	8,417
D. Impaired debts under troubled debt restructuring (TDR), accruing interest income	663	357
E. Unimpaired debts in arrears of 90 days or more	1,112	1,132
Of which:
Housing loans for which an allowance according to the extent of arrears exists	714	705
Housing loans for which an allowance according to the extent of arrears does not exist(1)	284	292

(1) Housing loans for which the minimum allowance is calculated according to the extent of arrears, which are in arrears of more than 3 months and up to 6 months; and other unimpaired housing loans in arrears of 90 days or more, for which the minimum allowance is not calculated according to the extent of arrears.

F. Risk indices:

	As at
	June 30, 2012	December 31, 2011
Balance of impaired credit to the public not accruing interest income,
as a percentage of the balance of credit to the public*	3.12%	3.29%
Balance of unimpaired credit to the public, in arrears of 90 days or more,
as a percentage of the balance of credit to the public*	0.44%	0.45%
Balance of allowance for credit losses in respect of credit to the public,
as a percentage of the balance of credit to the public*	1.58%	1.63%
Balance of allowance for credit losses in respect of credit to the public, as a percentage
of the balance of impaired credit to the public not accruing interest income*	50.72%	49.65%
Problematic commercial credit risk in respect of the public,
as a percentage of total credit risk in respect of the public*	3.28%	3.09%
Problematic credit risk in respect of the public, as a percentage
of total credit risk in respect of the public*	3.83%	3.65%

* Before deduction of the allowance for credit losses.

Cash on Hand and Deposits with Banks

Cash on hand and deposits with banks totaled NIS 53.8 billion as at June 30, 2012, compared with NIS 55.8 billion at the end of 2011, a decrease of approximately 3.7%.

Set out below are details of the balance of cash and deposits with banks:

	Balance as at				Change vs.
	June 30, 2012	March 31, 2012	December 31, 2011	March 31, 2012	December 31, 2011
		NIS millions		%
Cash	2,128	2,106	2,232	1.0%	)4.7%(
Deposits with the Bank of Israel	32,823	31,253	31,319	5.0%	4.8%
Deposits with central banks abroad	13,537	14,173	16,451	)4.5%(	)17.7%(
Deposits with banks in Israel	113	237	290	)52.3%(	)61.0%(
Deposits with banks abroad	5,150	4,501	5,498	14.4%	)6.3%(
Total	53,751	52,270	55,790	2.8%	)3.7%(

Securities

Securities as at June 30, 2012, totaled NIS 40.7 billion, compared with NIS 34.4 billion at the end of 2011, an increase of approximately 18.4%, which mainly resulted from the purchase of government bonds. For further details, see Note 2 to the Condensed Financial Statements.

Details of the securities of the Bank Group by balance sheet classification are set out below:

	June 30, 2012
	Depreciated cost	Unrealized gains from adjustments to fair value	Unrealized losses from adjustments to fair value	Fair value	Balance sheet value
			NIS millions
Bonds:
Held to maturity	817	60	-	877	817
Available for sale	32,915	264	)89(	33,090	33,090
For trading	5,382	*25	*)4(	5,403	5,403
Total bonds	39,114	349	)93(	39,370	39,310
Shares:
Available for sale	1,320	71	)19(	1,372	1,372
For trading	52	*1	*)7(	46	46
Total shares	1,372	72	)26(	1,418	1,418
Total securities	40,486	421	)119(	40,788	40,728

* Charged to the statement of profit and loss.

Details of the securities of the Bank Group by balance sheet classification are set out below.

			As at December 31, 2011
	Depreciated cost	Unrealized gains from adjustments to fair value	Unrealized losses from adjustments to fair value	Fair value	Balance sheet value
			NIS millions
Bonds:
Held to maturity	869	57	-	926	869
Available for sale	28,251	253	)92(	28,412	28,412
For trading	3,516	*24	*-	3,540	3,540
Total bonds	32,636	334	)92(	32,878	32,821
Shares:
Available for sale	1,343	198	)3(	1,538	1,538
For trading	61	*-	*)9(	52	52
Total shares	1,404	198	)12(	1,590	1,590
Total securities	34,040	532	)104(	34,468	34,411

* Charged to the statement of profit and loss.

Set out below are details of the unrealized loss from adjustments to fair value in respect of securities in the availablefor-sale portfolio, as at June 30, 2012.

With respect to bonds*:

Up to 20%	40	4	16	29	89
		NIS millions
Rate of decline	Up to 6 months	6-9 months	9-12 months	Over 12 months	Total

		Time elapsed since beginning of decline in value

With respect to shares:

		Time elapsed since beginning of decline in value
	Up to 6 months	6-9 months	9-12 months	Over 12 months	Total
Rate of decline			NIS millions
Up to 20%	19	-	-	-	19

* The decrease in the capital reserve mainly derived from Israeli government bonds.

Investments in Bonds in the Available-for-Sale Portfolio and in the Trading Portfolio

The following table provides additional details regarding the Bank Group's investments in bonds, as at June 30, 2012 (in NIS millions):

	Balance sheet	Total balance
	value	sheet value
Government bonds:
Israeli government	31,946
US government	18
Governments of developed countries	1,751
Governments of developing countries	682
		34,397
Bonds of banks and financial institutions:
Banks in Israel		77
Banks in developed countries:
US	240
Australia	82
Netherlands	265
UK	226
Spain	50
Sweden	129
Other*	189
		1,181
Banks in developing countries		47
Financial institutions (other than banks):
Israel	86
US**	711
UK	32
Peru	6
Netherlands	2
		837
		2,142

Bonds of corporations, other than banks and financial institutions, by economic sector:

Industry	496
Real-estate activities	166
Electricity and water	556
Commerce	99
Transportation	24
Communications and computer services	132
Financial services	225
Public services***	101
Other business services	155
	1,954
Total bonds	38,493

* Includes 7 countries; the highest balance is approximately NIS 49 million.

** Includes 14 issuers; the highest balance of a single issuer is approximately NIS 184 million.

*** Includes asset-backed securities.

Investments in Shares

The Bank has investments in tradable shares, non-tradable shares, and mutual funds, broadly diversified, at a total amount of NIS 1,418 million as at June 30, 2012, compared with NIS 1,590 million at the end of 2011.

Deposits

Deposits include deposits from the public, government deposits, and deposits from the Bank of Israel and other banks.

	Balance as at
	June 30, 2012	December 31, 2011	Change
	NIS millions
Deposits from the public	259,668	256,417	1.3%
Deposits from banks	6,434	7,001	)8.1%(
Government deposits	883	1,085	)18.6%(
Total	266,985	264,503	0.9%

Deposits from the public as at June 30, 2012 totaled NIS 259.7 billion, compared with NIS 256.4 billion at the end of 2011, an increase of approximately 1.3%. This increase mainly resulted from an increase in the amount of NIS 6.2 billion in deposits in the retail banking segments, and an increase of NIS 0.4 billion in deposits in the Financial Management Segment, which were offset by a decrease of NIS 3.3 billion in Corporate deposits.

Set out below is the distribution of the portfolio of deposits from the public, by linkage segment:

	Balance as at					Share of segment in total deposits from the public as at
	June 30, December 2012 31, 2011		Change		June 30, 2012	December 31, 2011
	NIS millions		NIS millions	%	%	%
Israeli currency unlinked	156,316	155,391	925	0.6%	60.2%	60.6%
Israeli currency CPI-linked	20,729	20,615	114	0.6%	8.0%	8.0%
Foreign currency (including f. c. linked)	82,480	80,191	2,289	2.9%	31.7%	31.3%
Non-monetary items	143	220	)77(	)35.0%(	0.1%	0.1%
Total	259,668	256,417	3,251	1.3%	100.0%	100.0%

Deposits from the public by segment of activity:

		Balance as at			Change vs.
	June 30, 2012	March 31, 2012	December 31, 2011	March 31, 2012	December 31, 2011
		NIS millions	%
Households Segment	36,154	35,446	34,965	2.0%	3.4%
Private Banking Segment	128,267	123,415	124,352	3.9%	3.1%
Small Business Segment	24,594	23,473	23,545	4.8%	4.5%
Commercial Segment	13,491	13,409	13,662	0.6%	)1.3%(
Corporate Segment	49,674	49,897	52,757	)0.4%(	)5.8%(
Financial Management Segment	7,488	5,936	7,136	26.1%	4.9%
Total	259,668	251,576	256,417	3.2%	1.3%

Bonds and subordinated notes totaled NIS 35.7 billion as at June 30, 2012, compared with NIS 32.9 billion at the end of 2011, an increase of approximately 8.3%. Most of the increase resulted from subordinated notes constituting lower Tier 2 capital in a total amount of approximately NIS 2.8 billion, issued by the Bank during the first half of 2012, which were included in lower Tier 2 capital subject to the limit in the Proper Conduct of Banking Business Directives.

Description of the Bank Group's Business by Segments of Activity

Condensed Financial Information on Segments of Activity

The Bank Group operates in Israel and abroad in all areas of banking through the Bank, subsidiaries, branches, and representative offices, and provides a wide range of banking and financial services to its customers. The Bank also has investments in equity-basis investee companies.

The activity of the Bank Group is conducted via six principal segments of activity. The division into segments of activity is based on the types of products and services or on the types of customers included in each of the segments. The Board of Management of the Bank uses this division to make decisions and to analyze the Group's business results. The segments of activity are presented according to characteristics stipulated by the Supervisor of Banks.

For details regarding the assignment of customers to the segments of activity, see Note 32 to the Annual Financial Statements for 2011.

The Bank adopted the directives of the Supervisor of Banks concerning the format of statements of profit and loss for banking corporations for the first time on January 1, 2012. The directives were adopted retroactively, with the exception of the cancellation of CPI linkage differences on accrued unpaid principal in respect of debts classified as impaired prior to the initial implementation date. Accordingly, data included in the statement of profit and loss with regard to comparison periods last year were reclassified to match the new definition, headings, and presentation method of the current reporting period. For details, see Note 1(C)(1) to the Condensed Financial Statements.

Set out below are the condensed developments in the results of operations of the Bank Group and the principal balance sheet items, by segment of activity.

	For the three months ended		Change vs. three months ended		For the six months ended		Change vs. six months ended
	June 30, 2012	March 31, 2012	June 30, 2011	March 31, 2012	June 30, 2011	June 30, 2012	June 30, 2011	June 30, 2011
	NIS millions			%		NIS millions		%
Households Segment	72	107	133	)32.7%(	)45.9%(	179	186	)3.8%(
Private Banking Segment	64	91	79	)29.7%(	)19.0%(	155	131	18.3%
Small Business Segment	89	121	92	)26.4%(	)3.3%(	210	191	9.9%
Commercial Segment	74	65	91	13.8%	)18.7%(	139	132	5.3%
Corporate Segment	240	222	232	8.1%	3.4%	462	681	)32.2%(
Financial Management Segment	72	62	80	16.1%	)10.0%(	134	265	)49.4%(
Others and Adjustments	)4(	)9(	5	)55.6%(		)13(	17
Total	607	659	712	)7.9%(	)14.7%(	1,266	1,603	)21.0%(

A. Net Profit Attributed to Shareholders of the Bank

B. Net Credit to the Public by Segment of Activity

		Balance as at			Change vs.
	June 30, 2012	March 31, 2012	December 31, 2011	March 31, 2012	December 31, 2011
		NIS millions		%
Households Segment	62,443	61,676	61,685	1.2%	1.2%
Private Banking Segment	29,782	28,496	28,509	4.5%	4.5%
Small Business Segment	23,239	23,069	22,911	0.7%	1.4%
Commercial Segment	25,316	24,770	24,405	2.2%	3.7%
Corporate Segment	103,604	102,575	104,839	1.0%	)1.2%(
Others and Adjustments	4,230	4,218	4,146	0.3%	2.0%
Total	248,614	244,804	246,495	1.6%	0.9%
Of which, consumer credit in Israel excluding housing loans:
Households Segment	27,041	26,771	26,814	1.0%	0.8%
Private Banking Segment	10,854	10,634	10,767	2.1%	0.8%
Small Business Segment	19,287	19,270	19,258	0.1%	0.2%
Total	57,182	56,675	56,839	0.9%	0.6%
Housing loans in Israel:
Households Segment	34,997	34,473	34,409	1.5%	1.7%
Private Banking Segment	11,861	11,173	10,806	6.2%	9.8%
Small Business Segment	3,952	3,799	3,653	4.0%	8.2%
Total	50,810	49,445	48,868	2.8%	4.0%

C. Deposits from the Public by Segment of Activity

		Balance as at			Change vs.
	June 30, 2012	March 31, 2012	December 31, 2011	March 31, 2012	December 31, 2011
		NIS millions	%
Households Segment	36,154	35,446	34,965	2.0%	3.4%
Private Banking Segment	128,267	123,415	124,352	3.9%	3.1%
Small Business Segment	24,594	23,473	23,545	4.8%	4.5%
Commercial Segment	13,491	13,409	13,662	0.6%	)1.3%(
Corporate Segment	49,674	49,897	52,757	)0.4%(	)5.8%(
Financial Management Segment	7,488	5,936	7,136	26.1%	4.9%
Total	259,668	251,576 256,417		3.2%	1.3%

Set out below are details of the capital allocated to each segment of activity for the purpose of the calculation of return on equity(1):

		For the three months ended		Change vs. three months ended		For the six months ended		Change vs. six months ended
	June 30, 2012	March 31, 2012	June 30, 2011*	March 31, 2012	June 30, 2011	June 30, 2012	June 30, 2011*	June 30, 2011
		NIS millions		%		NIS millions		%
Households Segment	3,484	3,404	3,336	2.4%	4.4%	3,444	3,421	0.7%
Private Banking Segment	1,795	1,719	1,765	4.4%	1.7%	1,757	1,571	11.8%
Small Business Segment	2,113	2,025	1,938	4.3%	9.0%	2,069	1,971	5.0%
Commercial Segment	2,641	2,533	2,454	4.3%	7.6%	2,587	2,304	12.3%
Corporate Segment	11,100	10,770	10,706	3.1%	3.7%	10,935	10,115	8.1%
Financial Management Segment	2,875	3,207	1,894	)10.4%(	51.8%	3,041	2,509	21.2%
Others and Adjustments	688	673	555	2.2%	24.0%	681	556	22.4%
Total	24,696	24,331	22,648	1.5%	9.0%	24,514	22,447	9.2%

* Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements.

(1) The capital allocation based on risk-adjusted assets in each segment is calculated according to risk-adjusted assets pursuant to Basel II.

Off-Balance sheet Activity

Set out below is the development in balances of holdings in off-balance sheet monetary assets of customers of the Bank Group(1):

		Balance as at		Change vs.
	June 30, 2012	March 31, December 2012 31, 2011		March 31, 2012	December 31, 2011
	NIS millions				%
Households Segment	4,723	5,026	5,052	)6.0%(	)6.5%(
Private Banking Segment	146,462	143,315	133,214	2.2%	9.9%
Small Business Segment	10,317	10,788	10,168	)4.4%(	1.5%
Commercial Segment	12,093	11,700	11,341	3.4%	6.6%
Corporate Segment	517,395	532,456	514,023	)2.8%(	0.7%
Others and Adjustments	75,567	79,151	76,617	)4.5%(	)1.4%(
Total	766,557	782,436	750,415	)2.0%(	2.2%

(1) Includes customers' holdings in securities portfolios and mutual funds, and in assets of provident funds receiving operational services.

The Households Segment

General and Segment Structure

The Households Segment provides a range of services to private customers who mostly operate at relatively low financial volumes. Services are provided to customers of the segment through 277 branches located throughout Israel, from Kiryat Shmona to Eilat, organized by geographical location into eight regional administrations. These services are also delivered through direct channels: automated teller machines adjacent to branches and in "Customer Courts," "Poalim Online," "Poalim by Cell Phone," and "Poalim by Telephone." These services are also provided to Bank customers belonging to other segments, as well as to walk-in customers.

The Bank's activity in the Households Segment abroad also includes the households activity of Bank Pozitif in Turkey and Bank Pozitiv in Kazakhstan, at immaterial volumes.

In the second quarter of 2012, the Bank opened a new retail branch, tailored to customers' needs, and consolidated two existing branches.

	For the six months ended June 30, 2012
		Activity in Israel				Activity abroad
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Banking and financial services	Housing loans	Total
				NIS millions
Net interest income:
- From externals	707	44	2	941	8	27	1,729
- Inter-segmental	236	-	-	)825(	)9(	)16(	)614(
Total	943	44	2	116	)1(	11	1,115
Non-interest income:
- From externals	262	286	22	46	1	2	619
- Inter-segmental	)33(	-	)6(	14	-	-	)25(
Total income	1,172	330	18	176	-	13	1,709
Provision for credit losses	100	18	-	10	-	1	129
Operating and other expenses:
- From externals	904	229	30	117	8	9	1,297
- Inter-segmental	8	-	-	-	-	-	8
Profit (loss) before taxes	160	83	)12(	49	)8(	3	275
Provision for taxes (tax benefit) on profit (loss)	56	29	)4(	17	)2(	1	97
Net profit (loss):
Before attribution to non-controlling interests	104	54	)8(	32	)6(	2	178
Attributed to non-controlling interests	-	)1(	-	-	2	-	1
Attributed to shareholders of the Bank	104	53	)8(	32	)4(	2	179

Return on equity (net profit attributed to shareholders of the Bank as a percentage of average equity)(2)	14.7%	25.5%	-	4.3%	-	-	10.7%

Average balance of assets	21,156	5,980	-	34,591	363	106	62,196
Average balance of liabilities	35,384	-	-	-	13	-	35,397
Average balance of risk-adjusted assets	18,151	5,464	-	18,498	310	54	42,477
Average balance of mutual funds	-	-	2,079	-	-	-	2,079
Average balance of securities in custody	-	-	2,792	-	-	-	2,792
Balance of credit to the public	21,251	5,790	-	34,997	323	82	62,443
Balance of deposits from the public	36,141	-	-	-	13	-	36,154

(1) Distribution fees for financial products and securities activity.

(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.

	For the six months ended June 30, 2011*
		Activity in Israel				Activity abroad
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Banking and financial services	Housing loans	Total
				NIS millions
Net interest income:
- From externals	654	52	2	927	41	5	1,681
- Inter-segmental	266	-	-	)790(	)24(	)4(	)552(
Total	920	52	2	137	17	1	1,129
Non-interest income:
- From externals	270	269	29	55	-	-	623
- Inter-segmental	)43(	-	)8(	17	-	-	)34(
Total income	1,147	321	23	209	17	1	1,718
Provision for credit losses	95	25	-	19	-	-	139
Operating and other expenses:
- From externals	883	210	33	126	33	4	1,289
- Inter-segmental	6	-	-	-	-	-	6
Profit (loss) before taxes	163	86	)10(	64	)16(	)3(	284
Provision for taxes (tax benefit) on profit (loss)	56	30	)3(	22	)4(	)1(	100
Net profit (loss):
Before attribution to non-controlling interests	107	56	)7(	42	)12(	)2(	184
Attributed to non-controlling interests	-	)2(	-	-	3	1	2
Attributed to shareholders of the Bank	107	54	)7(	42	)9(	)1(	186
Return on equity (net profit attributed to shareholders of the Bank as a percentage of average equity)**(2)	15.3%	27.2%	-	5.6%	-	-	11.2%
Average balance of assets	19,818	5,531	-	33,057	419	116	58,941
Average balance of liabilities	32,427	-	-	-	17	-	32,444
Average balance of risk-adjusted assets	17,798	5,189	-	18,673	373	62	42,095
Average balance of mutual funds	-	-	2,606	-	-	-	2,606
Average balance of securities in custody	-	-	3,176	-	-	-	3,176
Balance of credit to the public	20,116	5,481	-	34,087	423	105	60,212
Balance of deposits from the public**	32,918	-	-	-	12	-	32,930

** Reclassified.

(1) Distribution fees for financial products and securities activity.

(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.

			For the three months ended June 30, 2012
		Activity in Israel				Activity abroad
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Banking and financial services	Housing loans	Total
				NIS millions
Net interest income:
- From externals	337	23	1	628	4	12	1,005
- Inter-segmental	135	-	-	)570(	)5(	)7(	)447(
Total	472	23	1	58	)1(	5	558
Non-interest income:
- From externals	128	147	11	23	-	1	310
- Inter-segmental	)16(	-	)3(	8	-	-	)11(
Total income	584	170	9	89	)1(	6	857
Provision for credit losses	69	9	-	7	-	1	86
Operating and other expenses:
- From externals	457	114	15	64	4	5	659
- Inter-segmental	4	-	-	-	-	-	4
Profit (loss) before taxes	54	47	)6(	18	)5(	-	108
Provision for taxes (tax benefit) on profit (loss)	17	17	)2(	6	)1(	-	37
Net profit (loss):
Before attribution to non-controlling interests	37	30	)4(	12	)4(	-	71
Attributed to non-controlling interests	-	-	-	-	1	-	1
Attributed to shareholders of the Bank	37	30	)4(	12	)3(	-	72

			For the three months ended March 31, 2012
	Activity in Israel					Activity abroad
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Banking and financial services	Housing loans	Total
				NIS millions
Net interest income:
- From externals	370	21	1	313	4	15	724
- Inter-segmental	101	-	-	)255(	)4(	)9(	)167(
Total	471	21	1	58	-	6	557
Non-interest income:
- From externals	134	139	11	23	1	1	309
- Inter-segmental	)17(	-	)3(	6	-	-	)14(
Total income	588	160	9	87	1	7	852
Provision for credit losses	31	9	-	3	-	-	43
Operating and other expenses:
- From externals	447	115	15	53	4	4	638
- Inter-segmental	4	-	-	-	-	-	4
Profit (loss) before taxes	106	36	)6(	31	)3(	3	167
Provision for taxes (tax benefit) on profit (loss)	39	12	)2(	11	)1(	1	60
Net profit (loss):
Before attribution to non-controlling interests	67	24	)4(	20	)2(	2	107
Attributed to non-controlling interests	-	)1(	-	-	1	-	-
Attributed to shareholders of the Bank	67	23	)4(	20	)1(	2	107
Balance of credit to the public	21,080	5,691	-	34,473	350	82	61,676
Balance of deposits from the public	35,433	-	-	-	13	-	35,446

				For the three months ended June 30, 2011*
		Activity in Israel				Activity abroad
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Banking and financial services	Housing loans	Total
				NIS millions
Net interest income:
- From externals	323	25	1	609	18	3	979
- Inter-segmental	147	-	-	)528(	)10(	)3(	)394(
Total	470	25	1	81	8	-	585
Non-interest income:
- From externals	139	138	12	27	-	-	316
- Inter-segmental	)28(	-	)4(	14	-	-	)18(
Total income	581	163	9	122	8	-	883
Provision for credit losses	24	12	-	19	-	-	55
Operating and other expenses:
- From externals	416	104	15	74	15	2	626
- Inter-segmental	2	-	-	-	-	-	2
Profit (loss) before taxes	139	47	)6(	29	)7(	)2(	200
Provision for taxes (tax benefit) on profit (loss)	48	16	)2(	8	)1(	)1(	68
Net profit (loss):
Before attribution to non-controlling interests	91	31	)4(	21	)6(	)1(	132
Attributed to non-controlling interests	-	)1(	-	-	1	1	1
Attributed to shareholders of the Bank	91	30	)4(	21	)5(	-	133

Principal Changes in Net Profit and Balance sheet Balances

Net profit attributed to shareholders of the Bank in the Households Segment totaled NIS 179 million in the first half of 2012, compared with NIS 186 million in the same period last year. The decrease in profit resulted from a decrease in net interest income and an increase in operating expenses. This decrease was offset by a decrease in the provision for credit losses and an increase in non-interest income.

Net interest income in the first half of 2012 totaled NIS 1,115 million, compared with NIS 1,129 million in the same period last year. The 1.2% decrease mainly resulted from a decrease in financial spreads and a decrease in the interest rate. This decrease was offset by an increase in the volume of credit and deposits activity.

Non-interest income in the first half of 2012 totaled NIS 594 million, compared with NIS 589 million in the same period last year.

The provision for credit losses totaled NIS 129 million in the first half of 2012, compared with NIS 139 million in the same period last year.

The segment's expenses totaled NIS 1,305 million in the first half of 2012, compared with NIS 1,295 million in the same period last year.

Net credit to the public totaled approximately NIS 62.4 billion as at June 30, 2012, compared with approximately NIS 61.7 billion as at December 31, 2011. The increase mainly resulted from an increase in housing loans.

Housing loans in Israel totaled approximately NIS 35.0 billion as at June 30, 2012, compared with approximately NIS 34.4 billion as at December 31, 2011.

Deposits from the public totaled approximately NIS 36.2 billion as at June 30, 2012, compared with approximately NIS 35.0 billion as at December 31, 2011.

The balance of off-balance sheet monetary assets of the customers of the Bank Group attributed to this segment as at June 30, 2012 totaled approximately NIS 4.7 billion, compared with approximately NIS 5.1 billion as at December 31, 2011. This balance includes customers' holdings in securities portfolios and mutual funds.

Regulatory Changes Concerning Housing Loans

The Uniform Contracts Bill (Amendment No. 5) (Establishing a Minimum Linkage Rate as a Depriving Condition), 2012, was approved by the Knesset plenum in a second and third reading in July 2012. The bill states that a condition in a uniform contract establishing linkage to any index, such that a decrease or increase in the index does not result in crediting the customer, shall be considered a depriving condition. The amendment takes effect four months from its publication in the Official Gazette of the Israeli Government and shall not apply retroactively. Upon inception of this amendment, the Bank will be required to amend the mechanism for linkage to the consumer price index in its housing loan contracts, which currently stipulate that in the event that the CPI falls below the baseline CPI established for the contract, the borrower will continue to pay the same amount, with no adjustment of the payments.

Technological Changes that May Have a Material Impact on the Segment

Poalim HD, an advanced, innovative, smart application for account management via iPad, was launched at the end of the first quarter of 2012. The application allows Bank Hapoalim customers to view information and execute transactions in their accounts in an innovative way, through an interface adapted to customers' current iPad use.

The Committee on Competition

In December 2011, the Committee for the Examination of Increasing Competition in the Banking System, headed by the Supervisor of Banks, was appointed as an adjunct to the Committee for Economic and Social Change, headed by Prof. Manuel Trajtenberg. The committee's letter of appointment states: "The lack of competition in the banking industry in Israel allows a relatively high level of prices to be maintained in this industry. Additional factors, such as the complexity of banking products, the difficulty of collecting information for customers, and the asymmetrical information among banks with regard to customers' credit history, may serve to reduce the intensity of competition between banks."

The goal of the committee, as defined in its letter of appointment, is to examine and recommend various means and measures for the increase of competition in the Israeli banking market. The committee will consider various means of simplifying banking products, enhancing customers' bargaining power, and improving the quality and sophistication of credit data services for the households and small business sectors.

The recommendations of the committee, as published in an interim report on July 16, 2012, can be classified into three categories:

Measures with structural significance – Measures aimed at intervention in the structure of the various aspects of the industry, such as an increase of the number of competitors in the industry, variety in the nature of occupation of the competitors, reduction in size of competitors, and more. This type of intervention is designed to remove entry barriers to the industry and expand the range of competitors.
Measures for the removal of barriers to competition within the system – Measures applied, in view of the market structure and players, to increase competition between banks, by reducing and removing barriers to transition and transfer of information within the banking system, and in certain segments to increase competition with competitors outside the system, through various means such as the reduction of search and comparison costs, reduction of transfer costs, increased transparency, improved geographical accessibility, and more.
Localized measures concerning price supervision and stronger enforcement – Measures reflecting intervention in results, particularly in the prices set by the banks, such as changes in the structure and pricing of fees.

The Bank is currently working to map and examine the overall implications for its revenues, schedules for implementation, business and operational significance, and other long-term consequences.

The submission and publication of the interim report mark the completion of the first stage of the committee's work. Before consolidating its recommendations into a final report, the committee is awaiting comments from the public, within thirty days; these will be taken into consideration in formulating the final version of the report.

Further to the interim report, on August 21, 2012, the Supervisor issued a draft amendment of the Banking Rules (Service to Customers) (Fees), 2008, reflecting the main points of the recommendations in the interim report concerning fees. In the draft, the Supervisor orders the cancellation of numerous fees, including fees for information cards and cash-withdrawal cards, the fee for changing credit-card debit dates, and account-management fees for small businesses. The exemption from credit and collateral processing fees has been increased from NIS 50,000 to NIS 100,000. Management fees for T-bills (Makams) and money-market funds have been cancelled; the minimum fee for management of securities deposits has been cancelled; and more. The final version of these rules will be established following examination of the responses submitted to the recommendations in the interim report.

According to the Bank's estimates, approval of the recommendations in the interim report, as proposed, including the revisions set forth in the draft amendment to the Banking Rules, as described above, would have a material negative impact on the results of its operations.

Legal Proceedings

See Note 6C to the Condensed Financial Statements.

The Private Banking Segment

Developments in the Segment's Markets or Changes in the Profile of its Customers

The second quarter of 2012 was marked by exceptionally low turnovers in Tel Aviv 25 stocks, with investors clinging to linked and unlinked government bonds. The crisis in Europe was reflected in continued appreciation of the US dollar and depreciation of the Euro. The Bank's customers have been moderating equity diversification overseas and have not expanded their equity investments in Israel. An atmosphere of caution is apparent, due to the tightening regulation, unstable geopolitical environment, and concerns over developments in the global financial debt crisis.

	For the six months ended June 30, 2012
		Activity in Israel				Activity abroad
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Banking and financial services	Capital market(1)	Total
				NIS millions
Net interest income:
- From externals	)769(	13	8	239	25	-	)484(
- Inter-segmental	1,261	-	-	)215(	64	-	1,110
Total	492	13	8	24	89	-	626
Non-interest income:
- From externals	123	162	298	3	102	85	773
- Inter-segmental	)16(	-	)78(	1	-	)5(	)98(
Total income	599	175	228	28	191	80	1,301
Provision for credit losses	1	11	-	1	2	-	15
Operating and other expenses:
- From externals	492	114	153	11	177	88	1,035
- Inter-segmental	14	-	-	-	-	-	14
Profit (loss) before taxes	92	50	75	16	12	)8(	237
Provision for taxes (tax benefit) on profit (loss)	32	17	26	6	4	)4(	81
Net profit (loss):
Before attribution to non-controlling interests	60	33	49	10	8	(4)	156
Attributed to non-controlling interests	-	)1(	-	-	-	-	)1(
Attributed to shareholders of the Bank	60	32	49	10	8	)4(	155
Return on equity (net profit attributed to shareholders of the Bank as a percentage of average equity)(2)	24.5%	28.3%	-	4.1%	3.2%	-	18.4%
Average balance of assets	7,532	3,270	-	11,308	6,845	-	28,955
Average balance of liabilities	103,631	-	-	-	20,409	-	124,040
Average balance of risk-adjusted assets	6,427	2,988	-	6,047	5,841	-	21,303
Average balance of mutual funds	-	-	30,721	-	-	671	31,392
Average balance of other assets
under management	-	-	222	-	-	961	1,183
Average balance of securities in custody	-	-	73,262	-	-	30,643	103,905
Balance of credit to the public	7,591	3,263	-	11,861	7,067	-	29,782
Balance of deposits from the public	106,958	-	-	-	21,309	-	128,267

Condensed operating results and principal data of the Private Banking Segment:

(1) Distribution fees for financial products and securities activity.

(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.

			For the six months ended June 30, 2011*
		Activity in Israel				Activity abroad
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Banking and financial services	Capital market(1)	Total
				NIS millions
Net interest income:
- From externals	)634(	9	10	189	19	-	)407(
- Inter-segmental	1,113	-	-	)172(	73	-	1,014
Total	479	9	10	17	92	-	607
Non-interest income:
- From externals	133	152	331	5	79	92	792
- Inter-segmental	)17(	-	)87(	1	-	)2(	)105(
Total income	595	161	254	23	171	90	1,294
Provision for credit losses	25	13	-	6	1	-	45
Operating and other expenses:
- From externals	507	103	159	11	156	98	1,034
- Inter-segmental	14	-	-	-	-	-	14
Profit (loss) before taxes	49	45	95	6	14	)8(	201
Provision for taxes (tax benefit) on profit (loss)	17	16	33	2	5	)3(	70
Net profit (loss):
Attributed to shareholders of the Bank	32	29	62	4	9	)5(	131
Return on equity (net profit attributed to shareholders of the Bank as a percentage of average equity)**(2)	13.1%	25.9%	-	1.9%	4.5%	-	17.4%
Average balance of assets	6,963	3,085	-	9,325	5,869	-	25,242
Average balance of liabilities	91,388	-	-		19,571	-	110,959
Average balance of risk-adjusted assets	6,204	2,920	-	5,267	5,225	-	19,616
Average balance of mutual funds	-	-	31,866	-	-	1,382	33,248
Average balance of other assets under management	-	-	245	-	-	1,090	1,335
Average balance of securities in custody	-	-	73,769	-	-	28,282	102,051
Balance of credit to the public	7,063	3,089	-	9,983	5,951	-	26,086
Balance of deposits from the public**	93,202	-	-	-	19,705	-	112,907

** Reclassified.

(1) Distribution fees for financial products and securities activity.

(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.

				For the three months ended June 30, 2012
		Activity in Israel				Activity abroad
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Banking and financial services	Capital market(1)	Total
				NIS millions
Net interest income:
- From externals	)411(	4	5	165	8	-	)229(
- Inter-segmental	656	-	-	)152(	36	-	540
Total	245	4	5	13	44	-	311
Non-interest income:
- From externals	52	84	152	1	54	43	386
- Inter-segmental	)8(	-	)38(	-	-	)3(	)49(
Total income	289	88	119	14	98	40	648
Provision for credit losses	3	6	-	1	2	-	12
Operating and other expenses:
- From externals	246	57	85	7	90	43	528
- Inter-segmental	8	-	-	-	-	-	8
Profit (loss) before taxes	32	25	34	6	6	)3(	100
Provision for taxes (tax benefit) on profit (loss)	12	8	12	3	2	)2(	35
Net profit (loss):
Before attribution to non-controlling interests	20	17	22	3	4	)1(	65
Attributed to non-controlling interests	-	)1(	-	-	-	-	)1(
Attributed to shareholders of the Bank	20	16	22	3	4	)1(	64

				For the three months ended March 31, 2012
	Activity in Israel					Activity abroad
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Banking and financial services	Capital market(1)	Total
				NIS millions
Net interest income:
- From externals	)358(	9	3	74	17	-	)255(
- Inter-segmental	605	-	-	)63(	28	-	570
Total	247	9	3	11	45	-	315
Non-interest income:
- From externals	71	78	146	2	48	42	387
- Inter-segmental	)8(	-	)40(	1	-	)2(	)49(
Total income	310	87	109	14	93	40	653
Provision for credit losses (reduction of provision)	)2(	5	-	-	-	-	3
Operating and other expenses:
- From externals	246	57	68	4	87	45	507
- Inter-segmental	6	-	-	-	-	-	6
Profit (loss) before taxes	60	25	41	10	6	)5(	137
Provision for taxes (tax benefit) on profit (loss)	20	9	14	3	2	)2(	46
Net profit (loss):
Attributed to shareholders of the Bank	40	16	27	7	4	)3(	91
Balance of credit to the public	7,426	3,208	-	11,173	6,689	-	28,496
Balance of deposits from the public	103,653	-	-	-	19,762	-	123,415

			For the three months ended June 30, 2011*
		Activity in Israel				Activity abroad
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Banking and financial services	Capital market(1)	Total
				NIS millions
Net interest income:
- From externals	)369(	5	5	130	25	-	)204(
- Inter-segmental	620	-	-	)123(	25	-	522
Total	251	5	5	7	50	-	318
Non-interest income:
- From externals	65	78	156	3	39	44	385
- Inter-segmental	)8(	-	)40(	1	-	-	)47(
Total income	308	83	121	11	89	44	656
Provision for credit losses	6	6	-	6	4	-	22
Operating and other expenses:
- From externals	240	52	76	8	81	49	506
- Inter-segmental	8	-	-	-	-	-	8
Profit (loss) before taxes	54	25	45	)3(	4	)5(	120
Provision for taxes (tax benefit) on profit (loss)	19	9	15	)1(	1	)2(	41
Net profit (loss):
Attributed to shareholders of the Bank	35	16	30	)2(	3	)3(	79

Principal Changes in Net Profit and Balance sheet Balances

Net profit attributed to the shareholders of the Bank in the Private Banking Segment totaled NIS 155 million in the first half of 2012, compared with NIS 131 million in the same period last year. The increase mainly resulted from an increase in net interest income and a decrease in operating expenses. This increase was offset by a decrease in non-interest income.

Net interest income totaled NIS 626 million in the first half of 2012, compared with NIS 607 million in the same period last year. The increase mainly resulted from an increase in the volume of credit and deposit activity. This increase was offset by a decrease in financial spreads and by the decrease in the interest rate.

Non-interest income of the segment totaled NIS 675 million in the first half of 2012, compared with NIS 687 million in the same period last year. The decrease resulted from a decrease in income from the capital market, and was offset by an increase in income from credit cards.

The provision for credit losses totaled NIS 15 million in the first half of 2012, compared with NIS 45 million in the same period last year. The decrease resulted from a decrease in the collective provision.

The segment's expenses totaled NIS 1,049 million in the first half of 2012, compared with NIS 1,048 million in the same period last year.

Net credit to the public totaled approximately NIS 29.8 billion as at June 30, 2012, compared with NIS 28.5 billion as at December 31, 2011. The increase mainly resulted from an increase in housing loans.

Housing credit in Israel totaled approximately NIS 11.9 billion as at June 30, 2012, compared with approximately NIS 10.8 billion as at December 31, 2011.

Deposits from the public totaled approximately NIS 128.3 billion as at June 30, 2012, compared with approximately NIS 124.4 billion as at December 31, 2011.

The balance of off-balance sheet monetary assets of the customers of the Bank Group attributed to this segment as at June 30, 2012 totaled approximately NIS 146.5 billion, compared with approximately NIS 133.2 billion as at December 31, 2011. This balance includes customers' holdings in securities portfolios and mutual funds.

Technological Changes that May Have a Material Impact on the Segment

During the second quarter of 2012, the Bank expanded its value offer for private banking and Platinum clients who are registered for Hapoalim Online, offering them comprehensive service through the My Advisor application. For the first time, customers can receive all of the information relevant to their investment portfolios through a special interface on the Bank's website, including data on returns of the portfolio. The launch of this service joins a series of steps led by the Bank in the area of investment advising, with the aim of moving banking in Israel forward using smart tools for better financial conduct, and strengthening the perception of the Bank and of its investment advising system in particular as a partner in the customer's financial future.

The Committee on Competition

See the Households Segment section above.

Legal Proceedings

See Note 6C to the Condensed Financial Statements.

The Small Business Segment

Condensed operating results and principal data of the Small Business Segment:

	For the six months ended June 30, 2012
			Activity in Israel
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Total
			NIS millions
Net interest income:
- From externals	504	29	1	84	618
- Inter-segmental	16	-	-	)68(	)52(
Total	520	29	1	16	566
Non-interest income:
- From externals	232	56	21	2	311
- Inter-segmental	)22(	-	)6(	-	)28(
Total income	730	85	16	18	849
Provision for credit losses	67	3	-	-	70
Operating and other expenses:
- From externals	400	38	19	3	460
- Inter-segmental	)2(	-	-	-	)2(
Profit (loss) before taxes	265	44	)3(	15	321
Provision for taxes (tax benefit)
on profit (loss)	92	15	)1(	5	111
Net profit (loss):
Attributed to shareholders of the Bank	173	29	)2(	10	210
Return on equity (net profit attributed to shareholders of the Bank as a percentage
of average equity)(2)	23.3%	39.2%	-	6.0%	21.3%
Average balance of assets	18,116	1,196	-	3,812	23,124
Average balance of liabilities	23,737	2,183	-	-	25,920
Average balance of risk-adjusted assets	20,049	1,417	-	4,153	25,619
Average balance of mutual funds	-	-	2,577	-	2,577
Average balance of other assets
under management	-	-	22	-	22
Average balance of securities in custody	-	-	7,872	-	7,872
Balance of credit to the public	18,161	1,126	-	3,952	23,239
Balance of deposits from the public	24,594	-	-	-	24,594

(1) Distribution fees for financial products and securities activity.

(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.

	For the six months ended June 30, 2011*
			Activity in Israel
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Total
			NIS millions
Net interest income:
- From externals	495	20	1	62	578
- Inter-segmental	11	-	-	)55(	)44(
Total	506	20	1	7	534
Non-interest income:
- From externals	231	53	27	1	312
- Inter-segmental	)24(	-	)8(	-	)32(
Total income	713	73	20	8	814
Provision for credit losses	57	4	-	1	62
Operating and other expenses:
- From externals	421	34	20	3	478
- Inter-segmental	)18(	-	-	-	)18(
Profit before taxes	253	35	-	4	292
Provision for taxes on profit	88	12	-	1	101
Net profit:
Attributed to shareholders of the Bank	165	23	-	3	191
Return on equity (net profit attributed to shareholders of the Bank as a percentage of average equity)**(2)	22.0%	35.1%	-	2.1%	20.3%

Average balance of assets	17,313	1,094	-	3,115	21,522
Average balance of liabilities	20,706	2,042	-	-	22,748
Average balance of risk-adjusted assets	19,359	1,300	-	3,577	24,236
Average balance of mutual funds	-	-	3,085	-	3,085
Average balance of other assets under management	-	-	18	-	18
Average balance of securities in custody	-	-	9,507	-	9,507
Balance of credit to the public	17,461	1,096	-	3,340	21,897
Balance of deposits from the public**	20,651	-	-	-	20,651

(1) Distribution fees for financial products and securities activity.

(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.

	For the three months ended June 30, 2012
			Activity in Israel
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Total
			NIS millions
Net interest income:
- From externals	242	13	1	56	312
- Inter-segmental	20	-	-	)47(	)27(
Total	262	13	1	9	285
Non-interest income:
- From externals	112	28	10	2	152
- Inter-segmental	)11(	-	)3(	-	)14(
Total income	363	41	8	11	423
Provision for credit losses	55	1	-	-	56
Operating and other expenses:
- From externals	200	19	9	2	230
Profit (loss) before taxes	108	21	)1(	9	137
Provision for taxes on profit (loss)	38	7	-	3	48
Net profit (loss):
Attributed to shareholders of the Bank	70	14	)1(	6	89

	For the three months ended March 31, 2012
			Activity in Israel
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Total
			NIS millions
Net interest income:
- From externals	262	16	-	28	306
- Inter-segmental	)4(		-	)21(	)25(
Total	258	16	-	7	281
Non-interest income:
- From externals	120	28	11	-	159
- Inter-segmental	)11(	-	)3(	-	)14(
Total income	367	44	8	7	426
Provision for credit losses	12	2	-	-	14
Operating and other expenses:
- From externals	200	19	10	1	230
- Inter-segmental	)2(	-	-	-	)2(
Profit (loss) before taxes	157	23	)2(	6	184
Provision for taxes (tax benefit) on profit (loss)	54	8	)1(	2	63
Net profit (loss):
Attributed to shareholders of the Bank	103	15	)1(	4	121
Balance of credit to the public	18,132	1,138	-	3,799	23,069
Balance of deposits from the public	23,473	-	-	-	23,473

	For the three months ended June 30, 2011*
			Activity in Israel
	Banking and financial services	Credit cards	Capital market(1)	Housing loans	Total
			NIS millions
Net interest income:
- From externals	258	12	-	43	313
- Inter-segmental	3	-	-	)42(	)39(
Total	261	12	-	1	274
Non-interest income:
- From externals	113	27	13	1	154
- Inter-segmental	)12(	-	)4(	-	)16(
Total income	362	39	9	2	412
Provision for credit losses	51	2	-	1	54
Operating and other expenses:
- From externals	201	16	11	2	230
- Inter-segmental	)8(	-	-	-	)8(
Profit (loss) before taxes	118	21	)2(	)1(	136
Provision for taxes (tax benefit) on profit (loss)	39	7	)1(	)1(	44
Net profit (loss):
Attributed to shareholders of the Bank	79	14	)1(	-	92

Principal Changes in Net Profit and Balance sheet Balances

Net profit attributed to the shareholders of the Bank in the Small Business Segment in the first half of 2012 totaled NIS 210 million, compared with NIS 191 million in the same period last year. The increase mainly resulted from an increase in net interest income. This increase was offset by an increase in the provision for credit losses.

Net interest income in the first half of 2012 totaled NIS 566 million, compared with NIS 534 million in the same period last year. The 6.0% increase mainly resulted from an increase in the volume of credit and deposit activity.

Non-interest income of the segment in the first half of 2012 totaled NIS 283 million, compared with NIS 280 million in the same period last year.

The provision for credit losses totaled NIS 70 million in the first half of 2012, compared with NIS 62 million in the same period last year.

The segment's expenses totaled NIS 458 million in the first half of 2012, compared with NIS 460 million in the same period last year.

Net credit to the public as at June 30, 2012 totaled approximately NIS 23.2 billion, compared with approximately NIS 22.9 billion as at December 31, 2011.

Deposits from the public as at June 30, 2012 totaled approximately NIS 24.6 billion, compared with approximately NIS 23.5 billion as at December 31, 2011.

Activities

The Small Business Segment is an important element of the Bank's activity in 2012. Accordingly, the Bank will provide credit in a total amount of approximately NIS 2 billion to small businesses, through various funds, including the Bank's specialized Poalim for Growth fund, the Bank's win of the small and mid-sized businesses fund backed by the state, and sector-based funds to be established by the Bank in cooperation with leading market players.

The Committee on Competition

Further to the description in the Households Segment section, the interim report also includes, "Various measures have been applied in recent years to assist the small business sector, including in the area of banking."

The committee's recommendations concerning small businesses can be classified into two complementary categories: 1. Recommendations focused on the small business sector – The cost of banking services, cost of early repayment of business credit, easing the process of repaying business credit, uniform definitions for statistical purposes, and creation of an infrastructure for the collection of data for future analysis.

Recommendations for the retail sector (households and small businesses) – The report contains additional recommendations addressing the regulation of activity of all customers, encompassing competitive aspects as well as consumer aspects; these recommendations are expected to affect the small and mid-sized business sector as well.

For further details, see the Households Segment section above.

Legal Proceedings

See Note 6C to the Condensed Financial Statements.

The Commercial Segment

Condensed operating results and principal data of the Commercial Segment:

			For the six months ended June 30, 2012
	Activity in Israel			Activity abroad
	Banking and financial services(1)	Construction and real estate	Banking and financial services(1)	Construction and real estate	Total
			NIS millions
Net interest income:
- From externals	317	177	85	27	606
- Inter-segmental	)102(	)67(	)54(	)19(	)242(
Total	215	110	31	8	364
Non-interest income:
- From externals	86	43	9	3	141
- Inter-segmental	)16(	-	-	-	)16(
Total income	285	153	40	11	489
Provision for credit losses (reduction of provision)	84	)46(	11	2	51
Operating and other expenses:
- From externals	169	31	21	5	226
- Inter-segmental	)4(	)1(	-	-	)5(
Profit before taxes	36	169	8	4	217
Provision for taxes on profit	13	59	4	1	77
Net profit:
Before attribution to non-controlling interests	23	110	4	3	140
Attributed to non-controlling interests	-	-	)1(	-	)1(

Attributed to shareholders of the Bank	23	110	3	3	139
Return on equity (net profit attributed to shareholders of the Bank as a percentage
of average equity)(2)	3.4%	25.3%	2.5%	12.4%	11.0%
Average balance of assets	13,884	8,939	2,199	497	25,519
Average balance of liabilities	13,770	1,879	107	32	15,788
Average balance of risk-adjusted assets	17,093	11,272	2,707	627	31,699
Average balance of mutual funds	1,365	-	-	-	1,365
Average balance of other assets
under management	13	-	-	-	13
Average balance of securities in custody	10,540	-	-	-	10,540
Balance of credit to the public	13,864	8,937	2,060	455	25,316
Balance of deposits from the public	11,344	2,002	118	27	13,491

(1) Includes activity in the area of credit cards and the capital market.

(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.

			For the six months ended June 30, 2011*
	Activity in Israel			Activity abroad
	Banking and financial services(1)	Construction and real estate	Banking and financial services(1)	Construction and real estate	Total
			NIS millions
Net interest income:
- From externals	325	168	80	23	596
- Inter-segmental	)127(	)67(	)41(	)15(	)250(
Total	198	101	39	8	346
Non-interest income:
- From externals	86	41	3	1	131
- Inter-segmental	)13(	-	-	-	)13(
Total income	271	142	42	9	464
Provision for credit losses	61	4	-	-	65
Operating and other expenses:
- From externals	137	25	15	2	179
- Inter-segmental	7	1	-	-	8
Profit before taxes	66	112	27	7	212
Provision for taxes on profit	23	39	9	2	73
Net profit:
Before attribution to non-controlling interests	43	73	18	5	139
Attributed to non-controlling interests	-	-	)6(	)1(	)7(
Attributed to shareholders of the Bank	43	73	12	4	132
Return on equity (net profit attributed to shareholders of the Bank as a percentage of average equity)**(2)	6.7%	20.4%	12.0%	16.0%	11.8%
Average balance of assets	12,884	7,682	1,986	571	23,123
Average balance of liabilities	10,861	1,946	134	14	12,955
Average balance of risk-adjusted assets	15,927	9,259	2,494	671	28,351
Average balance of mutual funds	1,697	-	-	-	1,697
Average balance of other assets
under management	13	-	-	-	13
Average balance of securities in custody	9,390	-	-	-	9,390
Balance of credit to the public	12,710	7,994	1,792	573	23,069
Balance of deposits from the public**	9,728	2,155	86	21	11,990

** Reclassified.

(1) Includes activity in the area of credit cards and the capital market.

(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.

		For the three months ended June 30, 2012
	Activity in Israel			Activity abroad
	Banking and financial services(1)	Construction and real estate	Banking and financial services(1)	Construction and real estate	Total
			NIS millions
Net interest income:
- From externals	155	104	45	14	318
- Inter-segmental	)45(	)47(	)29(	)10(	)131(
Total	110	57	16	4	187
Non-interest income:
- From externals	41	19	4	2	66
- Inter-segmental	)8(	-	-	-	)8(
Total income	143	76	20	6	245
Provision for credit losses (reduction of provision)	29	)22(	5	1	13
Operating and other expenses:
- From externals	87	16	11	3	117
- Inter-segmental	)3(	)1(	-	-	)4(
Profit before taxes	30	83	4	2	119
Provision for taxes on profit	11	30	3	1	45
Net profit:
Attributed to shareholders of the Bank	19	53	1	1	74

		For the three months ended March 31, 2012
	Activity in Israel			Activity abroad
	Banking and financial services(1)	Construction and real estate	Banking and financial services(1)	Construction and real estate	Total
			NIS millions
Net interest income:
- From externals	162	73	40	13	288
- Inter-segmental	)57(	)20(	)25(	)9(	)111(
Total	105	53	15	4	177
Non-interest income:
- From externals	45	24	5	1	75
- Inter-segmental	)8(	-	-	-	)8(
Total income	142	77	20	5	244
Provision for credit losses (reduction of provision)	55	)24(	6	1	38
Operating and other expenses:
- From externals	82	15	10	2	109
- Inter-segmental	)1(	-	-	-	)1(
Profit before taxes	6	86	4	2	98
Provision for taxes on profit	2	29	1	-	32
Net profit:
Before attribution to non-controlling interests	4	57	3	2	66
Attributed to non-controlling interests	-	-	)1(	-	)1(
Attributed to shareholders of the Bank	4	57	2	2	65
Balance of credit to the public	13,589	8,763	1,908	510	24,770
Balance of deposits from the public	11,438	1,866	79	26	13,409

			For the three months ended June 30, 2011*
	Activity in Israel			Activity abroad
	Banking and financial services(1)	Construction and real estate	Banking and financial services(1)	Construction and real estate	Total
			NIS millions
Net interest income:
- From externals	168	99	39	13	319
- Inter-segmental	)60(	)47(	)19(	)7(	)133(
Total	108	52	20	6	186
Non-interest income:
- From externals	41	21	2	1	65
- Inter-segmental	)7(	-	-	-	)7(
Total income	142	73	22	7	244
Provision for credit losses (reduction of provision)	19	)3(	)4(	)1(	11
Operating and other expenses:
- From externals	64	12	7	1	84
- Inter-segmental	4	1	-	-	5
Profit before taxes	55	63	19	7	144
Provision for taxes on profit	20	21	6	1	48
Net profit:
Before attribution to non-controlling interests	35	42	13	6	96
Attributed to non-controlling interests	-	-	)4(	)1(	)5(
Attributed to shareholders of the Bank	35	42	9	5	91

Principal Changes in Net Profit and Balance Sheet Balances

Net profit attributed to shareholders of the Bank in the Commercial Segment in the first half of 2012 totaled NIS 139 million, compared with NIS 132 million in the same period last year. The increase mainly resulted from an increase in net interest income and a decrease in the provision for credit losses. This increase was offset by an increase in operating expenses attributed to this segment.

Net interest income of the segment in the first half of 2012 totaled NIS 364 million, compared with NIS 346 million in the same period last year. The increase mainly resulted from an increase in credit balances and an increase in financial spreads.

Non-interest income of the segment totaled NIS 125 million in the first half of 2012, compared with NIS 118 million in the same period last year. The increase mainly resulted from an increase in fees from financing transactions.

The provision for credit losses totaled NIS 51 million in the first half of 2012, compared with NIS 65 million in the same period last year.

The segment's operating and other expenses totaled NIS 221 million in the first half of 2012, compared with NIS 187 million in the same period last year. The increase mainly resulted from an increase in the direct expenses of the segment, due to the expansion of the network of business branches during the year.

Net credit to the public totaled approximately NIS 25.3 billion as at June 30, 2012, compared with approximately NIS 24.4 billion as at December 31, 2011.

Deposits from the public totaled approximately NIS 13.5 billion as at June 30, 2012, compared with approximately NIS 13.7 billion as at December 31, 2011.

Legal Proceedings

See Note 6C to the Condensed Financial Statements.

The Corporate Segment

Condensed operating results and principal data of the Corporate Segment:

Activity in Israel Banking and financial services(1) Net interest income: - From externals 938 - Inter-segmental )270( Total 668 Non-interest income: - From externals 255 - Inter-segmental - Total income 923 Provision for credit losses (reduction of provision) 452 Operating and other expenses: - From externals 238	Construction and real estate	Banking and financial services(1)	Activity abroad Construction and	Total

			real estate
		NIS millions

	732	126	64	1,860
	)394(	)49(	)24(	)737(
	338	77	40	1,123

	86	98	4	443
	-	-	-	-
	424	175	44	1,566
	)61(	)8(	)1(	382

	53	126	20	437
- Inter-segmental 33	8	-	-	41
200 Profit before taxes	424	57	25	706
Provision for taxes on profit 69	147	20	8	244
Net profit:
Attributed to shareholders of the Bank 131	277	37	17	462
Return on equity (net profit attributed to shareholders of the Bank as a percentage of average equity)(2) 4.4%	15.6%	8.6%	10.6%	8.6%
Average balance of assets 57,629	35,910	8,239	3,049	104,827
52,816 Average balance of liabilities	6,864	3,644	21	63,345
74,819 Average balance of risk-adjusted assets	45,281	10,143	3,845	134,088
Average balance of mutual funds 2,048	-	-	-	2,048
Average balance of other assets 28 under management	-	-	-	28
Average balance of securities in custody 525,862	-	-	-	525,862
Balance of credit to the public 57,452
Balance of deposits from the public 39,223 6,452	34,896	8,212	3,044	103,604

(1) Includes activity in the area of credit cards and the capital market.

(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.

		For the six months ended June 30, 2011*
	Activity in Israel			Activity abroad
	Banking and financial services(1)	Construction and real estate	Banking and financial services(1)	Construction and real estate	Total
			NIS millions
Net interest income:
- From externals	667	895	100	52	1,714
- Inter-segmental	)80(	)589(	)33(	)22(	)724(
Total	587	306	67	30	990
Non-interest income:
- From externals	331	69	77	3	480
- Inter-segmental	1	)1(	-	-	-
Total income	919	374	144	33	1,470
Provision for credit losses (reduction of provision)	)239(	273	)4(	-	30
Operating and other expenses:
- From externals	196	42	101	16	355
- Inter-segmental	33	9	-	-	42
Profit before taxes	929	50	47	17	1,043
Provision for taxes on profit	321	17	18	6	362
Net profit:
Attributed to shareholders of the Bank	608	33	29	11	681
Return on equity (net profit attributed to shareholders of the Bank as a percentage of average equity)**(2)	22.4%	1.9%	8.8%	9.0%	13.9%
Average balance of assets	54,204	35,662	6,882	2,689	99,437
Average balance of liabilities	51,858	5,923	2,470	29	60,280
Average balance of risk-adjusted assets	70,301	42,915	8,643	3,158	125,017
Average balance of mutual funds	7,003	-	-	-	7,003
Average balance of other assets under management	28	-	-	-	28
Average balance of securities in custody	537,174	-	-	-	537,174
Balance of credit to the public	55,336	34,880	6,248	2,639	99,103
Balance of deposits from the public**	39,132	6,215	2,287	37	47,671

** Reclassified.

(1) Includes activity in the area of credit cards and the capital market.

(2) In activities to which risk-adjusted assets cannot be attributed, return on equity was not calculated.

		For the three months ended June 30, 2012
	Activity in Israel			Activity abroad
	Banking and financial services(1)	Construction and real estate	Banking and financial services(1)	Construction and real estate	Total
			NIS millions
Net interest income:
- From externals	493	451	66	34	1,044
- Inter-segmental	)148(	)270(	)25(	)11(	)454(
Total	345	181	41	23	590
Non-interest income:
- From externals	108	44	38	3	193
- Inter-segmental	2	-	-	-	2
Total income	455	225	79	26	785
Provision for credit losses (reduction of provision)	204	)19(	)7(	)1(	177
Operating and other expenses:
- From externals	123	27	57	13	220
- Inter-segmental	16	4	-	-	20
Profit before taxes	112	213	29	14	368
Provision for taxes on profit	39	75	10	4	128
Net profit:
Attributed to shareholders of the Bank	73	138	19	10	240

			For the three months ended March 31, 2012
	Activity in Israel			Activity abroad
	Banking and financial services(1)	Construction and real estate	Banking and financial services(1)	Construction and real estate	Total
			NIS millions
Net interest income:
- From externals	445	281	60	30	816
- Inter-segmental	)122(	)124(	)24(	)13(	)283(
Total	323	157	36	17	533
Non-interest income:
- From externals	147	42	60	1	250
- Inter-segmental	)2(	-	-	-	)2(
Total income	468	199	96	18	781
Provision for credit losses (reduction of provision)	248	)42(	)1(	-	205
Operating and other expenses:
- From externals	115	26	69	7	217
- Inter-segmental	17	4	-	-	21
Profit before taxes	88	211	28	11	338
Provision for taxes on profit	30	72	10	4	116
Net profit:
Attributed to shareholders of the Bank	58	139	18	7	222
Balance of credit to the public	57,799	34,159	7,919	2,698	102,575
Balance of deposits from the public	40,612	5,967	3,303	15	49,897

		For the three months ended June 30, 2011*
	Activity in Israel			Activity abroad
	Banking and financial services(1)	Construction and real estate	Banking and financial services(1)	Construction and real estate	Total
			NIS millions
Net interest income:
- From externals	417	439	50	26	932
- Inter-segmental	)115(	)276(	)12(	)10(	)413(
Total	302	163	38	16	519
Non-interest income:
- From externals	127	35	41	1	204
- Inter-segmental	2	)1(	-	-	1
Total income	431	197	79	17	724
Provision for credit losses (reduction of provision)	)140(	328	)3(	-	185
Operating and other expenses:
- From externals	92	20	53	8	173
- Inter-segmental	16	4	-	-	20
Profit before taxes (loss)	463	)155(	29	9	346
Provision for taxes (tax benefit) on profit (loss)	156	)57(	11	4	114
Net profit (loss):
Attributed to shareholders of the Bank	307	)98(	18	5	232

Principal Changes in Net Profit and Balance sheet Balances

Net profit attributed to shareholders of the Bank in the Corporate Segment in the first half of 2012 totaled NIS 462 million, compared with NIS 681 million in the same period last year. The decrease in net profit resulted from an increase in the provision for credit losses, an increase in operating expenses, and a decrease in non-interest income. This decrease was offset by an increase in net interest income.

Net interest income of the segment totaled NIS 1,123 million in the first half of 2012, compared with NIS 990 million in the same period last year. The 13.4% increase mainly resulted from an increase in the average credit balance compared to the same period last year and from an increase in financial spreads.

Non-interest income totaled NIS 443 million in the first half of 2012, compared with NIS 480 million in the same period last year. The 7.7% decrease resulted from a decrease in income from credit handling, mainly due to nonrecurring fees for the organization of syndications recorded in the same period last year (income under this item totaled NIS 43 million in the first half of 2012, compared with NIS 72 million in the same period last year), as well as a decrease in income from the capital market. This decrease was offset by an increase in operating income overseas and by an increase in fees from financing transactions.

The provision for credit losses in the first half of 2012 totaled NIS 382 million, compared with NIS 30 million in the same period last year. The increase mainly resulted from a provision on an individual basis recorded in the first half of 2012, compared with income recorded under this item in the same period last year. A decrease in the provision on a collective basis offset this increase.

Operating and other expenses totaled NIS 478 million in the first half of 2012, compared with NIS 397 million in the same period last year.

Net credit to the public totaled approximately NIS 103.6 billion as at June 30, 2012, compared with approximately NIS 104.8 billion as at December 31, 2011.

Deposits from the public totaled approximately NIS 49.7 billion as at June 30, 2012, compared with approximately NIS 52.8 billion as at December 31, 2011.

The balance of off-balance sheet monetary assets of the customers of the Bank Group attributed to this segment as at June 30, 2012 totaled approximately NIS 517.4 billion, compared with approximately NIS 514.0 billion as at December 31, 2011. This balance includes customers' holdings in securities portfolios and mutual funds.

Legal Proceedings

See Note 6C to the Condensed Financial Statements.

The Financial Management Segment

General and Structure

Further to the information provided in the section on the Financial Management Segment in the Annual Financial Statements for 2011, responsibility for brokerage activities, securities operation and clearing, control over Maof trading, and services for financial asset managers was transferred from the Client Asset Management Area to the Financial Markets Area.

Condensed operating results of the Financial Management Segment:

	For the six months ended
	June 30, 2012	June 30, 2011*
	NIS millions
Net interest income:
- From externals	)221(	)119(
- Inter-segmental	535	556
Total	314	437
Non-interest income:
- From externals	65	164
Total income	379	601
Operating and other expenses:
- From externals	226	233
Profit before taxes	153	368
Provision for taxes (tax benefit) on profit	)9(	126
Profit after taxes	162	242
The Bank's share in profits of equity-basis investees, after taxes	-	2
Net profit:
Before attribution to non-controlling interests	162	244
Attributed to non-controlling interests	)28(	21
Attributed to shareholders of the Bank	134	265

Condensed operating results of the Financial Management Segment (continued):

	For the three months ended June 30, March31, 2012 2012 NIS millions )304( 83 519 16 215 99 )93( 158 122 257 106 120 16 137 )64( 55 80 82 2 )2( 82 80
			June 30, 2011*

Net interest income:
- From externals			)264(
- Inter-segmental			457
Total			193
Non-interest income:
- From externals			)2(
Total income			191
Operating and other expenses:
- From externals			110
Profit before taxes			81
Provision for taxes (tax benefit) on profit			20
Profit after taxes			61
The Bank's share in profits (losses) of equity-basis investees, after taxes			1
Net profit:
Before attribution to non-controlling interests			62
Attributed to non-controlling interests	)10(	)18(	18
Attributed to shareholders of the Bank	72	62	80

Principal Changes in Net Profit and Balance Sheet Balances

Net profit attributed to shareholders of the Bank in the Financial Management Segment in the first half of 2012 totaled NIS 134 million, compared with profit in the amount of NIS 265 million in the same period last year.

Total income attributed to this segment totaled NIS 379 million in the first half of 2012, compared with NIS 601 million in the same period last year. The decrease mainly resulted from adjustments to fair value of derivative instruments, which amounted to profit in the amount of NIS 79 million, compared with profit in the amount of NIS 343 million in the first half of 2011 and from financing expenses resulting from hedging of investments overseas, compared with income in the same period last year. By contrast, profit from bonds attributed to this segment increased.

The tax benefit in the first half of 2012 mainly resulted from the effect of the change in foreign-exchange rates on recorded investments in consolidated companies overseas that are not included in the tax base. This effect offset the decrease in net financing profit arising from expenses for hedging of investments overseas.

Others and Adjustments

This section includes all other activities of the Bank Group, each of which does not form a reportable segment under the Supervisor of Banks' directives. These activities mainly include investment banking, services for financial asset managers, trust activity, capital market activity not attributed to the banking segments, and activity in credit cards in respect of the activity of customers of banks outside the Group and from incoming tourism. This segment also includes income from computer services for companies consolidated in the past. In addition, adjustments of inter-segmental activities are allocated to this section.

Losses attributed to shareholders of the Bank under this section totaled approximately NIS 13 million in the first half of 2012 compared with a profit in the amount of NIS 17 million in the same period last year.

Profit from credit cards in respect of the activity of customers of banks outside the Group and from incoming tourism totaled NIS 13 million in the first half of 2012, compared with profit in the amount of NIS 12 million in the same period last year.

Credit to customers of other banks, which are not part of the Bank Group and with which the Isracard Group has entered into an arrangement, as at June 30, 2012, totaled approximately NIS 4.2 billion, compared with NIS 4.1 billion as at December 31, 2011.

Additional Information Concerning Activity in Certain Products

Credit Cards

General

The Bank Group's principal activities in the area of credit cards are conducted through companies operating in the area of means of payment under a single managerial and operational umbrella, referred to hereinafter as the "Isracard Group." The core activity of the Isracard Group is the issuance and clearing of Isracard credit cards, a private brand under its ownership, as well as of MasterCard, Visa, and American Express cards under licensing agreements.

Credit Card Issuance

The Isracard Group issues credit cards to customers of banks that have entered into arrangements with the Isracard Group, including the Bank, Mizrahi Tefahot Bank, First International Bank, Bank Yahav, Bank Otsar Hahayal, Bank Massad, Bank Poaley Agudat Israel Ltd., Bank of Jerusalem Ltd., and Union Bank Ltd. The Isracard Group also issues cards directly to customers ("non-bank cards"), primarily members of various consumer clubs and groups with which the Isracard Group has contracted.

Customers of the Isracard Group in the area of issuance are private customers, employees of corporations, and corporations (as well as corporate purchasing, including B2B – Business to Business payments).

As part of its issuance activity, the Isracard Group issues and operates a range of additional products and services, such as cards providing revolving credit, fuel cards and fuel devices, gift cards, and gift certificates. In addition, the Isracard Group grants general-purpose credit and loans based on credit facilities of credit cards.

In addition to the Bank Group, two credit-card companies controlled by banks currently operate in Israel in the area of issuance: Cartisei Ashrai LeIsrael Ltd. (hereinafter: "CAL"), controlled by Discount Bank, and Leumi Card Ltd. (hereinafter: "Leumi Card"), controlled by Bank Leumi.

The number of cards issued by the Isracard Group as at June 30, 2012 is 3.5 million, compared with 3.4 million cards as at December 31, 2011.

In the first half of 2012, the volume of activity in Isracard Group cards reached NIS 50.3 billion, compared with NIS 46.3 billion in the same period last year.

Credit Card Clearing

In agreements signed for the purpose of providing clearing services, the clearing credit-card company undertakes a commitment to the merchant, subject to fulfillment of the terms of the agreement, to settle the debits to the merchant undertaken by holders of the cards which it clears when purchasing goods or services from the merchant. The Isracard Group also offers merchants a range of additional financial services, such as loans, advances (advancement of payments in respect of transactions executed), and marketing and operational services.

Customers of the Isracard Group in the area of credit-card clearing are numerous diverse merchants that have entered into agreements with it, including various government agencies, as well as companies that provide discounting services to merchants.

The credit-card clearing sector is characterized by a very high level of competition, due to factors including the operation of the local interface for cross-clearing of transactions in MasterCard and Visa credit cards (subsequent to which CAL and Leumi Card began to clear MasterCard cards, and the Isracard Group began to clear Visa cards). In May 2012, the market for clearing of Isracard private brand cards was opened; merchants can now switch clearers of these brands.

Competition in the area of clearing is focused on recruiting new merchants for clearing agreements and retaining existing merchants as customers in the area of clearing. Another aspect of this competition is reflected in the development of financial and operational products and services for merchants, to increase the volume of transactions and/or the amounts of transactions executed with each merchant.

In addition to the Bank Group, the two credit-card companies controlled by banks listed above operate in the area of clearing in Israel.

Additional Activities

In addition to activities related to the issuance and clearing of credit cards, as described above, the Isracard Group has the following additional activities: check settlement guaranteeing and check discounting; granting of consumer credit other than through credit cards; direct sales-slip discounting; and factoring (receivables discounting).

Contribution of Income from Credit Cards

The contribution of income from credit cards to income from fees, included within operating income (before deducting related expenses), totaled NIS 776 million in the first half of 2012, compared with NIS 756 million in the same period last year, an increase of approximately 2.6%.

Legal Proceedings

For details regarding various regulatory issues, see Note 19C to the Annual Financial Statements for 2011. For details regarding claims pending against Isracard, see Note 6C to the Condensed Financial Statements.

Set out below is the distribution of the results of operations and principal data in credit cards, by segment of activity:

				For the six months ended June 30, 2012
	Households Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Financial Management Segment	Incoming tourism and others	Total
					NIS millions
Net interest income:
- From externals	44	13	29	9	-	1	-	96
Non-interest income	286	162	56	6	4	36	262	812
Total income	330	175	85	15	4	37	262	908
Provision for credit losses	18	11	3	-	-	-	-	32
Operating and other expenses	229	114	38	3	2	-	242	628
Profit before taxes	83	50	44	12	2	37	20	248
Provision for taxes on profit	29	17	15	4	1	10	7	83
Net profit:
Before attribution to non-controlling interests	54	33	29	8	1	27	13	165
Attributed to non-controlling interests	)1(	)1(	-	-	-	-	-	)2(
Attributed to shareholders of the Bank	53	32	29	8	1	27	13	163
Average balances
Average balance of assets	5,980	3,270	1,196	217	109	-	4,223	14,995
Average balance of liabilities	-	-	2,183	2,047	9,416	-	268	13,914
Average balance of risk-adjusted assets	5,464	2,988	1,417	134	72	-	-	10,075

Distribution of the results of operations and principal data in credit cards by segments of activity (continued):

				For the six months ended June 30, 2011
	Households Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Financial Management Segment*	Incoming tourism and others	Total
					NIS millions
Net interest income:
- From externals	52	9	20	6	-	8	-	95
Non-interest income	269	152	53	5	4	-	273	756
Total income	321	161	73	11	4	8	273	851
Provision for credit losses	25	13	4	-	-	-	-	42
Operating and other expenses	210	103	34	3	2	-	255	607
Profit before taxes	86	45	35	8	2	8	18	202
Provision for taxes on profit	30	16	12	3	1	3	6	71
Net profit:
Before attribution to non-controlling interests	56	29	23	5	1	5	12	131
Attributed to non-controlling interests	)2(	-	-	-	-	-	-	)2(
Attributed to shareholders of the Bank	54	29	23	5	1	5	12	129
Average balances
Average balance of assets	5,531	3,085	1,094	199	99	-	3,924	13,932
Average balance of liabilities	-	-	2,042	1,914	8,805	-	194	12,955
Average balance of risk-adjusted assets	5,189	2,920	1,300	175	90	-	-	9,674

* Financial Management Segment activity classified separately from "Incoming tourism and others".

Set out below is the distribution of the results of operations in credit cards by segments of activity (continued):

		For the three months ended June 30, 2012
	Households Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Financial Management Segment	Incoming tourism and others	Total
				NIS millions
Net interest income:
- From externals	23	4	13	4	-	-	-	44
Non-interest income	147	84	28	3	1	-	132	395
Total income	170	88	41	7	1	-	132	439
Provision for credit losses	9	6	1	-	-	-	-	16
Operating and other expenses	114	57	19	1	-	-	126	317
Profit before taxes	47	25	21	6	1	-	6	106
Provision for taxes on profit	17	8	7	2	1	-	2	37
Net profit:
Before attribution to
non-controlling interests	30	17	14	4	-	-	4	69
Attributed to
non-controlling interests	-	)1(	-	-	-	-	-	)1(
Attributed to shareholders
of the Bank	30	16	14	4	-	-	4	68

Set out below is the distribution of the results of operations in credit cards by segments of activity (continued):

				For the three months ended March 31, 2012
	Households Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Financial Management Segment	Incoming tourism and others	Total
				NIS millions
Net interest income:
- From externals	21	9	16	5	-	1	-	52
Non-interest income	139	78	28	3	3	36	130	417
Total income	160	87	44	8	3	37	130	469
Provision for credit losses	9	5	2	-	-	-	-	16
Operating and other expenses	115	57	19	2	2	-	116	311
Profit before taxes	36	25	23	6	1	37	14	142
Provision for taxes on profit	12	9	8	2	-	10	5	46
Net profit:
Before attribution to non-controlling interests	24	16	15	4	1	27	9	96
Attributed to non-controlling interests	)1(	-	-	-	-	-	-	)1(
Attributed to shareholders of the Bank	23	16	15	4	1	27	9	95

				For the three months ended June 30, 2011
	Households Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Financial Management Segment*	Incoming tourism and others	Total
				NIS millions
Net interest income:
- From externals	25	5	12	4	-	4	-	50
Non-interest income	138	78	27	2	2	-	143	390
Total income	163	83	39	6	2	4	143	440
Provision for credit losses	12	6	2	-	-	-	-	20
Operating and other expenses	104	52	16	1	1	-	138	312
Profit before taxes	47	25	21	5	1	4	5	108
Provision for taxes on profit	16	9	7	2	1	2	1	38
Net profit
Before attribution to non-controlling interests	31	16	14	3	-	2	4	70
Attributed to
non-controlling interests	)1(	-	-	-	-	-	-	)1(
Attributed to shareholders of the Bank	30	16	14	3	-	2	4	69

* Financial Management Segment activity classified separately from "Incoming tourism and others".

Capital Market Activity

General

The Bank Group's capital-market activity includes a range of financial activities and services in various areas: executing trading transactions in securities and financial assets, including in "Maof" (the Bank and a wholly-owned subsidiary are members of the Tel Aviv Stock Exchange and the TASE Clearing House; the Bank is also a member of the Maof Clearing House; for details regarding a lien placed on the assets of the Bank as a condition of its membership in various clearing houses, see Note 14 to the Annual Financial Statements for 2011) and in foreign securities (the Bank is a member of the Euroclear clearing house); custody services in securities; research and consulting services for customers on the capital market; provision of services to financial-asset managers; issuance management; management of investment portfolios in securities and financial assets for private customers, corporations, non-profit organizations, and institutions; and trust services (an equity-basis investee of the Bank also engages in underwriting). Some of the aforesaid financial activities and services are performed directly by the Bank, while others are performed by subsidiaries, each of which specializes and engages in a specified field.

Pension Advising

In 2009, the Supervisor of the Capital Markets, Insurance, and Savings at the Ministry of Finance (the "Supervisor") granted the Bank a pension advisor's license. Upon receiving its license, the Bank began to provide pension-advising services. In the first stage, this service was provided by the Bank only at certain branches and only to some customers. The number and geographical distribution of the branches offering pension-advising services through trained pension advisors is planned to expand gradually. To date, the Bank has signed distribution agreements with approximately 25 management companies of provident funds and pension funds.

Despite the aforementioned preparations by the Bank, difficulties have arisen in the provision of pension-advising services to customers, as a result of the absence of regularization of the relationships between the parties operating in the market (advisors, institutional entities offering products, and employers) with regard to the transfer of information from these entities to pension advisors in a routine and efficient manner. Another difficulty on the operational level concerns the settlement of monetary transactions between the aforesaid parties, due to the lack of a central settlement system for these transactions. The operation of a pension clearing house is contingent upon licensing by the Supervisor and is subject to the Supervisor's supervision. In March 2012, the Supervisor published a new tender for the establishment of a pension clearing system. However, at the date of preparation of this report, a winner has not yet been chosen in this tender and it is not possible to estimate when a pension clearing house may commence operations or what its contribution will be to the Bank in its capacity as a pension advisor.

Another obstacle to the delivery of pension-advising services to customers concerns the distribution of insurance products. As at the date of preparation of this report, regulations have not yet been enacted to establish the rate of the distribution fees to be received by banks for the distribution of insurance products; distribution agreements have not been signed between the Bank and the insurance companies; and there are problems with the examination and identification of insurance products, due to the wide variety of types of insurance plans in the various years, the lack of a fixed parameter for ratings of the various products, and a lack of standardization that would make it possible to compare the different products and match the product to the customer. All of these factors may lead to delays in the Bank's readiness and ability to provide pension advice regarding insurance products.

In November 2010, the Capital Markets, Insurance, and Savings Division of the Ministry of Finance announced a plan aimed at increasing competition in the pension-savings market. The plan was published in a presentation and a press release. Drafts, circulars, and regulations regarding the implementation of the plan were released in late 2011 and during the first half of 2012. The plan includes the following elements, among others:

• Establishment of a uniform distribution fee for pension advisors in respect of pension-saving products.The maximum distribution fee to a bank for advisory services on pension-saving products, with the exception of study funds, will be just 0.2% of accrual and 1.6% of routine deposits, or 40% of management fees, whichever is lower. ( This replaces the current version of the distribution fee regulations, in which the maximum rate is 0.25% of accrual, as detailed therein.) The Bank's fee for advising on study funds will remain at the previous level of 0.25% of accrual.
• Distribution fees will be paid only to the last distributor appointed by the customer. Even if the last distributor is an insurance agent or pension marketer, the advising bank will be denied the distribution fee owed to it in respect of the advisory services, starting on the transition date.

Because the implementation of the plan largely depends on legislative processes and on the enactment of regulations, at this stage it is not possible to estimate when the plan may be implemented, whether it will be implemented in full, or what its impact will be on the Bank in its capacity as a pension advisor.

Set out below are the developments in the balances of study funds and pension products for which advice is provided.

	Balance as at
	June 30, December 31, 2012 2011	Change
	NIS millions	%
Advisory balances	12,055 10,100	19.4%

Advisory balances are balances of pension products, including study funds, in respect of which customers have received pension advice, or advice regarding a study fund in the financial track. There are two categories of advisory balances: balances in respect of which the Bank does not receive distribution fees (established pension funds, provident funds, and study funds with which the Bank does not have a distribution agreement); and income-generating balances.

Set out below is a description of the principal services provided by the Bank Group within its capital-market activity, and of some of the companies in the Bank Group that operate in this area:

Distribution of Study Funds, Provident Funds, and Pension Funds

The Bank has entered into agreements with management companies of study funds, provident funds, and pension funds regarding the distribution of study funds, provident funds, and pension funds to its customers. The Bank is entitled to collect distribution fees for the distribution of the funds, as stipulated in the regulations.

Distribution of Mutual Funds

The Bank has reached agreements with the decisive majority of mutual-fund managers in Israel with regard to the distribution of mutual-fund units to its customers. The Bank is entitled to collect distribution fees from the fund managers in respect of this activity, as stipulated in the regulations.

Poalim Sahar Ltd.

Poalim Sahar Ltd. (hereinafter: "Poalim Sahar"), a wholly owned subsidiary of the Bank, is a member of the TASE and of the TASE Clearing House. The company specializes in services for institutional entities: new and established pension funds, segmental provident funds, study funds, insurance companies, and public companies and entities. The company provides brokerage services to customers in Israel and abroad, as well as research services, custody services, and other related services, including operational services. For further details, see the section "Principal Subsidiary and Affiliated Companies," below.

Peilim Portfolio Management Company Ltd.

Peilim Portfolio Management Company Ltd., a wholly owned subsidiary of the Bank, manages investment portfolios for private customers, business organizations, non-profit entities, and others. Investments are managed for local and foreign customers in the Israeli capital market and in capital markets worldwide.

As at June 30, 2012, the company manages portfolios at a monetary value of NIS 10.39 billion, compared with NIS 10 billion at the end of 2011.

Services for Financial Asset Managers

The Financial Asset Manager Services Unit encompasses activities related to the provision of various services to financial-asset managers: provident-fund managers, study funds and pension funds, mutual-fund managers, and investment-portfolio managers. Following the organizational change at the Bank, within which responsibility for the dealing rooms and for securities trading and clearing activities was transferred from the Client Asset Management Area to the Financial Markets Area (see below), this unit was consolidated with the Operational Services Division in the Financial Markets Area.

The activity of the unit encompasses the operation of the financial assets noted above and the provision of banking services to entities that manage these assets. Services include asset revaluation, production of control reports, production of reports to government agencies, bookkeeping, management of accounts and rights of provident-fund members, calculation of daily and monthly returns of provident funds, and calculation of daily rates in mutual funds. The Bank has signed agreements for the provision of operational services in the area of provident funds to provident-fund management companies, some incidental to the sale of provident funds formerly owned by the Bank. In the area of mutual funds, service agreements have been signed with mutual-fund management companies. At the end of June 2012, the volume of assets of provident funds, study funds, and pension funds for which the Bank supplies operational services totaled approximately NIS 75.6 billion. The value of assets of mutual funds for which the unit provides services related to account management, at various volumes, totaled approximately NIS 45.2 billion.

Organizational Change in the Client Asset Management Area and the GT Area and Establishment of the Financial Markets Area

In September 2011, the Board of Management and Board of Directors of the Bank approved an organizational change in which responsibility for brokerage activities, operation and clearing of securities, control over Maof trading, and services for financial-asset managers was transferred from the Client Asset Management Area to the Global Treasury Area.

The goal of the organizational change is to solidify the Bank's leadership in the area of financial-market activity and to offer Bank customers an advanced, efficient, professional service package for trading in the complete range of financial instruments, in a full-service operation. The organizational change was implemented in January 2012. As a result of the change, the Global Treasury Area was renamed the Financial Markets Area.

The Dealing Rooms and Brokerage Division, established within the new Area, includes the dealing room for currencies, interest rates, and commodities and the dealing rooms for Israeli and foreign securities. The Financial Markets Operational Services Division was established to oversee operations and clearing for all activities of the dealing rooms as well as operations and clearing activity in securities of the Bank and its customers, and to provide services to financial-asset managers. In addition, a central system was established for analysis and control of risks in the activity of the Bank and its customers in the financial markets.

	For the six months ended June 30, 2012
	Households Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Others	Total
				NIS millions
Net interest income	2	8	1	-	1	-	12
Non-interest income:
- From externals	22	383	21	9	143	35	613
- Inter-segmental	)6(	)83(	)6(	)3(	)10(	108	-
Total income	18	308	16	6	134	143	625
Operating and other expenses	30	241	19	1	101	163	555
Profit before taxes (loss)	)12(	67	)3(	5	33	)20(	70
Provision for taxes (tax benefit) on profit (loss)	)4(	22	)1(	2	12	)7(	24
Net profit (loss):
Attributed to shareholders of the Bank	)8(	45	)2(	3	21	)13(	46
Average balances
Average balance of assets of provident funds and mutual funds	2,079	31,392	2,577	1,365	2,048	77,112	116,573
Average balance of other assets under management	-	1,183	22	13	28	-	1,246
Average balance of securities in custody	2,792	103,905	7,872	10,540	525,862	-	650,971

Set out below is the distribution of results of operations and principal data in the capital market, by segment of activity:

Set out below is the distribution of the results of operations and principal data in the capital market by segment of activity (continued):

	For the six months ended June 30, 2011*
	Households Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Others	Total
				NIS millions
Net interest income	2	10	1	-	)1(	-	12
Non-interest income:
- From externals	29	423	27	10	154	55	698
- Inter-segmental	)8(	)89(	)8(	)3(	)14(	122	-
Total income	23	344	20	7	139	177	710
Operating and other expenses	33	257	20	-	88	182	580
Profit before taxes (loss)	)10(	87	-	7	51	)5(	130
Provision for taxes (tax benefit) on profit (loss)	)3(	30	-	2	19	)2(	46
Net profit (loss):
Attributed to shareholders of the Bank	)7(	57	-	5	32	)3(	84
Average balances
Average balance of assets of provident funds and mutual funds	2,606	33,248	3,085	1,697	7,003	84,720	132,359
Average balance of other assets under management	-	1,335	18	13	28	-	1,394
Average balance of securities in custody	3,176	102,051	9,507	9,390	537,174	-	661,298

	For the three months ended June 30, 2012
	Households Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Others	Total
				NIS millions
Net interest income	1	5	1	-	1	-	8
Non-interest income:
- From externals	11	195	10	5	57	10	288
- Inter-segmental	)3(	)41(	)3(	)2(	)3(	52	-
Total income	9	159	8	3	55	62	296
Operating and other expenses	15	128	9	1	42	76	271
Profit before taxes (loss)	)6(	31	)1(	2	13	)14(	25
Provision for taxes (tax benefit) on profit (loss)	)2(	10	-	1	5	)5(	9
Net profit (loss):
Attributed to shareholders of the Bank	)4(	21	)1(	1	8	)9(	16

Set out below is the distribution of results of operations and principal data in the capital market, by segment of activity (continued):

	For the three months ended March 31, 2012
	Households Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Others	Total
				NIS millions
Net interest income	1	3	-	-	-	-	4
Non-interest income:
- From externals	11	188	11	4	86	25	325
- Inter-segmental	)3(	)42(	)3(	)1(	)7(	56	-
Total income	9	149	8	3	79	81	329
Operating and other expenses	15	113	10	-	59	87	284
Profit before taxes (loss)	)6(	36	)2(	3	20	)6(	45
Provision for taxes (tax benefit) on profit (loss)	)2(	12	)1(	1	7	)2(	15
Net profit (loss):
Attributed to shareholders of the Bank	)4(	24	)1(	2	13	)4(	30

	For the three months ended June 30, 2011*
	Households Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Others	Total
				NIS millions
Net interest income	1	5	-	-	)1(	-	5
Non-interest income:
- From externals	12	200	13	5	76	23	329
- Inter-segmental	)4(	)40(	)4(	)2(	)6(	56	-
Total income	9	165	9	3	69	79	334
Operating and other expenses	15	125	11	-	47	84	282
Profit before taxes (loss)	)6(	40	)2(	3	22	)5(	52
Provision for taxes (tax benefit) on profit (loss)	)2(	13	)1(	1	9	)2(	18
Net profit (loss):
Attributed to shareholders of the Bank	)4(	27	)1(	2	13	)3(	34

Principal Subsidiary and Affiliated Companies

General

The Bank Group operates through banking and non-banking subsidiary companies in Israel and abroad. The non-banking subsidiaries operate in the fields of finance, marketing and operation of credit-card systems, trust activity, issuance and financing, and investment-banking services.

The contribution of subsidiary and affiliated companies to the Bank's results of operations in the first half of 2012, excluding exchange-rate differences of the subsidiaries overseas, totaled NIS 384 million, compared with NIS 308 million in the same period last year.

The Bank's investment in subsidiary and affiliated companies totaled NIS 15.4 billion as at June 30, 2012, compared with NIS 15.0 billion at the end of 2011.

Subsidiaries in Israel

The principal companies are reviewed below:

The Isracard Group

The Group includes the following companies: Isracard Ltd., Poalim Express Ltd., Aminit Ltd., Europay (Eurocard) Israel Ltd., Isracard Mimun Ltd., Isracard (Nechasim) 1994 Ltd., Tzameret Mimunim Ltd., and Global Factoring Ltd. These companies constitute the Bank's credit-card business. The core activity of the Isracard Group is issuance, clearing, and financing in Isracard credit cards, a private brand under its ownership, as well as MasterCard, Visa, and American Express credit cards under licensing agreements. The Group also has activities in the following areas: granting consumer credit other than through credit cards, check payment guarantees and check discounting, direct sales-slip discounting, and factoring (receivables discounting).

Net profit of the Isracard Group totaled NIS 143 million in the first half of 2012, compared with NIS 103 million in the same period last year, an increase of approximately 39%. Net profit for the quarter included profit in the amount of NIS 16 million from the sale of shares of MasterCard Inc. Net profit excluding the sale of shares of MC amounted to NIS 127 million, compared with NIS 103 million, an increase of 23%.

The contribution of the Isracard Group to the Bank's operating results after taxes amounted to NIS 152 million in the first half of 2012, compared with NIS 102 million in the same period last year.

Most of the increase in the Isracard Group's net profit and contribution to the Bank's operating results stemmed from the sale of MasterCard shares in the first half of 2012.

The Bank's investment in the Isracard Group totaled NIS 1,773 million on June 30, 2012, compared with NIS 1,636 million at the end of 2011.

In August 2011, a government bill was passed by the Knesset plenum and published in the Official Gazette of the Israeli Government, concerning discounting, among other matters, as well as a directive stating that an issuer of 10% or more of the charge cards issued in Israel, or an issuer of charge cards used to execute 10% or more of the amount of transactions executed in Israel, shall be required to contract with a clearer for cross-clearing of transactions in the charge cards which it issues. The directives of this law are in effect as of May 15, 2012. In the opinion of the Bank, this law will have an adverse effect on the revenue of the Bank Group in the future; however, at this stage the Bank cannot estimate the extent of this effect.

An agreement was signed between Isracard and Leumi Card in April 2012, and an agreement was signed between Isracard and CAL in May 2012, both in connection with the implementation of Amendment 18 to the Banking (Licensing) Law. Pursuant to the agreement, Leumi Card and CAL were granted licenses to clear Isracard brand charge cards, under the terms agreed upon by the parties. On May 14, 2012, the Commissioner granted a temporary exemption for a restrictive arrangement, under which, following an extension, this exemption is in effect until September 13, 2012. Pursuant to the exemption, Leumi Card and CAL will be able to clear cards of the Isracard brand by paying an issuer fee. If the Commissioner approves the collection of any additional amounts by Isracard in the future, Isracard will be able to collect such amounts retroactively, including with respect to the period of the temporary exemption.

Poalim Capital Markets – Investment House Ltd.

Poalim Capital Markets Ltd. (hereinafter: "Poalim Capital Markets") operates in two main areas: investment-banking activity in Israel and abroad; and investments in private-equity funds and direct investments, including technology sector investment funds.

In the area of investment banking, Poalim Capital Markets provides a range of services, including financial and strategic consulting for mergers and acquisitions in Israel and abroad, consulting for privatization processes and for public and private issues abroad, and guidance of companies in Israel and abroad in investments of various kinds. The Poalim Capital Markets Group also provides, through its equity-basis investee (19.97%) Poalim I.B.I., consulting, underwriting, and management services for public issues in Israel and capital raising through private issues.

In the area of investment in private-equity funds and direct investments, Poalim Capital Markets invests in funds operating in various sectors, including venture capital, alternative energy, and others; invests in management corporations of private-equity funds; and provides services to these corporations. In addition, Poalim Capital Markets continues to manage venture-capital funds, in accordance with a permit from the Bank of Israel.

The contribution of Poalim Capital Markets to the results of operations of the Bank in the first half of 2012 amounted to NIS 24 million, compared with a contribution in the amount of NIS 16 million in the same period last year.

The Bank's investment in Poalim Capital Markets totaled NIS 698 million on June 30, 2012, compared with NIS 673 million at the end of 2011.

Poalim Sahar Ltd.

The net profit of Poalim Sahar and its contribution to the operating results of the Bank totaled NIS 11 million in the first half of 2012, compared with NIS 15 million in the same period last year.

The Bank's investment in Poalim Sahar totaled NIS 268 million on June 30, 2012, compared with NIS 257 million at the end of 2011.

Activity of the Bank Group Abroad

General

The international activity of the Bank Group encompasses 46 locations, and is conducted through banking subsidiaries, financial companies, the Bank's overseas branches, and representative offices. The Bank's activity overseas is focused on the private-banking and corporate sectors. The Bank also has activities in the households and commercial sectors in Turkey and Kazakhstan. Within its international activity, the Bank maintains relationships with over 2,400 correspondent banks around the world. Its activity with these correspondent banks includes trading through dealing rooms, cooperation in foreign trade and international trade financing, project financing, clearing of payments, and capital-market services (see the section "Credit Exposure to Foreign Financial Institutions").

In its Global Private Banking business, the Bank provides high-net-worth customers abroad with advanced professional services and products, including investment products and global asset management. Activity in the corporate segment abroad includes granting credit to local and foreign borrowers, mainly through participation in credit organized by leading banks overseas; granting credit to borrowers with an affinity to Israel; and investments in bonds. Activity in the households and commercial segments in emerging markets is focused on activity in Turkey and Kazakhstan through the Pozitif Group.

The Bank's strategy is currently targeted to the development and expansion of its international activity, in the area of Global Private Banking (hereinafter: GPB) and in the business activities of its London and New York branches. The Bank aims to continue to expand its service offering and improve its capabilities in products, marketing, and customer service.

Legislative Restrictions, Regulation, and Special Constraints Applicable to International Activity

The following is a brief description of the main limits applicable to international activity.

Regulatory Supervision Abroad

In addition to the rules and limits imposed by the Bank of Israel on the international activity of the Bank Group, pursuant to legislation and procedures as well as the provisions of permits granted by the Bank of Israel for the acquisition of subsidiaries and/or opening of branches abroad, the activity of the international sector in the various countries is subject to regulatory supervision by various government agencies in the relevant countries, which includes requirements concerning capital, holdings of liquid assets, etc.

Regulatory Supervision – Miami Branch

An agreement (called a "Written Agreement") between the Bank and the Miami branch of the Bank, on one side, and the Federal Reserve of New York, the Federal Reserve of Atlanta, and the Office of Financial Regulation of the State of Florida (hereinafter: the "US Regulatory Agencies"), on the other side, took effect on July 8, 2009. A Written Agreement is a formal enforcement procedure available to the US Regulatory Agencies, which has been used more extensively since the outbreak of the economic crisis in 2008. The agreement signed essentially concerns the reinforcement of the compliance, risk management, and audit functions of the Bank and the increased involvement of the Board of Directors and Board of Management of the Bank in the supervision of the Miami branch, with the aim of correcting flaws discovered in compliance with the provisions of US law in the area of the prevention of money laundering and "Know Your Customer" regulations. In addition, under the agreement the Bank undertook a commitment to adopt work plans for the correction of the flaws, as approved by the regulatory agencies, and to submit periodic progress reports on the implementation of the work plans.

The agreement does not create or impose any limitations on the Bank's business activity, in the US or in general; it is not expected to have a material impact on the financial results of the Bank.

The Bank is working to meet its obligations under the agreement in full and on time. A subcommittee of the Board of Directors' Risk Management Committee is monitoring and supervising the correction of the flaws at the Miami branch. An external consulting firm specializing in advising banks on enforcement processes occasionally advises the Board of Management of the Bank in Israel; in addition, supervision procedures have been tightened, and the compliance officers of the Miami branch now report to the Risk Management Area. Failure to fulfill the obligations in the Written Agreement could lead to the application of more severe enforcement procedures by the US Regulatory Agencies.

Condensed Aggregate Financial Statements of International Operations

The condensed financial statements of international operations presented below include the Bank's overseas offices with activity in one or more of the following areas: granting credit, taking deposits, issuing bonds or notes, and managing client assets. The activity of the Global Private Banking Center in Israel is also included.

A. Balance Sheet*

	Balance as at
	June 30, 2012	December 31, 2011
	USD millions
Assets
Cash on hand and deposits with banks	7,058	8,415
Securities	1,896	1,700
Net credit to the public	5,415	5,418
Buildings and equipment	31	31
Assets in respect of derivative instruments	116	337
Other assets	183	141
Total assets	14,699	16,042
Liabilities and Capital
Deposits from the public	8,400	8,310
Deposits from banks	4,040	5,491
Securities lent or sold under agreements to repurchase	134	41
Bonds and subordinated notes	529	530
Liabilities in respect of derivative instruments	271	469
Other liabilities	336	275
Total liabilities	13,710	15,116
Non-controlling interests	76	63
Capital means**	913	863
Total liabilities and capital	14,699	16,042

* The balance sheet of international operations is based on data of the overseas offices, translated into US dollars, following adjustments to the accounting principles applied by the Bank, with adjustments in respect of the balance of the surplus of the acquisition cost over the capital of the overseas offices, and attribution of the share of non-controlling interests.

^** Includes calculated capital in the amount of USD 187 million (December 31, 2011: USD 170 million) for branches of the Bank that are not companies. The calculated capital includes the amounts of the original deposits deposited with the branches of the Bank, with the addition of profits or subtraction of losses recorded up to the balance sheet date, including adjustments from the presentation of securities available for sale at fair value.

	Balance as at
	June 30, 2012	December 31, 2011
	USD millions
Deposits from the public, bonds, and subordinated notes	8,929	8,840
Client assets (off-balance sheet)	8,447	7,791
Total	17,376	16,631

C. Profit and Loss and Contribution of the Bank's Overseas Offices*

	For the three months ended			For the six months ended
	June 30, 2012	March 31, 2012	June 30, 2011**	June 30, 2012	June 30, 2011**
			USD millions
Net interest income	53	37	49	90	98
Provision for credit losses	1	2	)1(	3	)1(
Net interest income after provision for credit losses	52	35	50	87	99
Non-interest income	29	52	32	81	70
Operating and other expenses	63	66	71	129	139
Operating profit before taxes	18	21	11	39	30
Provision for taxes on operating profit	6	7	5	13	11
Net profit:
Before attribution to non-controlling interests	12	14	6	26	19
Attributed to non-controlling interests	1	2	1	3	1
Attributed to shareholders of the Bank	11	12	5	23	18

* Based on the results of the overseas offices, translated into US dollars, after adjustment to the accounting principles applied by the Bank, deduction of the surplus acquisition cost over the capital of the overseas offices, attribution of the share of minority interests in the results of consolidated companies, and a supplement for the additional tax applicable to the Bank in Israel.

** The Bank adopted the directive of the Supervisor of Banks concerning the format for statements of profit and loss of banking corporations for the first time on January 1, 2012. Accordingly, the data included in the statement of profit and loss with regard to the comparison periods last year were reclassified for adjustment to the new definition, item headings, and presentation method of the current reporting period. For details, see Note 1(C)(1) to the Condensed Financial Statements.

Set out below are data regarding the investment in the principal overseas offices, and their contribution to the net profit of the Bank:

As at June 30, 2012

	Investment balance as at June 30, 2012(1)	Contribution in the first half of 2012 excluding exchange-rate differences(2)	Contribution in the first half of 2012(3)	Exchange-rate differences in respect of the investment, allocated to the statement of	Contribution in the first half of 2012 including exchange-rate differences
				profit and loss in the first half of 2012*
Company	NIS millions		%	NIS millions
US branches	-	26		-	26
London branch	-	10		-	10
Bank Hapoalim (Switzerland) Ltd.	1,562	29	3.9%	-	29
Pozitif Group	652	21	6.1%	44	65
Hapoalim Securities U.S.A. Inc.	127	3	5.3%	3	6
Other offices	421	-		12	12
Total		89		59	148

As at June 30, 2011

	Investment balance as at June 30, 2011(1)	Contribution in the first half of 2011 excluding exchange-rate differences(2)	Contribution in the first half of 2011(3)	Exchange-rate differences in respect of the investment, allocated to the statement of profit and loss in the first half of 2011*	Contribution in the first half of 2011 including exchange-rate differences
Company	NIS millions		%	NIS millions
US branches	-	27		-	27
London branch	-	18		-	18
Bank Hapoalim (Switzerland) Ltd.	1,502	18	2.5%	105	123
Pozitif Group	636	)7(	)2.2%(	)45(	)52(
Hapoalim Securities U.S.A. Inc.	102	3	6.0%	)3(	-
Other offices	413	3		)11(	)8(
Total		62		46	108

* The functional currency of consolidated subsidiaries overseas is defined in accordance with the directives of the Supervisor of Banks (see also Note 1(C)3 to the Condensed Financial Statements). As of January 1, 2012, exchange-rate differences in respect of the investment in Bank Hapoalim Switzerland are allocated directly, net of hedging effects, to equity, within adjustments from translation. With regard to other investments, the Bank performs economic hedges of currency exposures arising from such investments.

(1) The balance of the investment in the subsidiaries is presented after adjustment to the accounting principles applied at the Bank.

(2) The contribution of the overseas offices consists of net profit, translated into NIS, with adjustments for the deduction of the surplus of the investment cost in respect of these offices, and the attribution of minority interests' share of the profits of consolidated companies overseas, excluding the supplement for the statutory tax rate applicable in Israel, in the amount of NIS 22 million (in the same period last year: NIS 15 million).

(3) The return of the companies is calculated on an annualized basis, by dividing the contribution of the subsidiaries, excluding exchange-rate differences, by the average investment.

Set out below are details of the net profit of the principal offices overseas, after adjustment to the accounting principles applied at the Bank (in local currencies):

		For the three months ended		For the six months ended
	June 30, 2012	March 31, 2012	June 30, 2011	June 30, 2012	June 30, 2011

US branches – USD*	6.3	3.9	5.0	10.2	12.0
London branch – GBP*	1.5	1.0	1.7	2.5	5.0
Bank Hapoalim (Switzerland) Ltd. – CHF	5.1	5.3	2.8	10.4	8.4
Bank Pozitif Group – TRY	6.8	6.7	)2.0(	13.5	1.4
Hapoalim Securities U.S.A. Inc. – USD	0.1	1.2	0.7	1.3	0.8
Other offices – USD	0.4	1.1	1.5	1.5	2.2

* At the US and London branches, data are before local tax.

Global Private Banking Activity of the Bank Group

Within this framework, the Bank Group provides private customers with accounts at the Bank Group's overseas branches and at the Private Banking Center in Tel Aviv with advanced professional services and products, including investment products and global asset management. This activity currently encompasses Israel, Europe, the United States, Latin America, Canada, Hong Kong, and Singapore, by means of sites including banking subsidiaries, branches, asset-management subsidiaries, and representative offices engaged solely in public relations.

Set out below are details of the Bank's branches and principal subsidiaries overseas operating in the area of private banking:

Bank Hapoalim (Switzerland) Ltd. (Hapoalim Switzerland)

A banking subsidiary, wholly owned by the Bank, mainly engaged in the provision of private-banking services, through four branches – two in Switzerland, in Zurich and Geneva; one in Luxembourg; and one in Singapore – as well as through an investment consulting firm in Hong Kong.

Net profit of Hapoalim Switzerland totaled approximately CHF 10 million in the first half of 2012, compared with approximately CHF 8 million in the same period last year. The increase in profit resulted from an increase in other income and a decrease in operating expenses.

The contribution of Hapoalim Switzerland, excluding exchange-rate differences and after supplementary taxes in Israel, to the Bank's operating results in the first half of 2012 totaled NIS 29 million, compared with approximately NIS 18 million in the same period last year.

Total capital of Hapoalim Switzerland amounted to approximately CHF 385 million as at June 30, 2012, compared with approximately CHF 374 million at the end of 2011.

The total balance sheet of Hapoalim Switzerland amounted to approximately CHF 3,230 million as at June 30, 2012, compared with approximately CHF 3,167 million at the end of 2011.

During the second half of 2011, Hapoalim Switzerland was notified that talks were underway between government agencies in Switzerland and in the United States in connection with the Double Taxation Treaty between these countries. The Swiss authorities informed Hapoalim Switzerland that several Swiss banks, including Hapoalim Switzerland, were under investigation by US authorities. No details or circumstances concerning Hapoalim Switzerland specifically were provided in connection with this investigation. Pursuant to a request by the Swiss authorities, the Swiss banks, including Hapoalim Switzerland, submitted statistical information to US authorities with regard to their business with American clients. Identifying information regarding the clients, such as client names, was not submitted. Hapoalim Switzerland is cooperating with the Swiss authorities and acting in accordance with the legal directives to which it is subject. At this stage, due to the limited information available to it, Hapoalim Switzerland cannot estimate the degree to which it will be affected by the investigation.

Global Private Banking Center in Tel Aviv

A center providing private-banking services and products to foreign residents from all over the world; an integral part of the GPB network.

Poalim Asset Management (UK) Ltd. and Poalim Asset Management (Ireland) Ltd., held by PAM

Holdings Ltd. (hereinafter: "PAM Companies")

PAM Companies (wholly owned subsidiaries of the Bank) are responsible for selecting and providing professional support for investment products offered to Global Private Banking customers worldwide, in cooperation with leading international financial companies in these fields. The Group is a key element in the implementation of the Bank's growth strategy abroad.

As at June 30, 2012, the Bank Group's customers have holdings in funds of international financial entities with which PAM collaborates totaling approximately USD 2.1 billion, compared with USD 2.0 billion on December 31, 2011. PAM Companies also develop, plan, and provide professional support for other investment products, such as structured products, in accordance with international standards, including through collaboration with leading global financial entities. In addition, PAM Companies offer consulting and research services to the Bank's subsidiaries and branches abroad.

Banque Hapoalim (Luxembourg) S.A. (hereinafter: "Hapoalim Luxembourg")

A banking subsidiary, wholly owned by the Bank, engaged in financial and banking activity in and outside of Luxembourg. Hapoalim Luxembourg grants loans to private and institutional customers.

Bank Hapoalim (Cayman) Ltd. (hereinafter: "Cayman")

A commercial bank, wholly owned by the Bank, which under the terms of its license is permitted to operate in all types of banking activity except for activity with local residents in the Cayman Islands. Cayman's assets include an investment in a wholly-owned subsidiary in Uruguay, Hapoalim (Latin America) S.A.

Hapoalim (Latin America) S.A. (hereinafter: "Hapoalim Latin America")

Provides private-banking services to the Bank's customers in South America. Hapoalim Latin America operates in Uruguay through three branches, in Montevideo, Punta del Este, and Colonia.

US Branches

The New York Branch – Activity in the Corporate Segment

Most of the Bank Group's international corporate activity is conducted through the New York branch. The New York branch is focused on three areas of activity:

• Providing comprehensive banking services to large Israeli companies operating in the United States as well as to local companies and clients, including credit, foreign trade, investments, and dealing-room services. The Bank allows Israeli companies as well as American companies with assets in Israel to use collateral held in Israel in order to open credit lines at the New York branch. The New York branch also offers its customers FDIC deposit insurance, similar to American banks.

• Granting corporate credit to large companies in the US economy by par ticipating in credit lines organized by leading banks (some 95% of the credit is provided to companies rated Investment Grade or secured by entities rated Investment Grade by the international rating agencies Standard & Poor's or Moody's).
• Providing dealing-room services, including during hours in which dealing rooms in Israel are closed, as par t of the global activity of the Bank's dealing rooms.

As part of the international strategy formulated for the coming years, the New York branch was granted approval to increase and focus its activity in the middle-market segment (hereinafter: "Local Activity") in the United States, by developing relationships with and granting direct credit to local commercial clients, with a clear business focus on specific geographical regions and areas of activity. The Local Activity primarily focuses on private companies with annual turnovers of up to USD 500 million. The plan includes expansion of the activity and an update of aspects of corporate governance. Concurrently, the Bank will continue its activity in the syndications market, as a complementary activity, as well as its activity with Israeli clients conducting business in the United States.

The branch's credit portfolio totaled approximately USD 2.0 billion as at June 30, 2012, compared with approximately USD 2.1 billion at the end of 2011. The branch also provided unutilized credit facilities and backup lines in the amount of approximately USD 1.6 billion as at June 30, 2012, similar to the end of 2011.

In addition, as at June 30, 2012, a total of approximately USD 3.3 billion was deposited with the Federal Reserve Bank, compared with approximately USD 4.1 billion on December 31, 2011.

Private Banking in the United States

The Miami branch and the Private Banking Department at the New York branch offer private-banking services to GPB customers. For further details regarding the activity of the New York branch, see above. Private banking in the United States primarily focuses on customers from Latin America.

The profit of the US branches before local taxes totaled approximately USD 10.2 million in the first half of 2012, compared with approximately USD 12.0 million in the same period last year.

Total capital means of the US branches amounted to approximately USD 125 million as at June 30, 2012, compared with approximately USD 112 million on December 31, 2011.

The total balance sheet of the US branches as at June 30, 2012, totaled approximately USD 7.1 billion, compared with approximately USD 8.2 billion on December 31, 2011.

Hapoalim Securities U.S.A. Inc. (hereinafter: "Hapoalim Securities")

A broker-dealer (wholly owned by the Bank) registered and operating in the United States. The broker-dealer is under the supervision of the Securities and Exchange Commission (SEC) in the United States, the New York Stock Exchange (NYSE), the National Association of Securities Dealers (NASD), and additional stock markets in which it is a member, and operates in accordance with the rules established by these entities. The company's activity is also subject to supervision by the Supervisor of Banks in Israel. The company supports the expansion of the Bank's activity in securities trading on behalf of its customers.

The London Branch

The London branch focuses on three areas of activity:

• Corporate credit activity, within which the branch provides comprehensive banking services to large Israeli companies operating in Europe and to local companies, including corporate credit and foreign trade.
• Dealing-room services, in which the branch provides its customers with trading services in foreign-currency futures and options, as part of the global dealing room activity of the Bank.
• The Private Banking Depar tment of the branch provides services to high-net-wor th clients and the companies under their ownership, including corporate credit and investment products.

Profit of the London branch before local taxes totaled approximately GBP 2.5 million in the first half of 2012, compared with approximately GBP 5.0 million in the same period last year.

Total capital means of the London branch as at June 30, 2012 amounted to approximately GBP 40 million, compared with approximately GBP 37 million on December 31, 2011.

The total balance sheet of the London branch amounted to approximately GBP 807 million as at June 30, 2012, compared with approximately GBP 970 million on December 31, 2011.

Activity in Emerging Markets

The Bank Group currently operates in Turkey and Kazakhstan through the Bank's holdings in the shares of Bank Pozitif Kredi Ve Kalkinma Bankasi Anonim Sirketi in Turkey, and its stake in JSC Bank Pozitiv in Kazakhstan.

Bank Pozitif Kredi Ve Kalkinma Bankasi Anonim Sirketi (hereinafter: "Bank Pozitif")

A bank incorporated and operating in Turkey, specializing in corporate and investment banking and in the households segment. The Bank's stake in Bank Pozitif stands at 69.8%. Bank Pozitif does not have a permit from the Turkish regulator to take deposits. Bank Pozitif's application for such a permit was recently denied. According to a statement by the Turkish regulator, the aforesaid permit cannot be granted due to the uncertainty in the global financial markets.

JSC Bank Pozitiv

A bank incorporated and operating in Kazakhstan, wholly owned by Bank Pozitif. The bank provides banking services to business and private customers.

Set out below are details regarding the balance sheet and results of the Bank Pozitif Group:

The profit of the Bank Pozitif Group totaled approximately TRY 13.5 million (approximately USD 7.0 million) in the first half of 2012, compared with TRY 1.4 million (approximately USD 0.7 million) in the same period last year. The increase in profit resulted from an increase in net interest income, due to a change in the composition of the credit portfolio, which led to an increase in spreads. The provision for credit losses also decreased. In addition, operating expenses decreased, due to a restructuring program implemented at the bank in late 2011 in which branches were closed and the bank's headcount was reduced.

The Bank Pozitif Group's contribution to the Bank's operating results, excluding exchange-rate differences and after supplementary taxes in Israel, amounted to a positive contribution of approximately NIS 21 million in the first half of 2012, compared with a negative contribution in the amount of NIS 7 million in the same period last year.

Total equity of the Bank Pozitif Group amounted to TRY 414 million (approximately USD 215 million) as at June 30, 2012, compared with approximately TRY 398 million (approximately USD 207 million) at the end of 2011. Total assets of the Bank Pozitif Group amounted to approximately TRY 2.00 billion (approximately USD 1.04 billion) as at June 30, 2012, compared with approximately TRY 1.95 billion (approximately USD 1.02 billion) at the end of 2011. The Bank's investment in the Bank Pozitif Group totaled NIS 652 million as at June 30, 2012, compared with approximately NIS 581 million at the end of 2011.

General Information and Additional Matters

Liquidity and Raising of Sources of Funds at the Bank

Monetary Tools of the Bank of Israel

There are several means available to the Bank of Israel in order to establish the liquidity level of the banking system. The monetary activity of the Bank of Israel is divided into two types:

• Activity during a liquidity month A liquidity month is defined by the Bank of Israel as a period of 4-5 weeks, ending on the last Wednesday of the calendar month. Activity is conducted through loan and/or deposit auctions for the commercial banks, including weekly and daily auctions, as well as through monetary loans and/or deposits at interest rates different by ±0.5% from the Bank of Israel interest rate.
• Activity over periods longer than a liquidity month According to economic conditions in Israel and globally, the Bank of Israel determines the desired liquidity position for the banking system. The Bank of Israel can apply expansionary monetary policies leading the system to high liquidity surpluses, or contractionary monetary policies that lead the system to liquidity deficits.

The monetary interest rate of the Bank of Israel, which stood at an annual rate of 2.75% at the beginning of 2012, was lowered to 2.50% at the end of January 2012 and 2.25% at the end of June 2012.

The following are the means used by the Bank of Israel:

• Makam (T-Bill) auctions –The Bank of Israel maintains balances of Makams (shor t-term notes) of approximately NIS 130 billion. By decreasing or increasing this balance it changes the liquidity position of the banking system.
• Intervention in the foreign-currency market The Bank of Israel buys or sells foreign currency from or to the banking system.
• Intervention in the government bond market –The Bank of Israel buys or sells government bonds.
• Operation of repo auctions Activity of the Bank of Israel with the banks and institutional entities.

At the end of 2011, the liquidity surpluses of the banking system totaled approximately NIS 109 billion. During the first half of 2012, the Bank of Israel increased net Makam issues by approximately NIS 8 billion. The liquidity surpluses of the banking system totaled approximately NIS 92 billion at the end of June 2012.

For reasons of caution, the Bank continues to deposit a large part of its liquidity balances in foreign currency with the Federal Reserve Bank in the United States, at low returns, and is considering investing some of its liquidity surpluses in bonds of high-rated countries and financial institutions.

The Bank monitors its overall liquidity position daily, as well as its liquidity position in NIS and in foreign currency separately (including the overseas offices). In addition to the monitoring of its current liquidity position, the Bank estimates liquidity risk using an internal model. The risk estimate is executed under various assumptions referring to different market conditions for the Israeli banking system and for the Bank.

Capital and Debt Raised from the Public

The Bank Group raises resources through both public and private issues of bonds and subordinated notes, which serve as part of the regulatory capital of the Bank.

The balance of bonds and notes totaled NIS 35.7 billion as at June 30, 2012, compared with NIS 32.9 billion at the end of 2011. For further details regarding bonds and subordinated notes issued by the aforesaid entities, see Note 11 to the Annual Financial Statements for 2011.

The balance of amounts raised by the Bank as at June 30, 2012 includes subordinated notes with a balance of approximately NIS 6.3 billion, of which tradable notes in the amount of approximately NIS 0.9 billion.

In addition, the Bank issues through its wholly owned subsidiaries, Hapoalim Hanpakot and Hapoalim International, which are primarily engaged in raising monetary resources in Israel and overseas, respectively, through issues of bonds and notes of various types (which constitute part of the regulatory capital of the Bank), and depositing the proceeds of the issuance with the Bank. As at June 30, 2012, the balance of notes issued by these companies is approximately NIS 18.1 billion, and the balance of bonds is approximately NIS 11.3 billion.

During the first half of 2012, the Bank issued subordinated notes constituting Lower Tier 2 capital through Hapoalim Hanpakot, in the amount of approximately NIS 2.8 billion, which are included in Lower Tier 2 capital, subject to the limit in the Proper Conduct of Banking Business Directives.

Objectives and Business Strategy

The Bank operates under a long-term strategic plan approved in late 2009, which is examined each year and adjusted to changes in the business environment in Israel and globally and to changes in the competitive landscape in which the Bank operates. At the end of 2011, the Board of Management and Board of Directors of the Bank approved the Bank's work plans and business objectives for 2012, based on its multi-year strategic plan, while making adjustments to the plan derived from the risks in the global economy, the slowdown in growth forecasts for the Israeli economy, and the changes and developments in the competitive environment for the various segments of the Bank's activity. The Bank of Israel published directives on increased core capital targets at the end of the first quarter of 2012. The Bank is preparing to implement these directives and has taken them into consideration within the formulation of its strategic plan for 2013-2017.

The Bank's multi-year strategic plan takes into consideration the caution necessitated by the risks still present in the global economy and the Israeli market, and balances risk and return considerations. This plan is expected to enable the Bank to continue to pursue a long-term trajectory of stable growth, despite the challenges and instability in the global economy and financial system, while generating a double-digit return on equity and solidifying the leadership of the Bank in the Israeli banking system.

At the end of 2011, as part of the Board of Directors' and Board of Management's commitment to and focus on effective implementation of the strategic plan, the Bank earned international certification for the Strategic Management methodologies, work processes, and technological tools that have been introduced over the last three years. The certification is granted by the international Palladium Group, founded by Prof. Kaplan and Prof. Norton of Harvard University, the inventors of the Balanced Scorecard method. The Bank thereby became the first organization in Israel to earn this certification, which is the highest rank in the international Strategic Management certification system of the Palladium Group.

The multi-year strategic plan is focused on five main axes:

• Expanding relationships and activity with the Bank's customers, based on innovation in service and in channels of activity, professional skill, and the creation of solutions tailored to customers' needs, with the aim of reinforcing the Bank's leadership in Israel.
• Creating a platform for future growth in international activity based on customer relationships, while leveraging the Bank's strengths in commercial and corporate activity and in private-banking services for high-net-worth customers.
• Development and expansion of income sources from investment activity, based on specialization in the management of the Bank's relationships with its customers.
• Operational excellence in the execution of existing activities and in the realization of the Bank's growth plans, while streamlining and curbing expenses.
• Strengthening global risk management and capital management capabilities.

The Bank will work to progress on these axes while emphasizing the cultivation of its human capital and excellence within the organization, based on the core values of the Bank and in alignment with the principles of sustainability, as defined in the Bank's vision. In this context, the Bank will work to continue to lead the financial industry in the areas of corporate social responsibility and contribution to the community, as it has in recent years.

As part of the streamlining process underway at the Bank, the structure of the Bank's Head Office units is currently being examined. The goal of this examination is to create a structure capable of providing an optimal response to customers' needs while cutting back expenses. Within this process, the Board of Directors of the Bank has decided to merge the activity of the Client Asset Management Area into other Areas of the Bank.

In the Retail Banking Area, the Bank will continue its focused, resolute efforts to solidify and strengthen its leadership. The Bank will focus on improving the value offered to its customers and on providing a comprehensive solution tailored to customers' requirements and needs, by means including optimization of the distribution of the branch network and opening branches in formats suited to customers, as well as strengthening of the multi-channel value offer and customer experience through constant improvement and addition of advanced technological transactions and services via a range of channels: mobile devices, Internet, self-service stations, and more. The Bank accords high importance to customer service and continually strives to significantly improve service while making use of technological means and adapting service to customers' needs.

In the Corporate Banking Area, the Bank will continue to work to preserve its leading position with customers in the corporate segment – the largest companies and businesses in the Israeli economy. The Bank aims and is working to extend and develop its activity with these clients, with an emphasis on the expansion of the service and product offering and the creation of a comprehensive package of specially tailored services providing the optimal solution to the needs of clients in this sector. The Bank also expects this activity to enable it to increase its non-credit revenues in this sector. Concurrently, the Bank will work to achieve a leap forward in its activity in the "middle-market" business sector, which is an important element of the backbone of the Israeli economy, through means including the network of Business Branches which the Bank will continue to deploy in the coming year, and an improved and expanded value offer for customers in this sector.

The activity of the Bank in the capital market and in the area of treasury management is centralized under the Financial Markets Area, a new Area formed as a result of the transfer of brokerage activities, securities clearing and operation, and services for financial asset managers from the Client Asset Management Area to the Global Treasury Area. The emphasis in these activities will be placed on adapting the Bank's alignment to the needs of its customers, in Israel and overseas, and to the changes in the capital and currency markets. The Bank will continue to work to implement a strategic plan based on global treasury management, encompassing the dealing rooms in Tel Aviv, New York, and London, while continuing to reinforce the infrastructures of the operational systems serving the dealing rooms and the area of asset and liability management at the Bank. The Bank will also continue to strengthen the management of its proprietary ("nostro") banking portfolio, with an emphasis on prudent management of the mix in the portfolio alongside risk management.

In overseas operations, led by the International Banking Area, the Bank will work to continue the development of Global Private Banking. In this area of activity, the Bank aims to continue to improve its abilities in products and expand the service package offered to its customers, in order to strengthen the platform for the organic growth of its asset portfolio, with a focus on high-net-worth clients.

The Bank will work to strengthen the connections between its international operations and the activity of its customers in Israel, in order to maximize possible synergies from the provision of banking services overseas to customers of the Bank. The Bank will offer Global Private Banking services to its customers at its specialized centers, as well as business services, primarily in the financial centers of Switzerland, New York, and London. At the same time, the Bank is following the changes in the developing markets in order to take advantage of opportunities for expansion, mainly through support for trading and investment activities of Israeli companies.

Striving for operational excellence and improving expense management will continue to be key principles for the Bank. The Bank will work to improve its operational efficiency ratio throughout the period of the strategic plan. The push towards operational excellence will allow the Bank to make optimal use of its existing resources in order to realize new initiatives. The Bank will work to continue to streamline and improve work processes at its Head Office and administrative units, with an emphasis on expansion and development of the Central Back Office, where additional activities not involving direct contact with customers will be channeled, thereby improving service to customers while strengthening operational excellence.

It should be noted that the strategic plan sets ambitious goals for each of the Bank's activities, yet in any planning, especially in planning several years ahead, and all the more so during a period of changes and turmoil in the global economy and in the world financial system, a considerable degree of uncertainty must be taken into consideration. Various diverse factors may prevent the assumptions on which the strategic plan is based from materializing, or may prevent them from materializing in full, and may prevent the realization or full realization of future plans. Among these factors, it should be noted that the success of a plan of this kind depends on the Bank's internal ability to carry out its objectives, as well as on the business environment in Israel and globally and on macro conditions. Special importance should be accorded to the condition of the global economy, and to the economic, political, and security situation in Israel and in the region. It should be taken into consideration that a high level of uncertainty remains with regard to the growth rates that will accompany the recovery of the real economy in Israel and globally in the coming years. It is emphasized that the Bank's approved work plans and the working assumptions on which they are based refer to the Bank's future activities; therefore, all of the above information in this section with regard to the Bank's action plans and intentions is "forward-looking information."

Risk Management

General

The Bank's activity is accompanied by financial risks: credit risks, which represent the risk that a borrower or debtor will default on scheduled payments to the Bank as defined in the credit agreement; market risks deriving from exposure to changes in rates in the financial markets, such as exchange rates, interest rates, and inflation; an additional financial risk is liquidity risk, which is the risk to a banking corporation's profits, stability, and ability to continue its routine operations resulting from uncertainty with regard to its ability to supply its liquidity needs. These risks are managed by designated members of the Board of Management and under their responsibility. The member of the Board of Management responsible for managing credit risks is Mr. S. Gal. The member of the Board of Management responsible for managing market and liquidity risks is Ms. A. Levin. A regulatory requirement of capital adequacy applies to credit risk and market risks.

Other non-financial risks are mainly legal risk and operational risks. Legal risk is managed by the Chief Legal Advisor, Attorney I. Mazur. Operational risk, excluding legal risk, is managed by each member of the Board of Management in the area of activity for which he or she is responsible. Operational risk is defined as the risk of losses that may be caused by failed or faulty internal processes, human actions, system malfunctions, or external events. A regulatory requirement of capital adequacy also applies to operational risk.

Other risks to which the Bank is exposed are handled directly as part of the management of its business: reputation risk, competitive risk, regulatory and legislative risk, economic risk, and political/security-related risk.

The Supervisor of Banks has set forth guidelines concerning risk management in the Proper Conduct of Banking Business Directives. The directives detail the risks to which a banking corporation is exposed and stipulate various basic principles for the management and control of risks, including suitable involvement in and thorough understanding of risk management by the board of directors of the banking corporation, the management of risks by a risk manager who is a member of the board of management, the employment of tools for the assessment and measurement of risks, and the creation of means for supervision and control, including the existence of an independent risk-control function. The Bank operates in accordance with the guidelines of the Supervisor of Banks concerning the Chief Risk Officer and the risk-management function. In addition, the Bank has established methodologies and working procedures for the implementation of the directives of the Supervisor of Banks concerning exposure to environmental risks and to large borrowers.

Risk management is performed based on a global view of the Bank's activity in Israel and of activity at the Bank's branches abroad, with due attention to the activity of banking subsidiaries. Risks are managed separately by each banking subsidiary in the Bank Group, according to policy formulated by each company's board of directors and presented to the Board of Directors of the Bank. The Bank manages the various risks, using hedges for some risks, as detailed in the relevant sections below. Risk control and the assessment of financial risks and operational risks are performed based on a uniform methodology at the Group level, under the direction of the Risk Management Area, taking into account the unique characteristics of the activity of each subsidiary.

Structure and Organization of the Risk Management System

The Board of Directors' Committee on Risk Management and Control and Basel II Implementation –

A Board of Directors' Committee on Risk Management and Basel II Implementation is in operation at the Bank. The committee's mission is to formulate the Bank's risk-management policy, including establishing risk limits in the various areas of activity, examining the Bank's risk profile, monitoring the implementation of the established risk-management policy, and examining the processes and actions to be implemented by the Bank in order to comply with all regulatory directives concerning risk management.

The Board of Directors' Committee on Risk Management and Basel II Implementation and the plenum of the Board of Directors receive reports on risks and on the execution of approved policies, at least once each quarter.

The Board of Management's Committee on Risk Management and Basel II Implementation Headed by the CEO – The Board of Management's Committee on Risk Management, headed by the CEO of the Bank, is responsible for planning the Bank's risk-management policy, risk limits, and reporting and control procedures, and for examining the Bank's overall risk profile and the interactions among the various risk types and factors.

The Board of Management's Committee on Compliance Headed by the CEO – The Board of Management's Committee on Compliance, headed by the CEO, was established in the first quarter of 2011. The objectives of the committee include strengthening and solidifying compliance at the Bank and addressing matters requiring special attention.

The Risk Management Area – The member of the Board of Management responsible for the Risk Management Area, as of July 1, 2012, is Mr. T. Cohen, Chief Risk Officer. The Area's primary objective is to instill an advanced culture of risk management and monitoring at the Bank Group, while formulating risk-management policies and methodologies in line with the goals of the Group and with the Basel II directives and the directives of the Supervisor of Banks. The Risk Management Area ensures the existence and quality of the key risk management processes of the Group: identification, assessment, establishment of risk tolerance limits, establishment of control mechanisms, monitoring of positions, and reporting. The Area leads and coordinates the ICAAP and is an active participant in capital management. The Risk Management Area comprises four units: (1) the Credit Risk Management Unit, which consists of two departments: the Credit Risk Analysis and Management Department, and the Credit Control Department; (2) the Operational and Market Risk Management Unit, which consists of two departments: the Operational Risk Management Department, and the Market and Liquidity Risk Management Department; (3) the Chief Compliance Officer Unit, which consists of three main units: the Compliance Department, the Anti-Money Laundering and Prevention of Terrorism Financing Department, and the International Compliance and Anti-Money Laundering Unit; and (4) the Basel II Plan Administration.

The approach taken with regard to control of all financial and operational risks at the Bank involves identification and assessment of the risks, and control of compliance with the limits stipulated in the various regulations, through three spheres of control: The first sphere includes the business units within the Areas, including supporting and operational units, that create or take risks, as well as the internal control units within the Areas that provide internal control over the risk creators and risk takers. The second sphere of control consists of the control units at the Risk Management Area, which is considered entirely independent of the business Areas. This sphere is also responsible for presenting an overview of risks. Additional independent control functions, such as accountancy, legal counsel, and human resources, are commonly attributed to the second sphere of control. The third sphere of control consists of the Internal Audit system.

Financial Risks

A. Credit Risks

General

Credit risk is the risk that a borrower or debtor may default on obligations to the Bank under a credit agreement. The credit portfolio is a major component of the asset portfolio of the Bank Group; therefore, deterioration in the stability of the various borrowers can have an adverse effect on the Group's asset value and profitability. In order to manage credit risks, a credit-risk management policy, credit policy, and exposure limits for borrowers and/or sectors and/or products in the various segments of activity have been defined for the Group.

Volatility in the global economic markets remains high, due to the debt crisis in Europe and the uncertainty regarding economic growth in the United States. These events have raised the risk level in the Israeli economy. In addition, recent reports indicate an increased probability of a slowdown in the real-estate market in Israel, which, if it persists, may have a negative effect on the repayment capability and value of collateral of borrowers in the construction and real-estate sectors and on mortgage takers. Accordingly, the Bank has mapped the sectors likely to be significantly affected by these changes, updated its exposure policies as necessary, and increased controls in these areas.

Management of Credit Risks

The goal of credit risk management is to allow and ensure that the Group operates in accordance with the policies and strategic objectives established, and within the risk appetite defined in the area of credit, from the level of the single transaction to the overview of the credit portfolio.

The Bank's policy on the management of credit risks is based on diversification of the credit portfolio and controlled management of risks. Risk diversification is reflected by the distribution of the Bank's credit portfolio among a large number of borrowers in different sectors of the economy, among the different linkage segments, and among different geographical regions overseas. The policy of distributing risks among economic sectors is based on an estimate of anticipated developments in the different sectors. For this purpose, the Bank conducts industry-level surveys and economic feasibility studies to evaluate the risk and business potential related to activity in the various economic sectors. The Bank's business objectives are determined in accordance with these surveys and studies.

The credit management system monitors customers' credit exposure on a daily basis. The credit control systems identify, monitor, and report to the responsible function and managers on negative signs related to borrowers.

As part of its credit risk management policy, the Bank applies principles including the following:

1. Independence

The principle of independence is an essential element of proper corporate governance, in order to prevent conflicts of interest and create a system of checks and balances. The goal of this principle is to ensure that the information regarding risks reported to managers, and in particular to senior management and the Board of Directors, is objective and is not influenced by other considerations, in particular considerations of business success and remuneration for such success.

2. Hierarchy of authority

The Bank has a hierarchy of authority that outlines a sequence of credit authorizations, according to the level of the debt of the borrower or group, the risk rating, and problematic classifications, allowing control over the process of approving new credit transactions. The hierarchy of authority provides a definition of individual credit approval thresholds and thresholds for transfer to approval committees, as well as the composition of such committees.

3. Comprehensive view of the customer/group

Management of risk groups encompassing several borrowers who are related in terms of risk, such as a company and its subsidiaries, a married couple, etc. The activity of customers and groups is overseen by a customer manager who is responsible for all activities of that borrower/group. Information systems continuously provide the customer manager and his or her staff with a comprehensive view of the activity of the customer/group, including the level of credit risk.

4. Credit policies and procedures

The Bank's credit policies and procedures are binding for everyone involved in the area of credit at the Bank. The policies and procedures specify all of the principles and considerations related to credit granting, the authority to grant credit, and the prohibitions and limits applied to credit granting. The procedures are a key means of managing credit risks, as they define the Bank's practices and principles in the areas of credit and collateral, including references to customer types, economic sectors, types of credit, etc.

5. Uniform instruction and training

Employees involved in the area of credit undergo training and instruction on credit, foreign trade, and mortgages. These sessions provide uniform training to all those involved in this area, imparting professional tools and teaching the Bank's policies and principles in the area of credit.

Credit risk management policy at the Bank's subsidiaries, offices, and branches abroad is based on similar principles to those of credit risk management policy in Israel, adapted to regulatory requirements in each country. The Credit Risk Management Unit at the Bank functions as the authoritative unit of the Group in the area of credit risks, with the aim of allowing uniform, centralized risk management, reporting, and control at the level of the Group. Credit risk policy at the Bank's overseas subsidiaries and offices is approved by the local board of directors following consultation with credit risk management officials at the Bank, and presented to the Board of Directors of the Bank.

Identification and Control of Credit Risks

The process of controlling and identifying credit risks is conducted by the three spheres of control. Risk at the level of the overall portfolio of the Group is monitored by the Credit Risk Management Unit (as part of the second sphere of control), which reports to the Board of Management and the Board of Directors of the Bank on trends and changes in the credit portfolio, including the level of credit risk in the portfolio, compliance with limits, special events, an analysis of concentration, extreme scenarios, and a presentation of general risk indices in Israel and globally.

The identification of credit risk in existing products is based on risk management, measurement, and control processes at the various levels. The identification of risk in new products relies on the procedure for new products, which specifies the policies and procedures to be followed for each new product at the Bank in order to identify all risks involved in the product, assess the extent and materiality of such risk, and provide solutions for the measurement, control, and hedging of the risk.

A quarterly and annual process has been designed in order to identify concentration risk and examine the potential implications of various shocks (financial, political, and others) on the financial robustness of the Bank. This process includes definition, examination, and reporting of the results of extreme scenarios, and mapping of the effects on profit and on capital adequacy.

Risk Quantification and Measurement

Credit risk is quantified and measured on several levels: the level of the individual borrower, borrower groups by area of activity, sectors of the economy, borrower sectors, products, and the overall portfolio of the Bank and of the Group. Procedures for risk quantification and measurement and for the ranking of borrowers and of credit have been developed and implemented for each area of activity and type of credit. These processes combine assessments by credit experts with decision-making processes and advanced statistical models.

In the area of financing of Bank customers' transactions involving derivative financial instruments, the Bank has developed computerized models for measuring and controlling the level of counterparty risk at the transaction level and the customer level. These models allow the Bank to regularly monitor customers' financial situation. In this activity, credit risk at a particular date is defined as the total of the value of the present position plus potential risk of future losses arising from volatility of the underlying assets in the position of the counterparty, taking into account offsets and correlation between the transactions; this represents the Bank's loss in the event of default by the counterparty. Rules and working procedures have been defined to determine the level of collateral required for these transactions. Rules have also been defined for the closing of exposures with respect to transactions and to customers. Limits on exposure to counterparties are set by the appropriate credit authorities at the Bank.

Risk Alignment

The mix and risk profile of the credit portfolio are managed through several mechanisms:

(1) The credit policies defined for the various areas of activity and economic sectors.
(2) A system of limits, including concentration limits for various parameters such as economic sectors, borrowers, borrower groups, and products.
(3) Price policies, which take risk into account, with a comprehensive view of the customer.
(4) Active management of the risk profile of the portfolio.

The Board of Directors of the Bank establishes credit policies, which are routinely examined and updated according to the changes in the financial markets and in the economy. This policy includes various restrictions of the credit portfolio, which include exposure limits by economic sector, country, and financial institution, as a function of the risk level estimated by the Bank. Limits are also imposed on the maximum exposure to a single borrower, based on the credit rating assigned to the customer, which reflects the customer's risk level; and on maximum exposure to a group of borrowers. Procedures are in place for the monitoring and control of compliance with such limits. The Board of Directors receives quarterly reports on limit control.

Within collateral policy, principles and rules have been set forth to determine the value of collateral with respect to its type and the type of credit that it secures, such as: the estimated time range and expenses necessary for realization of the collateral, type of indexation, volatility in the value of the collateral, etc. Procedures have also been defined for the processing of collateral and for monitoring changes in collateral and its value. A computerized collateral-management system is operational with respect to most types of collateral. Collateral received by the Bank to secure credit includes financial assets, real-estate assets, and other assets. Against credit granted to companies, the Bank also receives collateral in the form of general floating liens on the companies' assets.

Credit Exposure to Foreign Financial Institutions

In the course of its routine business operations, the Bank Group is exposed to risk arising from credit exposures to foreign financial institutions. This risk is evident in a variety of activities with financial institutions, such as transactions carried out at the Bank's dealing rooms (deposits, foreign-currency balances, and derivatives), purchases of bonds issued by such institutions, financing of the various types of foreign trade, capital-market activity, and account management. The foreign financial institutions include banks, investment banks, insurance companies, broker-dealers, and institutional entities, mainly pension funds.

The exposure to foreign financial institutions is influenced both by the specific condition of each institution and by the risk level of the countries in which it operates, and may be affected by events in foreign countries that can cause a decrease in the value of the Bank's assets or impair the foreign institutions' ability to meet their obligations, including obligations to the Bank Group. Such events include financial or economic crises, the effects of changes in political conditions in various countries, social instability, and more. It should be emphasized that the majority of the Bank Group's credit exposures to foreign financial institutions are to banks, and most of these exposures are to the banking system in Western Europe and North America; exposure to other financial institutions is relatively low.

Due to the financial crisis, which started in 2008-2009, the Bank took steps to minimize risk by channeling activity in derivative financial instruments to institutions with which Credit Support Annex (CSA) agreements have been signed (offsetting agreements that limit and minimize the credit risks in this activity, through daily account settlement usually performed between the Bank and the counterparty, pursuant to the agreement). Settlement risks were also neutralized by conducting currency settlement activities through the international clearinghouse known as CLS (Continuous Linked Settlement).

Credit policy is continually examined and adjusted to developments in the global markets. Accordingly, in view of the ongoing economic crisis in Europe over the last year, exposures to these countries were reduced or suspended, based on the developments in each country, and the frequency of monitoring and controls of exposures to institutions in these countries has been increased. This monitoring is based on routine examination of several indicators, among other matters: the position of the international rating agencies; price movements in the capital markets, including prices of insurance for financial assets (CDS); financial statements; macro-economic forecasts and estimates; and an examination of countries' ability to support the financial sector if necessary. For further details, see the section "Economic and Financial Review," above.

The following table details the Bank Group's exposure to foreign financial institutions as at June 30, 2012(1):

	Balance sheet credit risk(2)	Current off-balance sheet credit risk(3)	Total current credit risk
External credit rating(5)		NIS millions
AAA to AA-	2,372	2,200	4,572
A+ to A-	8,950	586	9,536
BBB+ to BBB-	675	89	764
BB+ to B-	49	20	69
Lower than B-	50	-	50
Unrated**	661	76	737
Total current credit exposures to foreign financial institutions*	12,757	2,971	15,728
Of which: Balance of problematic debts(4)	81	-	81
Of which: Balance of impaired debts	81	-	81
Individual allowance for credit losses	55	-	55
Total credit exposure to foreign financial institutions after deduction of the individual allowance for credit losses	12,702	2,971	15,673
Collective allowance for credit losses	6	2	8

* The balances include the exposure of the Bank Group to financial institutions in the following countries:

Spain – Total exposure of approximately NIS 105 million, of which a total of approximately NIS 47 million rated BBB, and the remaining NIS 58 million rated BBB- (total exposure at the end of 2011 was approximately NIS 79 million, NIS 78 million rated A, NIS 1 million rated BBB).

Ireland – Total exposure of approximately NIS 17 million, of which a total of approximately NIS 14 million rated AA, and the remaining NIS 3 million unrated (total exposure at the end of 2011 was approximately NIS 13 million, of which a total of approximately NIS 8 million rated AA-, NIS 2 million rated BB+, and the remaining NIS 3 million unrated).

Italy – Total exposure of approximately NIS 18 million, of which approximately NIS 16 million rated BBB, and the remaining approximately NIS 2 million rated BBB- (total exposure at the end of 2011 was approximately NIS 17 million, NIS 6 million rated A and approximately NIS 11 million rated BBB+).

In Greece and Portugal, exposure to financial institutions is minimal, in the amount of less than NIS 1 million.

** Of which, clearing houses overseas constitute 68% of the balance. The remaining amount is distributed among a long list of banks and financial institutions. (December 31, 2011: 50% of the balance).
(1) Foreign financial institutions include banks, investment banks, broker-dealers, insurance companies, institutional entities, and entities controlled by such entities.
(2) Deposits with banks, credit to the public, investments in bonds, securities borrowed or bought in resale agreements, and other assets in respect of derivative instruments.
(3) Mainly guarantees and commitments to grant credit. Does not include credit risk in off-balance sheet financial instruments, as calculated for the purposes of the limits on indebtedness of a borrower.
(4) The risk of credit that is impaired, substandard, or under special supervision.
(5) According to the lowest of the long-term foreign-currency credit ratings assigned by any of the major rating agencies: S&P, Moody's, and Fitch. Ratings are current as at August 2, 2012 (December 31, 2011: ratings current as at March 1, 2012).

The following table details the Bank Group's exposure to foreign financial institutions as at December 31, 2011(1):

	Balance sheet credit risk(2)	Current off-balance sheet credit risk(3)	Total current credit risk
External credit rating(5)		NIS millions
AAA to AA-	2,278	2,281	4,559
A+ to A-	9,999	685	10,684
BBB+ to BBB-	128	33	161
BB+ to B-	189	16	205
Lower than B-	56	-	56
Unrated**	517	52	569
Total current credit exposures to foreign financial institutions*	13,167	3,067	16,234
Of which: Balance of problematic debts(4)	85	-	85
Of which: Balance of impaired debts	85	-	85
Individual allowance for credit losses	55	-	55
Total credit exposure to foreign financial institutions after deduction of the individual allowance for credit losses	13,112	3,067	16,179
Collective allowance for credit losses	9	2	11

Details of expenses charged to the statement of profit and loss in respect of exposure to foreign financial institutions:

	For the three months ended June 30, 2012	For the year ended December 31, 2011
	NIS millions
Deposits/credit with foreign banks and financial institutions	-	25
Securities of foreign banks and financial institutions	-	15
Total	-	40

* The balances include the exposure of the Bank Group to financial institutions in the following countries:

Spain – Total exposure of approximately NIS 105 million, of which a total of approximately NIS 47 million rated BBB, a total of NIS 54 million rated BBB- and the remaining NIS 4 million unrated (total exposure at the end of 2011 was approximately NIS 79 million, NIS 78 million rated A, NIS 1 million rated BBB).

In Greece and Portugal, exposure to financial institutions is minimal, in the amount of less than NIS 1 million.

** Of which, clearing houses overseas constitute 68% of the balance. The remaining amount is distributed among a long list of banks and financial institutions. (December 31, 2011: 50% of the balance).

(1) Foreign financial institutions include banks, investment banks, broker-dealers, insurance companies, institutional entities, and entities controlled by such entities.

(2) Deposits with banks, credit to the public, investments in bonds, securities borrowed or bought in resale agreements, and other assets in respect of derivative instruments.

(3) Mainly guarantees and commitments to grant credit. Does not include credit risk in off-balance sheet financial instruments, as calculated for the purposes of the limits on indebtedness of a borrower.

(4) The risk of credit that is impaired, substandard, or under special supervision.

(5) According to the lowest of the long-term foreign-currency credit ratings assigned by any of the major rating agencies: S&P, Moody's, and Fitch. Ratings are current as at August 2, 2012 (December 31, 2011: ratings current as at March 1, 2012).

The exposure of the Bank Group to foreign financial institutions totaled approximately NIS 15.7 billion on June 30, 2012, a decrease of NIS 0.5 billion compared with approximately NIS 16.2 billion at the end of 2011. This decrease mainly resulted from a decrease in balance sheet exposure in respect of credit and derivatives, in the amount of approximately NIS 1.0 billion, and was offset by the purchase of bonds in the amount of approximately NIS 0.5 billion, mainly of foreign banks rated A- or higher.

Approximately 90% of the exposure to foreign financial institutions is to financial institutions rated A- or higher. The Bank Group's exposure to foreign financial institutions is distributed as follows: 81% in banks and banking holding companies, 15% in other financial institutions, 2% in pension funds, and 2% in insurance companies. Most of the Bank Group's exposure is to foreign financial institutions operating in the United States (46%) and in Western European countries (49%).

Credit Exposure in Respect of Derivative Financial Instruments

The Bank executes transactions in derivative financial instruments as part of the management of market risks (linkage base, currency, and interest rate exposures; see the section "Management of Market and Liquidity Risks"), and as a service to its customers. The activity in derivative financial instruments involves a number of risks, as detailed below:

• Credit risk –The maximum amount of loss to the Bank in the event that the counterpar ty fails to comply with the terms of the contract.
• Market risk Risk arising from fluctuations in the value of the derivative financial instrument as a result of changes in market prices, such as exchange rates, interest rates, inflation, etc.
• Illiquidity Risk arising from an inability to close an exposure rapidly through settlement in cash or through the creation of an opposite exposure.
• Operational risk Risk arising from errors in the operation of the transactions, from formation to the completion of account settlement, due to human errors or mechanical malfunctions or as a result of the realization of another operational risk.

This activity is routinely administered and measured using specialized automated systems commonly used in the international markets for these purposes, such as Opics, Summit, and Derivatech, as well as automated systems developed by the Bank. Market risks arising from this activity are measured using the Algorithmics system. For details regarding market risk measurement methodology, see the subsection "Risk Assessment and Control" below.

Credit risks arising from transactions in derivative financial instruments related to the counterparty to the transactions are measured by applying conservative coefficients to the nominal amounts of the transactions, or using the scenarios approach, in which the maximum potential exposure of the customer is calculated in a range of different market situations, or using an internal model developed at the Bank, as detailed above. The measurement method is matched to the customer according to the nature of activity in the customer's derivatives portfolio. Rules and working procedures have been established in order to determine the required level of collateral for such transactions, as well as rules regarding the actions necessary in order to close exposures, with regard to transactions and customers. Limits on exposure to counterparties are established by the appropriate credit authorities at the Bank. Operational aspects arising from this activity are examined and controlled routinely by a specialized unit.

		Credit rating
	AAA to AA-	A+ to A-	BBB+ to BB-	Total
Banks outside Israel:
United States(1)	11	1,311	-	1,322
England	256	430	8	694
Germany	-	660	-	660
France	-	915	-	915
Switzerland	4	296	-	300
Other	39	2	1	42
Eurozone – other	-	19	37	56
Total banks outside Israel	310	3,633	46	3,989
Banks in Israel				1,744
Stock exchanges				234
Governments and central banks				-
Brokers/dealers(2)				911
Corporate clients by economic sector:
Financial services				899
Transportation and storage				172
Electricity and water				32
Construction and real estate				107
Other				1,583
Total corporate clients by economic sector				2,793
Total*				9,671

The following table details credit exposures in respect of the positive fair value of derivative financial instruments, by counterparty to the contract, as at June 30, 2012 (in NIS millions).

* The Bank has implemented the directives of FAS 157 concerning fair-value measurement as of January 1, 2011. The amounts in this table are presented before the attribution of the effects of the implementation of this standard.

(1) Of which: JP Morgan Chase – balance in the amount of NIS 1,122 million.

(2) Of which: Goldman Sachs – balance in the amount of NIS 533 million.

Exposure of the Bank to securitization

A policy of reducing this portfolio was implemented due to the crisis; the current volume of the exposure is approximately NIS 198 million, mainly resulting from credit lines to corporations engaged in securitization.

Credit Exposure to Foreign Countries

The risk of credit exposure to foreign countries represents the possibility that an economic, political, or other event in a foreign country may impair the value of assets of the Bank Group or negatively affect the ability of debtors in that country to meet their obligations to the Bank Group. The risk of exposure to foreign countries includes cross-border balance sheet exposure (total balance sheet exposure of the Bank in Israel to residents of foreign countries, plus total balance sheet exposures of the Bank's overseas offices to non-residents of the country in which the office is located) as well as balance sheet exposure of the Bank's overseas offices to local residents in those countries, net of these offices' liabilities. Cross-border balance sheet exposure risk is the risk that actions taken by foreign governments may eliminate the possibility of converting currency and/or transferring currency outside the country (transfer risk), thereby affecting the ability of companies and customers to execute cross-border transactions.

The risk of exposure to foreign countries is managed at the Bank by individually examining the risks arising from the various countries, taking into consideration the countries' ratings by the international rating agencies S&P, Moody's, and Fitch. Appendix 4 to the Management Review details the total balance sheet exposure, by country risk, and divided into sectors (governments, banks, and others). The total exposure to foreign countries includes balance sheet exposures in respect of balance sheet debt balances, net of local liabilities, securities, and other investments attributed to countries other than Israel. The balance sheet exposure was adjusted based on the final risk, taking into account credit reinforcements, which include guarantees, tangible and liquid collateral, insurance contracts, participations in risk, and credit derivatives. For further details, see the section "Composition and Development of the Assets and Liabilities of the Bank Group," above.

The risk level in the global economic markets has risen recently, due to the debt crisis in Europe, and due to the uncertainty regarding global growth, and the more moderate than expected recovery of the US economy. The Bank is applying controls and monitoring credit risks arising from the capital markets following these developments. For further details, see the section "Economic and Financial Review," above.

Balance sheet exposure to foreign countries as at June 30, 2012 amounted to NIS 42.7 billion, compared with NIS 45.9 billion at the end of 2011.

	Total	Total	Total exposure	Percentage of
	balance sheet	off-balance sheet		balance sheet
Country	exposure(1)	exposure		exposure
United States	14,536	6,768	21,304	34.0%
Switzerland	5,624	550	6,174	13.2%
England	6,046	3,128	9,174	14.2%
Germany	2,280	1,229	3,509	5.3%
France	1,840	1,474	3,314	4.3%
Ireland*	82	204	286	0.2%
Spain**	140	132	272	0.3%
Portugal	1	-	1	0.0%
Greece	2	1	3	0.0%
Italy***	56	35	91	0.1%
Other developed countries(2)	7,670	1,598	9,268	18.0%
Turkey	3,142	874	4,016	7.4%
Other less developed countries (LDCs)(3)	1,307	1,230	2,537	3.0%
Total exposures to foreign countries	42,726	17,223	59,949	100%

Total principal exposures to foreign countries as at June 30, 2012 (in NIS millions):

Total principal exposures to foreign countries as at December 31, 2011 (in NIS millions):

Country	Total balance sheet exposure(1)	Total off-balance sheet exposure	Total exposure	Percentage of balance sheet exposure
United States	17,371	7,103	24,474	37.8%
Switzerland	5,661	548	6,209	12.3%
England	6,431	3,634	10,065	14.0%
Germany	1,926	995	2,921	4.2%
France	2,200	1,282	3,482	4.8%
Ireland	110	195	305	0.2%
Spain	124	129	253	0.3%
Portugal	1	-	1	0.0%
Greece	1	1	2	0.0%
Italy	49	32	81	0.1%
Other developed countries(2)	7,573	1,727	9,300	16.6%
Turkey	3,138	1,049	4,187	6.8%
Other less developed countries (LDCs)(3)	1,345	1,115	2,460	2.9%
Total exposures to foreign countries	45,930	17,810	63,740	100%

* The exposure in Ireland includes NIS 17 million to banks in Ireland and NIS 269 million to customers. Of the total exposure to customers, approximately NIS 196 million derives from a backup line granted by the Bank to an SPE incorporated in Ireland, which is engaged in securitization of debtors who are not residents of Ireland.

** The exposure to Spain includes NIS 233 million to banks, NIS 38 million to customers and NIS 1 million to the Spanish government. Of the total exposure to banks, approximately NIS 128 million constitutes off-balance sheet credit risk in respect of derivatives, as calculated for the purpose of borrower limits. Among other matters, the off-balance sheet indebtedness includes exposure in respect of the "added" coefficient reflecting the potential future exposure for the remaining lifetime of the derivative contract, multiplied by three. Note that these derivatives were executed with parties with which CSA agreements have been signed in order to limit and minimize credit risks in derivatives activity.

*** The exposure to Italy includes NIS 1 million to the Italian government, NIS 17 million to banks, and NIS 73 million to customers.

(1) After deducting liabilities of the Bank's overseas offices to local residents.

(2) The main exposures arise from Canada, Luxembourg, and the Netherlands.

(3) Less developed countries (LDCs) - according to definitions of the World Bank, based on national per-capita income. The main exposures arise from Kazakhstan and Russia.

Identification and Treatment of Borrowers in Distress

The Bank has established procedures for the identification and handling of borrowers who, according to the Bank's evaluation, may default on their obligations to the Bank. These borrowers are supervised and monitored more closely, and the Bank endeavors to reduce its exposure to them by redeeming credit from the borrowers' resources and/or by obtaining additional collateral from them. In certain cases, customers are transferred to a division specializing in monitoring and restructuring of customers' debt, or to debt collection units. In addition, the Bank regularly reviews the level of credit risk in borrower portfolios on the basis of conservative assumptions, classifies problematic credit risk according to the rules in the directives of the Bank of Israel (impaired, substandard, or under special supervision), and records a sufficient provision for credit losses in respect of the total credit risk at the Bank.

With regard to credit classified as "impaired," the provision for credit losses is derived from an individual examination of the amount collectible from the customer (cash flows and/or expected realization of collateral), after discounting the amounts according to the expected collection and realization dates. Debts not expected to be collected within a reasonable period are written off in accounting, in accordance with the rules established in the Bank of Israel's directives. The collectible amount is determined with the inclusion of safety margins aimed at addressing situations of uncertainty regarding the ability to repay the debt. However, because economic variables are involved, there is no certainty that the collectible amount will not be lower than the established estimate, due to worsening of economic parameters or for any other reason.

The suitability of the classification of the debt and of the collectible amount is approved by an officer one authorization level above the level of the authorization to grant the credit to the customer, with the necessary adjustments. For this purpose, a process is in place in which a discussion regarding the suitability of the classification and of the collectible amount for each such customer is held each quarter.

With regard to sound credit or problematic credit that is not impaired (substandard or under special supervision), a "collective provision" is calculated based on the history of credit losses in the economic sector to which the customer belongs. In order to calculate the collective provision, the Bank sets two provision rates for each economic sector, for problematic and sound credit risk, on a quarterly basis. The rates are set based on a quarterly analysis of historical credit losses, and on an analysis of market trends, in accordance with the instructions of the Bank of Israel.

With regard to borrowers in the housing finance sector, a provision is also calculated, according to the directives of the Supervisor of Banks, taking into account the extent of the arrears of the borrower, such that the deeper the arrears, the greater the rate of the provision out of the total credit. In addition, in accordance with the directives of the Supervisor of Banks, a collective provision is calculated in respect of housing loans granted with a high rate of leverage in recent years.

The Credit Risk Management Unit

The Credit Risk Management Unit serves as an independent administrative unit for the management and analysis of credit risks. The unit reports to the Chief Risk Officer and is independent of underwriting and credit approval processes. The role of the unit is to formulate credit risk management methodologies in line with the strategic goals of the Bank Group; to instill an organizational culture of rational risk-taking within limits – in other words, the execution of transactions that do not exceed the limits, at a price congruent with the risk; and to apply controls to ensure the Bank's compliance with the established policy. The unit serves as the administrative unit responsible for the control of credit risk management processes and methodologies at the subsidiaries in the Bank Group. Two departments operate within the Credit Risk Management Unit:

The Credit Risk Analysis and Management Department is responsible for the development of methodologies for the identification, control, and management of credit risks; the development of models for credit risk rating measurement and pricing, at the level of the individual borrower and at the portfolio level; the development of models for the allocation of economic capital in respect of credit risk to the various segments; the advancement of preparations for the measurement of credit risks in accordance with the advanced approach under Basel II; the development of methodologies for the calculation of collective provisions, for the implementation of the directive on impaired debts; monitoring credit exposures, the level of credit risk, and compliance with credit limits within the Group, and reporting the results to the Board of Management and Board of Directors; applying extreme scenarios at the level of the Bank and of the Group; and monitoring, measuring, and managing credit concentration risk.

The Credit Control Department performs independent assessments of the level of credit risk of all of the Bank's major corporate borrowers, in a three-year cycle, or at a higher frequency for borrowers identified as having risk potential. It also performs reliability tests on the credit ratings of the examined borrowers. The department is responsible for credit-control activities at the branches of the Bank and at the subsidiaries overseas, and monitors both control processes and the volume of control and execution of work plans.

B. Market and Liquidity Risks

General

Market risk – The risk of loss arising from change in the economic value of a financial instrument, or of a particular portfolio or group of portfolios; and on the general level, a change in the economic value of the Bank due to changes in prices, rates, spreads, and other parameters, detailed below:

Interest-rate risk – The risk of loss as a result of changes in interest rates in the various currencies.

Inflation risk and/or exchange-rate risk – The risk of loss as a result of changes in exchange rates or as a result of changes in the consumer price index.

Share price risk – The risk of loss as a result of changes in stock prices or in stock indices. The Group holds shares primarily for investment purposes (not for trading), and declines in the value of these shares may impair the profitability of the Bank. The volume of holdings of the Group in shares available for sale as at the date of this report stands at approximately NIS 1,372 million, and approximately NIS 46 million in shares for trading.

Spread risk – The risk of loss as a result of changes in the spreads between different interest-rate curves.

Liquidity risk – Defined as risk to the profit and stability of a banking corporation arising from an inability to supply its liquidity needs. The Bank takes a broader view of liquidity management, referring not only to the Bank's ability to meet all of its current liabilities (including off-balance sheet liabilities), but also to its ability to do so without damage to its routine operations (i.e. to the Bank's ability to continue to finance new business according to its wishes and needs) and to its existing capabilities, and without sustaining exceptional losses.

Management of Market and Liquidity Risks

Market and liquidity risks are managed based on a global view of the Bank's activity in Israel and at its branches abroad, taking into account the activity of the banking subsidiaries. The Board of Management and the Board of Directors approve areas of activity and risk limits. Market risk management policy is aimed at increasing expected profits on an economic basis, while maintaining approved, controlled risk levels.

Global asset and liability management in the banking book (ALM) and trading management (in the dealing rooms) are performed under the responsibility and direction of the Head of the Financial Markets Area. Routine management and supervision of asset and liability management and trading management are under the responsibility of managers in the Asset and Liability Management Division and in the Dealing Room Division of the Financial Markets Area in Tel Aviv, and in asset and liability management units and dealing rooms at the Bank's branches in New York and London, which are professionally subordinate to the Head of the Financial Markets Area, as relevant. Routine control and monitoring of activity at the branches abroad are performed by local units, in full coordination and with regular reports to the corresponding Head Office units, in accordance with the control approach (the spheres of control). In addition to the assessment of risks, examination of outcomes, and routine control of compliance with limits, various units in the Financial Markets Area perform operational control activities. The goals of these controls are to check for correctness, completeness, and congruence among the different databases in the various reporting systems and to identify operational errors.

Risk limits reflect the Bank's risk appetite for market risks – the level of risk which the Board of Management and the Board of Directors are willing to bear in the course of business operations in order to achieve returns or value. The limits are approved by the Board of Directors and fixed in regulations, including, among other things, limits on the sensitivity of the Bank's economic value to changes in the principal risk factors and specific limits for each of the various trading activities. The main risk factors to which the Bank is exposed are NIS interest rates in the linked and unlinked segments, inflation, and the NIS/USD exchange rate. The Bank's risk appetite is established in terms of VaR and/or sensitivities and/or scenarios.

The Board of Directors and the Risk Management and Control and Basel II Implementation Committee receive reports on activity, exposures, results of operations, and execution of approved policy, at least once each quarter. These reports include: a review of topics discussed and reported in committees, including main resolutions; exposures and risk levels utilized out of approved limits; results of operations; events requiring a report (losses, exceptions from procedures, exceptional events); expansion of activities and authorizations for the various dealing rooms, in line with approved authorizations; overview of risk at the Bank and banking subsidiaries in the Group; and a quarterly report on the control of market risks.

ALM and market and liquidity risk management policy are defined and controlled by the Global Asset and Liability Management Committee, which consists of members of the Bank's Board of Management, headed by the Bank's Chief Executive Officer. Policies, including the established limits, are submitted for discussion and approval to the Global Asset and Liability Management Committee of the Bank's Board of Management, the committees of the Board of Directors, or the plenum of the Board of Directors, as relevant.

Ongoing activity is conducted by secondary committees, with the participation of senior officers of the Bank; one secondary committee is headed by the Head of Financial Markets and another is headed by the Head of the ALM Division. Local committees also operate in New York and London. The committees operate on the basis of resolutions adopted by the Board of Directors and by its committees regarding exposure to market and liquidity risks, subject to the directives issued by the Supervisor of Banks or by the local regulator, as relevant.

Market and liquidity risks are managed separately by each banking subsidiary in the Bank Group, according to policy established by each company's board of directors and in accordance with Group policy. Market and liquidity risks are assessed and controlled based on a uniform methodology at the Group level, under the direction of the Risk Management Area, taking into account the size of capital and the unique characteristics of the activity of each banking subsidiary. Subsidiaries' exposures to market and liquidity risks are examined by the Market and Liquidity Risk Management Department in the Risk Management Area, and reported to the Board of Management and the Board of Directors of the Bank at an appropriate frequency based on the risk level.

Market Risks

Market risk management at the Bank differentiates between exposures that arise in the course of the Bank's routine asset and liability management (ALM – the banking book, "non-trade") and exposures in the trading book ("trade"). A detailed description of the management of market risks in activity in the banking book and in trading activity is provided in the Financial Statements as at December 31, 2011.

Liquidity Risk

Liquidity risk at the Bank, in foreign currency and in NIS, is managed and controlled routinely, in accordance with Group policy, with the aim of ensuring the ability to cope competitively even in exceptional supply and demand situations in the financial markets. Routine liquidity management is under the responsibility of the ALM Division, and is performed through NIS and foreign-currency liquidity units. A daily liquidity risk report is generated by a comprehensive computerized system for asset and liability management.

In accordance with Proper Conduct of Banking Business Directive No. 342, "Liquidity Risk Management," the Bank operates an internal model for the assessment of liquidity risk. This model is based on the proven stability of deposits at the Bank over long periods, and includes different scenarios with respect to rollover and maturity rates of assets and liabilities. A liquidity ratio is calculated for each scenario, which is not to fall below a minimum level defined in the directive. The scenarios applied in the internal model refer to different market conditions: ordinary business conditions and extraordinary conditions for the banking system in general and specifically for the Bank. In each scenario, the liquidity gap is examined, for a period of up to one month, against liquid assets. The scenarios mainly differ in the assumptions with regard to the rollover of deposits. Periods exceeding one month are examined routinely against the business plan.

The Bank has implemented a plan to address liquidity crises, on various levels. The plan includes a system for monitoring metrics that may indicate a crisis situation, and the steps necessary upon materialization of defined scenarios. These steps include committee meetings, a reporting system, and a series of actions to cope with a possible crisis. In addition, scenarios were set up to examine the effect of changes in the pace of execution of the business plan on liquidity needs in a one-year range.

In early August 2011, the Bank of Israel issued a draft amendment of Proper Conduct of Banking Business Directive No. 342. According to the draft, the Bank of Israel intends to adopt the Basel III directives on liquidity risk, with the necessary changes, at a date to be determined. The Bank is examining the measures required in order to comply with the amendment of the directive within the defined timeframe, and the measures required in order to implement and comply with the recommendations of the Basel III Committee.

Risk Assessment and Control

Identification and assessment of risks, control of limits on the volume of risks, and reporting of findings are carried out or controlled by the Risk Management Area, independently of the routine analyses and reports performed as part of the operation of the Financial Markets Area.

The Market and Liquidity Risk Management Department in the Risk Management Area is responsible for the formulation of market and liquidity risk assessment methodology, in line with the strategic goals of the Bank Group, and for the control of market and liquidity risks in the Group.

The Bank's risk level is measured and controlled according to procedures that include, among other things, limits in terms of the sensitivity of the Bank's economic value to changes in the primary risk factors. In addition, a risk estimate is calculated using the VaR (value at risk) method. The VaR method is used to estimate the maximum potential loss to a corporation resulting from the materialization of market risks within a given period of time and at a level of statistical significance predefined by the Bank and approved by the Board of Directors. The principal limits are detailed in the subsection "Procedures for Exposure to Market and Liquidity Risks," below. Risk assessments as well as limit control of trading positions are performed at least once daily.

Market Risk Assessment Methodology

The methodology used by the Bank to assess market risks was approved by the Board of Directors and by the Board of Management. This methodology includes both VaR calculations and the application of extreme scenarios (stress tests) to all trading portfolios and to the banking book. The market risk assessment methodology is congruent with the requirements of the Basel Committee and complies with international standards.

The estimate of the risk in trading activity is calculated for a horizon of ten business days, at a significance level of 99%. The higher of the risk-level outcomes of two commonly accepted risk-assessment methods (historical simulation, in which all observations are assigned equal weights; and Monte Carlo simulation, in which recent observations are assigned greater weight) is taken into account. This methodology is compatible with the relevant recommendations of the Basel Committee following the crisis in US markets. The estimate provides a relatively prompt alert of the level of market risk during periods of rising volatility. A full revaluation of the trading portfolio is executed at least once daily, under various scenarios, in order to produce an estimate. An assessment of the risk level of activity in the banking book is executed once a month, using a historical simulation with a one-month horizon.

In addition, a back-test procedure is performed routinely, based on the criteria recommended by the Basel Committee, in order to examine the validity of the risk-assessment model. The results of these tests are reported annually to the Board of Management and to the Board of Directors. According to the results of the test, the model meets the criteria defined by the Basel Committee for acceptance of a model.

The market risk assessment methodology of the Bank includes the application of stress tests to trading portfolios and to the overall banking book, in addition to the VaR calculations. The Market Risk Management Department applies three types of scenarios, in accordance with common practice worldwide: sensitivity analysis, worst historical scenario, and macro-economic scenarios. For an extensive review of the methodology, see this section in the Financial Statements as at December 31, 2011.

Overall Activity of the Bank

Set out below are data regarding the sensitivity of the capital of the Bank to changes in the CPI (the theoretical change in economic value as a result of each scenario), as at June 30, 2012.

	As at June 30, 2012	Maximum from beginning of 2012	Minimum from beginning of 2012
Scenario		NIS millions
1% decrease in CPI	)70(	)70(	)35(

The Bank operates in currency markets through spot and forward transactions, as well as through options, both on its own behalf and on behalf of its customers. Consequently, the Bank has activity in most of the world's tradable currencies, in developed markets as well as developing markets. Due to the limits imposed on currency exposure, key points of which are noted in the summary of limits below, net currency exposure is relatively low.

Set out below are data regarding the sensitivity of the capital of the Bank to changes in the major currency exchange rates (theoretical change in economic value as a result of each scenario, where an appreciation scenario indicates strengthening of the currency in question against all of the other currencies), as at June 30, 2012.

	10%	5%	5%	10%
	appreciation	appreciation	depreciation	depreciation
Currency	NIS millions
USD	94	28	)8(	)26(
EUR	)5(	)3(	)1(	)12(
JPY	18	7	)2(	)4(
TRY	)7(	)4(	4	7
GBP	14	4	)4(	)8(
CHF	)32(	)15(	12	23

Limits are imposed on the sensitivity of the capital of the Bank (including financial subsidiaries managed by the Bank) to a scenario of change in the NIS, CPI-linked, and dollar interest-rate curves.

Set out below are data regarding the sensitivity of the capital of the Bank to parallel changes in interest-rate curves (theoretical change in economic value as a result of each scenario) as at June 30, 2012:

	June 30, 2012			Maximum from beginning of 2012		Minimum from beginning of 2012
	1%	1%	0.1%	1%	1%	1%	1%
	increase	decrease	increase	increase	decrease	increase	decrease
Scenario				NIS millions
Shift in CPI-linked interest rate:
Bank	)91(	122	)10(	)91(	122	)14(	)30(
Of which: Banking book	)92(	123	)10(	)92(	123	)15(	)31(
Trading book	1	)1(	-	1	)1(	1	)1(
Shift in unlinked interest rate:
Bank	288	)285(	29	288	)285(	166	)153(
Of which: Banking book	286	)286(	29	287	)287(	155	)148(
Trading book	2	1	-	19	)14(	)1(	2
Shift in foreign-currency interest rates:
Bank	)8(	14	)1(	)22(	)41(	)8(	)9(
Of which: Banking book	1	19		)13(	)38(	)1(	)18(
Trading book	)9(	)5(	)1(	)10(	10	)6(	)3(

Set out below are data regarding the sensitivity of the capital of the Bank to parallel shifts in interest-rate curves (theoretical change in economic value as a result of each scenario) as at December 31, 2011:

		December 31, 2011			Maximum in 2011		Minimum in 2011
	1% increase	1% decrease	0.1% increase	1% increase	1% decrease	1% increase	1% decrease
Scenario				NIS millions
Shift in CPI-linked interest rate:
Bank	)21(	41	)3(	224	)241(	)21(	41
Of which: Banking book	)22(	42	)3(	223	)239(	)22(	42
Trading book	1	)1(	-	2	)2(	-	-
Shift in unlinked interest rate:
Bank	175	)169(	17	375	)376(	175	)169(
Of which: Banking book	172	)164(	17	353	)360(	164	)153(
Trading book	3	)5(	-	29	)36(	)17(	12
Shift in foreign-currency interest rates:
Bank	)2(	)16(	-	)30(	)39(	)2(	)7(
Of which: Banking book	4	)22(	-	43	)55(	)2(	)2(
Trading book	)6(	6	-	)28(	28	)3(	)3(

The above table presents an analysis of the sensitivity of the Bank's economic value to changes in interest-rate curves, based, among other factors, on the capitalization of expected cash flows in the interest-rate curve without taking into account the credit risk spread of the counterparty. This differs from a fair-value calculation, which is based on factors including the capitalization of expected cash flows at interest rates reflecting the risk levels.

The examination of extreme scenarios includes a test of the sensitivity of the Bank's economic value to the worst historical scenario of the last five years, including changes in the various risk factors in a one-month range. Note that since the beginning of 2012, this sensitivity did not exceed NIS 554 million.

Set out below are details of the fair value of the Bank and its consolidated companies, as at June 30, 2012, by linkage segment.

	Israeli currency		Foreign currency**
	Unlinked	CPI-linked	USD	EUR	Other	Total
			NIS millions
Financial assets*	205,886	62,434	54,167	9,603	13,477	345,567
Amounts receivable in respect of derivative and
off-balance sheet financial instruments***	187,321	14,509	192,279	23,481	24,910	442,500
Financial liabilities*	179,770	53,220	68,170	14,738	8,567	324,465
Amounts payable in respect of derivative and
off-balance sheet financial instruments***	198,584	19,190	179,808	18,502	29,589	445,673
Net fair value of financial instruments	14,853	4,533	)1,532(	)156(	231	17,929

Set out below are details of the fair value of the Bank and its consolidated companies as at December 31, 2011, by linkage segment.

	Israeli currency		Foreign currency**
	Unlinked	CPI-linked	USD	EUR	Other	Total
			NIS millions
Financial assets*	198,490	61,701	56,565	9,363	13,124	339,243
Amounts receivable in respect of derivative and
off-balance sheet financial instruments***	168,098	10,370	206,273	29,458	29,856	444,055
Financial liabilities*	179,176	50,523	67,663	14,056	7,386	318,804
Amounts payable in respect of derivative and
off-balance sheet financial instruments***	171,750	17,270	197,052	24,803	35,852	446,727
Net fair value of financial instruments	15,662	4,278	)1,877(	)38(	)258(	17,767

* Includes hybrid financial instruments. Does not include balance sheet balances of derivative financial instruments and fair value of off-balance sheet financial instruments.

** Includes foreign-currency-linked Israeli currency.

*** Amounts receivable (payable) in respect of derivative financial instruments and in respect of off-balance sheet financial instruments, capitalized by the interest rates used to calculate the fair value.

Set out below are data regarding the effect of theoretical changes in interest rates on the net fair value of financial instruments of the Bank and its consolidated companies, excluding non-monetary items, as at June 30, 2012.

	Net fair value of financial instruments, after the effect of changes in interest rates**							Change in fair value
	Israeli currency			Foreign currency*
		Unlinked CPI-linked	USD	EUR	Other	Total	Total	Total
Change in interest rates		NIS millions						%
Immediate parallel increase of 1%	14,984	4,640	)1,551(	)174(	194	18,093	164	0.9%
Immediate parallel increase of 0.1%	14,875	4,543	)1,543(	)157(	227	17,945	16	0.1%
Immediate parallel decrease of 1%	14,744	4,436	)1,523(	)135(	287	17,809	)120(	)0.7%(

		Net fair value of financial instruments, after the effect of changes in interest rates**
	Israeli currency		Foreign currency*
		Unlinked CPI-linked	USD	EUR	Other	Total	Total	Total
Change in interest rates		NIS millions						%
Immediate parallel increase of 1%	15,764	4,473	)1,899(	)55(	)295(	17,988	221	1.2%
Immediate parallel increase of 0.1%	15,684	4,304	)1,871(	)42(	)266(	17,809	42	0.2%
Immediate parallel decrease of 1%	15,572	4,164	)1,866(	)27(	)219(	17,624	)143(	)0.8%(

* Includes foreign-currency-linked Israeli currency.

** The net fair value of financial instruments presented in each linkage segment is the net fair value in that segment, assuming that the noted change occurred in all interest rates in that linkage segment. The total net fair value of financial instruments is the net fair value of all financial instruments (excluding non-monetary items) assuming that the noted change occurred in all interest rates in all linkage segments.

Trading Activity

Trade exposures result from the Bank's activity as a market maker and from dynamic management of a portfolio of liquid financial assets. The goal of this activity is to maximize expected profits, while maintaining a controlled, approved level of risk. The authorizations for activities and the risk of the activities are measured, as relevant, in terms of the value at risk (VaR); theoretical loss under various scenarios, including extreme scenarios; sensitivity to risk factors; and volume of activity. Risk assessments as well as limit control of trading activity are carried out at least once daily. In addition to the specific authorizations for each activity separately, an overall authorization in terms of VaR has been established for trading activity in the Bank's dealing rooms.

• Currency Exposures – Market Making and Trading

Spot/forward desks in foreign currency and in NIS operate in each of the Bank's three dealing rooms. The Tel Aviv dealing room also has a desk for options in foreign currency and in NIS. Trading and market-making activity in currencies and options is conducted subject to various limits on risk and under an overall authorization for exposure in NIS/foreign currency allocated to this activity, out of the total limit on the exposure of the Bank's financial capital to foreign currency.

• Interest-Rate Exposure – Market Making and Trading

The dealing rooms are also active in the area of interest-rate trading exposures, under authorizations from the Board of Management and the Board of Directors. The dealing room in Tel Aviv manages a trading desk in NIS interest-rate instruments, including market making in interest-rate options, and a bond trading desk. The desks' activity is subject to risk estimate limits and other restrictions.

	As at June 30, 2012	Average from beginning of 2012	Maximum from beginning of 2012	Minimum from beginning of 2012
		NIS millions
Total trading in dealing rooms	19	25	43	14

Set out below are risk estimates of trading activity (VaR) as at June 30, 2012.

Procedures for Exposure to Market and Liquidity Risks

At the end of 2011, the Board of Directors approved a document on exposures to market and liquidity risks for 2012. The approved limits include a general limit for the overall risk estimate of the Bank, limits on the overall sensitivity of the Bank to risk factors, limits for proprietary investment activity, and risk limits in the various areas of trading activity. The exposures document for 2012 reflects the work plan of the Financial Markets Area, including the expansion of investment activity in the proprietary portfolio, as part of the management of the banking book. Utilization of the approved limits is subject to approval by the Global ALM Committee of the Bank.

Set out below are the principal limits on exposures to market risks, in the overall activity of the Bank and separately for trading activity, as at June 30, 2012.

	Limit	NIS millions	% of active financial capital
Banking book	Overall risk estimate (VaR(	750
	Sensitivity of economic value to parallel changes of 1% and non-parallel changes of up to 1% in interest-rate curves:
	CPI-linked NIS	500
	Unlinked NIS	500
	Foreign currency	300
	Sensitivity of derivatives to parallel change of 1% in interest-rate curves:
	CPI-linked NIS	260
	Unlinked NIS	150
	Linkage-base exposures by segment:
	CPI-linked NIS		+/-100
	Foreign currency, including foreign-currency linked		+/-20
	Sensitivity to 10% change in NIS/USD exchange rate	500
	Volume of total proprietary investment*	*14,500
	Of which: Volume of investment in shares	3,000
Trading book	Overall risk estimate (VaR(	200
	NIS/foreign-currency exposure		+/-10
	Sensitivity to 10% change in NIS/USD exchange rate	200
	Sensitivity of economic value to parallel changes of 1% and non-parallel changes of up to 1.5% in interest-rate curves:
	Unlinked NIS	120
	Foreign currency	70
	Foreign-currency/foreign-currency exposure in trading and currencies	800

* Not including investment in short-term Israeli government bonds and in US bonds.

The Bank is required to maintain a minimum capital ratio in respect of market risks on the basis of a standard model defined by the Bank of Israel. The regulatory rate of capital adequacy is calculated for interest-rate risks in the areas of trading alone, as defined above, and for currency risks at the Bank Group.

Market and Liquidity Risk Management Department

In accordance with Proper Conduct of Banking Business Directive No. 339, "Risk Management," the Bank has a unit engaged in operational and market risk management. This unit reports to the Chief Risk Officer. Market and liquidity risk assessment and control are executed by the Market and Liquidity Risk Management Department, independently and in addition to the monitoring and analysis performed as part of the activity of the Financial Markets Area.

Operational and Legal Risks

A. Operational Risks

General

Operational risk is defined as the risk of loss resulting from failed or faulty internal processes, human actions, system malfunctions, or external events. The definition includes legal risk, but does not include strategic risk or reputation risk. Failures related to one of the aforesaid factors may cause damage to profitability. The Bank operates control units, including the Compliance Officer Unit and the Anti-Money Laundering and Terrorism Financing Prevention Unit, as well as procedures and systems in the area of human resources, information security, security, process control, emergency operation, survivability and recovery plans, and more.

Management of Operational Risks

Operational risk management policy is aimed at supporting the achievement of the Group's strategic objectives and maximizing business value, while taking into consideration the costs in terms of risk, by all responsible parties at all levels of the organization. The managerial process is oriented towards execution based on the designation of risk ownership. The goal is for communication and prudent treatment with regard to operational risks to contribute to managerial decision-making, based on considerations of business value versus cost in terms of risk, both at the level of the management of the organization and at the level of the various units.

The responsibility for routine management of operational risk and for activities aimed at mitigating the risk lies with the Area managers and the managers of subsidiaries in the Bank Group. These activities are overseen by the Operational Risk Management Department in the Risk Management Area. Routine activity is conducted in the Bank's units and in the Group by a network of operational risk controllers, based on the matrix management principle; controllers report organizationally to Area managers or CEOs of subsidiaries, and receive methodology guidance from the Operational Risk Management Department.

Operational risk management activity is supervised and directed by three forums:

• The Board of Directors' Committee on Risk Management and Control;
• The Board of Management Committee on Risk Management and Basel II Implementation, headed by the CEO;
• The Sub-Committee on Operational Risk Management, headed by the Head of the Risk Management Area.

The operational risk management policy was approved by the Board of Directors of the Bank. The policy document serves as a framework for operational risk management within the Group, in accordance with uniform principles and reporting duties aimed at complying with Basel II standards on Sound Practices. The Bank's activity in this area is conducted according to the rules of the Proper Conduct of Banking Business Directive concerning capital measurement and adequacy, which refers among other matters to capital allocation in respect of operational risks. The directive relevant to the management of operational risks is Directive 206, Capital Measurement and Adequacy – Operational Risk. The guidelines on this matter took effect in Israel as of January 1, 2010. In addition, Proper Conduct of Banking Business Directive 350, concerning operational risk management, has been published, based on the updated guidelines in the new Basel document of June 2011 on sound practice for operational risk management.

The Bank has operated in accordance with the Basel II standard approach and the requirements of the corresponding Proper Conduct of Banking Business Directives since 2010. The strategic plan for the coming years includes, among other matters, extension and expansion of some of the activities, and adjustment for updates of the relevant documents and regulatory guidelines.

The following projects and activities, among others, are underway as part of the standard approach:

• Quar terly repor ts submitted to the Subcommittee on Operational Risk Management,the Board of Management Committee on Risk Management and Basel II Implementation, the Board of Directors Committee on Risk Management and Control, and the plenum of the Board of Directors. The reports include updates on the implementation of the standard approach in the Group, work plans, the status of projects in progress, and information about operational events.
• Collection of information regarding operational events in the Bank Group.A database for this purpose was established in late 2002, and is used, among other things, to analyze events, trends, and patterns and to support the mapping and assessment of operational risks to which the Group is exposed.
• Routine procedures performed to identify,map, and assess operational risks and controls at the units of the Bank and the Group, including mapping of the risk of embezzlement and fraud. This activity is conducted based on a uniform methodology in line with the requirements of the Basel Committee and the directives of the Bank of Israel on this matter, including monitoring of the implementation of the recommendations. A comprehensive mapping process of operational risks in all units of the Group is performed periodically. Subsequently, the findings are maintained, updated, and expanded through additional analyses, depth analyses, and risk analyses regarding new products and activities.
• Activities aimed at identifying material risk areas, defining risk ownership, assessing existing risks (average and extreme) and controls, and adding controls if necessary, while applying cost/benefit considerations.
• A system known as the Operational Risk Management Automation Project (Basel II PAMELA) has been implemented at the Bank's units. The system operates in the areas of collection of information regarding operational events, mapping and assessment of risks and controls, action items, and reports. Additional applications and expansions are planned, in order to support operational risk management in the Bank Group.
• Principles and standards have been defined as par t of the process of formulating a uniform control philosophy within the Bank Group. This philosophy is currently being instilled and implemented.
• A methodological infrastructure has been defined for the management of operational risks in material IT processes.
• In the area of information security, activity is being conducted as required under the directives of the Bank of Israel, the Protection of Privacy Law, 1981, and other laws, as relevant, with the aim of protecting the informationtechnology system and minimizing information-security risks.

Emergency preparedness – In order to preserve business continuity, survivability, and the continuous activity of the Bank following a disaster or malfunction, in accordance with the Bank of Israel's Directive 357 concerning information technology management, the Bank has continuous preparedness based on detailed action plans, working procedures, and periodic drills, defined in a system of emergency procedures. As part of its emergency preparedness, the Bank conducted a lateral process to establish policies, define reference scenarios, map and analyze critical processes and the resources required for the recovery of such processes during an emergency, and update its action plans based on the prevalent methodologies globally. Several emergency drills are held by the Bank each year, with the participation of the various units, from branches, regional managements, units, and Areas, to the Board of Management of the Bank. The Israel Standards Institute has affirmed that the business continuity management system of the Bank complies with the requirements of Israeli standards and of the international standard BS 25999. This system undergoes annual authorization tests. Alongside the improvement and enhancement of emergency preparedness in Israel, business continuity plans at the Bank's overseas branches and subsidiaries are also being examined, with the aim of completing preparations based on the policies applied in Israel. The Bank is preparing for the implementation of the various new aspects of Directive 355 of the Bank of Israel concerning business continuity management. The process of setting up a new central IT site has been initiated; the project is slated for completion in mid-2015. A process is being conducted in order to improve the level of preparedness for various cyber-events, and an additional a process is underway to improve preparedness for recovery of the Bank's IT systems in various reference scenarios.

Insurance – The Bank has a banking insurance policy to hedge risks, which includes: (1) banking insurance to cover damages that may arise from embezzlement by employees, loss of documents, forged documents, etc.; (2) professional liability insurance, to protect against claims filed by customers regarding damage caused by negligent banking actions; (3) computer crimes insurance, to cover damages to the Bank and to customers of the Bank as a result of malicious penetration of the Bank's computer systems. The banking insurance policies are subject to exclusions common in insurance policies of banking corporations in Israel (including an exclusion of damage arising from violation of the directives related to money laundering and terrorism financing).

In addition, the insurance structure of the Bank also includes property insurance, third-party insurance, employers' liability, directors' and officers' insurance, and additional insurance policies.

The liability limits in the policies were established by the Bank according to its needs, as part of its overall risk-management policy. Within the fulfillment of the Sound Practice requirements under the Basel guidelines, cooperation and exchanges of information are maintained between the Operational Risk Management Department and the unit that handles banking insurance.

B. The Chief Compliance Officer Unit

In late 2010, the Bank appointed a Chief Compliance Officer, whose areas of responsibility include the areas of responsibility of the Compliance Officer of the Bank pursuant to Proper Conduct of Banking Business Directive No. 308, and of the Supervisor of the Prohibition of Money Laundering pursuant to the Prohibition of Money Laundering Law, the Prohibition of Terrorism Financing Law, and Proper Conduct of Banking Business Directive No. 411. As part of this process, the Bank established the Chief Compliance Officer Unit, which encompasses the Bank's existing Compliance Unit and Anti-Money Laundering Unit. The Chief Compliance Officer Unit includes two additional units, working alongside the Compliance Unit and the Anti-Money Laundering Unit. The first is the International Unit, which is responsible for ensuring compliance and the prohibition of money laundering at the Bank's offices outside Israel. Compliance staff at the Bank's overseas branches now report directly to this unit, on both the professional and the managerial level. The second unit is an administrative unit (Operations, Coordination, and Control), which assists the Chief Compliance Officer with the execution of systemic and operational assignments.

The purpose of the Chief Compliance Officer Unit is to support the achievement of the strategic and business objectives of the Group, while minimizing exposure to compliance and reputation risks. The objectives of the Chief Compliance Officer Unit are:

• To attain full implementation of legislation at all units of the Bank, in Israel and worldwide, with suppor t for the activity of the business units;
• To promote the internalization of professional, values-driven, fair business conduct by the Bank's employees and managers;
• To provide maximum protection to the Bank, its managers, its employees, and its reputation, with full realization of the professional capabilities of the Bank's employees and enhancement of these abilities.

The responsibility for routine management of the compliance aspects of risk at the Bank and for the execution of activities aimed at minimizing this risk lies with the Area managers and the managers of subsidiaries in the Bank Group. Professional responsibility in this field rests with the Chief Compliance Officer Unit in the Risk Management Area. Routine activity is conducted at the Bank's units and in the Group by a network of compliance officers, based on the matrix management principle, with organizational subordination to Area heads or CEOs of subsidiaries, and guidance and control by the Chief Compliance Officer Unit.

The activity of the Chief Compliance Officer Unit is supervised through three channels:

• The Board of Directors' Committee on Risk Management and Control and Basel II Implementation;
• The Board of Management Committee on Compliance, headed by the CEO;
• Quar terly and annual repor ts to the Board of Directors of the Bank, the CEO, and the heads of the Areas.The reports include updates on the main exposures and risk areas in the Group; progress on work plans; and activities performed, including controls, mapping of knowledge gaps, organizational learning, technological and other projects in this field, reports submitted to the Israel Money Laundering Prohibition Authority, violations, and reports of exceptional events.

Upon the establishment of the Chief Compliance Officer Unit, the Board of Directors of the Bank established a new Group-level compliance policy for the Bank. The new policy sets forth rules regarding all of the component areas of the prohibition of money laundering and compliance with consumer-protection directives. The policy emphasizes corporate control and the interaction with subsidiaries and branches outside Israel. The policy is based on Proper Conduct of Banking Business Directive No. 308, the Money Laundering Prohibition Law, the Terrorism Financing Prohibition Law, and Proper Conduct of Banking Business Directive No. 411. This policy took effect at the end of December 2010, and was updated in December 2011.

In order to comply with legislative directives and with the Group-level compliance policy, several activities are being conducted at the Bank, as detailed below:

• Identifying the main exposures and risk areas in the Group, and monitoring work plans to eliminate them;
• Applying process-based, qualitative, and quantitative controls to ensure adherence to the directives that regulate relationships between the Bank and its customers and the prohibition of money laundering and terrorism financing, analyzing such controls, and creating work plans to minimize any gaps discovered;
• Developing a training system in the area of compliance and the prohibition of money laundering and terrorism financing, including focused presentations to refresh knowledge, practical guides for bankers, workshops, instructional pamphlets, knowledge management on the organizational portal, etc.;
• Collecting information on the progress of learning within the organization in the area of compliance with directives that regulate relationships between the Bank and its customers and the prohibition of money laundering and terrorism financing;
• Conducting continual processes aimed at identifying, mapping, and assessing compliance risks and gaps in the Bank's procedures and systems through an infrastructure survey;
• Conducting a diagnostic process at the Bank's professional units, focused on compliance and the prohibition of money laundering and terrorism financing, and building control processes and training methods adapted to the nature of the units' activity, with the aim of minimizing exposures and risks in the area of compliance and the prohibition of money laundering and terrorism financing;
• Formulating job descriptions for compliance officers in corporate banking;
• Analyzing data in order to assess risks at the Bank, and as infrastructure for the construction of new controls and new learning systems, as necessary;
• Analyzing new products and services and new business activities from the perspective of compliance and the prohibition of money laundering;
• Developing improvements to technological systems and building new infrastructures in the area of compliance and the prohibition of money laundering, including systems for reporting to the Israel Money Laundering Prohibition Authority, and control and monitoring systems within the Bank;
• Developing risk metrics and performance metrics in the area of compliance and the prohibition of money laundering, and including the metrics in the strategic maps of the Areas of the Bank and in the executives' KPIs;
• Integrating compliance metrics into the remuneration model of the Retail Banking Area and into achievement metrics in the areas of customer relationship management and credit management in the Corporate Banking Area;
• Visiting the corporate units of the Bank, in order to provide localized responses to issues creating exposure for the Bank in the area of compliance and the prohibition of money laundering, clarify work processes, and locate risk areas at these units;
• Convening forums of compliance officers of the Group, for updates on legislation; instillation of new work processes, new systems and applications, and changes in procedures; training and knowledge refreshment presentations for instruction of other compliance officers within the system; etc.;
• Managing compliance units at the overseas branches, providing routine suppor t to overseas units, and monitoring compliance processes there.

The main activities of each department are described below.

The Anti-Money Laundering and Terrorism Financing Prevention Department

The Anti-Money Laundering Department is responsible for fulfillment of the duties imposed upon the banking corporation, and supervision of the execution of such duties. The department is also responsible for ensuring that the Bank's policies and procedures are implemented at the Group level. The department closely monitors banking activity in accounts, with the aim of identifying activities that appear to be unusual and reporting such activities to the Israel Money Laundering Prohibition Authority (IMLPA). The improved ability to monitor unusual activities, the improvement of computerized control systems, the training and absorption activities, and the increased awareness and professional capabilities of the staff in the business units have led, among other effects, to an increase in the number of reports to the IMLPA.

The Anti-Money Laundering Department conducted the following activities: Development of a regulatory rating model for the prohibition of money laundering; development of a new system for subjective reports; implementation of an abridged Know Your Customer questionnaire for transactions by walk-in customers; update of expanded and corporate Know Your Customer questionnaires; implementation of an expanded due diligence (EDD) questionnaire in the branch network; visits to branches and regional administrations to provide guidance and raise awareness of the monitoring of unusual activities and the importance of reporting; training through Campus courses and training sessions at compliance officers' conferences in this area. Presentations were held for bankers to refresh their knowledge in the relevant areas. In light of the instructions of the Bank of Israel, the Bank's policy concerning activity involving hostile nations and activity related to gambling websites has been updated and approved by the Board of Management and the Board of Directors. In addition, an initial survey has been conducted on the subject of activity involving hostile nations, and the findings have been reported to the Bank of Israel. At the request of the Bank of Israel, during the first quarter of 2012 the Bank also began to conduct a gap survey to examine the Bank's compliance with legal directives concerning the prohibition of money laundering and terrorism financing. The survey was completed during the second quarter of 2012. The findings of the survey and a plan for closure of the gaps discovered were presented to the Board of Management and the Board of Directors of the Bank for approval, and a report was made to the Bank of Israel.

The Compliance Department

The Compliance Department assists the Board of Management and the Board of Directors in fulfilling requirements in the areas under its responsibility, reducing the corporation's exposure to legal claims, and protecting the corporation's reputation. The Compliance Department monitors gaps and violations (if any) in the area of consumer-protection directives. In addition, changes in legislation and in the directives of the Bank of Israel are monitored, as they pertain to consumer-protection directives and their implementation at the Bank. A new infrastructure survey is performed at the Bank every five years, as required by Proper Conduct of Banking Business Directive No. 308, "Compliance Officers." Changes in procedures of the Bank related to consumer-protection directives are monitored routinely, through an infrastructure survey system developed for this purpose. Technological improvements have been made to this system to enable efficient routine processing and monitoring of survey records.

During the year, the Compliance Department conducted the following activities: Review of work processes at the various units of the Bank and adaptation of necessary controls and training activities; working meetings with professional units supporting the execution of the new compliance policy. Within this process, job descriptions were formulated for compliance officers at the units of the Bank, adding to those of units where these job descriptions have already been prepared. Controls were executed at the various business units, in areas such as account closures in the Retail Banking Area, control over third-party guarantees in the Personal Banking Department of the Retail Banking Area, and orders given via telephone or fax at the Business Branches.

In the area of absorption and training, a new tutorial on consumer-protection directives was developed, with the aim of imparting basic knowledge on the principles of consumer-protection directives to employees. In addition, educational presentations on various subjects were developed. The compliance portal was updated with training and learning materials related to compliance. A knowledge gap mapping process was performed with regard to the opening of accounts for corporations.

The Compliance Department gave lectures and conducted training sessions on compliance issues in courses for senior executives and others at the Poalim Campus, at compliance officers' conferences, and in various forums. The department examined new products and services of the Bank, examined findings of audit reports, and examined customer complaints related to consumer-protection directives, for learning purposes and in order to identify trends in the area of compliance.

The International Compliance Unit

The International Compliance Unit oversees the compliance officers at the Bank's overseas branches, from the professional perspective, and works to ensure that the compliance system at the subsidiaries operates in accordance with the policies of the Board of Directors and the local regulatory directives. The unit continued its activities aimed at creating a uniform compliance infrastructure and procedures for communication and reporting by all units of the Bank around the world.

The unit monitors the timely execution of the annual compliance plan at all units of the Bank and examines the quality of execution, through routine reports received as well as controls in the field, through visits to the branches. The unit examines the units' procedures and approves compliance procedures at the overseas branches. The unit supports and monitors the processing of audit reports relevant to compliance. In addition, the unit routinely addresses various issues raised by the units.

As part of the process of upgrading central computer systems and compliance system management applications in London, the unit has participated and assisted in the examination of specifications and adaptation to the need to control and monitor suspicious activities and scan names against alert lists. During the second quarter of 2012, testing continued, in order to ensure that the system provides an adequate solution for compliance needs. The unit also assisted in the implementation of eGifts, a new system for transfers, at the US branches. This system contains monitoring components that improve the ability to identify unusual transactions and to perform scans against published lists, for all transfers as well as specifically for correspondent banking activity.

The Administrative (Coordination, Operations, and Control) Department

The Administrative (Coordination, Operations, and Control) Department is responsible for coordination, monitoring, and control of the activities of the Chief Compliance Officer Unit; maintaining contact with the compliance system of the Bank; managing the work plans of the Chief Compliance Officer Unit; managing incentives and measurement; training activities and activities related to compliance and the prohibition of money laundering at the business units of the Areas of the Bank; management of controls, analysis of control findings, and creation of a work plan to address findings; centralizing reports to the Board of Directors and the Board of Management; managing technological projects and involvement in development projects of the systems of the Bank; ensuring that the systems are up-to-date; planning and construction of the training system in the area of compliance and the prohibition of money laundering; creation of knowledge-refreshment presentations and other training tools; managing conferences for the compliance officers of the Group; creating communication and change management plans for new systems and processes; distributing tasks to be performed with customers, derived from legislation or directives concerning the relationship between the Bank and its customers, or derived from violations or flaws discovered through computerized systems; and measuring the performance of the business units in this area. The department also develops risk metrics and performance metrics in the area of compliance and the prohibition of money laundering, including the inclusion of the metrics in the remuneration models of the business Areas, in the strategic maps of the Areas of the Bank, and in the executives' KPIs. During the first half of 2012, the department worked to address the findings of the gap survey in the area of money laundering and terrorism financing, and to implement a survey and optimization and control processes in the area of activity involving hostile nations.

C. Legal Risk

Risk to the Group's income and capital resulting from unexpected events such as legal claims, including class-action suits, inability to enforce contracts, or rulings against the Group, which may cause damage to the Group's profitability. The Group is aided by internal and external legal counsel.

According to the Bank of Israel's definition, legal risk is "the risk of a loss due to the inability to enforce an agreement by legal actions." Risks of this kind in the Bank's work may arise from a wide range of diverse circumstances. Thus, for example, risks may arise from the absence of written documentation of contractual engagements between the Bank and its customers, or between the Bank and its suppliers or others, deficient signatures, and/or a lack of details in written agreements; from improperly phrased agreements and/or agreements open to interpretation that does not reflect the Bank's intentions; or from agreements that are subject to cancellation (in full or in part) and/or that include unenforceable provisions or other legal flaws.

The Bank takes a broad approach to legal risks, encompassing risks arising from primary and secondary legislative directives, regulatory directives, rulings of courts, tribunals, and other entities with quasi-judicial authority, risks arising from activity not backed by legal counsel or from flawed legal counsel, and risks arising from legal proceedings.

Legal risks are naturally intertwined with operational risks, as for example in the case of the possible absence of a full, written, legally signed agreement in a particular transaction, despite the fact that an agreement of the same type exists at the Bank and is used in the ordinary course of its business.

A legal risk management policy document has been approved at the Bank, emphasizing the following points:

• Identifying and addressing areas of material legal risk, with the appointment of an officer responsible for implementing the directives.
• Preparing suitable agreements, guidelines, and procedures in order to ensure that risk-prevention measures are implemented.
• Examining the implications of legislative directives (including cour t rulings) and directives of government agencies, and their consequences for the Bank's work.
• Drawing conclusions from legislative changes (including cour t rulings) and applying those conclusions in the legal documents customarily used at the Bank; delivering opinions on such matters to the relevant Bank units.

With regard to subsidiaries in Israel and abroad, the plan delineates a general risk-management policy that each subsidiary must adapt to its circumstances and operations; mechanisms for reporting to the Head of Legal Risk are also required of these subsidiaries.

Other Risks

Reputation Risk

Reputation risk is defined as present or future risk of damage to income or capital as a result of a negative image in the eyes of relevant stakeholders, such as customers, counterparties to transactions, shareholders, investors, or regulatory agencies. The reputation risk management policy of the Bank Hapoalim Group has been approved by the Board of Management and the Board of Directors. As part of the process of instilling this policy, expansion of the risk assessment process and of reports in this area is planned.

Competition Risk

Competitive risks arise from the banking system in Israel and from various financial institutions such as insurance companies, investment-portfolio managers, foreign banks, etc., that may cause customers to transfer to these entities by transferring all of their activities or by selectively acquiring services from different suppliers; there is also a risk of erosion of profitability arising from competitive pressure to reduce fees and interest spreads. As a result, damage may be caused to the Group's market share and profitability. Measures aimed at coping with competitive pressure are an important element of the strategic plan and work plans; we therefore assume that no material impact is expected in the short to medium term, beyond the existing effects on which the plans are based.

Regulatory and Legislation Risk

Risk to the Group's income and capital arising from legislation and/or directives of various regulatory agencies that cause changes to the Group's business environment. Such changes may occasionally influence the Group's ability to offer certain services and/or may obligate the Group to carry out technological and other investments at considerable cost, while disrupting schedules for development of other planned services.

Changes in legislation as well as various regulatory developments, which result, among other things, in the imposition of limits on holdings of shares of the Bank and on holdings by the Bank in shares of entities related to the Bank, influence the Bank's operations and may influence its business results.

As a "bank" and as a "banking corporation," the Bank's activities are guided and bound by a system of laws, orders, and regulations, including, among others, the Banking Ordinance, 1941; the Bank of Israel Law, 1954; the Banking Law; and the Banking (Service to Customers) Law, 1981, as well as other laws with implications for its activity, such as the Securities Law, 1968; the Supervision of Financial Services (Profession of Pension Advising) Law, 2005; the Regulation of Investment Advice, Investment Marketing, and Investment Portfolio Management Law, 1995; and regulations and rules including the rules of the Governor of the Bank of Israel, and the directives, guidelines, and position statements of the Supervisor of Banks.

Banking laws include directives that apply to numerous areas of the Bank's activity, to the point that there is virtually no area of its activity that is not influenced by them to some degree. Banking laws also influence the Bank's subsidiaries, including those not considered "banking corporations," and to a lesser extent, companies related to the Bank.

Under the banking laws, the Bank is subject to supervision by the Bank of Israel, and in particular, supervision by the Governor of the Bank of Israel and by the Supervisor of Banks. In addition, the Bank is subject to supervision by agencies within government ministries, particularly the Ministry of Finance.

Banking laws refer to the Bank's capital and to the manner of its management, including the imposition of external and internal auditing and internal controls; they also determine the areas of activity in which the Bank is permitted to engage, and the other legal entities that the Bank is permitted to control, or in which it is permitted to hold means of control at specified rates; and they restrict the extent of the Bank's influence over controlled, related, and other companies in which it holds means of control.

These laws restrict the Bank's freedom of investment, particularly in "non-financial corporations," as defined in the Banking Law. The banking laws impose certain usages of assets on the Bank, and they impose restrictions and conditions for other usages of its assets.

The Bank monitors proposed legislation, regulations, and directives of the regulatory agencies to whose supervision it is subject and/or that may affect the activity of the Bank Group and/or its business results.

Economic Risk – Condition of the Israeli Economy

Risk to the Group's income and capital arising from a slowdown in economic activity, which may have an adverse effect on the condition of some businesses, on income levels, and on unemployment in the Israeli economy. Such a process may cause deterioration in the condition of some of the Group's borrowers, leading to an adverse effect on the probability of collecting credit. Furthermore, a slowdown in economic activity may cause a decline in non-credit income, such as income from capital-market activity and foreign-trade activity, and may cause a change for the worse in the composition of financial resources, such as an increase in the cost of resources and a decrease in their availability.

Economic Risk – Condition of the Global Economy

Risk to the Group's income and capital arising from a significant slowdown in economic activity in the global market, which may have an adverse effect on the condition of some businesses in Israel and on the volume of business activity. This could have a negative impact on the probability of collecting credit and/or reduce income from fees and/or from capital-market activity and/or from the Group's activity abroad and/or from the provision of services related to foreign-trade activity and/or from the activity of foreign investors and/or from the provision of services to Israeli customers with activity abroad.

In light of the recent economic events in the Eurozone and the uncertainty regarding economic growth in the United States, the Bank is conducting frequent analyses of the situation and its effects on the Bank, including scenarios of escalation of this situation. As a result, the Bank is updating its exposure policies and has increased control over sectors that may be affected by these events.

Political/Security Risk

Risk to the Group's income and capital arising from a lack of security/political stability in Israel. Deterioration in the security situation may cause a slowdown throughout the economy, and an adverse effect on particular industries such as tourism and hotels, aviation, commerce, construction, and foreign trade. In addition, there is a risk of damage to commercial relations between Israel and other countries. Such situations may cause an adverse effect on the ability to raise resources in foreign currency, on various investors, and on the condition of some of the Group's borrowers and the probability of collecting credit from these borrowers.

Environmental Risk

Environmental risk to the Bank is the risk of loss as a result of directives related to the protection of the environment and the enforcement thereof, which may occur if the Bank bears direct responsibility for an environmental hazard, including the possibility that the Bank may be required to remove an environmental hazard, or may be liable to a third party in respect of an environmental hazard, or as a result of the impairment of realized collateral. This risk may also materialize indirectly as a result of the deterioration of the financial condition of another entity due to environmental costs stemming from directives related to the protection of the environment. Reputation risk may also materialize as a result of the attribution to the Bank of an association with the cause of an environmental hazard.

On June 11, 2009, the Supervisor of Banks issued a letter to banking corporations concerning the exposure to and management of environmental risks. The letter refers to aspects of the Bank's exposure to environmental risks. Environmental risks may be included in other risks, such as operational risks, market risks, credit risks, and more. The letter emphasizes that the identification and assessment of environmental risks are an inseparable part of a proper process of risk assessment at the Bank; the Bank is therefore required to work to implement environmental risk management as part of its overall risk management, including through the implementation of procedures for the identification of material environmental risk when granting credit, and through the integration of environmental risk assessment in the evaluation of the quality of credit extended to customers by the Bank.

Accordingly, the Board of Management of the Bank approved policies and methodologies for the identification, specification, and management of environmental risks, to address the effect of environmental risk on the credit risk of major borrowers. In the course of formulating the policies and working procedures, prevalent methodologies used at international banks were examined and advisors specializing in this field were consulted.

Capital Adequacy

As of December 31, 2009, the Bank has implemented the directives on capital measurement and adequacy based on the Basel II directives (hereinafter: "Basel II"), as published by the Supervisor of Banks and as integrated into Proper Conduct of Banking Business Directives 201-211.

Pursuant to these directives, in addition to the calculation of the minimum capital requirement in respect of credit risk, market risk, and operational risk, the Bank is required to carry out an Internal Capital Adequacy Assessment Process (ICAAP), submitted annually. The Board of Directors received a review of the ICAAP on April 30, 2012, and approved the ICAAP report for 2011. The Board of Directors also approved the risk appetite policy of the Bank.

Implementation and Effect of New Regulatory Directives Regarding Capital Measurement and Adequacy

1. Basel III – On October 26, 2011, the Supervisor of Banks issued a letter entitled "Preparation for the Adoption of Basel III Recommendations." According to the letter, the banking system in Israel will adopt the recommendations of "Basel III: A global regulatory framework for more resilient banks and banking systems," published in December 2010, after the recommendations are formulated, with adjustments. Accordingly, working committees were established within the office of the Supervisor of Banks, which will submit professional recommendations regarding the manner of adoption.

On November 30, 2011, the Supervisor of Banks issued a draft translation of the original document of the Basel III directives. In addition, on December 11, 2011, the Supervisor of Banks issued a letter entitled "Draft Translation of Amendments to the Capital Measurement and Adequacy Framework – Basel II," which contains amendments of the Basel II directives on securitization and market risks.

On January 30, 2012, the Supervisor of Banks issued a letter entitled "Preparation for Implementation of the Basel III Directives – Quantitative Impact Survey (QIS)". According to this letter, the Bank is required to perform a quantitative survey estimating the effects of the implementation of the Basel III directives in connection with the allocation of capital for potential losses that may arise from revaluation to market value (CVA risk), changes in the definition of regulatory capital, and calculation of market risks. The Bank submitted the results of the survey to the Supervisor of Banks on June 14, 2012.

The Basel III directives change the structure of regulatory capital, including by focusing on reinforcement of the components of core capital, and by applying limits to the types of instruments to be included in Tier 1 capital and in Tier 2 capital. The directives also establish two new capital cushions: a cushion for the preservation of capital, and an anti-cyclical cushion, designed to increase supervision and adjust capital requirements to the risk profile of the bank. The directives also add a new limit – the leverage ratio – to the existing capital adequacy ratios, as well as addressing liquidity ratios. The Bank is examining the effect of these guidelines and will begin implementation thereof subject to the adoption of the guidelines by the Supervisor of Banks. At this stage, it is not possible to estimate the effect of the implementation of these directives on the Bank.

2. Minimum Core Tier 1 capital ratios – In March 2012, the Supervisor of Banks issued a circular to all banking corporations concerning minimum capital ratios, within the process of preparation for implementation of the Basel III directives. According to the directive, all banking corporations will be required to maintain a minimum Core Tier 1 Capital ratio of 9% by January 1, 2015. The Core Tier 1 Capital ratio is to be calculated in accordance with the Basel III directives and the adjustments to be established by the Supervisor of Banks.

In addition, a large banking corporation whose total consolidated balance sheet assets constitute at least 20% of the total balance sheet assets in the banking system in Israel will be required to maintain a minimum Core Tier 1 capital ratio of 10% by January 1, 2017. This additional directive applies to the Bank.

The Bank is preparing to comply with the requirements to be established. The Bank's Core Tier 1 capital ratio, calculated according to the Basel II directives, stands at 8.29% as at June 30, 2012.

Pillar III Disclosure

The following table summarizes the disclosure requirements according to Pillar III:

	Quantitative
	disclosure
Subject	Page number
Structure of regulatory capital and composition of capital	137
Capital adequacy	138
Credit risk exposures	139
Credit risk mitigation	142
Credit risk in respect of derivative financial instruments	146
Securitization exposures	147
Capital requirements in respect of market risk	147
Positions in shares in the banking book	147
Interest risk in the banking book	120

Capital Requirements Pursuant to Basel II Directives

Set out below is the calculation of the capital ratio according to the Basel II directives.

	June 30, 2012	December 31, 2011*
	NIS millions
	Unaudited	Audited
1. Capital for the calculation of the capital ratio
Core capital	25,038	23,769
Tier I capital, after deductions	27,465	26,157
Tier II capital, after deductions	17,194	16,175
Total overall capital	44,659	42,332
2. Weighted balances of risk-adjusted assets
Credit risk	274,037	274,037
Market risks	6,881	7,018
Operational risk	20,955	20,047
Total weighted balances of risk-adjusted assets	301,873	301,102
3. Ratio of capital to risk-adjusted assets	%
Ratio of core capital to risk-adjusted assets	8.29%	7.89%
Ratio of Tier I capital to risk-adjusted assets	9.10%	8.69%
Ratio of total capital to risk-adjusted assets	14.79%	14.06%
Minimum total capital ratio required by the Supervisor of Banks	9.00%	9.00%
4. Significant subsidiaries
Isracard
Ratio of Tier I capital to risk-adjusted assets	14.90%	13.80%
Ratio of total capital to risk-adjusted assets	15.10%	14.00%
Minimum total capital ratio required by the Supervisor of Banks	9.00%	9.00%
Bank Hapoalim Switzerland
Ratio of Tier I capital to risk-adjusted assets	24.82%	22.36%
Ratio of total capital to risk-adjusted assets	24.82%	22.36%
Minimum total capital ratio required by local regulation	11.20%	11.20%
Bank Pozitif
Ratio of Tier I capital to risk-adjusted assets	22.82%	20.76%
Ratio of total capital to risk-adjusted assets	20.33%	18.34%
Minimum total capital ratio required by local regulation	12.00%	12.00%

* Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements.

Structure of Regulatory Capital and Composition of Capital

Set out below is the composition of capital for the purpose of calculating the capital ratio.

	June 30, 2012	December 31, 2011

	NIS millions
Tier I capital
Paid-up common share capital and premium	8,017	8,066
Retained earnings	16,611	*15,345
Non-controlling interests in equity of consolidated subsidiaries	316	282
Other capital instruments	201	188
Amounts deducted from Tier I capital	)107(	)112(
Total core capital	25,038	*23,769
Innovative hybrid instruments	2,427	2,388
Total Tier I capital	27,465	*26,157
Tier II capital
Upper Tier II capital	3,492	3,523
Lower Tier II capital	13,757	12,707
Amounts deducted from Tier II capital	)55(	)55(
Total Tier II capital	17,194	16,175
Total eligible capital	44,659	*42,332

* Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements

For further details, see Note 4 to the Condensed Financial Statements.

Capital Adequacy

Set out below are risk-adjusted assets and capital requirements in respect of credit risk, market risk, and operational risk.

	June 30, 2012			December 31, 2011
	Risk-adjusted assets	Capital requirements	Risk-adjusted assets	Capital requirements
		NIS millions
Credit risk
Sovereign debt	1,911	172	1,709	154
Debts of public-sector entities	3,450	311	3,395	306
Debts of banking corporations	7,241	652	7,919	713
Debts of corporations	126,884	11,420	127,004	11,430
Debts secured by commercial real estate	58,151	5,234	59,504	5,355
Retail exposures to individuals	35,080	3,157	34,395	3,096
Loans to small businesses	5,981	538	5,971	537
Housing loans	25,426	2,288	24,146	2,173
Securitization	20	2	41	4
Other assets	9,893	890	*9,953	*896
Total in respect of credit risk	274,037	24,664	274,037	24,664
Market risks	6,881	619	7,018	632
Operational risk	20,955	1,886	20,047	1,804
Total risk-adjusted assets in respect of the various risks	301,873	27,169	*301,102	*27,100
Total capital	44,659		*42,332
Capital ratio required by the Supervisor of Banks	9.00%		9.00%
Ratio of core capital to risk-adjusted assets	8.29%		*7.89%
Ratio of Tier I capital to risk-adjusted assets	9.10%		*8.69%
Ratio of total capital to risk-adjusted assets	14.79%		*14.06%

* Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements.

Credit Risk Exposures

Set out below is the segmentation of credit risk exposures by counterparty and by main types of credit exposures, before provision for credit losses(1)

						June 30, 2012
	Sovereign	Public sector	Banking corporations	Corporations	Secured by commercial real estate	Retail to individuals	Small businesses	Housing loans	Securitization	Others	Gross credit exposure(2)	Average gross credit exposure
						NIS millions
Loans(3)	46,826	4,696	6,633	99,822	43,441	45,270	8,252	50,839	-	-	305,779	303,886
Bonds(4)	28,899	1,163	1,044	2,651	148	-	-	-	2	-	33,907	31,478
Derivatives(5)	78	563	9,131	5,548	384	10	1	13	-	-	15,728	15,138
Other off-balance sheet exposures	781	1,953	1,832	65,504	41,929	48,893	4,197	2,857	196	-	168,142	166,561
Other assets(6)	-	-	-	-	-	-	-	-	-	12,227	12,227	12,250
Total	76,584	8,375	18,640	173,525	85,902	94,173	12,450	53,709	198	12,227	535,783	529,313

						December 31, 2011
	Sovereign	Public sector	Banking corporations	Corporations	Secured by commercial real estate	Retail to individuals	Small businesses	Housing loans	Securitization	Others	Gross credit exposure(2)	Average gross credit exposure
						NIS millions
Loans(3)	48,128	4,806	7,227	99,259	45,002	44,066	8,192	48,746	-	-	305,426	290,023
Bonds(4)	24,914	1,195	888	2,190	87	-	-	-	7	-	29,281	25,684
Derivatives(5)	81	429	9,413	5,693	1,100	12	1	18	-	-	16,747	14,633
Other off-balance sheet
exposures	546	1,491	2,046	64,542	40,369	48,699	4,120	2,176	191	-	164,180	157,087
Other assets(6)	-	-	-	-	-	-	-	-	-	*12,429	*12,429	*12,357
Total	73,669	7,921	19,574	171,684	86,558	92,777	12,313	50,940	198	*12,429	*528,063	*499,784

* Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements.

(1) After deduction of charge-offs, and before deduction of the allowance for credit losses on an individual and collective basis.

(2) Before conversion to credit of off-balance sheet components, as required in the Basel II directives (e.g. weighting of unutilized credit facilities as credit), and before credit risk mitigation as a result of the execution of certain actions (e.g. use of guarantees).

(3) Including credit to the public, credit to the government, and deposits with central banks.

(4) Not including bonds held for trading.

(5) Positive fair value of derivatives, including the add-on established in the Basel II directive reflecting the amount of the future potential exposure to credit in respect of the balance of the face value of derivative instruments.

(6) Including cash, advance payments to tax authorities, shares, and other assets with no counterparty such as buildings and equipment.

The main gross credit exposures derive from loans extended by the Bank to its customers and from off-balance sheet exposures, which mainly include credit facilities, guarantees, and commitments to extend credit.

Gross credit exposures as at June 30, 2012 totaled approximately NIS 535.8 billion, compared with NIS 528.1 billion as at December 31, 2011, an increase of approximately NIS 7.7 billion. This increase is mainly the result of an increase in government bonds, in the amount of approximately NIS 4 billion. In addition, housing loans increased by a total of approximately NIS 2.8 billion, credit exposures in respect of corporations increased by a total of approximately NIS 1.8 billion and retail exposures to customers by a total of approximately NIS 1.4 billion. This increase was mainly offset by a decrease in deposits with central banks and credit to governments, in the amount of approximately NIS 1.3 billion, and by a decrease in the exposure to banking corporations, in the amount of approximately NIS 0.9 billion.

Approximately 32% of the gross credit exposure of the Bank derives from exposure to corporations handled by the Corporate Banking Area, or other clients each of whose total balance of credit, calculated in accordance with the directive, exceeds NIS 5 million. Risk-adjusted assets in respect of such customers are weighted according to ratings by international rating agencies or at 100% in the absence of such ratings.

Approximately 20% of the gross credit exposure of the Bank derives from retail exposure to customers each of whose total balance of credit, calculated in accordance with the directive, does not exceed NIS 5 million (including small businesses). Subject to compliance with certain conditions, the directive permits weighting of risk-adjusted assets in respect of such exposures at 75%.

Credit exposure in respect of housing loans, constituting approximately 10% of the gross credit exposure of the Bank, includes credit granted for the purchase of homes where the ratio of the loan to the value of the asset at the date of granting of the loan (LTV) does not exceed 75%. Subject to compliance with certain conditions, the directive permits weighting of risk-adjusted assets in respect of such exposures at 35%.

Sovereign credit exposures, constituting approximately 14% of the gross credit exposure of the Bank, primarily include deposits with central banks in Israel and in the United States, and investments in bonds issued by the Israeli government and the U.S. government.

Approximately 16% of the gross credit exposure of the Bank derives from exposure to debts secured by commercial real estate, including credit granted for the purchase of income-bearing commercial real estate.

Set out below is the segmentation of gross credit exposure, before deducting the allowance for credit losses(1), by contractual term to maturity (the last period), according to the principal types of financial instruments.

	June 30, 2012
	Up to 1 year	1 year to 5 years	Over 5 years	Other	Gross credit exposure(2)
			NIS millions
Loans(3)	145,108	75,481	85,190	-	305,779
Bonds(4)	15,365	5,459	13,083	-	33,907
Derivatives(5)	4,847	4,644	6,237	-	15,728
Other off-balance sheet exposures	26,931	136,045	5,166	-	168,142
Other assets(6)	2,128	-	-	10,099	12,227
Total	194,379	221,629	109,676	10,099	535,783

			December 31, 2011
	Up to 1 year	1 year to 5 years	Over 5 years	Other	Gross credit exposure(2)

Loans(3)	145,876	74,294	85,256	-	305,426
Bonds(4)	12,409	5,633	11,239	-	29,281
Derivatives(5)	7,252	4,315	5,180	-	16,747
Other off-balance sheet exposures	23,202	132,979	7,999	-	164,180
Other assets(6)	2,232	-	-	10,197	*12,429
Total	190,971	217,221	109,674	10,197	*528,063

* Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements.

(1) After deduction of charge-offs, and before deduction of the allowance for credit losses (on an individual and collective basis).

(2) Before conversion to credit of off-balance sheet components, as required in the Basel II directives (e.g. weighting of unutilized

credit facilities as credit), and before credit risk mitigation as a result of the execution of certain actions (e.g. use of guarantees).

(3) Including credit to the public, credit to the government, and deposits with central banks.

(4) Not including bonds held for trading.

(5) Positive fair value of derivatives, including the add-on reflecting the amount of the future potential exposure to credit in respect of the balance of the face value of derivative instruments.

(6) Including cash, advance payments to tax authorities, shares, and other assets with no counterparty such as buildings and equipment.

Information regarding problematic loans and the allowance for credit losses by counterparty is set out below.

		June 30, 2012
	Impaired loans	Loans in arrears	Allowance on an individual basis	Allowance on a collective basis
		NIS millions
Public sector	-	9	-	20
Banking corporations	-	14	-	4
Corporations	4,465	3,329	891	1,160
Secured by commercial real estate	2,683	1,256	226	942
Retail to individuals	1,206	466	339	488
Small businesses	180	82	69	63
Housing loans	-	998	-	390
Others	-	-	-	2
Total	8,534	6,154	1,525	3,069

		December 31, 2011
	Impaired loans	Loans in arrears	Allowance on an individual basis	Allowance on a collective basis
		NIS millions
Public sector	-	-	-	18
Banking corporations	-	-	-	4
Corporations	4,218	1,118	965	970
Secured by commercial real estate	3,206	1,365	388	1,043
Retail to individuals	1,038	464	284	488
Small businesses	147	76	55	56
Housing loans	-	997	-	387
Others	-	-	-	2
Total	8,609	4,020	1,692	2,968

For the distribution of the balance of problematic debts by economic sector, see Appendix 3 to the Management Review regarding total credit risk to the public by economic sector.

For the distribution of credit exposures by geographical region, see Appendix 4 to the Management Review regarding exposure to foreign countries.

For further information regarding changes in the allowance for credit losses, see Note 3 to the Condensed Financial Statements.

Credit Risk Mitigation

The Bank applies the comprehensive standard approach in order to determine risk weightings to apply to the counterparty. The standard approach requires the use of independent ratings prepared by international rating agencies. The following tables present details of gross credit exposure (after deducting the allowance for credit losses on an individual and collective basis) by risk weightings, with segmentation of the exposure by counterparty (segments), before and after credit risk mitigation in respect of recognized collateral.

Before credit risk mitigation

					June 30, 2012
	0%	20%	35%	50%	75%	100%		150% Gross credit exposure(1)
					NIS millions
Sovereign	70,257	4,594	-	601	-	1,132	-	76,584
Public sector	-	914	-	7,433	-	-	8	8,355
Banking corporations	-	13,105	-	5,132	-	385	14	18,636
Corporations	-	1,135	-	3,750	-	163,490	3,099	171,474
Secured by commercial real estate	-	-	-	-	-	83,536	1,198	84,734
Retail to individuals	-	-	-	-	93,164	104	78	93,346
Small businesses	-	-	-	-	12,294	12	12	12,318
Housing loans	-	-	36,164	-	8,968	8,000	187	53,319
Securitization	-	198	-	-	-	-	-	198
Others	2,457	-	-	-	-	9,076	692	12,225
Total	72,714	19,946	36,164	16,916	114,426	265,735	5,288	531,189

				December 31, 2011
	0%	20%	35%	50%	75%	100%		150% Gross credit exposure(1)
				NIS millions
Sovereign	68,496	4,035	-	216	-	922	-	73,669
Public sector	-	622	-	7,281	-		-	7,903
Banking corporations	-	12,830	-	5,985	-	755	-	19,570
Corporations	-	1,032	-	4,094	-	163,559	1,064	169,749
Secured by commercial real estate	-	-	-	-	-	83,887	1,240	85,127
Retail to individuals	-	-		-	91,725	163	117	92,005
Small businesses	-	-	-	-	12,165	9	28	12,202
Housing loans	-	-	35,096	-	8,754	6,307	396	50,553
Securitization	-	193	-	5	-	-	-	198
Others	2,606	-	-	-	-	*9,167	654	*12,427
Total	71,102	18,712	35,096	17,581	112,644	*264,769	3,499	*523,403

* Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements.

(1) Before conversion to credit of off-balance sheet components, as required in the Basel II directives (e.g. weighting of unutilized credit facilities as credit), and before credit risk mitigation as a result of the execution of certain actions (e.g. use of guarantees).

After credit risk mitigation

				June 30, 2012
	0%	20%	35%	50%	75%	100%		150% Gross credit exposure(1)
				NIS millions
Sovereign	70,257	4,594	-	601	-	1,000	-	76,452
Public sector	361	914	-	7,429	-	-	9	8,713
Banking corporations	-	15,301	-	17,846	-	594	14	33,755
Corporations	-	1,135	-	3,750	-	160,547	3,038	168,470
Secured by commercial real estate	-	-	-	-	-	80,766	1,197	81,963
Retail to individuals	-	-	-	-	77,908	103	78	78,089
Small businesses	-	-	-	-	10,217	11	11	10,239
Housing loans	-	-	36,164	-	8,968	8,000	187	53,319
Securitization	-	198	-	-	-	-	-	198
Others	2,457	-	-	-	-	9,076	692	12,225
Total	73,075	22,142	36,164	29,626	97,093	260,097	5,226	523,423

				December 31, 2011
	0%	20%	35%	50%	75%	100%		150% Gross credit exposure(1)
				NIS millions
Sovereign	68,496	4,035	-	216	-	922	-	73,669
Public sector	-	622	-	7,281	-		-	7,903
Banking corporations	-	15,305	-	18,292	-	755	-	34,352
Corporations	-	1,032	-	4,094	-	160,558	941	166,625
Secured by commercial real estate	-	-	-	-	-	81,197	1,222	82,419
Retail to individuals	-	-	-	-	77,010	162	117	77,289
Small businesses	-	-	-	-	10,177	9	27	10,213
Housing loans	-	-	35,096	-	8,754	6,307	396	50,553
Securitization	-	193	-	5	-	-	-	198
Others	2,606	-	-	-	-	*9,167	654	*12,427
Total	71,102	21,187	35,096	29,888	95,941	*259,077	3,357	*515,648

* Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements.

(1) Before conversion to credit of off-balance sheet components, as required in the Basel II directives (e.g. weighting of unutilized credit facilities as credit), and after credit risk mitigation.

Use of Eligible Collateral for Credit Risk Mitigation

The following table lists the types of collateral used, and presents the exposures covered by guarantees, exposures covered by credit derivatives, and exposures covered by eligible financial collateral, by counterparty.

				June 30, 2012
	Gross credit exposure(1)	Exposure covered by guarantees	Exposure covered by derivatives	Total amounts subtracted	Total amounts added(2)	Exposure covered by financial collateral(3)	Net credit exposure(4)
				NIS millions
Sovereign	76,584	)132(	-	)132(	-	-	76,452
Public sector	8,355	-	-	-	361	)3(	8,713
Banking corporations	18,636	-	-	-	15,119	-	33,755
Corporations	171,474	)444(	-	)444(	-	)2,560(	168,470
Secured by commercial real estate	84,734	)78(	-	)78(	-	)2,693(	81,963
Retail to individuals	93,346	)13,552(	-	)13,552(	-	)1,705(	78,089
Small businesses	12,318	)1,066(	-	)1,066(	-	)1,013(	10,239
Housing loans	53,319	-	-	-	-	-	53,319
Securitization	198	-	-	-	-	-	198
Others	12,225	-	-	-	-	-	12,225
Total	531,189	)15,272(	-	)15,272(	15,480	)7,974(	523,423

				December 31, 2011
	Gross credit exposure(1)	Exposure covered by guarantees	Exposure covered by derivatives	Total amounts subtracted	Total amounts added(2)	Exposure covered by financial collateral(3)	Net credit exposure(4)
				NIS millions
Sovereign	73,669	-	-	-	-	-	73,669
Public sector	7,903	-	-	-	-	-	7,903
Banking corporations	19,570	-	-	-	14,782	-	34,352
Corporations	169,749	)176(	-	)176(	-	)2,948(	166,625
Secured by commercial real estate	85,127	)71(	-	)71(	-	)2,637(	82,419
Retail to individuals	92,005	)13,132(	-	)13,132(	-	)1,584(	77,289
Small businesses	12,202	)1,026(	-	)1,026(	-	)963(	10,213
Housing loans	50,553	-	-	-	-	-	50,553
Securitization	198	-	-	-	-	-	198
Others	*12,427	-	-	-	-	-	*12,427
Total	*523,403	)14,405(	-	)14,405(	14,782	)8,132(	*515,648

* Restated, due to the initial implementation of International Accounting Standard 12, Income Taxes. See Note 1(C)(2.2) to the Condensed Financial Statements.

(1) Before conversion to credit of off-balance sheet components, as required in the Basel II directives (e.g. weighting of unutilized credit facilities as credit), and before credit risk mitigation.

(2) Including exposures added in respect of repurchase transactions.

(3) After taking safety coefficients into account.

(4) Before conversion to credit of off-balance sheet components, as required in the Basel II directives (e.g. weighting of unutilized credit facilities as credit), and after credit risk mitigation.

The use of eligible collateral led to a decrease in credit exposures assigned risk weightings of 75% and 100%. Credit exposures in the amount of approximately NIS 15.3 billion were assigned reduced risk weightings of 20% and 50%, due to the use of guarantees of banking corporations. In addition, the use of eligible financial collateral, mainly including pledged deposits and government bonds, led to a reduction of the overall credit exposure by a total of approximately NIS 8 billion.

			June 30, 2012
	Interest-rate derivatives	Foreign-currency and gold derivatives	Share derivatives	Precious metals	Commodity derivatives	Total
			NIS millions
Positive gross fair value	6,297	3,015	270	44	45	*9,671
Add-on values	1,729	4,183	182	16	58	6,168
Net credit exposure	8,026	7,198	452	60	103	*15,839

Credit Risk in Respect of Derivative Financial Instruments

* Before adjusting the credit risk inherent in these transactions, resulting from the implementation of the directives of FAS 157.

			December 31, 2011
	Interest-rate derivatives	Foreign-currency and gold derivatives	Share derivatives	Precious metals	Commodity derivatives	Total
		NIS millions
Positive gross fair value	5,580	4,895	299	105	42	*10,921
Add-on values	1,484	4,300	96	28	22	5,930
Net credit exposure	7,064	9,195	395	133	64	*16,851

* Before adjusting the credit risk inherent in these transactions, resulting from the implementation of the directives of FAS 157.

The following table details the face value of the Bank's credit-derivatives portfolio, used for risk management in the Bank's credit portfolio (the Bank is not a party to CDS transactions originating in mediation activities).

		June 30, 2012
		Face value in NIS millions
	Banking book
	Protection acquired	Protection sold	Total face value of credit derivatives
Credit derivatives	30	392	422
		December 31, 2011
		Face value in NIS millions
	Banking book
	Protection acquired	Protection sold	Total face value of credit derivatives
Credit derivatives	30	573	603

Securitization Exposures

Securitization exposures of the Bank arise from holdings of bonds of various securitization entities. The Bank uses the lower of the ratings assigned by two international credit rating agencies, Standard and Poor's Rating Group and Moody's Investor Service, to assign the relevant risk weights to these exposures.

The following table details securitization exposures acquired by the Bank and the relevant capital requirements.

			June 30, 2012	December 31, 2011
	Risk weight	Amount of exposure(1)	Capital requirement	Amount of exposure	Capital requirement
			NIS millions
AAA to AA-	20%	100	2	193	4
A+ to A-	50%	-	-	5	-
BBB+ to BBB-	100%	-	-	-	-
BB+ to BB-	350%	-	-	-	-
B+ or lower or unrated	Deducted from capital	-	-	-	-
Total		100	2	198	4

(1) After conversion to credit in respect of off-balance sheet components, as required in the Basel II directives.

Capital Requirements in Respect of Market Risk

		June 30, 2012		December 31, 2011
	Specific risk	General risk	Total	Specific risk	General risk	Total
			NIS millions
Interest-rate risk	83	247	330	55	211	266
Share risk	4	4	8	5	5	10
Foreign currency exchange-rate risk	-	230	230	-	282	282
Option risk	-	51	51	-	74	74
Total	87	532	619	60	572	632

Positions in Shares in the Banking Book

The following are details of the Bank's investments in shares in the banking book.

	June 30, 2012			December 31, 2011
	Balance sheet value and fair value	Capital requirements	Balance sheet value and fair value	Capital requirements
		NIS millions
Investments classified into the trading portfolio	46	)1( 8	52	)1( 10
Investments classified into the available-for-sale portfolio	1,372	123	1,538	138
Total investments in shares	1,418	131	1,590	148
Of which: Traded on the stock exchange	910		1,027
Privately held	508		563
Unrealized profits included in Tier II capital	23		88

(1) Including capital allocation with respect to specific market risk and general market risk.

Disclosure Regarding the Internal Auditor

Details regarding the Group's internal auditing, including the professional standards under which the internal audit operates and the considerations involved in formulating the annual and multi-year work plans, are provided in the Annual Report for 2011. No material changes occurred in this information during the reported period.

Poalim in the Community – Social Involvement and Contribution to the Community Strategy and Vision

As part of the Bank Hapoalim Group's vision, strategy, and corporate values, the Bank is committed to an active, leading role in the community, alongside its business leadership and economic initiatives. This involvement, implemented through "Poalim for the Community," is part of an advanced managerial approach stating that an organization that operates within the community, and draws both its employees and customers from it, is an integral part of that community, and as a business leader, should strengthen the community and take a leading role in the advancement and improvement of conditions for all members of the community, especially those who are underprivileged. In the spirit of this business philosophy, the Bank conducts a varied and extensive range of community-oriented activities that take the form of social involvement, monetary donations, and large-scale volunteer activities in which both members of management and employees participate. Activity on behalf of the community is an important factor in cultivating employees' sense of pride and cohesion.

Ongoing Activities

All of the Bank's community-oriented activity is organized within the framework of "Poalim for the Community"; part of the activity is conducted through the "Poalim for the Community Foundation (Registered Non-Profit Organization)," and the rest is conducted through other channels, described below.

Poalim for the Community devotes special attention to work with children and adolescents, with the aim of advancing the generation of the future. However, the activity of Poalim for the Community is extensive and varied, and includes other target groups as well.

In the first half of 2012, Poalim for the Community focused on projects in the area of education, aimed at children, adolescents, and specific population groups, with special emphasis on teaching sensible financial behavior. Poalim for the Community devotes approximately half of its budget to the area of education.

Through the areas of activity described below, and through the various projects promoted by the Bank Group, the Group's involvement in the community in the first half of 2012 was expressed in a financial expenditure of approximately NIS 30 million. The budget for this activity is determined each year by a committee headed by the Chairman of the Board of Directors. This decision is made separately for each specific year, and approved within the overall budget of the Bank.

"Poalim Volunteers" employee volunteer project – Several Bank units collaborate on this project, aimed at assisting employees interested in volunteering for community activities. The Bank units involved are the Human Resources, Logistics and Procurement Area, the Employees' Union, the Head of Community Relations, regional managements in the Retail Banking Area, and the "Ruach Tova" and "Matan" foundations. Within this collaboration, employees are offered a wide variety of volunteering possibilities, for groups, branches, or individuals. Other Bank employees also volunteer individually with the Bank's assistance; a specialized unit was established in 2011 to handle this activity, and continues to operate in 2012.

"Poalim for the Community Foundation" – Monetary donations to the numerous organizations supported by the Bank Group are made via the "Poalim for the Community Foundation." Donations are given to organizations that fulfill the criteria defined under the Foundation's donation policy. In the first half of 2012, as in previous years, the Poalim for the Community Foundation contributed to a large number of causes, including assistance for children and youth, strengthening disadvantaged population groups, and support for educational, culture, welfare, health care, and science institutions. Through the Foundation, the Bank contributes to higher-education institutions, to scholarships for university students and underprivileged schoolchildren, and to the realization of educational initiatives and enrichment programs for children and youth, as well as for children who are hospitalized and need special assistance in order to progress in their studies.

The Poalim for the Community Foundation contributes to the advancement of culture and the arts, and makes donations to various activities throughout Israel, focusing on enrichment programs for children and youth via innovative educational projects. The Foundation helps to run workshops in Jewish and Arab schools throughout Israel in order to promote understanding and coexistence among the peoples and encourage tolerance and democracy.

Another important area in which the Poalim for the Community Foundation is a regular donor is health care. The Poalim for the Community Foundation supports several medical centers, with donations intended mainly to improve conditions of patients' treatment and hospitalization. The Foundation also promotes projects aimed at integrating persons with disabilities into community life. In addition, the Foundation contributes to organizations that help realize wishes of children suffering from cancer.

"Read & Succeed" community project – Poalim for the Community is committed to changing the reading habits of Israeli children and youth. In addition to its ongoing community activities, the Foundation decided in 2004 to initiate a focused effort to bring about fundamental changes in the reading habits of Israeli children and youth. The project continued during 2005-2012. The aim of the project is to raise public awareness of the encouragement of reading. The project includes a public informational campaign; funding of story hours throughout Israel; activities during National Book Week; and collaboration with the Key Books Foundation, which operates a mobile library for remote communities, as well as various media outlets.

Community-oriented sponsorships – Poalim for the Community is involved in various community activities through community-oriented sponsorships, primarily encouraging excellence in sports, funding cultural events, and assisting health-care institutions.

Donations of computers and accompanying equipment – The Bank is aware of the paramount importance of investment in technology for the education and advancement of children and youth, and accordingly donates computers and accompanying equipment each year. In the first half of 2012, the Bank donated approximately 527 computer systems as well as additional accompanying equipment.

"Poalim for Culture and Nature in Israel" – The Bank believes that closeness to our heritage and culture is of the utmost importance, and has therefore resolved to make it possible for parents and children throughout Israel to tour during holidays and enjoy a variety of sites all over the country, without it resulting in a heavy financial burden for the families. During Passover 2005, the Bank launched a special project in which all Israelis were invited to visit sites throughout Israel free of charge during the holiday week. Since then, this project has become an annual tradition, which continued during Passover in 2012.

Support for culture and arts – Each year, the Bank contributes to the promotion of culture and the arts through donations and sponsorships; for example, the Bank provides support to museums throughout Israel. Likewise, through multi-year agreements, the Bank sponsors several internationally recognized cultural institutions committed to leadership and excellence in their field: the Bank supports the activity of the Batsheva Dance Company through three-year scholarships for dancers, and supports the Israel Philharmonic Orchestra and the Cameri Theater under three-year and five-year agreements respectively. The Bank also holds art exhibits at its Head Office building, with revenues devoted to the various foundations that participate in this initiative.

Financial education project with the ORT chain – The Bank is committed to an effort, in collaboration with the ORT chain, to promote financial education and education on sensible economic conduct for adolescents, and to improve financial dialogue between parents and children.

With the completion of the development of the learning environment and the writing of learning materials over recent months, the program is being rolled out to all of the schools in the ORT chain (about 900 classrooms) in the coming school year.

"Matan – Investing in the Community" (hereinafter: "Matan") – Since 1999, the Bank has engaged in activity on behalf of the community in cooperation with the Matan Foundation. Through the "Matan Campaign," employees engaged in volunteer work gain awareness of community needs and the importance of giving, and share this message with their colleagues. The model is based on partnership between management and employees in the workplace. All donations to Matan by employees and management are intended for a wide variety of community causes, aimed at supporting and strengthening disadvantaged groups in society. Donations are allocated in a special procedure that involves an examination of needs and effectiveness. Bank employees participate as volunteers on the Matan fund-designation committee, which decides on the distribution of the funds in the community, and as "Matan Observers," assisting in the monitoring process of use of the funds donated. Matan is committed to transferring donations to organizations or community causes chosen by the employee.

Sustainability and Corporate Social Responsibility

Bank Hapoalim has adopted the principles of sustainability and CSR as essential foundations for its activity, within its strategic philosophy, based on a strong conviction that this is its moral and professional duty and the expectation of the community in which the Bank operates and from which it draws its strength.

Based on this philosophy, the Bank is implementing a large-scale long-term plan to apply CSR principles to all levels of its activity, encompassing environmental issues, partnership with employees, service to customers, and contribution to the community.

Extensive details of sustainability and CSR activities are provided in the Bank's CSR report, which is available on its website. Like the previous editions, this report earned the Global Reporting Initiative's highest grade of A+. The Bank is the first business organization in Israel to attain the highest score for all four of its reports.

The full CSR report for 2011, in English, which was submitted to GRI in June 2012, attained the highest grade of A+ once again. This year's unique accomplishment lies in the fact that the report was prepared based on GRI's voluntary new advanced format (version 3.1). The Bank's full CSR reports for 2011, in Hebrew and in English, will be released to the public by the end of the third quarter of 2012.

The Bank continues to develop a wide range of activities and initiatives on the various levels of sustainability and CSR. As part of its business strategy of facilitating the transition to renewable energy, the Bank is leading a wide-ranging drive to promote the solar-energy sector in Israel, and offering a range of financing solutions in this field to all segments of the population. The Bank is also a leader in financing solutions for the water desalination market and for the construction of power stations fueled by natural gas.

Within the philosophy of sustainability, understanding of customers' full life cycle, and encouragement of a culture of long-term savings, the Bank has announced a new stage of the All-Life Financial Planning initiative, which is designed to impart knowledge and tools to customers for responsible, prudent management of their financial future: a relaunch of the legendary children's savings program, Dan the Saver, as a theme for a series of savings and investment plans for durations of up to 15 years, designed to instill a culture of savings from an early age. This program has met with great success, with 170,000 savings plans at an aggregate volume of NIS 1.29 billion opened by June 2012.

Ratings: At the end of the first quarter of 2011, the Bank was added to the global FTSE4Good index, considered a leading index of sustainability and responsible investment. In the semiannual update for 2012, the Bank scored 99 on this index.

In the ratings published in June 2012 by Maala of leading companies in the area of corporate responsibility in Israel for 2012, which are performed based on data in reports for 2011, the Bank appears in a new elite category, Platinum Plus, the highest ranking, with the top Maala score of 98.

Transparency index: In May 2012, in a study by Business Beyond, the Bank was awarded first place on the transparency index in the area of sustainability and CSR for 2012, of the 100 leading businesses listed in the TA-100 index.

Legal Proceedings

The Bank Group (the Bank and its consolidated subsidiaries) is a party to legal proceedings, including petitions to certify class actions, taken against it by its customers, former customers, and various third parties, who deem themselves injured or harmed by the Bank Group's operations during the normal course of its business. The causes of the claims against the Bank Group are various and wide-ranging. In the opinion of the Bank's Board of Management, based on legal opinions with regard to the likely outcome of pending claims, including petitions to certify class actions, the financial statements include sufficient provisions, in accordance with generally accepted accounting principles, to cover possible damages resulting from all claims, where such provisions are necessary.

For details, see Note 19(C)(11), 19(C)(12), 19D, 19F, and 19G to the Annual Financial Statements for 2011, and Note 6C to the Condensed Financial Statements.

Other Matters

On January 2, 2012, after receiving approval from the Bank of Israel, the Board of Directors approved and recommended approval by the authorized entities at the companies listed hereinafter of the extension of the term of service of Ms. Irit Izakson as Chairperson of the Board of Directors of the companies in the Isracard Group: Isracard Ltd., Europay (Eurocard) Israel Ltd., Aminit Ltd., and Poalim Express Ltd., for an additional period of two years, effective January 1, 2012.

The annual general meeting of shareholders of the Bank convened on January 3, 2012. The shareholders discussed the financial statements of the Bank for 2010; approved the appointment of the accountants; approved the replacement of Article 24 of the Articles of the Bank, with respect to directives concerning insurance and indemnification; approved the granting of a letter of indemnification to the officers of the Bank, including officers who may be considered to have a personal interest in the granting of the letter of indemnification; and approved the appointment of Mr. Imri Tov, who has served as an external director of the Bank as of February 5, 2009, for an additional term of service of three years, beginning February 5, 2012.

A special general meeting of shareholders of the Bank convened on April 5, 2012. The shareholders approved the appointment of Ms. Dafna Schwartz as an external director (under the Companies Law), for a period of three years, effective April 6, 2012, replacing Ms. Nira Dror, whose term of service ended April 5, 2012. Pursuant to the resolution of the meeting, Ms. Dafna Schwartz serves as an external director (under the Companies Law) as of April 6, 2012, replacing Ms. Nira Dror, whose term of service ended on April 5, 2012.

On May 31, 2012, the Board of Directors approved the end of the term of service of Ms. Orit Lerer as Member of the Board of Management of the Bank, and recommended her appointment to the position of Chief Executive Officer of Bank Hapoalim (Switzerland) Ltd., effective July 1, 2012.

The Board of Directors also approved the appointment of Mr. Dan Koller, Member of the Board of Management, to the position of Head of International Banking, effective July 1, 2012, replacing Ms. Orit Lerer.

In addition, the Board of Directors approved the appointment of Mr. Tzahi Cohen to the position of Member of the Board of Management and Chief Risk Officer, effective July 1, 2012, replacing Mr. Dan Koller.

A special general meeting of the shareholders of the Bank convened on July 25, 2012. The shareholders approved the terms of service and employment of Ms. Irit Izakson. For details, see Note 12 to the Condensed Financial Statements. The shareholders also approved the amendment to the Articles of the Bank and the adjustment of the Articles to the legislation updates concerning the service of directors.

On August 6, 2012, the Board of Directors of the Bank discussed the streamlining processes that have been underway at the Bank for some time, and decided to merge the activity of the Client Asset Management Area into other Areas of the Bank. With the execution of these changes, Ms. Hannah Pri-Zan, Head of Client Asset Management, will resign from the position of Member of Board of Management of the Bank, at a date to be determined over the coming months. Ms. Pri-Zan is slated to serve as Chairperson of the Board of Directors of Peilim Investment Portfolio Management Ltd. Further to this decision, it has been determined that Ms. Hannah Pri-Zan will resign from the Board of Management of the Bank on September 6, 2012.

The Board of Directors of the Bank held 17 meetings during the period of January-June 2012. The various committees of the Board of Directors held 97 meetings during the period of January-June 2012.

Controls and Procedures

In accordance with the Public Reporting Directives of the Supervisor of Banks, the Chief Executive Officer and the Chief Accountant of the Bank must each separately sign a declaration regarding their responsibility for the establishment and application of controls and procedures concerning disclosure and the Bank's internal control of financial reporting, including an assessment of the effectiveness of these controls, pursuant to the provisions of Sections 302 and 404 of the law known as the "Sarbanes-Oxley Act," enacted in the United States.

The provisions of these two sections of the law were consolidated by the Supervisor of Banks in a Proper Conduct of Banking Business Directive (Directive 309) in September 2008, and integrated into the Public Reporting Directives in June 2009.

These directives have been implemented at the Bank since their inception dates:

•The directive in Section 302 regarding the responsibility for the establishment and application of controls and procedures concerning disclosure has been implemented quarterly as of the financial statements for June 30, 2005.
•The directive in Section 404 regarding the responsibility for the Bank's internal control of financial reporting has been implemented at year end, as of the financial statements for December 31, 2008.

As part of the implementation of the directives of Section 404, the Bank, with the assistance of a consulting firm, mapped and documented all material control processes, based on the directives of the SEC (the Securities and Exchange Commission in the United States), using the prevalent methodologies, based on criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. In addition, in accordance with the requirements, the Bank carried out a test of the effectiveness of the procedures for internal control of financial reporting, through an examination of the effectiveness of the main controls in practice.

In accordance with its work plan for 2012, as it has done every year, the Bank is updating the documentation of the material control processes and examining the effectiveness of the procedures for the internal control of financial reporting, with the assistance of the consulting firm, according to the prevalent methodologies, through a renewed examination of the main controls for 2012. This process is planned to proceed throughout the year, concluding early in the fourth quarter of 2012.

Evaluations of Controls and Procedures Concerning Disclosure

The Board of Management of the Bank, in cooperation with the Chief Executive Officer and the Chief Accountant of the Bank, has assessed the effectiveness of the controls and procedures concerning disclosure at the Bank as at June 30, 2012. Based on this assessment, the Chief Executive Officer and the Chief Accountant of the Bank have concluded that, as at the end of this period, the controls and procedures concerning disclosure at the Bank are effective in order to record, process, summarize, and report the information that the Bank is required to disclose in its financial report, in accordance with the Public Reporting Directives of the Supervisor of Banks, on the date stipulated in these directives.

Changes in Internal Control

During the quarter ended on June 30, 2012, there was no change in the Bank's internal control of financial reporting that had a material impact, or could reasonably be expected to have a material impact, on the Bank's internal control of financial reporting.

Yair Seroussi Zion Kenan

Chairman of the Board of Directors President & Chief Executive Officer

Tel-Aviv, August 29, 2012

					For the three months ended June 30
		2012					2011
				Rate of income (expense)(3)				Rate of income (expense)(3)
	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)
	NIS millions		%			NIS millions	%
Israeli currency - Unlinked
Assets(5)(6)	206,935	2,307	4.53		*188,243	2,339	5.06
Effect of derivatives(4)
Embedded derivatives and ALM	164,680	2,291			123,349	1,330
Total assets	371,615	4,598		5.04	*311,592	3,669		4.79
Liabilities(6)	)174,699(	)770(	)1.77(		)152,362(	)793(	)2.10(
Effect of derivatives(4)
Embedded derivatives and ALM	)172,914(	)2,441(			)130,923(	)1,432(
Total liabilities	)347,613(	)3,211(		)3.75(	)283,285(	)2,225(		)3.18(
Interest spread			2.76	1.29			2.96	1.61
Israeli currency - Linked to the CPI
Assets(5)(6)	60,113	1,297	8.91		56,255	1,299	9.56
Effect of derivatives(4)
Embedded derivatives and ALM	13,620	427			7,525	91
Total assets	73,733	1,724		9.69	63,780	1,390		9.01
Liabilities(6)	)48,474(	)1,043(	)8.89(		)43,448(	)988(	)9.41(
Effect of derivatives(4)
Embedded derivatives and ALM	)18,720(	)453(			)16,580(	)189(
Total liabilities	)67,194(	)1,496(		)9.21(	)60,028(	)1,177(		)8.08(
Interest spread			0.02	0.48			0.15	0.93

* Restated following the initial implementation of International accounting standard 12, Taxes on Income. See Note 1(C)(2.2) to the condensed Financial Statements.

(1) The data are given before and after the effect of derivative instruments (including off-balance sheet effects of derivative instruments).

(2) Based on monthly opening balances (based on daily balances in the unlinked Israeli currency segment), and before deduction of the average balance sheet allowance for credit losses.

(3) Calculated on an annual basis.

(4) Hedging derivative instruments (excluding options), embedded derivatives that have been separated and ALM derivatives that form part of the Bank's ALM network.

(5) The average balance of the unrealized profits (losses) from adjustments to fair value, was deducted/added from the average balance of bonds available for sale and bonds held for trading at June 30, 2012 NIS 58 million (June 30, 2011: NIS 100 million) in the unlinked segment, NIS 28 million (June 30, 2011: NIS 76 million) in the CPI-linked segment, NIS 64 million (June 30, 2011: NIS 171 million) in the foreign currency segment (including Israeli currency linked to foreign currency).

(6) Excluding derivative instruments.

Note:

Appendix 1 (continued)

					For the three months ended June 30
		2012					2011
			income (expense)(3)	Rate of				Rate of income (expense)(3)
	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)
	NIS millions		%		NIS millions		%
Foreign currency - (including Israeli currency linked to foreign currency)
Assets(5)(6)	76,136	3,591	20.24		62,198	*194	*1.25
Effect of derivatives(4)
Hedging derivatives	8,748	90			11,370	266
Embedded derivatives and ALM	203,489	10,699			176,410	*)580(
Total assets	288,373	14,380		21.49	249,978	*)120(		*)0.19(
Liabilities(6)	)88,449(	)3,589(	)17.25(		)79,653(	330	1.65
Effect of derivatives(4)
Hedging derivatives	)9,221(	)251(			)11,655(	)171(
Embedded derivatives and ALM	)192,592(	)10,218(			)163,375(	310
Total liabilities	)290,262(	)14,058(		)20.83(	)254,683(	469		0.73
Interest spread			2.99	0.66			*2.90	*0.54

* The Bank has implemented the directives of the Supervisor of Banks concerning the format for statements of profit and loss of banking corporation as of January 1, 2012. Pursuant to the new directive, activity in derivative instruments is separated into trading activity and non-trading activity. The directive was adopted through retroactive implementation. Accordingly, other non-trading derivatives were reclassified, to match the new disclosure format.

(1) The data are given before and after the effect of derivative instruments (including off-balance sheet effects of derivative instruments).

(2) Based on monthly opening balances (based on daily balances in the unlinked Israeli currency segment), and before deduction of the average balance sheet allowance for credit losses.

(3) Calculated on an annual basis.

(4) Hedging derivative instruments (excluding options), embedded derivatives that have been separated and ALM derivatives that form part of the Bank's ALM network.

(6) Excluding derivative instruments.

Note:

Appendix 1 (continued)

					For the three months ended June 30
		2012					2011
				Rate of income (expense)(3)				Rate of income (expense)(3)
	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)
	NIS millions		%		NIS millions		%
Total
Monetary assets generating financial income(5)(6)	343,184	7,195	8.65		*306,696	**3,832	5.09
Effect of derivatives(4)
Hedging derivatives	8,748	90			11,370	266
Embedded derivatives and ALM	381,789	13,417			307,284	**841
Total assets	733,721	20,702		11.77	*625,350	**4,939		**3.20
Monetary liabilities generating financial expenses(6)	)311,622(	)5,402(	)7.12(		)275,463(	)1,451(	)2.12(
Effect of derivatives(4)
Hedging derivatives	)9,221(	)251(			)11,655(	)171(
Embedded derivatives and ALM	)384,226(	)13,112(			)310,878(	)1,311(
Total liabilities	)705,069(	)18,765(		)11.08(	)597,996(	)2,933(		)1.98(
Interest spread			1.53	0.69			2.97	**1.22

* Restated following the initial implementation of International accounting standard 12, Taxes on Income. See Note 1(C)(2.2) to the condensed Financial Statements.

** The Bank has implemented the directives of the Supervisor of Banks concerning the format for statements of profit and loss of banking corporation as of January 1, 2012. Pursuant to the new directive, activity in derivative instruments is separated into trading activity and non-trading activity. The directive was adopted through retroactive implementation. Accordingly, other non-trading derivatives were reclassified, to match the new disclosure format.

(1) The data are given before and after the effect of derivative instruments (including off-balance sheet effects of derivative instruments).

(2) Based on monthly opening balances (based on daily balances in the unlinked Israeli currency segment), and before deduction of the average balance sheet allowance for credit losses.

(3) Calculated on an annual basis.

(4) Hedging derivative instruments (excluding options), embedded derivatives that have been separated and ALM derivatives that form part of the Bank's ALM network.

(6) Excluding derivative instruments.

Note:

Appendix 1 (continued)

		For the three months ended June 30
	2012		2011
	Average balance(1)	Financing income (expenses)	Average balance(1)	Financing income (expenses)
In respect of options		1		**8
In respect of other derivative instruments (not including options, hedging derivatives, ALM derivatives and embedded derivatives that have been separated)(2)		-		**-
Fees from financing transactions and other financing income(5)		206		**127
Other financing expenses				1
Profit from financing activities before provision for credit losses		2,144		2,142
Provision for credit losses		)344(		)327(
Profit from financing activities after provision for credit losses		1,800		1,815
Total
Monetary assets that generated financing income(3)(4)	343,184		*306,696
Assets deriving from derivative instruments(6)	7,971		6,813
Other monetary assets	1,331		1,538
Provision for credit losses	)3,966(		)4,872(
Total monetary assets	348,520		*310,175
Total
Monetary liabilities that generated financing expenses(4)	)311,622(		)275,463(
Liabilities deriving from derivative instruments(6)	)11,042(		)10,208(
Other monetary liabilities	)6,615(		)7,697(
Total monetary liabilities	)329,279(		)293,368(
Total excess of assets over financial liabilities	19,241		*16,807
Non-monetary assets	6,301		6,607
Non-monetary liabilities	)691(		)573(
Total capital resources	24,851		*22,841

* Restated following the initial implementation of International accounting standard 12, Taxes on Income. See Note 1(C)(2.2) to the condensed Financial Statements.

(1) Based on monthly opening balances (based on daily balances in the unlinked Israeli currency segment), and before deduction of the average balance sheet allowance for credit losses.

(2) Hedging derivative instruments (excluding options), embedded derivatives that have been separated and ALM derivatives that form part of the Bank's ALM network.

(3) The average balance of the unrealized profits (losses) from adjustments to fair value, was deducted/added from the average balance of bonds available for sale and bonds held for trading at June 30, 2012 NIS 58 million (June 30, 2011: NIS 100 million) in the unlinked segment, NIS 28 million (June 30, 2011: NIS 76 million) in the CPI-linked segment, NIS 64 million (June 30, 2011: NIS 171 million) in the foreign currency segment (including Israeli currency linked to foreign currency).

(4) Excluding derivative instruments.

(5) Including profits and losses from the sale of investments in bonds and from the adjustments to fair value of bonds held for trading.

(6) Average balance sheet balances of derivative instruments (not including average off-balance sheet balances of derivative instruments).

Note:

Appendix 1 (continued)

					For the three months ended June 30
		2012					2011
				Rate of income (expense)(3)				Rate of income (expense)(3)
	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)
	USD millions		%		USD millions		%
Foreign currency (including Israeli currency linked to foreign currency)
Monetary assets in foreign currency generating financial income(5)(6)	19,928	54	1.09		18,060	173	3.89
Effect of derivatives(4)
Hedging derivatives	2,243	23			3,186	77
Embedded derivatives and ALM	51,829	)83(			51,658	572
Total assets	74,000	)6(		)0.03(	72,904	822		4.59
Monetary liabilities in foreign currency generating financial expenses(5)(6)	)23,188(	160	2.73		)23,080(	)179(	)3.14(
Effect of derivatives(4)
Hedging derivatives	)2,369(	)65(			)3,271(	)42(
Embedded derivatives and ALM	)49,642(	51			)47,264(	)622(
Total liabilities	)75,199(	146		0.77	)73,615(	)843(		)4.66(
Interest spread			3.82	0.74			0.75	)0.07(

(1) The data are given before and after the effect of derivative instruments (including off-balance sheet effects of derivative instruments).

(2) Based on monthly opening balances (based on daily balances in the unlinked Israeli currency segment), and before deduction of the average balance sheet allowance for credit losses.

(3) Calculated on an annual basis.

(4) Hedging derivative instruments (excluding options), embedded derivatives that have been separated and ALM derivatives that form part of the Bank's ALM network.

(6) Excluding derivative instruments.

Note:

Appendix 1 (continued)

					For the six months ended June 30
		2012					2011
				Rate of income (expense)(3)				Rate of income (expense)(3)
	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)
	NIS millions		%			NIS millions		%
Israeli currency - Unlinked
Assets(5)(6)	205,211	4,569	4.50		*186,579	4,318	4.68
Effect of derivatives(4)
Embedded derivatives and ALM	159,443	2,815			115,672	1,239
Total assets	364,654	7,384		4.09	*302,251	5,557		3.71
Liabilities(6)	)174,221(	)1,541(	)1.78(		)151,636(	)1,386(	)1.84(
Effect of derivatives(4)
Embedded
derivatives and ALM	)165,651(	)2,943(			)124,174(	)1,303(
Total liabilities	)339,872(	)4,484(		)2.66(	)275,810(	)2,689(		)1.96(
Interest spread			2.72	1.43			2.84	1.75
Israeli currency - Linked to the CPI
Assets(5)(6)	60,364	1,877	6.32		56,548	2,379	8.59
Effect of derivatives(4)
Embedded
derivatives and ALM	12,379	421			6,988	61
Total assets	72,743	2,298		6.42	63,536	2,440		7.83
Liabilities(6)	)47,874(	)1,483(	)6.29(		)42,524(	)1,763(	)8.46(
Effect of derivatives(4)
Embedded derivatives and ALM	)18,141(	)471(			)16,159(	)184(
Total liabilities	)66,015(	)1,954(		)6.01(	)58,683(	)1,947(		)6.75(
Interest spread			0.03	0.41			0.13	1.08

* Restated following the initial implementation of International accounting standard 12, Taxes on Income. See Note 1(C)(2.2) to the condensed Financial Statements.

(1) The data are given before and after the effect of derivative instruments (including off-balance sheet effects of derivative instruments).

(2) Based on monthly opening balances (based on daily balances in the unlinked Israeli currency segment), and before deduction of the average balance sheet allowance for credit losses.

(3) Calculated on an annual basis.

(4) Hedging derivative instruments (excluding options), embedded derivatives that have been separated and ALM derivatives that form part of the Bank's ALM network.

(5) The average balance of the unrealized profits (losses) from adjustments to fair value, was deducted/added from the average balance of bonds available for sale and bonds held for trading at June 30, 2012 NIS 76 million (June 30, 2011: NIS 2 million) in the unlinked segment, NIS 26 million (June 30, 2011: NIS 16 million) in the CPI-linked segment, NIS 59 million (June 30, 2011: NIS 165 million) in the foreign currency segment (including Israeli currency linked to foreign currency).

(6) Excluding derivative instruments.

Note:

Appendix 1 (continued)

					For the six months ended June 30
		2012					2011
				Rate of income (expense)(3)				Rate of income (expense)(3)
	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)
	NIS millions		%		NIS millions		%
Foreign currency (including Israeli currency linked to foreign currency)
Assets(5)(6)	76,016	2,866	7.68		62,968	*112	*0.36
Effect of derivatives(4)
Hedging derivatives	9,318	126			11,840	287
Embedded derivatives and ALM	198,874	7,773			176,811	*)716(
Total assets	284,208	10,765		7.72	251,619	*)317(		)0.25(
Liabilities(6)	)87,750(	)2,498(	)5.77(		)81,635(	603	1.47
Effect of derivatives(4)
Hedging derivatives	)9,796(	)242(			)12,135(	)184(
Embedded derivatives and ALM	)189,485(	)7,331(			)160,589(	*635
Total liabilities	)287,031(	)10,071(		)7.14(	)254,359(	*1,054		*0.83
Interest spread			1.91	0.58			*1.83	*0.58

(1) The data are given before and after the effect of derivative instruments (including off-balance sheet effects of derivative instruments).

(2) Based on monthly opening balances (based on daily balances in the unlinked Israeli currency segment), and before deduction of the average balance sheet allowance for credit losses.

(3) Calculated on an annual basis.

(4) Hedging derivative instruments (excluding options), embedded derivatives that have been separated and ALM derivatives that form part of the Bank's ALM network.

(5) The average balance of the unrealized profits (losses) from adjustments to fair value, was deducted/added from the average balance of bonds available for sale and bonds held for trading at June 30, 2012 NIS 76 million (June 30, 2011: NIS 2 million) in the unlinked segment, NIS 26 million (June 30, 2011: NIS 16 million) in the CPI-linked segment, NIS 59 million (June 30, 2011: NIS 165 million) in the foreign currency segment (including Israeli currency linked to foreign currency).

(6) Excluding derivative instruments.

Note:

Appendix 1 (continued)

					For the six months ended June 30
		2012					2011
				Rate of income (expense)(3)				Rate of income (expense)(3)
	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)
	NIS millions		%		NIS millions		%
Total
Monetary assets generating financial income(5)(6)	341,591	9,312	5.53		*306,095	**6,809	**4.50
Effect of derivatives(4)
Hedging derivatives	9,318	126			11,840	287
Embedded derivatives and ALM	370,696	11,009			299,471	**584
Total assets	721,605	20,447		5.75	*617,406	**7,680		**2.50
Monetary liabilities generating financial expenses(6)	)309,845(	)5,522(	)3.60(		)275,795(	)2,546(	)1.85(
Effect of derivatives(4)
Hedging derivatives	)9,796(	)242(			)12,135(	)184(
Embedded derivatives and ALM	)373,277(	)10,745(			)300,922(	**)852(
Total liabilities	)692,918(	)16,509(		)4.82(	)588,852(	**)3,582(		**)1.22(
Interest spread			1.93	0.93			**2.65	**1.28

* Restated following the initial implementation of International accounting standard 12, Taxes on Income. See Note 1(C)(2.2) to the condensed Financial Statements.

(1) The data are given before and after the effect of derivative instruments (including off-balance sheet effects of derivative instruments).

(2) Based on monthly opening balances (based on daily balances in the unlinked Israeli currency segment), and before deduction of the average balance sheet allowance for credit losses.

(3) Calculated on an annual basis.

(4) Hedging derivative instruments (excluding options), embedded derivatives that have been separated and ALM derivatives that form part of the Bank's ALM network.

(5) The average balance of the unrealized profits (losses) from adjustments to fair value, was deducted/added from the average balance of bonds available for sale and bonds held for trading at June 30, 2012 NIS 76 million (June 30, 2011: NIS 2 million) in the unlinked segment, NIS 26 million (June 30, 2011: NIS 16 million) in the CPI-linked segment, NIS 59 million (June 30, 2011: NIS 165 million) in the foreign currency segment (including Israeli currency linked to foreign currency).

(6) Excluding derivative instruments.

Note:

Appendix 1 (continued)

		For the six months ended June 30
	2012			2011
	Average balance(1)	Financing income (expenses)	Average balance(1)	Financing income (expenses)
In respect of options		9		**16
In respect of other derivative instruments (not including options, hedging derivatives, ALM derivatives and embedded derivatives that have been separated)(2)		-		**-
Fees from financing transactions and other financing income(5)		398		**281
Other financing expenses		-		)1(
Profit from financing activities before provision for credit losses		4,345		4,394
Provision for credit losses		)647(		)341(
Profit from financing activities after provision for credit losses		3,698		4,053
Total
Monetary assets that generated financing income(3)(4)	341,591		*306,095
Assets deriving from derivative instruments(6)	8,632		6,690
Other monetary assets(4)	1,516		1,709
Provision for credit losses	)4,013(		)4,643(
Total monetary assets	347,726		*309,851
Total
Monetary liabilities that generated financing expenses(4)	)309,845(		)275,795(
Liabilities deriving from derivative instruments(6)	)11,489(		)9,832(
Other monetary liabilities(4)	)7,102(		)7,242(
Total monetary liabilities	)328,436(		)292,869(
Total excess of assets over financial liabilities	19,290		*16,982
Non-monetary assets	6,065		6,290
Non-monetary liabilities	)703(		)685(
Total capital resources	24,652		*22,587

* Restated following the initial implementation of International accounting standard 12, Taxes on Income. See Note 1(C)(2.2) to the condensed Financial Statements.

(1) Based on monthly opening balances (based on daily balances in the unlinked Israeli currency segment), and before deduction of the average balance sheet allowance for credit losses.

(2) Hedging derivative instruments (excluding options), embedded derivatives that have been separated and ALM derivatives that form part of the Bank's ALM network.

(3) The average balance of the unrealized profits (losses) from adjustments to fair value, was deducted/added from the average balance of bonds available for sale and bonds held for trading at June 30, 2012 NIS 76 million (June 30, 2011: NIS 2 million) in the unlinked segment, NIS 26 million (June 30, 2011: NIS 16 million) in the CPI-linked segment, NIS 59 million (June 30, 2011: NIS 165 million) in the foreign currency segment (including Israeli currency linked to foreign currency).

(4) Excluding derivative instruments.

(5) Including profits and losses from the sale of investments in bonds and from the adjustments to fair value of bonds held for trading.

(6) Average balance sheet balances of derivative instruments (not including average off-balance sheet balances of derivative instruments).

Note:

Appendix 1 (continued)

					For the six months ended June 30

		2012		Rate of income (expense)(3)			2011	Rate of income (expense)(3)
	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)	Average balance(1)(2)	Financing income (expenses)(1)	Without effect of derivatives	Including effect of derivatives(4)
	USD millions		%		USD millions		%
Foreign currency (including Israeli currency linked to foreign currency)
Monetary assets in foreign currency generating financial income(5)(6)	20,068	247	2.48		17,870	398	4.50
Effect of derivatives(4)
Hedging derivatives	2,413	32			3,279	85
Embedded derivatives and ALM	51,827	684			50,404	*1,725
Total assets	74,308	963		2.61	71,553	*2,208		*6.27
Monetary liabilities in foreign currency generating financial expenses(5)(6)	)23,232(	)33(	)0.28(		)23,010(	)250(	)2.18(
Effect of derivatives(4)
Hedging derivatives	)2,540(	)63(			)3,363(	)46(
Embedded derivatives and ALM	)49,647(	)678(			)45,742(	*)1,600(
Total liabilities	)75,419(	)774(		)2.06(	)72,115(	*)1,896(		*)5.33(
Interest spread			2.20	0.55			2.32	*0.94

(1) The data are given before and after the effect of derivative instruments (including off-balance sheet effects of derivative instruments).

(2) Based on monthly opening balances (based on daily balances in the unlinked Israeli currency segment), and before deduction of the average balance sheet allowance for credit losses.

(3) Calculated on an annual basis.

(4) Hedging derivative instruments (excluding options), embedded derivatives that have been separated and ALM derivatives that form part of the Bank's ALM network.

(5) The average balance of the unrealized profits (losses) from adjustments to fair value, was deducted/added from the average balance of bonds available for sale and bonds held for trading at June 30, 2012 NIS 76 million (June 30, 2011: NIS 2 million) in the unlinked segment, NIS 26 million (June 30, 2011: NIS 16 million) in the CPI-linked segment, NIS 59 million (June 30, 2011: NIS 165 million) in the foreign currency segment (including Israeli currency linked to foreign currency).

(6) Excluding derivative instruments.

Note:

as at June 30, 2012 Appendix 2

	On demand	From	From	From	From	From	From
	up to 1	1 to 3	3 months	1 to 3	3 to 5	5 to 10	10 to 20
	month	months	to 1 year	years	years	years	years
				NIS millions

Israeli currency - unlinked
Financial assets and amounts receivable
in respect of derivative instruments
and in respect of off-balance sheet financial instruments and complex
financial assets
Financial assets, **	161,756	7,344	19,874	5,940	2,727	3,713	1,190
Derivative financial instruments
(except options)	36,362	58,493	39,827	23,017	11,819	13,596	233
Options (In terms of the underlying asset)	1,069	656	2,089	149	11	-	-
Total Fair value	199,187	66,493	61,790	29,106	14,557	17,309	1,423

Financial liabilities and amounts payable in respect of derivative instruments
and in respect of off-balance sheet
financial instruments and complex
financial liabilities
Financial liabilities*	144,372	8,998	11,347	8,678	1,702	4,188	424
Derivative financial instruments
(except options)	40,969	58,145	43,369	24,033	12,046	14,895	245
Options (In terms of the underlying asset)	1,181	1,352	2,131	214	4	-	-
Total fair value	186,522	68,495	56,847	32,925	13,752	19,083	669
Financial instruments, net
Exposure to changes in interest
rates in the segment	12,665	)2,002(	4,943	)3,819(	805	)1,774(	754
Cumulative exposure in the segment	12,665	10,663	15,606	11,787	12,592	10,818	11,572

* With the exception of balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of complex financial instruments.

** Average weighted by fair value of effective average duration.

*** The data include assumptions regarding early repayment in respect of housing loans. The effect of these assumptions is negligible.

1. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the different balance sheet items, will be provided upon request.
1. In this table, data by periods reflect the present value of future cash flows of each financial instrument, capitalized by the interest rate used for deduction to the fair value included in respect of the financial instrument, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used in the calculation of the fair value of the financial instruments, see Note 8A in the condensed Financial Statements.
1. The internal rate of return is the interest rate for the deduction of the expected cash flows from the financial instrument to the fair value included in respect of it.
1. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments.
1. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

		June 30, 2012			June 30, 2011			December 31, 2011
Over 20	With no Total fair	Internal	Effective	Total fair	Internal	Effective	Total fair	Internal	Effective
years	repayment value period	rate of return	duration	value	rate of return	duration	value	rate of return	duration
	NIS millions	%	years	NIS	%	years	NIS	%	years
				millions			millions





2	3,340 205,886	4.70	0.38	186,620	5.29	0.37	198,490	5.03
-	- 183,347		1.06	140,100		0.94	164,005
-	- 3,974		0.43	5,408		0.18	4,093
2	3,340 393,207		**0.70	332,128		**0.61	366,588		**0.65





-	61 179,770	3.54	0.41	160,580	4.62	0.42	179,176	3.89

- -	- 193,702 - 4,882		1.07 0.32	149,052 6,646		1.02 0.25	165,387 6,363

-	61 378,354		**0.75	316,278		**0.70	350,926
2	3,279 14,853			15,850			15,662		**0.68

as at June 30, 2012 Appendix 2 (continued)

	On demand	From	From	From	From	From	From
	up to 1	1 to 3	3 months	1 to 3	3 to 5	5 to 10	10 to 20
	month	months	to 1 year	years	years	years	years
				NIS millions
Israeli currency - Linked to the CPI
Financial assets and amounts receivable
in respect of derivative instruments
and in respect of off-balance sheet
financial instruments and complex
financial assets
Financial assets, **	1,849	2,332	10,180	20,453	14,434	9,230	3,059
Derivative financial instruments
(except options)	125	718	1,582	3,138	2,904	5,929	113
Total Fair value	1,974	3,050	11,762	23,591	17,338	15,159	3,172
Financial liabilities and amounts payable
in respect of derivative instruments
and in respect of off-balance sheet
financial instruments and complex
financial liabilities
Financial liabilities*	1,740	1,500	6,431	14,019	8,867	17,325	3,300
Derivative financial instruments
(except options)	526	964	3,195	5,366	2,018	7,056	65
Total fair value	2,266	2,464	9,626	19,385	10,885	24,381	3,365
Financial instruments, net
Exposure to changes in interest rates
in the segment	)292(	586	2,136	4,206	6,453	)9,222(	)193(
Cumulative exposure in the segment	)292(	294	2,430	6,636	13,089	3,867	3,674

* With the exception of balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of complex financial instruments.

** Average weighted by fair value of effective average duration.

*** The data include assumptions regarding early repayment in respect of housing loans. The effect of these assumptions on fair value is a reduction of the fair value by NIS 14 million, and a reduction of the duration of the assets and of the difference in the duration by 0.17 years.

1. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the different balance sheet items, will be provided upon request.
1. In this table, data by periods reflect the present value of future cash flows of each financial instrument, capitalized by the interest rate used for deduction to the fair value included in respect of the financial instrument, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used in the calculation of the fair value of the financial instruments, see Note 8A in the condensed Financial Statements.
1. The internal rate of return is the interest rate for the deduction of the expected cash flows from the financial instrument to the fair value included in respect of it.
1. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments.
1. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

June 30, 2012 June 30, 2011 December 31, 2011 With no Total fair Internal Effective Total fair Internal Effective Total fair Internal repayment value rate of duration value rate of duration value rate of period return return return NIS millions % years NIS % years NIS % millions millions 305 62,434 3.14 3.51 59,125 3.43 3.32 61,701 3.34 - - 14,509 4.30 8,999 4.84 10,370 305 76,943 3.66 68,124 3.52 72,071 - 53,220 2.55 4.14 47,133 2.32 4.11 50,523 2.47 - - 19,190 3.57 17,206 3.90 17,270 - 72,410 3.99 64,339 4.05 67,793

	From From 5 to 10	Over 20	Effective
	10 to 20 years	years	duration

			years






		592

		592	**3.53




			4.15



			**4.07
	38 38

		554
305 4,533 3,785 4,278 4,533		4,228

as at June 30, 2012 Appendix 2 (continued)

	On demand	From	From	From	From	From	From
	up to 1	1 to 3	3 months	1 to 3	3 to 5	5 to 10	10 to 20
	month	months	to 1 year	years	years	years	years
				NIS millions

Foreign Currency***
Financial assets and amounts receivable
in respect of derivative instruments
and in respect of off-balance sheet
financial instruments and complex
financial assets
Financial assets, ***	41,237	10,998	11,082	4,920	3,062	3,567	741
Derivative financial instruments
(except options)	54,650	70,875	57,603	15,676	16,538	14,053	748
Options (In terms of the underlying asset)	3,272	2,411	4,257	336	3	-	-
Total Fair value	99,159	84,284	72,942	20,932	19,603	17,620	1,489
Financial liabilities and amounts payable
in respect of derivative instruments
and in respect of off-balance sheet
financial instruments and complex
financial liabilities
Financial liabilities*	49,487	18,479	18,349	3,506	250	256	743
Derivative financial instruments
(except options)	62,865	57,576	46,647	15,856	17,557	17,282	694
Options (In terms of the underlying asset)	3,151	1,692	4,213	267	2	-	-
Total fair value	115,503	77,747	69,209	19,629	17,809	17,538	1,437
Financial instruments, net
Exposure to changes in interest
rates in the segment	)16,344(	6,537	3,733	1,303	1,794	82	52
Cumulative exposure in the segment	)16,344(	)9,807(	)6,074(	)4,771(	)2,977(	)2,895(	)2,843(

* With the exception of balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of complex financial instruments.

** Average weighted by fair value of effective average duration.

*** Including Israeli currency linked to foreign currency.

**** The data include assumptions regarding early repayment in respect of housing loans. The effect of these assumptions is negligible.

1. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the different balance sheet items, will be provided upon request.
1. In this table, data by periods reflect the present value of future cash flows of each financial instrument, capitalized by the interest rate used for deduction to the fair value included in respect of the financial instrument, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used in the calculation of the fair value of the financial instruments, see Note 8A in the condensed Financial Statements.
1. The internal rate of return is the interest rate for the deduction of the expected cash flows from the financial instrument to the fair value included in respect of it.
1. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments.
1. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

			June 30, 2012			June 30, 2011			December 31, 2011
From Over 20	With no	Total fair	Internal	Effective	Total fair	Internal	Effective	Total fair	Internal	Effective
10 to 20 years	repayment	value	rate of	duration	value	rate of	duration	value	rate of	duration
years	period		return			return			return
	NIS millions		%	years	NIS	%	years	NIS	%	years
					millions			millions





115	1,525	77,247	4.16	0.93	64,679	3.76	1.04	79,052	4.13

248	-	230,391		1.00	249,125		1.19	246,037
-	-	10,279		0.28	13,124		0.17	19,550
363	1,525	317,917		**0.95	326,928		**1.11	344,639





280	125	91,475	1.58	0.49	81,354	1.63	1.31	89,105	1.85
97	-	218,574		1.14	235,019		1.07	240,472
-	-	9,325		0.32	11,826		0.16	17,235
377	125	319,374		**0.93	328,199		**1.09	346,812		**0.96


)14(	1,400	)1,457(			)1,271(			)2,173(

)2,857(	)1,457(

as at June 30, 2012 Appendix 2 (continued)

	On demand	From	From	From	From	From	From
	up to 1	1 to 3	3 months	1 to 3	3 to 5	5 to 10	10 to 20
	month	months	to 1 year	years	years	years	years
				NIS millions

Total exposure to changes in interest rates
Financial assets and amounts receivable
in respect of derivative instruments
and in respect of off-balance sheet
financial instruments and complex
financial assets
Financial assets' ' **	204,842	20,674	41,136	31,313	20,223	16,510	4,990
Derivative financial instruments
(except options)	91,137	130,086	99,012	41,831	31,261	33,578	1,094
Options (In terms of the underlying asset)	4,341	3,067	6,346	485	14	-	-
Total Fair value	300,320	153,827	146,494	73,629	51,498	50,088	6,084
Financial liabilities and amounts payable
in respect of derivative instruments
and in respect of off-balance sheet
financial instruments and complex
financial liabilities
Financial liabilities*	195,599	28,977	36,127	26,203	10,819	21,769	4,467
Derivative financial instruments
(except options)	104,360	116,685	93,211	45,255	31,621	39,233	1,004
Options (In terms of the underlying asset)	4,332	3,044	6,344	481	6	-	-
Total fair value	304,291	148,706	135,682	71,939	42,446	61,002	5,471
Financial instruments, net
Exposure to changes in interest rates in the
segment	)3,971(	5,121	10,812	1,690	9,052	)10,914(	613
Cumulative exposure in the segment	)3,971(	1,150	11,962	13,652	22,704	11,790	12,403

* With the exception of balance sheet balances of derivative financial instruments, fair value of off-balance sheet financial instruments, and fair value of complex financial instruments.

** Average weighted by fair value of effective average duration.

*** Including shares presented in the "with no repayment period" column.

**** The data include assumptions regarding early repayment in respect of housing loans. The effect of these assumptions is negligible.

1. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities, according to the different balance sheet items, will be provided upon request.
1. In this table, data by periods reflect the present value of future cash flows of each financial instrument, capitalized by the interest rate used for deduction to the fair value included in respect of the financial instrument, in consistency with the assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used in the calculation of the fair value of the financial instruments, see Note 8A in the condensed Financial Statements.
1. The internal rate of return is the interest rate for the deduction of the expected cash flows from the financial instrument to the fair value included in respect of it.
1. The effective average duration of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (an increase of 0.1%) in the internal return rate of each of the financial instruments.
1. Option components embedded in financial instruments, for accounting purposes, were expressed in cash flows through sorting by terms to maturity.

		June 30, 2012			June 30, 2011			December 31, 2011
Over 20 With no years repayment period	Total fair value	Internal rate of return	Effective duration	Total fair value	Internal rate of return	Effective duration	Total fair value	Internal rate of return	Effective duration
NIS millions		%	years	NIS millions	%	years	NIS millions	%	years

340,833 4.49 1.03		4.64 1.05	312,414	1.06	6,588 346,985	709

420,412 1.14		1.18	398,224	1.14	- 428,247	248
23,643 0.16		0.17	18,532	0.32	- 14,253	-
**1.06	784,888	**1.10	729,170	**1.09	6,588 789,485	957

186 324,465 2.88	318	289,067 3.25	1.28	318,804	3.01 1.13

- 431,466	97	401,277	1.17	423,129	1.15
- 14,207	-	18,472	0.19	23,598	0.15
186 770,138 **1.13	415	708,816	**1.19	765,531	**1.11


6,402 19,347	542	20,354		19,357
19,347	12,945

In respect of borrower activity in Israel

Agriculture 2,174 694 2,868 108 70 )2( 50 24 Industry 20,764 21,475 42,239 2,400 1,347 )83( )139( 577 Construction and Real Estate(7) 40,952 33,653 74,605 4,149 2,238 )100( )181( 1,072 Electricity and water 3,771 4,995 8,766 88 58 1 )9( 31 Commerce 18,795 8,565 27,360 1,122 595 252 )191( 418 Hotels, hospitality & food services 6,646 1,046 7,692 543 512 44 )8( 108 Transportation and storage 6,217 1,982 8,199 1,063 29 76 )3( 99 Communications and computer services 7,085 3,885 10,970 536 163 2 4 58 Financial services 20,283 12,625 32,908 1,803 1,453 248 )62( 373 Other business services 9,243 4,500 13,743 209 99 )9( )6( 97 Public and community services 5,838 1,592 7,430 194 83 21 )14( 52 Private individuals - housing loans 46,583 2,658 49,241 972 - 8 )6( 355 Private individuals - other 42,660 37,315 79,975 1,171 958 179 )93( 944 Total with respect to borrower activity in Israel 231,011 134,985 365,996 14,358 7,605 637 )658( 4,208 With respect to borrower activity abroad 29,601 14,189 43,790 1,326 929 10 )55( 382 Total 260,612 149,174 409,786 15,684 8,534 647 )713( 4,590

Credit risk included within the various economic sectors:

Settlement movements(5) 2,886 1,295 4,181 565 408 )2( - 87

Local authorities(6) 4,206 476 4,682 26 - 3 - 20

* Balance sheet and off-balance sheet credit risk, problematic commercial credit risk, and impaired credit to the public are presented before the effect of the allowance for credit losses, and before the effect of collateral permitted for deduction for the purpose of the indebtedness of a borrower and borrowers group.
(1) Credit to the public, investments in corporate bonds, other debts of the public and other assets in respect of derivative instruments transacted against the public amounted to NIS 252,606, 3,550, 542 and 3,914 million respectively.
(2) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of the limits on indebtedness of a borrower (Excluding unutilized credit-card credit facilities under the responsibility of other banks in the amount of approximately NIS 10,555 million), pursuant to the amended Proper Conduct of Banking Business Directive No. 313, which took effect on December 31, 2011.
(3) Includes balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which a provision based on the extent of arrears exists, and housing loans for which a provision based on the extent of arrears does not exist, which are in arrears of 90 days or more.
(4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item "other liabilities").
(5) Kibbutzim and Moshavim, regional and national organizations and corporations controlled by settlement movements.
(6) Including corporations under their control.
(7) Including balance sheet credit risk in the amount of NIS 487 million, and off-balance sheet credit risk in the amount of NIS 2,225 million that extended to certain purchasing groups, which are currently in the process of construction.

				as at June 30, 2012
		Credit risk to the public*				Credit losses for the six months ended June 30, 2012(4)
				The risk of credit to the public includes:
Balance Sheet credit risk(1)	Off-Balance Sheet credit risk(2)	Total credit risk to the public	Problematic credit risk(3)	Impaired credit to the public	Provision (income) for credit losses	Net charge-offs	Allowance for credit losses
2,174	694	2,868	108	70	)2(	50	24
20,764	21,475	42,239	2,400	1,347	)83(	)139(	577
40,952	33,653	74,605	4,149	2,238	)100(	)181(	1,072
3,771	4,995	8,766	88	58	1	)9(	31
18,795	8,565	27,360	1,122	595	252	)191(	418
6,646	1,046	7,692	543	512	44	)8(	108
6,217	1,982	8,199	1,063	29	76	)3(	99
7,085	3,885	10,970	536	163	2	4	58
20,283	12,625	32,908	1,803	1,453	248	)62(	373
9,243	4,500	13,743	209	99	)9(	)6(	97
5,838	1,592	7,430	194	83	21	)14(	52
46,583	2,658	49,241	972	-	8	)6(	355
42,660	37,315	79,975	1,171	958	179	)93(	944
231,011	134,985	365,996	14,358	7,605	637	)658(	4,208
29,601	14,189	43,790	1,326	929	10	)55(	382
260,612	149,174	409,786	15,684	8,534	647	)713(	4,590

2,886	1,295	4,181	565	408	)2(	-	87
4,206	476	4,682	26	-	3	-

Total Credit Risk to the Public by Economic Sectors

Appendix 3 (continued)

In respect of borrower activity in Israel

Agriculture 1,974 658 2,632 166 85 7 )34( 40 Industry 19,132 20,977 40,109 2,639 1,625 )106( - 1,030 Construction and Real Estate(7) 40,271 31,657 71,928 4,198 3,044 293 )860( 902 Electricity and water 2,993 1,866 4,859 92 65 3 - 27 Commerce 16,573 8,507 25,080 887 350 205 12 366 Hotels, hospitality & food services 5,944 1,296 7,240 433 387 )2( )52( 90 Transportation and storage 5,633 1,956 7,589 86 60 )7( )3( 28 Communications and computer services 6,903 4,515 11,418 437 73 )122( 35 60 Financial services 19,482 14,638 34,120 2,277 1,503 )82( )45( 317 Other business services 9,469 4,275 13,744 179 117 20 )93( 148 Public and community services 6,350 1,995 8,345 217 64 27 )55( 44 Private individuals - housing loans 43,827 4,412 48,239 1,106 - 19 )6( 368 Private individuals - other 40,584 34,730 75,314 1,219 998 94 )110( 903 Total with respect to borrower activity in Israel 219,135 131,482 350,617 13,936 8,371 349 )1,211( 4,323 With respect to borrower activity abroad 26,414 19,112 45,526 1,667 1,053 )8( )6( 350 Total 245,549 150,594 396,143 15,603 9,424 341 )1,217( 4,673

Credit risk included within the various economic sectors:

Settlement movements(5) 3,268 1,314 4,582 621 377 7 - 96

Local authorities(6) 4,364 532 4,896 30 - - - 12

* Balance sheet and off-balance sheet credit risk, problematic commercial credit risk, and impaired credit to the public are presented before the effect of the allowance for credit losses, and before the effect of collateral permitted for deduction for the purpose of the indebtedness of a borrower and borrowers group.
(1) Credit to the public, investments in corporate bonds, other debts of the public and other assets in respect of derivative instruments transacted against the public amounted to NIS 238,280, 3,543, 362 and 3,364 million respectively.
(2) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of the limits on indebtedness of a borrower (Excluding unutilized credit-card credit facilities under the responsibility of other banks in the amount of approximately NIS 9,986 million), pursuant to Proper Conduct of Banking Business Directive No. 313 (old version).
(3) Includes balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which a provision based on the extent of arrears exists, and housing loans for which a provision based on the extent of arrears does not exist, which are in arrears of 90 days or more.
(4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item "other liabilities").
(5) Kibbutzim and Moshavim, regional and national organizations and corporations controlled by settlement movements.
(6) Including corporations under their control.
(7) Including balance sheet credit risk in the amount of NIS 401 million, and off-balance sheet credit risk in the amount of NIS 1,806 million that extended to certain purchasing groups, which are currently in the process of construction.

			as at June 30, 2011
		Credit risk to the public*				Credit losses for the six months ended June 30, 2011(4)
				The risk of credit to the public includes:
Balance Sheet credit risk(1)	Off-Balance Sheet credit risk(2)	Total credit risk to the public	Problematic credit risk(3)	Impaired credit to the public	Provision (income) for credit losses	Net charge-offs	Allowance for credit losses
1,974	658	2,632	166	85	7	)34(
19,132	20,977	40,109	2,639	1,625	)106(	-	40 1,030
40,271	31,657	71,928	4,198	3,044	293	)860(	902
2,993	1,866	4,859	92	65	3	-
16,573	8,507	25,080	887	350	205	12	366
5,944	1,296	7,240	433	387	)2(	)52(
5,633	1,956	7,589	86	60	)7(	)3(
6,903	4,515	11,418	437	73	)122(	35
19,482	14,638	34,120	2,277	1,503	)82(	)45(
9,469	4,275	13,744	179	117	20	)93(
6,350	1,995	8,345	217	64	27	)55(
43,827	4,412	48,239	1,106	-	19	)6(
40,584	34,730	75,314	1,219	998	94	)110(	903
219,135	131,482	350,617	13,936	8,371	349	)1,211(	4,323
26,414	19,112	45,526	1,667	1,053	)8(	)6(
245,549	150,594	396,143	15,603	9,424	341	)1,217(	4,673

3,268	1,314	4,582	621	377	7	-
4,364	532	4,896	30	-	-	-

Total Credit Risk to the Public by Economic Sectors

Appendix 3 (continued)

In respect of borrower activity in Israel

Agriculture 2,185 610 2,795 116 77 )12( )153( 23 Industry 20,311 21,207 41,518 2,630 1,482 )265( )108( 798 Construction and Real Estate(7) 41,583 32,681 74,264 4,628 2,709 1,165 )1,260( 1,178 Electricity and water 3,866 4,167 8,033 111 63 6 )48( 41 Commerce 18,492 8,561 27,053 1,220 712 136 )34( 356 Hotels, hospitality & food services 6,546 1,122 7,668 426 372 18 )168( 64 Transportation and storage 5,843 2,180 8,023 60 26 )11( )28( 16 Communications and computer services 7,180 4,272 11,452 380 166 )141( 97 53 Financial services 21,724 12,123 33,847 907 691 )20( )38( 135 Other business services 9,136 4,003 13,139 213 103 19 )19( 115 Public and community services 6,087 1,665 7,752 231 111 37 )120( 47 Private individuals - housing loans 44,781 2,012 46,793 984 - 45 )23( 356 Private individuals - other 41,741 36,059 77,800 1,176 924 240 )191( 899 Total with respect to borrower activity in Israel 229,475 130,662 360,137 13,082 7,436 1,217 )2,093( 4,081 With respect to borrower activity abroad 29,436 15,201 44,637 1,678 1,173 )14( )3( 575 Total 258,911 145,863 404,774 14,760 8,609 1,203 )2,096( 4,656

Credit risk included within the various economic sectors:

Settlement movements(5) 2,947 1,386 4,333 569 337 )12( - 92

Local authorities(6) 4,303 573 4,876 28 - 6 - 18

* Balance sheet and off-balance sheet credit risk, problematic commercial credit risk, and impaired credit to the public are presented before the effect of the allowance for credit losses, and before the effect of collateral permitted for deduction for the purpose of the indebtedness of a borrower and borrowers group.
(1) Credit to the public, investments in corporate bonds, other debts of the public and other assets in respect of derivative instruments transacted against the public amounted to NIS 250,592, 2,867, 687 and 4,765 million respectively.
(2) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of the limits on indebtedness of a borrower (Excluding unutilized credit-card credit facilities under the responsibility of other banks in the amount of approximately NIS 10,163 million), pursuant to the amended Proper Conduct of Banking Business Directive No. 313, which took effect on December 31, 2011.
(3) Includes balance sheet and off-balance sheet credit risk that is impaired, substandard, or under special supervision, including in respect of housing loans for which a provision based on the extent of arrears exists, and housing loans for which a provision based on the extent of arrears does not exist, which are in arrears of 90 days or more.
(4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item "other liabilities").
(5) Kibbutzim and Moshavim, regional and national organizations and corporations controlled by settlement movements.
(6) Including corporations under their control.
(7) Including balance sheet credit risk in the amount of NIS 433 million, and off-balance sheet credit risk in the amount of NIS 2,169 million that extended to certain purchasing groups, which are currently in the process of construction.

			as at December 31, 2011
		Credit risk to the public*				Credit losses for the year ended December 31, 2011(4)
				The risk of credit to the public includes:
Balance Sheet credit risk(1)	Off-Balance Sheet credit risk(2)	Total credit risk to the public	Problematic credit risk(3)	Impaired credit to the public	Provision (income) for credit losses	Net charge-offs	Allowance for credit losses
2,185	610	2,795	116	77	)12(	)153(	23
20,311	21,207	41,518	2,630	1,482	)265(	)108(	798
41,583	32,681	74,264	4,628	2,709	1,165	)1,260(	1,178
3,866	4,167	8,033	111	63	6	)48(
18,492	8,561	27,053	1,220	712	136	)34(	356
6,546	1,122	7,668	426	372	18	)168(
5,843	2,180	8,023	60	26	)11(	)28(
7,180	4,272	11,452	380	166	)141(	97
21,724	12,123	33,847	907	691	)20(	)38(	135
9,136	4,003	13,139	213	103	19	)19(	115
6,087	1,665	7,752	231	111	37	)120(
44,781	2,012	46,793	984	-	45	)23(	356
41,741	36,059	77,800	1,176	924	240	)191(	899
229,475	130,662	360,137	13,082	7,436	1,217	)2,093(	4,081
29,436	15,201	44,637	1,678	1,173	)14(	)3(
258,911	145,863	404,774	14,760	8,609	1,203	)2,096(	4,656

2,947	1,386	4,333	569	337	)12(	-
4,303	573	4,876	28	-	6	-

Exposure to Foreign Countries(1) Appendix 4

Part A – Information regarding total exposures to foreign countries and exposures to countries where total exposure to each country is greater than 1% of total consolidated assets or greater than 20% of capital, whichever is lower:

	as at June 30, 2012
	Balance Sheet exposure(4)
	Cross-Border Balance Sheet exposure
To Governments(3)	To Banks	To Others

Country
A. United States	-	2,030	1,963
B. Switzerland	-	289	479
C. England	-	1,994	3,178
D. Turkey	-	82	6
E. Germany	115	1,465	700
F. France	25	1,296	519
G. Ireland	-	17	65
H. Spain	1	105	34
I. Portugal	-	-	1
J. Greece	2	-	-
K. Italy	1	1	54
L. Others	548	1,643	6,384
Total exposure to foreign countries	692	8,922	13,383
Total exposure to LDC	70	216	707

The line "total LDCs" includes the total exposure to countries defined as Less Developed Countries (LDCs) in Proper Conduct of Banking Business Directive No. 315, "Supplementary Provisions for Doubtful Debts". This amount includes data for Turkey, as detailed in the table above.

The balance sheet exposure to a foreign country includes cross-border balance sheet exposure and balance sheet exposure of the offices of the banking corporation in the foreign country to local residents. Cross-border balance sheet exposure includes balance sheet exposure of the offices of the banking corporation in Israel to residents of the foreign country, and balance sheet exposure of the overseas offices of the banking corporation to non-residents of the country in which the office is located.

Balance sheet exposure of the banking corporation's offices in a foreign country to local residents includes balance sheet exposure of the offices of the banking corporation in that foreign country to the residents of the country, less liabilities of those offices (the deduction is performed up to the level of the exposure).

(1) Based on the final risk, taking into account guarantees, liquid collateral and credit derivatives.
(2) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limits on indebtedness of a borrower, pursuant to the amended Proper Conduct of Banking Business Directive No. 313, which took effect on December 31, 2011.
(3) Governments, Official institutions and Central Banks.
(4) Balance sheet and off-balance sheet credit risk, problematic commercial credit risk, and impaired debts are presented before the effect of the provision for credit losses, and before the effect of collateral permitted for deduction for the purpose of the indebtedness of a borrower and borrowers group.

				as at June 30, 2012
		Balance Sheet exposure(4)					Off-Balance Sheet exposure(2)(4)
Balance Sheet exposure of the Bank's overseas offices to local residents									Cross-Border Balance Sheet exposure
Balance Sheet exposure, before deduction for local liabilities	Deduction for local liabilities	Balance Sheet exposure, net of local liabilities	Total Balance Sheet exposure	Problematic Balance Sheet commercial credit risk(4)	Impaired debts(4)	Total off-Balance Sheet exposure	Of which: Problematic off-Balance Sheet commercial credit risk(4)	Maturity up to one year	Maturity over one year
19,011	8,468	10,543	14,536	308	192	6,768	43	1,520	2,473
4,856	-	4,856	5,624	-	-	550	-	444	324
1,333	459	874	6,046	74	48	3,128	-	2,815	2,357
3,581	527	3,054	3,142	81	81	874	-	79	9
-	-	-	2,280	1	1	1,229	-	1,133	1,147
-	-	-	1,840	35	36	1,474	-	633	1,207
-	-	-	82	-	-	204	-	73	9
-	-	-	140	-	-	132	-	52	88
-	-	-	1	-	-	-	-	1	-
-	-	-	2	-	-	1	-	-	2
-	-	-	56	3	-	35	-	12	44
405	3	402	8,977	159	41	2,828	-	5,026	3,549
29,186	9,457	19,729	42,726	661	399	17,223	43	11,788	11,209
3,986	530	3,456	4,449	113	114	2,104	-	376	617

Exposure to Foreign Countries(1)

Appendix 4 (continued)

Country
A. United States	-	1,449	1,525
B. Switzerland	-	821	463
C. England	-	1,699	2,195
D. Turkey	-	2	14
E. Germany	151	710	804
F. France	17	1,107	503
G. Ireland	-	11	130
H. Spain	25	104	46
I. Portugal	-	2	2
J. Greece	-	-	1
K. Italy*	-	8	57
L. Others*	752	1,439	5,710
Total exposure to foreign countries	945	7,352	11,450
Total exposure to LDC	13	184	529

* Reclassified; data on exposure to Italy, previously included in other countries, are presented separately.

(1) Based on the final risk, taking into account guarantees, liquid collateral and credit derivatives.
(2) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limits on indebtedness of a borrower, pursuant to the amended Proper Conduct of Banking Business Directive No. 313 (old version).
(3) Governments, Official institutions and Central Banks.
(4) Balance sheet and off-balance sheet credit risk, problematic commercial credit risk, and impaired debts are presented before the effect of the provision for credit losses, and before the effect of collateral permitted for deduction for the purpose of the indebtedness of a borrower and borrowers group.

				as at June 30, 2011
	Off-Balance Sheet exposure(2)(4)					Balance Sheet exposure(4)
Cross-Border Balance Sheet exposure							Balance Sheet exposure of the Bank's overseas offices to local residents
Maturity up Maturity to one year over one year	Of which: Problematic off-Balance Sheet commercial credit risk(4)	Total off-Balance Sheet exposure	Impaired debts(4)	Problematic Balance Sheet commercial credit risk(4)	Total Balance Sheet exposure	Balance Sheet exposure, net of local liabilities	Deduction for local liabilities	Balance Sheet exposure, before deduction for local liabilities
1,413 1,561	118	11,138	170	321	8,702	5,728	7,451	13,179
1 610 674		2,626	-	5	4,380	3,096	-	3,096
4 1,103 2,791		8,976	1	35	4,817	923	285	1,208
- 15 1		727	134	134	3,072	3,056	349	3,405
- 679 986		2,659	9	9	1,665	-	-	-
- 656 971		4,394	1	-	1,627	-	-	-
- 136 5		172	-	3	141	-	-	-
- 65 110		233	-	-	175	-	-	-
- 2 2		-	-	-	4	-	-	-
- 1 -		1	-	-	1	-	-	-
- 24 41 - 4,733 3,168		34 3,720	- 125	5 138	65 8,243	- 342	- 6	- 348
9,437 10,310	123	34,680	440	650	32,892	13,145	8,091	21,236
- 407 319		1,793	136	139	4,102	3,376	356	3,732

Exposure to Foreign Countries(1)

Appendix 4 (continued)

Country
A. United States	2	1,451	2,218
B. Switzerland	-	597	445
C. England	-	2,438	2,885
D. Turkey	-	82	44
E. Germany	139	1,185	602
F. France	-	1,698	502
G. Ireland	-	13	97
H. Spain	12	79	33
I. Portugal	-	-	1
J. Greece	-	-	1
K. Italy	-	3	46
L. Others	613	1,644	6,222
Total exposure to foreign countries	766	9,190	13,096
Total exposure to LDC	70	302	660

(1) Based on the final risk, taking into account guarantees, liquid collateral and credit derivatives.
(2) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limits on indebtedness of a borrower, pursuant to the amended Proper Conduct of Banking Business Directive No. 313, which took effect on December 31, 2011.
(3) Governments, Official institutions and Central Banks.
(4) Balance sheet and off-balance sheet credit risk, problematic commercial credit risk, and impaired debts are presented before the effect of the provision for credit losses, and before the effect of collateral permitted for deduction for the purpose of the indebtedness of a borrower and borrowers group.

Part B – Information regarding countries where total exposure to each country is between 0.75% and 1% of total consolidated assets, or between 15% and 20% of capital, whichever is lower.

Name of Country:
Canada
The aggregate balance sheet exposures to foreign countries detailed in this section total NIS 2,313 million as at June 30, 2012

(June 30, 2011: NIS 2,502 million, December 31, 2011: NIS 2,556 million).

Note: Data for June 2012 include countries that do not exceed the required exposure amount, because these countries were included in the data for December 2011.

				as at December 31, 2011
	Off-Balance Sheet exposure(2)(4)					Balance Sheet exposure(4)
Cross-Border Balance Sheet exposure							Balance Sheet exposure of the Bank's overseas offices to local residents
Maturity up Maturity over one year	Of which: Problematic to one year off-Balance Sheet commercial	Total off-Balance Sheet exposure	Impaired debts(4)	Problematic Balance Sheet commercial credit risk(4)	Total Balance Sheet exposure	Balance Sheet exposure, net of local liabilities	Deduction for local liabilities	Balance Sheet exposure, before deduction for local liabilities
1,346 2,325	credit risk(4) 90	7,103	231	424	17,371	13,700	7,575	21,275
795 247	-	548	-	-	5,661	4,619	-	4,619
3,324 1,999	-	3,634	47	70	6,431	1,108	395	1,503
67 59	-	1,049	120	120	3,138	3,012	310	3,322
1,006 920	-	995	8	8	1,926	-	-	-
1,088 1,112	-	1,282	1	-	2,200	-	-	-
104	-	195	-	3	110	-	-	-
43 81	-	129	-	-	124	-	-	-
- 1	- -	- 1	- -	- -	1 1	- -	- -	- -
11 38	1	32	-	5	49	-	-	-
5,158 3,321	-	2,842	43	159	8,918	439	10	449
12,943 10,109	91	17,810	450	789	45,930	22,878	8,290	31,168
363 669	-	2,164	154	155	4,483	3,451	320	3,771

Exposure to Foreign Countries(1)

Appendix 4 (continued)

Part C – Information regarding Balance Sheet exposure to foreign countries with liquidity problems. A. Change in amount of Balance Sheet exposure to foreign countries with liquidity problems, which are detailed in Section A above.

Greece	Ireland	Portugal	Italy	Spain	Total
6	100	2	61	108	277
-	)17(	-	)3(	24	4

-	1	-	1	7	9
-	-	-	-	1	1
)4(	)2(	)1(	)3(	-	)10(
2	82	1	56	140	281
					For the period of three months ended June 30, 2012

			For the period of six months ended June 30, 2012
	Greece	Ireland	Portugal	Italy	Spain	Total
Total exposure at beginning of the year	1	110	1	49	124	285
Net changes in amount of short-term exposure	)1(	)27(	-	)5(	4	)29(
Changes in other exposures:
Added exposures	6	1	1	25	34	67
Accrued interest income	-	-	-	1	1	2
Amounts collected	)4(	)2(	)1(	)14(	)23(	)44(
Total exposure at end of the period	2	82	1	56	140	281

			For the period of three months ended June 30, 2011
	Greece	Ireland	Portugal	Italy	Spain	Total
Total exposure at beginning of the period	1	147	5	63	207	423
Net changes in amount of short-term exposure	2	86	)2(	114	)6(	194
Changes in other exposures:
Added exposures	-	-	3	-	6	9
Accrued interest income	-	-	-	1	-	1
Amounts collected	)2(	)92(	)2(	)113(	)32(	)241(
Total exposure at end of the period	1	141	4	65	175	386

(1) Based on the final risk, taking into account guarantees, liquid collateral and credit derivatives.

Exposure to Foreign Countries (NIS millions) (1)

Appendix 4 (continued)

Part C – Information regarding Balance Sheet exposure to foreign countries with liquidity problems (continued) A. Change in amount of Balance Sheet exposure to foreign countries with liquidity problems, which are detailed in Section A above (continued)

			For the period of six months ended June 30, 2011
	Greece	Ireland	Portugal	Italy	Spain	Total
Total exposure at beginning of the year	2	215	-	136	186	539
Net changes in amount of short-term exposure	1	18	2	27	)6(	42
Changes in other exposures:
Added exposures	-	-	4	22	26	52
Accrued interest income	-	-	-	1	1	2
Amounts collected	)2(	)92(	)2(	)121(	)32(	)249(
Total exposure at end of the period	1	141	4	65	175	386

			For 2011
	Greece	Ireland	Portugal	Italy	Spain	Total
Total exposure at beginning of the period	2	215	-	136	186	539
Net changes in amount of short-term exposure	)1(	)110(	-	)80(	)58(	)249(
Changes in other exposures:
Added exposures	-	5	1	7	13	26
Accrued interest income	-	-	-	2	1	3
Amounts collected	-	-	-	)16(	)18(	)34(
Total exposure at end of the period	1	110	1	49	124	285

(1) Based on the final risk, taking into account guarantees, liquid collateral and credit derivatives.

CEO Certification

I, Zion Kenan, declare that:

1. I have reviewed the quarterly report of Bank Hapoalim B.M. (hereinafter: the "Bank") for the quarter ended June 30, 2012 (hereinafter: the "Report").
1. Based on my knowledge, the Report contains no incorrect presentation of a material fact, and there is no presentation of a material fact missing from the Report that is necessary so that the presentations included therein, in light of the circumstances under which such presentations were included, are not misleading with regard to the period covered by the Report.
1. Based on my knowledge, the quarterly financial statements and other financial information included in the Report fairly reflect the financial position, results of operations, changes in equity, and cash flows of the Bank, in all material aspects, for the dates and periods covered in the Report.
1. I, and others at the Bank making this declaration, are responsible for the establishment and application of controls and procedures with regard to the Bank's disclosure and internal control of financial reporting (as defined in the Public Reporting Directives concerning the "Board of Directors' Report"); furthermore:
(A) We have established such controls and procedures, or caused such controls and procedures to be established under our supervision, aimed at ensuring that material information pertaining to the Bank, including its consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in particular during the preparation of the Report;
(B) We have established such internal control of financial reporting, or caused such internal control of financial reporting to be established under our supervision, intended to provide a reasonable degree of confidence with regard to the reliability of the financial reporting, and that the financial reports for external purposes are prepared in accordance with generally accepted accounting principles and with the directives and guidelines of the Supervisor of Banks;
(C) We have assessed the effectiveness of the controls and procedures concerning disclosure at the Bank, and we have presented our findings with regard to the effectiveness of the controls and procedures concerning disclosure in the Report, as at the end of the period covered in the Report, based on our assessment; and
(D) We have disclosed in the Report any change in the internal control of financial reporting at the Bank that occurred during the quarter, and that had a material effect, or could reasonably be expected to have a material effect, on the internal control of financial reporting at the Bank; and
1. I, and others at the Bank making this declaration, have disclosed to the auditors, to the Board of Directors, and to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the internal control of financial reporting:
(A) Any significant deficiencies and material weaknesses in the establishment or application of internal control of financial reporting that can reasonably be expected to impair the Bank's ability to record, process, summarize, and report financial information; and
(B) Any fraud, whether material or immaterial, in which the Board of Management was involved, or in which other employees were involved who have a significant role in the internal control of financial reporting at the Bank.

The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.

Zion Kenan

President & Chief Executive Officer

Tel Aviv, August 29, 2012

Chief Accountant Certification

I, Ofer Levy, declare that:

1. I have reviewed the quarterly report of Bank Hapoalim B.M. (hereinafter: the "Bank") for the quarter ended June 30, 2012 (hereinafter: the "Report").
1. Based on my knowledge, the Report contains no incorrect presentation of a material fact, and there is no presentation of a material fact missing from the Report that is necessary so that the presentations included therein, in light of the circumstances under which such presentations were included, are not misleading with regard to the period covered by the Report.
1. Based on my knowledge, the quarterly financial statements and other financial information included in the Report fairly reflect the financial position, results of operations, changes in equity, and cash flows of the Bank, in all material aspects, for the dates and periods covered in the Report.
1. I, and others at the Bank making this declaration, are responsible for the establishment and application of controls and procedures with regard to the Bank's disclosure and internal control of financial reporting (as defined in the Public Reporting Directives concerning the "Board of Directors' Report"); furthermore:
(A) We have established such controls and procedures, or caused such controls and procedures to be established under our supervision, aimed at ensuring that material information pertaining to the Bank, including its consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in particular during the preparation of the Report;
(B) We have established such internal control of financial reporting, or caused such internal control of financial reporting to be established under our supervision, intended to provide a reasonable degree of confidence with regard to the reliability of the financial reporting, and that the financial reports for external purposes are prepared in accordance with generally accepted accounting principles and with the directives and guidelines of the Supervisor of Banks;
(C) We have assessed the effectiveness of the controls and procedures concerning disclosure at the Bank, and we have presented our findings with regard to the effectiveness of the controls and procedures concerning disclosure in the Report, as at the end of the period covered in the Report, based on our assessment; and
(D) We have disclosed in the Report any change in the internal control of financial reporting at the Bank that occurred during the quarter, and that had a material effect, or could reasonably be expected to have a material effect, on the internal control of financial reporting at the Bank; and
1. I, and others at the Bank making this declaration, have disclosed to the auditors, to the Board of Directors, and to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the internal control of financial reporting:
(A) Any significant deficiencies and material weaknesses in the establishment or application of internal control of financial reporting that can reasonably be expected to impair the Bank's ability to record, process, summarize, and report financial information; and
(B) Any fraud, whether material or immaterial, in which the Board of Management was involved, or in which other employees were involved who have a significant role in the internal control of financial reporting at the Bank.

The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.

Ofer Levy

Senior Deputy Managing Director, Chief Accountant

Tel Aviv, August 29, 2012

Auditors' Review Report to the Shareholders of Bank Hapoalim Ltd.

Introduction

We have reviewed the accompanying financial information of Bank Hapoalim B.M. and its subsidiaries (hereinafter – "the Bank") comprising of the condensed consolidated interim balance sheet as at June 30, 2012 and the related condensed consolidated interim statements of income, changes in equity and cash flows for the six and three-month periods then ended. The Board of Directors and Management are responsible for the preparation and presentation of this interim financial information in accordance with generally accepted accounting principles in Israel (Israeli GAAP) on interim financial reporting and in accordance with the directives and guidelines of the Supervisor of Banks. Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of Review

We conducted our review in accordance with Standard on Review Engagements 1, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" of the Institute of Certified Public Accountants in Israel and a review standard applied in the review of banking institutions according to the directives and guidelines of the Supervisor of Banks. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial information was not prepared, in all material respects, in accordance with generally accepted accounting principles in Israel (Israeli GAAP) on interim financial reporting and in accordance with the directives and guidelines of the Supervisor of Banks.

Without qualifying our above conclusion, we draw attention to Note 6C(B) regarding the exposure to class actions that were filed against the Bank Group.

Somekh Chaikin Ziv Haft

Certified Public Accountants (Isr.) Certified Public Accountants (Isr.)

Tel Aviv, August 29, 2012

Somekh Chaikin, an Israeli partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.

Condensed Consolidated Balance Sheet

as at June 30, 2012

		June 30		December 31
		2012	2011	2011
	Note	Unaudited		Audited
Assets
Cash on hand and deposits with banks		53,751	46,859	55,790
Securities	2	40,728	27,701	34,411
Securities which were borrowed or bought under agreements to resell		-	7	-
Credit to the public	3	252,606	238,280	250,592
Allowance for credit losses	3	)3,992(	)4,211(	)4,097(
Net credit to the public	3	248,614	234,069	246,495
Credit to governments		884	323	616
Investments in equity basis investees		128	130	125
Buildings and equipment		3,659	3,661	3,720
Intangible assets and goodwill		39	51	44
Assets in respect of derivative instruments	7	9,547	6,992	10,799
Other assets		4,755	*3,989	*4,662
Total assets		362,105	*323,782	*356,662
Liabilities and Equity
Deposits from the public		259,668	233,237	256,417
Deposits from banks		6,434	5,676	7,001
Deposits from the Government		883	1,139	1,085
Securities which were lent or sold under agreements to repurchase		1,116	927	1,305
Bonds and subordinated notes		35,679	29,962	32,933
Liabilities in respect of derivative instruments	7	12,672	9,929	13,421
Other liabilities		20,430	19,897	20,399
Total liabilities		336,882	300,767	332,561
Shareholders' equity	4	24,907	*22,706	*23,819
Non-controlling interests		316	309	282
Total equity		25,223	*23,015	*24,101
Total liabilities and equity		362,105	*323,782	*356,662

* Restated following the initial implementation of International Accounting Standard 12, Taxes on Income. See Note 1(C)(2.2) below.

The accompanying notes are an integral part of the condensed financial statements.

Yair Seroussi Zion Kenan Ofer Levy Board of Directors Chief Executive Officer Chief Accountant

Chairman of the President & Senior Deputy Managing Director,

Tel Aviv, August 29, 2012

Condensed Consolidated Statement of Profit and Loss

For the periods ended June 30, 2012

		Three months ended June 30		Six months ended June 30		Year ended December 31
		2012	*2011	2012	*2011	*2011
	Note		Unaudited			Audited
Interest income	9	4,146	4,110	7,520	7,655	14,793
Interest expenses	9	)2,000(	)2,035(	)3,412(	)3,612(	)6,696(
Net interest income		2,146	2,075	4,108	4,043	8,097
Provision for credit losses	3	344	327	647	341	1,202
Net interest income after provision for credit losses		1,802	1,748	3,461	3,702	6,895
Non-interest income
Non-interest financing income (expenses)	10	)105(	16	81	218	)213(
Fees		1,247	1,253	2,521	2,581	5,098
Other income		19	23	52	53	106
Total non-interest income		1,161	1,292	2,654	2,852	4,991
Operating and other expenses
Salaries and related expenses		1,222	1,147	2,429	2,422	4,759
Maintenance and depreciation
of buildings and equipment		397	386	778	755	1,535
Depreciation and impairment of intangible
assets and goodwill		2	11	5	14	21
Other expenses		497	469	1,010	944	2,050
Total operating and other expenses		2,118	2,013	4,222	4,135	8,365
Profit before taxes		845	1,027	1,893	2,419	3,521
Provision for taxes on profit		227	333	595	836	809
Profit after taxes		618	694	1,298	1,583	2,712
The Bank's share in profits (losses) of equity-basis
investees, after taxes		2	1	-	2	)5(
Net profit:
Before attribution to non-controlling interests		620	695	1,298	1,585	2,707
Loss (profit) attributed to non-controlling interests		)13(	17	)32(	18	39
Attributed to shareholders of the Bank		607	712	1,266	1,603	2,746
Profit per ordinary share in NIS:
Basic profit:
Net profit attributed to shareholders of the Bank		0.46	0.54	0.96	1.21	2.07
Diluted profit:
Net profit attributed to shareholders of the Bank		0.46	0.53	0.95	1.20	2.05

* The Bank adopted the directives of the Supervisor of Banks concerning the format for statement of profit and loss of banking corporation for the first time on January 1, 2012. The directives were adopted by retroactive implementation, with the exception of the cancellation of unpaid accrued CPI linkage differentials on principal in respect of debts classified as impaired prior to the initial implementation. Accordingly, the data included in the statement of profit and loss with regard to comparison periods last year and to 2011 were reclassified for adjustment to the new definition, item headings, and presentation method of the current reporting period. For details, see Note 1(C)(1) below.

Condensed Statement of Changes in Equity

For the periods ended June 30, 2012

		For the three months ended June 30, 2012
		Capital Reserves
	Share capital and premium*	Benefit inherent in share based payment transactions	Other	Total capital and capital reserves
Balance as at March 31, 2012	8,075	208	)21(	8,262
Net profit for the period
Buyback of shares	)65(			)65(
Adjustments in respect of presentation of securities available for sale at fair value
Adjustments in respect of presentation of securities available for sale which were reclassified to the statement of profit and loss
Related tax effect
Benefit inherent in share based payment transactions		11		11
Realization of options to shares	7	)10(		)3(
Net profits in respect of cash flow hedging which were reclassified to the statement of profit and loss
Related tax effect
Translation financial statements adjustments**
Net profits in respect of net hedging of investments in foreign currency
Related tax effect
Dividend for non-controlling interests in a consolidated company
Balance as at June 30, 2012	8,017	209	)21(	8,205

* Deducting 10,523,853 shares purchased by the Bank at a total cost of approximately NIS 155 million.

** Adjustments from translation of an affiliate overseas whose functional currency differs from the functional currency of the Bank; see Note 1(C)(3) below.

*** Includes an amount of NIS 2,734 million that cannot be distributed as dividend.

	For the three months ended June 30, 2012
				Cumulative other comprehensive profit (loss)
Total Non-controlling shareholders' interests equity	earnings	Retained	Net profits (losses) from cash flow hedging	Translation adjustments**	Adjustments in respect of presentation of securities available for sale at fair value
24,440 304	16,004		)10(	1	183
607 13	607
)65(
)52(					)52(
)28(					)28(
)13(					)13(
11
)3(
)3(			)3(
1			1
)3(				)3(
23				23
)8(				)8(
)3(
24,907 316		***16,611	)12(	13	90

Condensed Statement of Changes in Equity

For the periods ended June 30, 2012 (continued)

Share capital and premium*	Benefit inherent in share based payment transactions	Other	Total capital and capital reserves
8,117	206	)21(	8,302

)42(			)42(




	12		12
4	)3(		1


8,079	215	)21(	8,273
			Capital Reserves	For the three months ended June 30, 2011

* Deducting 3,078,853 shares purchased by the Bank at a total cost of approximately NIS 52 million.

** Restated following the initial implementation of International Accounting Standard 12, Taxes on Income. As a result of the initial implementation, the opening balance of retained earnings for the period decreased by a total of NIS 26 million. See Note 1(C)(2.2) below.

			For the three months ended June 30, 2011
			Cumulative other comprehensive profit (loss)
Non-controlling interests	Total shareholders' equity	Retained earnings	Translation Net profits (losses) adjustments from cash flow hedging	Adjustments in respect of presentation of securities available for sale at fair value
327 **22,735	**22,408	**13,760	)19(	365
)17(	712	712
	)42(
)2(	)160(			)160(
	)2(			)2(
	44			44
	)270(	)270(
1	12
	1
	5		5
	)2(		)2(
309 **23,015	**22,706	**14,202	- )16(	247

For the periods ended June 30, 2012 (continued)

Share capital and premium*	Benefit inherent in share based payment transactions	Other	Total capital and capital reserves
8,066	209	)21(	8,254

)71(			)71(



	30		30
22	)30(		)8(






8,017	209	)21(	8,205
			Capital Reserves	For the six months ended June 30, 2012

* Deducting 10,523,853 shares purchased by the Bank at a total cost of approximately NIS 155 million.

** Adjustments from translation of an affiliate overseas whose functional currency differs from the functional currency of the Bank; see Note 1(C)(3) below.

*** Includes an amount of NIS 2,734 million that cannot be distributed as dividend.

**** Restated following the initial implementation of International Accounting Standard 12, Taxes on Income. As a result of the initial implementation, the opening balance of retained earnings for the period decreased by a total of NIS 26 million. See Note 1(C)(2.2) below.

		For the six months ended June 30, 2012
				Cumulative other comprehensive profit (loss)
Non-controlling interests	Total shareholders'	Retained earnings	Net profits (losses) from cash flow	Translation adjustments**	Adjustments in respect of
	equity		hedging		presentation of securities available for sale at fair value
282 ****24,101	****23,819	****15,345	)13(		233
32	1,266	1,266
	)71(
2	)68(				)68(
	)68(				)68(
	)7(				)7(
3	30
	)8(
	1		1
	16			16
	)4(			)4(
	1			1
)3(
316	24,907	***16,611	)12(	13	90

Condensed Statement of Changes in Equity

For the periods ended June 30, 2012 (continued)

		For the six months ended June 30, 2011
		Capital Reserves
	Share capital and premium*	Benefit inherent in share based payment transactions	Other	Total capital and capital reserves
Balance as at January 1, 2011	8,147	217	)21(	8,343
Cumulative effect, net of tax, of the initial implementation on January 1, 2011 of the directive on the measurement of impaired debts and allowance for credit losses
Cumulative effect, net of tax, of the initial implementation on January 1, 2011 of certain IFRS	)45(	)5(		)50(
Net profit for the period
Buyback of shares	)42(			)42(
Adjustments in respect of presentation of securities available for sale at fair value
Adjustments in respect of presentation of securities available for sale which were reclassified to the statement of profit and loss
Related tax effect
Dividend declared during the period but not yet paid
Benefit inherent in share based payment transactions		20		20
Realization of options to shares	19	)17(		2
Net profits in respect of cash flow hedging which were reclassified to the statement of profit and loss
Related tax effect
Balance as at June 30, 2011	8,079	215	)21(	8,273

* Deducting 3,078,853 shares purchased by the Bank at a total cost of approximately NIS 52 million.

** Adjustments from translation of financial statements of autonomous units.

*** Restated following the initial implementation of International Accounting Standard 12, Taxes on Income. As a result of the initial implementation, the opening balance of retained earnings for the period decreased by a total of NIS 26 million. See Note 1(C)(2.2) below.

For the six months ended June 30, 2011
					Cumulative other comprehensive profit (loss)
Total equity	Non-controlling interests	Total shareholders' equity	Retained earnings	Net profits (losses) from cash flow hedging	Translation adjustments**	Adjustments in respect of presentation of securities available for sale at fair value
***22,872	337	***22,535	***13,773	)24(	)110(	553
)9( )816(		)807(	)807(
)3( )40(		)37(	)97(		110
1,585	)18(	1,603	1,603
)42(		)42(
)5( )408(		)403(				)403(
)10(		)10(				)10(
1 108		107				107
)270(		)270(	)270(
6		20
		2
		13		13
		)5(		)5(
***23,015	309	***22,706	***14,202	)16(	-	247

Condensed Statement of Changes in Equity

For the periods ended June 30, 2012 (continued)

Share capital and premium*	Benefit inherent in share based payment transactions	Other	Total capital and capital reserves
8,147	217	)21(	8,343

)45(	)5(		)50(

)74(			)74(




	31		31
38	)34(		4



8,066	209	)21(	8,254
			Capital Reserves	For the year ended December 31, 2011

* Deducting 5,183,853 shares purchased by the Bank at a total cost of approximately NIS 84 million.

** Adjustments from translation of financial statements of autonomous units.

For the year ended December 31, 2011
					Cumulative other comprehensive profit (loss)
Total equity	Non-controlling interests	Total shareholders' equity	Retained earnings	Net profits (losses) from cash flow hedging	Translation adjustments**	Adjustments in respect of presentation of securities available for sale at fair value
***22,872	337	***22,535	***13,773	)24(	)110(	553
)816(	)9(	)807(	)807(
)40(	)3(	)37(	)97(		110
2,707	)39(	2,746	2,746
)74(		)74(
)383(	)5(	)378(				)378(
)55(		)55(				)55(
114	1	113				113
)270(		)270(	)270(
	6	31
		4
		17		17
		)6(		)6(
	)6(
***24,101	282	***23,819	***15,345	)13(	-	233

Condensed Statement of Cash Flows

For the periods ended June 30, 2012

	For the three months ended June 30		For the six months ended June 30		For the year ended December 31
	2012	*2011	2012	*2011	*2011
		Unaudited			Audited
Cash flows generated by (for) operating activity
Net profit for the period	620	695	1,298	1,585	2,707
Adjustments necessary to present cash flows from operating activity:
The bank's share in losses (profits) of equity basis investees	)2(	)1(	-	)2(	5
Depreciation of buildings and equipment	182	180	358	354	718
Amortizations	8	16	15	22	38
Provision for credit losses	344	327	647	341	1,202
Profit from sale of securities available
for sale and held to maturity	)20(	)427(	)127(	)454(	)1,410(
Realized and unrealized profit from adjustments
to fair value of securities held for trading	)10(	)10(	)7(	)9(	)17(
Loss (profit) from realization of buildings and equipment	2	-	)5(	-	-
Change in benefit inherent in share based transactions	)10(	**)1(	-	**7	2
Net change in liabilities in respect of employee benefits	54	**)45(	38	**126	**209
Deferred taxes, net	3	114	21	)30(	)383(
Profit from sale of credit portfolios	-	-	-	-	)11(
Adjustments in respect of exchange-rate differences	)872(	210	)421(	415	)1,016(
Accumulation differentials included in investment
and financing activities	)248(	196	)549(	239	649
Net change in current assets:
Deposits in banks	)1(	276	594	68	)762(
Credit to the public	)4,335(	)4,587(	)2,929(	)10,394(	)24,821(
Credit to governments	)141(	)12(	)268(	16	)277(
Securities which were borrowed or bought
under agreements to resell	70	60	-	9	16
Assets in respect of derivative instruments	)2,302(	)619(	1,252	)520(	)4,327(
Securities held for trading	)1,283(	)288(	)1,850(	444	)1,155(
Other assets	)350(	)80(	)126(	)20(	)369(
Net change in current liabilities:
Deposits from banks	)192(	43	)578(	842	2,167
Deposits from the public	8,095	1,468	3,125	)728(	22,452
Deposits from the Government	)23(	)88(	)202(	)196(	)250(
Securities which were lent or sold
under agreements to repurchase	)277(	499	)189(	541	919
Liabilities in respect of derivative instruments	2,512	498	)752(	)320(	3,172
Other liabilities	)119(	**)469(	)26(	**)855(	**116
Net cash generated by (for) operating activity	1,705	)2,045(	)681(	)8,519(	)426(

* The directives of the Supervisor of Banks concerning International Accounting Standard 7, Statement of Cash Flows, as established in the circular of the Supervisor of Banks on the adoption of certain IFRS, of November 30, 2011, were adopted by the Bank for the first time on January 1, 2012. Comparison figures for previous periods were reclassified to match the new definitions, item headings, and presentation method of the current reporting period. For further details, see Note 1(C)(2.1) below.

** Reclassified.

Condensed Statement of Cash Flows

For the periods ended June 30, 2012 (continued)

	For the three months ended June 30		For the six months ended June 30		For the year ended December 31
	2012	*2011	2012	*2011	*2011
		Unaudited			Audited
Cash flows generated by (for) investment activity
Acquisition of bonds held to maturity	-	)3(	-	)203(	)283(
Proceeds from redemption of bonds held to maturity	30	22	46	103	218
Acquisition of securities available for sale	)9,784(	)1,605(	)17,580(	)2,752(	)19,008(
Proceeds from sale of securities available for sale	6,225	1,840	11,936	3,477	10,285
Proceeds from redemption of securities available for sale	1,521	1,538	1,888	2,879	8,125
Proceeds from sale of credit portfolios	186	66	269	191	1,114
Dividends received from equity-basis investees	-	1	-	2	5
Acquisition of rights in equity basis investees	-	-	-	-	)5(
Investment in equity basis investee	-	-	)4(	-	-
Proceeds from sale of investment in equity-basis investees	1	-	1	2	2
Acquisition of buildings and equipment	)136(	)129(	)306(	)249(	)673(
Proceeds from sale of buildings and equipment	2	-	14	-	1
Net cash inflow generated by (for) investment activities	)1,955(	1,730	)3,736(	3,450	)219(

Condensed Statement of Cash Flows

For the periods ended June 30, 2012 (continued)

	For the three months ended June 30		For the six months ended June 30	For the year ended December 31
	2012	*2011	2012	*2011	*2011
		Unaudited			Audited
Cash flows generated by financing activity
Issuance of bonds and subordinated notes	1,884	1,888	3,667	2,822	5,961
Redemption of bonds and subordinated notes	)965(	)417(	)1,097(	)707(	)1,285(
Issue of shares and options	-	1	1	2	4
Dividend paid to shareholders of the Bank	-	-	-	-	)270(
Buyback of shares	)65(	)42(	)71(	)42(	)74(
Dividend paid to minority shareholders of consolidated companies	)3(	-	)3(	-	)6(
Net cash inflow generated by financing activities	851	1,430	2,497	2,075	4,330
Increase (decrease) in cash	601	1,115	)1,920(	)2,994(	3,685
Balance of cash at beginning of period	51,054	44,960	53,975	49,274	49,274
Effect of changes in exchange rates on cash balances	876	)210(	476	)415(	1,016
Balance of cash at end of period	52,531	45,865	52,531	45,865	53,975
Interest and taxes paid and/or received:
Interest received	4,222	4,123	7,763	7,983	15,800
Interest paid	)1,799(	)1,321(	)3,409(	)2,722(	)5,493(
Dividends received	30	21	30	31	33
Income tax paid	)437(	)631(	)744(	)1,098(	)2,059(
Income tax received	8	20	183	69	266

Note 1 Significant Accounting Policies

A. General

The Condensed Financial Statements as at June 30, 2012 were prepared in accordance with generally accepted accounting principles in Israel (Israeli GAAP) concerning interim financial reporting and in accordance with directives and guidelines of the Supervisor of Banks. The accounting principles used in the preparation of these Condensed Financial Statements were implemented consistently with the accounting principles used in the preparation of the audited Financial Statements as at December 31, 2011, with the exceptions noted in Sections C and D below. These reports should be perused in conjunction with the Annual Financial Statements as at December 31, 2011, and the accompanying Notes.

The Condensed Financial Statements were approved for publication by the Board of Directors of the Bank on August 29, 2012.

B. Reclassification due to First-Time Implementation of Accounting Standards and Directives of the Supervisor of Banks

Due to the first-time implementation of certain accounting standards and directives of the Supervisor of Banks (see Section C below), certain items in the financial statements and certain comparative figures were reclassified, in order to match the items headings and presentation method of the current reporting period. Specifically, the following items were reclassified:

Items included in the condensed consolidated statement of profit and loss:

Due to the initial implementation of the directives of the Supervisor of Banks concerning the new format for the statement of profit and loss (see Note 1(C)(1) below), the reclassifications described below were performed in the financial statements for the three-month and six-month periods ended June 30, 2011, and in the financial statements for the year ended December 31, 2011.

• Items listed below, which were previously included in the item"profit from financing activity before provision for credit losses," were reclassified and included in the item "non-interest financing income," as part of non-trading activities:
Financing income (expenses) in respect of foreign currency exchange rate differences accrued in respect of financial assets or financial liabilities not measured at fair value through profit and loss (such as credit to the public and to governments, deposits with banks, securities borrowed or bought under agreements to resell, bonds available for sale and bonds held to maturity, deposits from the public, deposits from banks or deposits from the government, bonds and securities lent or sold under agreements to repurchase);
Income (expenses) in respect of derivative instruments used for ALM activity and the non-effective part of accounting hedge ratios;
Profits (losses) from the sale of bonds available for sale and bonds held to maturity; and
Profits (losses) from the sale of loans.

Note 1 Significant Accounting Policies (continued)

• Items listed below, which were previously included in the item"profit from financing activity before provision for credit losses," were reclassified and included in the item "non-interest financing income," as part of trading activities:
Realized and unrealized profits (losses) from adjustments to fair value of bonds held for trading;
Income (expenses) from other derivative instruments (not used for accounting hedge or ALM activity).
• Income from fees from financing transactions, previously included in the item"profit from financing activity before provision for credit losses," were reclassified and included in the item "fees" (formerly "operating fees").
• Early repayment fees previously included in the item "other financing income" were reclassified and included in the item "interest income."

As a result of the aforesaid reclassifications, income (expenses) included in profit from financing activity in the amount of NIS (34) million and in the amount of NIS 146 million in the three-month and six-month periods ended June 30, 2011, respectively, were reclassified under the item "non-interest financing income". In addition, an amount of NIS (268) million was reclassified in the aforesaid manner in the year ended December 31, 2011. In addition, income from fees from financing transactions, in the amount of NIS 101 million and NIS 205 million in the three-month and six-month periods ended June 30, 2011, respectively, and in the amount of NIS 402 million in the year ended December 31, 2011, were reclassified and included in the item "fees".

• Profits (losses) previously included in the item "net profits (losses) from investments in shares" were reclassified and included in the item "non-interest financing income," as part of trading activities or as part of non-trading activities, according to the classification of the shares in the portfolio held for trading or in the portfolio available for sale, respectively.
• Profits (losses) previously included in the item "profit (loss) from extraordinary transactions after taxes" were reclassified in the following manner:
Profits (losses) from the sale of shares of equity-basis investees were reclassified under the item "non-interest financing income," as part of non-trading activities;
Profits (losses) from the realization of buildings and equipment were reclassified under the item "other income." As a result of the aforesaid reclassification, "net profits (losses) from investments in shares" in the amount of NIS 50 million and in the amount of NIS 72 million in the three-month and six-month periods ended June 30, 2011, respectively, were reclassified under the item "non-interest financing income." In addition, an amount of NIS 55 million was reclassified in the aforesaid manner in the year ended December 31, 2011.

In addition, as a result of the aforesaid reclassification, "profits (losses) from extraordinary transactions after taxes" in the amount of NIS 1 million and in the amount of NIS 2 million in the three-month and six-month periods ended June 30, 2011, respectively, were reclassified under the item "other income." In addition, an amount of NIS 5 million was reclassified in the aforesaid manner in the year ended December 31, 2011.

Note 1 Significant Accounting Policies (continued)

Items included in the condensed consolidated statement of cash flows:

Due to the initial implementation of IAS 7, Statement of Cash Flows (see Note 1(C)(2.1) below), which establishes rules for the classification of the various items in the statement of cash flows according to the nature of the activity, the following reclassification has been implemented:

• Net changes in flows in respect of current assets (such as deposits with banks, credit to the public, securities lent or sold in repurchase agreements, assets in respect of derivative instruments, securities held for trading, and other assets) previously included in investment activity (formerly activity in assets), in the amount of NIS (5,250) million and in the amount of NIS (10,397) million in the three-month and six-month periods ended June 30, 2011, respectively, were reclassified under current activity. In addition, an amount of NIS (31,695) million was reclassified in the aforesaid manner in the year ended December 31, 2011.
• Net changes in flows in respect of current liabilities (such as deposits from banks, deposits from the public, deposits from the government, securities lent or sold in repurchase agreements, liabilities in respect of derivative instruments, and other liabilities) previously included in financing activity (formerly activity in liabilities and capital), in the amount of NIS 1,951 million and in the amount of NIS (716) million, in the three-month and six-month periods ended June 30, 2011, respectively, were reclassified under current activity. In addition, an amount of NIS 28,576 million was reclassified in the aforesaid manner in the year ended December 31, 2011.

C. First-Time Implementation of Accounting Standards, Updates of Accounting Standards, and Directives of the Supervisor of Banks

Set out below is a description of the main points of changes in accounting policies applied in these condensed consolidated financial statements and a description of the manner and effect of the initial implementation, if any:

1. Directives concerning the format for the statement of profit and loss, established in the circular of the Supervisor of Banks on the format for statement of profit and loss of banking corporations and the adoption of GAAP for US banks concerning the measurement of interest income

Pursuant to the circular of the Supervisor of Banks of December 29, 2011, concerning the format for statement of profit and loss of banking corporations and the adoption of GAAP for US banks concerning the measurement of interest income, the Bank has implemented the directives pertaining to the presentation method of the statement of profit and loss.

In accordance with these directives, the Bank has adjusted the presentation method of components of financing profit in the statement of profit and loss itself and in the accompanying notes, in the following manner:

• The item "profit from financing activity before provision for credit losses" was split into three separate items "interest income", "interest expenses" and "non-interest financing income", presented on separate lines.
• The components of non-interest financing profit and the components of profits (losses) from investments in shares were classified under the item "non-interest financing income", with a distinction between trading activities and non-trading activities.

Note 1 Significant Accounting Policies (continued)

• The definition of"interest" was updated to include CPI linkage differences on interest,rate differences on interest, and CPI linkage differences on principal (a component previously considered not part of the definition of interest).
• The distinction between fees from financing transactions, previously included in profit from financing activity, and operating fees was eliminated. Accordingly, all income from fees was included in the item "fees" in the statement of profit and loss (formerly the item "operating fees").
• The item "profit from extraordinary transactions" was canceled, and the common practice in the United States was adopted, where extraordinary items are defined as items that are "unusual" and "infrequent." Accordingly, the classification of any event as an extraordinary item in the statement of profit and loss shall be performed only with advance approval by the Supervisor of Banks.

Initial implementation of the directives on the new format for the statement of profit and loss:

The Bank has implemented the directives concerning the format for the statement of profit and loss as of January 1, 2012, retroactively, with the exception of the cancellation of CPI linkage differences on accrued unpaid principal in respect of debts classified as impaired prior to the initial implementation date. The initial implementation of this directive had no effect, other than the change in presentation. For details regarding the reclassifications, see Note 1B.

2. Certain International Financial Reporting Standards (IFRS)

Pursuant to the circular of the Supervisor of Banks of November 30, 2011, concerning the adoption of certain IFRS, the Bank implements the IFRS listed below:

2.1. IAS 7, Statement of Cash Flows

The statement of cash flows is presented with classification into cash flows from regular activity, investing activity (formerly "activity in assets"), and financing activity (formerly "activity in liabilities and capital").

Cash flows arising from main activities of the Bank are classified under regular activity.

The item of cash and cash equivalents includes cash, deposits with banks and deposits with central banks for original period of up to three months.

Initial Implementation of IAS 7, Statement of Cash Flows:

The Bank has implemented the rules established in this standard as of January 1, 2012, retroactively. The initial implementation of the standard had no effect, other than the change in presentation. For details regarding the reclassifications, see Note 1B.

Note 1 Significant Accounting Policies (continued)

2.2. IAS 12, Income Taxes

This standard, as adopted by the Supervisor of Banks, contains similar directives to Israel Accounting Standard 19, Taxes on Income, hitherto applied in the banking system. However, concurrently with the adoption of the international standard, specific directives, as established by the Supervisor of Banks, were changed, and directives were adopted with regard to the treatment of situations in which uncertain tax positions exist. In general, deferred tax assets are recognized in the books in respect of losses carried forward, tax credits, and deductible temporary differences, when it is more likely than not that income against which they can be used will exist in the future.

Uncertain Tax Positions

The Bank recognizes the effect of tax positions only if it is more likely than not that the positions will be accepted by the tax authorities or by the court. Recognized tax positions are measured according to the maximum amount with a probability of realization greater than 50%. Changes in recognition or measurement are reflected in the period during which the changes in circumstances occurred that led to the change in the decision.

Initial Implementation of IAS 12, Income Taxes

In accordance with Israeli GAAP (Standard 19) and the Public Reporting Directives of the Supervisor of Banks, no deferred tax liability was recognized in respect of temporary differences arising from the adjustment component of depreciable non-monetary assets defined as protected assets in the Income Tax Law (Taxation under Inflationary Circumstances), 1982, which were acquired before this law took effect, and which have a depreciation period of at least 20 years from the date of operation. Pursuant to IAS 12, the Bank is required to recognize such deferred tax liabilities. The Bank has implemented the rules set forth in the standard, as of January 1, 2012, retroactively. As a result of the retroactive implementation of this standard, a liability for deferred taxes (which reduced the balance of "other assets") in the amount of NIS 26 million was recognized, against a reduction of the balance of retained earnings in each of the reported periods for which data is included in the financial statements. The effect of the retroactive implementation on the statement of profit and loss is immaterial.

2.3. IAS 23, Borrowing Costs

This standard states that entities must capitalize borrowing costs attributable directly to the acquisition, construction, or production of a qualifying asset. A qualifying asset is an asset that requires a substantial period of time to prepare for its designated use or sale, including, among other matters, fixed assets, software assets, and other assets where a long period is necessary in order to bring the assets to a condition in which they can fulfill their designated function or be sold. However, it has been clarified in the directives of the Supervisor of Banks that banking corporations shall not capitalize borrowing costs unless they have established clear policy, procedures and controls with regard to the criteria for recognition of qualifying assets and with regard to the borrowing costs capitalized.

Initial Implementation of IAS 23, Borrowing Costs

The initial implementation of this standard had no effect on the financial statements of the Bank.

Note 1 Significant Accounting Policies (continued)

2.4. IAS 24, Related Party Disclosures

This standard establishes the disclosure required of entities with regard to their relationships with related parties and with regard to unsettled transactions and balances with related parties. In addition, disclosure of remuneration of key executives is required. Key executives are defined as persons with the authority and responsibility to plan the activity of the entity, or to directly or indirectly guide and control the entity, including any director (active or inactive) of the entity. As part of the adoption of this standard by the Supervisor of Banks, the format of the required disclosure in the financial statements was adjusted in order to comply with the disclosure requirements of IAS 24 as well as with the additional disclosures required under the Securities Regulations, 2010.

Initial Implementation of IAS 24, Related Party Disclosures

The Bank has implemented this standard as of January 1, 2012, retroactively. For the purpose of the initial implementation of the standard, the Bank mapped its relationships with related parties. Under the new definition, as a result of the mapping process, new related parties were identified. The initial implementation of the standard had no effect on the financial statements of the Bank, other than a change in presentation.

3. Clarifications of the Supervisor of Banks Regarding the Establishment of the Functional Currency of Overseas Banking Offices

Upon the initial implementation of the IFRS, among other matters, the Bank examined its overseas banking offices in accordance with the IFRS rules and the instructions of the Supervisor of Banks. Pursuant to the instructions of the Supervisor of Banks, changing the classification of a banking office as a foreign operation with a functional currency other than the NIS requires advance guidance from the Head of the Financial Reporting Unit of the Supervisor of Banks. Accordingly, until such advance guidance was received, the Bank continued to treat the overseas banking offices as foreign operations whose functional currency is the same as the functional currency of the Bank.

A circular of the Supervisor of Banks issued on February 14, 2012, contains criteria established by the Supervisor of Banks for determining the functional currency of an overseas banking office. In determining the functional currency, the Bank is required to examine the fulfillment/non-fulfillment of each of the following criteria:

• The primary environment in which the office generates and expends cash is foreign currency, whereas the office's activity in NIS is marginal;
• Autonomous recruitment of customers by the office –The activity of the office with customers of the Bank and/ or closely affiliated parties thereof and/or parties referred to the office by the Bank is not significant;
• The activity of the office with the Bank and/or with its related par ties is not significant. In addition, the office is not significantly dependent upon financing sources from the Bank and/or its related parties;
• The activity of the office is independent in essence and stands in its own right, and is not an extension or supplement to the local activity of the Bank. In addition, the office conducts its activities with a significant degree of autonomy.

Note 1 Significant Accounting Policies (continued)

Clear non-fulfillment of one of the aforesaid criteria is an indication that the office should be treated as a foreign operation whose functional currency is the NIS. The Bank has examined the classification of its overseas banking offices based on the new criteria. In light of this examination, the Bank classified Bank Hapoalim Switzerland as a foreign operation with a functional currency other than the NIS, as of January 1, 2012. The change in classification was performed prospectively, such that exchange-rate differences in respect of translation are recognized, as of January 1, 2012, in other comprehensive income, and presented under "translation adjustments."

Foreign Operations

Assets and liabilities of foreign operations, including goodwill and adjustments to fair value created in an acquisition, were translated into NIS at the exchange rates in effect at the reporting date. Income and expenses of foreign operations were translated into NIS at the average monthly exchange rate according to the date of execution of the transactions. Exchange-rate differences in respect of translation are recognized in other comprehensive income, as of January 1, 2012, and presented in equity under "translation adjustments."

Upon the realization of a foreign operation leading to a loss of control, material influence, or joint control, the amount accumulated in the translation reserve arising from the foreign operation is reclassified to profit and loss, as part of the profit or loss from the realization.

Hedges of Net Investment in a Foreign Operation

The Bank applies hedge accounting to exchange-rate differences between the functional currency of Bank Hapoalim Switzerland and the functional currency of the Bank (NIS). Exchange-rate differences in respect of the effective part of the hedge resulting from the translation of the financial liability hedging the net investment in Bank Hapoalim Switzerland are allocated to other comprehensive income and presented in equity under "translation adjustments." The non-effective part of the hedge is allocated to profit and loss.

4. Directives of the Supervisor of Banks Regarding Transactions between a Banking Corporation and its Controlling Party and a Company Controlled by the Banking Corporation

Pursuant to the circular issued by the Supervisor of Banks on November 30, 2011, concerning the adoption of certain IFRS, as of January 1, 2012, the Bank has implemented US GAAP for accounting for transactions between a banking corporation and its controlling party or a company controlled by the banking corporation. In situations where these rules do not address the treatment method, the Bank applies the rules established in Standard 23 of the Israel Accounting Standards Board, Accounting Treatment of Transactions between an Entity and its Controlling Party, in a manner consistent with the principles of the adoption of IFRS on matters not related to the core business of banking. Pursuant to the circular, loans or deposits given to or received from a controlling party are presented in the financial statements of the Bank at fair value as an asset or liability, as relevant. The difference between the amount of the loan granted or deposit received and the fair value thereof at the first recognition date is allocated to equity.

Note 1 Significant Accounting Policies (continued)

In reporting periods subsequent to the first recognition date, the aforesaid loans or deposits are presented in the financial statements of the Bank at their depreciated cost, with implementation of the effective interest method, excluding cases in which, pursuant to GAAP, they are presented at fair value.

The Bank has implemented these directives, prospectively, with regard to all transactions between the Bank and its controlling party executed after January 1, 2012, and with regard to loans granted or deposits received from the controlling party before the inception date of the directives, as of the inception date. The initial implementation of the directives had no material effect.

5. ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements

ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements, an update of rules established in FAS 166 (ASC 860), has been implemented by the Bank as of January 1, 2012.

The assessment of effective control focuses on contractual rights and contractual obligations of the transferor, and therefore does not take into consideration: (1) a criterion requiring the transferor to have the ability to acquire the transferred securities even in the event of default by the transferee, or (2) instructions regarding collateral requirements in connection with the aforesaid criterion.

In financial asset transfer transactions, the Bank determines that the transferor retains effective control over the transferred assets (and that the asset transfer should therefore be treated as a secured debt) if all of the following conditions are fulfilled:

• The assets to be repurchased or redeemed are identical or essentially identical to the assets transferred;
• The agreement is to repurchase or redeem the assets before the maturity date, at a fixed or fixable price; and
• The agreement is executed simultaneously with the transfer.

Initial Implementation of ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements

The Bank has implemented the rules established in ASU 2011-03, as of January 1, 2012, prospectively, with respect to new transactions and existing transactions changed after the inception date of the update. At the transition date, there was no effect on the financial statements of the Bank.

6. ASU 2011-04, Fair Value Measurement (ASC 820): Revision of Fair Value Measurement and Uniform Disclosure Requirements in US GAAP and IFRS

This update sets forth revisions to FAS 157 (ASC 820), necessary in order to establish a uniform definition of fair value measurement in US GAAP and in IFRS.

Among other matters, the update sets forth additional disclosure requirements with regard to the following:

• Classifications into the levels of the fair value hierarchy, with regard to items not measured at fair value in the balance sheet, but for which disclosure of fair value is required in the notes.

Note 1 Significant Accounting Policies (continued)

• With regard to fair value measurements classified as Level 3 in the fair value hierarchy:
The assessment process implemented by the Bank;
Qualitative disclosure of the analysis of sensitivity of the fair value measurement to changes in significant unobservable inputs and the interaction between such unobservable inputs, if any.
• Any transition of a fair value measurement from Level 2 to Level 1, or vice versa, including reasons for the transitions.

Initial Implementation of ASU 2011-04, Fair Value Measurement (ASC 820): Revision of Fair Value Measurement and Uniform Disclosure Requirements in US GAAP and IFRS

The Bank has implemented the revisions set forth in ASU 2011-04 as of January 1, 2012, prospectively. The initial implementation of ASU 2011-04 had no effect on the financial statements of the Bank, other than a change in presentation due to the new disclosure requirements.

D. Use of Estimates

The preparation of the consolidated interim condensed financial statements in conformity with Israeli GAAP and the directives and guidelines of the Supervisor of Banks requires the Board of Management of the Bank to exercise judgment and to use estimates, evaluations, and assumptions that affect the application of policies and the amounts of assets, liabilities, income, and expenses. It is hereby clarified that actual results may differ from such estimates. With the exception noted below, the judgment exercised by the Board of Management in applying the accounting policies of the Group and the principal assumptions used in estimates involving uncertainty are consistent with those used in the preparation of the Annual Financial Statements.

Liabilities for Employee Benefits

Pursuant to the instructions of the Supervisor of Banks regarding the measurement of liabilities in respect of employee benefits, assumptions regarding mortality and disability are to be adjusted, in the financial statements for the second quarter of 2012, according to the best information available to the Bank, using the draft mortality and disability tables recently published by the Ministry of Finance, among other means.

In accordance with the foregoing, the Bank adjusted its estimates regarding demographical variables, in the financial statements as at June 30, 2012, based on the updated longevity estimates in the draft position paper. As a result, the Bank increased its actuarial liability for employee benefits by approximately NIS 15 million. The increase in this liability was allocated to the statement of profit and loss, reducing profit before taxes by a total of approximately NIS 15 million and profit attributed to shareholders of the Bank by a total of approximately NIS 10 million.

Note that the aforesaid amounts may change following the release of the position paper containing the final estimates.

Note 1 Significant Accounting Policies (continued)

E. New Accounting Standards and New Directives of the Supervisor of Banks in the Period Prior to Implementation

1. Adoption of GAAP for US Banks on Interest Income Measurement

A circular of the Supervisor of Banks was issued on December 29, 2011, with the aim of adjusting the Public Reporting Directives for the purpose of adoption of the rules established in US GAAP regarding nonrefundable fees and other costs. The directive establishes rules for the treatment of loan origination fees and direct loan origination costs. The eligible fees and costs, according to the criteria established in the directive, shall not be recognized immediately in the statement of profit and loss, but shall be taken into account in calculating the effective interest rate of the loan. In addition, the directive changes the treatment of credit allocation commitment fees and costs, including credit-card transactions. The directive also sets forth rules regarding the treatment of changes in the terms of debt that do not constitute troubled debt restructuring, treatment of early repayment of debts, and treatment of other credit granting transactions, such as syndication transactions.

The rules established in the directive represent a significant change relative to the existing rules in the Public Reporting Directives. The preparations for the implementation of the rules established in the directive are complex; the Supervisor of Banks intends to guide the banking corporations in the preparatory process, especially in the area of identifying eligible costs. It has been determined that the rules on this matter will be implemented from January 1, 2014, forward. The Bank is examining the expected implications of the initial implementation of the directives. At this stage, the Bank is unable to estimate the expected effect of the implementation of the directives.

2. Adoption of IFRS

In July 2006, the Israel Accounting Standards Board published Accounting Standard No. 29, Adoption of International Financial Reporting Standards (IFRS). The standard states that entities subject to the Securities Law, 1968, and required to report under its regulations shall prepare their financial statements according to IFRS for periods starting as of January 1, 2008. The aforesaid does not apply to banking corporations whose financial statements are prepared according to the directives and guidelines of the Supervisor of Banks. In June 2009, the Supervisor of Banks issued a letter concerning reporting by banking corporations and credit-card companies in Israel in accordance with IFRS, which establishes the expected manner of adoption of IFRS by banking corporations.

It was further clarified that subsequent to the completion of the process of adjusting the directives to the international standards, the Supervisor of Banks will retain the authority to set forth binding clarifications with regard to the manner of implementation of the requirements of the international standards, and to set forth additional directives in cases in which it is necessary due to the requirements of the supervisory agencies in developed countries globally, or on matters not addressed by the international standards. In addition, the Supervisor of Banks will retain the authority to establish disclosure and reporting requirements.

Pursuant to the circular, the deadlines for reporting by banking corporations according to IFRS are as follows:

Note 1 Significant Accounting Policies (continued)

• On matters not related to the core business of banking Gradual implementation during 2011 and 2012. However, IAS 19, Employee Benefits, has not yet taken effect and will be adopted according to the instructions of the Supervisor of Banks, when such instructions are published, with regard to the timing and manner of initial implementation.
• On matters related to the core business of banking As of January 1, 2013.The Supervisor of Banks intends to reach a final decision on this matter, taking into consideration the schedule established in the United States and the progress of the convergence process between international and American standards.

A New System of New Financial Reporting Standards Concerning the Consolidation of Financial Statements and Related Matters

In May 2011, the IASB published a new system of standards, which is part of the consolidation project conducted jointly by the IASB and the FASB, and essentially replaces the existing standards concerning the consolidation of financial statements and joint transactions, and includes a number of changes with regard to equity-basis investees. Pursuant to the directives of the Supervisor of Banks, banking corporations shall routinely update the accounting treatment of matters adopted in the Public Reporting Directives. Such update is required prior to the inception date and according to the transitional directives established in new IFRS to be published on these matters, and in accordance with the adoption principles and clarifications of the Supervisor of Banks. In light of the foregoing, the implementation of the rules established in the new system of standards concerning the consolidation of financial statements and related matters shall be performed subject to the guidelines set forth in the Public Reporting Directives, among other matters, concerning the implementation of the standard, on matters regarding which specific rules were established or adopted in the Public Reporting Directives that differ from the rules set forth in the standard and/or in the guidelines referring to the standard.

For further details, see Note 1(F)(5) to the Annual Financial Statements for 2011.

On June 28, 2012, the IASB issued amendments of the transitional directives for the new system of standards. The amendments define the initial implementation date and simplify the transitional directives for the new system of standards, as well as easing disclosure requirements. The amendments take effect in annual periods beginning January 1, 2013, or later, in line with the inception date of the new system of standards.

Note 2 Securities

	as at June 30, 2012
1) Bonds held to maturity		Book value Amortized cost (in shares-cost)	Unrecognized profits from adjustments to fair value	Unrecognized losses from adjustments to fair value	Fair value*
Bonds and debentures:
Of Israeli government	59	59	-	-	59
Of financial institutions in Israel	758	758	60	-	818
Total bonds held to maturity	817	817	60	-	877
				Cumulative other comprehensive income
		Book value Amortized cost (in shares-cost)	Profits	Losses	Fair value*
2) Securities available for sale
Bonds and debentures:
Of Israeli government	27,495	27,379	170	)54(	27,495
Of foreign governments	2,373	2,350	27	)4(	2,373
Of financial institutions in Israel	163	164	1	)2(	163
Of foreign financial institutions	1,327	1,320	17	)10(	1,327
Asset-backed securities (ABS)	2	2	-	-	2
Of others in Israel	662	655	24	)17(	662
Of foreign others	1,068	1,045	25	)2(	1,068
Total bonds and debentures available for sale	33,090	32,915	264	)89(	33,090
Shares:
Of others	1,372	1,320	71	)19(	)1( 1,372
Total securities available for sale	34,462	34,235	)2( 335	)2( )108(	)1( 34,462

* Fair value data is usually based on stock exchange prices, which do not necessarily reflect the price which will be obtained from a large-volume sale of securities.

(1) Including shares and options for which no fair value is available, which are stated at cost, amounting to NIS 557 million.

(2) Included in equity in the item "Adjustments in respect of presentation of securities available for sale at fair value".

Notes:

a. For details of the results of activity in investments in bonds and in shares - see Note 10.

	as at June 30, 2012
		Book value Amortized cost (in shares-cost)	Unrealized profits from adjustments to fair value	Unrealized losses from adjustments to fair value	Fair value*
3) Securities held for trading
Bonds and debentures:
Of Israeli government	4,451	4,431	20	-	4,451
Of foreign governments	78	82	-	)4(	78
Of foreign financial institutions	652	647	5	-	652
Of others in Israel	22	22	-	-	22
Of foreign others	200	200	-	-	200
Total bonds and debentures held for trading	5,403	5,382	25	)4(	5,403
Shares:
Of others	46	52	1	)7(	46
Total securities held for trading	5,449	5,434	)2( 26	)2( )11(	5,449
Total securities(3)	40,728	40,486	421	)119(	)1( 40,788

4) Data regarding impaired bonds

	as at
	June 30,
	2012
Set out below are the recorded debt balances of:

Impaired bonds accruing interest income 43

* Fair value data is usually based on stock exchange prices, which do not necessarily reflect the price which will be obtained from a large-volume sale of securities.

(1) Including shares and options for which no fair value is available, which are stated at cost, amounting to NIS 557 million.

(2) Attributed to the Statement of Profit and Loss.

(3) Of which: Securities in the amount of approximately NIS 4.5 billion were pledged to lenders.

Notes:

a. For details of the results of activity in investments in bonds and in shares - see Note 10.

	as at June 30, 2011**
		Book value Amortized cost (in shares-cost)	Unrecognized profits from adjustments to fair value	Unrecognized losses from adjustments to fair value	Fair value*
1) Bonds held to maturity
Bonds and debentures:
Of Israeli government	51	51	-	-	51
Of financial institutions in Israel	842	842	60	-	902
Of foreign financial institutions	7	7	-	-	7
Total bonds held to maturity	900	900	60	-	960
				Cumulative other comprehensive income
		Book value Amortized cost (in shares-cost)	Profits	Losses	Fair value*
2) Securities available for sale
Bonds and debentures:
Of Israeli government	17,365	17,408	117	)160(	17,365
Of foreign governments	2,205	2,182	26	)3(	2,205
Of financial institutions in Israel	96	97	)1(	-	96
Of foreign financial institutions	1,830	1,796	39	)5(	1,830
Asset-backed securities (ABS)	229	229	-	-	229
Of others in Israel	418	394	25	)1(	418
Of foreign others	738	717	21	-	738
Total bonds and debentures available for sale	22,881	22,823	227	)169(	22,881
Shares:
Of others	1,935	1,623	338	)26(	)1( 1,935
Total Securities available for sale	24,816	24,446	)2( 565	)2( )195(	)1( 24,816

* Fair value data is usually based on stock exchange prices, which do not necessarily reflect the price which will be obtained from a large-volume sale of securities.

** On November 15, 2011, the Supervisor of Banks issued a circular concerning disclosure of investments in securities and description of the business of banking corporations, which established new disclosure requirements regarding securities. Accordingly, the Bank reclassified the data as of June 30, 2011 to match the item headings and presentation method of the current period.

(1) Including shares and options for which no fair value is available, which are stated at cost, amounting to NIS 547 million.

(2) Included in equity in the item "Adjustments in respect of presentation of securities available for sale at fair value".

Notes:

a. For details of the results of activity in investments in bonds and in shares - see Note 10.

	as at June 30, 2011**
		Book value Amortized cost (in shares-cost)	Unrealized profits from adjustments to fair value	Unrealized losses from adjustments to fair value	Fair value*
3) Securities held for trading
Bonds and debentures:
Of Israeli government	1,171	1,174	1	)4(	1,171
Of foreign governments	38	38	-	-	38
Of foreign financial institutions	551	551	-	-	551
Of others in Israel	23	21	2	-	23
Of foreign others	147	147	-	-	147
Total bonds and debentures held for trading	1,930	1,931	3	)4(	1,930
Shares:
Of others	55	64	-	)9(	55
Total securities held for trading	1,985	1,995	)2( 3	)2( )13(	1,985
Total securities(3)	27,701	27,341	628	)208(	)1( 27,761

4) Data regarding impaired bonds

	as at
	June 30,
	2011
Set out below are the recorded debt balances of:
Impaired bonds accruing interest income	48
Impaired bonds not accruing interest income	21

Total recorded debt balances 69

* Fair value data is usually based on stock exchange prices, which do not necessarily reflect the price which will be obtained from a large-volume sale of securities.

(1) Including shares and options for which no fair value is available, which are stated at cost, amounting to NIS 547 million.

(2) Attributed to the Statement of Profit and Loss.

(3) Of which: Securities in the amount of approximately NIS 2.7 billion were pledged to lenders.

Notes:

a. For details of the results of activity in investments in bonds and in shares - see Note 10.

			as at December 31, 2011
		Book value Amortized cost (in shares-cost)	Unrecognized profits from adjustments to fair value	Unrecognized losses from adjustments to fair value	Fair value*
1) Bonds held to maturity
Bonds and debentures:
Of Israeli government	57	57	-	-	57
Of financial institutions in Israel	804	804	57	-	861
Of foreign financial institutions	8	8	-	-	8
Total bonds held to maturity	869	869	57	-	926
				Cumulative other comprehensive income
		Book value Amortized cost (in shares-cost)	Profits	Losses	Fair value*
2) Securities available for sale
Bonds and debentures:
Of Israeli government	23,859	23,738	176	)55(	23,859
Of foreign governments	2,053	2,041	18	)6(	2,053
Of financial institutions in Israel	173	169	4	-	173
Of foreign financial institutions	1,026	1,033	13	)20(	1,026
Asset-backed securities (ABS)	7	7	-	-	7
Of others in Israel	547	539	18	)10(	547
Of foreign others	747	724	24	)1(	747
Total bonds and debentures available for sale	28,412	28,251	253	)92(	28,412
Shares:
Of others	1,538	1,343	198	)3(	)1( 1,538
Total Securities available for sale	29,950	29,594	)2( 451	)2( )95(	)1( 29,950

* Fair value data is usually based on stock exchange prices, which do not necessarily reflect the price which will be obtained from a large-volume sale of securities.

(1) Including shares and options for which no fair value is available, which are stated at cost, amounting to NIS 563 million.

(2) Included in equity in the item "Adjustments in respect of presentation of securities available for sale at fair value".

Notes:

a. For details of the results of activity in investments in bonds and in shares - see Note 10.

			as at December 31, 2011
		Book value Amortized cost (in shares-cost)	Unrealized profits from adjustments to fair value	Unrealized losses from adjustments to fair value	Fair value*
3) Securities held for trading
Bonds and debentures:
Of Israeli government	2,924	2,900	24	-	2,924
Of foreign governments	50	50	-	-	50
Of financial institutions in Israel	10	10	-	-	10
Of foreign financial institutions	348	348	-	-	348
Of others in Israel	27	27	-	-	27
Of foreign others	181	181	-	-	181
Total bonds and debentures held for trading	3,540	3,516	24	-	3,540
Shares:
Of others	52	61	-	)9(	52
Total securities held for trading	3,592	3,577	)2( 24	)2( )9(	3,592
Total securities(3)	34,411	34,040	532	)104(	)1( 34,468

4) Data regarding impaired bonds

	as at December 31, 2011
Set out below are the recorded debt balances of:
Impaired bonds accruing interest income	39
Impaired bonds not accruing interest income	4
Total recorded debt balances	43

* Fair value data is usually based on stock exchange prices, which do not necessarily reflect the price which will be obtained from a large-volume sale of securities.

(1) Including shares and options for which no fair value is available, which are stated at cost, amounting to NIS 563 million.

(2) Attributed to the Statement of Profit and Loss.

(3) Of which: Securities in the amount of approximately NIS 5.4 billion were pledged to lenders.

Notes:

a. For details of the results of activity in investments in bonds and in shares - see Note 10.

A. Credit to the public

		June 30, 2012		June 30, 2011			December 31, 2011
	Recorded debt balance	Allowance for credit losses	Net debt balance	Recorded debt balance	Allowance for credit losses	Net debt balance	Recorded debt balance	Allowance for credit losses	Net debt balance
				Unaudited				Audited
Credit to the public examined on an individual basis*	148,156	2,992	145,164	140,149	3,273	136,876	149,320	3,075	146,245
Credit to the public examined on a collective basis**	104,450	1,000	103,450	98,131	938	97,193	101,272	1,022	100,250
Total credit to the public	252,606	3,992	248,614	238,280	4,211	234,069	250,592	4,097	246,495
Of which: Customers' liabilities for acceptances	599	5	594	457	4	453	305	3	302

* Including credit examined on an individual basis and found to be unimpaired. The allowance for credit losses in respect of such credit was calculated on a collective basis.

** Credit for which the allowance for credit losses is assessed on a collective basis using the method of the extent of arrears, pursuant to the appendix to Proper Conduct of Banking Business Directive No. 314, and other credit not individually examined for which the provision for credit losses was calculated on a collective basis.

B. Credit to the public examined on an individual basis:

1. Credit to the public examined on an individual basis includes:

		June 30, 2012			June 30, 2011			December 31, 2011
	Recorded debt balance	Allowance for credit losses	Net debt balance	Recorded debt balance	Allowance for credit losses	Net debt balance	Recorded debt balance	Allowance for credit losses	Net debt balance
				Unaudited				Audited
Impaired credit to the public*	8,534	1,438	7,096	9,424	1,963	7,461	8,609	1,608	7,001
Unimpaired credit to the public, 30 to 89 days in arrears**	270	5	265	421	17	404	648	16	632
Other unimpaired credit to the public**	139,352	1,549	137,803	130,304	1,293	129,011	140,063	1,451	138,612
Total unimpaired credit to the public**	139,622	1,554	138,068	130,725	1,310	129,415	140,711	1,467	139,244
Total individually examined credit to the public	148,156	2,992	145,164	140,149	3,273	136,876	149,320	3,075	146,245

* Impaired credit does not accrue interest income, with the exception of certain credit in restructuring, as noted in sub-section 4 below.

** Credit examined individually and found to be unimpaired. The allowance for credit losses in respect of this credit was calculated on a collective basis.

B. Credit to the public examined on an individual basis (continued):

	June 30, 2012	June 30, 2011	December 31, 2011
	Unaudited		Audited
2.
Impaired credit to the public for which an individual credit loss allowance exists	4,865	6,034	5,290
Impaired credit to the public for which an individual credit loss allowance does not exist	3,669	3,390	3,319
Total impaired credit to the public	8,534	9,424	8,609
3.
Impaired credit to the public measured at the current value of cash flows	5,915	6,944	5,639
Impaired credit to the public measured by the value of collateral	2,619	2,480	2,970
Total impaired credit to the public	8,534	9,424	8,609

4. Troubled debt restructuring where the terms of the credit have been changed

		June 30, 2012			June 30, 2011		December 31, 2011
	Recorded debt balance	Allowance for credit losses	Net debt balance	Recorded debt balance	Allowance for credit losses	Net debt balance	Recorded debt balance	Allowance for credit losses	Net debt balance
				Unaudited				Audited
Not accruing interest income	2,715	441	2,274	3,885	816	3,069	3,255	635	2,620
Accruing interest income	663	-	663	299	-	299	357	-	357
Total credit (included in impaired credit to the public)	3,378	441	2,937	4,184	816	3,368	3,612	635	2,977

Commitments to grant additional credit to debtors whose troubled debt has been restructured with changes to the terms of the credit totaled NIS 68 million as at June 30, 2012 (June 30, 2011: NIS 170 million, December 31, 2011: NIS 65 million).

5.

	For the three months ended June 30			For the six months ended June 30	For the year ended Dec. 31
	2012	2011	2012	2011	2011
		Unaudited			Audited
Average recorded debt balance of impaired credit to the public in the reported period	8,505	9,842	8,464	10,264	9,867
Total interest income recorded in the reported period in respect of this credit, during the period of time in which it was classified as impaired*	44	49	74	78	171
Total interest income that would have been recorded in the reported period, if this credit had accrued interest according to its original terms	188	237	374	464	887
* Of which: Interest income recorded according to the cash base accounting method	31	38	50	60	139

C. Credit to the public examined on a collective basis includes:

1. Housing loans in respect of which a minimum provision for credit losses was performed based on the extent of arrears, pursuant to the appendix of Proper Conduct of Banking Business Directive No. 314:

				June 30, 2012
				Extent of arrears
	30 to 90 days			More than 90 days
	Over a month, up to 3 months	Over 3 months, up to 6 months	Over 6 months, up to 15 months	Over 15 months, up to 33 months	Over 33 months	Total over 3 months	Balances in respect of refinanced loans in arrears***	Total
Amount in arrears	9	10	24	19	99	152	14	175
Of which: Allowance for interest*	-	-	-	1	44	45	6	51
Recorded debt balance(1)	516	284	182	78	97	641	364	1,521
Allowance for credit losses**	-	-	26	37	94	157	138	295
Net debt balance	516	284	156	41	3	484	226	1,226

				June 30, 2011
				Extent of arrears
	30 to 90 days			More than 90 days
	Over a month, up to 3 months	Over 3 months, up to 6 months	Over 6 months, up to 15 months	Over 15 months, up to 33 months	Over 33 months	Total over 3 months	Balances in respect of refinanced loans in arrears***	Total
Amount in arrears	9	12	18	19	105	154	15	178
Of which: Allowance for interest*	-	-	-	1	43	44	6	50
Recorded debt balance(1)	558	287	185	82	160	714	405	1,677
Allowance for credit losses**	-	-	27	39	88	154	144	298
Net debt balance	558	287	158	43	72	560	261	1,379

* In respect of interest on amounts in arrears.

*** Loans in which an arrangement has been signed for repayment of the arrears of the borrower, where the amortization schedule has been changed in respect of the balance of the loan that has not yet matured.

(1) Excluding interest on arrears and early repayment fees.

C. Credit to the public examined on a collective basis includes (continued):

				December 31, 2011
				Extent of arrears
	30 to 90 days			More than 90 days
	Over a month, up to 3 months	Over 3 months, up to 6 months	Over 6 months, up to 15 months	Over 15 months, up to 33 months	Over 33 months	Total over 3 months	Balances in respect of refinanced loans in arrears***	Total
				Audited
Amount in arrears	9	14	18	19	99	150	14	173
Of which: Allowance for interest*	-	-	-	1	43	44	5	49
Recorded debt balance(1)	580	276	184	77	102	639	365	1,584
Allowance for credit losses**	-	-	26	39	93	158	141	299
Net debt balance	580	276	158	38	9	481	224	1,285

* In respect of interest on amounts in arrears.

** Includes the balance of the individual allowance, beyond the level required under the method of the extent of arrears; does not include the balance of the allowance for interest and the balance of the collective allowance in respect of housing loans. *** Loans in which an arrangement has been signed for repayment of the arrears of the borrower, where the amortization schedule

has been changed in respect of the balance of the loan that has not yet matured.

(1) Excluding interest on arrears and early repayment fees.

2. Other credit not individually examined, for which the credit loss allowance was calculated on a collective basis:

		June 30, 2012			June 30, 2011			December 31, 2011
	Recorded debt balance	Allowance for credit losses	Net debt balance	Recorded debt balance	Allowance for credit losses	Net debt balance	Recorded debt balance	Allowance for credit losses	Net debt balance
			Unaudited					Audited
Unimpaired credit to the public, 90 days or more in arrears	114	46	68	124	49	75	135	52	83
Unimpaired credit to the public, 30 to 89 days
in arrears	362	28	334	371	34	337	392	38	354
Other unimpaired credit to the public	52,846	537	52,309	49,863	482	49,381	51,539	546	50,993
Total	53,322	611	52,711	50,358	565	49,793	52,066	636	51,430

		Allowance for credit losses
	On an individual	On a collective basis		Total
	basis	By extent of arrears	Other*
Allowance for credit losses as at March 31, 2012 (unaudited):	1,561	296	2,751	4,608
Three months ended June 30, 2012 (unaudited):
Provision for credit losses	261	1	82	344
Charge-offs	)386(	)2(	)87(	)475(
Recoveries of debts charged-off in previous years	89	-	28	117
Net charge-offs	)297(	)2(	)59(	)358(
Allowance for credit losses as at June 30, 2012 (unaudited):	1,525	295	2,774	4,594
Of which: Allowance not deducted from the item "credit to the public"	87	-	515	602
Allowance for credit losses as at March 31, 2011 (unaudited)	2,662	300	2,268	5,230
Three months ended June 30, 2011 (unaudited):
Provision for credit losses	198	4	125	327
Charge-offs	)809(	)6(	)132(	)947(
Recoveries of debts charged-off in previous years	3	-	65	68
Net charge-offs	)806(	)6(	)67(	)879(
Allowance for credit losses as at June 30, 2011 (unaudited):	2,054	298	2,326	4,678
Of which: Allowance not deducted from the item "credit to the public"	91	-	376	467

D. Allowance for credit losses in respect of debts and in respect of off-balance sheet credit instruments:

* Including allowance on a collective basis in respect of debts examined individually and found to be unimpaired.

D. Allowance for credit losses in respect of debts and in respect of off-balance sheet credit instruments (continued):

		Allowance for credit losses
	On an individual	On a collective basis		Total
	basis	By extent of arrears	Other*
Allowance for credit losses as at December 31, 2011 (audited):	1,692	299	2,669	4,660
Six months ended June 30, 2012 (unaudited):
Provision for credit losses	430	2	215	647
Charge-offs	)686(	)6(	)259(	)951(
Recoveries of debts charged-off in previous years	89	-	149	238
Net charge-offs	)597(	)6(	)110(	)713(
Allowance for credit losses as at June 30, 2012 (unaudited):	1,525	295	2,774	4,594
Of which: Allowance not deducted from the item "credit to the public"	87	-	515	602
Allowance for credit losses as at January 1, 2011 (audited):	3,145	310	2,099	5,554
Six months ended June 30, 2011 (unaudited):
Provision for credit losses	)38(	)6(	385	341
Charge-offs	)1,090(	)6(	)249(	)1,345(
Recoveries of debts charged-off in previous years	37	-	91	128
Net charge-offs	)1,053(	)6(	)158(	)1,217(
Allowance for credit losses as at June 30, 2011 (unaudited):	2,054	298	2,326	4,678
Of which: Allowance not deducted from the item "credit to the public"	91	-	376	467

* Including allowance on a collective basis in respect of debts examined individually and found to be unimpaired.

D. Allowance for credit losses in respect of debts and in respect of off-balance sheet credit instruments (continued):

	Allowance for credit losses
	On an individual	On a collective basis		Total
	basis	By extent of arrears	Other*
Composition of the allowance as at June 30, 2012 (unaudited):
In respect of credit to the public	1,438	295	2,259	3,992
In respect of debts other than credit to the public	-	-	6	6
In respect of off-balance sheet credit instruments (included in the "other liabilities" item)	87	-	509	596
Allowance for credit losses as at June 30, 2012	1,525	295	2,774	4,594
Composition of the allowance as at June 30, 2011(unaudited): In respect of credit to the public	1,963	298	1,950	4,211
In respect of debts other than credit to the public	-	-	5	5
In respect of off-balance sheet credit instruments (included in the "other liabilities" item)	91	-	371	462
Allowance for credit losses as at June 30, 2011	2,054	298	2,326	4,678
Composition of the allowance as at December 31, 2011 (audited):
In respect of credit to the public	1,608	299	2,190	4,097
In respect of debts other than credit to the public	-	-	6	6
In respect of off-balance sheet credit instruments (included in the "other liabilities" item)	84	-	473	557
Allowance for credit losses as at December 31, 2011	1,692	299	2,669	4,660

* Including allowance on a collective basis in respect of debts examined individually and found to be unimpaired.

	June 30, 2012
	Housing loans	Housing loans – impaired or more than 90 days in arrears
						other*
	Recorded debt balance	Amount in arrears***	Recorded debt balance	By extent of arrears	On a collective basis	On an individual basis	Total
Housing loans requiring calculation of allowance for credit losses based on extent of arrears**	51,128	166	998	295	94	-	389
Other housing loans(1)	155	-	-	-	1	-	1
Total	*51,283	166	998	****295	95	-	390

E. Additional details regarding housing loans and the manner of calculation of the allowance for credit losses

	June 30, 2011
	Housing loans	Housing loans – impaired or more than 90 days in arrears			Allowance for credit losses
						other*
	Recorded debt balance	Amount in arrears***	Recorded debt balance	By extent of arrears	On a collective basis	On an individual basis	Total
Housing loans requiring calculation
of allowance for credit losses based on extent of arrears**	47,773	169	1,121	298	75	-	373
Other housing loans(1)	115	-	-	-	-	-	-
Total	*47,888	169	1,121	****298	75	-	373

* The allowance also includes the collective allowance in respect of housing loans granted from 2009 forward in which the ratio of the debt to the value of the pledged asset when the credit was granted (LTV) is greater than 60%.

** Of which: General-purpose loans with the mortgage of a residence, in the amount of approximately NIS 4,454 million (June 30, 2011: NIS 4,029 million, December 31, 2011: NIS 4,240 million).

*** Includes interest on the amount in arrears.

**** Includes the allowance beyond the requirement based on the extent of arrears in the amount of approximately NIS 27 million (June 30, 2011: NIS 10 million, December 31, 2011: NIS 24 million).

***** Of which: Floating-rate housing loans in the amount of approximately NIS 37,009 million (June 30, 2011: NIS 33,259 million, December 31, 2011: NIS 35,177 million).

(1) This group includes housing loans not repaid in monthly or quarterly installments.

E. Additional details regarding housing loans and the manner of calculation of the allowance for credit losses (continued):

		December 31, 2011
	Housing loans	Housing loans – impaired or more than 90 days in arrears			Allowance for credit losses
						other*
	Recorded debt balance	Amount in arrears***	Recorded debt balance	By extent of arrears	On a collective basis	On an individual basis	Total
Housing loans requiring calculation of allowance for credit losses based on extent of arrears**	49,206	164	997	299	87	-	386
Other housing loans(1)	138	-	-	-	1	-	1
Total	*49,344	164	997	****299	88	-	387

** Of which: General-purpose loans with the mortgage of a residence, in the amount of approximately NIS 4,454 million (June 30, 2011: NIS 4,029 million, December 31, 2011: NIS 4,240 million).

*** Includes interest on the amount in arrears.

**** Includes the allowance beyond the requirement based on the extent of arrears in the amount of approximately NIS 27 million (June 30, 2011: NIS 10 million, December 31, 2011: NIS 24 million).

***** Of which: Floating-rate housing loans in the amount of approximately NIS 37,009 million (June 30, 2011: NIS 33,259 million, December 31, 2011: NIS 35,177 million).

(1) This group includes housing loans not repaid in monthly or quarterly installments.

Note 4 Capital and Capital Adequacy

A. Capital Adequacy in consolidated data

	June 30, 2012	June 30, 2011*	December 31, 2011*
	Unaudited		Audited
		NIS millions
1. Capital for the purpose of calculating the capital ratio
Core Tier I capital	25,038	22,679	23,769
Tier I capital, after deductions	27,465	25,067	26,157
Tier II capital, after deductions	17,194	15,382	16,175
Total Capital	44,659	40,449	42,332
2. Weighted balances of risk assets
Credit risk	274,037	260,193	274,037
Market risks	6,881	6,937	7,018
Operational risk	20,955	19,825	20,047
Total weighted balances of risk assets	301,873	286,955	301,102
3. Ratio of capital to risk assets		%
Ratio of Core Tier I capital to risk assets	8.29%	7.90%	7.89%
Ratio of Tier I capital to risk assets	9.10%	8.74%	8.69%
Ratio of Total capital to risk assets	14.79%	14.10%	14.06%
Minimum ratio of Total capital as required by the Supervisor of Banks	9.00%	9.00%	9.00%
B. Significant Subsidiaries
Isracard
Ratio of Tier I capital to risk assets	14.90%	13.70%	13.80%
Ratio of Total capital to risk assets	15.10%	13.90%	14.00%
Minimum ratio of Total capital as required by the Supervisor of Banks	9.00%	9.00%	9.00%
Bank Hapoalim Switzerland
Ratio of Tier I capital to risk assets	24.82%	23.03%	22.36%
Ratio of Total capital to risk assets	24.82%	23.03%	22.36%
Minimum ratio of Total capital as required by the local regulation	11.20%	**8.00%	11.20%
Bank Pozitif
Ratio of Tier I capital to risk assets	22.82%	23.08%	20.76%
Ratio of Total capital to risk assets	20.33%	21.73%	18.34%
Minimum ratio of Total capital as required by the local regulation	12.00%	12.00%	12.00%

* Restated following the initial implementation of International Accounting Standard 12, Taxes on Income. See Note 1(C)(2.2) above.

** On March 30, 2011, the Swiss central bank issued a circular on capital adequacy, effective July 1, 2011. The circular classifies financial institutions in Switzerland into several categories, in accordance with criteria that have been established. Bank Hapoalim Switzerland has been assigned to a category in which it is required to maintain a minimum total capital ratio of 11.2%, instead of the 8% required until the date of implementation of the directive.

Note 4 Capital and Capital Adequacy (continued)

C. Components of capital for the purpose of calculating the capital ratio

	June 30, 2012	June 30, 2011	December 31, 2011
	Unaudited		Audited
1. Tier I capital
Capital	25,223	*23,015	*24,101
Hybrid capital instruments	2,427	2,388	2,388
Less: Intangible assets and goodwill	)39(	)51(	)44(
Less: net profits in respect of adjustments to fair value of securities available for sale	)90(	)231(	)233(
Less: Investments in financial companies in which the Bank has material influence	)56(	)54(	)55(
Total Tier I capital	27,465	*25,067	*26,157
2. Tier II capital
A. Upper Tier II capital
45% of the total net profits before the effect of related taxes
In respect of adjustments to fair value of securities available for sale	103	167	160
General provision for doubtful debts	674	674	674
Hybrid capital instruments	2,715	2,685	2,689
B. Lower Tier II capital
Subordinated notes	13,757	11,910	12,707
C. Tier II capital deductions
Investments in financial companies in which the Bank has material influence	)55(	)54(	)55(
Total Tier II capital	17,194	15,382	16,175
Total Capital	44,659	*40,449	*42,332

* Restated following the initial implementation of International Accounting Standard 12, Taxes on Income. See Note 1(C)(2.2) above.

Note 4 Capital and Capital Adequacy (continued)

D. Capital Adequacy Target

Capital adequacy is calculated in accordance with Proper Conduct of Banking Business Directives No. 201-211, "Capital Measurement and Adequacy." A resolution of the Board of Directors of December 30, 2010 established minimum targets of 7.5% for the Bank's core Tier I capital ratio and 12.5% for the Bank's total capital ratio.

Minimum Core Tier 1 Capital Ratios

In March 2012, the Supervisor of Banks issued a circular to all banking corporations concerning minimum capital ratios, within the process of preparation for the implementation of the Basel III directives. According to the circular, all banking corporations will be required to maintain a minimum core Tier 1 capital ratio of 9% by January 1, 2015. The core Tier 1 capital ratio is to be calculated in accordance with the Basel III directives and the adjustments to be established by the Supervisor of Banks.

In addition, a large banking corporation whose total consolidated balance sheet assets constitute at least 20% of the total balance sheet assets in the banking system in Israel will be required to maintain a minimum core Tier 1 capital ratio of 10% by January 1, 2017. This additional directive applies to the Bank.

The Bank is preparing to comply with the requirements to be established. The core Tier 1 capital ratio of the Bank as at June 30, 2012, calculated according to the Basel II directives, is 8.29%.

Note 5 Assets and Liabilities According to Linkage Basis

				as at June 30, 2012
	Israeli Currency			Foreign Currency(1)
	Unlinked	Linked to the CPI	US Dollar	Euro	Other	Non monetary items*	Total
Assets
Cash on hand and deposits with banks	34,804	60	16,568	1,031	1,288	-	53,751
Securities	25,925	3,727	6,366	1,201	2,091	1,418	40,728
Credit to the public, net(2)	144,347	56,816	30,588	6,895	9,825	143	248,614
Credit to governments	190	-	437	257	-	-	884
Investments in equity basis investees	-	-	-	-	-	128	128
Buildings and equipment	-	-	-	-	-	3,659	3,659
Intangible assets and goodwill	-	-	-	-	-	39	39
Assets in respect of derivative instruments(3)	2,949	74	5,562	255	696	11	9,547
Other assets	3,188	254	449	200	60	604	4,755
Total assets	211,403	60,931	59,970	9,839	13,960	6,002	362,105
Liabilities
Deposits from the public	156,316	20,729	61,989	13,589	6,902	143	259,668
Deposits from banks	1,970	551	2,866	842	205	-	6,434
Deposits from the Government	192	552	139	-	-	-	883
Securities which were lent or sold
under agreements to repurchase	-	-	590	-	526	-	1,116
Bonds and subordinated notes	6,389	27,215	1,123	95	857	-	35,679
Liabilities in respect of derivative instruments(3)	3,429	1,989	6,175	334	745	-	12,672
Other liabilities	18,005	196	1,393	220	103	513	20,430
Total liabilities	186,301	51,232	74,275	15,080	9,338	656	336,882
Excess of assets (liabilities)	25,102	9,699	)14,305(	)5,241(	4,622	5,346	25,223
Effect of hedging derivatives:
Derivative instruments (not including options)	1,502	-	34	-	)1,536(
Effect of non hedging derivatives:
Derivative instruments (not including options)	)11,324(	)2,766(	13,760	3,737	)3,407(
Options in the money, net (in terms of underlying asset)	)538(	-	)505(	821	222
Options out of the money, net (in terms of underlying asset)	)436(	-	)156(	504	88
Total	14,306	6,933	(1,172)	(179)	(11)	5,346
Options in the money, net (nominal present value)	(346)	-	(1,243)	1,167	422
Options out of the money, net (nominal present value)	)3,396(	-	1,393	1,621	382

* Including derivative instruments whose underlying asset relates to a non-monetary item.

(1) Including linked to foreign currency.

(2) After the deduction of allowances for credit losses attributed to the linkage bases.

(3) The Bank has implemented the directives of FAS 157 concerning fair value measurements as of January 1, 2011. Balances of assets and liabilities presented in this note are net amounts, after the attribution of the effects of the implementation of the standard, in the amount of NIS (37) million, these effects were presented in the unlinked segment.

Note 5 Assets and Liabilities According to Linkage Basis (continued)

	as at June 30, 2011
	Israeli Currency			Foreign Currency(1)
	Unlinked	Linked to the CPI	US Dollar	Euro	Other	Non monetary items*	Total
Assets
Cash on hand and deposits with banks	33,852	165	11,388	484	970	-	46,859
Securities	15,225	1,889	4,914	2,047	1,636	1,990	27,701
Securities which were borrowed or bought under agreement to resell	-	-	-	-	7	-	7
Credit to the public, net(2)	137,122	55,097	25,522	7,193	8,878	257	234,069
Credit to governments	1	-	226	96	-	-	323
Investments in equity basis investees	-	-	-	-	-	130	130
Buildings and equipment	-	-	-	-	-	3,661	3,661
Intangible assets and goodwill	-	-	-	-	-	51	51
Assets in respect of derivative instruments(3)	2,300	317	2,884	554	926	11	6,992
Other assets	**2,777	3	334	235	43	597	**3,989
Total assets	**191,277	57,471	45,268	10,609	12,460	6,697	**323,782
Liabilities
Deposits from the public	139,407	20,355	54,276	12,596	6,346	257	233,237
Deposits from banks	1,373	777	2,771	590	165	-	5,676
Deposits from the Government	259	752	128	-	-	-	1,139
Securities which were lent or sold under agreements to repurchase	-	-	-	-	927	-	927
Bonds and subordinated notes	5,568	22,472	1,476	73	373	-	29,962
Liabilities in respect of derivative instruments(3)	2,500	2,661	3,000	643	1,125	-	9,929
Other liabilities	17,826	114	1,093	255	91	518	19,897
Total liabilities	166,933	47,131	62,744	14,157	9,027	775	300,767
Excess of assets (liabilities)	**24,344	10,340	(17,476)	(3,548)	3,433	5,922	**23,015
Effect of non hedging derivatives:
Derivative instruments (not including options)	(8,811)	(5,862)	15,814	2,654	(3,795)
Options in the money, net (in terms of underlying asset)	(522)	-	311	448	(237)
Options out of the money, net (in terms of underlying asset)	(672)	-	283	311	78
Total	**14,339	4,478	(1,068)	(135)	(521)	5,922
Options in the money, net(nominal present value)	(926)	-	794	622	(490)
Options out of the money, net (nominal present value)	(2,476)	-	907	1,150	419

* Including derivative instruments whose underlying asset relates to a non-monetary item.

** Restated following the initial implementation of International Accounting Standard 12, Taxes on Income. See Note 1(C)(2.2) above.

(1) Including linked to foreign currency.

(2) After the deduction of allowances for credit losses attributed to the linkage bases.

(3) The Bank has implemented the directives of FAS 157 concerning fair value measurements as of January 1, 2011. Balances of assets and liabilities presented in this note are net amounts, after the attribution of the effects of the implementation of the standard, in the amount of NIS (44) million, these effects were presented in the unlinked segment.

Note 5 Assets and Liabilities According to Linkage Basis (continued)

				as at December 31, 2011
	Israeli Currency			Foreign Currency(1)
	Unlinked	Linked to the CPI	US Dollar	Euro	Other	Non monetary items*	Total
Assets
Cash on hand and deposits with banks	33,271	166	19,881	995	1,477	-	55,790
Securities	21,747	3,136	5,172	1,291	1,475	1,590	34,411
Credit to the public, net(2)	142,503	56,718	30,760	6,455	9,839	220	246,495
Credit to governments	80	1	303	232	-	-	616
Investments in equity basis investees	-	-	-	-	-	125	125
Buildings and equipment	-	-	-	-	-	3,720	3,720
Intangible assets and goodwill	-	-	-	-	-	44	44
Assets in respect of derivative instruments(3)	2,449	77	7,098	229	927	19	10,799
Other assets	**3,127	509	307	184	91	444	**4,662
Total assets	**203,177	60,607	63,521	9,386	13,809	6,162	**356,662
Liabilities
Deposits from the public	155,391	20,615	60,404	12,938	6,849	220	256,417
Deposits from banks	2,338	693	3,058	857	55	-	7,001
Deposits from the Government	264	684	137	-	-	-	1,085
Securities which were lent or sold under agreements to repurchase	-	-	1,148	-	157	-	1,305
Bonds and subordinated notes	6,265	24,646	1,690	75	257	-	32,933
Liabilities in respect of derivative instruments(3)	3,040	2,143	6,971	334	933	-	13,421
Other liabilities	18,330	189	1,074	200	128	478	20,399
Total liabilities	185,628	48,970	74,482	14,404	8,379	698	332,561
Excess of assets (liabilities)	**17,549	11,637	(10,961)	(5,018)	5,430	5,464	**24,101
Effect of non hedging derivatives:
Derivative instruments (not including options)	(814)	(4,834)	9,211	3,285	(6,848)
Options in the money, net (in terms of underlying asset)	(1,630)	-	(658)	1,307	981
Options out of the money, net (in terms of underlying asset)	(629)	-	582	169	(122)
Total	**14,476	6,803	(1,826)	(257)	(559)	5,464
Options in the money, net (nominal present value)	(1,893)	-	(942)	1,743	1,092
Options out of the money, net (nominal present value)	)2,072(	-	1,651	469	)48(

* Including derivative instruments whose underlying asset relates to a non-monetary item.

** Restated following the initial implementation of International Accounting Standard 12, Taxes on Income. See Note 1(C)(2.2) above.

(1) Including linked to foreign currency.

(2) After the deduction of allowances for credit losses attributed to the linkage bases.

(3) The Bank has implemented the directives of FAS 157 concerning fair value measurements as of January 1, 2011. Balances of assets and liabilities presented in this note are net amounts, after the attribution of the effects of the implementation of the standard, in the amount of NIS (19) million, these effects were presented in the unlinked segment.

Note 6 Contingent Liabilities and Special Commitments

	June 30		Dec. 31		June 30	Dec. 31
	2012	2011	2011	2012	2011	2011
	Unaudited Audited			Unaudited	Audited
		Contract balances*			Allowance for credit losses
A. Off-balance sheet financial instruments:
Transactions, the balance of which represents a credit risk:
(1) Documentary credit	2,002	2,138	2,627	3	9	4
(2) Credit guarantees	6,626	6,313	7,012	22	27	18
(3) Guarantees to purchasers of apartments	14,576	12,506	13,032	67	36	58
(4) Other guarantees and liabilities	18,788	17,966	19,359	181	119	168
(5) Unutilized credit facilities for credit cards under the responsibility of the bank	32,927	30,878	32,924	76	68	76
(6) Unutilized credit facilities for credit cards under the responsibility of other banks	10,555	9,986	10,163
(7) Unutilized revolving debitory and other on-demand credit facilities	36,802	37,125	34,515	92	96	90
(8) Irrevocable obligations to grant credit, which has been approved but is yet undrawn	26,622	25,341	26,456	69	67	67
(9) Obligations to issue guarantees	18,856	15,018	17,636	86	40	76
B. Contingent liabilities and other special commitments:
(1) Liability to purchase securities	294	250	260
(2) Construction and purchase of buildings and equipment	101	97	39
(3) Rent payable in future years for buildings and equipment in respect of commitments for periods longer than three years, after balance sheet date**:
First year	151	134	147
Second year	151	134	147
Third year	151	134	147
Fourth year	146	132	140
Fifth year	134	122	129
Over five years	818	763	795
Total rent for buildings and equipment	1,551	1,419	1,505

* Contract balances or their nominal amounts for period-end, before the affect of allowance for credit losses.

** Restated.

Note 6 Contingent Liabilities and Special Commitments (continued)

C. Legal Claims

The additional exposure in respect of claims filed against the Bank Group on various matters, as at June 30, 2012, that have a "reasonably possible" probability of materialization amounts to approximately NIS 110 million.

(A) For details concerning claims and petitions to certify claims as class actions in material amounts, see Note 19(D)(a) to the Financial Statements as at December 31, 2011.

As at the date of publication of the Financial Statements, there have been no material changes with regard to claims against the Bank Group relative to the description in the aforesaid Financial Statements, with the exceptions described below. 1. The Bank has been notified by Psagot Provident Funds and Pensions Ltd. (hereinafter: "Psagot") and by Clal Pensions and Provident Funds Ltd. (hereinafter: "Clal") that, in July 2011, a claim and a petition to certify the claim as a class action against Psagot, Clal, and four other defendants that manage provident funds and study funds was filed

with the District Court of Tel-Aviv-Jaffa.

In the claim, the claimants allege that the defendants caused unlawful discrimination between provident-fund members, by granting only some of the members benefits in the payment of management fees. The claimants demand equalization of the rights of all members of the provident funds, such that all of the members pay identical, uniform management fees at the lowest rate collected from any of the members, or alternatively, at a uniform average rate to be determined. The claimants also demand reimbursement of overcharged management fees collected from the members allegedly discriminated against in the last five years.

This claim has not been filed against the Bank; however, because it concerns the period of the last five years, during which the Bank (through companies under its ownership) managed some of the provident funds currently managed by Psagot and Clal, for approximately two years, Psagot and Clal have notified the Bank that in the event that a financial charge is imposed upon them in connection with the provident funds managed by the Bank during the period of management by the Bank, they will demand indemnification and compensation from the Bank for such charges. This claim was described in Note 19(D)(b)6 to the Financial Statements as at December 31, 2011.

2. With regard to the claim described in Note 19(D)(a)8 to the Annual Financial Statements, filed with the District Court of Tel Aviv on July 8, 1997, concerning the collection of life insurance and building insurance fees from borrowers, where on December 5, 2011, the mediation agreement between the parties was granted the status of a verdict – the verdict became final on July 1, 2012, and the case was closed.

Note 6 Contingent Liabilities and Special Commitments (continued)

3. A claim statement and a petition to certify and administer the claim as a class action were filed with the District Court of the Central District against the Bank and against two additional banks (hereinafter: the "Respondent Banks") on September 21, 2011. The claim against all of the Respondent Banks is in a total amount of NIS 927 million, while the share of the Bank is in the amount of NIS 280 million.

The cause of the claim, according to the petitioners, is excessive collection allegedly deriving from prohibited collection of "compound interest" in housing loans taken by the petitioners from the Respondent Banks, and the Respondent Banks' interest calculations that disregard the fact that the interest has already been paid and that previous payments also repaid part of the principal.

This claim was described in Note 19(D)(b)5 to the Financial Statements as at December 31, 2011.

(B) Also pending against the Bank Group are claims, including petitions to certify class actions, as detailed below. In the opinion of the Bank's Board of Management, based on legal opinions, at this stage it is not possible to assess the probability of success of these legal proceedings; accordingly, no provision has been made in respect thereof:

1. A claim statement and a petition to certify and administer the claim as a class action against the Bank were filed with the District Court of Tel Aviv on July 16, 2012. The amount of the class-action suit noted in the claim statement is NIS 18 billion. The claim and the petition concern the allegation that the Bank conceals the existence of a "transaction permit" from its customers who take out loans, and charges such customers arrears interest not in accordance with this permit.

2. A claim and a petition to certify the claim as a class action against Isracard Ltd., a wholly owned subsidiary of the Bank (hereinafter: "Isracard"), were filed with the District Court of Tel-Aviv-Jaffa on May 20, 2012. The amount of the personal claim noted in the claim statement is NIS 1,231, and the class-action suit is estimated at no less than NIS 373 million. According to the claimant, Isracard clears credit-card transactions on websites (transactions with a missing document) with no examination of the credit-card data entered into the website, other than the number and expiration date of the card, and without cross-referencing the data transferred to it. According to the claimant, Isracard thereby acted negligently, and therefore in violation of the contract signed with the claimant. The claimants seek to represent "merchants who execute transactions with missing documents." The remedy sought is reimbursement for the members of the aforesaid group of the fees paid in respect of denied transactions, as well as the value of the goods delivered to the customer following Isracard's approval of a transaction that was subsequently denied. At this preliminary stage, it is not possible to estimate the probability of certification of the claim as a class action or the probability of success of the claim itself.

3. On March 29, 2012, Attorney Irving Pickard, liquidator of Bernard L. Madoff Investment Securities LLC (hereinafter: "Madoff") filed a claim with the US Bankruptcy Court - Southern District of New York against the Bank and against Bank Hapoalim (Switzerland) Ltd., a wholly owned subsidiary of the Bank (hereinafter: "BHS"). The claim is in the amount of approximately USD 27.5 million, of which approximately USD 26 million against BHS. The claim demands that the defendants reimburse the Madoff liquidation fund for redemptions withdrawn from the Fairfield Sentry and Kingate funds during the period preceding Madoff's bankruptcy. This refers to funds in which customers of the Bank and of BHS invested at the time, which in turn invested in Madoff.

It should be noted that a substantial part of the amount of the reimbursement demanded in this claim (approximately USD 22 million of the total USD 27.5 million) corresponds to the amounts claimed by the Fairfield Sentry fund on its own behalf, in the claim described in Note 19(D)(a)1 to the Annual Financial Statements for 2011; therefore, there does not seem to be a risk of duplicate payment in respect of the corresponding amounts.

Note 6 Contingent Liabilities and Special Commitments (continued)

4. A claim statement and a petition to certify the claim as a class action against Isracard Ltd., a wholly owned subsidiary of the Bank (hereinafter: "Isracard"), and against others, were filed with the District Court of Tel Aviv on January 22, 2012. The personal claim is in the amount of NIS 5,000, and the class-action suit is in an estimated amount of NIS 75 million against all of the defendants. According to the petitioners, Isracard was negligent in failing to check the security of a certain shopping website. Isracard filed for dismissal in limine, as it believes that the petition is missing factual infrastructure, lacks cause, and does not discover opponency between the group and Isracard, and that there is no cause for a personal claim. Note that concurrently with the filing of the request for dismissal in limine, a request was filed to extend the deadline for submission of a response to the petition for certification, until after the ruling on the request for dismissal.

5. A claim statement and a petition to certify and administer the claim as a class action against the Bank were filed with the District Court of the Central District on November 27, 2011. The claim and the petition concern the allegation that the Bank charges its customers for various legal expenses (delivery of pleading statements, collection expenses, etc.), unlawfully, because the Bank charges the customer for the aforesaid expenses even in cases in which the expenses have not been approved by a judicial authority or by the Execution Office, and the Bank adds the aforesaid expenses to the debt balance of the customer, thereby creating a misleading misrepresentation for the customer; and because the Bank charges the customer for such expenses at an interest rate higher than the rate established in the Adjudication of Interest and Linkage Law, 1961. The class-action suit does not stipulate an amount, and states that the amount cannot be estimated.

6. A petition to certify a derived claim against the Bank and a derived claim against four members of the Board of Management of the Bank who served in 2006 (the "Defendants"), and against the Bank as a formal defendant, was filed with the Economic Department of the District Court of Tel Aviv-Jaffa on October 23, 2011. According to the claimant, the petition and the derived claim concern alleged failures in the conduct of the Defendants with respect to financial instruments acquired and held by the Bank during and after the second quarter of 2006.

The claimant bases his claim on a report which he alleges that the Defendants ordered from an external company during 2006, the conclusions of which, he alleges, were that MBS series acquired by the Bank were mortgage-backed bonds of private entities, and were therefore riskier than MBS series of United States government agencies. The claimant alleges that the surplus returns on these bonds did not justify the risk of holding the bonds. The claimant alleges that the Defendants disregarded the findings of the report, did not exchange the MBS series for allegedly less risky series, and allegedly continued to acquire MBS series at the same level of risk, even after receiving the report. The claimant further alleges that the Defendants concealed the findings of the report from the Board of Directors of the Bank.

The claimant alleges that the losses caused to the Bank by the investment in MBS exceed a total of USD 1 billion, and that if the Defendants had ensured that the Bank realize the MBS series, or alternatively exchange the aforesaid series for allegedly less risky series, the Bank would not have incurred any loss.

The claimant is petitioning the court to determine that the Defendants violated the duties imposed upon them by law towards the Bank, and to therefore obligate them to reimburse the Bank for the monetary damages incurred by the Bank.

Note 6 Contingent Liabilities and Special Commitments (continued)

7. In November 2011, it came to the attention of the Bank, through publications in the media, that a petition to certify a class action had been filed against three credit-card companies, including Isracard, and against banks including the Bank.

According to these publications, the claim is in the amount of NIS 4.9 billion, and concerns the rates of fees collected by the credit-card companies.

The Bank and Isracard did not receive the aforesaid petition by the date of approval of the financial statements of the Bank; the Bank therefore does not know the amount of the claim attributed to it and to Isracard, and cannot formulate a position with regard to the petition.

D. Variable Interest Entities (VIE)

The Bank supplies liquidity lines to securitization entities in which third parties serve as the sponsors. The lines supplied by the Bank constitute a relatively small share of the total liquidity lines of these securitization entities. The Bank does not supply credit reinforcement to these entities. The total liquidity lines supplied to securitization entities, as described above, as at June 30, 2012, amounted to NIS 196 million (USD 50 million), compared with NIS 191 million (USD 50 million) at the end of 2011. No withdrawals were performed on any of these lines up to June 30, 2012. Taking into consideration the fact that the Bank usually supplies a relatively small share of the total liquidity lines to these securitization entities and does not provide them with other types of support, the Bank has determined that it does not hold variable interests that would make it the primary beneficiary in any VIE of these securitization entities.

E. Further to Note 19C to the Annual Financial Statements for 2011, a government bill was approved by the Knesset plenum and published in the Official Gazette in August 2011 which concerns, among other matters, the area of discounting, as well as a directive whereby an issuer that issues 10% or more of the number of charge cards issued in Israel, or an issuer of charge cards used to execute at least 10% of the amount of transactions executed in Israel, shall be required to contract with a clearer for cross-clearing of transactions in the charge card which it issues. The directives of this law are in effect as of May 15, 2012. According to the Bank's estimates, this law will have an adverse effect on the Bank Group's revenues in the future; however, at this stage the Bank is unable to estimate the extent of this effect.

An agreement was signed between Isracard and Leumi Card in April 2012, and an agreement was signed between Isracard and CAL in May 2012, both in connection with the implementation of Amendment 18 to the Banking Licensing Law. Pursuant to the agreement, Leumi Card and CAL were granted licenses to clear Isracard brand charge cards, under the terms agreed upon by the parties. On May 14, 2012, the Commissioner granted a temporary exemption for a restrictive arrangement, in effect until September 13, 2012, following an extension. Pursuant to the exemption, Leumi Card and CAL can clear Isracard brand cards by paying an issuer fee. If the Commissioner approves the collection of any additional amounts by Isracard in the future, Isracard will be able to collect such amounts retroactively, including with respect to the period of the temporary exemption.

			as at June 30, 2012
	Interest contracts		Foreign	Shares	Commodity	Total
	NIS-CPI	Other	currency contracts	related contracts	and other contracts
1. Hedging derivatives*
Forward contracts	-	-	3,071	-	-	3,071
Swaps	-	9,302	-	-	-	9,302
Total hedging derivatives	-	9,302	3,071	-	-	12,373
Of which interest rate swaps contracts in
which the banking corporation has agreed to
pay a fixed interest rate	-	4,309	-	-	-	4,309
2. ALM derivatives, *
Futures contracts	-	12,514	-	-	-	12,514
Forward contracts	10,134	20,422	119,334	25	1,479	151,394
Option contracts traded
on the stock exchange:
Options written	-	-	322	-	-	322
Options bought	-	-	317	-	-	317
Other option contracts
Options written	-	30,346	22,219	4,719	609	57,893
Options bought	-	29,763	21,396	1,204	452	52,815
Swaps	2,821	209,944	36,601	1,972	-	251,338
Total ALM derivatives	12,955	302,989	200,189	7,920	2,540	526,593
Of which interest rate swaps contracts in
which the banking corporation has agreed to
pay a fixed interest rate	2,243	96,654	-	-	-	98,897
3. Other derivatives*
Option contracts traded
on the stock exchange:
Options written	-	-	2,726	6,858	-	9,584
Options bought	-	-	2,726	6,858	-	9,584
Total other derivatives	-	-	5,452	13,716	-	19,168
4. Credit derivatives and spot swap
foreign currency contracts
Credit derivatives for which the banking	-	-	-	-	392	392
corporation is a guarantor
Credit derivatives for which the banking	-	-	-	-	30	30
corporation is a beneficiary
Spot swap foreign currency contracts	-	-	15,350	-	-	15,350
Total nominal value	12,955	312,291	224,062	21,636	2,962	573,906

A. Nominal value of derivative instruments

* Except for credit derivatives and foreign currency spot swap contracts.

** Derivatives constituting part of the Bank's assets and liabilities management network, that have not been designated for hedging.

B. Gross fair value of derivative instruments*

			as at June 30, 2012
	Interest contracts		Foreign	Shares	Commodity	Total
	NIS-CPI	Other	currency contracts	related contracts	and other contracts
1. Hedging derivatives**
Gross positive fair value	-	43	33	-	-	76
Gross negative fair value	-	576	74	-	-	650
2. ALM derivatives, *
Gross positive fair value	119	6,135	2,921	95	78	9,348
Gross negative fair value	402	6,547	4,809	71	83	11,912
3. Other derivatives**
Gross positive fair value	-	-	61	175	-	236
Gross negative fair value	-	-	61	168	-	229
4. Credit derivatives
Credit derivatives for which the banking corporation is a guarantor:
Gross negative fair value	-	-	-	-	1	1
Credit derivatives for which the banking corporation is a beneficiary:
Gross positive fair value	-	-	-	-	11	11
Total gross positive fair value	119	6,178	3,015	270	89	9,671
Total gross negative fair value	402	7,123	4,944	239	84	12,792

* The Bank has implemented the directives of FAS 157 concerning fair value measurements as of January 1, 2011. Balances of assets and liabilities presented in this note are gross amounts, before the attribution of effects of the implementation of this standard, in the amount of NIS (37) million.

** Except for credit derivatives.

*** Derivatives constituting part of the Bank's assets and liabilities management network, that have not been designated for hedging.

A. Nominal value of derivative instruments

			as at June 30, 2011*
	Interest contracts		Foreign	Shares	Commodity	Total
	NIS-CPI	Other	currency contracts	related contracts	and other contracts
1. Hedging derivatives**
Swaps	-	10,338	-	-	-	10,338
Total hedging derivatives	-	10,338	-	-	-	10,338
Of which interest rate swaps contracts in which the banking corporation has agreed to
pay a fixed interest rate	-	2,839	-	-	-	2,839
2. ALM derivatives, *
Futures contracts	-	11,911	15	-	-	11,926
Forward contracts	8,280	35,969	135,562	47	1,840	181,698
Option contracts traded on the stock exchange:
Options written	-	-	190	-	-	190
Options bought	-	-	190	-	-	190
Other option contracts
Options written	-	20,460	29,123	4,698	872	55,153
Options bought	-	20,887	28,238	753	596	50,474
Swaps	2,122	152,174	29,067	769	-	184,132
Total ALM derivatives	10,402	241,401	222,385	6,267	3,308	483,763
Of which interest rate swaps contracts in which the banking corporation has agreed to pay a fixed interest rate	1,662	74,266	-	-	-	75,928

* The Bank has implemented the directives of the Supervisor of Banks concerning the format for statements of profit and loss of banking corporations as of January 1, 2012. Pursuant to the new directive, activity in derivative instruments is separated into trading activity and non-trading activity. The directive was adopted through retroactive implementation. Accordingly, other non-trading derivatives were reclassified, to match the new disclosure format.

** Except for credit derivatives and foreign currency spot swap contracts.

*** Derivatives constituting part of the Bank's assets and liabilities management network, that have not been designated for hedging.

A. Nominal value of derivative instruments (continued)

		as at June 30, 2011*
	Interest contracts		Foreign	Shares	Commodity	Total
	NIS-CPI	Other	currency contracts	related contracts	and other contracts
3. Other derivatives**
Option contracts traded on the stock exchange:
Options written	-	-	2,089	12,583	-	14,672
Options bought	-	-	2,089	12,583	-	14,672
Total other derivatives	-	-	4,178	25,166	-	29,344
4. Credit derivatives and spot swap foreign currency contracts
Credit derivatives for which the banking corporation is a guarantor	-	-	-	-	512	512
Credit derivatives for which the banking corporation is a beneficiary	-	-	-	-	30	30
Spot swap foreign currency contracts	-	-	22,221	-	-	22,221
Total nominal value	10,402	251,739	248,784	31,433	3,850	546,208

** Except for credit derivatives and foreign currency spot swap contracts.

B. Gross fair value of derivative instruments**

	as at June 30, 2011*
	Interest contracts		Foreign	Shares	Commodity	Total
	NIS-CPI	Other	currency contracts	related contracts	and other contracts
1. Hedging derivatives***
Gross positive fair value	-	52	-	-	-	52
Gross negative fair value	-	340	-	-	-	340
2. ALM derivatives, *
Gross positive fair value	40	3,047	3,674	79	51	6,891
Gross negative fair value	287	3,510	5,619	62	59	9,537
3. Other derivatives***
Gross positive fair value	-	-	43	188	-	231
Gross negative fair value	-	-	43	188	-	231
4. Credit derivatives
Credit derivatives for which the banking corporation is a guarantor:
Gross positive fair value	-	-	-	-	3	3
Total gross positive fair value	40	3,099	3,717	267	54	7,177
Total gross negative fair value	287	3,850	5,662	250	59	10,108

** The Bank has implemented the directives of FAS 157 concerning fair value measurements as of January 1, 2011. Balances of assets and liabilities presented in this note are gross amounts, before the attribution of effects of the implementation of this standard, in the amount of NIS (44) million.

*** Except for credit derivatives.

**** Derivatives constituting part of the Bank's assets and liabilities management network, that have not been designated for hedging.

A. Nominal value of derivative instruments

		Foreign	Shares	Commodity	Total
NIS-CPI	Other	contracts	contracts	contracts

-	10,101	-	-	-	10,101
-	10,101	-	-	-	10,101
					3,802


-	10,355	-	-	-	10,355
9,018	31,548	143,006	42	1,536	185,150


-	-	190	-	-	190
-	-	190	-	-	190

-	24,770	36,740	4,387	736	66,633
-	26,669	37,139	743	509	65,060
2,106	179,525	32,254	841	-	214,726
11,124	272,867	249,519	6,013	2,781	542,304
					85,718
	- 1,739	Interest contracts 3,802 83,979	currency - -	as at December 31, 2011* related - -	and other - -

** Except for credit derivatives and foreign currency spot swap contracts.

*** Derivatives constituting part of the Bank's assets and liabilities management network, that have not been designated for hedging.

A. Nominal value of derivative instruments

	as at December 31, 2011*
	Interest contracts		Foreign	Shares	Commodity	Total
	NIS-CPI	Other	currency contracts	related contracts	and other contracts
3. Other derivatives**
Option contracts traded on the stock exchange:
Options written	-	-	2,956	7,193	-	10,149
Options bought	-	-	2,956	7,193	-	10,149
Other option contracts
Options bought	-	-	-	81	-	81
Total other derivatives	-	-	5,912	14,467	-	20,379
4. Credit derivatives and spot swap foreign currency contracts
Credit derivatives for which the banking corporation is a guarantor	-	-	-	-	573	573
Credit derivatives for which the banking corporation is a beneficiary	-	-	-	-	30	30
Spot swap foreign currency contracts	-	-	18,578	-	-	18,578
Total nominal value	11,124	282,968	274,009	20,480	3,384	591,965

** Except for credit derivatives and foreign currency spot swap contracts.

B. Gross fair value of derivative instruments**

			as at December 31, 2011*
	Interest contracts		Foreign	Shares	Commodity	Total
	NIS-CPI	Other	currency contracts	related contracts	and other contracts
1. Hedging derivatives***
Gross positive fair value	-	67	-	-	-	67
Gross negative fair value	-	535	-	-	-	535
2. ALM derivatives, *
Gross positive fair value	93	5,420	4,844	61	146	10,564
Gross negative fair value	373	6,018	6,105	96	159	12,751
3. Other derivatives***
Gross positive fair value	-	-	46	238	-	284
Gross negative fair value	-	-	46	228	-	274
4. Credit derivatives
Credit derivatives for which the banking corporation is a guarantor:
Gross positive fair value	-	-	-	-	1	1
Gross negative fair value	-	-	-	-	6	6
Credit derivatives for which the banking corporation is a beneficiary:
Gross positive fair value	-	-	-	-	5	5
Total gross positive fair value	93	5,487	4,890	299	152	10,921
Total gross negative fair value	373	6,553	6,151	324	165	13,566

*** Except for credit derivatives.

**** Derivatives constituting part of the Bank's assets and liabilities management network, that have not been designated for hedging.

C. Credit risk in respect of derivative instruments, according to transaction counterparty

				as at June 30, 2012
	Stock Exchanges	Banks	Dealers/ Brokers	Governments and central banks	Others	Total
	Unaudited
Positive gross fair value of derivative instruments(1)	234	5,733	911	-	2,793	9,671
Balance sheet balances of assets deriving from derivative instruments(2)	234	5,733	911	-	2,793	9,671
Off balance sheet credit risk in respect of derivative instruments(3)	7	8,782	1,539	235	7,942	18,505
Total credit risk in respect of derivative instruments	241	14,515	2,450	235	10,735	28,176

	as at June 30, 2011
	Stock Exchanges	Banks	Dealers/ Brokers	Governments and central banks	Others	Total
	Unaudited
Positive gross fair value of derivative instruments(1)	232	3,764	651	28	2,502	7,177
Balance sheet balances of assets deriving from derivative instruments(2)	232	3,764	651	28	2,502	7,177
Off balance sheet credit risk in respect of derivative instruments(3)	3	27,683	3,914	180	13,361	45,141
Total credit risk in respect of derivative instruments	235	31,447	4,565	208	15,863	52,318

	as at December 31, 2011
	Stock Exchanges	Banks	Dealers/ Brokers	Governments and central banks	Others	Total
	Audited
Positive gross fair value of derivative instruments(1)	274	6,114	856	-	3,677	10,921
Balance sheet balances of assets deriving from derivative instruments(2)	274	6,114	856	-	3,677	10,921
Off balance sheet credit risk in respect of derivative instruments(3)	-	8,348	1,519	259	7,665	17,791
Total credit risk in respect of derivative instruments	274	14,462	2,375	259	11,342	28,712

(1) Of which positive gross value of embedded derivative instruments is NIS 13 million (June 30, 2011: NIS 21 million, December 31, 2011: NIS 18 million).

(2) Positive gross fair value, before attribution to the effects of the implementation of FAS 157 concerning fair value measurement which total in a negative amount of NIS 111 million (June 30, 2011: NIS 164 million, December 31, 2011: NIS 104 million). For further details, see note 8 below.

(3) Off balance sheet credit risk in respect of derivative instruments (including derivative instruments with negative fair value) as calculated for the purpose of restrictions on the liability of a borrower. Data on off-balance sheet credit risk as at December 31, 2011 were calculated according to the new definitions established in Proper Conduct of Banking Business Directive No. 313, Limits on Indebtedness of a borrower and borrowers group (amended version). Data on off-balance sheet credit risk as at June 30, 2011 are presented according to the definitions established in Proper Conduct of Banking Business Directive No. 313 prior to the update.

D. Details of maturity dates (nominal value amounts):

			as at June 30, 2012
	Up to 3 months	From 3 months to 1 year	From 1 to 5 years	Over 5 years	Total
			Unaudited
Interest rate contracts
NIS-CPI	1,753	2,967	5,628	2,607	12,955
Other	79,304	73,826	105,134	54,027	312,291
Foreign currency contracts	130,931	54,437	14,638	24,056	224,062
Shares related contracts	14,807	2,657	3,545	627	21,636
Commodity and other contracts
(including credit derivatives)	1,463	826	673	-	2,962
Total	228,258	134,713	129,618	81,317	573,906
			as at June 30, 2011
			Unaudited
Total	215,616	149,410	105,589	75,593	546,208
			as at December 31, 2011
			Audited
Total	271,475	136,409	110,323	73,758	591,965

A. Balances and fair value estimations of financial instruments

		as at June 30, 2012
		Balance sheet balances
	(1)	(2)	Total	Fair Value
Financial Assets
Cash on hand and deposits with banks	2,128	51,623	53,751	53,741
Securities*	39,911	817	40,728	40,788
Credit to the public, net	772	247,842	248,614	250,191
Credit to governments	-	884	884	886
Assets in respect of derivative instruments	9,547	-	9,547	9,547
Other financial assets	1,412	111	1,523	1,522
Total financial assets	53,770	301,277	355,047	356,675
Financial liabilities
Deposits from the public	772	258,896	259,668	261,753
Deposits from banks	-	6,434	6,434	6,592
Deposits from the Government	-	883	883	955
Securities which were lent or sold
under agreements to repurchase	-	1,116	1,116	1,116
Bonds and subordinated notes	-	35,679	35,679	38,017
Liabilities in respect of derivative instruments	12,672	-	12,672	12,672
Other financial liabilities	3,459	12,775	16,234	16,175
Total financial liabilities	16,903	315,783	332,686	337,280

* Includes shares and options for which no fair value is available, stated at cost in the amount of NIS 557 million.

Notes:

(1) Financial instruments for which the balance sheet balance is identical to the fair value.

(2) Other financial instruments for which fair value calculated.

		as at June 30, 2011
		Balance sheet balances
	(1)	(2)	Total	Fair Value
Financial Assets
Cash on hand and deposits with banks	2,167	44,692	46,859	46,850
Securities*	26,801	900	27,701	27,761
Securities which were borrowed or bought under agreements to resell	7	-	7	7
Credit to the public, net	852	233,217	234,069	236,245
Credit to governments	-	323	323	324
Assets in respect of derivative instruments	6,992	-	6,992	6,992
Other financial assets	1,423	62	1,485	1,484
Total financial assets	38,242	279,194	317,436	319,663
Financial liabilities
Deposits from the public	852	232,385	233,237	234,515
Deposits from banks	-	5,676	5,676	5,914
Deposits from the Government	-	1,139	1,139	1,216
Securities which were lent or sold under agreements to repurchase	-	927	927	927
Bonds and subordinated notes	-	29,962	29,962	31,322
Liabilities in respect of derivative instruments	9,929	-	9,929	9,929
Other financial liabilities	2,341	13,167	15,508	15,430
Total financial liabilities	13,122	283,256	296,378	299,253

A. Balances and fair value estimations of financial instruments (continued)

* Includes shares and options for which no fair value is available, stated at cost in the amount of NIS 547 million.

Notes:

(1) Financial instruments for which the balance sheet balance is identical to the fair value.

(2) Other financial instruments for which fair value calculated.

		as at December 31, 2011
		Balance sheet balances
	(1)	(2)	Total	Fair Value
Financial Assets
Cash on hand and deposits with banks	2,212	53,578	55,790	55,776
Securities*	33,542	869	34,411	34,468
Credit to the public, net	880	245,615	246,495	248,501
Credit to governments	-	616	616	616
Assets in respect of derivative instruments	10,799	-	10,799	10,799
Other financial assets	1,580	114	1,694	1,692
Total financial assets	49,013	300,792	349,805	351,852
Financial liabilities
Deposits from the public	880	255,537	256,417	258,369
Deposits from banks	-	7,001	7,001	7,218
Deposits from the Government	-	1,085	1,085	1,156
Securities which were lent or sold under agreements to repurchase	-	1,305	1,305	1,307
Bonds and subordinated notes	-	32,933	32,933	34,806
Liabilities in respect of derivative instruments	13,421	-	13,421	13,421
Other financial liabilities	2,513	13,726	16,239	16,168
Total financial liabilities	16,814	311,587	328,401	332,445

A. Balances and fair value estimations of financial instruments (continued)

* Includes shares and options for which no fair value is available, stated at cost in the amount of NIS 563 million.

Notes:

(1) Financial instruments for which the balance sheet balance is identical to the fair value, or constitutes an approximation of fair value.

(2) Other financial instruments for which fair value calculated.

Note 8 Balances and fair value estimations of financial instruments (continued)

Fair Value of Financial Instruments

This note includes information concerning the assessment of the fair value of financial instruments.

A "market price" cannot be quoted for the majority of financial instruments at the Bank because no active market exists in which they are traded. Fair value is therefore estimated by means of accepted pricing models, such as the present value of future cash flows discounted by a discounting interest rate that reflects the level of risk inherent in the financial instrument. An estimate of fair value by means of an assessment of future cash flows and the setting of a discounting interest rate are subjective. Therefore, for the majority of financial instruments, the following assessment of fair value is not necessarily an indication of the disposal value of the financial instrument on the reporting date. The fair value is assessed on the basis of the interest rates valid at the reporting date, and does not take interest-rate volatility into account. Under the assumption of different interest rates, fair values would be obtained that may differ materially. This mainly applies to financial instruments that bear a fixed rate of interest or that do not bear interest. In addition, the assessment of fair value does not take into consideration fees to be received or paid in the course of business activity, and does not include the effect of non-controlling interests or tax effects. Moreover, the difference between the balance sheet balance and fair-value balances may not be realized, because in the majority of cases the financial instrument may be held to maturity by the Bank. Due to all of these factors, it should be emphasized that the data included in this note are insufficient to indicate the value of the banking corporation as a going concern. In addition, due to the broad spectrum of assessment techniques and estimates that can be applied in assessing fair value, caution should be exercised when comparing fair values between different banks.

Principal Methods and Assumptions Used to Estimate the Fair Value of Financial Instruments

Deposits with banks, nontradable bonds and loans, and credit to the government – By discounting future cash flows according to the interest rates at which the Bank executed similar transactions at the reporting date. Marketable securities – According to market value in the primary market.

Credit to the public – The fair value of the balance of credit to the public is estimated using the method of the present value of future cash flows discounted by a suitable discounting rate. The balance of credit was segmented into homogenous categories. In each category, the flow of future receipts (principal and interest) was calculated. These receipts were discounted by an interest rate reflecting the level of risk inherent in the credit in that category. This interest rate was usually determined according to the interest rate at which similar transactions were executed at the Bank at the reporting date.

The fair value of impaired debts was calculated using discounting interest rates reflecting the high credit risk inherent in such debts. In any case, these discounting rates were not lower than the highest interest rate used by the Bank in its transactions at the reporting date.

Future cash flows for impaired debts and other debts were calculated after the deduction of the effects of charge-offs and of allowances for credit losses in respect of the debts.

Note 8 Balances and fair value estimations of financial instruments (continued)

Charge-offs and allowances for credit losses were attributed to the periods in which the debt was classified, where possible (e.g. when an allowance was calculated on an individual basis according to the current value of a cash flow). In the absence of these data, charge-offs and the allowance are attributed proportionally to the balance of credit, according to the term to maturity at the end of the period.

The fair-value calculation includes assumptions with regard to early repayment of housing credit, according to the estimates of the Bank, based on an examination of historical data on early repayment in relation to the parameters that account for the repayments. These assumptions had the effect of reducing the fair value by NIS 14 million.

Deposits, bonds, and subordinated notes – By discounting future cash flows according to the interest rates at which the corporation raises similar deposits or the Bank issues similar bonds and notes (if a price quoted in an active market is not available) on the reporting date. With regard to bonds and subordinated notes traded as an asset in an active market, fair value is based on quoted market prices or on quotes from traders for an identical liability traded as an asset in an active market.

Inter-client lending – Presented as credit and deposits, and measured according to the value of the loaned securities on the stock market.

Derivative instruments – Derivative financial instruments that have an active market were assessed at the market value established in the primary market. Derivative financial instruments not traded in an active market were assessed on the basis of models used by the Bank in its routine operations, taking into account the risks inherent in the financial instrument.

The measurement of the fair value of derivative instruments takes the credit risk inherent in such transactions into account, among other factors. Estimates of the fair value of assets in respect of derivative instruments also reflect the credit risk of the counterparty, and estimates of the fair value of liabilities in respect of derivative instruments also reflect the credit risk of the Bank.

	Unaudited
	NIS millions
Assets in respect of derivative instruments	9,671
Adjustment in respect of credit risk of assets in respect of derivative instruments	)111(
Liabilities in respect of derivative instruments	12,792
Adjustment in respect of credit risk of liabilities in respect of derivative instruments	)74(

Set out below are data regarding the adjustment of assets and liabilities in respect of derivative instruments, as described above, as at June 30, 2012.

Assets and liabilities for which fair value is measured based on Level 3 data – Items for which fair value is determined based on an indicative price from an independent entity, an indicative price of a counterparty to the transaction, or evaluation models in which some of the significant inputs are unobservable; and items for which fair value is determined based on internal calculators or service bureaus in which some of the inputs are unobservable.

B. Items measured at fair value on a recurrent basis

		as at June 30, 2012
		Fair-value measurements using –
	Prices quoted in an active market (level 1)	Other significant observable inputs (level 2)	Significant unobservable inputs (level 3)	Balance Sheet balance
Assets
Securities available for sale:
Government bonds - Israeli government	23,846	3,649	-	27,495
Government bonds - Foreign governments	1,897	476	-	2,373
Bonds of financial institutions in Israel	163	-	-	163
Bonds of foreign financial institutions	442	818	67	1,327
Bonds of others in Israel	328	334	-	662
Bonds of foreign others	877	190	1	1,068
Asset backed securities (ABS)	-	-	2	2
Tradable shares	815	-	-	815
Securities held for trading:
Government bonds - Israeli government	4,451	-	-	4,451
Government bonds - Foreign governments	78	-	-	78
Bonds of foreign financial institutions	652	-	-	652
Bonds of others in Israel	22	-	-	22
Bonds of foreign others	200	-	-	200
Tradable shares	46	-	-	46
Assets in respect of derivative instruments:
NIS-CPI contracts	-	119	-	119
Other interest contracts	-	6,174	4	6,178
Foreign-currency contracts	61	2,939	15	3,015
Share contracts	168	18	84	270
Commodity and other contracts	-	73	16	89
Credit in respect of inter-customer lending	772	-	-	772
Assets in respect of activity in the Maof market	438	-	-	438
Total Assets	35,256	14,790	189	50,235

B. Items measured at fair value on a recurrent basis (continued)

		as at June 30, 2012
		Fair-value measurements using –
	Prices quoted in an active market (level 1)	Other significant observable inputs (level 2)	Significant unobservable inputs (level 3)
Liabilities
Liabilities in respect of derivative instruments:
NIS-CPI contracts	-	402	-	402
Other interest contracts	-	7,120	3	7,123
Foreign-currency contracts	61	4,881	2	4,944
Share contracts	168	18	53	239
Commodity and other contracts	-	77	7	84
Deposits in respect of inter-customer lending	772	-	-	772
Liabilities in respect of activity in the Maof market	438	-	-	438
Total Liabilities	1,439	12,498	65	14,002

B. Items measured at fair value on a recurrent basis (continued)

		as at June 30, 2011*
		Fair-value measurements using –
	Prices quoted in an active market (level 1)	Other significant observable inputs (level 2)	Significant unobservable inputs (level 3)	Balance Sheet balance
Assets
Securities available for sale:
Government bonds - Israeli government	14,772	2,593	-	17,365
Government bonds - Foreign governments	1,837	368	-	2,205
Bonds of financial institutions in Israel	96	-	-	96
Bonds of foreign financial institutions	1,016	724	90	1,830
Bonds of others in Israel	129	289	-	418
Bonds of foreign others	733	5	-	738
Asset backed securities (ABS)	-	-	229	229
Tradable shares	1,388	-	-	1,388
Securities held for trading:
Government bonds - Israeli government	1,171	-	-	1,171
Government bonds - Foreign governments	38	-	-	38
Bonds of foreign financial institutions	551	-	-	551
Bonds of others in Israel	23	-	-	23
Bonds of foreign others	147	-	-	147
Tradable shares	55	-	-	55
Assets in respect of derivative instruments:
NIS-CPI contracts	-	40	-	40
Other interest contracts	-	3,068	31	3,099
Foreign-currency contracts	43	3,642	32	3,717
Share contracts	189	-	78	267
Commodity and other contracts	-	51	3	54
Credit in respect of inter-customer lending	852	-	-	852
Assets in respect of activity in the Maof market	362	-	-	362
Total Assets	23,402	10,780	463	34,645

* On November 15, 2011, the Supervisor of Banks issued a circular concerning disclosure of investments in securities and description of the business of banking corporations, which established new disclosure requirements regarding securities. Accordingly, the Bank reclassified the data as at June 30, 2011 to match the item headings and presentation method of the current period.

B. Items measured at fair value on a recurrent basis (continued)

		as at June 30, 2011*
		Fair-value measurements using –
	Prices quoted in an active market (level 1)	Other significant observable inputs (level 2)	Significant unobservable inputs (level 3)	Balance Sheet balance
Liabilities
Liabilities in respect of derivative instruments:
NIS-CPI contracts	-	287	-	287
Other interest contracts	-	3,807	43	3,850
Foreign-currency contracts	43	5,600	19	5,662
Share contracts	189	-	61	250
Commodity and other contracts	-	58	1	59
Deposits in respect of inter-customer lending	852	-	-	852
Liabilities in respect of activity in the Maof market	362	-	-	362
Total Liabilities	1,446	9,752	124	11,322

B. Items measured at fair value on a recurrent basis (continued)

	as at December 31, 2011
		Fair-value measurements using –
	Prices quoted in an active market (level 1)	Other significant observable inputs (level 2)	Significant unobservable inputs (level 3)	Balance Sheet balance
Assets
Securities available for sale:
Government bonds - Israeli government	20,658	3,201	-	23,859
Government bonds - Foreign governments	1,714	339	-	2,053
Bonds of financial institutions in Israel	173	-	-	173
Bonds of foreign financial institutions	621	342	63	1,026
Bonds of others in Israel	237	310	-	547
Bonds of foreign others	741	6	-	747
Asset backed securities (ABS)	-	-	7	7
Tradable shares	975	-	-	975
Securities held for trading:
Government bonds - Israeli government	2,924	-	-	2,924
Government bonds - Foreign governments	50	-	-	50
Bonds of financial institutions in Israel	10	-	-	10
Bonds of foreign financial institutions	348	-	-	348
Bonds of others in Israel	27	-	-	27
Bonds of foreign others	181	-	-	181
Tradable shares	52	-	-	52
Assets in respect of derivative instruments:
NIS-CPI contracts	-	93	-	93
Other interest contracts	-	5,483	4	5,487
Foreign-currency contracts	46	4,824	20	4,890
Share contracts	229	2	68	299
Commodity and other contracts	-	147	5	152
Credit in respect of inter-customer lending	880	-	-	880
Assets in respect of activity in the Maof market	590	-	-	590
Total Assets	30,456	14,747	167	45,370

	as at December 31, 2011
		Fair-value measurements using –
	Prices quoted Other significant in an active observable market (level 1) inputs (level 2)		Significant unobservable inputs (level 3)	Balance Sheet balance
Liabilities
Liabilities in respect of derivative instruments:
NIS-CPI contracts	-	373	-	373
Other interest contracts	-	6,547	6	6,553
Foreign-currency contracts	46	6,102	3	6,151
Share contracts	228	4	92	324
Commodity and other contracts	-	159	6	165
Deposits in respect of inter-customer lending	880	-	-	880
Liabilities in respect of activity in the Maof market	590	-	-	590
Total Liabilities	1,744	13,185	107	15,036

B. Items measured at fair value on a recurrent basis (continued)

						For the three months ended June 30, 2012
	Fair value as at March 31, 2012	Profits (losses) included in statement of profit and loss(1)(3)	Profits (losses) included in equity(2)			Acquisitions Issuance Extinguishment Fair value	as at June 30, 2012	Unrealized profits (losses) in respect of instruments held as at June 30, 2012
Assets
Securities available for sale:
Bonds of foreign financial institutions	65	-	2	-	-	-	67	)2()1( 2
Bonds of foreign others	-	-	1	-	-	-	1	)2()1( 1
Asset backed securities (ABS)	2	-	-	-	-	-	2	)2()1( -
Net balances in respect of derivative instruments:
Other interest contracts	)3(	4	-	-	-	-	1	)3( 3
Foreign-currency contracts	17	)4(	-	-	-	-	13	)3( )4(
Share contracts	28	5	-	2	)2(	)2(	31	)3( 3
Commodity and other contracts	2	7	-	-	-	-	9	)3( 7
Total	111	12	3	2	)2(	)2(	124	12

C. Changes in items measured at fair value on a recurrent basis included in level 3
-------------------------------------------------------------------------------------	--	--

(1) Profits (losses) are included in the statement of profit and loss, under the item "Interest income".

(2) Profits (losses) are included in equity, under the item "adjustments in respect of the presentation of securities available for sale at fair value".

(3) Profits (losses) are included in the statement of profit and loss, under the item "Non-interest financing income".

						For the three months ended June 30, 2011*
	Fair value as at March 31, 2011	Profits (losses) included in statement of profit and loss(1)(3)	Profits (losses) included in equity(2)			Acquisitions Issuance Extinguishment Fair value	as at June 30, 2011	Unrealized profits (losses) in respect of instruments held as at June 30, 2011
Assets
Securities available for sale:
Bonds of foreign financial institutions	240	7	2	-	-	)159(	90	)2()1( 8
Asset backed securities (ABS)	269	)7(	1	-	-	)34(	229	)2()1( )6(
Net balances in respect of derivative instruments:
Other interest contracts	)11(	7	-	33	)45(	4	)12(	)3( 7
Foreign-currency contracts	12	1	-	-	-	-	13	)3( 1
Share contracts	19	)7(	-	11	)13(	7	17	)3( )7(
Commodity and other contracts	)3(	7	-	-	)2(	-	2	)3( 7
Total	526	8	3	44	)60(	)182(	339	10

C. Changes in items measured at fair value on a recurrent basis included in level 3 (continued)
-------------------------------------------------------------------------------------------------	--

* Restated.

(1) Profits (losses) are included in the statement of profit and loss, under the item "Interest income".

(2) Profits (losses) are included in equity, under the item "adjustments in respect of the presentation of securities available for sale at fair value".

(3) Profits (losses) are included in the statement of profit and loss under the item "Non-interest financing income".

						For the six months ended June 30, 2012
	Fair value as at Dec. 31, 2011	Profits (losses) included in statement of profit and loss(1)(3)	Profits (losses) included in equity(2)			Acquisitions Issuance Extinguishment Fair value	as at June 30, 2012	Unrealized profits (losses) in respect of instruments held as at June 30, 2012
Assets
Securities available for sale:
Bonds of foreign financial institutions	63	1	3	-	-	-	67	)2()1( 3
Bonds of foreign others	-	-	1	-	-	-	1	)2()1( 1
Asset backed securities (ABS)	7	-	-	-	-	)5(	2	)2()1( -
Net balances in respect of derivative instruments:
Other interest contracts	)2(	1	-	-	-	2	1	)3( 1
Foreign-currency contracts	17	)4(	-	-	-	-	13	)3( )4(
Share contracts	)24(	56	-	4	)4(	)1(	31	)3( 10
Commodity and other contracts	)1(	10	-	-	-	-	9	)3( 10
Total	60	64	4	4	)4(	)4(	124	21

C. Changes in items measured at fair value on a recurrent basis included in level 3 (continued)
-------------------------------------------------------------------------------------------------	--	--

(1) Profits (losses) are included in the statement of profit and loss, under the item "Interest income".

(2) Profits (losses) are included in equity, under the item "adjustments in respect of the presentation of securities available for sale at fair value".

(3) Profits (losses) are included in the statement of profit and loss, under the item "Non-interest financing income".

				For the six months ended June 30, 2011*
	Fair value as at	Profits (losses)	Profits (losses)			Acquisitions Issuance Extinguishment Fair value	as at	Unrealized profits (losses)
	Dec. 31, 2010	included in statement of profit and loss(1)(3)	included in equity(2)				June 30, 2011	in respect of instruments held as at June 30, 2011
Assets
Securities available for sale:
Bonds of foreign financial institutions	242	4	3	-	-	)159(	90	)2()1( 6
Bonds of others in Israel	*105	)1(	-	-	-	)104(	-	)2()1( -
Asset backed securities (ABS)	262	)12(	14	-	-	)35(	229	)2()1( -
Net balances in respect of derivative instruments:
Other interest contracts	)4(	4	-	33	)45(	-	)12(	)3( 8
Foreign-currency contracts	12	-	-	-	1	-	13	)3( -
Share contracts	10	)4(	-	11	)7(	7	17	)3( )7(
Commodity and other contracts	)1(	5	-	-	)2(	-	2	)3( 5
Total	*626	)4(	17	44	)53(	)291(	339	12

C. Changes in items measured at fair value on a recurrent basis included in level 3 (continued)
-------------------------------------------------------------------------------------------------	--	--

* Restated.

(1) Profits (losses) are included in the statement of profit and loss, under the item "Interest income".

(2) Profits (losses) are included in equity, under the item "adjustments in respect of the presentation of securities available for sale at fair value".

(3) Profits (losses) are included in the statement of profit and loss under the item "Non-interest financing income".

D. During the period, there were no transfers of items measured at fair value from Level 2 measurement to Level 1 measurement.

			as at June 30, 2012
		Fair-value measurements using –
	Prices quoted in an active market (level 1)	Other significant observable inputs (level 2)	Significant unobservable inputs (level 3)		Total fair value Balance Sheet balance
Assets measured at fair value on a nonrecurrent basis
Investments in Shares	-	-	13	13	13
Other Assets and Liabilities
Assets:
Cash on hand and deposits with banks	2,128	-	51,613	53,741	53,751
Securities	-	-	1,421	1,421	1,361
Credit to the public, net	-	-	249,419	249,419	247,842
Credit to government	-	-	886	886	884
Other	-	-	1,084	1,084	1,085
Total assets	2,128	-	304,423	306,551	304,923
Liabilities:
Deposits from the public	-	-	260,981	260,981	258,896
Deposits from banks	-	-	6,592	6,592	6,434
Deposits from the Government	-	-	955	955	883
Securities which were lent or sold under agreements to repurchase	-	-	1,116	1,116	1,116
Bonds and subordinated notes	32,645	-	5,372	38,017	35,679
Other	-	-	15,737	15,737	15,796
Total Liabilities	32,645	-	290,753	323,398	318,804

E. Items measured at fair value on a nonrecurrent basis and other items*

* Items not measured at fair value in the balance sheet, but in respect of which disclosure of fair value is given.

F. Additional information regarding significant unobservable inputs and assessment techniques used in the measurement of the fair value of items classified as Level 3

			as at June 30, 2012
	Fair value	Assessment technique	Unobservable inputs	Range (weighted average)
Assets
Securities:
Investment in shares(1):			Weighted average
		Discounted	cost of capital
	13	Cash Flow	(WACC)	14.6%
Net balances in respect
of derivative instruments:
Foreign-currency contracts(2)			Unlinked NIS
	13	Option pricing model	interest rate	1.30%-5.59% )3.16%(
Share contracts(3)	9	Option pricing model	Standard deviation	25.25%-64.46% )34.59%(
			Dividend yield	2.00%-10.56% (2.08%)
			Unlinked NIS
			interest rate	4.43%-4.69% (4.49%)
Sensitivity analysis of fair value measurements classified as Level 3:

(1) An increase (decrease) in the rate of return on equity would lead to a higher (lower) fair value measurement.

(2) An increase (decrease) in the discounting interest rate would lead to a significantly lower (higher) fair value measurement.

(3) An increase (decrease) in the standard deviation would lead to a significantly higher (lower) fair value measurement. Conversely, an increase (decrease) in the dividend yield or in the discounting interest rate would lead to a significantly lower (higher) fair value measurement.

Note 9 Interest income and expenses

	For the three months ended June 30		For the six months ended June 30
	2012	2011*	2012	2011*
A Interest income**
From credit to the public	3,600	3,626	6,520	6,754
From credit to governments	5	2	9	4
From deposits with banks	30	25	50	45
From deposits with Bank of Israel and from cash	159	208	319	360
From securities which were borrowed or bought under agreements to resell	-	1	-	1
From bonds	345	242	615	483
From other assets	7	6	7	8
Total interest income	4,146	4,110	7,520	7,655
B. Interest expenses**
On deposits from the public	)1,218(	)1,297(	)2,202(	)2,275(
On deposits from the Government	)16(	)21(	)23(	)39(
On deposits from banks	)52(	)81(	)102(	)143(
On securities which were lent or sold under agreements to repurchase	)6(	)1(	)11(	)1(
On bonds and subordinated notes	)708(	)630(	)1,074(	)1,150(
On other liabilities	-	)5(	-	)4(
Total interest expenses	)2,000(	)2,035(	)3,412(	)3,612(
Total interest income, net	2,146	2,075	4,108	4,043
C. Details of net effect of hedging derivative instruments on interest income and expenses***
Interest income	)160(	)139(	)123(	)122(
Interest expenses	)4(	229	4	221
D. Details of interest income from bonds on a cumulative basis
Held to maturity	20	23	32	39
Available for sale	299	211	532	433
Held for trading	26	8	51	11
Total included in interest income	345	242	615	483

** Including effective component in hedging relations.

*** Details of effect of hedging derivative instruments on subsections (A) and (B).

Note 10 Non-Interest Financing Income

A. Non-interest financing income (expenses) in respect of non-trading activities

		For the three months ended June 30		For the six months ended June 30
	2012	2011*	2012	2011*
1. From activity in derivative instruments
Non-effective part of hedging ratios (see C below)(1)	13	5	21	4
Net income (expenses) in respect of ALM derivative instruments(2)	292	)474(	243	)272(
Total from activity in derivative instruments	305	)469(	264	)268(
2. From investment in bonds
Profits from sale of bonds available for sale	57	4	117	21
Losses from sale of bonds available for sale(3)	)10(	)17(	)14(	)26(
Total from investment in bonds	47	)13(	103	)5(
3. Net exchange differences	)470(	434	)356(	399
4. Profits (losses) from investment in shares
Profits from sale of shares available for sale	21	29	76	40
Losses from sale of shares available for sale(4)	)48(	)4(	)52(	)4(
Dividend from shares available for sale	30	21	30	31
Total from investment in shares	3	46	54	67
Total non-interest financing income (expenses) in respect of non-trading activities	)115(	)2(	65	193

(1) Excluding the effective component of hedging ratios.

(2) Derivative instruments constituting part of the asset and liability management network of the Bank, which are not designated for hedging ratios.

(3) Including a provision for other-than-temporary impairment in the amount of NIS 7 million for the three-month and six-month periods ended June 30, 2012 (NIS 5 million for the same periods ended June 30, 2011).

(4) Including a provision for other-than-temporary impairment.

Note 10 Non-Interest Financing Income (continued)

B. Non-interest financing income in respect of trading activities**

		For the three months ended June 30		For the six months ended June 30
	2012	2011*	2012	2011*
Net income in respect of other derivative instruments	1	8	9	16
Net realized and unrealized profits from adjustments to fair value of bonds held for trading(1)	12	6	5	4
Net realized and unrealized profits (losses) from adjustments to fair value of shares held for trading(2)	)2(	4	2	5
Dividends received from shares held for trading	)1(	-	-	-
Total non-interest financing income from trading activities***	10	18	16	25
Total non-interest financing income (expenses)	)105(	16	81	218
Details of non-interest financing income in respect of trading activities, by risk exposure
Interest-rate exposure	12	6	6	4
Foreign-currency exposure	1	1	1	2
Share exposure	)3(	11	9	19
Total	10	18	16	25
C. Non-effective part of hedging ratios – further details****
1. Fair value hedges
Non-effectiveness of hedges Profit component in respect of derivative instruments excluded for the evaluation of the effectiveness of the hedge	3 -	5 -	2 1	4 -
2. Cash flow hedges
Profit (loss) component in respect of derivative instruments excluded for the evaluation of the effectiveness of the hedge	10	-	18	-
Total	13	5	21	4

** Includes exchange differences arising from trading activity.

*** With regard to interest income from investment in bonds held for trading, see Note 9.

**** For a disclosure of the net effect of hedging derivative instruments on interest income and expenses, see Note 9.

(1) Of which, the part of profits (losses) associated with bonds held for trading still held at the balance sheet date, in the amount of approximately NIS (5) million (June 30, 2011: NIS 11 million).

(2) Of which, the part of profits associated with shares held for trading still held at the balance sheet date, in the amount of approximately NIS 0 million (June 30, 2011: NIS 1 million).

					For the three months ended June 30, 2012
	Household Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Financial Management Segment	Others and Adjustments	Total
Net interest income:
- From externals	1,005	)229(	312	318	1,044	)304(	-	2,146
- Inter-segmental	)447(	540	)27(	)131(	)454(	519	-	-
Non-interest income:
- From externals	310	386	152	66	193	)93(	147	1,161
- Inter-segmental	)11(	)49(	)14(	)8(	2	-	80	-
Total income	857	648	423	245	785	122	227	3,307
Provision for credit losses	86	12	56	13	177	-	-	344
Net profit (loss) attributed to shareholders of the Bank	72	64	89	74	240	72	)4(	607
Return on equity (percent net profit attributed to shareholders of the Bank out of average equity)	8.5%	15.0%	17.9%	11.7%	8.9%	10.4%		10.2%

Note 11 Operating Segments

	For the six months ended June 30, 2012
	Household Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Financial Management Segment	Others and Adjustments	Total
Net interest income:
- From externals	1,729	)484(	618	606	1,860	)221(	-	4,108
- Inter-segmental	)614(	1,110	)52(	)242(	)737(	535	-	-
Non-interest income:
- From externals	619	773	311	141	443	65	302	2,654
- Inter-segmental	)25(	)98(	)28(	)16(	-	-	167	-
Total income	1,709	1,301	849	489	1,566	379	469	6,762
Provision for credit losses	129	15	70	51	382	-	-	647
Net profit (loss) attributed to shareholders of the Bank	179	155	210	139	462	134	)13(	1,266
Return on equity (percent net profit attributed to shareholders of the Bank out of average equity)	10.7%	18.4%	21.3%	11.0%	8.6%	9.0%		10.6%

Total

Others and Adjustments

	For the three months ended June 30, 2011*
Household	Private	Small	Commercial	Corporate	Financial
Segment	Banking	Business	Segment	Segment	Management
	Segment	Segment			Segment

Note 11 Operating Segments (continued)

Net interest income:
- From externals	979	)204(	313	319	932	)264(	-	2,075
- Inter-segmental	)394(	522	)39(	)133(	)413(	457	-	-
Non-interest income:
- From externals	316	385	154	65	204	)2(	170	1,292
- Inter-segmental	)18(	)47(	)16(	)7(	1	-	87	-
Total income	883	656	412	244	724	191	257	3,367
Provision for credit losses	55	22	54	11	185	-	-	327
Net profit attributed to shareholders of the Bank	133	79	92	91	232	80	5	712
Return on equity (percent net profit attributed to shareholders of the Bank out of average equity)**	16.9%	19.1%	20.4%	15.7%	9.0%	18.0%		13.2%

	For the six months ended June 30, 2011*
	Household Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Financial Management Segment	Others and Adjustments	Total
Net interest income:
- From externals	1,681	)407(	578	596	1,714	)119(	-	4,043
- Inter-segmental	)552(	1,014	)44(	)250(	)724(	556	-	-
Non-interest income:
- From externals	623	792	312	131	480	164	350	2,852
- Inter-segmental	)34(	)105(	)32(	)13(	-	-	184	-
Total income	1,718	1,294	814	464	1,470	601	534	6,895
Provision for credit losses	139	45	62	65	30	-	-	341
Net profit attributed to shareholders of the Bank	186	131	191	132	681	265	17	1,603
Return on equity (percent net profit attributed to shareholders of the Bank out
of average equity)**	11.2%	17.4%	20.3%	11.8%	13.9%	22.2%		14.8%

** Reclassified.

				For the year ended December 31, 2011*
	Household Segment	Private Banking Segment	Small Business Segment	Commercial Segment	Corporate Segment	Financial Management Segment	Others and Adjustments	Total
Net interest income:
- From externals	3,390	)811(	1,150	1,198	3,848	)678(	-	8,097
- Inter-segmental	)1,128(	2,080	)29(	)497(	)1,815(	1,389	-	-
Non-interest income:
- From externals	1,263	1,559	632	263	903	)319(	690	4,991
- Inter-segmental	)68(	)209(	)62(	)25(	)1(	-	365	-
Total income	3,457	2,619	1,691	939	2,935	392	1,055	13,088
Provision for credit losses	268	57	124	130	623	-	-	1,202
Net profit attributed to shareholders of the Bank	340	299	433	268	961	118	327	2,746
Return on equity (percent net profit attributed to shareholders of the Bank out of average equity)	10.0%	18.5%	21.7%	11.1%	9.0%	5.5%		12.0%

Note 11 Operating Segments (continued)

Note 12 Officers' Salaries

Irit Izakson (who serves as a director of the Bank) serves as Acting Chairperson of the Board of Directors of Isracard Ltd. and of Europay (Eurocard) Israel Ltd. (hereinafter: "Chairperson of Isracard") as of October 1, 2008, and also serves as Acting Chairperson of the Board of Directors of Aminit Ltd. and of Poalim Express Ltd. as of January 1, 2009. The appointment of the Chairperson of Isracard was for a term of three years and three months, which ended on December 31, 2011.

On January 25, 2012, further to approval by the Wage and Remuneration Committee and the Audit Committee of Isracard, and by the Supervisor of Banks, the Board of Directors of Isracard approved the extension of Ms. Izakson's term of service until December 31, 2013. On April 30, 2012, further to approval by the Wage and Remuneration Committee and the Audit Committee of Isracard, the Board of Directors of Isracard approved a new employment agreement with the Chairperson of Isracard (hereinafter: the "Employment Agreement"). The Employment Agreement was approved by the Human Resources - Salaries and Remuneration Committee, the Audit Committee, and the Board of Directors of the Bank. The Employment Agreement is subject to approval by the general meeting of shareholders of Isracard and by the general meeting of the Bank.

The Employment Agreement covers a period of three years, beginning January 1, 2012, and ending December 31, 2014. The continued contractual engagement with the Chairperson of Isracard in the third year of the agreement (2014) is subject to approval by the Supervisor of Banks. Notwithstanding the aforesaid, the parties are entitled to terminate the contractual engagement pursuant to the Employment Agreement, at any time, with a 90 day advance notice in writing. In the event that the Supervisor of Banks does not approve the continued service of Ms. Izakson as Chairperson of the Board of Directors of Isracard, the contractual engagement shall be considered terminated; if her employment is terminated at the initiative of Isracard, or at her initiative under circumstances that entitle her to severance pay according to law, the Chairperson of Isracard shall be entitled to receive the full supplement of the amount of severance pay to 250% of her last salary, if the amount of severance pay accumulated in the provident funds is lower. The Chairperson of Isracard will be entitled to a monthly salary in a total amount of NIS 92,126, linked to the CPI for December 2011 (to be paid from the inception date of the Employment Agreement, i.e. beginning January 1, 2012). The Employment Agreement also includes related terms, such as a vehicle, telephone, etc., and employer contributions to compensation (including disability), severance pay, and a study fund.

The Chairperson of Isracard shall also be entitled to an annual bonus, in accordance with a bonus plan essentially similar to the bonus plan for senior executives at Isracard (which is structured based on the bonus plan for senior executives at the Bank) (hereinafter: the "Bonus Plan"). The annual bonus to be paid to the Chairperson of Isracard, inasmuch as is paid, shall be derived from the difference between the aggregate annual net operating profit of the Isracard Group and the threshold profit for remuneration established in the Bonus Plan (under certain conditions, the threshold profit for remuneration will be updated by the Board of Directors of Isracard, subject to approval by the organs of the Bank as required by law). Part of the annual bonus will be determined according to a personal score to be assigned to the Chairperson of Isracard each year, based on achievement of objectives. The payment of the annual bonus amount is spread over several years. In addition, a negative bonus amount may be established in years in which the aggregate annual net operating profit of the Isracard Group is lower than the threshold profit for remuneration established in the Bonus Plan. In any event, pursuant to the Bonus Plan, the amount of the positive annual bonus for the Chairperson of Isracard in any given year shall not exceed 18 monthly salaries of the Chairperson of Isracard, while the amount of the negative annual bonus in any given year shall not exceed 10 monthly salaries of the Chairperson of Isracard.

Note 12 Officers' Salaries (continued)

In addition, the Chairperson of Isracard shall be entitled to Restricted Share Units ("RSU"), exercisable into shares of the Bank, as follows: 161,241 ordinary RSU and 51,000 contingent RSU, under the terms detailed in the "Secondary Plan for the Grant of Restricted Stock Units (RSU) to Senior Executives 2011" of the Bank (hereinafter: the "Remuneration Plan of the Bank") (for further details, see Note 16 to the Annual Financial Statements for 2011).

Isracard has undertaken a commitment to compensate the Bank for the cost arising from the RSU granted by the Bank to the Chairperson of Isracard.

On April 29, 2012, April 30, 2012, and May 3, 2012, respectively, the Wage and Remuneration Committee, the Audit Committee, and the Board of Directors of Isracard approved the exercise of the options granted to the Chairperson of Isracard under her former employment agreement, ended on December 31, 2011, which had vested in full, using the net exercise method. Accordingly, the Chairperson of Isracard will be allocated ordinary shares of Isracard, which will be sold to Isracard, subject to approval by the Supervisor of Banks. In the event that such approval is not granted by the Supervisor of Banks, the Bank has undertaken a commitment to purchase the aforesaid shares, at the same terms. After the Bank was notified that the Supervisor of Banks had not approved the acquisition of the shares by Isracard, the shares were acquired by the Bank. The purchase of the shares is on a total amount of approximately NIS 3,512 thousand (before deduction of applicable tax), established based on an assessment by an external assessor. The aforesaid exercise of options and sale of shares were approved by the Human Resources, Salaries, and Remuneration Committee, the Audit Committee, the Board of Directors, and the meeting of shareholders of the Bank.

Note 13 Events after the Balance Sheet Date

A. Change in Rate of Value Added Tax

The Value Added Tax Order issued on August 2, 2012, amends the rate of value-added tax in respect of transactions and imports of goods to 17% as of September 1, 2012.

On August 1, 2012, the Knesset Finance Committee approved an increase in wage tax and in profit tax, as of September 1, 2012, to 17%; The increase was approved by the Knesset plenum on August 6, 2012.

The Bank is defined as a financial institution for the purposes of the Value Added Tax Law, which imposes wage tax and profit tax on such institutions. Accordingly, the provision for income taxes includes income tax in accordance with the Income Tax Ordinance and profit tax in accordance with the Value Added Tax Law.

The effects of the change in tax rates described above will be reflected in the financial statements for the third quarter of 2012.

As a result of the aforesaid change, the statutory tax rate applicable to the Bank will rise from 35.34% to 35.53% in 2012, and 35.9% from 2013 forward. In addition, the rate of wage tax applicable to the Bank will rise to 17% for wages paid from September 2012 forward, instead of 16% for 2012 and 15.5% from 2013 forward.

The expected effect is an increase in the balance of deferred taxes in the amount of approximately NIS 50 million, and an increase in the balance of the liability for employee benefits in the amount of approximately NIS 37 million, before related tax effects.

Note 13 Change in Rate of Value Added Tax (continued)

B. Change in Rate of National Insurance Fees

The Law for Reduction of the Deficit and Change of the Tax Burden (Legislative Amendments), 2012 (hereinafter: "the Law") was issued on August 9, 2012. Pursuant to the Law, as of January 2013, the rate of National Insurance fees collected from employers in respect of the component of wages exceeding 60% of the average wage in Israel will rise from the current 5.9% to 6.5%. This rate will increase again in January 2014 and January 2015, to 7% and 7.5% respectively. The effect of this change on the balance of the liability for employee benefits is immaterial.

Note 14 The Committee for Competition

The goal of the committee, as defined in its letter of appointment, is to examine and recommend means and measures for the increase of competition in the Israeli banking market. The committee will consider various means of simplifying banking products, enhancing customers' bargaining power, and improving the quality and sophistication of credit data services for the households and small business sectors.

The recommendations of the committee, as published in an interim report on July 16, 2012, include, among other matters, measures aimed at changing the structure and pricing of fees; supervision of prices and increased enforcement; and changing the structure of the various aspects of the industry, such as by increasing the number of competitors in the industry, diversifying the nature of occupation of the competitors, and reducing the size of competitors, by reducing and removing barriers to transfers and information between players within the banking system and by increasing competition with competitors outside this system.

AI assistant

ASM International N.V. — Interim / Quarterly Report 2012

3812_rns_2012-06-30_fe388ce3-8aef-47f5-9c3f-dc4c5ccf6c73.pdf

Bank Hapoalim Condensed Financial Statement as at June 30, h2012

Contents

Board of Directors' Report As at June 30, 2012

Description of the General Development of the Bank Group's Business

Activities of the Bank Group and Description of the Development of its Business Development of the Bank Group's Business

Principal Data of the Bank Hapoalim Group

Principal Data of the Bank Hapoalim Group (continued)

Forward-Looking Information

Investments in the Capital of the Bank and Transactions in its Shares

Changes in the capital of the Bank from January 1, 2012, to near the date of publication of the financial statements:

Buybacks of Shares of the Bank

Dividend Distribution

Capital and Capital Adequacy

Capital Adequacy Target

Ratings of the Bank

Economic and Financial Review

Developments in the Global Economy

Economic Activity in Israel

Inflation and Exchange Rates

Fiscal and Monetary Policy

Financial and Capital Markets

Accounting Policies on Critical Matters

Liabilities for Employee Benefits

Disclosure Regarding the Procedure for Approval of the Financial Statements

Profit and Profitability

Developments in Income and Expenses

Net financing profit:

Composition and Development of the Bank Group's Assets and Liabilities

Net Credit to the Public

Net credit to the public by segment of activity:

Volume of Problematic Debt

Development of amounts in arrears in housing loans and allowance for credit losses (excluding the collective allowance)*

Risk Quantification and Measurement – Housing Credit Execution

Housing loan data – percentage of total new loans executed

Risk Quantification and Measurement – Housing Credit Portfolio

Monthly Discussion of Housing Credit Risks

Overall Credit Risk to the Public

Construction and Real Estate

Credit Risk in Respect of Exposure to Borrower Groups

Information Regarding Problematic Debts for the Measurement and Disclosure of Impaired Debts, Credit Risk, and Allowance for Credit Losses

B. Problematic credit risk

Note:

Nonperforming Assets

F. Risk indices:

Cash on Hand and Deposits with Banks

Securities

Investments in Bonds in the Available-for-Sale Portfolio and in the Trading Portfolio

Bonds of corporations, other than banks and financial institutions, by economic sector:

Investments in Shares

Deposits

Description of the Bank Group's Business by Segments of Activity

Condensed Financial Information on Segments of Activity

A. Net Profit Attributed to Shareholders of the Bank

B. Net Credit to the Public by Segment of Activity

Off-Balance sheet Activity

The Households Segment

General and Segment Structure

Principal Changes in Net Profit and Balance sheet Balances

Regulatory Changes Concerning Housing Loans

Technological Changes that May Have a Material Impact on the Segment

The Committee on Competition

Legal Proceedings

The Private Banking Segment

Developments in the Segment's Markets or Changes in the Profile of its Customers

Principal Changes in Net Profit and Balance sheet Balances

Technological Changes that May Have a Material Impact on the Segment

The Committee on Competition

Legal Proceedings

The Small Business Segment

Principal Changes in Net Profit and Balance sheet Balances

Activities

The Committee on Competition

Legal Proceedings

The Commercial Segment

Principal Changes in Net Profit and Balance Sheet Balances

Legal Proceedings

The Corporate Segment

ASM International N.V. Interim / Quarterly Report 2012