By Steven Scheer

JERUSALEM Bank Leumi, Israel's largest lender, reported a slight dip in third-quarter net profit as its provisions against loan defaults jumped tenfold due to the Israel-Hamas war that has raised economic concerns.

Leumi also trimmed its dividend payout to 20% of net income - or 353 million shekels in the quarter - from a prior 30% after Israel's banking regulator told banks to be more conservative on dividends, while also pausing its share buyback programme after buying back 600 million shekels of shares out of a planned 800 million.

"We understand that financial statements which reflect financial stability and the bank's robustness - especially during wartime - are highly significant," said Chairman Shmuel Ben Zvi.

Leumi said on Wednesday it earned 1.77 billion shekels ($482 million) in the July-September period, versus 1.78 billion a year earlier. Net interest income rose 15% to 3.94 billion shekels, helped by steep Bank of Israel rate increases to fight inflation.

Its loan loss expense jumped to 991 million shekels from 99 million a year ago after Israel's banking regulator asked banks to bring forward higher loan loss provisions to their third-quarter results despite the war breaking out at the start of the fourth quarter.

The central bank also told banks to remain conservative when issuing dividends, and to provide credit while the country was at war and the economy was set to slow.

Leumi said that since the war broke out on Oct. 7 it has offered relief to customers impacted in the form of a full exemption from mortgage payments, exemption from loan repayments for retail customers and small businesses, aid funds, exemption of fees and donations totalling 560 million shekels.

As part of plans to move its headquarters, Leumi agreed to sell two buildings in Tel Aviv that will generate a pre-tax capital gain of about 800 million shekels in the first quarter of 2024, once the transition has been completed.

Earlier this month, rival Hapoalim reported lower quarterly profit due to higher provisions, while earlier on Wednesday, smaller rival First International Bank of Israel (FIBI) reported a dip in quarterly profit for the same reason.

Leumi's credit portfolio has risen 8.4% so far this year while its Tier 1 capital ratio fell to 11.3% in the third quarter from 11.41% a year ago.

Its shares were up 2.9% at midday in Tel Aviv.

($1 = 3.6710 shekels)

(Reporting by Steven Scheer; Editing by Bernadette Baum)