FIBI in the first quarter: profit softened, and value is still held at the holding layer

The first quarter of 2026 did not change the basic read on FIBI: it still holds a strong banking asset through First International Bank, but its own shareholders still do not receive the full value created inside the bank. Net profit attributable to FIBI shareholders fell to NIS 231 million, down 9.4%, mainly because funding margins weakened, not because credit quality broke. At the same time, the bank kept growing credit, especially to large businesses and institutional borrowers, but that growth is already visible on the other side of the balance sheet: cash and bank deposits fell, public deposits fell, and bonds and subordinated notes rose sharply. The quarter therefore sharpens two tests at once: whether the bank can keep double-digit return on equity while spreads compress, and whether the holding layer opens through a merger or resumes distributions. Cal can still add a capital event, but that story became messier too: the expected net gain for the bank is capped at about NIS 113 million, the El Al frequent-flyer club exercised an early exit right, and new VAT assessments left an unprovided exposure. The next proof point is a combination of stabilized funding margins, credit quality that holds after fast growth, a clear decision on the merger or payout policy, and a cleaner closing path for Cal.

FIBI Is A Control Layer Above A Profitable Bank

FIBI is not an operating bank story in itself. It is a holding layer that owns about 48.35% of First International Bank, so the economic question passes through three filters: how much the bank earns, how much it can distribute, and how much actually reaches FIBI shareholders. That is why this quarterly report matters after the prior discussion of trapped value at the holding layer and the separate analysis of the possible FIBI and First International merger.

At the bank level, the picture is still strong. The bank posted net profit of NIS 480 million in the first quarter, and FIBI recorded a NIS 230 million contribution from it. Bank ROE fell to 13.2%, compared with 15.7% in the parallel quarter and 16.2% for full-year 2025, but that is still a double-digit return with no immediate sign of a credit-quality break. The problem is not a dramatic deterioration in the banking asset. It is that the mechanism that turns that asset into value for public shareholders is still stuck between payout, merger and waiting.

The distribution policy makes the friction visible. In May 2026, the bank board approved a dividend of about NIS 240 million, around 50% of first-quarter net profit. FIBI's share should be about NIS 116 million. But the holding company itself has no dividend policy, and it decided not to distribute now because of the February 2026 approach to the bank regarding merger talks. For investors, this is the active bottleneck: the bank distributes, but the value still does not travel all the way to the public-shareholder layer.

Profit Fell Because Spreads Weakened, Not Because Credit Broke

The profit decline does not come from one line item. Net interest income fell to NIS 1.09 billion, down 5.5%, and financing profit from routine activity fell 7%. The ratio of net interest income to interest-bearing assets fell to 1.84%, from 2.09% in the parallel quarter. The bank attributes the pressure to the quarterly decline in CPI, weaker credit spreads and weaker deposit spreads. The surplus of CPI-linked assets declined from about NIS 9.5 billion at the end of March 2025 to about NIS 6.6 billion at the end of March 2026, and the CPI effect that helped last year became a small drag this quarter.

The mitigating point is that credit did not deteriorate with earnings. Credit-loss expense was zero, because an NIS 11 million group provision was fully offset by recoveries and reversals of specific provisions. Problematic credit declined to 0.90% of total credit, compared with 0.97% at year-end 2025 and 1.26% in the parallel quarter. Loans that are non-accrual or more than 90 days past due also declined to 0.42% of credit, from 0.46% at year-end 2025.

That distinction matters. Current credit quality still supports the bank, but earnings quality now depends less on generous interest spreads and more on activity volume, fees and expense control. Fees rose 9.2%, mainly because securities and capital-market fees rose 18.4%, but that does not fully replace a weaker deposit spread. In the next quarters, the market will focus less on whether the bank remains profitable and more on whether it can stabilize funding margins without taking more credit risk.

Credit Growth Is Already Changing The Balance Sheet

The important balance-sheet number is not credit growth alone. Net credit to the public rose 4.9% in one quarter and 16.3% from March 2025, while public deposits fell 2.9% from year-end 2025 and cash and deposits at banks fell 15.6%. Bonds and subordinated notes rose 41.7%, partly after about NIS 2.8 billion of issuance during the quarter. This is not a distress signal, but it does mean that growth is moving through a balance sheet that needs more funding and more capital.

The growth is not evenly spread. Credit to large businesses rose 9% during the quarter and 29.2% from the parallel quarter. Credit to institutional borrowers rose 35.9% in the quarter and 186.1% from March 2025, albeit from a smaller base. By sector, financial services and holding companies already account for 23.6% of public credit risk, while real estate and construction account for another 16.2%. The list of the six largest borrowers is still heavily tilted toward financial services, but this quarter it also includes a real estate and construction borrower with exposure after permitted deductions of about NIS 1.83 billion.

Liquidity ratios are still far from shortage. The liquidity coverage ratio was 129%, and the net stable funding ratio was 122%, both above the 100% requirement. The bank's CET1 ratio, 10.82%, is also above its normal-business target of 9.50% and the regulatory requirement of 9.24%. Still, the direction matters: CET1 declined from 11.10% at year-end 2025, the net stable funding ratio fell from 127%, and the public-deposit-to-credit ratio fell to 150.9% from 162.9%. Fast credit growth is positive only if it comes without further margin erosion, without a rise in problematic credit and without excessive consumption of capital buffers.

Cal Adds Capital Potential, But Also More Conditions

Cal was supposed to be a relatively straightforward event: the sale of the bank's stake in the credit-card company could create a capital gain and strengthen capital. The first quarter made that picture less comfortable. The bank owns 28.2% of Cal's equity and 21% of voting rights, and its pre-tax share of Cal profit fell to NIS 20.8 million, compared with NIS 24.6 million in the parallel quarter. If the sale closes, the bank expects to record an after-tax net gain of up to about NIS 113 million, plus a possible future gain of up to NIS 52 million linked to contingent consideration.

But there are more conditions here than a capital-gain headline suggests. The transaction between Discount, Union and Harel still depends on permits and approvals, including the Competition Authority and the Supervisor of Banks. If all available extensions are used, the final completion deadline can reach 1 November 2026. At the same time, Cal's own business received a new friction point: the El Al frequent-flyer club notified Cal in March 2026 that it will exercise its early exit right at the end of 2026. Club customers held about 381,000 active cards, about 9.3% of Cal active cards, and their share of Diners activity is described as very material.

The legal note adds another layer. Cal faces claims with reasonably possible exposure estimated at about NIS 228 million, and new VAT assessments for 2023-2025 of NIS 220 million, or NIS 251 million including interest and linkage. Beyond provisions already recorded, Cal estimates additional unprovided exposure of about NIS 221 million. For FIBI, this does not mean Cal must become a negative event. It means the path from an accounting gain inside the bank to value available to FIBI shareholders still passes through approvals, closing, tax, an anchor customer and legal risk.

Conclusion

The first quarter leaves FIBI in a mixed but clearer position. Its core asset remains profitable, distributing cash and showing reasonable credit quality, so this is not a broken banking story. On the other hand, profit no longer enjoys the same interest-margin tailwind, credit growth is starting to consume liquidity and capital, and shareholder value still depends on an unresolved structural decision: a merger with the bank or a return to direct distributions.

Over the next two to four quarters, the test is practical. At the bank, deposit spreads need to stabilize and growth in large businesses, institutional credit and real estate needs to avoid turning into a rise in problematic credit. At FIBI, the merger needs to advance toward terms, an exchange ratio, a tax ruling and a Bank of Israel permit, or the board needs to release cash again to shareholders. At Cal, investors need to see an actual transaction closing, more clarity on the El Al club exit and a fuller picture of the VAT exposure. Until then, the quarter says one clear thing: the bank is still creating value, but the route for FIBI shareholders to receive it has not yet opened.