(Adds analyst comments, details, background)
By Tova Cohen
TEL AVIV, May 24 (Reuters) - Bank Hapoalim, Israel's largest lender, on Wednesday reported better-than-expected first-quarter net profit on higher income from financing activities and fees.
In the fourth quarter Hapoalim had reported lower profit after it took provisions of $68.5 million regarding an investigation by U.S. authorities into suspected tax evasion by the bank's U.S. clients.
This was in addition to $120 million Hapoalim had already set aside.
Bank Leumi underwent a similar investigation and paid $400 million in fines in late 2014.
"While we see the ongoing U.S. investigation as a continuing potential headline risk, we see the bank as capable of weathering any potential sizable fines," Barclays analyst Tavy Rosner said.
Hapoalim earned 767 million shekels ($213.5 million) in the first quarter, up from 674 million a year earlier and above the 754 million forecast in a Reuters poll of analysts.
Net financing income rose to 2.26 billion shekels from 2.21 billion, while it had net credit loss expenses of 107 million shekels compared with 46 million a year earlier.
Hapoalim's net credit to the public slipped 0.7 percent given the bank’s policy to reduce its exposure to large corporate clients as it focuses on the retail sector and small and medium-sized businesses.
The bank declared a quarterly dividend of 307 million shekels, after it said last month it would increase its cash payout to 40 percent of net profit.
Hapoalim is next expected to seek approval to raise its dividend distribution to 50 percent of profit.
Its core Tier 1 capital ratio to risk-weighted assets rose to 11.21 percent from 11.01 percent at the end of 2016.
"This level easily supports a dividend increase to 50 percent," said Barclays' Rosner, who rates Hapoalim shares "equal weight".
Bank Leumi will report its results on Thursday.
$1 = 3.5927 shekels Reporting by Tova Cohen; editing by Steven Scheer and Jason Neely