* Q4 net profit 169 mln shekels vs 188 mln forecast
* Tier 1 capital ratio rises to 8.6 pct
* Says considering partial or full sale of subsidiaries
* Shares down 3 percent (Adds details, CEO comments, share reaction)
By Steven Scheer
TEL AVIV, March 20 (Reuters) - Israel Discount Bank , Israel's third-largest lender, said it expected 2013 to be as challenging as 2012, after reporting a larger-than-expected decline in quarterly profit.
Discount earned 169 million shekels ($46 million) in the fourth quarter, down from 219 million a year earlier and below 188 million forecast in a Reuters poll of analysts.
Net interest income slipped 3.8 percent to 1.07 billion shekels, while the cost of credit losses was unchanged at 252 million, it said on Wednesday.
Chief executive Reuven Spiegel said he expected 2013 to be like 2012, with credit loss charges remaining elevated in the first half as the economy weakens and conglomerates struggle to pay back debt.
Discount's core Tier 1 ratio of capital to risk assets rose to 8.6 percent in 2012 from 8.1 percent in 2011 and Spiegel said one of the its priorities this year was to boost core capital.
"We don't want to lag anymore," he said. Discount's capital adequacy ratio is among the lowest of Israel's top banks.
The ratio is expected to be slightly above 9 percent based on Basel II directives at the end of 2013 and the bank is aiming for 9.4-9.5 percent based on Basel III at the end of 2014, Spiegel told Reuters after a news conference.
Israel's banking regulator has called for banks to raise their core capital adequacy ratio to 9 percent by the end of 2014 to comply with international Basel III standards.
"We're preserving capital and considering a partial or full sale of one of our subsidiaries," he said, adding that its New York unit could be sold.
The bank would have to work out how it can sell assets without reducing its activities too much, Spiegel said.
"Each one of our subsidiaries is large enough to resolve capital issues but almost too large," he said. "So, what will give us the cushion without taking excessive action?"
The bank would not raise more capital, Spiegel noted.
Discount's shares were down 3 percent, lagging a 0.5 percent decline on the Tel Aviv banking index.
In 2012, Discount's net profit fell 5.3 percent to 802 million shekels. But excluding a provision for the impairment of its investment in First International Bank of Israel (FIBI) , profit would have risen 3.3 percent.
Its bottom line in 2013 would be impacted by the 26.5 percent holding in FIBI it is trying to sell, Spiegel said.
FIBI, Israel's fifth-largest bank, earlier reported a 26 percent drop in quarterly profit.
$1 = 3.69 shekels Reporting by Steven Scheer; Editing by Helen Massy-Beresford