* Hapoalim Q2 net profit 655 mln shekels vs 597 mln forecast
* Leumi Q2 profit 474 mln shekels vs 497 mln forecast (Adds details, analyst comments, share reaction)
By Tova Cohen
TEL AVIV, Aug 29 (Reuters) - Israel's biggest bank Hapoalim posted forecast-beating second-quarter net profit, defying the low interest rate environment and a government crackdown on banking fees.
Hapoalim, like rival Leumi, has reduced its exposure to large corporate debtors and increased lending to households and small businesses to bolster its bottom line.
About 50 percent of its loan portfolio is to the retail sector, with big corporates accounting for 38 percent and small and medium-sized businesses close to 12 percent. In 2009, corporate lending accounted for almost 50 percent, with smaller businesses taking up only 8 percent.
Second-quarter net profit rose to 655 million shekels ($179 million) from 607 million a year earlier, beating the consensus forecast of 597 million shekels in a Reuters poll of analysts.
The bank's loan loss provisions dipped to 301 million shekels from 344 million, but this was higher than the 258 million expected by analysts.
DS Brokerage analyst Meir Slater said he expects loan provisions to drop further this year.
Hapoalim made a 214 million shekel gain from exercising some of its bond holdings and improved its Tier 1 capital ratio to risk-weighted assets to 9.2 percent from 8.9 percent at the end of 2012.
In Basel III terms the ratio is about 8.8 percent, just short of the 9 percent Israel's banking regulator requires banks to hold by 2015 as part of the global drive to strengthen the industry and prevent a repeat of the 2008 crisis.Hapoalim is expected to reach 9 percent by the end of the year.
The bank declared a second-quarter dividend of 0.07 shekels per share, having pledged last month to reinstate regular quarterly payments.
By 1113 GMT, Hapoalim shares were up 3 percent at 16.74 shekels, against a 0.5 percent gain for the Tel Aviv 25 blue-chip index.
Leumi, Israel's second-biggest bank, posted net profit of 474 million shekels in the second quarter, up from 280 million a year earlier but short of the 497 million expected by analysts in a Reuters poll.
Net interest income dipped 4.4 percent to 1.84 billion shekels, while non-interest income jumped 25 percent to 1.25 billion. Its bottom line was boosted by an 86 million shekel gain from the sale of shares in quartz surface maker Caesarstone .
Loan loss provisions fell nearly 75 percent to 84 million shekels.
Leumi's core Tier I capital to risk-weighted assets rose to 9.03 percent from 8.55 percent at the end of 2012. ($1 = 3.65 shekels) (Editing by Steven Scheer and David Goodman)