While quarterly profits were mixed, four of Israel's top five banks reduced high labour expenses and trimmed workforces after negotiations with the country's strong unions.

Israel's biggest lender Hapoalim (>> Bank Hapoalim Ltd.) reported a higher than expected rise in second-quarter net profit of 886 million shekels ($229 million) from 782 million a year earlier on higher financing and fees income and lower expenses.

In March, it said it would slash up to 700 jobs this year and next after cutting more than 500 in the last two years.

Its efficiency ratio - or expenses as a percentage of revenue - fell to 55.2 percent from 60.8 percent a year earlier, outperforming No. 4 bank Mizrahi-Tefahot's (>> Mizrahi Tefahot Bank Ltd.) 58.4 percent to become Israel's most efficient bank.

"Costs to income will continue to go down," Micha Goldberg, head of equity research at the Excellence Nessuah brokerage, said of the banking sector.

"Assuming that we see revenue from interest rate hikes, I think we will see the cost-income ratio come down on a sector basis to 60 to 65 percent in the next couple of years."

Israel's banks have struggled to maintain revenue with interest rates at 0.1 percent, down from 3.25 percent in 2011. The Bank of Israel is widely expected to leave rates between zero and 0.10 percent the rest of 2015. The bank's own economists project a gradual rise in 2016 to 1.25 percent.

CHALLENGES

No. 2 bank Leumi's (>> Bank Leumi Le Israel BM) second-quarter profit more than doubled to 518 million shekels from 229 million a year ago, but missed analysts' forecast.

But overall expenses fell 17 percent to 2.16 billion shekels and its efficiency ratio narrowed to 63.5 percent from 76.2 percent at the end of June 2014 thanks to a retirement plan that began a year ago. Salary costs fell nearly 9 percent in the first half of 2015.

"Leumi has overcome two major challenges in 2014 - a settlement with the U.S. authorities and a salary agreement with the trade unions regarding salaries and benefits, and is now actively focussing on streamlining its operations and expanding its return on equity," Barclays analyst Tavy Rosner said.

In January, Leumi paid $400 million to settle two separate investigations into whether it helped U.S. clients evade taxes. While the case is now closed, Leumi said the New York authorities continued to monitor its activities.

It shares fell 2.8 percent, underperforming Hapoalim's 0.6 percent dip and Discount Bank's (>> Israel Discount Bank Limited) 1 percent rise. Tel Aviv's banking index <.TELBANK> was 1.3 percent lower.

Discount, the country's third-largest bank, reported a 68 percent rise in second-quarter profit to 270 million shekels, beating estimates.

Salary and other expenses fell 25.4 percent while overall expenses were down 14.6 percent and its efficiency ratio narrowed to 76.0 percent from 78.4 percent last year following a 2014 retirement plan.

"The bank has a history of industrial conflict, which could prevent management from implementing (further) cost cuts," said Citi analyst Michael Klahr.

The cost to income ratio at Israel's fifth-largest bank, First International (FIBI) (>> The First International Bank of Israel), edged down to 74.8 percent from 75.9 percent.

Chief Executive Smadar Barber-Tsadik said the merger of two subsidiaries, UBank and PAGi, would result in further savings in expenses.

It posted a 21 percent profit fall to 118 million shekels that met estimates. Its shares fell 1.4 percent.

On Monday, Mizrahi beat estimates with a 7.5 percent rise in profit to 330 million shekels.

(Editing by Susan Thomas)

By Steven Scheer and Tova Cohen