(Adds details, analyst comments, share reaction, background)
TEL AVIV, Aug 16 (Reuters) - Israel's largest lender Bank Hapoalim reported higher quarterly net profit that topped estimates, but put its second quarter dividend on hold for now due to a U.S. tax evasion investigation.
Hapoalim said on Thursday it earned 920 million shekels ($250 million) in the second quarter, the highest among Israeli banks and up from 812 million a year earlier. This compares with 875 million forecast in a Reuters poll of analysts.
The bank said it did not make additional provisions this quarter to cover a possible future settlement of the U.S. investigation of the bank's business with American clients. To date it has provisioned $365 million.
"Yet, for reasons of conservatism and in coordination with the Bank of Israel, the board of directors did not declare a distribution of dividend from second quarter 2018 net profits at the date of the approval of the financial statements," Hapoalim said.
This does not change its policy of paying dividends of up to 40 percent of quarterly net profit, the bank added.
"We believe this is for sake of conservatism in the context of the ... offer made to, and then rejected by, Mizrahi-Tefahot last week," Barclays analyst Tavy Rosner said.
Mizrahi, Israel's third-largest bank, said last week it would not accept a proposal from the U.S. Department of Justice to pay a fine of $342 million to settle a U.S. tax evasion investigation.
Mizrahi said it believed any "reasonable calculation" based on the behaviour of its employees as described by the Justice Department would result in a much smaller fine.
The large amount sought by U.S. authorities took Mizrahi and the market by surprise.
Hapoalim's legal expenses for the U.S. investigation amounted to 100 million shekels in the second quarter.
Hapoalim's shares were down 1 percent in morning trade.
Its net interest income rose to 2.3 billion shekels in the quarter from 2.17 billion a year earlier while credit loss expenses fell to 90 million shekels from 138 million.
Hapoalim said that in view of progress made in separating the bank from its credit card unit - as required by Israeli regulators - Isracard's activity has been classified as a "discontinued operation".
Its core Tier 1 capital ratio to risk-weighted assets, a key measure of financial strength, slipped to 11.16 percent from 11.26 percent at the end of 2017. ($1 = 3.6795 shekels) (Reporting by Tova Cohen; Editing by Adrian Croft)