TEL AVIV, Aug 1 (Reuters) - Israel's banking regulator said on Wednesday it will not allow Bank Leumi to take a stake in the firm that is buying the lender's credit card unit because it wants top banks to offload card units into separate companies.
Leumi, Israel's second-biggest bank, said separately that this would not affect the deal it agreed to sell its 80 percent holding in Leumi Card to Warburg Pincus.
The deal gave Leumi an option to buy a 20 percent stake in the Warburg Pincus unit that is buying Leumi Card.
Leumi Bank and property developer Azrieli Group, which holds 20 percent of Leumi Card, announced on Saturday that they had agreed to sell the business to the U.S. private equity firm for 2.5 billion shekels ($679 million), subject to regulatory approval.
Israeli regulators, in a bid to increase competition, have instructed the country's top two banks to sell off their credit card companies by early 2020.
"It was clarified that such a purchase is not consistent with the spirit of the Increased Competition Law," the Bank of Israel's Supervisor of Banks said in a statement, referring to the option.
"Despite the possibility that such a holding could create a commitment on the part of Leumi Group to the success of Leumi Card, the decisive consideration in the Bank of Israel's decision is its desire to ensure the implementation of the purpose of the law, which is intended to create separate financial entities that will not hesitate to become a significant competitive factor."
The central bank still has to decide whether to approve the sale of Leumi Card to Warburg Pincus. On Saturday it estimated that process would take about four months. ($1 = 3.6805 shekels) (Reporting by Tova Cohen; Editing by Susan Fenton)