UPDATE 2-Israel's Leumi Q1 profit dips but tops estimates

* Q1 net profit 429 mln shekels vs 218 mln shekels forecast

* Bad debt provisions rise to 354 mln shekels

* Net financing income falls to 1.36 bln shekels

* Shares close 4.2 percent higher (Adds details, analyst comment, share reaction)

By Steven Scheer

JERUSALEM, May 31 (Reuters) - Bank Leumi (LUMI.TA: Quote, Profile, Research), Israel's largest bank, reported an 8.7 percent drop in first-quarter profit on Sunday but beat expectations as a result of paying much lower taxes.

Like Israel's other large banks, Leumi was hurt by lower financing income due to low interest rates and higher bad debt provisions stemming from a deteriorating economy. But it recorded a drop in expenses, mostly in salaries.

After overtaking rival Hapoalim (POLI.TA: Quote, Profile, Research) as Israel's largest bank in the fourth quarter 2008, Leumi extended its lead with a 2.3 percent rise since the beginning of the year in total assets to 318.1 billion shekels. Hapoalim posted a 0.6 percent decline to 305.2 billion shekels.

Leumi's shares closed 4.2 percent higher, outpacing gains of 2.1 percent on the broader Tel Aviv bourse.