Despite slower economic growth, profits at the five largest banks remained stable in the third quarter of the year. The more interesting story is to whom the banks were lending their money. It has been less to the business tycoons and the business sector in general and more in mortgage credit provided to the public at large.
The total credit extended by the banking system as of the end of September was NIS 816 billion, just 2.45% higher than at the end of 2011, and less than the banks have become accustomed to in recent years. And if you take major growth in mortgage credit out of the equation, the growth in bank credit is actually wiped out.
Some banks are also agreeing to provide more leverage mortgage loans, financing larger loan amounts in relation to the underlying asset which is being mortgaged. In the first nine months of the year, bank credit provided to members of the public grew by NIS 20 billion, but about NIS 18 billion of that was due to the growth of mortgage credit. If it had not been for mortgages, bank credit this year would have not grown at all.
On the flip, side, over the past nine months, the amount of credit the country's five largest banks provided to businesses has declined by 1.55% to NIS 265 billion. The business sector as a whole has received about NIS 5 billion less in credit from the banks and a portion of that decline represents less credit to the business tycoons. At least some of the vacuum caused by the drop in business credit provided by the banks has been filled by institutional lenders, which increased their direct loans to businesses by 26% to NIS 29 billion.
The bank that showed the biggest drop in its business lending was Leumi, which cut business loans by 8.5% or NIS 6.5 billion. One of the explanations for the decline at Leumi, however, could be that the bank did not have a full-time business division director in place for an extended period after Rakefet Russak-Aminoach was promoted from the job in May to CEO of the entire bank.
For its part, Bank Hapoalim reduced credit to the business sector by 2.3% or NIS 2.4 billion. Bucking the trend, however, was Israel Discount Bank, the country's third largest, which boosted the credit it provided to the business sector by 12.8% or NIS 5 billion in actual monetary terms, but the bank's CEO said it was mostly short-term credit.
The largest bank, Hapoalim, and the second largest, Leumi, attribute the decline in business lending to a desire to diversify business lending. They also say the drop was caused by slower economic growth and a decline in investment in non-financial assets.
Banks are currently faced with the challenge of either finding new sources of revenue or drastically cutting expenses to maintain their current level of profitability, which on an industry-wide basis is around 10% on average. In addition to low interest rates, the industry has had to face regulatory demands to reduce the extent to which they are leveraged - as measured by new capital adequacy standards that will take effect at the beginning of 2015.
Lower growth in the lending business, coupled with expected curbs on the amounts banks will be able to charge in fees, may mean that banks will take a big hit on the revenue side at the same time as they are committed through collective wage agreements to provide many of their employees with salary increases that are constantly inflating their costs.
Against the backdrop of this situation, the three largest banks in the country, Bank Hapoalim, Bank Leumi and Israel Discount Bank, have announced major cost-cutting plans to enable them to maintain current profit levels despite the poor prospects on the revenue side. Last week, Bank Hapoalim, for example, not only announced higher quarterly earnings, but also issued layoff notices, apparently to hundreds of employees, although the bank refused to disclose numbers. It simply noted that a number of technology workers provided by outside firms had finished their projects at the end of the year and returned to the firms that provided them. For its part, Bank Leumi's management has decided to lay off 250 longtime workers, a move that was approved by the bank's board of directors.
On the revenue side, the banks' readiness to provide extensive mortgage credit to homebuyers may be explained by pressures to find new sources of income. In the third quarter of the year, 17.6% of the mortgage loans provided by Leumi involved financing more than 70% of the properties' value. At Mizrahi-Tefahot, 11% of the bank's mortgage lending was for more than 75% of the value of the property. Bank Hapoalim was more cautious, with just 3.3% of its mortgage loans in the quarter involving financing of more than 75% of the value of the underlying property.
Last month, in an effort to cool the banks' enthusiasm for mortgage financing, the Bank of Israel's banking supervisor, David Zaken, barred writing mortgage loans in amounts exceeding 75% of the value of the underlying property.
Mortgage credit, it should be noted, has doubled over a six-year period to NIS 243 billion, which represents about 30% of all bank credit.
The increasingly stringent capital adequacy standards the banks will be facing in coming years also comprise an incentive to de-emphasize business credit. For example, although banks have to allocate capital in the full amount of most business loans, most mortgage lending only requires allocation of 35% of the amount of the loan.
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