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Bank fees are a hot-button topic these days, but the truth is they're simply distracting us from two dramatic changes that will impact bank results in the years to come.

In fact, raising fees was meant to solve two main problems in the banking system.

One is stagnation of the public's credit portfolio. In the last three years, the banks' total credit to the public has stood at about NIS 589 billion. It's hardly grown at all.

In contrast to the conventional wisdom, banks make more money from the interest rates spread than from fees (which means, they make more from the difference between the interest they collect from you on debt, and the interest they pay on savings).

The banks' combined income from interest totaled NIS 17.2 billion in the first nine months of 2006, compared with operating income of NIS 10.3 billion (most of which derived from bank fees).

The reason for the stagnation is that new options have opened up before corporate Israel. Namely, companies are tapping the financial markets for loans, rather than the banks. Companies have in fact raised more than NIS 100 billion in loans from investors in the last few years. The upshot is that the banks have lost a growth driver.

Paying through the nose

The second problem the banks face is growing wage costs. The chief executive of one of the big banks recently phrased it well: "We are streamlining and slashing and convincing workers to take early retirement, but costs just keep climbing."

Really. The banks' operating costs (mainly wages) shot up 14.5% in the first nine months of 2006 against the same period of 2005.

Yes, the economic situation improved and it was right to loosen belts by a notch or two. But the banks' high profitability in 2006 was fueled mostly by selling their provident and mutual funds (under duress).

When income from interest isn't growing but wage costs are, the bank managements find that the easiest solution is to raise fees. It's easier than cutting back, less risky than giving loans to every Tom, Dick and Yossi. Remember that in a month, when the banks publish their results, showing "record profits", and the usual uproar begins about just how much they earn.