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l A strange country, Israel. It may be the only place in the world where managers are terrified to present record-breaking quarterly profits.

Elsewhere, the public expects management to strive to present the strongest results possible. Here, robust profits at the banks are perceived as an occasion for concern, seen as they are against the backdrop of the Poverty Report and Israel's high unemployment rate.

Take the Bank Hapoalim financial statement published last Thursday. It is not impossible that the bank delayed its release by a bit, to distance it from the Poverty Report.

Why? Because the bank knew that the press couldn't resist bundling the bank's record results with the image of poverty spreading among the masses.

Is it occasion for concern?

l Should record results at Bank Hapoalim or at Bank Leumi really cause concern? No, they should not. A bank, like any other business, has to compete in the capital markets, and the way to do that is to maximize profits.

The profits Israel's banks post seem impressive in absolute terms. But profit is also measured relative to equity and to the profits of other companies.

The average return on equity at Israeli banks is low not only compared with banks elsewhere in the world, but compared with the stronger of Israel's companies. But this year, that picture started to change.

l In the first nine months of 2004, Bank Hapoalim netted NIS 1.6 billion. That is a record high, but the main reason for the extraordinary jump in earnings lies in New York, not in Israel or in fees from households.

For the third quarter Bank Hapoalim posted a one-time capital gain of NIS 189 million from selling Signature Bank shares. That added to the NIS 121 million profit it made from floating Signature in the first quarter.

Signature is a small bank that Hapoalim floated on Wall Street earlier in the year. Its shares doubled on Nasdaq to an astonishing company value of $900 million.

Israeli investors are accustomed to seeing the market values of Israeli banks trudge along for years at roughly the level of the shareholders' equity. How is Signature trading at three times its equity?

Whether Signature was inflated by a Nasdaq boom, or not, clearly the capital gains it contributed to Hapoalim are nonrecurring in nature. And without them, Hapoalim's profit would have been much lower.

Even the record earnings Bank Leumi presented derive from holdings, not organic business. It can thank its 20 percent stake in The Israel Corporation and 20 percent in Africa Israel.

l The capital gains from Signature were dramatic, but the drop in provision for doubtful debt was more so. Hapoalim's provisioning plunged by half a billion shekels compared with the third quarter of 2003.

Actually, that drop is the mirror image of the gargantuan climb in provisioning last year and the year before, after the banks lavished credit on unworthy customers. Setting aside 0.84 percent of a bank's credit portfolio is still high.

The real occasion for concern is problem debt. At Bank Hapoalim it grew by NIS 1.5 billion at the start of 2004 to NIS 22.2 billion, mainly due to a leap in the debt of big corporate customers defaulting on interest payments.

Meaning, the banks are still carrying a huge hump from the bubble days, and it will take many more years to get rid of it.

For comparison, Hapoalim's problem debt is 55 percent higher than its shareholders' equity.

l Editors who resisted the temptation to compare Hapoalim's financials with the Poverty Report couldn't resist bundling it with the 800 jobs cut at the bank two years ago.

Does the bank's profit prove that the job cuts were unnecessary? Far from it. Bank Hapoalim, like most of Israel's banks, is overstaffed. The management knows it and the workers know it. The economic crisis two years ago enabled the bank to do the practically impossible, in banking circles, and shed some of its flab.

Was the 2002 crisis the last chance Israel's banks will have to streamline? Maybe, but one can only hope not. If the banks fail to derail the Bachar report, which discusses sweeping reform of the banking sector, they should have another chance, when forced to sell their provident and mutual funds.

At present the top brass at Hapoalim and Leumi are fighting with all their strength against the Bachar report, which seeks to reduce their domination of the financial establishment and create a more competitive market structure.

Thing is, the object of concern in the banks' profits isn't their size. It is how the profits were achieved. Did the banks make their money in a competitive market environment, or in a market ruled by a duopoly?

What the bank managers fear is loss of power when they have to part from their provident and mutual funds.

But maybe they are making a mistake. If Hapoalim and Leumi lose a significant share of the financial sphere, at first in investments and later in credit, they won't be perceived as an oppressive duopoly milking households any more, but as businesses that are supposed to maximize its return on equity.

Maybe then the managers can celebrate strong quarterly results, instead of quailing at the proximity to the Poverty Report.

Naturally, when forced to lose their monopolistic status, the banks will have to become more efficient. They will have to change their corporate culture and fight over their market status.

Then we'll find out whether they truly are icons of competition and the free market, or whether they merely pay lip service to capitalism when speaking from positions of unassailable power.