The Bottom Line / Good news? Don't bank on it
Finance Minister Benjamin Netanyahu would love to use the banks' third quarter results as a sign that we have truly left the recession behind, and that we're heading for 5 percent growth per annum.
Finance Minister Benjamin Netanyahu would love to use the banks' third quarter results as a sign that we have truly left the recession behind, and that we're heading for 5 percent growth per annum. Fact: The five biggest banks ended the quarter with net profits of NIS 997 million, compared to NIS 592 million in the parallel quarter last year.
First of all, there is no reason to be so surprised over these profits, because 2002 was a particularly bad year in that respect. Secondly, the major factor behind the profits was the boom in the stock exchange and capital market. Rising profitability in financing comes from the rise in prices in the bond market following the return of investors' faith and falling inflation. The increase in commission revenues also stems from the blossoming borse. In addition, provisions for doubtful debts have fallen by around 10 percent. But there has been no growth in profits as a result of increased activity, as no extra credit has been extended, and some of the credit is simply a reincarnation of old credit which previously looked dodgy: such as for the real estate industry.
In normal countries, when the economy is in a dire recession - with unemployment rising, businesses closing and activity dropping - the banks just don't manage to make bigger profits. In such a situation, banks are forced to fight over every client, for every deal, for every credit line, on every commission and fee, so profit margins shrink as fees get eroded, and the profits drop.
But in Israel it's oh, so different. The two biggest banks, Hapoalim and Leumi, control banking activity and the capital market such that the banking system is one of the most concentrated in the world; an oligopoly that allows the banks to cream far greater profits off the public than they would otherwise manage in a competitive environment, both in interest and in fees. Which explains why even in a deep recession, the banks here can show rising profits.
Households and small businesses are the ones paying the price. They are enslaved to the banks through their monthly savings plans and provident funds, and through obstacles that make it too difficult to jump from bank to bank. This is the public that pays 240 types of banking charges, and interest of 12-15 percent on checking accounts when inflation is barely above zero.
Similarly, the banks here - unlike in most parts of the world - dominate the capital market. Some 90 percent of provident funds are held by the banks which collect NIS 900 million a year in management fees - twice what they would take if there was sophisticated competition. They also hold sway in the mutual funds and brokerage industry. And indeed, these activities in the capital market brought the banks far greater profits in the third quarter. The call of Bank of Israel governor David Klein to remove the banks from the capital market went unheeded.
There is no outside competition to the banks in Israel. Business corporations cannot issue short-term bonds on the stock exchange, and foreign banks barely operate here. So Israeli banks are no reflection of the true economy. The third quarter results point therefore to a stabilization of the recession, an end to the slide, but not to progress to the fast-growth track.