Banking on Households

For now, the bank balance is saved by the fact that the economy is in excellent condition, but what will happen when the stock market falls?

The year 2006 was excellent for the banks. They raked in enormous profits and bonuses flowed like water - to senior management and the rank and file alike. The fact that a significant portion of the profit was a one-time deal, coming from the sale of provident and mutual funds, didn't stop the celebrations. But now the bank managers have a problem. The windfall has come to an end and they are being pressured by controlling shareholders to earn higher profits this year, too. And that's not easy.

On the revenue side, the banks have a problem in the commercial sector. It has become clear that there's been a decrease over the past three years in the amount of credit banks give large businesses. In addition, stable businesses pay off credit to the banks and simultaneously get cheaper credit in the capital market. In January and February, companies listed on the stock exchange raised NIS 15 billion from the capital market. Insurance companies and provident, mutual and pension funds provided the money. Some of the fundraising was carried out by ephemeral companies liable to collapse, but a major portion was raised by serious tycoons, who miss no opportunity to get cheap money from the public.

For instance, IDB Holdings, controlled by Nochi Dankner raised NIS 1.8 billion, and the Alon Israel Oil Company, controlled by Dudi Weisman, Africa Israel and the Kibbutz Movement raised NIS 1 billion, as did Zadik Bino's Paz Oil Company. And the banks are grimacing as their activity diminishes.

For now, the bank balance is saved by the fact that the economy is in excellent condition, there is rapid growth and corporations are doing well. The allocations for debt payment are therefore shrinking, and this boosts the bottom line. In addition, the stock market is flourishing and the public is buying and selling whatever it can lay its hands on - and the banks, after all, get fees for purchases as well as sales. But what will happen when the stock market falls?

On the expenses side, the banks operate as though they were in another world. They continue to raise their wage expenses by some 5 percent a year, in real terms, based on old agreements with committees that were appropriate for the period of inflation, which eroded salary increases. But now, with zero inflation, every nominal wage increase becomes a real wage increase.

The bank workers have also become stronger. The banks have established a consultation system for pensions, recruited investment advisers and opened new branches. At the same time, bank management has not become more efficient and superfluous workers are not fired, due to the committee's power. The case of Bank Hapoalim, which fired some 800 workers five years ago, was a single episode. Computerization costs have also increased, in the wake of the increasing demands of the regulators - the banks supervisor, the securities authority and the tax authorities.

With rising expenses and diminishing returns, there is only one cow left to milk: households. Indeed, despite all the criticism, the banks continue to charge households outlandish fees and interest rates. But now they are facing a problem in this area as well.

Knesset members are going for broke. They want to pass a law requiring the supervision of all bank fees, such that any fee change will have to be approved by the Knesset Economics Committee. Supervisor of Banks Rony Hizkiyahu opposes total monitoring of the fees and has proposed an alternative plan to increase competition in the banking sector.

According to Hizkiyahu's plan, the banks will reduce the number of fees they charge households and publish a list of standard fee rates solely for households. The banks would also be required to report fee data to the banks supervisor, which will allow for the release of cost comparisons and give the public a chance to decide which bank it prefers. The plan also calls for rules that would make it easier for customers to switch banks. Only in the event that all this fails would the banks supervisor crack the whip by monitoring fee rates.

Now the banks have two options: accepting the bank supervisor's plan or fighting the MKs. It's clear that Hizkiyahu's plan is the lesser of two evils, from their perspective, but it's not clear whether the MKs will give up their struggle. The results will be seen in the bank balance.