A major shift has taken place in bank lending since the Bank of Israel ordered lenders to strengthen their capital adequacy ratios at the end of 2011, with banks directing more credit to households and less to businesses. The change was revealed in data published by the Bank of Israel yesterday, which showed loans outstanding to business has declined NIS 18.4 billion since the start of 2012, to NIS 387 billion at the end of June. Of that decline, NIS 7 billion occurred in June, the figures showed. That represented a 4.5% decline in business lending during the 18 months, of which 3.3% occurred in the first half of this year.
Part of the drop can be attributed to a decline in loans to the big business groups, among them those controlled by the Ofer family. Over the last two years the groups have been required to repay billions of shekels of loans after the central bank ordered lenders to reduce their exposure to the groups.
Banking industry sources say that in addition to the tougher capital adequacy requirements, the decline in business lending is also due to weak demand for credit by the sector. They say that many businesses are concerned about weak economic growth going forward, and the general state of the economy.
Another factor contributing to the drop in business lending is that many Israeli banks have closed offices abroad because they were insufficiently profitable, which has reduced overseas lending. The strength of the shekel against the dollar has, meanwhile, reduced the shekel value of foreign currency loans they have outstanding.
Diverting their lending from the business to the household sector also enables the banks to show better capital adequacy ratios, which in turn has allowed them to resume dividend payments to shareholders. Growing household lending has also been helped by increasing demand for mortgages, which has been the fastest growing segment of lending.
In the 18 months to the end of June, the banking industry increased it value of home loans it has made by NIS 31.7 billion, to a total of NIS 253 billion. This year alone, the banks' combined mortgage portfolios have grown by 4.2%.
Getting a mortgage from an lender other than a conventional bank is still an infant industry, with total home loans outstanding in the sector amounting to just NIS 4 billion. Nevertheless, the segment is growing quickly: In the first half of the year it registered an increase of 8.5%. All told, all home-loan debt, which includes government-granted loans to couples with mortgage rights, reached NIS 279.4 billion at the end of June. Meanwhile, bank lending to households — not including mortgages — grew about 2.5% in the first half of this year to about NIS 100 billion. All told, total outstanding loans owed by householders to all financial institutions grew this year 3.3%, to NIS 396.6 billion.
Banking industry sources says that Israeli households still have relatively little debt compared to other developed economies. They see the trend toward more household lending, as well as lending to small businesses, all at the expense of lending to big and medium-sized companies, continuing in the year ahead. Consumer demand is being stimulated by offers for ever-bigger loans at interest rates that are relatively low, which is contributing a culture of consumer borrowing.
It's not just the banks that are making fewer loans to business, but a decline in borrowing from the sector all around. According to the central bank, total debt outstanding stood at NIS 775.6 billion at the end of June, a decline of 2.2%, or NIS 127.7 billion, since the start of the year. Most of that drop — some NIS 12 billion — occurred in June alone.
That decline came not only from lower bank lending but from a 3.7% drop in debt raised from other financial institutions. The one area of growth was a small 0.5% increase in bond sales and loans from institutional investors, according to the Bank of Israel.