When the global financial crisis struck in 2008 leaving business borrowers struggling, Israel’s banks began looking for a new market. They found it in household lending, where the competition was minimal and profit margins were high.
In the years that followed consumer lending soared. Even after Bank Leumi, followed by Bank Hapoalim and the others, began pulling back as the risk factor started to grow, consumer lending remains a big business.
With the onset of the coronavirus, the risk factor has grown even more.
The consumer lending business is based on the borrower’s ability to service debt from his or her wage earnings, but with Israel’s unemployment rate still at 12.3% in the first half of July, or 511,000 people, more and more households will struggle to repay their loans.
In a report last week, the Bank of Israel said the problem hinged on how long the pandemic and lockdowns would weigh on the economy.
“It could be a temporary problem if the economy succeeds in returning to full activity quickly or it could turn into a prolonged one if the economy struggles to return to normalcy, businesses go bankrupt and unemployment remains at high levels for a long period,” it said.
The banks will publish their results for the second quarter of the year, when the first wave of the coronavirus occurred, only later this month. In first-quarter, when the impact of the pandemic was only a couple of weeks old, Israel’s five biggest banks set aside 400 million shekels ($116 million) for possible losses on household loans, less than 15% of total provisions (the great majority of which was taken out against business loans).
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Ahead of the second-quarter, the central bank is urging lenders to step up provisions against all loans even though they took big provisions in the previous two quarters.
During the first coronavirus wave, the Bank of Israel’s banks supervisor told banks household borrowers could suspend repayments on loans for up to three months if the outstanding portion of the loan was less than 100,000 shekels. It later extended the suspension for as much as six months. Mortgage repayments have also been suspended for those who ask until the end of 2020.
At the end of June, according to the Bank of Israel, some 277,600 consumer loans, accounting for 8.8% of the total, have been deferred. In the home loan segment, 144,600 mortgage borrowers, or 16% of the total, had suspended repayments. They represent about a quarter of all home loans held by the banks.
What will be the impact on the banks? Alon Glazer, banking analyst at Leader Capital Markets, says it’s hard to tell. On the one hand, consumer credit is relatively high-quality debt and it is spread out among many borrowers and many categories, including overdrafts and credit card balances. On the other hand, the pandemic has taken a heavy financial toll on many households.
“According to the Bank of Israel, until now we’ve seen requests for deferred payments for just 8.5% of all consumer loans, a much lower rate than for small businesses or on mortgages,” he said. “I believe that because the crisis is stretching out we’ll see an increase in provisions for the segment together with more requests for deferrals.”
At the end of the first quarter, household lending accounted for 200 billion shekels, or 12%, of the banks’ risk assets. Nearly 90 billion shekels, or 44%, of the loans were given for general purposes, many of them awarded without any collateral. Unlike credit card companies and non-bank lenders, the banks tend to give those loans to low-risk borrowers. But if unemployment and the recession continued for a prolonged period, the banks will begin to run up losses on them.
Another big segment of household debt that is off the banks’ balance sheet are overdraft facilities to household clients and various kinds of loan guarantees. These amount to 75.4 billion shekels, or 38% of all risk assets. Glazer assumes the banks will act to reduce the credit lines.
Another 9% is credit card debt and 5% is unauthorized overdrafts; Glazer regards the latter as the riskiest. For the big five banks, these add up to about 27.2 billion shekels of risk assets.
Auto loans account for another 7.5 billion shekels, or 4%. That segment has shrunk in recent years due to steps taken by the banks supervisor, leaving the business to specialist companies.
Among the banks, Hapoalim has the most exposure to consumer lending, a total of 58.4 billion shekels. Leumi is No. 2 with 44.1 billion shekels followed by Israel Discount Bank with 30.5 billion. However, Discount’s total doesn’t include the 15.5 billion in loans held by its 72%-owed CAL credit card unit. Under government orders, Leumi and Hapoalim sold their credit card subsidiaries but Discount has at least until the start of 2021 to do so.
Even though it is the smallest of the big five, First International Bank of Israel has the third-largest exposure to consumer credit, a total of 34.8 billion shekels. It accounts for more than a quarter of all risk assets in consumer loans in the Israeli banking sector, However, its household borrowers come from sectors facing few employment risks such as teachers and career army officers.