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Israel banking regulator cautious on profits despite current strength

REUTERS/Ronen Zvulun
Bank of Israel completes the inspection process for the new institution named Esh Bank Israel

Israel’s banking regulator on Wednesday warned of a possible deterioration of banking system profits stemming from an uncertain economic outlook and higher interest rates that could lead to loan defaults.

The Bank of Israel in its semi-annual report was still largely upbeat, saying all of Israel’s banks are maintaining capital ratios that are above the central bank’s minimum capital requirements.

It pointed to banks’ high returns on equity, improved efficiency ratios, strong capital and liquidity ratios, growth in activity, and good credit quality, with higher interest rates and inflation as short-term advantages for the banks amid increased income from interest.

Inflation peaked at a 14-year high rate of 5.2 percent in July and stood at 5.1 percent in October. As a result, policymakers have sharply raised short-term interest rates to 2.75 percent from 0.1 percent in April, with another hike of as much as 3/4-point expected next week.

This has led to a sharp rise in mortgage loan repayment and other loans.

“Looking forward, there is uncertainty as economic developments may negatively impact the banking system’s profitability due to concern of eroded credit quality in view of borrowers’ increased difficulty in continuing to meet their loan repayments,” the Bank of Israel said.

It added that an increasing number of households have shifted money into interest-bearing savings accounts from non-interest accounts.

Banks in Israel will begin to report their third-quarter earnings next week.