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Israeli bank regulator predicts profit slowdown after 2022 gains
Abir said Israel's economy was strong, with growth of 2.8% expected this year

Israeli bank profits will slow somewhat next year after a robust 2022, the country’s banking regulator said.

Big profits have angered some consumers who say fees for basic services like deposits and withdrawals are too high and banks have not raised rates on deposit accounts quickly enough.

Israel’s top five banks posted combined net profit of 6.1 billion shekels ($1.8 billion) in the third quarter, up 30 percent from the same period in 2021, and returns on capital of 15 percent to 18.5 percent.

“Profits are quite high, but I believe that these are not sustainable,” Yair Avidan, Israel’s Supervisor of Banks, told Reuters on the sidelines of a recent central bank conference.

This year has been a continuation of a rebound from the Covid-19 pandemic, when “overshot” on credit default provisions in 2020 and have been unwinding them in 2021 and 2022, padding out profits at the same time as rapid loan growth, he said.

Meanwhile, banks’ efficiency ratios have dropped to near 40 percent from around 60 percent amid the closing of branches, laying off of staff and shifting to digital services.

“2023 is going to be year of moderation,” Avidan said.

Tel Aviv’s banking index is down 1.2 percent so far in 2022, versus blue chip and broader index losses of up to 10 percent.

Avidan said next year should be a more “challenging year” for banks, with interest rates expected to peak, while banks will be forced to raise default provisions as Israel’s economy looks to slow to three percent growth from six percent in 2022.

Such provisions are now less than 0.1 percent of outstanding loans, a level Avidan said was not sustainable and historically well below more normal levels of 0.75 percent.

Similarly, returns on capital have been 10-12 percent and not 15-20 percent. Avidan said that in the current environment returns will ultimately settle at between 12 percent and 15 percent.

Pushing on Rates

Meanwhile, Bank of Israel policymakers have raised the benchmark interest rate to 3.25 percent from 0.1 percent in April, and banks have sharply raised lending rates, with the cost of mortgages up more than 1,000 shekels a month.

Banks have at the same time been paying quarterly dividends of up to 50 percent of net profit, which has resulted in criticism.

Avidan said that while Israel’s banks are well capitalised, they were not taking advantage of consumers and that new data will make banks more transparent.

The regulator said he has no issues with dividend levels as long as banks meet capital requirements.

“Investors (benefit) from dividends and Israeli citizens benefit indirectly from (higher) pensions,” he added.

The central bank has started publishing rates offered by banks so consumers can compare them more easily.

Its data show that rates on deposits up to three months by the five largest banks are no more than 1.65 percent. From accounts of two to five years, the range is 1.76 percent for Israel Discount Bank to 3.57 percent for Bank Leumi.

“We are pushing the banks as far as we can. We would like the banks to transmit the interest rate rises much faster,” Avidan said, adding that Israeli banks have moved quicker than in many other countries.