Israeli says high Q1 profits of banks not sustainable  

Reuters/Ronen Zvulun

Israel’s financial system is strong but the very high profits banks posted in the first quarter are not sustainable, its banking regulator said on Wednesday.

The country’s largest five banks posted a combined 6.3 billion shekels ($1.7 billion) in net profit in the first quarter, helped by higher inflation and interest rates that sharply boosted interest income, allowing banks to expand dividends and share buyback programmes.

The central bank noted that an average return on equity of 16.4 percent was the highest since 2006. Some banks reached 20 percent.

“The 20 percent is like a spike right now,” Yair Avidan, the Bank of Israel’s bank supervisor, told reporters, adding that many assets in Israel are inflation linked. “The second quarter will be mostly the same, but going forward it’s not sustainable.”

With inflation stubbornly high, the central bank on Monday raised its benchmark interest rate by 25 basis points to a 2006 high of 4.75 percent. This was its 10th hike in a more than year-long tightening cycle that brought the rate from 0.1 percent, leading to a sharp rise in mortgage and other loan repayments.

Avidan called on banks to further pass on higher interest rates to customers’ deposit accounts. He said that while 82 percent of the rate hikes have been passed on, many customers were still not fully aware they can open interest-bearing accounts.

“(I) call on banks to bring attention to customers that there are different options for their money,” Avidan said.

He said even with a jump in mortgage rates, defaults are low, but cautioned that as long as interest rates are high, failure rates could rise.

Proposed judicial reforms that led to widespread protests earlier this year and alarm among Israel’s Western allies have had minimal impact on banks, he said.

Some companies had said they would move funds from Israel, but Avidan said the outflows were not large and that money had come back to the country after the Silicon Valley Bank collapse.

Even if foreign inflows to tech firms slow, it will take time to filter to the economy,