Difficulty repaying household loans? A slowdown in the economy or a recession? On the face of it, it seems that the heavy cloud hanging over the global economy has not yet reached the financial system in Israel. In fact, it seems that the banks are mainly benefiting from the economic crisis and in particular from the increase in the Bank of Israel’s interest rate, which only in the last quarter amounted to 1.25% (the Bank of Israel’s interest rate today stands at 3.25%). Three banks that reported this week their financial results for the third quarter of the year reveal that the last few months have been good for them, thanks in large part to the increase in interest rates and inflation, which jumped their profits by up to 50%.
● Inflation and interest rates provided the banks with strong reports: who is the peak and what is expected for the future?
● The investors’ talks brought down the shares of the yielding real estate in Tel Aviv. This is the reason
● The interest rates of the credit card companies have reached a double-digit rate, and who is the highest?
Between the months of July and September, Bank Hapoalim recorded a profit of approximately NIS 1.8 billion, Discount presented a profit of approximately NIS 900 million and International Bank 467 million NIS. For each of them, this is a double-digit increase in profit that allowed the distribution of dividends of hundreds of millions of shekels. At the same time, the banks understand that this profitability is going to be damaged due to the global economic crisis, the increase in inflation and the jump in interest rates that burdens households and will lead to a slowdown in economic growth and private consumption.
In fact, the banks have already begun to lose one of the engines of growth that characterized the last year – the mortgages. A look at Bank Hapoalim’s reports for example reveals that the bank reports that in the third quarter of 2022 there is indeed an increase in housing loan balances of 2.2% compared to the previous quarter, but this is a lower rate than the increase in the previous quarters. “The moderation in the rate of increase in balances was influenced by the interest rate hikes which reduced the ability of households to purchase an apartment, and also reduced purchases by investors,” the practitioners explained.
Similar messages are also broadcast at Discount. There they write that “there has been a decrease in the volume of demand for mortgages, the increase in the monthly repayment due to the increase in interest rates may have a negative effect on the ability to repay and in the process increase the number of borrowers who request deferrals in principal repayments. In addition, the rise in housing prices leads to higher leverage rates and repayment rates, as well as to the lengthening of the mortgage “M (the length of time to repay the loan 1000) in housing loans”.
Discount also warns that the abnormal increase recorded in the volume of housing loans in the banking system, together with a scenario of an increase in unemployment and interest rates, may damage the quality of the housing credit portfolio and increase the exposure to credit risks in the banking system.
Banking factor: signs of a slowdown in the financial system
According to a banking Source, the banks are indeed starting to see signs of slowing down and credit growth is lower in the entire system (only about 2%, after very high growth in the previous quarters). “The banks will continue to benefit from the increase in interest rates,” he estimates, “but the increase will be dramatically lower. With the increase in interest rates, customers will be more price sensitive and we will see an increase in provisions for credit losses. However, the banks are facing a long and probably significant crisis, but they enter it strong And they will be able to support the economy and companies that will fall into crisis.”
However, he claims that we will not see huge provisions as reserves for cases in which borrowers will not be able to meet their loans (provisions for credit losses), as happened in the Corona crisis and also in the economic crises of 2001 and 2008. This is, among other things, because the banks came to see that the fear of a wave of borrowers not meeting their obligations did not materialize and not out of an understanding that this is a less significant crisis.
The banks are always the last to take the hit
In the capital market, there are those who explain that previous crises revealed that in events of this magnitude the first to pay the price are the investors in the stock markets (and Wall Street has already entered a bear market) and the banks, simply absorb the blow later.
Indeed, Hapoalim, Discount and International are in no rush to increase provisions for credit losses in the meantime. Hapoalim settled for a provision of only 45 million shekels, most of which comes from the necessity of a directive from the Bank of Israel that requires a security cushion of 1.5% on each new credit. The International has set aside a relatively similar amount, NIS 43 million, for a smaller credit portfolio, but these are still much lower amounts than those set aside during the Corona period.
Discount is also not excited at the moment that borrowers will not be able to repay their obligations. In total, the bank set aside NIS 106 million for credit losses in the third quarter, a decrease compared to the provision in the second quarter of the year, which stood at NIS 131 million.
Although for many sections of the Israeli public the heaviness of the monthly repayments on the loans is already felt, all the banks report that this still has no effect on the credit risk. But as a banking official said in a conversation with Globes, “The economy is healthy and will continue to grow, but we certainly won’t see crazy growth in credit like it has been until now.”