Dozens of foreign financial institutions now operate in Israel, offering a wide range of services, from regular banking, to investment banking, asset portfolio management for individuals and institutions, underwriting, as well as foreign currency trading, shekel futures, broking services, securities depository services, and market making in government bonds. Their activity in all these fields is neither marginal or unsubstantial; quite the contrary, foreign financial institutions have a significant market share in each of them, and even dominate some of them, especially investment banking.
A new joint survey by Globes Research and Kesselman and Kesselman -PricewaterhouseCoopers on activity by foreign firms in Israel's financial markets, maps out the foreign financial institutions' penetration of the Israeli economy, and provides an updated picture by assessing the foreign players' overall activity in one study. Only by putting their activities side by side and seeing the links between them, can the considerable weight and influence of foreign firms in local economic life be assessed.
The findings reveal that foreign institutions have a very strong and impressive presence in Israel, and that their presence in the local capital and money market is underestimated. The survey also found that the foreigners' penetration of the Israeli market is still a long way from exhausting itself, and that their presence in corporate banking, asset management, and financial services will increase over the coming years.
The foreign presence has yielded many advantages for the economy so far, headed by access to the global market in a far higher measure than the Israeli economy's weight in the global economy. It would be difficult to imagine the high-tech revolution in Israel without the presence of foreign banks in the Israeli economy. These have provided a broad range of services, such as consulting, underwriting, or advising on offerings, mergers, acquisitions, or the sale of Israeli companies to overseas corporations. On the other hand, it would be difficult to imagine the expansion of the foreigners' presence without the growth in the local high-tech sector. Another field in which foreign banking has made a sizable contribution is asset management, and the provision of tools that help the Israeli business sector gauge the risks that ventures could hold.
The survey, which is based on interviews with key executives at the foreign institutions operating in Israel, and at Israeli companies, reveals a number of conditions that explain the entry by foreign institutions into the local markets. Foreign activity in a given market depends on four conditions. First, there must be room to act, or in other words, Israeli banking institutions should not have a dominant presence in this market. Second, legislation must be in place that corresponds to the legislative infrastructure for markets that the foreign banks are familiar with. Third, an operating infrastructure - clearing and trading arrangements - must be built along the lines of those that foreign institutions work with overseas. Lastly, the foreigners must have a clear advantage over local competitors.
In examining each of these conditions, the survey unveils a dynamic view of the foreigners' penetration of Israel's financial markets. Banks and financial institutions from overseas frequently encountered the activity by companies and entrepreneurs from Israel in other countries, and it was contacts like these that brought them to Israel. These contacts became even stronger over time, and today large Israeli corporations have standing associations with certain institutions which have advised them on various deals over long periods.
At present, four of the foreign banks operating in Israel hold full-banking service licenses - Citigroup, BNP Paribas, HSBC, and the State Bank of India. Each one operates in different fields, according to the advantages they have in them, and each of them gives Israeli activity easy access to a different geographical region. In addition, dozens of other institutions operate through local representatives, and two of them - UBS and Deutsche Bank - are members of the Tel Aviv Stock Exchange (TASE).
Investment banking was the first field to see foreign activity in Israel - an earlier incarnation of Lehman Brothers operated in Israel back in the 1960s - and foreigners now dominate it. This refers not only to offerings on overseas bourses, but also local activity by Israeli corporations, whether it is offerings or mergers and acquisitions. The global banks' expertise in specific fields enabled them to serve as tool that facilitated the execution of major deals. It is doubtful whether the restructuring of Israel's telecommunications sector in recent years could have gone ahead without the foreign banks' constant support and advice.
Keeping clear of retail banking
According to the survey, investment banking is one of the key fields that will see further expansion of the foreign financial presence. Still, foreign banks are highly unlikely to begin offering services to Israeli households in the near future, due to the tremendous advantage that local banks still have in retail banking, chiefly the large branch networks already in place, but also the range and quality of services available to people in almost every community throughout Israel. The survey concludes that, in this respect, it would be unwise to pin any hopes on greater competition in the retail sector through the penetration by foreign banks of this market.
However, this conclusion should not be taken as an indication that the retail sector will not see any competition at all. One of the interesting questions, to which there is as yet no clear answer, is how keen will the foreign banks be to begin offering financial advisory services, at least to households with means? If they do so, it could bring about a substantial change in the advisory and financial instruments distribution sector within a short space of time.
From the viewpoint of the foreign institutions, the changes now taking place in the Israeli economy have created quite a few business opportunities. These are to be found in the Israeli economy's rapid growth, the opening up of its markets to foreign competition, Israel's integration in the globalization process, and the major reforms that have been implemented in the capital markets over recent years.
If, in the past, foreign institutions were accustomed to focusing their efforts on investment banking, the immediate future will probably see a marked expansion of their activity into asset management. The acquisition by US fund Plainfield Asset Management LLC of the Gadish provident fund and its management company Gadish Global Financial Services (2007) Ltd., and the merger of the latter with Psagot Ofek Investment House Ltd., marks the start of the foreigners' entry into the asset management market.
Foreign bankers, it should be noted, already constitute an important part of the asset management market, especially through their contacts with Israeli institutional investors. Insurance companies and pension funds invest part of their resources overseas, or purchase financial products from the foreign banks' representatives in Israel. Moreover, foreign institutions are the ones that provide local banks with all the structured instruments that they offer the Israeli public, once they have been divided into smaller units. It should also be remembered that foreign banks have been offering private banking services to a select group of wealthy people in Israel for many years. These services have expanded in recent years, in line with the increase in the number of highly affluent figures in the Israeli economy.
Government policy and actions will play a pivotal role in all these processes. The structural change and increasing competition taking place in markets in Israel would have been inconceivable without the presence of the foreigners. The potential entry into the Israeli economy by foreign financial institutions was one of the factors that motivated governments in Israel to introduce structural reforms. Further structural reforms of a micro-economic nature were also needed once the foreigners started operating in Israel, in order to bring the economy into line with the accepted standard in other industrialized economies. The result of all these changes, when we look them in their totality, is a total grassroots change in the capital and money market in Israel, ensuring it conforms with the existing game rules overseas. The foreign institutions were, as mentioned earlier, one of the main catalysts in this process.
In Israel, people often tend to overlook the critical weight that government policy has on the willingness to bring regulatory and legal frameworks into line with those overseas. The survey includes an analysis of a series of microeconomic changes, whose purpose, in many cases, was to adapt the modus operandi of local financial markets to the benchmark in other countries. Some of these changes were a direct outcome of needs created following the introduction of earlier reforms, thereby creating the dynamics for structural change. The reform created a need for complementary reform, one structural change laid the foundations for the next structural change, and different procedures introduced simultaneously have fueled one another, intensifying the effect of each one in turn.
Alongside the benefit to the economy, the foreigners' entry has also created problems that policy makers must tackle. The most daunting of all these is the proliferation of market segmentation, as part of the population has been blocked from gaining access to the services that foreign institutions offer. Not every Israeli company can benefit from the underwriting services offered by foreign banks, and not every individual can make use of their asset management services.
The foreigners' entry into Israel has been typified by cherry picking, although to tell the truth, they do not bear sole responsibility for this, since there were also quite a few legal barriers that prevented people from gaining access to the various services the foreigners have to offer. This does not make the existence of separate segments for large or small companies, or different asset segments for the wealthy and for those with middle incomes or lower, any less problematic.
Published by Globes [online], Israel business news - www.globes.co.il - on October 1, 2007
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