The lowering of interest rates by the Bank of Israel also caused a fall in unlinked shekel financial margins at an average rate of 0.41%, which cut the profits of Israeli banks in the first half of 2009 by NIS 800 million. Bank Hapoalim (LSE: 80OA; TASE: POLI) alone estimated that its profit was cut by NIS 150 million per quarter, while estimates are that profits for all the banks in 2009 will be cut by NIS 1.4 billion.
An analysis of the financial results of the banks finds that the average shekel financial margin (without activities of derivatives) stood at 2.47% in the first half of 2009 compared with 2.88% in the first half of 2008.
The financial margin is the gap between the interest that the bank charges its customers and the interest that it pays on the money it raises. The unlinked shekel sector represents 45% of the bank's assets. Total assets amounted to NIS 400 billion at the end of 2009. Every percentage point fall in the shekel financial margin causes the banks to deduct NIS 40 million from their annual profits. Thus a fall of 0.41% in the first half of 2009 cut bank profits by NIS 800 million.
Israel Discount Bank (TASE:DSCT) had the highest financial margin in the first half of 2009 with a margin of 2.83%, down from 3.26% last year.
Discount Bank charged its customers 3.76% interest, compared with 6.02% in the corresponding half of 2008. On the other hand, Discount Bank paid its customers 0.93% interest in the first half of 2009, compared with 2.76% in the corresponding half last year.
After Discount Bank was Hapoalim with a margin of 2.79%, Bank Leumi (TASE:LUMI) (2.42%) and First International Bank of Israel (TASE:FTIN1; FTIN5) (2.23%). The bank with the steepest fall in its financial margin was Leumi - 0.48%. Mizrahi Tefahot Bank (TASE:MZTF) was the bank with the lowest financial margin (2.21%), probably as a result of its large proportion of mortgage activities, which are characterized by low financial margins.
The fall in margins occurs when the Bank of Israel's interest rate falls, while the interest paid by banks on current accounts also falls, but can only fall so far.
Published by Globes [online], Israel business news - www.globes-online.com - on September 14, 2009
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