Israel's top two banks, Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI), both follow a strategy of "follow your customer" by heading overseas. While there are nuances between them, the basic policy has been the same: opening branches and representative offices in international business centers in London and New York, as well as branches in Switzerland to handle private customers, mostly Jews who feel comfortable depositing their money in an Israeli bank.
Both banks have built a large international operation, with about 1,300 employees in their foreign branches and offices, ranging from Bank Leumi's office in Melbourne in Australia to Bank Hapoalim's office in the Uruguayan capital of Montevideo. While these offices create executive perks, such as regular flights, the strategy is apparently paying off.
The question is, how much. Even if the crisis year of 2008 is excluded (and for Bank Hapoalim, 2007 as well), the two banks' profits from their international business is nothing to write home about. Before the crisis, their international business generated just 10% of their total profits; after the crisis the contribution was halved to 5% at best.
A bank executive said, "You have to look at the big picture, and look at the customer as a whole. My situation overseas is anomalous, because I provide full services there irrespective of size, while the overheads are relatively high. Sometimes part of the customer's profitability is in Tel Aviv, while the profit from London, for example, is low."
Low profit margins are not the only problem of the two banks' international operations. There is also the problem of increased risk. It is easy to get in trouble, and it is only necessary to look at the string of failures and scandals at Israeli banks' foreign branches over the past decade.
There was money laundering at Israel Discount Bank (TASE: DSCT) subsidiary Israel Discount Bank of New York; regulatory irregularities at the Miami branch; embezzlement at Bank Leumi Switzerland; compliance problems at Mizrahi Tefahot Bank's (TASE:MZTF) Los Angeles branch; and just two weeks ago, the deputy CEO of Discount Bank Swiss subsidiary IDB (Swiss) Bank Ltd. was suspended after accusing his superior of misdeeds.
The damage to reputation is huge, especially when money laundering and embezzlement are the focus of banking regulators the world over. Time and again, the oversight and control of Israeli banks of their foreign branches and subsidiaries has been poor, and remote control from the head office simply does not work.
Bank Leumi has 76 foreign branches and representative offices, 37 of them at Bank Leumi Romania SA. Bank Hapoalim has 41 foreign branches and representative offices. Altogether, Israel's five big banks have 158 points of potential weakness and risk.
Has not the time come to reconsider and refresh the foreign branches? Does not the cost/benefit ratio as reflected by the low profitability and the high risk rally justify such a broad international deployment?
Published by Globes [online], Israel business news - www.globes-online.com - on December 28, 2010
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