Sources inform ''Globes'' that, on the eve of Independence Day, Supervisor of Banks David Zaken ordered the banks to increase their doubtful debt provisions on their mortgage portfolios. The special provision will already come into effect in the banks' financial reports for the first quarter, which will be published later this month. "Globes" obtained a copy of the letter to the banks.
Zaken told the banks that the provision was aimed at "taking into account the drop in the coverage rate of the provision for the mortgage portfolio, in view of the rapid growth in recent years in housing credit, which has not yet received full expression in the provisions according to the depth of the lag."
The last time that the Bank of Israel took such a step was nine years ago, during the recession in 2002.
For now, the Bank of Israel instructed that the special provision will not be recorded as an expense, nor will it be included in the profit and loss statement. Instead, it will be considered as a capital fund within the shareholders' equity; in other words, it won't affect business results, but only the banks' capital adequacy ratios and their ability to distribute dividends.
The special provision will function as a safety cushion if the situation of borrowers or the real estate market worsens and there is a need to make large provisions for doubtful debts, or if there is an increase in insolvency.
The Bank of Israel is worried about the growing risk in the mortgage market. Zaken did not set the amount of the provisions, and gave the banks discretion on this matter. However, he verbally warned bank managers that he might set a system-wide provision for all the banks.
A top banker said, "The provision itself isn't the drama. The Bank of Israel is sending us a message to stop what it sees as profligacy in mortgages."
The special provision will not be against any specific mortgage loan, but a general provision against the higher latent risk in the banks' mortgage portfolios and a deterioration in the economy. The Bank of Israel reportedly expects the banks to make a provision of 0.5% of their mortgage credit portfolios.
The banks' aggregate mortgage portfolios amount to NIS 200 billion; a 0.5% provision therefore amounts to NIS 1 billion. However, belying earlier predictions, the Bank of Israel will not allow the banks to spread the provision over several quarters, but make the entire provision now.
A top banker lambasted the special provision, saying, "There is no justification for the special provision. [Governor of the Bank of Israel Prof. Stanley] Fischer is hysterical. We're not Ireland. Banks have a reasonable safety cushion for their mortgage portfolios."
The banker added, "The formula for provisions for loans in arrears creates a substantial provision surplus, and there is no need for an additional provision."
It should be pointed out, however, that the banks have no discretion in setting the provision for mortgage loans in arrears; the provision is derived from the length of the arrears. A bank begins making a provision of 8% of a mortgage loan after three months of arrears. The provision gradually increases to 80% of a mortgage loan after 33 months of arrears.
The Bank of Israel also ordered the banks to increase disclosure about mortgages in their financial reports. The banks will detail the characteristics of their mortgage portfolio, including the proportion of loans in arrears, loans with high levels of financing, and loans about to be repaid.
The Bank of Israel said, "In view of increased risk from housing loans activity, the banks must expand their disclosure about these loans to help users of the financial reports to better understand the banks' exposure to this activity."
The Bank of Israel also required the banks to report on measures to deal with the risks and describe the underwriting procedures for housing loans. These procedures will come into effect with the banks' financial reports for the second quarter, which will be published in August.
Published by Globes [online], Israel business news - www.globes-online.com - on May 11, 2011
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