The S&P rating agency is concerned about the growing exposure of Israeli banks to the real estate sector, according to a special review of the Israeli banking sector obtained by "Globes."
The review, written by S&P Maalot head of financial institutions Lena Schwartz, states that credit for mortgages, construction, and real estate accounted for 46% of the banks' total credit, as of September 2018, compared with only 32% in 2006.
"The high exposure to credit for construction and real estate, together with mortgages, constitutes almost half of the banking sector's credit portfolio. It continues to be an important risk for the banking system. There is a risk in the event of a renewed upheaval in the housing market equilibrium," Schwartz writes.
S&P says that this trend is gaining force, because half of the growth in business credit in 2018 was in real estate and construction. S&P believes that Israeli banks have less problem credit in residential real estate than their European counterparts, but "The concentration in this sector constitutes an ongoing risk, given the volatility in housing prices and the drop in housing starts."
S&P predicts that most of the growth in the banks' credit portfolios will come from the business sector, despite the growing competition from investment institutions and the bond market. "We believe that the banks will find an opportunity to increase their business credit, while increasingly using syndication deals or financing of more complex deals," the agency wrote.
Despite the risk of exposure to the real estate sector, S&P says that the Israeli banks will maintain stable profits in 2019, but that higher provisions for credit losses and greater competitions will detract from their results.
The survey compares the Israeli banks' results to those of their European counterparts, and finds that the Israeli banks are more profitable, and are also narrowing gaps in the efficiency ratio.
"We expect the Israeli banks to continue being more profitable than banks in Western Europe. In recent years, Israeli banks maintained a healthy profit, supported by strong economic growth and improved operational efficiency, while the global banking center had to undergo significant restructuring. As a result, the performance of Israeli banks outstripped that of most banks in Western Europe," S&P wrote.
The figures show that the capital multiple of Israeli banks averaged 1.01, compared with 0.99 in the US, 0.77 in Switzerland, and 0.56 in the UK. At the same time, Israeli banks' capital multiple is still lower than that of banks in Canada and Sweden.
S&P is optimistic that the Israeli banks' good results will continue, but nevertheless cites sources of risk and threats. "We anticipate a slight rise in credit losses. The level of provisions for credit losses reached a low point last year because of collection of problem debt in the business sector, but this figure will decrease. The low level of provisions for credit losses reported by the banks in recent years is therefore unsustainable," S&P writes.
No further efficiency improvement expected
The Israeli banks conducted deep streamlining measures in recent years. This substantially improved their efficiency ratios to a level on a par with Western European banks. S&P believes that the banks will have difficulty in further improving this ratio, because they will have to make substantial investments in the coming years in technology in order to cope with increasing competition.
S&P states, "The Israeli banks will have trouble attaining further improvement in efficiency. For a long time, they have been taking determined measures to cut costs. The reduction in operating costs improved the efficiency ratio from 71% in 2014 to 62% in 2018. This improved level is closer to the average of the 50 largest European banks."
Even though the banks have closed over 150 branches in recent years, which arouses considerable criticism in Israel, S&P is unimpressed, saying that this is not a dramatic change. The review states, "The Israeli banks made no substantial efforts to distance themselves from branch banking. We see a 10% drop in the number of branches in the past five years, the same as in European banks. We believe that this trend will continue in the next 12 months."
S&P predicts that improvement in the efficiency ratio will not continue because "The process of withdrawing from branch banking is slow. We anticipate higher expenses as a result of the need to invest in information systems and digital capabilities. Repricing aimed at dealing with competition from non-banking credit providers and credit card companies in the household and small and medium-sized business will also affect results."
Published by Globes, Israel business news - en.globes.co.il - on April 18, 2019
© Copyright of Globes Publisher Itonut (1983) Ltd. 2019