In early July, a meeting was held at the Bank of Israel's offices attended by senior executives in the banking system. At the meeting senior central bank officials conveyed the clear message that increased provisions should already be set aside for credit losses already in the financial reports that will be published in the coming few weeks, "Globes" learned.
The meeting was chaired by Assistant Supervisor of Banks Or Sofer, who made it clear to the CFOs in attendance that they are expected to adjust their provisions for credit losses in their upcoming reports for the second quarter due to developments in the business environment and the increased uncertainty in the economy. The Bank of Israel's focus is on the overall provisions and not on individual provisions that the banks make for specific borrowers.
The Bank of Israel may not require the banks to do so, but it is clear to everyone that the request cannot simply be ignored. This was also the case when the Governor, Prof. Amir Yaron, recently clarified to the banks that he expects them to provide benefits to customers following the public criticism of their high profits.
The same was also true on the issue of interest rate hikes and passing them on to customers deposits. A few days after Yaron convened the bank's CEOs for an urgent meeting, they all began to announce a series of benefits one, starting with interest on current accounts, through to refunds for customers whose mortgages have become more expensive, and onto increased interest rates on deposits.
The most recent warning of the Bank of Israel
Just last week, the Bank of Israel published its financial stability report for the first half of 2023, in which it set out in detail the main risks to the Israeli economy, which have intensified due to the changes caused by the judicial overhaul. The report also emphasized increased risk in the real estate industry due to the interest rate hikes.
In order to avoid exposure to large numbers of borrowers who will not be able to repay loans, the banks set aside sums of money as safety cushions, what is called in professional parlance - provisions for credit losses. In 2022, when the banks realized that they would not need the huge safety cushions that they had set aside during the Covid crisis, they began to liquidate the reserves, which helped them to record huge profits.
However, after interest rates began to rise, the banks began to estimate that there would be credit losses due to the difficulties facing borrowers in repaying loans. Consequently, in the first quarter of 2023, they increased credit loss provisions compared with the credit loss provision in the first quarter of 2022, before the Bank of Israel began its series of interest rate hikes.
Leumi was the bank that made the largest provision in the first quarter of 2023 of about NIS 400 million; Bank Hapoalim, which holds the largest security cushions in Israel's banking system, set aside about NIS 185 million. Israel Discount Bank set aside NIS 204 million, Mizrahi Tefahot Bank NIS 227 million and First International Bank NIS 72 million.
Changes in credit demand
The banks, like the Bank of Israel and the credit card companies, did not identify any significant rise in debt write-offs, which did not even reach the level of before the outbreak of the Covid pandemic. Therefore, the provisions made in the first quarter of 2023 were mainly overall provisions, in case there is a deterioration in repayment capacity, and not provisions made for specific borrowers that had already announced that they were unable to repay debt.
However, at Israel Discount Bank has already started preparing the ground for more such cases, after identifying a number of borrowers who may encounter difficulties in repayments. This is in contrast to previous quarters, when all provisions were made as purely group provisions.
The Bank of Israel's suggestion to adjust credit losses is due to a decline in the public's demand for credit. In the latest stability report, the central bank indicated a clear trend of reduced non-housing credit, at the same time as the fall in mortgage volumes, which were halved in recent months compared with the corresponding period in 2022.
The reason for this is of course the sharp increase in interest on loans. For example, the average bank interest rate for credit to households that is not for housing stood at 9.7% in April 2023, an increase of almost 4.8 percentage points compared with March 2022.
Bank of Israel response
The Bank of Israel said, "We do not relate to individual professional discussions by the Supervisor with the bodies that he is supervising. As always, the Bank of Israel monitors the overall significant economic developments and acts accordingly."
Published by Globes, Israel business news - en.globes.co.il - on August 8, 2023.
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