An assumption in the world of finance is that the product that best reflects the public’s mood is mutual funds. Every time a local or global crisis breaks, people rush to redeem their money. Thus it was when the Covid-19 pandemic broke out: in one day, March 15, 2020, the mutual funds lost NIS 10 billion of their assets. Now, data gathered by "Globes" show that, in the past two years, the public’s current account balances at the banks have become a clear gauge of the state of the economy.
After the Bank of Israel began raising its interest rate in April 2022, bank customers switched billions of shekels to interest bearing instruments, such as bank deposits, money market funds, and the capital market. According to Bank of Israel figures, at the end of 2023 Israelis had NIS 497.6 billion in current accounts, almost 15% less than the aggregate balance at the end of 2022, and 29% less than before interest rates started rising.
Since these numbers include interest bearing current accounts, which some of the banks started to offer under pressure from the public (but limited them to balances of up to NIS 25,000), we delved into the banks’ financials. The total balance on non-interest bearing current accounts at the banks that had released their 2023 financials by the time of this report - Hapoalim, Mizrahi Tefahot, Discount, and First International - was NIS 342 billion at the end of 2023, 23% lower than at the end of 2022. This means that more than NIS 80 billion exited from current accounts last year.
The more interesting figure, indicative of change in the public’s mood, emerges when one looks at what happened after the outbreak of the Swords of Iron war on October 7 last year. The trend reversed. In October, current account balances still declined, to NIS 454.8 billion, but in November they rose to NIS 475.3 billion, that is, a NIS 20.5 billion rise in total current account balances in one month. The new trend continued in December, resulting in the year-end total of NIS 497.6 billion, as mentioned.
The main reason for this, banking sector sources say, is that the public wants its money to be available and liquid against any trouble that might arise. It prefers not to lock it up for long periods when there is greater security, political, and perhaps economic uncertainty.
It should be mentioned that the halt in the exit of money from current accounts came when, towards the end of 2023, analysts were estimating that the Bank of Israel would start to cut its interest rate, which in fact it did, in January 2024. The banks rushed to reduce the interest rates offered on deposit accounts even before the Bank of Israel cut its rate, but it was still possible to obtain 4% on a twelve-month deposit. Nevertheless, the public preferred liquidity.
An examination of the four banks’ financial statements confirms the trend. In the first nine months of 2023, the total balance on non-interest bearing current accounts at Bank Hapoalim fell by NIS 44 billion, but it rose by NIS 4 billion in the fourth quarter. At Mizrahi Tefahot, the balance fell by NIS 20 billion in the first nine months, but rose by NIS 5 billion in the fourth quarter. At Discount Bank, there was a decline of NIS 16 billion in the first nine months, followed by a rise of NIS 1.5 billion in the fourth quarter. The numbers at First International Bank were similar.
Changes in consumption patterns
Another possible reason for the rise in current account balances is that Israelis spent less in the first months of the war. There were hardly any flights overseas, and thousands of businesses shut down or reduced their activity. Credit card spending was 7.3% down in October 2023 in comparison with October 2022, and in November 2023 the year-on-year decline was 5.5%.
Moreover, thousands of people were drafted into the IDF reserves, and some are still in uniform. While most of them maintained their income levels or even increased them, thanks to grants, their spending shrank. Reserve soldiers generally spend less on entertainment, restaurants and tourism. In a way, this is reminiscent of the pandemic period, when households spent less and savings grew.
In addition, with security at the top of people’s concerns, it may well be that they pay less attention to their financial affairs. This can also be seen from withdrawals from advanced training funds, which rose in line with the rises in interest rates. While in the first half of 2023 withdrawals averaged NIS 2 billion monthly, the average in the period October to December was only NIS 1.6 billion.
"It’s important to remember that, while the balances on current accounts add up to hundreds of millions of shekels, that is made up of small sums of thousands and perhaps tens of thousands per customer, and not from customers keeping millions of shekels in their current accounts," says Merav Oliel, head of the customer asset department at the Bank of Jerusalem. "It’s also important to remember that even if we keep fairly low amounts in our current accounts, we lose hundreds, and even thousands of shekels a year from not taking the simple step of putting money on deposit."
The trend may, however, be changing again. In January this year, aggregate current account balances fell to NIS 490.8 billion, NIS 7 billion less than at the end of December. It’s too early to tell whether this really is a turnaround, but the situation in the war has stabilized both in the north and the south, there is growing talk of a ceasefire to allow for the return of hostages held by Hamas, and there are attractive opportunities on world capital markets.
Overdrafts decline
If there’s a positive side to all this, it’s that many households have managed to reduce their overdrafts, with lower spending and more liquid cash. According to the Bank of Israel, in 2022 about half of bank current accounts were overdrawn, and 25% were chronically overdrawn, that is, were in overdraft for twelve successive months. For accounts in occasional overdraft, the average amount overdrawn was about NIS 15,000, while for chronically overdrawn accounts, the average amount was NIS 20,400.
Full, up-to-date figures on bank overdrafts have yet to be released, but the Bank of Israel does publish figures for the total of debit balances that do not exceed overdraft limits approved by the banks. In December, the total was NIS 8.56 billion, down from NIS 10.06 billion in November and NIS 10.3 billion in October (when overdrafts rose in comparison with September because of the Jewish holiday period).
Published by Globes, Israel business news - en.globes.co.il - on March 19, 2024.
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