The Bank of Israel has raised the interest rate to 2% and the banks have been benefitting. While the interest rates charged by the banks on mortgages and other loans has jumped by tens and hundreds of thousands of shekels per month, the interest rates paid to the public on its deposits have risen by a lower rate.
The gaps between the interest rates paid by the bank and the interest rates charged have allowed the banks to increase the margin between the cost of their money and the interest rate they offer us on our money. This is how it works in practice. The banks raise their money from two main sources: deposits from the public and issuing bonds on the capital market. The banks add their profit to the cost of raising money and this difference is the margin, which, in regards to deposits, represents the amount they have left after clearing the interest rate they pay us. For the loans, this is contained in the difference between the price of their money and the interest rate they charge.
Examining the financial statements of the banks for the second quarter shows that the increase in margins was due to rolling on only a part of the increase in the interest on deposits, and this more than doubled the income of the banks as a result of the interest on the deposits compared with the corresponding quarter last year. And this, when the second quarter did include two interest rate increases, 0.25% in April and 0.4% in May, but the two significant interest rate increases together totaling 1.25% didn't happen until the third quarter. Therefore, the profit margins will increase further in the coming quarter.
Thus, while the interest-bearing deposits at the five largest banks increased by 2.24% to about NIS 565 billion, the margins they collected jumped by 123% - and stood at NIS 686 million, more than double the margins in the corresponding quarter last year.
Hapoalim's income from margins tripled
The holder of the largest interest-bearing deposit portfolio is Bank Hapoalim, with a portfolio of NIS 161.6 billion, up 2.3% from the corresponding quarter last year. A look at the income from the margin on the deposits reveals that they have tripled - from NIS 53 million to NIS 151 million. Bank Leumi did not increase the total interest-bearing deposits (0.3%), but the income from the margin for them jumped by 148% to NIS 154 million. Bank Mizrahi Tefahot, which has almost caught up with Leumi's deposit portfolio, recorded the highest income of NIS 180 million shekels, but its growth was the lowest - amounting to 61%.
Financial consultant Tomer Varon explains, "The figures show how much the banks profited in the second quarter by not passing on to customers the Bank of Israel's interest rate hikes and in effect taking advantage of the change in macroeconomic conditions to improve their profitability. What is perhaps most amazing is that we are only talking about the second quarter in which the Bank of Israel's rate hikes were only beginning."
If the banks had remained at the same level of profitability as the previous quarter, and passed on the increase in the total interest-bearing deposits (which constitute only about a third of the total public deposits) - their income from the interest on the deposits would have been cut by about NIS 300 million. Considering that the combined profit of the five banks in the first half of the year was NIS 11 billion, this is apparently a small amount, but for those who are looking these days for a return on their money, or at least to maintain its value when inflation is more than 5% - these are significant differences.
Varon adds that as interest rate rise, the attractiveness of the deposits will of course increase but you have to remember that rates are rising because inflation has jumped. "For example today we are depositing money in a savings account and receiving 2% annually on it, while inflation is 3% above that so we are making a real loss."
Rates don't reflect the Bank of Israel's hikes
So how much have the banks margins grown? Interest rates have risen since the Bank of Israel began its interest rate hikes in April but by relatively small rates, which have not fully reflected the hikes.
Bank data shows that before the Bank of Israel raised the interest rate by 0.75% last week, the bank offering the highest interest rate on a NIS 10,000 deposit was One Zero: a variable interest rate of prime minus 0.55%. Since the prime was then 2.75%, the interest rate offered was 2.2%. After the Bank of Israel raised the interest rate to 2%, the prime increased to 3.5%, and the digital bank raised their interest rate a little - so that today it offers a variable interest rate of 2.65%.
Public criticism has been led by Knesset Finance Committee chairman MK Alex Kushnir (Israel Beitenu), who is demanding explanations from the CEOs of the banks. Israel Discount Bank has already announced an increase in the interest rate on deposits for one year or higher at a fixed interest rate to 3% per year through digital means (2.5% at the branch). At the same time, the bank has raised the variable interest rate on deposits for one year or more, which will be the same as the Bank of Israel interest rate: 2% (prime minus 1.5%).
Bank Hapoalim offers the lowest interest rates for one-year deposits with a fixed interest rate of 1.7%, for those who close the money digitally, and 0.85% for a variable interest rate. For a five-year deposit, Hapoalim offers a fixed annual interest rate of 2.75%, and 3% for 10 years.
Most banks refuse to disclose the interest rates they grant to business customers. However, the banks stated that they offer large depositors a benefit that usually ranges between 0.1% and 0.2%, in addition to the interest rate offered to individuals.
Published by Globes, Israel business news - en.globes.co.il - on August 31, 2022.
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