May last year.Yair Seroussi jumps from relative anonymity straight into the eye of the storm, straight to one of the seats of power and influence in the Israeli economy. Seroussi, formerly a senior Finance Ministry official and then representative of US investment bank Morgan Stanley in Israel, was appointed chairman of Bank Hapoalim (TASE: POLI).
He came to the bank in one of its toughest periods, following the highly-publicized removal of previous chairman Danny Dankner, which involved a struggle between the controlling shareholder, Shari Arison, and Governor of the Bank of Israel Stanley Fischer. Bank Hapoalim was never out of the headlines. It became the punch bag of the business media. Negative headline followed negative headline, day after day. "I devoted all my time to one purpose: to restore calm to the bank," says Seroussi, in his first interview as chairman.
Seroussi, who has a wide macro perspective, presents a refreshing world-view, yet is sober and realistic about the Israeli economy. He does not subscribe to popular notions of Israel's loss of competitiveness, or of concentration as the problem of problems, or of a loss of innovation in the high-tech industry.
During his time at the Finance Ministry, Seroussi dealt with the competitiveness of the Israeli economy and its ability to lead. Having been responsible for Israel's first overseas bond issue after the 1985 stabilization program, he certainly thinks that Israel has undergone a quantum leap.
"Twenty years ago, we were a closed country. Since then, we have gone through privatization, and the private sector has grown steadily," says Seroussi. "The spirit of entrepreneurship, which began in high-tech, has burst through into other markets. Once foreigners bought Israeli technology; now we are also on the buyer side. Amdocs and Teva arose, and began to acquire foreign companies, and later, other companies like Israel Chemicals and Frutarom did the same," he explains, and it is evident that the subject is one close to his heart.
What advantage does Israel have in the global economy?
"What gives Israel relative advantages is the forging process we have undergone as a country. Maybe this also explains how robust we were during the crisis. We have become prudent. Look at the state budget: since 1985 we have maintained fiscal discipline, which makes for stability," says Seroussi, and pulls out a graph showing how, within 25 years, Israel's debt to GDP ratio shrank from 270% to around 80%, the kind of ratio typical of developed countries.
"Our situation relative to the world, has improved" he says. "For example, in the debt to GDP ratio, which is the heaviest issue today, after the crisis. We remained stable when every country increased its debt. Debt is like a carrying a weight, and whoever has less debt will grow faster. Israel should focus on how to accelerate growth and increase per capita income faster. There are no shortcuts; we have to decide on a line and go with it."
"Our advantage is an entrepreneurial culture
So what is our advantage?
"We have the advantage of an entrepreneurial culture. Not in every country do you find so many people who want to break out, to start projects, found companies, take the initiative and buy, to go out into the world. Some entrepreneurs have succeeded, others have not, but people here have big dreams, and that's an advantage. The degree of entrepreneurship and the readiness to compete globally found in Israel are exceptional. I attribute this to the fact that we are a country of immigrants, with the advantage of languages and global connections. In the next round, our advantage will lie in management, because our managers have learned and developed."
Sometimes we sense an anti-business atmosphere in Israel.
"The problem is one of confusion between the wheat and the chaff. What should preoccupy us is our competitiveness. The main thing is growth and raising income levels. The economy in general is competitive, but we have to examine which parts are not competitive, to lift barriers and let entrepreneurship work. There's a great deal of talk about concentration. People take a side issue and turn it into the main one. Concentration should not be the main question; the main question is increasing the size of the whole cake. The regulator should be thinking how to help the economy grow. He shouldn't hamper things and fuss about secondary matters."
Do you think the venture capital model has had its day?
"The venture capital model has undoubtedly succeeded in the world's best funds, and so they have no problem raising money. In Israel, there will continue to be venture capital funds, but fewer than during the peak years. The sectors will change, because if once there were areas in which you could set up at low cost, and get to the companies up to the IPO stage, today you have to think of other areas. If once the focus was semiconductors, now medical products and software look more promising. It comes in waves. The market is not dead and we are seeing a lot of mergers and acquisitions. There are fewer IPOs and companies that manage to achieve independence. There are also quite a few managers who have accumulated experience and I think we will continue to see IPOs. Acquisition of Israeli technology will continue, and I have no doubt the innovation is here and ingrained in us. Every exit brings forth more entrepreneurs, arouses hope among investors, and helps to bring on the next wave."
"Invest the royalties in education and welfare"
Are you in favor of raising royalties on gas discoveries?
"The discovery of gas creates a revolution in the Israeli economy. For years we wanted energy independence, and now we have found it, it's there for us off the coast. The economic significance is enormous: it stabilizes the price of energy for the future and improves the country's position. That's the number one issue, and only after that comes the question of royalties. But instead of discussing how to expedite the gas infrastructure, we worry about royalties."
What would you do with the royalties? How would you apply these funds?
"It's claimed that there will be a problem of surplus money, but in my view that's not a future economic problem; there are plenty of things to do with the money. I would put it all into education and welfare, in a special fund earmarked only for these areas. The money must be invested in our children and young people, in the future, and not in today's current spending. The entire business sector identifies education as the number one concern. This is a common goal, and the sources discovered in the sea should be used for its benefit.
"Education leads to social mobility .If we find ourselves in a situation of affluence and we have greater resources, let's look twenty years ahead. The 21st century will be the century in which countries will be distinguished according to infrastructure and technology level. Education is human capital and human capital is technology. Here lies the key to growth and success."
No stranger
In June 2009, Seroussi took up the post of deputy chairman of Bank Hapoalim, and within two months he took over the reins and was appointed chairman. Seroussi is no stranger to Hapoalim. He was a director of the bank at the beginning of the decade, but previous familiarity did not reduce the challenge facing him: to rehabilitate the bank that in the three years preceding his appointment had been battered on all sides, from the dismissal of two chairmen, through resignation of the CEO, to frequent changes in top management, and a loss of billions of shekels on investments in complex financial instruments. Along the way, Hapoalim also lost the title of Israel's largest bank to Bank Leumi.
"Today, we are somewhere quite different from where we were when I took up the post," says Seroussi. "The bank was in crisis, but emerged from it quickly. It was a V-shaped recovery, as they like to say today."
The process of "healing", as Seroussi calls it, included the appointment of a new CEO who grew up in the bank, Zion Kenan, and building an almost completely new management. At the same time, the rifts with the employees and the regulators were mended, and Hapoalim's capital structure improved dramatically, after a successful round of capital raising led by Seroussi when he was still deputy chairman.
When you started out in this job, you talked about the need to restore peace to the bank.
"Bank Hapoalim was shaken and suffered heavy losses. My first goal was to instill calm and get the bank out of the headlines. Then I worked to motivate people again, to restore confidence and the feeling in the employees of doing something worthwhile, to put the sparkle back in people's eyes, and enable them to work in a spirit of cooperation. In other words, back to basics. Identify where you are strong, and reinforce those areas, infrastructure financing, for example. See where you have lost market share, and turn this into an opportunity."
You have set a lower return on equity target than your predecessors did.
"In the past, returns on equity were inappropriate, in my opinion. The return talked about around the world at that time was 20%.I remind you that we are talking about commercial banks, and this notion was taken from Wall Street investment banks. I thought it was wrong. Today, after the crisis, the question of risk versus return has become central, and at current world interest rate levels, there is no doubt that returns are much harder to achieve. So I've set a target of 10-15%"
Is it possible to reach the return target you have set without increasing the bank's risk?
"This is a reasonable target for the levels of risk that the bank wants to take. The world cannot keep interest rates at virtually zero for years, and so interest rates will rise. In an interest rate environment higher than today's, it will be possible to reach the goal without taking big risks. This of course requires us to work hard." {
"I believe in simplicity and logic"
How do you avoid repeating mistakes like investing in mortgage backed securities, which almost resulted in a loss of the bank's entire shareholders' equity?
"It's hard to step into the shoes of another period. Today, things are different. Everyone is risk-oriented, and there's discipline. Before the crisis, companies went into large investments, prices were high, and the whole market rose. You feel strong, and worry that the price will rise, so you buy. I believe in simplicity and common sense, in spreading risk. The kind of crisis we had in 2008 is not common, but a once in a hundred years kind of crisis, and we cannot build business systems based on the peak point of a crisis. To be attractive, we have to give an appropriate return to investors. And there's a debate over how to achieve returns over time. In the coming years, the risk of failing to pay attention and getting into places like that is small."
Will Bank Hapoalim get into non-financial investments, as Bank Leumi has done with great success?
"Historically, Bank Hapoalim has been an important investment body, perhaps the biggest in the economy. In the last decade, Bank Hapoalim's decision has been not to invest in non-finacial investments. We have not changed that strategy, and we don't believe that we have an advantage in non-financial investment. But we want to build the right portfolio. Today, our position is very conservative, and we have a lot to do with the portfolio. We brought in Anat Levin, an expert in managing proprietary investments, and we will examine which capital instruments will make up the portfolio of the bank. We will build a portfolio by buying shares, as in the Azrieli deal, and through investment in companies, but without obtaining special special status in them. This allows more flexibility."
Bank Hapoalim's slogan is "To be first obliges," but the leading bank is Leumi.
"We are first in many areas. Hapoalim is the largest provider of credit in the economy, with the most customers. In terms of banking alone, we are the biggest."
Do you have a goal of overtaking Leumi?
"It's not my first goal, but we'll have to make the effort. It's good, and it sharpens your thinking. We'll get to that as well."
"Bank Hapoalim has lowest fees"
Another hat that Seroussi wears is that of president of the Association of Banks. With that hat on, he sets out to defend the much criticized banking system. "There was a global crisis, but in Israel, credit did not dry up, neither to companies nor to individuals. Banking service in Israel is of a high standard. Bank employees are of a higher standard that elsewhere in the world. The proportion of those with university degrees is high. During the crisis, the capital market stopped financing companies, and the banks did not. Therefore, by the way, a firm should keep both options open, because in a time of crisis a bank will not start to extend credit to someone who is not its customer."
Is there competition in the banking system?
"The banking system is very competitive. In this crisis, concentration in the American banking system rose sharply. Around the world, the big banks continue to grow, and here we see small and medium-size banks strengthening. There is competition for each customer and segment. There is fierce competition within the banking market, and competition between the banks and the capital markets. Today, there are more players on the same field. The capital market already provides 45% of the credit given."
There are complaints that, even after the reform in banking charges, charges are too high.
"That there are complaints is fine, and that people don't want to pay is fine. But service is something you have to pay for. All in all, commissions are low, and they are lowest at Bank Hapoalim, according to figures published by the Bank of Israel. The banks invest capital in computer systems, and that costs money. The public needs to ask itself whether it has the ability to switch to another bank, and it has. We see people transferring."
The real problem is not fees, but the large spread, which is the banks' main source of revenue, You pay little on savings. and take a lot on overdrafts. A business person who takes billions in credit pays lower interest rates than a small borrower.
"Credit pricing in Israel is reasonable and competitive. You have to look differently at a system that gives credit to business from the way you look at a system for giving credit to the individual. They are completely different operations, including in their costs. The way spreads are priced is an example of competitiveness. You will not see international players who can compete with us on prices to the business sector."
What about households?
"Any player can enter the market, but the fact is that the foreigners who are here do not enter the retail segment. Why? Because prices are low."
The Supervisor of Banks recently said that banks' expenditure level is too high, meaning chiefly expenditure on manpower. Are the unions not too powerful, making wages in the banking system high, which makes customer service expensive?
"Bank Hapoalim's advantage is a very good system of labor relations, over time. Just this past year, the system proved itself. The employees forewent salary raises amounting to hundreds of millions of shekels, and acted responsibly."
The monthly salary cost per employee in the banks is NIS 25 thousand. Is that not excessive?
"Any number for any employee immediately seem high. I am very pleased with the output of the workers. The system continues to expand with no increase in the number of employees, so that it's a case of streamlining."
Is there surplus manpower at Bank Hapoalim?
(After some hesitation) "Any large organization needs to examine itself all the time. Our employees work very hard, around the clock."
We're not leaving Turkey
What is the bank's international strategy?
"Wherever we have a presence, we will strengthen it. The New York branch, the bank in Switzerland, the London branch - these are the main centers, and a basis for future development. There is a branch in Singapore for deals in the East. We will adapt ourselves to our customers and go with them. We have restructured the entire activity. In the past, New York, for example, reported to the business division. Today, everything is in the international division. In the future, New York will be the main center, where the management will be located."
What is happening to the deposit taking permit for Bank Pozitif, the branch in Turkey?Will you obtain a permit by buying another bank?
"Our goal is to improve the asset. Bank Pozitif cannot expand because it has no permit for accepting deposits. Therefore, obtaining the permit is a major preoccupation, and we are working with various approaches in order to obtain it."
Why should an Israeli bank be in Turkey, given the problematic geo-political situation?
"When we went in, strategic relations between Israel and Turkey were closer, but Turkey is a very interesting country. There are many Israeli companies in Turkey. Economic relationships have been built up, and it is important to preserve relationships where possible."
If you do not obtain the permit, will you sell Bank Pozitif?
"If we don't receive it, we'll meet and talk again. Right now, I'm busy obtaining the permit. This is not a security that you buy and sell in a second. It's a business, and every business has its problems. Going into Turkey is something we have done, and we have to deal with the asset. A license will make it possible to enhance it. There are currently no other plans, and we are not thinking of selling the bank."
"There is no competition in management fees"
The Bachar Committee was supposed to have created objective pensions advice. It hasn't happened. What can be done?
"Objective advice and encouraging long-term savings are very important goalss, and unfortunately, for a period, pensions advice was not a focus of the Ministry of Finance's efforts. The Commissioner of Capital Markets, Oded Sarig, wants to make progress. It will take time. At present we are waiting for a pensions clearinghouse to be established. We are starting to see the light at the end of the tunnel."
You were appointed to your position eighteen months ago. All at once, you became one of the most influential people in the economy. Does being in the limelight embarrass you?
"It embarrassed me, it still embarrasses me. It was not on my agenda."
What is the division of labor between you and the CEO?
"Chairman and CEO are different roles, and the relationship should instill calm and allow for teamwork. We come from different backgrounds. I have an international, macro background, and deal more with strategic planning and work processes. Zion came out of the system, knows every nut and bolt in it, and has operational expertise. We consult on every matter, including the choice of people. I know quite a few people in the profession, and I had a part in identifying the right people and bringing them to the bank, and the CEO accepts the decision."
The board of directors was battered and bruised after the ousting of Dankner. Has the board recovered, and is it now functioning properly?
"We had to restore confidence Today, there is a dialogue within the board; we are trying to regain focus and discuss the essential issues. There is a corporate governance committee, we are dealing with the question of how the board should work, and we are only at the beginning."
How do you get along with the controlling shareholder?
"Relations with Shari Arison are very good. She is a veteran businesswoman. I got to know her when I was an external director at the bank a decade ago, but we had not been in touch since. Her outlook is very businesslike. She doesn't enquire about day-to-day matters, but she is kept informed on a quarterly basis, and about strategic moves that the bank makes. For example, she was informed about the principles of the new compensation plan for senior managers. She had a general understanding, without going into too much detail in depth."
In the past three years, housing prices have risen by 48%, while the average wage has risen only 7%.The Bank of Israel is concerned that a bubble is forming in the real estate market, and Bank Hapoalim chose precisely this moment to expand its share of the mortgage market.
Why did you choose to grow in mortgages right now?
"Mortgages are an anchor product. The bank previously lost market share, reaching the point where its market share in this area was smaller than its share in banking generally. Competition is so tough, that if your customer does not come to you for a mortgage loan, you have a problem."
Do you sleep at night, knowing the bank's mortgage portfolio?
"I sleep very well indeed, because the bank is strict about risk management.
Is the rise in real estate prices developing into a bubble?
"I am concerned that a social problem is being created when people cannot afford to buy a home, but the Bank of Israel has recognized that the real estate market is not healthy, and is dealing with it. Once the Bank of Israel defines a policy, the leverage stops and cannot grow. But the solution is not only in interest rate adjustments, but in supply and demand. There has been no construction here for years, and demand has arisen for housing. In addition, there is a speculative element in the demand, resulting from low interest rates. People are looking for something to do with their money, looking for investment alternatives, and real estate is an investment that makes sense."
Will the price rise continue?
"I feel we have passed the peak of the rate of price increases."
When Seroussi looks at the world beyond Israel, he evinces optimism, and great faith in the power of the US market. "I believe in the US economy. They know how to deal quickly with problems. Already, US companies are very profitable, and the problem is employment and consumer confidence.
"America has a big advantage, which is that she is basically very capitalist. America knows that what will get it going is the business sector, and not government. That is how they see their role. Our luck, and the world's luck, is that the Americans reacted the way they did. Other countries would have set up lots of committees and chewed things over for a long time."
What about Europe, are you're worried?
"I'm a banker, it's my job to worry, but I'm optimistic. Europe consists of Germany, France - and all the rest. The first two are growing, in other places there are wide variations, but there is no danger of collapse."
Published by Globes [online], Israel business news - www.globes-online.com - on September 26, 2010
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