Real estate credit crunch looms

The banks are afraid: credit for residential construction has dried up and provisions for doubtful debts have soared.

Please note the number 530. It is the number that indicates the change that is unfolding in the real estate market. NIS 530 million is the banks' provision for doubtful debts in the second quarter of 2011. To put it in perspective, the provision for doubtful debts for 2010 as a whole was NIS 972 million. In other words, the banks' provision for doubtful debts for the second quarter alone soared. Part of the increase was due to Bank Hapoalim's (TASE: POLI) specific problems with real estate developer Mordechay Zisser, but the significance cannot be missed - the banks have begun making larger provisions.

Another figure has to be added - NIS 149 billion. This is the aggregate credit to real estate, which increased by NIS 4 billion in the first half of 2010, after increasing by NIS 15 billion in 2010 as a whole. At the same time, the banks' income from real estate is stagnant. Income totaled NIS 1.92 billion in the first half, just 0.6% more than in the corresponding half.

When the banks make bigger provisions, their income from real estate is stagnant, and the growth rate of bank credit is falling, no official statement that the party is over is needed.

However, the banks' profits actually grew. The aggregate profit rose 7% over the corresponding half to NIS 678 million in the first half.

These are figures for the first half of the year, but profit from real estate totaled NIS 128 million in the second quarter, 60% less than in the corresponding quarter.

Bank Leumi (TASE: LUMI) continues to be the leader in real estate, with the highest income at NIS 732 million in the first half, 4% less than in the corresponding half.

The gap between Bank Leumi and Bank Hapoalim (TASE: POLI) was unchanged. Bank Hapoalim's income from real estate was NIS 558 million in the first half, 4% less than in the corresponding half.

The gap between the two banks' profits is wider. Bank Leumi's profit from real estate was NIS 328 million in the first half, and Bank Hapoalim's was NIS 121 million, giving a difference of NIS 227 million.

Israel Discount Bank (TASE: DSCT) had NIS 324 million revenue from real estate in the first half, 15% more than in the corresponding half. Its provision for doubtful debts rose from NIS 25 million to NIS 68 million, and its profit from real estate was unchanged at NIS 134 million.

First International Bank of Israel (TASE: FTIN) had NIS 119 million revenue from real estate in the first half and a profit of NIS 33 million. Mizrahi Tefahot Bank (TASE:MZTF) had NIS 113 million revenue from real estate in the first half and a profit of NIS 47 million.

No more credit to buyers groups

The growth in credit to buyers groups ended in the second quarter. Aggregate credit totaled NIS 12.04 billion, just 0.6% more than in the preceding quarter. Credit to buyers groups was 7% higher in the first quarter than in the fourth quarter of 2010.

Credit to buyers groups rose by 7.9% in the first half. Balance sheet credit totaled NIS 3.2 billion at the end of June, and off-balance sheet credit, i.e. customers' unused credit lines, totaled NIS 8.8 billion.

Who will finance construction?

The banks' decision to halt credit to the real estate industry was not wholly an independent decision. Over the past few months, the Bank of Israel has been sending a clear message to the banks: calm it down.

The Banking Supervision Department ordered the banks to review their real estate portfolios and carry out stress tests on the basis of various scenarios: what would happen to their collateral and what would happen to the viability of new projects if home prices fell by over 15%. At the same time, the government has taken many measures to boost the supply of land for construction, which is supposed to lower home prices.

The contradiction is clear. The Bank of Israel's unofficial message to the banks is tighten financial conditions for real estate companies and loans for projects. The onset of an economic slowdown means that the banks are automatically closing the credit taps. On the other hand, the government expects contractors to begin large scale housing construction, and the question is - who will finance all this new construction?

The equation does not add up. The banks will not act unprofitably, and in conditions of falling prices, they will want to protect themselves by tightening financing terms. The writing is on the wall in large letters - the banks will not finance residential construction. The government is ignoring the problem, but it will reach the threshold very quickly.

Published by Globes [online], Israel business news - www.globes-online.com - on September 19, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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