An analysis of the five big banks financial reports finds that credit to the public rose by just 2.3% in the first half of 2012 to NIS 800 million at the end of June. The growth is well below the average annual growth of 8% in the preceding five years (excluding the crisis year of 2009).
However, analysis of bank credit by the retail and business sectors shows that the retail sector led the growth in credit to the public, and within this sector, mortgages were the growth drivers. While credit to the retail sector rose, credit to the business sector stagnated, and even fell slightly. In previous years, the business sector was responsible for the growth of the banks' credit portfolios; that is no longer the case.
In the first half of 2012, retail credit rose by 3.2%, or NIS 10 billion, to NIS 347 billion at the end of June. Mortgage loans rose by NIS 8 billion during the first half, accounting for 80% of the growth in retail credit.
However, early 2012 was characterized by a cooling of the mortgage market, until it began to heat up again in May. By August, new mortgages reached an all-time high of NIS 6.3 billion, 70% above the monthly average for the 12 preceding months. The banks will report the figures for July and August in their financial reports for the third quarter, which will be published in November.
The banks are responding to the strong demand for mortgages for several reasons. Firstly, this is low-risk credit, as a mortgage is an anchor product for persuading a customer to open an account at the bank, generating more revenue for the bank.
Another important reason is the banks' current capital shortage; they must increase their capital to meet the Bank of Israel's 9% capital adequacy ratio by the end of 2014. Under Basel II - The New Basel Capital Accord of the Basel Committee on Banking Supervision, the banks are required to set aside less capital for mortgages than for business credit (the banks must set aside 35% of capital for mortgages compared with the amount set aside for business credit), so they prefer granting mortgages to business credit.
The result is that while the retail sector is growing, the situation in the business sector is far less rosy. In effect, the increase in customers' activity worsens the credit crunch. The small business sector, the banks' smallest division, saw a 1.9% increase in credit in the first half of the year to NIS 62.8 billion at the end of June.
The commercial sector (credit of up to NIS 100 million) is stagnant; credit rose by a negligible 0.1% in the first half. At the next level, the business sector (the biggest customers), credit, which accounts for a third of total bank credit, fell by 1.4% in the first half.
Published by Globes [online], Israel business news - www.globes-online.com - on September 12, 2012
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