Supervisor of Banks Dudu Zaken is worried about the banks' low provisions for credit losses. Zaken is currently conducting a series of meetings with the boards of directors of the various banks, and sources inform "Globes" that in the meetings that have already taken place, he told them that he was dissatisfied with the low level of provisions for credit losses. He noted that these provisions were too low, given the economic slowdown, and in comparison with the rate of provisions by banks in Europe.
The banks' provisions have been low for the past two years. Last week, the banks published their third quarter reports, which also showed low provisions. The banks are now concerned that Zaken will require them to make a one-time provision for their entire credit portfolios, as he did last year for mortgages, when he forced them to provide a uniform given rate on the portfolios, regardless of quality and the state of each portfolio. Bank Israel said in response, "The Bank of Israel Banking Supervision Department is precluded from commenting on internal discussions with the banks."
The provision for credit losses item reflects the portfolio's level of risk. In the past decade, the annual proportion of provisions averaged 0.5% of the portfolio. During a recession, provisions by the banks amount to as much as 1% of the portfolio.
In the past two years, however, these provisions have fallen substantially. In 2013, the provision rate averaged 0.26%. It dropped further in 2014, and amounted to a negligible 0.02% for the first nine months of the year: NIS 146 million was provided on a credit portfolio of NIS 843 billion. These low provisions are a key factor in the good results reported by the banks. The banks' profits grew 9% to NIS 2.1 billion in the third quarter, despite stagnation in revenue caused by the interest rate cut and tighter regulation governing bank fees. Actually, without the plunge in provisions for credit losses, the banks' profits would have been lower, not higher.
The banks have repeatedly asserted this year that their provisions reflect the state of their credit portfolios. They said that their low provisions were due mainly to revenue in this item resulting from recovery (problem debt for which provision were made in the past, and which was eventually collected). They further claim that their credit portfolios are of better quality than in the past. It is true that their credit portfolios are smaller than previously, and also less concentrated. There are almost no new loans for the purpose of leveraged buyouts, which are considered high-risk loans.
Published by Globes [online], Israel business news - www.globes-online.com - on November 26, 2014
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