In the credit card industry, 2014 will be remembered as the non-bank credit year. The three Israeli credit card companies - Isracard Ltd., Leumi Card Ltd., and Israel Credit Cards Ltd. (ICC-Cal) - have invested a great deal in the industry's's growth, and have reaped the rewards of very high growth.
As of the end of December, the companies' aggregate non-bank credit totaled NIS 6.4 billion, 29% growth in one year. Still, despite the steep growth rates, it should be kept in mind that the credit card companies' share of consumer credit is relatively low. For the sake of comparison, household credit granted by banks (excluding mortgages) amounted to over NIS 100 billion.
Here are the main figures:
NIS 669 million
This is the three credit card companies' aggregate profit in 2014. Despite tighter regulation, ostensibly greater competition, and the negative impact on consumption of Operation Protective Edge, the credit card companies are maintaining their high profits; in fact, their profits grew 3% in 2014, compared with 2013.
The increased profit was achieved mainly because the companies benefited from growth in the industry. Use of credit cards grew 6% to NIS 242.4 billion, with most of the growth coming from the transition to credit cards at the expense of other means of payment, rather than a rise in private consumption. During Operation Protective Edge, use of credit cards slid 10%. Once the war was over, however, the industry quickly recovered, and almost completely made up what it had lost.
Another indication of the industry's growth is the number of active credit cards, which exceeded seven million for the first time, totaling 7.07 million, a 6% rise in 2014.
NIS 4.04 billion
This is the credit companies aggregate revenue in 2014, following 3% growth during the year, while use of the credit cards grew 6% - twice as fast. The reason for the moderate growth in revenue is regulation. For example, cross-commissions, representing a floor for clearance fees paid by businesses, fell again in 2014. This year, the credit card companies expect further revenue erosion, following the reform in fees instituted by the Bank of Israel Banking Supervision Department, which went into effect recently.
The credit card companies are coping with the various restrictions in two main ways. First of all, they simply compensate themselves by raising clearance fees for businesses, where they have more flexibility, and are not subject to a Bank of Israel fee scale.
The second way is a search for new growth engines, headed by non-bank credit. The credit card companies realize that regulation in general will grow, particularly in fees, among other things given the introduction of debit cards (instantaneous billing cards), for which fees are lower. They are therefore expanding in non-bank credit field, which has substantial growth potential, since their current share of the credit pie is small.
8.4%
This is the average annual interest rate charged by the credit card companies for the credit that they grant to the public, while the interest rate that they pay the banks in order to finance the loans averages 0.65%. The credit card companies explain that the interest rate is high because these are high-risk loans, since the credit card companies have no collateral. Still, the extent of default on these loans is only 1-2%, leaving the companies with a handsome profit on the loans.
The credit card companies also assert in their defense that the interest that they charge is substantially lower than the interest rate charged by overseas credit card companies. A senior Visa Europe executive recently told "Globes" that the interest rates overseas were double those in Israel in this sector. Still, despite all these explanations, it is hard not to wonder whether leaving the credit card companies with such a big financial spread is justified.
It should be noted that the average interest rate charged by the credit card companies is on a downtrend. It was 9.8% in 2013, and over 10% the year before that. Only ICC-Cal has an interest rate above 10% - 10.8%. The lowering of interest rates is also due to the Bank of Israel's interest rate cut, but no less important is the change in the composition of the loans portfolio.
The credit card companies, especially Leumi Card, grant a considerable proportion of their loans for car purchases, which account for a quarter of the companies' loans. The interest rate on these loans is relatively low, because there is collateral for them (the car itself).
This means that the 8.4% interest rate does not reflect the real interest rate paid on the classic loans granted by the credit card companies (instant credit). There is no collateral for those ordinary loans, on which the interest rate is still high - probably above 10%.
NIS 1.6 billion
This is the amount of credit granted by the credit card companies for car purchases.
The credit card companies entered the car finance niche, which accounts for a quarter of their portfolio. The figure is particularly noticeable at Leumi Card, where these loans total NIS 1.02 billion, almost a third of its portfolio. In contrast, at Isracard the figure is a relatively negligible NIS 110 million, 12% of the portfolio.
The relatively low interest rate on these loans pulls down the average interest rate reported by the companies in their reports. For example, Leumi Card reported that it charged an average interest rate of "only" 6.4% on its loans portfolio.
Published by Globes [online], Israel business news - www.globes-online.com - on February 26, 2015
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