The economic slowdown is now also being seen in the collapse in bank profits for the third quarter. The aggregate profit from ordinary activities of the five big banks plunged 75% to NIS 603 million in the third quarter, compared with NIS 2.4 billion in the corresponding quarter of 2007. Since the beginning of the year, the banks' profit from ordinary activities totals NIS 1.07 billion, an 83.5% decrease.
The fall in profit stems, first and foremost, from the increase in provision for doubtful debts, as a result of the worsening state of the economy, which is likely to deteriorate further in 2009. All five banks drastically increased their debt provisions, parallel to a marked jump in the scale of debts classed as problematic, especially those classed as 'debts under special supervision.' The aggregate provision stood at NIS 1.45 billion at the end of the third quarter, three times the sum in the corresponding quarter in 2007 and more than the two preceding quarters together.
Since the beginning of the year, the banks' provision for doubtful debts totals NIS 2.5 billion, double the amount in 2007. The banks have been exceptionally conservative in their debt provisions, especially given the concerns that the Bank of Israel has been voicing of late. The Bank of Israel Banking Supervision Department recently expressed its dissatisfaction with the previous level of provision in the banking system, with department officials describing the provisions up to the third quarter as having too optimistic a perspective, and even warning that they would intervene if necessary.
It is estimated that the level of debt provision will reach 1% of the banks' credit portfolio as early as the fourth quarter of this year. Commenting on the issue yesterday, Mizrahi Tefahot Bank (TASE:MZTF) CEO Eli Yones said, "These days, you can't be too cautious. At a time like this, you cannot assess anything with the same perspective and assumptions about the future you had a year ago."
Hundreds of millions in write-downs
The banks have also been hard hit by the global financial crisis, making hundreds of millions of shekels in write-downs on their exposure to Lehman Brothers ($368 million across the entire banking sector), Washington Mutual ($85 million) and foreign corporate bonds. Because of the write-downs, Bank Leumi (TASE: LUMI), Israel's largest bank, whose CEO is Galia Maor, recorded a loss of NIS 84 million for the first time since September 2001. Nevertheless, Bank Leumi's profit since the beginning of the year totals NIS 1 billion, the highest of all the banks.
The bank that has been affected the least by the crisis is Mizrahi Tefahot Bank (TASE:MZTF), which saw its profit fall by 23%. The bank, headed by Eli Yones, recorded a profit of NIS 140 million for the quarter, and a return on equity of 10%, the only double digit return in the banking sector. Bank Hapoalim (LSE: 80OA; TASE: POLI), whose CEO is Zvi Ziv, posted a third quarter profit of NIS 384 million, the highest of all the banking sector, but still 53% less than in the corresponding quarter. Discount Bank's profit was down 65% over the corresponding quarter, while First International Bank of Israel (TASE: FTIN1;FTIN5) saw its profit dive 70%.
As a result of the fall in profitability, the banks' return on equity has in turn fallen to single digit figures. Bank Hapoalim recorded a return on equity of 8.3% and has still not recouped the losses it made on the write-downs in the first quarter. Discount Bank, whose CEO is Giora Ofer, posted a return of 4.8%, and First International, whose CEO is Smadar Barber-Tsadik, recorded a return of 4%, the lowest of all the banks.
Higher fees, more credit
Bank fees have continued to rise, with a total of NIS 9.2 billion paid in fees since the beginning of 2008, a 3.8% increase compared with the corresponding period last year. Bank Leumi and Bank Hapoalim both said in their quarterly reports that the coming into force of the new Bank Fees law would shave NIS 330 million (on an annualized basis) off their revenue. The reports also show for the first time, a decrease in the banks' revenue from capital market activity.
The banks are continuing their efforts to bring their capital adequacy rations up to the benchmark set by the Bank of Israel, 12% by the end of 2009. Bank Leumi has already exceeded the target with 12.08%, the highest ratio of all the banks. Bank Hapoalim is continuing to bolster its capital adequacy ratio, which reached a record 11.51% in the third quarter. Mizrahi Tefahot and First International both have a capital adequacy ratio of 11.4%. Discount has the lowest capital adequacy ratio of all at 10.6%, down from 11%.
Credit to the public rose by 3.9% compared with the preceding quarter, and by 7.4% compared with the end of 2007. The growth in credit doesn't support the Ministry of Finance's plan to inject capital into the banks to prevent a credit squeeze. "The figures for the increase in credit at all the banks since the beginning of the year are impressive, and are inconsistent with a situation of slowing credit. I am sure that neither the government nor the Bank of Israel expect us to stop exercising the discretion required of banks when approving credit, and I don't believe their aim is to make us hand out money irresponsibly. The goal here isn't to start giving away money to anyone who asks for it, without subjecting such requests to the proper banking scrutiny," said Yones, who does not support the Ministry of Finance plan.
Published by Globes [online], Israel business news - www.globes-online.com - on December 2, 2008
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