The hot topic at Israel's banks today isn't the credit crunch or the Zaken Committee, but streamlining. The banks, especially Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI) are busy drawing up wide-ranging plans that will affect the careers of more than 1,500 employees. The equation is as follows: rigid salaries, massive overstaffing, and ever-rising operating costs equals inefficiency. This is the condition of the Israeli banking system.
Although the two big banks - Bank Hapoalim and Bank Leumi - each made profits of more than NIS 2 billion in 2011, but when the Bank of Israel compares them with their peers in the West, the results are dismal. In international terms, the operating efficiency of Israel's banks is low, and the return on equity is middling. The Bank of Israel has said this more than once, and both the Trajtenberg Committee and the Zaken Committee reached the same conclusion.
After years of neglect, the banks are suddenly worried about their low efficiency. Very quietly, over the past three years, the banks have been undertaking major streamlining measures. Bank Hapoalim began back in 2009, and was followed by the rest of the banks. The measures have been accompanied by complaints about why this was necessary, and why such painful measures should be implemented when profits were high. These complaints have since dissipated, and it is clear that the measures are essential and must be executed as soon as possible.
It is impossible to touch salaries or tenured employees, which is why the banks are focusing on the size of their workforces, positions, organizational structure, and work processes. When all is said and done, we should (emphasizing the word "should") see leaner and more efficient banks.
Bank streamlining is more complicated than in other industries. For example, the mobile carriers underwent a rapid and painful streamlining in recent months. Competition is rising and profits are falling? No problem, we'll immediately adjust our cost structure and fire hundreds of employees, and there was not a peep or threat or labor sanctions. But the banks, with their strong unions and rigid collective labor contracts, face a more protracted and sensitive process.
So why have the banks nonetheless decided to streamline? It is because of low operating efficiency, mainly due to overstaffing in certain areas and high salaries, especially for veteran employees. Bank Hapoalim's efficiency ratio was 62.4% in the first half of 2012 and Bank Leumi's was 70.8%. In other words more than 60% of the banks' revenue was swallowed by their operating expenses, 60% of which is for salaries. For the sake of comparison, the foreign banks in the peer group have efficiency ratios of 50-55%, showing that Israel's banks have a lot of room for improvement.
At the same time, banks' capital has become more expensive, due to the Bank of Israel's tighter capital adequacy requirements. The higher capital adequacy will reduce the banks' return on equity by 2-3%, which means that under conditions of rigid expenses, profits will fall.
In addition, the public's much greater awareness of the banks' fees and commissions has made it hard to raise them. Since the fees reform in 2008, the banks have not raised their fees. Since the outbreak of the social protest last year, the banks have not dared to even consider raising their fees, which is perceived as illegitimate, especially when every hike requires Bank of Israel approval. As a result, in real terms, the banks' income from fees has been falling for several years.
On top of this is stricter regulation, which raises costs while reducing profits. For example, the Zaken Committee recommendations will reduce the banks' aggregate revenue by NIS 700 million a year, and the reductions in distribution fees for mutual funds will reduce their revenue by NIS 100 million a year.
The banks have room to streamline: they are overstaffed and salaries at some levels are well above the employees' productivity. The banks' financial reports for 2011 indicate that the average monthly salary cost of the banking system's 50,000 employees reached NIS 28,100 that year.
The salary cost of bank employees has risen 21% since 2003, or NIS 6 billion. The main reason for this steady rise is the automatic pilot clause in the collective labor contracts. The banks' aggregate salary cost was NIS 17.1 billion in 2011, 6% more than in 2010.
The banks' streamlining plans have some common features:
- It is not possible to fire bank employees, but it is possible to fire temporary workers and employees of external companies.
- Employees can be transferred to branches or back office centers, replacing temporary workers.
- Not replacing employees who retire.
- Early retirement plans.
The streamlining plans do not only result in savings on salaries; the reduction in space at branches and headquarters also greatly reduces real estate expenses, which could amount to tens of millions of shekels a year at the big banks.
Published by Globes [online], Israel business news - www.globes-online.com - on October 16, 2012
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