Israeli banking system stable but real estate loans too high

Israel Materials 25 May 2022 17:39 (UTC +04:00)
Israeli banking system stable but real estate loans too high

Israel's banking system is very stable, although there are some concerns that banks are underwriting too much in loans to real estate companies buying land, the country's banking regulator said on Wednesday, Trend reports with reference to Reuters.

"From a stability point of view, I am not concerned at all," Yair Avidan, the supervisor of banks at the Bank of Israel, told a news conference after publishing its 2021 annual report.

Still, the economic environment has changed, with the Ukraine conflict harming the supply chain and rising inflation and interest rates, potentially leading to more defaults, he noted. "The (financial) system right now is in very good shape, even though the two banks didn't pay dividends in the first quarter," Avidan said.

Of Israel's five largest banks, two opted against a quarterly dividend. One is paying 50% of net profit and two others will pay 20%, citing the need to retain capital for growth.

"They have the regulation needs to keep minimum capital requirements," Avidan said.

Israel's top five banks combined earned a profit of 5.7 billion shekels ($1.7 billion) in the first quarter versus 4.3 billion a year earlier on the heels of higher inflation that boosted financing income, while banks continued to unwind large loan provisions made during the pandemic to protect against defaults.

Earlier, the banking regulator issued a directive to banks to allocate more capital for financing land purchases for construction to minimise risk. Banks must allocate 100% capital on loan values of up to 80% and 150% capital above 80%.

Avidan said he was more concerned by the "culture" and not the marginal risk of the loan. "I was bothered that in case the underwriters will do the same not just in real estate, but in some other loans not having a substantial collateral like real estate," he said.

He added that in order to boost competition in the banking sector, another online bank is in the pipeline for approval after Digital Bank began operations last year.