Banks asked to hold sufficient capital cushions and provide credit to customers
Israel’s banking regulator has sent a letter to commercial banks, advising them to be cautious when issuing dividends and conducting share buybacks, in light of the ongoing war with Hamas and the expected economic slowdown. The regulator said that banks should take into account the new conditions and the effects related to them, and verify that they have enough capital buffers to deal with the various risks.
The letter, written by Supervisor of Banks Daniel Hahiashvilli, also stressed the importance of continuing to assist customers, especially by providing credit to creditworthy borrowers. He said that limited access to credit for borrowers could worsen the economic crisis, make the recovery more difficult, and increase credit losses later on.
Hahiashvilli noted that the banking system entered the war period in a strong state, with high liquidity and adequate capital levels. He did not ban dividends and buybacks, as the central bank did at the beginning of the COVID pandemic, but asked banks to examine their policies and respond to his request by Wednesday.
Banks to report third-quarter results amid war uncertainty
The banks are expected to report their third-quarter results starting from Thursday, when Bank Hapoalim, the second-largest bank in Israel, is slated to announce its earnings. The banks had reaped strong profits in the first half of 2023, thanks to higher interest rates and lower loan loss provisions, and boosted their dividend payouts to as much as 40% of net profit in the second quarter.
However, the war with Hamas, which began on Oct. 7, has changed the outlook for the banking sector, as well as the whole economy. The war has caused financial market volatility, increased credit risks, and reduced consumer and business confidence. The central bank has revised down its economic growth forecast for 2023 from 5.5% to 4.8%, and warned that the war could have a deeper and longer impact if it continues.
Leumi, the largest bank in Israel, has already announced that it would post a loan loss provision of up to 1.1 billion shekels ($270 million) in the third quarter, to protect itself from the consequences of the war. The other banks have not made similar announcements yet, but analysts expect that they will also have to increase their provisions, which will weigh on their profitability.
War poses challenges and opportunities for banks
The war with Hamas, which has killed more than 300 people and injured thousands more, has posed significant challenges for the banks, as well as the entire Israeli society. The banks have had to deal with operational difficulties, such as closing branches in rocket-hit areas, ensuring the safety of their employees and customers, and maintaining their technological systems and cyber security.
The banks have also had to cope with the humanitarian and social aspects of the war, such as supporting the families of the victims, donating to relief organizations, and offering financial assistance and flexibility to affected customers. The banks have announced various measures, such as waiving fees, postponing loan repayments, and providing emergency loans, to help their customers cope with the war situation.
On the other hand, the war could also create some opportunities for the banks, such as increasing their market share, enhancing their customer loyalty, and diversifying their income sources. The banks could benefit from the increased demand for credit, especially from the government and the defense sector, as well as from the potential inflow of foreign capital and aid, once the war ends. The banks could also leverage their digital platforms and innovation capabilities, to offer new products and services to their customers, and to attract new segments of the market.
