Israel’s Banking Industry Remains Stable, Regulator Urges Higher Capital Buffers

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Introduction

The Israeli banking industry has been deemed stable by Standard & Poor’s, with a moderate risk appetite and high transparency standards. The report highlights the sector’s strong governance and transparency, competitive dynamics, and moderate risk appetite.

Stability of the Banking Industry

The Bank of Israel (BoI) has introduced several measures to strengthen the sector, including a requirement for banks to hold an additional capital buffer as a proportion of their mortgage portfolio. Each bank is also urged to set an individual CET1 capital target depending on its specific risk exposures.

Concentration and Competition

Israel’s banking system is highly concentrated, with five commercial banking groups holding about 95% of the market. While there may be limited effects from new entrants in the near future, the sector remains competitive and stable.

Governance and Transparency

“We view governance and transparency in Israel as supportive of the banking sector,” said Standard & Poor’s analyst. “Reporting standards, accounting transparency, and standardization of Israeli banks are high and steadily improving.”

Operational Efficiency

Banks’ operational efficiency, as measured by the cost-to-income ratio, is in the 60%-80% range, which compares less favorably with global peers. However, banks have been successful in reducing labor costs in recent years.

Efforts to Shift Risks Off Balance Sheet

The report notes that there are efforts by banks to shift risks off their balance sheet, mainly through selling loans rather than using securitization. While there is potential for the use of securitization in the future, following legislation of securitization laws.

Growth and Stability

Growth of total assets in the local banking system has been steady over the past few years, with a cumulative GDP growth rate of 11.6% from 2012-2015. This does not indicate a high risk appetite, according to Standard & Poor’s.

Conclusion

The Israeli banking sector is stable and expected to remain so, with no market distortions due to government or government-related financial institutions. However, there are distortions stemming from nonbank players, mainly insurance groups and institutional investors, which are expected to persist in the corporate and middle market lending segments.

Overall, Standard & Poor’s maintains a stable outlook for Israel’s banking industry, citing its strong governance and transparency standards, competitive dynamics, and moderate risk appetite.