It's not pleasant to receive a rebuke from the boss. That apparently is how the chiefs of Israel's banks felt on Thursday, when they sat opposite Governor of the Bank of Israel Stanley Fischer like chastised children caught after running wild and breaking a classroom window. Politely, in a soft Anglo-Saxon accent, but with uncompromising words, Fischer reprimanded the respected bank CEOs, with their high salaries and high prestige.
Fischer is very concerned about the growing competition between the banks in the mortgage market. It sounds strange after all, we are all in favor of competition, especially Fischer. He was the one who pushed and coaxed the banks into competition over the household account market, so why is he rebuking them when they do as he asks and compete aggressively with one another?
The answer, in a word, is proportion. As Fischer sees it, the banks have gone too far. In recent years, mortgages at most banks have become a loss-leader. The banks have been subsidizing mortgages in order to attract customers and increase their market share. The consequences can be seen in the banks' profits on mortgage activity. Since 2004, the mortgage portfolio has grown from NIS 104 billion to NIS 184 billion, a jump of 77%, half the increase coming in the past two years. However, the banks' aggregate profit on mortgage activity has risen only 20%. The conclusion is clear: the spread has narrowed, and the product is even sold at a loss.
How much do the banks make on every shekel invested in a mortgage? In most of the banks, the return on capital in mortgage activity is substantially lower than in other activities. Mizrahi Tefahot Bank, thanks to exceptional efficiency and an older and highly profitable mortgage portfolio, reports a return of 13.4%, but at Leumi Mortgage Bank the return is 6.8%, while at Discount Bank it is 5.7% and at Bank Hapoalim 4.9%.
The problem, from Fischer's point of view, is that mortgages are not just another product. A mortgage is a huge long-term loan in a risky, disaster-prone real estate market. Bad mortgages set off the crisis of 2007. Fischer has no intention of going there. If the banks put themselves at risk, if the customers are problematic, if the risk management is defective, in the end, it's his problem. And Fischer, like every responsible adult, is protecting the wild children from themselves.
Published by Globes [online], Israel business news - www.globes-online.com - on May 2, 2011
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