Despite the economic slowdown and tighter regulation, the banks reported a good third quarter. The five large banks recorded NIS 1.9 billion in third quarter profits - up 7.3% from the corresponding quarter of 2012. In the first nine months of the year the banks saw combined profits of NIS 5.7 billion - up 10% from the corresponding period of 2012.
However, although the numbers look good, the picture is actually more complicated. Considerable amounts of most of the banks' profits came from one-off items. For example, in the past quarter the banks enjoyed income from deferred tax assets. This item, which contributed more than NIS 100 million to some of the banks, came from the expected rise in company tax of about 1.5% at the start of the year.
What also helped the banks present good results in recent quarters was the aggressive selling of bonds portfolios with good profits, while Bank Leumi (TASE: LUMI) sold its Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) stake. If we take out these accounting profits and various capital profits we find a far gloomier picture of stagnation in income and financing and erosion of revenue from fees. These two trends are expected to continue and perhaps worsen.
The item of setting aside credit losses also helped most of the banks present growth in profits. In fact, except for Bank Hapoalim (TASE: POLI), all the banks reported a fall in this item with Bank Leumi even reporting income of NIS 44 million from this item following the recovery of a debt. The overall amount set aside by the banks for credit losses amounted to less than NIS 600 million in the third quarter compared with close to NIS 1 billion in the corresponding quarter.
The bans' income from financing totaled NIS 6.72 billion in the third quarter, up a meager 1% compared with the corresponding quarter. The stagnation in income was a result of low income but was not uniform in all the banks. For example Mizrahi Tefahot Bank (TASE:MZTF) grew this item by 11.7% while Bank Leumi saw 4% growth but the other banks aw a fall of 5% in this item.
How much did customers pay?
Customers paid the banks NIS 3.7 billion in fees in the third quarter, down nearly 2% from the corresponding quarter. In this item First International Bank of Israel (TASE: FTIN) was exceptional which succeeded in collecting 7.5% more in fees mainly due to more capital market activity - a main area of operation for the bank. Bank Leumi maintained its NIS 1.05 billion income from fees because it conducted a deep examination of customer benefits and found that in many instances it found were not justified such as student customers who had already completed their studies but still received benefits. Correcting fee pricing allowed the bank to prevention erosion of fees but it will difficult to maintain this achievement in the coming quarters. The most significant erosion in fee income was reported by Mizrahi Tefahot and Bank Hapoalim, which saw their fees decline 5.8% and 4.3% respectively.
The banks have been making efforts in recent years to implement streamlining plans and curb salary expenses. The first buds of this strategy are beginning to bloom will salary costs down 2.3% to NIS 4.3 billion in the third quarter.
Bank Hapoalim continues to report the highest profit among the banks with NIS 653 million in the third quarter. With the exception of Mizrahi Tefahot, the banks reported single digit capital returns of 8-9% on average. This is lower than in the past because the banks have greatly increased their capital base to meet Bank of Israel requirements on the matter. Surprisingly the most profitable bank was Israel Discount Bank (TASE: DSCT), which in the first 9 months of 2013 had impressive capital returns of 9%, higher than those of First International Bank. However, no small part of the bank's profits was one-off and it is unlikely the bank can repeat this next year.
Published by Globes [online], Israel business news - www.globes-online.com - on December 1, 2013
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