2017 is shaping up as the last year with a significant increase in consumer credit from the banks. Consumer credit growth averaged 3% last year, and some of the banks took an even more aggressive attitude, boosting their consumer credit by 6-10%. 2018, however, is shaping up as a completely different story, whether because of messages from the Bank of Israel or internal decisions by the banks.
The most conservative bank in consumer credit is Bank Leumi (TASE: LUMI), which called a halt to growth in consumer credit already in 2017. Bank Leumi already explicitly addressed this point in its annual reports, stating, "In view of the prolonged trend in the Israeli economy in the level of private consumption, and in view of the degree of leverage among households, as reflected in the great volume and proportion of Bank Leumi's problem debt, the bank's management and board of directors have decided against increasing the appetite for risk in this segment." Bank Leumi also emphasized that it was enhancing supervision of consumer credit: "Given the rise in leverage among households in Israel, and in view of the likelihood that this trend will persist, in addition to scrupulous adherence to underwriting processes, regular monitoring of individual credit has been expanded and stepped up."
Mizrahi Tefahot Bank (TASE:MZTF) commented in its reports on difficulties in collection, following legislative changes, writing, "The increase in the proportion of expenses in respect of credit losses resulted, among other things, from the effects of legislation reducing the volume of debt payments by private customers who have encountered difficulties."
The banks' annual reports, provide a more profound look at the characteristics of consumer credit. Bank Leumi's figures show that the bank substantially reduced credit granted to customers for whom this was their sole activity, i.e. those with an account in another bank whose only business with Bank Leumi was taking a loan. This credit is considered relatively risky, because the bank usually lacks information about such borrowers that it has for other customers, and has no securities in the form of salary paid into the bank account or other assets of the customer. Bank Leumi cut its credit in this category by 25% to less than NIS 2 billion in 2017.
The bank's figures further show that it also shortened the duration of its loans. The proportion of loans for periods of over seven years and loans with no repayment period fell from 12.5% of Bank Leumi's portfolio in 2016 to 11.4% in 2017. Bank Leumi also reduced its exposure to large loans; the proportion of loans in excess of NIS 300,000 dropped from 9.2% of its credit portfolio in 2016 to 8.2% in 2017. Bank Leumi also cut its car loans 13% to NIS 2.26 billion last year.
Bank Leumi was not the only bank to reduce its risk exposure. Bank Hapoalim (TASE: POLI) will publish its annual reports tomorrow, so there are still no figures for its 2017 credit portfolio, but Mizrahi Tefahot Bank, which increased its consumer loans by over 6% in 2017, is slightly reducing its risk in large loans. The number of the bank's borrowers with loans of over NIS 300,000 fell 3% to 3,712 in 2017.
Israel Discount Bank (TASE: DSCT) has stood out in recent years in the growth of its consumer credit, with a steep increase in provisions for credit losses, which totaled NIS 550 million in 2016-2017. Discount Bank has also begun cutting back on its risk, as reflected in slower growth in the fourth quarter of 2017. The bank is also reducing the duration of its credit - the volume of its loans for periods of over five years was down 18% to NIS 2.6 billion in 2017.
Although Discount Bank's total consumer credit jumped 10% in 2017, credit for customers with no money coming regularly into their account fell from NIS 2.6 billion in 2016 to NIS 2.1 billion in 2017. Credit to borrowers whose monthly income was lower than NIS 10,000 also dipped slightly from NIS 10 billion to NIS 9.9 billion. Growth in Discount Bank's credit portfolio focused on stronger customers, who are considered safer, with monthly incomes of over NIS 10,000. Credit to these customers grew from NIS 14.5 billion in 2016 to NIS 16.8 billion in 2017.
Has implementation of the recommendations by the Committee on Increasing Competition in Banking and Financial Services (the Strum Committee) reduced credit prices? It is a pipe dream. The regulators are still trying to implement this reform, which was championed by Minister of Finance Moshe Kahlon for increasing competition in the banking system, especially in credit for households. In addition to separating the credit card companies from the large banks, the reform includes regulations aimed at introducing new players into the consumer credit market, currently controlled by the banks.
Will the reform really lower credit prices? It is by no means sure. What can be said is that non-banking credit concerns, headed by the credit card companies, which are being separated from the banks, will grow, and the supply of credit in the market will continue expanding. For their part, the banks are likely to fight for the stronger customers. The losers are likely to be the economically disadvantaged. More and more credit will be pushed at them, but because of their greater risk (again, partly due to the easing of bankruptcy proceedings), it will be credit at much higher interest rates.
Published by Globes [online], Israel Business News - www.globes-online.com - on March 26, 2018
© Copyright of Globes Publisher Itonut (1983) Ltd. 2018