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Quickening Growth No Help to Banks Hit by Shekel: Israel Markets

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Construction Of Residential Property
New residential apartment blocks stand during construction in Jerusalem. The Bank of Israel announced new limits on mortgages last year designed to shield borrowers and the financial system from risk after house prices surged more than 70 percent since 2007. Photographer: Ariel Jerozolimski/Bloomberg

April 30 (Bloomberg) -- Israel’s quickening economic growth is bringing no relief to the nation’s banks, whose profits are being hit by record-low lending rates and an appreciating shekel that’s whacking their exporter clients.

The Tel Aviv Banking Index of the five largest lenders dropped 1.1 percent today, extending this year’s decline to 2.1 percent. That compares with a 3.7 percent gain for the benchmark TA-25 Index. Shares of Bank Leumi Le-Israel Ltd., the second-biggest lender by assets, have slumped 4.6 percent, while Israel Discount Bank Ltd. is down 6.8 percent in the period.

The currency is little changed this year after climbing 7.5 percent against the dollar in 2013, the most of 31 major currencies tracked by Bloomberg, stoked in part by discoveries of natural gas off Israel’s Mediterranean coast. That’s biting into the profits of exporters, which account for about a third of the economy, and curtailing expansion plans.

“What we’re seeing is a big drop in corporate lending and banks are looking for alternatives,” said Daniel Hewitt, a senior emerging-market economist at Barclays Capital Securities Ltd. in London.

Bank credit to business fell an annual 4 percent in February to 386 billion shekels ($111 billion), according to the central bank. That compares with annual growth of 3.8 percent in June 2012.

‘Big Problem’

The shekel is a “big problem” and will limit the “ability to grow our employee base in Israel,” Dafna Gruber, chief financial officer of Nice Systems Ltd., said in February. The maker of analytical telecommunications products is based in Ra’anana near Tel Aviv.

The shekel appreciated 0.2 percent to 3.4641 a dollar at 5:32 p.m. in Tel Aviv.

“The appreciating shekel is becoming more and more of a burden on Israel’s export economy,” said Joel Kruger, the founder and strategist at Tel Aviv-based FirstMacro. “Business is drying up for banks because their customers are dependent on export revenue.”

Bank earnings are also under pressure because central bank policy makers have cut borrowing costs 10 times since August 2011 to 0.75 percent, the lowest since November 2009.

At the same time, new capital requirements, limits on mortgage lending and regulation aimed at lowering fees and increasing competition are hurting an industry with assets of 1.4 trillion shekels.

“The regulatory environment right now is very challenging,” Hewitt said.

Mortgage Limits

The Bank of Israel announced new limits on mortgages last year designed to shield borrowers and the financial system from risk after house prices surged more than 70 percent since 2007. Mortgages accounted for about 29 percent of the balance sheet of the five biggest banking groups as of June 2013, up from 20 percent in December 2007, according to the central bank.

The discount of the price-to-book value of Israeli lenders on the Tel Aviv Banking Index to Europe’s Stoxx 600 Banks Index has widened to 18 percent from 10 percent in the third quarter.

Banks “are struggling with the strong shekel and interest margins are getting compressed,” Terence Klingman, head of research at Tel Aviv-based Psagot Investment House, said by phone. “In this low rate environment, it’s hard to improve income levels.”

To contact the reporters on this story: Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net; Robert Lakin in Tel Aviv at rlakin1@bloomberg.net

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net Robert Lakin

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