Key Provision of Israel Banking Reform Said to Be at Risk

  • Panel said at odds over top banks issuing new credit cards
  • Members inclined to let Discount Bank sell part of card unit

A key element of Israeli Finance Minister Moshe Kahlon’s pledge to bring down banking costs is said to be at risk.

Kahlon and other members of a panel formed to boost competition in the industry want to force the two biggest lenders, Bank Hapoalim Ltd. and Bank Leumi Le-Israel Ltd., out of the credit card business for several years so new non-banking lenders can spring up. The Bank of Israel, which also sits on the panel, says that could hurt consumers. Months of compromise efforts have stalled, according to a person with direct knowledge of the matter, auguring ill for this effort to dilute the banks’ power.

“The banks will sell their credit card businesses, get a nice price for those assets, then find their way back into the market with a new hat,” said Yaniv Pagot, the chief strategist at Ayalon Group Ltd., an institutional investor in Ramat Gan, Israel, with 20 billion shekels ($5.2 billion) under management.

While the panel has agreed on dozens of key issues, this one is crucial to the reform, members say. If the impasse continues, the committee will stick to the majority opinion while noting the Bank of Israel dissent, leaving it to the government to decide, according to the person familiar. He spoke on condition of anonymity because he wasn’t authorized to discuss confidential talks.

Banks Resisting

Although Kahlon is a senior member of cabinet, the central bank’s arguments would carry significant weight. The banks, which derive 10 percent of their revenue from credit card operations and control more than half of banking market share, are lobbying lawmakers against the reform package, saying it could endanger a stable sector that weathered the 2008 financial crisis.

“From Kahlon’s perspective, he’s much better off if they’ve reached compromise on everything, and he doesn’t have the central bank raising concerns,” said Adi Scop, bank analyst at Israel Brokerage & Investments Ltd. in Tel Aviv. “I have a hard time seeing any legislation happening this year, if at all, and who knows if the government will still be standing by then.”

Shares of Leumi rose 1.2 percent and Hapoalim gained 1.7 percent at the close of trading in Tel Aviv.

The finance minister is trying to make good on a pledge he made during his election campaign last year, when he said he’d join any government that would allow him to “break the banks.” His promise to pare banking and housing costs helped him to lead his new Kulanu party to win 10 of parliament’s 120 seats.

Sale Agreed

Both the Finance Ministry and the central bank agree that Hapoalim and Leumi should sell their credit card units within two years to open the market to new competition, primarily in the household and small-business segments. What happens afterward is the point of contention.

Kahlon wants to bar them from issuing cards for at least four years, arguing that the new companies need time to cultivate market share. The Bank of Israel says they should be allowed to issue new cards immediately, reasoning that the new cards would have fewer financial resources and that may push margins up, not down.

Panel members have narrowed gaps on other issues of the reform that were in dispute, so compromise here may also prove possible. They had been divided over whether to let the third-largest lender, Israel Discount Bank Ltd., hold on to its credit card operations, but are likely instead to let it sell part of its card unit to an investor or to the bourse, the person said.

And while Kahlon wants a new regulator for the divested Hapoalim and Leumi card companies, the recommendations may leave the central bank as the supervisor of these businesses, he said.

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