Israeli Regulator Says Banks Must Cut Costs to Spur Growth

Israeli banks, whose shares have underperformed the benchmark index this year, need to reduce costs to cope with lower interest rates and tougher competition, Supervisor of Banks David Zaken said.

“It’s unrealistic to know there’s a problem and not deal with it,” Zaken said in an interview at his Bank of Israel office in Jerusalem on July 9. “Israeli banks need to improve efficiency. Their expenses are relatively high and this is reflected mainly in salary costs.”

The nation’s lenders have struggled to spur profit growth as the central bank cut its base lending rate by two percentage points since 2011 to 1.25 percent to support economic growth, which slowed to an annualized 2.7 percent in the first quarter from 2.9 percent a year earlier. The five-member Tel Aviv Banking Index has gained 0.9 percent this year, trailing the benchmark TA-25 Index’s 3 percent climb, after earnings at three of the lenders fell in 2012.

About 60 percent of operational expenses at Israeli banks stem from salaries, the most of any country in the Organization for Economic Cooperation and Development after Denmark and compared with an average of 47 percent, Bank of Israel data show. The efficiency ratio of Israeli banks, which measures the effect of operational expenses on revenue, is about 70 percent, the data show. The OECD average is 62 percent.

Tougher Rules

Banks “have the tools” to improve their efficiency, Zaken said. “I don’t think there will be a major shakeup,” in the industry, he said.

Israel Discount Bank Ltd. has adopted “efficiency measures including a voluntary retirement program and a substantial cut back in head count” since 2011, Barry Simon, head of investor relations, said today by phone. “This is an ongoing story and a central focus of the current management.” The bank’s stock gained 0.8 percent at today’s close in Tel Aviv.

The Bank of Israel stipulated last month that lenders must offer clients a single price for all basic services involved in managing current accounts to help customers better compare between offerings and improve competition.

The move comes after tougher capital requirements last year deterred banks from paying dividends as they sought to comply with new regulations to raise Tier 1 capital ratios to 9 percent by Jan. 1, 2015. The two biggest banks, Bank Hapoalim Ltd. and Bank Leumi Le-Israel Ltd., must achieve a ratio of 10 percent by 2017, according to a draft guideline published by the central bank in March 2012.

Paying Dividends

First International Bank of Israel Ltd. paid last month its first dividend since September 2010 after raising its Tier-1 capital ratio to 9.2 percent in the first quarter from 8.8 percent a year earlier. The stock increased 1.1 percent at the market close today in Tel Aviv, trimming this year’s drop to 1.1 percent.

“A bank that has reached or has the possibility to reach these targets, with the possibility to grow and also has a buffer for unforeseen events, will be able to distribute a dividend,” Zaken said.

Bank Hapoalim and Bank Leumi spokesmen declined to comment when contacted by Bloomberg News. Spokesmen for Mizrahi Tefahot Bank Ltd. and First International Bank didn’t immediately respond to e-mails and phone calls seeking comment.

Bank Hapoalim said July 11 it got regulatory approval to reintroduce quarterly cash dividend payments, triggering a 3.4 percent rally in the shares that day, the most since October, and bringing this year’s gain to 6.7 percent. The lender’s Tier 1 capital ratio increased to 9.87 percent at the end of March from 9 percent a year earlier, according to data compiled by Bloomberg. Bank Hapoalim last paid a dividend in July 2011, according to data compiled by Bloomberg. The shares fell 1.1 percent today.

Zaken said the regulator would publish a directive on liquidity levels in the next couple of months that would comply with international Basel III capital rules. Banks in most developed countries will phase in Basel III rules, which require lenders to hold more capital to back loans.