Title: Bank of Israel Urges Banks to Increase Provisions as Economic Uncertainty Grows
Subtitle: Concerns over inflation, interest rates, and political instability raise alarm bells
Date: [Insert Date]
The Bank of Israel has expressed deep concern over the economic uncertainty gripping the world, stemming from rising inflation rates and soaring interest rates. Adding to the worry is the ongoing political instability in Israel, which directly impacts the local economy. Last week, the bank published its financial stability report, highlighting these issues and urging banks to take necessary precautions.
In a dramatic message to banks, the central bank made it clear that it expects them to increase provisions for credit losses. This move comes as a response to the prevailing economic climate, which poses challenges to borrowers’ ability to meet their obligations. The bank called for an immediate increase in provisions in the credit loss section, which serves as a safety net for banks in case of loan defaults.
The publication of this message had a significant impact on the stock market, with the bank stock index dropping nearly 2% on Tuesday. While some experts believe that the concerns are currently headline driven, they acknowledge the need for banks to bolster their provisions given the high interest rates and anticipated economic slowdown.
Micha Goldberg, VP of research at Psagot Investment House, noted that the increase in provisions is not yet significant at the individual level. However, he predicted that the five major banks would collectively increase their provisions for credit losses by about 50%, rising from approximately NIS 1.1 billion in the first quarter to around NIS 1.6 billion in the second quarter.
Goldberg highlighted that these provisions are proactive measures taken by banks against potential future difficulties in repayment rather than a response to existing bankruptcies or credit problems. The banks currently have substantial reserves amounting to over NIS 18 billion as of the first quarter-end.
Despite the need to bolster provisions, Psagot predicts that the five largest banks will report high profits in the second quarter, with a total expected profit close to NIS 6.8 billion. However, this projection accounts for a decrease in profits when excluding a previous quarter’s reduction in value made by Bank Leumi.
Goldberg emphasized the optimistic outlook, stating that banks maintain high profitability even with increasing provisions. The average return on capital stands at 17%, showcasing banks’ ability to manage the situation. Additionally, Psagot’s forecast indicates that the banks will continue to generate substantial income from interest collected on loans to the public, surpassing NIS 15 billion in the second quarter.
Looking ahead, Psagot estimates that the banks will distribute 35% of the quarter’s profits as dividends. While uncertainties continue to loom, the banking sector seems well-positioned to weather these economic challenges, at least for the time being.
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