Dr. Yuval Rabinovitch
The year 2016 was not a good one for the Israeli Banking System, especially not for the group "Hapoalim". Indeed, the
profits increased but the profitability decreased. The return on equity (ROE) and the return on assets (ROA), as well as
the profits from regular operations to total assets, all have decreased compare to the previous year. Notably the reduction of
the interest margin. It is quite important because the financial operations are the main source for income of the banks. If the
profitability decreases, the banks will have to look for other sources of profits, which compensate the cut down in
interest income.
A positive and important point is the continuation of decline in number of the employees, together with increase of labor
productivity. However, higher productivity did not reflect higher profits nor higher efficiency. Some of the indices,
though, showed a moderate increase, compare to last year, but other efficiency ratios sowed deterioration. Low
efficiency is the most weakness of Israeli Banking System. In recent years, Israeli banks have devoted much effort to reduce
the number of employees. However it seems that it is not enough. The banks must increase investment in technology and
improve work processes. Regarding risk taking, most of the indices have improved substantially. The ratios of "Capital
Adequacy" have reached the minimum requirements and even more. Nevertheless, higher Capital Adequacy ratios
means less loans that banks can give.
The quality of the loans improved in the last year at most of the banks. The amount of problem loans diminished as
did the amount of non-performing loans. The provisions for problem loans cut down and reached a very low level,
compare to recent years. The improvement of the loan files took place in spite of the fact that economic conditions of
the firms in Israel remained unchanged.
What will be in next year? The economic rate of growth is very low. The level of interest rate is close to zero, the
inflation rate is also very low and the capital market in a recession. The conclusion is that the external sources of
income will not suffice and the banks will have to rely on internal sources only.
