Israeli banks reported
solid results in the first half of 2007. Bank Leumi reported net
profit for the second quarter of ILS913 million, an increase of 142
percent compared with the second quarter of 2006. The government is
trying to sell one or more of the country’s banks to a foreign
player to increase competition.

Without the competitive pressure of foreign banks, it has
largely fallen to the Israeli government to legislatively foster
competition in Israel’s retail banking market. Some of the banks,
in turn, have been looking beyond Israel’s borders for growth

According to a recent report on the country by investment bank
Keefe, Bruyette & Woods (KBW), the combination of an increase
in wages and rising consumer consumption has created a positive
outlook for Israeli banks. For Bank Leumi, the largest bank in
terms of total assets and deposits, net profit for the second
quarter of 2007 was ILS913 million ($230 million), an increase of
141.5 percent compared with the corresponding quarter of 2006. Net
profit for the first half of 2007 was ILS1.83 billion, an increase
of 22.8 percent.

While the net profit of the Bank Hapoalim Group totalled ILS1.64
billion in the first half of 2007, a decrease of 11.1 percent, net
profit in the second quarter of the year totalled ILS1.0 billion,
compared with ILS665 million in the same period last year, an
increase of 50.7 percent.


Israel has a heavily concentrated retail banking sector dominated
by five banks: Bank Hapoalim, Bank Leumi, Israel Discount Bank,
Mizrahi Tefahot and First International Bank of Israel. Between
them, they have a 95 percent market share, with the largest two
banks (Hapoalim and Leumi) controlling 60 percent. Overall, the
government favours the sale to an international bank of one or more
of the largest five banks – though interest from major
international banking groups remains, seemingly, slight. Under
government legislation, Israel’s banks have been forced to withdraw
from areas of business where they might dominate, such as asset
management, as the government looks to actively dilute the market’s
concentration in certain areas.

One such law restricts the banks’ scope for pension fee income. All
banks in Israel have to apply for a pension counselling licence,
but are limited in the type of products they can sell. Of Israel’s
Big Five, only Mizrahi Tefahot has been granted a pension licence.
Earlier this year, the Israeli parliament passed legislation to
regulate banking fees also, although its delegation to the central
bank to determine the level of any restriction in fees was
regarded, said KBW, as a moral victory for the banking

The challenge for the government – and the banks – is that the
penetration of basic banking services in Israel is well ahead of
the level seen in most other countries in the EMEA region. In terms
of product penetration in 2006, total lending to the public stood
at 99 percent of GDP. Retail lending still has room to grow,
however, in particular the mortgage sector, with Israeli house
lending at around 30 percent market penetration, said KBW. While
the use of plastic as a means of payment is high in Israel – more
than 40 percent by value and volume – there remains scope for
increased credit card borrowing. Until around two years ago, the
structure of the market meant that card issuers tended only to
attract the credit card business of their current account
customers. The introduction of revolving credit cards in 2005 is
expected, going forward, to enable banks to improve cross-sell


According to KBW, the prospect of legislation from the Israeli
government forcing banks to divest their ownership of credit card
clearing and acquiring companies may result in “another round of
exceptional capital gains, generous dividends and pressure on
Israeli bank operating profits”.

While Bank Hapoalim continues to target increased market share in
its domestic retail operations, the bank has targeted 30 percent of
its revenue to be generated internationally by 2010, compared with
15 percent in 2007. It has enjoyed a degree of success by expanding
in Turkey and Kazakhstan and is known to be looking to add
acquisitions in Russia and Ukraine.

On 18 September, Bank Hapoalim sold its 51 percent stake in Bank
Massad to domestic rival FIBI for ILS236 million. Hapoalim’s
chairman, Dan Dankner, said: “Our decision to sell our stake in
Bank Massad is in line with Bank Hapoalim’s long-term strategic
plan of increasing the weight of international activity in its
overall business operations.”

The third-largest bank, Israel Discount Bank, has embarked on an
ambitious domestic retail investment programme, targeting in
particular on its branch and distribution strategy, but it has also
diversified away from Israel. On 24 September it bought a 10
percent stake in Netherlands-based Kardan Financial Services for
€50 million ($73 million); Kardan is focused on banking, insurance
and pension markets in Central and Eastern Europe.