Hugh Fasken talks to Zvi Ziv, president
and CEO of Israel’s largest retail bank, Bank Hapoalim. Despite
forecasts of a substantial slowdown in the Israeli economy, he
expects his bank to generate a positive return on equity in 2009,
with retail and private banking at the heart of its long-term
business strategy.

Bank Hapoalim vies with local rival Bank Leumi as Israel’s
largest banking group (see RBI 582). At roughly 30 percent
each, the two have a 60 percent plus share of the country’s banking
market, a market of just five financial groups: Hapoalim, Leumi,
Israeli Discount Bank, Mizrahi Tefahot Bank and First International
Bank of Israel.

Zvi Ziv, Bank HapoalimFull-year results from
Hapoalim will be published at the end of March. Figures for the
first nine months of 2008 revealed a period loss of NIS532 million
($126 million), compared with net profit of NIS2.46 billion for the
first nine months of 2007.

The loss stems primarily from a charge of
NIS3.1 billion before tax recorded in the first quarter from the
sale of its entire US-based mortgage-backed securities portfolio at
steep discount. But net profit in the third quarter of the year was
positive at NIS441 million, compared with NIS823 million for Q307.
Moreover, net profit for the bank’s Household Segment – its core
retail banking business – was up 86 percent over the first nine
months to NIS514 million, and up 408 percent in Q308 year-on-year
to NIS127 million.

On 3 February, Hapoalim published a
comprehensive business plan which detailed how the bank will deal
with the impact the global recession is having on Israel’s
export-led economy.

The plan, in particular, involves a
significant reorganisation of the bank’s retail banking operations
with a view to substantial cost reduction: the roll-out of more
than 30 ‘Poalim Express’ branches (which offer quick, basic banking
services); a significant increase in self-service banking terminals
and ATMs; the addition of “dozens” more mortgage points-of-sale; a
focus on very small businesses (it has allocated NIS1 billion in
new credit to this segment); and the further centralisation of
administrative functions to make the bank’s 288 branches operate
more “efficiently”.

Zvi Ziv, Bank Hapoalim’s president and CEO,
said in the business plan that “despite forecasts of a substantial
slowdown of the Israeli economy and the persisting instability of
the global economy, we expect Hapoalim’s business momentum to
generate a positive return on equity in 2009”. Ziv, who joined
Hapoalim in 1974 and was appointed president and CEO in 2003, spoke
to RBI at the start of March.

RBI: What happened
to the Israeli retail banking market in 2008? Can you give any
indication of Hapoalim’s performance across the year? Has the bank
gained or lost market share in retail lending or

Macroeconomy. Israel - GDP growth, 2000 - 2009ZZ: During the first half of
the year, business activity was normal, although we clearly felt a
downturn in trading results and a significant drop in income from
capital markets activity. The competitive environment in the first
half of 2008 was also notable for increasing competition for
households, as indicated by the intention of all the banks to
expand their branch network. In total 56 new branches were opened
by Israeli banks during 2008 – not including mortgage branches –
versus only 17 during 2007.

During the second half of 2008, and mainly in
the fourth quarter, the competitive and business environment
changed due to the economic crisis. The decline in the value of
private banking customers’ assets, offloading in the capital
markets and the decrease in trading results adversely affected
income from retail banking. This trend is expected to continue in

Towards the end of the year (November and
December), an increase in the provisions for bad debt was apparent,
a result of the initial effects of the crisis on small-sized
businesses and of individuals losing jobs.

Overall, retail credit grew by 15 percent
during 2008, a rate of increase slightly lower than in previous
years. This was mainly because during 2005-2007, a focus on
corporate customer activity partially exhausted this potential. Our
deposits balances increased by 5.5 percent, slightly less than
market growth of 6.3 percent. In total, the bank’s market share of
approximately 32 percent was similar to 2007. The rapid interest
rate reduction caused erosion in financial margins, leading to a
significant decline in the retail division’s income, especially
from deposits.

Towards the end of the year, as market turmoil
increased, our focus turned to coping with macro scenarios, in
addition to day-to-day competition.

Liabilities. Bank Hapoalim - deposits breakdown, September 2008RBI: What have been
the key product developments over the year? Mortgage penetration in
the country is relatively low, for instance – has the bank made any
gains in the mortgage market? And what about credit

ZZ: The overall mortgage penetration
rate in Israel (around 34 percent in the Jewish population as of
end-of-year 2007) is indeed relatively low, but it is expected to
grow since in 2007 80 percent of home purchasers also took a
mortgage, and this trend is expected to continue in the future.

With respect to this market, we are developing
an operational model that will make it possible to offer mortgages
at twice the existing number of branches by, among other things,
building an advanced computerised selling model. However, since
Bank Hapoalim chose not to participate in the aggressive price
competition that was initiated in 2008 by some of the mid-sized
local banks, we lost a small part of this market segment.

With regards to consumer credit, during the
year Bank Hapoalim’s retail division undertook a major effort to
improve models for the extension of credit on the basis of
differential pricing, which make it possible to sell credit
directly. It is important to note that an advanced external credit
rating service does not yet exist in Israel.

The credit card market in Israel is actually
highly developed, with a penetration rate of around 75 percent in
the adult population and an average of 1.3 cards per customer. The
main development in this area is a rapid increase in the number of
non-bank credit cards. These make it possible to take a non-bank
loan and manage current consumption by determining the amount of
monthly repayment, like existing revolving solutions.

Largely because this is still a relatively new
market, the global annual rate of increase in non-bank credit cards
is estimated at 40 percent.

RBI: The Israeli
government has actively tried to increase competition in the market
via a number of legislative procedures (such as cutting banks out
of asset management activities, restricting pension fee incomes).
Did the level of government intervention in the market change in

ZZ: The extent of regulatory
involvement in the Israeli market clearly increased during 2008.
Investment houses and private brokers, which took on the management
of provident funds that were previously managed by banks, were
still performing strongly at the beginning of the year. With the
onset of the crisis, it became clear that a large portion of the
funds had been hurt, and public criticism of the loss of pension
fund capital increased.

As a result, the regulator considered issuing
the large banks a license for pension consultancy to salaried
employees (planned for the end of 2010). This followed the
realisation that the desire to encourage competition by delaying
the large banks’ entry to pension consultancy was inconsistent with
the need to provide advice to the largest possible number of
customers within a short period of time (due to the results of the
crisis and its implication for long-term savings).

The regulator became involved to a serious
extent in 2008 when it intervened in the charging of current
account fees, canceling a substantial number of them, and
determining two price levels: one for a transaction in a manned
channel and another for a transaction in an unmanned channel (the
price quotes are competitive, and a uniform price is not enforced
on the banks, but the separation is enforced). This intervention
led to a significant annual loss of income of hundreds of millions
of NIS, further compounded by a resulting increase in the use of
direct channels.

RBI: Banking fees
have become a hot topic around the world, with regulators
increasingly looking at ‘unfair’ banking charges (ATM fees,
overdrafts fees, etc). Is this a feature of the Israeli market

ZZ: Of course – and this can be seen
in the intervention in setting current account fee scales –
although we have to be precise about the reasons. The regulator in
Israel is taking action to create transparency and simplicity by
reducing the number of fees, making it easier for consumers to
effectively compare banks. However, there has never been a claim by
the Israeli regulator regarding so-called “unfair” banking charges.
Specifically, ATM fees and overdraft fees are clearly legitimate

It is important to note that as part of this
process, the regulator did not permit the continuation of the
“flat-fee method” practiced by Bank Hapoalim, which allowed the
customer to make a fixed payment for a basket of transactions, thus
creating simplicity and transparency. The regulator chose to leave
only the pay-as-you-go method in place at this stage. However, due
to public pressure, the regulator is now considering the resumption
of a “flat-fee method” in one form or another.

RBI: About a year
ago, the goals for the Israel banking industry seemed to be to get
a) more international banks to set up shop in Israel; b) for
Israel’s banks to expand more overseas. How has Hapoalim’s
international strategy played out in 2008? Any plans for further
expansion/mergers and acquisitions in 2009?

ZZ: Bank Hapoalim continues to grow
its global private banking line of business through subsidiaries
and representative offices around the world. The most recent
additions to the Bank’s international activities are its operations
in Turkey and Kazakhstan, through its recently acquired Turkish
subsidiary Bank Pozitif.

The bank is currently reviewing its
international strategy in light of global market conditions, and
making the necessary adjustments to avoid markets where risk has
increased beyond the bank’s appetite. As such, and also as a result
of limitations imposed on Israeli banks by the Bank of Israel, our
planned acquisitions in Ukraine and Russia were recently put on
hold. Moreover, we are making the necessary adaptations to our
operations in Bank Pozitif in light of the recent economic downturn
in its target markets.

At the same time, the strategic review is
aimed at ensuring that the bank is well-positioned to capitalise on
new opportunities as they arise.

RBI: Have
international banks set up in Israel? Are there significant
barriers to entry?

ZZ: No foreign bank has yet made a
significant entry into Israel. The number of affluent customers,
the natural main target segment for international banks, in Israel
may not justify making the required investments and incurring the
on-going costs associated with setting up a local retail

The extensive retail deployment of existing
banks in Israel creates a challenging competitive environment.
Also, there is a need to serve different sectors (ultra-orthodox,
Arab, Russian and Israelis in general), which involves cultural
differences and the need to adapt to different languages. The
absence of an advanced credit rating agency makes it difficult to
grant high-quality credit without an extensive historical database
on retail customers.