The risks according to Bank Hapoalim: households, hotels and restaurants

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When the corona crisis erupted in March, there was hysteria in the economy that included a collapse in the capital market and the realization of lines of credit from the banks by many companies who feared that they would run into credit crunch and liquidity shortages.

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In addition, market volatility has forced capital market players to stock up on credit during this period as well. The result: within a few weeks, credit to the business sector jumped by about NIS 20 billion. But it seems that after the panic subsided and the economy returned to a certain routine, many companies realized that they did not really need the credit they had taken, and some returned it. This trend is reflected in Bank Hapoalim’s reports – the bank’s business credit fell by NIS 7 billion to NIS 73.9 billion in the quarter, while in the first quarter it jumped by more than NIS 5 billion.

This is just one example of fluctuations in Bank Hapoalim results In the second quarter, released in the sea last Thursday. The bank’s results seem to reflect the state of the economy – the expectation of a wave of bankruptcies, a decrease in the demand for credit due to the recession, and a move to digital that affects revenues. The Bank recorded a significant provision for credit losses of NIS 1.13 billion, which resulted in a sharp 85% cut in profits to NIS 133 million in the second quarter, reflecting a return on capital of only 1.3%.

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1. The main thing that obscured Bank Hapoalim’s reports managed by Dov Kotler were the provisions for credit losses. Already in the 2019 annual report published at the end of March this year, the Bank made provisions at the beginning of the corona crisis From NIS 2.5 billion. There is a difference between the current provision and the previous one: this time it is more focused. The Bank mapped the impact of the crisis on the various sectors, and accordingly their exposure to the various industries, and made the provisions.

The bank notes that high provisions were recorded in industries such as commerce, hotels, restaurants, commercial real estate and offices, as well as in credit to households. For example, provisions for credit to households amounted to NIS 507 million – of which NIS 244 million was in mortgages and the rest was credit. Consumer.

However, it is important to emphasize that most of the provision made by Bank Hapoalim, which stands at more than NIS 900 million, was made as a group provision, ie out of a negative outlook for the economy, and not due to failures by specific borrowers. The reason why the difficulties have not yet been revealed is that the banks have made it possible to freeze loans following the crisis. Bank Hapoalim has so far rejected debt repayments of customers in the amount of NIS 2.3 billion, with total loans frozen at more than NIS 40 billion. That is, the current state of the economy is of the artificial soul, and only next year, when the freeze is over, will the wave of bankruptcies and failures in debt payments begin.

The CEO"To Dov Kotler CEO Dov Kotler Photo: Max Moron

The rate of provisions made by Bank Hapoalim in the second quarter of the total credit portfolio is 1.5%, a rate that characterizes recession periods. For comparison, in the corresponding quarter last year, the rate of provisions from the portfolio was 0.4%. However, it is worth mentioning that for reasons of conservatism, the Bank of Israel pressured the banks to make a higher provision than the banks had planned.

2. Hapoalim’s credit portfolio grew at a moderate rate of 0.3% in the first half of the year to NIS 294 billion, but there were various trends within the Bank’s areas of activity. Consumer credit has fallen sharply by more than 7% since the beginning of the year to NIS 38.4 billion, both because the risk has risen and because during the closure the bank’s credit sales system did not work.

On the other hand, in the mortgage sector, the Bank continued to grow, with this portfolio growing by 5% since the beginning of the year. The bank’s environment notes that although the mortgage rate has not been affected so far, the mix has changed and there is a decrease in the average mortgage volume, as well as in certain segments such as luxury apartments. Although the bank has made high provisions for credit losses in this area in the last quarter, in the long run it still sees it as a strategic target for growth.

It is worth noting that the trend according to which on the one hand the Bank’s mortgage sector is growing, while on the other hand consumer credit is declining, affects the profitability of the Bank’s financing activities, because the interest rate on consumer credit (as well as risk) is significantly higher than mortgage interest rates.

Credit to small businesses recorded a slight increase in activity in the last quarter thanks to its participation in a state-guaranteed fund established following the Corona crisis. The bank provided NIS 3.8 billion in loans under this fund, close to 80% of which was given to small businesses.

Since the beginning of the year, credit in the commercial sector – credit to medium-sized businesses, has risen by less than 2%, while it has been the bank’s growth engine in recent years. This slowdown indicates the effect of the recession on companies, both in the decline in investments they make and in the decline in their working capital needs following the decline in activity in the economy.

3. At Bank Hapoalim, they are adapting to the situation: At the beginning of the year, it was decided at the bank to implement an efficiency plan that would include a cut of 900 jobs. The plan was built for three years (2022-2020), however following the Corona crisis its implementation was accelerated, and it is estimated that it will be completed by the end of the first half of 2021.

In addition, the current crisis is also leading to an increase in the use of digital. This is reflected in the Bank’s Fees section. Commissions in current account management were eroded in the second quarter by 13% to NIS 184 million, as a result of the transition to digital operations, where the commission is tens of percent lower than the clerk’s commission. That will allow the bank to simultaneously streamline and streamline the branch process, a move it has been operating in the past decade.

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