Israeli Banks Face Profit Squeeze Amid Shifting Economic Landscape

Israeli banks, which achieved record profits of approximately 32 billion shekels in 2025, are bracing for a more challenging year in 2026. Despite previous commitments from the Finance Minister, banks will face a special tax in 2026, adding to their concerns. The high profitability of recent years was largely fueled by a favorable macroeconomic environment, characterized by slowly declining inflation and high interest rates, which allowed banks to profit significantly from public funds with limited consumer financial literacy.

However, this trend is reversing. Declining bank profits have been observed in recent months, and 2026 is expected to be the first year in a long time without profit growth. Several factors are contributing to this shift. A reform in current account fees, increasing competition in foreign exchange and securities trading, and the anticipated entry of international digital bank Revolut alongside local digital bank esh will make it harder for traditional banks to charge fees.

Furthermore, while Israeli banks have historically excelled in efficiency compared to their global counterparts, current attempts by CEOs at major banks like Bank Leumi and Bank Hapoalim to implement significant changes are encountering strong resistance from employee unions. These combined pressures suggest that the era of easy profits for Israeli banks may be drawing to a close.

Bank executives are entering a new year where they will need to work considerably harder. This increased effort is seen as beneficial not only for customers, who will hopefully see more competitive services, but also for the broader economy, given the banks' critical role in economic growth and stability. The true test for these institutions will be their ability to become more competitive and innovative while maintaining stability, requiring exceptional management.