Israeli Banks Face Profit Decline in Q3 Amidst Interest Rate Cuts
Translated & summarized from Globes by baba
Israeli banks are anticipating an 8% drop in combined Q3 profits, totaling around 8 billion shekels, due to falling interest rates and inflation. Bank of Jerusalem reported a 13% profit decrease, missing forecasts. Major banks like Leumi, Hapoalim, Mizrahi Tefahot, and Discount are expected to follow suit with varying profit declines. Analysts predict low credit loss provisions, potentially cushioning the overall profit reduction.
The story in 6 lines · by baba
- Israeli banks' aggregate Q3 net profit is projected at 8 billion shekels, an 8% year-on-year decrease.
- Falling interest rates and moderating inflation are the primary drivers of the profit decline.
- Bank of Jerusalem reported a 13% profit drop to 508 million shekels, missing analyst expectations.
- Bank Leumi is expected to lead with 2.6 billion shekels profit, while Hapoalim faces a 12% decline.
- Low provisions for credit losses are anticipated across the sector, potentially softening the profit decrease.
- A special tax on banks continues to impact overall profitability.
Israeli banks are set to report a decline in profits for the third quarter of the year, with aggregate net profit for the five major banks projected to reach approximately 8 billion shekels. This represents a decrease from 8.7 billion shekels in the same quarter last year and 8.5 billion shekels in the second quarter of 2023. The downturn is attributed to a combination of falling interest rates and moderating inflation, although this has been partially offset by rapid credit growth and unusually low provisions for credit losses.
The Bank of Jerusalem, which initiated the reporting season, saw its net profit drop by 13% year-on-year to 508 million shekels, falling short of analyst expectations. Its return on equity was 13.8%, impacted by a special tax on banks. The bank's stock fell 4% following the report. Bank of Jerusalem will distribute a dividend of approximately 254 million shekels, half of its quarterly profit.
Analysts at Leader Capital Markets forecast that Bank Leumi will lead the sector with a profit of around 2.6 billion shekels, a modest 3% decrease from the previous year. Bank Hapoalim is expected to experience the sharpest decline, with profits around 2.4 billion shekels, down 12% year-on-year. Mizrahi Tefahot is projected to report a profit of approximately 1.34 billion shekels, a 10% drop, while Discount Bank is expected to show the lowest return on equity at around 12%, with profits of 1.05 billion shekels, an 8% decrease.
While inflation continues to contribute to financing income, its impact is lessening compared to previous quarters. The September inflation rate, which fell by 0.5%, is expected to negatively affect fourth-quarter results. The reduction in interest rates, however, is having a less severe impact than initially feared, as credit growth and stable checking account balances mitigate the effect of lower-interest deposits. The special tax on banks, amounting to about 3 billion shekels annually, continues to weigh on profitability.
Provisions for credit losses are expected to remain low across the banking system, with Bank of Jerusalem even recording an income of 9 million shekels from this category, attributed to a conservative provision made last year. Analysts believe that while risks in the system are growing, banks and the Bank of Israel feel confident about the current state of bank credit portfolios. If the trend seen at Bank of Jerusalem holds, other banks may also report lower-than-expected provisions, softening the overall profit decline.
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