Israeli Banks Adapt to Lower Interest Rates While Maintaining Strong Profits
Israeli banks are entering a new financial environment marked by falling interest rates and easing inflation, which makes generating profits from lending more challenging. Despite this, four of the five largest banks, Leumi, Hapoalim, Discount, and the International Bank, reported their second-quarter financial results last week, with Mizrahi-Tefahot set to close the reporting season. While Hapoalim and the International Bank showed a decline in net profit, excluding a special 3 billion shekel tax imposed on the banking sector in 2026, they still posted moderate profit improvements. Bank Leumi stood out with a record net profit of 2.83 billion shekels, and most banks maintained high double-digit returns on equity between 15% and 16%, levels unheard of a decade ago.
The banks accelerated credit growth in the last quarter, with Bank Leumi’s loan portfolio, the largest in Israel, growing 9% since the start of the year and 15.8% compared to the same quarter last year. Other banks also saw significant loan growth: Hapoalim by 14.3%, Discount by 9.8%, and the International Bank by 20.1%. This growth occurred despite geopolitical risks, government warnings about economic challenges, and real estate market uncertainties. Importantly, credit quality remained stable, with non-performing loan ratios low and manageable across the major banks. Exposure to the construction and real estate sectors also appeared well controlled.
However, the increase in credit volumes only partially offset declines in interest income due to the drop in interest rates from 4.5% last year to 3.5% in July, with expectations of further decreases. The International Bank was most affected, with a 1% rate cut potentially reducing its financing income by about 453 million shekels. Inflation moderation also dampened income, particularly impacting Mizrahi-Tefahot due to its large mortgage portfolio. Additionally, the banks’ large current account balances, which generate little or no interest income, contributed less to profits as these balances shrank relative to loan portfolios.
To sustain profitability, banks relied on three main strategies: expanding non-interest income and investment arms, increasing fee income, and operational efficiency. Bank Leumi’s non-interest income surged nearly 40% to about 2 billion shekels, driven by capital market gains and subsidiary profits. Fee income rose across the sector, with Discount up 7.8%, the International Bank 9%, and Leumi 2.8%. Operationally, banks are implementing workforce reductions and early retirement plans, with Discount planning to cut 600 employees in 2026 and Hapoalim aiming to reduce 770 staff by 2028. Leumi improved its operational efficiency ratio to 24.7% in the first half of the year.
Finally, banks maintain substantial provisions for credit losses, which could be released if economic conditions improve or loan growth slows, potentially boosting profits further in a low-interest environment.
