The Israeli banking sector may be on the verge of a
fundamental change in its structure and business environment.
Various legislative initiatives are aiming to reshape the
banking sector, inter alia by make it easier to establish new
banks that will compete with the existing banks in providing
credit to retail and small business customers. These
legislative initiatives were triggered by public and political
changes and this is alongside the forces of the technological
revolution and the unique characteristics of the generation
that is new to the workforce and the client base.
The various initiatives provide opportunities as well as
challenges to potential newcomers and to the current players.
Only time will tell how these initiatives will actually change
the markets, and now is the time for entrepreneurs and
investors to be part of this change.
The current structure of Israel banking
sector
The Israeli banking sector is highly concentrated, dominated
by two banking groups, whose combined market share is about 60%
in terms of asset size and profit. In addition to their market
share, the two largest banking groups own two out of the three
credit card companies that operate in Israel. Two other banking
groups share another 30% of the market share, while the
remaining 10% is shared by three other banks and four global
bank representatives.
The structure of the banking system is a result of a
consolidation process that had been taking place over the past
few decades. This process took place partially due to the
policy of the Bank of Israel, the central bank that is in
charge of banking supervision, after the collapse of several
small banks at the beginning of the 2000s'. The 2008 crisis and
its outcome enhanced this trend because complying with
post-crisis regulations, such as increased capital requirements
and an enhanced control environment, is much more challenging
to a small bank with limited resources and capabilities.
One of the main challenges of the banking sector is its
relatively high costs, mainly the costs of its labour force.
Measured by two common ratios, the efficiency ratio and the
average cost ratio, the Israeli banking system seems to be less
efficient than the most OECD banking systems (source: 2015
annual review of the Israeli system, the Bank of Israel, June
13, 2016). In times of decrease in interest rate spreads due to
the lower interest rate environment and the increasing
digitation, the need to lower labour cost is crucial. The Bank
of Israel expressed its concern about this challenge, and in a
letter issued at the beginning of 2016, it required banks to
prepare long-term efficiency plans. In an unprecedented
initiative, the Bank of Israel will provide capital reliefs by
reducing capital targets for a transitional period for the cost
deduction gained by these plans. This is in addition to other
measures of the central bank to encourage deduction of costs of
the banking sector.
| Market share (in %)
of the Israeli banks |
|
Asset
market share (%) |
Profit
market share (%) |
| Poalim
group |
29.7% |
36.3% |
| Leumi group |
28.70% |
33.40% |
| Discount group |
14.10% |
8.80% |
| Mizrahi-Tefahot
group |
14.40% |
13.30% |
| FIBI group |
8.60% |
5.20% |
| Others |
4.50% |
3.00% |
| Total |
100.00% |
100.00% |
| Data
is based on Bank of Israel publications regarding the
financial statements of banks as at December 31,
2015 |
|
Public figures have been challenging the concentrated
structure
The concentrated structure of the banking system has been
criticized by political and public figures, claiming that it
prevents competition and that it is actually a duopoly of the
two largest groups. According to the critics, the lack of
competitiveness is reflected in high fees and interest rates
paid by the retail and small business customers, together with
lack of credit supply to these populations.
One of the notable critics of this concentrated structure is
the incumbent Minister of Finance ("the finance minister") who
took office in May 2015. Enhancing the competitiveness in the
banking sector was put on the top of the agenda of the Finance
Ministry. The Bank of Israel also announced that it will
support various measures that will enhance competitiveness in
the banking sector.
As a result, several unprecedented legislative initiatives
were introduced in recent months
After discussions between the central bank and the Ministry
of Finance, several initiatives were introduced, and currently
they are in different stages of enactment. The various
initiatives combined are aiming to strengthen the smaller
banks, to increase the number of players in the banking system
and to enable non-banking entities to compete with the banks.
The focus of these initiatives is the retail and small business
sectors. The main legislative initiatives are as follows:
Forced sale of two out of the three credit card companies
owned by the two largest banks. As noted above, there are three
credit cards companies in Israel, all of them owned by the
banks. One of the major initiatives for enhancing
competitiveness in the banking sector is forcing the two
largest banks to sell their credit card companies. Since the
credit card companies have a large client base, IT and
operational capabilities and risk management infrastructure,
they may be able to compete with their former owners and the
rest of the banking system in a relatively short time.
According to the understandings between the Ministry of Finance
and the Bank of Israel, currently the two largest banks will be
forced to sell their credit card companies, and a decision
about the third credit card company will be taken in four
years. This initiative is unique and it may raise concerns
about the expected increase of the household debt and the
optimal supervisory model. In addition, the banks oppose this
initiative, claiming that it breaches basic civil rights.
Establishing a central credit repository. To date, unlike
most developed countries, there is not yet a credit scoring
system in Israel. Because the banks do have credit history of a
large proportion of the population, the lack of a central
credit repository (CCR) gives them advantage in term of pricing
and other terms of credit granting over non-banking credit
providers. Thus, another infrastructure for enhancing
competitiveness in the banking sector is the establishment of a
central credit repository. This information sharing will enable
the non-banking credit providers to compete with banks and
consequently to increase the credit supply and lower fees and
interest rates paid by the customers. Legislation for the
establishment of a CCR was enacted in 2016, according which a
CCR will be established and maintained by the central bank.
Banks and other credit suppliers will provide the CCR with
credit history information, while credit bureaus will score
individuals based on the data stored in the CCR. The law sets
an aggressive timeframe of less than three years for the
completion of the CCR establishment.
Allowing institutional investors to grant credit to retail
and small business customers. Under the current legal
framework, banks are not allowed to provide insurance products
and insurance companies are not allowed to provide banking
services. This separation is also applied to holding and
ownership, as banks and insurance companies are not allowed to
be part of the same group or be controlled by the same
shareholders. One of the initiatives of the finance minister is
to allow insurance conglomerates to provide credit to the
retail and small business sector and to compete with the banks
on this population.
Sharing of IT resources by small banks. Currently banks are
required to own and maintain their main IT systems. For a small
bank, this requirement puts a heavy burden on its budget.
According to the understandings between the Ministry of Finance
and the Bank of Israel, this requirement will change so that
small banks will be allowed to share IT infrastructure and
hence to cut their IT expenses substantively. A regulation
draft with regard to this was issued by the Bank of Israel,
while the Ministry of Finance is considering allocating budget
to support the establishment of a new banking IT infrastructure
and thus making this initiative possible.
Easing licensing requirements of new banks. The Bank of
Israel issued several drafts for easing the licensing
requirements of new banks, mainly small ones. Inter alia, the
Bank of Israel will be committed to take decisions in a
pre-defined timeframe and it will lower the initial capital
requirements of a new bank. Issuing the new drafts reflects
some change of the policy of the central bank, which
historically preferred the stability that comes with larger
banks than the competitiveness advantages of having smaller
ones. However according to the drafts issued, these changes
will be applied after completion of the establishment of a
central credit repository, introduction of a deposit insurance
system and the setting of a recovery and resolution regime for
banks.
Adjusting the supervision framework to support the
suggested changes
As a complement measure to the various initiatives, the
Ministry of Finance and the Bank of Israel discussed the
desired supervisory model of the expected new environment. The
main issues of the discussions were which body will be in
charge of the supervision of the credit card companies after
sold, how to ease some supervisory requirements to small and
new banks, which body will be in charge of the supervision of
non-banking credit supplier and more.
In addition to the legislative initiatives, the
technological revolution makes its own impact
Israeli banks, like their counterparties globally, need to
deal with the technological revolution. Peer to peer lending,
payments, robo-advisory are only some of activities that had
been performed by banks and are threatened by new Fintech
entrepreneurs. The vivid start up ecosystem of Israel attracts
financial institutions from all over the world looking for
cutting edge technology and innovation. The generation that is
joining the labour market and the client base uses technology
naturally and is not attracted by old style face-to-face
banking. From a competitiveness point of view, the Fintech
initiatives are targeting the banks and forcing them to lower
fees and interest rates. The Israeli regulators are seeking
ways to encourage innovation and technological progress of the
banking system and are considering the regulatory model of the
growing Fintech community.
The future is being shaped today, as the financial system,
newcomers and the regulators are setting the foundations for a
new era. Now is the time for everybody to prepare so they will
be part of the future and will not be left behind.
The views appearing in this article are own
private views of the undersigned writers, and they do not
necessarily reflect the official views of KPMG in this
particular area. The information herein is of a general nature
and is not intended to address the circumstances of any
particular individual or entity. Although we endeavor to
provide accurate and timely information, there can be no
guarantee as of the date it is received or that it will
continue to be accurate in the future. No one should act on
such information without appropriate professional advice after
a thorough examination of the particular
situation.
| About the
author |
|
|
Eileen Toledano
KPMG Somekh-Chaikin
Tel-Aviv, Israel
T+972 3 6848120
F + 972 3 6848444
E etoledano@kpmg.com
W kpmg.com/il
Eileen heads the KPMG Israel Financial Services (FS)
practice with over 30 years of experience in the
financial sector. The Israel Financial Services (FS)
practice includes Audit well as Advisory Services.
Eileen is involved in both national as well as
global KPMG projects, and is a member of to the Global
KPMG Fintech Community of Interest.
Eileen is the Chairman of the liaison committee
between the Bank of Israel and the Institute of CPAs in
Israel (ICPA), as well as a member of various
subcommittees of the Israel Securities Authority.
|
| About the
author |
|
|
Dan Gan-Zvi
KPMG Somekh-Chaikin
Tel-Aviv, Israel
T+972 3 6848532
F + 972 3 6848444
E dganzvi@kpmg.com
W kpmg.com/il
Dan is a manager at KPMG Israel financial services
(FS) practice, leading knowledge management and
industry expertise of the banking sector. In addition,
Dan is involved in various audit and advisory projects
of banks and credit card companies.
Prior to KPMG, Dan worked for the regulation unit of
the Supervision of Banks department at the Bank of
Israel.
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