Banking Sector: Weathering A Storm
BMI View: Israel's commercial banking sector is facing a difficult period, with credit growth slowing and profitability contracting. Although we forecast loan growth accelerating, profitability will remain subdued due to increasing concerns associated with loan quality, which is resulting in an uptick in loan-loss provisioning. That said, the sector is still well placed to weather a storm over the coming quarters, given its conservative asset allocation strategy and rigorous regulatory standards.
Data from the Bank of Israel (BOI) show deposit growth in the commercial banking sector has accelerated in recent months, while credit growth has slowed considerably. However, we expect this trend will be partially reversed. Deposit growth came in at 10.1% year-on-year (y-o-y) in June, compared to average growth of 7.2% in 2011. However, the government will likely decrease its support for the economy over the coming months ( see our online service, September 3, 'Further Austerity Measures Unlikely') and with base effects kicking in, the pace of expansion will slow. We forecast deposit growth averaging 8.5% and 7.5% in 2012 and 2013 respectively.
Conversely, though credit growth has been slowing in recent months, averaging 5.7% y-o-y in H112, compared to 8.1% in 2011, we forecast it rising at a faster pace. This is mainly a result of the issuance of new mortgages, which account for a quarter of the commercial banking sector's credit portfolio, as the value of new mortgages spiking by 17% month-on-month in August. This was a 71.0% jump from average growth over the previous 12 months. That said, credit growth will not outpace deposit growth. Israel's weak macroeconomic backdrop, with growth set to slow in the coming quarters ( see 'Growth To Slow Heading Into 2013', Sepetmber 12), will limit lending. Moreover, increasing concerns over loan quality will incentivise the sector to maintain a conservative asset allocation strategy. Finally, while there is a risk the government could adopt macro-prudential policies such as limitations on mortgages to cool demand in the housing sector (as consumer price inflation has mainly been triggered by elevated housing prices), we do not think these policies will be implemented in the short term. As a result, we forecast credit growth averaging 6.5% and 6.8% in 2012 and 2013 respectively, down from 8.1% in 2011.
|Set To Slow|
|Banking Sector Deposits (ILSbn)|