'Banks must prepare for unexpected losses'

Capital adequacy ratios need to be improved, Bank of Israel says.

MarketWatch: In-depth global business coverage The Bank of Israel, having cut interest rates and boosted its economic growth outlook this week, turned its attention to the banking system and said that while the nation's banks had improved their performance, they still needed to strengthen their capital levels. Even as banks have improved their levels of risk-based capital in the past few years, "Israel is among the countries with the lowest surplus capital adequacy," the central bank said Wednesday. On this measure, Israel finished 23rd in a 2005 survey of 24 countries, with only Italy trailing. The strongest was Switzerland; the US finished 10th. "The banking system should therefore increase its capital-adequacy ratio ... to improve its ability to absorb unexpected losses in the future, particularly in periods of recession," the Bank of Israel wrote. In its review of the banking system for 2005 and the first nine months of 2006, the central bank noted that banks' risk-based capital had improved to 10.7% of risk-weighted assets in 2005 from 10% in 2000. The regulatory minimum is 9%. Through the first nine months of 2006, "the downward trend in banking risks persisted" as loan-loss provisions shrank and doubtful debts as a percentage of total bank credit eased, the central bank said. "On the other hand, salary and related expenses rose steeply," it stated, noting that this extended a trend seen over the last several years. The banking system's work force rose 3.7% in 2005, a reversal after falling for three years. And continuing a long-term trend, salary and related expenses rose 10.3% in 2005, faster than in other sectors, the bank said. In corporate lending, the banks have faced a challenge from other sources of credit, particularly corporate bonds, the report said. Total bank credit rose 3% in 2005 from 2004, to NIS 352.4 billion, while credit from alternative sources rose nearly 12% to NIS 63.7b. Not mentioned in the report - but critical to the banks' fortunes - is that the Bank of Israel also has been pressuring institutions about what many consider excessive fees placed on consumers. Profit at five major banking groups - Discount, First International, Bank Hapoalim, Bank Leumi and Mizrahi-Tefahot - rose 25% in 2005 to a total NIS 6.64b. The group achieved a return on equity of 17.9% in the first three quarters of 2006. The return on equity for all of 2005 was 15.5%. The figure, excluding extraordinary gains for the nine months of 2006 was 10.3%, the central bank said. The banks generated the gains after having been required to divest a number of investment funds in the interest of increasing competition in financial services. Earlier this week, the Bank of Israel increased its estimates of the country's economic growth for 2006 and 2007 and reduced the expected jobless rate, citing factors including signs of significant growth in fourth-quarter economic activity plus an improving global economy. It also surprised Israel's financial markets by cutting its benchmark interest rate half a percentage point, to 4.5%. Most economists had been looking for a quarter-point reduction. The bank cited lower-than-target inflation and the shekel's strength against the dollar for the move. (MarketWatch) MarketWatch: In-depth global business coverage