Israel's financial system is strong but the very high profits banks posted in the first quarter are not sustainable, its banking regulator said on Wednesday.
The country's largest five banks posted a combined 6.3 billion shekels in net profit in the first quarter, helped by higher inflation and interest rates that sharply boosted interest income, allowing banks to expand dividends and share buyback programs.
The central bank noted that an average return on equity of 16.4% was the highest since 2006. Some banks reached 20%.
"The 20% is like a spike right now," Yair Avidan, the Bank of Israel's bank supervisor, told reporters, adding that many assets in Israel are linked to inflation. "The second quarter will be mostly the same, but going forward it's not sustainable."
With inflation stubbornly high, the central bank on Monday raised its benchmark interest rate by 25 basis points to a high of 4.75%, its 10th hike in a more than year-long tightening cycle that brought the rate up from 0.1% - leading to a sharp rise in mortgage and other loan repayments.
Warnings about rising failure rates
Avidan called on banks to further pass on higher interest rates to customers' deposit accounts. He said that while 82% of the rate hikes have been passed on, many customers were still not fully aware they can open interest-bearing accounts.
"(I) call on banks to bring attention to customers that there are different options for their money," Avidan said.
He said even with a jump in mortgage rates, defaults are low, but cautioned that as long as interest rates are high, failure rates could rise.
Proposed judicial reforms that led to widespread protests earlier this year and alarm among Israel's Western allies have had minimal impact on banks, he said.
Some companies had said they would move funds from Israel, but Avidan said the outflows were not large and that money had come back to the country after the Silicon Valley Bank collapse.
Even if foreign inflows to tech firms slow, it will take time to filter to the economy,