The announcement on Sunday that CEO Rakefet Russak-Aminoach planned to step down from the helm of Bank Leumi Le-Israel, the nation’s biggest bank by market capital, may have caught people unprepared, but is perhaps not truly surprising.
Russak-Aminoach, 53, is the third CEO of Israel’s five largest banking groups to announce a departure in the past four months.
Arik Pinto, 58, the CEO of the nation’s second largest lender, Bank Hapoalim Ltd., said in April that he would be leaving his position at the end of 2019 after four years, and the CEO of Israel Discount Bank Ltd., Lilach Asher-Topilsky, 49, said in June she would step down to become a senior partner at the Israeli private equity fund FIMI Fund. She was at the helm of Israel’s fourth largest lender since February 2014.
Russak-Aminoach and Pinto did not give a reason as to why they were leaving, but commentators say it is a combination of increased regulation in the industry, which limits the ability of CEOs to steer their firms to where they’d like, and the siren call of higher salaries in other, non-financial sectors, like private equity funds, tech firms, construction companies or even chemicals manufacturers.
Financial website Globes said Russak-Aminoach was in talks to join Israeli firm Team8, a cybersecurity think tank and investor. Team8 and Moody’s Corp., the ratings agency, said last week they will be setting up a joint venture for what they hope will become a global standard for evaluating how vulnerable companies are to cyberattacks. Leumi declined to comment on the report.
In 2016, Israel passed a law capping executive compensation in financial institutions, including banks and insurance firms, at NIS 2.5 million ($700,000) a year, or no more than 44 times the net salary of the lowest worker in the company. Before the cap, top CEO banking salaries reached as much as 8 million shekels a year.
Such generous pay is “unjustifiable and beyond all reason,” Finance Minister Moshe Kahlon said at the passing of the law curbing executive pay in the financial sector. The curbs and increased scrutiny on bankers’ activities were set in the wake of public outrage at the high salaries paid out to bankers even as banks wrote off colossal debts of millions of shekels belonging to business moguls with whom they cozied up to.
A cross-party parliamentary commission of inquiry set up in 2017 said earlier this year that these bank bailouts for failed tycoons have cost the Israeli public billions of shekels.
Yet detractors of the law, mainly representatives of the financial industry, warned at the time of a brain drain from the financial sector toward other industries in which limits were not imposed. And that, it appears, is coming true: The combination of capped salaries and increased scrutiny is turning these CEOs away.
“The capping of salaries is definitely a wrong move once this regulation was imposed only on the financial sector,” said Yaniv Pagot, an economist and head of strategy at the Ayalon Group, an institutional investor, in a phone interview. “In the long run this will cause damage and mean that first choice candidates won’t be leading our most important and sensitive banking institutions.”
Even so, he added, the CEOs who are leaving now “have been at their posts for a number of years; they haven’t left from one day to the next. I think it is a combination of feeling they need to move on to new challenges but also that they could be earning more for their skills.”
The Israeli banking system is dominated by five main groups: Bank Leumi, Bank Hapoalim, Mizrahi-Tefahot Bank Ltd., Israel Discount Bank and First International Bank of Israel Ltd.
These banks are in “an excellent state,” said Pagot. “Banks shares are at the highest levels they have been in the past few years and the fundamentals are strong. The management at these banks have managed to create efficiencies — by cutting back workers in cooperation with the strong labor unions at these banks, something other managements failed to do.”
At the end of 2018 the five banks jointly showed a 9.4 percent rise in net interest income to NIS 30.7 billion ($8.6 billion) and a 2% rise in net profit, to NIS 9.3 billion. Once notorious for inefficiency and unbreakable strong labor unions, Israeli banks have over the years managed to become more efficient through the use of technology and by downsizing workers and branches.
The efficiency ratio in the banking system (cost to income ratio) improved to some 64.4% at the end of 2018 from 72.6 in 2014, according to Bank of Israel data.
At end 2018, banks had cut back on the number of branches by some 8% and employees by some 15% from 2011 levels, the central bank data shows.
Banks’ credit portfolios have also improved, with provisions for doubtful debt accounting for just 0.2% of their credit portfolio at end 2018, compared to 0.5% some 10 years ago, Pagot said. And all the banks meet the capital adequacy ratios set for them by the banking regulator.
Shares have reacted accordingly: The TA-Banks index of the nation’s five largest banks has advanced 19% in the past 12 months, compared to a 5.4% rise of the benchmark TA-35 index for the same period of time.
“We are talking about people who are still relatively young, especially Russak-Aminoach and Asher-Topilsky,” Pagot said. “They can do other things and earn far more. If you can double or triple your income and do something new and exciting, why not?”
Israeli banks are not alone. The insurance industry, on which the salary caps were also imposed, has also been losing its chiefs to other industries. In May, Shikun & Binui Ltd., a construction and real estate group, appointed as its new CEO Eyal Lapidot, 53, who had formerly been the CEO of Phoenix Group, an insurer. Raviv Zoller, a former CEO of IDI Insurance company, in February 2018 was appointed CEO of fertilizer and chemicals maker Israel Chemicals.
Each of these CEOs “undoubtedly has his/her reasons for leaving, but clearly in some cases the ability to earn more outside of the banking and insurance sector may have played some part in the decision making,” said Terence Klingman, chief investment officer at the Heritage Family Office Partners Ltd., which advises wealthy families on where to invest their funds. Klingman is also a former head of sell-side research at Psagot Investment House where he covered Israeli banks, and has worked as director of equity research at the chief investment office of UBS Wealth Management.
“Overall, the role of CEO of a financial institution in Israel today is most likely less appealing that in the past due to a combination of the increasingly complex task of navigating financial institutions coupled with strict limitations on remuneration and increased perceived level of personal responsibility of management.”
The annual remuneration of the CEOs and senior management of Israeli financial institutions has been effectively capped at less than $1 million annually (the figure is the total cost to the bank, including pensions and other items), he said, while CEO pay in other industries remains unregulated, he said.
At the same time, regulators have required banks to do more to prevent money laundering and tax evasion and have increasingly enforced far more rigorous fair conduct and transparency towards clients, particularly in the insurance sector, by intervening in fee and premium levels set by insurers while attempting to allow for clawbacks in senior management remuneration linked to regulatory and conduct shortcomings.
“A $1 million salary is very frugal on a global scale, for CEOs who now have to deal with complex regulatory challenges and cannot be as flexible as they’d like when it comes to making strategic decisions for their companies,” Klingman said.
Moreover, financial institutions face increasing disruption from fintech, insurance technologies and technology startups in general, and non-traditional lenders who are now taking a bite of their market share, Klingman said. Facebook’s plan to launch Libra, a digital currency, could even further disrupt a global banking system that is already now undergoing a massive technological onslaught.
“Weighing this all up, we would not be surprised if at least some CEOs of financial institutions opted to transition to other less tightly regulated industries which may offer more freedom of movement to adapt to strategic challenges as well as holding out the possibility far higher levels of remuneration,” Klingman said.
“It is not only about money of course, but if you weigh up everything together –more regulation and a limited ability to maneuver strategically, then why shouldn’t they move, especially if they are young enough to do so. If you are a talented manager, you don’t need to be limited to just one sector.”
Since the 2008 financial crisis, regulators overseas have also increased scrutiny of the financial sector, but have generally not opted for a hard cap on salaries. In parts of Europe, for example, bonuses have been capped as a percentage of base salaries, which have resulted in base salaries moving higher, widening the gap with Israel, Klingman said. In the US, under the Dodd-Frank Wall Street Reform, financial firms have to reveal the ratio between the top pay and the bottom pay within the firm, but there is no cap on the ratio.
Israel’s salaries curbs on the financial sector are “far more draconian” than those imposed on their overseas peers, Klingman said.
So how can Israel ensure that, given the limitations, it still manages to attract top talent to its banks and financial institutions, which are key to the economy maintaining a healthy heartbeat?
The Bank of Israel, which is in charge of supervising the banking system, declined to comment.
“Overall remuneration in the financial sector globally has gone down, and the world will have to deal with the problem of how to attract top level talent to these jobs,” said Klingman.
Creating a system that links salaries and bonuses to the performance of the share price would perhaps have been a wiser move than just capping the salaries, Pagot said.