Israeli banks rake in record profits as their war-battered customers drown in debt

Israel’s two largest banks published financial statements this week showing both raking in record numbers of shekels. Behind the soaring financials stand millions of Israelis, whose sky-high interest payments, credit fees and other charges have fueled the unprecedented payday for lenders.

Not only have the banks posted massive financial gains on mortgage payments and superfluous fees and by avoiding paying interest on money deposited by customers, but they have done it all despite the nation being mired in war and economic hardship.

Why this anomaly? For starters, the banks are designed to serve the prime business interest of maximizing profits for themselves. But it’s also simply because they can, thanks to a weak regulatory environment allowing banks to run roughshod over their customers.

“The banks have exploited the war situation,” Gali Ingber, head of finance studies at the College of Management Academic Studies, told The Times of Israel. “During this challenging period, most customers were not available to deal with banking issues or their savings plans, as a large part of the population was serving in the army and reserve duty to defend the country, and thousands of others were evacuated from southern and northern communities grappling with the impact of the war.”

“This has allowed the banks to continue to act like a pig,” she added.

On Tuesday, Bank Leumi, Israel’s second-largest lender, announced that its profits in 2024 had soared to a record of almost NIS 10 billion ($2.8 billion), as it cashed in on high interest rates paid by mortgage and loan holders, and its credit and loan operations flourished.

The country’s largest financier, Bank Hapoalim, said this week that it earned a whopping profit of NIS 7.64 billion ($2.1 billion) last year, besting records set in 2022 and then in 2023, as borrowing costs for mortgage and loan holders remained high and helped propel income from net interest and credit fees.

Data shows that large numbers of Israelis spend more than they earn each month, with more than one-third of households in 2024 stuck in a chronic overdraft trap. Many are falling ever deeper into debt as they struggle with a series of war-related tax and price hikes, and interest rates remain high.

The Hamas-led onslaught on southern Israel on October 7, 2023, that triggered the war has brought economic hardships to many families, in particular residents of border towns near Gaza in the south and Lebanon in the north. Many reservists were forced to shutter their businesses and others have collapsed as the economy is battered by the war.

Over the past years, the central bank steadily hiked interest rates from a record low of 0.1 percent in April 2022 to 4.75% in July 2023 to prevent inflation from climbing too high. Despite the outbreak of war, the Bank of Israel has cut borrowing costs only once since then, in January 2024, with the rate now remaining at 4.5% for over a year.

The big winners are the banks. The loser is the paying public, which is contending with ever-increasing monthly repayments of mortgages and loans. This is increasing the financial burden on households and businesses and reduces their disposable income.

This has allowed the banks to continue to act like a pig

At the same time, the country’s banks have been sluggish or are failing to offer customers higher interest rates faster on their deposits and savings. Israeli banks charge households with accounts in overdrafts a steep 12.7% interest on average. Meanwhile, the average interest Israeli banks pay on shekel deposits ranges between 3.5% and 4% on average. The wide gap leads to the public paying very high interest rates on debt, which in turn is deepening the personal finance troubles of households and businesses.

Banks also notch major profits off of money that their customers place in checking accounts. Despite not offering any interest payments or returns to the customers, the banks are able to use the money in the accounts as a cheap and stable source of financing for themselves.

Lack of competition, reduced services

So why don’t consumers just go to a better bank that offers them more competitive rates? There are none.

“The banks in Israel enjoy excess profits as they are earning more than they would in a competitive market,” said Moshe Kashi, director of the Finance Department at grassroots advocacy group Lobby 99. “The country’s concentrated banking system is controlled by the country’s five largest banks and if there were more competition, the banks wouldn’t be increasing their income from the interest rate margin – the difference between interest received and interest paid.”

With little competition, banks are also able to charge excessive fees with little fear of blowback.

“The excess profit comes straight out of the pocket of consumers as it is generated partly from unnecessary bank fees that customers are paying, some of which they often don’t even know about,” Kashi said.

Kashi elaborated that the profitability of Israeli banks also stems from aggressive efficiency measures they implemented, allowing them to cut operational costs.

“In a competitive market, this would have led to a reduction in the costs of products and services banks offer and trickle down to the consumer, but in Israel the fruit of their efficiency measures goes straight into their profits,” said Kashi.

The central bank and Supervisor of Banks have in recent years been seeking to increase competition by trying to lower the barriers for the entry of new banks.

Bank of Israel Governor Amir Yaron has repeatedly urged the country’s banks to present concrete plans that would expand the options available to customers for investing their money in interest-bearing deposits, but with little success.

On Tuesday, Knesset Finance Committee chairman Moshe Gafni criticized the regulator, saying the “state and the Bank of Israel have failed in their supervision of banks.”

“There is an economic need to allow banks to operate independently, but this recklessness… crosses the line of reasonable and normative management of banks in Israel,” Gafni lamented. “At a time when the cost of living is rising and many families are barely making ends meet, the banks are operating as if there are no price increases.”

Gafni’s comments tapped into a vein of outrage among the general public over the banks’ seeming greediness. Some lawmakers over the past year have proposed legislation to rein in excess profits and ease the burden of credit and loan payments for households and businesses.

“The optimal way to improve customer conditions is by increasing competition within the banking system,” a spokesperson for the central bank said in response to a Times of Israel query, noting that it was advancing various measures toward that goal.

“Some of these initiatives have already materialized, improving customer welfare — such as the mortgage transparency reform, rapid switching between banks, and the credit data system — while others will take effect in the future,” the spokesperson said.

Hapoalim and Leumi did not immediately respond to requests for comment.

It’s likely no coincidence that days before Hapoalim and Leumi posted their massive profits, the central bank instructed the country’s lenders to allocate NIS 3 billion ($830 million) for a voluntary program to fund financial relief and improve credit and interest conditions for war-affected customers.

Both Kashi and Inberg agreed that regulators’ efforts had fallen short, and that proposals by policymakers should be considered to increase competition among the banks in a way that will serve a public drowning in debt and bank fees.

“This is not the way a regulator in Israel should act,” Kashi said of the voluntary relief program. “A regulator needs to take care of customers and create a competitive market that serves the public instead of making voluntary deals and hop[ing] for the banks to give back.”