Israel regulator tells banks to be cautious over dividends during war uncertainty

By Steven Scheer

JERUSALEM (Reuters) – Israel’s banking regulator told commercial banks to be cautious when issuing dividends and conducting share buybacks, citing the need to remain conservative and provide credit while the country was at war and the economy was set to slow.

In a letter to banks, Supervisor of Banks Daniel Hahiashvilli said that since the conflict between Israel and Hamas began on Oct. 7, economic forecasts had been revised down and still may not reflect the expected decline. He noted that financial markets are volatile, credit risks have risen and loan losses are expected to “grow markedly.”

“When examining the capital plans and the decision on dividend distributions, you are to take into account the new conditions and the effects related to that, and to verify that you hold capital cushions that are sufficient enough to deal with the various risks,” Hahiashvilli wrote.

“It is also important that you will be able to continue to assist customers, among other ways, by providing credit to creditworthy customers,” he said, adding “limited access to credit for borrowers is liable to increase the severity of the economic crisis, to make exiting from it more difficult, and later on, to increase credit losses.”

Hahiashvilli, who noted that the banking system entered the war period in a strong state with high liquidity and adequate capital buffers, stopped short of banning dividends and buybacks as the central bank did at the outset of the COVID pandemic.

Banks, which have until Wednesday to examine their policies and respond to the request, said their plans would be known when they issue third-quarter results which begin on Thursday when Bank Hapoalim is slated to report.

On the heels of higher interest rates, banks had reaped strong profits so far in 2023 and boosted dividend payouts in the second quarter to as much as 40% of net profit.

Leumi, Israel’s largest bank, has said it would post a loan loss provision of up to 1.1 billion shekels ($270 million) in the third quarter to protect itself from consequences of Israel’s war with Palestinian Hamas militants.

“Whilst the other banks have yet to make announcements, the anticipated macro deterioration shall require further provisions,” said Jefferies analyst Joseph Dickerson.

However, he added: “The conclusion of our balance sheet ‘burndown’ analysis show banks’ (are) adequately capitalised to absorb losses.”