Israel’s banking sector is experiencing an exceptional year, with both Bank Leumi and Bank Hapoalim reporting record-breaking profits for 2024. Following Hapoalim’s strong financial performance, Leumi delivered an even bigger surprise, posting a 40% surge in net profit to NIS 9.8 billion – the highest ever recorded in the country’s banking industry.

Like Hapoalim, Leumi announced it would distribute 40% of its annual profit as dividends. The bank’s fourth-quarter net profit reached NIS 2.5 billion, reinforcing its strong financial standing.

Leumi’s impressive performance was fuelled by rising interest income and a sharp decline in provisions for credit losses. The bank’s net interest income climbed 3.2% year-over-year to NIS 16.5 billion, bolstered by high interest rates. At the same time, provisions for credit losses plummeted by 70% to NIS 713 million, following a spike in 2023 due to increased risk assessments mandated by the Bank of Israel amid the war.

Market analysts had anticipated strong results, but the bank exceeded expectations. IBI’s research director, Liran Lublin, had projected a fourth-quarter return on equity of 14.6%, but Leumi outperformed with a ROE of 16.2% in the quarter and nearly 17% for the full year. The unexpected boost stemmed from strong non-interest financing income and lower-than-expected tax expenses, as the bank met its annual war tax obligations sooner than expected.

However, not all financial indicators were positive. Leumi incurred a NIS 600 million impairment charge related to its holdings in the U.S.-based Valley Bank, though this was a reduction from the previous year’s provisions.

For the first time, Leumi outlined ambitious financial targets for the next two years, following a similar move by Hapoalim. The bank expects annual net profits to range between NIS 9 billion and NIS 11 billion in 2025 and 2026, with an ROE between 15% and 16%. While this marks a slight decline from 2024 levels, it remains significantly higher than the 13.7% recorded in 2023 before adjustments for credit losses.

Both banks project continued high profitability despite expectations of declining interest rates and inflation. Leumi anticipates interest rates to drop to a range of 3.7%–4.25% by the end of 2026, down from the current 4.5%. Inflation is expected to moderate to 2.5%–3%, compared to the current annual rate of 3.8%.

A notable development in Israel’s banking sector is the shift toward increased transparency in financial forecasting. Market sources suggest that Leumi’s decision to publish multi-year earnings projections stems from a growing influence of foreign investors. European investors reduced their holdings in Leumi at the onset of the war, and U.S. investors, accustomed to forward-looking guidance, have taken their place. Similar trends appear to be at play at Bank Hapoalim, which recently published an investor presentation in English on the stock exchange website.

Despite record profits, the Bank of Israel is closely monitoring the banking sector’s exposure to the real estate market. Leumi’s mortgage portfolio grew by 11% in 2024, reaching NIS 147 billion, compared to 6.4% growth at Hapoalim.

Loans with a loan-to-value (LTV) ratio above 60% accounted for 44% of Leumi’s mortgage issuances last year, totalling NIS 12.9 billion. This high-leverage lending is particularly relevant to first-time homebuyers, who are eligible for mortgages covering up to 75% of a property’s value.

Image credit: Bank Leumi, Tel-Aviv. (REUTERS Corinna Kern)