Israeli banks Bank Leumi (TASE: LUMI) and Mizrahi Tefahot (TASE: MZTF) reported record profits for 2022, citing a growth in the credit portfolio and an increase in interest rates as the main reasons behind the great performance.

Leumi Bank’s net profit for 2022 increased by 28% to approximately NIS 7.7 billion, while Mizrahi Tefahot’s net profit increased by 40.3% to NIS 4.47 billion. Leumi Bank also recorded the largest profits in the banking sector, while Mizrahi Tefahot presented the highest return on capital at 20.1% in 2022, excluding capital gains from the sale of assets.

The increase in net financing income for both banks was largely due to the increase in the credit portfolio and increase in the interest rate of the Bank of Israel. Leumi Bank’s credit portfolio jumped by 18.8% and reached approximately NIS 385 billion, while Mizrahi Tefahot’s public credit portfolio reached approximately NIS 307.5 billion, an increase of 13.3%.

The interest rate increases raised Mizrahi Tefahot’s average monthly mortgage repayments by about a thousand shekels, resulting in interest income of NIS 10.24 billion, a 33% jump compared to 2021. Similarly, Leumi Bank’s interest income amounted to NIS 13.2 billion, an increase of 27.7% compared to 2021.

Despite the competition and changes in the operating environment, Mizrahi Tefahot managed to keep its status as the largest and leading bank in Israel in the field of mortgages. In 2022, the bank made new loans for housing and any purpose with a financial scope of approximately NIS 41 billion. Mizrahi Tefahot’s mortgage portfolio grew by 12% last year and stands at NIS 196 billion. Leumi Bank’s credit portfolio grew by a total rate of 18.4%, with the business portfolio growing by 28.7%, and the mortgage portfolio by 15.7%.

With interest rates rising from near zero to more than a decade highs in 2022, both banks increased their credit loss expenses in anticipation of borrowers failing to meet their obligations.

In contrast to consumers, Israel’s banks have benefited from changes in macroeconomic conditions, with the Bank of Israel raising interest rates to curb price increases and return inflation to its target of 2%. The consumer price index in Israel increased by 5.3% last year, compared to 2.8% in 2021. Following two additional interest rate hikes, the Bank of Israel interest rate, which was 0.1% at the end of the first quarter of 2022, has now reached 4.25%.

Unsurprisingly, Leumi’s board of directors approved a dividend distribution of NIS 698 million, or 30% of the company’s net profit for Q4 2022, for a total payment of NIS 1.8 billion to shareholders. Similarly, Mizrahi-Tefahot will distribute NIS 326 million (30% of Q4 2022 profits) in dividends in light of the company’s financial success. This brings the company’s total dividend payout for the year to NIS 995.4 million.