In its semi-annual report released on Wednesday, the Bank of Israel highlighted that all of Israel’s banks have capital ratios that exceed the central bank’s minimal capital requirements.

It cited banks’ improved efficiency ratios, strong capital and liquidity ratios, activity growth, and good credit quality. It also highlights a higher interest rates and inflation as short-term benefits for banks amid increasing interest income that boosted the banking system’s return on equity, which stood at 15.8% at the end of the first half of 2022.

However, Israel’s banking supervisor warned of a possible decline in banking system profits due to an uncertain economic outlook and increasing interest rates, which could lead to an increase in loan defaults.

As inflation reached a 14-year high of 5.2% in July before decreasing to 5.1% in October, regulators were forced to intervene to bring it under control, raising interest rates from 0.1% in April to 2.75%, the highest in almost a decade. However, the analysts are forecasting for this record to be broken next week, when another 75 basis points increase is expected. And, with the Bank of Israel stating during the last month’s meeting that it intends to keep interest rates above 3%, there is clearly a possibility that some borrowers would default on their loans.

From a financial viewpoint, banks’ bottom lines have benefited from interest rate hikes because of the substantial uptick in mortgage and other debt repayments. Thus, the banking sector was one of the year’s few bright spots, outperforming major stock market indices.

Next week, Israeli banks will start reporting their financial results for the third quarter.