Wharton’s Public Policy group did a nice analysis of Israeli bank regulatory changes in 2017 and the time is now due for major players to execute. The regulator’s objective is to open competition and bring innovation. Little is done to address pricing, but rather to break down walls for new players.
- The recent passage of the Law for Increasing Competition and Reducing Concentration in the Israeli Banking Market by the Knesset (parliament) marks the biggest structural change in the banking sector since the ‘Bachar reform’ of 2005 — named after Yossi Bachar, former finance ministry director general — which required commercial banks to divest their asset-management subsidiaries. These reforms resulted in a far-reaching shake-up of the pension, insurance and investment sectors.
- The central feature of the new law is the requirement that the two biggest Israeli banks — Hapoalim and Leumi — divest their credit card subsidiaries.
- This time, the divestment is limited to Isracard and Leumi Card, the two main credit card companies and hence the dominant players in the sector, which are owned by Hapoalim and Leumi respectively.
- Meanwhile, Hapoalim and Leumi were given three years to divest Isracard and Leumi Card, either by being spun off, or sold to strategic or financial investors. If they choose the former route, the law allows them to sell 60% of their stake within three years and to complete the process in the fourth.
Today, Bloomberg reports on the IPO of Israel’s largest credit card business
- Bank Hapoalim Ltd. is leaning towards an initial public offering for Israel’s largest credit-card business, rather than a sale or distributing its stake to shareholders, that could value the unit at about $1 billion, according to people familiar with the matter.
- Two factors underpin the bank’s current thinking: underwhelming bids from private investors and a desire to remain as a minority shareholder in a business that will compete with Hapoalim over retail credit in the near future, the people said.
- Hapoalim and its largest rival Bank Leumi Le-Israel Ltd. are obligated to sell their credit-card businesses by 2020 under recently passed Israeli banking reforms. An IPO gives the banks another year to sell down to 40 percent.
Globes, an Israel based business journal, defined the market and growth in 2017.
- The credit card market in Israel has a NIS 300 billion annual turnover. Credit card use has been growing by 7-8% a year as a result of the rise in private consumption and the switch to the use of credit cards. Three companies control the market: Isracard, with a market share of almost 50%; Leumi Card; and ICC-Cal, whose market share is 25-27%. Will tiny Bank of Jerusalem manage to change the balance of power?
- There are over eight million active credit cards in Israel. (with a population of 8 million)
The big takeaway is that regulators are requiring large issuers to sever their relationship with their bank parents, which will be interesting. Credit cards are different in Israel than most of the world. They are branded American Express, Discover, Mastercard or Visa, but they work more like debit cards than credit cards. Instead of the good-old-American-invented minimum payment, they settle and clear the balance monthly. Credit resembles a delayed debit function with 30 days credit rather than the typical 2-3% of balance our market is used to.
In this market you may ask for payment extension by saying ““Cama tishlumim” but the money held back in your credit line.
What I am watching for in this market is the long term impact of the divestment; will this bring true and all the economic benefits? A few revolving shekels won’t hurt!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group