Bank Leumi branch

Hanan Friedman talks about digital strategy in the lockdown age and the opportunities created by the Abraham Accords.

Hanan Friedman headshot

Hanan Friedman

Benefiting from one of the world’s highest vaccination rates, Israel’s economy is set to rebound strongly this year, despite fresh concerns about the spread of the Delta variant of Covid-19. After shrinking by 2.6% in 2020, the country’s economy is set to grow by 6.3% this year and 5% in 2022, according to Bank of Israel projections.

Bank Leumi is Israel’s largest bank by assets, recently climbing one place to ninth position in The Banker’s Middle East ranking. The bank reported a sharp rise in earnings in the first quarter of 2021 on the back of a 4% growth in credit, together with a reduction in provisions as the country’s economy began to pick up steam.

Bank Leumi CEO Hanan Friedman spoke to The Banker’s John Everington about the prospects for further unwinding of provisions, his predictions for the ongoing growth of digital banking services, and the economic impact of Israel’s newly-normalised relations with the United Arab Emirates (UAE) and Bahrain.

Q: How has Israel – and its banking sector – weathered the storm of coronavirus thus far?

A: Israel’s economy shrank by just 2.6% in 2020. The decline was quite modest due to the ongoing growth of the country’s technology sector, the start of operations at the Leviathan Gas Field, and also a relatively low macro exposure to incoming tourism. Moreover, the underlying population growth in the country remains supportive for consumer demand.

Israeli banks, which were well-capitalised ahead of the crisis, took additional steps to ensure they had adequate buffers, and so were able to meet the challenges brought up by Covid-19.

For Bank Leumi, we were fortunate in that we had revised our business continuity plan just ahead of the crisis, so we were well prepared even though we never envisaged an event like the pandemic. We also benefited from our digital capabilities that enabled us to respond quickly to customers’ changing needs. Our digital strategy – which has been criticised by some of our competitors – has subsequently become a key strategic component for all banks in the country.

Q: Bank Leumi has already begun releasing provisions built up in 2020 against loan defaults. Are provisions likely to be reduced further during the remainder of the year?

A: We recorded a return on equity of 15% in the first quarter of the year, the highest in the sector. We achieved this alongside a small reduction in our loan loss reserves, and I say that in light of the fact that we have taken the most conservative position of any bank.

If things continue as we expect in the economy for the rest of the year, there is potential for the further material release of provisions, but we’ll have to wait and see.

What’s also remarkable is that our cost-to-income ratio fell below 50% for the first time to 49.4% during the first quarter, thanks to a dramatic growth in our income together with the streamlining of our costs. This is an ongoing process and we expect to have additional successes in this respect going forward as well.

Q: What impact has the virus crisis had on your digital strategy?

A: We’ve seen a 21% increase in digital usage since the start of the pandemic, and around 88% of Bank Leumi transactions are now carried out via digital channels. Very few of our customers now come to our branches, which are now run more like offices than traditional bank branches.

We’ve dramatically accelerated our digital journey, implementing key milestones in 2020 that were originally intended to be put in place in the next three to four years. One example is our digital mortgage service, which allows customers to discuss their mortgage with a banker via Zoom meeting and complete the process digitally with no paperwork. We began offering this service during the pandemic and now nearly a third of our mortgages are granted this way. The vast majority of our consumer lending is a 100% end-to-end digital process.

Very few of our customers now come to our branches, which are now run more like offices than traditional bank branches

We’re continuing to invest in areas such as artificial intelligence and robotics in line with our strategy. Ultimately our vision is to become first and foremost a tech company, that is a company that can grow exponentially with almost no change in our operating expenditure. The Covid-19 crisis has shortened our journey towards achieving this vision.

Q: First Digital Bank, the country’s first digital-only bank, is planning a pilot launch later this year. Is digital banking a threat to Bank Leumi and other established banks?

A: From our perspective First Digital Bank is the second [digital entrant], because we launched our digital bank Pepper [in 2017]; while it uses our licence, it runs on separate systems and with different personnel.

Q: How many customers has Pepper signed up so far?

A: Since launching four years ago, it has signed up more new customers than Bank Leumi. I won’t give the exact number, but it’s grown faster than our initial projections.

Q: Open banking has become a reality in Israel in the first half of this year. Is this a challenge or an opportunity?

A: We see it more as an opportunity than a challenge, particularly as we collaborate more and more with fintechs. Such collaborations offer our customers types of services we would not be offering on our own without the innovation of such fintechs. We’ve already developed our own cloud-based open banking platform to enable more of such partnerships

Q: Last year, Israel normalised relations with the UAE as part of the Abraham Accords. What economic opportunities does the establishment of formal diplomatic relations offer Israel and the UAE?

A: I’ve visited the UAE twice in the past 12 months. We’ve had a number of Zoom calls with the CEOs of local banks, and many of our largest customers have already started to do business there. I’ve been impressed by the efficiency of their way of doing business; they are number 16 in the World Bank’s Doing Business rankings, while Israel is number 35.

There are opportunities for collaboration where Israel brings its strength in innovation and the UAE brings its infrastructure and execution capabilities. For example, Israel’s water desalination technology is considered to be the most advanced in the world alongside that of Singapore, and a number of our customers [in this field] are already starting to do business in the UAE.

Israel also has great strengths in medical technology and pharmaceutics that we know is of interest to the UAE, and there have already been agreements signed between hospitals in both countries. So, there are many opportunities for such collaborations between the two countries.

Q: Do you have a plan to open a branch in the UAE or Bahrain?

A: Not at this moment, but we have signed collaboration agreements with three UAE banks and one in Bahrain. These agreements enable our customers in Israel who want to do business in the UAE [and Bahrain] the ability to do so, and vice versa.


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