Discount group’s credit growth comes with higher risk

The major banks in Israel have seen their share prices rise steeply in the past year, with the Banks5 Index rising some 80%. Bank Leumi and Bank Hapoalim have both risen by about 90%, followed by Discount Bank of Israel, headed by Avi Levi, which has risen by 70%.

The banks continue to report dream profits and double-digit returns on equity, but the real estate sector is starting to look more problematic than other parts of the economy, as sales slow and the stock of unsold homes rises.

While the banks are enjoying favorable macro conditions, including high interest rates, and a high inflation rate, to which a large proportion of their credit portfolios is linked, on the other side, the public is suffering from expensive mortgages, and contractors are having to pay high financing costs on their construction projects.

Analysis of its second quarter financials shows that Discount Bank has become extremely active in the real estate sector. The bank’s commercial credit portfolio grew, and the real estate played a prominent part in the growth. In the two and a half years between the end of 2002 and the end of the second quarter of 2025, the balance on the bank’s portfolio of credit to construction and real estate grew by 40% to NIS 52 billion. In the first half of this year, more than half the growth in commercial credit came from real estate.

From Discount Bank’s financials it would appear that that the growth in commercial was achieved in part thanks to narrower spreads. The average interest rate on credit to large and mid-size businesses fell by 0.2% between the end of 2023 and the end of June 2025. At the big two banks, Leumi and Hapoalim, the average interest rate rose by 0.1%.

It’s important to stress that the figures in the financial statements on average interest rates relate to the stock of credit; that is to say, it includes the interest rates on old credit. It can be presumed that in the new credit that the bank has extended in the past year, the average interest rate has been eroded to an extent not revealed.

Despite the erosion of interest rate spreads, the risk level of Discount Bank’s loans actually rose. But even if it appears that the increased risk comes from from the growth in Discount Bank’s real estate credit portfolio – a situation reminiscent of challenges it has faced in the past with problematic credit to contractors – this time the growth in risk in the credit figures actually comes from an unexpected direction, which will be discussed later on.

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It must be remembered that the Discount banking group is the most complicated and the hardest to understand in Israel. It consists of the business of Discount Bank itself, Mercantile Discount Bank, IDB New York, and credit card company Cal – Israel Credit Cards, which was transferred to a new classification in the second quarter financials as an asset up for sale.

So when the risk in the Discount group’s credit portfolio is examined on the basis of non-performing loans (NPL), it emerges that it rose in the first half of this year in comparison with the first half of 2024. Loans are generally classified as non-performing when interest and capital payments have not been made for 90 days.

While the NPL item improved at Bank Leumi, Bank Hapoalim, and Mizrahi Tefahot Bank in the first half of this year, at Discount the opposite happened, and it rose from 0.6% of total credit at the end of last year to 0.7% at the end of June 2025.

In credit to the real estate sector, the trend has been significantly negative: from an NPL rate of 0.9% at the end of 2024 to 1.2% at the end of the second quarter. At Bank Leumi and Bank Hapoalim it was 0.3% at the end of the second quarter.

Mercantile raises credit risk

In the past two years, while the interest rate on commercial credit awarded by Discount Bank, at 6.2%, has been fairly similar to the figure for Bank Leumi and Bank Hapoalim, which is 6.0-6.1% (at Mizrahi Tefahot Bank it is higher, at over 7%), Discount Bank’s risk level has risen. In credit to the real estate sector, it is even higher than at Mizrahi Tefahot Bank, with a 1.2% NPL rate at the end of June, versus 0.7% at Mizrahi Tefahot (and, as mentioned, under 0.3% at the two largest banks).

The rise in the NPL rate stems from Mercantile’s activity, and not from the real estate activity of Discount Bank itself. Sources at the bank stress that its own credit portfolio is of very high quality after determined work in recent years to correct damage from the past. The growth in credit risk (NPL) indeed exists in the group, but, as mentioned, not because of the award of credit to the real estate sector by Discount Bank itself.

Mercantile’s own financials show that there has indeed been a jump in credit classified as problematic since the end of 2024. This is apparently because of a specific customer. Sources at the bank say that now that Cal – Israel Credit Cards has been separated from the group financials in advance of its sale, the provision for credit losses has become 0.1% of the portfolio, a normal level and similar to that at the other banks.

Published by Globes, Israel business news – en.globes.co.il – on August 28, 2025.

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