Foreign banks such as HSBC and Citibank have set up shop in Israel for the long run and may in the future take over a local bank. But it won't happen within the coming year, predicts HSBC Israel manager Yehuda Levi.

Speaking at the Israel Business Conference 2001, taking place at the David-Intercontinental Hotel, Levi reviewed the activity of foreign banks in Israel, starting in the mid-nineties. Their entry was encouraged by liberalization of Israel's currency market, and by the peace process, he said. HSBC set up its Tel Aviv operations in 2001.

But at this point, Israel has largely lost its attraction for the global banking establishment, for several reasons. It simply isn't an important target market. The amounts of equity up for sale are way below the kind of stake foreign banks prefer to hold, which would be 70% to 80% at least. The domestic banking system is overcentralized, with the five big banks ruling 85% to 90% of the scene and utterly controlling retail banking, which is the true source of profits.

That isn't all. The banks' profits are likely to suffer in the quarters to come because of increased doubtful debt provision, Levi added. Their return on capital is relatively low. Israel's cities and towns are already replete with bank branches, leaving little room to compete.

Another problem Levi raises is manpower disputes. While international banks can contend with crises by cutting large amounts of jobs, Israel's banks are blocked from doing so by powerful labor unions.