Warren Buffett's right-hand man, Charlie Munger, once compared making loans with a fencing match.

One of the fighters makes a lightning move and leaps back. Didn't touch me, taunts his opponent. To which the first replies, Wait till you shake your head.

Munger's message was that it looks simple to grant a loan, at the stage of handing over the money and setting the interest. The complications set in when it's payback time.

This week Israel's bankers began to shake their heads and blood began to spray. Credit Suisse First Boston, which yesterday published a Hold rating for Bank Hapoalim stock, crushingly titled its report "Finally facing reality". Finally, indeed.

Just two months ago Israel's banks skewered the central bank watchdog for ordering them to make extra provisions for doubtful debt. But the executive summaries in the banks' financial statements for the third quarter indicate that the Supervisor of Banks' directive had been timely indeed. The quality of the banks' credit portfolio had deteriorated very fast in the last year.

The banks used to excuse the discrepancy between the rapid growth of credit to the general public and the economic slowdown, by saying that the Israeli economy was adapting to Western standards.

They aren't saying that any more. In Hapoalim's executive summary, bank chiefs Shlomo Nehama and Amiram Sivan explained the discrepancy through unplanned increase of inventories by companies, and difficulty in returning loans. That is quite a change in tune. They also pointed at the specific culprits: the telecommunications, corporate service and real estate sectors.

And the prize for worst deal of the year doesn't go to -
The man making the headlines as far as provisions for doubtful debt are concerned is Gad Zeevi, who borrowed $730 million to buy shares in the state-run Bezeq phone company. For the third quarter, Israel's banks were forced to set aside up to NIS 250 million for his loans alone.

But the truth is that the Zeevi loan wasn't the banks' worst deal. That's just the one that made the front pages. Truth is, the banks stand to recover their money one day, when the stock market recovers, thanks to the Bezeq shares they hold as collateral.

No, the banks have other loans in their books that are much riskier.

The First International Bank of Israel shows the worst deterioration from this perspective. Outstanding nonperforming loans soared from NIS 285 million as the year began to NIS 968 million. Loans under extra supervision grew from NIS 621 million to NIS 1,433 million. Total problem debts grew from NIS 1.2 billion to NIS 2.8 billion, or 85% of the bank's equity capital.

Bank Hapoalim saw problem debts increase by NIS 1.5 billion, but its loans portfolio and equity and four times that of FIBI's.

FIBI's rocketing problem debt is understandable, given that it and the other banks lent generously while setting aside small amounts for doubtful debt.

There could be another explanation, though: FIBI brought in a new CEO. The new broom has no reason to sweep writeoffs and required provisions under the carpet. On the contrary, he wants to clean up the bank as fast as possible.

The Bank of Israel has a pet explanation of its own ¿ competition between the banks over big customers led them to lend wildly, to close deals of doubtful profit but clear risk.


For all the tooth-and-nail infighting over big deals, there are plenty of lesser areas where the duopoly of Leumi and Hapoalim rules. That explains the vast gaps between the reports of the dueling duo and their smaller brethren.

The big banks rule credit cards, mutuals, and households, where competition is minor and most of the audience is captive.

While the economy surged, FIBI managed to lift profits by granting more loans. But once the trend reversed, the big banks turned out to have padding in the shape of retail banking, which FIBI didn't have.

Yesterday TheMarker.com broke the news that FIBI's new broom, David Granot, is a candidate to become chairman of Bank Hapoalim in the stead of Amiram Sivan. The story has been denied. But one has to wonder.

Granot has headed three banks in recent years ¿ Union Bank of Israel, Israel Discount Bank and now FIBI. Everywhere he went, he cleaned out the stables. One has to wonder what he'd do as chief of Bank Hapoalim, the biggest bank in Israel. Would we suddenly see a leap in provision for doubtful debt?

The real question is: Have Israel's banks finished facing reality, or have they just begun? Is the Gad Zeevi saga a one-off, or is he symptomatic of a rot pervading the entire banking establishment?