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INTRODUCTION
This review describes the main developments in the Israeli banking system during the first half of 2025. These developments were influenced by, among other factors, the security situation and geopolitical uncertainty. The State of Israel has been in a state of war for nearly two years, which included Operation Rising Lion against Iran, which took place toward the end of the period being reviewed. Economic activity recovered after the downturn during Operation Rising Lion, as Israel’s risk premium stabilized at a lower level relative to the period prior to the operation, although it remained higher than its level on the eve of the war. Alongside these developments, high geopolitical uncertainty continued. The Monetary Committee left the interest rate unchanged at 4.5 percent in all of its decisions during the first half of 2025, and the inflation rate continued to be slightly above the inflation target during the reviewed period. Finally, the shekel appreciated during the reviewed period, mainly against the dollar.
Israel’s banking system continued to maintain its resilience during the first half of 2025. Capital and liquidity ratios remained at a high level, which is explained by, among other factors, the high profitability of the banking system. The high profitability of the banking system in the first half of 2025 stemmed mainly from the continued expansion in net interest income, against the backdrop of the macroeconomic environment, and from an increase in fee income, with these trends partially offset by a rise in expenses for credit losses, which were particularly low during the corresponding period last year. Despite the increase in net profit, a slight decline was recorded in return on equity, which is explained by the growth in shareholders’ equity. The annual growth rate of the credit portfolio was higher during the reviewed period than in 2024, while there was some deterioration in the quality of the portfolio of credit to households (excluding housing loans) and to micro and small businesses.
The Common Equity Tier 1 capital ratio of the banking system remained at a high level during the first half of 2025, and is estimated at approximately 11.6 percent. This reflects the
banking system’s resilience to shocks and its ability to continue supporting the economy amid prolonged uncertainty. High profitability during the year continued to contribute to the strengthening of capital ratios. However, profit distributions and the continued growth in risk-weighted assets acted to erode capital ratios.
Bank credit to the public increased in the first half of 2025 at an annualized rate of approximately 9.3 percent, a higher growth rate than in 2024, when the growth rate was approximately 8.8 percent. Business credit, particularly in the construction industry, continued to lead the growth in the credit portfolio, while the growth rate of housing credit remained stable and the growth rate of fixed-term consumer credit moderated slightly. Trends in the quality of the credit portfolio were mixed: a slight deterioration was recorded in the quality of the consumer credit portfolio and in credit to micro and small businesses, as noted above, while stability was observed in the quality indicators of the housing credit portfolio and in credit to large businesses.
The upward trend in the public’s deposits continued, and this rate stood at 6.2 percent on an annualized basis. The share of the public’s funds held in interest-bearing deposits, which began to rise in the second half of 2022, when the Bank of Israel raised its interest rate, continued to increase during the reviewed period, though at a more moderate pace, reaching approximately 78 percent. This occurred against the backdrop of the interest rate level. The reallocation of public deposits continued: during the period, relative stability was recorded in current account balances and bank deposits of private customers, alongside a significant increase in investments in shekel money market funds. This trend, which began in the second half of 2024, points to a change in the composition of the low-risk assets held by households, which are characterized by higher potential returns and higher liquidity relative to bank deposits. The pass-through rate of the Bank of Israel’s interest rate to deposit rates remained stable. Relative to other countries, the pass-through of the Bank of Israel interest rate to household fixed-rate deposits remains high.
Uncertainty in the economy remains high, and the banking system is required to maintain financial resilience that will enable it to cope with additional challenges that may arise. The Banking Supervision Department continues to closely monitor developments, with particular emphasis on the economic implications of the uncertain environment. At the beginning of the year, against the backdrop of the economic challenges and the continued high profitability of banks in Israel, the Banking Supervision Department formulated a financial relief framework1 that was adopted by the banking system. Under the framework, a total of NIS 3 billion will be allocated over a period of two years to a range of relief measures and financial rebates directly to the accounts of private customers and micro and small businesses. The formulation of the framework was carried out in parallel to structural measures that the Banking Supervision Department continues to advance in order to enhance fairness, competition, and innovation. These serve to strengthen customers' bargaining power and increase public trust in the banking system, and it is intended to serve as a bridge until structural measures to enhance competition in the banking system become fully ready.