For a country that has experienced continuous political turmoil over the past decades, the performance of the HNWI population has been relatively strong. John Schaffer delves into a report from WealthInsight which suggests there will be notable growth among the wealthy in Israel
Israel’s economy experienced somewhat poor performance in Q1 of 2016 compared with its expansion of GDP in the previous quarter. Growth in the region has been at its slowest rate in three quarters – with contractions in government spending and exports being the key factors behind the deceleration.
However, private consumption and fixed investment continued to be resilient in Q1 – with low interest rates and strong nominal wage growth supporting private consumption.
For a country that has been blighted with political upheaval, there have been reasons to be optimistic of late. In June, Israeli Prime Minister Benjamin Netanyahu signed a reconciliation deal with Turkish Prime Minister Binali Yildirim, after six years of conflict between the two countries.
High Net Worth Individuals (HNWIs) in Israel have benefited from prospering industries such as technology and telecommunications (accounting for 37.5% of the source of wealth for HNWIs), and from a strong financial services industry.
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According to WealthInsight, the population of HNWIs in Israel stood at 79,186 in 2015, accounting for just below 1% of the overall population of 8.4m. These affluent individuals collectively held $447bn in wealth.
The Israeli HNWI population rose by 2.9% in 2015, following a 3.0% increase in 2014.
WealthInsight forecasts that the HNWI population in the region will grow by 17.7% to reach 96,790 by 2020, while HNWI wealth is projected to grow by 24.3% to reach $579.7bn.
WealthInsight also indicates that Israeli HNWIs held a significant 24.6% (US$109.8 bn) of their wealth outside their home country in 2015.
The incumbent ultra high net worth (UHNWI) population is also signigficant in Israel – totalling 1,532 in 2015, with WealthInsight predicting an increase of 10% to reach 1,740 by 2020.
Equities were the largest asset class for Israeli HNWIs in 2015, with 26.2% of total HNWI assets, followed by business interests with 25.8%, real estate with 18.0%, fixed-income with 13.2%, cash and deposits with 10% and alternatives with 6.8%.
Amongst UHNWIs, business interests made up 31.5% of wealth in 2015. Equities were the second-largest category, accounting for 25.7% of total assets, followed by real estate with 15.9%, fixed-income with 13.4%, alternatives with 8.3% and cash and deposits with 5.2%.
Private banking landscape
The Israeli private banking sector is modest in size in comparison to more mature private banking markets and is largely dominated by local players. The three largest domestic private banks are Bank Leumi Private Banking, Israel Discount Bank Private Banking, and Bank Hapaolim International.
Although international players such as Credit Suisse, JP Morgan, and Citibank are active in Israel – the market has not been highly penetrated by international private banks. One factor at play is regulation – according to the World Bank, Israel’s banking sector is one of the most regulated in the world, with the cost of compliance discouraging international banks from establishing operations.
However, the private banking sector is displaying growth potential, with demand for private banking services expected to rise as the Israeli economy grows. There are also greater opportunities to be had in the wealth management space due to implementation of new policies.
Since 2005, as recommended by the Bachar Committee, the provident fund and mutual funds were separated from the banks. These steps brought more competition to the sector as customers were free to opt for third-party products.
The small size of the private banking sector has made it easy for Israeli customers to take advantage of private banking services; the required account size is lower than that required by private banks in other developed nations.