The banking sector became more concentrated and less competitive last year, according Banks Supervisor David Zaken's annual report on the sector.

The banking sector became less concentrated between 2004 and 2011, but the trend has reversed slightly since then, the Bank of Israel report states.

Five banking groups – Leumi, Hapoalim, Discount, Mizrahi-Tefahot and First International Bank of Israel – control 94% of the market, according to the central bank report. The two largest companies – Leumi and Hapoalim – control 58% of the market.

One reason for this is that Discount Bank and Bank Leumi merged with their respective mortgage banks, Zaken states in his report.

"An international comparison indicates that concentration in Israel's banking sector is significantly higher than the European Union average," he says.

In addition, banks are the main source of credit for households and small businesses, Zaken notes. The high concentration means that customers likely do not benefit from much competition among banks, he adds.

The report also includes the first official acknowledgment that attempts by Israeli banks to expand abroad have largely failed.

"Israel's large banks also have operations abroad via branches and subsidiaries, but these operations have not succeeded in generating significant, stable sources of profit. Israeli banks' attempts to enter foreign markets did not succeed to a large degree, and their assets abroad comprise a shrinking portion of the banking sector's total assets," he states.

The Bank of Israel received 6,000 complaints in writing and 16,000 phone calls regarding the banks last year, it stated in its annual report. Some 21.5% of complaints were deemed to be justified, versus 26.1% in 2011. Banks reimbursed customers to the tune of NIS 3.8 million due to complaints filed with the central bank.

Last year, there were more cases of banks meeting customers' demands without agreeing or acknowledging that the complaints were justified, noted the central bank. Hapoalim, Mizrahi-Tefahot and the First International Bank of Israel in particular changed their approach to their customers in this regard, it said.

The country's social-justice protests may have been a factor in the banks' decision to reach out to customers.

The central bank also found that Mizrahi and FIBI had improved in terms of the percentage of complaints deemed justified – only 20.1% of complaints against Mizrahi were justified, down from 38.4% in 2011, and only 16.7% of complaints against FIBI were justified, down from 25.8% in 2011.

The figures did not change significantly for the other banks, the report noted.

According to the central bank's report, customer complaints led to the discovery of some system-wide shortcomings.

"An inquiry revealed that Bank Hapoalim was charging a fee for sending a legal warning letter before the letter was even sent, and that this was the bank's work method. From our inquiry we found that customers sometimes were charged even when a letter was not sent," states the report.

The bank fixed its systems following the complaint, and was ordered to find cases in which customers were wrongly charged and to reimburse them, said the central bank.

In another case, Bank Leumi was found to be charging customers for holding checking accounts even when these accounts were opened primarily for the purpose of taking out a loan or making a deposit. Here, too, the central bank ordered Leumi to reimburse customers who were wrongly charged.

Another issue that was addressed following several complaints was the credit card company CAL's practice of charging customers currency conversion fees on purchases made online, in shekels, from Israeli companies. Following the complaints, the central bank forbade charging currency conversion fees on credit card transactions made within Israel.

The bank also found that Discount Bank had failed to exempt Holocaust survivors from certain fees despite its declarations that it would do so.

"On September 18, 2011, Discount Bank announced it would be dropping currency conversion fees on reparation payments made by the German government or the Claims Commission to Holocaust survivors. After looking into a complaint, it turned out that despite the announcement, the bank was charging Holocaust survivors these fees because it had not updated its systems. The bank returned these fees to customers," stated the central bank.

Open gallery view Social-justice protesters shattered a window of a Bank Hapoalim branch in central Tel Aviv, June 23, 2012. Credit: Tomer Appelbaum