The figure in Mizrahi Tefahot's reports that should raise a red flag in the real estate market

Mizrahi Tefahot Bank closed yesterday the financial reporting season of the major banks for the second quarter of 2026 with a 1.7% decrease in net profit, which amounted to about 1.43 billion shekels, and with a return on equity that eroded from 17.8% in the same quarter last year to 16% in the current quarter. Similar to the trend in other banks, the moderation of inflation and the decrease in the Bank of Israel's interest rate curbed the trend of record profits of recent years, except for Leumi, which presented a record profit for a bank in Israel of 2.83 billion shekels. This is in addition to the special tax in the amount of about 3 billion shekels imposed by the Ministry of Finance on the banks. Mizrahi Tefahot's pre-tax profit grew by 0.54% to 2.43 billion shekels. The bank, under the management of Moshe Lari, announced a cash dividend distribution of 50% of net profit, like Leumi and Hapoalim, totaling 714 million shekels. But unlike Leumi, Hapoalim, and Discount, not all the dividend returns to the public: the bank's controlling shareholders — Eyal Ofer (21.01%) and brothers Dudi and Drorit Wertheim (20.28%) — will together reap about 295.8 million shekels from the current distribution.

The most prominent characteristic of Mizrahi Tefahot is the mortgage sector. Mizrahi holds the largest mortgage portfolio in the system — about 253 billion shekels, which constitutes nearly 40% of the mortgage portfolio in Israel. But while in years of soaring inflation the portfolio, which benefits from the index-linking of the principal, pushed the bottom line up, in an environment of moderating inflation Mizrahi is the main victim in the system: the surplus of index-linked assets makes it the most sensitive to any decrease in the rate of index increase compared to its competitors. Indeed, even though the mortgage portfolio grew by 8.7% since June last year and the total credit portfolio rose by 12.5%, net interest income in the quarter decreased by 2.6% to 3.01 billion shekels. The bank partially compensated for this damage through two engines: a fourfold jump in non-interest financing income (which amounted to 171 million shekels compared to 43 million shekels in the same quarter, mainly thanks to derivatives revaluation and profits from the securities portfolio), alongside a 2.7% decrease in operating expenses, thanks to a decrease in provisions for salaries and bonuses.

The influx of veteran borrowers

Anyone who has sought to receive several price quotes for a mortgage in recent years has likely been exposed to the fierce competition taking place in the industry. Although the interest margin charged by the bank on a mortgage is low compared to other loans, in the end, it is a large and long-term loan, with significant collateral and high payment morale, and the banks are storming it. A comparison between the three major banks (according to data from the Bank of Israel's supervisory sector) shows that in an annual view, Mizrahi Tefahot led the growth of the mortgage portfolio with an increase of 8.7%, to 252.3 billion shekels net, compared to 7.6% at Leumi and 6.5% at Hapoalim. However, in the first half of 2026, Leumi increased the pace and presented growth of 4.0% (to 159.8 billion shekels), compared to 3.4% at Hapoalim and 3.3% at Mizrahi. The sources of growth in each bank were different: Leumi led in the growth of new mortgage executions (including apartment purchases and the transition of customers from competing banks), with a jump of 25.6% in new executions in the first half to a total of 15.65 billion shekels. For comparison, at Mizrahi Tefahot, which concentrates the highest volume of activity, new executions grew by only 7% (to 19.78 billion shekels), and at Hapoalim, a moderate growth of 3.5% was recorded (to 12.69 billion shekels). On the other hand, at Mizrahi Tefahot, there was significant internal refinancing activity: the volume of loans refinanced within the bank jumped in the half-year by 38.8% to a total of 8.66 billion shekels — a pace more than double that of Leumi, and more than triple that of Hapoalim. The jump in refinancing reflects the influx of veteran borrowers to branches with the aim of adjusting loan tracks to the falling interest rate environment: at Mizrahi Tefahot, only 17.9% of the portfolio is linked to the prime rate — which requires most borrowers to perform active refinancing to lower the repayment.

A warning light for credit risks

An examination of credit quality shows that the rate of non-performing loans (NPL) — loans with a deep delinquency of 90 days or more for which the bank has stopped recognizing income — stands in Mizrahi Tefahot's mortgage portfolio at 1.03% compared to 0.96% in the same quarter last year. This is a higher rate than that of competitors (0.72% at Hapoalim and 0.57% at Leumi), stemming from a risk profile that includes a higher average loan-to-value (LTV) ratio — 55.5% of the asset value at Mizrahi compared to about 45%-49% at competitors — as well as the age of the portfolio, which by its nature accumulates prolonged legal collection proceedings. Alongside this, the rate of net accounting write-offs in Mizrahi's housing portfolio stood at 0%, a figure illustrating that the lien on residential apartments prevents the bank from actual final losses. Alongside the mortgage portfolio for households, Mizrahi Tefahot has deepened its activity with developers in the construction and real estate industry. The bank's total credit risk to the industry crossed the 100 billion shekel threshold for the first time and reached 101.6 billion shekels — a jump of 20.5% within a year. "Credit risk" reflects the bank's full financial exposure to the industry — that is, the maximum amount the bank could lose in the event of a general failure of the borrowers. This figure consists of 54.9 billion shekels in direct loans actually provided to contractors, alongside 46.7 billion shekels in future commitments and open frameworks. The report raises a first warning light among developers, as the total credit to the real estate industry that is not in a normal performance rating (credit that is under special monitoring or supervision) rose in the half-year by 20.6% to 5.74 billion shekels, and it now constitutes 5.65% of the total exposure to the industry (compared to 4.64% in June last year). Of this, credit classified as problematic with a higher risk level (but for which borrowers are still meeting interest payments, "problematic accruing credit") climbed by 25.2% to 318 million shekels. The bank itself lists in the report a series of challenges weighing on contractors, led by a stock of about 84 thousand unsold apartments in Israel (about 55% of which are concentrated in the Tel Aviv and Central districts) and the lengthening of construction duration. The central question around the real estate industry is whether and when the slowdown in new apartment sales will reach the mortgage market with force. So far, the mortgage market has continued to present high performance mainly thanks to "on paper" deals signed two and three years ago. To encourage purchases and subsidize financing costs without officially lowering apartment prices, contractors flooded the market with 20/80 campaigns, in which buyers paid only a small down payment at the time of the contract, and are required to take the main mortgage and complete the balance of the payment only upon receiving the key. But this mechanism created a "delay" in risk: if the stagnation in apartment sales continues and contractors find it difficult to clear the accumulated stock of apartments, the mortgage market will lose its main growth engine. In a situation where the moderation of inflation and interest rate decreases are already eroding financing margins, Mizrahi's significant growth engine will face a significant challenge.