Moody's Investors Service announced yesterday that it had changed to negative from stable the outlooks on the deposit ratings of three Israeli banks -- namely Bank Hapoalim (TASE: POLI), Bank Leumi (TASE: LUMI) and First International Bank of Israel (TASE: FTIN)International Bank of Israel. At the same time, Moody's affirmed the banks' actual ratings.
Bank Hapoalim and Bank Hapoalim BM, New York branch have their A2/Prime-1 deposit ratings affirmed; the outlook is changed to negative from stable on the long-term ratings. Bank Leumi also has its A2/Prime-1 deposit ratings affirmed and outlook changed to negative from stable on the long-term ratings. First International Bank of Israel has its A3/Prime-2 deposit ratings affirmed, and outlook changed to negative from stable on the long-term ratings.
"The change in outlook has been triggered by (1) the Israeli authorities' intention to develop a new resolution framework, which could facilitate the resolution of financial institutions with the option of burden sharing with bank creditors; and (2) insights gained from the 2008-09 global financial crisis and regulatory trends, which illustrate how authorities are increasingly employing market solutions in the provision of support to troubled banks in order to protect public finances," Moddy's said.
Moody's says it will continue to assess the implications of the new framework as it moves towards finalisation and as greater clarity emerges as regards its application in practice.
Moody's clarified that its rating actions exclude Israel Discount Bank (TASE: DSCT) and Mizrahi Tefahot Bank (TASE:MZTF) whose deposit ratings, for bank-specific reasons, already carry negative outlooks. However, Moody's will factor in the aforementioned systemic support risks in its ongoing assessment of these ratings.
In its rationale for the negative outlooks, Moody's says that they reflect the potential credit implications of two interrelated developments for Moody's systemic support assumptions:
The Bank of Israel has indicated that a new law surrounding the resolution of troubled banks is being considered. According to central bank statements, the Banking Supervision Department is formulating a draft amendment to the Banking Ordinance regarding the resolution of a failing banking corporation, in line with regulatory changes globally. Although details regarding the provisions of the new law are not yet finalised, Moody's believes that Israel is likely to introduce changes that comply with the Financial Services Board's Key Attributes of Effective Resolution Regimes for Financial Institutions. The rating agency expects these changes to provide the option to resolve financial institutions in a manner that includes the bail-in of existing bank creditors. -
The insights gained following the global financial crisis, which has illustrated how governments -- in line with global regulatory trends -- are increasingly employing market solutions in the provision of support to troubled banks, particularly to protect their own balance sheets and taxpayers when systemic banking crises coincide with periods of challenging macro-economic conditions. This is relevant for banking systems with low cross-border diversification like Israel, where one bank's idiosyncratic problem could prompt wider systemic risks, substantially increasing the banking sector's capital and funding needs and forcing governments to make difficult choices in terms of allocating public resources.
"There is currently limited likelihood of any upwards rating momentum. The deposit ratings of the rated Israeli banks could be downgraded if Moody's considers that the probability of support has materially changed, reflecting, for instance, the introduction of a new resolution regime.
"Negative pressure could also be exerted on the Israeli banks ratings following any deterioration in operating conditions -- either as a result of heightened geopolitical tensions or adverse developments in the property market -- that affect banks' asset quality and profitability metrics, and/or if banks fail to contain their high cost bases.
Published by Globes [online], Israel business news - www.globes-online.com - on October 21, 2014
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