Moody's Investor Service today issued a report entitled "Negative for Israeli banking system." The report cited the expected slowdown in the domestic economy and the impact of the global crisis as the reasons for its negative outlook.
Moody's negative outlook for the Israeli banking system expresses the rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.
Moody's continued that with some delay, Israel is now feeling the effects of the ongoing global financial and economic crisis. The banking system has been indirectly affected by the increased risk aversion and the re-pricing of risk globally that has negatively affected the valuation of their securities portfolios. In addition, the defaults by international financial institutions leading to counterparty exposure losses, and the fall in global real estate prices that is impacting some of their larger corporate exposures,
However, Moody's added that the banking system as a whole has a manageable exposure to 'toxic assets' and is not over-exposed to troubled financial institutions overseas.
Going forward, Moody's expects a gradual deterioration in the banks' financial fundamentals, and credit quality in particular, stemming from their relatively high exposure to potential challenged economic sectors, the risk of a possible default from a single large borrower that could lead to considerable credit losses, and the general economic slowdown in the country.
Moody's sees high single borrower concentrations as a weakness for most of the rated banks and constraining their financial strength ratings. Furthermore, the domestic corporate bond market has major refinancing needs over the next couple of years, suggesting that Israeli banks may have to participate in such refinancing given that such corporations are also bank customers. Finally, the banks' asset mix has gradually moved towards a higher proportion of loans compared to more liquid holdings and investments, thus increasing the likely adverse impact of a deteriorating credit portfolio on the banks' financial fundamentals.
Moody's cautions that profitability is under pressure due to exposure to some defaulted overseas financial institutions and losses on the banks' securities portfolios, while the ongoing capital markets reforms in Israel are curbing the ability of the banking sector as a whole to generate fees and commissions. "Problematic exposures will likely increase, leading to elevated provisioning expenses and pressuring bottom-line profitability. This suggests that some banks will have difficulty reaching the 12% minimum capital adequacy ratio by the end of 2009.
On the positive side, Moody's cites the dominant and stable franchise positioning within Israel supports the rated banks' financial strength ratings. With franchise value hard to develop further in Israel, increased competition from non-bank financial institutions and recent reforms limiting opportunities for earnings diversification domestically, Israeli banks have increased their cross-border activities by acquiring banks in emerging markets and have moved ahead with other investments abroad -- moves that have raised their overall risk profile.
In the current market conditions, Moody's considers liquidity and retail funding to be key strengths of the Israeli banking system. Israeli banks benefit from a large, stable customer deposit base that adequately funds their lending business. Deposits have been highly stable over the past few years and this has supported the banks' ratings. Furthermore, Israeli banks do not depend on foreign funding, and so the ongoing financial crisis has not hurt their funding position. Liquidity management is considered adequate.
In 2009, the Israeli banks are expected to implement the new guidelines of the Basel II agreement. Moody's expects this to lead to more focused and better risk management, improved decision-making and increased transparency and disclosure.
Published by Globes [online], Israel business news - www.globes-online.com - on January 21, 2009
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