Regulatory Filings • Oct 31, 2023
Regulatory Filings
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30 October 2023
First International Bank of Israel Ltd.
| Domicile | Israel |
|---|---|
| Long Term CRR | A1 , Possible Downgrade |
| Type | LT Counterparty Risk Rating - Fgn Curr |
| Long Term Deposit | A2 , Possible Downgrade |
| Type | LT Bank Deposits - Fgn Curr |
| Outlook | Rating(s) Under Review |
Source: Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date.
| Alexios Philippides VP-Senior Analyst |
+357.2569.3031 | ||||
|---|---|---|---|---|---|
| [email protected] | |||||
| Corina Moustra Lead Ratings Associate [email protected] |
+357.2569.3003 | ||||
| Henry MacNevin +44.20.7772.1635 Associate Managing Director [email protected] |
|||||
| Nick Hill MD-Financial Institutions [email protected] |
+33.1.5330.1029 |
Update following initiation of rating review
First International Bank of Israel Ltd. (FIBI)'s A2 long-term deposit ratings reflect (1) the bank's baa2 Baseline Credit Assessment (BCA); and (2) currently three notches of rating uplift based on our assessment of a very high likelihood of support from the Government of Israel (A1 review for downgrade), in case of need.
FIBI's baa2 BCA reflects the bank's (1) strong asset quality; (2) stable retail deposit funding base and comfortable liquidity; and (3) a strong presence in niche segments that benefit it with consistent business opportunities.
The ongoing military conflict will have an impact on Israel's economy, which will depend on its duration and scale, and therefore on the bank's asset quality and profitability. Profitability, which had been moderate in the past, benefited significantly from higher interest rates and was well above historical levels prior to the conflict.
At the same time, the bank's BCA also captures (1) adequate but modest capital buffers with a tangible common equity (TCE)/risk-weighted assets (RWAs) ratio of 10.1% as of June 2023, which are below those of similarly-rated international peers, although it has been consistently stable and mainly reflecting Bank of Israel's (BoI) conservative risk-weighting on mortgages, as well as, (2) additional downside risks from a significant exposure to the Israeli property market.
These are our Banks Methodology scorecard ratios. Asset Risk and Profitability reflect the weaker of either the latest figure or the three-year and latest figure average. Capital is the latest reported figure. Funding Structure and Liquid Resources reflect the latest fiscal year-end figures.
Source: Moody's Investors Service
The bank's ratings are on review for downgrade, reflecting the review for downgrade on the Government of Israel's A1 rating.
» Potential for an upgrade of FIBI's ratings is limited, as indicated by the review for downgrade. However, the ratings could be confirmed at their current level if Israel's A1 issuer rating were confirmed. This would also depend upon the bank's standalone fundamentals, notably solvency and liquidity, being maintained.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com for the most updated credit rating action information and rating history.
Exhibit 2
| 06-232 | 12-222 | 12-212 | 12-202 | 12-192 | CAGR/Avg.3 | |
|---|---|---|---|---|---|---|
| Total Assets (ILS Million) | 208,130.0 | 195,955.0 | 180,470.0 | 167,778.0 | 141,110.0 | 11.74 |
| Total Assets (USD Million) | 56,085.4 | 55,534.9 | 58,119.6 | 52,254.3 | 40,854.1 | 9.54 |
| Tangible Common Equity (ILS Million) | 11,166.0 | 10,436.0 | 9,620.0 | 8,804.0 | 8,252.0 | 9.04 |
| Tangible Common Equity (USD Million) | 3,008.9 | 2,957.6 | 3,098.1 | 2,742.0 | 2,389.1 | 6.84 |
| Problem Loans / Gross Loans (%) | 0.5 | 0.5 | 0.7 | 0.9 | 1.1 | 0.75 |
| Tangible Common Equity / Risk Weighted Assets (%) | 10.1 | 9.9 | 10.5 | 10.3 | 10.0 | 10.16 |
| Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) | 4.7 | 4.9 | 7.0 | 7.9 | 10.4 | 7.05 |
| Net Interest Margin (%) | 2.6 | 2.0 | 1.6 | 1.7 | 1.9 | 2.05 |
| PPI / Average RWA (%) | 3.7 | 2.7 | 2.2 | 1.9 | 1.9 | 2.56 |
| Net Income / Tangible Assets (%) | 1.2 | 0.9 | 0.8 | 0.5 | 0.7 | 0.85 |
| Cost / Income Ratio (%) | 42.0 | 49.8 | 56.7 | 60.4 | 62.4 | 54.35 |
| Market Funds / Tangible Banking Assets (%) | 4.7 | 4.9 | 5.3 | 4.5 | 2.8 | 4.55 |
| Liquid Banking Assets / Tangible Banking Assets (%) | 39.0 | 37.1 | 40.2 | 42.0 | 34.0 | 38.45 |
| Gross Loans / Due to Customers (%) | 67.4 | 70.0 | 66.7 | 65.4 | 74.6 | 68.85 |
[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully loaded or transitional phase-in; LOCAL GAAP. [3] May include rounding differences because of the scale of reported amounts. [4] Compound annual growth rate (%) based on the periods for the latest accounting regime. [5] Simple average of periods for the latest accounting regime. [6] Simple average of Basel III periods.
Sources: Moody's Investors Service and company filings
FIBI is the fifth-largest banking group in Israel by assets with an 8.6% market share and total consolidated assets of NIS208 billion (around \$56 billion) as of June 2023. As a universal bank, FIBI provides banking services to individuals, small businesses, corporations and high net-worth clients. The bank also provides capital market, foreign currency, global trade and corporate finance services.
FIBI maintains a strong market presence in specific niche retail segments in Israel, including the armed forces, teachers and the ultraorthodox. The bank also has a leading position in capital market services.
The bank's common stock trades on the Tel Aviv Stock Exchange (ticker: FIBI). As of June 2023, FIBI Holdings Ltd. held a 48.3% stake in FIBI, with the Bino-Liberman Group in turn, owning 51.9% of the shares in FIBI Holdings Ltd.
FIBI's strong asset quality will likely deteriorate, although the extent of this will depend on the ongoing military conflict's duration and scale, actions by the authorities to mitigate its impact on affected businesses and households and the potential for any lasting economic damage.
Additionally to risks from geopolitical tensions and similarly to other Israeli banks, the bank's significant exposure to Israel's property market through its lending activities along with recent high property prices1 is also a downside risk for its asset quality. However, the bank's asset risk is supported by the relatively low risk structure of the bank's loan book and conservative underwriting standards along with close regulatory oversight. These characteristics have translated into low credit costs over past economic cycles, which were lower than most of its domestic peers.
Problem loans were a low 0.5% of gross loans as of June 2023 (see Exhibit 3) and lower than its domestic peers. They remained stable compared to the end of 2022 and down from 0.7% as of the end of 2021 reflecting strong lending growth and few borrower defaults. Beyond the impact of the conflict, we also expect some problem loan formation because of higher interest rates and as the bank's newly originated loans season. Following a 15% growth in 2022 that drives some unseasoned risk, loan growth moderated to 2% during the first six months of 2023.
Problem loans remained stable in 2023, and the bank has demonstrated strong asset quality performance over time Evolution of problem loans ratio and credit costs
In 2022, Israeli banks implemented the US current expected credit losses (CECL) standard. Before the CECL standard implementation we defined problem loans as impaired loans and loans in arrears of 90 days or more. Accruing loans previously classified as impaired were not included in non-accruing debts under the new standard. 2021 problem loans ratio reflects the restated figures under the new standard. Source: Moody's Investors Service
We also expect FIBI's credit costs (loan loss provision expenses to average gross loans) to also likely rise above their historic average of 0.22%2 , which includes an entire economic cycle, but to remain below the domestic peer average. Following provision chargebacks in 2021 equivalent to 0.2% of gross loans, credit costs increased to 0.1% and 0.3% in 2022 and in the first six months of 2023 respectively, exclusively driven by an increase in group provisions owing to the macroeconomic uncertainty.
Strong asset quality is a reflection of the bank's loan book structure and underwriting standards. Relatively low risk residential mortgages accounted for 29% of total loans, while medium and large businesses (including institutional entities) for 35% as of June 2023 (see Exhibit 4). Other retail and consumer loans were 19% of total, but a significant portion of the unsecured retail portfolio is salary-assigned and the bank's client base is mainly higher-income, wealthier individuals.
FIBI's loan book is relatively diversified by customer type Loan book breakdown as of June 2023 (supervisory segments)
Housing loans include housing loans to private individuals whose business activity is classified to small business, equivalent to 1.7% of total credit to the public. Due to rounding, the percentages above do not add up to 100%. Source: Bank's financial statements
Borrower concentrations are moderate, after declining in recent years, with no individual exposure exceeding 15% of the bank's capital as of the end of 2022. However, sector concentration is high. FIBI's significant and growing exposure to residential mortgages and the construction and real estate sector, which made up a further 15% of total lending as of June 2023. This concentration renders FIBI's
asset quality susceptible to developments in the Israeli property market and it is still uncertain what impact the conflict will have on the sector.
For housing loans, risks are mitigated by (1) banks' full recourse to the borrowers and a strong repayment culture; (2) the low level of housing debt at around 34% of GDP3 ; and (3) macroprudential measures4 that enforce tight underwriting standards (from the bank's outstanding housing portfolio as of June 2023, 68% of credit was granted at an original loan-to-value of up to 60%; 89% of credit was granted at a debt-income ratio of up to 35%), as well as high capital buffers against mortgages.
There is higher risk in financing of the construction and real estate sector. FIBI's exposure, although lower than most of its domestic peers, grew by a high 22% in 2022 because of strong demand, but moderated to 8% as of June 2023 year-over-year. Credit secured by residential property accounted for 47% of the bank's total credit risk5 to the construction and real estate sectors as of June 2023. These are mostly closed construction projects where risk is mitigated by close oversight6 and more conservative underwriting criteria7 . Credit secured by commercial property accounted for 25%. A significant part, around 30%, of the exposure to the sector was for the acquisition of land for construction where projects will take several years to complete.
We view FIBI's risk-weighted capitalisation and leverage as adequate, but modest compared to global peers. However, FIBI's lossabsorption buffers are supported by relatively conservative regulatory risk-weights, especially on residential mortgages. The bank's capital ratios are also significantly more stable compared to banks globally that use a model-based approach in calculating credit RWAs, and FIBI has demonstrated its ability to maintain steady capital ratios over time while it has typically maintained higher buffers to minimum regulatory requirements compared to peers.
FIBI's TCE/RWAs ratio was 10.1% as of June 2023, below the median level of similarly-rated international peers (see Exhibit 5). However, the BoI maintains a conservative approach to risk-weighting that results in higher loss-absorption buffers than capital ratios show. Israeli banks use the standardised approach to risk-weighting. Mortgages are further risk-weighted according to loan-to-value8 , resulting in an average risk weight of over 50% in Israel. This effective mortgage loan risk weight is significantly higher than the risk weights applied by banks in other developed markets that use the internal ratings-based approach and even the 35% risk weight normally used in the standardised approach.
The bank's TCE-to-total assets ratio was 5.4% as of June 2023, broadly at the same level as its 5.2% Basel III leverage ratio that was above the 4.5% minimum regulatory requirement that applied at that time9 .
Source: Moody's Investors Service
FIBI reported a Common Equity Tier 1 (CET1) capital ratio of 10.6% as of June 2023, well above the 9.2% minimum regulatory requirement. The bank's CET1 ratio was broadly stable compared to a CET1 ratio of 10.4% as of the end of 2022, with retained earnings offsetting growth in RWAs and dividend distributions. FIBI paid dividends amounting to 50% of net profits in each quarter of 2022, in line with its dividend policy10. However, it approved a dividend distribution of around 35% of net profits for both the first and second quarters of 2023, taking into account uncertainty in Israeli and global markets.
Similarly to other periods of high volatility we also expect the bank to retain more profits while the economic and financial impact of the conflict remains uncertain, which will support its capital metrics and loss absorbing buffers.
Profitability will decline from recent exceptionally high levels because of higher cost of risk, lower credit growth and support measures to customers affected by the conflict.11
FIBI's recurring profitability is moderate but stable, reflecting a relatively high operating cost base but also strong revenue growth, supported by the bank's presence in niche segments. Continued cost-reduction initiatives have driven significant operating efficiency gains for FIBI, paving the way for higher sustainable profitability and strengthening its ability to adapt and resist growing competition and income headwinds.
FIBI reported net profits equivalent to 1.2% of tangible assets in the first six months of 2023, well above historical levels and up from 0.9% in 2022, 0.8% in 2021 and 0.5% in 2020 (see Exhibit 6). Profitability was supported by strong revenue growth owing to strong loan growth, an expanding net interest margin and higher CPI benefiting returns from the bank's net long CPI position (deriving mainly from CPI-linked mortgages).
Source: Moody's Investors Service
Exhibit 6
The bank's net interest margin increased further to 2.6% in the first six months of 2023 from 2.0% in 2022 and 1.6% in 2021 because of rising policy rates in Israel that have allowed the bank to unlock value from its low-cost core deposit base. Even before the conflict we expected limited further upside from higher interest rates because of a gradual shift from current accounts to costlier time deposits, with the bank's non-interest bearing deposits accounting for 26% of total deposits as of June 2023 compared to 33% at the end of 2022.
FIBI's strong presence in niche markets, which include capital markets activity and teachers, armed forces and religious segments, coupled with high customer satisfaction, have resulted in consistent credit and revenue growth in recent years. At the same time, management's ongoing initiatives to improve cost efficiency have successfully brought down the bank's high operating cost base, which nevertheless remains higher than most of its domestic peers. These trends have improved the bank's cost-to-income ratio to 42% in the first six months of 2023, from 50% in 2022 and 57% in 2021.
FIBI benefits from a sound funding structure supported by a large and stable customer deposit base in Israel, which comfortably funds its loan portfolio, helped by Israel's strong savings culture. FIBI's net loans-to-deposits ratio stood at 67% as of June 2023.
Further, 53% of total deposits from the public were relatively granular household and small business deposits (excluding private banking deposits; see Exhibit 7). However, our assessment of FIBI's funding structure also considers that 29% of total deposits from the public as of June 2023 were sourced from institutional and capital markets investors, growing by 36% during the first six months of 2023, that could be more vulnerable to a loss in depositor confidence. This relatively high share of institutional investor deposits is partly driven by the bank's significant capital market activity and confidence-sensitivity is mitigated by sufficient liquidity. FIBI's deposit base has also proven to be stable during past systemic shocks.
Granular household and small business deposits make up the bulk of FIBI's deposit base Breakdown of deposits by segment as of June 2023
Due to rounding, the percentages above do not add up to 100%. Source: Bank's financial statements
The bank is a net lender in the interbank market and has a low reliance on potentially more confidence-sensitive market funding at just 5% of tangible banking assets as of June 2023.
The bank also maintains a comfortable level of liquidity, with a liquid assets to total assets ratio of 39% as of June 2023. The bank's liquid assets portfolio is also conservatively structured, with a high 28% of total assets held in cash and deposits with banks, and 11% invested in securities of which 53% is made up of A1-rated Israeli government securities. The overall duration of the bank's portfolio is also relatively short, at 1.7 years as of June 2023. FIBI reported a healthy Liquidity Coverage Ratio of 134% as of June 2023.
Unless noted otherwise, we have sourced data relating to systemwide trends and market shares from the central bank. Bank-specific figures originate from the banks' reports and are based on our own chart of accounts and may be adjusted for analytical purposes. Please refer to Financial Statement Adjustments in the Analysis of Financial Institutions published on 9 August 2018. We do not use the Bank of Israel's exchange rates in converting figures from Israeli shekel into US dollars, so US dollar figures may differ from bank reported figures.
FIBI's CIS-2 indicates that ESG considerations are not material to the current ratings because a very high level of government support mitigates the impact of ESG factors. In particular, social risks for the bank have increased and are high because of the military conflict in addition to high customer relations risks.
Source: Moody's Investors Service
FIBI faces moderate exposure to environmental risks, mainly because of its portfolio exposure to carbon transition risks as a diversified bank and one of Israel's five largest banks with a significant corporate exposure. In line with its peers, FIBI faces growing business risks and stakeholder pressure to meet broader carbon transition goals. FIBI is engaging in further developing its climate risk and relevant portfolio management capabilities and increasing its green financing.
FIBI faces high social risks, related to societal and demographic trends as well as from customer relations. The current military conflict may cause a severe disruption of the economy and impact the bank's financial performance, depending on its duration and scale. However, a relatively young and growing population in Israel affords business opportunities for the bank. Further, FIBI faces high customer relations risk because of the considerable focus on consumer protection in Israel, exposing banks to potential fines from regulators and litigation from customers. High cyber and personal data risks are mitigated by a sound IT framework.
FIBI faces low governance risks, and its risk management, policies and procedures are in line with industry practices and commensurate with its universal banking model, while the bank provides timely and detailed external reporting. Although FIBI is publicly listed, its ownership is dominated by a controlling group of shareholders, but this does not result in incremental governance risks. The large presence of independent directors, and the domestic legal and regulatory framework mitigate associated risks. Furthermore, the bank's financial strategy is conservative, under the oversight of a proactive and hands-on regulator.
ESG Issuer Profile Scores and Credit Impact Scores for the rated entity/transaction are available on Moodys.com. In order to view the latest scores, please click here to go to the landing page for the entity/transaction on MDC and view the ESG Scores section.
FIBI's A2 deposit ratings continue to incorporate three notches of government support uplift from the bank's baa2 Adjusted BCA because of our expectation of a very high probability of support from the Israeli authorities, in case of need. This assumption is based on FIBI's systemic importance as one of the country's five large banking groups and the Israeli government's long standing practice of injecting capital into systemically important banks in case of need. A potential weakening of the sovereign's capacity to provide support, indicated by a downgrade of the Government of Israel's rating, may reduce the support uplift incorporated in the bank's ratings.
Prior to government support, the CR Assessment is positioned one notch above the bank's baa2 Adjusted BCA, reflecting our view that its probability of default is lower than that of deposits. Senior obligations represented by the CR Assessment will be more likely preserved to limit contagion, minimise losses and avoid disruption of critical functions. The CR Assessment also benefits from government support uplift, in line with our support assumptions on deposits.
For jurisdictions with a non-operational resolution regime, such as Israel, the starting point for the CRR is one notch above the bank's Adjusted BCA. The CRRs also benefit from three notches of government support uplift.
Our Bank Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity
First International Bank of Israel Ltd.
| Macro Factors | ||||||
|---|---|---|---|---|---|---|
| Weighted Macro Profile Strong |
100% | |||||
| Factor | Historic Ratio |
Initial Score |
Expected Trend |
Assigned Score | Key driver #1 | Key driver #2 |
| Solvency | ||||||
| Asset Risk | ||||||
| Problem Loans / Gross Loans | 0.6% | aa2 | ↓↓ | baa2 | Sector concentration | Expected trend |
| Capital | ||||||
| Tangible Common Equity / Risk Weighted Assets (Basel III - transitional phase-in) |
10.1% | baa3 | ↓ | ba1 | Nominal leverage | Expected trend |
| Profitability | ||||||
| Net Income / Tangible Assets | 0.9% | baa2 | ↓ | baa3 | Return on assets | Expected trend |
| Combined Solvency Score | a3 | baa3 | ||||
| Liquidity | ||||||
| Funding Structure | ||||||
| Market Funds / Tangible Banking Assets | 4.9% | aa3 | ↓ | a2 | Deposit quality | Expected trend |
| Liquid Resources | ||||||
| Liquid Banking Assets / Tangible Banking Assets | 37.1% | a2 | ↓ | a3 | Expected trend | |
| Combined Liquidity Score | a1 | a2 | ||||
| Financial Profile | baa2 | |||||
| Qualitative Adjustments | Adjustment | |||||
| Business Diversification | 0 | |||||
| Opacity and Complexity | 0 | |||||
| Corporate Behavior | 0 | |||||
| Total Qualitative Adjustments | 0 | |||||
| Sovereign or Affiliate constraint | A1 | |||||
| BCA Scorecard-indicated Outcome - Range | baa1 - baa3 | |||||
| Assigned BCA | baa2 | |||||
| Affiliate Support notching | 0 | |||||
| Adjusted BCA | baa2 |
| Instrument Class | Loss Given Failure notching |
Additional notching |
Preliminary Rating Assessment |
Government Support notching |
Local Currency Rating |
Foreign Currency Rating |
|---|---|---|---|---|---|---|
| Counterparty Risk Rating | 1 | 0 | baa1 | 3 | A1 | A1 |
| Counterparty Risk Assessment | 1 | 0 | baa1 (cr) | 3 | A1(cr) | |
| Deposits | 0 | 0 | baa2 | 3 | A2 | A2 |
[1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. Source: Moody's Investors Service
| Category | Moody's Rating | ||
|---|---|---|---|
| FIRST INTERNATIONAL BANK OF ISRAEL LTD. | |||
| Outlook | Rating(s) Under Review | ||
| Counterparty Risk Rating | A1/P-11 | ||
| Bank Deposits | A2/P-11 | ||
| Baseline Credit Assessment | baa2 | ||
| Adjusted Baseline Credit Assessment | baa2 | ||
| Counterparty Risk Assessment | A1(cr)/P-1(cr)1 |
[1] Rating(s) within this class was/were placed on review on October 24 2023 Source: Moody's Investors Service
10In accordance with its profit distribution policy, FIBI distributes a dividend at a rate of up to 50% of its annual net income.
11 On 15 October 2023, the BoI set out a comprehensive outline to support bank customers during this period. The measures include a 3-month deferral of loan repayments without accruing interest for a specific set of households and small businesses that are most affected by the conflict. All other bank customers can also defer repayments but with interest accruing. Individual banks are additionally offering more customised solutions.
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Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER 1384509
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