Regulatory Filings • Feb 14, 2024
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Moody's downgrades the depositratings offive Israeli banks;outlook onlongterm depositratings is negative RatingAction:
13 Feb 2024
Limassol,February 13, 2024 -- Moody's InvestorsService (Moody's) had today downgraded toA3/P-2 fromA2/P-1 the long- and short-term depositratings ofBank Leumi Le-IsraelB.M.(Bank Leumi),Bank Hapoalim B.M.(Bank Hapoalim), MizrahiTefahotBank Ltd.(Mizrahi), Israel DiscountBank Ltd.(IDB) and First InternationalBank of Israel Ltd.(FIBI).The outlook on the long-term depositratings is negative.
Concurrently the rating agency has also downgraded the five banks' long-term Counterparty Risk Ratings (CRRs)to A2, theirlong-term Counterparty Risk (CR)Assessments toA2(cr) and IDB's foreign currency senior unsecured debt rating toA3 with a negative outlook.At the same time, Moody's affirmed the five banks' baa2Baseline Credit Assessments (BCAs) andAdjustedBCAs.The banks'P-1 short-term CRRs andP-1(cr) short-term CRAssessments were also affirmed.
The rating action follows Moody's downgrade of theGovernment of Israel's long-term issuerratings toA2 with a negative outlook fromA1 on 9 February 2024. Forfurtherinformation on the sovereign rating action, please referto Moody's press release: https://ratings.moodys.com/ratings-news/415081.
Today's actions conclude the ratings review that Moody's initiated on 24October 2023.
Please click on this link forthe List of Affected Credit Ratings.This list is an integral part of thisPress Release and identifies each affected issuer. https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL485619
The downgrade of the banks' long-term depositratings toA3 is driven by a lower government support uplift incorporated in those ratings because of the downgrade of Israel's sovereign ratings.
Moody's continues to assume a very high probability of government support forthe five large Israeli banking groups that itrates given their systemic importance and the Israeli government's long standing practice of supporting such systemically important banks, in case of need.Given theA2 sovereign rating, this now results in two notches, down from three previously, of government support uplift from their baa2AdjustedBCAs to theirlong-term depositratings.
The downgrade of the short-term depositratings toP-2 follows the downgrade of the long-term depositratings and
reflects Moody's standard mapping forlong-term ratings to short-term ratings.
The negative outlook on the long-term depositratings captures both the negative outlook on theGovernment of Israel's rating and therefore the potential further weakening of the sovereign's capacity to provide support, together with the potential for a significantly more negative impact on the economy in the event of an escalation in the ongoing conflict, which could lead to the banks' standalone fundamentals being impacted more severely than is currently assumed. Furthermore socialrisks forthe banks have increased because of the military conflict and the weakened security environment and are also a driverforthe negative outlook.
Moody's lowered its MacroProfile forIsrael to "Strong -"from "Strong",reflecting the weaker operating environment for banks, to capture the increased susceptibility to eventrisks (from elevated exposure to politicalrisks) and weakened institutions, which together with the country's economic strength are sovereign inputs to the MacroProfile.
The affirmation of the banks' baa2BCAs andAdjustedBCAs reflects their strong financial fundamentals coming into this period of uncertainty, and Moody's central expectation that the economy willrecoverrelatively quickly from the conflict provided that it does not escalate further and that the banks' financial performance, particularly their capital and liquidity, will be broadly resilient to the impact of the current situation.
Moody's expects the banks' loan quality will deteriorate from strong levels because of the impact of the military conflict. The five banks have a relatively high, albeit varying, exposure to the construction and real estate sectors that had grown in previous quarters and which would be particularly affected in the event of a sustained disruption in real estate activity and demand.The construction industry, in particular, is facing a lack of workers. Underlying demand for residential units continues to be driven by a young and growing population and banks are mostly exposed to residential construction, but they also have exposure to income-generating properties and raw land.
The five banks are using strong revenues in 2023 to proactively book collective provisions against downside macroeconomic scenarios and affected sectors, such as construction and real estate. Credit costs had stayed contained over past economic downturns and underwriting standards are relatively conservative supported by close and proactive oversight by theBank of Israel(BoI).
The Israeli authorities are providing support to affected businesses and households, and the banks have rolled out, in co-ordination with theBoI, a repayment deferral scheme that will cushion the impact of the war on borrowers.
Against the current uncertain environment, the five banks lowered their dividend payouts inQ3 2023. Capitalretention together with modest credit growth will support capitalisation and therefore resilience against unexpected losses. Capital metrics at Israeli banks are moderate, but consistently stable and driven by conservative risk-weights, especially on mortgages.
Profitability, which benefited from higherinterestrates, will also decline from recent exceptionally high levels because o
higher cost ofrisk, lower credit growth, the support measures to customers and a planned increase in bank taxes.The banks had, however, achieved large cost efficiency gains in recent years that support profitability and enhance their ability to withstand and recoverfrom shocks.
Israel banks' funding bases have remained stable, benefiting from a large domestic deposit base, mostly from households and small businesses, and liquidity remains ample.
Moody's downgradedBank Leumi's long-term depositratings toA3 fromA2 and affirmed its baa2BCAandAdjusted BCA.The bank's standaloneBCAreflects its strong domestic deposit-based funding structure, healthy liquidity and low problem loans and credit losses over a whole economic cycle.Bank Leumi's problem loans (defined as nonaccruing loans and accruing loans that are more than 90 days overdue) were a 0.8% of gross loans as ofSeptember 2023.
TheBCAalso reflects downside risks from a significant exposure concentration to the Israeli property market. Lending to the construction and real estate sector made up 26% of total lending as ofSeptember 2023, growing by 20% yearover-year. Capitalisation is moderate with a tangible common equity (TCE)/risk-weighted assets (RWAs)ratio of 11.6% as ofSeptember 2023.
Moody's downgradedBank Hapoalim's long-term depositratings toA3 fromA2 and affirmed its baa2BCAand AdjustedBCA.TheBCAreflects the bank's strong deposit-based funding structure, sound liquidity and low levels of problem loans and contained credit losses over an entire economic cycle.Problem loans were 1.0% as ofSeptember 2023.
The standaloneBCAalso reflects downside risks from a significant exposure concentration to the Israeli property market. Lending to the construction and real estate sector made up 20% ofBank Hapoalim's gross loans as of September 2023 and the bank's exposure grew by a high 13% year-over-year as ofSeptember 2023. Capitalisation is also moderate. Moody'sTCE/RWAs ratio was 11.5% as ofSeptember 2023.
Moody's downgraded Mizrahi's long-term depositratings toA3 fromA2 and affirmed its baa2BCAandAdjustedBCA. The bank's standaloneBCAreflects its strong asset quality and low-risk residential mortgage-lending focus in Israel, its deposit-based funding structure, mostly from households and small businesses, and adequate liquidity mostly made of cash and equivalents.Problem loans were 1.0% of gross loans as ofSeptember 2023.The bank had exposure concentration to real estate, whereby its lending to the construction and real estate sector made up 11% of Mizrahi's gross loans as ofSeptember 2023, although this is lowerthan peers.
Mizrahi'sBCAalso captures modest capitalisation, with aTCE/RWAs ratio of 9.8% asSeptember 2023 that is lower
than local and global peers, but it has been consistently stable and buffers are aided by the conservative risk-weightin on mortgages.
Moody's has downgraded IDB's long-term depositratings toA3 fromA2 and affirmed its baa2BCAandAdjusted BCA.The bank'sBCAreflects its favourable deposit-based funding structure along with comfortable liquidity, its currently strong asset quality, with low problem loans and strengthened recurring profitability supported by recent efficiency gains.The bank's problem loans were 0.9% of gross loans as ofSeptember 2023.
TheBCAalso reflects modest but stable capital buffers, with aTCE/RWAs ratio of 10.5% as ofSeptember 2023 and downside risks from a significant exposure concentration to the property market. Lending to the construction and real estate sector made up 15% of IDB's gross loans as ofSeptember 2023 and the bank's exposure grew by a high 12% year-over-year as ofSeptember 2023 because of strong demand.
Moody's downgraded FIBI's long-term depositratings toA3 fromA2 and affirmed its baa2BCAandAdjustedBCA. TheBCAreflects the bank's strong asset quality, stable retail deposit funding base, high liquidity, and a strong presence in niche segments that benefit it with consistent business opportunities.Problem loans were 0.5% of gross loans as ofSeptember 2023, a reflection of the bank's low-risk loan book structure and underwriting standards.
The bank'sBCAalso reflects additional downside risks from a significant exposure concentration to the Israeli property market. Lending to the construction and real estate sector made up 14% ofFIBI's gross loans as ofSeptember 2023, although this was lowerthan most peers.The bank's capital buffers are adequate but modest with aTCE/RWAs ratio of 10.3% as ofSeptember 2023, which, however has been consistently stable.
There is a limited scope for an upgrade of the banks' depositratings given the negative outlook. Moody's could stabilise the outlook on the banks'ratings in case the outlook on the sovereign rating changes to stable and/or downside risks to the economy and the banks subside.Overthe longer-term, the banks' depositratings could be upgraded in case the sovereign rating is upgraded, orthe banks individually demonstrate a more resilient performanc under significantly adverse conditions than in the past and address sector concentration risks.
Israeli banks' long-term depositratings could be downgraded if both the sovereign rating and their standaloneBCAs are downgraded.
The banks'BCAs could be downgraded in case of a prolonged and wider conflict that could have a significant impact on their standalone fundamentals, orif any individual bank's performance proves more volatile than in previous conflicts and economic crises.
PRINCIPALMETHODOLOGY
The principal methodology used in these ratings wasBanks Methodology published in July 2021 and available at .Alternatively, please see the Rating Methodologies page on for a copy of this methodology. https://ratings.moodys.com/rmc-documents/71997 https://ratings.moodys.com
The List ofAffected Credit Ratings announced here are a mix of solicited and unsolicited creditratings. For additional information, please referto Moody'sPolicy for Designating andAssigning Unsolicited Credit Ratings available on its website .Additionally, the List ofAffected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link forthe List ofAffected Credit Ratings.This list is an integral part of thisPress Release and provides, for each of the creditratings covered, Moody's disclosures on the following items: https://ratings.moodys.com https://www.moodys.com/viewresearchdoc.aspx? docid=PBC_ARFTL485619
Forfurther specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions andSensitivity toAssumptions in the disclosure form. Moody's RatingSymbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
Forratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices.Forratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the creditrating action on the support provider and in relation to each particular creditrating action for securities that derive their creditratings from the support provider's creditrating. For provisionalratings, this announcement provides certain regulatory disclosures in relation to the provisionalrating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed priorto the assignment of the definitive rating in a mannerthat would have affected the rating.Forfurtherinformation please see the issuer/deal page forthe respective issuer on https://ratings.moodys.com.
For any affected securities orrated entities receiving direct credit support from the primary entity(ies) of this creditrating action, and whose ratings may change as a result of this creditrating action, the associated regulatory disclosures will be those of the guarantor entity.Exceptions to this approach exist forthe following disclosures, if applicable to jurisdiction:AncillaryServices, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity orits designated agent(s) and issued with no amendmentresulting from that disclosure.
Regulatory disclosures contained in this press release apply to the creditrating and, if applicable, the related rating outlook orrating review.
At least oneESGconsideration was material to the creditrating action(s) announced and described above.
Moody's general principles for assessing environmental, social and governance (ESG)risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1355824.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additionalregulatory disclosures for each credit rating.
AlexiosPhilippides VicePresident-SeniorAnalyst Financial InstitutionsGroup Moody's InvestorsService Cyprus Ltd. PortoBelloBuilding 1,SiafiStreet, 3042 Limassol POBox 53205 Limassol, CY3301 Cyprus JOURNALISTS: 44 20 7772 5456 ClientService: 44 20 7772 5454
Henry MacNevin Associate Managing Director Financial InstitutionsGroup JOURNALISTS: 44 20 7772 5456 ClientService: 44 20 7772 5454
ReleasingOffice: Moody's InvestorsService Cyprus Ltd. PortoBelloBuilding 1,SiafiStreet, 3042 Limassol POBox 53205 Limassol, CY3301 Cyprus JOURNALISTS: 44 20 7772 5456 ClientService: 44 20 7772 5454
© 2024 Moody's Corporation, Moody's InvestorsService, Inc., Moody'sAnalytics, Inc. and/ortheirlicensors and affiliates (collectively,"MOODY'S").Allrights reserved.
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