Earnings Release • Jan 22, 2023
Earnings Release
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Research Update:
January 19, 2023
On Jan. 19, 2023, S&P Global Ratings affirmed its 'BBB+' long-term and 'A-2' short-term issuer credit ratings on Israel Discount Bank Ltd. (IDB). At the same time, we affirmed our 'BBB+' long-term issuer credit rating on its core U.S. subsidiary Israel Discount Bank of New York (IDB NY). The outlooks on both long-term ratings are still positive.
The affirmations reflect our view that IDB's earnings capacity has improved on the back of effective management and rising interest rates. Thanks to tight cost management and reduction in staff and branches, IDB has brought its efficiency closer to that of peers. IDB's cost-to-income ratio dropped to 56% at end-September 2022 from 67% at end-2020, and its cost to average assets declined to 1.96% from 2.41% at the same dates. These improvements, complemented by a growing business, rising interest rates, and inflation–-about 8% of IDB's assets are linked to the consumer price index--enhanced revenues in 2022. We estimate that
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IDB's 2022 return on equity will stand around 13.2%, versus 9.0%-9.5% prior to the pandemic, then slow to 11.5%-11.0% in 2023-2024. These ratios suggest that IDB is on track to meeting its 2025 profitability and cost-focused financial targets, which the bank shared with investors at end-2021.
base. Although economic turbulence is more pronounced in Europe, Israel faces slowing growth and tightening monetary policy. We believe IDB enters this downturn with strong credit quality. We note the bank's low nonperforming exposures (NPEs) ratio at 1.1% and high NPE coverage at 118% as of end-September 2022, according to our calculations, as well as a sound earnings buffers. However, in line with that of peers, IDB's loan portfolio is skewed toward construction and real estate (about 18% of the bank's credit exposure) and consumer financing, and we see these activities as highly sensitive to domestic economic developments. We expect IBD's clients operating in these cyclical sectors will feel increased stress that sets off higher credit losses. Consequently, we believe that higher NPEs and credit losses could weigh on the bank's bottom line and hinder capital build-up.
As a result, we forecast IDB's risk-adjusted capital (RAC) ratio will improve to close to 10.0% by end 2024 from 9.4% at end-2021. In our view, stronger earnings will steady vigorous lending growth and rising credit losses. Additionally, the bank is rebalancing its portfolio toward the less risky mortgage and medium corporate segments, and this should benefit the RAC ratio.
The positive outlook on IDB and IDB NY reflects the possibility of an upgrade over the next two years due to stronger capital and earnings.
An upgrade will hinge on continued positive performance of the bank's operational efficiency, cost of risk, and profitability amid a deteriorating environment. Specifically, an upgrade would stem from a sustainable improvement in IDB's earnings capability and indications that the RAC ratio will stay at or above 10%.
We could revise the outlook to stable if the bank's earnings deteriorated, thereby weakening capitalization and restraining the RAC ratio meaningfully below 10%. This could occur if the pace of loan growth or cost of risk exceeded our projections, or if dividend payouts were to the detriment of internal capital generation.
| Issuer Credit Rating | BBB+/Positive/A-2 |
|---|---|
| SACP | bbb |
| Anchor | bbb+ |
| Business position | Adequate (0) |
| Capital and earnings | Adequate (0) |
| Risk position | Moderate (-1) |
| Funding and liquidity | Adequate and adequate (0) |
| Comparable ratings analysis Adequate | |
| Support | +1 |
| ALAC support | 0 |
| GRE support | 0 |
| Group support | 0 |
| Sovereign support | +1 |
| Additional factors | 0 |
SACP--Stand-alone credit profile.
Issuer Credit Rating BBB+/Positive/A-2
Issuer Credit Rating BBB+/Positive/--
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; or Stockholm (46) 8-440-5914
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