Interest Rate Update/Notice • Mar 18, 2021
Interest Rate Update/Notice
Open in ViewerOpens in native device viewer
18 MAR 2021
Fitch Ratings - London - 18 Mar 2021: Fitch Ratings has assigned Mizrahi Tefahot Bank Ltd (UMTB) a Long-Term Issuer Default Rating (IDR) of 'A' with Stable Outlook and Viability Rating (VR) of 'a-'. A full list of rating actions is below.
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
UMTB's IDRs are based on sovereign support and together with the Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's expectation of an extremely high probability of support from Israel (A+/Stable), if needed. Our expectation is underpinned by Israel's ability to support domestic banks as well as our view that it has a strong willingness to do so. This view is reinforced by UMTB's large franchise, particularly in mortgage lending, and its importance to the Israeli economy.
Our view is also supported by the government's objective to preserve confidence in the banking sector, especially considering the absence of a deposit guarantee scheme and the lack of effective recovery and resolution legislation. UMTB accounts for about 20% of banking sector assets (including the recently acquired Union Bank) and is a domestic systemically important bank.
The bank's 'F1+' Short-Term IDR is the higher of the two possible options that map to a 'A' Long-Term IDR. This is because we view the sovereign's propensity to support UMTB as more certain in the near term. We also view the risk of a simultaneous deterioration in the liquidity profile of both Israel and UMTB as low, and have not identified other potential impediments to the prompt flow of funds to the bank.
UMTB's VR reflects its strong domestic franchise, low to moderate risk appetite, and limited industry concentrations within its business lending portfolio. It also reflects resilient asset quality with low levels of impaired loans, which are lower than peers, and a higher proportion of low-risk retail mortgage lending than peers. The VR also reflects UMTB's stable business model, strong market position in retail lending and better-than-average cost efficiency, which support stable profitability. Capital, funding and liquidity ratios are sound.
Impaired loans remained a low 0.68% of gross loans at end-2020, according to Fitch's calculations. The ratio is supported by a framework for pandemic-related payment deferrals and fiscal support for
borrowers as well as more flexible guidance on the classification of temporarily impaired and restructured loans. We expect impaired loans to increase in 2021 and 2022 but to a level still commensurate with our current asset quality assessment, and not materially greater than 2% of gross loans. Most borrowers who requested payment deferrals have resumed normal repayments.
Loan loss allowances increased to 143% of gross impaired loans at end-2020 as the bank used management overlays to increase its provisions to cover expected losses from pandemic-related assetquality deterioration. We expect exposure to businesses to experience the greatest deterioration, although UMTB is less exposed to business borrowers than its larger peers.
The bank has demonstrated consistent profitability through the economic cycle thanks to its strong mortgage lending franchise and better cost efficiency than peers, with a sector-leading cost/income ratio of 54% in 2020. Operating profit/risk-weighted assets was a resilient 1.3% in 2020, despite high provisions of ILS1,050 million (2019: ILS364 million) driven by the pandemic.
UMTB's sound common equity Tier 1 (CET1) ratio of 10.0% at end-2020 reasonably exceeded its temporarily reduced regulatory requirement of 8.7%. Temporary capital requirement relief, which has reduced the minimum ratio by 100bp and also removed an additional capital requirement of 1% of outstanding residential mortgage balances, is expected to be extended to the end of September 2021. When this relief comes to an end, the capital buffer will reduce but remain adequate, in our view. Our assessment of the buffer considers the bank's conservative risk-weights across all asset classes, which is reflected in a high RWA density of 56% and a robust leverage ratio of 5.2%. Both metrics are high compared with global peers with a similar focus on residential mortgage lending.
Funding benefits from UMTB's stable and granular retail and SME deposit base and a loans/deposits ratio of 87% at end-2020. The bank also has access to capital markets where it issues senior and subordinated notes. Liquidity is sound, with a 133% liquidity coverage ratio at end-2020.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
We could downgrade UMTB's IDRs if we believe the Israeli authorities become less willing or able to provide timely support to the banking sector. A downgrade of Israel's Long-Term IDR would likely result in a downward revision of the bank's SRF and a downgrade of its IDRs. The introduction of a bank resolution law, which could reduce the sovereign's support propensity, is under discussion, but we do not expect this to come into effect within the rating horizon.
A downgrade of UMTB's VR would most likely be driven by a deeper and more prolonged economic disruption than our baseline expectations. A delayed recovery would likely result in more permanent damage to the bank's earnings and asset quality, which would take time to reverse. We would likely downgrade the VR if the bank's impaired loan ratio exceeds 3% over a prolonged period or if a deterioration in profitability significantly weakens the bank's capitalisation, which we do not expect. The VR would likely be downgraded if the bank's CET1 ratio falls towards its minimum requirement
without a clear prospect to rebuild it quickly.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of UMTB's VR would require the successful integration of Union Bank and growth in business segments that results in a materially more diversified business model while achieving stronger capitalisation and maintaining healthy asset quality. We do not expect this over the next two years, given the time required to complete the integration as well as the time required to diversify the bank's business model in a market with strong bank and non-bank competition.
An upgrade of Israel's Long-Term IDR is unlikely to result in an upgrade of UMTB's Long-Term IDR because Fitch typically does not assign SRFs above 'A' to domestic systemically important banks in countries where the sovereigns are rated 'AA' or 'AA-' and where support propensity is high.
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sectorspecific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/ 10111579]
10 March 2021
The principal sources of information used in the analysis are described in the Applicable Criteria.
UMTB's IDRs, SR and SRF reflect Fitch's expectation of an extremely high probability of sovereign support from Israel.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's
ESG Relevance Scores, visit www.fitchratings.com/esg
Senior Director Primary Rating Analyst +44 20 3530 1012 Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN
Associate Director Secondary Rating Analyst +44 20 3530 1379
Senior Director Committee Chairperson +49 69 768076 123
London +44 20 3530 2452 [email protected]
| ENTITY/DEBT | RATING | RECOVERY | PRIOR | ||
|---|---|---|---|---|---|
| Mizrahi Tefahot Bank Ltd |
LT IDR | A | New Rating | ||
| ST IDR | F1+ | New Rating | |||
| Viability | a- | New Rating | |||
| Support | 1 | New Rating | |||
| Support Floor |
A | New Rating |
| POSITIVE | |
|---|---|
| NEGATIVE | |
| EVOLVING | |
| STABLE |
Bank Rating Criteria (pub.28 Feb 2020) (including rating assumption sensitivity)
Solicitation Status
Endorsement Status
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/ SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYST IS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE.
Copyright
Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in
respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US\$1,000 to US\$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US\$10,000 to US\$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.
Fitch's international credit ratings produced outside the EU or the UK, as the case may be, are endorsed for use by regulated entities within the EU or the UK, respectively, for regulatory purposes, pursuant to the terms of the EU CRA Regulation or the UK Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019, as the case may be. Fitch's approach to endorsement in the EU and the UK can be found on Fitch's Regulatory Affairs page on Fitch's website. The endorsement status of international credit ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for structured finance transactions on the Fitch website. These disclosures are updated on a daily basis.
Building tools?
Free accounts include 100 API calls/year for testing.
Have a question? We'll get back to you promptly.