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June 12 (The following statement was released by the rating agency)
Fitch Ratings says in a new report that the two major Israeli banks, Bank Leumi Le-Israel B.M (A-/Stable) and Bank Hapoalim B.M. (A-/Stable), have been reporting stable underlying performance but remain exposed to concentration risk by sector and by borrower.
Leumi and Hapoalim hold about 30% each of the Israeli banking system's assets, with the other three banks covered in the report (Israel Discount Bank, Mizrahi Tefahot and First International Bank of Israel, none of which are rated by Fitch) accounting for a further 40%. High barriers to entry have ensured revenues remain strong despite low domestic interest rates. Costs are generally high but overall profitability has remained fairly stable, with returns on equity in the high single/low double digits.
Although Israeli households are not highly indebted and mortgage loans have performed well so far real estate prices have been rising rapidly and declining affordability could become a stress on the system as interest rates rise.
Exposure to the construction and real estate sector, often to highly leveraged corporates, remains large and could become problematic. However, the supply of land and the release of construction permits are tightly controlled. Demand for housing by the rising population is closely monitored by the authorities.
Possible risk also remains in legacy exposure to highly leveraged holding companies. Not all banks are affected by the same extent, however. Domestic banks benefit from large volumes of stable retail and corporate deposits; loan-to-deposits in the system are below 100%. Liquidity is supported by large reserves of liquid assets (in both foreign and domestic currencies) and the absence of wholesale funding maturities.
Capitalisation is improving at both Leumi and Hapoalim, as they need to reach a Basel III core Tier 1 ratio of 10% by 2017. Given the high levels of concentrations in the system, Fitch views capitalisation as just moderate.
Leumi's and Hapoalim's Issuer Default Ratings are support-driven. The probability of support from the Israeli authorities remains high despite the planned introduction of a resolution law, in Fitch's view. However, we do not expect the law to be implemented in the short-term. The country does not operate a deposit guarantee system and the practical implementation of resolution tools, such as bail-in of senior creditors, is unlikely in the short- to medium-term.
The report "Peer Review: Israel's Banks" is available on www.fitchratings.com.
Link to Fitch Ratings' Report: Peer Review: Israel's Banks