The outlook for Israel's banking system has been changed to stable from negative, Moody's Investors Service said in a new report, reflecting the expectation of gradually improving macroeconomic conditions, increasing capital buffers to absorb unexpected losses, and strong liquidity with stable deposit-based funding.
The stable outlook also captures Moody's view that the substantial financial assets of Israeli households, relatively low loan-to-value ratios (LTV) and the tightening of underwriting will significantly mitigate credit risks related to rapid house price increases.
The rating agency projects that Israel's real GDP will grow by 3.4% in 2014, reflecting gradually improving -- albeit still subdued -- growth in the euro area (Israel's main export partner) and resilient domestic consumer demand, supported by low interest rates and low unemployment. Moody's said it expects that this growth, in the context of Israel's competitive, export-oriented economy, will translate into modest credit growth (3%-5% in 2014) as banks remain risk-averse to highly-indebted corporates and focus on further strengthening their capital buffers.
Moody's said that the sector's Tier 1 ratio will rise to 10% in the coming quarters (September 2013: 9.7%; December 2010: 8.5%), despite an estimated 50 basis points negative impact from the implementation of Basel III in January 2014. In Moody's view, banks have adequate buffers to absorb unexpected losses, especially in light of Bank of Israel's cautious risk-weighting approach, including an average 50% risk-weight on mortgages compared with below 20% for various euro area banks.
“Israeli banks will maintain sound and stable funding profiles,” the rating agency said, supported by Israel's strong savings culture.
Customer deposits accounted for 76% of total assets as of September 2013 and banks reported a loan-to-deposits ratio of 89%. Israel's rated banks will also maintain solid liquidity buffers, given their role as net interbank lenders, with liquid assets accounting for an estimated 30% of total assets as of September 2013.
Get all the latest news and videos in your inbox. Register FREE