The outlook on the Israeli banking system remains positive, reflecting the continued strong macroeconomic environment and the rated banks’ sound liquidity and retail funding profiles and improving risk management, Moody’s Investors Service said in its new Banking System Outlook for
The outlook on the rated entities’ bank deposit ratings is also positive, reflecting the positive outlook on
“Since the recession of 2001-2002, driven by the IT sector collapse and the second Intifada, the Israeli economy has been growing steadily. In 2007 GDP is forecast to grow above 5% for the fourth year in a row. This is despite the lack of improvement in the geopolitical situation, as the economy has proved resilient to shocks,” said Carlo Gori, a Moody’s Vice President-Senior Analyst and author of the report.
This strong and resilient macroeconomic performance has proven beneficial to the country’s banks, with a notable decline in loan loss provisions, in particular.
However, Moody’s notes that the reduced loan loss provisions only partially offset higher operating costs in 2006, contributing to a 10% fall in net operating profits.
However, the extraordinary gains from the sale of investment fund managers resulted in a 38% increase in net income. In this context, the outlook on the rated institutions’ bank financial strength ratings (BFSRs) remains stable.
“Going forward, the low level of loan loss provisions seen in 2007 does not appear sustainable. To preserve profitability, Israeli banks will need to offset the loss of fund
management fees (which represented 16% of revenues in 2005) with activities such as pension advice, life insurance, credit cards, foreign operations and trading and it will be essential for these to be supported by strong risk management,” Gori explained.
Asset quality continued to improve in 2006, although it remains weak and compounded by high loan concentration by borrower and towards the construction industry, which has not yet recovered from a long crisis.
Moody’s also recognises that risk management is strengthening, although the segregation between risk management and the business line could be further improved. Exposure to subprime-related assets and CDOs appears manageable for the system. As corporate clients are substituting bank loans with bond issuance, Israeli banks are increasingly targeting the retail market.
Moody’s expectation of systemic support for the banking system is based on its belief that the Israeli authorities would act to prevent any of the major banks from defaulting, as they are regarded as essential financing channels for the Israeli economy, although support for the minor banks is less certain. It also reflects the fact that Israeli banks do not benefit from any institutionalised support system.
