Bank Hapoalim rating outlook cut from ‘stable’ to ‘negative’

Moody's Investors Service has cut the outlook on Bank Hapoalim’s A1 long-term domestic and foreign currency deposit ratings, A1 senior and A2 subordinated debt ratings to negative from stable. The outlook on the C- bank financial strength ratings (BFSR) remains stable.
The outlook changes have been prompted by Moody's growing concerns over Hapoalim's intrinsic financial strength due to: (a) accelerated deteriorating economic and operating conditions in Israel, (b) the ongoing financial crisis, (c) reduced profitability due to elevated credit costs, possible further financial asset impairments, a lower interest rate environment and perhaps a weaker business expansion, and (d) relatively elevated exposure to sectors that face severe financial stress, such as construction and tourism.
A relatively low earning power is expected to curtail Hapoalim's ability to absorb elevated provisioning expenses at a time when credit costs are increasing due to weaker credit quality trends. Based on Moody's internal stress tests, this suggests that bottom-line profitability and capitalisation will remain under pressure in the coming quarters. Moody's also notes that Hapoalim has recently issued a profit warning relating to the fourth quarter of 2008. Accordingly, the bank expects to post a loss, increasing the full year expected loss.
Furthermore, Moody's expects asset quality metrics to worsen in the coming quarters as deteriorating economic conditions in Israel take their toll on credit quality. The economy contracted by 0.5% in the last quarter of 2008 and forecasts for 2009 point to a further contraction, with a number of sectors facing significant stress. The prospect of higher unemployment rates could also lead to a rise in default rates in retail lending, necessitating elevated provisioning expenses. In tandem, relatively high single borrower concentrations are a challenge for most Israeli banks, as they can result in potentially rapid asset quality deterioration during an economic downturn.
Moody's added that in current market conditions, liquidity and retail funding are considered key strengths of the Israeli banking system and of Hapoalim in particular. Hapoalim benefits from a large, stable customer deposit base, which comfortably funds its loan portfolios. All Israeli banks are net providers of credit abroad, therefore the ongoing financial crisis has negatively affected the value of their investments and has not resulted in a liquidity squeeze, thus far.
Headquartered in Tel Aviv, Israel, Bank Hapoalim had total assets of NIS297.9 bln (US$ 86.1 bln) as at end-September 2008.