Stable outlook for Israeli banking

The fundamental credit outlook for the Israeli banking sector is stable, reflecting expectations of healthy domestic economic growth in 2010, following a shallow contraction in 2008/2009, Moody's Investors Service said in its new Banking System Outlook.
Israeli banks' modest direct exposure to the global financial crisis, their sound liquidity profiles and adequate capitalisation meant that financial performance recovered in 2009, despite a moderate increase in provisioning expenses. Some asset quality pressures are likely to persist in 2010, but Moody's expects the overall credit environment and bank financial performance to continue to improve over the year.
"The Israeli economy proved relatively resilient to the global financial crisis and economic slowdown in 2008 and 2009 thanks to the circumstances prevailing in Israel at the time. These included the high-tech composition of exports, which were less affected by declining global demand, the absence of a property bubble, modest consumer leverage, the government's healthy fiscal position, the Bank of Israel's
appropriate monetary policy, and the adequate financial health of the Israeli corporate sector. The relative soundness of the banking sector going into the crisis also protected the economy from further external shocks," said George Chrysaphinis, a Moody's senior analyst and author of the report.
Within this context, Israeli banks' 2009 financial performance was primarily characterised by flat asset growth, tighter interest margins, elevated credit costs and below-trend profitability. This followed a sharp deterioration in profitability for some banks in 2008. Increased loan loss provisioning began in the fourth quarter of 2008 for some banks and continued into 2009, reflecting a moderate deterioration in corporate credit.
"On the one hand, the recovering Israeli economy and improving global economic context reduces the risk of a further significant deterioration in asset quality over the next few months and suggests that 2010 provisioning needs are unlikely to exceed 2009 levels. However, Israeli banks' credit risk remains our primary concern over the short-to-medium term and will be our main focus," Chrysaphinis explained.
Finally, during 2010 the Israeli banks are implementing the new guidelines of the Basel II agreement. Moody's acknowledges that the preparations made by the banks for its implementation should lead to more focused and better risk management, improved decision-making and increased transparency and disclosure.