Moody’s drops outlook on four Israeli banks to negative

Moody's Investors Service has changed the outlook on the ratings of four Israeli banks to negative from stable: Bank Leumi, First International Bank of Israel, Israel Discount Bank and Mizrahi Tefahot Bank.
The outlook changes have been prompted by Moody's growing concerns over the banks' intrinsic financial strength due to a number of factors, including:
1. Economic conditions in their domicile are increasingly challenging. Growth in Israel is expected to drop from an average rate of 5% for the last five-year period to less than 2% in 2009. Moody's adds that the slowdown could be more severe, depending on the longevity and severity of the international financial and economic crisis.
2. Israeli real estate companies that have expanded globally are affected by the global downturn. Although the majority of the companies have raised funds from the domestic corporate bond market to finance their overseas expansion, any potential problems that such corporations experience would negatively affect the Israeli banks given their exposure to this sector.
3. Economic slowdown and challenging conditions for some economic sectors suggest that unemployment may rise, leading to increased default levels in the banks' household credit portfolios.
4. The pressure on the banks' profitability arising from reduced revenues and increased credit costs. Moody's expects the weakening credit environment to lead to higher default rates among borrowers, necessitating elevated provisioning expenses, especially given that provisioning levels have been low during recent quarters.
Furthermore, exposure to some defaulted overseas institutions and losses in the banks' securities portfolios have taken a toll on the banks' financial performance. Finally, the ongoing capital markets reform (Bachar reform) in Israel is resulting in lower fees and commissions for the banking sector as a whole.
Moody's notes that the Israeli authorities are in the process of finalising and implementing a number of measures to support the financial sector, including the domestic capital markets and local banks, in order to mitigate the impact from the global downturn.