(The following statement was released by the rating agency)
Jan 15 -
Summary analysis -- Israel Discount Bank Ltd. --------------------- 15-Jan-2013
CREDIT RATING: BBB-/Stable/A-3 Country: Israel
Primary SIC: Commercial banks,
Mult. CUSIP6: 465074
Credit Rating History:
Local currency Foreign currency
30-Apr-2009 BBB-/A-3 BBB-/A-3
21-Feb-2008 BBB/A-2 BBB/A-2
Ratings Score Snapshot
Issuer Credit Rating BBB-/Stable/A-3
Business Position Adequate (0)
Capital and Earnings Moderate (-1)
Risk Position Moderate (-1)
Funding and Liquidity Average
and Adequate (0)
GRE Support 0
Group Support 0
Sovereign Support +1
Additional Factors 0
The stable outlook reflects Standard & Poor's Ratings Services' view that Israel Discount Bank's (IDB) business and financial position will remain broadly stable over the next 12-24 months. We expect any impact from potential economic turbulence, such as a slowdown in the Israeli economy or the residential real estate sector, on the bank's financial profile to remain manageable, allowing the bank to maintain its capitalization at the current level. All else being equal, a change in the sovereign ratings on the State of Israel (foreign currency A+/Stable/A-1; local currency AA-/Stable/A-1+) would not have a direct impact on the bank's ratings.
Significant deterioration of the Israeli economy could put pressure on the bank's asset quality or capitalization, and trigger a negative rating action. In addition, the sale of core assets by the bank, as part of its capital management plan, which we believe would increase its risk profile or weaken its business stability, could also lead us to take negative rating action.
Given the slower growth prospects for the Israeli economy, the low interest rate environment constrains margins and continues to exert negative pressure on corporate sector refinancing needs. Hence, we believe that a positive rating action is less likely at this stage.
The ratings on IDB reflect its 'bbb' anchor, its "adequate" business position, "weak" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms. The ratings also incorporate our view of the moderate likelihood of extraordinary government support to IDB in case of need, given IDB's "moderate" systemic importance in Israel, which we view as "supportive" toward its banking sector.
We assess IDB's stand-alone credit profile (SACP) at 'bb+'.
Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating (ICR). Our anchor for a commercial bank operating in Israel is 'bbb'. While 13% of IDB's lending is in the U.S., it has no impact on the anchor. The BICRA score is informed by our evaluation of economic risk; we view Israel's economic indicators as supportive to the banking sector, with "adequate" resilience and no major imbalances. However, the situation could deteriorate rapidly considering the high political risk in the country. The credit risk in the economy is also "high" due to significant borrower concentration and large exposure to real estate. With regard to industry risk, the Israeli banking sector has an adequate institutional framework and is underpinned by a high and stable share of core retail deposits. We expect stability to remain high, although somewhat distorted by nonbank competitors focusing on corporate lending.
Business position: Business stability is pressured by ongoing capital constraints
Our assessment of IDB's business position as "adequate" reflects its good commercial position in the Israeli market but also its high geographic concentration. The bank has about 15% market share by assets and benefits from a robust customer franchise. With total assets of Israeli shekel (NIS) 200 billion (about $50 billion) as of Sept. 30, 2012, IDB is the third largest banking group in Israel. High geographical concentration is partly offset by diversified business lines and a retail customer base which support business stability. The bank saw massive change in its senior management in 2011, and we believe the main challenges for the new management remain the need to address the bank's weak capitalization and low operating efficiency, which constrain business growth and market position. We expect loan growth to remain low for 2013, at about 1%-2%, due to the bank's limited capital position and in consideration of the updated regulatory capital requirements set by the authorities (9% core tier 1 by the end of 2014).
Capital and earnings: Moderate capitalization and weak earning capacity We assess IDB's capital and earnings as "moderate." Our projected RAC (risk-adjusted capital) ratios before adjustments are higher than our projections for last year, and remain within the range of 5%-5.5% for the next 18-24 months. These take into account the bank's recent deleveraging which supported its capital base. However, we believe the bank's earning capacity will remain weak for the period, and therefore more sensitive than its domestic peers to potential stress scenarios. Our projection incorporates increasing regulatory demands reflected in a zero dividend distribution assumption. We believe low operational efficiency will continue to weigh on the bank's earnings capacity in the next 12-24 months; the bank had a cost-to-income ratio of 75%-77% in 2011 and 2012. We also believe that credit losses will likely increase in the next 12-24 months, picking up from their low level, driven by the slower growth of the Israeli economy. Furthermore, we expect the liquidity pressure of some of the highly leveraged big local conglomerates to continue in 2013, in light of their significant debt repayments. In addition, we expect the low interest environment to continue to put pressure on the bank's interest margins during 2013.
The bank reported net profit of NIS633 million in the first nine months of 2012, almost flat from the previous year, and equivalent to a low ROE (return on equity) of 7.7%. Profits in 2012 were impacted by an impairment of the bank's equity minority holdings in FIBI in the second half. ROE excluding this impairment would reach 8.6%.
Risk position: Moderate risk position with low growth prospects, and potential pressure on asset quality
We assess IDB's risk position as "moderate." We expect IDB's growth rates to be lower than the industry average and Israeli GDP growth of about 2%-3% in 2013. We do not expect any significant change in the bank's risk exposure. IDB is highly exposed to the Israeli economy, but as the third largest player in Israel, its loan profile is well-diversified by industry sectors. A key negative issue for IDB and the other large Israeli banks' risk position is single-party concentration. In addition, the bank's exposure to holding companies and LBO (leveraged buyout) transactions is high, in our view. This is becoming a key credit risk in the current environment due to the high volatility of the capital market, which impacts the value of collaterals. The loan book concentration is a reflection of the concentrated Israeli economy, which we have already incorporated into our BICRA assessment. In addition, the bank is exposed to the commercial real estate sector, which represents almost 20% of its total exposure (on and off balance sheet).
We expect a negative trend in asset quality and credit costs in 2013 driven by the projected slowdown for the Israeli economy and the expected continued liquidity pressure on the corporate sector. We believe that IDB's low NPL (nonperforming loans) coverage ratio, which was about 33% as of Sept. 30, 2012, might indicate higher credit costs for the next 12-24 months.
Funding and liquidity: Sound funding base which supports adequate liquidity position
We consider that IDB's funding is "average" and its liquidity "adequate." The funding base is well diversified and in line with local peers'. The bank's loan-to-deposit ratio was about 78% at Sept. 30, 2012, compared with the industry average of about 90%-100%. Its funding base mainly relies on retail core deposits, while wholesale funding levels are in line with local peers'. Liquidity is "adequate" with approximately 25% of the assets in the form of cash and Israeli government bonds, which together comprise 30% of total deposits.
External support: SACP benefits from one notch uplift for extraordinary government support
The long-term rating on IDB is one notch higher than our SACP assessment, reflecting IDB's "moderate" systemic importance in Israel, which we view as "supportive" to its banking sector. Consequently, we consider the likelihood of extraordinary government support to IDB, if needed, as "moderately high."
Related Criteria And Research
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Group Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011