Fitch, the international rating agency, has downgraded The First International Bank of Israel's (FIBI) long-term rating to BBB+ from A- and its individual rating to C/D from C. The outlook has been changed to stable from negative. FIBI's short-term rating of F2 and support rating of 4 have been affirmed.
The decision taken by Fitch reflects the relatively high vulnerability of FIBI's performance and asset quality to economic recession compared to some of its peers due to its lower penetration of the household market, as well as its tight capitalization by international standards.
FIBI's core businesses are corporate banking for high credit quality Israeli companies, holding a 20 percent market share and financial services for high net worth individuals. Like all Israeli banks, FIBI has suffered from the recession. The Israeli economy has been severely affected by the worldwide economic slowdown and by the regional security issue since October 2000, with a fall in Gross Domestic Product (GDP) of 0.6 percent in 2001.
However, unlike some other large Israeli banks, FIBI's retail banking franchise with individuals has recently proved too limited to offset the especially high provisioning charge against a few corporates. This has led FIBI to post its first net loss ever in the first quarter of 2002.
While FIBI's asset quality has historically been better than average, it has suffered from the deterioration in the economy, especially in the telecommunications sector, and is now in line with that of FIBI's peers with net non-performing loans accounting for 2.8 percent of the loan book at end-March 2002.
FIBI's total capital/weighted risks ratio as per Israeli regulations was 9.45 percent at end-March 2002. While good by Israeli standards, this is low by international standards, bearing in mind that its non-performing uncovered loans are equivalent to 41 percent of the bank's equity.
On the positive side, FIBI's market share of the household market has increased to around five to six percent. The bank has been successful in safeguarding its operating revenue thanks to growth in fee income arising from its increasing share of the local FX and derivative markets, and reductions in its cost to income ratio. The bank's proportion of impaired lending in the loan book has also remained lower than average.
While FIBI remains a solid and well managed bank, its medium-term outlook is unpredictable because of uncertainty about the Israeli economy and the impact continued recession will have on loan defaults and thus on the bank's provisioning charges.
GDP seems likely to fall by at least one percent in 2002, even if the economy revives in the second half of the year. Fitch believes that the impact of stronger world growth is likely to be offset by declining confidence in the Israeli economy due to the deterioration of the security situation.
The latter, combined with rising unemployment, falling wages and inflation of 5.5 percent in the year to May 2002 are having a direct impact on private consumption. This means that Israeli banks could find 2002 more difficult than 2001, when economic difficulties were still in their early stages and concentrated on a small number of sectors.
Bank Hapoalim's and Bank Leumi's ratings have remained unchanged so far, mainly due to the size of their retail franchises with private individuals which has enabled them to withstand the economic downturn better than some of their peers. However, their Individual ratings may possibly be downgraded if the security and economic situation deteriorates and these banks suffer further strain on profitability and asset quality against a background of low capitalization by international standards. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
