Standard & Poor's Ratings Services said today that it lowered its long-term counterparty credit rating on Israel-based Bank Leumi le-Israel B.M. (Leumi) to 'BBB+' from 'A-'. At the same time, the 'A-2' short-term counterparty credit rating on Leumi was affirmed. The outlook on Leumi is negative.
"The rating actions reflect our view of the negative impact of the global and domestic economic and market downturn on Leumi's earnings and asset quality," said Standard & Poor's credit analyst Magar Kouyoumdjian. Standard & Poor's anticipates that the global recession could severely affect Israel's economy in 2009. "We believe that growth prospects will deteriorate markedly compared with previous years, with real GDP contracting by 1.5% in 2009, with only a modest 0.8% growth rate forecast for 2010," added Mr. Kouyoumdjian.
With both the global and Israeli economies and markets already slowing markedly in 2008, Leumi reported a loss in the fourth quarter of the year, driven by losses on its securities and interbank portfolio as well as significantly increased credit provisions. In our view, earnings will remain suppressed in the short-to-medium term given the ongoing asset quality pressure and the associated credit provisioning needs, as well as margin contraction due to the low interest rate environment.
The ratings on Leumi are based on our view of its strong market position and domestic banking franchise, sound funding profile, and good liquidity. The ratings are constrained by its vulnerable loan quality due to the economic downturn and its impact on domestic borrowers, in particular large Israeli conglomerates, which are highly leveraged and are experiencing tight liquidity.
"We expect that Leumi's financial profile and business prospects, while still considered satisfactory, will be adversely affected by the ongoing setbacks in its operating environment, particularly due to the economic slowdown and weaker capital markets both domestically and globally," said Mr. Kouyoumdjian. If these setbacks are greater than we anticipate, Leumi's creditworthiness could weaken further. A significant increase in problem loans (particularly if one or more of the large Israeli conglomerates' creditworthiness weakens substantially, given borrower concentrations), and the associated erosion of earnings and capitalization, would lead to a downgrade.
The bank also has potential vulnerability to further losses on its securities portfolio and interbank exposures, with material unrealized losses. Furthermore, any significant escalation in economic and political turbulence in Israel could materially affect asset quality and financial performance, and could put pressure on the ratings.
Over the longer term, a less risky operating environment could lead to improved creditworthiness for Leumi. Furthermore, if economic prospects strengthen and loan quality, cost efficiency, and capitalization also improve, this could lead to a positive rating action.
