Leader Capital Markets Ltd. analyst Alon Glazer says Bank Hapoalim (LSE: BKHD; TASE: POLI) has invested $2.5 billion in mortgage-backed securities (MBS) and First International Bank of Israel (TASE: FTIN1;FTIN5) invested $250 million. “When it rains everyone gets wet, and these mortgages have also become more risky in recent weeks,” he says.
First International Bank said in response that its MBS portfolio is rated AAA, and is not exposed to sub-prime mortgages. Bank Hapoalim said that it does not expect any harm to its profit because “the entire portfolio is rated AAA and there is no exposure to sub-prime mortgages. Despite the seesaws in the capital market, the rating agencies have not downgraded any of the securities in the portfolio.” Bank Hapoalim added that it saw the market swings as business opportunities that could improve the bank’s profits.
Glazer warns, however, that the sub-prime crisis could affect the valuation of the MBS. “Although Israeli banks are not direct investors in the sub-prime market, and are therefore unlikely to be dramatically affected as we’ve seen happen to some international banks, there could be a significant impact because these are substantial debts and a fall in value could affect the results of both Bank Hapoalim and First International Bank.”
Glazer adds that the foreign subsidiaries of Israel Discount Bank (TASE: DSCT) and Bank Leumi (TASE: LUMI) have little MBS exposure, so any affect will be marginal at best.
However, Glazer says that the falls in the Israeli and international bond markets will affect the banks’ third quarter results because their nostro portfolios will record capital losses.
Dun & Bradstreet Israel general manager Reuven Kuvent also believes that Israel faces no mortgage crisis like the sub-prime mortgage crisis in the US, because the characteristics of Israeli market are completely different. “Whereas in the US mortgage market, loans are granted to borrowers solely on the basis of the property value, in Israel, loans are granted on the basis of borrowers’ ability to repay them,” says the company.
Kuvent adds, “Demand for homes in Israel has been consistent and stable for years, which creates a constant demand for mortgages. In addition, the Israeli mortgage banks’ conduct is based on the borrower’s ability to pay, whereas in the sub-prime segment in US, the banks rely solely on the value of the property. In, Israel it is rarely possible to obtain a loan that equals the value of the property, whereas this option exists in the US. This is why the US is so sensitive to housing prices, and any fall in prices acutely affects the mortgage market.
“The situation is Israel is very different, because loans usually amount to up 70% of a property’s value, which means that housing prices must plummet before the value of a loan exceeds the value of the property and it becomes worthwhile for the borrower to default on his mortgage, assuming that the apartment is the only security.”
Published by Globes [online], Israel business news - www.globes.co.il - on August 12, 2007
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