Israel's bankers believe that the US federal government's takeover of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) has greatly reduced the risk to bondholders of the two companies. Israeli banks hold $4 billion worth of the two companies' securities.
Israeli banks have been reducing their exposure to asset-back securities (ABS) in recent months as worries about the companies sharpened. The reductions were made either through sales of the securities or redeeming them as they matured. Only Israel Discount Bank (TASE: DSCT), which holds $3 billion worth of Fannie Mae and Freddie Mac mortgage-backed securities (MBS) has steadily increased its exposure.
Discount Bank believes that the widening of the spread on Fannie Mae and Freddie Mac securities is a buying opportunity and with about $400 million worth of debt, due to mature in the coming months, the bank invested a similar amount in Fannie Mae and Freddie Mac debt.
Discount Bank reported a temporary write-down of $9.5 million on its portfolio in its financial report for the second quarter. However, the loss has subsequently ballooned to $31 million as of last week.
More than a year since the sub-prime mortgage crisis erupted, Israel's top five banks have written off $1.58 billion (NIS 5.7 billion on the basis of the average shekel-dollar exchange rate) in shareholders' equity and losses on their exposure to asset backed securities, including MBSs, structured investment vehicles (SIV), collateralized debt obligations (CDO), and synthetic CDOs (SCDO). The average write-down amounts to 17% of the banks' portfolios of those asset classes.
The banks' first half financial reports indicate that their exposure to the US crisis amounts to $6 billion at the end of June, a third of their aggregate shareholders' equity. Their exposure totaled $9.7 billion at the end of 2007. The reduction was mainly due to Bank Hapoalim's (TASE: POLI; LSE:80OA) sale of its MBS portfolio in late May. 75% of the banks' portfolios, $4.45 billion, are comprised of MBSs.
Bank Hapoalim has had the largest loss, writing off $1.4 billion, mostly on its MBS and SIV portfolios. Its asset-backed portfolio is currently worth $1.16 billion, including $502 million in commercial paper that the bank bought as part of its commitment to provide credit lines for securitization deals for which it acted as a sponsor.
Bank Leumi (TASE: LUMI) has an MBS and ABS portfolio worth $1.4 billion, mostly in Fannie Mae and Freddie Mac MBSs. The portfolio also includes $445 million in non-mortgage ABSs.
Mizrahi Tefahot Bank (TASE:MZTF) has written down 62% of the value on its MBS portfolio - $49 million - proportionally the largest write-down of all the banks. The bank wrote-off the entire value of its mortgage-backed CDOs and SIVs and reported a $14 million temporary write-down on its CDO portfolio.
First International Bank of Israel (TASE: FTIN1;FTIN5) has an exposure to asset-backed and structured securities of $370 million, including $268 million to MBSs, more than half of which belong to Fannie Mae and Freddie Mac.
Published by Globes [online], Israel business news - www.globes-online.com - on September 8, 2008
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