The combination of a low interest rate that makes it difficult to obtain deposits and the booming corporate bond market has brought the banks back to the debt issuing market. Three banks are scheduled to issue an aggregate total of NIS 4.5 billion in debt next week. Bank Hapoalim (TASE: POLI) and Mizrahi Tefahot Bank (TASE:MZTF) are each planning NIS 2 billion offerings, while Union Bank is planning to raise up to NIS 500 million, a substantial sum, given that Union Bank is only Israel's six largest bank.
Other banks have also considered the possibility of issuing debt on the capital market. Sources inform "Globes" that both First International Bank of Israel (TASE: FTIN) and Bank Leumi (TASE: LUMI) considered the matter, but decided against an offering in the near future.
For the banks, the bonds they are releasing in the capital market are a substitute for deposits from customers as a source of the credit they are granting to customers. "The bank debt being issued is medium and long-term, averaging about five years. It is very difficult right now for the banks to attract such deposits now," said Avi Ben-Noon, who heads the Midroog banking team that rated the debt of Bank Hapoalim and Union Bank.
Last week, the Governor of the Bank of Israel lowered the interest rate to an unprecedented low of 0.25%. The interest rate has been low for a long time, leading to a situation in which deposits and savings plans give negligible interest (following the Bank of Israel's latest measure, interest on deposits is falling even lower, usually approaching zero), making it difficult for the banks to attract deposits, certainly for the long term.
The banks are therefore searching for another source for the credit they grant, with the capital market constituting such an alternative. At the same time, the capital market offerings are taking place at a higher price than the cost of deposits. For this reason, the banks have refrained from raising capital on the market for a long time. The booming corporate bond market, however, has lowered yields. Ben-Noon says that these bonds issued by the banks (of medium and long-term average duration) are now trading at a spread of less than 0.5%, in contrast to the return on government bonds, making the alternative of raising money on the capital market attractive.
Published by Globes [online], Israel business news - www.globes-online.com - on September 3, 2014
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