Moody's Investors Service announced today that it maintains a stable outlook for Israel's banking system for a second successive year. The stable outlook is based on Moody's expectation of robust economic growth, rising capital buffers, strong liquidity and the maintenance of stable deposit-based funding.
The outlook also takes into account the downside risks posed by a potential rise in geopolitical tensions and rapid house price inflation, as well as the banks' relatively weak -- albeit stable -- efficiency and profitability.
"Improved economic conditions will create an accommodative macro environment for the banks and translate into sector-wide credit growth of 4% to 5%," says Constantinos Kypreos, a Moody's Vice President - Senior Credit Officer, and author of the report. Overall, Moody's forecasts real GDP growth of 3.3% in 2015, driven by stronger global demand for Israeli exports and higher levels of domestic investment.
Aided by improved economic conditions, the rating agency expects the volume of non-performing loans to remain stable (ranging between 2% and 3% of gross loans). "Despite credit risks related to rising property prices (up 92% since 2008), we expect the performance of real estate related lending will be upheld by enhanced macro-prudential measures, high household wealth, low interest rates, low unemployment and declining concentrations of loans to single borrowers," says Kypreos.
Moody's also highlights that the Israeli banking system will report improved capital buffers despite the need for the banks to comply with more stringent accounting principles and the (fully-loaded) Basel III framework. In particular, the rating agency forecasts a rise in the sector's Tier 1 capital ratio to around 10% in the coming quarters (December 2014: 9.7%; December 2010: 8.5%), mainly through profit retention (i.e., low dividend payouts), the disposal of non-core assets and only modest increases in the volume of risk-weighted assets.
Moody's also expects Israeli banks to sustain a sound and stable funding, underpinned by the population's strong savings culture. Customer deposits accounted for 75% of total banking assets as of December 2014 and the banks reported a loans-to-deposits ratio of 85%. However, 2015 net profits will remain flat sector-wide, translating into a return on risk-weighted assets of around 0.7%, weaker than those of similarly rated peers globally.
Moody's says that profitability will continue to be affected by compressed interest margins owing to the low interest-rate environment, coupled with a high cost base and a high tax burden.
Published by Globes [online], Israel business news - www.globes-online.com - on April 30, 2015
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