Moody's upgrades Israel's banking system to stable

Despite the overall improved outlook, several problems remain , including housing market, the shekel's appreciation, and political risks.

February 12, 2014 15:15
1 minute read.

Moody's corporate HQ. (photo credit: REUTERS)


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Credit Ratings agency Moody’s on Wednesday restored the outlook on Israel’s banking system to “stable” after two years of classifying it as negative.

The change resulted from expectations of improving economic conditions – in part a reflection of recovery in Europe, Israel’s main trading partner – and increased liquidity and capital buffers in the banking system. The company calculated that Israel’s economy would grow at a rate of 3.4 percent in 2014.

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In 2012 and 2013, the outlook was deemed negative because of tough global economic conditions that affected Israel’s own growth, limited capital buffers and a tough operating environment for banks.

The 2014 report, too, said that “high tax rates and personnel costs – due to strong unions – weigh on efficiency and banks’ earnings generating capacity.”

Despite the overall improved outlook, several problems remained on the agenda, including the housing market, the shekel’s appreciation and political risks.

Prices in the property market increased 79% since 2008, the report said, and “rising prices increase the vulnerability of buyers and mortgage lenders to an increase in interest rates, given that around 70% of mortgages were granted at variable- rate interest, according to the BoI.”

Although an increase in unemployment or a major correction in the housing market could increase problem loans, the worry was mitigated by more stringent mortgage standards set by the Bank of Israel and high levels of household financial assets.

The difficulty of stemming the appreciation of the shekel, which in January strengthened by another 7% against a basket of Israel’s trade partners’ currencies, could also harm exports.

Merrill Lynch/Bank of America on Wednesday estimated that the Bank of Israel would need to purchase over $1 billion a month to keep the exchange rate stable. About $300 million of that is to compensate for the effects of gas production.

As for the political risks, Moody’s cited the ongoing dispute with the Palestinians, civil strife in bordering Egypt and Syria and “Iran’s nuclear ambitions [despite the latter’s agreement with the international community].”

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