Bank Hapoalim cutting its subprime mortgage losses and selling portfolio
By Sharon Shpurer
Bank Hapoalim is negotiating to sell a large share of its mortgage-backed securities portfolio - and take a $1 billion loss on its investment. The bank is expected to sell off subprime asset-backed bonds known as Alt-A and Alt-B, which make up the riskiest part of its holdings - about $2.5 to $3 billion worth.
Sources are talking about a price of 60 to 70 cents on the dollar for the securities. This translates into a loss of between $70 million and $1.2 billion loss for Hapoalim, in addition to the permanent write-downs of about $300 million it has already recognized.
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The net losses after taxes are figured in will be much smaller, at between $470 million and $620 million in total.
However, this is only part of Bank Hapoalim's asset-backed portfolio. It will remain holding another $2 billion, though most of the remaining securities are considered to be of higher quality and less risky than the mortgage-backed share up fpr sale.
Rumors of the sale began spreading last Wednesday, sending the share down 4.8% on twice the bank's normal trading volume. On Thursday the stock recovered slightly but fell again yesterday by another 0.65%. But this seemingly moderate fall cames as the Banks-5 Index rose 0.7%.
The bank did not publish a denial of sale, even after the rumors spread widely - and investors are selling. All Bank Hapoalim would say is "The bank does not comment on rumors."
However, sources close to the bank's management did not deny that the sale is one of the possibilities under consideration and the board of directors is expected to meet soon and discuss the matter, now the Passover holiday has ended.
The mortgage-backed securities under discussion, Alt-A and Alt-B, are based on mortgage loans to credit-worthy homebuyers. However, Alt-A are missing various details or documentation concerning the loans, such as information about the buyers' income. Other loans may have a relatively high ratio of mortgage to home value.
Alt-B loans are similar to Alt-A only, worse. This means they have an even higher ratio of mortgage to home value or are missing even more documentation.
The problem is that such documentation is a very important component in determining the quality of the loans, based on the ability of the homeowners to repay the debt. These figures are critical for the rating given to the securities. Statistics show that borrowers without adequate documentation tend to have a 20% greater chance of falling behind on their payments. This is a level close to the rate of loans defined as subprime mortgages, a less credit-worthy group in which many have fallen behind in their payments.
The Supervisor of Banks, Rony Hizkiyahu, responded to Hapoalim's investments in such risky securities by demanding that the bank recalculate its capital adequacy ratios - the ratio between equity and risky assets.
Hizkiyahu required the bank to double the capital requirement to cover such assets. This forces the bank to hold more capital in reserve against such assets, which restricts the use of such capital.
It limits the amount of credit the bank can give and reduces the leverage available to the bank. All of this translates into lower profits and lower return on equity.
Bank Hapoalim reported that as a result of the changes in its capital allocation due to the new requirements, its capital adequacy ratio dropped 0.35%.
This is critical to the bank: It has less and less capital to use for its regular business of making loans and providing credit, as the additional capital is now required as a safety cushion in case of further losses in its asset-backed securities portfolio.
That is why the sale of a large part of the portfolio is attractive despite the immediate losses involved: It will free up more capital for the bank's main business.
So far the bank has written down $333 million as a permanent loss of value on its asset-backed portfolio; $43 million was written off as losses on its profit and loss statement.
In addition, through the end of March the bank has made $748 million in provisions to its equity account for possible losses in value on its portfolio.
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