Bank Hapoalim struggled yesterday to find the upside in Moody's announcement, and to minimize the less pleasant parts. The bottom line is that the credit rating agency upgraded Hapoalim's long-term foreign-currency deposit rate by a whole notch just as it did for the other for big banks in Israel following the sovereign credit upgrade.
But you can't ignore Moody's other message, which is that it's going to be examining Hapoalim's investments in mortgage-backed securities (MBS). It wants to see if Hapoalim's losses could worsen and if, or how, they'll affect the bank's financial status
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Hapoalim won't admit it, but it's a new stage in the crisis caused by its adventures in derivatives. So far, speaking with analysts and the press, the bank stressed the differences between losses on its books (for instance, its losses on structured investment vehicles can't be recouped) and "temporary drop in value" resulting from some transient liquidity crunch, which could be recouped. But now there's at least one international credit rating agency that's considering a downgrade of Hapoalim's very financial strength rating, and it's about to examine the bank board's kishkes with a microscope.
Moody's says it will be looking at the quality of the mortgage-backed securities. Hapoalim bought more than $3.5 billion worth of them. Moody's can do that easily enough, because it graded these MBS in the first place. It wants to see how the dropping market value of these securities will affect Hapoalim's financial ratios. But the thing causing Hapoalim's controlling shareholders to lose sleep, is that Moody's will be examining the bank's strategy and plans regarding its equity and remaining liquid assets.
The Moody's analysts Mardig Haladjian and Constantinos Pittalis don't write so explicitly, but this is their message to Bank Hapoalim: Show us your fund-raising plans. It's a message that forces the bank's owners and managers to the wall. To raise money, Hapoalim has to issue shares or assets, neither of which the owners would like to do in these hard times. A stock offering means a dilemma: either buy the shares themselves, injecting money into the bank, or sell to somebody else and dilute their shareholding.
To spell it out, Bank Hapoalim is not in danger. Nobody, including Moody's, is questioning its stability, its ability to pay its debts or its ability to meet commitments to customers. On the contrary, Moody's itself upgraded Hapoalim's debt rating to the highest level possible in Israel, as high as rival Bank Leumi's, which hardly lost a penny on mortgage-based high jinks. Bank Hapoalim's customers can sleep well at night.
Moody's inspection may end in nothing and Hapoalim's financial strength rating may remain intact at C. Or, perhaps its subprime adventures really have torn holes in its safety nets and gnawed at the quality of its equity, requiring it to resort to emergency measures to shore up its cash. Almost all the major banks in the United States have had to do so. Just yesterday, the Royal Bank of Scotland, the second-biggest bank in England, admitted raising a vast $24 billion to beef up its equity.
Bank Hapoalim wanted to be cutting-edge, kicky and profitable like its big brothers overseas. It may now join them in the same leaky boat.
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