Despite credit crisis, Maalot still rates Hapoalim bonds AAA and stable
By Sharon Shpurer
Bank Hapoalim's portfolio crisis and the massive losses incurred by the failed investments in American mortgage-backed bonds are apparently little cause for concern at Maalot - The Israel Securities Rating Company.
Maalot, which is supposed to provide negotiable bond investors with reviews and updates on the bank's condition and repayment ability, has addressed the crisis only once.
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In a paper published in early December, Maalot mentioned Hapoalim's exposure to the subprime crisis, but at that time the extent of its impact was limited and most of the decline in the bank's financial instruments occurred later. Furthermore, that review considered figures available two months beforehand, in September.
Even though there is a daily discussion in the capital market on the lamentable assets purchased by Hapoalim, Maalot has yet to address the ramifications of the billion-dollar shrinkage in the bank's portfolio, or the damage to its equity or capital adequacy ratio - important parameters for the bank's operations.
Maalot's rating for Hapoalim is AAA, with a stable horizon, meaning that the rating company's analysts not only have the highest regard for the bank's financial strength, but are also not worried about any imminent change.
"As of the end of September 2007," states Maalot's December report, "the bank's equity has declined by $142 million, of which $30 million is permanent.
"In Maalot's estimation, the bank's investment in SIV (structured investment vehicles) is liable to lead to further declines in value in the future due to the liquidity crisis in the U.S. Even so, the bank's high profitability and continued growth expectations for the Israeli economy in 2008 will be mitigating factors. Hence Maalot does not foresee any change in the bank's rating due to its exposure to these investment products."
But what has happened since then?
Hapoalim has written off an additional $300 million in its annual report and provisioned another $700 million, which will likely have to be redefined as a write-off in the first quarter of 2008. Maalot's predictions for the Israeli economy did not pan out either.
Even though the economy is still expected to grow this year, the Finance Ministry recently lowered its forecast, and if the American economy continues to slow, Israel's economy will not be unscathed.
Maalot's puzzling review methods are all the more inexplicable because Moody's analysts have already announced the possibility that Hapoalim's rating will probably be lowered.
Any damage to the bank's capital adequacy ratio will hamper Hapoalim's ability to provide credit, the bank's main activity, and will harm Hapoalim's overseas expansion strategy.
Yaniv Rahimi of Ramco Consultants and Portfolio Management does not understand why Maalot has not yet announced a rating change for Hapoalim, or any consideration of such a possibility.
"We do not necessarily think that Hapoalim's rating should be lowered," says Rahimi, "but its rating horizon should at least be examined."
Ramco's analysts checked Maalot's rating of Israeli banks in the past few years and found that since 2000, their ratings have been changed only twice, having been downgraded to AA+ in February 2003 and upgraded back to AAA in May 2006.
Interestingly, shortly after the downgrading of the banks' negotiable bonds, the banks' share prices started to rise. For four years they climbed steadily, and then just as Maalot decided to reinstate the top rating, the shares began losing ground.
Rahimi believes that the rating companies are very important to institutional investors, but the ratings are problematic because they reflect a current situation and not a forecast.
Thus when the banks' rating was lowered, the rating companies were looking at the record high bad debts from 2002, when in fact that year marked the end of the recession.
Rahimi notes that in practice the market usually precedes the rating - yields rise before ratings are lowered and fall before ratings are raised.
In any event, Ramco analysts say that Hapoalim's bonds do not currently reflect the added risk they entail, compared with an investment in the bonds issued by the competition - Bank Leumi - even though Hapoalim's bonds are still a safe, solid investment. Still, Rahimi favors investments in Leumi.
"Maalot is constantly following developments at Hapoalim," said a company source. "Maalot will continue to examine the effect of further provisioning by the bank on its rating."
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