Moody's mulling downgrade of Hapoalim financial strength rating
By Sharon Shpurer
It doesn't mean that Hapoalim's customers need lose sleep, but the credit rating company Moody's has placed the bank's financial strength rating on review for possible downgrading. Moody's Bank Financial Strength Rating (BFSR) describes the quality of a bank's strength using the letters A through E, with A being the highest. The rating is a function of the bank's internal strength, or how it would be expected to function without a theoretical safety net from government.
Bank Hapoalim's BFSR is C, reflecting acceptable fundamentals in a stable environment. Moody's is waiting for the bank's first-quarter financials to see how its investments in derivatives affected its results.
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The bank has so far admitted that the market value of its mortgage-backed securities has fallen by about a billion dollars. It's written off about $330 million of that, which has hurt profit. It has to decide whether to write down the balance of the decline, about $700 million, which could cut into next quarter profits, or to maintain the current "temporary drop in value" definition of the decline on the books. Meaning, it thinks its mortgage-backed securities may rebound in value.
Sources in the know believe that Hapoalim will have to write off at least some of this in the coming quarter, hitting its equity and negatively affecting its financial ratios.
Moody's reportedly expects the bank to shore up its capital adequacy if it continues to suffer from the effects of mortgage-backed assets. In recent months Hapoalim has taken steps to increase its capital ratios, raising about NIS 600 million in debentures, and allocating 4% of its shares to the York Capital Management for about NIS 728 million.
Nevertheless, the bank's equity has declined as a result of losses from asset-backed investments, and at the insistence of the Bank of Israel's supervisor of banks, it recently announced that its capital ratio had declined by 0.35% due to risky investments.
The bank has several options for increasing its equity and improving its capital ratio as a result, such as selling or floating its subsidiary Isracard, or issuing shares or debentures. Hapoalim's board is expected to discuss the options after the Passover holiday. In addition to a review of the bank's financial strength, the rating company has also placed its long-term shekel deposit rating, which now stands at Aa3, on review for possible downgrade.
Countering this unpleasant news, Moody's also upgraded Hapoalim's foreign currency long-term deposit rating from A1 to A2, along with Leumi, First International Bank of Israel, Discount and Mizrahi Tefahot. The upgrade of the foreign currency long-term deposit ratings of the five banks was automatically triggered by the rating upgrade by Moody's Sovereign Risk Unit of Israel's foreign currency deposit ceiling to A1 from A2, having been constrained by the earlier forex deposit country ceiling.
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