Moody's lowered its outlook for Israeli banks from Stable to Negative Tuesday - in part because of their heavy exposure to a small group of large business concerns. Another reason, the Moody's sovereign debt analysts explained, is that Israel has its own unique security and economic challenges. Also, because of Israel's intense economic concentration, the asset quality of Israeli banks is problematic, said the agency.
The horizon of the outlook is 12 to 18 months, during which time Israel's economic growth is likely to slow as the global and European economy rock.
"The banks' capital metrics are tight relative to those of global peers," Moody's wrote in its report last night. Meanwhile, it added, the weakness in the Israeli corporate-bond market poses credit risks for the quality of assets the banks hold, "because of the banks' high credit concentrations in domestic corporate conglomerates."
In English, the banks are loaded with bonds issued by Israel's biggest conglomerates - which could become a problem as the economy slows (if Moody's forecast is accurate ), the conglomerates' profits suffer, and their securities (stocks and bonds ) tank. Moody's warns that Israeli GDP growth could badly slow in 2013 as exports to a hurting world - most notably its main export market, Europe - shrink.
Then there are the geopolitical problems unique to Israel in the context of the crisis with Iran, and the outcome of the "Arab Spring" uprisings around the world. Of course, in the past Israel's economy has proven quite resilient to shocks, Moody's observes.
As for the banks, Moody's expects a slight increase in capital levels, but it foresees their core tier-1 capital adequacy falling short of peer banks in the next 12 to 18 months. Also, it foresees doubtful debt zooming to as much as 5% of their credit portfolios in 2013 as the Israeli economy slows, from 3.8% in September 2011.
