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Some Israeli conglomerates have become too large for the local banking establishment, says Moody's banks analyst in a special interview with TheMarker. The banks' current ratings warrant another close look, Constantinos Pittalis added.

"In recent years a number of conglomerates have developed in Israel that, in some cases, are too big for the domestic banks. With these corporates being too large, they end up doing business with all the banks in the country.

"Also, the absence of a developed corporate bond market in Israel means that these corporates have to rely heavily on the banking system to finance their operations," Pittalis told TheMarker, speaking from his offices in Cyprus.

Moody’s monitors the Israeli banks on a continuous basis and publishes an annual report once a year. The outlooks of Financial Strength Ratings of all five Israeli banks were changed to Negative from Stable in March 2002.

Two weeks ago, Standard and Poor's beat Moody's to cut the rating of Israel's biggest banks, from A-minus to BBB+. Moody's and the British agency Fitch have yet to follow suit, but the stretch of time since their last updates and S&P's move are likely to compel a move sooner rather than later.

Pittalis and his team have been closely tracking Israel's banks to see if they warrant their current rating.

Negative Outlook means there is a chance of at least 50% that their rating might be reviewed for downgrade over a six to 18 months. However, Pittalis stressed, Moody's tries to analyze the banks from a medium- and long-term perspective, and does not give much weight to the financial statements of a given quarter.

"A given bank could have a good quarter at one point in time, but we want to see trends over two quarters or more, trying to see through the cycle," Pittalis explained.

Moreover, there are differences between the banks. Some could find themselves cut while others retain their ratings, Pittalis adds.

Asked what kind of event could trigger a rapid downgrade, Pittalis gives the example of a major conglomerate going broke, leaving its main banker being heavily exposed to it. Another example is solid evidence that a bank is persistently incurring heavy losses despite declarations of recovery plans designed to restore profitability.

Although Israel's banks seem to be in adequate-though-weakening condition, Pittalis does not believe the level of loan loss provisions has peaked. In the United States, he points out, where provision for doubtful debt is a more technical matter depending mainly on how late a debt is, in Israel that figure is set by the bankers themselves.

Moody's is therefore keeping an eye on developments, as it does for other countries in the region. Furthermore, it does not feel that a further 5% to 10% devaluation in the shekel versus the dollar could drag the banks deeper into the hole, or threaten their capital adequacy ratio.