Taking Stock / Stand up and bite the bullet
Bank Hapoalim hit the capital market and business sector like a bolt of lightning late last week when it revealed it is upping its fourth-quarter doubtful debt provisions to mind-boggling NIS 2 billion.
Wait a second, though. What is the great shock here? When we looked at Bank Hapoalim's credit portfolio, we noticed several major borrowers over whom the bank is shaking its head and whose horrible financial circumstances have become perfectly well known to every man, woman and tea lady in the business and banking world.
The "surprise" therefore isn't that Bank Hapoalim is stuck with mountains of bad credit extended during the boom years. It is that the bank has bowed to pressure from the public and elected to sweep out the bums in droves from its fourth quarter results.
In fact, all these bad debt provisions, charges, writeoffs and other adjustments that Israel's banks, financing institutions and others need to make because of the economic deterioration are an old story.
The need for huge writeoffs was recognized. The fact that billions and billions of value has evaporated was not news. The only new story is who acknowledges the losses, who gulps and makes the writeoff, and who drags his feet hoping that a new day will dawn and shine on his luck.
The one spearheading the wave of valuation adjustments in the last couple of weeks has been, interestingly enough, the IDB group of holding companies. A bunch of IDB group companies wrote off huge sums, tens to hundreds of millions of shekels, after deciding to apply Standard 15 to their fourth-quarter results - the standard that requires companies to write down the value of assets, if their economic value has sunk below their book value.
Why is IDB in the vanguard? Is it because the group's situation is especially tricky, stuck as it is with poorly performing investments, and expensive leveraged acquisitions, chosen during the fat years? That is apparently not the reason. No - The reason is far more prosaic.
IDB's managers have no incentive to gussy up their balance sheets at this stage. Most have nothing to lose from the massive writeoffs. Some people in the capital market say that if anything, they have something to gain, as the adjustments benefit the situation of the group's boss-to-be, Nochi Dankner. They will allow him to demand, at the last second, that the sellers lower the price for the group.
But the really interesting ones aren't the companies that have sighed and accepted the writeoffs, but the ones that haven't. The interesting ones are the companies putting off the pain for the first quarter of 2003, or that have ordered appraisals of their investments in order to evade any writeoffs at all, come what may.
What characterizes these companies isn't a squeaky-clean investment portfolio, or a balance in which all assets are worth the money. It is high leverage and difficulty in raising fresh credit from the banks.
The difference between the bullet biters and the ones avoiding writedowns like the plague is that the latter are mostly bound by covenants - terms that govern the loans they received from the banks. The covenants require them to maintain certain ratios between their equity, profit and cash flow and the loans.
Sometimes, the big borrowers can't "afford" to write down their investment in the spirit of Standard 15, because it would impact on their profits, or worse - lead to losses that would lead them to breach their covenants with the banks.
Don't their bankers understand that? Don't they realize that deferring the day is merely an accounting gambit? Of course they do. But they too, like their borrowers, care less about substance than style.
After all, they are in the same boat as their borrowers. They are wondering how these dodgy loans will look to the Bank of Israel's Supervisor of Banks, who's been combing the banks, marking customers, checking their ability to defray debt and forcing the banks to increase their provision for doubtful debt.
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