Dexia Israel in Shadow of Parent's Rescue

Dexia Israel Bank will be trading on the Tel Aviv Stock Exchange today under the shadow of the global financial crisis, which has slammed into its parent bank.

Less than half a year ago, when the financial crisis was roaring but the collapse of major banks was but a doomsday scenario, Dexia Israel raised NIS 725 million from institutional investors. Dexia Israel is a subsidiary (65%) of the global Dexia banking group.

Today Israel's institutional investors find that the risk associated with the bonds they pounced on has jumped. Right before Rosh Hashana, the markets learned that the parent bank Dexia needed an $9.2 billion emergency influx from the Belgian, Luxembourg and French governments to stop it from joining the blacklist of bankrupt banks.

Dexia was rescued, but Israel's investors are facing the question of whether the emergency infusion will suffice to keep the group afloat. There is also the question of whether a collapse by the parent bank will doom the local one.

Meanwhile, after a quick credit rating downgrade of the Dexia group companies, Standard & Poor's upgraded their outlook to Stable, from Negative, after the cash infusion. S&P says the infusion indicates that if more trouble arises, the governments will step in again.

Despite the support of Paris, Brussels and Luxembourg, in the case of Lehman Bros' collapse, its subsidiaries suspended payments to debt-holders. This is a risk that Dexia bondholders must consider.

S&P had downgraded the Dexia group companies to "AA-minus," despite the bank's statement earlier in the week that it did not need fresh capital.

Together with the June offering, Dexia Israel's liabilities in the form of bonds and warrants amount to some NIS 2.2 billion. It also holds NIS 2.7 billion in deposits by the general public and local authorities, while shareholders' equity totals NIS 467 million.

Dexia Israel starts trading today at a market capitalization of NIS 221 million, less than half its shareholders' equity. Its stock has lost 30% of its value since May 2007. Dexia Israel currently holds an "AA/stable" credit rating from Maalot, which could conceivably be revisited given the events at the parent company.

No comment could be obtained from David Kapah, chief executive of Dexia Israel, for this report.

Meanwhile, as the banking world continues to roil and the Jewish new year came in, Wachovia went out - at least as an independent entity. Citigroup announced on the holiday eve, Monday, that it would buy the banking operations of Wachovia Corp. The deal had been brokered by the Federal Deposit Insurance Corp, but it triggered a selloff of bank stocks that day. Wachovia depositors are fully protected by the Fed and the FDIC begged to point out that Wachovia hadn't failed: it had been bought, but its stock collapsed. Citi is paying about $2.16 billion in stock for Wachovia, and Citi CEO Vikram Pandit said the bank would assume just over $100 billion of Wachovia debt in aggregate.