2012-09-04 08:46:07 - Recently published research from Business Monitor International, "Israel Commercial Banking Report Q3 2012", is now available at Fast Market Research
BMI View: We expect asset growth within Israel's commercial banking sector to drop off in the coming quarters as the domestic economy runs into a soft patch, forecasting total asset growth to fall to 5.0% in 2012, compared with 9.7% last year. However, we stress that the sector is in a strong position to weather the impact of a slowdown, given relatively low leverage ratios and minimal concerns over asset quality. We hold to our view that asset expansion in the Israeli commercial banking sector is set to slow throughout 2012. Israeli banks performed relatively well in 2011, in spite of the sluggish global economy, with total assets growing 9.7% to ILS1.2trn (US$312.8bn). However, with a domestic slowdown likely to
bite in the coming quarters (see our online service, March 7, 'No Avoiding A Slowdown In 2012 we expect the sector to fare worse this year, forecasting asset growth of just 5.0%. Moreover, we flag up some downside risks to our outlook, in particular ongoing economic uncertainty in several of Israel's main trading partners, as well as persistent questions over the state of the domestic housing market. That said, we stress that banks are well-placed to weather the impact of decelerating economic momentum, even if either of the above risks plays out. The sector's aggregate balance sheet position looks robust, with a low loan-to-deposit ratio, minimal concerns over asset quality and a high proportion of liquid assets in banks' portfolios. While profitability within the sector has been slack - and is likely to remain so in 2012 - four out of the country's five largest commercial banks reported an uptick in net profits last year, suggesting that the overall condition of the sector remains in good shape. Israel Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 36 Stuttering Economy To Weigh On Asset Expansion Deposit growth sped up significantly throughout 2011, reaching 10.6% y-o-y in December, up from 3.6% at the beginning of the year. The healthy rate of expansion was driven by relatively strong economic growth - real GDP growth came in at 4.7% in 2011 - and was further bolstered by several of the economic reforms introduced by the Trajtenberg Committee (established by the government in response to last year's 'tent protests which included a reduction in lower-band tax rates, new social spending measures and increased tax credits for families. However, we expect deposit growth to tick lower in the coming quarters. Available leading indicator data suggest that economy has hit a soft patch, with both the Bank Hapoalim Purchasing Managers' Index and the Bank of Israel's 'state of the economy' index pointing a significant slowdown in domestic consumption. We are forecasting real GDP growth to fall to 3.2% in 2011. Although a public sector pay hike implemented by the government following a general strike in March offers some upside potential for the banking sector's stock of customer deposits, we nevertheless forecast deposit growth to fall to 4.5% this year. At the same time, we do not expect banks to respond to a sluggish deposit intake with increased borrowing. Historically, total asset growth has been tightly correlated to deposit growth, while a slowing economy will also impact badly on demand for new credit. Moreover, the sector's ability to leverage up its balance sheet will be constrained somewhat by the government's decision on March 14 to raise the minimum core capital requirement to 9% by 2015 (and 10% for banks holding more than 20% of the sector's total assets, which for the time being includes Bank Leumi and Bank Hapoalim) in order to comply with Basel III regulations. As a result, we see total asset growth falling to 5.0% in 2012, from 9.7% last year. Some Risks, But Banks Well-Positioned To Cope We also see some downside risks to our outlook. For one, the Israeli economy is heavily exposed to any slowdown in developed markets, with over half its exports going to the US and the eurozone. While macroeconomic data out of the US have improved of late, and European Central Bank intervention appears to have staved off the worst of the sovereign debt crisis in the eurozone for now, a re-emergence of the crisis cannot be ruled out entirely. We also flag persistent concerns over the state of the domestic housing market, with rapid house price inflation in recent years raising questions about the existence of a bubble. Given that mortgages account for over a quarter of banks' loan portfolio, any sharp contraction in house prices would certainly impact badly on the sector's balance sheet dynamics. That said, we emphasise that banks are well-placed to weather the impact of a slowdown, even if either of the above risks plays out. The loan-to-deposit ratio is low compared with similar economies - standing at 0.82 in January - and has fallen from 0.85 in July 2011. Moreover, for now asset quality is not an issue, with the non-performing loan ratio standing at just 2.0% at the end of 2011, and the IMF recording a liquid assets/total assets ratio of 59.6% in Q211 (up from 28.9% in 2010). Direct exposure to the eurozone is also low, at just 1.6% of total assets (and 0.2% for the most vulnerable economies), further reinforcing our view that a major downturn in banks' fortunes is highly unlikely in the medium term.
Full Report Details at
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