Fitch Ratings is maintaining
The bank's Viability Rating (VR) has been affirmed at 'a-'.
Key Rating Drivers
State Support Drives IDRs: IDB's IDRs reflect Fitch's view of a very high probability that
Uncertain Economic Environment: The Israel-Hamas war has caused an initial contraction of economic activity. Our negative outlook on the operating environment reflects the uncertainty around the severity, duration and longer-term impact of the war. The Israeli government and the
Diversified Business Model: IDB's VR reflects a strong franchise in retail and corporate banking in
Close Regulatory Oversight: IDB's underwriting standards are conservative, helped by tight regulatory limits and oversight from the
Asset Quality Under Pressure: IDB's impaired loans ratio increased to 0.8% at
IDB took a loan impairment charge of ILS596 million in 3Q23 to reflect the impact of the war. IDB's asset-quality score is supported by its strong metrics and solid historical performance, with low arrears underpinned by its modest risk appetite. We forecast the impaired loans ratio to remain below 2% over the next two years due to sound underwriting and
Earnings to Weaken: Profitability has benefitted from increasing interest rates and loan growth (7.7% in 9M23), which boosted net interest income. However, we expect lower loan growth in 2024, which will only be partially offset by cost-efficiency programmes. We forecast a Fitch-calculated cost/income ratio of 48%, compared with an average of 73% over the past decade. We expect the bank's operating profit to remain above 2% of risk-weighted assets (RWAs) over the next two years, despite weakened credit demand, softening NIM and higher impairment charges.
Adequate Capital Buffers: Capital headroom is limited, with a common equity Tier 1 (CET1) ratio of 10.36% at end-3Q23. IDB had a 117bp buffer above its 9.19% regulatory CET1 requirement at end-9M23, which is small by international standards, but we view it as adequate for the high standardised risk-weights (end-9M23 RWAs/total assets: 68%) used by the Israeli banking sector. IDB has temporarily decreased its dividend pay-out ratio to 15% at 3Q23. Our capitalisation assessment also considers the bank's strong internal capital generation.
Large, Stable Deposit Base: IDB's solid and stable funding base consists mostly of customer deposits, which represented 88% of total non-equity funding at end-9M23, broadly in line with domestic and international peers'.
Since the outbreak of the Israel-Hamas war, the bank has not noted material change in its liquidity ratios or funding mix. Funding benefits from the bank's granular deposit base, split equally between retail and corporate deposits. Liquidity is soundly above the 100% minimum regulatory requirement, with a liquidity coverage ratio of 136% at end-9M23. IDB recently accessed international wholesale funding markets by issuing
Short-Term Support More Certain: IDB's 'F1+' Short-Term IDR is the higher of two possible options that map to an 'A' Long-Term IDR. This is because we view the sovereign's propensity to support as more certain in the near term.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of the sovereign rating is likely to result in a downgrade of IDB's GSR and IDRs.
A sharp deterioration of asset quality as a result of the war that would result in an impaired loan ratio of above 2% for an extended period, combined with the CET1 declining below current levels, and weakening internal capital generation, funding stability or liquidity could result in a VR downgrade. Given the bank's significant exposure to the real estate sector, a sharp decline in real estate prices would put pressure on asset quality and therefore on the VR.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
IDB's GSR and IDRs are likely to be affirmed and removed from RWN if
A VR upgrade is unlikely given the bank's geographical concentration and would require a material and structural improvement in profitability that allows the bank to generate stronger and more stable operating profit/RWAs while also maintaining materially higher capital ratios, which we do not expect.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Senior Debt
IDB's senior unsecured notes are rated in line with the Long-Term IDR as they constitute the bank's unsecured and unsubordinated obligations.
IDRs (xgs)
The Long-Term IDR (xgs) of 'A-(xgs)' is at the level of the VR. The Short-Term IDR (xsg) of 'F2(xgs)' is the lower of two possible options that map to a 'A-' Long-Term IDR (xgs) due to IDB's 'a-' funding & liquidity score.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Senior Debt
The rating on the senior unsecured notes is sensitive to a change in IDB's IDR.
IDRs (xgs)
The IDRs (xgs) are sensitive to changes in the bank's VR.
VR ADJUSTMENTS
The operating environment score of 'a' is below the 'aa' implied category score due to the following adjustment reasons: sovereign rating (negative), size and structure of economy (negative).
The business profile score of 'a-' is above the 'bbb' implied category score due to the following adjustment reason: market position (positive).
The capitalisation & leverage score of 'a-' is above the 'bbb' implied category score due to the following adjustment reason: leverage and risk-weight calculation (positive).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
IDB's IDRs and GSR reflect a very high probability of support from
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visithttps://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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