Bank Hapoalim B M : S&P Affirmed A/Stable/A-1, outlook stable

Bank Hapoalim B.M.

Primary Credit Analyst:

Regina Argenio, Milan + 39 0272111208; [e-mail]

Secondary Contact:

Lena Schwartz, RAMAT-GAN + 972-3-7539716; [e-mail]

Table Of Contents

Credit Highlights

Outlook

Key Metrics

Anchor: 'bbb+' For Banks Operating In Israel

Business Position: One Of The Largest Banking Groups In Israel

Capital And Earnings: Recovered Profitability Will Sustain Capitalization

Risk Position: Concentrated Loan Book

Funding And Liquidity: Diversified Funding Base And Good Liquidity

Support: One Notch Of Uplift For Government Support Environmental, Social, And Governance

Hybrids

Key Statistics

Related Criteria

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Bank Hapoalim B.M.

SACP

a-

+

Support

+1

+

Additional

0

Factors

Anchor

bbb+

ALAC

Issuer Credit Rating

0

Business

Strong

+1

Support

Position

GRE Support

0

Capital and

Strong

+1

Earnings

A/Stable/A-1

Risk Position

Moderate

-1

Group

0

Support

Funding

Average

0

Sovereign

+1

Liquidity

Adequate

Support

Credit Highlights

Overview

Key strengths

Key risks

Market leader in Israel, with a strong presence in all key business lines.

High concentration in the real estate sector.

Large capital cushion.

Limited ability to diversify or raise fees.

Large domestic customer deposit base that underpins good funding and liquidity metrics. Regulatory attempts to limit market share.

The Israeli economy's resilient performance supports BNHP's creditworthiness. Our expectation of solid GDP growth of 6.5% in 2021 and 4% in 2022, after a limited contraction of 2.6% in 2020, will help Bank Hapoalim B.M.'s (BNHP's) profitability to recover after the COVID-19-related impact. Specifically, we expect strong lending expansion and growth in fee income to support revenues while economic recovery will help contain the cost of risk.

Strong provisioning efforts in late 2019 and 2020 will help contain the impact on the bottom line. We anticipate a moderate rise in the nonperforming loan (NPL) ratio--to about 1.3%-1.4% of total loans in 2023 from a low 1.2% as of Sept. 30, 2021. We expect credit losses to be exceptionally low in 2021, and then normalize to 20-25 basis points (bps), in line with the system average. In this context, we forecast that BNHP's risk-adjusted capital (RAC) ratio will be about 10.5%-11% in 2023, compared with 11.2% as of December 2020.

Higher concentration will continue to constrain the ratings. Our ratings factor in BNHP's higher-than-international peer concentration, reflecting its geographical focus on Israel, the local economy's relatively concentrated nature, and sensitivity to tail risks associated with high real estate exposure.

Large and granular deposit base supports its funding profile. In addition, we believe the bank's large stock of liquid assets is sufficient to comfortably cover its liquidity needs, thus reducing its reliance on short-term wholesale funding.

Government support will continue to benefit the ratings. We factor into our ratings our view that Israel (AA-/Stable/A-1+) would provide extraordinary support to the bank in the event of financial distress.

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Bank Hapoalim B.M.

Outlook: Stable

The stable outlook on BNHP reflects our view that the bank will be able to maintain strong capitalization and grow its new lending on the back of improving economic conditions in Israel over the next 24 months. The ratings on the bank also reflect our view that the bank's business, financial, and risk profiles will remain stable over the forecast horizon. We expect the bank's RAC ratio to remain sustainably above 10% over the next two years, with asset quality metrics remaining broadly in line with the system average.

Downside scenario

Rating pressure could emerge if the Israeli economy, particularly the real estate sector, markedly deteriorated. Such weakening might be triggered by higher-than-expected economic stress amid the COVID-19 pandemic, abrupt readjustment of the local real estate market, or a pronounced escalation in local geopolitical turbulence.

Upside scenario

Although unlikely during our two-year outlook period, an upgrade could happen if BNHP materially improved its capital policy or risk profile.

Key Metrics

Bank Hapoalim B.M. Key Ratios And Forecasts

		--Fiscal year ended Dec. 31 --
(%)	2019a	2020a	2021f	2022f	2023f
Growth in operating revenue	-3.4	-1.1	7.0-8.6	1.9-2.3	2.6-3.2
Growth in customer loans	3.8	3.5	10.8-13.2	3.6-4.4	3.6-4.4
Net interest income/average earning assets (NIM)	2.6	2.3	2.3-2.5	2.3-2.5	2.3-2.5
Cost to income ratio	57.0	57.3	54.9-57.7	54.1-56.953.7-56.4
Return on average common equity	4.8	5.3	10.5-12.1	8.1-9.4	7.8-9.1
Return on assets	0.4	0.4	0.7-0.9	0.6-0.7	0.6-0.7
Gross nonperforming assets/customer loans	1.8	1.5	1.5-1.7	1.4-1.6	1.3-1.4
Risk-adjusted capital ratio	11.3	11.2	10.4-10.9	10.4-11.010.4-10.9
All figures are S&P Global Ratings-adjusted.a--Actual. e Estimate. f Forecast. NIM------	Net interest margin.

Anchor: 'bbb+' For Banks Operating In Israel

We use our BICRA economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning

an issuer credit rating. The anchor for banks operating only in Israel is 'bbb+'.

We think that the Israeli economy is likely to rebound by 6.5% in 2021, after a decline in GDP by 2.6% in 2020. A

sizable support package to the private sector pressured the government's fiscal balance and we expect government

debt to increase to 72.8% in 2021. One of our key assumptions is that the new government will contain public debt and

so ease pressure on the economy.

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Bank Hapoalim B.M.

The support measures provided to the private sector and the banking system have helped to contain pandemic-related financial damage. We expect economic recovery to be supported by ongoing demand for credit, mostly from business- and real-estate-related segments, especially mortgages. After a few years of slower growth, residential real estate prices are accelerating, fueled by growing demand from households and investors. We note banks' growing exposure to the residential property market, either through mortgage lending or financing construction projects. While current indicators suggest that the level of risk in this segment is manageable, we are mindful that this could change if house prices continue to escalate, triggering growing imbalances. We could see problem loans emerge in banks' balance sheets in the near future as support measures wind down, but they should be non-material and not challenge banks' capital positions. We think most problem loans will come from SME lending exposures and we might see higher loss provisioning and more write downs in unsecured retail lending. In 2021, we expect banks to release the precautionary credit loss provisions they made in 2020 before credit losses return to more normalized levels of 0.2%-0.3% in 2022-2023. One of the key risks to our assumption is pandemic risks resurfacing, undermining recovery and reintroducing economic uncertainty.

At the same time, Israel's ongoing exposure to geopolitical and domestic security risks renders it vulnerable to shocks.

The pandemic has hit banking sector profitability, but has not weakened its fundamental strengths. The banks are well capitalized, liquid, and have sound funding bases comprising domestic deposits. Regulatory oversight is prudent and has led banks to reduce their most risky exposures over the past decade and further tighten their lending standards. Macroprudential measures applied to mortgage lending have reduced banks' exposure to risks from the booming housing market, in our view.

We expect more nonbank players to enter the credit market and customers to have greater control of their personal financial information over the next few years as the Bank of Israel (BoI) promotes competition and technological adaptation. The banks are adjusting to the evolving operating landscape. They are becoming more efficient and we think they are well equipped to handle digitalization challenges. We do not therefore view attempts to spur competition in retail lending and the potential entrance of new players as materially undermining the sector's profitability in the near term. Nevertheless, some differences exist between the various players and we think smaller players with less diversified revenues might be more challenged by the effects of increasing competition and evolving customer needs, unless they adapt quickly.

Business Position: One Of The Largest Banking Groups In Israel

BNHP benefits from its leading position in most of the segments of Israeli market.

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Bank Hapoalim B.M.

Chart 1

BNHP's medium-term strategy and growth objectives consist of increasing its exposure to the mortgage, retail, and commercial and corporate sectors, with controlled risk appetite. At the same time, it targets to increase operational efficiency and digitalization.

Mortgages are a key target for the bank. While we see increasing competition in the sectors, eroding good margins, we anticipate that the risk associated with mortgage exposures will be contained, owing to macroprudential measures that the BoI introduced in the past (such as increasing banks' regulatory capital requirements and limiting mortgages' loan-to-value and payment-to-income ratios).

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