Fitch Ratings has affirmed Bank Hapoalim B.M.'s Long-Term Issuer Default Rating (IDR) at 'A' with a Stable Outlook and Short-Term IDR at 'F1+'.
The bank's Viability Rating (VR) has been affirmed at 'a-'.
Key Rating Drivers
Support Drives Ratings: Hapoalim's IDRs reflect Fitch's view of a very high probability that Israel (A+/Stable/F1+) would provide support to the bank, if needed. Fitch believes that Israel's ability and propensity to support Hapoalim is very high, particularly given the bank's systemic importance in the country, with about 30% of banking system assets.
Universal Banking Franchise: Hapoalim's VR reflects a strong franchise in retail and corporate banking in Israel, asset quality that we expect to remain resilient considering the bank's material exposure to the property sector, and adequate capitalisation. The VR also reflects the bank's sound funding, given its large deposit base, and strengthening profitability, which in 2022 benefited from significant demand for credit, particularly in the mortgage market, and from several interest rate increases during the year.
Close Regulatory Oversight: Hapoalim's underwriting standards are conservative, helped by tight regulatory limits and oversight. Like other Israeli banks, Hapoalim has material exposure to the construction and real estate sectors, which results in risk concentration and makes asset quality vulnerable to a sharp decline in real estate prices. However, the majority of exposure is to residential projects, which we expect to continue to perform adequately given high population growth and structural demand for housing in Israel.
Asset Quality Remains Sound: Hapoalim's impaired loans ratio decreased to 0.8% at end-September 2022, partly benefiting from high loan growth, particularly in mortgages. We expect to see higher loan impairment charges next year as the loans season. Asset quality will also be affected by higher interest rates and high inflation (albeit lower than many other countries), but due to sound underwriting and resilient operating environment we expect the impaired loans ratio to remain below 1.5% over the next two years.
Strong Earnings Recovery: Profitability benefited from strong loan growth (+8% in 9M22), which boosted net interest income, as well as wider net interest margins due to increasing interest rates. Cost efficiency continues to improve due to ongoing efficiency programmes. We expect positive profitability trends to remain, with the bank's operating profit/risk-weighted assets (RWAs) ratio expected to remain above 2% in 2023, despite slowing loan demand. This is due to weakened credit demand on higher mortgage rates and a decrease in housing transactions in Israel, already observable in 4Q22.
Capital Buffers Adequate: Headroom in our assessment is limited, but capitalisation has remained adequate, with a common equity Tier 1 (CET1) ratio of 11.10% at end-September 2022. Hapoalim calculates RWAs using the standardised approach, which results in fairly high RWAs density (RWAs/total assets) of 62%. We expect the bank to maintain a moderate buffer above the minimum regulatory requirement, which has reverted to 10.23% following a temporary reduction during the pandemic. Our capital assessment also considers the bank's improved internal capital generation.
Large, Stable Deposit Base: Hapoalim has a solid and stable funding basis that consists mostly of customer deposits, which exceed the size of the loan book. It also has proven access to domestic and international debt markets. Liquidity is strong, with a 126% liquidity coverage ratio at end-September 2022, which is adequately above the 100% minimum regulatory requirement.
Hapoalim's 'F1+' Short-Term IDR is the higher of two possible Short-Term IDRs that map to a '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:
Sovereign Support: Hapoalim's IDRs are primarily sensitive to a weakening of Israel's ability or propensity to support the bank. A downgrade of Israel's Long-Term IDR would likely result in a downgrade of Hapoalim's Government Support Rating (GSR) and its IDRs. A reduced propensity of the Israeli authorities to support the country's largest banks, which could be signalled by the introduction of a deposit guarantee scheme to start and subsequently effective bank resolution legislation, would also result in a downgrade of the bank's IDRs and GSR.
Asset Quality and Capitalisation: A sharp deterioration of asset quality that results in an impaired loan ratio of above 2% for an extended period combined with the CET1 ratio declining below current levels and weakening internal capital generation 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:
Limited Upside: An upgrade of Israel's Long-Term IDR is unlikely to result in an upgrade of the bank's GSR and Long-Term IDR as we typically do not assign GSRs above 'a' for domestic systemically important banks in countries whose sovereigns are rated 'AA' or 'AA-' and where support propensity is high.
An upgrade of Hapoalim's VR 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
Subordinated Debt: Subordinated debt is notched down from the bank's VR, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.
Hapoalim's USD1 billion Tier 2 notes are rated two notches below the bank's VR, reflecting poor recovery prospects in the event of a failure of the bank, in line with Fitch's base-case notching for Tier 2 debt.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Subordinated Debt: The ratings of Hapoalim's Tier 2 notes are sensitive to changes in the bank's VR.
VR ADJUSTMENTS
The operating environment score has been assigned below the implied score due to the following adjustment reasons: sovereign rating (negative), size and structure of economy (negative)
The business profile score has been assigned above the implied score due to the following adjustment reason: market position (positive)
The capitalisation & leverage score has been assigned above the implied score due to the following adjustment reason: leverage and risk-weight calculation (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
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
Hapoalim's IDRs and GSR reflect Fitch's expectation of a very high probability of state support from Israel.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/esg
BANK HAPOALIM B.M. 