- The capital market in Israel
The situation in the banks is stable. This is good, but not for everyone
The banks in Israel are coping well with the crisis and there is no need to worry about mortgages, at least for now. Who is still bothered by this sector? Investors, for whom the near future does not look brightTags
David RosenthalMonday, 10 August 2020, 00:33
During the past week, the Bank of Israel published on conducting sensitivity tests for banks for the first half of 2020, which, as is well known, was not easy. The report reads: "The banking system in Israel has entered the corona crisis in a solid state: the banks have enjoyed large capital surpluses, strong liquidity ratios and quality credit portfolios. Since the global crisis in 2008, the Banking Supervision Authority Advanced nationalities, improving the quality of capital and increasing its volume, decentralizing the credit portfolio, reducing exposure to large borrowers, etc. However, the rolling, systemic and unpredictable nature of the corona crisis makes it difficult for the banking system and regulator to perform stress tests frequently at this time.
"Banks invest most of their effort in ensuring the continuity of core business alongside supporting their main customers - households and companies (the business sector). The sensitivity tests reviewed in this document are, in the opinion of many, an important complementary tool The benefit of the various intervention tools, as well as the identification of the mix of shocks that may bring one or more banks below the required capital adequacy ratios. "
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To the full articleThere is no reason to get into stress. Discount Bank in Jerusalem at the height of the Corona crisis, April 20 (Photo: Olivier Fitoussi, Flash 90)
Although the banking system in Israel has been proven solid in the past, no one predicted a scenario like the Corona. The slowdown in the economy is reflected, among other things, in the capital market, when the confidence of the investing public in banks has not yet returned. At the end of March, the Banks 5 index, which represents the leading banks in Israel, fell to 1,683 points, between May and June flirted and even occasionally exceeded 2,000 points and today it shuffles around 1,800 points, far from the peak in January of more than 2,600 points.
"This situation is expected to continue in the near future," explains Eyal Debbie, director of analysis at Leumi Capital Markets. "When we reach a point that is clearly unreasonable, the indices will correct. At the moment, yields are low and so are profitability. "
Debbie explains that one has to get used to the creeping devaluation in the status of the banks, even though the prices are currently cheap. "We are in a very low interest rate arena. The interest rate is a factor of production at the banks and therefore there is an erosion." However, he notes that the pricing of banks is too conservative. "The trend of the financial sector is challenging. Beyond the strong interest rate drop, many banks are investing in the capital market. The results will be bad in the next 3-4 quarters, so I have a hard time seeing them break the ceiling. This is also why the market is not in a hurry to buy. "For investors in the short term. In the long term, however, these prices are very interesting."
The Bank of Israel mentioned 2008, and Debbie lingers on this point: "Today the crisis is in the real economy, compared to 2008, when the crisis was financial. It is more like the crisis of 2001/2, which was severe in itself. We will not reach 2008, but we should "Remember that even then, even then, the banks wrote off a total of 12 percent of the capital. I have a hard time seeing a scenario in the compound of the likelihood that in today's reality they will reach such a level."
However, Debbie notes the place where banks are relatively sensitive: "The giant companies will overcome the crisis, the small and medium-sized companies, the ones that have no air to breathe, are the soft underbelly that will cause damage. Workers and Discount are mostly leaning in this direction, low risk "For mortgages that are less risky. Investors expect less good results for Discount and work."
We mentioned mortgages and here the association really leads to the 2008 crisis in the United States. The horror scenario for borrowers is an inability to pay, which will transfer the property to the bank. In this section, Debbie is relaxing, at least for the time being. "Mortgages are linked to unemployment," he says, "Most mortgage borrowers are in a less fragile socio-economic situation. It should be noted that the wedding with the bank is long, also on its side. The banks will do anything to grant a lifeline, they have no interest in coming and taking "Go to the house." The last thing the bank wants is for it to go bankrupt, it has absolutely no interest in realizing apartments.
So what will happen next? "I am not bothered by the depth of the crisis but by its length," Debbie concludes. "At first there was talk of a 'recovery', a quick correction after the fall, but forecasts have been updated. The Bank of Israel is growing at minus 6 percent and may go in the 8 percent direction. "There will be a rebound. The banks will succeed, the investors want to know that the breathing will not stop for too long. If there is a real second wave, when the virus is violent and infection is high - 2021 will also be lost for investors. Then there will be another story."
All in all, the Bank of Israel reinforces the propaganda that the banking sector in Israel is in a solid position. "The results show that in any extreme scenario, even the one with the most severe intensity, the banking system will remain stable." However, the longer the crisis, the greater the exposure: "It can be seen that only in the most severe scenario is a certain decline below the capital adequacy required only in some banks, but even in this scenario the stability of the banking system as a whole is maintained."