“The strengths of the banking industry in Israel will allow it to deal with the growing risks in 2023,” according to a review by S&P Global that came into the hands of a sponsor.
“The Israeli banks will benefit from a windfall given the expectation that the local economy will show excess performance in 2023 compared to most economies of countries in the reference group, despite monetary tightening, a high inflation rate and a decrease in global demand that slows down growth,” according to the global rating company.
At the same time, S&P states that default rates in the banking sector are expected to increase during the coming year, although to relatively low levels, as the customers’ ability to repay may be under pressure. The basic profitability of the banks is solid, due to efficiency improvements and interest rate increases. Capitalization of the banking system may improve in 2023 as earnings increase, but we expect dividends and growth to largely consume new capital generation.
S&P warns that the high exposure to real estate (construction, mortgages and real estate activities) remains the main risk to the banking system, but the banks’ solid credit underwriting partly reduces the potential concerns.
S&P notes under the main risk factors for the banking system, the possibility of a significant slowdown in economic activity in Israel, and in particular a sharp correction in real estate prices which will cause a significant increase in credit losses. The economists of the rating company also point out that the realization of the security-political risks may have a negative effect on the performance of the entire industry. Beyond that, another possible risk for banks could be in the form of the entry of new players into the industry who will compete through business models based on new technologies.
The rating company’s report does not include reference to the legal reform, despite its importance, as this is reflected in the state rating report that is expected to be published in May, and for now there is no change in the state rating.