The step taken by Supervisor of Banks David Zaken, to instruct the banks to classify their loans to a large concern as problem debt, is highly unusual. But don’t expect a catastrophe in the banks' results because of IDB Holding Corp. Ltd. (TASE:IDBH). IDB's woes didn’t begin yesterday, and some of the banks have already made provisions against their loans to the group. Although IDB is one of the biggest borrower groups in the Israeli economy, with a very large amount of credit, the main problem is in the higher levels of Nochi Dankner's pyramid: IDB Holding, and the controlling shareholder, privately held Ganden.
It's true that the situation of some of the subsidiaries is not brilliant: regulation, competition, the economic slowdown and the decline on the capital markets, have eroded the profits of flagship companies like Shufersal Ltd. (TASE:SAE), Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), but these are still companies clearly capable of servicing their debt. The problem, as mentioned, is higher up, and there, the debt to the banks is relatively small, less than NIS 2 billion.
In addition, the results of the stress tests carried out by the Bank of Israel in the past year show that, even if the largest borrower group should fall, the damage to the entire banking system will be NIS 9 billion at most- not pleasant, but not a loss that will lead to the collapse of a bank.
If so, why is Zaken bothering himself about IDB and taking the trouble to instruct the banks to classify loans to the group and to make provisions against them accordingly? The answer is that Zaken is worried, even very worried. "The Bank of Israel doesn't know what will happen, and is very fearful of the next blow. No-one knows where it will come from: Iran, Europe, or a deepening recession," a senior banking source told us.
Another thing. The Bank of Israel's instruction has importance at the symbolic level. The Bank of Israel, an official state body and the regulator whose task it is to care for the stability of the financial system, understands that there is a problem at IDB. The approach to the banks and the instruction to classify the debt as problematic stands out against the background of a general disinclination of the Supervisor to intervene in the classification of loans to specific borrowers at the banks, leaving them broad freedom of action.
Zaken's instruction is a powerful signal. This is no longer a matter of hysterical investors rushing to dump bonds and sending yields skywards. Now we are talking about the regulator, who has identified a problem, and officially defined it as such. If Zaken has decided to intervene on this occasion, it means he really is concerned. And if Zaken is concerned, it would appear that we have reason to be concerned as well.
Published by Globes [online], Israel business news - www.globes-online.com - on August 22, 2012
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