Israeli banks are continuing to reduces their exposure to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). An examination by "Globes" found that the five big banks reduced their exposure by almost NIS 500 million during the first half of 2012 to NIS 1.57 billion at the end of June from NIS 2.06 billion at the end of 2011.
The banks' greatest exposure is to Spain, totaling NIS 714 billion, almost half the banks' total PIIGS exposure. Italy is in second place, with a total exposure of NIS 502 million, most of which (NIS 316 million) is exposure to Bank Leumi (TASE: LUMI). The banks' exposure to Ireland is NIS 316 million, most of which (NIS 286 million) is exposure to Bank Hapoalim (TASE: POLI). The banks' exposure to Greece is a negligible NIS 6 million, and Bank Hapoalim's exposure to Portugal amounts to a few million shekels.
The PIIGS are considered problematic, due to their huge government debts, which raise concerns about the countries' economic stability. The yields on their government bonds reflect investors' fears about the countries' ability to redeem the bonds. Because of the countries' problematic condition, Israel's banks are required to report their exposure.
There are two main kinds of bank exposure to the PIIGS: balance sheet exposure, and off-balance sheet exposure. Off-balance sheet exposure is mostly only an accounting exposure because the banks are also brokers, and is considered low risk. It is the settling of accounts with foreign banks, and most of the exposure is closed daily through clearance. The off-balance sheet exposure of most of the banks is low, at around 20% of their exposure to the PIIGS. Bank Hapoalim has a large off-balance sheet exposure, amounting to over half of its exposure to the PIIGS.
More important is the banks' balance sheet exposure, through their nostro investments in government and bank bonds. Here too, however, the Israeli banks' exposure is not direct, but through European securities that serve as collateral for bank loans.
Bank Hapoalim has the largest exposure among the five big banks, at NIS 652 million at the end of June, more than half of which, NIS 372 million in off-balance sheet exposure. The high exposure is because, in contrast to the other banks which reduced their exposure, Bank Hapoalim's exposure barely changed during the first half of the year. Its largest exposure is to bonds of Spanish banks, totaling NIS 105 million. Of this amount, NIS 47 million is in BBB rated bonds, and NIS 54 million is in BBB minus rated bonds. Bank Hapoalim's off-balance sheet exposure to Spain is NIS 286 million.
Although Bank Hapoalim has the largest PIIGS exposure, it is important to state that it only carries NIS 3 million in problem debt in Italy, and it has no problem credit or impaired debt.
Bank Leumi has the second largest PIIGS exposure, after having the largest exposure among Israel's banks for many years. It has worked hard to reduce its exposure, including a NIS 278 million reduction during the second quarter, to NIS 638 million at the end of June. NIS 629 million of the exposure is to Spain and Italy. In its financial report for the second quarter, the bank says that it holds no Spanish or Italian government bonds, and that most of its exposure is to bonds of European banks with global operations and that the bonds are rated A minus or higher.
Among the mid-sized banks, First International Bank of Israel (TASE: FTIN) has the largest PIIGS exposure, amounting to NIS 248 million at the end June, down from NIS 271 million at the end of 2011. NIS 216 million of the exposure is balance sheet exposure, including deposits, bonds, credit to the public, and fair value valuations of financial instruments. It holds NIS 48 million in Spanish government bonds and NIS 78 million in Italian government bonds.
In addition to the PIIGS, First International Bank had exposure at the end of June to Cyprus, Hungary, and Iceland, which have liquidity problems. Its exposure to these countries was NIS 66 million at the end of June, NIS 1 million less than at the end of 2011.
Mizrahi Tefahot Bank's (TASE:MZTF) PIIGS exposure fell to NIS 16 million at the end of June from NIS 90 million at the end of 2011. Israel Discount Bank's (TASE: DSCT) exposure fell to NIS 14 million at the end of June from NIS 60 million at the end of 2011.
Published by Globes [online], Israel business news - www.globes-online.com - on September 11, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012