Bethel Finances: BoI to raise bank capital requirements

www.bethelfinance.com

The Bank of Israel is to raise the core capital requirements for the five largest banks in Israel, as it moves to implement the Basel III rules on banking supervision. It is believed that Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI) will have to raise their core capital adequacy ratio to 9-9.5%, while the minimum for Israel Discount Bank (TASE: DSCT), Mizrahi Tefahot Bank (TASE:MZTF), and First International Bank of Israel (TASE: FTIN) will be 8-8.5%. This means that the banks will have to expand their capital by an aggregate NIS 7 billion.

By the end of the year, Supervisor of Banks David Zaken will issue clear guidelines on targets and timetables, but according to estimates the banks will be given two years to reach the new target, that is, until the end of 2013. At present, the minimum capital adequacy ratio for all the banks is 7.5%. Apart from First International, none of the banks is within the new target.

Under the Basel III rules, the regulator in each country has to define banks whose failure would carry systemic risk, to be designated Systemically Important Financial Institutions (SIFI). Such institutions have to be set especially strict capital requirements, with the recommended ration being 8-9.5%. The Bank of Israel designated Bank Hapoalim and Bank Leumi as SIFIs six months ago.

It may be that Zaken will eventually decide to impose the higher capital ratio on all the banks. The Bank of Israel says that the new guidelines will be set after a "dialogue" with the banks.

Bank Hapoalim and Bank Leumi currently have capital adequacy ratios a little over 8%. To boost the ratio to 9%, Bank Hapoalim will need to raise capital of NIS 3 billion, and Bank Leumi will need to raise NIS 2.5 billion. Discount and Mizrahi-Tefahot each have a core capital adequacy ratio of 7.7%. To raise this to over 8%, Discount will need additional capital of NIS 800 million, and Mizrahi-Tefahot NIS 500 million. As mentioned, First International's ratio is already above the new target, at 8.19%.

Expanding their capital, even if happens over two years, will mean a fall in the banks' return on equity, and reduce their ability to pay dividends. Alternatively, the banks can reduce the credit that they give, thus reducing their risk assets and raising their capital adequacy ratio. Discount Bank adopted this course in the first quarter, when it reduced credit by NIS 2 billion in order to reach the required capital adequacy ratio of 7.5%.