ISRAEL AT WAR - DAY 147

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Israel shares drop, led by SVB fallout fears; analysts see less risk to local banks

Psagot Investment House and IBI Investment House see no fear of contagion to financial stability of Israeli banks; lenders have capital buffers to withstand times of turmoil

Sharon Wrobel is a tech reporter for The Times of Israel.

The Tel Aviv Stock Exchange, December 25, 2018. (Adam Shuldman/Flash90)
The Tel Aviv Stock Exchange, December 25, 2018. (Adam Shuldman/Flash90)

Israeli shares slipped on Monday erasing morning gains, led by financial stocks, even as United States regulators reassured investors that depositors of collapsed go-to tech lender Silicon Valley Bank (SVB) would be protected and fully repaid.

SVB, the go-to lender of tech startups in Israel and the US, collapsed on Friday, forcing the US federal government to step in and seize its assets. The failure of the tech-focused lender sent shockwaves into Israeli tech industry over the weekend fueling concern of furloughs if affected local startups with accounts at SVB can’t meet payroll in coming weeks.

Overnight, S&P 500 futures gained after US authorities late Sunday guaranteed SVB customers would get full access to their deposits starting on Monday.

“We are taking decisive actions to protect the US economy by strengthening public confidence in our banking system. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” read the joint statement by the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). “This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”

The positive impact of the US regulator intervention did not sustain. Also on Sunday, regulators shut down Signature Bank in New York, driving concern about contagion risk to other US regional banks following SVB’s collapse. In US trading, shares of San Francisco’s First Republic Bank dived as much as 65%, leading a decline in stocks of regional banks, amid investor worry that more seizures might be in the offing sending stocks down in European and other markets.

Tel Aviv Stock Exchange’s benchmark TA-125 index slipped 1.1%, while the TA-35 index of blue-chip companies fell 0.7%. The TA index of the five largest banks was down 2.1% and the TA-Insurance & Financial Services dropped 2.8%.

Psagot Investment House chief strategist Ori Greenfeld. (Courtesy)

“Global markets are not truly convinced that fallout from the event is over and that is why we are seeing local stocks going down as well following the trend overseas,” Ori Greenfeld, chief strategist at Psagot Investment House, told The Times of Israel. “US regulators introduced a new backstop for banks to protect customer deposits and avert systematic risk to the economy, while signaling that they will not bail out banks or their equity.”

“So, if other regional banks in the US face similar issues to SVB by having taken too much risk and are showing losses their equity might go down but it won’t have a macroeconomic effect,” Greenfeld elaborated.

Founded in 1983, SVB has been providing banking and finance services to the growing startup industry in Silicon Valley and increasingly serving Israeli startups. Throughout the years with the tech industry raising billions of dollars in capital and investments, SVB grew into the 16th largest bank in the US.

It failed after depositors hurried to withdraw money last week triggering a run on the bank amid anxiety over its health and its ill-fated decisions incurring huge losses as the interest rate environment went up at a faster pace than SVB had expected over the past year. It was the second-biggest bank failure in US history after the collapse of Washington Mutual in 2008.

Both Psagot’s Greenfeld and Lior Shilo, financial services analyst at IBI investment house pointed out that Israel’s domestic banks have a different capital structure compared to their US counterparts with solid investments and big capital buffers to withstand times of turmoil should they need to write losses on their portfolios.

“The SVB will raise many discussions regarding the vigilance of the regulator, the classification of assets in the banks’ trading portfolio, and the recognition and account of profit and loss of yield-to-maturity bonds,” said Shilo. “The situation of Israel’s local banks seems much better and their management together with the close supervision of the local regulator leaves them stable even in such an environment.”

People line up outside of the shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023, in Santa Clara, California (Justin Sullivan/Getty Images via AFP)

Shilo emphasized that although most banks have exposure to a securities portfolio, the situation of SVB was very unique in terms of the bank’s volume of bonds in relation to its total trading portfolio and in relation to its volume of deposits.

“Unlike SVB, the banks in Israel are managed in a completely different way,” Shilo noted. “The volume of assets held in bonds is nowhere near the holding rate of SVB (76%) and most of the portfolio is held in bonds available for sale.”

As the Federal Reserve hiked interest rates over the past year, the value of banks’ bond portfolios was hit. Due to high exposure to these bonds, SVB was showing losses of about $15 billion, or 16.5% on a $91 billion portfolio of securities that the US bank classified as held to maturity.

Though rising interest rates have hit the value of domestic banks’ portfolios over the past year, they were nowhere close to the losses realized by SVB, according to Shilo, ranging from 1% to 6.5% to the total portfolio.

“Local banks are financially stable and have also recently shown good performance in their results driven by their traditional banking operations generating profits from the interest earned on deposits and loans as rates went up,” said Greenfeld.  “In addition, Israel’s economy is growing at a robust pace compared with the US.”

Last week, Bank Hapoalim, one of Israel’s largest lenders posted a record NIS 6.5 billion ($1.8 billion) net profit in 2022 as rising interest rates and higher inflation boosted total income and credit activities. Net interest income in 2022 increased 38% to NIS 13.5 billion ($3.7 billion) versus the previous year. Hapoalim’s credit portfolio grew by 10.2% in the full year of 2022.

A Bank Hapoalim cash machine. (Yonatan Sindel/Flash90)

Israel’s economy expanded 6.5% in 2022 growing at a slower pace than the fast 8.6% expansion in 2021. Gross domestic product rose a seasonally adjusted, annualized 5.8% in the fourth quarter of 2022 surpassing analysts’ expectations. In 2022, the average growth among OECD countries was 2.8%.

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