Moody's maintains stable outlook on the Israeli banking system amid GDP growth and strong asset quality and funding structure

Moody's Investors Service (Moody's) has maintained its stable outlook on the Israeli banking system, reflecting the rating agency's expectation of an improving operating environment, as well as low levels of non-performing loans and sound funding structure and liquidity buffers. The outlook expresses Moody's expectation of how bank creditworthiness will evolve in Israel over the next 12-18 months.

Moody's report, entitled "Banking System Outlook -- Israel: Increasing Economic Growth and Sound Asset Quality Underpin Our Stable Outlook" is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

Moody's expects real GDP growth in Israel to increase to 3.4% in 2018, from 3.0% in 2017, underpinned by consumer spending and corporate investment. Low interest rates, a favourable labour market and rising real wages will fuel household credit demand, with bank lending growth picking up to 5%-6% in 2017.

Israeli banks will maintain adequate capital buffers and uninterrupted access to domestic deposits to finance their lending, owing to the population's strong savings culture. The banks' high exposure to real estate -- combined with rising property prices -- continues to expose them to significant credit risks, but these are largely mitigated by prudent underwriting and the rating agency's expectations of sustained high employment and low interest rates.

"While Israeli banks are subject to rising credit risks on the back of their high real estate exposure and rising property prices, prudent underwriting coupled with sustained high employment and low interest rates largely offset these risks. As a result, non-performing loans will remain low, at around 1.6% of total loans," says Melina Skouridou, Assistant Vice President and Analyst at Moody's.

Profitability will remain moderate, with return on assets of 0.6%-0.7% in 2017, despite efforts to contain high costs. Higher revenues and flat operating expenses will be offset by a normalisation of provisioning needs (following recent recoveries) and lower investment-related gains. Beyond 2017, cost-cutting will improve efficiency but increased competition will pressure revenue growth and keep profits in check.

Israeli banks will maintain stable deposit funding, with liquid assets accounting for 32% of total assets, mainly in the form of cash (18% of assets), with the remaining invested in securities, mainly A1-rated Israeli government bonds. Customer deposits, primarily domestic, accounted for 82% of banking system liabilities as of December 2016.

Moody's assume a very high probability of government support for Israeli banks, reflecting the track record of support in Israel and the rated banks' systemic importance, accounting for 96% of the system's total assets.