OREANDA-NEWS. Fitch Ratings has affirmed Bank Leumi Le Israel B.M.'s (Leumi) and Bank Hapoalim B.M.'s (Hapoalim) Long-term Issuer Default Ratings (IDRs) at 'A-' with Stable Outlooks. Both banks' Viability Ratings (VRs) have been affirmed at 'bbb+'. A full list of rating actions is provided at the end of the rating action commentary.

KEY RATING DRIVERS - IDRs, SUPPORT RATING FLOORS AND SUPPORT RATINGS
The two banks' Long- and Short-term IDRs are support-driven. Their IDRs, Support Ratings (SRs) and Support Rating Floors (SRFs) reflect Fitch's expectation of an extremely high probability of support for the banks, if needed, from the State of Israel (A/Stable).

Fitch's expectation of support from the authorities is underpinned by Israel's strong ability to provide support to its banks, as reflected in its ratings, combined with Fitch's belief that there would be a strong willingness to do so. This view is reinforced by the banks' large domestic franchises (accounting for a combined 60% of the banking sector assets and liabilities) and their importance to the Israeli economy.

RATING SENSITIVITIES-IDRs, SRs AND SRFs
The IDRs, SRs and SRFs are potentially sensitive to a change in Fitch's assumptions around the Israeli authorities' propensity or ability to provide timely support to the banking sector. While the introduction of a resolution law is in discussion, Fitch does not expect this law to become functional in the short-term. The country does not operate a deposit guarantee system and the practical implementation of resolution tools, such as bail-in of senior creditors, remains unlikely in Fitch's view.

KEY RATING DRIVERS - VRs
Leumi's and Hapoalim's VRs factor in the significant, although declining, concentrations of their loan portfolios in terms of sector and/or single-name exposures, and moderate capital levels. The ratings also consider their large deposit bases, healthy asset quality, and reasonable profitability.

Credit concentrations by economic sector, and in some instances by obligor, remain in both banks, and are reflected in Fitch's assessment of the banks' risk appetite, which is a factor of high importance when analysing the banks' respective VRs. The banking sector has reduced large exposures, supported by prudential regulations, although Fitch believes that concentration levels are likely to remain a feature of Israel's fairly small economy. Given ample deposit funding, and generally limited possibilities to grow in core areas where the banks already have leading franchises, they have at times expanded in some higher-risk -and margin segments; this is also factored into Fitch's assessment of risk appetite.

Leumi's and Hapoalim's capitalisation are moderate. Risk-weighted ratios are fairly low, although mainly driven by high risk weights under the standardised approach. Leverage, as measured on a non-risk weighted basis, compares well internationally for both banks. From January 2015, Israeli banks need to meet a minimum Basel III Tier 1 ratio of 9%, increasing to 10% from January 2017 for the two largest banks (applicable to banks with over 20% of banking sector assets). Fitch expects both banks will comfortably meet these regulatory requirements.

Leumi's and Hapoalim's strong liquidity and mainly deposit-funded lending support the ratings. Both banks' liquidity buffers consist of cash and high quality sovereign bonds. Funding is reliant on fairly stable customer deposits, which entirely cover lending needs as reflected in loan-to-deposit ratios being consistently below 100% at both banks. Wholesale funding remains limited.

Asset quality continued to perform well in 2014, with low levels of impaired loans and increasing coverage ratios. Low interest rates and a fairly benign operating environment support asset quality. Fitch expects commercial real estate lending to be stable in 2015, although risks arising from the large individual exposures remain, in Fitch's view.

Profitability is sound and has remained stable despite low interest rates, although cost efficiency is weak compared with similarly rated international peers. Fitch believes that profitability will be supported by low loan impairment charges and additional cost cutting in 2015, offsetting the low interest rates and limited growth in corporate lending.

RATING SENSITIVITIES-VRs
The VRs take into account both banks' improving capitalisation through internal capital generation and a progressive reduction of credit concentrations. A downgrade of the VRs would most likely be driven by increased risk appetite, either abroad or for higher-risk sectors in Israel, or large losses affecting capitalisation. Given the already high ratings in the context of their operating environment, an upgrade of the VRs is currently unlikely.

The rating actions are as follows:

Leumi
Long-Term IDR: affirmed at 'A-'; Stable Outlook
Short-Term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'bbb+'
Support Rating: affirmed at '1'
Support Rating Floor: affirmed at 'A-'

Hapoalim
Long-Term IDR: affirmed at 'A-'; Stable Outlook
Short-Term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'bbb+'
Support Rating: affirmed at '1'
Support Rating Floor: affirmed at 'A-'