Bank Leumi le-Israel B.M.

We factor into our ratings our view that Israel (A+/Negative/A-1) would provide extraordinary support to the bank in the event of financial distress. The negative outlook on Leumi mirrors that on the sovereign and reflects our view that an escalation of the war could have negative implications for Leumi's creditworthiness over the next 12-24 months. We could lower the rating on Leumi if we lowered the rating on Israel because we would then consider it less likely that the government would provide extraordinary support to Leumi in case of need. We could also lower the rating on Leumi if we considered that security risks had escalated, with negative consequences for the banking sector and Leumi's asset quality, capitalization, or earnings.

...Leumi's strong franchise and large and granular deposit base are credit positive. Leumi is a universal bank that serves the full spectrum of customers in Israel, which provides reasonable earnings and balance-sheet predictability. It benefits from large core deposits base, accounting for about 90% of its funding. Despite some deposit-pricing competition, its revenues remain resilient. Higher-for-longer interest rates are a tailwind helping loss-absorption capacity and supporting the bank's capitalization. Interest rates are also supporting its profitability, as are cost-efficiency initiatives. We expect credit losses to remain high at 40 basis points (bps) per year on average in 2024-2026. Leumi's superior earning capacity represents a strength compared to peers and a buffer at the current rating level. We forecast that Leumi's risk-adjusted capital (RAC) ratio will improve slightly to 8.4%-8.8% in 2026, from 8.4% as of December 2023....

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