In a deal reached regarding seized Lehman Brothers assets, Bank Discount will get first dibs on those assets.

According to Globes: “The two banks agreed that Discount Bank will receive first priority and only afterwards will Bank Leumi receive funds. The compromise has the status of a judicial ruling according to the reports of Bank Discount. Sources in the banking system estimate that there are more than NIS 600 million of Lehman Bros. in Discount Bank., the same amount written off by the two Israeli banks in debts from the US investment bank. Therefore, if the legal process is realized vis-à-vis Lehman Bros. trustee, the two Israeli banks should fully realize their losses. The trustee of Lehman Bros. assets is the London accounting firm PWC and estimates are that the receivership process will take years.”

Good news for shareholders of both banks.

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In another signal that the Israeli economy is falling further into the abyss, Moody’s has cut the ratings of 4 Israeli banks. Interesting to note that Bank Mizrahi Tefahot did not get cut, as they continue to implement their conservative business model, which has kept them both profitable and out of much of the financial crisis.

According to Globes: “International ratings company Moody’s has cut its ratings for four Israeli banks: Bank Leumi (TASE: LUMI), Bank Hapoalim (LSE: BKHD; TASE: POLI), First International Bank of Israel (TASE: FTIN1;FTIN5), and Israel Discount Bank (TASE: DSCT). Moody’s has downgraded the long-term local currency deposit rating of Bank Leumi to A1 from Aa3. The Baseline Credit Assessment (BCA) was lowered to Baa1 from A3 and the bank financial strength rating (BFSR) was downgraded to C- from C. The bank’s A1 long-term foreign currency deposit rating and Prime-1 short-term deposit ratings were affirmed. The outlook on both the long-term local and foreign currency deposit ratings and on the BCA is negative, while the outlook on BFSR is stable.”

The resons cited for the downgrades were familiar. A slowing economy, bank exposure to construction and tourism which are both in trouble and lower profitability.

Let’s see if PM elect Benjamin Netanyahu, can turn things around quickly so that Israel can get a credit upgrade.

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With most of the world trying to cope with a banking sector that is teetering on the brink of disaster, it’s refreshing to see that someone thinks Israeli banks are safe. Barclays came out with a call on the Israeli banking sector, and while they give an ‘underweight’ weighting, at least they don’t forecast anything close to what has befallen US banks.

According to Globes: “Wolf says that Israeli banks are well capitalized compared with US banks. He notes that “in Israel, the overwhelming majority of the Tier 1 capital is common equity. Hybrid Tier 1 is relative latecomer to Israel.” He adds, “Given the dearth of opportunities, the Israeli banks have not growth via acquisition and as such have limited to no goodwill being counted as Tier 1 capital.”Barclays Capital notes that since Israel is not a classic emerging market, growth rates and opportunity in Israel are far more similar to those in the US and Western Europe than they are to emerging markets. The major risk in Israel is geopolitical, but we believe this risk is more a perception than a reality. Despite a “history of violence with its Palestinian and Arab neighbors” the economic policies have remained strongly in place, the currency has been relatively stable and interest rate moves and inflation have mirrored the moves in the US.”

Once again it seems that the Israeli economy is, fundamentally, in a stronger position than most countries.

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As if the Israeli banking system needed more bad news, UBS came out yesterday with a negative report on the nation’s big banks. According to Globes: “The main event of the day was a report by UBS on Israel’s banks. UBS predicts that the banks will stay in the red through 2009 and 2010, and that they will need an aggregate additional capital injection of NIS 22.5 billion by the end of next year. The report sent the bank shares down. Israel Discount Bank (TASE: DSCT) had the sharpest fall of 4.1%. Bank Leumi (TASE: LUMI) fell 1.8% after also garnering a “Sell” recommendation. Two banks received a “Neutral” recommendation: Bank Hapoalim (TASE: POLI; LSE:80OA), which fell 1%, and Mizrahi Tefahot Bank (TASE:MZTF), which also fell 1%.”

We have spoken here about the potential for a large Israeli bank to fail. If you listen to the UBS report, that potential may turn into a reality.

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