Israel Discount Bank of New York

Transcription

1 U.S. Financial Institutions Bank & BHC Rating Report Israel Discount Bank of New York Analytical Contacts: Joseph Scott, Senior Director (646) Christopher Whalen, Senior Managing Director (646) Jay Zhou, Associate (646) September 21, 2015

2 Table of Contents Executive Summary... 3 Key Rating Drivers... 3 Financial Metrics... 4 Comparative Statistics... 5 Rating Rationale... 5 Key Quantitative Rating Determinants... 5 Liquidity... 5 Asset Quality... 6 Capital Adequacy... 6 Earnings... 7 Key Qualitative Rating Determinants... 8 Market Strategy... 8 Risk Management... 9 Liquidity Management... 9 Economic and Regulatory Framework External Support Outlook Drivers of Rating Change Israel Discount Bank of New York Page 2 September 21, 2015

3 Executive Summary Kroll Bond Rating Agency (KBRA) has assigned the following ratings to Israel Discount Bank of New York ( the Bank or IDBNY ), based on KBRA s Global Bank and Bank Holding Company Rating Methodology dated January 28, Ratings Entity Type Rating Outlook Action Israel Discount Bank of New York Deposit A- Stable Assigned Senior Unsecured Debt A- Stable Assigned Subordinated Debt BBB+ Stable Assigned Short-Term Deposit K2 N/A Assigned Short-Term Debt K2 N/A Assigned Discount Bancorp, Inc., a Delaware bank holding company (BHC), owns 100% of Israel Discount Bank of New York. Consolidated assets totaled $9.8 billion with deposits of $7.8 billion. Chartered by the State of New York, IDBNY focuses on middle market commercial banking activities and private banking. Discount Bancorp, Inc. is regulated by the Federal Reserve. The Bank s strategy is to focus on domestic growth in select markets, while maintaining its international private banking relationships. The Bank has branches in the New York Metropolitan Area, Los Angeles Area, and Southern Florida. The Bank s international network includes representative offices in Mexico, Uruguay, Chile, Peru and Israel to service private banking customers. IDBNY through its U.S. parent, Discount Bancorp, Inc., is wholly-owned by Israel Discount Bank Limited (IDB Ltd.), a $54 billion banking group based in Tel Aviv, Israel. IDBNY is a key operating unit of IDB and is considered strategically important to the group. IDBNY operates as a standalone bank without any intercompany risk between it and the ultimate parent, IDB Ltd. Key Rating Drivers The ratings of Israel Discount Bank of New York are supported by the Bank s conservative management, strong asset quality metrics, and healthy liquidity and capital position. The ratings are constrained by the Bank s relatively low profitability and reliance on spread income, although profitability is expected by KBRA to improve over time. Credit Strengths Conservative and experienced management team Excellent asset quality metrics Ample liquidity and solid customer depository base Comfortable capital position Credit Constraints Comparatively low profitability, but gradual improvement expected Reliance on spread income, but non-interest revenues anticipated to increase over time Israel Discount Bank of New York Page 3 September 21, 2015

4 Financial Metrics Discount Bancorp, Inc. Key Statistics 1H15* Total Assets (000s) $9,772,832 $9,783,466 $9,603,713 $9,983,916 $9,487,504 $9,319,216 $9,519,594 $9,450,100 Total Loans / Total Assets 53.64% 53.16% 49.06% 41.97% 40.32% 42.10% 37.36% 42.35% Nonperforming Assets / Total Assets 0.22% 0.31% 0.47% 0.41% 0.82% 0.69% 1.00% 0.37% Nonperforming Assets / Tangible Equity + Reserves 2.46% 3.51% 5.20% 4.50% 9.01% 7.78% 12.34% 5.07% Reserves / Total Assets 0.70% 0.67% 0.69% 0.71% 0.78% 0.67% 0.68% 0.68% Reserves / Nonperforming Assets % % % % 95.04% 96.96% 68.13% % Net Charge-Offs / Average Total Assets -0.01% 0.07% 0.21% 0.20% 0.30% 0.50% 0.43% 0.11% Net Charge-Offs / Provisions % % % % 70.68% % 98.61% 58.97% Loan Loss Provisions / Average Total Assets 0.04% 0.05% 0.13% 0.17% 0.43% 0.47% 0.43% 0.19% Total Deposits / Total Assets 79.62% 79.49% 79.05% 74.80% 69.63% 65.59% 65.21% 65.66% Total Loans/ Total Deposits 67.37% 66.87% 62.06% 56.11% 57.91% 64.20% 57.28% 64.49% Total Equity (000s) $812,455 $784,345 $794,409 $838,436 $788,279 $767,003 $709,888 $624,470 Net Revenue (000s) $218,684 $213,617 $175,901 $220,223 $211,070 $215,670 $227,462 $250,508 Tier 1 / RWA 12.52% 11.93% 12.89% 14.19% 14.27% 12.54% 12.46% 9.94% Total Equity - Intangible Assets / Total Assets 8.31% 8.02% 8.27% 8.40% 8.31% 8.23% 7.46% 6.61% Net Interest Margin 1.80% 1.76% 1.46% 1.83% 2.06% 2.21% 2.43% 2.48% Net Interest Income / Total Revenue 74.54% 74.75% 73.37% 73.00% 76.56% 75.75% 80.72% 79.49% Noninterest Income / Total Revenue 25.46% 25.25% 26.63% 27.00% 23.44% 24.25% 19.28% 20.51% Return on Average Assets 0.55% 0.23% 0.10% 0.45% 0.48% 0.54% 0.47% 0.37% Return on Equity 6.62% 2.86% 1.18% 5.09% 5.81% 6.69% 6.17% 5.61% Efficiency Ratio 63.71% 64.51% 69.36% 78.29% 68.09% 62.94% 62.18% 59.93% Double Leverage 98.80% 98.75% 89.73% 87.31% 86.58% 99.23% 99.16% 99.18% Data Source: Discount Bancorp, Inc.'s Forms FR Y-9C *Annualized where appropriate Israel Discount Bank of New York Key Statistics 1H15* Total Assets (000s) $9,772,799 $9,783,466 $9,600,085 $9,980,203 $9,483,877 $9,315,266 $9,514,120 $9,445,307 Total Loans / Total Assets 53.64% 53.16% 49.08% 41.99% 40.34% 42.12% 37.38% 42.37% Nonperforming Assets / Total Assets 0.22% 0.31% 0.47% 0.41% 0.82% 0.69% 1.01% 0.37% Nonperforming Assets / Tangible Equity + Reserves 2.49% 3.56% 5.77% 5.11% 10.31% 7.87% 12.48% 5.12% Reserves / Total Assets 0.70% 0.67% 0.69% 0.71% 0.78% 0.67% 0.68% 0.68% Reserves / Nonperforming Assets % % % % 95.04% 96.96% 68.13% % Net Charge-Offs / Average Assets -0.01% 0.07% 0.21% 0.20% 0.30% 0.51% 0.43% 0.11% Net Charge-Offs / Provisions % % % % 70.68% % 98.61% 58.97% Loan Loss Provisions / Average Total Assets 0.04% 0.05% 0.13% 0.17% 0.43% 0.48% 0.44% 0.19% Total Deposits / Total Assets 79.73% 79.60% 79.93% 75.89% 70.77% 65.67% 65.30% 65.73% Total Loans / Total Deposits 67.28% 66.78% 61.40% 55.33% 57.00% 64.14% 57.24% 64.46% Total Equity (000s) $802,206 $774,004 $709,457 $728,622 $679,090 $757,642 $700,921 $617,022 Net Revenue (000s) $218,682 $212,929 $175,459 $219,335 $210,987 $215,585 $227,363 $249,643 Tier 1 / RWA 12.36% 11.77% 11.61% 12.38% 12.38% 12.40% 12.32% 9.83% Total Equity - Intangible Assets / Total Assets 8.21% 7.91% 7.39% 7.30% 7.16% 8.13% 7.37% 6.53% Net Interest Margin 1.89% 1.89% 1.62% 2.00% 2.19% 2.27% 2.52% 2.61% Net Interest Income / Total Revenue 74.54% 74.95% 73.31% 72.89% 76.56% 75.75% 80.71% 79.67% Noninterest Income / Total Revenue 25.46% 25.05% 26.69% 27.11% 23.44% 24.25% 19.29% 20.33% Return on Average Assets 0.55% 0.23% 0.09% 0.44% 0.48% 0.54% 0.46% 0.37% Return on Total Equity 6.73% 2.87% 1.29% 5.79% 6.75% 6.68% 6.15% 5.57% Efficiency Ratio 63.62% 64.48% 69.48% 78.54% 68.08% 63.19% 62.46% 60.08% Data Source: Israel Discount Bank of New York's Forms FFIEC 041 *Annualized where appropriate Israel Discount Bank of New York Page 4 September 21, 2015

5 Comparative Statistics Rating Rationale KBRA s deposit ratings of A-/K2 for IDBNY are supported by the following factors: i) a quantitative view of the Bank s financial fundamentals, including stress testing, ii) a qualitative assessment of the Bank s management and market strategy, and iii) the incorporation of potential external systemic support. Consistent with KBRA s notching guidelines, the Bank s subordinated debt is rated BBB+, one notch below its deposit and senior unsecured debt rating. Key Quantitative Rating Determinants The quantitative financial fundamentals of IDBNY are reflected in the primary credit rating (PCR) of A-, which is derived from the financial strength rating (FSR) and potential adjustments to the FSR due to KBRA s stress testing as well as analysis of current and historical financial metrics. Liquidity KBRA believes liquidity is conservatively managed. The Bank maintains an ample level of liquid assets combined with a growing customer deposit base, particularly domestic deposits. The loans to deposits ratio compares well to the average of rated peers. There remains a relatively higher portion of customer time deposits versus many U.S. banks, but this difference is expected given IDBNY s focus on private banking customers. Brokered time deposits represent a modest portion of the deposit mix. As of June 30, 2015, IDBNY excluding DBLA had $6.6 billion in deposits. The Bank is managed on a standalone basis and, consequently, does not rely on its ultimate parent bank in Israel for funding. IDBNY exceeds the minimum liquidity coverage ratio (LCR) calculated daily under Basel III regulations. At the bank level, liquid assets and estimated unused borrowing capacity totaled over $1.6 billion as of mid-year This estimate is based on excess cash, FHLB of NY capacity, repo Israel Discount Bank of New York Page 5 September 21, 2015

6 capacity, Fed Funds availability, and brokered deposit availability. Liquid assets at the U.S. based holding company totaled $9.7 million at mid-year 2015 with no liabilities. Chart Title Deposit Composition Deposit Levels Deposit Levels 2Q15: $6.6 bn Domestic Banks, Gov'ts and Affiliates 5% Brokered Deposits 8% Foreign Customer Deposits 37% 64% 66% 70% 58% 56% 75% 62% 79% 79% 80% 67% 67% Source: Company Presentation Domestic Customer Deposits 46% Foreign Banks, Gov'ts and Affiliates 4% Q15 Loans / Deposits Deposits / Assets Source: Regulatory Filings Asset Quality The Bank has comparatively strong asset quality. The level of non-performing assets and charge-off experience are both far better than respective peer averages. As of mid-year 2015, the Texas ratio of just 2.5% compares favorably to the average of rated peers. IDBNY is a conservative credit underwriter with deep knowledge of its customers and markets of operation. During the financial crisis and its aftermath, IDBNY s levels of non-performing assets and charge-offs were considerably better than the track records of many banks. Construction and development exposure remains relatively low with zero losses even during the financial crisis. Capital Adequacy Capital ratios remain well above regulatory minimums to be considered well capitalized. The Tier 1 riskbased capital ratio of 12.5% was above the average of rated peers and the ratio of tangible equity to assets compared was in line with peer averages. IDBNY s economic capital position is viewed even more positively, given the low risk nature of IDBNY s asset mix, healthy level of loan loss reserves and favorable charge-off experience. Double leverage was below 100% at June 30, 2015, indicating no reliance on debt at the U.S. based holding company to finance an equity investment in IDBNY. Regulatory Capital Ratios- Discount Bancorp, Inc. 2Q Tier 1 leverage ratio 8.41% 8.13% 8.71% 8.96% 8.56% 8.14% 7.76% Tier 1 risk-based capital ratio 12.52% 11.93% 12.89% 14.19% 14.27% 12.54% 12.46% Total risk-based capital ratio 13.57% 12.94% 13.90% 15.39% 16.48% 14.69% 14.87% Data Source: Discount Bancorp, Inc.'s Forms FR Y-9C Israel Discount Bank of New York Page 6 September 21, 2015

7 Capital Ratio Comparison 13.6% 12.5% 12.5% 12.4% 10.2% 13.4% 14.7% CET1 Capital Ratio Tier 1 Leverage Ratio Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio Min. Total Risk-Based Capital Ratio = 10.5% 8.4% Min. Tier 1 Risk-Based Capital Ratio = 8.5% Min. CET1 Capital Ratio = 7% Min. Tier 1 Leverage Ratio = 4% Discount Bancorp, Inc. Like-Sized Peers* *Peer set consists of 135 bank holding companies in Peer Group 2 Note: Minimum capital ratios reflect new capital conservation buffer requirement Source: Bank Holding Company Performance Report Earnings Profitability as measured by ROA has been below average among rated peers, but is expected by KBRA to gradually improve in the next few years. In 2014 and 2013, reported profits were negatively affected by various charges (as detailed below). In 2014, charges were taken related to the sale of the Bank s portfolio of trust preferred securities issued by other financial institutions. This sale was in response to Basel III capital rules which punitively treat holdings of preferred investments in other financial institutions. In addition, moderate charges were taken in late 2014 following the definitive agreement to sell DBLA to ScotiaBank. ($ in millions) FY 2011 FY 2012 FY 2013 FY 2014 YTD 2Q15 Reported Net Income $46 $43 $9 $22 $27 Loss on Sale of TruPS, net of tax $17 Valuation Allowance for DBLA, net of tax $19 Adjustment for AFS Securities of DBLA, net of tax $3 Cumulative US Taxes since Inception, DBLA $28 Normalized Net Income $46 $43 $41 $59 $27 Adjusted ROAA 0.48% 0.45% 0.38% 0.41% 0.55% Adjusted ROAE 5.76% 5.22% 4.39% 4.97% 6.67% Source: Company Presentation Discount Bancorp, Inc. Profitability increased in the first half of 2015, reflecting moderate growth in net interest income and noninterest revenues combined with lower loan loss provisions and greater operating efficiency. A continued improvement in profitability is expected in the second half of 2015 as these trends continue. The NIM and overall profitability are still hampered by negative spreads generated on high cost term repo funding. Particularly in 2017 and 2018, NIM is expected to benefit when a large portion of these repos mature. Any move by the Federal Reserve to increase interest rates would benefit the bank s profitability, given its asset sensitive balance sheet. Non-interest revenues are expected to gradually increase as a percentage of the revenue mix as management continues to build up the investment management business. Israel Discount Bank of New York Page 7 September 21, 2015

8 Key Qualitative Rating Determinants The qualitative aspects of IDBNY were assessed using a scoring model that focuses on four equally weighted key factors: market strategy, risk management, liquidity management, and the economic and regulatory framework. Overall, IDBNY scored in the strong category for qualitative factors using data obtained from annual reports, earnings statements, management presentations, and regulatory reports. The following describes KBRA s qualitative assessment for the Bank: Market Strategy The Bank s network includes its main office in Manhattan, branches in Staten Island, Brooklyn, and Short Hills, NJ, in addition to branches in Beverly Hills and Downtown Los Angeles, California; and Aventura, Florida. The Bank also maintains an offshore Grand Cayman Island Branch; an International Banking Facility at its main office in New York; and representative offices in Chile, Israel, Mexico, Peru and Uruguay. Securities brokerage activities are conducted through IDB Capital Corp., a broker-dealer regulated by FINRA and the SEC. IDBNY provides personal and commercial banking services to its U.S. and international customers. Private banking services include a full range of investment management, trust, brokerage, insurance as well as loans and depository services. Lending and other credit activities include corporate lending, factoring, commercial real estate lending, asset based lending, and trade finance. Additional services include cash management, foreign exchange, and interest rate derivatives. IDBNY is a relationship focused bank with many long-standing customers. Referrals from existing customers are the primary source of new business. C&I Portfolio by Sector Chart Title CRE Portfolio by Chart Property Title Type Other 26% Source: Company Presentation Apparel & Accessories 26% Food & Related 9% Jewelry 6% Manufacturing 5% Investment Real Estate 5% Wholesale Durables 9% Health Care and Social Assistance 4% Unsecured 4% Other 6% Retail 30% Source: Company Presentation Residential 11% Industrial 5% Land & Construction 16% Office 14% Mixed Use 14% The Bank s strategy is to focus on domestic growth, while maintaining its international private banking relationships. In late 2014, IDBNY signed an agreement to transfer all assets and liabilities of its Uruguayan retail bank (assets: $1.3 billion) to ScotiaBank. This transaction is expected to close soon. IDBNY established a domestic private banking enterprise which led to the opening of private banking branches in Staten Island (2010), New Jersey (2013), and Brooklyn (2014). The bank is building its investment management and trust business in an effort to improve its product offerings and increase the proportion of fee income. Combined AUM of global portfolio management and domestic investment management/trust is relatively small but with sizeable growth potential given the Bank s roster of high net worth customers. In 2014, combined AUM grew 25% to reach $512 million as of year-end The executive management team is very experienced with strong knowledge of customers, industries, and markets in which IDBNY operates. IDBNY s U.S. holding company has its own board of directors consisting of nine members including the CEO of IDBNY, two members from IDB Ltd.(the group CEO and the head of Israel Discount Bank of New York Page 8 September 21, 2015

9 the corporate division), and six independent board members. Independent board members have extensive financial sector experience. Overall, IDBNY scores average to strong in market strategy for its relationship-focused approach, increasing diversity in product offerings, and seasoned and conservative management team. Risk Management KBRA considers IDBNY s risk appetite to be conservative with a comparatively strong track record of loan portfolio quality. Non-performing assets remain at low levels with ample coverage by loan loss reserves. IDBNY s charge-off experience is favorable, reflecting conservative underwriting standards focused on collateral strength combined with personal guarantees from customers typically with considerable financial resources. For commercial real estate loans, average LTV ratios are conservative with solid debt service coverage. Risk management practices and procedures are comprehensive. All credits require approval by independent credit risk management. Approval levels factor in both the internal credit rating and amount borrowed. All new credits over $10 million (approximately 1% of total regulatory capital) and existing customers over $15 million require approval by the credit committee chaired by the CEO. Credit exposures over $35 million (4% of total regulatory capital) require additional approval by the executive committee of the board of directors. The independent loan review department typically reviews 40% of the loan portfolio per year in addition to targeted industry reviews. The credit portfolio is prudently monitored. Management reviews all watch list, criticized and classified credits quarterly and conducts monthly meetings to discuss/implement strategies to reduce loans warranting special attention and review all work-out credits. The chief risk officer leads weekly meetings to discuss past dues and non-accruals, overdrafts, over lines/over advances, as well as upcoming annual credit reviews and line/loan maturities. The risk management group performs a DFAST compliant stress test quarterly. In this test, IDBNY well exceeds minimum regulatory requirement in the severely adverse scenario. Stress testing capabilities compare favorably to typical U.S. banks of IDBNY s size. Overall, IDBNY scores strong in risk management for its favorable track record, comprehensive risk oversight, corporate governance, and knowledge of customers and markets. Liquidity Management The Bank maintains a strong liquidity position with relatively high proportion of liquid assets on its balance sheet combined with a stable customer deposit base. The bulk of the deposit base consists of customer deposits from both domestic and international private banking customers and middle market companies. The customer deposit base is considered stable with many longstanding customers, although private banking customer balances typically well exceed FDIC insurance coverage limits. The securities portfolio is low risk with 78% of securities AAA-rated, 95% AA- and above, and 99% A- and above. The vast majority of AAA-rated securities are U.S. agency-related MBS with the largest concentration in GNMA MBS given the favorable treatment of these issues for the Basel III liquidity coverage ratio (LCR). The Basel III liquidity coverage ratio (LCR), which currently exceeded the 100% minimum, is calculated on a daily basis. Under Israeli banking regulations, subsidiary banks of Israeli banks must comply with the LCR. The average duration of the MBS portfolio is 3.9 years and the extension risk is well contained in a rising interest rate scenario. Overall, IDBNY scores strong in liquidity management for its well-developed liquidity risk framework, solid customer deposit base, and ample ability to meet short-term liquidity requirements. Israel Discount Bank of New York Page 9 September 21, 2015

10 Economic and Regulatory Framework IDBNY operates primarily in the United States, an advanced economy with a developed banking infrastructure and a relatively good regulatory framework for the banking system. IDBNY is subject to a comprehensive system of holding company and bank supervision administered by federal and state regulatory agencies. The holding company is subject to regulation and examination by the FRB, and the Bank is subject to regulation by the Federal Deposit Insurance Corporation (FDIC) and New York State banking regulators. Banking institutions continue to adjust and comply with several additional rules and regulations resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act and the new Basel III standards. Given the advanced banking infrastructure and strict banking oversight of U.S. federal and state authorities, IDBNY has a strong score for this factor. External Support External support of IDBNY is likely in the event of need from IDB s international parent, IDB Ltd., given the strategic importance of IDBNY to the group. However, this support is not factored into ratings of IDBNY, given its solid standalone financial condition. Pursuant to the 2010 Dodd Frank Act, U.S. regulators are in the process of creating a working resolution regime for large banks so that their potential failure does not lead to a systemic crisis. However, KBRA believes that for the foreseeable future, depositories such as the Bank and their uninsured depositors and creditors will benefit from some degree of extraordinary systemic support. While we do not adjust the rating to reflect this reality, the fact that the FDIC, when acting as a receiver of a bank, can pay uninsured depositors and other creditors at its discretion creates the expectation of governmental support. 1 However, KBRA does not foresee any regulatory support being extended to the holding company level. Outlook The stable outlook for the rating reflects the resilience of IDBNY s capital and earnings to KBRA s forwardlooking economic stress scenarios. Drivers of Rating Change Rating Upgrade The Bank and its U.S. parent share a stable outlook for the mid-term and in KBRA s view, a rating upgrade in the near future is not expected. A significant improvement in profitability over time could lead to an upgrade. Moreover, favorable asset quality, comfortable liquidity, and solid capital would have to be maintained. Rating Downgrade As the Bank s ratings incorporate a certain degree of resilience based upon KBRA s stress testing, a rating downgrade in the near term is unlikely. Unexpected deterioration in asset quality and/or profitability could lead to a downgrade. In addition, more aggressive lending and/or capital management could have negative rating implications. The possibility of this occurring is considered remote given management s conservative financial and risk management practices. 1 Statement by Jeffrey M. Lacker, President, Federal Reserve Bank of Richmond before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C., June 26, Israel Discount Bank of New York Page 10 September 21, 2015

11 Copyright 2015, Kroll Bond Rating Agency, Inc., and/or its licensors and affiliates (together, "KBRA ). All rights reserved. All information contained herein is proprietary to KBRA and is protected by copyright and other intellectual property law, and none of such information may be copied or otherwise reproduced, further transmitted, redistributed, repackaged or resold, in whole or in part, by any person, without KBRA s prior express written consent. Ratings are licensed by KBRA under these conditions. Misappropriation or misuse of KBRA ratings may cause serious damage to KBRA for which money damages may not constitute a sufficient remedy; KBRA shall have the right to obtain an injunction or other equitable relief in addition to any other remedies. The statements contained in this report are based solely upon the opinions of KBRA and the data and information available to the authors at the time of publication of this report. All information contained herein is obtained by KBRA from sources believed by it to be accurate and reliable; however, KBRA ratings are provided AS IS. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, or fitness for any particular purpose of any rating or other opinion or information is given or made by KBRA. Under no circumstances shall KBRA have any liability resulting from the use of any such information, including without limitation, for any indirect, special, consequential, incidental or compensatory damages whatsoever (including without limitation, loss of profits, revenue or goodwill), even if KBRA is advised of the possibility of such damages. The credit ratings, if any, and analysis constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. KBRA receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings and from subscribers to its website. Israel Discount Bank of New York Page 11 September 21, 2015