KBRA Affirms Ratings for Israel Discount Bank of New York

KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for New York City-headquartered, Israel Discount Bank of New York (“IDB Bank” or “the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

IDB Bank’s ratings remain supported by a conservative balance sheet profile – notably, its earning asset mix, as well as solid core capitalization (CET1 recently tracking at ~14%) – along with favorable asset quality performance historically. Established in 1980 as a core, wholly-owned subsidiary after decades of operating as the New York branch of Tel Aviv-based, Israel Discount Bank Limited ("IDB Ltd."), the parent company sold a 15% interest in IDB Bank’s U.S. holding company, Discount Bancorp, Inc., to investment firm, Gallatin Point Capital (“Gallatin”) in August 2024. While IDB Bank has been and continues to be managed independently under U.S. regulation, the Gallatin investment, which includes a Board seat in the U.S. subsidiary, is expected to contribute an additional independent, domestic strategic perspective to further enhance IDB Bank's operating profile.

Like most NY-based institutions, as well as other industry peers, IDB Bank’s recent performance during 2024 (ROA of ~0.65% for 9M24) has been somewhat constrained by the challenging interest rate environment, further magnified by ultra-competitive deposit markets. With that said, the ongoing conflict in Israel and surrounding areas has seemingly not impacted the bank's performance in a discernible way, though KBRA continues to monitor any potential impacts from heightened geopolitical risks.

Given its ownership structure, with IDB Bank’s Israeli parent operating under the Bank of Israel's Basel III regulatory capital and liquidity rules, the New York subsidiary integrates key elements of these standards into its own risk management framework, including adherence to the Liquidity Coverage Ratio (LCR) and active management of High-Quality Liquid Assets (HQLA). As a result, the bank's balance sheet is constructed more conservatively compared to most banks in its rating group. Furthermore, this conservative approach, combined with rigorous stress testing—maintaining the core framework of Dodd-Frank Act Stress Tests (DFAST), despite no regulatory requirement to do so—has consistently supported strong asset quality. Favorable credit performance notwithstanding, like many peers, IDB Bank has reflected a modest increase in charge-off activity during 2024 compared to prior years. However, the uptick in NCOs remains well-below historical levels and slightly lower than the peer average. Moreover, this has been driven by idiosyncratic problem loans that are in the process of liquidation and are not, in our view, indicative of systemic issues or underwriting weakness.

Historically, IDB Bank’s ratings remain somewhat constrained by below-peer reported profitability; partially a by-product of the low-risk nature of the balance sheet. However, also impacting returns, particularly during the recent period of higher interest rates, has been noted deposit competition within the NYC and other urban markets served by the bank's branch-lite business model, resulting in relatively high aggregate deposit costs. While IDB Bank remains core and is considered strategically important to its Israeli parent, for the purposes of the development of the bank’s ratings, KBRA does not incorporate external/parental support as a core factor. The bank has independent corporate governance separate from its Israeli parent, though we consider the bank to benefit from synergies stemming from its ultimate parent, including access to strategy, treasury, information/cyber security, and risk management.

Rating Sensitivities

Given the Stable Outlook, a rating upgrade is not expected in the near to medium term. However, sustained improvements in core earnings performance while maintaining similar risk and liquidity profiles could support positive rating momentum over time. Deterioration in asset quality, earnings, or capital (global conflict driven or otherwise), beyond KBRA's expectations, to below peer averages could result in negative rating action.

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Methodologies