Leumi After the Payout Year: What the Funding Wave Says About Capital and Funding
Leumi did not enter 2026 short of common equity. It entered 2026 with a much tighter total-capital layer just as the bank is trying to keep growing and distribute 50% to 65% of earnings. The January-March 2026 funding wave therefore reads less like stress and more like a deliberate purchase of flexibility, while also showing exactly where investors should keep looking.
The main article argued that the real debate around Leumi in 2026 is no longer whether the bank is strong, but whether post-peak-margin earnings can remain strong once the easy rate tailwind is gone. This follow-up isolates a different question: what does the January-March 2026 funding wave actually say about Leumi's capital stack and funding position? The short answer is that the pressure is not in common equity. It sits in the total-capital layer, and in management's desire to keep growing, keep distributing, and still avoid finishing with too little cushion.
That is the distinction a superficial read can miss. At the end of 2025, Leumi's CET1 ratio stood at 12.05%, above the 10.24% regulatory minimum and above the internal CET1 target of 10.85%. The presentation also showed about NIS 10 billion of capital surplus above that internal target. But the total capital ratio fell to 14.08%, against a minimum of 13.5%. Put differently, the comfort sits mostly in the top equity layer, while the layer underneath has become much tighter.
This matters precisely because the picture does not look like a liquidity squeeze. Public deposits stood at NIS 687 billion, the liquidity coverage ratio was 127%, and the leverage ratio was 6.82%, all above regulatory requirements. So the early-2026 funding wave does not look like a chase for air. It looks like active management of funding and capital layers at the same time the bank is stepping up its payout framework and still targeting credit growth.
Three Quick Conclusions
- The surplus sits in CET1, not in total capital. CET1 headroom above the minimum narrowed only slightly, from 1.93 percentage points to 1.81 percentage points. Total-capital headroom fell from 1.33 percentage points to just 0.58 percentage points.
- Tier 2 is the layer that tightened. Tier 2 capital fell to NIS 11.422 billion from NIS 13.372 billion, which is why the total-capital ratio moved much closer to the regulatory floor.
- That is why the funding wave looks like flexibility-buying, not panic repair. It spans several layers: local senior debt, commercial paper, mortgage-backed funding, and a possible additional CoCo that would count toward Tier 2.
Where the Capital Stack Actually Tightened
The key figure here is not only 12.05% in CET1, but the gap between 12.05% and 14.08% in total capital. CET1 capital rose in 2025 to NIS 67.596 billion from NIS 61.255 billion, but risk-weighted assets jumped 11.5% to NIS 561.1 billion. That is why the CET1 ratio slipped only modestly. It is a reasonable amount of erosion in a year of balance-sheet growth and capital return.
The real analytical issue sits elsewhere. Tier 2 capital fell by NIS 1.95 billion to NIS 11.422 billion, a decline of almost 14.6%. At the same time, total capital grew only 5.9%, far below the pace of growth in risk-weighted assets. The result was a drop in the total-capital ratio from 14.83% to 14.08%. That is not a number that signals systemic weakness, but it does signal a layer that now has to be managed actively rather than simply observed.
| Metric | 2024 | 2025 | What It Means |
|---|---|---|---|
| CET1 capital | NIS 61.255 billion | NIS 67.596 billion | Common equity still grew at a double-digit pace |
| Tier 2 capital | NIS 13.372 billion | NIS 11.422 billion | This is where the meaningful squeeze emerged |
| Risk-weighted assets | NIS 503.3 billion | NIS 561.1 billion | Balance-sheet growth kept pressing on the ratios |
| CET1 ratio | 12.17% | 12.05% | Only modest erosion |
| Total capital ratio | 14.83% | 14.08% | Much faster move toward the minimum |
| CET1 headroom above minimum | 1.93 percentage points | 1.81 percentage points | Cushion remained comfortable |
| Total-capital headroom above minimum | 1.33 percentage points | 0.58 percentage points | This is now a layer that needs work |
The most important note is that part of the 2026 pressure was already pulled back into the year-end 2025 numbers. The bank explains the Tier 2 decline mainly through a roughly NIS 2.6 billion drop in eligible regulatory capital instruments. Within that, two items matter. One was the early redemption of Series 403 during the first quarter of 2025. The other was a NIS 2.7 billion decline tied to the early redemption of the 2031 dollar-linked series in January 2026, which was therefore no longer recognized in regulatory capital at year-end 2025. In other words, part of the tightening was already visible in the 14.08% figure before the cash event actually happened.
The same note also explains why early 2026 should be read as a refill effort rather than a stress signal. The bank partly offset the pressure through roughly NIS 1.6 billion from the issuance of Series 406 during 2025, and through a NIS 674 million increase in the group provision that was recognized in Tier 2. This is exactly the moving piece to watch now: whether additions to Tier 2 can keep running fast enough against redemptions, payouts, and risk-weighted-asset growth.
The Payout Year Changed the Starting Point
It is impossible to read the capital layer without reading the payout framework at the same time. In 2023 Leumi returned NIS 2.3 billion to shareholders. In 2024 it already distributed NIS 3.9 billion. In 2025 capital return rose to NIS 5.9 billion, a 58% payout ratio. Then the March 2026 strategic update pushed the framing one step further: the 2026-2027 targets call for 14.5% to 16% return on equity, 8% to 10% credit growth, and a 50% to 65% payout ratio.
That is the core of the story. A bank can live with a total-capital layer that sits closer to the minimum if it slows growth or softens distribution. Leumi is choosing the opposite path. It is keeping growth ambitions alive, lifting the payout framework, and then going to market to rebuild funding and capital layers. This is not a criticism. It is simply the right way to read the sequence.
This means the early-2026 funding activity is not just a tactical answer to one redemption or another. It is needed to preserve room under a more demanding strategic framework of growth and payout. That is why the question "is there enough CET1?" is no longer sufficient. The more precise question is whether the bank has enough flexibility across the full stack to support those targets without turning total capital into the bottleneck.
Mapping the January-March 2026 Moves
The early-2026 sequence looks dense, but it is not one-dimensional. Each event touches a different layer of the structure.
| Date | Move | Size | Layer | What It Says |
|---|---|---|---|---|
| 7 January 2026 | Mandatory partial early redemption of credit-linked Series 1-4 | About NIS 177.9 million in total | Structured liability management | The redemption followed partial repayments in the underlying loans, so it reads more like contractual runoff than broad funding stress |
| 13 January 2026 | Covered-bond pricing | EUR750 million, 3.197% fixed coupon, maturity January 2031 | Mortgage-backed funding | Opens a new medium-term secured funding channel |
| 22 January 2026 | Local issuance results | About NIS 4.923 billion of immediate gross proceeds | Senior debt, commercial paper, and a deferred instrument | Leumi did not come to market with one tool, but with a multi-layer funding package |
| 18 January 2026 | Midroog rating on Series 187 | Aaa.il stable, up to NIS 1.0 billion par value | Local senior unsecured funding | The local senior layer remains clearly open and high quality |
| 4 March 2026 | Midroog rating on possible Series 407 CoCo | Up to NIS 600 million par value, Aa2.il(hyb) stable | Tier 2 | A direct option to reinforce the layer that tightened most |
The event that best explains why this should not be read as distress is actually the early-redemption report. The Series 1-4 redemption does not reflect emergency pressure. It is a built-in mechanism triggered by partial repayments in the loans underlying the instruments. That makes it contractual runoff, not a market confidence event.
By contrast, the bigger issuance steps show why it would be wrong to treat the bank's CET1 comfort as the whole story. The 22 January local deal was spread across Series 406, Series 187, and Commercial Paper Series 10, delivering about NIS 4.923 billion of immediate gross proceeds. This is not just about size. It is about layer design: maintaining a deferred capital instrument, a senior bond channel, and short-term market flexibility at the same time.
The covered-bond move matters for a different reason. After fees and issuance expenses, the proceeds were intended, among other uses, to fund loans to a wholly owned subsidiary so that it could acquire mortgage-backed loans and related collateral from the bank. In other words, Leumi did not merely raise cash. It built a dedicated mortgage-backed funding channel. That improves source diversification, but it does not directly solve the total-capital layer. It is a funding move, not a capital move.
And that leads to the most important point. The possible issuance of up to NIS 600 million in Series 407 CoCo is where the message becomes very explicit. This is not a liquidity-diversification tool. It is a regulatory capital instrument recognized as Tier 2. So if the goal is to understand what the funding wave really says, the right focus is not the generic headline of "more issuance", but the fact that the new instrument on the table in March 2026 sits exactly in the layer that had become tighter.
What the Ratings Say, and What They Do Not Say
The early-2026 rating map does not signal distress. It maps the structure. Midroog kept Leumi's baseline credit assessment at aa1.il, long-term deposits and bonds at Aaa.il, short-term deposits and commercial paper at P-1.il, and the CoCo layer at Aa2.il(hyb). Fitch assigned the inaugural covered bonds an AA- stable rating.
The first implication is that Leumi still has strong market access across almost every relevant layer: local senior unsecured debt, short-term market funding, mortgage-backed funding, and hybrid capital-recognized instruments. The second, more interesting implication is that the ratings themselves show where management is choosing to add flexibility. If a new CoCo needs to be rated, the market is getting a clear hint: CET1 may still be comfortable, but Tier 2 and total capital are the layers that now require deliberate maintenance.
Midroog's 4 March methodology note says this almost directly. The proposed CoCo sits one notch below the bank's BCA because of contractual subordination and loss-absorption features, but without an additional notch, because Midroog sees low uncertainty around reaching a non-viability point given current capital and liquidity conditions. Put simply, Leumi is not coming to market from the corner. It is coming while the starting point is still strong, which is exactly why it can act early instead of late.
Fitch's covered-bond rating is also more meaningful than the headline alone suggests. This was the first programme of its kind in Israel, with a five-year maturity, a 12-month extendible feature, and a residential mortgage cover pool of ILS3.4 billion as of 15 January 2026. Fitch based the AA- rating on an AP of 82.7% against an AA- break-even AP of 93.5%. The practical meaning is that this is not a decorative funding label. It is a channel built with meaningful structural cushion. But it is still a funding cushion, not a substitute for Tier 2 capital.
Conclusions
The right reading of January to March 2026 is neither "Leumi is under pressure" nor "Leumi simply took advantage of a window". A more accurate reading is that Leumi is buying itself flexibility exactly where the payout year and redemptions reduced it. With CET1 at 12.05%, about NIS 10 billion above the internal target, an LCR of 127%, and a leverage ratio of 6.82%, this is not a story of common-equity scarcity or liquidity stress. But with a total-capital ratio of 14.08% and only 0.58 percentage points of headroom above the minimum, it is also not a layer that can be left on autopilot.
Current thesis: the early-2026 funding wave says Leumi still has excellent market access, but it also says management understands that 2026-2027 flexibility will be determined less by whether there is enough CET1 and more by whether Tier 2 and long-term funding can be replenished fast enough against payout, redemption, and risk-weighted-asset growth.
What would strengthen that read? A renewed widening in total-capital headroom, execution of Series 407 or an equivalent instrument, and repeated use of the covered-bond channel so that it becomes a recurring tool rather than a one-off opening trade. What would weaken it? A situation in which payout stays at the top of the range, credit keeps growing, but the total-capital layer remains narrow and needs too much frequent maintenance through the capital markets.
So if the main article asked whether Leumi could sustain exceptional profit after peak margin, this continuation asks a different question: how much flexibility has the bank really bought in order to do that while still distributing capital? For now the answer is positive, but not costless, and certainly not without one ratio deserving much more attention than the CET1 headline.
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