Deutsche Bank analyst Dan Harverd says that Mizrahi Tefahot Bank's (TASE:MZTF) management predicts that the growth in mortgages will slow to single digits in 2012-13 in the wake of the Bank of Israel's latest directive on mortgages. However, Mizrahi Tefahot Bank also believes that the new directive will improve spreads and will therefore not affect profits from its mortgage business. The managers added that the solution to rising home prices should come from a return to positive real interest rates and increased supply.
Harverd reiterated his "Buy" recommendation for Mizrahi Tefahot Bank with a target price of NIS 51, a 39% premium on today's opening price. He says that the bank's return on equity target of 15% is achievable, but not yet priced into the share.
Deutsche Bank hosted Mizrahi Tefahot Bank CFO Eldad Fresher in London last week. Mizrahi Tefahot Bank is Israel's largest mortgage bank, issuing NIS 16 billion in new mortgages in 2010.
Harverd said that Mizrahi Tefahot Bank believes that it can meet its target of 6-7% overall annual credit growth by increasing corporate credit because Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI) are nearing the regulatory lending limits with Israel's large holding companies, and by maintaining non-mortgage retail credit growth.
Harverd quotes Fresher as saying that the Bank of Israel's directive restricting the variable component of mortgages to one third of the total will shift the mortgage mix from low-margin prime-linked mortgages to more complex fixed-rate that generally carry a higher margin. Harverd notes that prime-linked loans accounted for half of mortgages issued last year (though less at Mizrahi) and had become a commodity product due to price competition, and that most of Mizrahi's new mortgages were low volume low risk weighted loans while it has maintained margins, suggesting a prudent approach.
Harverd said, "The Bank of Israel voiced concern that banks are not generating enough profit from mortgage loans to build up provisions. We view this as implying that the regulator would be comfortable to see higher mortgage margins and note that Mizrahi is the exception with sector-high return on equity."
Mizrahi Tefahot Bank's share price rose 2.3% by early afternoon to NIS 37.42, giving a market cap of NIS 8.2 billion.
Published by Globes [online], Israel business news - www.globes-online.com - on May 11, 2011
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