Deutsche Bank says that while the fundamentals of Israeli banks are closer to those of banks in the US and developed Asian countries, their valuations are closer to European banks. Analyst Dan Harverd says, Israeli bank shares have been amongst the weakest globally over the past 12 months, comparable in performance only to banks with exposure to troubled sovereign credit risk, weak funding and recapitalization needs."
Harverd adds, "Stock performance has been most closely correlated to European banks (with the emerging market link finally breaking down), though amazingly the Israeli banks have underperformed European peers, especially over the past three months. We view this as curious given lower macro pressures and more stable balance sheets, and see this as the right time to take an overweight sector stance."
Harverd gives "Buy" recommendations for Bank Hapoalim (TASE: POLI), Israel Discount Bank (TASE: DSCT), and Mizrahi Tefahot Bank (TASE:MZTF), and "Hold" recommendation for Bank Leumi (TASE: LUMI).
Harverd says that the current valuation levels of Israeli banks have only been seen twice over the past decade, at the height of the global financial crisis and during the 2002 recession when GDP contracted 0.6%, the government debt-GDP ratio was over 100%, and long-term bond yields were over 10%. "By contrast the current environment appears relatively benign, with the main concern credit quality as the economy slows and the corporate bond market remains problematic. The next few quarters should see a typical credit cycle, but we do not expect pressure on equity levels."
Harverd concludes that the current low valuations for Israeli banks are "fundamentally unwarranted given their relative strength and different scale of challenges facing the systems."
Bank Leumi and Discount Bank are among the 15 worst performers over the past 12 months of the more than 200 banks covered by Deutsche Bank, and they are among the bottom five over the past three months. Bank Leumi's share price is down 46% in dollar terms over in the past 12 months and 27% in the past 3 months, and Discount Bank is down 44% and 26%, respectively.
Harverd says that the poor share performance of Israeli banks could be explicable had they been stellar performers in 2010-11, and subsequently came down from high levels, but that is not the case. More bizarrely, Israeli banks underperform their European peers in the past year, even though the latter are dealing with structural issues, such as funding sources, recapitalization, sovereign debt exposures, asset quality, regulatory challenges and the profitability of core banking operations.
Harverd discounts the main bearing argument against Israeli banks - questionable credit quality due to concentration risk to large corporates, elevated real estate prices and the difficulty of holding companies refinancing debt in the capital markets saying that the deterioration in credit quality in coming months will be no worse than in any typical credit cycle. "On a basis, the challenges facing the local banks are moderate compared to banks in economies that face an absolute contraction or stagnation in GDP," he says.
Published by Globes [online], Israel business news - www.globes-online.com - on August 9, 2012
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