UBS finds that Israel's banks are under increasing pressure as they will need to increase their Tier 1 capital and raise provisions for problem debts, even as a weakening global economy and capital markets lead to investment write-offs.
UBS analysts Darren Shaw and Rami Myerson call 2009 "really problematic" for banks, and are not confident that 2010 will be better.
The analysts point out that Israel's banks have the lowest Tier 1 capital of any global emerging markets banks.
UBS cuts its price target forecasts for Isael's four largest banks, and lowered its recommendation on Israel Discount Bank (TASE: DSCT) to "Sell" from "Neutral". Discount Bank's target price was lowered 25% to NIS 3, from NIS 4. The target price for Bank Hapoalim (LSE: BKHD; TASE: POLI) was cut 15% to NIS 8.50 from NIS 10, Bank Leumi's (TASE: LUMI) target price was cut 6.7% to NIS 7 from NIS 7.50, and Mizrahi Tefahot Bank's (TASE:MZTF) target price was lowered to NIS 21 from NIS 22.
The UBS analyst forecast that the banks will need to raise further capital to cope with asset write-downs, risk of higher provisions than in the 2002 recession and to facilitate loan growth, saying "We believe the current capital adequacy ratios are insufficient relative to other banks globally. We believe that stabilizing the Israeli financial system could include a move to 10% Tier 1 to protect the system, compared to the 8% target for December 2009." They estimate the system will need nearly NIS 22.5 billion cash to reach those ratio levels.
Shaw and Myerson find that the capital needed by the banks will be raised from controlling shareholders or from the government .They add that neither the shareholders nor the government probably want to inject more capital at this time.
The banks may have to continue writing down the value of investment securities they own. UBS explains that all the Israeli banks have securities portfolios which include government and corporate bonds, MBSs and ABSs as well as equities and they believe that there could be more write-downs within these portfolios. Except for possibly Mizrahi, they say that "the banks could have to write down the value of their bonds and other assets, either on a mark-to-market value or with a permanent diminution of value. In addition, the banks have stakes in other companies, such as Bank Hapoalim’s near 10% stake in Clal Insurance or Delek Real Estate, and we believe these may need to be written down."
UBS also warns that provisions for problem debts could reach or surpass the levels of the 2002 recession.
Published by Globes [online], Israel business news - www.globes-online.com - on February 19, 2009
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