In a new survey, Clal Finance Batucha analyst Yuval Ben-Zeev recommends buying bank shares, after a long period in which bank shares were virtually untouchable.
Ben-Zeev says, "The opportunities in bank shares outweigh the risks. Prices for bank shares give great weight to the risks, but do not take into account the banks' long-term profitability.
Ben-Zeev's top picks are Bank Hapoalim (TASE: POLI; LSE:80OA) and Mizrahi Tefahot Bank (TASE:MZTF), followed by Bank Leumi (TASE: LUMI), Israel Discount Bank (TASE: DSCT), and First International Bank of Israel (TASE: FTIN1;FTIN5).
He cites three reasons for his recommendations. First is the rise in credit margins over the past year by an average of over one percentage point, which he estimates will boost the banks' revenue by 10%. This has created great value in the banks' credit portfolios, which will be reflected in the coming years.
Second is the decline in risk in the banks' securities portfolios, which was the banks' main weakness in 2008. The risk has fallen because of measures initiated by the banks to lower the risk, as well as measures to stabilize the global financial system by governments.
The third reason is that bank shares are now cheap, trading at a capital multiple of 0.68, which while higher than their multiple of 0.5 at the beginning of the year, still gives too much emphasis to short-term fears.
Ben-Zeev recommendations take the banks' capital adequacy ratios into account. First International Bank has already reached the Bank of Israel mandated the minimum capital adequacy ratio of 12%. Ben-Zeev believes that Bank Hapoalim, Bank Leumi, and Mizrahi Tefahot Bank will also reach the 12% threshold by mid-2009.
As for Discount Bank, even after raising capital in recent weeks, he says that it "still needs to raise NIS 2 billion, and there is a good chance that the bank will have to raise share capital and slow the growth in its credit."
Ben-Zeev believes that the main risk facing the banks is credit, although he wryly observes, "Every bank believes that it is comfortable with its credit portfolio, and that it has taken a conservative policy with regard to credit and provision for doubtful debts."
Published by Globes [online], Israel business news - www.globes-online.com - on April 16, 2009
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