Deutsche Bank sees mortgage lending expanding further

Analyst Dan Harverd: Despite denials, we believe Mizrahi Tefahot Bank will merge with First International Bank.

7 December 10 11:50, Adi Ben-Israel

"Third quarter results suggest that the banks are entering an era of low provisioning that we expect to last through 2013," says Deutsche Bank analyst Dan Harverd in a new review of the Israeli banking industry. He also expects a further increase in mortgage lending, but cautions that the banks' rising p/e multiples require a "selective" approach.

"We expect mortgage lending to continue to expand, with Mizrahi Tefahot Bank (TASE:MZTF) maintaining its high share and attractive margins. Increased development activity and government plans to cut red tape point to a higher supply pipeline in the mid-range segment of the housing market, the sweet spot for mortgages," says Harverd.

Harverd adds, "While Mizrahi has denied press reports that it is in merger talks with First International Bank of Israel (TASE: FTIN), we believe the deal could provide access to retail deposits, improve liquidity and enable cost synergies."

Harverd's stock picks are Mizrahi Tefahot Bank and Bank Leumi (TASE: LUMI), saying that they are "the main beneficiaries of expected sector trends." He also raised his target price for Mizrahi Tefahot Bank from NIS 42 to NIS 51, a 32.8% premium on yesterday's closing price,

Harverd says that net provisions at Bank Leumi will be lower than its peers in the coming years. He notes that Bank Leumi’s provisions have been the highest of the banks since the financial crisis, and that it has a track-record of a higher recovery rate (38% since 2004). Recoveries have been on the rise at Bank Leumi while declining at Bank Hapoalim (TASE: POLI) - Leumi has recovered 2.5 times more bad debt since the start of 2009 than its main rival. He says that there were some signs of under-provisioning at Bank Hapoalim and Israel Discount Bank (TASE: DSCT) during 2010, which has had a positive impact on short-term profitability levels, but could represent a long-term drag.

Harverd reiterated his target price for Bank Leumi of NIS 17.50, raised the target price for Bank Hapoalim to NIS 18.40 from NIS 18, and cut the target price for Discount Bank to NIS 7.50 from NIS 7.60.

Mizrahi Tefahot Bank's share price rose 1.5% by midday to NIS 30.96. Bank Hapoalim's share price rose 1.2% to NIS 18.22, Bank Leumi's share price rose 0.7% to NIS 17.89, and Discount Bank's share price rose 1.7% to NIS 7.91.

Published by Globes [online], Israel business news - www.globes-online.com - on December 7, 2010

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