Citi Research analyst Michal Klahr today cut his recommendations for Bank Leumi (TASE: LUMI) and Israel Discount Bank (TASE: DSCT), only reiterating his "Buy" recommendation for Bank Hapoalim (TASE: POLI), citing the sharp slowdown in the Israeli economy, which will affect the banks over the next two years.
"We see the outlook for the Israeli banks worsening in the second half of 2012 and 2013 as the local economy weakens," says Klahr. "Tax receipts are falling. Food retail and auto sales are declining. The housing market is slowing. June CPI was minus 0.3% month-on-month. All suggest a major slowdown in domestic demand. Exports are also likely to remain under pressure due to ongoing issues in Europe. Volumes for both credit and fees are likely to slow, with non-performing loans and provisioning going higher."
Klahr cut his earnings forecasts for the banks for 2012-13 by 40%, and cut his recommendations for Bank Leumi and Discount Bank from "Buy" to "Neutral". He kept his "Buy" recommendation for Bank Hapoalim, citing its "superior core banking return on equity (5 percentage point difference to Leumi in 2011) and higher target price to book ratio (p/B) according to our estimates."
Bank shares have fallen sharply in the past year, and are traded at historically low capital multiples, causing some investors and analysts to believe that a buy opportunity has been created. However, Klahr believes that the low multiples reflect the prospect of a a major economic slowdown, a scenario he believes will materialize. For example, Discount Bank is traded at a multiple of 0.36 on capital, lower than the 0.4 multiple in the great crisis in 2008, following the collapse of Lehman Brothers.
Klahr cut his target prices as follows: Discount Bank from NIS 7 to NIS 4; Bank Leumi from NIS 18.10 to NIS 9; and Bank Hapoalim from NIS 19 to NIS 15.60.
Klahr cut his earnings per share forecasts as follows: Discount Bank from NIS 0.83 to NIS 0.62 in 2012, and from NIS 0.92 to NIS 0.62 in 2013: Bank Leumi from NIS 0.2/09 to NIS 1.03 in 2012, and from NIS 2.02 to NIS 1.01 in 2013; and Bank Hapoalim from NIS 2.46 to NIS 1.73 in 2012, and from NIS 2.36 to NIS 1.62 in 2013.
Bank Hapoalim's share price fell 0.8% in morning trading to NIS 11.04, Bank Leumi's share price fell 0.4% to NIS 8.96, and Discount Bank's share price fell 1.1% to NIS 3.67.
Published by Globes [online], Israel business news - www.globes-online.com - on July 24, 2012
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