Even as many analysts have been advising investors to buy Israeli bank shares in the past few days, citing the banks' multiples and low prices, UBS has published a comprehensive review on the banks about what it calls "The bad, good, and unknown."
UBS analyst Roni Biron starts with the bad news: "We expect economic deceleration coupled with core tier-1 targets and pending banks regulations to weigh on return on equity performance and deny dividends in the coming years." He expects stricter banking regulations and capital adequacy targets, which coupled with a slowing economy to have an adverse impact on loan growth, fees, and provisions. He expects Bank of Israel tier-1 capital targets to dictate a more selective loan growth and deny any dividend payments in the coming years, and that the pending Zaken committee recommendations to drive a significant reduction in fee income (NIS 600-800 million), compounding the impact on the banks' return on equity. That said, we do not expect the same radical measures we saw in other Israeli sectors as the Bank of Israel seeks to maintain economic stability. We believe the banks will work to mitigate the top-line headwinds by focusing on the retail and middle-market segments, higher interest margins in the corporate segment, and cost optimization.
UBS expects GDP growth to decelerate to 3.0% in 2012 and 3.5% in 2013 from 4.8% in 2010 and 2011.
The good news, according to Biran, "We believe these headwinds are already in the price and see current valuation as undemanding."
The unknowns are the downside risks of geopolitics and the Eurozone, and the potential catalyst of Israel’s possible inclusion in MSCI Europe. UBS notes, "The increased headlines over a potential conflict between Israel and Iran have adversely impacted share performance on the TASE. While difficult to predict the likelihood of such an attack and its implications, this scenario remains an overhang over the sector’s performance."
As for the MSCI Europe Index, says that while Israel's inclusion in the index is still undecided, "a potential inclusion would be a positive catalyst, in our view, due to the passive inflows and a much needed dedicated investor base."
Biran upgrades his recommendation for Mizrahi Tefahot Bank (TASE:MZTF) to "Buy" and raised his target price from NIS 37 to NIS 43, saying that it is a "defensive growth proposition".
Biran cut his recommendation for Bank Leumi (TASE: LUMI) from "Buy" to "Neutral" and cut his target price from NIS 13.30 to NIS 10.30. He reiterated his "Buy" recommendation for Israel Discount Bank (TASE: DSCT) and his "Neutral" recommendation for Bank Hapoalim (TASE: POLI. He cut his target price for Discount Bank from NIS 7.60 to NIS 5.40, but raised his target price for Bank Hapoalim from NIS 14 to NIS 14.30
Biran concludes, "Notwithstanding exogenous factors such a geopolitical event or dramatic Eurozone developments, we believe Israeli banks trade at attractive levels given their economic backdrop. The economy in Israel is expected to grow by around 3% in 2012 with a relatively low sovereign risk and a liquid banking system." He adds, "We believe the sector is heading into a challenging year, in which cost rationalization will be required to make up for slowing trends and capital preservation… We believe the economic backdrop for the Israeli banks compares favorably to many European countries from growth and risk perspectives while lagging behind on cost/income. Israel does not suffer from a significant sovereign risk and despite an increase in the budget deficit it maintains a relatively balanced economy."
Published by Globes [online], Israel business news - www.globes-online.com - on August 21, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012