- Lenders remain `undervalued' after outperforming global peers
- Government policies to boost competition remain key risk
Israel’s biggest money managers are touting the nation’s banking shares as the cheapest valuations in a year outweigh the threat to lenders’ profits from government efforts to boost competition in the industry.
Psagot Provident Funds & Pension Ltd. and Meitav DS Investments Ltd. are recommending investors buy Mizrahi Tefahot Bank Ltd. and other local lenders including Bank Hapoalim Ltd. that have outperformed global peers in the past year. The price-to-book ratio for the five members in the Tel Aviv Banking Index was 0.73 on Monday, below its 10-year average of 0.95 and compared with 1 for the MSCI World Bank Index, according to data compiled by Bloomberg.
Shares of Israeli banks have declined 5.4 percent since the central bank and the Finance Minister Moshe Kahlon set up a panel in June to boost competition in an industry dominated by the five lenders. While the policy shifts threaten to curtail earnings, a lot of the downside is already priced into equities, according to Rafi Niv at Meitav, who also favors First International Bank of Israel Ltd.
“Prices are very cheap compared to the return banks offer,” according to Niv, who manages a 30 billion-shekel ($7.7 billion) fund for Meitav, the country’s second-largest money manager. “The reforms are expected to hurt banks’ profitability, but the low valuations already incorporate the bad news.”
Return on equity for the nation’s lenders was estimated to be 9.1 percent this year, similar to the return of global peers which are more expensive.
As part of the industry revamp, Kahlon’s panel proposed making cheaper credit available to small businesses and households by encouraging new entrants into the market and by separating banks from their credit-card units. A centralized credit register will make credit information on individuals, once the sole domain of the banks, available to competitors.
Credit card companies can quickly become Internet banks, Kahlon said at a Tel Aviv conference on Monday, adding that he favors selling such companies to the public on the stock exchange. The Tel Aviv Banking Index closed 0.3 percent lower, bringing its decline this month to 2.2 percent.
While “regulatory headwinds” will challenge banks, Amir Gil, who manages 66 billion shekels as chief investment officer at Psagot, part of the nation’s largest investment house, said valuations are too low. He’s recommending Bank Hapoalim and Israel Discount Bank Ltd. among his top picks.
“There is an investment opportunity here, especially in the short term,” he said by phone.
Israel’s five largest banks, which hold about 95 percent of total bank credit in the country, have already seen non-banking institutions take half of their market share of corporate loans after a reform that started 10 years ago separated them from their provident funds. Now, as the focus of the regulator shifts to easing terms for consumers, they risk losing share also in the 140 billion shekels consumer market, which is their second fastest growing market and one of their most profitable, said Meir Slater, head of research at Bank of Jerusalem Ltd.
Ofra Preuss, a spokeswoman for Bank Hapoalim, and Lee Neumann, a spokesman for Bank Leumi, both declined to comment, as did Udi Nachshon, a spokesman for the Association of Banks in Israel.