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Tightening Bank Controls Tops Next Israeli Government To-Do List

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Banks probably will be next on the list of companies facing increasingly tough Israeli government regulation as politicians seek to trim the cost of living and boost competition.

Regardless of who wins the March 17 election, investors are bracing for the next administration to introduce more regulation in the private sector. Moshe Kahlon, the leader of the new Kulanu party who wants to become the next finance minister, said in a Feb. 5 Army Radio interview that he “will sit in any government that allows us to beat the banks.” Some bank fees were eliminated or reduced last month by the central bank.

“One of the new government’s main priorities will be to tackle the high cost of living,” Eldad Tamir, chief executive officer of Tel Aviv-based Tamir Fishman Group, a financial services company with more than $3 billion in assets under management, said by phone on March 8. “We’re definitely keeping our exposure to banks underweight at the moment.”

Israel Chemicals Ltd., a manufacturer of fertilizers and other mineral-based products that harvests chemicals from the Dead Sea, and Shufersal Ltd., which runs a chain of supermarket stores, were among the worst performers in the TA-100 stock index under Prime Minister Benjamin Netanyahu’s government as politicians sought to raise taxes on natural resources and spur competition in the food sector.

Increased regulation in the telecommunications and gas markets has wiped billions of shekels from the shares of listed companies in those sectors. Since February, the central bank has eliminated fees paid by account-holders for bounced checks and some charges for managing mortgages, credit card payments and issuing debit cards.

Cutting Costs

While Netanyahu’s Likud faction and the rival Zionist Union are split by approaches to the peace process, there is little disagreement about the need to increase competition in Israel’s economy. Even if Kahlon doesn’t become the next finance minister, he is almost certain to end up in the next government and be an influential voice, Steven Shein, a Tel Aviv-based trader at Psagot Investment House, said on Feb. 3.

Netanyahu told Israel Radio on Sunday he’d appoint Kahlon as Finance Minister, an offer Kahlon dismissed as “spin.” The last polls before the election show Netanyahu’s Likud party trailing Isaac Herzog’s Zionist Union party.

Kahlon, who has sought to distinguish himself as an economy-focused politician after driving down mobile phone costs by 90 percent as communications minister, has said that dealing with high housing prices and banking should be a priority. Kahlon said on March 10 he’d help new banks enter the market. In an economic plan released by his Kulanu party on Feb. 3, Kahlon proposed separating credit card companies from banks. Shares of Israel’s two largest lenders, Bank Hapoalim Ltd. and Bank Leumi Le-Israel Ltd., dropped as much as 2.1 percent and 1.9 percent respectively that day.

Reform Focus

“On the economic front there will be more emphasis on reforms, on lowering the costs for consumers,” Yair Shani, chief investment officer at IBI Mutual Funds, which manages 15 billion shekels ($3.7 billion), said by phone on March 8. “While many sectors have been targeted, one of the most prominent ones has been the banking industry.”

Hapoalim and Leumi control more than 50 percent of market share, according to the central bank. Since the “banking system is relatively concentrated,” and the main provider of financial services to households and small businesses, there is concern that there isn’t enough competition, David Zaken, the supervisor of banks, wrote in a 2013 report.

To be sure, Israeli bank valuations are attractive relative to global peers, and Idan Azoulay, chief investment manager at Tel Aviv-based Epsilon Investment House Ltd., says it’s not time to sell. Hapoalim and Leumi both have a price-to-book ratio, a measure of market price versus equity, of about 0.7. That compares with MSCI Europe Banks Index of about 1, according to data compiled by Bloomberg.

Cheap Companies

“Banks are trading at very low valuations, so it could be the market is preparing itself for this,” Azoulay said by phone on March 8. “I don’t think that their shares will be hit so much after elections if there will be a very militant finance minister.”

A lack of populist ire toward banks and barriers to entry like capital requirements will shield lenders from the kind of competition that has eroded profits in the telecom sector, Citigroup Inc. analyst Michael Klahr wrote in a note to clients last week.

Efrat Peled, the chief executive officer of Arison Investments, which holds a controlling stake in Hapoalim, said in a March 12 interview that she still thinks Israel’s banking sector “is an interesting sector to grow in.”

Falling Margins

Still, lenders are already struggling with tightening margins. The Bank of Israel has cut interest rates 13 times since 2011 to a record low to boost an economy that last year grew at the slowest pace since 2009.

A widening tax-evasion probe in the U.S. has also ensnared the country’s largest banks, including Leumi, Hapoalim and Mizrahi Tehafot Bank Ltd. Hapoalim and Mizrahi said on March 10 they had set aside a combined 291 million shekels to cover the potential costs. The provisions come after Leumi agreed to pay $400 million in December for helping American clients evade taxes.

IBI’s Shani said that while he’s not rushing to sell bank shares before the elections, he is accumulating investments in Israeli companies that operate abroad and are insulated from government intervention.

“While there won’t be any short-term solutions, the next government will emphasize reforms that lower the cost for consumers,” Shani said. “I prefer that my portfolio be focused on companies that aren’t under regulator scrutiny.”

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