March has been an extremely difficult month for financial equities. With only a few days remaining in the month, bank shares in the United States are down more than 26% due to the collapse of Silicon Valley Bank (US:SIVB) and New York’s Signature Bank (US: SBNY).
It’s not much better in Europe, where Credit Suisse’s (US: CS, CH: CSGN) problems compelled the Swiss government to intervene and bring in competitor UBS as a rescuer (US: UBS, CH: UBSG). Yet last week, German market leader Deutsche Bank (US: DB, DE: DBK) alarmed investors with fears of a widening contagion. According to the KBW Nasdaq Global Bank Index, global banks have fallen by 14% so far this month.
Exist locations where bank stocks have been profitable for investors?
Yes. In Israel, the Tel Aviv-traded shares of the country’s five largest banks have increased by close to 7 percent through March 27. And if analysts are accurate, some of the companies have 50% more upside potential.
Rate Hike Help
A brief introduction to the nation’s banks: Bank Leumi (IL: LUMI, US: BLMIF) is the largest lender in the country, followed by Bank Hapoalim (IL: POLI), Discount Bank (IL: DSCT, US: ISDAY), Mizrachi Tefahot (IL: MZTF), and First International Bank of Israel (IL: MZTF) (IL: FIBI).
The five banks released papers in March detailing the impact of central bank rate rises since this time last year. The Bank of Israel has authorized a series of rate hikes that have increased the prime lending rate to 4.5% this month from 0.1% in April of last year. The upshot has been a substantial increase in lenders’ financing income.
Hapoalim started off the results season by reporting a net profit for the fourth quarter of 2022 that was nearly double that of the same time the previous year. In the three months ending December 31, 2022, the country’s second-largest lender generated a net of 1,76 billion Israeli shekels ($487 million), compared to 934 million shekels a year earlier. The bank is distributing a dividend of 525 million shekels, equal to 30% of its net profit for the fourth quarter.
A week later, Leumi reported a 60% increase in quarterly net income, from 1.5 billion shekels in 2021 to 2.3 billion shekels in 2022.
Discount Bank’s net interest income climbed by 33% in 2022, resulting in a record year. Its rise was aided by credit expansion that exceeded 13%. The bank’s operating efficiency, as measured by its return on equity, was 15.1%.
First International or FIBI posted comparable results, with a net income of 536 million shekels for the fourth quarter. The bank’s board of directors decided to distribute 50% of net earnings as a dividend to stockholders.
Hence, despite the outrage over Prime Minister Benjamin Netanyahu’s efforts to “reform” the country’s court and the accompanying mass strike and protest that almost paralyzed the country on Monday, Tel Aviv bank stocks appear rather desirable. Why?
Global Resistance
Barclays analysts provided an extremely favorable appraisal of Israel’s banks earlier this month, predicting a 50% increase in the share prices of LUMI, POLI, and DSCT.
Loan growth will accelerate in the next years. The country’s strong resistance to global economic shocks could help banks achieve a return on equity between 13 and 17 percent this year. This is one of the reasons why investors should pay attention.
This study followed the S&P Global Israeli banks forecast issued last month, which predicted that the country’s economy will be “more dynamic than peers” and that banks “will profit from the economy functioning better than that of the majority of global peers notwithstanding a slowdown in 2023.”
What bolsters S&P’s argument?
In the first place, banks’ underlying profitability is robust thanks to efficiency gains and rising interest rates. Capitalization of the banking sector might expand in 2023 if earnings increase, although dividends and growth are anticipated to mostly absorb new capital formation.
As for risks, analysts note a significant exposure to real estate — construction, mortgages, and real estate operations — as a major worry, although they anticipate that solid credit underwriting will alleviate some of the possible issues. In addition, default rates are projected to increase in the next year, albeit to relatively modest levels, since consumers’ capacity to repay may be hampered.
Four of the five bank stocks are in the top 10 holdings of the two broad index exchange-traded funds focused on Israel-based firms; FIBI appears lower on the holdings lists of the VanEck Israel ETF (US:ISRA) and the iShares MSCI Israel ETF (US:EIS).
