HSBC has reiterated its "Overweight" ratings for Israel's big two banks, Bank Leumi (TASE: LUMI) and Bank Hapoalim (LSE: BKHD ; TASE: POLI). In a report dated January 13, the bank's emerging market bank analysts Mark Rorison and Nadia Kabbani have raised their price target range for Hapoalim, from NIS 25.8-30.8 to NIS 28.8-34.4, and maintained the target for Leumi at NIS 23.8-27.8. The price targets are for the end of 2007. Hapoalim shares are currently at NIS 21.60 on the Tel Aviv Stock Exchange, and Leumi shares at NIS 17.80.
"A continued improvement in the economy, falling provision charges, large cash inflows from asset sales and high dividend yields, we think underpin valuations. Israeli banks rank among the cheapest banks in our EMEA universe, on 2006 estimated earnings, and a potential dividend yields of 8-10%," Rorison and Kabbani write.
"We agree with Hapoalim’s positive statement, targeting ROE of c.25% for 2006, including asset sales, 15% from underlying earnings. Reflecting greater gains than we had modelled, and better margin, we have increased our 2006 net profit estimate by 23% and underlying earnings by 6%.
"As a result we have raised our notional end-2007 valuation range from NIS 25.8-30.8,with mid-point NIS 28.1, to NIS 28.8 34.4, with mid point NIS 31.4.This implies upside potential, also suggests Hapoalim would trade at a forward PER rating of 10.8x at end-2007, and the total return is made more attractive by a potential dividend yield of 10% in 2006.
"We maintain our rating and valuation range for Leumi. This range for end-2007 is NIS 23.8-27.8, and notional mid-point of flexed assumptions of NIS 25.6. At this price Leumi would trade at an estimated forward PER of 11.5x at end-2007, and the total return is made more attractive by a potential dividend yield of 8% in 2006.
"We reiterate our Overweight ratings on Hapoalim and Leumi and look for end-2007 mid-range valuations that are some 40-50% higher than current price levels.
HSBC is undeterred by the political upheavals of the past few months in Israel, and by the situation following the hospitalization of Prime Minister Ariel Sharon. HSBC sees a Kadima victory in the upcoming Israeli election, and says that, as far as economic policy is concerned, it will make little difference which other parties are brought into the coalition.
"2006 should then be another year of robust economic growth. We expect GDP growth of some 4.2%, after close to 4.6% growth for 2005. Interest rates may be a bit kinder than we expect, since the market now thinks US rates are likely to be softer than thought a month ago. This should mean a continuation of growth in the retail lending segment, with employment improving. In their Q3 results, although the banks showed no overall loan growth they reported consumer lending up some 15 to 20% year-on-year," HSBC's report says.
"In 2006,with improving asset quality, there should not be such a decline in larger corporate assets, but continue the shift in mix towards better yielding customer assets, which should help to keep the margin firm," the analysts say.
Published by Globes [online], Israel business news - www.globes.co.il - on January 16, 2006