Is another bank merger brewing? One of the ideas recently mooted is a merger between two small banks, Dexia Israel (Public Finance) Ltd. (TASE:DXIL), and Bank of Jerusalem (TASE: JBNK), through a share swap. Such a merger would create a bank with shareholders' equity of NIS 900 million, a high capital adequacy ratio, and diversified revenue sources.
The Bank of Jerusalem is controlled by the Shoval family which holds 82.3% through Export Investment Corp. Ltd. At the head of the family is politician and businessman Zalman Shoval, while his son Gidi is CEO of Export Investment Corp. The bank is traded at market cap of NIS 428 million, reflecting a capital multiple of 0.88. The Bank of Jerusalem now generates a return on equity of 12.1%, and has a capital adequacy ratio of 11.1%. This will rise with the transition to Basel II - The New Basel Capital Accord of the Basel Committee on Banking Supervision, since the bank's credit portfolio consists primarily of mortgages. Dexia Israel, which is 65% held by Franco-Belgian bank Dexia Groupe (Paris: DX; Brussels: DEXB), has just one branch, specializing in credit services to the municipal sector. The bank is traded at a market cap of NIS 277 million, reflecting a capital multiplier of 0.66. Gidi Shoval said in response that "the idea sounds as interesting as the other opportunities on the market for the Bank of Jerusalem's further business expansion." Dexia Bank declined to comment.
A merger between Dexia Israel and the Bank of Jerusalem would create a controlling core, with the Shoval family owning a 45% stake in the merged bank and Dexia Israel holding 30%. This structure would enable the controlling shareholders to lower their joint stake to 51% and raise additional capital to drive rapid growth.
The rationale for the merger is that these two small banks complement each other. While Dexia Groupe has gone on record as stating that it sees its Israeli subsidiary as a strategic holding that would enable it provide financial backing for infrastructure projects, in practice Dexia Israel is at a disadvantage because of its size, and has struggled to generate a reasonable return or value for its owners.
The merger would contribute to the stability and profitability of both banks, since Dexia's weakness would be counterbalanced by the Bank of Jerusalem's robustness. It would also reduce the disadvantage that both banks suffer from because of their size, create a larger activity platform, reduce fixed expenditure, and, as a result, raise profitability.
Published by Globes [online], Israel business news - www.globes.co.il - on December 31, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007