Of the five big banks in Israel, Mizrahi Tefahot Bank (TASE:MZTF) is unusual. While all the other four banks count mortgage business among their other activities, at Mizrahi Tefahot, mortgage lending accounted for a significant 34% of its ordinary activity in 2007, against 2-8% at the other banks. At one time it seemed that Mizrahi Tefahot was essentially a mortgage bank which also had ordinary banking activity.
Although the name may be the same, the mortgage sector in Israel cannot be compared to that in the US. Unlike the US, the mortgage sector in Israel is characterized by a low risk profile and, like the retail banking sector, it also serves as an anchor in times of recession. While ordinary banking activity is highly sensitive to the macroeconomic situation, mortgage banking has advantages that enable it to benefit from lower volatility both in terms of revenue and in terms of provision for doubtful debts.
Mizrahi Tefahot's financial results are characterized by volatility, which, compared with that of the other banks, is fairly low. Although the bank's profitability during growth periods is moderate compared with that of the rest of the banking sector, the relative stability its profitability has maintained during times of recession compensates for this.
We feel Mizrahi Tefahot's market price reflects a discount of 26% over the current economic value of the share. We rate the share at "Outperform" with a target price of NIS 26.60.
The writer is a sell-side analyst at the research division of Psagot Investment House Ltd.
Published by Globes [online], Israel business news - www.globes-online.com - on November 11, 2008
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