With growing optimism on Israel's economy, investment house Barclays Capital has upgraded its rating for the local banking sector to "Neutral" from "Negative". Saying Bank Leumi (TASE: LUMI) has the "top position" now in the industry, Barclays upgraded the bank to "Overweight" from "Underweight".
Barclays analyst Joseph Wolf says that three items were the primary focus for the banking industry earlier in the year, and apparently none of the three has turned out to be as bad as feared. The issues were doubtful debt provisions, capital adequacy ratios (CAR), and corporate bond repayments.
With a low number of actual bankruptcies in Israel, Barclays says that while banks provisions for problem debts did jump, they are now at reasonable levels.
Barclays is also impressed that the banks have been able to raise funds on the capital markets, and have not had to turn to a government-backed option. Wolf finds that the Israeli banks will all be able to reach the 12% Bank of Israel target for capital adequacy ratio by the end of 2009. He says that Mizrahi Tefahot Bank (TASE:MZTF) probably does not have to raise any more capital this year.
The issue of companies paying back large loans is still up in the air, since many of the repayments are due in the second half of this year, but Wolf is encouraged by the fact that there hasn't been "frantic borrowing" ahead of repayments.
Wolf does point out that it is possible the rally will "run out of steam", and that international investors stay away from banks, as most will not pay a dividend until mid-2010 at the earliest.
Wolf eased his earlier concerns about Bank Leumi - uncertainty about the stake held by Cerberus and Gabriel and the financial results of firms in which it has large stakes since Cerberus and Gabriel have now sold their entire stake in the bank, and he thinks that companies such as Israel Chemicals Ltd. (TASE: ICL) and Israel Corp. (TASE: ILCO) subsidiary Zim Integrated Shipping Services Ltd. are near their bottom.
Barclays also upgraded Bank Hapoalim (TASE: POLI), to "Equal weight" from "Under weight", as management issues have been sorted out. However, Barclays is still unconvinced about Hapoalim's unclear strategic direction.
Wolf says that Israel's economic slide, and beginning recovery, are both primarily dependent on the global economic situation. "In our opinion, the current recession in Israel is almost 100% imported. The credit crunch, sub-prime lending, and housing bubbles that are the oft-cited reasons behind this recession are phenomena that do not describe the situation in Israel. Banks never relaxed lending standards for the housing market and loan-to-value for mortgages start at a globally low 60%. Housing prices did not rise to unrealistic levels in most areas and supply and demand for residential housing is fairly well in synch. In point of fact, the contraction of the economy has been caused almost entirely by the demand slowdown in the US and Eurozone and there have been no structural defects found in the local economy. We therefore believe that the export-driven nature of the Israeli economy will be supportive of a US-led sharp recovery."
Published by Globes [online], Israel business news - www.globes-online.com - on June 24, 2009
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