The banks will publish poor, indeed dismal, financial reports for the third quarter of 2011, Leader Capital Markets analyst Alon Glazer believes . "The profits at all the banks will fall very sharply. Except for Mizrahi Tefahot Bank (TASE:MZTF), all the banks will probably present small profits for the third quarter," he says.
Glazer says that it is very hard to offer accurate forecasts about the quarterly results because of greater than usual uncertainty. He nevertheless believes that in every scenario, all five big banks will report very low profits, and that their return on equity will be negligible to middling.
Glazer cites eight problems that are adversely affecting the banks' results:
- An increase in provisions for doubtful debts.
- Large provisions for leverage credit granted for takeovers.
- A drop in the recovery rate (lower past provisions).
- Losses on derivatives.
- Declines in nostro securities portfolios, due to the market crisis.
- A blow to regular banking business, due to the economic slowdown.
- A drop in income on securities fees, due to falls on the TASE.
- A reduction in credit card activity.
"All the banks will be hit by these problems. In addition, each bank has its own unique problems," says Glazer. "For example, Bank Hapoalim (TASE: POLI) will report a heavy loss on its derivatives position, which was hurt by its exposure to leveraged credit (credit granted for company takeovers where the collateral is the shares in the companies, E.P.)." He therefore believes that Bank Hapoalim will produce a weak financial report, with a single-digit return on equity.
The situation at Bank Leumi (TASE: LUMI) is no better. Glazer says that the bank is liable to absorb losses on its securities portfolio, which has foreign exposure that is several times greater than that of other banks. However, banking sources believe that most of the reduction in value in Bank Leumi's securities portfolio will be to a capital fund, and will not directly affect profit. "There is a big question mark over Israel Corporation (TASE: ILCO) and the impact of Zim Integrated Shipping Services Ltd. on Bank Leumi's results," says Glazer.
Glazer notes another problem that is mainly relevant for Bank Leumi, although it will also affect both Israel Discount Bank (TASE: DSCT) and First International Bank of Israel (TASE: FTIN): losses by employees' severance funds. The three banks set aside severance and pension money in favor of employees through a special provident fund that the bank manages. Each quarter, the bank draws on a balance sheet of the employees' pension liabilities for severance and the severance fund's assets. If the fund has a surplus yield over the pension liabilities, the bank has the right to use the surplus and recognize it as income. But if the accumulated assets in the fund are less than the pension liabilities, the bank makes up the difference from its income, recording the expense in its profit and loss statement.
The employee severance funds at the three banks currently manage NIS 5.5 billion in assets, half of which is at Bank Leumi's fund. Since the provident fund market had a negative yield of 5-6% for the third quarter, the banks will probably have to set aside at least NIS 300 million in favor of their employees. This expense will reported in the banks' profit and loss statements, and will affect their results.
Glazer is unperturbed by the situation at Mizrahi Tefahot Bank. "It's all honey at Mizrahi," he says. "The bank has been almost unaffected, it has almost no loans to controlling shareholders, it has no severance fund. In a quarter in which all the banks are generating very low returns, Mizrahi Tefahot Bank will probably present a double-digit return on capital."
Glazer is also not very worried about First International Bank, and believes that it will report fair third quarter results. "The bank will be hit to some extent by the severance funds and the decline in capital market activity, but the provisions will stay low, because this is a very, very conservative bank."
One of Bank Hapoalim's credit lines that most worries analysts is the NIS 1 billion given to Mordechay Zisser, which was originally granted to finance the acquisition of the controlling interest in Elbit Imaging Ltd. (Nasdaq: EMITF; TASE: EMIT).
Zisser has missed his debt payments for a long time now, despite repeated postponements based on promises to pay. The promises have not been kept, and the money is not there. Meanwhile, the bank's collateral - Zisser's shares in Elbit Imaging - have fallen 70% in the past year, and the company's market cap has fallen to just NIS 200 million. The company also owes its bondholders NIS 3 billion.
Banking sources nonetheless believe that Bank Hapoalim has already absorbed most of the damage, after making provisions for doubtful debts over the past year for most of the credit granted to Zisser. As a result, Zisser's failure to pay his debt will not have a material effect on the bank's third quarter financials.
Published by Globes [online], Israel business news - www.globes-online.com - on November 3, 2011
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