Leader's Alon Glazer: Banks still cheap

"Mizrahi Tefahot Bank will not publish a profit warning, and Bank Hapoalim will have fairly low profitability."

Leader Capital Markets VP research Alon Glazer says in response to today's profit warnings by Bank Leumi (TASE: LUMI) and First International Bank of Israel (TASE: FTIN) that the warnings were expected and do not necessarily indicate anything about the trend in subsequent quarters.

As for profit warnings by other banks, Glazer says that he doubts that Mizrahi Tefahot Bank (TASE:MZTF) will publish a profit warning, because "almost all the specific effects of the capital market seen at the other banks, such as the nostro portfolio and losses from derivatives do not affect Mizrahi. We expect goods results with a high return on equity."

Glazer expects Bank Hapoalim (TASE: POLI) to be hit by two main factors: derivatives (more than other banks); and a fairly high provision for doubtful debts, due to reductions in the value of collateral given in the form of shares for credit granted by the bank. He is apparently referring to loans to Mordechay Zisser, who controls Elbit Imaging Ltd. (Nasdaq: EMITF; TASE: EMIT), and Lev Leviev, who controls Africa-Israel Investments Ltd. (TASE:AFIL).

"On the other hand, the impact from the capital market is lower than at the other banks, so fairly low profitability is expected, but probably higher than at Bank Leumi, and it is not certain that it will have to issue a profit warning," says Glazer.

"Israel Discount Bank (TASE: DSCT) probably faces negative effects from the capital market similar to those at First International Bank. It should be noted that, because the bank owns shares in First International Bank, First International Bank's announcement increases the impact on Discount Bank's results. It is therefore possible that the impact from the capital market, together with the news about First International Bank's results, will cause Discount Bank to publish a profit warning too," says Glazer.

"A blow to the Israeli economy or a sharp drop in real estate prices are the real threats to the Israeli banking system. Meanwhile, we're not there yet. Obviously, the global crisis and news from Europe has had a negative effect, but for now, the Israeli economy and with it, the banks, are still in good shape. So long as we don’t see a greater blow, we don’t expect a significant impact on results, except for specific effects of the capital market, such as we saw during the third quarter."

Despite the threats to the banking sector, such as the crisis in Europe, worries about slower growth in the Israeli economy, the effects of the social protest, and the raising of capital adequacy ratios, Glazer reiterates that the banks are traded at cheap prices. He estimates Bank Hapoalim and Bank Leumi have capital multiples at less than 0.75, justifying holding shares in the two banks at their current share prices, even with the pending new capital requirements.

Glazer therefore gives the banks "Outperform" recommendations.

Bank Hapoalim's share fell 2.8% by early afternoon to NIS 12.67, Bank Leumi's share fell 2.5% to NIS 11.52, Discount Bank's share fell 2.7% to NIS 5.69, Mizrahi Tefahot Bank's share fell 1.3% to NIS 31.20, and First International Bank's share fell 2.2% to NIS 36.90.

Published by Globes [online], Israel business news - www.globes-online.com - on November 14, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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