In its latest survey of banks in emerging market, UBS puts Israel top of its country rankings. "Effectively, Israel (top pick) is a value and re-rating play, Taiwan (two) is a valuation play, South Africa (third) and Russia (fourth) are both commodity-underpinned plays, and Turkey (fifth)is benefiting from rapidly improving fundamentals.
In general, UBS recommends caution when it comes to GEM (global emerging markets) banks, saying "the sector is very close to its fair value." Nevertheless, UBS gives "Buy" ratings to both Bank Hapoalim (LSE: BKHD; TASE: POLI) and Bank Leumi (TASE: LUMI). Its ranking of GEM banks stocks is Chinatrust Group, Denizbank, Fubon, Bank Hapoalim, Bank Leumi, PT Bank, Danamon, Standard Bank, Nedcor, Garanti Bank and Sberbank
"Earnings growth should be driven by continued improvement in net provisions, as most sectors of the economy are in recovery. Real estate and construction remains troublesome, but even here we expect 2005 to be more stable than prior years. In addition, we believe a more focused consumer credit effort could potentially begin to boost net interest margins in H2 05," UBS says of the Israeli banking sector.
On Bank Hapoalim in particular, the report says, "Hapoalim has also articulated an international growth strategy, supplemented by a recent small acquisition that should drive future results.
"Finally, the recent sale of Signature Bank in NY will provide a c$150 million after tax one time gain in 1H05.
"By our estimate, Hapoalim should be able to achieve ROE of about 18% given our positive macro outlook."
UBS sets a price target of NIS 18 for Bank Hapoalim, some 21% above market.
For Bank Leumi, UBS is looking for ROE of about 17%. It sets a price target of NIS 16, about 30% above market.
Among the risks of investing in Bank Leumi, UBS mentions the govermnet's privatization plans. "The government of Israel still owns about 23.5% of LUMI and intends to sell that stake by the end of 2005," the report says.
"Sale to a strategic/financial buyer; block trade, and/or distribution to the public are the potential means of achieving this. Of the three we believe a combination of the first two is the most likely outcome. We see this issue as a transitory overhang in the shares."
Referring to the Bachar committee recommendations on Israel's financial services market, UBS warns that both Bank Hapoalim and Bank Leumi could suffer revenue shortfalls if banking activity is separated from asset management.
Published by Globes [online], Israel business news - www.globes.co.il - on May 2, 2005