Israel's banks

'Leumi has highest exposure to Europe crisis'

Deutsche Bank downgrades Israeli banks' target price, notes that 'Bank Mizrahi has the lowest asset risk level'

Reuters | Published: 09.22.11, 08:15

"In light of weak markets recently, we decided to cut the target prices of the banks in Israel," states an analysis of the performance of Israel's large banking institutions authored by Dan Harvard of Deutsche Bank.

Deutsche Bank stressed the NIS 3 billion ($810 million) exposure to eurozone bank bonds at Bank Leumi. "Usually, these bonds get a high rating but the disintegration of the eurozone and the return of the financial crisis might drive Leumi to losses."

"We would like to reiterate that Bank Mizrahi presents the lowest exposure to assets – the bank's investment portfolio is simple and it has a relatively low level of exposure to real estate loans, leveraged deals and large borrowers."

Bank Hapoalim's target price was cut to NIS 17 ($4.6) with a buy recommendation – a price that beats the market price by 26%; Discount Bank's target price was dropped to NIS 6.4 ($1.7) with a hold recommendation – a premium of 16% over the market price; Bank Laumi's target price was shaved to NIS 13 ($3.5) per share which is 12% higher than the share's market price and Mizrahi Tefahot's target price was cut to NIS 43 ($11.6) per share with a buy recommendation – a 37% premium.

Deutsche Bank concluded that the banks' shares dropped too much too soon but in light of forecasts for climbs in the banks' core capital, there are no expectations that the banks, with the exception of Mizrahi Tefahot, will gain the required return on capital in the long run.

This means that the banks' price-to-book ratio will remain below 1 for the long term and their share performance will be below the market.

Deutsche Bank imparted that "altogether, bank asset quality seems stable, although it is subjected to the usual risks of credit volatility which might affect short term profitability."