Merrill Lynch estimates that the sub-prime mortgage crisis in the US poses little risk to Israel's big two banks, Bank Hapoalim (LSE: BKHD; TASE: POLI) and Bank Leumi (TASE: LUMI).
"Our channel checks with management at both Hapoalim and Leumi supported our belief that the direct and indirect exposure to the US sub-prime mortgage market and CDOs is minimal. Furthermore, what exposure there is is entirely contained to the banks’ available for sale (AFS) portfolio, where unrealized gains or losses are not recorded on the banks’ profit and loss account, but added/reduced to equity. Assuming net gains on other parts of the banks’ security portfolio, we see minimal risk to Israeli bank sector earnings or balance sheets from US sub-prime and CDO’s," Merrill Lynch analyst Haim Israel writes.
Israel believes the impact of the exposure the two banks do have to sub-prime mortgage lending on their results will be small.
"Assuming current spreads and liquidity levels at the higher-rated trenches will prevail, we estimate fair value adjustments’ recorded at the banks’ equity will be limited to a gross loss of NIS 20-30 million at Hapoalim, and NIS 10-15 million at Leumi. At equity levels of NIS 18.5 billion each, we believe this is insignificant," Israel says.
Despite this assessment, Israel does not see the Israeli banks as especially attractive for investment at present, and he maintains a "Neutral" rating for both of them. "Both lack the key characteristics that make emerging market banks appealing: credit expansion and RoE re-rating," he writes, but adds, "However, in this environment, these characteristics actually turn to an ST advantage and position both banks as portfolio diversifiers. Key factors supporting this investment theses is that in the event of credit tightening Israeli banks are (i) under exposed as systematic risk tightened with global credit quality is marginal, (ii) under-owned - underweighted in EM portfolio and therefore in case or more volatility in the markets we see limited marginal sellers and (iii) under- risk as beta to MSCI EMF = approx 0.5," the report concludes.
Published by Globes [online], Israel business news - www.globes.co.il - on August 13, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007