With just a few days left to the end of 2022, there’s no doubt that this will be the best year ever for Israel’s banks, as far as profits are concerned. In the first three quarters of the year, the aggregate profit of the five largest banks was over NIS 17 billion, and, given the rise in interest rates over the past few months, likely to be continued next week, and the high rate of inflation, they can be pretty sure of ending the year with an aggregate profit of over NIS 20 billion.
These profits, following an aggregate net profit of 18 billion in 2021, led to the Tel Aviv Banks Index becoming a bonanza for investors, Israeli and foreign alike, on the Tel Aviv Stock Exchange. The index rose by nearly 70% in 2021, and the first part of this year was also positive, but then things took a turn for the worse, and bank stocks fell as inflation rose, until it became clear to what extent higher interest rates were a source of income and the index started rising again. There was a further jump after the latest interest rate hike by the Bank of Israel in October.
In the past month, however, the situation has tuned round again, and in December so far the index has fallen by more than 9%. For the sake of comparison, the Tel Aviv 35 Index, which includes all five major bank stocks, has fallen by less than 5% this month, the Tel Aviv 125 has fallen by a similar amount, and the Tel Aviv Technology Index has fallen by only 3.75%. Still, looking at the year as a whole, the Banks Index is still well placed, with a decline of 9%, which compares with 13% for the Tel Aviv 35 Index and 27% for the Tel Aviv Technology Index. All of them are a very long way behind the Tel Aviv Oil and Gas Index, which has risen by 38% so far this year, despite a 6% drop in December.
Not just the impending recession
So what has caused bank stocks to fall? First of all, alongside the strong results, there is the prospect of a recession in 2023, and financial stocks in general and bank stocks in particular are the first to respond negatively to such an outlook. This happens mainly because the banks’ profits are based on credit and consumption, which decline during economic slowdowns.
“2023 will be a year of mixed trends. On the one hand, the banks will continue to present strong results, but the uncertainty that will be with us next year is likely to weigh on pricing,” says IBI Investment House financial services analyst Lior Shilo. “The positives next year can be expected to come from continued growth in financing income, first of all from growth in the credit portfolio, and secondly from further rises in interest rates and inflation. On the other hand, the inversion of the yield curve and the sharp rise in interest rates together with high inflation herald a recession in the short term. The banks are directly affected by the level of economic activity, so we estimate that in 2023 they will start raising credit loss provisions more rapidly to the extent that the macro figures indicate a deterioration.”
The emerging recession or slowdown will, as mentioned, affect the banks’ credit portfolios. These have grown rapidly in the past few years, but they are now expected to revert to a growth rate close to the long-term sector average of around 5%.
“In addition,” Shilo continues, “public pressure on the banks to raise their deposit interest rates has had the effect of making the public transfer money from current accounts to interest bearing deposit accounts. The amounts are not very large in comparison with total bank deposits, but, nevertheless, this erodes the sensitivity of net interest income to any rise in Bank of Israel interest rates.”
For all that, Shilo says that IBI is optimistic about bank stocks. “Despite the expectations of a recession and a rise in credit loss provisions together with a slowdown in credit portfolio growth, the banks will exhibit financial strength and will report good results,” he says.
There are however additional reasons for the fall in bank stocks, since in a recession almost all sectors suffer. “The banks are more liquid than other securities,” a market source explains. “Anyone who holds large amounts in bank stocks can rest assured that when he needs to sell them he will have no problem, because Israel’s banks are strong and their position is good.”
And indeed, a glance at Israeli mutual funds reveals that since the beginning of December, the funds investing in Israel stocks, not just in the banks, have had redemptions of over NIS 4.6 billion. This, incidentally, is at a time when the money market funds, which compete with bank deposits, have taken in some NIS 6 billion, similar to the inflow in previous months.
Another factor that could explain the decline in bank stocks is decisions by foreign players to exit from Israeli investments. For example, Norway’s sovereign wealth fund, which holds large stakes in Bank Leumi and Bank Hapoalim, has recently threatened to stop investing in Israel for political reasons, and it’s not alone. These foreign players mainly hold bank deposits and bank stocks, and so any decision to withdraw from Israel affects the prices of those stocks.
Bank of Israel figures show that in the third quarter foreign investment in stocks in Tel Aviv amounted to just NIS 778 million, which compares with NIS 2.13 billion in the second quarter, so there certainly does seem to be a decline.
Published by Globes, Israel business news – en.globes.co.il – on December 28, 2022.
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