Happy New Year Meets Bad War: What Happens to Bank Shares?

The banks in Israel have released fantastic balance sheets that point to unprecedented profits.

How is it that stocks have been falling since then?

Mainly because of the uncertainty created by the Russian invasion of Ukraine, regarding the rise in interest rates.

And despite the estimate that 2022 will be less glamorous, it is still the right investment

Roast Greenberg

13/03/2022

Sunday, 13 March 2022, 08:44 Updated: 09:03

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Uncertainty breaks the magnet law: Russia-Ukraine crisis distracts investors from bank shares, which have fallen by an average of 9.1% since Russia invaded Ukraine on February 24 this year.

The declines in the sector were led by Bank Hapoalim, whose shares fell 13.5% during the same period.

The decline in bank shares continued despite the record results presented by all Israeli banks in their financial statements for 2021, which contributed to a small increase on the day the results were reported, but failed to prevent the upward trend in financial institutions' shares during the post-Corona period.

The profits of the two largest banks, for example, jumped by an average of 162%.

Bank Leumi led with a record profit of NIS 6 billion - a jump of 185% compared to the profit in 2020, which then stood at NIS 2.1 billion.

Hapoalim posted a profit of NIS 4.9 billion.

The three medium-sized banks (see table) also presented no less impressive results with an average jump of about 122% in net profit, led by Discount Bank, which presented a bottom line of NIS 2.77 billion - an increase of 184% compared to about NIS 975 billion a year earlier.

All banks ended 2021 with a double-digit return on capital (the measure of banks' efficiency in generating profits relative to their equity), led by Mizrahi Bank, which achieved a return of 15.8% on capital.

But peak earnings, such as the relatively high return on capital achieved by all banks, have failed to prevent an average decline of about 9.1% in their shares in recent weeks, since the start of the trading day with the entry of Russian forces into Ukraine.

Despite the weakening of the banks' shares, it must be noted that even after absorbing the declines, they remained with high yields, which stand at about 63% on average since the beginning of 2021, compared to a 28.77% increase presented by the Tel Aviv 35 index. After absorbing the declines, its stock remained with a return of 84.01%, as of the last trading day examined.

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Bank shares: the big gains of 2021 and the decline, mainly due to the Russian invasion (Photo: Walla !, no)

Hoping for higher inflation, but not destructive

So why do investors' money not continue to stick to bank shares?

, explains that "the uncertainty created by the war between Russia and Ukraine has hurt equities in all sectors, except some that benefit from it such as security and oil

. But as a result of the rising surplus interest rate hike in the economy as a result

.

Banks are benefiting from interest rate hikes as they are contributing to their financial spread, and now the expectation of an increase in the spread has dropped.

On the other hand, it is worth noting that the crisis has led to a rise in commodity prices, which will lead to short-term inflation, whether fixed or temporary, which is largely good for banks - as long as it does not slide into extreme percentages that lead to slowdown and recession.

Inflation will increase the amount of money that goes into businesses and the wages of employees, which will increase consumption and hence also increase their appetite for credit - the main activity of banks.

But in the capital market there is also the psychological aspect, and people tend to exercise tradable shares of banks in times of uncertainty.

In addition, there is a fear of a recession and a global economic downturn, which will not benefit the banks.

The realizations continued even though the banks presented exceptional results for 2021, which should be noted that they also contained the provisions they were required to increase in 2020 for credit losses, as a safety cushion for their operations.

These provisions were then recorded as an expense, and with the advent of vaccines, the return of the economy to routine, and the discovery that most businesses had not collapsed in Corona and returned to full function, they returned the excess capital they had set aside then - and recorded it in 2021 as income.

Although some of the profits presented came from accounting operations, the banks' activity in 2021 was also exceptional following the growth of credit, which was mainly due to a jump in the volume of mortgages, which stood at NIS 116 billion that year - the highest historically.

In 2020 and 2019, for example, the scope of taking out mortgages was NIS 78 billion and NIS 67 billion, respectively.

In this sense, the rise in housing prices has had a positive effect on the banks. "

Lior Shilo, Finance Analyst at IBI Investment House (Photo: Ilan Beshor)

Despite the declines, a key element remained in the portfolio

Sheila also refers, at our request, to the specific performance of each bank:

"Of the two largest banks, it was Leumi that presented stronger results, mainly due to high credit growth, along with record income from the bank's investment arm - Leumi Partners, and repayments from credit losses

. Efficiency that contributed to a decrease in its expenses, both in manpower and in the transition of part of its activities to the digital dimension, which accelerated during the Corona period

. The

bank's investment arm, Poalim Equity, also began investing in various businesses a period after Leumi Partners began to do so, which is the main difference between the two.

Among the smaller banks, it is possible to note the uniqueness of Mizrahi Bank, which almost always achieves the highest return on equity, because most of its activity is carried out in the most profitable sector - mortgages, which constitute about 60% of its portfolio.

Discount Bank also had an extraordinary year, but the fourth quarter hit its profits slightly, mainly due to a signing grant of NIS 200 million, resulting from the collective agreement it signed with the employees, as part of which early retirement is possible, which will affect its future results.

If this expenditure is mainly neutralized, then the return on capital achieved by the bank already stands at 14.8%.

In 2022 the banks are at a high point from which it is difficult to ensure such a return in the future, especially when the near future will be marked by geopolitical events that slightly blur the ability to look ahead.

Estimates are that the performance of banks in 2022 will not show the same growth they experienced in 2021, as demand for credit in the past year was mainly due to the release of the economy after the corona stagnation.

In addition, it is expected that interest rate hikes will curb demand for credit, and rising house prices alongside rising purchase taxes will lower mortgage demand, which in turn will lower banks' return on capital.

On the other hand, the distribution of dividends increases the attractiveness of purchasing the banks' shares and strengthens the argument that they should be an integral part of the investment portfolio, even in the current multipliers in which the banks are traded. "

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Tags

• stock

• Banks

• Russia

• Ukraine

• Bank Hapoalim

• National Bank

• Discount Bank

• Mizrahi Bank