The banks are making money, so why are their stocks floundering?

In view of the increase in interest rates in the economy, the banks were portrayed as the biggest gainers.

On the face of it, the public should flock to bank deposits as a profitable alternative to investing in real estate, but if this is the spirit of the times, why have the shares of most banks in Israel fallen since the beginning of the year?

Greenberg roasts

10/20/2022

Thursday, October 20, 2022, 09:24 Updated: 12:54

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The banks benefit from the increase in interest rates, but at the same time they face increasing competition and expectations of a slowdown or even a recession (Photo: ShutterStock)

Profit from the rise in interest rates

Are the banks the biggest beneficiaries of the increase in interest rates?

Recently, a finger of blame has been pointed at the banks for not increasing the public's deposit margins as a result, while they themselves began to enjoy the new profit margins created for them by the increase in interest rates.

On the face of it, the increase in interest rates is supposed to serve the banks faithfully, since its increase increases their profits on the loans and credit they grant and is expected to increase the total amount of money in the public's deposits in the banks, due to the expectation that the deposits will be a substitute for those with money who are risk-averse, who seek to replace what some find as "pain The head" involves obtaining a return on their investments in real estate (mainly), in a conservative and stable bank deposit, which will allow them to obtain a higher return in the short term.

However, an examination of bank stocks also shows the other, less positive side, which the banks may reach following the rise in interest rates , and shows investors' concerns about an economic slowdown that will also affect the banks' activities.

The performance of the shares of the largest banks in Israel (photo: Walla! system, no)

The one that goes up or the one that goes down?

For example, the shares of Bank Leumi and Bank Hapoalim, the two largest banks in the country, fell by 4.2% and 1.6% respectively from the beginning of the year until the end of the trading day on the Tel Aviv Stock Exchange last Tuesday.

The stock of Bank Discount, which lost its place as the third largest bank in the country to Bank Mizrahi Tefahot (after it merged Bank Agud into it), experienced a sharper decline for the same period, amounting to 11.3%.

In contrast, the shares of the Mizrahi Tefahot and International Banks surprised with price increases since the beginning of the year which were about 5.7% and about 17.4%.

The increases of the last two led the shares of the five banks to an average return of about 1.2% for the same period, while the Tel Aviv 35 index, which comprises the shares of the 35 largest companies traded on the Tel Aviv Stock Exchange, including the banks, decreased from the beginning of the year until the day of their examination by 4.91% .

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An impressive jump in the value of the stock since the beginning of the year (Photo: Shay Oknin)

The economy is catching a cold, the bank is coughing

Lior Shila, finance analyst at the IBI investment house: "The roller coaster that bank stocks have experienced with ups and downs since the beginning of the year may not be able to adhere to the conservative and stable image that is displayed above the banks, but expresses the mood in the markets, which includes investors' concerns about the slowdown of economic activity as a result of the trend of interest rate increases.

After all, even if there are several trends that are positive for banks, such as the increase in inflation and the increase in the Bank of Israel's interest rate alongside it, these increases also have a side because the role of the interest rate increase is to cool the activity of the economy, and the cooling of the activity may cause a deterioration in the borrowers' situation, and in extreme cases even insolvency. These cause Certainty regarding loan repayments and possible credit losses, and of course are not something that the banks long for.

These concerns are expressed by the market in the shares of the sector, and especially the fear of damage to the results of the banks if a global recession comes, which the estimates are that it will be accompanied by high provisions for credit losses and a slowdown in their core activities.

The differences between the performances of the five bank stocks in the table stem, in my estimation, from the defensive approach of both the banks' and investors' activities, and on the other hand also the positivity, which is decreasing, that is contributed to the banks with the interest rate increases.

The defensive approach helped the results of the International Bank share, for example, which is known for its conservatism, especially during crisis periods, when Mizrahi Tefahot Bank also presented relatively low provisions for credit losses during the Corona crisis period.

As for the performance of the Discount Bank stock, it is possible that these are due to a certain existing assessment regarding its credit portfolio that it is of lower quality compared to the banking system.

In my opinion, this opinion is wrong, and the best proof is the financial soundness and extent of the provisions made by the bank for credit losses during the Corona crisis.

These result from moves made by the management in recent years to improve the portfolio, tighten relations with the workers' council and improve performance."

The banks became a justified target of the audit arrows and were forced to improve the interest rate on deposits (Photo: ShutterStock)

Cash in the check and play the profits

Sheila also refers to the public criticism leveled at the banks regarding the deposit margins and also attributes to it the recent publications by the banks regarding the interest rates they offer on the deposits: "The recently published programs offering interest rates of 3.5% and 4% did not witness the same public criticism that was leveled, and there is no doubt that the interest rates The banks were worn out by those new deposits.

And the more the public gets into the new deposits offered today, the more expensive they will be for the banks. The fact that an election is coming up only accelerated the formation and publication of the new deposits since the banks did not want to deal with public scrutiny before an election. That's why everyone turned cold, when It must be remembered that their reputation is just as important to them, and in an age where it is possible to switch with a click, this is important in being able to keep customers and continue to recruit new ones."

Lior Shilo, financial analyst at IBI Investment House (Photo: Ilan Bashor)

The recession is coming and the public is under stress

Sheila adds: "One of the questions being asked is whether the assessment that the interest rate increase expected to stand in November by an additional 0.5% to a total of 3.75% benefits the banks or harms them, and this reflects the advantages and disadvantages of it; on the one hand, this contributes to the results in the immediate term, but any additional weight that slows down The activity of the economy may harm the future results.

The economy is already operating based on the knowledge that there will be a recession in Israel, and the only question is how strong, and according to estimates in Israel it will be less severe than in the world in light of energy independence and the positive economic data as a whole.

But alongside all this, it must be remembered that we are still an economy A small one that is affected by what is happening in the world's economies and any crisis may come to us as well. The banks will therefore have to be careful with their growth rate and the reserves they build up. And they will have to keep a certain amount of capital, among other things by stopping or slowing down the distribution of dividends, which apart from the international ones we have already seen a slowdown.

In general, the banks know how to deal with crises and are financially stable, so that there will be no collapse in the system.

It is likely that the business results will be affected in the quarters of next year, and the banks will present weaker results following the expected recession and interest rate increases.

And when examining the bank shares, the investment in their alternative shares must also be examined, and in most sectors the situation is much less good than with them."

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