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The good news about Israel's banks just doesn't stop coming. The Israeli rating agency Maalot and now the international one Moody's both upgraded Israel's five big banks last week, heaping praise on their liabilities and deposits. The agencies did not relate to the banks' share prices, only to their financial robustness, and from that perspective the agencies were surely dead on the money.

But what about the mushrooming share prices of the big banks? They are trading at almost three times their equity multiples of three years ago.

Since the near-financial meltdown in 2002, Israel's bank shares have been climbing practically without cease.

For instance, shares in Bank Hapoalim

For years Israel's banks traded at share prices that roughly reflected their shareholders' equity. When times were good their market cap increased by 10% or 20% above equity, and in bad times, like in 2002, their market cap shrank to half their shareholders' equity.

Today Israel Discount Bank (TASE: DSCT) is trading at 35% above its shareholders' equity. Bank Hapoalim's market cap is now 80% above is shareholders' equity.

And then there are Bank Discount's shares

The banks claim that when compared with their peers abroad, their share prices are cheap. Foreign banks can trade at two or three times their shareholders' equity, while in Israel the norm has been roughly 1.

Could investors have completely changed their opinion of what Israel's banks are worth?

There is no question that the business environment of the banks is much calmer now than during the crisis of 2002. Their market caps should be higher than they were then. As Israel's economy rebounded, so did the banks' loan portfolios and collateral for loans.

Thank you, Yossi

Even ostensibly adverse regulatory moves such as the Bachar reform, which forced the banks to shed their provident and mutual fund holdings, actually turned out to be for the better for the banks. If anything, the reform headed by treasury director-general Yossi Bachar proved how adept the banks are at making the best of any situation.

Yet the question remains: are they trading too high?

If we look at developments in the banking sphere and in the financial markets, we find signs that the bank shares are reaching the end of their potential.

Lost income: In the area of lending to corporate Israel, during the last three years the banks lost a lot of potential income as companies raced to the capital market instead, raising money by issuing bonds. True, that reduced the banks' risk and the business sector's dependence on them. But the banks are losing financing income.

Efficiency: From time to time the banks introduce efficiency measures, such as early retirement programs, or closing branches that don't make money. But their operating costs keep rising, mainly because of wages. The top brass at the banks draw sky-high salaries and therefore have difficulty deflecting wage demands of envious underlings. We cannot expect Israel's banks to make serious strides ahead in terms of operating efficiency.

Regulation: It is not pressing as hard as in the past, but lenience is not going to stay. If the banks raise the prices they charge their customers, we can expect the watchdogs or politicians to pounce. It is also possible that the credit card companies, which contribute tremendous profits to their parent banks, will be burned at the stake. Certainly, the threat is there.

Prophets: Bank shares have been changing hands, big time. Bank Hapoalim chairman Shlomo Nehama sold his interest in Arison Investments, which controls Bank Hapoalim. The Dankners have been steadily selling their Hapoalim shares in dribs and drabs and last week the state sold more than 6% of Bank Discount. When the big shareholders are selling, it's a good sign that they don't think the share price has much more room to rise.