Subscribe to Print Edition | Thu., November 20, 2008 Cheshvan 22, 5769 | | Israel Time: 03:13 (EST+7)   Back to Homepage web haaretz.com Haaretz Toolbar Diplomacy Defense Jewish World Opinion National Print Edition Car Rental Books Haaretz Magazine Business Real Estate GA 2008 Travel Week's End Anglo File

Bank stocks battered as investors fret over mounting dubious debt By Sharon Shpurer Tags: banks, Israel News Analysts covering Israel's banks have been repeating the mantra for weeks: shares in this sector are cheap, for long-term investors. Their equity multiples have sunk to record-low levels, they argue. Yet investors seem uncharmed and the selloff of bank shares has continued, sending the Tel Aviv Banks-5 index plummeting as much as 20% a week. From the year's start, the Banks-5 has lost 54%. The banks' equity multiples - calculated by dividing their market capitalization by their equity - are now even lower than during Israel's last economic crisis, in 2002. Advertisement The equity multiple formula is an accepted method for examining bank shares. Shareholders equity is the base for their lending, which is their main money maker. During the economic crisis of 2002, which saw big write-offs at local banks, equity multiples fell to 0.55-0.75. Now bank shares are trading at multiples of 0.35-0.69, reflecting deep pessimism. One factor that dragged down the sector in 2002 was the banks' heavy provisioning for doubtful debts. They were so exposed to dubious borrowers that they set aside 1.7% of the entire value of their loans to cover for contingencies. Last year provisioning was just 0.3% of all loans. Investors fear a huge jump in the banks' provisioning for doubtful debts in 2008-2009, and therefore badly impaired return on equity - even though unlike 2002, banks aren't the only lenders any more. For the past three years corporate Israel has been tapping investors, by selling bonds. Economic leaders, analysts and the banks themselves insist that Israel's banking system is stable and is not at risk of collapsing, and that provisions for doubtful debts will not reach 2002 levels. Why then is the market displaying such dubiety? The answer is two-fold. First is the negative sentiment toward the stock market in general and the finance sector in particular. People fear that Israel will sink into recession too, hurting companies and households, causing an increase in bad debt. Second is opacity regarding what the banks are doing with their own huge securities portfolios. What have the banks invested in? How likely is it that bad loans will mount? That a major borrower will go bust? Yuval Ben-Zeev, manager of the research department at Clal Finance, published a review of the banks Monday in advance of their third quarter financial reports. In a break from custom, Ben-Zeev he didn't predict the banks' results, excusing his deviation by noting the uncertainties. Bank shares are low but remain risky, Ben-Zeev says, and advises against running out to buy them. Why? Two reasons. First is the sharp rise in credit risk, as demonstrated in the high yields on corporate bond. Ben-Zeev estimates that in 2008 provisions for doubtful debts will be 0.5%-0.6% of the banks' loan portfolios, following relatively low provisioning in the first half of this year. As for 2009, he predicts that provisioning for doubtful debts will rise to 0.7%-0.8%, or even 0.9%, but with no risk of the high provisioning seen in 2002, mainly thanks to the "buffer zone" provided by the corporate bond market, which will likely be the first to suffer heavy losses. The second reason is that the banks will likely be affected by the sharp rise in market risks to their proprietary portfolios. At the end of the second quarter these portfolios had assets of NIS 130 billion. About half that was in shares and corporate bonds. Which means, their portfolios have shrunk. Corporate bonds have been trading at ever-higher yields, indicating mounting fear of companies defaulting - and that includes the companies associated with the "tycoons", such as Yitzhak Tshuva and Lev Leviev. Leader Capital Markets analyst Alon Glazer figures that as long as corporate bonds remain weak, the stock market can't recover. Yet he isn't worried about the banks' loans: banks make lenders provide collateral, he points out. "Assuming we aren't heading for total chaos, both the bond market and the banks are trading at low prices," Glazer said. "Still, the Israeli banks will of course be affected by what happens around the world." Bookmark to del.icio.us   The King is dead Archeologists find new evidence for King Herod's tomb site. Al-Hasbara Israel launches Arabic YouTube channel to bypass Arab media.

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