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Since the start of the world financial meltdown two years ago, Israeli bankers have been trying to maintain a sense of calm. They take care to remind us at every chance that banks in the Holy Land are in much better shape than their counterparts abroad. And by and large it's true too.

The Israeli investment community, however, seems unpersuaded by the charm offensive. At the beginning of the crisis Israeli bank stocks were riding high, but their value has since shrunk by tens of billions of shekels, including about NIS 8 billion over that past month alone.

In July 2007 Israel's five big banks were worth about NIS 72 billion combined. That figure has since plunged 63% to NIS 26.3 billion - the value of Bank Leumi and Bank Hapoalim each in July 2007.

The two big banks have been the biggest losers over the past year, with Leumi shedding NIS 15.1 billion and Hapoalim NIS 18.4 billion in value.

Israeli bank shares continue to baffle analysts, who have been saying for months that the low prices actually represent a buying opportunity. But investors are not swallowing that, as judged by the performance of the indexes. Stocks continue to tumble.

Last month the Banks-5 index fell a further 23%.

In 2008 the biggest factor affecting bank stocks was the Israeli sector's exposure to risky financial instruments issued by overseas financial institutions, the most notorious of which was "mortgage-based securities" - but there were many others too. The culprit this year is the banks' own loan portfolios.

"The investors are afraid of the black hole in the banks' loan portfolios," says one senior investment manager.

This month the banks are due to publish their financial statements for 2008, and their fourth-quarter provisions for dubious debts are expected to be even higher than in the third quarter.

Leumi, for example, is expected to provision fora full 2% of its loan portfolio. The other banks are likely to be provisioning between 1% and 1.5% of their portfolios.

Provisions hurt the bottom line because they sting banks' revenues and profit from financing.

Even those provisions may not be enough. If the economy continues to sour, which it may well do, the biggest borrowers from the banks could find themselves defaulting on loans, forcing the banks to make even larger provisions in the quarters to come.

At the end of September, borrowers owed the banks roughly NIS 660 billion. Provisioning for doubtful debts of between 1.5% and 2% translates into NIS 10 to NIS 13 billion - enough to totally wipe out the banks' profits from financing and a hefty chunk of their operating profits.

By the end of the third quarter last year - before the financial crisis in the west had escalated into a full-blown global economic meltdown - the dubious debts at Israel's five biggest banks had already risen 14% in a single quarter to NIS 42.9 billion.