Israel Clearing the Way for Bank Share Buybacks

'It will be another tool the bank will use alongside dividends to manage their capital. ... It’s something investors like,' banks supervisor says

FILE PHOTO: The Bank of Israel building in Jerusalem.
Bloomberg

Israel’s banking regulator is poised to issue a policy that will allow the country’s banks to buy back their own shares in addition to making dividend payouts.

Hedva Ber, supervisor of banks at the Bank of Israel, said the policy should be in place around early July.

“I believe that most banks with capital buffers will use the buyback option once we publish it,” Ber told reporters Wednesday, adding that the new policy will state the conditions for a buyback.

“It will be another tool the bank will use alongside dividends to manage their capital. ... It’s something investors like,” Ber said.

Bank Leumi, Israel’s second-largest bank, said last week it planned to buy back up to 700 million shekels ($195 million), or 2%, of its shares, by March 31, 2019, subject to meeting a Tier 1 equity ratio of no less than 10.%. Leumi needed special permission from the central bank to do so.

Leumi and its main rival, Bank Hapoalim, pay dividends equal to 40% of net profit, which Ber noted was above the average of about 35% for U.S. banks. But U.S. banks buy back shares at profit levels that can exceed 100%.

Ber added that buybacks are more flexible than dividends.

Hedge funds are betting the landmark move by the Israeli financial regulator to permit buybacks will lead to further programs from other banks.

Ber, speaking after the central bank issued its annual report on the Israeli banking system, also said there had been strong interest from a host of local and foreign institutions and private equity funds to buy the credit card companies from Israel’s largest banks.

To boost competition and lower the cost of credit, a recent Israeli law requires Hapoalim and Leumi to sell their credit card firms by 2020. The banks have said they are considering a number of options, including selling to a strategic investor or making initial public offerings, and Ber said she had no preference. “All options should be available,” she said. “The banks will decide how they will sell.”

Ber said Israeli banks are becoming more efficient due to a reduction of staff and branches. She said the three midsized banks, Mizrahi Tefahot, Israel Discount and First International, had shown a jump in credit supply and now have a 44% market share.

Banks still supply about 80% of credit in the country and Ber expects in coming years there will be more competition for credit from technology firms, similar to Alibaba.