Analysis

Israel’s Banks: Will Anyone Be in Control?

The Wertheim family has received a temporary banking license for Mizrahi Tefahot, but like the controlling shareholders of Israel’s other big lenders, they are looking to exit | Analysis

A Bank Mizrahi Tefahot conference room.
Tomer Appelbaum

The decision of the Bank of Israel to award the heirs of the late Muzi Wertheim a license to continue controlling Mizrahi Tefahot Bank is nothing more than a minor hiccup on the way to a future when none of Israel’s banks will be in the hands of a single shareholder or shareholder group.

Already two of the Big Five banks – Bank Leumi and Israel Discount Bank – have no controlling shareholder at all. Mizrahi Tefahot, Bank Hapoalim, First International Bank of Israel and the tiny Union Bank of Israel are all destined to end up that way in the next few years.

Banks Supervisor Hedva Ber had originally intended to deny Dudi and Drorit Wertheim, the heirs to the family’s 22% holding in Mizrahi after their father died four months ago. But in a policy reversal, she agreed yesterday to give them the license, albeit until December 10, 2019 (See story in The Ticker).

Like the other banking controlling shareholders, the Wertheims face an end-of-2019 deadline to either divest their bank shares or divest their controlling stakes in their major non-banking business. The deadline is set in the Business Concentration Law, which seeks to break the stranglehold that big holding groups have had over the economy. Barring any one group from controlling bank or an insurance company and major non-financial company is a key facet of the legislation.

In the Wertheims’ case the choice is between retaining their Mizrahi stake or offloading Central Bottling Company, the Israeli Coca Cola franchisee.

Israel’s banks

In fact, both businesses are hugely profitable. Mizrahi Tefahot in particular is Israel’s most profitable lender, thanks to soaring home prices and a mortgage demand. While Mizrahi Tefahot is Israel’s third-largest bank, it’s the dominant mortgage bank, with a 40% market shares.

Mizrahi Tefahot’s Tel Aviv Stock Exchange market capitalization is 13 billion shekels ($3.37 billion), meaning the family’s stake in worth 2.86 billion shekels. Sources familiar with the family’s thinking believe they will opt to offload the bank, in which they are passive investors that can contribute little to managing the bank.

Leora and Doron Ofer, heirs to an even bigger 22.5% share in Mizrahi Tefahot, likewise face a similar decision about whether to bail out of the bank or of the family’s publicly traded company Melisron.

Like the Wertheims, the Ofers are also expected to sell their Mizrahi Tefahot shares: Israel’s second-largest mall developer and manager, Melisron is also highly profitable, pays generous dividends and the family’s 60% in it is worth 4.4 billion shekels.

The same process is underway at Bank Hapoalim, Israel’s largest lender with a market cap of 31 billion shekels. Shari Arison, who inherited her controlling share from her father Ted many years ago, has whittled down her stake over the years to just 20%, the minimum needed to retain control under securities regulations.

Zero is fine, too

Arison is looking to reduce her holding further still and has been seeking a buyer for some time now for at least half her stake, which is worth 6.23 billion shekels. Sources say she would even be willing to sell the entire 20%.

Arisnon is in no need of the cash, but is unwilling to part with her shares at a valuation of less than 1 to Hapoalim’s book value. Right now that’s a premium to its TASE-traded price, but with its price rising, she may eventually opt to sell her shares to the public.

Zadik Bino, who controls First international Bank of Israel with the Australian Lieberman and Abeles families, is the only one of the controlling shareholders who seems to be taking a different strategy. Bino has been gradually selling down his stake in Paz, the oil company, rather than in FIBI, but sources say he may yet opt to divest FIBI.

Shlomo Eliahu and Union Bank’s other controlling shareholders are looking for a way out as well. But with the bank trading at a paltry 0.5 to book, their preferred route is a merger with Discount or Mizrahi Tefahot, which may be prepared to pay a premium.

Failing that, however, Eliahu also faces the Business Concentration Law deadline and may sell his 27% stake in the market.

Theoretically, single buyers could emerge as buyers for one or more of the banks, but that is unlikely to happen as Arison’s lengthy search for a buyer for her Hapoalim stock shows. The Business Concentration Law limits the number of prospective buyers inside Israel. In any case, banking regulations have been growing tougher – for instance, the banks are under orders now to spin off their credit card unit – and rules limit the ability of controlling shareholders to call the shots at their own banks.

As a result, all the controlling stakes are likely to be sold on the TASE to the general public or in off-the-floor sales to institutional investors. Israeli banks will start to resemble their peers elsewhere in the developed world – run by their elected boards and top executives, rather than a tycoon.