Taking Stock / Arison's Cruise on Hapoalim

The past year wasn't a particularly good one for Shari Arison. In August, her new husband, Ofer Glazer, was investigated for alleged molestation. In September, she abandoned Israel entirely and moved to Miami.

Emotionally, not a great year. But financially, she couldn't complain, as Forbes' latest listing of the world's wealthy reminds us. Arison jumped from 158th place to 94th. Her personal wealth is estimated at $4.6 billion. (For comparison, the personal fortune of her partners in Bank Hapoalim, the entire Dankner family, is about $100-150 million.)

How did Arison's wealth grow so fabulously? Was it the 80 percent leap in Bank Hapoalim's share price in 2003? Hardly. Even after that, her share in the bank is a negligible part of her assets. Most of her wealth derives from the shares she inherited from her late father, Ted Arison, in Carnival Cruise.

Carnival shares are almost as good as hard cash. In the last month, Shari Arison easily shrugged off a few "small" blocks of the stock for $50 million.

In fact, in the last year Carnival shares were a lot better than hard cash. They rose 125 percent, from $20 to $45, thanks to the recovery of global tourism and the low interest rates that pushed many stocks to record heights. Arison owns almost 80 million Carnival shares, which are worth about $3.6 billion at the current share price.

What about Bank Hapoalim, though? Well, even after the mad surge in its share price, it remains a piddling, second-rate niche in the Arison portfolio.

Misleading reports on bank profits

In September, it will have been seven years since the Arisons bought into Hapoalim, and we can safely say it won't make them any richer. The dividends barely serviced the interest on the loans, nor were the capital gains anything to write home about. In fact, the bank enriched Shari by not one red cent.

How could that be? Israel's banks are pure mints, aren't they? Doesn't the press keep printing huge headlines about their tremendous profits? This year, for instance, Hapoalim will be netting about NIS 1.5 billion.

All true, but these absolute profit figures are misleading. In terms of returns on equity (ROE), Israel's banks have never led the list of earners. In the last 10 years, the average ROE of the banks has been around 10 percent net. In the peak year of 2000, Bank Hapoalim presented a record ROE of 15 percent and in the slump, the figure dropped to 5 percent.

For comparison, Israel's insurance companies present average ROE of 20-30 percent, while the best trade and industry companies, such as Teva Pharmaceuticals, Osem Food Industries and Delek Group, generate anywhere from 20 percent to 40 percent.

Foreigners do it better

The poor performance of Israel's banks is all the more egregious when compared with their foreign counterparts. The best banks in the world generate real ROE of 20 percent to 25 percent, while the middling ones accomplish 15 percent to 20 percent.

Bank Hapoalim's low returns, coupled with the public criticism of the high fees the banks charge, may explain why the bank's shareholders and leaders - CEO Zvi Ziv, chairman Shlomo Nehama, and the American directors Scott Shay and Lew Ranieri - have decided to dramatically expand Hapoalim's operations outside Israel. In 2003, overseas operations generated 16 percent of the bank's profits, a ratio the bank wants to double within three years.

In April, Bank Hapoalim will be floating its New York subsidiary, Signature Bank, on Wall Street. The unit is expected to command a valuation of $350 million, almost double its equity capital. Meanwhile, here in Tel Aviv, the parent bank Hapoalim is trading at roughly the same level as its equity capital, and has been for about the seven years since its privatization.

Leumi also wants some action abroad

The ability to demand a premium abroad, and the desire to significantly better Bank Hapoalim's stock, are pushing the bank's owners to pursue more aggressive investments abroad. Now Bank Leumi, jealous of Bank Hapoalim's success in New York, is searching for major investments abroad, as well.

From a macroeconomic perspective, it is better that the two big banks look for growth opportunities outside the country, rather than vie to increase their already excessive share of the local market.

From the micro vantage point, though, one has to ask if Israel's banks proffer any particular advantage in the international arena, which doesn't rely on deposits by Jews. Their record is pretty weak. In the 1980s, Israel's banks lost their pants on their foreign ventures.

But Hapoalim chief executive Ziv is convinced Hapoalim has an edge, that it is at the global forefront of retail banking know-how and sophistication.

If Israel's big banks manage to develop a significant volume of international business, in a few years they might be able to demand the kind of pricing that American banks get.

Until then, Shari Arison will keep starring in the local headlines by virtue of her Bank Hapoalim shares, but her fortunes will rise or fall on Carnival Cruise's voyage on Wall Street.