Israel Economics

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Merrill Lynch sees Israeli banks improving with economy

"We believe that loan growth should slowly trend up to positive territory this year."

Globes correspondent 13 Mar 05 12:53

In its review of banks in emerging markets, US investment house Merrill Lynch continues to look favorably on the Israeli economy, and on the prospects of the big two Israeli banks, Bank Hapoalim (LSE: BKHD; TASE: POLI) and Bank Leumi (TASE: LUMI). "On Israel, the recent retraction has once more exposed value in the banks. We remain buyers of both Hapoalim and Leumi, noting their high dividend yields (8%to 9%) and scope for limited P/ BV expansion. Further, the risk-reward contribution of Israeli banks tends to be especially positive, given their low correlation to other GEM banks," Merrill Lynch's reports says. "Merrill Lynch is positive on the outlook for the Israeli economy. We expect an increasingly broad- based expansion to take root in 2005, with private consumption becoming the main engine of growth. This should produce more gains in employment. The recent trends show that price pressures are well contained, indicating that inflation is unlikely to become a major overall issue in 2005.
"The year- to- date budget performance indicates that the government is on track to attain its full year deficit target of 3. 4% of GDP. We expect the Bank of Israel to be on hold during the first half of the year. However, it is likely to push rates as high as 4.3% by the end of the year.

"On the peace front, both the Palestinian Authority and Israel appear to be doing everything they can to preserve a truce declared on February 8. However, we remain cautious on prospects for peace negotiations in the short- term. In Israel, aggregate banking sector data becomes available very late. Thus, it unfortunately has little value as a leading indicator. However, looking at the aggregate credit growth in Q1 ‘04, there was a small improvement in credit trends compared to the previous quarter (-2.7% year-on-year growth in Q1 versus 3.8% in Q4 03).

"We believe that loan growth should slowly trend up to positive territory this year. Bank Hapoalim and Leumi had flat year-on-year credit growth in Q3 ’04, suggesting a relative improvement. Given strong macro fundamentals and lower lending rates, consumer and SMEs should start demanding more credit in 2005, in our opinion."

Published by Globes [online], Israel business news - www.globes.co.il - on March 13, 2005

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