Israeli Financial Stocks Soar, But Can the Rally Continue?
The Israeli financial sector, encompassing banks, insurance companies, and investment houses, has experienced a significant surge, with stocks in these areas rising hundreds of percent over the past three years, making it the highest-yielding sector on the local stock exchange. This growth is fueled by a massive increase in financial assets managed, which have doubled in the last decade to reach 7.7 trillion shekels. This boom has led to the launch of seven new financial indices, including a recent bank and insurance index.
Banks are primarily benefiting from interest rate margins, the difference between the interest they pay on deposits and the interest they charge on loans. Despite recent interest rate cuts and a special tax, major Israeli banks reported a combined net profit of 8.5 billion shekels in the second quarter of the year. However, their stock performance has lagged behind the broader market recently due to rate cuts, though analysts suggest future interest rate movements and election results could impact their trajectory. Discount Bank and Leumi are highlighted as potentially attractive investments within the banking sector.
Insurance companies and investment houses, in contrast, are more closely tied to capital market performance. They manage public funds in provident funds, pension funds, and mutual funds, earning management fees based on assets under management. Their revenues and profits have soared with rising asset values and stock market gains. The five largest insurance companies manage 2.8 trillion shekels in assets, with their sector index up 480% over three years. Despite strong performance, some analysts caution that their heavy reliance on the stock market could lead to weaker results if the market falters, though diversification into credit card companies and other financial activities is ongoing. Migdal is suggested as a potentially well-priced insurance stock.
Investment houses have also seen substantial growth, managing over 1.2 trillion shekels in assets, with revenues up 28% and net profit soaring 52% in the first half of the year. This growth is attributed to increased public sophistication in financial markets and the introduction of new investment products. While some investment house stocks have seen explosive growth, others have lagged due to fund outflows. Meitav, More, IBI, and Analyst are noted as strong performers, while Yelin Lapidot and Altshuler Shaham are seen as potentially undervalued by some.
