US Investment Firm Jefferies Upgrades Israeli Banks, Citing Strong Economy

American investment firm Jefferies has issued a highly positive assessment of Israel's banking sector, highlighting its structural resilience and potential for growth. The firm's analysis, led by veteran analyst Tavi Rosner, notes that the Israeli macroeconomy appears strong, having weathered the recent conflict "exceptionally well." Bank of Israel forecasts project economic growth of 4% this year and 5.5% next year.

Jefferies specifically upgraded its recommendation for Bank Hapoalim to 'Buy' from 'Hold,' while issuing 'Buy' recommendations for all other covered Israeli banks. The firm initiated coverage on Mizrahi Tefahot, now covering four of the five largest Israeli banks: Leumi, Hapoalim, Discount, and Mizrahi Tefahot. Price targets were set at NIS 92 for Leumi (16% upside), NIS 91 for Hapoalim (12% upside), NIS 43 for Discount (18% upside), and NIS 300 for Mizrahi Tefahot (25% upside).

The report praises the stringent capital requirements and lending standards in Israel, resulting in low levels of problematic debt and a sector that is "structurally more resilient to investors." Jefferies observes that despite trading near all-time highs, Israeli bank stocks remain undervalued compared to their European counterparts, trading at a lower price-to-book multiple while offering comparable dividend yields.

Key factors influencing the valuation gap include the sustainability of banks' net interest margins amidst expected interest rate cuts, the impact of regulation, and the upcoming elections. Jefferies described Bank Leumi as a "blue-chip leader" due to its liquidity, asset quality, and operational efficiency. Bank Hapoalim was lauded as "well-balanced" with strong management and credit growth, Mizrahi Tefahot as a leader in mortgages and customer service with high profitability, and Discount as an "improving contender" with significant potential for operational enhancement.