'Tel Aviv' Stock Exchange banking index falls 20% amid war on Gaza

By Al Mayadeen English
Source: Agencies
25 Oct 2023 22:15
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This decline marks a stark contrast to the previous performance of Israeli banks, which had previously been considered a safe investment.

A billboard welcoming US President Joe Biden who arrived on a visit to Palestine to express solidarity with "Israel" in the wake of the resistance operation led by Hamas fighters is seen in "Tel Aviv", occupied Palestine, Wednesday, Oct. 18, 2023 (AP)

The "Tel Aviv" Stock Exchange's Banking Index, a benchmark for Israeli banks, has experienced a significant decline of 20% since the outbreak of hostilities in the region, the Israeli website Globes reports.

This decline marks a stark contrast to the previous performance of Israeli banks, which had previously been considered a safe investment.

In the first half of 2023, these banks collectively reported record profits of NIS 14 billion and boasted double-digit returns on equity. As a result, the "Tel Aviv" Stock Exchange Banking Index surged by 12% in September, reaching an all-time high.

However, the index took a sharp nosedive following the resistance operation that began on October 7. This decline encompasses the regime's five largest banks: Bank Leumi, Bank Hapoalim, Israel Discount Bank, Mizrahi Tefahot Bank, and First International Bank of Israel.

Between the onset of the war on Gaza and October 23, these banks witnessed a 20% decrease in the Banking Index, which also meant a 6% dip since the beginning of the year.

The individual performance of these banks since the start of the conflict revealed Bank Leumi to be the hardest hit, with a 22% drop, while Discount and First International recorded a 20.4% loss. Bank Hapoalim saw an 18% decrease, and Mizrahi Tefahot's shares fell by 17.1%. Experts predict that this downward trend might not have reached its bottom yet, as they anticipate more investors to sell their bank shares the longer the conflict persists.

One significant reason for this decline is the increase in perceived risk due to the ongoing conflict. Furthermore, foreign investors are offloading their shares, which is a natural response in situations of heightened instability. It's noted that settlers would similarly avoid holding bank shares in a region facing conflict.

Another factor contributing to the sharp decline in bank shares is the liquidity of these stocks on the "Tel Aviv" Stock Exchange. The financial sector is a cornerstone of the "Tel Aviv" market, and the Banking Index is among the most accessible and tradable indices.

With banks being a crucial pillar of the Israeli economy, their performance often serves as a barometer for the regime's economic health. However, the ongoing war is anticipated to hinder their activities, especially in terms of loan repayment difficulties for businesses, households, and the real estate sector.

Rating agencies like Midroog acknowledge these risks but believe there's no significant liquidity threat to the banking system, given its reliance on retail deposits, which have displayed stability during previous crises. Nonetheless, there's an expectation that banks will have to set aside larger provisions for credit losses in the upcoming quarter, potentially impacting their income.

As for investing in Israeli banks at this time, opinions differ. Some experts believe that the current average capital multiples in the banking sector don't represent a particularly attractive opportunity, considering the ongoing turmoil.

Others view this as an interesting investment opportunity, especially in banks like Leumi and Hapoalim, which are trading at low capital multipliers, potentially offering significant profit potential once the crisis subsides.

One crucial variable that will impact the banks' performance is the Bank of "Israel's" interest rate. While it currently remains unchanged at 4.75%, most analysts anticipate a future rate cut to stimulate the economy.

However, this is expected to come only after the end of October, and the effect on the banks might be limited, particularly since banks have already initiated relief programs for customers. Nonetheless, if and when interest rates drop, it may affect the banks' profitability, albeit not significantly, according to the Bank of "Israel's" research department.