IBI on Bank Reports: Prefer Discount

Lior Shilo, Bank Analyst, IBI Investment House publishes today a review summarizing the banks’ fourth quarter 2020 reports published last week and explains that it can be said with almost absolute certainty that local banks have succeeded in 2020 and the economic crisis.

Of course there are many more disappearing in the foreseeable future such as the unknown extent of bankruptcies of businesses and individuals, however banks have coped well with the crisis thanks to a number of moves – streamlining, deferring payments, accumulating capital cushions and margin against those future credit failures. So in a year when they expected the banks to show losses, everyone made a profit and some even made a very good profit.

At the industry level, the banks presented a return on capital of 9.3% in the last quarter of 2020, and excluding non-recurring items, a return on capital of 10%. In other words, this is the best quarter of the year, largely due to credit loss expenses that decreased significantly compared to the first three quarters of 2020. In summary, the return on equity was 6.2%, a low return compared to recent years, but compared to a crisis year, these are encouraging and positive results.

In terms of deferred payments, it seems that most borrowers who requested deferred payments have returned to pay and now there are only a few percent of the banks’ credit portfolios that still defer payment and some that have started to pay according to the new outline of the Bank of Israel. The data in the reports show that about 4% of the total credit portfolio of the five banks remains under deferral of payments and some according to the new outline as stated.

This is compared to double-digit rates during the first half of the year, so most of the risk at the beginning of the crisis has now dissipated. It should be noted, however, that the extension of the unemployment benefit period ends in June, after which insolvency cases may increase. On the other hand, approaching the end date of the extension of the unemployment benefit plan pushes into the labor market a certain part of those workers who remain at home.

Among the banks, the highest return on equity was presented by Mizrahi Bank with a return on equity of 11.4%. Recall that this is the first quarter in which the Bank presents its results in full consolidation with the results of Union Bank including the opportunity profit arising from its acquisition at a discount and less expenses related to the dismissal plan of Union employees.

Followed by Poalim, Leumi and International showed a relatively similar return around 9.5% -10.5%. Poalim (9.6%) recorded specific loans and recorded low group expenses, Bank Leumi (9.9%) showed stability in income along with a reduction in the structure of expenses and recorded a low rate for credit losses. International Bank (9.6%) continued to present good results and included clearing expenses related to a voluntary retirement plan at the Bank, excluding this expense, the Bank’s return on equity was 10.3%, the second best result in the quarter.

Looking ahead, we believe that 2021 is expected to be better than the last due to lower credit loss expenses compared to those presented in 2020 (although slightly higher compared to 2019), higher inflation revenues compared to expenditure in 2020 (which according to the market forecast is expected to be Around 1%, compared to 0.6% – in 2020) and a decrease in expenses as a result of efficiency and transition plans for digitization.

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It is clarified and emphasized that what is stated in this review does not constitute a substitute for advice that takes into account the data and the special needs of each person. In publishing the information in this review, there is no recommendation or opinion regarding the execution of any transaction or investment in securities, including the purchase and / or sale of securities. It should be emphasized that for any information of any kind that appears in the review – each person must perform additional testing and verification, taking into account his data and special needs. It should be noted that the information may contain errors and that market changes and / or other changes may apply to it, and that significant deviations may also be discovered between the forecasts and analyzes that appear in the actual situation. Therefore, making any decision based on a fact, opinion, opinion, forecast or analysis that appears in the review – is the sole responsibility of the reader.

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