Mizrahi Tefahot Bank Ltd.’s planned bid for a smaller rival signals a shift away from the Israeli housing market that transformed it into the country’s most profitable lender.

Mizrahi, Israel’s third-largest bank by assets, is considering a $400 million offer for Union Bank of Israel Ltd., according to a stock market filing on Monday. The banks are in talks for a tie-up in which Mizrahi would purchase all traded shares of Union Bank for as much as 60 percent of its equity, according to the statement.

“The bank has been looking for a long time to diversify away from the housing market and a deal like this would do it in one swoop,” said Meir Slater, head of research at Bank of Jerusalem Ltd., in Tel Aviv. “This would speed up the process that would have taken years to accomplish.”

Mizrahi, which is 44 percent owned by Israel’s Wertheim family and billionaire cousins Liora and Eyal Ofer, has generated higher returns than its rivals for the past seven years -- except in 2015 -- as home prices soared. Two-thirds of its 173 billion shekels ($48 billion) lending portfolio is housing loans. Now, with the housing market showing signs of cooling, Mizrahi plans to boost its corporate loan book. Business loans made up about 46 percent of Union Bank’s revenue in the first quarter, compared with 32 percent at Mizrahi.

“Competition in the corporate segment is significant,” said Slater. “It’s not just the big banks who have dedicated staff that know how to go after this business, but they’d also have to compete with the prices in Israel’s corporate bond market," he said.

Mizrahi didn’t reply to emailed questions for comment.

Government efforts to slow Israel’s housing market are starting to work after prices more than doubled over the past decade. The number of new mortgages in June fell 15 percent from a year earlier, according to data from the Bank of Israel. Mortgage rates, which almost doubled in the eighteen months until February, have since fallen four straight months to the lowest level since October.

The government has freed up land and boosted construction schedules to meet a housing shortage that helped fuel the boom. The finance ministry also introduced purchase taxes and is trying to pass a new levy on ownership of third apartments to deter property investors.

“That’s taken investors out of the market in a big way,” said David Gubbay, a real estate analyst at Excellence Investments Ltd. The government’s steps have “more meat to them” compared with previous initiatives that failed, he said.

Mizrahi’s shares are expected to rise 2 percent over the next twelve months as real estate transactions slow, according to the average of six estimates compiled by Bloomberg. The stock has risen 57 percent since 2015, outpacing a 40 percent increase on the Tel Aviv Bank Index over the same period. Mizrahi posted a 10.4 percent return on equity in the first quarter, the highest among Israeli lenders, and triple the yield on the MSCI Europe Banks Index.

One of Mizrahi’s biggest challenges will be to get large companies to borrow from it. Bank Hapoalim Ltd. and Bank Leumi Le-Israel Ltd., the country’s two biggest lenders, held 51 percent of loans issued to large corporations at the end of 2016, while Mizrahi held 8.1 percent, according to central bank data.

Mizrahi’s shift in strategy is “the right thing to do to,” said Micha Goldberg, head of research at Excellence Nessuah Services Ltd. “The bank understood that the party isn’t going to last forever. In the coming quarters we’ll see more corporate lending as management aims to have a more balanced loan book.”

Source:
courtesy of BLOOMBERG

by Yaacov Benmeleh

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