Investment bank Merrill Lynch, in a report on banks in emerging market for international investors, covers 24 banks in eight countries ¿ Israel, Turkey, South Africa and a number of countries in eastern and central Europe.

The central conclusion of the report is that the risk-reward ratio for investing in Israeli banks is low compared to investments in Turkish, South African, Hungarian, Czech and Croatian banks. The U.S. investment bank rates three South African banks "strong buy", and five banks in the Czech Republic, Egypt, Tunisia and Turkey were rated "buy". The Israeli banks were only rated "neutral".

Merrill Lynch, which classifies any bank investment in an emerging market as high risk, rated Bank Hapoalim(TASE: POLI ), Bank Leumi Le-Israel(TASE: LUMI ), and First International Bank as neutral for the short term, but for three years and up, Hapoalim and Leumi earned strong buys. The report noted the low likelihood of the three Israeli banks distributing cash dividends.

The analysts write that newsflow from Israel continues to weaken with the shekel breaking the NIS 4.90 barrier, economic indicators showing little cause for optimism, and fiscal concerns looming. "We consider a potential tax on deposit interest a negative, as this may only serve to encourage capital outflows. Further, with a recovery now looking unlikely near term, and rate hikes looming, we remain highly cautious on the outlook for credit expansion and loan quality."

The bank goes on to state unequivocally "Valuations may be at historic lows, but with very limited capital cushion, we think the risks remain on the downside."

The increased dollar demand of recent weeks raised concerns that foreign investors were pulling out of Israel. Market sources estimate however that until now most of the demand came from Israelis seeking protection from shekel devaluation, but not removing the money from Israel. A recommendation of this sort, from a major American investment advisor, renews fears of foreign investors capital movements taking money outside Israel's borders.