UBS cuts EPS, target prices for banks Hapoalim, Leumi and FIBI

Update lists problems from construction to tourism to cable-sat war to Gilat to tycoon Gad Zeevi
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UBS Warburg published an update on the Israeli banking establishment, slashing 2002 earnings and profitability estimates and lifting forecast provisions, based on the deteriorating economic outlook.

The analysts' bottom line is that some of the banks' problems are recession-related, while other woes derive from incautious behavior during the hi-tech boom. How many of the doubtful debts will turn into bad ones is anyone's guess.

Analysts Stephen Levey, Charles Silber and Christopher Mallin affirmed a Hold rating for banks Hapoalim, Leumi and First International Bank of Israel (FIBI), but recommended overweighting Hapoalim over Leumi.

The team lowered earnings per share estimates for Bank Leumi by 28%, for Bank Hapoalim by 18%, and for FIBI by 12%.

Not only is the general economy in sorry shape, they write: the banks are exposed to "relatively risky" telecommunications and technology companies.

Provisions will be climbing, especially after the Bank of Israel's Supervisor of Banks issued a directive (exempting only Bank Discount, but not its subsidiaries) to set aside more money for doubtful debt.

In keeping with the general economic deterioration, the UBS analysts lowered their loan-growth estimates ¿ credit consumption ¿ from 7.5% to 4.1% in 2002, and also reduced their deposit growth forecast from 8.3% to 2.6%.

The team therefore also reduced their price targets for the Israeli banks. Hapoalim was lowered to NIS 9.7, a mere 11.6% above its current market price. Bank Leumi got NIS 6.7, 12% below its selling price today.

FIBI5 shares, of the First International Bank, received a target of NIS 22.4, about 10% below its current level.

UBS singled out several problem sectors, companies - and one problem businessman - for the banks:

Construction: This sector alone comprises 20% of the banks' balance sheet exposure, and is just getting riskier as occupancy declines, partly due to the hi-tech crisis. Construction has been in recession for years, and isn't getting any better. Forecast: More provisioning.

Tourism: Slammed by the intifada and the global slowdown, the banks' exposure is only 3% to 4% - but given its horrible condition, the sector's effect on the banks' balances will be weighty. Won't kill the banks, though.

Gad Zeevi: This businessman alone is responsible for about $300 million in loans to buy a 20% stake in the Bezeq phone company from U.K. firm Cable & Wireless. He's struggling to meet interest payments, let alone principal. (Just this week Union Bank sued to liquidate two of his companies over a mere NIS 8 million debt.)

Koor: Start by noting UBS' assessment that affiliate ECI Telecom (Nasdaq:ECIL), which has wreaked havoc on Koor's results of late, is not about to collapse. ECI could yet sell its ECtel (Nasdaq:ECTX) stake and return every penny it owes to Bank Hapoalim. But if market conditions worsen further, there is some danger that ECI and Koor could reach bankruptcy.

Cable companies: UBS estimates that Israel's cable trio owes the banks $600 million. Of that, about half is owed to Bank Leumi alone. The cable companies are still spending hand over fist and can't raise money from the debt or equity markets. The banks may yet be forced to lend more to help the companies reach their goals.

Satellite TV: Hapoalim, Leumi and FIBI have lent the YES satellite broadcasting company some $400 million to finance its war with the cable companies. Spending heavily to squash either other like cockroaches, none are making a dime. DBS may never reach the black but the Bezeq phone company will bail it out, eventually. Until then, it may cause trouble.

Gilat Satellite: Owes Hapoalim $100 million, UBS estimates. It isn't about to collapse, or to recover.

Green Venture Capital: Danger ¿ none. Green's controlling shareholder Yitzhak Tshuva has personally guaranteed the $76 million lent primarily by Bank Leumi. Meanwhile Green's market cap has shrunk to $5.4 million. The case just goes to show the risks Israel's banks undertook during the hi-tech boom.

The Arison-Dankner group: Borrowed from Leumi to acquire control of Hapoalim, used dividends from Hapoalim to repay Leumi. But Hapoalim won't be handing out cushy dividends in the year to come. Risk: Almost nil, but still.

LBOs: A nasty habit. UBS credits with calculating that in recent years the banks extended NIS 23 billion to finance leveraged buyouts. Not all the loans are "safe as houses", write the analysts.