"The Idea That a Bank Should Trade at 1x Book Value Is Wrong When ROE Is at These Levels"

Bank stocks were one of the most successful investments of 2024, with the bank index soaring 36% for the year. Early on, there were fears that banks would take a hit from the war, with concerns about credit loss provisions for borrowers and clients affected by the conflict. But as the year progressed, it became clear that 2024 was a record-breaking year for banks. For a long time, bank stocks traded at price-to-book (P/B) multiples below 1, but they gradually climbed above that threshold as they reported phenomenal returns on equity (ROE) of 12%-14%—and in some cases, even higher.

One of the main investor concerns for bank stocks was the possibility of a Bank of Israel rate cut. However, in recent months, it has become clear that this won’t happen anytime soon. The central bank once again kept rates steady this week at 4.5%, amid a 0.6% rise in the January CPI, bringing annual inflation to 3.8%.

So far, the only bank to report fourth-quarter earnings is Mizrahi Tefahot, which posted record net income of nearly NIS 5.5 billion and an 18.5% ROE. Despite these stellar results, the stock is down. According to Lublin, this decline stems from high investor expectations. In our conversation, Lublin also touched on the potential for increased competition in the sector and whether, after the run-up in bank stocks, there’s still room for upside.

Why Is Mizrahi’s Stock Dropping Despite Strong Earnings?

"The bank is highly exposed to inflation because of its mortgage portfolio. Every 1% drop in the inflation rate translates to a 3% impact on Mizrahi Tefahot’s ROE. The results were largely in line with expectations, but the stock is falling—when a bank trades at 1.4x book before earnings, the market expects phenomenal results, and Mizrahi delivered results that were merely 'very good.'"

"The market is also correcting a distortion here. For a bank to trade at a premium to peers, it needs to be extremely efficient or have a rapidly growing niche. Mizrahi’s mortgage segment was that growth driver, but it has slowed down."

What Could Pressure ROE This Year Besides Rate Cuts?

"Banks thrive on financial margins. If we assume that credit growth will be around the historical average or slightly above—say 7%-8%—and interest rates remain high, then banks will continue to benefit. However, savvier customers who transfer funds from checking accounts to interest-bearing deposits, or public pressure to offer interest on checking accounts, could hurt banks."

עוד תכניות

"We won’t see 2024-level profitability in 2025, not because rates will change but mainly because inflation is cooling. We’re coming off two years of significant inflation into a year of more subdued price growth. The market currently prices in inflation of around 2.3% for 2025, though some expect it to be higher. The sharp inflation of recent years was a key driver of credit growth."

Did the Market Expect Higher Credit Loss Provisions?

"Banks are required to set aside collective provisions, and they have done so—these levels are now close to where they were during COVID. So, I’m not sure who expected even higher provisions."

Do Bank Stocks Still Have Upside After Their Rally?

"The equation is simple: banks generating 15% ROE and trading at 1x book are delivering a 15% return to investors. How much of that goes back to the bank and how much gets distributed to investors via dividends depends on regulators. The notion that banks should trade at 1x book is flawed when double-digit ROEs are in play. I don’t know many assets that can deliver those kinds of returns."

Could Competition Increase? What About Credit Companies?

"As long as banks have access to cheaper funding sources—mainly from the Bank of Israel—there won’t be real competition. Sure, you can take a loan from a credit company, but borrowing from a bank is still the cheapest option. There’s no real competition. I don’t see a scenario where someone takes a mortgage from a credit company. The road to change is still long. We will continue to operate in a market dominated by five major banks and a handful of credit card companies."

"There’s also the issue of public trust. It’s not clear that people would rush to deposit money with a non-bank lender. Most would likely prefer to earn 0.5% less at a traditional bank and feel their money is safer."

What About Digital Banks Like One Zero?

"The market has already spoken—One Zero offers the lowest mortgage rates but still struggles to grow. It’s a matter of educating consumers. For example, it took years for people to realize that trading through a brokerage firm was cheaper than trading via a bank. Eventually, that market broke open, and the same could happen here. But when it comes to where Israelis keep their money, they only recognize five names: Leumi, Hapoalim, Mizrahi, Discount, and International."