Israeli banking regulator to clear way for share buybacks

Policy should be in place around early July • Regulator expects most banks with capital buffers to use option

The country’s banking regulator is poised to publish policy proposals that will allow the banks to buy back their own shares in addition to making dividend payouts, increasing the appeal of banking stocks to investors.

Hedva Ber, supervisor of banks at the Bank of Israel, said on Wednesday the new rules should be in place around early July.

“I believe that most banks with capital buffers will use the buyback option once we publish it,” Ber told reporters, adding the new policy will state the conditions for a buyback.

Russell Echlov, portfolio manager at Mendon Capital, which has $1.2 billion in assets under management, said the move was a good first step. But he believes buybacks will continue to require regulatory approval with each program.

“This is good and will be accretive to earnings and book [value] in most cases,” Echlov said.

Zev Marynberg, chief investment officer at hedge fund firm Adar Capital Partners, said: “We are cautiously optimistic with Israeli banks, as the economy continues strongly to grow and banks have a quasi-monopoly.”

Leumi, the nation’s second-largest bank, said last week it planned to buy back up to NIS 700 million ($195m.), or 2%, of its shares, by March 31, 2019. Leumi, though, needed special permission from the central bank for what would be the first move of its kind in three decades.

Leumi and its main rival, Hapoalim, pay dividends equal to 40% of net profit, which Ber noted was above the average of about 35% for US banks. But US banks buy back shares at profit levels that can exceed 100%.

Ber added that buybacks are more flexible than dividends.

Hedge funds have been betting the landmark move by the Israeli financial regulator to permit buybacks will lead to further programs from other banks.

Ber, speaking after the central bank issued its annual report on the Israeli banking system, also said there had been strong interest from a local and foreign institutions and private equity funds to buy the credit card companies from the country’s largest banks, as required under a recent Israeli law.

On the banking system, Ber said Israeli banks are becoming more efficient due to a reduction of staff and branches. She said the three midsized banks, Mizrahi-Tefahot, Discount and First International, had shown a jump in credit supply and now have a 44% market share.

Banks still supply about 80% of credit in the country and Ber expects in coming years there will be more competition for credit from technology firms, similar to Alibaba. (Reuters)