Best bank
Bank Hapoalim
Best debt house
Citigroup/Salomon Smith Barney
Best equity house
UBS Warburg
Best M&A
Citigroup/Salomon Smith Barney
In Israel two banks compete strongly for the position of best bank. This year Bank Hapoalim continues to beat off the formidable challenge of its closest rival, Bank Leumi.
| Joel Maryles | ||||||
Both are seen as very strong players and are easily the country’s two biggest banks. “Between the two it is always hard to choose, because they are much of a muchness” says an analyst.
Hapoalim, though, is reckoned to be maintaining its focus on core strengths, whereas Leumi is perceived to be diversifying into sectors that commentators feel offer little value. “Hapoalim hasn’t been buying hotels and oil companies and is focusing on straightforward banking,” explains one.
Although Israel is not a large market in terms of population, customers are sophisticated – by far the most sophisticated in the Middle East. As a result there is no easy route to increasing size or improving a franchise by introducing telephone banking or internet banking because those services are already widespread.
As a result banking analysts feel the best strategy to pursue, especially given sentiment towards the country in the light of the simmering regional political situation, is a simple one. “It’s best just to steer steady as she goes,” says an analyst. “Lend money to people who are going to pay it back – simple core values. The downturn in the Israeli economy and the political problems and the technology slowdown means you have to focus on getting your money back. It is not a market where you can grow quickly without deteriorating asset quality.”
Israel’s debt market has continued to be active and Citigroup/Salomon Smith Barney leads the way as best debt house, with a strong share of the market.
Joel Maryles, managing director and head of investment banking for Salomon Smith Barney in Israel, says issues from Israel will continue to be popular. “From a financial standpoint of the Israeli economy, I think there’s going to be continued demand for Israeli debt issues,” he says. “High-quality issues, such as Israel Electric this year and the State of Israel, will be in great demand with investors.”
Maryles predicts additional high-yield financing in the market. “Both from investment grade and high yield I think you’re going to see a broadening of the client base,” he says.
UBS Warburg takes this year’s honours as best equity house. Equity activity is dominated by the technology sector, which of course has suffered in the past year. Many Israeli technology firms list on Nasdaq which has been particularly hard hit.
Despite this, John Ferreira, responsible for the European emerging markets equity product for UBS Warburg, remains optimistic. “We like the long-term prospects for technology,” he says.
The foundation for his outlook lies in the fact that Israeli technology firms have continued to attract a large amount of venture-capital funding, principally from the US. Some $3 billion poured into the country last year, ranking it only behind California and Massachusetts. Ferreira expects this investment to drive the emergence of new technology companies that will then filter through into capital markets activity. “From an investment point of view, what that points to in the long term is that some of these companies will be coming to market,” he says.
At the moment there are two distinct equity markets for Israeli companies, with those listed on Nasdaq far outstripping the Tel Aviv stock exchange in terms of daily trading. Although dual listing is being introduced, it will take a long time for the domestic exchange to start to catch up, says Ferreira. “It’s really very much two markets and it’s going to be a long process,” he says.
In a wider context Israel has suffered in comparison with other emerging markets as the telecoms and technology stocks have fallen out of favour. Investors have headed towards commodities and Russia instead. The political tension has not helped.
| John Ferreira | ||||||
“Having said that,” says Ferreira, “although no-one expects massive strides in the short term in the political situation and people know it’s a long-term issue, they will look at value situations on an ad hoc basis and they will look at the technology sector.”
So UBS Warburg, which had a record year in Israel last year, expects business to continue to thrive despite all the uncertainties.
Citigroup/Salomon Smith Barney follows up its fine performance in the Israeli debt market, by also scooping the M&A award.
Salomon Smith Barney’s Maryles, says last year was terrific, in no small part thanks to Salomon’s involvement in the $2.7 billion sale of Galileo to US firm Marvel – the largest ever deal for a publicly traded Israeli company. “Last year we advised on a number of outstanding deals,” he says and adds that the future looks good for this side of the business. “The M&A outlook for Israel in the next couple of years will be very strong.”
As Marvel’s pursuit of Galileo showed, US and European technology companies see Israel as a centre of technological innovation and many international firms have opened research and development operations there in recent years. The next step, says Maryles, will be to acquire Israeli companies to bring home-grown technology in house.
Meanwhile, with the large inflow of venture capital to fledgling companies, in recent years those companies will be approaching the next stage of their development, he adds. “There is obviously an incubation period for many of these companies as they get their first and second rounds of investment and they come to a stage where they have a product they’re beginning to sell and they have to make a choice: do they build themselves, develop their own marketing channels, or do they align themselves with a large international organization?” The attraction of a merger will be increased by the weak equity market, he argues.
