Modern Digital Banking In Israel Will Unlock Future Efficiency

Key Takeaways

• Ongoing digitization and operational modernization are driving cost efficiencies, margin expansion, and higher non-interest revenues tied to changing consumer behavior.
  
• Improved credit quality and robust lending growth position the bank for sustained profitability and flexibility in shareholder returns amid favorable economic conditions.
  
• Geopolitical instability, regulatory pressures, and sector concentration expose the bank to higher costs, weaker earnings, and increased vulnerability to economic and property market shocks.

Catalysts

Provides various banking and financial services in Israel and internationally.

• Ongoing digitization of financial services and modernization of the bank's operations, as indicated by a strong cost/income ratio (35%), continued investment in process automation, and margin expansion, are likely to enhance cost efficiencies and boost net margins.
  
• Robust growth in household and business lending (credit growth of 10.8% YoY and broad-based growth across all segments) aligns with Israel's technology-driven economic strength and rising urban affluence, positioning the bank for sustained revenue and earnings growth as macroeconomic conditions remain favorable.
  
• The scaling of fee income streams (up 9.2% YoY) from areas like account management, credit cards, and securities reflects increasing demand for value-added digital banking services tied to changing consumer behavior, supporting higher non-interest revenue and future earnings resilience.
  
• The bank's strong capital generation (CET1 ratio of 11.74%, shareholders' equity up 11.4% YoY) provides flexibility for increased shareholder returns (targeting ≥50% payout in dividends/buybacks when restrictions ease), likely enhancing per-share earnings and driving stock rerating when war-related uncertainties subside.
  
• Significant credit quality improvements (NPL ratio down to 0.52% with robust coverage) not only reduce risk and provisioning expenses but also support further portfolio expansion, boosting the bank's ability to grow net interest income and improve overall profitability.

Bank Hapoalim B.M Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank Hapoalim B.M's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 37.6% today to 42.0% in 3 years time.
• Analysts expect earnings to reach ₪10.5 billion (and earnings per share of ₪7.53) by about July 2028, up from ₪8.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, which is the same as it is today today. This future PE is greater than the current PE for the IL Banks industry at 10.1x.
• Analysts expect the number of shares outstanding to decline by 1.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.65%, as per the Simply Wall St company report.

Bank Hapoalim B.M Future Earnings Per Share Growth

Risks

• Persistent geopolitical risks and war-related uncertainties in Israel could result in prolonged regulatory restrictions on dividend payouts and buybacks, limiting capital returns to shareholders and potentially dampening earnings growth and share price appreciation.
  
• A significant portion of recent credit growth was driven by high demand in the Israeli real estate and corporate sectors; overexposure to these sectors may leave the bank vulnerable to property market corrections or macroeconomic downturns, increasing loan loss provisions and negatively impacting net margins.
  
• The bank's outlook and loan growth guidance are premised on continued GDP and inflation growth in Israel; any slowdown in economic activity or adverse macroeconomic shocks could undermine revenue growth and pressure overall profitability.
  
• Ongoing regulatory interventions, including mandatory customer benefits and relief programs (such as the ₪400 million yearly grants), could lead to higher operating costs and reduced fee income, impacting cost/income ratios and net earnings over time.
  
• Repeated emphasis on collective allowances for credit losses due to "potential impact of the change in the economic, political and security landscape in Israel" signals that sustained instability could drive up provisioning costs, erode credit quality, and weigh on future earnings.

Valuation

• The analysts have a consensus price target of ₪67.0 for Bank Hapoalim B.M based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₪75.0, and the most bearish reporting a price target of just ₪62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₪24.9 billion, earnings will come to ₪10.5 billion, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 8.6%.
• Given the current share price of ₪64.2, the analyst price target of ₪67.0 is 4.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.