October 23, 2021
  • October 23, 2021

Leumi USA merger could benefit other Israeli banks

By on October 10, 2021 0

In May 2020, Bank Hapoalim (TASE: POLI) announced that he would pay a fine of $ 875 million as part of a deal with US law enforcement. The move ended a serious case in which she admitted to helping her U.S. clients evade taxes. A year earlier, Mizrahi Tefahot Bank (TASE:MZTF) paid $ 195 million for its share in the case. Even earlier, in 2014, the third Israeli bank involved, Bank Leumi (TASE:LUMI), managed to settle its share by paying a fine of $ 270 million.

The investigation into the facilitation of tax evasion, opened in 2008, has shocked Israeli banking subsidiaries abroad in general and in the United States in particular. The episode made a media comeback last week, when Leumi announced that it had entered into a deal to merge Leumi USA with Valley National Bancorp, in a deal that would give Leumi USA a market cap of $ 1.2 billion. dollars and would earn Bank Leumi considerable capital gains of between NIS 650 million and NIS 750 million.

In the Israeli banking community, there is a consensus that this is a great financial deal for Leumi. If implemented, Leumi USA’s market capitalization will be 140% greater than equity, i.e. a multiplier of 1.4 on equity. For comparison, Leumi trades at a market cap of NIS 40 billion, reflecting a multiplier of less than 1.

The vice chairman of capital markets leader Alon Glazer said: “This is a very positive step for Leumi and means a good price. control in a US bank to a liquid and negotiable stake.

“I hope Leumi will take it one step further and realize part of its stake in the merged bank (which will be 14.2% according to the deal), as there is no reason to hold so many shares over time.”

“You cannot grow as a boutique bank in the United States”

Talk to Globes a day after signing the deal, Leumi CEO Hanan Friedman and Valley National CEO and Chairman Ira Robbins explained why the merger was decided. Friedman: “History teaches us that although Israeli banks operating in the United States have a high volume of activity, growth has been much slower than the American banking industry, which speaks volumes. We found out that you cannot be a boutique bank in the United States. and grow up. “

Market insiders note that despite the value it brings to Leumi USA, the deal will only remain valid as long as the merged bank’s share does not decline, as 90% of the deal is equity-based, with only a small part based on cash. A review from Valley National, however, reveals it at 1.22 (as of last week), while competing banks have higher multipliers. So although the bank specializes in mergers and has acquired a number of financial entities, its share has not increased significantly over time, which may make it easier for Leumi to sell part of it. its stake in the merged bank.

Another reason why Leumi needs to complete the merger now is the agreement it signed in 2018 to sell 15% of the shares of Leumi USA to two investors – investment funds MSD Capital and Endicott Management, to $ 140 million. This agreement reflected a market capitalization of $ 933 million for Leumi USA, far less than the Valley agreement, but also indicates that if in four to five years the shares of Leumi USA do not become tradable, the funds have the possibility of them. resell to Leumi.

Discount – The leader in US activity

Of the five largest banks, four others are active in the United States in one way or another, the largest being Israel Discount Bank (TASE: DSCT) with total deposits of almost $ 10 billion (in the first half of 2021), followed by Leumi with around $ 7 billion in deposits, Hapoalim with around $ 4 billion and Mizrahi Tefahot with little activity compared to others.

Discount is also the largest in terms of public credit with a portfolio of $ 7.6 billion, followed by Leumi USA (5.4) and Hapoalim (4.5). By comparison, Valley National’s credit portfolio stood at $ 32 billion at the end of the second quarter of 2021.

“We will benefit from their growth because, from now on, we are part of them. We can recommend Israeli clients to receive services from Americans who are familiar with the local market. Israeli companies that contact us will be served by a Leumi partner. bank, so that they feel at home and benefit from a much broader value proposition, ”notes Friedman.

Connection to Israel is a consideration when choosing a bank

However, not everyone agrees with Leumi CEO’s statement. Additionally, some sources in the banking market believe that this merger will trigger the battle of Israeli banks for the hearts – and wallets – of Jews and Israelis living in the United States and Israeli companies wishing to start an American business.

These sources claim that the merger could harm Leumi USA’s Israeli affiliation in the eyes of existing and potential clients, although Leumi USA CEO Avner Mendelson is expected to be vice president of the merged bank, and senior members and Senior Leumi USA executives will serve in a variety of key positions.

Discount US and Hapoalim US are therefore already preparing for a trend of customer attrition. For these two Israeli banking subsidiaries, this can be an opportunity, as connection with Israel is one of the main considerations for Jewish and Israeli clients when choosing an Israeli bank operating abroad.

Mendelson himself explains that this is exactly the reason for the merger. “Our competition is with the American market and not with the Israeli market; it’s a market that competes with different companies, different industries, and different sizes. In high tech, the competition is certainly not with Israeli banks but with Silicon Valley Bank, JPMorgan and others. he said, speaking from the United States.

“Our business, like other Israeli banks, generally does not involve Israeli customers. It is impossible to build a bank with only Israeli customers, so the struggle for the tech world is not limited to Israeli competitors. We serve hundreds of businesses, between 600 and 700, and the connection with Valley National will allow us to grow with those businesses. To date, working with some of them has been difficult, due to the glass ceiling blocking our ability to compete for the unicorns. [companies valued at over a billion dollars],“adds Mendelson.

Do you think other Israeli banks operating in the United States will follow in your footsteps?

“This step is trivial, if you understand where the market is heading and read the writing on the wall. Everyone understands that there are limits to organic growth, also because you are a foreign bank bound by foreign regulations. increases, and I won’t be surprised if we see other banks doing what we’ve been doing, after years of thinking, reviewing and analyzing the market, and getting to know all the banks involved in the States -United.

“You have to understand that all of us – the American team, Hanan [Friedman, Leumi CEO], and the team in Israel – knew Valley National in depth. He was chosen not because of the price but because of my relationship and my dialogue with the people of Valley for four years. Hanan met and got to know Ira, CEO of Valley Ira [Robbins]. We wouldn’t have taken the step without it being a good fit, as well as Ira’s innovative vision. He understands the need to focus on technology investments. He is well versed in Israel and its potential to align all parties, and is enthusiastic about the deal, especially in leveraging the connection with Israel, Leumi, and certainly with Israeli and tech companies. “

Discount and Hapoalim will develop via digital

Despite their desire to increase activity by welcoming Leumi USA customers, if they decide to leave this bank after the merger, Discount and Hapoalim do not currently plan to open new branches, due to the high cost of the transaction. maintaining offices in major US cities. Discount currently has seven branches in the United States – in New York, New Jersey, Florida and California. Hapoalim has a central branch in New York and branches in Miami, New Jersey and Los Angeles.

This year, for example, Discount moved its US headquarters to a new building in Manhattan with rental costs (excluding taxes, insurance and other related expenses) totaling around $ 8.4 million per year. Its policy is therefore to develop primarily through digital technology.

The agreement with Leumi USA is also a golden opportunity for Discount and Hapoalim to learn where they stand in terms of market value for their operations in the United States. The price Leumi paid, $ 1.2 billion, puts Discount US, which is ostensibly larger than Leumi US, in a good position for future sale or merger negotiations. Given the low profitability of these overseas subsidiaries, compared to the excellent results for the first half of 2021 reported by their Israeli parent companies, it is possible that the Leumi USA merger will not be the last.

Posted by Globes, Israel business news – en.globes.co.il – on October 10, 2021

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