High Tech Services Expansion And Cost Efficiency Will Support Solid Long Term Performance

Catalysts

About Bank Leumi le-Israel B.M

Bank Leumi le-Israel B.M is a leading Israeli bank providing a broad range of retail, corporate and capital markets banking services.

What are the underlying business or industry changes driving this perspective?

• The steady expansion of Israel's high tech services exports, described as a key growth engine for the economy, supports ongoing demand for corporate banking, capital markets services and transaction banking. This can feed into finance income and fee revenue.
• Credit portfolio growth of 8.8% over the first 9 months of 2025, with demand from corporates, real estate, infrastructure, mortgages and the middle market, points to a broader funding need across the economy that can support interest income and scale benefits for earnings.
• The multiyear improvement in the cost to income ratio to 27% in Q3 2025, supported by advanced technology and high digital adoption by nearly 90% of private customers, suggests scope to keep operating expenses in check and support net margins.
• Very low nonperforming loans of 0.41%, troubled debt at 1.34% of gross loans and an NPL coverage level that is about 3x, together with low credit loss expenses of 0.03% of gross loans, indicate that asset quality and provisioning trends may continue to support relatively stable earnings.
• A core Tier 1 ratio of 12.33% with a capital buffer of more than 2% above regulatory minimums, along with the Bank of Israel approval for a payout ratio up to 75% of net profit, gives the bank room to keep funding growth in target segments while also returning capital. This can influence earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Bank Leumi le-Israel B.M's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 46.0% today to 42.6% in 3 years time.
• Analysts expect earnings to reach ₪11.6 billion (and earnings per share of ₪8.06) by about June 2029, up from ₪10.2 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 13.5x on those 2029 earnings, up from 9.5x today. This future PE is greater than the current PE for the IL Banks industry at 9.1x.
• Analysts expect the number of shares outstanding to decline by 1.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.64%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The Bank of Israel is considering interest rate cuts, and management estimates that a 1% reduction in rates could reduce results by around ILS 800 million, which they translate to roughly a 0.8% impact on ROE. A sustained lower rate environment could therefore pressure net interest income and overall earnings.
• Regulatory changes such as a potential higher tax rate on banks or mortgage subsidies were mentioned as possibilities that would require legislation. If enacted in a less favorable form for banks, these changes could compress net margins and reduce net profit.
• The bank currently benefits from very low credit loss expenses at 0.03% of gross loans and high NPL coverage at about 3x. Any reversal in the geopolitical improvement or a weaker macro backdrop could lift credit losses from unusually low levels, which would weaken earnings and ROE.
• Fee income has been supported by strong securities activity and credit growth, but part of it is offset by customer benefits under the Bank of Israel program. If trading activity or credit demand slow while customer benefits continue or increase, fee growth could soften and weigh on total revenue.
• The bank is returning a high share of profit to shareholders with a 75% payout ratio and an annualized return of 8.2% at the current share price. If this level of capital return is not sustained due to future regulatory, macro or capital needs, investor expectations around shareholder returns and earnings per share could be challenged.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₪82.65 for Bank Leumi le-Israel 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 ₪90.5, and the most bearish reporting a price target of just ₪67.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be ₪27.1 billion, earnings will come to ₪11.6 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 9.6%.
• Given the current share price of ₪65.7, the analyst price target of ₪82.65 is 20.5% higher.
• 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.