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HSBC, one of the world's largest banks, has reiterated its overweight rating on Israel's top two banks, saying they are among the cheapest in the Europe, Middle East and Africa region.
The UK-based company, however, warned against the election of Labor's Amir Peretz as prime minister, on fears it could result in a reversal of the government's economic reforms.
The firm also forecast that, while economic growth would slow in the run up to March general election, gross domestic product would increase 4.2% in the year as a whole.
HSBC, in a note to investors released to the press on Monday, said Bank Hapoalim's shares were underpriced by 20 percent and Leumi's by 16%, and that it expects both the stocks to jump 40%-50% in the next two years to NIS 31.40 and NIS 25.60, respectively.
Shares in the two banks each rose 3% following the comments, with Hapoalim closing at NIS 22.15 and Leumi at NIS 18.42.
Part of the attraction to HSBC is that the banks are expected to pay dividends of about 50%-60% of their net profit for 2006, thereby providing a "very attractive yield" of around 8%.
HSBC also forecast that Hapoalim and Leumi would continue to improve their loan portfolios and their earnings, which reached record levels last year. In addition, it believes the banks will offset the fall in revenue following the enforced sale of their interests in mutual and provident funds.
"The banks should make money from the distribution and switching of the funds," HSBC noted.
Last Thursday, Hapoalim said it expects its underlying profit in 2006 to provide return on equity (ROE) of 15% and total net profit to provide ROE of 25%. The first figure excludes the income Hapoalim is due to receive from the sale of its mutual and provident funds assets, while the latter figure includes it.
HSBC said the valuations of the banks are underpinned by continued economic growth, despite the volatility caused by Prime Minister Ariel Sharon's stroke and the upcoming elections.
"[Before the elections] there is likely to be an increase in uncertainty, and a natural slowdown, particularly for consumer spending, from the growth which picked up last year," HSBC said, but added that "we think this should be short- lived" and that growth would be "robust."
Although it believes a Labor victory in the election was "very unlikely," it warned of dangers if such a scenario were to take place.
"The market's concern is that that we get a majority Labor Government which follows a leftist economic program, rolling back recent reforms," HSBC said.