Despite investor concerns that slowing revenue growth is weighing on underperforming shares in the banking sector, analysts are upbeat on the sector and find "good value" in local banking shares, ahead of year-end reports. "Three years into this banking cycle, earnings growth, for which falling provisions had been a key driver, has naturally slowed," said Michael Klahr, an analyst at Deutsche Bank. "Sluggish revenue growth has been compounded by a low CPI but also by protracted asset management sales." Investors are most worried, he said, that after three years revenue growth was slowing, but that he sees "more potential for earnings surprise on the upside to our and consensus estimates, from non-core activities such as real estate and construction, improving credit quality and lower provisioning." With GDP still growing at 5% year-on-year, Deutsche Bank does not see deterioration in the domestic banking environment either. Similarly, Alon Glazer, an analyst at Leader Capital Markets expects fourth-quarter results for the banks, which kick off with First International Bank of Israel's release on Tuesday, will reflect the growth trend in the economy, although the business credit sector segment of the banks did not grow last year due to the large raising of debt capital in the market. "The growth in the economy is boosting the bank's activities, boosting distribution fees, boosting credit card sales and improving credit portfolio quality," said Glazer. However, Glazer believes the positive impact of the country's growing economy in the fourth quarter will be offset by lost income from asset management post-Bachar reforms, the negative inflation rate and the cleaning up of the banks' credit portfolios, negatively impact profits from continuous operations. Leader expects Bank Hapoalim, which reports on Wednesday, to post a fourth-quarter net profits of NIS 667m. down from NIS 620m. a year earlier. For the full year, Bank Hapoalim is forecasted to report net profits of NIS 3.28 billion. Benefiting from the sale of Leumi Pia mutual fund, it expects Bank Leumi, which reports on March 27, to post quarterly net profits of NIS 1.1b., more than double the NIS 462 million reported in the fourth quarter of 2005. For all of 2006, Leader sees Leumi's profit at NIS 3.53b. Meanwhile, Leader projects Bank Discount, will report earnings of NIS 305m. for the fourth quarter, turning around from the NIS 111m. loss reported a year earlier, when it releases its numbers on March 28. Full year earnings were seen at NIS 993m. Mizrahi-Tefahot, which reports on March 26, is expected to generate fourth quarter net profits of NIS 140m., up from NIS 110 a year ago, and NIS 646m. for the 12 months of 2006. Finally, First International, reporting on March 20, is forecasted to post fourth quarter net profits of NIS 128m. vs NIS 124m. in the fourth quarter of 2005, and NIS 532m. for the full year. Responding to investor concerns about lost income at the banks from asset management fees post-Bachar, Deutsche Bank said it expects asset management sales to reduce revenues by 6% in 2007, but noted that distribution fees, advisory services, the sale of pension products and the reinvestment of asset sale proceeds would reduce this to a 2% gross revenue hit, amounting to NIS 630m. Furthermore, bank profits are likely to be boosted by hundreds of millions of shekels in 2007 because of the long-delayed cable merger between Matav, Tevel and Golden Channels, which resulted in arrangements that ultimately mean the banks can abolish charges they had taken for doubtful debt. "Recoveries of loans to the cable companies are alone NIS 300m. post-tax or up to 4% to 2007 sector earnings alone," noted Klahr. "Other high profile loans that may also be recovered are to Tnuva (being sold to Apax Partners) and Lumenis." On the other hand, analysts raise the question as to why banking shares have not rallied despite an excellent year in profits adding. The banking sector has underperformed the TA- 25 index by 10% over recent months and 12% versus the MSCI Israel. "We believe that the pricing of the banks is very cheap and looking at the alternatives in the market where risk has been growing over the past year, we view investment in the sector as justified," said Leader's Glazer. Deutsche Bank's Klahr called Bank Hapoalim the best quality name in the sector with the highest return on equity, which can be bought in a global context as a cheap bank.