(Bloomberg ) Israel's largest banks are finally getting into the technology startup game, and Google Inc. (GOOGL)'s acquisition of Waze Inc. may have had something to do with it.
Bank Hapoalim Ltd. (POLI) and Bank Leumi Ltd. (LUMI), the nation's two largest lenders, say they plan to increase lending and adapt services to meet the needs of technology startups. Both say they can no longer stay away from a segment that accounts for about half of industrial exports and last year prompted the most venture capital-backed deals in a decade.
"We are seeking ways to grow," Bank Hapoalim Chairman Yair Seroussi said in a June 17 interview at the lender's headquarters in Tel Aviv. "The high-tech industry is such a big portion of the economy you can't ignore it."
Israel's high-tech industry, which raised $6.6 billion in 85 deals last year, gets most of its money from foreign funds, according to IVC Research Center. Google, the world's biggest search provider, paid $969 million last year for Waze, an Israeli navigation-software company.
Banking revenue is under pressure amid the lowest interest rates since 2009, weaker corporate credit demand and tougher regulation such as caps on mortgage lending. The sector posted a 3.1 percent drop in net interest income in the first quarter, according to central bank data. Israeli banking shares traded at 0.8-times book value through yesterday, compared with 0.96-times for Europe's Stoxx 600 Banks Index and 1.4-times for the MSCI Emerging Markets Financials Index, data compiled by Bloomberg show.
"The banks are likely to generate more fee income from services provided to these companies than from credit," Terence Klingman, head of research at Psagot Investment House Ltd. in Tel Aviv, said by phone yesterday. "But this will not be a game changer, as what the banks need is for interest rates to be higher and a lot of relief from regulation."
Israel's central bank left its benchmark rate unchanged at 0.75 percent on June 23, after cutting it 10 times since 2011 in an effort to boost growth and weaken the shekel to help exports. The currency has climbed almost 5 percent against the dollar in the past 12 months, making it the sixth-best performer among 31 major currencies tracked by Bloomberg. Economic growth is expected to slow to 3.1 percent this year from 3.3 percent in 2013, according to a central bank forecast in March.
Leumi said last month it will allocate 2 billion shekels ($582 million) to a new technology unit, LeumiTech, for credit to startups. Both banks say they're also adjusting their policies to enable them to fund companies at an earlier stage of development and provide added services, such as English documentation.
"The banks want a piece of the cake," Koby Simana, chief executive at IVC, a Tel Aviv-based research company that tracks the information technology industry, said in a phone interview yesterday. "Companies need different kinds of funding at different stages of their development, so the initiative by the banks is welcome."
Google's Waze and Cisco Systems Inc. (CSCO) $475 million purchase of Intucell Ltd. last year contributed to a total $47 billion of technology mergers and acquisitions in the past decade, according to IVC. Bank debt makes up about 33 percent of technology companies' capital structure in the U.S. and 10 percent to 15 percent in Israel, data from Bank Leumi show.
"Traditionally banks haven't been a player in the industry as they have been deterred by the lack of information around these companies and their special needs," Yifat Oron, chief executive officer of LeumiTech said in an interview at the company's office in Tel Aviv on June 22. Banks are targeting the industry now as it has proven to be "significant in terms of amounts of money" and not a passing trend, she said.
Leumi's net income is forecast to jump 11 percent to 2.16 billion shekels in 2014 and Hapoalim's net is expected to rise 4.5 percent to 2.7 billion shekels, according to an estimate of 3 analysts surveyed by Bloomberg. Hapoalim shares fell 1.6 percent to 19.91 shekels at the close in Tel Aviv. Leumi fell 1.7 percent.
When an Israeli company is sold overseas or sells shares on a foreign exchange, each dollar of the price represents a loss of more than $3 for the country's economy, according to the Israel Securities Authority.
"The funding will supply the industry with enough fuel to allow them to grow to later stages and stay independent longer," LeumiTech's Oron said. That will help with "creating jobs and using local services," she said.