After the July Comeback and Ahead of Earnings: Which Bank Is Worth Investing In?

For most of the year, the bank index on the stock exchange has been stagnant. Since the beginning of 2026, the bank index has risen by 16%, while the TA-35 index has jumped by 38% — more than double. But in July, something changed. Bank stocks moved from stagnation to a surge, and the sectoral index became the monthly leader on the local stock exchange, with a jump of almost 10% compared to a rise of only 2% in the TA-35. This comeback comes just before the publication of bank reports, which is expected to begin next week.

In the market, it is estimated that the surprising strength in bank stocks stemmed from a combination of relative calm on the war front and expectations for strong financial reports. But above all, there is the hypothesis that bank stocks rose in July simply because they had fallen too hard in the preceding months. "The recent increases, in our assessment, reflect mainly a correction after a period of weakness, and not necessarily a fundamental change in the sector's underlying conditions," says CPA Amit Federman, Deputy CEO and Head of the Financial Institutions Division at the rating company Midroog.

"Banks are operating in a challenging environment of falling interest rates and inflation, alongside excessive taxation and increasing competition, which are expected to continue to exert pressure on profitability. It is still too early to determine that this is a trend change. A recovery in the housing market and the curbing of price declines may support sentiment towards banks, which are highly exposed to the construction and real estate sectors."

At Leader Capital Markets, they do identify some improvement in sentiment. Analyst Alon Glazer, Deputy CEO specializing in bank and insurance stocks, says: "At the macro level, reasonable data was published on the housing market, which is the biggest threat to the banking business. After the fear of weak data in April, the data in May was reasonable, and that is somewhat reassuring." In addition, he mentions that bank stocks represent a kind of mirror image of technology stocks: "When technology is doing well, it is harder for banks, and vice versa, and this was a month in which they (technology stocks) were hit. Bottom line, it is difficult to point to a trend."

The leaders: Mizrahi Tefahot and First International

The big winners of the July rally were Mizrahi Tefahot, which jumped 12.5% in the month, followed by First International with 10%. By the way, these two banks are also the only ones among the major banks with controlling shareholders (the Wertheim family and Eyal Ofer at Mizrahi, and Zadik Bino at First International).

The rally in Mizrahi Tefahot stock can be explained by its relatively large exposure to the real estate sector, a field for which encouraging data has recently been published. Mizrahi Tefahot, which trades at a market value of 58 billion shekels, is known specifically for its dominance in the mortgage sector, which enjoys record demand (last June it totaled more than 11 billion shekels). Regarding First International, it is likely a combination of two factors. It is the bank that showed the lowest return since the beginning of the year — a decline of about 4%, and it is currently trading at a market value of 23 billion shekels, so it is possible that this is a correction. In addition, a wave of departures of managers, which was revealed in Globes, may reduce the bank's expenses.

Last week we published that about 60 middle-level managers are expected to take early retirement from the bank by the end of the year. The retirements come with the direct encouragement of the bank's management, led by Eli Cohen, who aims to lead a broader move: voluntary retirement of about 15% more of the management staff. All of these are expected to increase the bank's return on equity.

In the "good middle" are the two largest banks in the system, Leumi with a rise of almost 7% and Hapoalim with 6%, and they are currently trading at a market value of 106 billion shekels and 97 billion shekels respectively.

Will the disappointment become an opportunity?

In last place in the July rally is Discount. In July it rose by 5%, and since the beginning of the year it has fallen by 3.85%. In the market, it is estimated that disappointing results in the first quarter, when net profit was eroded more sharply than expected, influenced sentiment. In addition, management presented a plan to leave hundreds of employees, but some investors fear that its cost will be heavy. In addition, Discount plans to merge Mercantile Bank, and in the market there are doubts regarding the scope of savings in the efficiency moves, in a bank whose efficiency ratios are considered among the highest in the banking system (meaning it is considered less efficient).

On the other hand, in terms of pricing, there are those who see an opportunity in Discount. The parameter commonly used to examine the price question of bank stocks is their P/B ratio, the ratio between the bank's market value and the equity attributed to shareholders. The rule of thumb in the market is that when the P/B ratio of banks is lower than 1, it is a buying opportunity. Indeed, until a few years ago, banks traded stably below this threshold. However, this year they are showing higher P/B ratios, with the "most expensive" banks being Mizrahi Tefahot (1.67) and First International (1.62), followed by Leumi (1.54) and Hapoalim (1.49), and finally — the one that remained behind in the July rally, Discount, with a P/B ratio significantly lower than its competitors — 1.14.

Itay Lipkovitz, CEO of Horizon Capital Markets, believes that it is worth paying attention to Discount stock. "Discount is currently trading at the lowest P/B ratio among the banks, while the other banks are trading at ratios of 1.5–1.8, and on the other hand, it has started efficiency measures," he says. "If the merger moves (between Mercantile and the bank's parent company) lead to the consolidation of branches, the reduction of labor costs, and the closing of inefficient branches, while generating a one-time capital gain from the sale of branches, the market will price the bank at P/B ratios similar to those of the others. There are still obstacles here with the workers' committee regarding Mercantile, with the understanding that a significant part of the bank's employees will not continue, and in the short term there will be one-time costs of increased severance pay."

Waiting position ahead of the reports

Starting next week, the banks will publish financial results for the second quarter. The starting shot will be provided, as mentioned, by Bank Hapoalim on Tuesday, followed by Leumi and First International on Wednesday, Discount on Thursday, and Mizrahi Tefahot on the following Monday. Liran Lublin, head of the research department at the hedge fund Total Capital, estimates that the recent increases in bank stocks are also fueled by expectations for a strong quarter. "The second quarter is expected to be a successful quarter for the banks, because the Consumer Price Index for the second quarter totaled 1.3% and was relatively high. Such an index has a positive impact of 1.4 billion shekels on the banking system's revenues in the quarter." According to him, banks are expected to continue to show double-digit return on equity in the 14%–15% range.

Lublin added that "one needs to examine in the reports whether a point phenomenon of problems with provisions (for problematic debts) is developing, because until now the main provisions were group-based, meaning not focused on borrowers who have fallen into difficulties. In my assessment, no point problems are expected for the time being."