The Door to Wall Street: Israeli Banks Prepare for Dual Listing

The Supervisor of Banks at the Bank of Israel, Daniel Hahiashvili, has distributed a draft circular to the banking system that will allow banks to publish financial statements according to US Generally Accepted Accounting Principles (US GAAP), as revealed in Globes this week.

Such a move, once completed, has broad practical significance for the Israeli capital market. For the banks, this is the removal of one of the main barriers that have stood until now in the way of a dual listing of their shares on the New York stock exchanges, while for the stock exchange and local investors, it involves broad implications for stock pricing and international trading patterns.

The door to Wall Street is opening, but there is a price

To understand the significance of the step, one must return to the accounting standards according to which Israeli banks report. Unlike other public companies in Israel, which report according to International Financial Reporting Standards (IFRS), banks report according to the Supervisor of Banks' instructions. This framework largely adopts the reporting rules applicable to banks in the US, including FASB standards and SEC instructions, but is not entirely identical to them.

The gap between the reporting frameworks creates difficulties for listing bank shares on Wall Street. According to US regulatory rules, a foreign corporation is required to report according to one of the two main accounting standards: US GAAP or IFRS. Any other framework requires expensive and complex adjustment work, and the Supervisor's draft circular is intended precisely to bridge this gap.

In terms of the capital market, this represents the potential for expanding the investor base. Although foreign investors often purchase bank shares as a "gateway" to the Israeli economy, a dual listing could change the rules of the game. On one hand, such a move would increase the accessibility of the shares to global investors, but it could erode the power of the local market.

CPA Amit Federman, Deputy CEO and Head of the Financial Institutions Division at the rating company Midroog, notes: "As long as the move allows for a dual listing of Israeli banks on US stock exchanges, it is a positive development that could expand the investor base and improve stock liquidity. On the other hand, broader exposure to international markets could increase the sensitivity of bank shares to global sentiment and geopolitical developments, leading to higher volatility."

What does the Bank of Israel's move include?

• The Change: Bank of Israel will allow banks to report according to US accounting rules (US GAAP).

• The Significance: Removes a major obstacle to dual listing of bank shares on Wall Street.

• The Potential: More foreign investors, more liquidity.

• The Challenge: More volatility, regulatory costs, and the need to justify the move with sufficient demand.

The Timing: After a July rally and before the reports

The draft comes at an interesting time for the sector. After prolonged underperformance, the bank index became the monthly leader of the local stock exchange in July with an increase of almost 10%. The price-to-book ratios at which banks trade (1.67 for Mizrahi Tefahot, 1.62 for First International, 1.54 for Leumi, 1.49 for Hapoalim, and 1.14 for Discount) are historically high. At the same time, the system's return on equity, ranging between 14% and 15%, is higher than most of its counterparts in the world.

At this stage, it is only a draft instruction. Banks have refused to comment for now, noting that they will consider the move only after seeing the full draft. Sources in the financial system tell Globes that the Bank of Israel has been leading this process for a year, aiming to open options in the US market where American investors see significant potential.