A Shift in Geopolitical Risk Signals a Positive Turn for the Israeli Market

British investment bank Barclays has published an exceptionally bullish outlook on the Israeli banking sector, marking a shift in tone following months of investor caution. In a research report released on June 25, 2025, the bank highlights the ceasefire agreement with Iran as a pivotal moment that significantly reduces geopolitical risk and improves the outlook for Israel’s economy. As a result, Barclays has raised its price targets for the country’s leading banks, forecasting upside potential of 14% to 27% in the near to medium term.

According to the analysts, the de-escalation of regional tensions justifies a decrease in the risk premium embedded in valuations, allowing for higher capital multiples and signaling renewed investor confidence. This change follows a prolonged period during which foreign capital largely avoided Israeli equities due to uncertainty and security concerns.

Quantitative Snapshot: Significant Gaps Between Market Price and Target Valuations

At the center of the report is Bank Leumi, now assigned a price target representing a 27% upside from its quoted price at the time of publication and a 24% increase from its current trading level of  Barclays raised its return on equity (ROE) forecast for Leumi to 15%, while lowering its cost of equity to 10%, which led to an upward revision of its price-to-book (P/B) multiple from 1.3 to 1.5.

Bank Hapoalim was also upgraded, with a new target price of indicating 22% upside from its current price . Analysts praised the bank’s operational efficiency, noting an ROE forecast of 14.5% and a similar cost of equity assumption.

Discount Bank received a target price of ₪38, reflecting 20% upside from its current value. Although the bank lacks clearly stated mid-term financial targets, Barclays noted favorably its long-term strategic direction, which justified increasing its P/B multiple from 1.2 to 1.3.

Mizrahi Tefahot was assigned a more modest upside of 10%, with a target price of compared to a market price of around. Barclays cited the bank’s strategic focus on expanding market share in mortgages and business lending, alongside investments in automation and digital transformation.

Data vs. Performance: Bank Stocks vs. Broader Indices

The report underscores the outperformance of Israeli bank stocks relative to the broader market. Over the past year, the banking sector has returned 78%, compared to a 55% gain in the TA-35 Index. This performance was driven primarily by domestic investors, while foreign investors remained on the sidelines due to geopolitical instability. Now, with fears easing, Barclays expects a renewed wave of foreign capital, with banks positioned to benefit first due to their stability and profitability.

Strategic Analysis: ROE, Dividend Policies, and Interest Rate Environment

A clear trend emerges from the report: improved investor sentiment is driving upward revisions in projected ROE and downward adjustments in cost of capital. Barclays’ analysis aligns with recent publications from Israeli institutions like IBI and Psagot, which have also cited strong banking sector fundamentals. The current interest rate environment further supports higher net interest income, which directly boosts banks’ profitability.

Barclays also addressed dividend policies, stating that strong earnings will allow Israeli banks to continue distributing healthy dividends. However, they noted that banks are likely to maintain flexible payout strategies in response to macroeconomic developments.

International Context: How Israeli Banks Compare to Global Peers

Barclays argues that Israeli banks are still undervalued relative to their global counterparts. U.S. banks currently trade at P/B multiples between 1.4 and 1.6, while European banks range between 0.9 and 1.1. In contrast, Israeli banks are trading at 1.2 to 1.5—suggesting room for further gains. Furthermore, Israeli banks’ operational P/E ratios remain conservative, especially when compared to banks in highly leveraged economies like Italy or Spain, providing a buffer against potential economic volatility.

Conclusions and Forward-Looking Outlook

This optimistic assessment from Barclays complements a string of recent macroeconomic developments in Israel, including upgraded GDP forecasts from the Bank of Israel, easing inflation, and improving consumer and industrial sentiment indices. All signs point to the beginning of a broader recovery trend.

According to the report, bank stocks are likely to be the first beneficiaries of returning foreign investment. When geopolitical risk recedes, international capital typically flows into sectors perceived as reliable and defensive—characteristics that describe banking precisely. Should the geopolitical calm continue and the shekel remain stable or strengthen, the broader market is expected to follow the banks’ upward trend.