Financial stocks soared by hundreds of percent: Can the rally continue?
Financial stocks in Tel Aviv have soared by hundreds of percent over the last three years, and now investors are facing a dilemma: has the rally exhausted itself or is this just the beginning? Globes presents the investor's guide to the financial rally: is it worth investing in a bank, insurance company, or investment house stock, and where else are there opportunities?
The financial sector sometimes looks like a huge mountain of money that only grows over the years. 7.7 trillion shekels of financial assets are distributed among banks, insurance companies, and investment houses. Over the last decade, this amount has doubled.
Cash, current accounts, and deposits lie in banks. Provident funds, training funds, pension funds, and mutual funds are divided between insurance companies and investment houses, and securities such as stocks and bonds also span the financial industry. These huge sums translate into growth in revenues and profits of financial entities — billions of shekels that accumulate every quarter.
These data were revealed in recent weeks during the second-quarter reporting season of the year. One after another, the banks published their results, followed by the investment houses, and finally the insurance companies.
And it's not just the current quarter. Over the last three years, bank, insurance, and investment house stocks have soared by hundreds of percent and have become the sectors with the highest return on the local stock exchange. This phenomenon has also led to the launch of countless financial indices — no less than 7, the latest of which was launched just this week, a bank and insurance index. Now the question arises: has the financial rally in Tel Aviv exhausted itself? Or will the growth in Israelis' financial assets continue at the same pace in the next decade and fuel another rally.
But to decide the question of whether the financial rally will continue, one must dive into each sector separately. While banks skim off the interest rate spreads, insurance companies and investment houses benefit mainly from returns in the capital market and the jump in the volume of managed assets, which trickles down to the management fees they charge.
Globes presents the guide to investing in the entities that concentrate the public's money: which of the sectors have already risen too much, where are there still opportunities according to experts, and what should one pay attention to before choosing a bank, insurance company, or investment house stock?
Banks
Influenced by interest rates, inflation, and foreign investors
A figure with a decisive influence on bank results is the credit spread, i.e., the difference between the price the bank pays to customers (interest on deposits and savings) and the price it charges for the loans it provides (overdraft, credit line, mortgages, etc.). Therefore, banks are significantly influenced by the Bank of Israel's interest rate, which directly affects the spreads.
Since banks rely significantly on the money lying in the public's current accounts and also fully roll over the Bank of Israel's interest rate to the loans they give (but only part of it to the deposits they give to the public), when the interest rate falls, the banks' spreads narrow, and vice versa.
Accordingly, bank stocks have underperformed the stock market in the last year, in the shadow of interest rate cuts. The bank stock index did rise by 18% in the last year, but the local flagship index, TA-35, jumped by 37% at the same time, more than 2 times, and the insurance stock index completed a jump of 62%, 3.5 times.
And yet, banks continue to prove that they know how to profit. Despite the drop in interest rates and despite a special tax imposed on them by the state (in the amount of 3 billion shekels), they are increasing their credit portfolio, becoming more efficient, enjoying the party on the stock exchange (by collecting commissions), and managing to maintain astronomical profits.
Accordingly, the five largest banks in Israel (Leumi, Hapoalim, Mizrahi Tefahot, Discount, and Beinleumi) concluded the second quarter of the year with a combined net profit of 8.5 billion shekels, an increase of 2% compared to the same quarter last year, and a profit of 16 billion shekels in half a year (a decrease of 2% compared to last year).
Despite this, Yoav Kabablum, investment manager at Meitav's active funds, estimates that the interest rate level is what will determine the direction of bank stocks more than anything: "The parameter that influences bank pricing the most is the forecast for the intensity and timing of the interest rate cut. The faster and stronger the interest rate falls, the more the banks' financing spread, which is the gap between the interest charged to borrowers and the interest paid to savers, will narrow. There is a lot of money in current accounts on which the bank does not pay interest, while when the interest rate falls, the interest on loans also falls".
In addition, he estimates that the results of the elections in Israel this coming October will have "a significant impact on the stock exchange and in particular on bank stocks, as banks are perceived as the heart of the Israeli economy. Results that are interpreted as positive will bring foreign investors to invest in Israel and in particular in bank stocks. Also, the increase in the dividend they are distributing now and the good appearance of the dividend rate out of the bank's total profits is positive for the sector's stocks".
Another figure worth paying attention to in the context of banks is the return on equity, an index that examines the company's profit relative to its equity. In the second quarter, the major banks presented an average return on equity of 15.5%. Oded Makler, senior investment manager at IBI Portfolio Management, adds that "when you weigh this, you can expect a return per share of 9%-10% per year in the industry, this is a very nice return, certainly in relation to the stability and consistency of the banks".
Among the major bank stocks, Itay Lipkovitz, CEO of the Horizon investment house, currently recommends the Discount stock, which is "the cheapest stock. If the merger of Discount with the Mercantile bank it owns takes place, it is a potential for significant improvement in the bank's efficiency ratios and profitability, and will give it an upside".
In addition, he also recommends the Leumi stock, which according to him "is not cheap, but presents high efficiency ratios and high return on equity, which justify the current P/E ratio".
Insurance companies
Showcase of the capital market
If banks are the showcase of the Israeli economy, "investment houses and especially insurance companies are a mirror image of the capital market", determines Makler from IBI. "The public is used to looking at insurance companies as companies that sell it insurance, but that is really no longer true. Today these are entities with a very broad financial angle, to which the public constantly deposits money, passively and actively, and they very, very benefit from this".
And indeed, unlike banks, which profit as mentioned mainly from interest rate gaps, insurance companies are more influenced by performance in the capital market, with an emphasis on the local one. They manage customer money in provident funds, pension funds, and savings policies, and charge management fees as a percentage of the managed amount. Their revenues, and therefore their profits, soar as the volume of their assets grows, whether as a result of the flow of new money or as a result of price increases in the capital and debt markets.
In addition, insurance companies have an independent investment portfolio (nostro), which together with managing the public's savings makes their stocks a leveraged option on the local capital market. So that in periods of rises on the stock exchange, the insurance companies' profits also rise. The risk in their case is the reversal of the trend of recent years on the stock exchanges. In times of market declines, they suffer a hit in performance. "Insurance companies have a high correlation to the capital market, the more the public enjoys a higher return, the more they enjoy higher management fees", says Makler.
According to the reports they recently published for the second quarter of 2026, the five largest insurance companies in Tel Aviv manage assets in the amount of 2.8 trillion shekels, an increase of 17% per year. The growth in assets led to an increase in revenues and total profit, which jumped in the half-year by 11.5%. The strong results alongside the raising of forecasts for the future jumped the sectoral index in the last week, while completing a rise of 36% since the beginning of the year, and a jump of 480% in three years.
In the insurance industry, they were busy this week explaining that the potential in the field is still high, and this returned in all the companies' investor calls. In addition, a senior figure in the insurance industry estimated this week in a conversation with Globes that if the volume of assets and profits continue to grow at the same pace, the stocks could still continue to rise from here by another 50%.
However, not everyone thinks so. Lipkovitz from Horizon, although he estimates that insurance companies "are not priced at too high P/E ratios", and continue to show good performance, including in core areas with an increase in revenues and profits from various insurance activities. However, he estimates that the dependence on the capital market may also be their undoing: "We saw definitely strong reports in the last quarter, which rely on the boom that was in the capital markets. But one must take into account that in the next quarter we will see less good results, especially against the background of a certain weakening of the Israeli capital market. Therefore, the investor who looks at this sector must understand that the real P/E ratios are probably higher". For those who want to join the investment in the sector, his recommendation is the Migdal stock, which in his opinion "is priced better in relation to the field".
"The capital market is a prominent factor in insurance companies and will continue to influence stock prices", agrees Amit Rosenzweig, investment manager at the Tamir Fishman investment house. However, he notes "that the managers in the insurance companies are aware of this situation and are constantly trying to introduce more activities, which will improve their profitability, through the acquisition of non-bank credit activities, credit card companies, or the acquisition of customer portfolios of smaller insurance companies". Thus, for example, the Harel company is currently facing the completion of the acquisition of the Cal credit card company (together with Union of George Horesh).
Also, they explain in the market that those who expect insurance stocks to soar by hundreds of additional percent again might be disappointed, even in a scenario of further rise in the capital market. In the last year and a half, insurance companies also enjoyed a new accounting standard (IFRS17) that allowed them to recognize profits from health and life insurance earlier, which in turn dramatically jumped their profits, and accordingly the stocks. In the market, they agree that the figure gave more certainty to investors, but this is a one-time event.
Investment houses
Enjoying the new generation of investors
Alongside banks and insurance companies, in recent years the large investment houses, whose stocks are traded on the stock exchange, have become a dominant factor in the financial sector. This is reflected in the jump in the volume of assets they manage — over 1.2 trillion shekels, thanks to a jump of 18% in their managed assets. This figure trickles down to a jump of 28% in the revenues of the large investment houses in the first half of the year to 3.6 billion shekels. An even greater jump was recorded in the bottom line as their net profit soared by 52%. This is thanks to the "operating leverage", which dramatically jumps their profit (from management fees) as the volume of their asset portfolio grows.
Similar to insurance companies, investment houses also enjoyed in recent years the continuous growth in the financial markets, which jumped the portfolio of assets they manage (provident, pension, mutual funds, etc.). "The correlation between the performance of investment houses and the capital market is very high", says Rosenzweig, from Tamir Fishman. To this, he adds the fact that investment houses also enjoyed the structural changes that the local market underwent.
"If in the past, the dependence on banks in everything related to securities trading, and the lack of financial understanding were very high, in recent years a change has taken place and the public is more sophisticated, which benefits investment houses that receive tens of thousands of new clients every year (retail investors). In addition, new products have entered such as hedge funds in mutual funds, which were once the exclusive domain of qualified clients, and thanks to the Securities Authority today everyone can be exposed to this segment".
Which brings him to the conclusion that the field is traded "at fair levels", but investment in it depends on how one "sees the capital market looking forward". According to him, "today, the capital market is not significantly cheap, but at the same time, we see many positive processes that really improve the companies' profits.
"At the same time, we expect that the markets will become more and more volatile, and this is something that investment houses will also have to learn to deal with and manage".
Looking at the performance of stocks in the field reveals a greater difference compared to the performance in the banking and insurance fields. While the stocks of the Meitav, Mor, IBI, and Analyst investment houses soared in the last three years by hundreds of percent, the stocks of the Altshuler Shaham and Yelin Lapidot investment houses (through the parent company Atrau) rose by about 26% and 45% only (respectively). This is against the background of the massive outflow of money that was recorded in their provident activity following the weak returns they recorded.
In view of this gap, there are also those who identify an opportunity: "The market is now pricing Yelin Lapidot (through the Atrau stock) at a relatively attractive P/E ratio for investment", notes Lipkovitz. "Besides Yelin Lapidot, I think that Analyst is also in an interesting place, it is indeed at a P/E ratio of 12 which is not a cheap P/E ratio, but still reasonable in relation to other stocks in the sector".
