UBS Securities downgraded rating of Israel-based Mizrahi Tefahot Bank Ltd. to 'neutral' from 'buy', while maintaining its price target of 40 Israeli shekel or $10.89.

Mizrahi reported another strong third quarter, with net investment income up 26 percent year-over-year and earnings per share up 34 percent year-over-year. The company said that up 2.5 percent quarter-over-quarter loan growth and net interest margin expansion offset by seasonally lower capital market activity and higher tax rate.

"We expect another strong quarter in Q4; however, given Bol determinations to slowdown the housing market, we see the results as somewhat backward looking," said Darren Shaw, an analyst at UBS Securities.

"We expect loan growth to disappear in 2011, driven by affordability issues, interest rate rises, small impact from the Bol's recent measures (LTV 60 percent from 70 percent; Banks need to provide more for certain variable based mortgages), and further measures from the Bol if pricing continues to rise. We do not expect increased housing supply in 2011," said Shaw.

The brokerage lowered its loan growth assumption to 0 percent from 2 percent for 2011 and to 1.5 percent from 2 percent for 2012. The brokerage also reduced its EPS by 1 percent to 2 percent in 2011-12.

The brokerage lowered its 2011 EPS estimate for Mizrahi Tefahot Bank to 4.14 Israeli shekel from 4.19 Israeli shekel, while maintaining its 2010 estimate of 3.35 Israeli shekel.

Shaw said he now models a 300 million Israeli shekel negative impact on Core Tier 1 (not through the profit and loss) on January 1, 2011 due to a change in provisions methodology and cut dividends to 40 percent in 2010 but leave 50 percent payout for 2011 and forward, giving a 2011 yield of 5.4 percent.

Giving a positive outlook on the bank, Shaw said its successful strategy may "yield the highest return on equity and 5.4 percent dividend (2011)."

"That said, having almost reached our price target and trading at an all time high with the shares trading at 1.2 times of December 2010 price-to-book ratio, and with the backdrop of the Bol determination to cool off the housing market, we see limited upside," said Shaw.

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