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Information Technology : Electronic Equipment, Instruments & Components | Small Cap Value
Based in Israel
Company profile

Eltek Ltd. manufactures, markets and sells custom made printed circuit boards (PCBs), including high density interconnect (HDI), flex-rigid and rigid, with high layer count boards. The Company manufactures and supplies custom made circuitry solutions for use in compact electronic products. The Company's principal customers include manufacturers of defense and aerospace, medical, industrial, telecom and networking equipment, as well as contract electronic manufacturers. The Company designs and develops manufacturing solutions pursuant to interconnect requirements of original equipment manufacturers, and provides its customers with a range of custom designed PCBs, including rigid, double-sided and multi-layer PCBs, as well as flexible circuitry (flex and flex-rigid boards) made of various types of base material. The Company also acts as an agent for the importation of PCBs from South East Asia. The Company provides fabrication of dense multi-layer PCBs.

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UPDATE: 'This is going to hurt' -- pain is on the way for the four big U.S. banks

7:51 am ET April 20, 2020 (MarketWatch)

By Philip van Doorn, MarketWatch

Earnings held up during the first quarter -- it may not last as loan losses mount

The four largest U.S. banks posted profits in the first quarter, even though they set aside billions of dollars for expected loan losses. Some analysts referred to the hit on earnings as "noise" because the banks simply moved money from one bucket to another.

Chris Kotowski, a bank analyst at Oppenheimer, referred to large quarterly provisions for loan losses (that is, additions to loan loss reserves) as "reserve noise" that lacks "economic substance" in reports April 14 and 15 for the simple reason that the largest banks haven't yet taken significant credit losses from the economic turmoil caused by the coronavirus outbreak.

Kotowski also pointed out that the first quarter didn't result in the largest banks taking significant trading losses as the Federal Reserve's 2019 stress tests predicted in their "severely adverse" economic scenario.

Edward Jones analyst James Shanahan said in an interview that the trading business has been serving the banks well in a difficult environment because "it diversifies their sources of earnings."

Prudent provisions

But maybe setting aside a lot of money in anticipation of loan losses is prudent, necessary and not a distraction. Bank regulators frown upon over-reserving, because it can lead to a smoothing-out of earnings if a bank under-reserves during subsequent quarters.

The banks made large provisions for loan losses in the first quarter because they expected eventually to take the losses. The economic crisis really didn't hit home until mid-March, so first-quarter loan-loss figures remained low, while expectations mounted that the second quarter would be brutal.

Mark Doctoroff of Mitsubishi UFJ Financial Group (MUFG), who is based in New York and co-heads the global financial institutions group within corporate and investment banking, said he was "not surprised" the largest U.S. banks had set aside so much for reserves during the first quarter.

"The banks can easily afford it this time, as opposed to last time," he said during an interview April 15, referring to the 2008 credit crisis.

"Taking out the credit and exceptional items, it is not as if it was a bad quarter," Doctoroff said, echoing what Kotowski and other analysts wrote in their client notes this week. But Doctoroff also said "this is going to hurt a lot more," with the most important unknown being "how long this lasts."

J.P. Morgan's dire 'base case'

During J.P. Morgan Chase's (JPM) earnings call April 14, Wells Fargo analyst Mike Mayo asked the bank's CEO James Dimon to define the economic "base case" that justified the buildup of loan loss reserves.

Dimon said: "We're talking about June, July, August -- something like that" for the lifting of restrictions.

J.P. Morgan CFO Jennifer Piepszak addressed the "base case" by saying that after initially factoring in an annualized 25% GDP decline and 10% unemployment for the second quarter, the bank's economists had "updated their outlook and now have GDP down 40% in the second quarter and unemployment at 20%," according to a transcript provided by FactSet.

Those figures are by no means unreasonable. This week's initial jobless claims report brought the total to more than 20 million, creating a 15% unemployment rate estimate (http://www.marketwatch.com/story/jobless-claims-soar-again-by-525-million-as-coronavirus-pushes-unemployment-to-15-2020-04-16).

That said, there are many moving parts. Later in the call, after Kotowski asked whether federal and regulatory relief efforts for borrowers might "push back the charge-off curve," Piepszak responded: "It may, because as long as a customer is performing under the forbearance program, they are not delinquent. But,of course, it will all depend on whether these programs ultimately are able to bridge people back to employment."

Clean credit in the first quarter

Here's a summary of how the provisions for loan losses lowered first-quarter earnings for the largest four U.S. banks, with all numbers in millions:

Bank Ticker Provision for loan losses - Q1, 2020 Provision for loan losses - Q4, 2019 Provisions for loan losses - Q1, 2019

J.P. Morgan Chase & Co. US:JPM $8,245 $1,427 $1,495

Bank of America Corp. US:BAC $4,761 $941 $1,013

Citigroup Inc. US:C $7,027 $2,222 $1,980

Wells Fargo & Co. US:WFC $1,718 $522 $710

Source: company filings

Bank Ticker Net income - Q1, 2020 Net income - Q4, 2019 Net income - Q1, 2019

J.P. Morgan Chase & Co. US:JPM $2,865 $8,520 $9,179

Bank of America Corp US:BAC $4,010 $6,994 $7,311

Citigroup Inc. US:C $2,522 $4,979 $4,710

Wells Fargo & Co. US:WFC $653 $2,873 $5,860

Source: company filings

You can click on the tickers for more about each company, including news coverage.

You will have to scroll the tables to see all the data.

Note: The net income figures are before preferred-stock dividends.

Here are some common credit measures, showing that the banks were certainly looking ahead while setting aside so much for loan loss reserves, backing Kotowski's "noise" comments.

The first is nonaccrual loans to total loans. A loan is placed in nonaccrual status if the lender is no longer confident that principal and interest will be repaid. The loan can stay in this status for some time before it is charged-off as a loss. Consumer loans will be carried in "performing" but delinquent categories of past due 30-89 days and past due 90-plus days before being placed in nonaccrual. A commercial loan may be categorized quickly as nonaccrual if it cannot be renewed or if there is some other credit event making its repayment doubtful.

Bank Nonaccrual loans/total loans - March 31, 2020 Nonaccrual loans/total loans - Dec. 31, 2019 Nonaccrual loans/total loans - March 31, 2019

J.P. Morgan Chase & Co. 0.59% 0.43% 0.55%

Bank of America Corp 0.39% 0.36% 0.52%

Citigroup Inc. 0.58% 0.57% 0.54%

Wells Fargo & Co. 0.61% 0.56% 0.73%

Source: company filings

So there was only an uptick in nonaccruals, sequentially.

Next is net charge-offs to average loans. Net charge-offs are loan losses minus recoveries. After charging-off a loan, a bank may recover some of the loss by repossessing and disposing of collateral. You can see that net charge-offs remained low during the first quarter:

Bank Net charge-offs/average loans - Q1, 2020 Net charge-offs/average loans - Q4, 2019 Net charge-offs/average loans - Q1, 2019

J.P. Morgan Chase & Co. 0.62% 0.63% 0.58%

Bank of America Corp 0.46% 0.39% 0.43%

Citigroup Inc. 0.30% 0.28% 0.29%

Wells Fargo & Co. 0.38% 0.32% 0.30%

Source: company filings

Most of the big four banks saw a small increase in net charge-offs but these are low figures, especially when compared with the banks' rising reserve coverage:

Bank Loan loss reserves/total loans - March 31, 2020 Loan loss reserves/total loans - Dec. 31, 2019 Loan loss reserves/total loans - March 31, 2019

J.P. Morgan Chase & Co. 2.32% 1.39% 1.43%

Bank of America Corp 1.51% 0.97% 1.02%

Citigroup Inc. 2.91% 1.84% 1.82%

Wells Fargo & Co. 1.19% 1.09% 1.14%

Source: company filings

This last chart is interesting, because it shows that Citigroup (C) has set aside more reserves than the others, reflecting greater international and credit-card exposure. JPM's high reserve set-aside reflects the dreadful economic scenario in the "base case," as described above by Piepszak.

Wells Fargo (WFC) has the lowest level of reserves, which reflects in part the restrictions against balance-sheet expansion the bank has been operating under since early 2018, in the wake of several customer-service problems and investigations in its retail, loan servicing and wealth management divisions.

(MORE TO FOLLOW) Dow Jones Newswires

April 20, 2020 07:51 ET (11:51 GMT)

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