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Standard & Poor's raised its long-term credit ratings on Bank Leumi le-Israel and Bank Hapoalim on Tuesday, after placing greater emphasis on potential government support in evaluating the banks' credit worthiness.
The ratings agency also affirmed its "A-2" short-term ratings for the two banks.
"The upgrades reflect our opinion that the government of the State of Israel would likely provide extraordinary assistance to banks vital to the country's [financial] system in the event that these banks encountered distress, S&P credit analyst Magar Kouyoumdjian said in a report.
According to S&P, the government's bailout of the banking system in the early 1980s was a clear sign of the ability and willingness of the Bank of Israel to take steps aimed at avoiding a wider banking crisis.
Separately, S&P affirmed its "BBB+" long-term and "A-2 short-term ratings on telecommunications company Bezeq Ltd. and removed the "CreditWatch negative" designation it had carried on the company since May 10. A negative creditwatch rating meant the ratings were subject to review with negative implications. Nevertheless, the firm's outlook for Bezeq remained negative.
"Bezeq's financial flexibility has reclined as a result of the new, indebted controlling shareholder's aggressive financial policy," said S&P credit analyst Simon Redmond. "This is being implemented at a time when the core fixed-line business faces intensifying competitive pressures."
The firm also said an unmitigated deterioration in operating performance, particularly in its fixed-line business, which contributes 60 percent of the company's earnings before interest, taxes, depreciation and amortization, would put pressure on the ratings, especially if cash flow weakened.
"In addition, there is a near-term risk of evolution in Bezeq's ownership and overall capital structure," Redmond said. "In any case, the Ap-Sab-Ar Holdings consortium is expected to exit or evolve, most likely in the medium-term."
S&P said, however, that strong operating performance, resulting in both strengthening cashflows and coverage metrics, could lead to the outlook for Bezeq being revised to stable over the medium-term, in the absence of other negative developments.