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Moody's, the well-known U.S. credit rating company, published a negative outlook for Israeli banks yesterday, further compounding the negative effects of a bad day in the US banking sector the day before that sent local bank share prices sharply down. Moody's said the rating is a reflection of the expected deterioration in the domestic economic and credit environment under the influence of the global financial crisis.

As the negative forecast further weighed down the TA-Banks index, which lost some 6% by the end of the day. All of the major banks lost ground, with Bank Discount shares plunging 8.2% by the end of a bloody day on the market. Bank Hapoalim shares shed 5.82%, Mizrahi Bank sank 4.72% and First International shares got off relatively easy, losing just 3.42% by the close of trade. Moody's noted that the negative forecast was for the sector in general and does not necessarily indicate that forecasts for specific banks would be lowered.

"After some delay, Israel is now feeling the effects of the ongoing global financial and economic crisis," according to Moody's report. The rating company says that the banks are being indirectly affected by a number of problems: increased risk aversion and re-pricing of risk worldwide, with a negative affect on their securities portfolios. In addition, defaulted international institutions has lead to exposure to losses, and the fall of global real estate prices carries a negative affect on a number of the large corporations that finance them.

Moody's forecasts a gradual decline of the banks' operations, particularly in their credit business, as a result of a high exposure to distressed sectors. In addition, Moody's notes that the risk of default of one of the banks' larger debtors could lead to losses.

High demand for corporate bond debt recycling is likely to result in banks becoming involved in financing of their corporate clients. Moody's thinks that corporate financing will gradually comprise a larger proportion of bank assets compared to more liquid assets, which could lead to a gradual decline of banks' credit portfolios.