Bank Hapoalim, Israel's largest bank in terms of assets, reassured investors on Monday they would receive interest payments on deferred capital notes that had been downgraded by the Standard & Poor's Maalot ratings agency.

The bank said it would pay in advance interest totalling 80 million shekels ($19 million) on deferred capital notes that are part of its Tier 1 and Tier 2 capital.

The interest is due on June 27 and Sept. 27 for the Tier 2 notes and on Aug. 1 and Nov. 1 for the Tier 1 notes.

Hapoalim's shares closed down 5.5 percent, compared with a decline of 0.6 percent in the Tel Aviv 25 index.

A spokeswoman for Hapoalim said the decision followed a meeting of the board on Monday but could not say whether it was related to the ratings downgrade earlier in the day.

But an analyst said the announcement was related.

There was a legitimate fear that the interest payments would be stopped after the first quarter, Alon Glazer, an analyst at brokerage Leader Capital Markets, told Reuters.

The bank does not want its reputation damaged and so it acted to get approval to make the payments early.

Hapoalim said when the notes were issued they carried a clause that calls for a postponement in interest payments if the bank accumulates a loss over six consecutive quarters.

This could be the situation after the first quarter of 2009, following losses in 2008. Hapoalim, which has estimated it would post a loss of 250 million shekels for the fourth quarter of 2008, lost 532 million in the first nine months of the year.

S&P Maalot lowered its rating for Hapoalim's hypbrid Tier 1 capital to ilA from ilAA- and upper Tier 2 capital to ilA+ from ilAA, saying the possibility that the bank will not pay interest on time on these notes was higher than in the past.

It also placed these notes on credit watch negative.

The agency noted Hapoalim is expected to post a loss of about 780 million shekels in 2008 and a loss of 563 million shekels for the past five quarters.

Hapoalim said it is seeking the necessary authorisation to make the payments early. It expects to receive approval quickly, after which it will announce the date of the payments.

($1 = 4.21 shekels) (Editing by David Cowell)