THE international credit ratings agency Moody's has given favourable ratings to AIB, Bank of Ireland, Irish Permanent and First National Building Society.

But the agency has sounded a warning about diversification outside core markets and has warned that the Irish banks have fallen behind their European peer group in terms of cost reduction.

Moody's analyst, Mr Antonio Carballo, is, however, upbeat about the four institutions and cites various supports for their credit quality.

"The bank ratings reflect their vigorous national economy and domestic franchises as well as their high profitability ratios among the best in Europe and their good asset quality."

The report warns that competitive pressures and heavy expenses pressures have started to affect Irish banks' "comfortable profitability levels".

Moody's says that "additional efforts to reduce cost/income ratios which currently do not compare well to those of European peers will help compensate for the erosion of bottom line profits".