Irish banks are generally well positioned to absorb any downturn in the Irish economy and will continue to enjoy strong growth prospects while the economy is buoyant, according to the international rating agency Moodys.

In a new report, Moodys forecasts a soft landing for the economy and maintains a stable credit rating for the Irish financial institutions on the basis that they do not have any major concerns in the short term. It says domestic growth is supporting a good business environment and sustaining banking profitability. Analyst Ms Elisabeth Rudman believes factors such as low interest rates in the euro zone and real productivity growth in the Irish economy will soften the impact of any economic downturn. Such a downturn is expected over the medium term and could negatively affect asset quality and ratings.

"This is particularly the case for banks that have grown very quickly and relaxed underwriting criteria in order to expand market share during the high growth period," it warns.

Moodys also cautions that the entry of British banks into the Irish market last year has led to a lowering of margins and a consequent impact on net interest margins. Ms Rudman notes that several banks have already begun to rationalise their networks and cost savings will begin to filter through over time.

Another key rating factor for Irish banks is their ability to diversify income streams through different products and new markets. The main banks will benefit substantially from overseas operations, but those which lack diversification and are focused on the Irish economy will remain vulnerable to margin pressure.