Moody's downbeat on Irish banks

Moody’s Investors Service said today the outlook for Ireland’s banking system remains negative, citing the banks’ weak funding and liquidity profiles and a very challenging operating environment.

"The substantial weakening in the funding and liquidity profiles of the banking sector is a key driver of the negative banking system outlook," Moody's said.

"The banks continue to rely on short-term central bank funding from the European Central Bank and in some cases from the Central Bank of Ireland."

The negative outlook has been in place since 2008, partly due to the tough operating conditions. Moody's also believes that profitability will remain weak, and said the improved capital positions of Irish banks only partly mitigate these weaknesses.

The Government has also weakened its own credit profile through supporting the banks, the agency said, and warned the banks would have to deal with the implications of this as the Government tries to cut the debt burden.

The reduction in Government spending could put "considerable pressure" on the country’s recovery prospects, Moody's said, weakening asset quality and putting pressure on the bank's profitability.

“We expect the operating environment for Irish banks to remain very difficult over the outlook period, primarily as a result of Government’s considerable austerity efforts, the continued financial market turmoil in the euro area, and deterioration in the global economic environment,” said senior analyst Ross Abercromby.