Fears of a fall in house prices coupled with strong credit growth have led to the Republic again featuring on a Standard & Poor's (S&P) list of countries whose banking systems are potentially under stress. Ireland has been on the list every year since 1999 but was joined for the first time this year by Britain. Other countries on the list, drawn up by the ratings agency to guide investors, include the US, the Netherlands, Spain and Panama.
S&P noted that while the rate of house price inflation in Ireland had slowed to around 10 per cent since early 2001, the growth rate in the price of residential real estate since 1995 is the highest in Europe.
Prices more than doubled in the past six years, it said.
Private sector borrowing, particularly in the retail sector, has also steadily increased to a level exceeding the EU average.
"The orderly deceleration in economic growth and house prices since 2001 is encouraging, but the Irish banking system remains vulnerable to a sharper economic slowdown and a hard downward correction in house prices," S&P said. It noted that, while bank profitability in the Republic still compared well internationally, competition and low interest rates were pressuring margins.
The banking sector was also vulnerable to weaker earnings and a potential deterioration in asset quality. As a result of their international expansion, Irish banks also are exposed to the economic conditions in other countries, notably Britain, the US and Poland.
But Ms Michelle Brennan, banks analyst with the ratings agency, said S&P was not expecting a crash.
She said the Irish banks' asset quality in personal lending was "very good" with low levels of arrears and, while some problems had surfaced in the corporate loan book - particularly in hard-pressed areas like tourism and technology - overall asset quality was still good.
"We are not expecting a crash. The ratings on the Irish banks are all for a stable outlook. We are just keeping an eye on them to make sure they manage the potential risks well," she said.
A Central Bank spokesman noted that the areas highlighted in the S&P report were areas the bank had monitored closely in the last few years.
