Credit rating agency Fitch has downgraded some of its ratings for EBS Building Society due to its view that the Irish economy's performance is worse than expected.
Credit rating agencies rate the ability of banks and other companies to meet their financial obligations and their reports are watched by those who lend money in capital markets.
Fitch said it believed the two riskiest elements in EBS's loan book were its large exposure to high loan to value mortgages and some of its commercial lending. These were likely, Fitch said, to lead to significant bad debt charges and lower profits.
It noted that EBS benefited from the two-year Government guarantee scheme, and rated debt due in this period as AAA, but said turmoil in financial markets was reducing its flexibility.
On Friday, Irish Life & Permanent said it had been in discussions with EBS about how the two institutions might work together 'in the current market environment'.
Earlier this month, EBS chief executive Fergus Murphy predicted that the second half of 2008 would be loss-making for the society. He said around €500m or 2.5% of EBS's total loan book was exposed to 'development finance to the commercial property sector'.
Earlier, credit rating agency Moody's said the credit outlook for the Irish banking system was 'negative'. The agency says that the recession is likely to lead to a substantial increase in bad debts for lenders, as well as less lending and weaker profits.
Though its report does not change the credit rating of any of the banks individually, Moody's warns that it is likely to lower its ratings for some banks over the coming year, due to the 'rapid deterioration' in the economic outlook.
Moody's said it viewed the Government's guarantee scheme favourably, but it noted that some Irish banks had relatively lower levels of capital compared with other banks. The agency said it would not rule out a capital injection into Irish banks, and would expect 'some consolidation' in the market as part of this process.
Moody's said it viewed the smaller Irish banks less positively than AIB and Bank of Ireland, which it said had strong franchises and growing deposit bases.
