Credit rating agency Moody's has revised upwards its outlook on the Irish banking system to positive from stable.
Moody's said the positive outlook reflects its expectation that the banks' credit fundamentals will continue to improve over the next 12-18 months.
This is due to the favourable operating environment and the successful execution of the banks' restructuring plans, the agency added.
"We expect Ireland's real GDP to grow by 6.2% in 2015 and 4% in 2016, substantially outperforming European peers," Moody's Dany Castiglione said.
"Against this favourable backdrop, we expect to see a material strengthening of banks' credit fundamentals, although these improvements come from a low base," the analyst said.
The agency also predicted that the banks' pre-provision profitability levels will improve on the back of low funding costs, the favourable competitive environment and increasing demand for new lending.
Although the cost of risk will gradually increase, it will remain at very low levels, supporting bottom line profitability and strengthening the system's capital levels, it added.
But Moody's also noted that, while rapidly improving, asset quality - or loans - still poses significant challenges to Irish banks. It said this will continue "to impede a return to a full normalisation of the banking sector".
The rating agency added that strong internal capital generation - boosted by write-backs on loan loss provisions - has materially improved banks' solvency profiles, leaving them now better positioned to absorb potential losses.
Moody's also noted the continued favourable funding profile of the country's banking system.
It said it was assuming a "moderate probability of government support for the three largest domestic banks and a low probability of government support for other institutions".
"The outlook on the Irish banking system now fully reflects revised government support assumptions, following the European Union's implementation of a banking resolution framework," the agency added.
