Ratings agency S&P Global Ratings has revised down its outlook for three of the main Irish banks from stable to negative, saying that downside risks for the banks' financial profiles remain substantial.

However, the agency has affirmed the current ratings of AIB, Bank of Ireland, Permanent TSB and KBC Bank Ireland.

It has also not changed the outlook for KBC because it thinks its parent group will be willing and able to provide both ongoing and extraordinary support over the next 18-24 months.

The agency said European economies, including ours, face an unprecedented economic challenge due to the global slowdown in activity and trade, despite efforts by governments to contain the coronavirus pandemic.

"We continue to expect Ireland's wide-ranging fiscal and related monetary measures to substantially mitigate this extraordinarily sharp, cyclical shock to the economy, and so also support the banking system in its key role as a conduit of fiscal and monetary support," the S&P said.

But it added that even under its base case of an economic recovery starting in the third-quarter of this year, its expectation is that the banks' earnings, asset quality, and in some cases, capitalisation will weaken meaningfully during the remainder of this year and into next.

"We could take further negative rating actions if we expect the cyclical economic recovery to be substantially weaker or delayed, as this would imply a far more negative effect on banks' credit strengths," it said in a statement this evening.

"Actions could also follow idiosyncratic negative developments at individual banks."

The actions following a review by S&P of banking systems in Western Europe following the start of the coronavirus crisis.

"The Irish economy is small and open, making it vulnerable to economic cycles and external shocks, like the ones caused by the COVID-19 pandemic," it said.

"We expect the Irish economy to contract in 2020 and recover only gradually starting from 2021. However, despite the anticipated recovery, we believe that there will be significant pressure on Irish banks' operating environment and earnings prospects over the next two-to-three years."

It says profitability is under increasing pressure at Irish banks because of their ongoing high cost base, compressed interest margins and their investments in transforming their business and becoming more digitally capable.

S&P sees growth opportunities as modest and says competition is stiff.

"The rating actions we have taken reflect that we now see Irish banks' profitability remaining structurally low for at least the next two years with return on equity in the low single digits," it says.

It says that even under its economic assumption, the policy responses taken in Ireland may not be completely successful in avoiding permanent economic damage later.

Earlier this month, ratings agency Fitch downgraded its outlook on AIB and Bank of Ireland to negative from stable as a result of the challenges posed by the Covid-19 pandemic.