Despite the country's anticipated economic recovery, credit rating agency S&P said the earnings and profitability of Irish banks remain under pressure due to their modest growth opportunities and significant cost bases.
S&P said that Irish banks are also facing high capital requirements, especially for mortgage loans, and still low levels of revenue diversification.
It said that while banks have started taking steps to widen their product offerings and diversify their revenue streams, these moves have not yet had a noticeable impact on profitability.
S&P also said that the planned exit of international players like NatWest Group - which owns Ulster Bank here - and KBC Group from the Irish market underscores the tough operating environment and weak profitability prospects.
"We therefore still see a negative industry risk trend for Ireland's banks and affirmed our ratings on three Irish banks, while maintaining our negative outlooks," S&P said in a note today.
But S&P also noted that Irish banks entered the Covid-19 pandemic with "healthy capitalisations and robust liquidity profiles" due to consumers' high level of savings.
It said while this allowed the banks to set aside large provisions in 2020 for future defaults, it also led to reported losses.
"So far, we have not observed significant deterioration of asset quality, but we expect non-performing loans to rise over 2021-2022 as Government support to households and businesses unwinds," S&P said.
The rating agency said that lower credit provisions will support profitability improvements, but not enough for returns to reach pre-pandemic levels.
"Generally, our negative outlooks indicate that we could lower our ratings if Irish banks are unable to resolve current weaknesses in profitability," S&P said.
"In particular, we will look at how pre-provision income evolves, apart from the potential one-off benefits from acquiring NatWest and KBC's portfolios," it added.
