The international ratings agency, Moody's, has issued a stable rating for Ireland's financial institutions, suggesting they will remain the most profitable in Europe and reflecting few concerns about bad debts.

In its latest report on Ireland, Moody's states that while Irish banks are operating in an environment of lower economic growth than in the 1990s, they continue to enjoy higher profitability than their European peers.

"Overall, Irish banks' growth in profits and lending, although still strong, slowed down in 2002 and the first half of 2003. In addition, weak global equity markets continue to negatively impact the performance of Irish banks' life insurance arms and sales of equity products. However, barring a further downturn in the global economy, which would have a knock-on effect on the Irish economy, the current levels of profitability appear sustainable," according to the report.

Moody's says that the €300 million levy on the Irish banks over three years has not materially impacted on their profitability. Costs have also been kept under control in the face of pressure on wages due to the National Wage Agreement.

It states that asset quality across the Irish banking sector remains robust. It is expecting that their loan-loss provisions are likely to increase by year-end but that underlying asset quality remains strong.

The banks are primarily exposed to the residential mortgage market and commercial lending sectors.

AIB, Bank of Ireland and Anglo Irish Bank do have an exposure to international markets but generally have minimal exposure to troubled overseas sectors such as high-tech, telecoms and aviation.

Moody says that Royal Bank of Scotland's proposed takeover of First Active could herald further overseas investment in the Irish banking sector but it did not expect significant changes in the short term.

The rating agency believes that AIB and Bank of Ireland will continue to command a very high share of banking business.