SLOWER LENDING and the management of difficult long-term funding conditions will threaten Irish bank profits, according to a report by debt ratings agency Standard & Poor's (S&P).

Among the risks facing Irish banks are a deterioration in the quality of property-related loans, pressures on earnings from higher funding, lower business volumes and the effect of negative equity as property prices fall, S&P said in a report on the Irish banking sector.

"Performance in 2007 by the Irish-rated banks was once again stellar, but the outlook for the sector is now more mixed. Challenges are inevitable in 2008 and beyond," said the agency.

Irish banks should be "largely self-funding" in 2008 as growth slows, although capitalisation remained "a relative weakness".

Analyst Claire Curtin said falling property values had left borrowers who took out high loan-to-value (LTV) mortgages in late 2006 and early 2007 facing "modest negative equity".

The benign interest rate and employment environments, and the stress testing of affordability, had provided "some cushion". "However, should house price depreciation re-accelerate in 2008, this would heighten our concerns about negative equity positions of Irish mortgage borrowers and would likely increase banks' loss rates, which are currently low," said S&P.

The agency said its positive outlook on AIB and Bank of Ireland was "undoubtedly under some pressure", while the ratings on Irish Life & Permanent (IL&P) and Anglo Irish Bank were "relatively more vulnerable".

IL&P, which has a negative outlook, was being "tested by higher funding costs" and "constrained repricing ability" given its greater focus on Irish retail business, which will "subdue" its performance this year.

Anglo's stable rating "may be pressured by a worsening in the commercial-lending environment beyond our current expectations, or a pressured funding position".

Davy Research said in a note yesterday that banks were not providing finance in commercial property deals where the loan was greater than 75 per cent of the property's value. It raised the possibility of "distressed deals".

"As banks are reluctant to take on new risks and in fact roll some existing ones, it will be interesting to see if we get any forced asset sales in the market over the coming year, particularly of development land," said Davy.