AIB and Bank of Ireland will need to institute slower dividend growth in the coming years as loan growth eases off, according to a new analysis from Citigroup.

The report finds that even with a slower outlook for lending, the two largest domestic banks remain "attractive" investments when compared to much of the European financial sector.

Citigroup notes that while strong demographics mean it should be easy for Irish banks to find lending opportunities that will deliver resilient earnings growth for a number of years, this will come as funding costs are rising.

The broker also points to competition from new entrants in the Irish market.

These new players are starting to squeeze spreads, "making ongoing margin pressure seem inevitable", according to the Citigroup report.

Already, domestic loan growth is running well ahead of deposit growth, a trend that creates more pressure when the average cost of other funding rises.

For this reason, the Citigroup report argues that both AIB and Bank of Ireland will need to rethink their dividend payout policies over the next few years.

A "paring back of the currently generous level of distribution" should help, according to the analysis, in avoiding "significant capital problems".

Banks should also look at other capital management techniques such as securitisation, Citigroup suggests.

The broker has raised its price target for AIB to €19.89 and puts a fair value of €14.20 on Bank of Ireland.

AIB closed at €17.66 last night while Bank of Ireland finished at €13.19.