Punching the air at their profits early in the year, bankers were tugging uncomfortably at their collars by year end, writes Simon Carswell,Finance Correspondent.

It was was a year of record profitable highs and ominous recent lows for Irish banks. In February the ISEQ broke the 10,000 barrier for the first time, boosted by the record profits at the banks. Those heady days are now a distant memory. The final three months of 2007 were the worst fourth-quarter performance by the Iseq since the 1987 market crash.

They started the year punching the air at their profits, but now the State's bankers are tugging uncomfortably at their collars. Ireland is unloved by international investors, who simply don't believe the property market is in for a gentle landing.

International investors are right to be less confident about the Irish story. House prices are falling, new home loans are down and the liquidity freeze is driving up borrowing costs in the wholesale market, where banks borrow money from each other. Irish banks don't rely heavily on this market; they use it as a kind of overdraft, but they are still shouldering higher costs.

"This is a once-in-a-50-year occurrence you're seeing here," one chief executive of an Irish financial institution said of the continuing credit crunch.

Certainly, few expected a credit crunch this severe at the start of the year. Hundreds of thousands of defaulting US homeowners with poor credit histories in the subprime market seemed to be an exclusively US problem during the first half of the year. The story centred on US lenders closing subprime units, recording losses and sacking mortgage managers.

Then, in June, US investment bank Bear Stearns dropped a bombshell - it revealed it had spent $3.2 billion (€2.2 billion) bailing out two funds exposed to the subprimemarket - the bailout was the largest by a bank in almost a decade. The following month Ben Bernanke, chairman of the Federal Reserve, warned subprime losses could hit $100 billion.

By August, investment bankers and investors were growing more distrustful of each other, fearing that investment packages being traded on debt markets might contain some exposure to subprime losses. The game of pass the parcel quickly drew to a close, as investors stopped trusting mortgage- backed products that had been sold to fuel the residential lending boom.

Later that month the credit crunch had claimed its first Irish victim. Debts at Dublin firm Structured Credit Company, a type of credit risk reinsurer for banks, jumped from $5 million to €350 million in the space of amonth, as its banker customers called for more collateral. An examiner was appointed in an attempt to save the company and repay the banks something.

A much larger and more highprofile casualty emerged three months later when International Securities Trading Corporation, the specialist lender to banks set up by former Anglo Irish Bank executive Tiarnan O'Mahoney, also sought court protection after the value of its assets plummeted due to the credit crunch.

During the summer, O'Mahoney was predicting year-end profits of €15 million and a 2008 flotation. By late November, he was trying to save the company from debts of €871 million. The losers here will be big, in terms of names and money - the firm's creditors are a who's who of international banks, while it can count top Irish business figures on its share register.

The September crisis at British bank Northern Rock didn't help the cause of Irish banks. The beleaguered lender's well of funding - the asset-backed investment, money and inter-bank markets - dried up and it was forced to turn to the Bank of England as the lender of last resort for emergency funding. The news broke all too quickly and the bank lost control of the PR ball. Queues of people, including some of the 24,500 Irish savers with €2.4 billion on deposit, started appearing on the streets in what was the first run on a British bank since 1866. Only a British government guarantee to cover all deposits stopped the panic.

But it didn't help the naysaying about Irish banks. International investors speculated that the surge in mortgage lending in recent years had also left Irish lenders vulnerable, especially now the property boom was drawing to an end. House-building was falling dramatically from record levels - about 85,000 houses will be built this year but possibly as few as 35,000 in 2008.

Average house prices in October were 4.7 per cent down on the same month last year.

BANK OF IRELAND, much to its frustration, was the first to show its cards in the reporting game because of its March year end. As the credit storm was blowing around it in the international financial markets, the bank was forced to go public - one of the few to do so in Ireland or Britain - to reassure investors in a September trading statement that it was well funded, had no subprime exposure and could weather the credit storm. The bank shrugged off concerns about the liquidity crisis, saying profit growth was progressing nicely.

But by November the crisis had worsened and the bank moved into reverse. At its interim results, Bank of Ireland was forced to cut back its full-year earnings forecast to March 2008 due to the Irish economic slowdown and the credit crunch. It also declined to give any guidance on earnings growth for the rest of 2008. Investors weren't leaping for joy. Financial stocks, already down over 30 per cent, fell further.

Bank of Ireland chief executive Brian Goggin enjoyed a 58 per cent pay hike to almost €4 million in the year to the end of March, when the bank's pretax profits jumped 28 per cent to a record €1.96 billion. However, his 2008 pay will be hard-earned as the bank, like most Irish banks, will face a tough first half to 2008.

Anglo Irish Bank felt a little more exposed to the storm. Its entire business model is based on commercial property lending. In early November it took the unusual step of meeting analysts during a closed period to reassure them it waswell funded with "sticky" customer deposits.

However, the bank saved the biggest charm offensive for its interim results at the end of November when it hoped its record profits, passing the billion euro mark for the first time, might "silence" critics. The bank disclosed a huge amount of information about its sturdy funding foundations, its steadily increasing flow of deposits and its careful lending practices. Shares rose 10 per cent - a welcome respite from its falling cycle over the last six months.

Irish Life & Permanent was less lucky. Just over a fortnight later, the group - unlike Bank of Ireland - decided to provide more analysis of how it would be blown if the credit storm continued.

It pointed out that if the market volatility continued through the first half of 2008, operating profit growth would fall by up to 9 per cent. Investors were not happy. The stock fell 11 per cent at one point before closing down 6 per cent.

Anglo wasn't the only one to go on the defensive in 2007. AIB chief Eugene Sheehy and Bank of Ireland boss Brian Goggin spoke publicly about their concerns about talking down the economy and how they spent more time selling Ireland to international institutional investors than talking about their businesses.

Economists may be expecting the European Central Bank (ECB) to hold rates steady or reduce them this year - having started the year at 3.5 per cent and ended it at 4 per cent. However, homeowners will face higher monthly repayments in another way -some banks (Permanent TSB and Ulster Bank/First Active) have already passed on their higher borrowing costs to customers on some mortgage products. More will follow.

The 2007 rollercoaster ride for Irish stocks has been expensive for investors - more than €40 billion was knocked off the value of Irish shares from their high in February to their low in November. Financial stocks have fallen around 35 per cent since the start of the year.

Banks and analysts have been at pains to point out in the recent months the value to be had in financial stocks, given that all the banks are still forecasting profit growth in 2008. The bargain hunters have notmoved yet, however.

Given that the credit crunch doesn't look like easing any time soon, it could be some time before they feel stocks are at rock bottom.