Ratings agency Moody's says the Irish banking system is likely to show the "strongest improvement" through to 2015 when compared with Spain, Italy and Portugal.

It says Irish banks’ asset quality will improve, while the rate of erosion will slow in Italy, Portugal and Spain.

"Pressure on profitability will persist in Italy, Portugal and Spain, but improve in Ireland, whilst tight funding conditions and bank reliance on ECB funds will ease," Moody's says in a 14-page special comment.

“The Irish banking system is likely to show the strongest improvement over the remainder of 2014 and through 2015, albeit from the lowest starting point, with comparatively high economic growth supporting improved bank profitability and asset quality.”

Perform better

It adds that Spanish banks should also perform better over this period. “In Italy, where economic growth is more sluggish, as well as in Portugal, banks’ internal capital generation is likely to remain more subdued for a longer period of time.”

Of the four countries featured in the report, Moody’s predicts the highest economic growth in Ireland and the lowest in Italy. It is forecasting 2.8 per cent GDP growth for Ireland this year, “levelling off at around 3 per cent over the next three to five years”.

It expects Spain and Portugal will grow more moderately this year at 1.2 per cent and 1 per cent respectively. Italy is likely to remain in recession in 2014 with a GDP contraction of 0.1 per cent, it adds.

Moody’s notes that the gradual improvement of asset- quality ratios in Ireland stems from its stronger economic recovery, although the level of problem loans is still the highest among the four systems.

It also says tracker mortgages would “continue to be a drag on [Irish] banks’ profitability because of their very low or even negative margins”.