A weaker sterling could create further pressures on earnings for Irish banks, though Bank of Ireland and Irish Life & Permanent will benefit from lower UK interbank borrowing costs on their lending, according to analysts.

Stockbroker Davy said in a research note that the recent surge in the euro against sterling has implications for Irish banks but added that it was not planning any formal changes to forecasts at this stage.

It said Bank of Ireland was most exposed given that 31 per cent of its earnings came from the UK, though some of this came through its wholesale division.

The UK accounted for 27 per cent of Anglo Irish Bank's earnings and about 24 per cent for AIB.

Sterling has weakened in recent months.

It was trading at 74p against the euro yesterday, compared to 69p on September 1st last.

Davy analyst Scott Rankin said the weaker sterling would create "another headwind" for Irish banks this year but it would not have the same effect as an increase in the level of bad debts. He said sterling would weaken further against the euro as the European Central Bank maintained rates, while the Bank of England continued to cut rates.

NCB Stockbrokers said in a research note that lower interbank borrowing rates should ease funding pressures for banks and that Bank of Ireland and Irish Life & Permanent, which have mortgage lending operations in the UK, should benefit from "any sustained reduction in spreads".

Bank funding costs have fallen as the spreads between UK base rates and the three-month Libor have reduced in recent weeks due to the massive injection of funds into the money markets.

The Bank of England has said the amount of secured credit made available by lenders to customers in the final three months of 2007 had "reduced materially" due to the global credit crunch.

Yesterday sterling rose against the euro on speculation that interest rates will not be cut in the UK next week.