Ireland’s banking system faces a “very challenging” environment in 2010 as the economy contracts and a housing slump extends, Moody’s Investors Service said today.

The property slump, together with the weak economic environment in Ireland “will continue to feed through into very substantial arrears and losses,” Moody’s said in an e-mailed note.

“The fundamental credit outlook for the Irish banking system remains negative.”

Ireland’s banking system almost collapsed last year, forcing the state to create a bad bank NAMA to purge the nation’s lenders of €77 bn of toxic property loans.

Property prices have halved since peaking in 2007 and the economy will contract 1.25 percent in 2010, the Government estimates.

Even after NAMA is implemented, “the banks will continue to face many challenges” to clean up their balance sheets, as the agency “does not capture all of the impaired assets,” Moody’s said.

Bank of Ireland and Allied Irish “may be able to raise further capital through either a rights issue or asset sales,” Moody’s said, adding that for Ireland’s other lenders “any capital will need to come from the government.”

Allied Irish fell 6.7 cents, or 5.3 pc, to €1.198 at 3:05 pm in Dublin trading, while Bank of Ireland dropped 3 cents, or 2.1 pc, to €1.40.

Allied Irish Banks plc share price

Bank of Ireland share price

- Colm Heatley

© Bloomberg

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Tags: 2010 Moody’s, Moody’s