Moody's Investors Service said it doesn't expect to see any substantial improvement in Irish banks' asset quality until at least 2011.
Analyst Ross Abercromby said the return to growth in gross domestic product indicated last week in the data compiled by the Central Statistics Office was positive in the long term and pointed to a "gradual stabilisation" of the economy, but there were still reasons to be concerned.
He said the banking sector remained fragile, a situation that was expected to continue until the National Asset Management Agency (Nama) had finished its transfer of property assets and the banking sector had been recapitalised.
"The high level of foreign direct investment in the Irish economy means that a large section of the economy is owned by foreign companies. Therefore, for the domestic banks a more telling economic statistic is the performance of GNP, which continued to be negative in the first quarter (-0.5 per cent) showing the two-speed economy that has developed in Ireland," Mr Abercromby wriote in a note.
"In addition, this weeks' Live Register figure shows a further increase, indicating that unemployment will remain a substantial issue, and this will further delay improvement in bank asset quality."
Analysts have expressed concern about the weakness in the domestic economy, with economic growth dependent on exports and external factors.
"The concentration on the struggling domestic market means that the Irish banking sector will take longer to recover than more geographically diversified banks or banks in economies that have not suffered to the same extent in recent years," Mr Abercromby wrote.
