The recent European stress tests show that investor confidence towards Irish banks Allied Irish Banks (AIB) and Bank of Ireland (BKIR) has improved, Fitch said.

In its semi-annual review of Irish banks, the rating agency said that this improved investor confidence may strengthen the banks' ability to raise funds, The Irish Times reported.

Funding is "the most important challenge facing Irish banks," Fitch said.

Fitch said Bank of Ireland may return to a normal performance much faster than rivals Allied Irish Banks and Anglo Irish Banks, thanks to a shorter restructuring period.