UPDATE 1-S&P downgrades IL&P over weak banking operations

* S&P says group's financial profile is relatively poor

* Cuts ratings to 'BBB+/A-2' from 'A-/A-1'

DUBLIN, June 25 (Reuters) - Standard and Poor's cut Irish Life & Permanent's (IPM.I) credit ratings on Thursday, citing a weak outlook for its banking operations and the weakening of the group's earnings prospects.

The bancassurer, which said last month it was creating a new holding company to enable the separation of its banking arm, permanent tsb, from its insurance business, saw its long and short-term counterparty credit ratings fall to 'BBB+/A-2' from 'A-/A-1'.

Media reports have said IL&P may eventually spin off permanent tsb, one of Ireland's top mortgage providers, to concentrate on its relatively strong life assurance business.

"The downgrade reflects our broader view that the group's banking operations in their current format appear to have limited strategic options," Standard & Poor's credit analyst Nigel Greenwood said in a statement.

S&P said that while the group's life assurance arm -- which it also downgraded to 'BBB+' from 'A-' -- was a ratings strength, its prospective separation was neutral for ratings.

The strength of Irish Life -- from where the group plucked its new CEO Kevin Murphy last week -- and a lack of exposure to struggling property developers has allowed the group to avoid a state bailout. [ID:nnLH868700]

Irish Life & Permanent also does not plan to take part in the "bad bank" scheme that will see up to 90 billion euros worth of risky loans transferred to a new National Asset Management Agency from other banks.

However S&P said the group's overall financial profile is relatively poor, with pressure on margins due to its reliance on wholesale funding, and a weakening asset quality.

S&P said its stable outlook for both entities reflected an expectation of further support from the Irish government, should the need arise.

Shares in Irish Life & Permanent were down 3.5 percent at 1345 GMT underperforming a 2.2 percent weaker Irish market .ISEQ. (Reporting by Padraic Halpin; Editing by Jon Loades-Carter)