Allied Irish returns to profit as bad loans tumble

We have 'strong lending capability': AIB CEO

Allied Irish Banks (AIB) returned to profit in the first half of the year after its bad debts on loans fell sharply, marking a major milestone as it moves towards repaying a state bailout next year.

State-owned AIB, whose rescue in the financial crisis cost taxpayers more than 20 billion euros ($26.8 billion) - the most given to any Irish lender that is still open - made a pretax profit of 437 million euros compared with a 838 million euro loss a year ago.

AIB posted a first-half profit in 2011 but only after it imposed losses on junior debtors and sold foreign units. It was last in the black prior to that in 2008 before a banking crisis pushed Ireland into an EU/IMF bailout it completed last year.

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PETER MUHLY | AFP | Getty Images

The bank flagged its return to profitability in a trading update in May, saying it was driven by a significant reduction in impairment charges. Provisions for soured loans fell to 92 million euros from 738 million in the first half of 2013.

The level of bad loans in Ireland - where almost one in five home loans are in arrears - had made a return to profitability elusive for its banks. AIB said the total number of arrears fell by 6 percent in the period.

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The bank's proportion of owner-occupiers in arrears for more than 90 days stood at 10.5 percent at the end of June, while 25.7 percent of all buy-to-let mortgage holders were behind on payments.

AIB's core Tier 1 capital ratio, a measure of financial strength, was 16.1 percent at the end of June, and 10.5 percent complying with Basel III rules. Its net interest margin - gauging the profitability of its lending - rose to 1.60 percent.

AIB, which announced a review of its capital structure earlier this year to prepare the bank for sale in 2015, said it expected to remain profitable for 2014 but challenges remained including a still shrinking net loan book.